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As filed with the Securities and Exchange Commission on May 23, 2000.
Registration No. 333____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
Protein Polymer Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0311631
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
10655 Sorrento Valley Road, San Diego, California 92121 (858) 558-6064
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
J. Thomas Parmeter Copies to:
Chairman & Chief Executive Officer Robert A. Miller, Jr., Esq.
Protein Polymer Technologies, Inc. Paul, Hastings, Janofsky & Walker LLP
10655 Sorrento Valley Road 555 South Flower Street
San Diego, California 92121 Los Angeles, California 90071-2371
(858) 558-6064 (213) 683-6000
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date 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 the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement 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, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, 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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Registered (1))(2) Price Per Unit (3) Aggregate Offering Price (3) Registration Fee (3)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 12,640,000 $0.875 $11,060,000 $2,919.84
per share
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</TABLE>
(1) Represents the following: (A) the maximum of 4,200,000 shares of common
stock issuable upon conversion of our Series G Convertible Preferred Stock; (B)
the maximum of 4,200,000 shares issued upon exercise of warrants issued in
connection with our Series G Convertible Preferred Stock; (C) the maximum of
4,200,000 shares issuable upon exercise of warrants issued in connection with
the exercise and exchange of warrants issued with our Series G Convertible
Preferred Stock; (D) the maximum of 15,000 shares issuable upon exercise of
warrants issued in connection with a $150,000 loan to us and (E) the maximum of
25,000 shares issuable upon exercise of warrants issued as compensation in
relation to our private placement of Series G Convertible Preferred Stock.
(2) Pursuant to Rule 416 promulgated under the Securities Act, there are also
registered hereunder such indeterminate number of additional shares as may be
issued to the Selling Securityholders to prevent dilution resulting from stock
splits, stock dividends, or similar transactions pursuant to the terms of our
Series G Convertible Preferred Stock and warrants.
(3) Estimate based on average of the bid and asked prices of our common stock
as reported on the NASD Bulletin Board on May 22, 2000 pursuant to Rule 457(c)
promulgated under the Securities Act.
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.
<PAGE>
Subject to Completion, Dated May 23, 2000
PROSPECTUS
- ----------
Protein Polymer Technologies, Inc.
12,640,000 Shares of Common Stock
___________________
The Selling Securityholders are offering (i) up to 4,200,000 shares of our
common stock issuable upon conversion of 21,000 shares of our Series G
Convertible Preferred Stock, issued to a small group of accredited and
institutional investors in a private placement on September 15, 1999; (ii) up to
4,200,000 shares of our common stock issued upon exercise of common stock
warrants issued in conjunction with the Series G Convertible Preferred Stock;
(iii) up to 4,200,000 shares of our common stock issuable upon exercise of
common stock warrants issued in connection with the exercise and exchange of the
warrants issued with the Series G Convertible Preferred Stock; (iv) up to 15,000
shares of our common stock issuable upon exercise of common stock warrants
issued in connection with a $150,000 bridge loan to us; and (v) up to 25,000
shares of our common stock issuable upon exercise of common stock warrants
issued in connection with a consulting agreement.
We will not receive any proceeds from the sale of our common stock by the
Selling Securityholders except for funds received upon the exercise of the
warrants. All costs, expenses and fees incurred in connection with the
registration of our common stock, estimated to be approximately $32,920.00, are
being borne by us, but all selling and other expenses incurred by the Selling
Securityholders will be borne by such Selling Securityholders.
Our common stock may be offered from time to time by each Selling
Securityholder acting as principal for its own account or in brokerage
transactions at prevailing market prices or in transactions at negotiated
prices. No representation is made that our common stock will or will not be
offered for sale. It is not possible at the present time to determine the price
to the public in any sale of our common stock by the Selling Securityholders and
each Selling Securityholder reserves the right to accept or reject, in whole or
in part, any proposed purchase of shares of our common stock. Accordingly, the
public offering price and the amount of any applicable underwriting discounts
and commissions will be determined at the time of such sale by the Selling
Securityholders.
The Selling Securityholders, and the brokers through whom sales of the
shares of our common stock offered hereby are made, may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. In
addition, any profits realized by the Selling Securityholders or such brokers on
the sale of the shares of our common stock offered hereby may be deemed to be
underwriting commissions.
Our common stock is traded "over the counter" on the NASD Bulletin Board
under the symbol "PPTI.OB."
_____________________
Copies of our Annual Report on Form 10-KSB for the year ended December 31,
1999 and our Quarterly Report on Form 10-QSB for the quarter ended March 31,
2000 accompany this prospectus.
_____________________
Investing in our common stock involves a high degree of risk. Please
consider carefully the Risk Factors beginning on page 5.
_____________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
Prospectus dated May __, 2000
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
Available Information......................................................... 2
Incorporation By Reference.................................................... 2
Forward Looking Statements.................................................... 3
The Company................................................................... 3
Risk Factors.................................................................. 5
Plan of Distribution.......................................................... 12
Use of Proceeds............................................................... 13
Selling Securityholders....................................................... 13
Description Of Securities To Be Registered.................................... 17
Legal Matters................................................................. 22
Experts....................................................................... 22
Indemnification Of Directors And Officers..................................... 22
</TABLE>
We have not authorized any dealer, salesman or other person to give any
information or represent anything not contained in this prospectus or
incorporated by reference. You should not rely on any unauthorized information.
We are offering to sell, and seeking offers to buy, the securities only in
jurisdictions where offers and sales are permitted. The information in this
prospectus is accurate as of the date on the cover. Delivery of this prospectus
or any sale of the securities does not indicate that there has been no change in
our affairs since the date of this prospectus.
AVAILABLE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. Copies of such reports, proxy and other information may be read and
copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can request copies of such documents by writing to the SEC and
paying a fee for the copying cost. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site at (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
This prospectus is part of a Registration Statement on Form S-2 that we
filed with the SEC. Certain information in the Registration Statement has been
omitted from this prospectus in accordance with the rules and regulations of the
SEC. We have also filed exhibits and schedules with the Registration Statement
that are excluded from this prospectus. For further information you may:
. read a copy of the Registration Statement, including the exhibits and
schedules, without charge at the SEC's Public Reference Room; or
. obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" certain of our publicly
filed documents into this prospectus, which means that information included in
these documents is considered part of this prospectus. We incorporate by
reference in this prospectus:
. Our Annual Report on Form 10-KSB for the year ended December 31, 1999;
and
. Our Quarterly Report on Form 10-QSB for the quarter ended March 31,
2000.
We will provide any person to whom a copy of this prospectus is delivered,
on written or oral request, a copy of any or all of the documents incorporated
by reference, other than exhibits to such documents unless specifically
incorporated by reference therein. You should direct any requests for documents
to Janis Neves,
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Director, Finance, Protein Polymer Technologies, Inc., 10655 Sorrento Valley
Road, San Diego, California 92121, telephone (858) 558-6064.
FORWARD LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include those set forth in this prospectus, including under the caption
"Risk Factors." Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements. We disclaim any
obligation to update any such statements or to publicly announce any updates or
revisions to any of the forward-looking statements contained in this prospectus
to reflect any change in our expectations or any change in events, conditions,
circumstances or assumptions underlying such statements.
THE COMPANY
We are a development-stage biotechnology company engaged in the research,
development, production and clinical testing of medical products based on our
proprietary protein-based biomaterials technology. We were incorporated in
Delaware on July 6, 1988. Since 1992 we have focused primarily on developing
materials, technology and products to be used for:
. soft tissues augmentation products;
. surgical adhesives and sealants;
. wound healing matrices; and
. drug delivery devices.
We have also developed coating technology that can efficiently modify and
improve the surface properties of more traditional biomedical devices. Our
primary goal is to develop medical products with significantly improved patient
outcomes as compared to current products and practices.
In December 1999, we initiated human clinical testing of our urethral
bulking agent for the treatment of female stress urinary incontinence. The
August 1999 approval by the U.S. Food and Drug Administration of our
Investigational Device Exemption allows us to test the safety and effectiveness
of the incontinence product in women over the age of 40 who have become
incontinent due to the shifting of their bladder or the weakening of the muscle
at its base that controls the flow of urine, or both problems combined. We
estimate that more than 2.5 million women begin to experience stress urinary
incontinence in the United States each year. In most untreated cases, the
problem becomes progressively more pronounced. Due to limited efficacy or
invasiveness of current treatments, only a small proportion of the women
experiencing stress urinary incontinence are clinically treated, relying instead
on pads and plugs and the like that only address the symptoms. In contrast, our
product is injected, typically in an outpatient procedure, into urethral tissue
at the base of the bladder forming a solid implant that provides support to the
muscles controlling the flow of urine. We believe that our product will prove
to be easy for the physician to use, offer enduring effectiveness, and avoid
most of the other limitations of urethral bulking products on the market or in
development.
In January 2000, we established a strategic alliance with Femcare, Ltd. for
the commercialization of the incontinence product in Europe and Australia. In
the agreement, Femcare is responsible for clinical testing, regulatory approval,
and product sales and marketing within these territories, and we are responsible
for product manufacturing. Commercialization of the product in Europe is
expected to begin more than a year before approval for marketing the product in
the United States can be obtained. We are also in discussions with several
companies
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regarding the establishment of strategic alliances for commercializing the
incontinence product in the United States and other markets outside the Femcare
territories.
The tissue augmentation materials and technology underlying the
incontinence product have the potential to be effective and desirable in a
number of other clinical applications. We intend to submit an additional
Investigational Device Exemption to the U.S. Food and Drug Administration in
2000 to obtain approval to begin human clinical testing of our dermal bulking
agent for use in cosmetic and reconstructive surgery applications. We began
studies to identify our most promising biomaterial formulations for use in these
soft tissue augmentation products in 1996, devoted increasing resources through
1997 and 1998, and have primarily focused in 1999 and 2000 on human clinical
testing of the incontinence product.
Our other advanced product technology is in the area of tissue adhesives
and sealants. We have demonstrated both the adhesive performance and the
biocompatibility of our product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. Currently our research and development in this area is focused on the
repair of spinal discs for the treatment of lower back pain. We are committed
to the commercial development of our adhesive and sealant technology and
continue to determine the specific markets and products providing the most
significant opportunities for their use. We are seeking to establish new
strategic alliances with leaders in those markets.
To the extent sufficient resources are available, we continue to research
the use of our protein polymers for other tissue repair and medical device
applications, principally for use in tissue engineering matrices and drug
delivery devices.
Through 1999, we marketed specialty use products for in vitro cell culture
applications including SmartPlastic(R), ProNectin(R) F Cell Attachment Factor
and ProNectin(R) L Cell Attachment Factor. ProNectin(R) F was launched
commercially in 1991. SmartPlastic is ProNectin(R) F Activated Cultureware
where ProNectin F is presented in ready to use form on the surfaces of
disposable plastic labware for culturing human and animal cells. SmartPlastic
was launched commercially in 1995. In 1998, we discontinued direct sales of our
cell culture products, and in February 2000, we sold all rights to the use of
the technology for in vitro cell culture applications, the product trademarks,
and remaining inventory to Sanyo Chemical Industries, Ltd.
Our current development efforts are focused primarily on products to
augment the body's soft tissues. Key markets include the treatment of female
stress urinary incontinence and the correction of facial contour deficiencies
due to aging and disease. Other markets of interest to us are being evaluated in
relation to our tissue adhesive and sealant technology, scaffold technology for
wound healing and tissue engineering, and drug delivery technology.
Our address is Protein Polymer Technologies, Inc., 10655 Sorrento Valley
Road, San Diego, California 92121, and our telephone number is (858) 558-6064.
4
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RISK FACTORS
You should read the following risk factors carefully before purchasing any
common stock. If any of the risks discussed below actually occur, our business,
financial condition, operating results or cash flows, could be materially
adversely affected. This impact could cause the trading price of our common
stock to decline, and you could lose all or part of your investment.
Dependence on Strategic Partners
Our strategy is to enter into partnerships or licensing arrangements with
major medical or pharmaceutical companies with broad distribution capabilities
in appropriate markets in order to reduce the time and costs for developing and
commercializing our potential products. In January 2000, we entered into a
license and development agreement, conditioned upon obtaining the requisite
regulatory approval, with Prospectivepiercing Limited, to be known as Femcare
Urology Limited, for marketing and distribution of our urethral bulking agent
for stress urinary incontinence in Australia and Europe. There can be no
assurance that we will be able to establish additional strategic partnerships or
licensing arrangements, or, if available, that they will be on acceptable terms
and conditions. Additionally, these arrangements generally may be subject to
termination under various circumstances, or solely at the discretion of the
strategic partner without prior notice. Termination of such arrangements would
have a material adverse effect on our business and financial condition.
Furthermore, our strategy may lead to multiple alliances regarding different
product opportunities that are active at the same time. There can be no
assurance that we will be able to successfully manage such multiple arrangements
in various stages of development.
We have entered into certain materials evaluation agreements and
preliminary negotiations with other entities regarding additional biomedical and
specialty use applications of our polymers and technology, including
applications in areas other than those identified above as product candidates.
These agreements provide, or are intended to provide, for the evaluation of
product feasibility. There can be no assurance that we will be able to
establish such agreements, or, if available, do so in a timely manner and on
reasonable terms, or that such agreements will lead to joint product development
and commercialization agreements.
Technological and Commercial Uncertainties
Our technological strategy of designing and producing unique biocompatible
products based on genetically engineered proteins is commercially unproven. The
process of developing products and achieving regulatory approvals is time-
consuming and prone to delays. Except for limited sales averaging less than
$100,000 per year of ProNectin(R) F, ProNectin(R) L and SmartPlastic(R), we have
not completed the development of any product or generated any significant
revenues from product sales. In February 2000, we sold all rights to the use of
the technology for in vitro cell culture applications, the product trademarks
and the remaining inventory of ProNectin(R) F, ProNectin(R) L and
SmartPlastic(R) to Sanyo Chemical Industries, Ltd.
Our success will depend upon:
. our ability to identify products with the most commercial potential;
. our ability to allocate sufficient resources to develop such products;
. our ability to design and produce biocompatible materials with the
intended chemical, biological and functional properties needed for the
targeted products;
. our ability to secure strategic alliances appropriate to a product's
development, marketing and distribution requirements; and
. our ability to manufacture our products in sufficient quantity at
reasonable costs under regulated conditions to meet product demand.
The product candidates we are currently pursuing will require substantial
further development, testing and regulatory approvals. There can be no
assurance that these efforts will result in commercially acceptable products.
There can be no assurance that such products:
5
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. can be produced in commercial quantities at reasonable costs;
. can be effectively marketed in a timely fashion;
. will have significant benefits compared to competitive products on the
market at the time of product introduction; or
. will be accepted for use by the target markets.
There can be no assurance that our research and development activities will
be successful or that any of our future products will ultimately be commercially
successful.
History of Operating Losses; Continued Expectation of Losses; Funding Through
January of 2001; Future Capital Requirements
We have incurred operating losses since our inception in 1988, and will
continue to do so for at least several more years. As of March 31, 2000, our
accumulated deficit was approximately $37.7 million, and we have continued to
incur losses since that date. Such losses have resulted principally from
expenses of research and development and to a lesser extent, from general and
administrative expenses. Any potential contract revenues derived from
collaborative agreements with possible strategic partners will, alone, be
insufficient for us to become profitable. The timing of our losses, and
possible offsetting contract revenues, is highly uncertain and may produce
financial results that fluctuate significantly from period to period.
We believe that our current capital resources will be sufficient to fund
our operating losses through January of 2001. We are actively pursuing a number
of potential approaches to meet the continuing capital requirements of our
operations, such as initiating and engaging in preliminary negotiations with a
number of potential collaborative partners. There can be no assurance that we
will be able to raise sufficient additional capital funds, if at all, or that
such financing will be available on acceptable terms. If adequate funds are not
available, we will be required to significantly curtail our operations and
relinquish rights to major portions of our technology or products, including
rights to the manufacture and sale of protein polymers and rights with respect
to our soft tissue augmentation and our tissue repair technologies.
Substantial additional capital resources will be required to fund our
continuing operating expenditures and activities including:
. increasing expenditures related to our research and development
activities;
. establishment and scale-up of appropriate manufacturing capabilities;
. preclinical and clinical testing;
. regulatory compliance;
. business development activities; and
. patent prosecution.
Intense Competition and Rapid Technological Change
The areas of business in which we engage and propose to engage are
characterized by rapidly evolving technology and intense competition. The
anticipated commercial uses of our biomaterials are primarily end-use products
for medical applications. End-use products using or incorporating our
biomaterials would compete with other products that rely on the use of
alternative materials or components. Technologies which compete with ours are,
therefore, diverse, complex and numerous.
Competition in the biomedical and surgical repair markets is particularly
significant. Our competitors in those markets include major pharmaceutical,
surgical product, chemical and specialized biopolymer companies, many of which
have financial, technical, research and development and marketing resources
significantly greater than ours. Academic institutions and other public and
private research organizations are also conducting research
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and seeking patent protection, and may commercialize products on their own or
through joint ventures. Most of our competitors depend on technology other than
protein engineering for developing products, for example Focal, Inc. and Closure
Medical Corp. We believe that DuPont and several university laboratories are
currently conducting research into similar protein engineering technology.
The primary competitive factors in the biomedical and surgical repair
products market are:
. performance;
. cost;
. safety;
. reliability;
. ease of use; and
. commercial production capabilities.
We believe that our ability to compete in this market will be enhanced by
our issued patent claims, the breadth of our other pending patent applications
and our experience in protein engineering. However, we currently do not have
the resources to compete commercially without the use of collaborative
agreements with third parties. Our product technology competes for corporate
development and marketing partnership opportunities with numerous other
biotechnology companies, research institutes, academic institutions and
established pharmaceutical companies. There can be no assurance that our
competitors will not succeed in developing products based on our technology or
other technologies that are more effective than any which are being developed by
us, or which would render our technology and products obsolete and non-
competitive.
Manufacturing Uncertainties
To date, we have manufactured only limited amounts of our biomedical
products for internal testing, initial human clinical testing and, in certain
cases, evaluation and testing by corporate partners and other third parties.
The development and commercialization of certain biomedical products will
require us, pursuant to applicable governmental regulations, to upgrade our
manufacturing facilities and to obtain manufacturing approvals from the United
States Food and Drug Administration. Currently, we are conducting our
manufacturing operations under the FDA's "Good Laboratory Practices" and
portions of the FDA's Quality System Regulation required for use of our products
in preclinical and pilot clinical testing.
In May 1999, the FDA conditionally approved our Investigational Device
Exemption application requesting permission to begin human clinical feasibility
testing of our urethral bulking agent for the treatment of female stress urinary
incontinence. In August 1999, unconditional approval was obtained and we
initiated pilot human clinical testing in December 1999. There can be no
assurance that the human clinical trials will be successful.
We are currently considering alternative methods for increased production
of our product candidates to meet clinical sample requirements under the FDA's
applicable Quality System Regulation and cognate international quality system
requirements, i.e., ISO 9001. For example, we may upgrade and expand our
existing facility; however, there can be no assurance that, if desired, we could
adequately develop, fund, implement and manage such a manufacturing facility.
Alternatively, we may establish external contract manufacturing arrangements;
however, there can be no assurance that such arrangements, if desired, could be
entered into or maintained on acceptable terms, if at all, or would comply with
applicable governmental regulations.
We have not yet developed a process to manufacture our product candidates
on a commercial scale. There can be no assurance that a process can be
developed by us or any other party at a cost or in quantities necessary to
become commercially viable. Alternative methods may be needed for producing
commercial quantities of products, if any. The actual method, or combination of
methods, that we may ultimately pursue will depend on a number of factors,
including availability, facilities, needed quantities, cost and governmental
regulations. There is no assurance that we will successfully assess the ability
of such production methods or establish contract manufacturing
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arrangements to meet our commercial objectives, or that such methods and
arrangements would not adversely affect our margins or our ability to compete in
the marketplace.
Uncertainty of Regulatory Compliance and Approvals
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. Our current operations and products are, and
anticipated products and operations will be, subject to substantial regulation
by a variety of local, state, federal and foreign agencies, particularly those
products and operations related to biomedical applications. Our activities are
subject to regulation primarily under the Occupational Safety and Health Act and
the Food, Drug & Cosmetic Act, as amended.
Pre-clinical and clinical testing and pre-market approval from the FDA is
required for new medical devices, drugs or vaccines, a generally costly and
time-consuming process. The FDA could require additional preclinical or
clinical testing in addition to those we have completed or planned, which would
result in increased costs and significant development delays. The failure to
demonstrate adequately to the FDA the safety and efficacy of a product under
development would prevent regulatory approval. Many companies have experienced
these types of setbacks during later stage clinical trials, despite promising
results in earlier trials. If we do not directly produce and sell medical
devices, drugs or vaccines, we may not be directly affected by FDA regulations.
However, our anticipated customers and strategic partners would be required to
comply with such regulations. Additionally, we may be required to file and
maintain with the FDA a "Master File" containing information regarding our
products. There can be no assurance that we or our customers and strategic
partners will be able to obtain or maintain the necessary approvals from the FDA
or corresponding international regulatory authorities, or that we will be able
to maintain a Master File in accordance with FDA regulations. In either case,
our anticipated business could be adversely affected.
We have manufactured limited amounts of our biomedical materials and
products for internal testing, initial human clinical testing, and, in certain
cases, evaluation and testing by strategic partners and other third parties.
Preclinical and clinical testing of potential medical device products, where the
results will be submitted to the FDA, requires compliance with the FDA's Good
Laboratory Practices and other quality system regulations. We have implemented
polymer production and quality control procedures, have made certain facilities
renovations, and believe we are in compliance with applicable requirements.
Before pursuing expanded clinical testing and commercial production, we will be
required to conform our operations to additional FDA Quality System Regulations.
International quality system requirements, i.e., ISO 9001, are similar to the
FDA's Quality System Regulation. Quality System Regulations requirements are
rigorous, and there can be no assurance that acceptable Quality System
Regulations status could be obtained in a timely manner and without the
expenditure of substantial resources, if at all. We may also be required to
register our facility with the FDA as an establishment involved in the
manufacture of medical devices.
Our research, development and production activities are, or may be, subject
to various federal and state laws and regulations relating to environmental
quality and the use, discharge, storage, transportation and disposal of toxic
and hazardous substances. Our future activities may be subject to regulation
under the Toxic Substances Control Act, which requires us to obtain pre-
manufacturing approval for any new "chemical material" we produce for commercial
use that does not fall within the FDA's regulatory jurisdiction.
We believe we are currently in substantial compliance with such laws and
regulations applicable to our current operations. Although we intend to use our
best efforts to comply with all laws and regulations in the future, there can be
no assurance that we will be able to fully comply with such laws, or that full
compliance will not require substantial capital expenditures. There can be no
assurance that future approvals will be sought or obtained, and the failure to
obtain or maintain these approvals, or any substantial delay in obtaining these
approvals, would likely have a material adverse effect on our operations.
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Dependence on Key Employees
As of May 15, 2000, we had nineteen full-time employees and two part-time
employees of whom two hold Ph.D. degrees in the chemical or biological sciences.
Our success will depend largely upon the efforts of our scientists and certain
of our executive officers. The loss of services of any one of these individuals
would have a material adverse effect on our business opportunities and
prospects. The recruitment and retention of additional qualified management and
scientific personnel is also critical to our success. There can be no assurance
that we will be able to attract and retain required personnel on acceptable
terms, due to the competition for such experienced personnel from other
biotechnology, pharmaceutical and chemical companies, universities and non-
profit research institutions. We do not maintain "key-man" or similar life
insurance policies with respect to such persons to compensate us in the event of
their deaths.
Product Liability; Absence of Insurance
Product liability claims may be asserted with respect to our technology or
products either directly or through our strategic partners. We may be exposed
to potential product liability risks whenever human clinical testing is
performed or upon the use of any commercially marketed medical product. We
believe that our prior sales of SmartPlastic(R), ProNectin (R) F and
ProNectin(R) L products do not pose any material product liability risk. Prior
to initiating human clinical testing of our urethral bulking agent, we procured
product liability insurance. To our knowledge no product liability claims have
ever been made against us. There can be no assurance that adequate levels of
insurance coverage will continue to be obtainable on acceptable terms, or that
the assertion of a product liability claim would not materially adversely affect
our business or financial condition.
Patents and Trade Secrets
Our success will depend, in part, on our ability to obtain patent
protection or maintain other protection for our technology and product
candidates. Other protection includes maintenance of trade secrets and
contractual agreements. Our success will also depend in part on not violating
the proprietary rights of third parties, including the infringement of patents.
To date, we have been issued eighteen United States patents and six
additional United States patent applications are pending. The patent position
of biotechnology companies is highly uncertain and involves complex legal,
scientific and factual questions. There can be no assurance that patents will
issue from any of our pending patent applications or that, if patents do issue,
the claims allowed will be sufficiently broad to protect our technology and
product candidates. In addition, there can be no assurance that any patents
previously or subsequently issued to us will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide us with any
proprietary protection or competitive advantage.
Competitors may have filed patent applications or may have obtained patents
and other proprietary rights relating to products or processes similar to and
competitive with ours. The scope and validity of such patents, the extent to
which we may be required to obtain licenses under these patents or other
proprietary rights, and the cost and availability of such licenses are presently
unknown. There can be no assurance that any licenses required under any patents
or proprietary rights will be made available to us on acceptable terms, if at
all. Further, we may enter into collaborative research and development
arrangements with strategic partners that may result in the development of new
technologies or products. There can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology or
products that may be so developed.
We have also applied for patent protection with respect to certain of our
patents in foreign countries, including Japan and Europe. We have not yet
marketed, sold or developed our products outside the United States, except for
limited amounts of ProNectin(R) F, ProNectin(R) L and SmartPlastic(R) cell
culture products. To date, we have been issued fifteen foreign patents and we
have twenty-seven pending foreign patent applications. There can be no
assurance that additional patents will issue from any of our pending foreign
patent applications or that, if patents do issue, the claims allowed will be
sufficiently broad to protect our technology and product candidates. In
addition, there can be no assurance that any foreign patents issued to us will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide us with any proprietary protection or competitive
9
<PAGE>
advantage. Furthermore, certain foreign intellectual properties laws may not be
as protective as those of the United States.
We also seek to protect our intellectual property in part by
confidentiality agreements with our employees and consultants. There can be no
assurance that these agreements will not be breached, that we will have an
adequate remedy for any breach, or that our trade secrets will not otherwise
become known or independently discovered by competitors.
Dividend Policy; No Payment of Dividends
We have never paid dividends on our common stock, and given our continuing
loss situation, we do not anticipate paying any cash dividends on the common
stock in the foreseeable future. Additionally, the holders of our Series D
Convertible Preferred Stock and Series F Convertible Preferred Stock have
certain preferences that entitle them to cumulative dividends prior to the
payment of any cash dividends on our common stock. Our Series E Convertible
Preferred Stock and Series G Convertible Preferred Stock do not have any
preference with respect to cash dividends and share ratably, after payment of
preferred dividends on our Series D Convertible Preferred Stock and Series F
Convertible Preferred Stock, with the holders of our common stock, Series D
Convertible Preferred Stock and Series F Convertible Preferred Stock in any cash
dividends declared on our common stock.
Volatility of Trading Price
There has been significant volatility in market prices of securities of
biotechnology companies, and the trading price of the securities could be
subject to wide fluctuations. Factors that could have a significant adverse
impact on the market price of our common stock include:
. announcements of technological innovations by our competitors;
. announcements of new commercial products by our competitors;
. adverse results in product testing;
. litigation;
. governmental regulation; or
. adverse patent or proprietary rights developments.
Investment Company Act Considerations
We believe that we are primarily engaged in business other than investing,
reinvesting, owning, holding or trading in securities. We invest our cash in
cash equivalents and short-term investments of high quality, following the
investment guidelines approved by our board of directors. However, there can be
no assurance that we may not be required to comply with the registration
requirements of the Investment Company Act of 1940. Such registration
requirements would have a material adverse effect upon us.
Nasdaq Delisting; Potential Regulation as a Penny Stock
Our common stock was delisted from the Nasdaq SmallCap Market on September
20, 1999. Trading in the common stock after our delisting, if any, will likely
be conducted in the over-the-counter markets in the so-called "pink sheets" or
the National Association of Securities Dealers' Electronic Bulletin Board and
could also be subject to additional restrictions. As a consequence of such
delisting, it is expected that our stockholders will find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
common stock. In addition, such delisting will make the common stock
substantially less attractive as collateral for margin and purpose loans, for
investment by financial institutions under their internal policies or state
legal investment laws, or as consideration in future capital raising
transactions.
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<PAGE>
After our securities were delisted from the Nasdaq SmallCap Market, the
common stock may have become subject to regulation as a "penny stock." The
Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price or
exercise price less than $5.00 per share, subject to certain exceptions,
including listing on the Nasdaq SmallCap Market. If the common stock is
delisted from the Nasdaq SmallCap Market and no other exception applies, our
common stock may become subject to the SEC's Penny Stock Rules, Rule 15g-1
through Rule 15g-9 under the Exchange Act. For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the
purchase of such securities and have received the purchaser's written consent to
the transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a risk disclosure document mandated by the SEC relating to
the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the penny
stock rules may restrict the ability of broker-dealers to sell our securities
and may affect the ability of holders to sell our securities in the secondary
market and the price at which such holders can sell any such securities. Rule
15g-9 under the Exchange Act imposes additional sales practice requirements on
broker-dealers who sell such securities except in transactions exempted from
such rule. Such exempt transactions include those meeting the requirements of
Rule 505 or 506 of Regulation D promulgated under the Securities Act and
transactions in which the purchaser is an institutional accredited investor or
an established customer of the broker-dealer.
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<PAGE>
PLAN OF DISTRIBUTION
We issued an aggregate of 21,000 shares of Series G Convertible Preferred
Stock to several institutional and accredited investors at a price of $100 per
share in a private placement on August 17, 1999 and September 15, 1999 under
Rule 506 promulgated under the Securities Act. Each share of Series G
Convertible Preferred Stock is convertible into shares of our common stock at a
conversion ratio equal to the quotient derived by dividing (A) the stated value
of $100 by (B) $0.50 (subject to certain antidilution adjustments for future
stock distributions, stock splits or similar capital adjustments). Each share of
Series G Convertible Preferred Stock also received a common stock warrant,
exercisable for 12 months, that allowed the holder to acquire 200 shares of our
common stock at a price of $0.50 per share; all of such warrants were exercised
in February 2000. Each holder of the warrants issued in connection with our
Series G Convertible Preferred Stock received, in connection with the exercise
and exchange of such warrants, an additional common stock warrant, exercisable
for 12 months, that allows the holder to acquire 200 shares of our common stock
at a price of $1.50 per share. In addition under Section 4(2) of the Securities
Act we issued (i) common stock warrants, exercisable for 12 months, to purchase
up to 15,000 shares of our common stock at a price of $0.50, in connection with
a $150,000 bridge loan to us, and (ii) common stock warrants, exercisable for
five years, to purchase up to 25,000 shares of our common stock at a price of
$0.75, in connection with a consulting agreement. Shares underlying the Series
G Convertible Preferred Stock may only be offered by the Selling Securityholders
if such Series G Convertible Preferred Stock is converted prior to such
offering. Shares underlying the warrants may only be offered by the Selling
Securityholders if such warrants are exercised prior to such offering. The
selling holders are the institutional and accredited investors, and any of their
pledgees, assignees, donees, other transferees and successors-in-interest,
pursuant to the aforementioned transactions and the securities being offered
under this prospectus are the shares of our common stock issued or issuable upon
conversion of the Series G Convertible Preferred Stock and exercise of the
warrants.
The shares offered hereby may be sold from time to time by the Selling
Securityholders. Such sales may be made in the over-the-counter market or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. As of May 15, 2000,
our common stock is trading only on the NASD Bulletin Board. Our common stock
may be sold by each of the Selling Securityholders acting as principal for its
own account or in ordinary brokerage transactions and transactions in which the
broker solicits purchasers. In effecting sales, broker-dealers engaged by the
Selling Securityholders may arrange for other broker-dealers to participate in
the resales.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Securityholders in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any shares covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus.
The Selling Securityholders may agree to indemnify any broker-dealer or
agent that participates in transactions involving sales of the shares offered
hereby against certain liabilities, including liabilities arising under the
Securities Act. We have agreed to indemnify the Selling Securityholder against
certain liabilities in connection with the offering of our common stock,
including liabilities arising under the Securities Act.
It is not possible at the present time to determine the price to the public
in any sale of our common stock by the Selling Securityholders. Accordingly,
the public offering price and the amount of any applicable underwriting
discounts and commissions will be determined at the time of such sale by the
Selling Securityholders. The aggregate proceeds to the Selling Securityholders
from the sale of the Shares will be the purchase price of the shares of our
common stock sold less all applicable commissions and underwriters' discounts,
if any. We will pay substantially all the expenses incident to the
registration, offering and sale of the shares of our common stock to the public
by Selling Securityholder, other than fees, discounts and commissions of
underwriters, dealers or agents, if any, and transfer taxes.
Our common stock has been removed from listing by the Nasdaq SmallCap
market and if no other exception applies, our common stock may become subject to
the SEC's Penny Stock Rules and broker-dealers may
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<PAGE>
become subject to the requirements summarized above under the caption "Risk
Factors - Possible Nasdaq Delisting; Potential Regulation as a Penny Stock."
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the Selling
Securityholders and will not receive any proceeds upon conversion of the Series
G Convertible Preferred Stock into our common stock. We will only receive
proceeds if the selling Securityholders exercise the warrants. If all warrants
are exercised, we will receive aggregate proceeds of $8,426,250. All of the
warrants issued in connection with our Series G Preferred Stock were exercised
in February 2000 upon which we received aggregate proceeds of $2.1 million.
There can be no assurance that any of the other warrants will be exercised. If
any of the warrants are exercised, we intend to use such proceeds for working
capital purposes. To the extent that the net proceeds are not immediately
required for such purposes, they may be invested principally in either U.S.
government securities, short-term certificates of deposit, money market funds or
other short-term interest bearing investments.
SELLING SECURITYHOLDERS
The following table sets forth as of May 22, 2000, and upon completion of
the offering described in this Prospectus, information with regard to the
beneficial ownership of our common stock by the Selling Securityholders. The
Selling Securityholders may not have a present intention of selling the Shares
and may offer no Shares for sale or less than the number of Shares indicated, or
may sell the Shares by a means other than this offering. All Selling
Securityholders have represented to the Company that they are "accredited
investors" as that term is defined in Regulation D promulgated under the
Securities Act.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Before Offering 1 After Offering 1,3
--------------------------- Common Stock -------------------------
Name Amount % Offered 2 Amount %
- ---- --------- ----- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Parmeter, J. Thomas 4, 5.................. 781,777 4.2% 90,000 691,777 3.7%
Lamon, Steven M. 4, 6..................... 859,989 4.6% 600,000 259,989 1.4%
Davis, Philip J. 4, 7..................... 834,345 4.5% 300,000 534,345 2.9%
Wang, Daniel I.C. 4, 8.................... 330,000 1.8% 300,000 30,000 *
Stern, Russell T. 4, 9.................... 1,083,223 5.8% 450,000 633,223 3.4%
Hurckes, Richard W. 4, 10................. 327,500 1.8% 180,000 147,500 *
Hurckes Children Trust 4, 11............. 165,000 * 120,000 45,000 *
Lyon, Anthony 4........................... 179,200 1.0% 120,000 59,200 *
Smith, Allison 4.......................... 90,000 * 90,000 0 0
Smith, Lindsay 4.......................... 90,000 * 90,000 0 0
Smith, Tracy 4............................ 90,000 * 90,000 0 0
Adelson, Trust fbo Claire 4, 12, 13....... 1,600,572 8.3% 1,500,000 100,572 *
Adelson, Richard 4, 12, 14................ 499,600 2.7% 300,000 199,600 1.1%
Cole, Bernard IRA 4, 12................... 315,000 1.7% 300,000 15,000 *
DeSalvo-Cavelius, Patricia 4, 12.......... 222,453 1.2% 180,000 42,453 *
Arthur Kaplan Co. PS fbo A. Kaplan 4, 12.. 313,663 1.7% 180,000 133,663 *
McSorley, Edward 4, 12, 15................ 246,225 1.3% 150,000 96,225 *
Smith, Donald 4, 12....................... 356,235 1.9% 240,000 116,235 *
Ardmore Retirement 4, 12.................. 229,572 1.3% 180,000 49,572 *
Baigelman, Carly, Irrev. Trust fbo 4, 12.. 60,000 * 60,000 0 0
Baigelman, Robert, Irrev. Trust fbo 4, 12. 60,000 * 60,000 0 0
Becker, Ellen & Stephen 4, 12............. 161,000 * 120,000 41,000 *
Bernstein, Stanley IRA 4, 12.............. 90,000 * 90,000 0 0
Branitz, Marlon IRA 4, 12................. 120,000 * 120,000 0 0
Brown, Douglas, Z.S. Fund fbo 4, 12....... 180,000 1.0% 180,000 0 0
Edelstein Investment Partners 4, 12, 16... 371,700 2.0% 210,000 161,700 *
Farber, Alisa S. Trust 4, 12, 17.......... 1,104,086 5.8% 840,000 264,086 1.4%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Before Offering 1 After Offering 1, 3
--------------------------- Common Stock -------------------------
Name Amount % Offered 2 Amount %
- ---- --------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Goodman, Arline IRA 4, 12................ 90,000 * 90,000 0 0
Gordon, Brian J. 4, 12.................... 90,000 * 90,000 0 0
Gordon, Elizabeth L. 4, 12................ 150,000 * 150,000 0 0
Gordon, Ronald & Claire 4, 12............. 240,000 1.3% 240,000 0 0
Greenblatt, William IRA 4, 12, 18......... 170,250 * 90,000 80,250 *
Grubard, Marc 4, 12....................... 120,000 * 120,000 0 0
Holder, Andrew 4, 12...................... 185,000 1.0% 150,000 35,000 *
Holder, Andrew SEP IRA 4, 12.............. 150,000 * 150,000 0 0
Intertrade Media Pens & PS 4, 12.......... 170,000 * 150,000 20,000 *
Kalman, Tobie 4, 12, 19................... 252,500 1.4% 180,000 72,500 *
Kamens, Michael IRA 4, 12................. 150,000 * 150,000 0 0
Kamens, Michael & Joan 4, 12.............. 225,000 1.2% 150,000 75,000 *
Katz, Non-Marital Trust uwo Katz 4, 12.... 240,000 1.3% 240,000 0 0
Kaye Family Limited Partership 4, 12, 20.. 227,500 1.2% 150,000 77,500 *
Kertes, Ronald 4, 12...................... 180,000 1.0% 180,000 0 0
Kiernan, Kenneth J. IRA 4, 12............. 367,000 2.0% 240,000 127,000 *
Kipperman, Eric M. 4, 12.................. 90,000 * 90,000 0 0
Kipperman, Eric M. IRA 4, 12.............. 90,000 * 90,000 0 0
Kipperman, Jerry IRA 4, 12................ 165,000 * 120,000 45,000 *
LaFauci, Joseph & Rosalie 4, 12........... 120,000 * 120,000 0 0
Levinsohn, Ross 4, 12..................... 90,000 * 90,000 0 0
Levitt, Steven & Wendi 4, 12, 21.......... 261,658 1.4% 180,000 81,658 *
Mann, Michael 4, 12....................... 180,000 1.0% 180,000 0 0
Mercadante, Carmin IRA 4, 12.............. 139,786 * 90,000 49,786 *
McGloin John J. 4, 12..................... 90,000 * 90,000 0 0
Marvin Mittman Profit-Sharing 4, 12....... 265,000 1.4% 240,000 25,000 *
Moss, Barbara S. 4, 12.................... 120,000 * 120,000 0 0
Moss, Nancy S. 4, 12...................... 120,000 * 120,000 0 0
Newman, Rose 4, 12........................ 272,500 1.5% 240,000 32,500 *
Omega 4, 12............................... 305,000 1.7% 240,000 65,000 *
Pincus, D.A. & Co. Profit-Sharing 4, 12... 60,000 * 60,000 0 0
Robinson, Douglas 4, 12, 22............... 333,000 1.8% 150,000 183,000 1.0%
Rosenberg, Alison & Abraham 4, 12, 23..... 252,500 1.4% 180,000 72,500 *
Snyder, David Pension 4, 12............... 210,000 1.1% 210,000 0 0
Susser, Phyllis IRA 4, 12................. 60,000 * 60,000 0 0
Sutton, Patrick 4, 12..................... 110,000 * 90,000 20,000 *
Szulik, Matthew & Kyle 4, 12, 24.......... 267,500 1.5% 180,000 87,500 *
Techvest Partners LLC 25.................. 40,960 * 25,000 15,960 *
Taurus Advisory Group, Inc. 26, 27........ 15,000 * 15,000 0 0
TOTALS 17,426,294 62.5% 12,640,000 4,786,294 24.6%
========== ========== =========
</TABLE>
______________
* Amount represents less than 1% of the common stock outstanding. As of May 22,
2000, we had 18,311,882 shares of common stock outstanding.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes, generally, voting power
and/or investment power with respect to securities. Shares of common stock
subject to options or warrants exercisable within 60 days are deemed
outstanding for computing the percentage of the person holding such options
or warrants but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to joint
ownership with spouses and community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Information with respect to
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<PAGE>
beneficial ownership is based upon the Company's stock records and data
supplied to the Company by the Selling Securityholders.
(2) The Selling Securityholders may offer less than the amount of shares
indicated. No representation is made that any shares will or will not be
offered for sale.
(3) This assumes that all shares owned by the Selling Securityholders which are
offered hereby are sold. The Selling Securityholders reserve the right to
accept or reject, in whole or in part, any proposed purchase of shares.
(4) Shares to be offered represents shares of common stock issuable upon
conversion of shares of Series G Convertible Preferred Stock, shares of
common stock issued upon exercise of warrants issued in connection with the
Series G Convertible Preferred Stock and shares of common stock issuable
upon exercise of warrants issued upon the exercise or exchange of the
warrants issued in connection with the Series G Convertible Preferred Stock.
(5) Shares beneficially owned also includes an additional 40,000 shares issuable
upon conversion of Series E Convertible Preferred Stock convertible within
60 days and 160,000 shares issuable upon the exercise of options exercisable
within 60 days. Mr. Parmeter is our Chairman of the Board, President and
Chief Executivie Officer.
(6) Shares beneficially owned also includes an additional 40,000 shares issuable
upon conversion of Series E Convertible Preferred Stock convertible within
60 days and 30,000 shares issuable upon the exercise of options exercisable
within 60 days.
(7) Shares beneficially owned also includes an additional 80,000 shares issuable
upon conversion of Series E Convertible Preferred Stock convertible within
60 days and 44,000 shares issuable upon the exercise of options exercisable
within 60 days. Mr. Davis is one of our directors and is our Secretary.
(8) Shares beneficially owned also includes an additional 30,000 shares issuable
upon the exercise of options exercisable within 60 days.
(9) Shares beneficially owned also includes an additional 80,000 shares issuable
upon conversion of Series E Convertible Preferred Stock convertible within
60 days and 20,000 shares issuable upon the exercise of options exercisable
within 60 days.
(10) Shares beneficially owned also includes an additional 32,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days.
(11) Shares beneficially owned also includes an additional 8,000 shares issuable
upon conversion of Series E Convertible Preferred Stock convertible within
60 days.
(12) This person is an investment advisory client of Taurus Advisory Group.
These shares are held by Sigler & Co. as custodian for the investment
advisory clients of Taurus. Taurus is a registered investment advisor that
has discretionary authority to vote or dispose of the shares held in its
client accounts and therefore may be deemed to be the beneficial owner of
these shares. Taurus expressly disclaims such beneficial ownership.
Patricia J. Cornell, a vice president and director of Taurus, is one of our
directors.
(13) Shares beneficially owned also includes an additional 20,000 shares
issuable upon exercise of warrants issued in connection with our Series E
Convertible Preferred Stock exercisable within 60 days.
(14) Shares beneficially owned also includes an additional 16,000 shares
issuable upon exercise of warrants issued in connection with our Series E
Convertible Preferred Stock exercisable within 60 days and 5,000 shares
issuable upon the exercise of options exercisable within 60 days. Mr.
Adelson is one of our directors.
(15) Shares beneficially owned also includes an additional 4,000 shares issuable
upon exercise of warrants issued in connection with our Series E
Convertible Preferred Stock exercisable within 60 days.
(16) Shares beneficially owned also includes an additional 50,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 12,500 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
15
<PAGE>
(17) Shares beneficially owned also includes an additional 156,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 55,000 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(18) Shares beneficially owned also includes an additional 25,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 6,250 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(19) Shares beneficially owned also includes an additional 30,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 7,500 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(20) Shares beneficially owned also includes an additional 30,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 7,500 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(21) Shares beneficially owned also includes an additional 20,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 5,000 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(22) Shares beneficially owned also includes an additional 20,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 5,000 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(23) Shares beneficially owned also includes an additional 30,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 7,500 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(24) Shares beneficially owned also includes an additional 30,000 shares
issuable upon conversion of Series E Convertible Preferred Stock
convertible within 60 days, and an additional 7,500 shares issuable upon
exercise of warrants issued in connection with our Series E Convertible
Preferred Stock exercisable within 60 days.
(25) Shares to be offered represents shares of common stock issuable upon
exercise of warrants issued in connection with a consulting agreement with
us. Shares beneficially owned also includes 15,960 shares of common stock
issuable upon exercise of warrants issued in connection with our Series E
Convertible Preferred Stock exercisable within 60 days.
(26) Shares to be offered represents shares of common stock issuable upon
exercise of warrants issued in connection with a loan to us.
(27) Shares beneficially owned excludes shares beneficially owned by investment
advisory clients of Taurus Advisory Group. Taurus is a registered
investment advisor that has discretionary authority to vote or dispose of
the shares held in its client accounts and therefore may be deemed to be
the beneficial owner of these shares. Taurus expressly disclaims such
beneficial ownership. Patricia J. Cornell, a vice president and director
of Taurus, is one of our directors.
16
<PAGE>
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
As of May 22, 2000, there were 18,311,882 outstanding shares of common
stock held by approximately 162 holders of record, including 4,200,000 shares
issued upon exercise of the warrants issued in conjunction with the Series G
Convertible Preferred Stock. After giving effect to conversion of the
outstanding Series G Convertible Preferred Stock and the other warrants, there
will be 26,751,882 shares of common stock outstanding.
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the common stock entitled to
vote in any election of directors, together with the Series G Convertible
Preferred Stock voting with the common stock as a single class, may elect all of
the directors standing for election. The holders of our common stock are
entitled to receive such dividends, if any, as may be declared by our board of
directors from time to time out of legally available funds, subject to any
preferential dividend rights of the holders of our preferred stock. Upon our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share in all of our assets that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of our preferred stock then outstanding. The
holders of our common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of our common stock are, and the
shares of our common stock offered hereby by Selling Securityholders will be,
when issued, fully paid and nonassessable. The rights, preferences and
privileges of holders of our common stock will be subject to the rights of the
holders of shares of our Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock, Series F Convertible Preferred Stock and Series G
Convertible Preferred Stock and any other series of our preferred stock that we
may issue in the future.
Preferred Stock
Our preferred stock may be issued from time to time in one or more series
and our board of directors, without further approval of the holders of our
common stock (but subject to the rights of the holders of our outstanding
preferred stock), is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of our preferred stock. The purpose of
authorizing our board of directors to determine such rights and preferences is
to eliminate delays associated with a stockholder vote on specific issuances.
The issuance of our preferred stock, while providing flexibility in connection
with possible financings, acquisitions and other corporate purposes, could,
among other things, adversely affect the voting power of the holders of our
common stock and, under certain circumstances, make it more difficult for a
third party to gain control of us.
Series D Convertible Preferred Stock. We have authorized 71,600 shares of
our Series D Convertible Preferred Stock, of which 1,344.01 shares remain issued
and outstanding. The holders of our Series D Convertible Preferred Stock are
entitled to receive cumulative dividends when and as declared by our board of
directors at a rate of $10.00 per share. In the event of our liquidation,
dissolution or winding-up, whether voluntary or involuntary, the holders of
shares of our Series D Convertible Preferred Stock are entitled to receive,
prior and in preference to any distribution of any of our assets to the holders
of our common stock, an amount per share of $100.00, plus an amount equal to all
accrued and unpaid dividends on our Series D Convertible Preferred Stock, if
any. As of May 22, 2000, no dividends had been declared on the Series D
Convertible Preferred Stock.
Each share of our Series D Convertible Preferred Stock is convertible at
any time at the option of the holder thereof into our common stock at conversion
ratio equal to the quotient derived by dividing (A) the stated value of $100 by
(B) the lesser of (1) $3.75 (subject to certain antidilution adjustments for
future stock distributions, stock splits or similar capital adjustments) or (2)
the market price of the common stock at the time of conversion. The conversion
ratio is subject to further adjustments in the event of specific dilutive
financings. Each share of Series D Convertible Preferred Stock is automatically
converted into shares of our common stock at the applicable conversion ratio
upon the closing of a firmly committed public offering of our common stock at an
aggregate price to the public equal to or exceeding $2.50 per share, or upon a
vote in favor of such conversion by the holders of a majority of the then
outstanding shares of Series D Convertible Preferred Stock, or upon written
notice by us at any time after the
17
<PAGE>
average common stock value over a twenty-day period equals or exceeds $5.00. The
shares of our common stock offered hereby will not result in automatic
conversion of the Series D Convertible Preferred Stock.
We may redeem the Series D Convertible Preferred Stock, in whole or in
part, after September 13, 1999, out of funds legally available therefore. The
redemption price is $100.00 per share, plus all accrued and unpaid dividends, if
any, to the date of redemption.
Generally, each share of Series D Convertible Preferred Stock has no voting
rights. However, so long as any Series D Convertible Preferred Stock is
outstanding, without the consent of the holders of at least a majority of the
outstanding Series D Convertible Preferred Stock, we may not create or issue any
security with rights, preferences or privileges equal or senior to the Series D
Convertible Preferred Stock; increase the authorized number of shares of Series
D Convertible Preferred Stock or adversely alter or change the rights,
preferences or privileges of the Series D Convertible Preferred Stock. The need
to obtain the consent of a majority of the outstanding Series D Convertible
Preferred Stock may adversely affect our ability to effect these transactions in
a manner deemed advisable by our management.
Series E Convertible Preferred Stock. We have authorized 55,000 shares of
our Series E Convertible Preferred Stock, of which 35,312.50 shares remain
issued and outstanding. The holders of the Series E Convertible Preferred Stock
are entitled to receive noncumulative dividends when and as declared by our
board of directors, if at all; provided, however, that no dividend may be paid
on the Series E Convertible Preferred Stock until the preferential cumulative
dividends on the Series D Convertible Preferred Stock and the Series F
Convertible Preferred Stock have been first fully paid or declared and set
aside. In the event of our liquidation, dissolution or winding-up, whether
voluntary or involuntary, the holders of shares of Series E Convertible
Preferred Stock, together with the holders of our Series F Convertible Preferred
Stock, are entitled to receive, prior and in preference to any distribution of
any of our assets to the holders of our common stock, but only after the
preference is paid or set apart for the Series D Convertible Preferred Stock, an
amount per share of $100.00, plus an amount equal to declared and unpaid
dividends on the Series E Convertible Preferred Stock, if any. As of May 22,
2000, no dividends had been declared on the Series E Convertible Preferred
Stock.
Each share of Series E Convertible Preferred Stock is convertible at any
time at the option of the holder thereof into our common stock at conversion
ratio equal to the quotient derived by dividing (A) the stated value of $100 by
(B) $1.25 (subject to certain antidilution adjustments for future stock
distributions, stock splits or similar capital adjustments). The conversion
ratio is subject to further adjustments in the event of specific dilutive
financings. Each share of Series E Convertible Preferred Stock is automatically
converted into shares of our common stock at the applicable conversion ratio
upon the closing of a firmly committed public offering of our common stock at an
aggregate price to the public equal to or exceeding $7.50 per share, where the
minimum offering is for at least $15 million or upon a vote in favor of such
conversion by the holders of 75% of the then outstanding shares of Series E
Convertible Preferred Stock electing to unconditionally convert such shares of
Series E Preferred. The shares of our common stock offered hereby will not
result in automatic conversion of the Series E Convertible Preferred Stock.
We may redeem the Series E Convertible Preferred Stock, in whole or in
part, at any time, out of funds legally available therefore. The redemption
price is $400.00 per share.
Generally, each share of Series E Convertible Preferred Stock has no voting
rights. However, so long as any Series E Convertible Preferred Stock is
outstanding, without the consent of the holders of at least 75% of the Series E
Convertible Preferred Stock, we may not create or issue any security with
rights, preferences or privileges equal or senior to the Series E Convertible
Preferred Stock; increase the authorized number of shares of Series E
Convertible Preferred Stock or adversely alter or change the rights, preferences
or privileges of the Series E Convertible Preferred Stock. The need to obtain
the consent of the 75% of the Series E Convertible Preferred Stock may adversely
affect our ability to effect these transactions in a manner deemed advisable by
our management.
Series F Convertible Preferred Stock. We have authorized 27,317 shares of
our Series F Convertible Preferred Stock, all of which shares remain issued and
outstanding. The holders of the Series F Convertible Preferred Stock are
entitled to receive cumulative dividends when and as declared by our board of
directors at a rate of $10.00 per share. In the event of our liquidation,
dissolution or winding-up, whether voluntary or involuntary, the holders of
shares of Series F Convertible Preferred Stock, together with the holders of our
Series E Convertible
18
<PAGE>
Preferred Stock, are entitled to receive, prior and in preference to any
distribution of any of our assets to the holders of our common stock, but only
after the preference is paid or set apart for the Series D Convertible Preferred
Stock, an amount per share of $100.00, plus an amount equal to all accrued and
unpaid dividends on the Series F Convertible Preferred Stock, if any. As of May
22, 2000, no dividends had been declared on the Series F Convertible Preferred
Stock.
Each share of Series F Convertible Preferred Stock is convertible at any
time at the option of the holder thereof into our common stock at conversion
ratio equal to the quotient derived by dividing (A) the stated value of $100 by
(B) the lesser of (1) $3.75 (subject to certain antidilution adjustments for
future stock distributions, stock splits or similar capital adjustments) or (2)
the market price of the common stock at the time of conversion. The conversion
ratio is subject to further adjustments in the event of specific dilutive
financings. Each share of Series F Convertible Preferred Stock is automatically
converted into shares of our common stock at the applicable conversion ratio
upon the closing of a firmly committed public offering of our common stock at an
aggregate price to the public equal to or exceeding $2.50 per share, or upon a
vote in favor of such conversion by the holders of a majority of the then
outstanding shares of Series F Convertible Preferred Stock, or upon written
notice by us at any time after the average common stock value over a twenty-day
period equals or exceeds $5.00. The shares of our common stock offered hereby
will not result in automatic conversion of the Series F Convertible Preferred
Stock.
We may redeem the Series F Convertible Preferred Stock, in whole or in
part, after September 13, 1999, out of funds legally available therefore. The
redemption price is $100.00 per share, plus all accrued and unpaid dividends, if
any, to the date of redemption.
Generally, each share of Series F Convertible Preferred Stock has no voting
rights. However, so long as any Series F Convertible Preferred Stock is
outstanding, without the consent of the holders of at least a majority of the
outstanding Series F Convertible Preferred Stock, we may not create or issue any
security with rights, preferences or privileges equal or senior to the Series F
Convertible Preferred Stock; increase the authorized number of shares of Series
F Convertible Preferred Stock or adversely alter or change the rights,
preferences or privileges of the Series F Convertible Preferred Stock. The need
to obtain the consent of a majority of the outstanding Series F Convertible
Preferred Stock may adversely affect our ability to effect these transactions in
a manner deemed advisable by our management.
Series G Convertible Preferred Stock. We have authorized 35,000 shares of
our Series G Convertible Preferred Stock, of which 21,000 shares remain issued
and outstanding. The holders of the Series G Convertible Preferred Stock are
entitled to receive non-cumulative dividends when and as declared by our board
of directors, if at all; provided, however, that no dividend may be paid on the
Series E Convertible Preferred Stock until the preferential cumulative dividends
on the Series D Convertible Preferred Stock and the Series F Convertible
Preferred Stock have been first fully paid or declared and set aside. In the
event of our liquidation, dissolution or winding-up, whether voluntary or
involuntary, the holders of shares of Series G Convertible Preferred Stock are
entitled to receive, prior and in preference to any distribution of any of our
assets to the holders of our common stock, but only after the preference is paid
or set apart for the Series D Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series F Convertible Preferred Stock, an amount per share of
$100.00, plus an amount equal to all declared and unpaid dividends on the Series
G Convertible Preferred Stock, if any. As of May 22, 2000, no dividends had
been declared on the Series G Convertible Preferred Stock.
Each share of Series G Convertible Preferred Stock is convertible at any
time at the option of the holder thereof into our common stock at conversion
ratio equal to the quotient derived by dividing (A) the stated value of $100 by
(B) $0.50 (subject to certain antidilution adjustments for future stock
distributions, stock splits or similar capital adjustments). The conversion
ratio is subject to further adjustments in the event of specific dilutive
financings. Each share of Series G Convertible Preferred Stock is automatically
converted into shares of our common stock at the applicable conversion ratio
upon the closing of a firmly committed public offering of our common stock at an
aggregate price to the public equal to or exceeding $2.50 per share, where the
minimum offering is for at least $10 million or upon a vote in favor of such
conversion by the holders of a majority of the then outstanding shares of Series
G Convertible Preferred Stock. The shares of our common stock offered hereby
will not result in automatic conversion of the Series G Convertible Preferred
Stock.
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<PAGE>
We may redeem the Series G Convertible Preferred Stock, in whole or in
part, at any time, out of funds legally available therefore. The redemption
price is $100.00 per share, plus all accrued and unpaid dividends, if any, to
the date of redemption.
Generally, each share of Series G Convertible Preferred Stock has voting
rights and votes on an as converted basis together with the common stock voting
as a single class. In addition, so long as any Series G Convertible Preferred
Stock is outstanding, without the consent of the holders of at least a majority
of the outstanding Series G Convertible Preferred Stock, we may not create or
issue any security with rights, preferences or privileges equal or senior to the
Series G Convertible Preferred Stock; increase the authorized number of shares
of Series G Convertible Preferred Stock or adversely alter or change the rights,
preferences or privileges of the Series G Convertible Preferred Stock. The need
to obtain the consent of a majority of the outstanding Series G Convertible
Preferred Stock may adversely affect our ability to effect these transactions in
a manner deemed advisable by our management.
Rights Agreement
On August 22, 1997, our board of directors declared a dividend distribution
of one right to purchase a certain number of units (determined by a formula
described herein) for each outstanding share of our common stock at an exercise
price of $8.00, subject to adjustment. Each unit is equal to one one-hundredth
of a share of our Series X Junior Participating Preferred Stock.
The distribution was payable to stockholders of record as of the close of
business on September 10, 1997. Our board of directors further declared that
one right be distributed with each share of common stock issued after the record
date but prior to the separation or the earlier expiration, exchange, redemption
or termination of the rights.
Initially, the rights attached to the common stock then outstanding, and no
separate certificates evidencing the rights were issued. The rights will
separate from the common stock, rights certificates will be issued and the
rights will become exercisable upon the earlier to occur of 10 business days (or
such later date as may be determined by action of our board of directors prior
to the separation of the rights) following the earlier to occur of (i) a public
announcement or resolution of our board of directors recognizing that a person
or group of affiliated or associated persons has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
common stock (subject to certain exceptions that may be made by board of
directors prior to separation of the rights), or (ii) the commencement or
announcement of an intention to make a tender or exchange offer for our common
stock the consummation of which would result in the beneficial ownership by a
person or group of affiliated or associated persons of 15% or more of such
outstanding common stock. However, a person or group of affiliated or
associated persons who acquires the beneficial ownership of 15% or more of the
common stock then outstanding either (i) by reason of share purchases by us
reducing the number of common stock outstanding, or (ii) inadvertently, if such
person or group notifies our board of directors of such inadvertent purchase
within five business days and within two business days after such notice divests
itself of enough common stock so as to no longer have beneficial ownership of
15% or more of the outstanding common stock, will not trigger a separation of
the rights.
Until the separation of the rights, the rights will be evidenced only by
the certificates evidencing, and will be transferred only with, the common
stock. Until the separation of the rights, new common stock certificates issued
after the record date will contain a notation incorporating the right by
reference. Until the separation of the rights, the surrender for transfer,
conversion or exchange of any certificates for common stock outstanding on or
after the record date, even without such notation, will also constitute the
transfer of the rights associated with the common stock represented by such
certificates. As soon as practicable following the separation of the rights,
separate rights certificates will be mailed to holders of record of the common
stock as of the close of business on the date of the separation of the rights,
and such separate rights certificates alone will evidence the rights.
The rights are not exercisable until the date of the separation of the
rights. The rights will expire at the close of business on September 9, 2007,
unless earlier redeemed, exchanged or terminated.
Following the separation of the rights, holders of the rights (other than
rights beneficially owned by an acquiring person that triggered the separation
of the rights or its affiliates or associates, which will thereafter be
20
<PAGE>
void) will be entitled to receive upon exercise and payment of the exercise
price that number of units of the Series X Preferred Stock which equals the
result obtained by dividing the exercise price by 50% of the market price per
share of common stock. The exercise price payable, and the number of shares of
Series X Preferred Stock or other securities or property issuable, upon exercise
of the rights are subject to adjustment from time to time to prevent dilution.
In the event that, after the separation of the rights we consolidate or
merge with another entity or sell or otherwise transfer 50% or more of our
consolidated assets or earning power, proper provision will be made so that each
rights holder (other than rights beneficially owned by an acquiring person that
triggered the separation of the rights or affiliates or associates thereof) will
thereafter have the right to receive, upon exercise, either that number of
shares of our common stock, if we are the surviving corporation of the merger or
consolidation, or of common stock in the surviving acquiring company (or, in the
event there is more than one acquiring company, the acquiring company receiving
the greatest portion of the assets or earning power transferred), which at the
time of such transaction would have a market value of two times the exercise
price of the right.
We may elect not to issue fractional shares of Series X Preferred Stock
upon exercise of a right and in lieu thereof may evidence such fractional shares
by depositary receipts or may make an adjustment in cash based on the market
price of the Series X Preferred Stock on the last trading date prior to the date
of exercise of the right.
At any time prior to the earlier to occur of: (i) the separation of the
rights or (ii) the expiration date, we may redeem the rights in whole, but not
in part, at a price of $.01 per right. Immediately upon the action of our board
of directors ordering redemption of the rights, the right to exercise the rights
will terminate and the only right of rights holders will be to receive the
redemption price.
Subject to applicable law, our board of directors, at its option, may, at
any time after a person or group becomes an acquiring person that triggers the
separation of the rights, exchange all or part of the then outstanding rights
(other than rights beneficially owned by such person or affiliates or associates
thereof) for common stock at an exchange ratio equal to the exercise price
divided by the market price of one share of common stock per right, subject to
adjustment.
The Series X Preferred Stock purchasable upon exercise of the Rights will
not be redeemable and will be, in ranking as to dividends, on a parity with, and
as to liquidation preferences, senior to, our common stock but junior to any
other series of our preferred stock that we may issue or have issued (unless
otherwise provided in the terms of such preferred stock). Each Series X
Preferred Stock will have a dividend in an amount equal to 100 times any cash
dividend declared on each share of common stock. In the event of liquidation,
the holders of Series X Preferred Stock will be entitled to a preferred
liquidation payment equal to the greater of $100.00 or 100 times the payment
made per each share of common stock. Each share of Series X Preferred Stock
will have 100 votes, voting together with the common stock. In the event of any
merger, consolidation or other transaction in which shares of common stock are
exchanged, each share of Series X Preferred Stock will be entitled to receive
100 times the amount and type of consideration received per share of common
stock. The rights of the Series X Preferred Stock as to dividends, liquidation
and voting are protected by customary antidilution provisions.
Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder, including, without limitation, the right to vote or to
receive dividends.
The terms of the rights may be amended at any time by our board of
directors without the consent of rights holders in order to cure any ambiguity
or to correct or supplement any defective or inconsistent provision and may,
prior to the separation of the rights, be amended to change or supplement any
other provision in any manner that our board of directors may deem necessary or
desirable. After the separation of the rights, the terms of the rights may be
amended (other than to cure ambiguities or to correct or supplement defective or
inconsistent provisions) only so long as the amendment does not adversely affect
the interests of rights holders (other than the acquiring person that triggers
the separation of the rights).
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us without
conditioning the offer on a substantial number of rights being acquired. The
rights should not interfere with any merger or other business combination
approved by our board of directors
21
<PAGE>
because the board of directors may, at its option, at any time prior to the
separation of the rights, redeem all but not less than all the then outstanding
rights at a price of $.01 per right.
Delaware Takeover Statute
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which prohibits a publicly-held Delaware corporation from
engaging in any ''business combination'' with an ''interested stockholder'' for
three years following the date that such stockholder became an interested
stockholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3 % of the outstanding voting stock not owned by the
interested stockholder.
Generally, a ''business combination'' includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the stockholders.
An ''interested stockholder'' is a person who, together with affiliates and
associates, owns (or within three years prior did own) 15% or more of the
corporation's voting stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
LEGAL MATTERS
The validity of the shares of common stock offered hereby has been passed
upon by Paul, Hastings, Janofsky & Walker LLP, Los Angeles, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements included in our Annual Report on Form 10-KSB for the year ended
December 31, 1999, as set forth in their report, which is incorporated by
reference in this prospectus. Our financial statements are incorporated by
reference in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide generally for indemnification of our officers,
directors, agents and employees to the extent authorized by the Delaware General
Corporation Law. Pursuant to Section 145 of the Delaware General Corporation
Law, a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation, and with respect to any criminal action, they
had no reasonable cause to believe their conduct was unlawful. With respect to
suits by
22
<PAGE>
or in the right of a corporation, however, indemnification is not available if
such person is adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless the court determines that
indemnification is appropriate. In addition, a corporation has the power to
purchase and maintain insurance for such persons. We currently maintain such
directors' and officers' insurance. The statute also expressly provides that the
power to indemnify authorized thereby is not exclusive of any rights granted
under any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise.
As permitted by Section 102 of the Delaware General Corporation Law, our
stockholders have approved and incorporated provisions into our certificate of
incorporation eliminating a director's personal liability for monetary damages
to us and our stockholders arising from a breach of a director's fiduciary duty,
except for liability under Section 174 of the Delaware General Corporation Law
or liability for any breach of the director's duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law or for any transaction in
which the director derived an improper personal benefit.
We have entered into indemnification agreements with each of our directors
and executive officers. These agreements contractually obligate us to indemnify
our directors and executive officers to the fullest extent permitted by
applicable law, including mandatory indemnification unless prohibited by
statute, mandatory advancement of expenses, accelerated procedures for the
authorization of indemnification and litigation "appeal" rights of an indemnitee
in the event of an unfavorable determination or where the board fails or refuses
to act. The indemnification agreements are not intended to deny or otherwise
limit third-party or derivative suits against us or our directors or officers,
but to the extent a director or officer were entitled to indemnity or
contribution under the indemnification agreement, the financial burden of a
third-party suit would be borne by us, and we would not benefit from derivative
recoveries against the director or officer. Such recoveries would accrue to our
benefit but would be offset by our obligations to the director or officer under
the indemnification agreement.
The above discussion of our bylaws, certificate of incorporation and
indemnification agreements and of Section 145 of the Delaware General
Corporation Law is not intended to be exhaustive and is qualified in its
entirety by such bylaws, certificate of incorporation, indemnification
agreements and statute.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have 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.
23
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The fees and expenses payable by the Company in connection with the sale of
the shares of common stock being registered are estimated as follows:
<TABLE>
<CAPTION>
Amount
----------------
<S> <C>
SEC Filing Fee....................................................................... $ 3,336.96
Legal Fees and Expenses*............................................................. $15,000.00
Accounting Fees*..................................................................... $10,000.00
Printing and Miscellaneous Expenses*................................................. $ 5,000.04
----------
Total*.......................................................................... $33,337.00
==========
___________________
*Indicates estimate
</TABLE>
Item 15. Indemnification of Directors and Officers.
The Bylaws provide generally for indemnification of officers, directors,
agents and employees of the Company to the extent authorized by the Delaware
General Corporation Law. Pursuant to Section 145 of the Delaware General
Corporation Law, a corporation generally has the power to indemnify its present
and former directors, officers, employees and agents against expenses incurred
by them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful.
With respect to suits by or in the right of a corporation, however,
indemnification is not available if such person is adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless the court determines that indemnification is appropriate. In addition, a
corporation has the power to purchase and maintain insurance for such persons.
The statute also expressly provides that the power to indemnify authorized
thereby is not exclusive of any rights granted under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise.
As permitted by Section 102 of the Delaware General Corporation Law, the
Company's stockholders have approved and incorporated provisions into the
Company's Certificate of Incorporation eliminating a director's personal
liability for monetary damages to the Company and its stockholders arising from
a breach of a director's fiduciary duty, except for liability under Section 174
of the Delaware General Corporation Law or liability for any breach of the
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law or for any transaction in which the director derived an
improper personal benefit.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements contractually obligate the
Company to indemnify its directors and executive officers to the fullest extent
permitted by applicable law, including mandatory indemnification unless
prohibited by statute, mandatory advancement of expenses, accelerated procedures
for the authorization of indemnification and litigation "appeal" rights of an
indemnitee in the event of an unfavorable determination or where the board fails
or refuses to act. The indemnification agreements are not intended to deny or
otherwise limit third-party or derivative suits against the Company or its
directors or officers, but to the extent a director or officer were entitled to
indemnity or contribution under the indemnification agreement, the financial
burden of a third-party suit would be borne by the Company, and the Company
would not benefit from derivative recoveries against the director or officer.
Such recoveries would accrue to the benefit of the Company but would be offset
by the Company's obligations to the director or officer under the
indemnification agreement.
The above discussion of the Company's Bylaws, Certificate of Incorporation
and indemnification agreements and of Section 145 of the Delaware General
Corporation Law is not intended to be exhaustive and is qualified in its
entirety by such Bylaws, Certificate of Incorporation, indemnification
agreements and statute.
II-1
<PAGE>
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to legality of securities being
registered.
13.1 Annual Report on Form 10-KSB for the year ended December 31, 1999.
13.2 Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of counsel (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of this registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in this registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of post-effective amendment any
of the securities which remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
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 such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
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 S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on May 22, 2000.
PROTEIN POLYMER TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ J. THOMAS PARMETER
----------------------
J. Thomas Parmeter, Chairman of the Board,
President & Chief Executive Officer
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints J. Thomas Parmeter and Janis Neves, and
each of them, his true and lawful attorney-in-fact and agent, 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 this Registration Statement
and any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, 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 attorney-in-
fact and agent or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
s/ J. THOMAS PARMETER Chairman of the Board, President and Chief May 22, 2000
- ------------------------------------ Executive Officer
J. Thomas Parmeter (Principal Executive Officer)
/s/ JANIS NEVES Director of Finance and Assistant Secretary May 22, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
Janis Neves
/s/ RICHARD ADELSON Director May 22, 2000
- ------------------------------------
Richard Adelson
/s/ PATRICIA J. CORNELL Director May 22, 2000
- ------------------------------------
Patricia J. Cornell
/s/ EDWARD E. DAVID Director May 22, 2000
- ------------------------------------
Edward E. David
/s/ PHILIP J. DAVIS Director May 22, 2000
- ------------------------------------
Philip J. Davis
/s/ EDWARD J. HARTNETT Director May 22, 2000
- ------------------------------------
Edward J. Hartnett
/s/ J. PAUL JONES Director May 22, 2000
- ------------------------------------
J. Paul Jones
/s/ KERRY L. KUHN Director May 22, 2000
- ------------------------------------
Kerry L. Kuhn
/s/ GEORGE R. WALKER Director May 22, 2000
- ------------------------------------
George R. Walker
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to legality of securities being
registered.
13.1 Annual Report on Form 10-KSB for the year ended December 31, 1999.
13.2 Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of counsel (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
II-6
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF PAUL, HASTINGS, JANOFSKY & WALKER LLP]
May 22, 2000
Protein Polymer Technologies, Inc.
10655 Sorrento Valley Road
San Diego, California 92121
Ladies and Gentlemen:
We are furnishing this opinion of counsel to Protein Polymer
Technologies, Inc., a Delaware corporation (the "Company"), for filing as
Exhibit 5.1 to the Registration Statement on Form S-2 (the "Registration
Statement") to be filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the resale
of 12,640,000 shares of the Company's common stock, $0.01 par value (the
"Shares").
We have examined the Certificate of Incorporation and Bylaws, each as
amended to date, of the Company, and the originals, or copies certified or
otherwise identified, of records of corporate action of the Company as furnished
to us by the Company, certificates of public officials and of representatives of
the Company, and such other instruments and documents as we deemed necessary, as
a basis for the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all corporate
records and other documents submitted to us and the conformity to original
documents submitted to us as certified or photostatic copies.
Based upon our examination as aforesaid, and in reliance upon our
examination of such questions of law as we deem relevant under the
circumstances, we are of the opinion that the Shares, when purchased as
described in the Registration Statement, will be validly issued, fully paid and
nonassessable.
We express no opinion with respect to the applicability or effect of
the laws of any jurisdiction other than the Delaware General Corporation Law, as
in effect as of the date hereof.
We hereby consent to the filing of this opinion of counsel as Exhibit
5.1 to the Registration Statement.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
<PAGE>
EXHIBIT 13.1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________________ to ___________________
Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of Principal Executive Offices)
Issuer's Telephone Number: (619) 558-6064
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Redeemable Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The issuer's revenues for the most recent fiscal year were $96,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 22, 2000 was $15,208,769.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 22, 2000, 18,286,510
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed no later than April 7, 2000 pursuant to
Regulation 14A with respect to the Registrant's 2000 Annual Meeting of
Stockholders (incorporated by reference in Part III).
Transitional Small Business Disclosure Format: Yes [_] No [X]
================================================================================
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page No.
--------
PART I.................................................................... 2
Item 1. Business.................................................. 2
Item 2. Properties................................................ 18
Item 3. Legal Proceedings......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 19
PART II................................................................... 20
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 20
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 24
Item 7. Financial Statements...................................... F-1
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 29
PART III.................................................................. 29
Items 9, 10, 11 and 12 - Incorporated by Reference
Item 13. Financial Statements, Exhibits and Reports
on Form 8-K.............................................. 29
Signatures ......................................................... 35
1
<PAGE>
PART I
ITEM 1. BUSINESS
COMPANY BACKGROUND
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or
"the Company"), is a development-stage biotechnology company incorporated on
July 6, 1988 and is engaged in the research, development, production and
clinical testing of medical products based on its proprietary protein-based
biomaterials technology. Since 1992, the Company has focused primarily on
developing materials technology and products to be used in the surgical repair
of tissue: surgical adhesives and sealants; soft tissue augmentation products;
wound healing matrices; drug delivery devices; and surgical adhesion barriers.
The Company has also developed coating technology that can efficiently modify
and improve the surface properties of more traditional biomedical devices. A
common goal is to develop materials that beneficially interact with human cells,
enabling cell growth and the regeneration of tissues with improved outcomes as
compared to current products and practices.
In December 1999, the Company initiated human clinical testing of its
urethral bulking agent for the treatment of female stress urinary incontinence.
The August 1999 approval by the U.S. Food and Drug Administration ("FDA") of the
Company's Investigational Device Exemption ("IDE") allows PPTI to test the
safety and effectiveness of the incontinence product in women over the age of 40
who have become incontinent due to the shifting of their bladder or the
weakening of the muscle at its base that controls the flow of urine, or both
problems combined. The Company estimates that more than 2.5 million women begin
to experience stress urinary incontinence in the United States each year. In
most untreated cases, the problem becomes progressively more pronounced. Due to
limited efficacy or invasiveness of current treatments, only a small proportion
of the women experiencing stress urinary incontinence are clinically treated,
relying instead on pads and plugs and the like that only address the symptoms.
In contrast, PPTI's product is injected, typically in an out patient procedure,
into urethral tissue at the base of the bladder forming a solid implant that
provides support to the muscles controlling the flow of urine. The Company
believes that its product will prove to be easy for the physician to use, offer
enduring effectiveness, and avoid most of the other limitations of urethral
bulking products on the market or in development.
The tissue augmentation materials and technology underlying the
incontinence product have the potential to be effective and desirable in a
number of other clinical applications. The Company intends to submit an
additional IDE to the FDA in 2000 to obtain approval to begin human clinical
testing of its dermal bulking agent for use in cosmetic and reconstructive
surgery applications. PPTI began studies to identify its most promising
biomaterial formulations for use in these soft tissue augmentation products in
1996, devoted increasing resources through 1997 and 1998, and has primarily
focused on this program area in 1999 in preparation for human clinical testing.
2
<PAGE>
In January 2000, PPTI established a strategic alliance with Femcare,
Ltd. ("Femcare") for the commercialization of the incontinence product in Europe
and Australia. In the agreement, Femcare is responsible for clinical testing,
regulatory approval, and product sales and marketing within these territories,
and PPTI is responsible for product manufacturing. Contingent on successful
clinical trials commercialization of the product in Europe is expected to begin
more than a year before approval for marketing the product in the United States
can be obtained. PPTI also is in discussions with several companies regarding
the establishment of strategic alliances for commercializing the incontinence
product in the United States and other markets outside the Femcare territories.
Between 1994 and 1997, the Company's efforts were focused predominantly
on the development of its surgical adhesive and sealant technology. As part of
this effort, the Company targeted the establishment of a strategic alliance with
a market leader in the field of surgical wound closure products which lead to
the execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.
The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. PPTI is committed to the commercial development of its adhesive and
sealant technology. Subsequent to the termination of the Ethicon agreement, the
Company has worked to determine the most significant market and product
opportunities for its use. PPTI is seeking to establish new strategic alliances
with leaders in those markets.
To the extent sufficient resources are available, the Company continues
to research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.
Through 1999, PPTI marketed specialty use products for in vitro cell
--------
culture applications including SmartPlastic(R) and ProNectin(R) F Cell
Attachment Factor. ProNectin F was launched commercially in 1991. SmartPlastic
is ProNectin F Activated Cultureware where ProNectin F is presented in ready to
use form on the surfaces of disposable plastic labware for culturing human and
animal cells. SmartPlastic was launched commercially in 1995. In 1998 the
Company discontinued direct sales of its cell culture products, and in February
2000, the Company sold all rights to the use of the technology for in vitro cell
--------
culture applications, the product trademarks, and remaining inventory to Sanyo
Chemical Industries, Ltd.
Prior to 1992, the Company's scientists had successfully demonstrated
the ability to create and produce novel protein polymer materials having
important physical, biological and chemical properties. During this period, most
of the Company's efforts were dedicated to supplying E. I. DuPont de Nemours &
Co. ("DuPont") with materials under contract for its proprietary research and
testing purposes.
3
<PAGE>
In 1992, the Company raised approximately $8.9 million through its
initial public offering of common stock and redeemable warrants. The Company
used a major portion of these proceeds to generate substantive in vitro
--------
laboratory evidence and in vivo animal test data demonstrating the
-------
biocompatibility and performance of its protein polymers and derived
biomaterials, and to establish a materials science group which has developed
important materials modification and fabrication technology.
In July 1994, the Company raised approximately $2.1 million from the
sale of its unregistered Series C Preferred Stock to private investors. In
September 1995, the Company raised approximately $2.4 million from the sale of
its unregistered Series D Preferred Stock to the same private investors. Also at
this time these investors exchanged all of their holdings of Series C Preferred
Stock and accumulated dividends into Series D Preferred Stock. In January 1997,
the Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.
In April and May 1998, the Company raised approximately $5.4 million
from the private sale of the Company's Series E Convertible Preferred Stock and
warrants to a small group of institutional and accredited investors. In
connection with this transaction, the Company also issued shares of Series F
Convertible Preferred Stock in exchange for the same number of shares of
outstanding Series D Convertible Preferred Stock.
During April 1999, the Company received approximately $508,000 from the
exercise of redeemable, publicly traded warrants originally issued as part of
PPTI's Initial Public Offering, and during May 1999 the Company received
approximately $416,000 for the conversion of warrants issued in conjunction with
its private placement of Series E Convertible Preferred Stock. In August and
September of 1999, the Company received approximately $2 million, net of costs,
from a private placement of its Series G Convertible Preferred Stock priced at
$100 per share with warrants to purchase an aggregate of 4,200,000 shares of
common stock to a small group of institutional and accredited investors.
The Company's cash balance as of December 31, 1999 was $156,000. The
Company believes this amount, in combination with approximately $3.4 million in
revenues and receivables obtained in January and February 2000 from licensing
and R&D agreements, and the exercise of common stock warrants issued in
connection with Series G Convertible Preferred Stock, is sufficient to fund its
operations through January 2001. Beyond this fiscal year, we believe there are a
number of alternatives available to meet our continuing capital requirements.
See the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion.
THE COMPANY'S TECHNOLOGY
PPTI is focused on developing products to improve medical and surgical
outcomes, based on an extensive portfolio of proprietary biomaterials.
Biomaterials are materials that are used to direct, supplement, or replace the
functions of living systems. The interaction between materials
4
<PAGE>
and living systems is dynamic. It involves the response of the living system to
the materials (e.g., biocompatibility) and the response of the materials to the
living system (e.g., degradation). The requirements for performance within this
demanding biological environment have been a critical factor in limiting the
myriad of possible metal, polymer, and ceramic compositions to a relatively
small number that to date have been proven useful in medical devices.
The goal of biomaterials development historically has been to produce
inert materials -- materials that elicit little or no response from the living
system. However, the Company believes that such conventional biomaterials are
constrained by their inability to convey appropriate messages to the cells that
surround them -- the same messages that are conveyed by proteins in normal human
tissues.
The products targeted for development by PPTI are based on a new
generation of biomaterials which have been designed to be recognized and
accepted by human cells, to aid in the natural process of bodily repair
(including the healing of tissue and the restoration or augmentation of its form
and function), and, ultimately, to promote the regeneration of tissues. The
Company believes that the successful realization of these properties will
substantially expand the role that artificial devices can play in the prevention
and treatment of human disability and disease, and enable the culture of native
tissues for successful reimplantation.
Through its proprietary core technology, PPTI produces high molecular
weight polymers that can be processed into a variety of material forms such as
gels, sponges, films, and fibers, with their physical strength and rate of
resorption tailored to each potential product application. These polymers are
constructed of the same amino acids as natural proteins found in the body. The
Company has demonstrated that its polymers can mimic the biological and chemical
functions of natural proteins and peptides, such as the attachment of cells
through specific membrane receptors and the ability to participate in enzymatic
reactions, thus overcoming a critical limitation of conventional biomaterials.
In addition, materials made from PPTI's polymers have demonstrated excellent
biocompatibility in a variety of preclinical feasibility studies.
PPTI's patented core technology enables messages that direct activities
of cells to be precisely formulated and presented in a structured environment
similar to what nature has demonstrated to be essential in creating, maintaining
and restoring the body's functions. The Company's protein polymers are made by
combining the techniques of modern biotechnology and traditional polymer
science. The techniques of biotechnology are used to create synthetic genes that
direct the biological synthesis of protein polymers in recombinant
microorganisms. The methods of traditional polymer science are used to design
novel materials for specific product applications by combining the properties of
individual "building block" components in polymer form.
In contrast to natural proteins, either isolated from natural sources
or produced using traditional genetic engineering techniques, PPTI's technology
results in the creation of new proteins with unique properties. PPTI has
demonstrated its capability to create materials that:
. combine properties of different proteins found in nature;
5
<PAGE>
. reproduce and amplify selected activities of natural proteins;
. eliminate undesired properties of natural proteins; and
. incorporate synthetic properties via chemical modifications.
This capability is fundamental to PPTI's current primary product
research and development focus -- tissue repair and regeneration. Tissues are
highly organized structures made up of specific cells arranged in relation to an
extracellular matrix ("ECM"), which is principally composed of proteins. The
behavior of cells is determined largely by their interactions with the ECM.
Thus, the ability to structure the cells' ECM environment allows the protein
messages they receive -- and their activity -- to be controlled. Similar to what
nature has demonstrated to be essential in creating, maintaining and restoring
the body's functions, PPTI's patented core technology enables messages that
direct activities of cells to be precisely formulated and presented in a
structured environment.
FUNDAMENTAL PROTEIN POLYMERS
PPTI's primary products under development are based on protein polymers
combining selected properties from two of the most extraordinary structural
proteins found in nature: silk and elastin. Silk, based upon its crystalline
structure, has long been known as an incredibly strong material, and has a long
history of medical use in humans as a material for sutures. Elastin fibers are
one of the most remarkable rubber-like materials ever studied. Found in human
tissues such as lungs and arteries, elastin fibers must expand and contract over
a life time, and can be extended nearly three times their resting length without
damaging their flexibility.
Despite the incredible individual properties of silk and elastin,
neither of these natural protein materials is capable of being processed into
forms other than what nature has provided without destroying their valuable
materials properties. However, PPTI's proprietary technology has enabled the
creation of polymers that combine the repeating blocks of amino acids
responsible for the strength of silk and the elasticity of elastin. By precisely
varying the number and sequence of the different blocks in the assembled protein
polymer, new combinations of properties suitable for various medical
applications have been created.
The Company has also created protein polymers based on repeating blocks
of amino acids found in two other classes of structural proteins found in
nature: collagen and keratin. Collagen is the principal structural component of
the body, found in some shape or form in virtually every tissue, ranging from
shock absorbing cartilage to light transmitting corneas. Keratin is a major
component in hair, nails and skin. The development of materials based on these
polymers is at an early stage of research.
PRODUCT CANDIDATES AND ANTICIPATED MARKETS
The Company's technology and materials have the potential to create
products and product applications in a variety of medical and specialty use
markets. The Company's current development efforts are principally focused on
preparations for scale-up and validation of manufacturing processes for its
hydrogel bulking agents for soft tissue augmentation. However,
6
<PAGE>
opportunities for research and development of product candidates for other
medical and specialty use continue to be evaluated, particularly those based on
its tissue adhesive and sealant technology.
All of the Company's product candidates are subject to preclinical and
clinical testing requirements for obtaining U.S. Food and Drug Administration's
("FDA's") marketing approval. The actual development of other product
candidates, if any, will depend on a number of factors, including the
availability of funds required to research, develop, test and obtain necessary
regulatory approvals; the anticipated time to market; the potential revenues and
margins that may be generated if a product candidate is successfully developed
and commercialized; and the Company's assessment of the potential market
acceptance of a product candidate.
Soft Tissue Augmentation
Conditions where there is a need to augment the body's soft tissues
include both cosmetic and medical applications. In the former, for example,
current procedures include the injection of collagen-based materials to smooth
out facial wrinkles, acne scars and to modify lip contours. However, these
treatments only last a matter of months, which puts them economically out of
reach for a large portion of the population of people who would otherwise desire
the procedure.
Medical applications include the treatment of stress urinary
incontinence, gastroesophageal reflux, and fecal incontinence, the reversible
blockage of fallopian tubes for birth control, the augmentation of vocal chords,
and the expansion of gingival tissues impacted by periodontal disease. PPTI
believes there is a lack of materials with suitable properties for these
applications, primarily because materials having the required durability in vivo
-------
either lack the requisite biocompatibility or the ability to be easily injected.
The Company has developed protein polymers that demonstrate excellent
biocompatibility, are soluble in water at room temperature, and are easily
injected into body tissues, irreversibly forming soft, durable gels at body
temperature. Previously, PPTI has shown gels of similar composition to persist
at least 18 months in an animal model.
PPTI's bulking agents are unique in that they are applied as an aqueous
solution, easily injected through a 30-gauge needle, rapidly spreading
throughout the native tissue architecture. With the increase from room to body
temperature, the polymer solution irreversibly transforms within minutes to a
soft, pliable hydrogel. Importantly, the volume of material remains constant in
the liquid to gel transition, such that the tissue expansion observed by the
physician upon administration will be subsequently maintained.
This is in direct contrast to the majority of competing technologies,
which are suspensions or slurries of solid particles in an aqueous carrier such
as saline. When injected through a fine gauge needle, with some difficulty due
to their thick constitution, the carrier liquid dissipates through the tissues
with time, usually within 24 hours, such that roughly half of the effective
bulking volume is lost. This requires the physician to either overcompensate for
the expected volume reduction upon initial administration, with increased risks
to the patient, or to
7
<PAGE>
"top off" the bulking effect with repeated administrations of the product over
time, with substantially increased costs.
Other hydrogel technologies of which the Company is aware are either
preformed gels, difficult to administer by injection, or polymer solutions mixed
with a chemical cross-linking agent prior to injection. PPTI believes that such
technologies are limited in their overall performance including durability,
biocompatibility and ease of administration.
In August 1999, the Company obtained the FDA's approval of its
Investigational Device Exemption (IDE) to begin human clinical testing of its
urethral bulking agent for the treatment of female stress urinary incontinence.
The Company began pilot clinical testing of the product's safety and efficacy in
December 1999. The Company projects expanding into a multi-site pivotal clinical
study in the fourth quarter of 2000. To the extent funds are available, the
Company intends to submit an additional IDE to the FDA in 2000 to obtain
approval to begin human clinical testing of its dermal bulking agent for use in
cosmetic and reconstructive surgery applications.
Surgical Adhesives and Sealants
Surgeons are master craftsmen. However, instead of working with metal,
wood or plastic, they work with living tissues. Like carpenters, they use saws,
chisels (knives) and drills to take things apart and fit pieces together. But
they only have access to string (sutures) and nails (staples, pins, screws) to
hold things in place. Furthermore, a surgeon's work is complicated by the
biological healing response occurring when tissues are injured.
As in everyday life, there are many surgical uses for glue where string
and nails just don't work well. They may not be quick or easy enough to use;
they may not be capable of staying in place; they may do more damage than
desired; they and/or the tools to use them may not fit within the available work
space; they may result in fluid or air leaks; or the "fit and finish" or healing
response is just not satisfactory.
Certain surgical adhesives and sealants that seek to avoid these
limitations have been developed and marketed outside the United States by other
parties. In 1998, the FDA approved two such products for certain uses in the
U.S. DermaBond(TM), a cyanoacrylate adhesive, was approved for topical
application to close skin incisions and lacerations. Cyanoacrylate adhesives set
fast and have high strength, but are toxic to certain tissues and form brittle
plastics that do not resorb. These limitations restrict their use to bonding the
outer surfaces of skin together. Tisseel(TM), a fibrin sealant, was approved for
use as an adjunct to hemostasis in surgery. Fibrin sealants have excellent
hemostatic properties, but are derived from human and/or animal blood products,
set slowly, have low strength, and lose their strength rapidly.
A third category of tissue adhesives combines natural proteins such as
collagen or albumin with aldehyde cross-linking agents. Such products are
marketed in Europe for limited life-threatening indications. The aldehyde
cross-linking agents employed (i.e. glutaraldehyde, formaldehyde) in such
products are known to cause adverse tissue reactions. Additional adhesive
8
<PAGE>
and/or sealant products employing other polymer systems and cross-linking agents
are also under development.
PPTI is seeking to develop surgical adhesives and sealants that combine
the biocompatibility of fibrin glues (without the risks associated with use of
blood-derived products) with the high strength and fast setting times of
cyanoacrylates. Unique features include significant elasticity within the
adhesive matrix (to move as tissues move) and the capability of tailoring the
resorption rate of the adhesive matrix with the rate at which the wound heals. A
non-resorbable adhesive or sealant can only be used where the damaged tissues
will not heal. Otherwise, a barrier to wound healing is unavoidably created.
In September 1995, the Company entered into a series of agreements with
Ethicon regarding this program. Ethicon elected to terminate these agreements in
December 1997. However, the Company has demonstrated both the adhesive
performance and the biocompatibility of its product formulations in animal
models, including the resorption of the adhesive matrix in conjunction with the
progression of wound healing. Subsequently, the Company has worked to determine
the specific markets and products providing the most significant opportunities
for the use of its adhesive and sealant technology.
As a result of its evaluations of the medical market needs, the
properties achievable with its technology, and the capabilities of competitive
technologies, PPTI has focused its product development interests on certain
orthopedic applications, particularly those related to the repair of the spinal
disc for the treatment of chronic low back pain. Low back pain is the most
common musculoskeletal disorder in industrialized societies. PPTI is committed
to the commercial development of its adhesive and sealant technology and is
seeking to establish new strategic alliances with market leaders. However, there
can be no assurance that such alliances can be entered into.
Wound Healing/Tissue Engineering Matrices
The current market for wound care products is highly segmented,
involving a variety of different approaches to wound care. Products currently
marketed and being developed by other parties include fabric dressings (such as
gauze), synthetic materials (such as polyurethane films) and biological
materials (such as growth factors and living tissue skin graft substitutes).
While the type of product used varies depending on the type of wound and extent
of tissue damage, the Company believes that a principal treatment goal in all
instances is to stimulate wound healing while regenerating functional (as
opposed to scar) tissue.
The Company has developed protein polymers which it believes may be
useful in the treatment of dermal wounds, particularly chronic wounds such as
decubitous ulcers, where both reconstruction of the ECM and re-establishment of
its function are desired. These polymers, based on key ECM protein sequence
blocks, are biocompatible, fully resorbable and have been processed into gels,
sponges, films and fibrous sheets. The Company believes that such materials, if
successfully developed, could improve the wound-healing process by providing
physical support in situ for cell migration and tissue regeneration and as
-------
delivery systems for
9
<PAGE>
growth factors. Additionally, such materials may serve as scaffolds for the
ex vivo production of living tissue substitutes.
- -------
This program is in the early stages of research, which the Company has
principally conducted in collaboration with third parties. Such collaborations
have primarily focused on the treatment of dermal wounds.
Controlled Release Drug Delivery
Oral delivery of drugs is the most preferred route of administration.
However, for many drugs this is not possible and alternative drug delivery
routes are required. Alternative routes include transdermal, mucosal, and by
implantation or injection. For implantation or injection, it is often desirable
to extend the availability of the drug in order to minimize the frequency of
these invasive procedures. A few materials have been commercialized which act as
depots for a drug when implanted or injected, releasing the drug over periods
ranging from one month to several years. Other material and drug combinations
are being developed by third parties. PPTI believes that the properties of these
materials for such applications can be substantially improved upon, making
available the use of depot systems for a wider range of drugs and applications.
PPTI's soft tissue augmentation products, its wound healing matrices,
and its medical device coating technology all provide platforms for drug
delivery applications, serving as controlled release drug depots. The protein
polymer materials the Company has developed exhibit exceptional
biocompatibility, provide for control over rates of resorption, and are
fabricated using aqueous solvent systems at ambient temperatures -- attributes
which can be critical in maintaining the activity of the drug, particularly
protein-based drugs emerging from the biotechnology industry. This program is in
the early stages of research.
MANUFACTURING, MARKETING AND DISTRIBUTION
Preclinical and clinical testing of potential medical device products,
where the results will be submitted to the FDA, requires compliance with the
FDA's Good Laboratory Practices ("GLP") and other Quality System Regulations
("QSR"). The Company has implemented, and continues to implement, polymer
production and quality control procedures, and has made certain facilities
renovations to operate in conformance with FDA requirements. The Company
believes its current polymer production capacity is sufficient for supplying its
development programs with the required quality and quantity of materials needed
for feasibility and preclinical testing and initial ("pilot") clinical testing.
To expand beyond initial clinical trials, the Company will require additional
manufacturing capacity.
The Company is considering several methods for increasing production of
its biomedical and other product candidates to meet clinical and commercial
requirements. For example, the Company may expand its existing facility to
produce needed quantities of materials under FDA's GLP and QSR regulations for
clinical and commercial use. Alternatively, the Company may establish external
contract manufacturing arrangements for needed quantities of materials.
10
<PAGE>
However, there can be no assurance that such arrangements, if desired, could be
entered into or maintained on acceptable terms, if at all, or that the existence
or maintenance of such arrangements would not adversely affect the Company's
margins or its ability to comply with applicable governmental regulations. The
actual method, or combination of methods, that the Company may ultimately pursue
will depend on a number of factors, including availability, cost and the
Company's assessment of the ability of such production methods to meet its
commercial objectives.
PPTI has entered into an agreement with Femcare for marketing and
distribution of its urethral bulking agent for stress urinary incontinence in
certain countries, if the required regulatory approvals are obtained (see
"Collaborative Agreements). The Company currently expects that its other
biomedical products, if any were commercialized, would be marketed and
distributed by corporate partners. While this arrangement could minimize the
Company's marketing costs and facilitate wider distribution of any biomedical
products it may develop, these arrangements could possibly reduce the Company's
revenues and profits as compared to what would be possible if the Company
directly sold such products.
RESEARCH AND DEVELOPMENT
Information regarding Company-sponsored research and development
activities and contract research and development revenue is set forth below
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
COLLABORATIVE AGREEMENTS
Because of the highly technical focus of its business, the Company must
conduct extensive research and development prior to any commercial production of
its biomedical products or the biomaterials from which they are created. During
this development stage, PPTI's ability to generate revenues is limited. Because
of this limitation, the Company does not have sufficient resources to devote to
extensive testing or marketing of its products. The Company's primary method of
expanding its product development, testing and marketing capabilities is to seek
to form collaborative arrangements with selected corporate partners with
specific resources that the Company believes complement its business strategies
and goals.
The medical device industry has traditionally licensed from development
stage companies product candidates whose safety and efficacy has been
demonstrated at least in pilot human clinical trials. In December 1999, the
Company began human clinical testing of its urethral bulking agent for the
treatment of female stress urinary incontinence. The Company also intends to
submit an additional IDE to the FDA in 2000 to obtain approval to begin human
clinical testing of its dermal bulking agent for use in cosmetic and
reconstructive surgery applications.
11
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Femcare, Ltd.
In January 2000, PPTI announced the formation of a strategic alliance
with Femcare, Ltd. for the commercialization in Europe and Australia of its
urethral bulking agent for treatment of stress urinary incontinence. Femcare is
a British-based developer and international marketer of surgical products for
gynecological and urological applications.
In the alliance, PPTI will provide Femcare with technical assistance,
and the incontinence product for Femcare's clinical testing and regulatory
approvals in the Femcare territories. Femcare will utilize its existing customer
base and its extensive distribution network as the basis for introducing the
product into Europe and Australia. Currently, Femcare markets its products in 40
countries worldwide. A new Urology division has been created to extend the
company's success in gynecology to urological applications, in particular female
stress urinary incontinence. PPTI receives a $1 million license fee and a
royalty on the revenues generated by Femcare from the sale of the product. PPTI
will be responsible for providing the product to Femcare for commercial sale.
Other Agreements
PPTI is discussing other potential collaboration agreements with
prospective marketing partners for both its soft tissue augmentation products
and its tissue adhesive and sealant products. There can be no assurance that the
Company will continue such discussions or be able to establish such agreements
at all, or do so in a timely manner and on reasonable terms, or that such
agreements will lead to successful product development and commercialization.
From time to time, the Company is a party to certain materials evaluation
agreements regarding biomedical and specialty use applications of its products,
polymers and technology, including applications in areas other than those
identified as product candidates above. These agreements provide, or are
intended to provide, for the evaluation of product feasibility. There can be no
assurance that the Company will continue to be able to establish such agreements
at all, or do so in a timely manner and on reasonable terms, or that such
agreements will lead to joint product development and commercialization
agreements.
INTENSE COMPETITION
The principal anticipated commercial uses of PPTI's biomaterials are as
components of end-use products for biomedical and other specialty applications.
End-use products using or incorporating the Company's biomaterials would compete
with other products that rely on the use of alternative materials. For example,
bulking agents for soft tissue augmentation are currently marketed based on
bovine collagen and, outside the U.S., silicone particles. Similarly, all
targeted applications of the Company's potential products will compete with
other products having the same or similar applications.
The areas of business in which the Company engages and proposes to
engage are characterized by intense competition and rapidly evolving technology.
Competition in the biomedical and surgical repair markets is particularly
significant. The Company's competitors in
12
<PAGE>
the biomedical and surgical repair markets include major pharmaceutical,
surgical product, chemical and specialized biopolymer companies, many of which
have financial, technical, research and development and marketing resources
significantly greater than those of the Company. Academic institutions and other
public and private research organizations are also conducting research and
seeking patent protection, and may commercialize products on their own or
through joint ventures. Most of the Company's competitors depend on synthetic
polymer technology rather than protein engineering for developing products.
However, the Company believes that DuPont and several university laboratories
are currently conducting research into similar protein engineering technology.
The primary elements of competition in the biomedical and surgical
repair products market are performance, cost, safety, reliability, convenience
and commercial production capabilities. The Company believes that its ability to
compete in this market will be enhanced by its issued patent claims, the breadth
of its other pending patent applications, its early entry into its field and its
experience in protein engineering.
PATENTS AND TRADE SECRETS
PPTI is aggressively pursuing domestic and international patent
protection for its technology, making claim to an extensive range of
recombinantly prepared structural and functional proteins, methods for preparing
synthetic repetitive DNA, methods for the production and purification of protein
polymers, end-use products incorporating such materials and methods for their
use.
The United States Patent and Trademark Office ("USPTO") has issued
fifteen patents to the Company. U.S. Patent 5,235,041 (1993) relates to the
Company's method for purifying structurally ordered recombinant protein
polymers. U.S. Patent 5,243,038 (1993) covers the Company's synthetic DNA
compositions that encode polymers and copolymers comprising the amino acid
"building blocks" of silk and elastin. U.S. Patent 5,496,712 (1996) covers the
Company's family of high molecular weight collagen like polymers and the DNA
sequences encoding them. U.S. Patent 5,514,581 (1996) covers DNA sequences
encoding silk-like structural building blocks with an intervening sequence
coding for the key cell attachment ligand from human fibronectin. One of the
claimed sequences encodes ProNectin F.
U.S. Patent 5,606,019 (1997) covers the protein compositions comprising
copolymers of the amino acid "building blocks" of silk and elastin. These are
the primary materials used in the Company's current product development efforts.
U.S. Patent 5,641,648 (1997) covers methods by which synthetic genes encoding
protein polymers are created.
U.S. Patent 5,723,588 (1998) covers molded articles incorporating
biologically active proteins. U.S. Patent 5,760,004 (1998) covers chemical
modification of protein polymers to enhance their water solubility. U.S. Patent
5,770,697 (1998) broadly covers protein polymers incorporating repetitive amino
acid sequences found in naturally occurring proteins. U.S. Patent 5,773,249
(1998) expands the coverage of high molecular weight collagen like polymers.
U.S. Patent 5,773,577 (1998) covers protein polymers that can be cross-linked by
certain enzymes
13
<PAGE>
that naturally occur in the body. U.S. Patent 5,808,012 (1998) expands the
coverage of molded articles to those incorporating chemically active proteins.
U.S. Patent 5,817,303 (1998) covers the use of protein polymers with chemical
cross-linking agents as adhesives and sealants. U.S. Patent 5,830,713 (1998)
expands the coverage of methods by which synthetic genes encoding protein
polymers are created. U.S. Patent 6,018,030 (2000) broadly covers DNA sequences
encoding protein polymers incorporating repetitive amino acid sequences found in
naturally occurring proteins. Additionally, PPTI has nine U.S. patent
applications pending, two of which have been allowed, covering related aspects
of its core technology.
Although the Company believes its existing issued patent claims may
provide a competitive advantage, there can be no assurance that the scope of the
Company's patent protection is or will be adequate to protect its technology or
that the validity of any patent issued will be upheld in the future.
Additionally, with respect to the Company's allowed and pending applications,
there can be no assurance that any patents will be issued, or that, if issued,
they will provide substantial protection or be of commercial benefit to the
Company. The two patents issued to PPTI in 1993 will expire in 2010, as will one
of the patents issued in 1996. The other patent issued in 1996 will expire in
2013, and the patents issued in 1997 will expire in 2014. The three patents
issued in 1998, which expand the coverage of previously issued patents, will
expire in concert with the original patents. The other five patents issued in
1998 will expire in 2015. The patent issued in 2000 will expire in 2017.
Generally, for patent applications filed in the U.S. prior to June 8,
1995, the term of the patent will be 17 years from the issue date. Subsequently
filed U.S. patent applications will have a term of 20 years from the date of
filing, consistent with the patent laws in international jurisdictions.
Although the Company does not currently have any operations outside the
U.S., it anticipates that its potential products will be marketed on a worldwide
basis, with possible manufacturing operations outside the U.S. For example, the
Company has recently established a licensing and distribution agreement with
Femcare Ltd. for the sale of its urethral bulking agents in Europe and
Australia. Accordingly, international patent applications corresponding to the
major U.S. patents and patent applications described above have been filed in
these and other important market jurisdictions. Due to translation costs and
patent office fees, international patents are significantly more expensive to
obtain than U.S. patents. Additionally, there are differences in the
requirements concerning novelty and the types of claims that can be obtained
compared to U.S. patent laws, as well as the nature of the rights conferred by a
patent grant. PPTI carefully considers these factors in consultation with its
patent counsel, as well as the size of the potential markets represented, in
determining the foreign countries in which to file patents.
In almost all cases, the Company files for patents in Australia,
Canada, Europe and Japan. Currently, PPTI has fourteen issued foreign patents,
and thirty-one pending foreign applications. One of the issued foreign patents
is in Europe and the scope of its claims broadly covers protein polymers having
biological or chemical activity.
14
<PAGE>
Because of the uncertainty concerning patent protection and the
unavailability of patent protection for certain processes and techniques, PPTI
also relies upon trade secret protection and continuing technological innovation
to maintain its competitive position. Although all of the Company's employees
have signed confidentiality agreements, there can be no assurance that the
Company's proprietary technology will not be independently developed by other
parties, or that secrecy will not be breached. Additionally, the Company is
aware that substantial research efforts in protein engineering technology are
taking place at universities, government laboratories and other corporations and
that numerous patent applications have been filed. The Company cannot predict
whether it may have to obtain licenses to use any technology developed by third
parties or whether such licenses can be obtained on commercially reasonable
terms, if at all.
In the course of its business, PPTI employs various trademarks and
trade names in packaging and advertising its products. The Company has assigned
the federal registration of its ProNectin(R) trademark and its SmartPlastic(R)
trademark for ProNectin F Activated Cultureware to Sanyo Chemical Industries,
Ltd. in connection with the sale to Sanyo of its cell culture business. The
Company intends to protect and promote all of its trademarks and, where
appropriate, will seek federal registration of its trademarks.
REGULATORY MATTERS
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company's current operations and products
are, and anticipated products and operations will be, subject to substantial
regulation by a variety of agencies, particularly those products and operations
related to biomedical applications. Currently, the Company's activities are
subject principally to regulation under the Occupational Safety and Health Act
and the Food, Drug and Cosmetic Act.
Extensive preclinical and clinical testing and pre-market approval from
the FDA is required for new medical devices, drugs or vaccines, which is
generally a costly and time-consuming process. PPTI is required to be in
compliance with many of the FDA's regulations to conduct testing in support of
product approvals; in particular, compliance with the FDA's Good Laboratory
Practices ("GLP") regulations and portions of the FDA's Quality Systems
Regulations ("QSR"). Where PPTI has conducted such testing, the Company may
choose to file product approval submissions itself or maintain with the FDA a
"Master File" containing, among other items, such test results. A Master File
can then be accessed by the FDA in reviewing particular product approval
submissions from companies commercializing products based on PPTI's materials.
There can be no assurance that the Company or its customers will be
able to obtain or maintain the necessary approvals from the FDA or corresponding
international regulatory authorities, or that the Company will be able to
maintain a Master File in accordance with FDA regulations. In either case, the
Company's anticipated business could be adversely affected. To the extent PPTI
manufactures medical devices, as opposed to a component material supplied to a
medical device manufacturer, it will be required to conform commercial
manufacturing operations
15
<PAGE>
to the FDA's QSR requirements. The Company would also be required to register
its facility with the FDA as an establishment involved in the manufacture of
medical devices. QSR requirements are rigorous, and there can be no assurance
that compliance could be obtained in a timely manner and without the expenditure
of substantial resources, if at all. International quality system requirements,
i.e., ISO 9001 issued by the International Organization for Standardization is
the quality model used by medical product manufacturers, and is required for the
sale of medical devices in Europe. ISO 9001 standards are similar to the FDA's
QSR.
In August 1999, the Company obtained the FDA's approval of its IDE to
begin human clinical testing of its urethral bulking agent for the treatment of
female stress urinary incontinence. The Company initiated clinical testing in
December 1999. The Company intends to submit an additional IDE to the FDA in
2000 to obtain approval to begin human clinical testing of its dermal bulking
agent for use in cosmetic and reconstructive surgery applications. The Company
has implemented, and continues to implement, polymer production and quality
control procedures, and has made certain facilities renovations, to operate in
conformance with FDA requirements.
The Company's research, development and production activities are, or
may be, subject to various federal and state laws and regulations relating to
environmental quality and the use, discharge, storage, transportation and
disposal of toxic and hazardous substances. The Company's future activities may
be subject to regulation under the Toxic Substances Control Act, which requires
the Company to obtain pre-manufacturing approval for any new "chemical material"
the Company produces for commercial use that does not fall within the FDA's
regulatory jurisdiction. The Company believes it is currently in substantial
compliance with all such laws and regulations. Although the Company intends to
use its best efforts to comply with all environmental laws and regulations in
the future, there can be no assurance that the Company will be able to fully
comply with such laws, or that full compliance will not require substantial
capital expenditures.
PRODUCT LIABILITY AND ABSENCE OF INSURANCE
PPTI's business may expose it to potential product liability risks
whenever human clinical testing is performed or upon the use of any commercially
marketed medical product. Prior to initiating human clinical testing of its
urethral bulking agent, the Company procured product liability insurance. There
can be no assurance, however, that PPTI will be able to continue to obtain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. A successful product liability claim or
series of claims could result in a material adverse effect on the Company.
16
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
J. Thomas Parmeter 60 Chairman of the Board of Directors,
President and Chief Executive Officer
Joseph Cappello, Ph.D. 43 Vice President, Research and Development,
Chief Technical Officer and Director,
Polymer Research
Philip J. Davis 69 Corporate Secretary
Franco A. Ferrari, Ph.D. 48 Vice President, Laboratory Operations and
Polymer Production and Director, Molecular Genetics
John E. Flowers 43 Vice President, Planning and Operations
Janis Y. Neves 48 Director, Finance and Administration,
Treasurer, and Assistant Secretary
</TABLE>
Mr. Parmeter has been the Company's President, Chief Executive Officer
and Chairman of the Board of Directors since its inception in July 1988 (and,
from July 1988 to July 1992, its Chief Financial Officer). From 1982 to November
1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to
June 1988, Chairman of the Board of Syntro Corporation.
Dr. Cappello has been the Company's Vice President, Research and
Development since February 1997 and Director, Polymer Research and Chief
Technical Officer since February 1993. From September 1988 to February 1993, he
was the Company's Senior Research Director, Protein Engineering.
Mr. Davis has been the Company's Secretary since January 1989. Mr.
Davis has been a director of the Company since April 1995; he previously served
as a director of the Company from January 1989 until October 1991. Mr. Davis has
been employed by Donaldson, Lufkin & Jenrette since June 1994 and currently is a
Managing Director of Investment Banking. He was Director, Institutional Sales at
Merrill Lynch, Inc. (formerly Merrill Lynch Capital Markets) from February 1991
to June 1994, and was a Vice President at Merrill Lynch, Inc. from 1986 to 1991.
Mr. Flowers has been the Company's Vice President, Planning and
Operations, since February 1993. From September 1988 to February 1993, he was
the Company's Vice President, Commercial Development.
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<PAGE>
Dr. Ferrari has been the Company's Vice President, Laboratory
Operations and Director, Molecular Genetics since February 1993. From September
1988 to February 1993, he was the Company's Senior Research Director, Genetic
Engineering.
Ms. Neves has been the Company's Director of Finance since November
1998 and Controller and Assistant Secretary since January 1990. From July 1988
until January 1990, Ms. Neves was the Company's Business Office Manager.
All executive officers of the Company were elected by the Board of
Directors and serve at its discretion. No family relationships exist between any
of the officers or directors of the Company.
EMPLOYEES
On June 30, 1999, the Company laid off eighteen employees,
approximately 60% of its work force, as part of a broad cost cutting measure to
preserve cash. In late July, several employees were brought back on the payroll
in order to prevent delays in beginning the clinical testing of the Company's
lead product, scheduled to begin in December, 1999. With the closing of the
Series G Preferred stock offering, several more of the laid off employees were
rehired.
As of February 29, 2000, PPTI had 19 full-time and one part-time
employee, of whom four hold employment contracts with the Company and three hold
Ph.D. degrees in the chemical or biological sciences. The Company is highly
dependent on the services of its executive officers and scientists. The loss of
the services of any one of these individuals would have a material adverse
effect on the achievement of the Company's development objectives, its business
opportunities and prospects. The recruitment and retention of additional
qualified management and scientific personnel is also critical to the Company's
success. There can be no assurance that the Company will be able to attract and
retain required personnel on acceptable terms, due to the competition for such
experienced personnel from other biotechnology, pharmaceutical, medical device
and chemical companies, universities and non-profit research institutions.
ITEM 2. PROPERTIES
PPTI does not own any real property. The Company leases approximately
21,000 square feet in San Diego, California from Sycamore/San Diego Investors.
The leased property includes the Company's administrative offices, which
encompass approximately 4,000 square feet, and its laboratory facilities, which
encompass approximately 17,000 square feet. The current annual rent is
approximately $417,000. The lease expires in May 2005.
The Company believes that its current facilities are adequate to meet
its needs until the end of 2000. The Company retains an option to lease an
additional 7,000 square feet of office and laboratory space in its present
facility and to extend its lease for an additional five years.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
NASDAQ Delisting
Prior to September 1999, the Company's Common Stock traded on The
Nasdaq Stock Market under the symbol "PPTI". The Company's Common Stock was
delisted from the NASDAQ Small Cap Quotation System, effective September 20,
1999. The reasons for the delisting were failure to maintain the minimum bid
requirement of $1.00 per share for PPTI common stock, and failure to meet the
minimum net asset requirement of $2 million. The Company's Common Stock is now
traded on the "over-the-counter" NASD Bulletin Board. To access the quotations
for the Company's Common Stock, use the call letters PPTI.OB.
The trade prices set forth below represent inter-dealer prices without
retail markups, markdowns or commissions.
Trade Prices
-------------------------------
1999 High Low
---- ------- -------
First Quarter $1.531 $1.063
Second Quarter 2.250 0.875
Third Quarter 1.719 0.750
Fourth Quarter 1.250 0.688
1998
----
First Quarter $1.531 $1.063
Second Quarter 2.250 0.875
Third Quarter 1.719 0.750
Fourth Quarter 1.250 0.688
As of March 22, 2000, the Company had approximately 163 shareholders
of record; it estimates it has approximately 1,500 beneficial holders. The
Company has never paid cash dividends on its Common Stock. The Company currently
intends to retain earnings, if any, for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Unregistered Offerings
On August 16, 1999, the Company received $1,775,000 for 17,750 shares
of Series G Convertible Preferred Stock ("Series G Stock") from several
institutional and accredited individual investors following the 10 day
stockholder notification period required by the NASD prior to the sale. On
September 15, 1999, the Company received an additional $325,000 for 3,250 shares
of Series G Stock, for a total of $2,100,000. Each share of Series G Stock was
priced
20
<PAGE>
at $100 per share. Each share can be converted at any time by the holder into
common stock at a price of $0.50 per share, subject to certain antidilution
adjustments. Each share of Series G Preferred Stock also received a common stock
warrant, exercisable for 12 months, that allows the holder to acquire 200 shares
of PPTI common stock at a price of $0.50 per share. The Series G Stock, warrants
and underlying common stock have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.
Between April 1 and April 15, 1999, the Company received approximately
$508,000 from the exercise of redeemable, publicly traded, warrants originally
issued as part of PPTI's Initial Public Offering. Following the close of
business on April 15, the remaining unexercised redeemable, publicly traded,
warrants expired. On May 12, 1999, the Company received approximately $416,000
from the exercise of warrants issued in conjunction with the private placement
of the Company's Series E Convertible Preferred Stock ("Series E Stock").
In April and May of 1998, the Company raised approximately $5.4 million
from the sale of 54,437 shares of the Company's Series E Stock priced at $100
per share, with warrants to purchase an aggregate of 3,266,250 shares of common
stock to a small group of institutional and accredited investors.
Each share of Series E Stock is convertible at any time at the election
of the holder into 80 shares of common stock at a conversion price of $1.25 per
share, subject to certain antidilution adjustments. No underwriters were engaged
by the Company in connection with such issuance and, accordingly, no
underwriting discounts were paid. The offering is exempt from registration under
Section 4(2) of the Securities Act, and met the requirements of Rule 506 of
Regulation D promulgated under the Securities Act. The Company has registered
the shares of common stock underlying the Series E Stock and the warrants with
the Securities and Exchange Commission.
Each share of Series E Stock received two common stock warrants. One
warrant (first warrant) is exercisable at any time for 40 shares of common stock
at an exercise price of $2.50 per share, and expires approximately 18 months
after the close of the offering; the other warrant (second warrant) is
exercisable at any time for 20 shares of common stock at an exercise price of
$5.00 per share, and expires approximately 36 months after the close of the
offering. In addition, an 18 month warrant to acquire 200,000 common shares
exercisable at $2.50 per share and a 36 month warrant to acquire 100,000 common
shares exercisable at $5.00 per share were issued as a finder and document
review fee paid to a lead investor. An 18 month warrant to acquire 32,000 common
shares exercisable at $2.50 per share, a 24 month warrant to acquire 16,000
common shares exercisable at $5.00 per share, and 5 year warrants to acquire an
aggregate of 25,200 common shares exercisable at $2.50 per share were issued to
certain persons for service as finders in relation to the private placement.
In connection with the above private placement, the Company issued
26,420 shares of its Series F Convertible Preferred Stock in exchange for the
same number of shares of outstanding Series D Convertible Preferred Stock. The
Company's Series F Convertible Preferred Stock is equivalent to the Company's
Series E Stock with regard to liquidation preferences. All other
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<PAGE>
terms of the Company's Series F Convertible Preferred Stock remained the same as
the Company's Series D Convertible Preferred Stock.
On January 7, 1997, the Company received $4,760,000, less expenses of
approximately $140,000, from a private placement of 1,904,000 shares of the
Company's common stock, at $2.50 per share, with a number of accredited
investors. No underwriters were engaged by the Company in connection with such
issuance and, accordingly, no underwriting discounts or commissions were paid.
The issuance was exempt from registration under Section 4(2) of the Securities
Act, and met the requirements of Rule 506 of Regulation D promulgated under the
Securities Act. The Company agreed to register the shares with the Securities
and Exchange Commission promptly after the closing. The registration was
declared effective on January 24, 1997.
On September 14, 1995, the Company issued 49,187 shares of its Series D
Convertible Preferred Stock and warrants to purchase 500,960 shares of common
stock at $1.25 per share in a private placement to certain accredited investors.
Of this amount, 20,000 shares of Series D Convertible Preferred Stock and
warrants to purchase 400,000 shares of common stock were issued for cash at
$100.00 per share; 21,600 shares of Series D Convertible Preferred Stock were
issued in exchange for all outstanding shares of the Company's Series C
Convertible Preferred Stock and 2,539 shares for accrued and unpaid dividends
thereon; and an additional 5,048 shares of Series D Convertible Preferred Stock
and warrants to purchase 100,960 shares of common stock were issued in exchange
for cancellation of a $500,000 bridge loan and accrued interest thereon. No
underwriters were engaged by the Company in connection with such issuance and,
accordingly, no underwriting discounts or commissions were paid. The issuance
was exempt from registration under Section 4(2) of the Securities Act and met
the requirements of Rule 506 of Regulation D promulgated under the Securities
Act.
Each share of Series D and Series F Convertible Preferred Stock earns a
cumulative dividend at the annual rate of $10 per share, payable as and when
declared by the Company's Board of Directors in the form of cash, common stock
or any combination thereof. The Series D and F Convertible Preferred Stock is
convertible into common stock after two years from the date of issuance at the
holder's option. The conversion price at the time of conversion is the lesser of
$3.75 or the market price. The Series D and F Convertible Preferred Stock is
redeemable at the Company's option after four years from the date of issuance.
Automatic conversion of all of the Series D and F Convertible Preferred Stock
will occur if: (a) the Company completes a public offering of common stock at a
price of $2.50 or higher; or (b) the holders of a majority thereof elect to
convert. The Company has the option to demand conversion of the Series D and F
Convertible Preferred Stock if the average market price of its common stock
equals or exceeds $5.00 per share over a period of twenty business days. The
Series D Convertible Preferred Stock has a liquidation preference of $100 per
share plus accumulated dividends.
At the time of purchase, the Series D Convertible Preferred
stockholders received warrants to purchase, at an exercise price of $1.25 per
share, twenty shares of the Company's common stock for each share of Series D
Convertible Preferred Stock acquired for cash, or upon conversion of the
outstanding bridge loan and accrued interest thereon, described above. Warrants
22
<PAGE>
to acquire a total of 500,960 shares of common stock were issued. All of these
warrants were exercised during 1996, from which the Company received aggregate
gross proceeds of $626,200. The Series D Convertible Preferred stockholders were
granted certain registration rights relating to their shares of common stock
issuable upon conversion of the Series D Convertible Preferred Stock and upon
the exercise of their warrants.
In July 1994, the Company received $2,160,000 from a private placement
of the Company's Series C Convertible Preferred Stock with certain accredited
investors, consisting of 21,600 shares at $100.00 per share. No underwriters
were engaged by the Company in connection with such issuance and, accordingly,
no underwriter discounts or commissions were paid. The issuance was exempt from
registration under Section 4(2) of the Securities Act and met the requirements
under Rule 506 of Regulation D promulgated under the Securities Act. As
described above, the investors exchanged 21,600 shares of Series C Convertible
Preferred Stock, plus accrued and unpaid dividends thereon, for 24,139 shares of
Series D Convertible Preferred Stock. There are currently no shares of Series C
Convertible Preferred Stock outstanding.
In connection with the issuance of the Series C Convertible Preferred
Stock, warrants were also issued to acquire a total of 432,000 shares of the
Company's common stock at a price of $1.25 per share. All of these warrants were
exercised during 1996, from which the Company received aggregate gross proceeds
of $540,000.
In July 1996, holders of warrants to acquire 322,663 shares of common
stock (all of whom were accredited investors) exercised such warrants at $2.50
per share, resulting in approximately $807,000 in gross proceeds to the Company.
These warrants were originally issued in 1991 in connection with the issuance of
the Company's Series B Convertible Preferred Stock. The issuance upon exercise
of these warrants was exempt from registration under Section 4(2) of the
Securities Act and met the requirements under Rule 506 of Regulation D
promulgated under the Securities Act. The Company agreed to register the resale
of the common stock received upon exercise of these warrants, and the applicable
registration was declared effective on July 19, 1996.
23
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS
ANNUAL REPORT ON FORM 10-KSB CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, HISTORY OF
OPERATING LOSSES, RAISING ADEQUATE CAPITAL FOR CONTINUING OPERATIONS, EARLY
STAGE OF PRODUCT DEVELOPMENT, SCIENTIFIC AND TECHNICAL UNCERTAINTIES,
COMPETITIVE PRODUCTS AND APPROACHES, RELIANCE UPON COLLABORATIVE PARTNERSHIP
AGREEMENTS AND FUNDING, REGULATORY TESTING AND APPROVALS, PATENT PROTECTION
UNCERTAINTIES AND MANUFACTURING SCALE-UP AND REQUIRED QUALIFICATIONS. WHILE
THESE STATEMENTS REPRESENT MANAGEMENT'S CURRENT JUDGMENT AND EXPECTATIONS FOR
THE COMPANY, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FUTURE RESULTS SUGGESTED HEREIN. THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE
DATE HEREOF.
GENERAL OVERVIEW
Incorporated in 1988, Protein Polymer Technologies, Inc. has
concentrated its research and development efforts on establishing a scientific
and technical leadership position in the production and development of unique
protein-based materials. The Company has identified biomedical market and
product opportunities for further research and development that management
believes will exploit the unique properties of the Company's technology to
competitive advantage. The Company has been unprofitable to date, and as of
December 31, 1999 has an accumulated deficit of $37,245,495.
The Company's product candidates for surgical repair, augmentation and
regeneration of human tissues are in various stages of research and development.
Its more advanced programs are in the areas of bulking agents for soft tissue
augmentation, particularly for use in urethral tissue for the treatment of
female stress incontinence and in dermal tissue for cosmetic and reconstructive
procedures. The Company currently is devoting the majority of its resources to
the development and registration of these products, with the greatest emphasis
on the incontinence product which began human clinical trials in December 1999.
The Company's other advanced product technology is in the area of tissue
adhesives and sealants. Currently the Company's research and development in this
area is focused on the repair of spinal discs for the treatment of lower back
pain. The Company's first commercial products, ProNectin F and SmartPlastic, are
used by biologists and cell culture laboratories, principally to grow mammalian
cells for biomedical research purposes. In February 2000, the Company licensed
the rights for the
24
<PAGE>
manufacture and sale of these products for use in in vitro cell culture,
-------
including the transfer of all existing inventory, to a third party.
In 1995, the Company entered into a collaborative relationship with
Ethicon regarding its surgical adhesives and sealants program. Ethicon
terminated the relationship in December 1997 which materially adversely affected
the Company. The Company's strategy with most of its programs is to enter into
collaborative development agreements with major medical product marketing and
distribution companies. Although these relationships, to the extent any are
consummated, may provide significant near-term revenues through up-front
licensing fees, research and development reimbursements and milestone payments,
the Company expects to continue incurring operating losses for the next several
years.
The Company's cash balance as of December 31, 1999 was $156,000. The
Company believes this amount, in combination with funds received from licensing
and R&D agreements in January and February 2000, and the exercise of the common
stock warrants issued in connection with the Series G Stock in February 2000,
which in total will generate approximately $3.4 million (net of costs) during
the calendar year 2000, is sufficient to fund its operations through January
2001. The Company will continue to attempt to raise additional funds for
continuing operations through private or public offerings and collaborative
agreements (see "Liquidity and Capital Resources" below, and Note 1 of the
Audited Financial Statements for additional information and a description of the
associated risks).
RESULTS OF OPERATIONS
Interest income was $39,000 for the year ended December 31, 1999, as
compared to $135,000 for 1998 and $187,000 for 1997. The year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.
Product sales for the years ended December 31, 1999 were $54,000,
compared to $71,000 and $77,000 in 1998 and 1997 respectively. Product sales
consist of ProNectin F related product revenues and licensing fees. Sales during
1996 reflected disappointing market interest in the line of ProNectin products;
as a result the Company discontinued related promotional expenditures to
conserve cash. Sales in 1998 and 1999 primarily reflect distributor stocking
orders. The manufacturing and marketing rights and the inventory for this
product line were sold to Sanyo Chemical Industries, Ltd. in February 2000.
Because of previously booked inventory reserves, their was no cost of sales
booked for any product sales in 1999.
Research and development expenses for the year ended December 31, 1999
were $2,812,000, compared to $4,138,000 in 1998, a decrease of 32%. This
decrease is due primarily to a downsizing of the Company's staff and operational
expenses in June 1999, but also in part to the completion of preclinical testing
and regulatory consulting costs associated with the filing of the Company's
Investigational Device Exemption (IDE) with the U.S. Food and Drug
Administration to begin human trials for the treatment of female stress urinary
incontinence. These latter savings are temporary and will be replaced and
increased by the cost of conducting
25
<PAGE>
human clinical testing which began in December 1999. Other related expenses
include expanded manufacturing capacity and manufacturing process validation,
quality assurance efforts, and outside testing services. The Company expects its
research and development expenses will increase in the future, to the extent
additional capital is obtained, due to the expansion of product-directed
development efforts including human clinical testing, increased manufacturing
requirements, and increased use of outside testing services.
Selling, general and administrative expenses for the year ended
December 31, 1999 were $1,554,000, as compared to $1,727,000 for 1998, a
decrease of 10%. This decrease was due to the Corporate downsizing in June 1999,
and generally tighter cost management following that period. To the extent
possible, the Company continues to concentrate on controlling costs reflected in
reduced travel, office supplies, and non-regulatory consulting costs. The
Company expects its selling, general and administrative expenses will increase
in the future, to the extent additional capital is obtained, consistent with
supporting its research and development efforts and as business development,
patent, legal and investor relations activities require.
For the year ended December 31, 1999, the Company recorded a net loss
applicable to common shareholders of $4,535,000, or $.36 per share, as compared
to $9,183,000, or $.88 per share for 1998, and $4,887,000, or $.52 per share for
1997. The difference between 1999 and previous year end results is due primarily
to a non-cash "imputed dividend" expense of $3,266,000 that resulted from the
sale and issuance of the Company's Series E Convertible Preferred Stock during
1998. The 1999, 1998 and 1997 losses and per share calculations also include
$278,000, $278,000, and $433,000, respectively, of undeclared and/or paid
dividends from the Company's Preferred Stock.
The Company expects to incur increasing operating losses for the next
several years, to the extent additional capital is obtained, based upon the
successful continuation of the tissue augmentation program and product
registration, and the tissue adhesives program, as well as expected increases in
the Company's other research and development, manufacturing and business
development activities. The Company's results depend in part on its ability to
establish strategic alliances and generate contract revenues, increased
research, development and manufacturing efforts, preclinical and clinical
product testing and commercialization expenditures, expenses incurred for
regulatory compliance and patent prosecution, and other factors. The Company's
results will also fluctuate from period to period due to timing differences.
To date, the Company believes that inflation and changing prices have
not had a material impact on its continuing operations. Based upon the Company's
earnings history, a valuation allowance of $12,867,000 is required to reduce the
Company's net deferred tax assets to the amount realizable.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash, cash equivalents and
short-term investments totaling $156,000, as compared to $1,383,000 at December
31, 1998. As of December 31, 1999, the Company had working capital of
$(458,000), compared to $600,000 at December 31, 1998. In April and May of 1999,
the Company realized approximately $924,000 from the exercise of common stock
warrants and in August and September 1999, approximately $2,075,000, net of
expenses, from the private placement of the Company's Series G Convertible
Preferred Stock and warrants. Subsequently, the Company received in January and
February 2000 approximately $1,350,000 (net of costs) in cash and receivables
from licensing and R&D agreements with Femcare, Ltd. for the European and
Australian marketing rights to the stress urinary incontinence bulking product,
with Perkin-Elmer for a research and development project and commercialization
option, and with Sanyo Chemical Industries, Ltd. for the rights to the in vitro
cell culture business. Also in February 2000, the Company received approximately
$2.1 million from the exercise of common stock warrants originally granted as
part of the sale of Series G Convertible Preferred Stock and warrants.
The Company had long-term capital lease obligations of $25,000 as of
December 31, 1999, compared to an obligation of $106,000 as of December 31,
1998. For the year ended December 31, 1999, the Company's cash expenditures for
capital equipment and leasehold improvements totaled $26,000, compared with
$197,000 for the same period last year. The Company anticipates that these
expenditures will be increased in 2000 as laboratory renovations and additional
equipment required to meet GLP manufacturing regulations and production capacity
as the Company scales up its manufacturing operations to meet product
requirements for clinical testing. The Company anticipates a significant
increase in manufacturing-related equipment and leasehold improvement
expenditures in 2001 due to an increase in need for products for clinical
testing, and anticipated need for additional product manufacturing for European
product sales. The Company may enter into additional capital equipment lease
arrangements in the future if available at appropriate rates and terms.
The Company believes its existing available cash, cash equivalents and
short-term investments as of February 29, 2000 would be sufficient to meet its
anticipated capital requirements through December 2000. Substantial additional
capital resources will be required to fund continuing expenditures related to
the Company's research, development, manufacturing and business development
activities. The Company believes there may be a number of alternatives available
to meet the continuing capital requirements of its operations, such as
collaborative agreements and public or private financings. During 2000, the
Company expects that the possible exercise of other existing warrants could
result in additional funds for continuing operations. Further, the Company is
currently in preliminary discussions with a number of potential collaborative
partners and, based on the results of various materials evaluations, revenues in
the form of license fees, milestone payments or research and development
reimbursements could be generated. There can be no assurance that any of these
fundings will be consummated in the necessary timeframes needed for continuing
operations or on terms favorable to the Company. If adequate funds are not
available, the Company will be required to significantly curtail its
27
<PAGE>
operating plans and may have to sell or license out significant portions of the
Company's technology or potential products.
YEAR 2000 COMPLIANCE
The Company's plan to modify its information technology in recognition
of the year 2000 issue has been successfully implemented. The "Year 2000" issue
concerned potential exposure related to the interruption of business practice
and financial misinformation resulting from the application of computer programs
which have been written using two digits, rather than four, to define the
applicable year of business transactions. Based on its assessments to date, the
Company does not expect to incur any further significant costs, or anticipate
any significant problems or uncertainties associated with remaining Year 2000
compliant.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Filed herewith are the following Audited Financial Statements for
Protein Polymer Technologies, Inc. (a Development Stage Company):
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................. F-2
Balance Sheets at December 31, 1999 and 1998.................................. F-3
Statements of Operations for the years ended December 31, 1999, 1998
and 1997 and the period July 6, 1988 (inception) to December 31, 1999...... F-4
Statements of Stockholders Equity for the period July 6, 1988 (inception)
to December 31, 1999....................................................... F-5
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997 and the period July 6, 1988 (inception) to December 31, 1999...... F-7
Notes to Financial Statements................................................. F-9
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Protein Polymer Technologies, Inc.
We have audited the accompanying balance sheets of Protein Polymer
Technologies, Inc. (a Development Stage Company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999 and for
the period July 6, 1988 (inception) to December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Protein Polymer
Technologies, Inc. (a Development Stage Company) at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 and for the period July 6, 1988
(inception) to December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 29, 2000
F-2
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 155,692 $ 1,383,148
Other current assets 49,266 66,459
-------------------------------
Total current assets 204,958 1,449,607
Deposits 36,177 36,177
Notes receivable from officers 140,000 141,000
Equipment and leasehold improvements, net 360,005 598,447
-------------------------------
$ 741,140 $ 2,225,231
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 385,932 $ 515,413
Accrued employee benefits 84,335 167,849
Other accrued expenses 17,118 21,574
Current portion capital lease obligations 79,593 84,518
Deferred rent 95,973 60,668
-------------------------------
Total current liabilities 662,951 850,022
Long-term portion capital lease obligations 25,088 105,548
Stockholders' equity:
Convertible Preferred Stock, $.01 par value,
188,917 shares authorized, 91,065 and
79,202 shares issued and outstanding at
December 31, 1999 and 1998, respectively -
liquidation preference of $9,106,500 and
$7,480,200 at December 31, 1999 and
December 31, 1998, respectively 8,761,072 7,600,226
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,443,510 and 10,827,240 shares
issued and outstanding at December 31, 1999
and 1998, respectively 134,447 108,274
Additional paid-in capital 28,403,077 26,549,125
Deficit accumulated during development stage (37,245,495) (32,987,964)
-------------------------------
Total stockholders' equity 53,101 1,269,661
-------------------------------
$ 741,140 $ 2,225,231
===============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $ 2,320 $ 50,000 $ 459,510 $ 4,357,285
Interest income, net 39,343 134,978 186,531 1,120,272
Product and other income 54,304 70,846 76,917 684,317
--------------------------------------------------------------
Total revenues 95,967 255,824 722,958 6,161,874
Expenses:
Research and development 2,799,147 4,167,144 3,188,398 24,754,081
Selling, general and administrative 1,554,351 1,726,883 1,988,493 14,704,903
--------------------------------------------------------------
Total expenses 4,353,498 5,894,027 5,176,891 39,458,984
--------------------------------------------------------------
Net loss (4,257,531) (5,638,203) (4,453,933) (33,297,110)
Undeclared and/or paid dividends on
preferred stock 277,639 3,544,323 432,682 5,239,654
--------------------------------------------------------------
Net loss applicable to common shareholders $ (4,535,170) $ (9,182,526) $ (4,886,615) $ (38,536,764)
==============================================================
Net loss per common share - basic and
diluted $ (.36) $ (.88) $ (.52)
=============================================
Shares used in computing net loss per
common share - basic and diluted 12,570,987 10,484,277 9,487,165
=============================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity
For the period July 6, 1988 (inception) to December 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock at $.01 per share for cash 400,000 $ 4,000 -- $ --
Issuance of common stock at $.62 per share for cash and receivables 1,116,245 11,162 -- --
Receivables from sale of common stock -- -- -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1988 1,516,245 15,162 -- --
Repayment of receivables from sale of common stock -- -- -- --
Issuance of common stock at $.62 per share 359,136 3,594 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1989 1,875,381 18,756 -- --
Exercise of common stock options at $.01 per share for cash 60,000 600 -- --
Issuance of common stock at $.68 per share for cash and compensation 5,000 50 -- --
Common stock repurchased at $.01 per share for cash (25,000) (250) -- --
Common stock issued at $.68 per share for cash and compensation 25,000 250 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1990 1,940,381 19,406 -- --
Exercise of common stock options at $.68 per share for cash 5,000 50 -- --
Exercise of warrants for common stock 483,755 4,837 -- --
Conversion of notes payable to common stock 339,230 3,391 -- --
Conversion of notes payable to preferred stock -- -- 278,326 2,783
Issuance of preferred stock at $2.00 per share for cash, net of
issuance costs -- -- 400,000 4,000
Issuance of warrants for cash -- -- -- --
Issuance of warrants in connection with convertible notes payable -- -- -- --
Net loss -- -- -- --
---------------------------------------------------
Balance at December 31, 1991 2,768,366 27,684 678,326 6,783
Initial public offering at $6.50 per unit, net of issuance costs 1,667,500 16,676 -- --
Conversion of Series B preferred stock into common stock in connection with
initial public offering 678,326 6,783 (6,783) --
Conversion of Series A preferred stock into common stock at 1.13342 per share 713,733 7,137 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1992 5,827,925 58,280 -- --
Exercise of common stock options at $.68 per share 3,000 30 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1993 5,830,925 58,310 -- --
Issuance of preferred stock at $100 per share for cash, net of
issuance costs -- -- 21,600 2,073,925
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1994 5,830,925 58,310 21,600 2,073,925
Issuance of preferred stock at $100 per share for cash and cancellation of
bridge loan, net of issuance costs -- -- 25,000 2,432,150
Series C dividends paid in Series D preferred stock -- -- 2,539 253,875
Interest paid in Series D preferred stock -- -- 48 4,795
Exercise of common stock options at $.53 per share 2,000 20 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1995 5,832,925 58,330 49,187 4,764,745
Exercise of common stock warrants at $1.25 per share 932,960 9,330 -- --
Exercise of common stock warrants at $2.50 per share, net of
issuance costs 322,663 3,226 -- --
Exercise of common stock warrants at $1.00 per share 25,000 250 -- --
Exercise of common stock options 136,000 1,360 -- --
Stock repurchases (16,320) (163) -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1996 7,233,228 72,333 49,187 4,764,745
Issuance of common stock at $2.50 per share, net of issuance costs 1,904,000 19,040 -- --
Exercise of common stock options 28,000 280 -- --
Issuance of common stock under stock purchase plan 15,036 151 -- --
Conversion of Series D preferred stock into common stock 1,032,537 10,325 (20,973) (2,097,342)
Series D dividends paid in common stock 207,921 2,079 -- --
Net loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1997 10,420,722 $ 104,208 28,214 $ 2,667,403
Issuance of common stock under stock purchase plan 36,715 368 -- --
Exercise of common stock options 12,000 120 -- --
Issuance of common stock at $1.60 per share, net of issuance costs 23,439 234 -- --
Issuance of Series E preferred stock, net of issuance costs -- -- 54,438 5,277,813
Grant of stock to finder 64,000 640 -- --
Conversion of Series D and E preferred stock into common stock 270,364 2,704 (3,450) (344,990)
Net Loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1998 10,827,240 $ 108,274 79,202 $ 7,600,226
Issuance of common stock under stock purchase plan 19,429 194 -- --
Issuance of common stock and warrants for services rendered and
debt issued 16,941 180 -- --
Issuance of Series G preferred stock, net of issuance costs -- -- 21,000 2,074,596
Conversion of Series E preferred stock into common stock 731,000 7,310 (9,138) (913,750)
Exercise of common stock and Series E warrants at $.50 per share 1,848,900 18,489 -- --
Net Loss -- -- -- --
----------------------------------------------------
Balance at December 31, 1999 13,443,510 $ 134,447 91,064 $ 8,761,072
====================================================
</TABLE>
F-5
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity
For the period July 6, 1988 (inception) to December 31, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING RECEIVABLES TOTAL
ADDITIONAL DEVELOPMENT FROM STOCKHOLDERS
PAID-IN CAPITAL STAGE STOCK EQUITY
-----------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock at $.01 per share for cash $ -- $ -- $ -- $ 4,000
Issuance of common stock at $.62 per share for cash and receivables 681,838 -- -- 693,000
Receivables from sale of common stock -- -- (86,000) (86,000)
Net loss -- (322,702) -- (322,702)
----------------------------------------------------
Balance at December 31, 1988 681,838 (322,702) (86,000) 288,298
Repayment of receivables from sale of common stock -- -- 86,000 86,000
Issuance of common stock at $.62 per share 219,358 -- -- 222,952
Net loss -- (925,080) -- (925,080)
----------------------------------------------------
Balance at December 31, 1989 901,196 (1,247,782) -- (327,830)
Exercise of common stock options at $.01 per share for cash -- -- -- 600
Issuance of common stock at $.68 per share for cash and compensation 3,350 -- -- 3,400
Common stock repurchased at $.01 per share for cash -- -- -- (250)
Common stock issued at $.68 per share for cash and compensation 16,750 -- -- 17,000
Net loss -- (1,501,171) -- (1,501,171)
----------------------------------------------------
Balance at December 31, 1990 921,296 (2,748,953) -- (1,808,251)
Exercise of common stock options at $.68 per share for cash 3,350 -- -- 3,400
Exercise of warrants for common stock 295,493 -- -- 300,330
Conversion of notes payable to common stock 508,414 -- -- 511,805
Conversion of notes payable to preferred stock 553,869 -- -- 556,652
Issuance of preferred stock at $2.00 per share for cash, net of
issuance costs 703,475 -- -- 707,475
Issuance of warrants for cash 3,000 -- -- 3,000
Issuance of warrants in connection with convertible notes payable 28,000 -- -- 28,000
Net loss -- (1,143,119) -- (1,143,119)
----------------------------------------------------
Balance at December 31, 1991 3,016,897 (3,892,072) -- (840,708)
Initial public offering at $6.50 per unit, net of issuance costs 8,911,024 -- -- 8,927,700
Conversion of Series B preferred stock into common stock in connection with
initial public offering -- -- -- --
Conversion of Series A preferred stock into common stock at 1.13342 per
share 1,717,065 -- -- 1,724,202
Net loss -- (3,481,659) -- (3,481,659)
----------------------------------------------------
Balance at December 31, 1992 13,644,986 (7,373,731) -- 6,329,535
Exercise of common stock options at $.68 per share 2,010 -- -- 2,040
Net loss -- (3,245,436) -- (3,245,436)
----------------------------------------------------
Balance at December 31, 1993 13,646,996 (10,619,167) -- 3,086,139
Issuance of preferred stock at $100 per share for cash, net of
issuance costs -- -- -- 2,073,925
Net loss -- (3,245,359) -- (3,245,359)
----------------------------------------------------
Balance at December 31, 1994 13,646,996 (13,864,526) -- 1,914,705
Issuance of preferred stock at $100 per share for cash and cancellation of
bridge loan, net of issuance costs -- -- -- 2,432,150
Series C dividends paid in Series D preferred stock -- (253,875) -- --
Interest paid in Series D preferred stock -- -- -- 4,795
Exercise of common stock options at $.53 per share 1,040 -- -- 1,060
Net loss -- (2,224,404) -- (2,224,404)
----------------------------------------------------
Balance at December 31, 1995 13,648,036 (16,342,805) -- 2,128,306
Exercise of common stock warrants at $1.25 per share $ 1,156,870 $ -- $ -- $ 1,166,200
Exercise of common stock warrants at $2.50 per share, net of
issuance costs 779,413 -- -- 782,639
Exercise of common stock warrants at $1.00 per share 24,750 -- -- 25,000
Exercise of common stock options 91,650 -- -- 93,010
Stock repurchases (81,437) -- -- (81,600)
Net loss -- (2,864,432) -- (2,864,432)
----------------------------------------------------
Balance at December 31, 1996 15,619,282 (19,207,237) -- 1,249,123
Issuance of common stock at $2.50 per share, net of issuance costs 4,601,322 -- -- 4,620,362
Exercise of common stock options 20,200 -- -- 20,480
Issuance of common stock under stock purchase plan 29,950 -- -- 30,101
Conversion of Series D preferred stock into common stock 2,087,017 -- -- --
Series D dividends paid in common stock 420,262 (422,341) -- --
Net loss -- (4,453,933) -- (4,453,933)
----------------------------------------------------
Balance at December 31, 1997 $ 22,778,033 $(24,083,511) $ -- $ 1,466,133
Issuance of common stock under stock purchase plan 38,010 -- -- 38,378
Exercise of common stock options 7,920 -- -- 8,040
Issuance of common stock at $1.60 per share, net of issuance costs 37,266 -- -- 37,500
Issuance of Series E preferred stock, net of issuance costs 3,266,250 (3,266,250) -- 5,277,813
Grant of stock to finder 79,360 -- -- 80,000
Conversion of Series D and E preferred stock into common stock 342,286 -- -- --
Net Loss -- (5,638,203) -- (5,638,203)
----------------------------------------------------
Balance at December 31, 1998 $ 26,549,125 $(32,987,964) $ -- $ 1,269,661
Issuance of common stock under stock purchase plan 15,111 -- -- 15,305
Issuance of common stock and warrants for services rendered and
debt issued 26,440 -- -- 26,620
Issuance of Series G preferred stock, net of issuance costs -- -- -- 2,074,596
Conversion of Series E preferred stock into common stock 906,440 -- -- --
Exercise of common stock and Series E warrants at $.50 per share 905,961 -- -- 924,450
Net Loss -- (4,257,531) -- (4,257,531)
----------------------------------------------------
Balance at December 31, 1999 $ 28,403,077 $(37,245,495) $ -- $ 53,101
====================================================
</TABLE>
See accompanying notes
F-6
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,257,531) $ (5,638,203) $ (4,453,933) $ (33,303,029)
Adjustments to reconcile net loss to net cash used
for operating activities:
Stock and warrants issued for services - - - -
rendered and debt interest 26,620 80,000 - 131,515
Depreciation and amortization 264,541 368,577 184,300 1,892,838
Write-off of purchased technology - - - 503,500
Changes in assets and liabilities:
Deposits - 440 (14,360) (36,177)
Notes receivable from officers 1,000 12,000 (153,000) (140,000)
Other current assets 17,193 22,409 (11,613) (49,266)
Accounts payable (129,481) 91,819 172,273 385,932
Accrued employee benefits (83,514) 16,018 34,219 84,335
Other accrued expenses (4,456) (19,577) (12,374) 17,118
Deferred revenue - - (75,000) -
Deferred rent 35,305 60,668 - 95,973
-----------------------------------------------------------------------------
Net cash used for operating activities (4,130,323) (5,005,849) (4,329,488) (30,417,261)
INVESTING ACTIVITIES
Purchase of technology - - - (570,000)
Purchase of equipment and improvements (26,099) (197,460) (295,778) (1,810,814)
Purchases of short-term investments - - (4,226,729) (16,161,667)
Sales of short-term investments - 974,817 4,244,954 16,161,667
-----------------------------------------------------------------------------
Net cash provided by (used for) investing activities (26,099) 777,357 (277,553) (2,380,814)
FINANCING ACTIVITIES
Net proceeds from issuance of warrants and sale of
common stock 939,755 83,918 4,670,943 17,537,666
Net proceeds from issuance of preferred stock 2,074,596 5,277,813 - 14,290,160
Net proceeds from convertible notes and detachable
warrants - - - 1,068,457
Payments on capital lease obligations (85,385) (75,112) (23,594) (184,089)
Payment on note payable (150,000) - - (242,750)
Proceeds from note payable 150,000 - - 484,323
Deferred offering costs - - 17,356 -
-----------------------------------------------------------------------------
Net cash provided by financing activities 2,928,966 5,286,619 4,664,705 32,953,767
Net increase (decrease) in cash and cash equivalents (1,227,456) 1,058,127 57,664 155,692
Cash and cash equivalents at beginning of the period 1,383,148 325,021 267,357 -
-----------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 155,692 $ 1,383,148 $ 325,021 $ 155,692
=============================================================================
</TABLE>
F-7
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION> JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Equipment purchased by capital leases $ - $ - $ 288,722 $ 288,772
Interest paid 19,983 26,692 7,763 117,911
Imputed dividend on Series E Stock - 3,266,250 - 3,266,250
Conversion of Series D preferred stock to common
stock - 44,990 2,097,342 2,142,332
Conversion of Series E preferred stock to - - - -
common stock 913,750 300,000 - 1,213,750
Series D stock issued for Series C Stock - - - 2,073,925
Series C dividends paid with Series D stock - - - 253,875
Series D dividends paid with common stock - - 422,341 422,341
</TABLE>
See accompanying notes.
F-8
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITIES
Protein Polymer Technologies, Inc. (the "Company") was established to design,
produce and market genetically engineered protein polymers for a variety of
biomedical and specialty materials applications. The Company was incorporated in
Delaware on July 6, 1988. For the period from its inception to date, the Company
has been a development stage enterprise, and accordingly, the Company's
operations have been directed primarily toward developing business strategies,
raising capital, research and development activities, conducting clinical
testing of its product candidates, exploring marketing channels and recruiting
personnel. The Company operates in one segment.
LIQUIDITY
As of December 31, 1999, the Company had cash, cash equivalents and short-term
investments totaling $156,000. In January and February 2000 the Company received
approximately $1,350,000 in cash and receivables from licensing and R&D
agreements with Femcare, Ltd. for the European and Australian marketing rights
to the stress urinary incontinence bulking product, with Perkin-Elmer for a
research and development project and commercialization option, and with Sanyo
Chemical Industries, Ltd. for the marketing rights, manufacturing technology,
and inventory for the in vitro cell culture business. Also in February 2000, the
Company received approximately $2 million net of costs from the exercise of
common stock warrants originally granted as part of the sale of Series G
Convertible Preferred Stock.
The Company believes its available cash, cash equivalents and short-term
investments would be sufficient to meet its anticipated capital requirements
through January 2001. Prior to the commercialization of its products,
substantial additional capital resources will be required to fund continuing
operations related to the Company's research, development, manufacturing,
clinical testing, and business development activities. The Company believes
there may be a number of alternatives available to meet the continuing capital
requirements of its operations, such as collaborative agreements and public or
private financings. During 2000, the Company expects that the possible exercise
of existing warrants could result in additional funds for continuing operations.
Further, the Company is currently in discussions with a number of potential
collaborative partners and, based on the results of various materials
evaluations, revenues in the form of license fees, milestone payments or
research and development
F-9
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
reimbursements could be generated. There can be no assurance that any of these
fundings will be consummated in the necessary time frames needed for continuing
operations or on terms favorable to the Company. If adequate funds in the future
are not available, the Company will be required to significantly curtail its
operating plans and may have to sell or license out significant portions of the
Company's technology or potential products.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments which
include debt securities with remaining maturities of three months or less when
acquired. Short-term investments consist primarily of commercial paper, notes
and short-term U.S. Government securities with original maturities beyond three
months and are stated at estimated fair value. Similar items with original
maturities of three months or less are considered cash equivalents. The Company
has established guidelines relative to diversification and maturities that
maintain safety and liquidity. The Company has not experienced any losses on its
short-term investments.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Equipment is depreciated over the estimated
useful life of the asset, typically one to seven years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease term
or life of the asset. Equipment and leasehold improvements consist of the
following:
DECEMBER 31,
1999 1998
--------------------------
Laboratory equipment $ 1,626,822 $ 1,600,723
Office equipment 175,128 175,128
Leasehold improvements 297,635 297,635
--------------------------
2,099,585 2,073,486
Less accumulated depreciation and amortization (1,739,580) (1,475,039
--------------------------
$ 360,005 $ 598,447
==========================
F-10
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
License fees and research and development contract revenues are recorded as
earned based on the performance requirements of the contracts. If the research
and development activities are not successful, the Company is not obligated to
refund payments previously received. Milestone payments are recorded as revenue
when received as they have not been refundable and the Company has no future
performance obligations. Payments received in advance of amounts earned are
recorded as deferred revenue. Research and development costs are expensed as
incurred.
PRODUCT REVENUE RECOGNITION
Sales are recognized upon shipment of products to customers.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company will value the
asset at fair value. While the Company's current and historical operating and
cash flow losses are indicators of impairment, the Company believes the future
cash flows to be received from the long-lived assets will exceed the assets'
carrying value, and accordingly the Company has not recognized any impairment
losses through December 31, 1999.
STOCK OPTIONS
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related Interpretations
in accounting for its employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recognized. Options issued to non-employees are recorded at their fair value and
recognized over the related service period. The effects of using the fair value
accounting method, as described in SFAS Statement No. 123 are described below in
Note 2.
F-11
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
NET LOSS PER COMMON SHARE
The Company reports its earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires the presentation of both basic and diluted
earnings per share on the statements of operations. Basic earnings per share is
calculated based upon weighted-average number of outstanding common shares for
the period. Diluted earnings per share is calculated based upon weighted-average
number of outstanding common shares, plus the effect of dilutive stock options.
The net loss per common share for the years ended December 31, 1999, 1998 and
1997 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities including
options, warrants and convertible preferred stock have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
Consequently, there is no difference between the basic and dilutive net loss per
common share for any of the periods presented and none of the prior periods were
required to be restated. For purposes of this calculation, net loss in 1999,
1998 and 1997 has been adjusted for accumulated and/or paid dividends on the
Preferred Stock.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires that the Company
disclose, either in the income statement or in a separate financial statement,
net income as currently reported and other components of comprehensive income.
Comprehensive income is defined as the change in stockholders' equity during a
period resulting from transactions and other events and circumstances from
non-owner sources. For the years ended December 31, 1999, 1998 and 1997 the
Company did not have any components of comprehensive income as defined in SFAS
No. 130.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the amount of revenue and expense reported during the period. Actual results
could differ from those estimates.
F-12
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series
G Preferred Stock from several institutional and accredited individual investors
following the 10 day stockholder notification period required by the NASD prior
to the sale. On September 15, 1999, the Company received an additional $325,000
for 3,250 shares of Series G Preferred Stock, for total proceeds of $2,100,000.
Each share of Series G Convertible Preferred Stock was priced at $100 per share.
Each share can be converted at any time by the holder into common stock at a
price of $0.50 per share, subject to certain antidilution adjustments. Each
share of Preferred Stock also receives a common stock warrant, exercisable for
12 months, that allows the holder to acquire 200 shares of PPTI common stock at
a price of $0.50 per share.
Between April 1 and April 15, 1999, the Company received approximately $508,000
from the exercise of redeemable, publicly traded, warrants to purchase common
stock originally issued as part of PPTI's initial public offering. Following the
close of business on April 15, the remaining unexercised redeemable, publicly
traded, warrants expired. On May 12, 1999, the Company received approximately
$416,000 from the exercise of warrants to purchase common stock issued in
conjunction with the private placement of the Company's Series E Convertible
Preferred Stock.
In April and May of 1998, the Company raised approximately $5.4 million from the
sale of 54,437 shares of the Company's Series E Convertible Preferred Stock
("Series E Stock") priced at $100 per share, with warrants to purchase an
aggregate of 3,266,250 shares of common stock to a small group of institutional
and accredited investors. In connection with this transaction, the Company
recorded a non-cash "imputed dividend" expense of $3,266,250 in order to account
for the difference between the fair market value of the common stock and the
conversion price of the preferred stock into common stock.
Each share of Series E Stock is convertible at any time at the election of the
holder into 80 shares of common stock at a conversion price of $1.25 per share,
subject to certain antidilution adjustments. This registration became effective
on October 3, 1998. As of December 31, 1999, 11,650 shares of Series E Stock had
been converted into 932,000 shares of the Company's common stock.
F-13
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY (continued)
Each share of Series E Stock received two common stock warrants. One warrant is
exercisable at any time for 40 shares of common stock at an exercise price of
$2.50 per share, and expires approximately 18 months after the close of the
offering; the other warrant is exercisable at any time for 20 shares of common
stock at an exercise price of $5.00 per share, and expires approximately 36
months after the close of the offering. In addition, an 18 month warrant to
acquire 200,000 common shares exercisable at $2.50 per share and a 36 month
warrant to acquire 100,000 common shares exercisable at $5.00 per share has been
issued as a finder and document review fee paid to a lead investor. An 18 month
warrant to acquire 32,000 common shares exercisable at $2.50 per share, a 24
month warrant to acquire 16,000 common shares exercisable at $5.00 per share,
and 5 year warrants to acquire an aggregate of 25,200 common shares exercisable
at $2.50 per share were issued to certain persons for service as finders in
relation to the private placement.
In connection with the above private placement, the Company issued 26,420 shares
of its Series F Convertible Preferred Stock ("Series F Stock") in exchange for
the same number of shares of outstanding Series D Convertible Preferred Stock
("Series D Stock").
Each share of Series D and F Stock earns a cumulative dividend at the annual
rate of $10 per share, payable if and when declared by the Company's Board of
Directors, in the form of cash, common stock or any combination thereof. The
Series D and F Stock is convertible into common stock after two years from the
date of issuance at the holder's option. The conversion price at the time of
conversion is the lesser of $3.75 or the market price. The Series D and F Stock
is redeemable at the Company's option after four years from the date of
issuance. Automatic conversion of all of the Series D and F Stock will occur if:
(a) the Company completes a public offering of common stock at a price of $2.50
or higher; or (b) the holders of a majority thereof elect to convert. The
Company has the option to demand conversion of the Series D and F Stock if the
average market price of its common stock equals or exceeds $5.00 per share over
a period of twenty business days. The Series D and F Stock have preference in
liquidation of $100 per share plus accumulated dividends.
The Series E Stock is convertible, at the option of the holder, into shares of
the Company's common stock, subject to anti-dilution adjustments, and has a
preference in liquidation of $100 per share, but only after any preference is
paid or declared set apart for the Series D Stock. Holders of the Series E Stock
are entitled to receive dividends when and if declared by the Board of
Directors; however, no such dividends will be declared or paid on the Series E
Stock until the preferential cumulative dividends on the Series D and F Stock
have been fully
F-14
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY (continued)
paid or declared and set apart. Automatic conversion of all Series E Stock will
occur if: (a) the Company completes a public offering of common stock at a price
of $7.50 or higher; or (b) the holders of more than 75% of outstanding Series E
Stock elect to convert.
The Series D, E and F Preferred Stock has been designated as non-voting stock.
STOCK OPTION PLANS
In September 1996 the Company established the Protein Polymer Technologies,
Inc., Employee Stock Purchase Plan ("Plan"). The Plan commenced January 2, 1997,
and allows for offering periods of up to two years with quarterly purchase dates
occurring the last business day of each quarter. The purchase price per share is
generally calculated at 85% of the lower of the fair market value on an eligible
employee's entry date or the quarterly purchase date. The maximum number of
shares available for issuance under the Plan is 500,000; an eligible employee
may purchase up to 5,000 shares per quarter. The Plan Administrator consists of
a committee of at least two non-employee directors of the Company. The Board may
modify the Plan at any time. During 1999, a total of 19,429 shares were
purchased under the Plan at prices ranging from $0.79 to $1.06. The value of
shares issued under the Plan as calculated in accordance with Statement 123 is
not significant and is not included in the following pro forma information.
In June 1996, the Company adopted the 1996 Non-Employee Directors Stock Option
Plan ("1996 Plan"), which provides for the granting of nonqualified options to
purchase up to 250,000 shares of common stock to directors of the Company. Such
grants of options to purchase 5,000 shares of common stock are awarded
automatically on the first business day of June during each calendar year to
every Participating Director then in office, subject to certain adjustments. No
Participating Director is eligible to receive more than one grant per year. The
purchase price of each option is set at the fair market value of the common
stock on the date of grant. Each option has a duration of ten years, and is
vested and exercisable six months after the grant date. The Board (or a
designated committee of the Board) administers the 1996 Plan. At December 31,
1999, 130,000 options to purchase have been granted under the 1996 Plan.
The Company adopted the 1992 Stock Option Plan which provides for the issuance
of incentive and non-statutory stock options for the purchase of up to 1,500,000
shares of common stock to its key employees and certain other individuals. The
options will expire
F-15
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY (continued)
ten years from their respective dates of grant. Options become exercisable
ratably over periods of up to five years from the dates of grant. At December
31, 1999, options to purchase 527,000 shares of common stock were exercisable,
and 212,000 shares were available for future grant.
The Company adopted the 1989 Stock Option Plan which provided for the issuance
of incentive and non-statutory stock options for the purchase of up to 500,000
shares of common stock to key employees and certain other individuals. The 1989
Stock Option Plan expired as of March 17, 1999. Options granted in the plan
became exercisable ratably over periods of up to five years from the date of
grant. At December 31, 1999, options for 365,000 shares were exercisable.
Since inception, the Company has granted non-qualified options outside the
option plans to employees, directors and consultants of the Company. At
December 31, 1999, options for 130,000 shares were exercisable.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 1,765,000 $1.51 1,540,600 $1.52 1,393,600 $1.38
Granted 548,500 $0.44 568,000 $0.99 190,000 $2.34
Exercised - - (12,000) ($0.67) (28,000) ($0.73)
Forfeited/Expired (315,500) ($1.40) (331,600) ($0.83) (15,000) ($0.60)
--------- ----- --------- ----- ------- -----
Outstanding - end of year 1,998,000 $1.23 1,765,000 $1.51 1,540,600 $1.52
========= ===== ========= ===== ========= =====
Exercisable - end of year 1,152,000 $1.37 1,093,600 $1.36 916,600 $1.56
========= ===== ========= ===== ========= =====
</TABLE>
F-16
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY (continued)
The exercise prices for options outstanding as of December 31, 1999 range from
$0.22 to $0.84. The weighted average remaining contractual life of these options
is approximately 7.20 years.
STATEMENT 123 PRO FORMA INFORMATION
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123, using the Black-Scholes
option pricing model. The fair value was estimated using the following
weighted-average assumptions: a risk free interest rate of 5.50% for 1999, 6.00%
for 1998 and 6.43% for 1997; a volatility factor of the expected market price of
the Company's common stock of 100% for 1999, 89% for 1998 and 102% for 1997;
expected option lives of 5 years for 1999, 5 years for 1998, and 8 years for
1997; and no dividend yields for all years.
The Black-Scholes option valuation model was originally developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the expected life of the options. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss as reported $ (4,535,170) $ (9,182,526) $ (4,886,615)
Net loss per share as reported (0.36) (0.88) (0.52)
Net loss pro forma (4,772,359) (9,877,344) (5,188,511)
Net loss per share pro forma (.38) (.94) (0.55)
Weighted average fair value per share
of options granted during the year $ 0.34 $ 0.87 $ 1.77
</TABLE>
F-17
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
2. STOCKHOLDERS' EQUITY (continued)
The pro forma effect on net loss for 1999, 1998 and 1997 is not representative
of the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense from option grants made prior
to 1995.
3. STOCKHOLDER PROTECTION AGREEMENT
In 1997, the Board of Directors of the Company adopted a Stockholder Protection
Agreement ("Rights Plan") that distributes Rights to stockholders of record as
of September 10, 1997. The Rights Plan contains provisions to protect
stockholders in the event of an unsolicited attempt to acquire the Company. The
Rights trade together with the common stock, and generally become exercisable
ten business days after a person or group acquires or announces the intention to
acquire 15% or more of the outstanding shares of the Company's common stock,
with certain permitted exceptions. The Rights then generally allow the holder to
acquire additional shares of the Company's capital stock at a discounted price.
The issuance of the Rights is not a taxable event, does not affect the Company's
reported earnings per share, and does not change the manner in which the
Company's common stock is traded.
4. COMMITMENTS
The Company leases its office and research facilities totaling 21,000 square
feet under an operating lease, which expires in May 2005. The facilities lease
is subject to an annual escalation provision based upon the Consumer Price
Index. The lease provides for deferred rent payments; however, for financial
purposes rent expense is recorded on a straight-line basis over the term of the
lease. Accordingly, deferred rent in the accompanying balance sheet represents
the difference between rent expense accrued and amounts paid under the lease
agreement.
F-18
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
4. COMMITMENTS (continued)
Annual future minimum operating and capital lease payments are as follows:
<TABLE>
<CAPTION>
Obligations
Operating Under
Year ending December 31, Leases Capital Leases
------------------------ --------------- ---------------
<S> <C> <C>
2000 $ 451,841 $ 87,228
2001 460,933 25,651
2002 461,782 -
2003 473,200 -
2004 487,396 -
Thereafter 164,064 -
--------------- ---------------
Total minimum operating and capital lease payments $ 2,499,216 112,879
===============
Less amount representing interest (8,198)
---------------
Present value of remaining minimum capital lease payments 104,681
Less amount due in one year (79,593)
---------------
Long-term portion of obligations under capital leases $ 25,088
===============
</TABLE>
Cost and accumulated depreciation of equipment held under capital leases as of
December 31, 1999 was $279,497 and $149,483, respectively. The carrying amount
of the Company's obligations under its capital lease agreements approximate
their fair value and the implicit interest rate approximates the Company's
borrowing rate.
Rent expense was approximately $417,000, $442,633, $412,000, and $3,637,633 for
the years ended December 31, 1999, 1998 and 1997 and for the period July 6, 1988
(inception) through December 31, 1999, respectively.
5. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $30,589,000 for federal income tax purposes, which may be applied
against future income, if any, and will begin expiring in 2004 unless previously
utilized. In addition,
F-19
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
5. INCOME TAXES (continued)
the Company had California net operating loss carryforwards of approximately
$12,249,000. The California tax loss carryforwards continue to expire. The
difference between the tax loss carryforwards for federal and California
purposes is attributable to the capitalization of research and development
expenses for California tax purposes, the required 50% limitation in the
utilization of California loss carryforwards, and the expiration of certain
California tax loss carryforwards.
The Company also has federal and California research and development tax credit
carryforwards of approximately $1,043,000 and $478,000, respectively, which will
begin expiring in 2004 unless previously utilized.
As a result of an ownership change that occurred in January 1992, approximately
$2,700,000 of the Company's federal net operating loss carryforwards will be
subject to an annual limitation regarding utilization against taxable income in
future periods. However, the Company believes that such limitations will not
have a material impact upon the utilization of the carryforwards.
Significant components of the Company's deferred tax assets as of December 31,
1999 are shown below. A valuation allowance of $12,867,000 has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.
1999 1998
-------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 11,410,000 $ 9,899,000
Research and development credits 1,354,000 1,122,000
Other, net 103,000 728,000
-------------------------------
Total deferred tax assets 12,867,000 11,749,000
Valuation allowance for deferred tax assets (12,867,000) (11,749,000)
-------------------------------
Net deferred tax assets $ - $ -
===============================
6. EMPLOYEE BENEFITS PLAN
On January 1, 1993, the Company established a 401(k) Savings Plan for
substantially all employees who meet certain service and age requirements.
Participants may elect to defer up to 20% of their compensation per year,
subject to legislated annual limits. Each year the
F-20
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
6. EMPLOYEE BENEFITS PLAN (continued)
Company may provide a discretionary matching contribution. As of December 31,
1999, the Company had not made a contribution to the Savings Plan.
7. SUBSEQUENT EVENTS
Between January 1 and February 29, 2000, the Company received approximately $3.5
million in cash and receivables from license and development agreements, the
sale of the Company's cell culture business, and the exercise of common stock
warrants.
FEMCARE AGREEMENTS
On January 26, 2000, PPTI and Femcare Ltd. ("Femcare"), headquartered in
Nottingham, Great Britain, executed three related agreements involving the grant
of a license to Femcare to register and market PPTI's urethral bulking agent for
the treatment of female stress urinary incontinence in Europe and Australia. In
addition to the License and Development Agreement, PPTI agreed in a separate
Supply Agreement to provide final product to Femcare, and if unable to do so,
agreed to make the manufacturing methods and materials available to Femcare as
specified in a separate Escrow agreement.
In addition to agreeing to purchase the final product from PPTI for a defined
percentage of the revenues received by Femcare from the sale of the incontinence
product, Femcare agreed to pay PPTI an upfront license fee of $1 million in two
installments and agreed to pay PPTI a royalty on revenues received from the sale
of the incontinence product. The agreements specify the performance benchmarks
and timelines for each party, the definition of yearly minimum royalties and
minimum product purchases, and the methods and procedures for determining
product manufacturing requirements.
The license grant from PPTI to Femcare is for the greater of 20 years or the
date upon which the last patent included within the license grant for the
territories covered expires, subject to meeting various sales requirements, and
is exclusive in the territories covered, subject to certain conditions being
maintained. The parties agreed to cooperate extensively in the clinical testing
and the registration of the product with the appropriate governmental
authorities.
SALE OF IN VITRO CELL CULTURE BUSINESS TO SANYO CHEMICAL INDUSTRIES, LTD.
--------
On February 18, 2000, PPTI and Sanyo Chemical Industries, Ltd. ("Sanyo"), of
Kyoto, Japan, executed an agreement involving the grant of a royalty-free
license to Sanyo for exclusive worldwide rights to make and sell ProNectin(R) F
and ProNectin(R)L and derivative
F-21
<PAGE>
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
December 31, 1999
7. SUBSEQUENT EVENTS (continued)
products for in vitro cell culture and related applications. PPTI will receive
--------
from Sanyo $355,000 (less associated expenses) for the license, including
assignment of the ProNectin(R) and SmartPlastic(R) trademarks and transfer of
remaining product inventory. The agreement remains in effect until the last
patent included within the license grant expires.
EXERCISE AND EXCHANGE OF SERIES G WARRANTS
During February 2000, holders of warrants issued in connection with the sale of
Series G Preferred Stock exercised their warrants to purchase common stock which
were due to expire in September, 2000. The exercise price was $0.50 per share.
As an inducement to exercise the warrant early, the Company offered each holder
a new one year warrant for a similar number of shares at an exercise price of
$1.50 per share. As a result the Company raised $2.1 million (less offering
expenses). The newly issued warrants will expire on the last day of February
2001.
F-22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 9, 10, 11 and 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Commission no
later than April 7, 2000.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The Financial Statements are incorporated herein as a part of Item 7.
(a)(3) Exhibits
The following documents are included or incorporated by reference:
Exhibit
Number Description
------ -----------
3.1 (6) Certificate of Incorporation of the Company, as amended.
3.1.1 (13) Certificate of Designation of Series E Convertible Preferred
Stock.
3.1.2 (13) Certificate of Designation of Series F Convertible Preferred
Stock.
3.1.3 (14) Certificate of Designation of Series G Convertible Preferred
Stock.
3.2 (6) Bylaws of the Company, as amended.
10.1 (1) 1989 Stock Option Plan, together with forms of Incentive Stock
Option Agreement and Nonstatutory Option Agreement.
10.2 (4) 1992 Stock Option Plan of the Company, together with forms of
Incentive Stock Option Agreement and Nonstatutory Option
Agreement.
29
<PAGE>
10.3 (1) Form of Employee's Proprietary Information and Inventions
Agreement.
10.4 (1) Form of Consulting Agreement.
10.5 (1) Form of Indemnification Agreement.
10.6 (4) License Agreement, dated as of April 15, 1992, between the
Board of Trustees of the Leland Stanford Junior University
and the Company.
10.7 (6) Amended and Restated Registration Rights Agreement dated
September 14, 1995, among the Company and the holders of its
Series D Preferred Stock.
10.8 (6) Securities Purchase Agreement related to the sale of the
Company's Series D Preferred Stock.
10.9 (7) Letter Agreement dated as of October 4, 1996 between the
Company and MBF I, LLC ("MBF") relating to the provision of
consulting and advisory services.
10.10 (7) Form of Warrant with respect to a warrant for 50,000 shares
issued to MBF, and to be used with respect to additional
warrants which may be issued to MBF.
10.11 (7) Registration Rights Agreement dated as of October 4, 1996
between the Company and MBF.
10.12 (7) Securities Purchase Agreement dated as of January 6, 1997
among the Company and the investors named therein relating to
the sale and purchase of 1,904,000 shares of the Company's
common stock.
10.13 (8) Lease, with exhibits, dated March 1, 1996 between the Company
and Sycamore/San Diego Investors.
10.14 (8) Second Amendment to Lease between the Company and Sycamore/San
Diego Investors, dated March 1, 1996.
10.15 (8) 1996 Non-Employee Directors' Stock Option Plan.
30
<PAGE>
10.16 (9) Stockholder Protection Agreement, dated August 22, 1997,
between the Company and Continental Stock Transfer & Trust
Company as rights agent.
10.17 (10) Employee Stock Purchase Plan, together with Form of Stock
Purchase Agreement.
10.18 (11) Lease, with rider and exhibits, dated April 13, 1998, between
the Company and Sycamore/San Diego Investors
10.19 (12) First Amendment to Stockholder Protection Agreement dated
April 24, 1998, between the Company and Continental Stock
Transfer & Trust Company as rights agent.
10.20 (13) Securities Purchase Agreement related to the sale of the
Company's Series E Convertible Preferred Stock dated as of
April 13, 1998 among the Company and Investors named therein
related to the purchase of 54,437.50 shares of Series E
Preferred Stock.
10.21 (13) Form of First Warrants to purchase Common Stock related to the
sale of the Company's Series E Preferred Stock.
10.22 (13) Form of Second Warrants to purchase Common Stock related to
the sale of the Company's Series E Preferred Stock.
10.23 (13) Letter of Agreement dated April 13, 1998 between the Company
and Johnson & Johnson Development Corporation for the exchange
of up to 27,317 shares of Series D Preferred Stock for a like
number of shares of Series F Preferred Stock.
10.24 (14) Securities Purchase Agreement related to the sale of the
Company's Series G Convertible Preferred Stock
10.25 (14) Form of Warrant to Purchase Common Stock issued in connection
with the Series G Preferred Stock
10.26 (14) Second Amendment to Stockholder Protection Agreement, dated
July 26, 1999 between the Company and Continental Stock
Transfer and Trust Company as rights agent
10.27 License and Development Agreement dated as of January 26,
2000 between the Company and Prospectivepiercing Limited,
to be known as Femcare Urology Limited.
31
<PAGE>
10.28 Supply Agreement dated as of January 26, 2000 between the
Company and Femcare Urology Limited.
10.29 Escrow Agreement dated as of January 26, 2000 between the
Company and Femcare Urology Limited.
10.30 Employment Agreement, dated as of February 17, 2000, between
the Company and J. Thomas Parmeter.
10.31 Employment Agreement, dated as of February 17, 2000, between
the Company and John E. Flowers.
10.32 Employment Agreement, dated as of February 17, 2000, between
the Company and Joseph Cappello.
10.33 Employment Agreement, dated as of February 17, 2000, between
the Company and Franco A. Ferrari.
10.34 License Agreement dated as of February 18, 2000 between the
Company and Sanyo Chemical Industries, Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
32
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 33-43875) filed with the Commission on November 12, 1991,
as amended by Amendments Nos. 1, 2, 3 and 4 thereto filed on November
25, 1991, December 23, 1991, January 17, 1992 and January 21, 1992,
respectively.
(2) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1992, as filed with the Commission on May 14,
1992.
(3) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended September 30, 1992, as filed with the Commission on
November 13, 1992.
(4) Incorporated by reference to Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1992, as filed with the Commission on
March 31, 1993.
(5) Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 1994, as filed with the Commission on
March 30, 1995.
(6) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended September 30, 1995, as filed with the Commission on
October 24, 1995.
(7) Incorporated by reference to Registrant's current Report on Form 8-K,
as filed with the Commission on January 7, 1997.
(8) Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 1996, as filed with the Commission on
March 27, 1997.
(9) Incorporated by reference to Registrant's Current Report on Form 8-K,
as filed with the Commission on August 27, 1997.
(10) Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 1997, as filed with the Commission on
April 9, 1998.
(11) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998, as filed with the Commission on May 14,
1998.
(12) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended June 30, 1998, as filed with the Commission on August 13,
1998.
(13) Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 1998, as filed with the Commission on
April 9, 1999.
(14) Incorporated by reference to Registrant's Report on Form 10-Q for the
quarter ended September 30, 1999, as filed with the Commission on
November 1, 1999.
33
<PAGE>
(b) Reports on Form 8-K.
On August 17, 1999, the Company filed a Current Report on Form 8-K with
the Commission. In Item 5 of the report, the Company reported an
initial private placement of 17,750 shares of the Company's Series G
Convertible Preferred Stock, and warrants to purchase an aggregate of
3,550,000 shares of common stock.
On September 20, 1999, the Company filed a Current Report on Form 8-K
with the Commission. In Item 5 of the report, the Company reported the
delisting of the Company's common stock from the NASDAQ Small Cap
Market. The Company also reported a subsequent closing of a private
placement of the Company's Series G Convertible Preferred Stock which,
including the previous closing, was for a total of 21,000 shares and
warrants to purchase an aggregate of 4,200,000 shares of common stock.
On January 27, 2000, the Company filed a Current Report on Form 8-K
with the Commission. In Item 5 of the Report, the Company reported the
establishment of a strategic partnership with Femcare, Ltd., including
the execution of a License and Development Agreement, a Supply
Agreement, and an Escrow Agreement which in combination granted Femcare
Ltd. the exclusive right to commercialize the Company's urethral
bulking agents in Europe and Australia.
34
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PROTEIN POLYMER TECHNOLOGIES, INC.
March 23, 2000 By /S/ J. THOMAS PARMETER
-----------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/S/ J. THOMAS PARMETER Chairman of the Board, Chief March 23, 2000
- ----------------------- Executive Officer, President
J. Thomas Parmeter
/S/ JANIS Y. NEVES Director of Finance, Controller, March 23, 2000
- ------------------- and Assistant Secretary
Janis Y. Neves
/S/ RICHARD ADELSON Director March 23, 2000
- --------------------
Richard Adelson
/S/ PATRICIA J. CORNELL Director March 23, 2000
- ------------------------
Patricia J. Cornell
/S/ EDWARD E. DAVID Director March 23, 2000
- --------------------
Edward E. David
/S/ PHILIP J. DAVIS Director March 23, 2000
- --------------------
Philip J. Davis
/S/ PATRICK A. GERSCHEL Director March 23, 2000
- ------------------------
Patrick A. Gerschel
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/S/ EDWARD J. HARTNETT Director March 23, 2000
- -----------------------
Edward J. Hartnett
/S/ J. PAUL JONES Director March 23, 2000
- ------------------
J. Paul Jones
/S/ GEORGE R. WALKER Director March 23, 2000
- ---------------------
George R. Walker
</TABLE>
36
<PAGE>
EXHIBIT 13.2
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of principal executive offices)
(858) 558-6064
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 12, 2000, 18,379,010 shares
of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
================================================================================
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
March 31, 2000 and December 31, 1999................................................ 3
Condensed Statements of Operations -
For the Three Months ended March 31, 2000 and 1999 and the period
July 6, 1988 (inception) to March 31, 2000.......................................... 4
Condensed Statements of Cash Flows -
For the Three Months ended March 31, 2000 and 1999 and the period
July 6, 1988 (inception) to March 31, 2000.......................................... 5
Notes to Condensed Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
Signature ............................................................................ 15
</TABLE>
2
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 2,153,893 $ 155,692
Accounts Receivable ...................................................... 574,869 --
Other current assets ..................................................... 19,490 49,266
------------ ------------
Total current assets ........................................................ 2,748,252 204,958
Deposits ................................................................. 36,177 36,177
Notes receivable from officers ........................................... 140,000 140,000
Equipment and leasehold improvements, net ................................ 339,992 360,005
------------ ------------
$ 3,264,421 $ 741,140
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 290,042 $ 385,932
Accrued employee benefits ................................................ 60,642 84,335
Other accrued expenses ................................................... 61,778 17,118
Current portion capital lease obligations ................................ 80,493 79,593
Current portion deferred revenue ......................................... 250,000 --
Deferred rent ............................................................ 102,753 95,973
------------ ------------
845,708 662,951
Long-term portion deferred revenue .......................................... 666,667 --
Long-term portion capital lease obligations ................................. 4,117 25,088
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 5,000,000 shares authorized,
84,077 and 91,065 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively; liquidation preference - $8,407,700
8,062,272 8,761,072
Common stock, $.01 par value, 40,000,000 shares authorized, 18,286,510 and
13,443,510 shares issued and outstanding at March 31, 2000 and December
31, 1999, respectively ................................................. 182,877 134,447
Additional paid-in capital ............................................... 31,226,747 28,403,077
Deficit accumulated during development stage ............................. (37,723,967) (37,245,495)
------------ ------------
Total stockholders' equity ............................................... 1,747,929 53,101
------------ ------------
$ 3,264,421 $ 741,140
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Three Months Ended (Inception)
March 31, to March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract and licensing revenue .................. 386,574 $ -- $ 4,743,859
Interest income ................................. 13,809 13,002 1,134,081
Product and other income ........................ 2,866 22,649 687,184
------------ ------------ ------------
Total revenues ..................................... 403,249 35,651 6,565,124
Expenses:
Research and development ........................ 554,187 714,132 25,308,268
Selling, general and administrative ............. 327,532 427,619 15,032,435
------------ ------------ ------------
Total expenses ..................................... 881,719 1,141,751 40,340,703
------------ ------------ ------------
Net loss ........................................... (478,470) (1,106,100) (33,775,579)
Undeclared dividends on preferred stock ............ 69,220 68,459 5,308,874
------------ ------------ ------------
Net loss applicable to common shareholders ......... $ (547,690) $ (1,174,559) $(39,084,453)
============ ============ ============
Net loss per common share - basic and diluted ...... $ (0.04) $ (0.11)
============ ============
Shares used in computing net loss per common share -
basic and diluted ............................... 15,320,744 10,940,748
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Three Months Ended (Inception)
March 31, to March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................. $ (478,470) $ (1,106,100) $(33,781,499)
Adjustments to reconcile net loss to net cash used for
operating activities:
Stock issued for compensation and interest ...... -- 18,000 131,515
Depreciation and amortization ................... 43,963 84,592 1,936,800
Write-off of purchased technology ............... -- -- 503,500
Deferred revenue .............................. 916,667 -- 916,667
Deferred rent ................................. 6,780 -- 102,753
Changes in assets and liabilities:
Deposits ...................................... -- (800) (36,177)
Notes receivable from officers ................ -- 1,000 (140,000)
Other current assets .......................... (545,093) (10,519) (594,359)
Accounts payable .............................. (95,890) (45,902) 290,042
Accrued employee benefits ..................... (23,693) 11,032 60,642
Other accrued expenses ........................ 44,660 4,378 61,778
------------ ------------ ------------
Net cash used for operating activities .............. (131,076) (1,044,319) (30,548,338)
INVESTING ACTIVITIES
Purchase of technology ............................... -- -- (570,000)
Purchase of equipment and improvements ............... (23,951) (22,282) (1,834,765)
Purchases of short-term investments .................. -- -- (16,161,667)
Sales of short-term investments ...................... -- -- 16,161,667
------------ ------------ ------------
Net cash provided by (used for) investing activities.. $ (23,951) $ (22,282) $ (2,404,765)
------------ ------------ ------------
</TABLE>
5
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Three Months Ended (Inception)
March 31, to March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from exercise of options and warrants,
and sale of common stock ........................ $ 2,173,299 $ 8,770 $ 19,710,966
Net proceeds from issuance of preferred stock....... -- -- 14,290,160
Net proceeds from convertible notes and
detachable warrants ............................. -- -- 1,068,457
Payments on capital lease obligations .............. (20,071) (20,204) (204,160)
Payment on note payable ............................ -- -- (242,750)
Proceeds from note payable ......................... -- -- 484,323
------------ ------------ ------------
Net cash provided by (used for) financing activities 2,153,228 (11,434) 35,106,996
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,998,201 (1,078,035) 2,153,893
Cash and cash equivalents at beginning of period.... 155,692 1,383,148 --
------------ ------------ ------------
Cash and cash equivalents at end of period ......... $ 2,153,893 $ 305,113 $ 2,153,893
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Equipment purchased by capital leases .............. $ -- $ -- $ 288,772
Interest paid ...................................... 2,731 5,270 120,642
Conversion of Series E preferred stock
to common stock ................................. 698,800 200,000 1,912,550
Series D stock issued for Series C stock ........... -- -- 2,073,925
Series C dividends paid with Series D stock ........ -- -- 253,875
Series D dividends paid with common stock .......... $ -- $ -- $ 422,341
</TABLE>
See accompanying notes.
6
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
March 31, 2000
1. BASIS OF PRESENTATION
The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three months ended March 31, 2000 and 1999 are unaudited.
These financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary to
state fairly the financial position at March 31, 2000 and the results of
operations for the three months ended March 31, 2000 and 1999. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for the year ended December 31, 2000.
For more complete financial information, these financial statements and the
notes thereto should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999, filed with the Securities and Exchange Commission.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. The loss figures used for this calculation
recognize accumulated dividends on the Company's Series D and Series F Preferred
Stock. Such dividends are payable when declared by the Board of Directors in
cash or common stock.
3. BASIC AND DILUTED LOSS PER SHARE
In accordance with FAS No. 128, the Company is required to present basic and
diluted earnings per share if applicable. Basic and diluted earnings per share
are determined based on the weighted average number of shares outstanding during
the period. Diluted earnings per share also includes potentially dilutive
securities such as options and warrants outstanding and securities convertible
into common stock.
Both the basic and diluted loss per share for the three months ended March 31,
2000 and 1999 are based on the weighted average number of shares of common stock
outstanding during the periods. Since potentially dilutive securities have not
been included in the calculation of the diluted loss per share for both periods
as their affect is antidilutive, there is no difference between the basic and
diluted loss per share calculations.
4. REVENUE AND EXPENSE RECOGNITION
License fees and research and development contract revenues are recorded as
earned based on the performance requirements of the contracts. If the research
and development activities are not successful, the Company is not obligated to
refund payments previously received. Milestone payments are recorded as revenue
when received as they have not been refundable and the Company has no future
performance obligations. Payments received in advance of amounts earned are
recorded as deferred revenue. Research and development costs are expensed as
incurred.
7
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
5. NOTE RECEIVABLE WITH OFFICER
A loan for $140,000, secured by a pledge of stock, was made to an officer of the
Company on April 16, 1997, solely to meet tax obligations arising from the
exercise of a stock option. Interest accrues at the annual rate of 8% on the
unpaid principal balance. In July 1999, the loan term was extended until April
2005.
6. EXERCISE AND EXCHANGE OF SERIES G WARRANTS
During February 2000, holders of warrants issued in connection with the sale of
Series G Preferred Stock exercised their warrants to purchase common stock which
were due to expire in September, 2000. The exercise price was $0.50 per share.
As an inducement to exercise the warrant early, the Company offered each holder
a new one year warrant for a similar number of shares at an exercise price of
$1.50 per share. As a result the Company raised $2.1 million (less expenses).
The newly issued warrants will expire on the last day of February 2001.
7. FEMCARE AGREEMENTS
On January 26, 2000, PPTI and Femcare Ltd. ("Femcare"), headquartered in
Nottingham, Great Britain, executed three related agreements involving the grant
of a license to Femcare to register and market PPTI's urethral bulking agent for
the treatment of female stress urinary incontinence in Europe and Australia. In
addition to the License and Development Agreement, PPTI agreed in a separate
Supply Agreement to provide final product to Femcare, and if unable to do so,
agreed to make the manufacturing methods and materials available to Femcare as
specified in a separate Escrow agreement.
In addition to agreeing to purchase the final product from PPTI for a defined
percentage of the revenues received by Femcare from the sale of the incontinence
product, Femcare agreed to pay PPTI an up front license fee of $1 million in two
installments and agreed to pay PPTI a royalty on revenues received from the sale
of the incontinence product. The agreements specify the performance benchmarks
and timelines for each party, the definition of yearly minimum royalties and
minimum product purchases, and the methods and procedures for determining
product manufacturing requirements. The license grant from PPTI to Femcare is
for the greater of 20 years or the date upon which the last patent included
within the license grant for the territories covered expires, subject to meeting
various sales requirements, and is exclusive in the territories covered, subject
to certain conditions being maintained. The parties agreed to cooperate
extensively in the clinical testing and the registration of the product with the
appropriate governmental authorities. These activities are scheduled to take
place over a period of approximately three years. Accordingly, the Company has
recorded the $1 million up front payment as deferred revenue, and is recognizing
it as license revenue ratably over a period of three years. In the period ended
March 31, 2000, the Company recognized $83,334 of revenue related to this
agreement.
8. SALE OF IN VITRO CELL CULTURE BUSINESS TO SANYO CHEMICAL INDUSTRIES, LTD.
--------
On February 18, 2000, PPTI and Sanyo Chemical Industries, Ltd. ("Sanyo") of
Kyoto, Japan, executed an agreement involving the grant of a royalty-free
license to Sanyo for exclusive worldwide rights to make and sell ProNectin(R) F
and ProNectin(R) L and derivative products for in vitro cell culture and related
applications. PPTI received net proceeds of $284,000 from Sanyo for the issuance
of the license, including assignment of the ProNectin(R) and SmartPlastic(R)
trademarks and transfer of remaining product inventory. The agreement remains in
effect until the last patent included within the license grant expires.
9. LIQUIDITY
The Company believes its existing available cash and cash equivalents as of
March 31, 2000, plus contractual amounts receivable, is sufficient to meet its
anticipated capital requirements until January 2001. Substantial additional
capital resources will be required to fund continuing expenditures related to
the Company's research, development, clinical trials, and product marketing
activities. If adequate funds are not available, the Company will be required to
significantly curtail its operating plans and may have to sell or license out
significant portions of the Company's technology or potential products.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS QUARTERLY
REPORT ON FORM 10-QSB CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR
INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY FORWARD-LOOKING STATEMENTS.
SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, HISTORY OF OPERATING LOSSES,
RAISING ADEQUATE CAPITAL FOR CONTINUING OPERATIONS, EARLY STAGE OF PRODUCT
DEVELOPMENT, SCIENTIFIC AND TECHNICAL UNCERTAINTIES, COMPETITIVE PRODUCTS AND
APPROACHES, RELIANCE UPON COLLABORATIVE PARTNERSHIP AGREEMENTS AND FUNDING,
REGULATORY TESTING AND APPROVALS, PATENT PROTECTION UNCERTAINTIES AND
MANUFACTURING SCALE-UP AND REQUIRED QUALIFICATIONS. WHILE THESE STATEMENTS
REPRESENT MANAGEMENT'S CURRENT JUDGMENT AND EXPECTATIONS FOR THE COMPANY, SUCH
RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
FUTURE RESULTS SUGGESTED HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE
PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE HEREOF.
GENERAL OVERVIEW
Incorporated in 1988, Protein Polymer Technologies, Inc. has concentrated its
research and development efforts on establishing a scientific and technical
leadership position in the production and development of unique protein-based
materials. The Company has identified biomedical market and product
opportunities for further research and development that management believes will
exploit the unique properties of the Company's technology to competitive
advantage. The Company has been unprofitable to date, and as of March 31, 2000
has an accumulated deficit of $37,723,967.
The Company's product candidates for surgical repair, augmentation and
regeneration of human tissues are in various stages of research and development.
Its more advanced programs are in the areas of bulking agents for soft tissue
augmentation, particularly for use in urethral tissue for the treatment of
female stress incontinence and in dermal tissue for cosmetic and reconstructive
procedures. The Company currently is devoting the majority of its resources to
the development and registration of these products, with the greatest emphasis
on the incontinence product.
In December 1999, the Company initiated human clinical testing of its urethral
bulking agent for the treatment of female stress urinary incontinence. The
August 1999 approval by the U.S. Food and Drug Administration ("FDA") of the
Company's Investigational Device Exemption ("IDE")
9
<PAGE>
allows PPTI to test the safety and effectiveness of the incontinence product in
women over the age of 40 who have become incontinent due to the shifting of
their bladder or the weakening of the muscle at its base that controls the flow
of urine, or both problems combined. The Company estimates that more than 2.5
million women begin to experience stress urinary incontinence in the United
States each year. In most untreated cases, the problem becomes progressively
more pronounced. Due to limited efficacy or invasiveness of current treatments,
only a small proportion of the women experiencing stress urinary incontinence
are clinically treated, relying instead on pads and plugs and the like that only
address the symptoms. In contrast, PPTI's product is injected, typically in an
outpatient procedure, into urethral tissue at the base of the bladder forming a
solid implant that provides support to the muscles controlling the flow of
urine. The Company believes that its product will prove to be easy for the
physician to use, offer enduring effectiveness, and avoid most of the other
limitations of urethral bulking products on the market or in development.
In January 2000, PPTI established a strategic alliance with Femcare, Ltd. for
the commercialization of the incontinence product in Europe and Australia. In
the agreement, Femcare is responsible for clinical testing, regulatory approval,
and product sales and marketing within these territories, and PPTI is
responsible for product manufacturing. Contingent on successful clinical trials
commercialization of the product in Europe is expected to begin more than a year
before approval for marketing the product in the United States can be obtained.
See also "Femcare Agreements" in the Notes to the Financial Statements. PPTI
also is in discussions with several companies regarding the establishment of
strategic alliances for commercializing the incontinence product in the United
States and other markets outside the Femcare territories.
The tissue augmentation materials and technology underlying the incontinence
product have the potential to be effective and desirable in a number of other
clinical applications. Assuming additional financial resources are available,
the Company intends to submit an additional IDE to the FDA in 2000 to obtain
approval to begin human clinical testing of its dermal bulking agent for use in
cosmetic and reconstructive surgery applications. PPTI began studies to identify
its most promising biomaterial formulations for use in these soft tissue
augmentation products in 1996, devoted increasing resources through 1997, 1998
and 1999, and at present is focused primarily on completing human clinical
testing of the incontinence product.
The Company's first commercial products, ProNectin F and SmartPlastic, are used
by biologists and cell culture laboratories, principally to grow mammalian cells
for biomedical research purposes. In February 2000, the Company licensed the
rights for the manufacture and sale of these products for use in in vitro cell
culture, including the transfer of all existing inventory, to a third party. See
also "Sale of In Vitro Cell Culture Business to Sanyo Chemical Industries, Ltd."
in the Notes to the Financial Statements.
The Company's other advanced product technology is in the area of tissue
adhesives and sealants. Currently the Company's research and development in this
area is focused on the repair of spinal discs for the treatment of lower back
pain. The Company's strategy with most of its programs is to enter into
collaborative development agreements with major medical product marketing and
distribution companies. Although these relationships, to the extent any are
consummated, may provide significant near-term revenues through up-front
licensing fees, research and development reimbursements and milestone payments,
the Company expects to continue incurring operating losses for the next several
years.
As of March 31, 2000 the Company had cash and cash equivalents totaling
$2,154,000, and $573,000 in receivables, primarily from licensing and R&D
agreements with Femcare, Ltd. for the European and Australian marketing rights
to the stress urinary incontinence bulking product, and from Perkin-Elmer for a
research and development project and commercialization option. The Company
believes its available cash and cash equivalents and future contractual R&D
payments would be sufficient to meet its anticipated capital requirements
through January 2001. The
10
<PAGE>
Company will continue to attempt to raise additional funds for continuing
operations through private or public offerings and collaborative agreements. See
"Liquidity and Capital Resources" below for additional information and a
description of the associated risks.
To the extent sufficient resources are available, the Company continues to
research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.
PPTI is aggressively pursuing domestic and international patent protection for
its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, end-use
products incorporating such materials and methods for their use. To date, the
United States Patent and Trademark Office ("USPTO") has issued 18 patents to the
Company, four of which have been issued in 2000. In addition, PPTI has filed
corresponding patent applications in other relevant commercial jurisdictions.
In April and May of 1998, the Company raised approximately $5.4 million from the
sale of 54,437.5 shares of the Company's unregistered Series E Convertible
Preferred Stock ("Series E Stock") priced at $100 per share with warrants to
purchase an aggregate of 3,266,250 shares of common stock to a small group of
institutional and accredited investors. In connection with this transaction, the
Company issued 26,240 shares of Series F Convertible Preferred Stock in exchange
for the same number of shares of outstanding Series D Convertible Preferred
Stock.
Between April 1 and April 15, 1999, the Company received approximately $508,000
from the exercise of redeemable, publicly traded, warrants to purchase common
stock originally issued as part of PPTI's initial public offering. Following the
close of business on April 15, the remaining unexercised redeemable, publicly
traded, warrants expired. On May 12, 1999, the Company received approximately
$416,000 from the exercise of warrants to purchase common stock issued in
conjunction with the private placement of the Company's Series E Convertible
Preferred Stock.
On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series
G Preferred Stock from several institutional and accredited individual investors
following the 10 day stockholder notification period required by the NASD prior
to the sale. On September 15, 1999, the Company received an additional $325,000
for 3,250 shares of Series G Preferred Stock, for total proceeds of $2,100,000.
Each share of Series G Convertible Preferred Stock was priced at $100 per share.
Each share can be converted at any time by the holder into common stock at a
price of $0.50 per share, subject to certain antidilution adjustments. Each
share of Preferred Stock also received a common stock warrant, exercisable for
12 months, that allows the holder to acquire 200 shares of PPTI common stock at
a price of $0.50 per share.
During February 2000, holders of warrants issued in connection with the sale of
Series G Preferred Stock exercised their warrants to purchase common stock which
were due to expire in September, 2000. The exercise price was $0.50 per share.
As an inducement to exercise the warrant early, the Company offered each holder
a new one year warrant for a similar number of shares at an exercise price of
$1.50 per share. As a result the Company raised $2.1 million (less expenses).
The newly issued warrants will expire on the last day of February 2001.
RESULTS OF OPERATIONS
The Company received $386,574 in contract and licensing revenue for the three
months ended March 31, 2000 as compared to no contract or licensing revenue for
the three months ended March 31, 1999. The increase in contract and licensing
revenue primarily represents the amortized portion of an up front license
payment of $1 million (being recognized ratably over a period of three years)
from Femcare Ltd. for the commercial rights to PPTI's incontinence product in
Europe and Australia, payments from Sanyo Chemical Industries Ltd. for the
comprehensive license to PPTI's
11
<PAGE>
in vitro cell culture business and existing product inventory, and initial R&D
payments from Perkin-Elmer for a development project. The lack of revenue in
1999 reflects primarily the termination of research and development
reimbursements from various operating entities of the Johnson & Johnson Company,
including Ethicon, Inc.
Interest income was $14,000 for the three months ended March 31, 2000 versus
$13,000 for the same period in 1999.
For the three months ended March 31, 2000 and 1999, sales and license fees from
the Company's ProNectin(R) and SmartPlastic(R) products were $3,000 and $23,000,
respectively. The Company incurred no cost of sales nor royalty payments for the
three months ended March 31, 2000, compared to a royalty expense of $6,000 the
three month period ended March 31, 1999. The decline in all of these items was
due to the sale of this business to Sanyo Chemical Industries, Ltd. in February
2000.
Research and development expenses for the three months ended March 31, 2000 were
$554,000, compared to $714,000 for the same period in 1999, a 22% decrease. The
decrease was primarily attributable to downsizing reductions in personnel and
expenditures implemented in June 1999, and completion of external contracts and
consulting services related to the Company's soft tissue augmentation program,
including preclinical testing and preparation of the Investigational Device
Exemption approved by the Food and Drug Administration ("FDA") in August 1999
granting permission to begin human clinical testing. The Company expects, in
general, that its research and development, human clinical testing, and
manufacturing expenses will increase over time if its incontinence product and
other products in development successfully progress and additional capital is
obtained.
Selling, general and administrative expenses for the three months ended March
31, 2000 were $328,000, as compared to $428,000 for the same period in 1999, a
23% decrease. This decrease was due both to the downsizing in 1999 and to a
reduction in legal and other professional services primarily related to
Securities and Exchange Commission filings and reduced investor relations
expenses. The Company expects its selling, general and administrative expenses
remain largely unchanged in the near term, but will increase in the future as
support for its research and development and manufacturing efforts may require
and to the extent additional capital is obtained.
For the three months ended March 31, 2000, the Company recorded a net loss
applicable to common shareholders of $547,690, or $0.04 per share compared to a
loss of $1,175,000, or $0.11 per share for the same period in 1999. Also
included in each of the three month periods of 2000 and 1999 was $69,000 and
$68,000, respectively, for undeclared dividends related to the Company's
preferred stock.
In general, there can be significant fluctuation in revenue from quarter to
quarter due to variability in outside contract and licensing payments. In
general, the Company expects to incur increasing operating losses in the future
(to the extent additional capital is obtained), due primarily to increases in
the Company's soft tissue augmentation program's development, manufacturing and
business development activities. The Company's results depend on its ability to
establish strategic alliances and generate contract revenues, increased
research, development and manufacturing efforts, preclinical and clinical
product testing and commercialization expenditures, expenses incurred for
regulatory compliance and patent prosecution, and other factors.
To date the Company believes that inflation and changing prices have not had a
material effect on its continuing operations.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and cash equivalents of $2,154,000 as
compared to $156,000 at December 31, 1999. As of March 31, 2000, the Company had
working capital of $1,902,544 as compared to ($458,000) at December 31, 1999.
The difference is due primarily to the completion in January 2000 of the
strategic alliance with Femcare, Ltd., and in February 2000 from the sale of the
in vitro cell culture business to Sanyo Chemical Industries, Ltd., and the
receipt of $2,100,000 from the exercise of common stock warrants granted in
association with the Series G Convertible Preferred Stock.
The Company had long-term debt obligations as of March 31, 2000 of $4,000 in the
form of capital lease obligations, versus $25,000 as of December 31, 1999. For
the three months ending March 31, 2000, the Company's expenditures for capital
equipment and leasehold improvements totaled $24,000, compared with $22,000 for
the same period last year. The Company is expecting to increase its capital
expenditures in the next few quarters (to the extent additional capital is
obtained), as the Company improves existing space to expand capacity to meet
materials manufacturing requirements for clinical testing. The Company may enter
into additional capital lease arrangements if available at appropriate rates and
terms.
The Company believes its existing available cash and cash equivalents, in
combination with anticipated contract research payments and revenues received
from the transfer of clinical testing materials, will be sufficient to meet its
anticipated capital requirements until January 2001. Substantial additional
capital resources will be required to fund continuing expenditures related to
the Company's research, development, manufacturing and business development
activities. The Company believes there may be a number of alternatives to
meeting the continuing capital requirements of its operations, including
additional collaborative agreements and public or private financings. The
Company is currently in discussions at various stages with several potential
collaborative partners that, based on the results of various in vitro and in
vivo product performance evaluations, could result in generating revenues in the
form of license fees, milestone payments or research and development
reimbursements. However, there can be no assurance that any of these fundings
will be consummated in the necessary time frames needed for continuing
operations or on terms favorable to the Company. If adequate funds are not
available, the Company will be required to significantly curtail its operating
plans and may have to sell or license out significant portions of the Company's
technology or potential products.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description
------- -----------
27 Financial Data Schedule.
b. Reports on Form 8-K
None.
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTEIN POLYMER TECHNOLOGIES, INC.
Date May 15, 2000 By /s/ J. Thomas Parmeter
------------ -----------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
Date May 15, 2000 By /s/ Janis Y. Neves
------------ -------------------
Janis Y. Neves
Director of Finance, Controller
and Assistant Secretary
15
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
27 Financial Data Schedule.
16
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-2) and related Prospectus of Protein Polymer
Technologies, Inc. for the registration of shares of its common stock and to the
incorporation by reference therein of our report dated February 29, 2000, with
respect to the financial statements of Protein Polymer Technologies, Inc.
included in its Annual Report on Form 10-KSB for the year ended December 31,
1999, filed with the Securities and Exchange Commission.
/s/Ernst & Young LLP
Ernst & Young LLP
San Diego, California
May 17, 2000
