SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21134
Procept, Inc.
-------------
(Exact name of registrant as specified in its charter)
Delaware 04-2893483
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
840 Memorial Drive, Cambridge, Massachusetts 02139
- -------------------------------------------- -----
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (617) 491-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of latest practicable date.
Class Outstanding as of November 6, 1998
----- ----------------------------------
Common Stock, $.01 par value 3,001,832
Exhibit Index Appears on Page 20
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PROCEPT, INC.
INDEX
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<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
September 30, 1998 and December 31, 1997
Statements of Operations 4
Three months and nine months ended September 30, 1998 and 1997
Statements of Cash Flows 5
Nine months ended September 30, 1998 and 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II - OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROCEPT, INC.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,568,890 $535,242
Marketable securities 2,003,254 --
Other current assets 15,406 132,062
Investment in Aquila (Note 3) 455,313 --
----------- ----------
Total current assets 6,042,863 667,304
Property and equipment, net 235,645 889,258
Deferred financing charges -- 54,424
Investment in VacTex (Note 3) -- 300,000
Other assets 197,026 257,026
------------ ----------
Total assets $6,475,534 $2,168,012
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $301,643 $1,069,952
Accrued compensation 138,202 320,463
Other current liabilities 173,033 142,680
Current portion of capital lease obligations -- 20,231
------------ ----------
Total current liabilities 612,878 1,553,326
Deferred rent 207,624 257,827
Other noncurrent liabilities -- 96,875
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized;
Series A 1 and 30,061 shares designated at September 30, 1998 and
December 31, 1997, respectively; 0 and 30,060 shares issued and
outstanding at September 30, 1998 and December 31, 1997, respectively -- 301
Common stock, $.01 par value; 30,000,000 shares authorized; 3,001,832
and 196,204 shares issued at September 30, 1998 and December 31,
1998 respectively 30,018 1,962
Additional paid-in capital 66,110,013 62,242,741
Cumulative dividends on preferred stock -- (4,217,388)
Accumulated deficit (60,631,556) (57,755,775)
Unrealized gain on investments 158,414 --
Treasury stock, at cost; 11,857 shares at September 30, 1998
and December 31, 1997 (11,857) (11,857)
------------ -----------
Total shareholders' equity 5,655,032 259,984
------------ -----------
Total liabilities and shareholders' equity $6,475,534 $2,168,012
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative arrangements
with related party -- $118,750 $109,375 $389,062
Revenue from grant -- -- -- 55,811
Interest income $75,031 23,493 155,530 124,414
---------- ----------- ----------- ------------
Total revenues 75,031 142,243 264,905 569,287
---------- ----------- ----------- ------------
Costs and expenses:
Research and development 371,958 1,287,328 1,707,256 5,165,693
General and administrative 269,666 592,005 1,411,786 2,017,028
Restructuring charges -- 220,555 225,000 220,555
Other (38,444) 10,940 (203,356) 38,541
---------- ----------- ----------- -----------
Total costs and expenses 603,180 2,110,828 3,140,686 7,441,817
---------- ----------- ----------- ------------
Net loss (528,149) (1,968,585) (2,875,781) (6,872,530)
Less: dividends on preferred stock -- (4,217,388) -- (4,217,388)
---------- ----------- ----------- ------------
Net loss available to common shareholders $(528,149) $(6,185,973) $(2,875,781) $(11,089,918)
========== =========== =========== ============
Basic and diluted net loss per common share $(0.18) $(25.23) $(1.35) $(52.12)
========== =========== =========== ============
Weighted average number of common
shares outstanding - basic and diluted 3,001,832 245,227 2,126,651 212,780
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,875,781) $(6,872,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 525,951 774,683
Non-cash related party revenue -- (112,500)
Gain on sale of equipment (208,365) --
Savings and retirement plan stock contribution 43,238 --
Stock options issued for consulting services 12,192 --
Changes in operating assets and liabilities:
Other current assets 124,536 89,165
Other assets 60,000 (112,758)
Accounts payable (768,309) (46,603)
Accrued compensation (182,261) 43,674
Accrued contract research -- 8,703
Other current liabilities 30,353 (104,092)
Other noncurrent liabilities (96,875) (68,154)
Deferred rent (50,203) --
----------- -----------
Net cash used in operating activities (3,385,524) (6,400,412)
----------- -----------
Cash flows from investing activities:
Capital expenditures (319,669) (50,214)
Purchases of marketable securities (2,000,153) --
Proceeds from maturity of marketable securities -- 4,006,463
Decrease in restricted investments -- 469,000
Proceeds from sale of equipment 647,816 --
----------- -----------
Net cash (used in) provided by investing activities (1,672,006) 4,425,249
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (20,231) (497,962)
Proceeds from issuance of common stock -- 410
Proceeds from private placement of common stock 9,802,500 3,005,999
Expenses from private placement of common stock (1,691,091) (131,381)
Proceeds from employee stock purchase plan -- 55,201
----------- -----------
Net cash provided by financing activities 8,091,178 2,432,267
----------- -----------
Net change in cash and cash equivalents 3,033,648 457,104
Cash and cash equivalents at beginning of period 535,242 1,962,229
----------- -----------
Cash and cash equivalents at end of period $3,568,890 $2,419,333
=========== ===========
Supplemental disclosures and non-cash transactions:
Interest paid $5,120 $25,896
=========== ===========
Stock options issued for consulting services $30,192 $--
=========== ===========
Savings and retirement plan stock contribution $43,238 $--
=========== ===========
Dividends on preferred stock $-- $4,217,388
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
Nature of Business
- ------------------
Procept, Inc. ("Procept" or the "Company") located in Cambridge, MA is a
biopharmaceutical company currently engaged in the development of novel drugs
with a focus in anti-infectives and immunosuppressants. The Company is also
actively seeking the acquisition or inlicense of drug development candidates
that would benefit from Procept's expertise in various therapeutic areas.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with FDA government regulations
and the ability to obtain financing.
Plan of Operations
- ------------------
Since its inception in 1985, Procept has devoted its principal efforts to drug
discovery and research. Procept has generated no revenue from product sales, has
not been profitable since inception, and has incurred an accumulated deficit of
$60.6 million through September 30, 1998. Losses have resulted principally from
costs incurred in research and development activities related to the Company's
efforts to develop drug candidates and from the associated administrative costs.
The Company expects to incur significant additional operating losses over the
next several years and expects cumulative losses to increase substantially due
to preclinical and clinical testing, and development of marketing, sales and
production capabilities. Procept's future plans will focus on drug development
rather than research. The Company is seeking strategic partnering opportunities
for its lead compounds to accelerate revenue and minimize the investment
required for marketing, sales and production capabilities.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through March 2000. Although management
continues to pursue additional funding arrangements and/or strategic partnering,
there can be no assurance that additional funding will be available from any of
these sources or, if available, will be available on acceptable or affordable
terms. If the Company is unable to enter into an additional corporate
collaboration(s) that produce revenue for the Company, or secure additional
financing, the Company's financial condition will be adversely affected.
The accompanying financial statements for the three-month and nine-month periods
ended September 30, 1998 and 1997 are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles. These
interim financial statements, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the interim periods ended September 30, 1998 and
1997. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
conjunction with the audited financial statements for the year ended December
31, 1997 which are contained in the Company's 1997 Annual Report on Form 10-K/A.
2. SHAREHOLDERS' EQUITY
--------------------
On May 18, 1998, Procept's shareholders approved a one-for-ten reverse split of
the Company's Common Stock (the "1998 Reverse Stock Split"), which was effected
on June 1, 1998. Shareholders' equity has been restated to give retroactive
application to the 1998 Reverse Stock Split in prior periods by reclassifying
from Common Stock to Additional Paid-In Capital the par value of the eliminated
shares arising from the 1998 Reverse Stock Split. In addition, all references in
the financial statements to number of shares, per share amounts, and stock
option and warrant data of the Company's Common Stock have been restated.
As part of a unit offering, the Company sold an aggregate of 1,960,500 shares of
Common Stock in January, February, and April of 1998 together with five-year
Class C Warrants to purchase 1,960,500 shares of Common Stock at an exercise
price of $5.00 per share (the "1998 Offering"). The Company completed the 1998
Offering on April 9, 1998 (the "Final Closing Date"). The $5.00 per share
exercise price of the Class C Warrants was determined as part of the terms of
the 1998 Offering in a negotiation between the Company and the placement agent
for the 1998 Offering. The Company did not separately value the Class C Warrants
from the Common Stock issued in the 1998 Offering since the resulting accounting
treatment for both securities is to record their value in Additional Paid-In
Capital within the equity section of the balance sheet. These securities were
sold for gross proceeds of $9.8 million. The purchasers in the 1998 Offering are
entitled to certain contractual rights requiring contingent additional issuances
of Common Stock to the purchasers, (x) based on a formula market price at April
9, 1999, (y) to protect them against future dilutive sales of securities and (z)
as a dividend substitute beginning on October 9, 1999. In the event of (i) a
liquidation, dissolution or winding up of the Company, (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or (iii)
any consolidation, merger, combination, reorganization or other transaction in
which the Company is not the surviving entity, the purchasers are entitled to
receive an amount equal to 140% of such purchaser's investment as a liquidation
"preference." Except in the case of a liquidation, dissolution or winding up,
such payment will be in the form that equity holders will receive, in the
applicable transaction, such as in cash, property or securities of the entity
surviving the acquisition transaction. In the event of a liquidation,
dissolution or winding up, such payment is contingent upon the Company having
available resources to make such payment. These contractual rights will
terminate after April 9, 1999 if the Common Stock trades at $15.00 per share or
more.
In connection with the Final Closing of the 1998 Offering on April 9, 1998 (the
"Final Closing") and certain advisory services, the Company sold to Paramount
Capital, Inc., the Company's placement agent in the 1998 Offering, for $0.001
per option, options to purchase an aggregate of 24.06875 units (each unit
consisting of 20,000 shares of Common Stock and warrants to purchase 20,000
shares of Common Stock at an exercise price of $5.00 per share) at an exercise
price of $110,000 per unit (i.e., $5.50 per share). Also on April 9, 1998, The
Aries Fund and the Aries Domestic Fund, L.P. exchanged an aggregate of 30,060
shares of Series A Convertible Preferred Stock and
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
related warrants for units in the 1998 Offering comprised of 841,680 shares of
Common Stock and five-year Class C Warrants to purchase 841,680 shares of Common
Stock at an exercise price of $5.00 per share. As part of the exchange of Series
A Convertible Preferred Stock and related warrants for units in the 1998
Offering, the cumulative dividends on Preferred Stock of $4.2 million was
reclassified to Additional Paid-In Capital.
3. RESEARCH COLLABORATIONS
-----------------------
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"). Under the Sponsored Research Agreement, Procept
conducted specified research tasks on behalf of VacTex for which Procept
received a combination of cash and equity in VacTex based on the number of
full-time equivalent employees of Procept engaged in the research, but subject
to maximum cash and stock limits. At December 31, 1997, the Company's investment
in VacTex was accounted for under the cost method since it was a restricted
security, it did not have a readily determinable fair value and Procept owned
less than twenty percent of VacTex.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
("Aquila"). The Company's investment in VacTex of 300,000 shares of common stock
was converted to 113,674 shares of Aquila common stock and $128,501 principal
amount of 7% debentures. As a result, the Company is accounting for its
investment in Aquila under Statement of Financial Accounting Standards ("SFAS")
115, "Accounting for Certain Investments in Debt and Equity Securities" as an
available for sale security and marked it to market by recording an unrealized
gain of $0.2 million as part of Shareholders' Equity, based on Aquila's common
stock closing price on September 30, 1998.
4. RESTRUCTURING
-------------
In order to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on all other research programs, except limited preclinical
support for its intracellular T-cell enzyme ("DHODH") program, and underwent a
significant downsizing, reducing its staff to 10 people. The amount of
termination benefits accrued and charged to restructuring costs in the statement
of operations for the nine-month period ended September 30, 1998 was $0.2
million. Also, in the fourth quarter of 1997, the Company accrued $0.3 million
in restructuring costs. For the three and nine months ended September 30, 1998,
the amount of termination benefits paid and charged against the 1998 and 1997
liability was $0.1 million and $0.4 million, respectively. The remaining
liability of $0.1 million is expected to be utilized by March 31, 1999. Due to
the restructuring and focus on the development of PRO 2000, the Company has sold
and plans to continue to sell most of its research and development equipment.
For the nine months ended September 30, 1998, the Company received $0.6 million
from the sale of equipment and has recorded a $0.2 million gain in other
expenses.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
5. BASIC AND DILUTED NET (LOSS) PER COMMON SHARE
---------------------------------------------
In the quarter ended December 31, 1997, the Company adopted SFAS 128, "Earnings
Per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is based upon the
weighted average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed exercises of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock options using the treasury stock method. For the three- and nine-month
periods ended September 30, 1998, there were no anti-dilutive securities.
6. COMPREHENSIVE INCOME
--------------------
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements and will provide such information annually in
its Statement of Shareholders' Equity and in a footnote disclosure for interim
periods. Accumulated other comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(528,149) $(1,968,585) $(2,875,781) $(6,872,530)
Change in unrealized gain
on investments (146,154) -- 158,414 --
----------- ------------ ------------- ------------
Comprehensive loss $(674,303) $(1,968,585) $(2,717,367) $(6,872,530)
========== ============ ============ ============
</TABLE>
<TABLE>
<S> <C>
Unrealized gain on investments:
Balance at December 31, 1997 --
Change during the three months ended March 31, 1998 --
Change during the three months ended June 30, 1998 $304,568
Change during the three months ended September 30, 1998 (146,154)
---------
Balance at September 30, 1998 $158,414
========
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
7. NEW ACCOUNTING STANDARDS
------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement specifies new guidelines for determining a company's operating
segments and related requirements for disclosure. SFAS 131 will become effective
for fiscal years beginning after December 15, 1997. The Company does not believe
that the adoption will have a material effect.
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
is effective for periods beginning after December 15, 1997, but excludes interim
periods during 1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans by requiring
additional information on changes in the benefit obligations and fair values of
the plan assets and eliminating certain disclosures that are no longer useful.
It does not change the measurement or recognition of those plans. The Company
does not believe that the adoption will have a material effect.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the adoption will have a material effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
8. SUBSEQUENT EVENT -- PROPOSED MERGER
-----------------------------------
On November 2, 1998, Procept entered into a non-binding Letter of Intent ("LOI")
to merge with Pacific Pharmaceuticals, Inc. ("Pacific"), a public research and
development company engaged in the development of cancer therapies. Both
companies will work together to enter into a definitive merger agreement by
November 19, 1998. The LOI provides that each of Pacific's shares of common
stock (including preferred stock on an as converted basis into common stock)
will convert into 0.12 shares of Procept common stock or a total of 2,755,000
Procept shares (of which 1,287,647 shares of Procept common stock to be issued
in the merger to the holders of Pacific's preferred stock shall be accompanied
by certain contractual rights identical to contractual rights held by purchasers
in Procept's 1998 private placement). In addition, Procept has agreed to assume
an approximately $7.3 million obligation (payable in common stock of Procept) of
Pacific's subsidiary, BG Development Corp., and Procept has agreed to
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
exchange all of Pacific's outstanding warrant, unit purchase option and stock
option obligations into like instruments of Procept. The merger remains
contingent upon several conditions including (i) satisfactory due diligence by
Procept and Pacific; (ii) fairness opinions by independent investment bankers;
and (iii) the final approval by both companies' shareholders.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Overview
- --------
Procept, Inc. ("Procept" or the "Company") located in Cambridge, MA is a
biopharmaceutical company currently engaged in the development of novel drugs
with a focus in anti-infectives and immunosuppressants. The Company is also
actively seeking the acquisition or inlicense of drug development candidates
that would benefit from Procept's expertise in various therapeutic areas.
PRO 2000 Gel
The lead candidate from the Company's AIDS program, PRO 2000 Gel, is a vaginal,
topical microbicide providing protection against HIV infection and other
sexually transmitted diseases ("STDs"). In the absence of both an effective HIV
vaccine and consistent condom use, vaginal microbicides offer an alternative,
female-controlled prevention technology. Estimates by the Joint United Nations
Programme on HIV/AIDS and the World Health Organization indicate that 5.8
million new HIV infections occurred in 1997 alone. In addition the New York
Times reported that an estimated 10-12 million new cases of STDs occur in the
U.S. each year. The momentum for HIV and STD prevention will accelerate as this
epidemic becomes more visible. Extensive preclinical studies have shown PRO 2000
Gel is active against HIV-1 and HIV-2. The contraceptive potential of PRO 2000
Gel also has been confirmed in a study in which PRO 2000 Gel blocked
fertilization in rabbits. In human trials, 70 healthy female volunteers
completed two Phase I clinical trials that showed PRO 2000 Gel to be safe and
well tolerated. PRO 2000 Gel was recently selected for safety testing in a human
clinical trial supported by the National Institute of Allergy and Infectious
Diseases, a unit of the U.S. National Institutes of Health. The U.S. Food and
Drug Administration has allowed the study to proceed following review of an
Investigational New Drug application filed by Procept. The trial, which will
involve women in the U.S. and South Africa, is scheduled to begin in the first
quarter of 1999. Additional clinical studies are being discussed with the
British MRC.
DHODH
Procept is currently seeking to partner or outlicense its immunosuppressive
research program. This program focuses on an intracellular enzyme ("DHODH") that
is known to be critical for the activation of the immune response, which may
provide target opportunities for treating immune system disorders, such as
rheumatoid arthritis, and for preventing transplant rejection. Patent
applications have been filed for a series of lead compounds. Procept has also
made significant progress in determining the three dimensional structure of the
DHODH enzyme.
12
<PAGE>
New Technology Search
In addition to focusing on PRO 2000's development, Procept will proactively seek
opportunities to acquire additional novel technologies that address key
healthcare needs. The Company is most interested in acquiring technologies that
have reached the early stages of human clinical trials. Procept's scientific
expertise will help quickly evaluate and bring these technologies in-house,
advance the clinical development, and then bring the technology to market by
partnering with a larger corporation, thereby focusing its resources on
development rather than research programs.
Results of Operations
- ---------------------
Since its inception in 1985, Procept has devoted its principal efforts to drug
discovery and research. Procept has generated no revenues from product sales,
has not been profitable since inception, and has incurred an accumulated deficit
of $60.6 million through September 30, 1998. The Company is dependent upon
research and development collaborations, equity financing and interest on
invested funds to provide the working capital required to pursue its intended
business activities. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to develop
drug candidates and from the associated administrative costs required to support
these efforts. The Company expects to incur significant additional operating
losses over the next several years due to its ongoing development efforts and
expanded preclinical and clinical testings. The Company's potential for future
profitability is dependent on its ability to effectively develop its current
pharmaceutical compounds and in-license and develop new pharmaceutical products,
as well as obtain regulatory approvals and adequate financing for such products.
Future profitability will require that the Company establish agreements for
product development, commercialization and sales of its products with corporate
sponsors.
Three Months Ended September 30, 1998 and 1997
- ----------------------------------------------
The Company's total revenues decreased by $0.1 million in the third quarter of
1998 from the same period in 1997, principally as a result of the expiration of
the Sponsored Research Agreement with VacTex, Inc. (the "VacTex Agreement"). In
the third quarter of 1998, revenues consisted of $75,000 in interest earned on
invested funds. In 1997, third quarter revenues consisted of $0.1 million earned
under the VacTex Agreement and $23,000 in interest earned on invested funds.
The Company's total operating expenses decreased to $0.6 million in the third
quarter of 1998 from $2.1 million during the same period in 1997. Research and
development expenses decreased 71% to $0.4 million in the third quarter of 1998
from $1.3 million in the third quarter of 1997. This expense decrease was due
primarily to a decrease in personnel in the Company's research and development
organization and their related research costs. In order to focus its limited
resources on PRO 2000, in January 1998 the Company terminated work on all other
research programs, except preclinical support for its intracellular T-cell
enzyme ("DHODH") program, and underwent a significant downsizing, reducing its
staff to 10 people. General and administrative expenses decreased 61% to $0.2
million in the third quarter of 1998 from $0.6 million in the third quarter of
1997, reflecting a decrease in
13
<PAGE>
administrative personnel and continued cost control measures including
subleasing activities. Interest expense, included in other expenses, decreased
to $600 in the third quarter of 1998 from $11,000 in the third quarter of 1997
as a result of the scheduled completion of the Company's lease financing
arrangements. Also included in other expenses in the third quarter of 1998 is a
gain of $39,000 from the sale of research and development equipment. Due to the
restructuring and focus on the development of PRO 2000, the Company has sold and
plans to continue to sell most of its research and development equipment.
Nine Months Ended September 30, 1998 and 1997
The Company's total revenues decreased to $0.3 million in the first nine months
of 1998 from $0.6 million during the same period in 1997. In the first nine
months of 1998, revenues consisted of $0.1 million earned under the VacTex
Agreement and $0.2 million in interest earned on invested funds. In 1997, first
nine months revenues consisted of $0.4 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.1 million in interest earned on invested funds.
The Company's total operating expenses decreased to $3.1 million in the first
nine months of 1998 from $7.4 million during the same period in 1997. Research
and development expenses decreased 67% to $1.7 million in the first nine months
of 1998 from $5.2 million in the same period in 1997, due primarily to a
decrease in personnel in the Company's research and development organization and
their related research costs. In order to focus its limited resources on PRO
2000, in January 1998 the Company terminated work on all other research
programs, except preclinical support for its intracellular T-cell enzyme
("DHODH") program, and underwent a significant downsizing, reducing its staff to
10 people. The amount of termination benefits accrued and charged to
restructuring costs in the statement of operations for the nine-month period
ended September 30, 1998 was $0.2 million. Also, in the fourth quarter of 1997,
the Company accrued $0.3 million in restructuring costs. The amount of
termination benefits paid and charged against the 1998 and 1997 liability for
the nine months ended September 30, 1998 was $0.4 million. The remaining
liability of $0.1 million is expected to be utilized by March 31, 1999.
General and administrative expenses decreased 30% to $1.4 million in the nine
months of 1998 from $2.0 million in the first nine months of 1997, reflecting a
decrease in administrative personnel and continued cost control measures
including subleasing activities. Interest expense, included in other expenses,
decreased to $5,000 in the first nine months of 1998 from $39,000 in the first
nine months of 1997 as a result of the scheduled completion of the Company's
lease financing arrangements. Also included in other expenses in the first nine
months of 1998 is a gain of $0.2 million from the sale of research and
development equipment. Due to the restructuring and focus on the development of
PRO 2000, the Company has sold and plans to continue to sell most of its
research and development equipment.
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company's aggregate cash, cash equivalents and
marketable securities were $5.6 million, a net increase of $5.0 million since
December 31, 1997. The increase in cash is primarily attributable to initial,
interim and final closings of the Company's private placement in January,
February and April of 1998, which resulted in net proceeds of $8.1 million,
offset by $3.4 million used in operations principally to fund research and
development activities and $0.3 million invested in property and equipment.
Included in cash is $0.6 million from the sale of research and development
equipment. Due to downsizing and focus on the development of PRO 2000, the
Company plans to continue to sell most of its research and development
equipment.
On November 2, 1998, Procept entered into a non-binding Letter of Intent ("LOI")
to merge with Pacific Pharmaceuticals, Inc. ("Pacific"), a public research and
development company engaged in the development of cancer therapies. Both
companies will work together to enter into a definitive merger agreement by
November 19, 1998. The LOI provides that each of Pacific's shares of common
stock (including preferred stock on an as converted basis into common stock)
will convert into 0.12 shares of Procept common stock or a total of 2,755,000
Procept shares (of which 1,287,647 shares of Procept common stock to be issued
in the merger to the holders of Pacific's preferred stock shall be accompanied
by certain contractual rights identical to contractual rights held by purchasers
in Procept's 1998 private placement). In addition, Procept has agreed to assume
an approximately $7.3 million obligation (payable in common stock of Procept) of
Pacific's subsidiary, BG Development Corp., and Procept has agreed to exchange
all of Pacific's outstanding warrant, unit purchase option and stock option
obligations into like instruments of Procept. The merger remains contingent upon
several conditions including (i) satisfactory due diligence by Procept and
Pacific; (ii) fairness opinions by independent investment bankers; and (iii) the
final approval by both companies' shareholders.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to the Company. If the Company is unable
to enter into an additional corporate collaboration(s) that produce revenue for
the Company, or secure additional financing, the Company's financial condition
will be adversely affected. If additional funds are raised by issuing equity
securities, further dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the execution of new collaboration agreements for the Company's research and
development programs. Other important factors that may affect achieving the
Company's strategic goals and other forward-looking statements are set forth in
Exhibit 99.1 of the Company's 1997 Annual Report on Form 10-K/A.
15
<PAGE>
The Company's working capital and other cash needs will depend heavily on the
success of the Company's clinical trials and the rate of acquisition of new
products and technologies. Success in early-stage clinical trials or acquisition
of new products and technologies would lead to an increase in working capital
requirements. The Company's actual cash requirements may vary materially from
those now planned because of the results of research and development, clinical
trials, product testing, relationships with strategic partners, acquisition of
new products and technologies, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the process of obtaining United States Food and Drug Administration or
other regulatory approvals and other factors.
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement specifies new guidelines for determining a company's operating
segments and related requirements for disclosure. SFAS 131 will become effective
for fiscal years beginning after December 15, 1997. The Company does not believe
that the adoption will have a material effect.
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
is effective for periods beginning after December 15, 1997, but excludes interim
periods during 1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans by requiring
additional information on changes in the benefit obligations and fair values of
the plan assets and eliminating certain disclosures that are no longer useful.
It does not change the measurement or recognition of those plans. The Company
does not believe that the adoption will have a material effect.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the adoption will have a material effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
16
<PAGE>
Year 2000
- ---------
The Company has completed its assessment of the potential impact of the year
2000 on its information technology and non-information technology systems. The
year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs or systems that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in a
miscalculation or system failures. Based on the Company's assessment, there is
no year 2000 impact on Procept's information technology systems. Operating
systems and applications used by the Company are year 2000 compliant. At this
time, the Company is not aware of any year 2000 issues relating to its third
party vendors. The Company has replaced several non-information technology
systems and believes that it is now year 2000 compliant. The cost of year 2000
compliant non-technology information systems was approximately $8,000. The
Company's most critical uncertainty relates to its third parties' information
technology systems not being year 2000 compliant. This may result in inaccurate
information from banks, government agencies, contracted research organizations,
vendors, etc. The Company believes it has in place an adequate internal control
structure to handle these issues if they were to occur.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
17
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
On November 2, 1998, Procept entered into a non-binding Letter of Intent ("LOI")
to merge with Pacific Pharmaceuticals, Inc. ("Pacific"), a public research and
development company engaged in the development of cancer therapies. Both
companies will work together to enter into a definitive merger agreement by
November 19, 1998. The LOI provides that each of Pacific's shares of common
stock (including preferred stock on an as converted basis into common stock)
will convert into 0.12 shares of Procept common stock or a total of 2,755,000
Procept shares (of which 1,287,647 shares of Procept common stock to be issued
in the merger to the holders of Pacific's preferred stock shall be accompanied
by certain contractual rights identical to contractual rights held by purchasers
in Procept's 1998 private placement). In addition, Procept has agreed to assume
an approximately $7.3 million obligation (payable in common stock of Procept) of
Pacific's subsidiary, BG Development Corp., and Procept has agreed to exchange
all of Pacific's outstanding warrant, unit purchase option and stock option
obligations into like instruments of Procept. The merger remains contingent upon
several conditions including (i) satisfactory due diligence by Procept and
Pacific; (ii) fairness opinions by independent investment bankers; and (iii) the
final approval by both companies' shareholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
3.1 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, filed with the
Secretary of State of Delaware on May 19, 1998,
effective as of June 1, 1998. Filed as Exhibit 4.4 to
Procept's Registration Statement on Form S-8,
Commission File No. 333-66885, and incorporated
herein by reference.
27.1 Financial Data Schedule. Filed herewith.
99.1 Letter of Intent dated November 2, 1998 between
Procept, Inc. and Pacific Pharmaceuticals, Inc. Filed
herewith.
(b) Reports on Form 8-K.
-------------------
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROCEPT, INC.
(Registrant)
Date: November 12, 1998 by: /s/ John F. Dee
--------------------------------------
John F. Dee
President and Chief Executive Officer
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Amendment to the Amended and
Restated Certificate of Incorporation, filed
with the Secretary of State of Delaware on May
19, 1998, effective as of June 1, 1998. Filed as
Exhibit 4.4 to Procept's Registration Statement
on Form S-8, Commission File No. 333-66885, and
incorporated herein by reference.
27.1 Financial Data Schedule. Filed herewith.
99.1 Letter of Intent dated November 2, 1998
between Procept, Inc. and Pacific
Pharmaceuticals, Inc. Filed herewith.
Exhibit 99.1
------------
Procept, Inc.
840 Memorial Drive
Cambridge, Massachusetts 02139
CONFIDENTIAL
------------
November 2, 1998
Dr. H. Laurence Shaw
President and Chief Executive Officer
Pacific Pharmaceuticals, Inc.
6730 Mesa Ridge Road, Suite A
San Diego, CA 92121
Re: Letter of Intent
----------------
Dear Dr. Shaw:
This letter is intended to confirm recent discussions between Procept,
Inc., a Delaware corporation ("Procept"), and Pacific Pharmaceuticals, Inc., a
Delaware corporation ("Pacific") regarding the terms which will form the basis
for our efforts to reach a definitive agreement regarding the proposed merger of
Pacific and Procept (the "Merger"). It is expressly agreed that, with the
limited exceptions of Sections 2 and 4, which shall be legally binding, this
letter does not constitute a firm proposal, offer or enforceable agreement to
consummate the Merger, is not legally binding on either of the parties and
imposes no duty or obligation on either of them to proceed with the proposed
transaction. In the event that a definitive agreement to consummate the Merger
is not signed by November 19, 1998, the binding provisions of Sections 2.1 shall
terminate, and the parties shall have no further obligations except as stated in
Sections 2.2 and 4.
1. Preparation of Definitive Agreement. Counsel for Procept and for
Pacific will prepare a definitive agreement for submission to and approval by
the boards of directors and stockholders of each of Procept and Pacific and
Procept will thereby succeed to and acquire the business of Pacific (the
"Business"). Procept and Pacific acknowledge agreement in principle to the
following terms and conditions of the transaction:
1.1 Proposed Merger. For the consideration set forth below,
Pacific will merge with and into Procept. All of the outstanding capital stock,
options, warrants and other rights to acquire an interest in the capital
structure of Pacific will convert into the aggregate securities specified in
Section 1.2 below.
1.2 Consideration. On the date of the closing of the
transaction (the "Closing Date"), Procept shall deliver:
(a) to the Pacific stockholders 2,755,000 shares of
Procept Common Stock (of which the 1,287,647 shares of Procept Common Stock that
will be issued in the Merger to the holders of Pacific Preferred Stock shall be
accompanied by certain contractual rights identical to contractual rights held
by purchasers in Procept's 1998 private placement); and
<PAGE>
(b) to the holders of outstanding options and
warrants to purchase Pacific stock, options and warrants to purchase Procept
Common Stock exercisable for that number of shares of Procept Common Stock which
such option or warrant holder would have been entitled to receive if the
underlying Pacific shares had converted in the Merger, at an exercise price per
share equal to the aggregate exercise price of the Pacific option or warrant
exchanged divided by the number of shares of Procept Common Stock subject to the
new option or warrant, and otherwise having the same terms and conditions as the
Pacific option or warrant.
1.3 Certain Assumed Rights and Obligations. Each of Procept and
Pacific acknowledges that by virtue of the Merger, Procept will acquire the
equity interest of Pacific in BGDC and will be subject to the obligations of
Pacific to the other stockholders of BGDC.
1.4 Stockholder Approval; Fairness Opinions. Each of Procept
and Pacific will promptly seek stockholder approval of the Merger after the
execution of the definitive merger agreement. Prior to the solicitation of
proxies or consents from stockholders (or the mailing of an information
statement in lieu thereof), each of Procept and Pacific will obtain fairness
opinions from a reputable investment banking firm with respect to the Merger,
copies of which shall be provided to the stockholders of each company.
1.5 Form of Transaction, Tax and Accounting Treatment. The
final form of the transaction will be determined by Procept and Pacific after
consultation with their legal, tax and accounting advisors. It is currently
contemplated that the transaction will be tax-free to Procept, Pacific and their
respective stockholders. Procept anticipates the transaction will be recorded
using "purchase accounting."
1.6 Employment and Consulting Agreements. Certain Pacific
employees may enter into employment agreements or consulting and confidentiality
agreements. Prior to the execution of a definitive agreement, the parties shall
identify each such person by name and title and determine his or her term of
employment or consultation and compensation. Prior to the Closing Date, all of
such agreements will be completed and signed by all parties.
1.7 Registration of Shares; Restrictions on Resale. The shares
of Procept Common Stock delivered in the Merger will have been registered under
the Securities Act of 1933, as amended (the "Act"), on Form S-4. As a result,
the shares of Procept Common Stock will be freely tradable following the Merger,
subject to the provisions of Rule 145 under the Act.
1.8 Timing. It is the intention of the parties to sign the
definitive agreement no later than November 19, 1998.
1.9 Representations and Warranties. The definitive agreement
will contain representations and warranties to the extent customary for merger
transactions involving the acquisition of a public company.
1.10 Conditions to Closing. As proposed to be structured, the
signing of the definitive agreement is conditioned on the approval of the
transaction by the Boards of Directors of Procept and Pacific. The consummation
of the transactions to be set forth in the definitive agreement shall be subject
to the following additional terms and conditions:
2
<PAGE>
1.10.1 Each of Procept and Pacific shall have
received satisfactory responses to its requests for information
from the other party and each of the parties shall have
completed its customary due diligence review to its
satisfaction, including review of the financial results of the
Business of Procept and Pacific for the last five years.
1.10.2 Pacific and Procept shall each have
received approval of their respective stockholders and all
other approvals, clearances and consents from any governmental
entities and other third parties necessary or desirable for the
consummation of the Merger and the Pacific shares shall be free
and clear of any lien or encumbrances.
1.10.3 Procept or its independent public
accountants shall have (i) completed a review of the revenues
and expenses of the Business; (ii) confirmed to Procept's
satisfaction that Pacific's financial statements fairly present
in all material respects the results of operations and cash
flows resulting from the Business in conformity with generally
accepted accounting principles; and (iii) confirmed to
Procept's satisfaction that Pacific's financial records are
adequate to permit Procept to fulfill its SEC financial
reporting obligations in connection with the exchange and in
connection with Procept's future registered financings without
unreasonable effort or expense.
1.10.4 To the extent necessary, each holder of
an outstanding Pacific option or warrant shall consent to the
exchange of such option or warrant for an option or warrant
exercisable for Procept Common Stock, as contemplated by
Section 1.2(b) above.
1.10.5 Pacific shall have exercised the option
agreement between BTI and Pacific and issued Pacific Common
Stock upon exercise thereof.
1.10.6 Such other closing conditions as are
customary in a transaction of this type.
1.11 Expenses. The definitive agreement will contain provisions
whereby Procept and Pacific shall each bear their own costs if the transaction
is not consummated. If the transaction is consummated, Procept will discharge
expenses of both parties.
2. Agreement not to Entertain other Offers. In consideration of the
efforts and expenses undertaken by both parties in pursuing the contemplated
Merger and other valuable consideration, the receipt and adequacy of which are
acknowledged, the parties agree as follows:
2.1 Until November 19, 1998 (or such earlier time as Procept
and Pacific agree to abandon the transactions contemplated by this Letter),
neither Pacific nor Procept nor any of their respective authorized
representatives may:
3
<PAGE>
(i) directly or indirectly, solicit any proposal relating to
the acquisition by another party of all or any portion of the capital stock of
such company or substantially all of the assets of such company (whether by
merger or otherwise);
(ii) directly or indirectly, engage in any discussions or
negotiations with any other party regarding any such acquisition, or otherwise
encourage or facilitate any efforts by any other party to engage in such an
acquisition; or
(iii) sell, transfer or dispose of all or any portion of the
capital stock of such company or substantially all of the assets of such company
(whether by merger or otherwise);
provided however, that nothing in the foregoing shall restrict either company
from engaging in discussions with potential collaborative partners, subject to
such company disclosing to the other the identity of the party involved in such
discussions and the general nature thereof; and provided further that,
notwithstanding the foregoing, each such company and its authorized
representatives may participate in discussions or negotiations with, provide
information to, and consummate a transaction with, a third party which would
otherwise be prohibited by this section, if (A) such discussions or negotiations
had been commenced prior to the date hereof or if commenced after the date
hereof, were not solicited by or on behalf of such company and (B) such
discussions or negotiations were being continued or initiated after consultation
with and based upon written advice of independent legal counsel which determined
in good faith that such action is necessary for the Board of Directors of the
involved company to comply with its fiduciary duties to its stockholders under
applicable law.
2.2 In the event that during the period between the date hereof
and November 19, 1998, either Pacific or Procept breaches its obligations under
Section 2.1 or engages in discussions or negotiations with, provides information
to, or consummates a transaction with a third party, which activity would have
been a breach of Section 2.1 but for the second proviso of such section, then,
unless a definitive agreement relating to the Merger is subsequently executed by
the parties hereto, on the earlier of (i) the consummation of any such
transaction with a third party or (ii) December 31, 1998, such company shall pay
the other a termination fee in the amount of $50,000, in immediately available
funds to an account designated by the recipient party. The parties acknowledge
and agree that the provisions for payment of such a termination fee are included
herein in order to induce each party to enter into this agreement and to
reimburse the non-terminating party for incurring the costs and expenses related
to the contemplated Merger. No more than one termination fee shall be paid by
any party hereunder. The parties hereto agree that any termination fee that is
paid or due hereunder shall be deemed to be liquidated damages designed to
reasonably compensate the recipient party for the loss incurred by the
terminating party's actions.
2.3 Any definitive agreement between the parties regarding the
Merger shall include a provision parallel to Sections 2.1 and 2.2 hereof,
provided that (i) the obligations of Section 2.1 shall continue until the
earlier of the closing of the Merger or the termination of such definitive
agreement, and (ii) the termination fee shall be in the amount of $150,000 and
shall be payable in the event of a breach by a party of the definitive Merger
agreement or a
4
<PAGE>
recommendation by the Board of Directors of a party that such company's
stockholders approve or accept a transaction with a third party of the type
described in clause (iii) of Section 2.1.
3. Investigation of Business and Operations of Pacific. Pending the
preparation, execution and delivery of the definitive agreement and continuing
until the Closing Date or termination of this Letter of Intent (i) Pacific will
cause officers and representatives of Pacific (including without limitation
Pacific's firm of independent certified public accountants) to furnish access to
such books and records of Pacific during normal business hours as Procept, its
representatives or agents, may reasonably request in connection with its review
and investigation of the business and operations, assets and liabilities of
Pacific and the market potential for the Business, and (ii) Procept will cause
its officers and representatives (including without limitation, Procept's firm
of independent certified public accountants) to furnish access to such books and
records of Procept during normal business hours as Pacific, its representatives
or agents, may reasonably request in connection with the review and
investigation by it or the Stockholders of the business and operations, assets
and liabilities of Procept.
4. Confidentiality. As provided in the Confidentiality Agreement
between the parties, the existence and the terms of this Letter of Intent and
the transactions contemplated herein shall be maintained in confidence by the
parties hereto. Except to the extent required by law, all public announcements,
notices or other communications regarding such matters to third parties shall
require the prior approval of Procept and Pacific.
5. General. This Letter of Intent is executed and shall be governed by,
and construed and enforced (to the extent the Sections are stated herein to be
enforceable) in accordance with, the laws of The Commonwealth of Massachusetts.
If you determine that the foregoing is satisfactory in principle, we
would appreciate acknowledgment of that determination by the execution and
delivery to us of the enclosed copy of this letter.
We look forward to your favorable consideration of this letter.
Very truly yours,
PROCEPT, INC.
/s/ John F. Dee
-------------------------------------
John F. Dee
President and Chief Executive Officer
5
<PAGE>
The foregoing is agreed to and accepted as of the date first set forth
above.
PACIFIC PHARMACEUTICALS, INC.
/s/ H. Laurence Shaw
-------------------------------------
Dr. H. Laurence Shaw
President and Chief Executive Officer
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet at September 30, 1998 and the statement of operations for the three months
and nine months ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 3,568,890 3,568,890
<SECURITIES> 2,003,254 2,003,254
<RECEIVABLES> 11,127 11,127
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,042,863 6,042,863
<PP&E> 2,315,932 2,315,932
<DEPRECIATION> 2,080,287 2,080,287
<TOTAL-ASSETS> 6,475,534 6,475,534
<CURRENT-LIABILITIES> 612,878 612,878
<BONDS> 0 0
0 0
0 0
<COMMON> 30,018 30,018
<OTHER-SE> 5,625,014 5,625,014
<TOTAL-LIABILITY-AND-EQUITY> 6,475,534 6,475,534
<SALES> 0 0
<TOTAL-REVENUES> 75,031 264,905
<CGS> 0 0
<TOTAL-COSTS> 602,581 3,135,979
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 599 4,707
<INCOME-PRETAX> (528,149) (2,875,781)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (528,149) (2,875,781)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (528,149) (2,875,781)
<EPS-PRIMARY> (0.18) (1.35)
<EPS-DILUTED> (0.18) (1.35)
</TABLE>
