SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
_X_ AMENDMENT NO. 1 TO AND RESTATEMENT OF QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
___ 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.
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(Exact name of registrant as specified in its charter)
Delaware 04-2893483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
840 Memorial Drive, Cambridge, Massachusetts 02139
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(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 10, 1997
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Common Stock, $.01 par value 1,962,036*
*Or 196,204 as restated for the May 18, 1998 Reverse Stock Split described in
Note 2 to the Financial Statements.
This report includes a total of 21 pages
Exhibit Index Appears on Page 20
<PAGE>
PROCEPT, INC.
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FORM 10-Q/A, SEPTEMBER 30, 1997
This Form 10-Q/A constitutes Amendment No. 1 to and Restatement of the
registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997. This Form 10-Q/A amends and restates Item 1 of Part I and Items 2 and 6 of
Part II and restates the remainder of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 filed with the Commission on
November 14, 1997. As indicated in Note 2 to the Financial Statements,
Shareholders' Equity has been restated to give retroactive effect to the
one-for-ten reverse stock split of the Company's Common Stock effected on June
1, 1998.
2
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PROCEPT, INC.
INDEX
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<TABLE>
<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 4
September 30, 1997 and December 31, 1996
Statements of Operations 5
Three months and nine months ended
September 30, 1997 and 1996
Statements of Cash Flows 6
Nine Months ended September 30, 1997 and 1996
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes In Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
PROCEPT, INC.
BALANCE SHEETS
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<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,419,333 $1,962,229
Marketable securities -- 4,001,625
Accounts receivable 81,250 172,812
Prepaid expenses and other current assets 113,634 111,237
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Total current assets 2,614,217 6,247,903
Property and equipment, net 1,138,731 1,863,200
Restricted investment -- 469,000
Deposits 250,615 135,975
Other assets 311,806 201,188
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TOTAL ASSETS $4,315,369 $8,917,266
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $726,898 $773,501
Accrued compensation 166,386 122,712
Accrued contract research costs 447,216 438,513
Other current liabilities 92,518 196,610
Current portion of capital lease obligations 136,332 614,063
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Total current liabilities 1,569,350 2,145,399
Capital lease obligations, less current portion -- 20,231
Other noncurrent liabilities 367,375 435,529
Commitments and contingencies
Stockholders' equity (Note 2):
Preferred stock, par value $.01 per share; 30,061 shares
authorized, 30,060 shares issued and outstanding at
September 30, 1997 (Liquidation Preference; $4,208,400
at September 30, 1997) 301 --
Common stock, par value $.01 per share; 30,000,000
shares authorized at September 30, 1997 and December
31,1996; 196,204 and 195,434 shares issued and
outstanding at September 30, 1997 and December
31, 1996, respectively 1,962 1,954
Additional paid-in capital 62,242,741 55,095,433
Cumulative dividends on preferred stock (4,217,388) --
Receivable from sale of stock (73,242) (73,242)
Accumulated deficit (55,575,730) (48,703,200)
Unrealized (loss) on securities available for sale -- (4,838)
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Total stockholders' equity 2,378,644 6,316,107
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,315,369 $8,917,266
========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
4
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PROCEPT, INC.
STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 (restated) 1996 1997 (restated) 1996
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<S> <C> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative arrangements $-- $425,000 $-- $1,275,000
Research and development revenue
under collaborative arrangements
with related party 118,750 202,187 389,062 352,187
Revenue from grant -- -- 55,811 --
Interest income 23,493 160,611 124,414 307,747
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Total revenues $142,243 $787,798 $569,287 $1,934,934
-------------- ------------- ------------- -----------
Costs and expenses:
Research and development 1,287,328 2,279,974 5,165,693 7,751,247
General and administrative 592,005 689,583 2,017,028 2,310,227
Restructuring charges 220,555 273,324 220,555 273,324
Interest expense 10,940 38,973 38,541 102,012
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Total costs and expenses 2,110,828 3,281,854 7,441,817 10,436,810
-------------- ------------- ------------- ------------
Net loss (1,968,585) (2,494,056) (6,872,530) (8,501,876)
Less: dividends on preferred stock (4,217,388) -- (4,217,388) --
-------------- ------------- ------------- ------------
Net loss available to common shareholders $(6,185,973) $(2,494,056) $(11,089,918) $(8,501,876)
============ ============ ============= ============
Net loss per common share $ (25.23) $ (12.88) $ (52.12) $ (55.01)
============ ============ ============== =============
Weighted average number of common
shares outstanding 245,227 193,679 212,780 154,562
============== ============ ============== ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
5
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,872,530) $(8,501,876)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 774,683 924,426
Non-cash related party revenue (112,500) (112,500)
Gain on sale of marketable securities -- (1,359)
Changes in operating assets and liabilities:
Accounts receivable 91,562 (158,687)
Prepaid expense and other current assets (2,397) 7,452
Deposits (114,640) (52,300)
Other assets 1,882 2,945
Accounts payable (46,603) (481,464)
Accrued compensation 43,674 124,853
Accrued contract research 8,703 (23,075)
Other current liabilities (104,092) (183,139)
Other noncurrent liabilities (68,154) 30,429
Deferred revenue -- (1,275,000)
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Net cash used in operating activities (6,400,412) (9,699,295)
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Cash flows from investing activities:
Capital expenditures (50,214) (101,510)
Proceeds from maturity of marketable securities 4,006,463 1,000,000
Proceeds from sale of marketable securities -- 2,004,070
Purchase of marketable securities -- (6,989,032)
Decrease in restricted investments 469,000 53,000
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Net cash provided by (used in) investing activities 4,425,249 (4,033,472)
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Cash flows from financing activities:
Principal payments on capital lease obligations (497,962) (707,615)
Proceeds from issuance of common stock 410 4,982,941
Proceeds from Private Placement of stock 3,005,999 11,028,289
Expenses from Private Placement securities (131,381) --
Deferred financing charges -- 152,773
Proceeds from employee stock purchase plan 55,201 96,764
Proceeds from sale of common stock warrants -- 220
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Net cash provided by
financing activities 2,432,267 15,553,372
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Net change in cash and cash equivalents 457,104 1,820,605
Cash and cash equivalents at beginning of period 1,962,229 565,521
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Cash and cash equivalents at end of period $2,419,333 $2,386,126
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Supplemental disclosures of cash flow information:
Interest paid $25,896 $110,225
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Supplemental disclosure of non-cash transactions:
Dividends on preferred stock $4,217,388 $ --
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</TABLE>
The accompanying notes are an integral part of the
financial statements.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Plan of Operations
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Since its inception Procept, Inc. ("Procept" or the "Company") has generated no
revenue from product sales. The Company has not been profitable since inception
and has incurred an accumulated deficit of approximately $55.6 million through
September 30, 1997. 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 due to ongoing research and
development efforts and expanded preclinical and clinical testing.
Because of its continuing losses from operations, the Company will be required
to obtain additional funds in the short term to satisfy its ongoing capital
needs and to continue operations. 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 obtain financing on acceptable terms, it could be forced to
curtail or discontinue its operations. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The accompanying financial statements for the three-month and nine-month periods
ended September 30, 1997 and 1996 are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles. The 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, 1997 and 1996. 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 conjunction with the audited financial
statements for the year ended December 31, 1996, which are contained in the
Company's 1996 Annual Report on Form 10-K.
Restatement of Financial Statements
- -----------------------------------
The Company restated its financial statements for the three and nine month
periods ended September 30, 1997 to include the effects of recording non-cash
dividends to the preferred stockholders totaling $4,217,388 not previously
recorded in the financial statements for the three and nine month periods ended
September 30, 1997. The preferred stock dividends had the effect of increasing
net loss available to common shareholders by $4,217,388 and increasing net loss
per share by $17.20 from $(8.03) to $(25.23) for the three months ended
September 30, 1997, and by
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
$19.82 from $(32.30) to $(52.12) for the nine months ended September 30, 1997
after giving effect to the one-for-ten reverse stock split.
2. STOCKHOLDERS' EQUITY
On May 18, 1998, Procept's shareholders approved a one-for-ten reverse split of
the Company's Common Stock (the "May 18, 1998 Reverse Stock Split"). The May 18,
1998 Reverse Stock Split was effected on June 1, 1998. Shareholders' equity has
been restated to give retroactive application to the May 18, 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 May 18, 1998
Reverse Stock Split. In addition, all references in the financial statements to
number of shares, per share amounts, and stock warrant data of the Company's
Common Stock have been restated.
On September 29, 1997, the Procept's stockholders approved a one-for-seven
reverse split of the Company's Common Stock (the "Reverse Stock Split"). The
Reverse Stock Split was effected on October 14, 1997. Stockholders' equity has
been restated to give retroactive application to the 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 Reverse Stock Split. In
addition, all references in the financial statements to number of shares, per
share amounts, and stock warrant data of the Company's Common Stock have been
restated.
On June 30, 1997, The Aries Fund and The Aries Domestic Fund L.P. (collectively
the "Aries Funds") made a direct investment of $3.0 million into the Company.
The Company received proceeds of $2.8 million for the issuance of 85,334 shares
of Common Stock (the "Common Shares"). The Common Shares contained certain
contractual obligations including, but not limited to, the right to convert the
Common Shares into preferred stock (the "Preferred Stock") upon Procept
shareholder approval of such Preferred Stock. The Company also received from
Aries an additional $0.2 million for the issuance of two convertible promissory
notes. The notes accrued interest at a rate of 12% per year and were due on or
before September 30, 1997. In addition to the Common Shares, the Aries Funds
received (i) Class A Warrants exercisable for an aggregate of 39,182 shares of
Procept Common Stock at an initial exercise price of $0.70 and (ii) Class B
Warrants exercisable for an aggregate of 108,603 shares of Procept Common Stock
at an initial exercise price of $32.80. The Company did not separately value the
Class A and Class B Warrants from the Preferred Stock since the resulting
accounting treatment for both securities is to record their value
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
in Additional Paid In Capital within the equity section of the balance sheet.
Additionally, since the Preferred Stock and the Class A and Class B Warrants are
not redeemable, no accretion is required. All of the Class A Warrants and the
Class B Warrants contemplated that such warrants would be converted on September
30, 1997 into "New Warrants" having the same aggregate exercise price as the
Class A and Class B Warrants converted, but with a per share exercise price
equal to the lesser of (i) $20.30 or (ii) 50% of the trading price (determined
per a formula) at September 30, 1997. The Class A and Class B Warrants further
provided that the exercise price of the New Warrants would be adjusted at the
time of the Company's next equity financing to ensure that the exercise price of
the New Warrants was at least 50% of the pricing in such future equity
financing. The Class A and Class B Warrants were converted to New Warrants for
328,314 shares of Procept Common Stock having a per share exercise price of
$10.90. In a negotiated transaction with the Aries Funds, the New Warrants were
exchanged in April 1998 for Class C Warrants for an aggregate of 814,680 shares
of Procept Common Stock having an exercise price of $5.00 per share.
At an adjourned session of the Company's 1997 annual meeting held on July 15,
1997, its shareholders approved an amendment and restatement of the Company's
Restated Certificate of Incorporation which authorized 1,000,000 shares of
preferred stock. On August 1, 1997, the Board of Directors established a series
of 30,061 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). Upon the establishment of this Series A Preferred Stock, the
purchasers of the securities issued in the June 1997 direct investment exercised
the right to convert their Common Shares to shares of Series A Preferred Stock.
On August 22, 1997, the Aries Funds converted the 85,334 Common Shares into
28,000 shares of Series A Preferred Stock. On September 30, 1997, the Aries
Funds converted the convertible promissory notes and the corresponding accrued
interest into 2,060 shares of Series A Preferred Stock.
The Series A Preferred Stock was initially convertible into Common Stock at a
conversion price equal to $32.80. The terms of the Series A Preferred Stock
provided that the conversion price would adjust on September 30, 1997 (or
earlier, if certain events occurred) to a new conversion price equal to the
lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a formula)
at September 30, 1997. On September 30, 1997, the conversion price of the Series
A Preferred Stock adjusted to $10.90. In connection with this adjustment, the
Company recorded a preferred stock
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
dividend in the amount of $4,217,388 which reflects the intrinsic value of the
beneficial conversion feature based upon the difference between the $26.25 per
share fair market value of the Company's Common Stock on the date of issuance
and the $10.90 per share adjusted conversion price of the Series A Preferred
Stock. Additionally, since the Series A Preferred Stock is not redeemable, no
accretion is required. As of September 30, 1997, the conversion price of the
Series A Preferred Stock was $10.90, but remains subject to further conversion
rate adjustments based on future events. At September 30, 1997, the Series A
Preferred Stock was convertible into 274,748 shares of Common Stock. After the
September 30, 1997 conversion price adjustment, the terms of the Series A
Preferred Stock provided for further reduction of the conversion price of the
Series A Preferred Stock (i) on June 30, 1998 to ensure that the market price at
that time was at least 140% of the conversion price, (ii) if equity securities
were issued in the future with a pricing reset feature, on the reset date of
such future equity securities (if such a reset date occurred on or prior to June
30, 1999), so that the conversion price of the Series A Preferred Stock was
reduced proportionately to the price reduction in the future equity securities,
(iii) if no reset date for future equity securities occurred by June 30, 1999,
to ensure that the market price at that time was at least 200% of the conversion
price, and (iv) on future issuances of equity securities at a price below the
then effective conversion price or the then market price, to a price determined
by a weighted average formula reflecting such dilutive issuance. Other
significant features of the Series A Preferred Stock include (1) a per share
cumulative annual dividend, payable in cash or in kind, of 10% of the sum of
$140 per share plus accrued but unpaid dividends, (ii) the right to participate
in most subsequent dividend distributions to Common Stock, (iii) the right to
vote the Series A Preferred Stock on an as converted to Common Stock basis
reflecting the then effective conversion price, and (iv) the right to a
liquidation preference of $140 per share plus accrued but unpaid dividends.
Furthermore, on September 30, 1997 in accordance with the original terms of the
Class A and Class B Warrants issued in the June 1997 private placement, such
warrants were exchanged for 328,314 "New Warrants" at an exercise price of
$10.90 per share. The $10.90 exercise price of the New Warrants was determined
based on a formula set forth in the Class A Warrants and Class B Warrants. The
formula provided that the exercise price of the New Warrants would equal the
lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a formula)
at September 30, 1997. The formula trading price at September 30, 1997 was
$21.80, and the exercise price was fixed at $10.90. The Company incurred costs
in the amount of $0.1 million related to the June 1997 private placement and the
subsequent conversion events which were charged to additional paid-in capital.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
3. RESEARCH COLLABORATIONS
In September 1996, the Company's three-year sponsored research agreement with
Sandoz Pharma Ltd. ended as originally scheduled. Upon the completion of the
agreement all rights to compounds developed under the agreement reverted to the
company that originally supplied or developed the compound. Under the terms of
this agreement, Procept recorded $425,000 in revenue during the three-month
period ended September 30, 1996. No revenue related to this agreement was
recorded during 1997.
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"), an entity created by a group of executives and
scientists from leading biotechnology companies and academic institutions to
provide research services relating to the development of novel vaccines based on
discoveries licensed from the Brigham and Women's Hospital and Harvard Medical
School. These discoveries shed light on a previously unknown aspect of
immunology, the CD1 system of lipid antigen presentation. Under the Sponsored
Research Agreement, Procept will conduct specified research tasks on behalf of
VacTex for which Procept will receive 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.
In July 1997, the Company announced that it had been awarded a Phase I Small
Business Innovation Research Grant from the National Institutes of Health to
support the development of novel vaccines for tuberculosis. Under the terms of
the Phase I Grant, Procept will receive $100,000 in financial support. The
Company proposes to identify and develop an effective tuberculosis vaccine by
utilizing the CD1 system of lipid antigen presentation. The Company plans to
apply for additional funding under a Phase II SBIR grant late in 1997.
In August 1997, Procept announced that it had entered into an agreement with
Abbott Laboratories, Inc. ("Abbott") in the area of NMR-based drug discovery.
Under the terms of the Agreement, Abbott and Procept will cooperate in the
screening by NMR of a specialized compound library against an undisclosed
Procept target. Based on the results of this collaboration, the companies may
negotiate the terms of a further agreement to license and develop any drug leads
first identified during the screening period. This represents the Company's
first agreement with a pharmaceutical partner involving NMR-based drug
discovery.
4. RESTRUCTURING
In September 1996, the Company implemented a restructuring plan that resulted in
the elimination of twenty positions, mostly from the research organization. The
amount of termination benefits accrued and charged to
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
restructuring costs in the statement of operations for the three-month and
nine-month periods ended September 30, 1996 was $273,000.
In July 1997, the Company further reduced staffing in its research organization
through the elimination of six senior research positions. The amount of
termination benefits accrued and charged to restructuring costs in the statement
of operations for the three-month and nine-month periods ended September 30,
1997 was $221,000. The amount of termination benefits paid and charged against
the liability for the three months and nine months ended September 30, 1997 was
$126,000.
5. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128), which is
effective for periods ending after December 15, 1997, including interim periods.
Earlier adoption is not permitted. However, an entity is permitted to disclose
pro forma earnings per share amounts computed under SFAS 128 in the notes to the
financial statements in periods prior to adoption. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
International Accounting Standard 33, Earnings Per Share. The Company plans to
adopt SFAS 128 in 1997 and has determined its adoption will have no impact.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
RESULTS OF OPERATIONS
Since its inception, the Company has generated no revenues from product sales.
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. The Company has incurred an
accumulated deficit of approximately $55.6 million through September 30, 1997.
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 due to its ongoing
research and development efforts and expanded preclinical and clinical testing.
Three Months Ended September 30, 1997 and 1996
The Company's total revenues decreased to $142,000 in the third quarter of 1997
from $788,000 during the same period of 1996, principally as a result of the
scheduled completion of the Sandoz Agreement. In the third quarter of 1997,
revenues consisted of $119,000 earned under the VacTex Agreement and $23,000 in
interest earned on invested funds. In 1996, third quarter revenues consisted of
$425,000 earned under the Sandoz Agreement, $202,000 earned under the VacTex
Agreement and $161,000 in interest earned on invested funds.
The Company's total operating expenses decreased to $2.1 million in the third
quarter of 1997, from $3.3 million during the same period in 1996. Research and
development expenses decreased 44% to $1.3 million in the third quarter of 1997
from $2.3 million in the third quarter of 1996. This expense decrease was due
primarily to a decrease in personnel in the Company's research and development
organization and their related research costs from the third quarter of 1996 to
the same period in 1997. The 14% decrease in general and administrative expenses
during the third quarter of 1997 to $592,000 from $690,000 in the third quarter
of 1996 reflects a decrease in administrative personnel as well as reduced
general and administrative expenses due to cost control measures. The Company
incurred charges of $273,000 and $221,000 related to the restructuring of its
research operations during the third quarter of 1996 and 1997 respectively.
Interest expense decreased to $11,000 in the third quarter of 1997 from $39,000
in the third quarter of 1996 as a result of the decrease in payments under the
Company's lease financing arrangements.
Nine months ended September 30, 1997 and 1996
The Company's nine month 1997 total revenues decreased to $569,000 from
$1,935,000 during the same period of 1996, principally as a result of the
scheduled completion of the Sandoz Agreement. In the nine-month period of
13
<PAGE>
1997, revenues consisted of $389,000 earned under the VacTex Agreement, $56,000
under a grant from the National Cooperative Drug Discovery Group and $124,000 in
interest earned on invested funds. In the nine-month period of 1996, revenues
consisted of $1,275,000 earned under the Sandoz Agreement, $352,000 earned under
the VacTex Agreement and $308,000 in interest earned on invested funds.
The Company's total operating expenses decreased to $7.4 million in the
nine-month period of 1997 from $10.4 million during the same period in 1996.
Research and development expenses decreased 33% to $5.2 million in the first
nine months of 1997 from $7.8 million in the first nine months of 1996. This
expense decrease was due primarily to a decrease in personnel in the Company's
research and development organization and their related research costs from the
third quarter of 1996 to the same period in 1997. The 13% decrease in general
and administrative expenses during the first nine months of 1997 to $2.0 million
from $2.3 million in the first nine months of 1996 reflects a decrease in
administrative personnel as well as reduced general and administrative expenses
due to cost control measures. Interest expense decreased to $39,000 in the first
nine months of 1997 from $102,000 in the first nine months of 1996 as a result
of the decrease in payments under the Company's lease financing arrangements.
FINANCIAL CONDITION
At September 30, 1997, the Company's aggregate cash and cash equivalents were
$2.4 million, a net increase of $.5 million since December 31, 1996. The
increase in cash is primarily attributable to the completion of the Company's
Private Placement in June 1997 resulting in net proceeds of $2.8 million, the
maturity of a marketable security of $4.0 million and the conversion of a
restricted investment to cash of $.5 million offset by $6.4 million used in
operations, principally to fund research and development activities and
principal payments on capital lease obligations of $.5 million.
In July 1997, the Company reduced staffing in its research organization through
the elimination of six senior research positions. As a result of this reduction
in force and other cost control measures, the Company expects that by year end
its cash burn rate will be reduced to approximately $500,000 per month.
The Company believes that its current funds, in conjunction with the net
proceeds from its June 1997 Private Placement and interest income will be
sufficient to fund Procept's financial needs for the remainder of 1997.
Additional financing will be required in order to fund the Company's operations
through 1998. 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
collaborations that produce revenue for the Company, or secure additional
financing, the Company's financial condition will be materially adversely
affected.
14
<PAGE>
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 timing of achievement of various milestones in the Company's research
and development programs.
The Company's working capital and other cash needs will depend heavily on the
success of the Company's clinical trials. Success in early stage clinical trials
would lead to an increase in working capital requirements. The Company's actual
cash requirements may vary materially from those now planned because of results
of research and development, clinical trials, product testing, relationships
with strategic partners, 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128), which is
effective for periods ending after December 15, 1997, including interim periods.
Earlier adoption is not permitted. However, an entity is permitted to disclose
pro forma earnings per share amounts computed under SFAS 128 in the notes to the
financial statements in periods prior to adoption. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
International Accounting Standard 33, Earnings Per Share. The Company plans to
adopt SFAS 128 in 1997 and has determined its adoption will have no impact.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a Complaint
with the United States District Court for the Southern District of New York
naming the Company as a defendant (the "Complaint"). The Complaint alleges that
the Company breached obligations to Commonwealth under the Underwriting
Agreement between Commonwealth and the Company dated February 8, 1996, giving
Commonwealth a right of first refusal to act as co-lead underwriter or
co-managing agent of a public offering or Private Placement of the Company's
securities during the period ended August 8, 1997. In the Complaint,
Commonwealth seeks aggregate compensatory damages in the amount of $750,000,
incidental and consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as the
court deems proper. The Company was served the Complaint on November 3, 1997 and
must respond by November 23, 1997 or face judgment by default. The Company
believes that Commonwealth's claims are without factual or legal merit. The
Company does not
15
<PAGE>
believe this action will have a material adverse effect on the Company's
business and it intends to vigorously defend this action. However, given the
early stage of this litigation, no assurance may be given that the Company will
be successful in its defense. A decision by the court in Commonwealth's favor or
any other conclusion of this litigation in a manner adverse to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is not a party to any material legal proceedings, except as set
forth above.
Item 2. Changes in Securities
The share and exercise price values with respect to Procept securities in
paragraph (a) of this amended and restated Item 2 have been adjusted to reflect
the one-for-ten reverse split of the Company's Common Stock effected on June 1,
1998.
(a) Issuance of Series A Convertible Preferred Stock and New Warrants. On August
22, 1997, the Aries Funds exchanged outstanding shares of the Company's Common
Stock for an aggregate of 28,000 shares of the Company's Series A Preferred. On
September 30, 1997, the Aries Funds converted outstanding Senior Convertible
Notes issued by the Company in the aggregate principal amount of $200,000 for an
additional aggregate of 2,060 shares of Series A Preferred.
In addition, on September 30, 1997, outstanding warrants for an aggregate of
147,785 shares of the Company's Common Stock held by the Aries Funds converted,
in accordance with their terms, to "New" warrants (the "New Warrants")
exercisable for an aggregate of 328,314 shares of the Company's Common Stock at
an exercise price of $10.90, subject to future adjustments.
The issuance of the shares of Series A Preferred and New Warrants were made in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering. The
Company has reason to believe that the Aries Funds were familiar with or had
access to information concerning the operations and financial condition of the
Company, and that the Aries Funds were acquiring the securities for investment
and not with a view to the distribution thereof. No underwriter was engaged in
connection with the foregoing issuances of securities
(b) Reverse Stock Split. At a special meeting of shareholders held on September
29, 1997, the Company's stockholders approved an amendment of the Company's
Restated Certificate of Incorporation that authorized a one-for-seven reverse
stock split. The split was effected on October 14, 1997.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders:
The Company held a special meeting of stockholders on Monday, September 29,
1997. The following tabulates the results of the proposals submitted to a vote
of the stockholders:
<TABLE>
<CAPTION>
Votes Cast Abstentions and
Votes Cast For Against or Withheld Broker Non-Votes
-------------- ------------------- ----------------
<S> <C> <C> <C>
1) Proposal to ratify and approve June 1997
Agreements. 10,196,916 1,508,398 4,592,206
2) Proposal to approve the issuance of a maximum of
200 units to investors under a Private Placement
to be conducted by the Company with each unit
consisting of 1,000 shares Series B Preferred
Stock and warrants to purchase 333,333 shares
of Common Stock. 9,989,262 1,674,323 4,633,935
3) Proposal to authorize and issue the Series B
Preferred Stock. 5,053,440 848,214 71,860
4) Proposal to approve an amendment of the Company's
Certificate of Incorporation to
effect a one-for seven reverse stock split. 15,611,400 610,049 76,071
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
--------
3.1 Certificate of Amendment of the Restated Certificate
of Incorporation, filed with the Secretary of State of
Delaware on October 7, 1997 to be effective as of
October 14, 1997. Filed as Exhibit 3.1 to the
Company's Form 10-Q for the quarter ended September
30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
4.1 "New Warrant" dated September 30, 1997 issued to The
Aries Fund. Filed as Exhibit 4.1 to the Company's Form
10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein
by reference.
4.2 "New Warrant" dated September 30, 1997 issued to The
Aries Domestic Fund. Filed as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September
30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
10.1 Executive Severance and Indemnification Agreement
between the Company and Stanley C. Erck dated as of
June 25, 1997. Filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein
by reference.
17
<PAGE>
10.2 Executive Severance and Indemnification Agreement
between the Company and Michael J. Higgins dated as of
June 25, 1997. Filed as Exhibit 10.2 to the Company's
Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein
by reference.
10.3 Form of Indemnification Agreement. Filed as Exhibit
10.3 to the Company's Form 10-Q for the quarter ended
September 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
27 Financial Data Schedule. 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: June 23, 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 of the Restated Certificate of Incorporation,
filed with the Secretary of State of Delaware on October 7, 1997 to be
effective as of October 14, 1997. Filed as Exhibit 3.1 to the Company's
Form 10-Q for the quarter ended September 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.
4.1 "New Warrant" dated September 30, 1997 issued to The Aries Fund. Filed
as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended
September 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
4.2 "New Warrant" dated September 30, 1997 issued to The Aries Domestic
Fund. Filed as Exhibit 4.2 to the Company's Form 10-Q for the quarter
ended September 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.1 Executive Severance and Indemnification Agreement between the Company
and Stanley C. Erck dated as of June 25, 1997. Filed as Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by reference.
10.2 Executive Severance and Indemnification Agreement between the Company
and Michael J. Higgins dated as of June 25, 1997. Filed as Exhibit 10.2
to the Company's Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by reference.
10.3 Form of Indemnification Agreement. Filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by reference.
27 Financial Data Schedule. Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheet at September 30, 1997 and the statement of operations for the three months
and nine months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-1-1997 JAN-1-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 2,419,333 2,419,333
<SECURITIES> 0 0
<RECEIVABLES> 81,250 81,250
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,614,217 2,614,217
<PP&E> 5,755,123 5,755,123
<DEPRECIATION> 4,616,392 4,616,392
<TOTAL-ASSETS> 4,315,369 4,315,369
<CURRENT-LIABILITIES> 1,569,350 1,569,350
<BONDS> 0 0
0 0
301 301
<COMMON> 1,962 1,962
<OTHER-SE> 2,376,381 2,376,381
<TOTAL-LIABILITY-AND-EQUITY> 4,315,369 4,315,369
<SALES> 0 0
<TOTAL-REVENUES> 142,243 569,287
<CGS> 0 0
<TOTAL-COSTS> 2,110,828 7,441,817
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,940 38,541
<INCOME-PRETAX> (1,968,585) (6,872,530)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,968,585) (6,872,530)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,968,585) (6,872,530)
<EPS-PRIMARY> (25.23) (52.12)
<EPS-DILUTED> (25.23) (52.12)
</TABLE>
