SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-21134
Procept, Inc.
(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
- -------------------------------------------- -----
(Address of principal executive offices) (zip code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
--------------------------------------
(Title of Class)
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 and 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. __X__
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1998 was $8,804,033.
The number of shares of the registrant's common stock outstanding as of March
25, 1998 was 8,807,435.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed
with the Securities and Exchange Commission relative to the
1998 Annual Meeting of Shareholders
are incorporated by reference into Part III of this report.
<PAGE>
PART I
ITEM 1. BUSINESS.
CORPORATE SUMMARY
Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company
currently engaged in the development of novel drugs for the prevention of HIV
and other infectious diseases. The Company is also seeking the acquisition or
in-license of drug development candidates that would benefit from Procept's
expertise in various therapeutic areas.
The Company was recently pursuing three principal research and development
programs. In order to focus its limited resources on its lead drug candidate,
PRO 2000 Gel, the Company suspended work in 1998 on its other research programs,
which it hopes to out-license, and underwent a significant downsizing, reducing
its staff from 38 on January 1, 1997 to 13 by March 13, 1998.
The lead product candidate from the Company's AIDS program, PRO 2000 Gel, is a
vaginal topical microbicide designed to prevent the sexual transmission of HIV
and other sexually transmitted disease ("STD") pathogens. The results of
recently completed Phase I clinical trials indicated that PRO 2000 Gel is safe
and well tolerated by healthy women. In addition, through the Company's research
in immunomodulation, the Company discovered a series of small molecule
compounds, T cell enzyme inhibitors, that have demonstrated significant
immunosuppressive activity in animal models. The Company is currently seeking
out-licensing opportunities for these compounds.
In addition to the continued development of PRO 2000, Procept is seeking to
identify strategic opportunities to in-license drug development candidates which
would benefit from Procept's expertise, thereby focusing its resources on
"development" rather than "research" programs.
PRO 2000 GEL: A TOPICAL MICROBICIDE TO PREVENT HIV INFECTION
The lead product candidate from the Company's AIDS program, PRO 2000 Gel is a
vaginal topical microbicide designed to prevent the sexual transmission of HIV
and other STD pathogens. PRO 2000 was shown in laboratory studies to be
effective at preventing HIV infection of cultured T cells, macrophages, and
dendritic cells (dendritic cells are believed to be the first cells infected
during sexual transmission). PRO 2000 showed high activity against HIV strains
from both the developed and developing world, and the virus did not develop
resistance to the compound even after prolonged exposure. Recently, PRO 2000 was
also shown to be active against herpes viruses including herpes simplex virus
type 2, the major cause of genital herpes infection. Genital herpes lesions are
a significant public health problem, and are believed to promote HIV infection.
The Company first evaluated PRO 2000 as an injectable therapy for HIV infection.
Early stage clinical testing showed that single injections of the drug are well
tolerated, but that doses are limited by side effects directly related to the
presence of PRO 2000 in the circulation. This, coupled with the competitive
environment for AIDS therapies, prompted the Company to suspend development of
PRO 2000 as an injectable therapy.
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The Company believes there is a need for new technologies to prevent the sexual
transmission of HIV and other STDs. HIV infection usually leads to AIDS, a
severe, life-threatening impairment of the immune system. HIV causes
immunosuppression by attacking and destroying T cells, which coordinate much of
the network of normal immune responses. The progression from HIV infection to
symptomatic disease may take many years. The Centers for Disease Control
recently estimated that there are approximately 240,000 individuals with AIDS in
the United States. Up to 900,000 people in the United States are estimated to be
infected by HIV. Despite years of effort, an effective HIV vaccine remains
elusive. Worldwide, approximately 70% of HIV transmission occurs through
heterosexual intercourse. In addition, The New York Times reported that an
estimated 10-12 million new cases of sexually transmitted diseases are reported
to the disease center each year, particularly human papillomavirus, chlamydia
and herpes. Male condoms are known to prevent STD transmission, but rates of
consistent and correct use are low, perhaps because they are unacceptable for
many couples and their use is controlled by the male partner. "Topical
microbicides," which are designed to provide a chemical barrier to infection,
are an attractive alternative: they are likely to be more acceptable than
condoms, and offer women a method they can use to protect themselves.
Development of topical microbicides is a high priority for both the U.S.
government and international agencies.
Preclinical studies demonstrate that PRO 2000 is a more effective anti-HIV agent
than nonoxynol-9. In addition, in vitro preclinical studies have demonstrated
that PRO 2000 is active against other sexually transmitted agents including
herpes simplex type 2 and Chlamydia trachomatis. The Company believes that PRO
2000 is ideally suited for use as a topical microbicide to prevent infection by
HIV and other sexually transmitted pathogens. In addition to its broad antiviral
activity, the compound is straightforward to manufacture, highly stable,
odorless and virtually colorless. PRO 2000 Gel has also been formulated for
intravaginal use. Preclinical studies suggest that PRO 2000 Gel will be safe.
Importantly, no PRO 2000 was detected in the circulation following repeated
vaginal application of the gel. In other studies, PRO 2000 Gel was shown to be
non-mutagenic, non-sensitizing, and compatible with latex condoms.
Procept recently completed two Phase I clinical trials to assess the safety and
tolerance of PRO 2000 Gel in healthy, female volunteers. The trials were
conducted at the Institute of Tropical Medicine in Antwerp, Belgium and at St.
Mary's Hospital in London, England, the latter with funding from the British
Medical Research Council ("MRC"). Preliminary results indicate that PRO 2000 Gel
was safe and well tolerated, and that no PRO 2000 was absorbed into the
circulation. Furthermore, participants generally found the product to be
aesthetically acceptable. The Company is now preparing to conduct a series of
Phase II clinical trials to assess safety and tolerance of PRO 2000 Gel in more
diverse populations, including groups at high risk for infection. Upon
completion of Phase II clinical trials, if successful, a Phase III clinical
trial may be conducted to evaluate efficacy. Discussions are underway with the
NIH and British MRC regarding financial and logistical support for this clinical
program.
The Company holds two issued patents on the use of PRO 2000 to prevent HIV
infection. Additional patent applications have been filed.
The Company's intentions with respect to the further development of PRO 2000 Gel
are forward looking statements, based on current management expectations.
Factors that could cause such expectations to change, resulting in the delay or
cancellation of the PRO 2000 research program and related preclinical and
clinical studies include the following: the availability of financing for the
Company's continued research and development operations; technical risks
associated with the development of PRO 2000; changes in regulatory requirements;
anticipated market acceptance of such new drug; and competitive factors and
pricing pressures.
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DHODH PROGRAM: INTRACELLULAR T CELL ENZYME INHIBITORS FOR AUTOIMMUNE DISEASES
In 1997, Procept implemented a new research program that focused on an
intracellular enzyme ("DHODH") that is known to be critical for the activation
of the immune response, thus making it a possible target for intervention in
transplantation and autoimmune disease. The potential market sizes for such
indications are immense, over $1 billion in size. Procept has made significant
progress and achieved a number of important milestones in this program in the
past year, including the cloning and expression of the human recombinant enzyme
and the identification of lead compounds with potent enzyme inhibitory
properties. Initial studies indicate that several lead compounds also possess
oral activity in animal models of immunosuppression. The Company intends to
out-license this program to a major pharmaceutical or biotechnology company.
However, there can be no assurance regarding the success of such out-licensing
effect.
THE VACTEX DRUG DEVELOPMENT PROGRAM -- TB VACCINE
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex") to develop novel vaccines based on the CD1 antigen
presentation system. The program, conducted in conjunction with Dr. Michael
Brenner at Brigham & Women's Hospital and Harvard Medical School, focuses on a
novel receptor system for presentation of lipid antigens from infectious disease
pathogens. This CD1 receptor system is thought to be critical in mediating the
immune response to tuberculosis bacteria ("TB") and other related bacteria. TB
kills more people than any other infectious agent. Over a third of the world's
population is infected with this bacterium. There is now no cure for some
multidrug resistant TB strains, and the current vaccine has been ineffective in
stopping the epidemic. VacTex is funding vaccine studies in in vivo models
involving presentation of lipids by the novel CD1 system.
During 1997, under the Sponsored Research Agreement, Procept received $0.5
million in research funding from VacTex and 150,000 shares of VacTex Common
Stock. In order to apply available resources to the PRO 2000 development
program, Procept did not seek to renew the Sponsored Research Agreement with
VacTex, which expired on January 8, 1998. The Company retains its equity
position in VacTex.
STRATEGIC CORPORATE ALLIANCES
A combination of large pharmaceutical partners and capital markets has provided
the financial support for Procept's research and development projects. The
Company's goal is to share the risk of product development while maintaining the
prospect of substantial rewards for our investors and partners. In addition to
discussions relating to PRO 2000 to actively partner this program, the Company
is engaged in discussions with several pharmaceutical companies regarding
potential licensing agreements for the Company's other research programs with
respect to which the Company ceased activities in 1998. If agreements are
successfully negotiated, the Company would expect to receive up-front fees and
milestone payments in addition to royalties.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technology by, among other things, filing
or causing to be filed on its behalf, patent applications for technology
relating to the development of its business. Currently, the Company is awaiting
action on various patent applications relating to technology or the uses or
products thereof which it owns or which it has licensed.
4
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The Company has been issued U.S. patents related to its AIDS program and to its
small molecule immunosuppressive program. The Company has filed patent
applications in the United States relating to (i) compounds and methods for
inhibiting immune response, (ii) compounds (which include PRO 2000) and methods
for inhibiting HIV infection and (iii) methods for making compounds that inhibit
HIV. Corresponding foreign patent applications have been filed on certain
compounds and will be filed on other compounds, as appropriate.
To protect its right to and to maintain the confidentiality of trade secrets and
proprietary information, the Company requires employees, Scientific Advisory
Board members, consultants, and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements prohibit the disclosure of confidential information to
anyone outside the company and require disclosure and assignment to the company
of ideas, development, discoveries and inventions made by employees,
consultants, advisors and collaborators.
The Company's ability to compete effectively with other companies will depend,
in part, on the ability of the Company to maintain the proprietary nature of its
technology. Although the Company has been granted, has filed applications for
and has licensed a number of patents in the United States and foreign countries,
there can be no assurance as to the degree of protection offered by these
patents, as to the likelihood that pending patents will be issued or as to the
validity or enforceability of any issued patents.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. There can also be no assurance that
competitors will not infringe the Company's patents. Further, with respect to
licensed patents, which, in the case of the Company, represent a significant
portion of the Company's proprietary technology, the defense and prosecution of
patent suits may not be in the Company's control.
The Company also relies on unpatented proprietary technology which is
significant to the development of the Company's technology, and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. If
the Company is unable to maintain the proprietary nature of its technology, the
Company could be adversely affected.
GOVERNMENT REGULATION
Regulations imposed by U.S. federal, state and local authorities, as well as
their counterparts in other countries, are a significant factor in the conduct
of the research, development, manufacturing and marketing activities for the
Company's proposed products.
Before testing of any compounds with potential therapeutic value in human test
subjects may begin, stringent government requirements for pre-clinical data must
be satisfied. These data, obtained both from in vivo studies and in vitro
studies, are submitted in an Investigational New Drug Application or its
equivalent in countries outside the U.S. where clinical studies are to be
conducted. These pre-clinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initial (Phase I) studies
in human volunteers.
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Phase I clinical studies are commonly performed in healthy human subjects or,
less commonly, selected patients with the targeted disease or disorder. Their
goal is to establish initial data about tolerance and safety of the drug in
humans. Also, the first data regarding the absorption, distribution, metabolism
and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought about the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of carefully selected patients. Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level and dosage schedule. Additional safety data are also gathered from
these studies.
The Phase III clinical development program consists of expanded, large-scale
studies of patients with the target disease or disorder, to obtain definitive
statistical evidence of the efficacy and safety of the proposed product and
dosage regimen. These studies may include investigation of the effects in
subpopulations of patients, such as the elderly.
At the same time that the human clinical program is being performed, additional
non-clinical in vivo studies are also conducted. Expensive, long duration
toxicity and carcinogenicity studies are done to demonstrate the safety of drug
administration for the extended period of time required for effective therapy.
Also, a variety of laboratory, and initial human studies are performed to
establish manufacturing methods for delivering the drug, as well as stable,
effective dosage forms.
All data obtained from a comprehensive development program are submitted in a
New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
and the corresponding agencies in other countries for review and approval.
Although the FDA policy is to review priority applications within 180 days of
their filing, in practice longer times may be required. The FDA also frequently
requests that additional information be submitted, requiring significant
additional review time. Any proposed product of the Company would likely be
subject to demanding and time-consuming NDA or PLA approval procedures in
virtually all countries where marketing of the products is intended. These
regulations define not only the form and content of safety and efficacy data
regarding the proposed product but also impose specific requirements regarding
manufacture of the product, quality assurance, packaging, storage, documentation
and record keeping, labeling, advertising and marketing procedures.
In addition to the regulations relating specifically to product approval, the
activities of the Company, its partners and licensees are subject to laws and
regulations regarding laboratory and manufacturing working conditions, handling
and disposition of potentially hazardous material, and use of laboratory
animals. In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial or institutional formularies or cost
reimbursement systems.
Completing the multitude of steps necessary before marketing can begin requires
the expenditure of considerable resources and can consume a long period of time.
Delay or failure in obtaining the required approvals, clearances, permits or
inclusions by the Company, its collaborators or its licensees would have an
adverse effect on the ability of the Company to generate sales or royalty
revenue. In addition, the impact of new or changed laws or regulations cannot be
predicted.
6
<PAGE>
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms and universities and
other research institutions. Competition may increase further as a result of
potential advances in the commercial application of biotechnology and greater
availability of capital for investment in these fields. Acquisitions of
competing companies and potential competitors by large pharmaceutical companies
or others could enhance financial, marketing and other resources available to
such competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including competitors of the Company, to market
commercial products. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
Company's technology obsolete and noncompetitive, or that such competitors will
not succeed in obtaining FDA or other regulatory approvals for products more
rapidly than the Company.
MANUFACTURING
The Company has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near term products. The Company believes that there
is currently substantial capacity worldwide for the production of its
anticipated products and that the Company will be able to establish
manufacturing arrangements on acceptable terms.
HUMAN RESOURCES
As of December 31, 1997, the Company had 35 full-time employees, 25 of whom were
engaged in research and development and 10 in management, administration and
finance. Doctorates were held by 12 of the Company's employees. On January 19,
1998, 15 full-time employees were terminated in an effort to conserve cash and
focus the Company's research and development efforts on its lead drug candidate,
PRO 2000. Each of the Company's employees has signed an agreement which
prohibits the disclosure of confidential information to anyone outside the
Company and requires disclosure and assignment to the Company of ideas,
developments, discoveries and inventions made by the employee.
The Company's employees are not covered by a collective bargaining agreement.
The Company has never experienced employment-related work stoppage and considers
its employee relations to be excellent.
ITEM 2. PROPERTIES.
The Company's headquarters and research and development facilities are located
in Cambridge, Massachusetts. At its 840 Memorial Drive location, the Company
leases a total of approximately 41,200 square feet of space, which includes
approximately 34,800 square feet of research laboratories. The Company currently
licenses approximately 50% of the laboratory space at its headquarters to
start-up pharmaceutical companies and is negotiating to license an additional
75% of the remaining available space to start-up pharmaceutical companies. The
Company also leases approximately 3,400 square feet of space at 84 Hamilton
Street, which includes approximately 1,100 square feet of research laboratories.
The Company believes such laboratory space will be adequate for its existing
research and drug development activities.
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ITEM 3. 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 $375,000,
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. Discovery has commenced in this action. The Company believes
that Commonwealth's claims are without factual or legal merit. The Company does
not 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 17, 1994, the date of the Company's initial public offering, until
March 26, 1998, the Common Stock has been quoted on the Nasdaq National Market
under the symbol "PRCT". Since March 27, 1998, the Common Stock has been quoted
on the Nasdaq Small Cap Market under the symbol "PRCTC." The following table
sets forth the range of high and low closing sale prices for the Common Stock as
reported by the Nasdaq National Market for the periods indicated below.
High Low
---- ---
1997
Fourth Quarter $3.125 $1.000
Third Quarter $4.158 $2.191
Second Quarter $6.783 $3.283
First Quarter $13.566 $5.691
1996
Fourth Quarter $9.842 $7.217
Third Quarter $16.625 $9.191
Second Quarter $23.625 $12.691
First Quarter $22.750 $15.204
As of March 25, 1998 there were 298 holders of record. On March 25, 1998 the
closing price reported on the Nasdaq National Market for the Common Stock was
$1.00.
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Dividend Policy
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 are derived
from the Company's financial statements included elsewhere in this Report, which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
selected financial data set forth below as of December 31, 1995, 1994 and 1993
and for the years ended December 31, 1994 and 1993 are derived from audited
financial statements not included in this Report. This data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this report.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $781 $2,278 $4,647 $7,571 $5,798
---- ------ ------ ------ ------
Costs and expenses:
Research and development 6,619 9,925 12,406 11,559 7,957
General and administrative 2,715 3,176 3,723 3,805 2,532
Restructuring charges 460 273 -- -- --
Interest 40 139 230 171 130
-- --- --- --- ---
Total costs and expenses 9,834 13,513 16,359 15,535 10,619
----- ------ ------ ------ ------
Net loss (9,053) (11,236) (11,712) (7,964) (4,821)
Preferred stock dividends (105) -- -- -- --
Accretion of discount on
preferred stock -- -- -- (20) (160)
-------- --------- --------- -------- --------
Net loss to common shareholders $(9,158) $(11,236) $(11,712) $(7,984) $(4,981)
======== ========= ========= ======== ========
Basic and diluted loss per share $(4.40) $(6.82) $(12.77) $(9.82) $(84.75)
======= ======= ======== ======= ========
Weighted average number of
common shares outstanding 2,083,705 1,648,357 917,516 812,705 58,771
========= ========= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $535 $1,962 $565 $7,450 $2,862
Marketable securities -- 4,002 2,006 9,393 --
Total assets 2,168 8,917 6,397 19,704 5,777
Capital lease obligations net of current
portion and other non-current
liabilities 355 456 907 860 858
Redeemable convertible
preferred stock -- -- -- -- 21,039
Total shareholders' equity (deficit) 260 6,316 1,439 12,851 (17,792)
Common stock dividends -- -- -- -- --
</TABLE>
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ITEM 7. 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 not been profitable
since incorporation and has an accumulated deficit of $57.9 million through
December 31, 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 required to support
those 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 license-in and develop
pharmaceutical products and 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.
Years ended December 31, 1997 and 1996
The Company's 1997 total revenues decreased to $0.8 million from $2.3 million in
1996, principally as a result of the scheduled completion of the Sandoz
Agreement. In 1997, revenues consisted of $0.5 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. In 1996,
revenues consisted of $1.3 million earned under the Sandoz Agreement, $0.6
million earned under the VacTex Agreement and $0.4 million in interest earned on
invested funds.
The Company's 1997 total operating expenses decreased to $9.8 million from $13.5
million in 1996, principally as a continuing result of a decrease in personnel
in the Company's research and development organization and their related
research costs. General and administrative expenses decreased 18% to $2.7
million in 1997 from $3.2 million in 1996 as a result of a decrease in
administrative personnel as well as cost control measures. In 1997, the Company
restructured its operations resulting in an expense charge of $0.5 million
consisting of salary and benefit costs relating to the restructuring. Interest
expense decreased 71% to $40,000 in 1997 from $0.1 million in 1996 as a result
of the scheduled completion of many of the Company's lease financing
arrangements.
Years ended December 31, 1996 and 1995
The Company's 1996 total revenues decreased to $2.3 million from $4.6 million in
1995, principally as a result of a decrease in research revenue due to an
amendment of the Sandoz Agreement. In 1996, revenues consisted of $1.3 million
earned under the Sandoz Agreement, $0.6 million earned under the VacTex
Agreement, and $0.4 million in earned interest on invested funds. In 1995,
revenues consisted of $3.9 million earned under the Sandoz Agreement, $29,000
earned under the Bristol-Myers Squibb Agreement, $0.1 million in grant revenue
and $0.6 million in earned interest on invested funds.
The Company's 1996 total operating expenses decreased to $13.5 million from
$16.4 million in 1995. Research and development expenses decreased 20% to $9.9
million in 1996 from $12.4 million in 1995 as a result of the restructuring that
the Company completed in September 1996. The restructuring resulted in a
decrease of 19 research employees. General and administrative expenses decreased
15% to $3.2 million in 1996 from $3.7 million in 1995 as a result of
management's efforts to control and reduce discretionary spending and maximize
the use of cost-
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effective resources. In 1996, the Company restructured its operations resulting
in an expense charge of $0.3 million consisting of salary and benefit costs
relating to the restructuring. There was no comparable charge in 1995. Interest
expense decreased 40% to $0.1 million in 1996 from $0.2 million in 1995 as a
result of the scheduled completion of many of the Company's capital equipment
leases.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1985, through December 31, 1997, the Company has financed
its operations from the sale of $58.0 million of its securities, the receipt of
$29.3 million under collaborative research agreements and $2.7 million in
interest income. At December 31, 1997, the Company's aggregate cash, cash
equivalents and marketable securities were $0.5 million, as compared with $6.0
million at December 31, 1996, a decrease of $5.5 million.
For the year ended December 31, 1997, the Company's decrease in cash is
primarily attributable to $8.1 million used in operations and $0.6 million
applied to principal payments on capital leases, offset by an equity financing
of $2.7 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 reduced its cash burn rate
to approximately $0.5 million per month by year end.
In order to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on most other research programs and underwent a significant
downsizing, reducing its staff to 13 people. This is expected to reduce the
Company's cash burn rate to approximately $0.2 million per month by the end of
1998. In the first quarter of 1998, the Company has accrued $0.2 million for
costs associated with this downsizing.
As part of a unit offering targeted at raising up to $6.0 million in the first
quarter of 1998, the Company has received net proceeds of $3.0 million through
the sale of units of Common Stock and warrants to purchase Common Stock. In
addition, The Aries Funds have committed to invest up to $2.0 million in the
Company. The Company expects that its current funds, the funds raised in the
Company's unit offering of which The Aries Funds have committed to invest up to
$2.0 million, interest income and equipment lease financing will be sufficient
to fund Procept's operations through March of 1999. 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 materially adversely affected.
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.
The Company will need to raise substantial additional funds to support its
operations. The Company intends to seek such additional funding through public
or private financing or collaborative or other arrangements with corporate
partners. 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. Other important
factors that may affect achieving the Company's strategic goals and other
forward-looking statements are set forth in Exhibit 99.1 to this Form 10-K, all
of which are incorporated herein by reference.
12
<PAGE>
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 the
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.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 will become effective for fiscal years beginning in the
first quarter of the fiscal year ended December 31, 1998. The Company does not
believe that the adoption will have a material effect on results from
operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 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 31, 1998. The Company does not believe that the
adoption will have a material effect.
YEAR 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information 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 that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in the future periods. However, if
the Company or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Accountants 15
Balance Sheets as of December 31, 1997 and 1996 16
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 17
Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 18
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 19
Notes to Financial Statements 20
Financial statement schedules have been omitted
since they are not required or are inapplicable.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Procept, Inc.:
We have audited the accompanying balance sheets of Procept, Inc. as of December
31, 1997 and 1996, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Procept, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 26, 1998
15
<PAGE>
PROCEPT, INC.
BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $535,242 $1,962,229
Accounts receivable (Note F) 81,951 172,812
Marketable securities (Note C) -- 4,001,625
Prepaid expenses and other current assets 50,111 111,237
---------- ----------
Total current assets 667,304 6,247,903
Property and equipment, net (Notes D and I) 889,258 1,863,200
Restricted investment (Notes I and J) -- 469,000
Deferred financing charges (Note E) 54,424 --
Deposits (Note I) 250,615 135,975
Investment in VacTex (Note F) 300,000 150,000
Other assets 6,411 51,188
---------- ----------
Total assets $2,168,012 $8,917,266
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,069,952 $773,501
Accrued compensation 320,463 122,712
Accrued contract research costs (Note I) -- 438,513
Other current liabilities 142,680 196,610
Current portion of capital lease obligations (Note I) 20,231 614,063
---------- ----------
Total current liabilities 1,553,326 2,145,399
Capital lease obligations, less current portion (Note I) -- 20,231
Deferred rent (Note I) 257,827 285,529
Other noncurrent liabilities 96,875 150,000
Commitments and contingencies (Notes F and I)
Shareholders' equity (Note E):
Preferred stock, par value $.01 per share; 1,000,000 shares authorized
Series A 30,061 shares designated; 30,060 shares issued and
outstanding at December 31, 1997
(Liquidation preference; $4,313,610 at December 31, 1997) 301 --
Common stock, $.01 par value; 30,000,000 shares authorized
at December 31, 1997 and 1996; 1,962,036 and 1,954,343
shares issued at December 31, 1997 and 1996, respectively 19,620 19,543
Additional paid-in capital 58,112,905 55,077,844
Receivable from sale of stock -- (73,242)
Accumulated deficit (57,860,985) (48,703,200)
Unrealized loss on securities available for sale (Note C) -- (4,838)
Treasury stock, at cost; 11,857 and 0 shares at
December 31, 1997 and 1996, respectively (11,857) --
---------- ----------
Total shareholders' equity 259,984 6,316,107
---------- ----------
Total liabilities and shareholders' equity $2,168,012 $8,917,266
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
16
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
--------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative agreements
(Note F) $-- $1,275,000 $3,925,000
Research and development revenue
under collaborative agreements
from related party (Note F) 519,552 562,500 28,645
Revenue from grant (Note F) 113,854 -- 105,264
Interest income 147,766 440,075 587,964
------- ------- -------
Total revenues 781,172 2,277,575 4,646,873
------- --------- ---------
Costs and expenses:
Research and development
(Notes F and I) 6,618,836 9,925,315 12,406,290
General and administrative 2,714,678 3,176,136 3,723,014
Restructuring charges (Note A) 459,969 273,324 --
Interest expense 40,264 138,560 229,856
------ ------- -------
Total costs and expenses 9,833,747 13,513,335 16,359,160
--------- ---------- ----------
Net loss (9,052,575) (11,235,760) (11,712,287)
Less: preferred stock dividends (105,210) -- --
------------ ------------ ------------
Net loss available to common shareholders $(9,157,785) $(11,235,760) $(11,712,287)
============ ============ ============
Basic and diluted net loss per common share $(4.40) $(6.82) $(12.77)
======= ======= ========
Weighted average number of common
shares - basic and diluted 2,083,705 1,648,357 917,516
========= ========= =======
</TABLE>
Theaccompanying notes are an integral
part of the financial statements.
17
<PAGE>
Procept, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
--------------------
<TABLE>
<CAPTION>
Common Stock Preferred Stock Series A Additional
------------ ------------------------ Paid-in
Shares Par Value Shares Par Value Capital
------ --------- ------ --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994 907,943 $9,079 $38,738,861
Employee stock purchase plan 10,418 104 131,627
Exercise of stock options 6,075 61 58,883
Issuance of stock in payment of bonus 486 5 8,495
Unrealized gain on securities for sale -- -- --
Collection on receivable from sale of stock -- -- --
Exercise of common stock warrants 230 2 (2)
Issuance of common stock warrants -- -- 300
Net loss -- -- --
---------- ---------- -----------
Balance at December 31, 1995 925,152 9,251 38,938,164
Employee stock purchase plan 8,572 86 96,680
Issuance from secondary offering 335,714 3,357 5,260,141
Issuance from private placement 676,896 6,769 11,572,311
Payment of costs of financings -- -- (855,673)
Exercise of stock options 8,009 80 66,001
Unrealized loss on securities for sale -- -- --
Collection on recivable from sale of stock -- -- --
Issuance of common stock warrants -- -- 220
Net loss -- -- --
---------- ---------- -----------
Balance at December 31, 1996 1,954,343 19,543 55,077,844
Employee stock purchase plan 7,634 76 55,124
Exercise of stock options 59 1 409
Issuance from private placement 853,334 8,533 2,791,467
Payment of private placement costs -- -- (131,382)
Conversion of note payable and
common stock to preferred stock (853,334) (8,533) 30,060 $301 214,233
Cancellation of notes receivable -- -- -- -- --
Preferred stock dividends -- -- -- -- 105,210
Maturity of marketable securites -- -- --
Net loss -- -- -- -- --
---------- ------- ------- ---- -----------
Balance at December 31, 1997 1,962,036 $19,620 30,060 $301 $58,112,905
========== ======= ======= ==== ===========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Receivable on Securities Total
From Accumulated Available Treasury Shareholders'
Sale of Stock Deficit For Sale Stock Equity
------------- ------- -------- ----- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $(25,022) $(25,755,153) $(116,356) $12,851,409
Employee stock purchase plan -- -- -- 131,731
Exercise of stock options (23,092) -- -- 35,852
Issuance of stock in payment of bonus -- -- -- 8,500
Unrealized gain on securities for sale -- -- 117,444 117,444
Collection on receivable from sale of stock 6,007 -- -- 6,007
Exercise of common stock warrants -- -- -- --
Issuance of common stock warrants -- -- -- 300
Net loss -- (11,712,287) -- (11,712,287)
----------- ------------ --------- -----------
Balance at December 31, 1995 (42,107) (37,467,440) 1,088 1,438,956
Employee stock purchase plan -- -- -- 96,766
Issuance from secondary offering -- -- -- 5,263,498
Issuance from private placement -- -- -- 11,579,080
Payment of costs of financings -- -- -- (855,673)
Exercise of stock options (50,150) -- -- 15,931
Unrealized loss on securities for sale -- -- (5,926) (5,926)
Collection on recivable from sale of stock 19,015 -- -- 19,015
Issuance of common stock warrants -- -- -- 220
Net loss -- (11,235,760) -- (11,235,760)
----------- ------------ --------- -----------
Balance at December 31, 1996 (73,242) (48,703,200) (4,838) 6,316,107
Employee stock purchase plan -- -- -- 55,200
Exercise of stock options -- -- -- 410
Issuance from private placement -- -- -- 2,800,000
Payment of private placement costs -- -- -- (131,382)
Conversion of note payable and
common stock to preferred stock -- -- -- 206,001
Cancellation of notes receivable 73,242 -- -- $(11,857) 61,385
Preferred stock dividends -- (105,210) -- -- --
Maturity of marketable securites -- -- 4,838 4,838
Net loss -- (9,052,575) -- (9,052,575)
----------- ------------ --------- --------- -----------
Balance at December 31, 1997 -- $(57,860,985) $ -- $(11,857) $259,984
=========== ============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
18
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(9,052,575) $(11,235,760) $(11,712,287)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,057,952 1,234,448 982,637
Non-cash related party revenue (150,000) (150,000) --
Compensation expense associated with cancellation of
notes receivable 112,789 -- --
Gain on sale of equipment (40,895) -- --
Loss on sale/leaseback of equipment -- -- 3,270
Gain on sale of marketable securities -- (1,359) --
Changes in operating assets and liabilities:
Accounts receivable 90,861 (163,868) (8,944)
Prepaid expenses and other current assets 61,126 36,274 8,512
Deposits (114,640) 10,000 --
Other assets (6,627) (18,243) (8,923)
Accounts payable 296,451 (115,199) (689,365)
Accrued compensation 197,751 (71,403) 1,005
Accrued contract research (438,513) 21,160 71,606
Other current liabilities (53,930) (54,210) 79,061
Deferred revenue -- (1,275,000) (1,725,000)
Deferred rent (27,702) 12,390 --
Other noncurrent liabilities (53,125) 150,000 63,893
----------- ----------- ----------
Net cash used in operating activities (8,121,077) (11,620,770) (12,934,535)
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (84,010) (297,888) (533,855)
Proceeds from sale of equipment 40,895 -- --
Proceeds from sale/leaseback of equipment -- -- 116,784
Proceeds from sale of marketable securities -- 2,004,070 5,485,252
Proceeds from maturity of marketable securities 4,006,463 3,000,000 2,000,000
Purchase of marketable securities -- (6,989,032) --
(Increase) decrease in restricted investment 469,000 53,000 (85,000)
----------- ----------- ----------
Net cash provided by (used in) investing activities 4,432,348 (2,229,850) 6,983,181
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 5,282,514 --
Payment of IPO and common stock financing costs -- (855,673) --
Proceeds from exercise of common stock options 410 15,931 41,859
Proceeds from employee stock purchase plan 55,200 96,766 131,731
Proceeds from issuance of warrants -- 220 300
Proceeds from private placement of stock 2,800,000 11,579,080 --
Expenses from private placement securities (131,382) -- --
Payment on note payable -- (115,851) --
Proceeds from note payable 206,001 -- 115,851
Deferred financing charges (54,424) 152,773 (152,773)
Principal payments on capital lease obligations (614,063) (908,432) (1,069,839)
----------- ----------- ----------
Net cash provided by (used in) financing activities 2,261,742 15,247,328 (932,871)
----------- ----------- ----------
Net change in cash and cash equivalents (1,426,987) 1,396,708 (6,884,225)
Cash and cash equivalents at beginning of year 1,962,229 565,521 7,449,746
----------- ----------- ----------
Cash and cash equivalents at end of year $535,242 $1,962,229 $565,521
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid $27,609 $146,772 $222,396
======= ======== ==========
Property and equipment acquired under capital leases -- -- $1,266,772
======= ======== ==========
Unrealized gain (loss) on securities available for sale -- $(5,926) $117,444
======= ======== ==========
Supplemental disclosure of non-cash transactions:
Common stock converted to preferred stock $2,800,000 -- --
========== ============== =============
Note payable converted to preferred stock $206,001 -- --
======== ============== =============
Common stock received in exchange for cancellation of
notes receivable $11,857 -- --
======= ============== =============
Preferred stock dividends $105,210 -- --
======== ============== =============
</TABLE>
Theaccompanying notes are an integral
part of the financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Nature of Business:
Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical
company currently engaged in the development of novel drugs for the
prevention of HIV and other infectious diseases. The Company is also
seeking the acquisition or in-license 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 the Company has generated no revenue from product
sales. The Company has not been profitable since inception and has
incurred an accumulated deficit of $57.9 million through December 31,
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
substantially due to preclinical and clinical testing and development
of marketing, sales and production capabilities.
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 in order to maintain
operations through the next fiscal year, 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 Aries Funds have committed to invest up to $2.0 million in the
Company which will, together with cash on hand at December 31, 1997,
$3.0 of net proceeds from the Company's private placement offering of
common stock units in January and February of 1998, and/or any
additional funds raised from the Company's private placement, fund the
operations of the Company through March of 1999.
Restructuring
In September 1996, the Company implemented a restructuring plan that
resulted in the elimination of 20 positions, mostly from the research
organization. The amount of termination benefits accrued and charged
to restructuring costs in the statement of operations for the year
ended December 31, 1996 was $0.3 million. The amount of termination
benefits paid and charged against the liability for the year ended
December 31, 1996 was $0.3 million.
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 year ended
December 31, 1997 was $0.5 million. The amount of termination benefits
paid and charged against the liability for the year ended December 31,
1997 was $0.2 million.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
In order to focus its limited resources on PRO 2000, in January 1998
the Company terminated work on all other research programs and
underwent a significant downsizing, reducing its staff to 13 people.
In the first quarter of 1998, the Company has accrued $0.2 million for
costs associated with this restructuring.
B. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Cash Equivalents and Marketable Securities
The Company considers all short-term investments purchased with an
original maturity of three months or less at the date of acquisition
to be cash equivalents, all short-term investments with a scheduled
maturity date of less than twelve (12) months at the balance sheet
date are considered to be current marketable securities, and all
investments purchased with a scheduled maturity date greater than
twelve (12) months at the balance sheet date are noncurrent marketable
securities.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Laboratory equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Equipment and furniture under capital lease Estimated useful life or term of
lease, if shorter
Leasehold improvements Estimated useful life or term of
lease, if shorter
</TABLE>
Major additions and improvements are capitalized, while repairs and
maintenance are expensed as incurred. Upon retirement or other
disposition, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in the
determination of net loss.
Research and Development
Research and development costs are expensed as incurred.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Income Taxes
The Company provides for income taxes under the liability method which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is provided for net
deferred tax assets if, based on the weighted available evidence, it
is more likely than not that some or all of the deferred tax assets
will not be realized.
Revenue Recognition
Revenue is recognized under collaborative research and development
agreements as earned based upon the performance requirements of each
agreement. Payments received in advance under these agreements are
recorded as deferred contract revenue until earned.
Financial Instruments
Cash, cash equivalents and marketable securities are financial
instruments which potentially subject the Company to concentrations of
credit risk. The Company invests its excess cash in corporate
obligations rated as A or better by Moody's Investment Rating Service,
U.S. Treasury securities and money market instruments.
New Accounting Standards
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires that changes in comprehensive income
be shown in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 will become
effective for fiscal years beginning in the first quarter of the
fiscal year ended December 31, 1998. The Company does not believe that
the adoption will have a material effect on results from operations.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS
131 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 31, 1998. The
Company does not believe that the adoption will have a material
effect.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per
Share". This statement specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") to simplify the
existing computational guidelines and increase comparability on an
international basis. This statement replaces primary EPS with basic
EPS, the principal difference being the exclusion of common stock
equivalents in the computation of basic EPS. In addition, this
statement requires the dual presentation of basic and diluted EPS on
the face of the statement of operations.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Under SFAS 128, the Company is required to present two EPS amounts,
basic and diluted. Basic EPS is calculated based on income available
to common shareholders and the weighted-average number of shares
outstanding during the reported period. Diluted EPS may include
additional dilution from potential common stock, such as stock
issuable pursuant to the exercise of shareholders options and warrants
outstanding and the conversion of preferred stock.
For the year ended December 31, 1997, the Company had convertible
preferred stock, stock options and stock warrants outstanding that
were anti-dilutive (see Note E). For the years ended December 31, 1996
and 1995, the Company had stock options and stock warrants outstanding
that were anti-dilutive (see Note E). These securities could
potentially dilute basic EPS in the future and were not included in
the computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented. Consequently, there were no
differences between basic and diluted EPS for these periods.
Related Parties
Certain members of the Company's Board of Directors are also retained
as consultants by the Company. Management believes the consulting
agreements have been negotiated at an "arms-length" basis and are
immaterial. Included in other assets is a note receivable from an
officer and shareholder in the amount of $30,000 at December 31, 1996.
Included in shareholders' equity are two notes receivable from the
same officer and shareholder in the amount of $73,242 at December 31,
1996. All three notes bear interest at prime plus 1% and are payable
upon termination. On December 31, 1997, in connection with a severance
agreement with the officer and shareholder, all three notes and the
associated accrued interest, in the amount of $124,646, were canceled
in exchange for 11,857 shares of Common Stock resulting in treasury
stock of $11,857 recorded at cost and $112,789 of compensation expense
which is included in general and administrative expenses for 1997.
In addition, Michael Weiss, who became a member of the Board of
Directors in July 1997, is a Senior Managing Director of Paramount
Capital, Inc. ("Paramount") which may be deemed an affiliate of
Paramount Capital Asset Management, the general partner and investment
manager, respectively of two significant shareholders of the Company
who together own 30,060 shares of the outstanding Preferred Stock of
the Company and warrants currently exercisable for 3,283,132 shares of
Common Stock. Such shareholders have agreed to exchange their
Preferred Stock, including accrued dividends, and warrants upon the
earlier of the completion of the Company's current private placement
offering of $6.0 million or upon the termination of the offering
period, which will be no later than May 11, 1998 (the "Final Closing
Date"), for an estimated 8,146,800 shares of Common Stock and warrants
to purchase an equal number of shares of Common Stock at an exercise
price currently set at $0.50 per share. The number of shares of Common
Stock, the number of shares of Common Stock issuable upon exercise of
the warrants and the per-share exercise price of the warrants are
based on the minimum of $0.50 and 75% of the average closing bid price
of Procept Common Stock for the 5 days and the 30 days immediately
prior to the Final Closing Date. If 75% of either average is less than
$0.50, the number of shares of Common Stock and the number of shares
of Common Stock issuable upon exercise of the warrants will be
adjusted upward and the per-share exercise price of the warrants will
be adjusted downward. Upon the Final Closing Date, the Company will
enter into a Financial Advisory Agreement with Paramount.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996
financial statements to conform with 1997 presentation.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
C. Marketable Securities:
The marketable securities of the Company, consisting of U. S.
Government Agencies have been classified as available for sale.
Realized gains and losses on disposition of securities are determined
on the specific identification method and are reflected in the
statement of operations. Net unrealized gains and losses are recorded
directly in a separate shareholders' equity account, except those
losses that are deemed to be other than temporary, which losses, if
any, are reflected in the statement of operations.
Fair values are estimated based on quoted market prices. Interest is
recognized when earned. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest
income.
The following table presents the amortized cost, fair value and
unrealized gains and losses of the marketable securities for the year
ended December 31, 1996. All marketable securities were held until
January 27, 1997, which was the maturity date.
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------
Amortized Unrealized
Cost Fair Value (Loss)
---- ---------- ------
<S> <C> <C> <C>
Marketable securities, current:
U.S. Government Agencies: $4,006,463 $4,001,625 $(4,838)
--------- --------- ------
$4,006,463 $4,001,625 $(4,838)
========= ========= =======
</TABLE>
The contractual maturities of all securities available
for sale was one month.
D. Property and Equipment:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Laboratory equipment $3,784,184 $3,845,739
Furniture and fixtures 147,123 147,123
Office equipment 570,954 547,476
Leasehold improvements 1,198,542 1,164,570
----------- -----------
5,700,803 5,704,908
Less: accumulated depreciation & amortization (4,811,545) (3,841,708)
----------- -----------
Property and equipment, net $889,258 $1,863,200
=========== ===========
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Depreciation and amortization expense amounted to $1.1 million,
$1.3 million and $1.0 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Included above in property and equipment are the following assets that
were acquired pursuant to capital lease arrangements:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Laboratory equipment $2,480,802 $2,568,918
Furniture and fixtures 119,557 119,557
Office equipment 213,570 213,570
Leasehold improvements 273,008 273,008
----------- -----------
3,086,937 3,175,053
Less: accumulated amortization (2,265,522) (1,759,347)
----------- -----------
$821,415 $1,415,706
=========== ===========
</TABLE>
E. Shareholders' Equity:
Common and Preferred Stock
On September 29, 1997, Procept's shareholders 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.
Shareholders' 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 option and 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 853,334 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 upon Procept shareholder approval
of such preferred stock. In addition to the Common Shares, the Aries
Funds received Class A and Class B warrants to purchase 1,477,834
shares of Common Stock. These warrants contained reset and conversion
features tied to the performance of the Company's Common 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.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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"). Upon the
establishment of this Series A Preferred, the purchasers of the
securities issued in the June 1997 direct investment exercised the
right to convert their Common Stock to shares of Series A Preferred.
On August 22, 1997, the Aries Funds converted their Common Stock
holdings of 853,334 shares into 28,000 shares of Series A Preferred.
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.
The Series A Preferred was initially convertible into Common Stock at
a conversion price equal to the price paid by the purchasers for the
Common Shares. As of December 31, 1997, the conversion price of the
Series A Preferred was $1.09, but remains subject to further
conversion rate adjustments based on future events. At December 31,
1997, the Series A Preferred was convertible into 2,747,484 shares of
Common Stock. Other significant features of the Series A Preferred
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, (iii) the right to vote the Series A
Preferred shares 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 the Class A and Class B warrants
issued in the June 1997 private placement were exchanged for 3,283,132
new warrants at an exercise price of $1.09 per share. 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.
As a part of a unit offering, the Company sold an aggregate of
6,845,000 shares of Common Stock in January and February of 1998
together with five-year warrants to purchase 6,845,000 shares of
Common Stock at an exercise price of $0.50 (the "1998 Offering").
These securities were sold for gross proceeds of $3.4 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 the market price (i) for the 5-day and
30-day periods immediately prior to the Final Closing Date and (ii) on
the first anniversary of the final closing date of the 1998 Offering,
(y) to protect them against future dilutive sales of securities and
(z) as a dividend substitute beginning 18 months after the final
closing date of the 1998 Offering. The purchasers also may put the
purchased shares back to the Company at 140% of the original purchase
price in the event of a liquidation or merger. These contractual
rights will terminate after the first anniversary of the final closing
if the Common Stock trades at three times the original purchase price
per share.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
On May 17, 1996, the Company completed a self-managed private
placement of units. Each Unit consisted of one share of the Company's
Common Stock and one callable warrant to purchase one share of the
Company's Common Stock. The Warrants are subject to redemption by the
Company upon 30 days prior notice to the holders of the Warrants
beginning May 17, 1998 at a price of $0.01 per Warrant Share in the
event that the average closing price of the Company's Common Stock for
any 20 consecutive trading day period exceeds $26.25. The initial
exercise price of the Warrants per share of common stock is $17.50.
The Company received proceeds of $11.6 million for the issuance of
676,896 Units. The Company incurred additional costs in the amount of
$0.6 million related to this financing which were charged to
additional paid-in capital in 1996.
On February 8, 1996 the Company closed on a second public offering.
The Company received proceeds of $4.9 million (net of underwriting
discount and underwriter's offering expenses) for the issuance of
314,286 shares of Common Stock. On March 27, 1996, the associated over
allotment option was partially exercised and the Company issued and
sold an additional 21,429 shares of the Company's Common Stock
resulting in net proceeds to the Company of $0.3 million. The Company
incurred costs in the amount of $0.2 million related to this financing
at December 31, 1995. The deferred financing costs were charged to
additional paid-in capital in 1996.
On February 17, 1994, the Company closed its initial public offering.
The Company received proceeds of $18.6 million (net of underwriting
discount and underwriter's offering expenses) for the issuance of
345,000 shares of common stock. In addition, all of the then
outstanding shares of redeemable convertible preferred stock (the
"Preferred Stock") converted automatically into 496,768 shares of
common stock.
Each holder of common stock is entitled to one vote for each share of
common stock held. Each share of common stock issued and outstanding
is identical in all respects to each other share. The Company has
reserved at December 31, 1997, and kept available out of the
authorized but unissued shares of common stock, 5,513,255 shares for
issuance upon the exercise of outstanding options and warrants.
1989 Stock Plan
Under the Company's 1989 Stock Plan (the "Plan") adopted by the Board
of Directors during 1989, and subsequently amended and restated, the
Company is permitted to sell or award common stock or to grant stock
options for the purchase of common stock to employees, officers and
consultants up to a maximum of 162,445 shares. In March 1996, the
Board of Directors approved an amendment to the Plan to increase the
number of shares covered by the Plan by 35,714 which amendment was
approved by the shareholders at the 1996 Annual Meeting of
Shareholders. In March 1997, the Board of Directors approved an
amendment to the Plan to increase the number of shares covered by the
Plan by 71,429 shares to 269,588 shares, which amendment was approved
by the shareholders at the 1997 Annual Meeting of Shareholders. In
October 1997, the Board of Directors approved an amendment to the Plan
to increase the number of shares covered by the Plan to 1,500,000
shares. This amendment is subject to shareholder approval at the 1998
Annual Meeting of Shareholders. At December 31, 1997, there were
155,160 shares available for future grant.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Plan provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. In the case of ISOs, the exercise
price shall not be less than 100% (110% in certain cases) of the fair
market value per share of the common stock, on the date of grant. In
the case of nonqualified options, the exercise price shall be not less
than the lesser of (a) book value per share of common stock as of the
fiscal year of the Company immediately preceding the date of such
grant, or (b) 50% of the fair market value of the common stock on the
date of grant. All stock options under the Plan have been granted at
exercise prices at least equal to the fair market value of the common
stock.
The options either become exercisable immediately on the date of grant
or shall become exercisable in such installments as the Compensation
Committee may specify, generally over a 4 year period. Each option
shall expire on the date specified by the Compensation Committee, but
not more than ten years and one day from the date of grant in the case
of nonqualified options, and generally ten years from the date of
grant in the case of ISOs (five years in certain cases).
Director Stock Option Plan
In June 1994, the shareholders of the Company adopted the 1994
Director Stock Option Plan (the "Director Plan"). The Director Plan
was established to attract and retain highly qualified, non-employee
directors. The price per share for each option granted under this plan
shall be the current fair market value at date of grant. The options
vest over a period of three years and have a term of ten years. As
originally adopted, the aggregate number of shares of the Company's
common stock which may be optioned under this plan is 21,429 shares.
In March 1997, the Board of Directors approved an amendment to the
Director Plan to increase the number of shares covered by the Director
Plan by 21,428 shares, which amendment was approved by the
shareholders at the 1997 Annual Meeting of Shareholders; currently,
the aggregate number of shares that may be subject to grants under the
Director Plan is 42,857 shares.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", ("SFAS 123") issued in 1995, defined a fair value
method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at grant
date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company
elected to continue to apply the accounting provisions of APB Option
No. 25 for stock options. The required disclosures under SFAS 123 as
if the Company had applied the new method of accounting are made
below.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Activity under all stock plans related to all the ISOs and
nonqualified stock options for the three years ended December 31, 1997
is listed below.
<TABLE>
<CAPTION>
ISO Nonqualified Weighted Avg.
Shares Shares Option Price Exercise Price
------- ------ ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 81,033 39,926 $7.00-$89.25 $33.39
Granted 22,929 14,523 $14.91-$57.75 $22.47
Exercised (3,579) (2,496) $7.00-$37.45 $9.73
Canceled (9,650) (429) $7.00-$73.50 $40.88
------- -----
Outstanding at December 31, 1995 90,733 51,524 $7.00-$89.25 $31.01
Granted 66,693 7,401 $8.75-$22.75 $10.71
Exercised (7,294) (714) $7.00-$18.76 $8.26
Canceled (29,668) (34,052) $7.00-$89.25 $26.18
-------- --------
Outstanding at December 31, 1996 120,464 24,159 $7.00-$89.25 $24.43
Granted 1,109,426 132,142 $1.00-9.63 $2.27
Exercised (59) -- $7.00 $7.00
Canceled (40,380) (912) $7.02-$89.25 $25.07
-------- -----
Outstanding at December 31, 1997 1,189,451 155,389 $1.00-$89.25 $3.95
========= =======
</TABLE>
Summarized information about stock options outstanding at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Exercisable
Weighted Avg. ----------------------------
Range of No. of Options Remaining Weighted Avg. Number of Weighted Avg.
Exercise Prices Outstanding Contract. Life Exercise Price Options Exercise Price
--------------- -------------- -------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
$1.00-$1.88 22,715 9.91 $1.66 0 $--
$2.19 1,198,000 9.75 $2.19 162,928 $2.19
$3.28-$9.63 71,891 7.46 $7.68 32,304 $7.68
$14.88-$18.73 19,814 7.30 $16.91 12,732 $17.18
$20.13-$39.20 7,440 6.08 $30.77 6,842 $31.39
$40.25-$89.25 24,980 6.24 $60.84 20,571 $60.54
</TABLE>
Options for the purchase of 235,378 shares, 59,251 shares and 81,771
shares are exercisable at December 31, 1997, 1996 and 1995,
respectively. The total exercise proceeds for all options outstanding
at December 31, 1997 is approximately $5.3 million.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 75% 75% 75%
Risk free interest rate 6.00% 6.25% 6.96%
Expected life of option 5.0 5.0 5.0
</TABLE>
All options granted in 1997, 1996 and 1995 were granted at fair value.
The weighted average fair value of options granted was $1.59, $7.07 and
$14.84 for 1997, 1996 and 1995, respectively.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards made in
1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been increased to the
pro forma amounts shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(9,052,575) $(11,235,760) $(11,712,287)
Net loss - pro forma $(9,368,531) $(11,455,536) $(11,950,312)
Basic and diluted net loss per
common share - as reported $(4.40) $(6.82) $(12.77)
Basic and diluted net loss per
common share - pro forma $(4.55) $(6.95) $(13.02)
</TABLE>
The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts.
1994 Employee Stock Purchase Plan
In April 1994, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (the "1994 Plan"). Under the 1994 Plan, eligible
employees of the Company may purchase shares of Common Stock, through
payroll deductions, at the lower of 85% of fair market value of the
stock at the time of grant or 85% of fair market value at the time of
exercise. As originally adopted, a total of 35,714 shares were reserved
for issuance under the 1994 Plan. In March 1997, the Board of Directors
approved an amendment to the 1994 Plan to increase the number of shares
covered by the 1994 Plan by 35,714 shares, which amendment was approved
by the shareholders at the 1997 Annual Meeting of Shareholders;
currently, the aggregate number of shares that may be purchased under
the 1994 plan is 71,428 shares. Shares are granted twice yearly, on
February 28 and August 31, and are exercisable upon issuance. The
Company issued 7,634 shares, 8,572 shares and 10,418 shares in 1997,
1996 and 1995, respectively. The weighted average fair values of grants
at fair value under the 1994 Plan during 1997, 1996 and 1995 were
$1.41, $7.00 and $8.40, respectively.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Common Stock Warrants
On December 16, 1992, the Company issued warrants, which expired on
December 16, 1997, to purchase an aggregate of 593 shares of common
stock at an initial exercise price of $42.14 in connection with a
bridge loan to the Company in the amount of $0.3 million, which was
subsequently repaid with interest thereon. In January 1993, the Company
issued warrants, which expire on December 14, 1998, to purchase
11,476 shares of the Company's common stock to an underwriter at an
initial exercise price of $50.61 per share, in connection with the
private placement of the Class F Preferred Stock.
On February 10, 1994, in connection with the closing of the initial
public offering the Company's underwriter purchased for $210.00
warrants to purchase 30,000 shares of the Company's common stock at an
exercise price of $83.30 per share. The warrants expire on February 10,
1999.
On April 1, 1994, in connection with the Company's $2 million master
lease agreement, the Company issued common stock warrants for a
purchase price of $350.00 to purchase 5,000 shares of common stock at a
price of $59.50 at any time on or after April 1, 1995 and on or before
April 1, 1999.
On September 11, 1995, the Company issued common stock warrants for a
purchase price of $300.00 to purchase 4,251 shares of the Company's
common stock to Oppenheimer & Co., Inc. at an exercise price of $49.00
per share, in connection with the engagement of Oppenheimer & Co., Inc.
to provide investment banking services to the Company. These warrants
are exercisable beginning September 11, 1996 and expire September 10,
2000.
On February 14, 1996, the Company issued common stock warrants for a
purchase price of $220.00 to purchase up to 31,428 shares of the
Company's common stock to Commonwealth Associates at an exercise price
of $21.91 per share in connection with a public financing. These
warrants are exercisable beginning February 14, 1997 and expire on
February 13, 2001.
On May 17,1996, the Company issued a common stock warrant to purchase
112,832 shares of the Company's common stock at an exercise price of
$17.50 per share to David Blech in connection with financial advisory
services to the Company. This warrant is exercisable beginning May 17,
1996 and expires on May 17, 2001.
On January 6, 1997, the Company issued a common stock warrant to
purchase 10,714 shares of the Company's common stock to Furman Selz LLC
at an exercise price of $10.50 per share in connection with financial
advisory services to the Company. This warrant is exercisable beginning
January 6, 1997 and expires on January 6, 2002.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
In August 1991 and September 1992, the Company issued warrants to
purchase up to 4,320 and 2,857 shares, respectively, of the Company's
Class D Preferred Stock (the "Class D Warrants") at a minimum exercise
price of $17.50 per share, in connection with leasing arrangements. The
Class D Warrants were automatically converted into warrants to purchase
2,681 shares of common stock at an exercise price of $46.83 per share
upon the closing of the Company's initial public offering on February 17,
1994. The warrants expire on February 10, 1999.
In connection with promissory notes issued in September 1992, the Company
granted warrants to acquire an aggregate of 12,698 shares of Class F
Preferred Stock at an exercise price of $15.75 per share. Upon conversion
of all Class F Preferred Stock effected by the initial public offering,
the warrants converted into warrants to purchase 4,745 shares of common
stock at an exercise price of $42.14 per share. In the year ended
December 31, 1995, 1,387 of these warrants were exercised. The remaining
warrants expired on September 15, 1997.
At December 31, 1997 there were 4,168,411 warrants outstanding, all of
which are exercisable.
F. Collaborative Research and Development Agreements:
In September 1993, the Company signed a Research and Development
Agreement with Sandoz Pharma Ltd. (the "Sandoz Agreement") to identify
and develop compounds which bind to CD4 or CD2, or their respective
ligands, and interfere with their interaction, as therapeutic agents for
immune suppression. Effective as of September 1, 1995, the Company's
sponsored research agreement with Sandoz Pharma Ltd. was amended to
focus the research program on compounds targeting CD4 and its ligand and
to limit the research program with respect to compounds that bind to CD2
and its ligand to certain screening activities being conducted by Sandoz
through the end of 1995. In connection with this amendment, the research
and license fees due for the third year of the research program were
reduced from $5 million to $2.2 million. Of the $2.2 million received,
$0.9 million was recorded as revenue in 1995 and $1.3 million as
deferred revenue at December 31, 1995 and was subsequently recorded as
revenue in 1996. Under the terms of the Sandoz Agreement, the Company
has received $14.2 million in initial license fees and research funding
to date. Procept remains eligible to receive $12 million in milestone
payments as compounds discovered in these research programs progress
through clinical development.
In 1994, the Company received $8.0 million and recorded as revenue $5.0
million for research performed by the Company under the Sandoz
agreement. The $3.0 million was advance payment for research to be
performed in fiscal year 1995 and is recorded as revenue in 1995.
In January 1996, Procept entered into a Sponsored Research Agreement
with VacTex, Inc. ("VacTex"), 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.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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. The Sponsored Research
Agreement also includes a provision requiring Procept to issue to VacTex
or its shareholders warrants to purchase an aggregate of 14,286 shares
of Procept Common Stock at an exercise price of $24.50 per share.
In the year ended December 31, 1997, the Company recorded revenue of
$0.5 million which consisted of $0.4 million in cash and 150,000 shares
of VacTex common stock. In the year ended December 31, 1996, the Company
recorded revenue of $0.6 million which consisted of $0.4 million in cash
and 150,000 shares of VacTex common stock. At December 31, 1997, the
Company had an accounts receivable of $21,000, which was subsequently
paid in January 1998, and an investment in VacTex of $0.3 million.
In order to apply available resources to the PRO 2000 development
program, the Company did not seek to renew the Sponsored Research
Agreement with VacTex, which expired on January 8, 1998.
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 $0.1 million
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.
G. Income Taxes:
No federal or state income taxes have been provided for as the Company
has incurred losses since its inception. At December 31, 1997, the
Company had Federal and State tax net operating loss ("NOL")
carryforwards of approximately $57.3 million and $50.7 million which
will expire beginning in the year 2000 through 2012 for Federal and
beginning in the year 1998 through 2002 for State, respectively.
Additionally, the Company had Federal and State research and
experimentation credit carryforwards of approximately, $1.6 million and
$1.0 million, respectively, both of which will expire in the year 2012.
The Internal Revenue Code of 1986 (the "Code") contains provisions which
limit the net operating loss carryforwards and tax credits available to
be used in any given year upon the occurrence of certain events,
including significant changes in ownership interests. In conjunction
with the initial public offering, such a change in ownership as defined
in the Code occurred. Accordingly, certain available NOL carryforwards
and tax credits are subject to these limitations.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The components of Procept's net deferred tax assets were as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards $22,665,000 $19,021,000
Tax credit carryforwards 2,660,000 1,947,000
Depreciation 1,263,000 1,057,000
Vacation and benefits 4,000 22,000
Capital leases and other (1,257,000) (957,000)
Valuation allowance (25,335,000) (21,090,000)
----------- -----------
Total net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence bearing upon
the realizability of its deferred tax assets which are comprised
principally of net operating loss and tax credit carryforwards.
Management has considered the Company's history of losses and concluded,
in accordance with the applicable accounting standards, that it is more
likely than not that the Company will not recognize the benefit of the
net deferred tax assets. Accordingly, the deferred tax assets have been
fully reserved. Management re-evaluates the positive and negative
evidence on an annual basis.
H. Savings and Retirement Plan:
On July 1, 1990, the Company established the Procept, Inc. Savings and
Retirement Plan (the "401(k) Plan"), a profit-sharing plan under Section
401 of the Code. Employees are eligible to participate in the 401(k)
Plan by meeting certain requirements, including length of service and
minimum age. The Company may contribute to the 401(k) Plan, without
regard to current or accumulated net profits, in an amount not to exceed
the maximum allowable under applicable provisions of the Code. The
amount is to be allocated to active participants based on their annual
pay as a percentage of the total annual pay of all such participants.
Participants may also contribute to the 401(k) Plan, but no more than
the maximum permissible amount allowed by regulatory definitions. For
the years ended December 31, 1997, 1996 and 1995, the Company did not
contribute to the 401(k) Plan.
I. Commitment and Contingencies:
Operating Leases
On February 28, 1989, the Company entered into an operating lease
arrangement for its facility. The Company has made several amendments
to its operating lease arrangement for its facility to include
additional leased space and extension of the lease terms. The
commitment under the operating lease requires the Company to pay
monthly base rent and an allocable percentage of operating costs and
property taxes.
The monthly base rent is subject to increases during the course of
the lease term which are unrelated to increases in utilized space.
Accordingly, the Company is providing for rent expense based on an
amortization of the lease payments on a straight-line basis over the
life of the lease arrangement.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Pursuant to the aforementioned leasing arrangements, at December 31,
1997 and 1996, the Company has recorded noncurrent liabilities of
$0.3 million and $0.3 million, respectively, for rent expense in
excess of cash expenditures for leased facilities.
Gross rent expense for leased facilities and equipment amounted to
approximately $1.8 million, $1.6 million and $1.7 million, for the
years ended December 31, 1997, 1996 and 1995, respectively. The
approximate future minimum annual rental payments for leased
facilities for the next five years under the lease arrangements
consist of the following at December 31,1997:
1998 $1,392,000
1999 $1,435,000
2000 $706,000
Pursuant to the facility lease agreement, the Company had provided an
open letter of credit for the term of its leases in the amount of
$0.4 million which would provide for payment to the lessor of its
main facility in the event of default by the Company. The Company
held a certificate of deposit, which was classified as a restricted
investment (see also Note J), solely for the purpose of
collateralizing this letter of credit in the amount of $0.4 million.
During September 1997, in substitution of the letter of credit and
restricted investment arrangement, the Company increased its rent
deposit with the lessor to $0.2 million.
Capital Leases
In 1992, the Company entered into a leasing agreement which allowed
the Company to lease up to $1.0 million of capital equipment at
implicit interest rates ranging from approximately 11% to 13% for a
42 month term.
In 1994, the Company entered into a $2 million master lease agreement
for the lease and sale/leaseback of certain equipment and leasehold
improvements. The implicit interest rates for the leases under this
agreement range from approximately 5.5% to 7% for a 36 month term.
During fiscal year 1994, the Company purchased and leased $0.7
million of laboratory equipment, office equipment and furniture and
fixtures pursuant to this leasing arrangement. During fiscal year
1995, the Company purchased and leased $1.3 million of laboratory
equipment, office equipment and leasehold improvements pursuant to
this leasing arrangement. These equipment leasing agreements have
been fully utilized at December 31, 1996.
Future minimum lease payments with initial or remaining terms of one
year or more consist of the following at December 31, 1997:
1998 $20,519
Less: amount representing interest (288)
-------
Present value of future minimum lease payments $20,231
=======
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Contract Research
In February 1987, the Company entered into a Research and Licensing
Agreement with Dana-Farber, a Massachusetts not-for-profit
corporation. As part of the Agreement, the Company had agreed to fund
certain research and development projects conducted by Dana-Farber in
relation to the development and eventual commercialization of
products related to T cell activation in exchange for exclusive
rights to technologies developed. The Research and Licensing
Agreement expired on March 31, 1997, as the Company chose not to
extend funding.
The amount of contract research costs under the Agreement incurred by
the Company and included in research and development expense amounted
to $0.2 million, $0.8 million and $0.8 million in 1997, 1996 and
1995, respectively. The Company has accrued $0 and $0.4 million at
December 31, 1997 and 1996, respectively, payable to Dana-Farber
under this Agreement.
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 $375,000, 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. Discovery
has commenced in this action. The Company believes that
Commonwealth's claims are without factual or legal merit. The Company
does not 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.
J. Note Payable:
On February 15, 1995, the Company signed a term note with
Bristol-Myers Squibb Company in the amount of $0.1 million. The term
note provided for scheduled payments of $38,617 on April 1, July 1,
and October 1, 1996. The interest rate for the note was 8.0%. Upon
the occurrence of certain financing events, the entire balance of the
note, including all accrued and unpaid interest, became due and
payable. This Note was repaid in full in 1996 upon the closing of the
secondary offering.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Line of Credit:
The Company maintained a $0.1 million line of credit through the use
of corporate credit cards. This line of credit was collateralized
with a certificate of deposit of $0.1 million and was classified as a
restricted investment on the balance sheet. The certificate of
deposit was recorded at cost, which approximated market. Interest
earned on the certificate of deposit was not restricted; accordingly,
any accrued interest was considered a cash equivalent. See also Note
B. In September 1997, the Company reduced its line of credit to
$35,000 and was no longer required to maintain the line of credit and
certificate of deposit.
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning disclosure pursuant to Item 405 of Regulation S-K is
included under the caption "Compliance with Section 16(a) of the Securities
Exchange Act" in the Proxy Statement and is incorporated herein by reference.
The current Executive Officers and Directors of the Company are as follows:
John F. Dee 40 President; Chief Executive Officer; Director
Michael S. Weiss 32 Director, Chairman of the Board
Zola P. Horovitz, Ph.D. 63 Director
Max Link, Ph.D. 57 Director
Ellis L. Reinherz, M.D. 47 Director
Mark C. Rogers, M.D. 55 Director
Elliott H. Vernon 54 Director
JOHN F. DEE has served as President, Chief Executive Officer and a member of the
Board of Directors of Procept since joining the Company in February 1998. From
April 1997 to October 1997, Mr. Dee was Interim Chief Executive Officer of Genta
Incorporated. From 1994 to 1997 and 1988 to 1992, Mr. Dee was a Senior
Management Consultant with McKinsey & Company, Inc. and from 1992 to 1994 served
as Chief Operating Officer, Chief Financial Officer, and Director of Walden
Laboratories, Inc. (now AVAX Technologies, Inc.). Mr. Dee holds an M.S. in
Chemical Engineering from Stanford University and an M.B.A. from Harvard
University.
MICHAEL S. WEISS has been a director of the Company, and the Chairman of its
Board of Directors, since July 8, 1997. Mr. Weiss is presently a Senior Managing
Director of Paramount Capital, Inc. Prior to joining Paramount, Mr. Weiss was an
attorney with Cravath, Swaine & Moore. Mr. Weiss is currently Vice-Chairman of
the Board of Directors of Genta Incorporated, a director of Pacific
Pharmaceuticals, Inc., AVAX Technologies, Inc. and Palatin Technologies, Inc.,
and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a
publicly traded biopharmaceutical company. Additionally, Mr. Weiss is currently
a member of the boards of directors of several privately held biopharmaceutical
companies. Mr. Weiss received his J.D. from Columbia University School of Law
and a B.S. in Finance from the State University of New York at Albany. Mr. Weiss
devotes only a portion of his time to the business of the Company.
ZOLA P. HOROVITZ, Ph.D. has been a director of the Company since 1992. Dr.
Horovitz, currently a consultant to pharmaceutical companies, served as Vice
President - Business Development and Planning at Bristol-Myers Squibb
Pharmaceutical Group, from August 1991 to April 1994, and as Vice President -
Licensing, from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President - Research Planning. He is also a director of seven other
biotechnology and pharmaceutical companies: Avigen, Inc., BioCryst, Inc.,
Clinicor, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Roberts
Pharmaceutical Corporation and Synaptic Pharmaceuticals, Inc. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.
38
<PAGE>
MAX LINK, Ph.D. has been a director of the Company since 1995. Dr. Link has held
a number of executive positions with pharmaceutical and healthcare companies.
Most recently, he served as Chief Executive Officer of Corange Limited, from May
1993 until June 1994. Prior to joining Corange, Dr. Link served in a number of
positions with Sandoz Pharma Ltd., including Chief Executive Officer, from 1987
until April 1992, and Chairman, from April 1992 until May 1993. Dr. Link
currently serves on the board of directors of six publicly traded life science
companies: Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Cell
Therapeutics, Inc., CytRx Corporation, Human Genome Sciences, Inc. and Protein
Design Labs, Inc. Dr. Link received his Ph.D. in Economics from the University
of St. Gallen in 1970.
ELLIS L. REINHERZ, M.D. has been a director of the Company since 1985. Dr.
Reinherz is a founder of Procept and has served as Chairman of its Scientific
Advisory Board since October 1985. Since 1984, he has served as Chief,
Laboratory of Immunobiology at the Dana-Faber Cancer Institute and as Professor
of Medicine at Harvard Medical School. He received his M.D. from Harvard Medical
School in 1975. Dr. Reinherz serves on the editorial and review boards of key
medical and scientific publications in hematology and immunology.
MARK C. ROGERS, M.D. has been a director of the Company since December 1997. Dr.
Rogers has been Senior Vice President, Corporate Development and Chief
Technology Officer at The Perkin-Elmer Corporation since joining Perkin-Elmer in
1996. From 1992 to 1996, Dr. Rogers was the Vice Chancellor for Health Affairs
at Duke University Medical Center, and Executive Director and Chief Executive
Officer of Duke University Hospital and Health Network. Prior to his employment
at Duke, Dr. Rogers was on the faculty of Johns Hopkins University for 15 years
where he served as a Distinguished Faculty Professor and Chairman of the
Department of Anesthesiology and Critical Care Medicine, Associate Dean for
Clinical Affairs, Director of the Pediatric Intensive Care Unit and Professor of
Pediatrics. Dr. Rogers currently serves on the board of directors of three
publicly traded companies: Discovery Laboratories, Inc., Galileo Corporation and
HCIA, Inc. Dr. Rogers received his M.D. from Upstate Medical Center, State
University of New York and has his M.B.A. from The Wharton School of Business.
He received his B.A. from Columbia University and held a Fulbright Scholarship.
ELLIOTT H. VERNON has been a director of the Company since December 1997. Mr.
Vernon has been the Chairman of the Board, President and Chief Executive Officer
of Healthcare Imaging Services, Inc., a publicly held operator of fixed-site
magnetic resonance imaging centers in the northeast, since its inception in
1991. For the past ten years, Mr. Vernon has also been the managing partner of
MR General Associates, a New Jersey general partnership which is the general
partner of DMR Associates, L.P., a Delaware limited partnership. Mr. Vernon was
also one of the founders of Transworld Nurses, Inc., the predecessor of
Transworld HealthCare, Inc., a publicly held regional supplier of a broad range
of alternate site healthcare services and products. Mr. Vernon is also a
principal of Healthcare Financial Corp., LLC, a healthcare financial consulting
company engaged primarily in FDA matters. From January 1990 to December 1994,
Mr. Vernon was a director, Executive Vice President and General Counsel of Aegis
Holdings Corporation, an international provider of financial services through
its investment management and capital markets consulting subsidiaries. Mr.
Vernon is currently a director of Pacific Pharmaceuticals, Inc., a publicly held
medical products company.
The term of office of each officer extends until the meeting of the Board of
Directors following the next annual meeting of Shareholders and until his
successor is elected and qualified or until his earlier resignation or removal.
39
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included under the captions "Compensation
Committee Interlocks and Insider Participation," and "Executive Compensation" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included under the caption "Share
Ownership" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The financial statements are listed under Part II, Item 8 of
this Report.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. EXHIBITS.
The exhibits are listed under Part IV, Item 14(c) of this
Report.
(b) REPORTS ON FORM 8-K.
Current Report dated December 10, 1997 filed with the
Securities and Exchange Commission on December 12, 1997
relating to the Company's private placement of common stock
units.
(c) EXHIBITS.
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of
Incorporation of the Company, as amended and
restated by Certificate of Amendment dated
July 15, 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.
3.2 By-laws of the Company. Filed as Exhibit
3.2 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein
by reference.
4.1 Specimen Stock Certificate for Common Stock
$.01 par value. Filed as Exhibit 4.1 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
4.2 Warrant Agreement to Purchase Class D
Convertible Preferred Stock dated August 1,
1991, issued to Comdisco, Inc. Filed as
Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
4.3 Warrant Agreement to Purchase Class D
Convertible Preferred Stock dated September
11, 1992, issued to Comdisco, Inc. Filed as
Exhibit 4.3 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
41
<PAGE>
4.4 Unit Purchase Warrant Agreement dated May
17, 1996, issued to David Blech. Filed as
Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997, Commission
File No. 0-21134, and incorporated herein by
reference.
4.5 [Reserved.]
4.6 Warrant to Purchase Common Stock dated
January 5, 1993, issued to Tucker Anthony
Incorporated. Filed as Exhibit 4.6 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
4.7 Warrant to Purchase Common Stock dated as of
February 17, 1994, issued to D. Blech &
Company, Incorporated. Filed as Exhibit 4.6
to the Company's Form 10-K for the year
ended December 31, 1994, Commission File No.
0-21134, and incorporated herein by
reference.
4.8 Warrant Agreement dated February 17, 1994
between the Company and D. Blech & Company,
Incorporated. Filed as Exhibit 4.7 to the
Company's Form 10-K for the year ended
December 31, 1994, Commission File No.
0-21134, and incorporated herein by
reference.
4.9 Warrant to Purchase Common Stock dated as of
April 1, 1994, issued to Hambrecht & Quist
Guaranty Finance, L.P. Filed as Exhibit 4 to
the Company's Form 10-Q for the quarter
ended March 31, 1994, Commission File No.
0-21134, and incorporated herein by
reference.
4.10 Warrant to Purchase Common Stock dated as of
September 11, 1995, issued to Oppenheimer &
Co., Inc. Filed as Exhibit 4.10 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-96798, and
incorporated herein by reference.
4.11 Form of Warrant Agreement between the
Company and Commonwealth Associates. Filed
as Exhibit 4.11 to the Company's
Registration Statement on Form S-1,
Commission File No. 33-96798, and
incorporated herein by reference.
4.12 Form of Warrant to Purchase Common Stock
dated May 17, 1996 and schedule of holders.
Filed as Exhibit 4.12 to the Company's Form
10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and
incorporated herein by reference.
4.13 Warrant to Purchase Common Stock issued to
Furman Selz LLC dated January 6, 1997. Filed
as Exhibit 4.13 to the Company's Form 10-K
for the year ended December 31, 1996,
Commission File No. 0-21134, and
incorporated herein by reference.
42
<PAGE>
4.14 "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.
4.15 "New Warrant" dated September 30, 1997
issued to Aries Domestic Fund, L.P. 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 Master Lease Agreement (equipment) dated as
of August 1, 1991 between the Company and
Comdisco, Inc. Filed as Exhibit 10.1 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.2 Master Lease Agreement (equipment) dated as
of September 11, 1992 between the Company
and Comdisco, Inc. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.3 Master Lease Agreement (equipment) dated as
of April 1, 1994 between the Company and
Hambrecht & Quist Guaranty Finance L.P.
Filed as Exhibit 10.3 to the Company's Form
10-Q for the quarter ended March 31, 1995,
Commission File No. 0-21134, and
incorporated herein by reference.
10.4 The 1989 Stock Plan, as amended. Filed as
Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997, Commission
File No. 0-21134, and incorporated herein by
reference.
10.5 The 1994 Employee Stock Purchase Plan, as
amended. Filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134,
and incorporated herein by reference.
10.6 The 1994 Director Stock Option Plan, as
amended. Filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134,
and incorporated herein by reference.
10.7 Registration Rights Agreement dated as of
January 5, 1993 among the Company and
certain of its security holders named
therein. Filed as Exhibit 10.4 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-51788, and
incorporated herein by reference.
10.8 Amendment No. 1 to Registration Rights
Agreement dated as of March 2, 1994 among
the Company and certain of its security
holders named therein. Filed as Exhibit 10.3
to the Company's Form 10-K for the year
ended December 31, 1994, Commission File No.
0-21134, and incorporated herein by
reference.
43
<PAGE>
10.9 Amendment No. 2 to Registration Rights
Agreement dated as of September 11, 1995
between the Company and Oppenheimer & Co.,
Inc. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1,
Commission File No. 33-96798, and
incorporated herein by reference.
10.10 Lease for 840 Memorial Drive dated February
28, 1989 between the Company and Robert
Epstein et al., Trustee of the 840 Memorial
Drive Trust, as amended February 28, 1989
and April 4, 1989. Filed as Exhibit 10.7 to
the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.11 Lease for 840 Memorial Drive dated August
21, 1990 between the Company and Robert
Epstein et al., Trustee of 840 Memorial
Drive Trust. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.12 Lease for 840 Memorial Drive dated February
10, 1992 between the Company and Robert
Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.9 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.13 Lease for 840 Memorial Drive dated September
8, 1992 between the Company and Robert
Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.14 Lease for 840 Memorial Drive dated April 27,
1994 between the Company and Robert Epstein
et al., Trustee of the 840 Memorial Drive
Trust. Filed as Exhibit 10 to the Company's
Form 10-Q for the quarter ended March 31,
1994, Commission File No. 0-21134, and
incorporated herein by reference.
+10.15 Amended and Restated Research and Licensing
Agreement dated as of February 19, 1987
between the Company and the Dana-Farber
Cancer Institute, as amended by Letter
Agreements between the Company and
Dana-Farber Cancer Institute dated as of
October 17, 1987, October 20, 1987, January
20, 1988, March 1, 1988, March 22, 1989,
March 27, 1989, March 5, 1990, May 3, 1993,
May 4, 1993, May 10, 1993 and May 12, 1993
(as amended, the "DFCI Agreement"). Filed as
Exhibit 10.11 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
+10.16 Letter Agreements between the Company and
Dana-Farber Cancer Institute dated April 29,
1994 and May 6, 1994, amending the DFCI
Agreement. Filed as Exhibit 10.16 to the
Company's Form 10-K for the year ended
December 31, 1994, Commission File No.
0-21134, and incorporated herein by
reference.
44
<PAGE>
+10.17 Collaboration Agreement dated as of January
1, 1992 between the Company and the
Molecular Modeling and Design Unit of the
University of California, San Francisco.
Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1,
Commission File No. 33-57188, and
incorporated herein by reference.
10.18 Confidential Screening Agreement dated as of
July 24, 1992 between the Company and the
Division of Acquired Immunodeficiency
Syndrome (AIDS), National Institute of
Allergy and Infectious Diseases. Filed as
Exhibit 10.14 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
10.19 Extension of Consulting Agreement dated
August 9, 1990 between the Company and Dr.
Ellis L. Reinherz. Filed as Exhibit 10.17 to
the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.20 Non-Competition Agreement dated as of August
21, 1990 between the Company and Stanley C.
Erck. Filed as Exhibit 10.18 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.21 Non-Competition Agreement dated as of
January 11, 1992 between the Company and
James C. Jenson. Filed as Exhibit 10.19 to
the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.22 Key Employee Confidentiality, Inventions,
and Non-Competition Agreement dated January
13, 1993 between the Company and A. James
Ueberroth. Filed as Exhibit 10.20 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.23 Consulting and Confidentiality Agreement
dated as of May 1, 1994 between the Company
and Zola P. Horovitz, Ph.D. Filed as Exhibit
10 to the Company's Form 10-Q for the
quarter ended June 30, 1994, Commission File
No. 0-21134, and incorporated herein by
reference.
+10.24 Collaborative Research Agreement dated March
6, 1992 between the Company and the
President and Fellows of Harvard College
(re: Harrison). Filed as Exhibit 10.22 to
the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and
incorporated herein by reference.
+10.25 Collaborative Research Agreement dated March
2, 1994 among the Company, the President and
Fellows of Harvard College and Howard Hughes
Medical Institute (re: Harrison). Filed as
Exhibit 10.27 to the Company's Form 10-K for
the year ended December 31, 1994, Commission
File No. 0-21134, and incorporated herein by
reference.
45
<PAGE>
+10.26 Sponsored Research Agreement dated August 4,
1992 between the Company and President and
Fellows of Harvard College (re: Wagner).
Filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1,
Commission File No. 33-57188, and
incorporated herein by reference.
+10.27 Research and Development Agreement between
the Company and Sandoz Pharma Ltd. dated as
of September 16, 1993. Filed as Exhibit
10.24 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
+10.28 Amendment No. 1 to Research and Development
Agreement between the Company and Sandoz
Pharma Ltd. dated as of January 25, 1995.
Filed as Exhibit 10.30 to the Company's Form
10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and
incorporated herein by reference.
+10.29 The Second Amendment to Research and
Development Agreement dated March 31, 1995
between the Company and Sandoz Pharma Ltd.
Filed as Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1995,
Commission File No. 0-21134, and
incorporated herein by reference.
10.30 Consulting and Confidentiality Agreement
dated as of April 20, 1995 between the
Company and Max Link, Ph.D. Filed as Exhibit
10.30 to the Company's Registration
Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by
reference.
+10.31 Third Amendment to Research and Development
Agreement dated August 31, 1995 between the
Company and Sandoz Pharma Ltd. Filed as
Exhibit 10.32 to the Company's Registration
Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by
reference.
+10.32 Research Agreement dated as of March 1, 1993
between the Company and The General Hospital
Corporation (re: Hirsch). Filed as Exhibit
10.25 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
+10.33 Research Agreement dated as of March 1, 1993
between the Company and The General Hospital
Corporation (re: Drake). Filed as Exhibit
10.26 to the Company's Registration
Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by
reference.
+10.34 Peptoid Library Screening Agreement dated
September 27, 1994 between the Company and
Chiron Corporation. Filed as Exhibit 10.1 to
the Company's Form 10-Q for the quarter
ended September 30, 1994, Commission File
No. 0-21134, and incorporated herein by
reference.
46
<PAGE>
10.35 Underwriting Agreement dated February 8,
1996 between the Company and Commonwealth
Associates. Filed as Exhibit 1 to the
Company's Registration Statement on Form
S-1, Commission File No. 33-96798, and
incorporated herein by reference.
10.36 Registration Rights Agreement dated January
6, 1997 between the Company and Furman Selz
LLC. Filed as Exhibit 10.36 to the Company's
Form 10-K for the year ended December 31,
1996, Commission File No. 0-21134, and
incorporated herein by reference.
10.37 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.
10.38 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.
10.39 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.
10.40 Placement Agency Agreement between the
Company and Paramount Capital, Inc. dated as
of October 26, 1997. Filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P.,
independent accountants to the Company.
Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important factors regarding forward-looking
statements. Filed herewith.
- -----------------------
+ Confidential treatment has been granted for the deleted portions
Exhibits 10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29,
10.32, 10.33 and 10.34.
Exhibits 10.4 through 10.7, 10.19 through 10.23, 10.30 and 10.37
through 10.39 are management contracts or compensatory plans, contracts
or arrangements in which executive officers or directors of the Company
participate.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by on this 27th day of March, 1998.
PROCEPT, INC.
(Registrant)
/s/ John F. Dee
---------------
John F. Dee,
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 27th day of March, 1998:
Capacity
--------
/s/ Michael A. Weiss Chairman
- --------------------
Michael A. Weiss
/s/ John F. Dee President, Chief Executive Officer
- --------------- and Director (Principal Executive Officer, Principal
John F. Dee Financial Officer and Principal Accounting Officer)
/s/ Zola P. Horovitz Director
- -----------------------
Zola P. Horovitz, Ph.D.
/s/ Ellis L. Reinherz Director
- -----------------------
Ellis L. Reinherz, M.D.
/s/ Elliott H. Vernon Director
- ---------------------
Elliott H. Vernon
48
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended and restated by Certificate of Amendment
dated July 15, 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.
3.2 By-laws of the Company. Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
4.1 Specimen Stock Certificate for Common Stock $.01 par value.
Filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.
4.2 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated August 1, 1991, issued to Comdisco, Inc. Filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
4.3 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated September 11, 1992, issued to Comdisco, Inc. Filed
as Exhibit 4.3 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q
for the quarter ended June 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.
4.5 [Reserved.]
4.6 Warrant to Purchase Common Stock dated January 5, 1993, issued
to Tucker Anthony Incorporated. Filed as Exhibit 4.6 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
4.7 Warrant to Purchase Common Stock dated as of February 17,
1994, issued to D. Blech & Company, Incorporated. Filed as
Exhibit 4.6 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
4.8 Warrant Agreement dated February 17, 1994 between the Company
and D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to
the Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by
reference.
<PAGE>
4.9 Warrant to Purchase Common Stock dated as of April 1, 1994,
issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as
Exhibit 4 to the Company's Form 10-Q for the quarter ended
March 31, 1994, Commission File No. 0-21134, and incorporated
herein by reference.
4.10 Warrant to Purchase Common Stock dated as of September 11,
1995, issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10
to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.
4.11 Form of Warrant Agreement between the Company and Commonwealth
Associates. Filed as Exhibit 4.11 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by reference.
4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996
and schedule of holders. Filed as Exhibit 4.12 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC
dated January 6, 1997. Filed as Exhibit 4.13 to the Company's
Form 10-K for the year ended December 31, 1996, Commission
File No. 0-21134, and incorporated herein by reference.
4.14 "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.
4.15 "New Warrant" dated September 30, 1997 issued to Aries
Domestic Fund, L.P. 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 Master Lease Agreement (equipment) dated as of August 1, 1991
between the Company and Comdisco, Inc. Filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
10.2 Master Lease Agreement (equipment) dated as of September 11,
1992 between the Company and Comdisco, Inc. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
<PAGE>
10.3 Master Lease Agreement (equipment) dated as of April 1, 1994
between the Company and Hambrecht & Quist Guaranty Finance
L.P. Filed as Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-21134, and
incorporated herein by reference.
10.4 The 1989 Stock Plan, as amended. Filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1997,
Commission File No. 0-21134, and incorporated herein by
reference.
10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.6 The 1994 Director Stock Option Plan, as amended. Filed as
Exhibit 10.3 to the Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.7 Registration Rights Agreement dated as of January 5, 1993
among the Company and certain of its security holders named
therein. Filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1, Commission File No. 33-51788, and
incorporated herein by reference.
10.8 Amendment No. 1 to Registration Rights Agreement dated as of
March 2, 1994 among the Company and certain of its security
holders named therein. Filed as Exhibit 10.3 to the Company's
Form 10-K for the year ended December 31, 1994, Commission
File No. 0-21134, and incorporated herein by reference.
10.9 Amendment No. 2 to Registration Rights Agreement dated as of
September 11, 1995 between the Company and Oppenheimer & Co.,
Inc. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
10.10 Lease for 840 Memorial Drive dated February 28, 1989 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust, as amended February 28, 1989 and April
4, 1989. Filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.11 Lease for 840 Memorial Drive dated August 21, 1990 between the
Company and Robert Epstein et al., Trustee of 840 Memorial
Drive Trust. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
<PAGE>
10.12 Lease for 840 Memorial Drive dated February 10, 1992 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.13 Lease for 840 Memorial Drive dated September 8, 1992 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.14 Lease for 840 Memorial Drive dated April 27, 1994 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q
for the quarter ended March 31, 1994, Commission File No.
0-21134, and incorporated herein by reference.
+10.15 Amended and Restated Research and Licensing Agreement dated as
of February 19, 1987 between the Company and the Dana-Farber
Cancer Institute, as amended by Letter Agreements between the
Company and Dana-Farber Cancer Institute dated as of October
17, 1987, October 20, 1987, January 20, 1988, March 1, 1988,
March 22, 1989, March 27, 1989, March 5, 1990, May 3, 1993,
May 4, 1993, May 10, 1993 and May 12, 1993 (as amended, the
"DFCI Agreement"). Filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
+10.16 Letter Agreements between the Company and Dana-Farber Cancer
Institute dated April 29, 1994 and May 6, 1994, amending the
DFCI Agreement. Filed as Exhibit 10.16 to the Company's Form
10-K for the year ended December 31, 1994, Commission File No.
0-21134, and incorporated herein by reference.
+10.17 Collaboration Agreement dated as of January 1, 1992 between
the Company and the Molecular Modeling and Design Unit of the
University of California, San Francisco. Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
10.18 Confidential Screening Agreement dated as of July 24, 1992
between the Company and the Division of Acquired
Immunodeficiency Syndrome (AIDS), National Institute of
Allergy and Infectious Diseases. Filed as Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
<PAGE>
10.19 Extension of Consulting Agreement dated August 9, 1990 between
the Company and Dr. Ellis L. Reinherz. Filed as Exhibit 10.17
to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
10.20 Non-Competition Agreement dated as of August 21, 1990 between
the Company and Stanley C. Erck. Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
10.21 Non-Competition Agreement dated as of January 11, 1992 between
the Company and James C. Jenson. Filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
10.22 Key Employee Confidentiality, Inventions, and Non-Competition
Agreement dated January 13, 1993 between the Company and A.
James Ueberroth. Filed as Exhibit 10.20 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.23 Consulting and Confidentiality Agreement dated as of May 1,
1994 between the Company and Zola P. Horovitz, Ph.D. Filed as
Exhibit 10 to the Company's Form 10-Q for the quarter ended
June 30, 1994, Commission File No. 0-21134, and incorporated
herein by reference.
+10.24 Collaborative Research Agreement dated March 6, 1992 between
the Company and the President and Fellows of Harvard College
(re: Harrison). Filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
+10.25 Collaborative Research Agreement dated March 2, 1994 among the
Company, the President and Fellows of Harvard College and
Howard Hughes Medical Institute (re: Harrison). Filed as
Exhibit 10.27 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
+10.26 Sponsored Research Agreement dated August 4, 1992 between the
Company and President and Fellows of Harvard College (re:
Wagner). Filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
<PAGE>
+10.27 Research and Development Agreement between the Company and
Sandoz Pharma Ltd. dated as of September 16, 1993. Filed as
Exhibit 10.24 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
+10.28 Amendment No. 1 to Research and Development Agreement between
the Company and Sandoz Pharma Ltd. dated as of January 25,
1995. Filed as Exhibit 10.30 to the Company's Form 10-K for
the year ended December 31, 1994, Commission File No. 0-21134,
and incorporated herein by reference.
+10.29 The Second Amendment to Research and Development Agreement
dated March 31, 1995 between the Company and Sandoz Pharma
Ltd. Filed as Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-21134, and
incorporated herein by reference.
10.30 Consulting and Confidentiality Agreement dated as of April 20,
1995 between the Company and Max Link, Ph.D. Filed as Exhibit
10.30 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.
+10.31 Third Amendment to Research and Development Agreement dated
August 31, 1995 between the Company and Sandoz Pharma Ltd.
Filed as Exhibit 10.32 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96798, and incorporated
herein by reference.
+10.32 Research Agreement dated as of March 1, 1993 between the
Company and The General Hospital Corporation (re: Hirsch).
Filed as Exhibit 10.25 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.
+10.33 Research Agreement dated as of March 1, 1993 between the
Company and The General Hospital Corporation (re: Drake).
Filed as Exhibit 10.26 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.
+10.34 Peptoid Library Screening Agreement dated September 27, 1994
between the Company and Chiron Corporation. Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
<PAGE>
10.35 Underwriting Agreement dated February 8, 1996 between the
Company and Commonwealth Associates. Filed as Exhibit 1 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-96798, and incorporated herein by reference.
10.36 Registration Rights Agreement dated January 6, 1997 between
the Company and Furman Selz LLC. Filed as Exhibit 10.36 to
the Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
10.37 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.
10.38 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.
10.39 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.
10.40 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants
to the Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important factors regarding forward-looking statements. Filed
herewith.
- -----------------------
+ Confidential treatment has been granted for the deleted portions
Exhibits 10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29,
10.32, 10.33 and 10.34.
Exhibits 10.4 through 10.7, 10.19 through 10.23, 10.30 and 10.37
through 10.39 are management contracts or compensatory plans, contracts
or arrangements in which executive officers or directors of the Company
participate.
PROCEPT, INC.
PLACEMENT AGENCY AGREEMENT
October 26, 1997
Paramount Capital, Inc.
787 Seventh Avenue
New York, New York 10019
Dear Sirs:
Procept, Inc., a Delaware corporation (the "Company"), hereby confirms its
agreement to retain Paramount Capital, Inc. (the "Placement Agent") on an
exclusive basis to introduce the Company to, and to procure subscriptions
from,"accredited investors" as that term is defined in Regulation D under the
Securities Act of 1933, as amended (the "Act") as prospective purchasers
("Purchasers") of a minimum (the "Minimum Offering") of twenty-five (25) Units
(the "Units") and a maximum (the "Maximum Offering") of one hundred (100) Units,
with an option in favor of the Placement Agent to offer up to an additional one
hundred fifty (150) Units to cover over-allotments at a purchase price of
$100,000 per Unit, with each "Unit" consisting of (a) a number of shares of
Common Stock (rounded to the nearest whole share, with one-half (0.5) of one
share being rounded upward) (the "Offering Quantity") of the Company, par value
$.01 per share (the "Common Stock"), determined by dividing one hundred thousand
dollars ($100,000) by the lesser of (A) $2.00 and (B) fifty percent (50%) of the
Trading Price (as defined in the Subscription Agreement (as defined below)) of
the Common Stock on the Nasdaq National Market immediately preceding (i) the
Initial Closing Date (as defined below), (ii) any Interim Closing Date (as
defined below), or (iii) the Final Closing Date (as defined below) of this
Offering, whichever is lowest (the "Offering Price") and (b) warrants (the
"Class C Warrants") to purchase at any time prior to the fifth anniversary of
the Final Closing Date, a number of shares of Common Stock equal to (x) the
Offering Quantity multiplied by (y) 0.5 (rounded to the nearest whole share,
with one-half (00.5) of one share being rounded upward). The Units shall have
the terms set forth in the Term Sheet (as defined below).
The sale to such Purchasers (the "Offering") will be made through a private
placement by the Placement Agent (or its designated selected dealers) on a "best
efforts" basis pursuant to the Confidential Term Sheet dated November 14, 1997,
and all supplements, amendments and exhibits thereto and documents incorporated
therein by reference, all of which constitute an integral part thereof (the
"Term Sheet"), separate subscription agreements between the Company and each
purchaser of Units in the Offering (collectively "Purchasers") and related
documents (the "Subscription Agreements") in accordance with Section 4(2) of the
Act and Regulation D promulgated thereunder.
The Term Sheet and the exhibits attached thereto, the Subscription
Agreements, the exhibits to the Subscription Agreements, the Warrant Agreement
to be entered into by and between the Company, American Stock Transfer and Trust
Company, as warrant agent, and the
<PAGE>
Paramount Capital, Inc.
Page 2
Placement Agent (the "Warrant Agreement"), the Escrow Agreement (the "Escrow
Agreement") among the Company, the Placement Agent and Fleet Bank, N.A. (the
"Escrow Agent"), the Financial Advisory Agreement (as defined in Section 5(k)
below), the Placement Options (as defined in Section 4(d) below), the Advisory
Options (as defined in Section 5(k) below ) and this Placement Agency Agreement
are collectively referred to herein as the "Offering Documents."
The Company, at its sole cost, shall prepare and deliver to the Placement
Agent a reasonable number of copies of the Offering Documents in form and
substance satisfactory to the Placement Agent.
Each prospective investor subscribing to purchase Units shall be required
to deliver, among other things, a Subscription Agreement, which shall include a
Confidential Investor Questionnaire ("Questionnaire"). The Company shall make
available to each prospective purchaser at a reasonable time prior to the
purchase of the Units the opportunity to ask questions of, and to receive
answers from, the Company concerning the terms and conditions of the Offering
and the opportunity to obtain additional information necessary to verify the
accuracy of the documents delivered in connection with the purchase of the Units
to the extent it possesses such information or can acquire it without
unreasonable effort or expense. After the investors shall have had an
opportunity to review the Offering Documents, and have had the opportunity to
address all inquiries to the Company, separate Subscription Agreements shall be
completed by each prospective investor. The Company, with the consent of the
Placement Agent, and the Placement Agent, in its sole discretion, shall have the
right to reject subscriptions in whole or in part. The Company shall evidence
its acceptance of a subscription by countersigning a copy of the applicable
Subscription Agreement and returning the same to the Placement Agent.
Capitalized terms used in this Agreement, unless otherwise defined herein
or unless the context otherwise indicates, shall have the same meanings provided
in the Offering Documents.
1. Appointment of Placement Agent.
(a) The Placement Agent is hereby appointed exclusive placement agent of
the Company (subject to the Placement Agent's right to have Selected Dealers, as
defined in Section 1(c) hereof, participate in the Offering) during the Offering
Period herein specified for the purposes of assisting the Company in finding
qualified subscribers pursuant to the Offering described in the Offering
Documents. The Placement Agent shall not be deemed an agent of the Company for
any other purpose. The "Offering Period" shall commence on the day the Offering
Documents are first made available to the Placement Agent by the Company for
delivery in connection with the offering for the sale of the Units (the
"Commencement Date"). Upon receipt of the Minimum Offering amount, the Placement
Agent may conduct a closing (the
<PAGE>
Paramount Capital, Inc.
Page 3
"Initial Closing Date") and may conduct subsequent closings on an interim basis
until the Maximum Offering amount (and any over-allotment amount) has been
reached or the Offering is terminated (the "Final Closing Date"). Each such
closing may be referred to herein as a "Closing". If not terminated earlier
pursuant to this Agreement, the Offering Period shall terminate at 11:59 p.m.
New York City Time on January, [ ] 1998, subject to an extension, at the option
of the Placement Agent, for an additional sixty (60) days (the "Termination
Date"), accordingly, the Offering Period shall terminate on the Final Closing
Date or the Termination Date, as the case may be. If subscriptions for the
Minimum Offering amount of 25 Units are not received prior to the end of the
Offering Period, the Offering will be terminated and all funds received from
Subscribers will be returned, without interest and without any deduction.
(b) Subject to the performance by the Company of all of its obligations
to be performed under this Agreement and to the completeness and accuracy of all
representations and warranties of the Company contained in this Agreement, the
Placement Agent hereby accepts such agency and agrees to use its best efforts to
assist the Company in finding qualified subscribers pursuant to the Offering
described in the Offering Documents. It is understood that the Placement Agent
has no commitment to sell the Units. The Placement Agent's agency hereunder is
not terminable by the Company prior to the Termination Date except as set forth
in Section 8(g).
(c) The Placement Agent may engage other persons, selected by it in its
sole discretion, who are members of the National Association of Securities
Dealers, Inc., ("NASD") or who are located outside the United States and that
have executed a Selected Dealers Agreement (each such person being hereinafter
referred to as a "Selected Dealer") and the Placement Agent may allow such
persons such part of the compensation and payment of expenses payable to the
Placement Agent hereunder as the Placement Agent shall determine; provided,
however, that any such compensation shall be received pursuant to Section 4(d)
hereof.
(d) Subscriptions for Units shall be evidenced by the execution by
qualified subscribers of a Subscription Agreement. No Subscription Agreement
shall be effective unless and until it is accepted by the Company. Until a
closing is held, all subscription funds received shall be held in escrow as
described in the Escrow Agreement. The Placement Agent shall not have any
independent obligation to verify the accuracy or completeness of any information
contained in any Subscription Agreement or the authenticity, sufficiency, or
validity of any check delivered by any prospective investor in payment for
Units, nor shall the Placement Agent incur any liability with respect to any
such check.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Placement Agent and each Selected Dealer, if any, as
follows:
(a) Securities Law Compliance. The Offering Documents, as of their
<PAGE>
Paramount Capital, Inc.
Page 4
respective dates do, and as of the date of the Term Sheet and each Closing,
shall describe the material aspects of an investment in the Company and conform
in all respects with the requirements of Section 4(2) of the Act and Regulation
D promulgated thereunder and with the requirements of all other published rules
and regulations of the Securities and Exchange Commission (the "Commission")
currently in effect relating to "private offerings" to "accredited investors"(as
that term is defined in Regulation D under the Act). The Offering Documents
shall not, as of the date of the Term Sheet and each Closing, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that no representation is
made with respect to information relating to the Placement Agent which is
provided in writing by the Placement Agent to the Company specifically for
inclusion in the Offering Documents. If at any time prior to the completion of
the Offering or other termination of this Agreement any event shall occur as a
result of which it might become necessary to amend or supplement the Offering
Documents so that they do not include any untrue statement of any material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances then existing, not misleading, the
Company will promptly notify the Placement Agent and will supply the Placement
Agent (or the prospective Purchasers designated by the Placement Agent) with
amendments or supplements correcting such statement or omission. The Company
shall also provide the Placement Agent for delivery to all offerees and
Purchasers and their representatives, if any, any information, documents and
instruments which the Placement Agent and the Company's counsel reasonably deem
necessary to comply with applicable state and federal law.
The Company acknowledges that the Placement Agent (i) has not supplied any
information for inclusion in the Offering Documents other than information
relating to the Placement Agent furnished in writing to the Company by the
Placement Agent specifically for inclusion in the Offering Documents; (ii) has
no obligation independently to verify any of the information in the Offering
Documents; and (iii) has no responsibility for the accuracy or completeness of
the Offering Documents, except for the information, relating to the Placement
Agent, furnished in writing by the Placement Agent to the Company specifically
for inclusion in the Offering Documents.
(b) Organization. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in Massachusetts and in each jurisdiction in which the nature of
the business conducted, or as proposed to be conducted in the Term Sheet, by it
or the properties owned, leased or operated by it, makes such qualification or
licensing necessary and where the failure to be so qualified or licensed would
have a material adverse effect upon the business, prospects and financial
condition of the Company and has all requisite corporate power and authority to
own and lease its respective properties, to carry on its respective business as
currently conducted and as proposed to be
<PAGE>
Paramount Capital, Inc.
Page 5
conducted, to execute and deliver this Agreement and to carry out the
transactions contemplated by this Agreement, as appropriate and is duly licensed
or qualified to do business as a foreign corporation in each jurisdiction in
which the conduct of its business or ownership or leasing of its properties
requires it to be so qualified, except where the failure to be so qualified
would not have a material adverse effect on the business, financial condition or
prospects of the Company.
(c) Capitalization. The authorized, issued and outstanding capital stock
of the Company prior to the consummation of the transactions contemplated hereby
is as set forth in the Term Sheet. All issued and outstanding shares of the
Company are validly issued, fully paid and nonassessable and have not been
issued in violation of the preemptive rights of any stockholder of the Company.
The Common Stock, when issued, will have the rights, preferences and privileges
substantially as set forth in the Subscription Agreements. All prior sales of
securities of the Company were either registered under the Act and applicable
state securities laws or exempt from such registration, and no security holder
has any rescission rights with respect thereto. Except as set forth in the Term
Sheet, there are no outstanding options, warrants, agreements, convertible
securities, preemptive rights or other rights to subscribe for or to purchase
any shares of capital stock of the Company. Except as set forth in the Term
Sheet and as otherwise required by law, there are no restrictions on the voting
or transfer of any shares of the Company's capital stock pursuant to the
Company's Certificate of Incorporation, By-laws or other governing documents or
any agreement or other instruments to which the Company is a party or by which
the Company is bound.
(d) Warrants, Preemptive Rights, Etc. Except as set forth in or
contemplated by the Term Sheet, there are not, nor will there be immediately
after any Closing (as hereinafter defined), any outstanding warrants, options,
agreements, convertible securities, rights of first refusal, rights of first
offer, preemptive rights or other rights to subscribe for or to purchase or
other commitments pursuant to which the Company is, or may become, obligated to
issue any shares of its capital stock or other securities of the Company and
this Offering will not cause any anti-dilution adjustments to such securities or
commitments except as reflected in the Term Sheet.
(e) Subsidiaries and Investments. Other than as disclosed in the Term
Sheet and 225,000 shares of common stock of VacTex, Inc., a Delaware
corporation, the Company does not own, directly or indirectly, capital stock or
other equity ownership or proprietary interests in any other corporation,
association, trust, partnership, joint venture or other entity.
(f) Financial Statements. The financial information contained in the
Offering Documents is accurate in all material respects. The Company's financial
statements have been prepared in conformity with generally accepted accounting
principles consistently applied and show all material liabilities, absolute or
contingent, of the Company required to be
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Paramount Capital, Inc.
Page 6
recorded thereon and present fairly the financial position and results of
operations of the Company as of the dates and for the periods indicated, subject
in the case of unaudited interim financial statements, to normal year-end
adjustments.
(g) Absence of Changes. Since the date of the Term Sheet, except as has
been or will be reflected in the Term Sheet prior to each Closing, the Company
has not incurred any liabilities or obligations, direct or contingent, other
than those that were incurred in the ordinary course of business, nor has the
Company entered into any transaction that is material to the business of the
Company, and there has not been any change in the capital stock of, or any
incurrence of long-term debt by, the Company, or any issuance of options,
warrants or other rights to purchase the capital stock of the Company, or any
adverse change or any development involving a prospective adverse change in the
condition (financial or otherwise), net worth, results of operations, business,
key personnel or properties which would be material to the business, prospects
or financial condition of the Company, and the Company has not become a party
to, and neither the business nor the property of the Company has become the
subject of, any material litigation whether or not in the ordinary course of
business.
(h) Title. The Company has good and marketable title to all tangible
properties and assets owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially significant or
important in relation to the Company's business. Except as has been or will be
reflected in the Term Sheet prior to each Closing, all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee are in full force and effect, and the Company is not in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and no material claim has been asserted by anyone adverse
to rights of the Company as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company to continued possession of the leased or subleased premises or
assets under any such lease or sublease. The Company owns or leases all such
tangible properties as are necessary to its operations as now conducted and
proposed to be conducted and except to the extent described in the Term Sheet,
the Company presently does not anticipate the need for any capital expenditures.
(i) Proprietary Rights. Except as has been or will be reflected in the
Term Sheet prior to each Closing, the Company owns or possesses adequate and
enforceable rights to use all patents, patent applications, trademarks, service
marks, trade names, corporate names, copyrights, trade secrets, processes, mask
works, licenses, inventions, formulations, technology and know-how and other
intangible property used or proposed to be used in the conduct of its business
as described in or contemplated by the Term Sheet (the "Proprietary Rights").
Except as has been or will be reflected in the Term Sheet prior to each Closing,
the Company or the entities from whom the Company has acquired rights, has taken
all necessary
<PAGE>
Paramount Capital, Inc.
Page 7
action to protect all of the Company's Proprietary Rights. Except as set forth
in the Term Sheet, the Company has not received any notice of, and there are not
any facts known to the Company that indicate the existence of (i) any
infringement or misappropriation by any third party of any of the Proprietary
Rights or (ii) any claim by a third party contesting the validity of any of the
Proprietary Rights; the Company has not received any notice of any infringement,
misappropriation or violation by the Company or any of its employees of any
Proprietary Rights of third parties, and, to the best of the Company's
knowledge, the Company nor any of its employees has infringed, misappropriated
or otherwise violated any Proprietary Rights of any third parties; and, to the
best of the Company's knowledge, no infringement, illicit copying,
misappropriation or violation of any intellectual property rights of any third
party has occurred or will occur with respect to any products currently being
sold by the Company or with respect to any products currently under development
by the Company or with respect to the conduct of the Company's business as
currently contemplated. Except as described in the Term Sheet, the Company is
not aware that any of its employees are obligated under any contract (including
licenses, covenants or commit ments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of the employee's best efforts to promote the
interests of the Company or that would conflict with the Company's business as
currently conducted or as proposed to be conducted. To the best of the Company's
knowledge, neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business, as currently conducted or as proposed to be
conducted, will conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any such employee is now obligated.
(j) Litigation. Except as set forth in the Term Sheet, there is no
material action, suit, claim or proceeding at law or in equity, or to the
Company's knowledge, investigation or customer complaint, by or before any
arbitrator, governmental instrumentality or other agency now pending or, to the
knowledge of the Company, threatened against the Company (or basis therefor
known to the Company which the Company believes will result in the foregoing)
the adverse outcome of which would materially adversely affect the Company's
business, prospects or financial condition. The Company is not subject to any
judgment, order, writ, injunction or decree of any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign which would materially adversely affect the
Company's business, prospects or financial condition.
(k) Non-Defaults, Non-Contravention. The Company is not in violation of
or default under, nor will the execution and delivery of this Agreement or any
of the Offering Documents, or consummation of the transactions contemplated
herein or therein result in a violation of or constitute a default in the
performance or observance of any obligation (i) under its Certificate of
Incorporation, its By-laws, or any indenture, mortgage, material purchase order
or other agreement or instrument to which the Company is a party or by which it
<PAGE>
Paramount Capital, Inc.
Page 8
or its property is bound or affected or (ii) with respect to any material order,
writ, injunction or decree of any court of any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and there is no existing condition, event
or act which constitutes, nor which after notice, the lapse of time or both,
could constitute, a default under any of the foregoing, which in either case
would have a material adverse effect on the business, prospects or financial
condition of the Company.
(l) Taxes. The Company has filed all Federal, state, local and foreign
tax returns required to be filed by it and all such returns are true and correct
in all material respects. The Company has paid all taxes pursuant to such
returns or pursuant to any assessments received by it or which it is obligated
to withhold from amounts owing to any employee, creditor or third party. The
Company has properly accrued all taxes required to be accrued. The tax returns
of the Company have never been audited by any state, local or Federal
authorities. The Company has not waived any statute of limitations with respect
to taxes or agreed to any extension of time with respect to any tax assessment
or deficiency.
(m) Compliance With Laws, Licenses, Etc. The Company has not received
notice of any violation of, or non-compliance with, any Federal, state, local or
foreign, laws, ordinances, regulations and orders applicable to its business,
the violation of, or noncompliance with which, would have a materially adverse
effect on the business, financial condition, prospects or operations of the
Company. The Company has all governmental licenses and permits and other
governmental certificates, authorizations and permits and approvals
(collectively, "Licenses") required by every Federal, state and local government
or regulatory body for the operation of its business as currently conducted and
the use of its properties, except where the failure to be licensed would not
have a material adverse effect on the business of the Company. The Company's
Licenses are in full force and effect and no violations are or have been
recorded in respect of any License and no proceeding is pending or, to the best
knowledge of the Company, threatened to revoke or limit any thereof.
(n) Authorization of Documents and Units. Each of the Offering
Documents, has been, or prior to any Closing will be, duly and validly
authorized, executed and delivered by the Company and the execution, delivery
and performance by the Company of the Offering Documents has been duly
authorized by all requisite corporate action by the Company and when delivered,
constitute or will constitute (assuming that such agreements are countersigned,
if necessary) the legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms, subject to the
availability and enforceability of equitable remedies and to applicable
bankruptcy and other laws relating to the rights of creditors generally and
except as the enforcement of the rights to indemnification and contribution
hereunder and under any other Offering Documents may be limited by federal or
state securities laws or public policy. The Company has full corporate power and
lawful authority to authorize, issue and sell the Units to be sold to the
Purchasers and the securities underlying the Units
<PAGE>
Paramount Capital, Inc.
Page 9
(as defined below). No consent is required by the Company or from any third
party (other than the SEC, but only insofar as such consent relates to the
Company's obligation to register the Registrable Securities (as defined below))
to perform any of its obligations under this Agreement or any of the Offering
Documents. Any increase to the number of authorized shares of Common Stock will
require, among other things, the approval of the holders of a majority of the
outstanding Common Stock of the Company.
(o) Exemption from Registration. Assuming (i) the accuracy of the
information provided by the respective Purchasers in the Subscription
Agreements, and (ii) the timely filing of a Form D by the Company, the offer and
sale of the Units and the granting of the Placement Options and the Advisory
Options (as defined below) pursuant to the terms of this Agreement are exempt
from the registration requirements of the Act and the rules and regulations
promulgated thereunder (the "Regulations"). The Company is not disqualified from
the exemption under Regulation D by virtue of the disqualification contained in
Rule 507 promulgated thereunder. There exists no fact or set of facts known to
the Company or its counsel that might cause the Offering to be integrated with
any other offering of the Company's securities which would cause this offering
to lose its exemption under Regulation D.
(p) Registration Rights. Except as set forth in the Term Sheet or
Section 5 of the Subscription Agreement, no person has any right to cause the
Company to effect the registration under the Act of any securities of the
Company.
(q) Brokers. Neither the Company nor any of its officers, directors,
employees or stockholders has employed any broker or finder in connection with
the transactions contemplated by this Agreement other than the Placement Agent.
(r) Title to Units. When certificates representing the Common Stock and
Class C Warrants shall have been duly delivered to the Purchasers and payment
shall have been made for the Units, the several Purchasers shall have good and
valid title to the Common Stock and the Class C Warrants and, upon exercise of
such Class C Warrants, will have good and valid title to the Common Stock
issuable upon such exercise (the "Conversion Shares"), in each case, free and
clear of all liens, encumbrances and claims and adverse claims, whatsoever
(except as arising from applicable Federal and state securities laws), and the
Company shall have paid all taxes, if any, in respect of the original issuance
thereof. When certificates representing the Placement Options and Advisory
Options shall have been duly delivered to the Placement Agent, the Placement
Agent or its designees shall have good and valid title to the Placement Options
and Advisory Options, upon exercise of such Placement Options and/or Advisory
Options, will have good and valid title to the Common Stock and Class C Warrants
issuable upon such exercise, and upon exercise of such Class C Warrants issuable
upon exercise of such Placement Options and/or Advisory Options, will have good
and valid title to the Common Stock into which such Class C Warrants are
converted, in each case, free and clear of all liens,
<PAGE>
Paramount Capital, Inc.
Page 10
encumbrances and adverse claims, whatsoever (except as arising from applicable
Federal and state securities laws), and the Company shall have paid all taxes,
if any, in respect of the original issuance thereof. When certificates
representing the Common Stock issuable pursuant to Article VI of the
Subscription Agreement (the "Article VI Issuances") shall have been duly
delivered to the Purchasers, the several Purchasers shall have good and valid
title to the Common Stock constituting such Article VI Issuances free and clear
of all liens, encumbrances and claims and adverse claims, whatsoever (except as
arising from applicable Federal and state securities laws), such Common Stock
shall be duly authorized, validly issued, fully paid and non-assessable, and the
Company shall have paid all taxes, if any, in respect of the original issuances
thereof.
(s) Non-Affiliated Directors. The Company's Board of Directors has not
less than two (2) directors who are independent from, and unaffiliated with,
management of the Company.
(t) Accuracy of Reports. All material reports required to be filed by
the Company within the two years prior to the date of this Agreement under the
Securities and Exchange Act of 1934 as amended (the "Exchange Act"), have been
duly filed with the SEC, complied at the time of filing in all material respects
with the requirements of their respective forms and, except to the extent
updated or superseded by the Term Sheet or any subsequently filed report, were
complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
(u) Reservation of Shares; Transfer Taxes, Etc. The Company shall at all
times reserve and keep available, out of its authorized and unissued shares of
Common Stock, solely for the purpose of effecting any exercises of Class C
Warrants, and any Reset Issuance (as defined in the Subscription Agreement),
Semi-Annual Issuance (as defined in the Subscription Agreement) and Dilution
Issuance (as defined below and, together with Reset Issuances and Semi-Annual
Issuances, referred to herein as "Article VI Issuances"), such number of shares
of its Common Stock free of preemptive rights as shall be sufficient to effect
such exercises and Article VI Issuances from time to time required or reasonably
anticipated. The Company shall use its best efforts from time to time, in
accordance with the laws of the State of Delaware to increase the authorized
number of shares of Common Stock if at any time the number of shares of
authorized, unissued and unreserved Common Stock shall not be sufficient to
permit any required or reasonably anticipated exercises of Class C Warrants or
Article VI Issuances. In the event, and to the extent, that the company does not
have sufficient authorized but unissued shares of Common Stock to effect any
exercise of Class C Warrants or any Article VI Issuance (collectively a "Common
Issuance Event"), the Company shall pay the Subscriber cash.
3. Representations and Warranties of the Placement Agent. The Placement
<PAGE>
Paramount Capital, Inc.
Page 11
Agent represents and warrants as follows:
(a) The Placement Agent is duly organized and validly existing and in
good standing as a corporation under the laws of the State of New York with full
and adequate power and authority to enter into and perform this Agreement.
(b) In offering the Units, the Placement Agent shall deliver (or direct
the Company to deliver) to each prospective purchaser, prior to the Company's
acceptance of any subscription from such prospective purchaser, the appropriate
Offering Documents. The Placement Agent will not engage in a general
solicitation or employ general advertising in connection with the Offering.
(c) The Placement Agent shall use its reasonable efforts to conduct the
Offering in material compliance with applicable federal and state securities
laws so as to preserve the exemption provided in Section 4(2) of the Act and any
applicable rules or regulations promulgated thereunder or under such state
securities laws. The Placement Agent shall use reasonable efforts to make offers
only to persons who the Placement Agent has reasonable grounds to believe are
"accredited investors" (as defined in Regulation D under the Act). The final
acceptance of any subscription shall be made only after the Company has reviewed
the Subscription Agreement and agreed to such final acceptance and determination
as to the status of such subscriber which such acceptance and determination
shall remain solely the responsibility of the Company.
(d) The Placement Agent is, and at each closing shall be, (i) a
securities broker-dealer registered with the Commission and any jurisdiction
where broker-dealer registration is required in order for the Company to sell
the Units in such jurisdiction and (ii) a member in good standing of the NASD.
4. Closing; Placement and Fees.
(a) Closing. Provided that the Placement Agent has received
subscriptions for the Minimum Offering amount, the Placement Agent may conduct,
in its sole discretion, closings (the date of each a "Closing Date") at the
offices of the Placement Agent, 787 Seventh Avenue, New York, New York, until
the Final Closing Date. On each Closing Date, payment for the Units issued and
sold by the Company shall be made to the Company in immediately available funds
against delivery of certificates evidencing the Common Stock and Class C
Warrants comprising such Units.
(b) Conditions to Placement Agent's Obligations. The obligations of the
Placement Agent hereunder are subject to the accuracy of the representations and
warranties
<PAGE>
Paramount Capital, Inc.
Page 12
of the Company herein contained as of the date hereof and as of each Closing
Date, to the performance by the Company of its obligations hereunder and to the
following additional conditions:
(i) Due Qualification or Exemption. (A) The Offering contemplated by
this Agreement shall become qualified or be exempt from qualification under the
securities laws of the several states pursuant to paragraph 4(c) below not later
than the Closing Date, subject to any filings to be made thereafter, and (B) at
the Closing Date, no stop order suspending the sale of the Units shall have been
issued, and no proceeding for that purpose shall have been initiated or
threatened;
(ii) No Material Misstatements. Neither the Blue Sky qualification
materials, the Offering Documents, nor the Term Sheet, nor any supplement
thereto, will contain an untrue statement of a fact which in the opinion of the
Placement Agent is material, or omit to state a fact, which in the opinion of
the Placement Agent is material and is required to be stated therein, or is, in
the opinion of the Placement Agent, necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(iii) Compliance with Agreements. The Company shall have complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied hereunder and under the Subscription Agreements at or prior to each
Closing;
(iv) Corporate Action. The Company shall have taken all corporate
action necessary to permit the valid execution, delivery and performance of the
Offering Documents by the Company, including, without limitation, obtaining the
approval of the Company's board of directors for the execution and delivery of
the Offering Documents and the performance by the Company of its obligations
hereunder and the offering contemplated hereby;
(v) Opinion of Counsel to the Company. The Placement Agent shall
receive the opinion of counsel to the Company (stating that each of the
Purchasers may rely thereon as though addressed directly to such Purchaser),
dated as of each Closing Date, substantially to the effect that:
(A) the Company is duly incorporated, validly existing and in
corporate good standing under the laws of the State of Delaware, has all
requisite corporate power and lawful authority necessary to own or hold its
properties and conduct its business as described in the Term Sheet and is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in Massachusetts and in each jurisdiction in which the nature of the
business conducted, or as proposed to be conducted in the Term Sheet, by it or
the properties owned, leased or operated by it, makes such qualification or
licensing necessary and where the failure to be so qualified or licensed would
have a material adverse effect upon the
<PAGE>
Paramount Capital, Inc.
Page 13
business, prospects and financial condition of the Company. To such counsel's
knowledge except with respect to VacTex, Inc., the Company does not own,
directly or indirectly, any capital stock or other equity ownership or
proprietary interests in any other corporation, association, trust, partnership,
joint venture or other entity;
(B) the execution, delivery and performance of each of the
Offering Documents to which the Company is a signatory, and the issuance of (I)
the Units, the Common Stock and Class C Warrants included in the Units and the
Placement and Advisory Options, (II) the Common Stock and Class C Warrants
issuable upon exercise of the Placement and Advisory Options and (III) the
shares of Common Stock issuable upon exercise of the Class C Warrants (the
"Exercise Shares") (including the Exercise Shares underlying the Class C
Warrants issuable upon exercise of the Placement and Advisory Options), have
been duly authorized by all necessary corporate action on the part of the
Company; provided, however, that shareholder consent is required for any
increase in authorized shares. Each of the Offering Documents to which the
Company is a signatory has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable in
accordance with its terms, subject to such limitations on enforceability as such
counsel shall specify in the opinion and that shall be acceptable to the
Placement Agent;
(C) the authorized, issued and outstanding capital stock of the
Company as of the date set forth therein (before giving effect to the
transactions contemplated by this Agreement) is as set forth in the Term Sheet.
To such counsel's knowledge, there are no outstanding warrants, options,
agreements, convertible securities, preemptive rights or other commitments
pursuant to which the Company is, or may become, obligated to issue any shares
of its capital stock or other securities of the Company other than as set forth
in the Term Sheet. To such counsel's knowledge, all of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and nonassessable and have not been issued in violation of the
preemptive rights of any security holder;
(D) assuming (x) the accuracy of the information provided by the
Subscribers in the Subscription Documents and (y) the timely filing with the
Securities and Exchange Commission and any applicable state securities
authorities of a Form D and amendments thereto containing accurate and complete
information, the issuance and sale of the Units is exempt from registration
under the Act and Rule 506 of Regulation D promulgated thereunder and is not
subject to integration with any other offering of the Company's securities which
will undermine the exempt status of the Offering;
(E) neither the execution and delivery of the Offering Documents
nor compliance with the terms hereof or thereof, nor the consummation of the
transactions herein or therein contemplated, has, conflicts with, results in a
breach of, or
<PAGE>
Paramount Capital, Inc.
Page 14
constitutes a default under the Certificate of Incorporation (provided that such
counsel may note that the Company may not issue shares in excess of the
authorized capital stock) or By-laws of the Company, or any material contract,
instrument or document known to such counsel after due inquiry to which the
Company is a party, or by which it or any of its properties is bound (provided
such counsel need express no opinion with respect to the satisfaction of the
stockholder approval requirement under the Company's existing agreement with
Nasdaq) or, to the best knowledge of such counsel, violate any applicable order
or decree of any governmental agency or court having jurisdiction over the
Company or any of its properties or business;
(F) except as disclosed in the Term Sheet, to such counsel's
best knowledge and without conducting a search of court documents, there are no
claims, actions, suits, investigations or proceedings before or by any
arbitrator, court, governmental authority or instrumentality pending or
threatened against the Company which could, if adversely determined, materially
and adversely affect the business, properties or financial condition of the
Company, the transactions or other acts contemplated by the Offering Documents
or the validity or enforceability of the Offering Documents. Except as disclosed
in the Term Sheet, to such counsel's knowledge, the Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality that names the Company;
(G) upon the issuance of the Units, the Common Stock (including
the Common Stock issuable pursuant to any Article VI Issuances) and Class C
Warrants (including the shares of Common Stock and the Class C Warrants issuable
upon exercise of the Placement and Advisory Options), the Placement and Advisory
Options and the Exercise Shares (including the Exercise Shares underlying the
Class C Warrants issuable upon exercise of Placement and Advisory Options), each
of the Purchasers or the Placement Agent and its designees, as the case may be,
shall acquire such securities, free and clear of all pledges, liens, claims,
encumbrances, preemptive rights, rights of first offer or right of first refusal
and restrictions known to such counsel after due inquiry, except for the
transfer restrictions set forth in the Subscription Agreements and any action
taken to encumber such securities by the holders thereof;
(H) the Common Stock included in the Units, when issued in
accordance with the terms of the Subscription Agreement for the consideration
expressed therein will have been duly authorized, fully paid, validly issued and
non-assessable. The Class C Warrants, the Placement Options and the Advisory
Options, when issued in accordance with the terms of this Agreement and/or the
Subscription Agreement, as applicable, for the consideration expressed therein,
will have been validly issued and will constitute legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, subject to such limitations on enforceability as such
counsel shall specify in the opinion and that shall be acceptable to the
Placement Agent. The Common Stock
<PAGE>
Paramount Capital, Inc.
Page 15
(x) constituting Article VI Issuances and (y) issuable upon exercise of the
Class C Warrants and the Placement and Advisory Options (including the shares of
Common Stock issuable upon exercise of the Class C Warrants underlying the
Placement and Advisory Options) (the securities referred to in clauses (x) and
(y) above collectively the "Additional Shares"), when issued in accordance with
the terms thereof for the consideration expressed therein, will have been duly
authorized, validly issued, fully paid, and non-assessable. The Additional
Shares have been duly authorized by all necessary corporate action on the part
of the Company and, to the extent such shares are available and as such shares
become, from time to time available, shall be reserved for issuance by the Board
of Directors.
(I) the Company's Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was, or has agreed to become a director of the Company. The Company's
Restated Certificate of Incorporation also provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
any breach of a fiduciary duty by such director as a director, to the fullest
extent permitted by the Delaware General Corporation Law, as from time to time
amended.
Such counsel shall state, in opining on any matter stated to be
subject to the knowledge of such counsel, that such knowledge shall include the
actual knowledge of such counsel who have given substantive attention to the
Company's affairs in connection with the Offering and that such counsel has made
due inquiry, including, but not limited to, appropriate inquiries of officers of
the Company with respect to the subject matter of such opinion and has reviewed
all documents the existence of which is disclosed by such inquiries or of which
such counsel is otherwise aware of as a result of its representation of the
Company.
In addition, such counsel shall state that in the course of the
preparation of the Offering Documents, which involved, among other things,
discussions and inquiries concerning the various legal matters and the review of
certain corporate records, documents and proceedings, counsel participated in
conferences with certain officers and other representatives of the Company and
the Placement Agent during which the contents of the Offering Documents and
related matters were discussed. Such counsel shall advise the Placement Agent in
the form of an opinion of counsel that such counsel has no reason to believe
that, as of the date of such opinion, the Term Sheet including any document
incorporated by reference therein contained any untrue statement of a material
fact relating to the Company or omitted to state a material fact relating to the
Company required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
<PAGE>
Paramount Capital, Inc.
Page 16
made.
(vi) Opinion of Patent Counsel. The Placement Agent shall
receive (unless waived in writing by the Placement Agent) the opinion of patent
counsel to the Company (which such counsel shall be satisfactory to the
Placement Agent), dated the Closing Date in the form and substance satisfactory
to counsel for the Placement Agent.
(vii) Comfort Letter. The Company shall cause Coopers & Lybrand,
L.L.P., the Company's independent public accountants, to address and deliver to
the Company and the Placement Agent a letter or letters (which letters are
frequently referred to as "Comfort Letters") dated as of each Closing Date and
the effective date of the registration statement required to be filed in
connection with the Subscription Agreements.
(viii) Officer's Certificate. The Placement Agent shall receive
an Officer's Certificate substantially in the form of Exhibit A hereto and a
Secretary's Certificate substantially in the form of Exhibit B hereto, signed by
the appropriate parties and dated as of each Closing Date. These certificates
shall state, among other things, that the representations and warranties
contained in Section 2 hereof are true and accurate in all material respects at
such Closing Date with the same effect as though expressly made at such Closing
Date.
(ix) Escrow Agreement. The Placement Agent shall receive a copy
of a duly executed Escrow Agreement with Fleet Bank, N.A.
(x) Transmittal Letters. The Placement Agent shall receive
copies of all letters from the Company to the investors transmitting the Common
Stock and Class C Warrants and shall receive a letter from the Company
confirming transmittal of the securities to the investors.
(c) Blue Sky. A summary blue sky survey, at the sole cost of the
Company (including, without limitation, the legal fees and disbursements in
connection therewith), shall be prepared by counsel to the Placement Agent
stating the extent to which and the conditions upon which offers and sales of
the Units may be made in certain jurisdictions. It is understood that such
survey may be based on or rely upon (i) the representations of each Subscriber
set forth in the Subscription Agreement delivered by such Subscriber, (ii) the
representations, warranties and agreements of the Company set forth in Section 2
of this Agreement, (iii) the representations and warranties of the Placement
Agent, and (iv) the representations of the Company set forth in the certificate
to be delivered at each Closing pursuant to paragraph (viii) of Section 4(b).
(d) Placement Fees and Expenses. (i) Simultaneously with payment for
and delivery of the Units at each Closing as provided in paragraph 4(a) above,
the Company
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Paramount Capital, Inc.
Page 17
shall at such Closing pay to the Placement Agent (i) a commission (the "Cash
Commission") equal to nine percent (9%) of the aggregate purchase price of the
Units sold and (ii) a non-accountable expense allowance (the "Expense
Allowance") equal to four percent (4%) of the aggregate purchase price of the
Units sold. The Company shall also pay all expenses in connection with the
qualification of the Units under the securities or Blue Sky laws of the states
which the Placement Agent shall designate. In addition, the Company shall pay to
the Placement Agent a commission of five percent (5%) upon the exercise of the
Class C Warrants. In addition, upon each Closing of the sale of the Units being
offered, the Company will sell to the Placement Agent and/or its designees, for
$.001 per option, options (the "Placement Options") to acquire a number of newly
issued Units equal to ten percent (10%) of the number of Units issued in the
Offering, exercisable for a period of five (5) years commencing six (6) months
after the Final Closing Date at an exercise price equal to one hundred ten
percent (110%) of the initial offering price of the Units. The Company agrees
with the Placement Agent and its successors and assigns that the securities
underlying the Placement Options will not be subject to redemption by the
Company nor will they be callable or mandatorily convertible by the Company. The
Placement Options cannot be transferred, sold, assigned or hypothecated for six
months except that they may be assigned in whole or in part during such period
to any NASD member participating in the Offering or any officer or employee of
the Placement Agent or any such NASD member. The Placement Options will contain
a cashless exercise feature, a provision for payment of the exercise price by
promissory note, antidilution provisions and the right to have the Common Stock
issuable upon exercise of the Placement Options included on the Shelf
Registration Statement.
(ii) The Cash Commission, Expense Allowance, and Placement
Options and Advisory Options as set forth in this Agreement shall be paid to the
Placement Agent with respect to any investment by any investors introduced to
the Company by the Placement Agent ("Covered Investors") in the event that any
such Covered Investor purchases securities from the Company during the twelve
(12) months following the Final Closing Date of the Offering.
(e) No Adverse Changes. There shall not have occurred, at any
time prior to the Closing (i) any domestic or international event, act or
occurrence which has materially disrupted, or in the Placement Agent's
determination will in the immediate future materially disrupt, the securities
markets of the United States; (ii) a general suspension of, or a general
limitation on prices for, trading in securities on the New York Stock Exchange,
the American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap
Market, or in the over-the-counter market; (iii) any outbreak of major
hostilities or other national or international calamity; (iv) any banking
moratorium declared by a state or federal authority; (v) any moratorium declared
in foreign exchange trading by major international banks or other persons; (vi)
any material interruption in the mail service or other means of communication
within the United States; (vii) any material adverse change in the business,
properties, assets,
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Paramount Capital, Inc.
Page 18
results of operations, financial condition or prospects of the Company; or
(viii) any change in the market for securities in general or in political,
financial, or economic conditions which, in the Placement Agent's reasonable
judgment, makes it inadvisable to proceed with the offering, sale, and delivery
of the Units.
5. Covenants of the Company.
(a) Use of Proceeds. The net proceeds of the Offering will be used by
the Company substantially as set forth in the Term Sheet. The Company shall not
use any of the proceeds from this Offering to repurchase, redeem or otherwise
acquire any shares of capital stock of the Company or repay any indebtedness of
the Company including but not limited to any indebtedness to current executive
officers or principal stockholders of the Company, but excluding accounts
payable to non-affiliates incurred in the ordinary course of business, without
the prior written consent of the Placement Agent.
(b) Expenses of Offering. The Company shall be responsible for and shall
bear all expenses incurred in connection with the proposed Offering, including
but not limited to, the costs of preparing and duplicating the Term Sheet and
all exhibits thereto; the costs of preparing, printing and filing with the
Securities and Exchange Commission (the "SEC") the Shelf Registration Statement
and amendments, post-effective amendments and supplements thereto; preparing,
duplicating and delivering exhibits thereto and copies of the preliminary, final
and supplemental prospectus; preparing, duplicating and delivering (including by
facsimile) all selling documents, including but not limited to the Term Sheet,
the Placement Agency Agreement, Subscription Agreements, Warrant agreements,
blue sky memorandum and stock and warrant certificates; blue sky fees, filing
fees and legal fees and disbursements of the Placement Agent's counsel in
connection with blue sky matters; fees and disbursements of the transfer and
warrant agent; the cost of a total of two sets of bound closing volumes for the
Placement Agent and its counsel; and the cost of three tombstone advertisements,
at least one of which shall appear in a national business newspaper and one of
which shall appear in a major New York newspaper (or, at the option of the
Placement Agent, forty (40) lucite deal mementos) (collectively, the "Company
Expenses"). The Company agrees to use a printer designated by the Placement
Agent and which is reasonably acceptable to the Company. The Company shall pay
to the Placement Agent a non- accountable expense allowance equal to 4% of the
total proceeds of the Offering (the "Expense Allowance"), of which twenty
thousand dollars ($20,000) shall be due and payable upon the date the Term Sheet
is completed, to cover the cost of the Placement Agent's mailing, telephone,
telecopy, travel to due diligence meetings and other similar expenses including
legal fees of the Placement Agent's counsel (other than legal fees in connection
with blue sky matters as to which fees the Company shall be responsible and any
items designated above as Company Expenses). Such prepaid expense allowances
shall be non-refundable. If the proposed financing is not completed because the
Company prevents it or because of a breach by the Company of any covenants,
representations or warranties contained herein, then the Company shall pay to
the
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Paramount Capital, Inc.
Page 19
Placement Agent a fee of one hundred thousand dollars ($100,000) against which
the $20,000, if previously paid, shall be credited (in addition to the Company
Expenses for which the Company shall in all events remain liable).
(c) Notification. The Company shall notify the Placement Agent
immediately, and in writing, (A) when any event shall have occurred during the
period commencing on the date hereof and ending on the Final Closing Date as a
result of which the Offering Documents would include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made and (B) of the receipt of any
notification with respect to the modification, rescission, withdrawal or
suspension of the qualification or registration of the Units, or of any
exemption from such registration or qualification, in any jurisdiction. The
Company will use its best efforts to prevent the issuance of any such
modification, rescission, withdrawal or suspension and, if any such
modification, rescission, withdrawal or suspension is issued and the Placement
Agent so requests, to obtain the lifting thereof as promptly as possible.
(d) Blue Sky. The Company will use its best efforts to qualify the
Units for offering and sale under exemptions from qualification or registration
requirements under the securities or "blue sky" laws of such jurisdictions as
the Placement Agent may reasonably request; provided however, that the Company
will not be obligated to qualify as a dealer in securities in any jurisdiction
in which it is not so qualified. The Company will not consummate any sale of
Units in any jurisdiction in which it is not so qualified or in any manner in
which such sale may not be lawfully made.
(e) Registration Statement Filing. The Company will, as soon as
practicable, but not later than thirty (30) days after the Final Closing Date,
(i) file a shelf registration statement (the "Shelf Registration Statement")
with respect to the resale of (A) the Common Stock underlying the Units
(including the Units issuable upon exercise of the Placement Options and
Advisory Options, (B) the Class C Warrants (including the Class C Warrants
underlying the Placement and Advisory Options, (C) the Exercise Shares
(including the Exercise Shares underlying the Class C Warrants issuable upon
exercise of Placement Options and the Advisory Options) and (D) the shares of
Common Stock constituting any Article VI Issuances (together the "Registrable
Capital Stock") with the SEC and use its best efforts to have such Shelf
Registration Statement declared effective by the SEC prior to the date that is
seventy-five (75) days after the Final Closing Date (subject to penalties for
failure to effect such registration in the time frames required) and (b) cause
such Shelf Registration Statement to remain effective until such date as the
holders of the securities (including the securities issued or then required to
be issued by the Company pursuant to any Article VI Issuances, whether pursuant
to Reset Issuances (as defined in the Subscription Agreement), Semi-Annual
Issuances (as defined in the Subscription Agreements) or Dilution Issuances (as
defined in the Subscription Agreement) have
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Paramount Capital, Inc.
Page 20
completed the distribution described in the Shelf Registration Statement or at
such time that such shares are no longer, by reason of Rule 144(k) under the
Act, required to be registered for the sale thereof by such holders who are not
affiliates of the Company. In the event that the Shelf Registration Statement is
not declared effective within the 75 day period described above, the Company
shall declare and pay, for no additional consideration, to the Purchasers
additional Units, equal to .25% of the Units, then held by such Purchaser for
each whole month in which the Shelf Registration Statement remains ineffective.
If requested by the Placement Agent, and in accordance with applicable
securities laws, the Shelf Registration Statement shall cover the direct sale of
such Registerable Capital Stock to the holders of such securities. The
Registerable Capital Stock will be subject to a staggered "lock-up" as may be
deemed advisable by the Placement Agent.
(f) Form D Filing. The Company shall file five (5) copies of a Notice
of Sales of Securities on Form D with the Commission no later than fifteen (15)
days after the first Closing Date. The Company shall file promptly such
amendments to such Notices on Form D as shall become necessary and shall also
comply with any filing requirement imposed by the laws of any state or
jurisdiction in which offers and sales are made. The Company shall furnish the
Placement Agent with copies of all such filings.
(g) Press Releases, Etc. Except as otherwise required by applicable law
or the rules of a regulatory body, the Company shall not, during the period
commencing on the date hereof and ending thirty (30) days after the Final
Closing Date, issue any press release or other communication, make any written
or oral statement to any media organization or publication or hold any press
conference, presentation or seminar, or engage in any other publicity with
respect to the Company, its financial condition, results of operations,
business, properties, assets, or liabilities, or the Offering, without the prior
written consent of the Placement Agent. Upon the request of the Placement Agent,
the Company shall make a Rule 135c (under the Act ) announcement with respect to
the commencement of the Offering.
(h) Public Documents. Following the Final Closing Date of the Offering,
the Company will furnish to the Placement Agent: (i) as soon as practicable (but
in the case of the annual report of the Company to its stockholders, within one
hundred twenty (120) days after the end of each fiscal year of the Company) one
copy of: (A) its annual report to its stockholders (which annual report shall
contain financial statements audited in accordance with generally accepted
accounting principles in the United States of America by a firm of certified
public accountants of recognized standing), (B) if not included in substance in
its annual report to stockholders, its annual report on Form 10-K, (C) each of
its quarterly reports to its stockholders, if any, and if not included in
substance in its quarterly reports to stockholders, its quarterly report on Form
10-Q, (D) each of its current reports on Form 8-K, and (E) a copy of the full
Shelf Registration Statement, (the foregoing, in each case, excluding exhibits);
and (ii) upon reasonable request, all exhibits excluded by the parenthetical to
the immediately preceding
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Paramount Capital, Inc.
Page 21
clause 5(h)(i)(E) and any other information that is generally available to the
public. In addition, the Company upon reasonable request will meet with the and
any other information that is generally available to the public. In addition,
the Company upon reasonable request will meet with the Placement Agent or its
representatives to discuss all information relevant for disclosure in any Shelf
Registration Statement covering shares purchased by Purchasers from the Company
and offered by them for resale and will cooperate in any reasonable
investigation undertaken by the Placement Agent for the purpose of confirming
the accuracy of the Shelf Registration Statement, including the production of
information at the Company's offices.
(i) Restrictions on Securities. During the thirty-six (36) months
following June 30, 1997, the Company shall not, without the prior written
consent of the Placement Agent, offer or sell any of its securities in reliance
on Regulation S of the Act. During the twenty-four (24) month period following
October 1, 1997, the Placement Agent shall have the right of first refusal to
act as placement agent for the offering of any securities of the Company issued
for fund raising purposes. During the thirty-six (36) month period following
June 30, 1997 the Company will not extend the expiration date or decrease the
exercise price of any options, warrants, convertible securities or other similar
security purchase rights without the prior written consent of the Placement
Agent.
(j) Listing. The Company will take all action necessary promptly to
file an Application for Listing of Additional Shares with the New York Stock
Exchange, the American Stock Exchange, the NASDAQ National Market, the NASDAQ
SmallCap Market, or the OTC Electronic Bulletin Board and/or take any other
necessary action to enable the (i) Common Stock (including the Common Stock
issuable (A) upon exercise of the Class C Warrants, (B) upon exercise of the
Placement and Advisory Options (including the shares of Common Stock issuable
upon exercise of the Class C Warrants underlying the Placement Options and (C)
pursuant to any Article VI Issuances) and (ii) the Class C Warrants to trade on
such market.
(k) Financial Advisory Agreement. Upon the Final Closing Date, the
Company and the Placement Agent will enter into an advisory agreement (the
"Financial Advisory Agreement") whereby the Placement Agent will act as the
Company's non-exclusive financial advisor. Such engagement will provide that the
Placement Agent receive (i) a monthly retainer of four thousand ($4,000) Dollars
(minimum engagement of 24 months and $20,000 of which shall be payable upon the
execution of the Financial Advisory Agreement), (ii) out-of-pocket expenses and
(iii) standard cash and equity success fees in the event the Placement Agent
assists the Company in connection with certain financing and strategic
transactions. In addition, upon the execution of the Financial Advisory
Agreement, the Company will sell to the Placement Agent and/or its designees,
for $.001 per option, options (the "Advisory Options") to acquire a number of
newly issued Units equal to fifteen percent (15%) of the Units issued in the
Offering, exercisable for a period of five (5) years commencing six (6) months
after the Final
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Paramount Capital, Inc.
Page 22
Closing Date at an exercise price equal to 110% of the initial offering price of
the Units. The Company has agreed to register certain of the securities
underlying the Advisory Options for resale under the Act on the Registration
Statement. The securities underlying the Advisory Options will not be subject to
mandatory conversion or redemption by the Company nor will they be callable by
the Company. The Advisory Options will contain a cashless exercise feature, a
provision for payment of the exercise price by promissory note, and antidilution
provisions.
(l) Company Insiders. Officers, directors or principal stockholders of
the Company may invest in the Offering. Any such investments will be included in
calculating whether the 25 Units have been sold in the Minimum Offering, whether
the 100 Units have been sold in the Maximum Offering, and whether the 150 Units
have been sold pursuant to the over-allotment option.
(m) Placement Agent Insiders. Certain affiliates of the Placement Agent
may purchase Units in the Offering. Affiliates of the Placement Agent will
invest net of cash commissions and expenses. Accordingly, the Placement Agent
will not receive a commission on the Units purchased by its affiliates and the
Company will receive net proceeds equivalent to the net proceeds received from
the purchase of Units by persons not affiliated with the Placement Agent. The
aggregate offering price of any such investments will be included in calculating
whether the 25 Units have been sold in the Minimum Offering, whether the 100
Units have been sold in the Maximum Offering, and whether the 150 Units have
been sold pursuant to the over-allotment option.
(n) Subscription Checks. All subscription checks and funds shall be
promptly and directly delivered without offset or deduction to the bank account
at the Escrow Agent described in the Escrow Agreement.
(o) No Offerings. Pending completion or termination of the Offering in
accordance with the terms of this Agreement, the Company agrees that it will not
enter into an agreement (whether binding or not) with any other person or entity
relating to a possible public or private offering or placement of its securities
(other than in connection with a corporate partnership, strategic alliance or
government funding).
(p) Lock-Up Agreement. If requested by the Placement Agent, the Company
will obtain from its directors, executive officers and beneficial owners of five
percent (5%) or more of the Company's outstanding common stock, an agreement
that, for a period of twenty-four (24) months from the Final Closing Date, they
will not sell, assign or transfer any of their shares of the Company's
securities without the Placement Agent's prior written consent.
(q) No Statements. The Company shall not use the name of the Placement
Agent or any officer, director, employee or shareholder thereof without the
express
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Paramount Capital, Inc.
Page 23
written consent of the Placement Agent. In the event the Placement Agent has
refused to give consent and the Company has been advised upon in a written
opinion of counsel that any such disclosure is required as a matter of law, the
Company may make such disclosure (to the extent that such opinion states that it
is required) without the Placement Agent's consent.
(r) Company Advisors. The Company covenants and represents that it
shall immediately notify its independent accountants and patent, regulatory and
outside corporate counsel of the pendency of the Offering and that comfort
letters and legal opinions will be required prior to any closing. The Company
agrees and represents that it will provide (i) preliminary drafts of the Term
Sheet to such firms for their review and comment and (ii) final drafts of the
Term Sheet to such firms immediately upon its completion.
(s) Directors and Observers.
(i) For a period of five (5) years after June 30, 1997, the
Placement Agent shall be entitled to designate a number of directors that would
constitute a majority of the Board of Directors for nomination as voting
directors ("Directors") of the Company. In no event shall the Board of Directors
exceed seven (7) members without the Placement Agent's consent. If necessary,
the Directors of the Company will elect each such person to the Board of
Directors of the Company (A) on the Initial Closing Date, by causing an existing
Director of the Company to resign and (B) thereafter, by creating a new position
on the Board of Directors promptly following such person's nomination by the
Placement Agent. The Board of Directors of the Company shall nominate each such
person for election in connection with any stockholder vote for Directors, and
the Company will use its best efforts to ensure that the stockholders of the
Company agree to vote all their securities in favor of each such person's
election. The Company agrees to vote all voting securities for which the Company
holds proxies granting it voting discretion, or which the Company is otherwise
entitled to vote, in favor of, and to use its best efforts in all respect to
cause, the election of each such individual proposed by the Placement Agent. In
the event that a vacancy is created on the Board of Directors at any time by the
death, disability, resignation or removal (with or without cause) of any such
individual proposed and nominated by the Placement Agent pursuant to this
Agreement, the Company shall, and shall use its best efforts to ensure that the
stockholders of the Company, vote all its or their voting securities to elect
each individual proposed by the Placement Agent and nominated for election by
the Placement Agent to fill such vacancy and serve as a voting Director.
(ii) At the Placement Agent's option, in addition to or in lieu of
proposing for nomination and election the majority of the Directors of the
Company to be proposed by the Placement Agent as set forth in Section 5(s)(i),
the Placement Agent may, until such time as no Article VI Rights (as defined in
the Subscription Agreement) remain outstanding, designate a nonvoting observer
or observers who shall be entitled to attend all meetings of the Board of
Directors and any of its committees and who shall be (A) provided reasonable
prior
<PAGE>
Paramount Capital, Inc.
Page 24
notice of all meetings of the Board of Directors and any of its committees, (B)
provided reasonable prior notice of any action that the Board of Directors or
any of its committees may take by written consent, (C) promptly delivered copies
of all minutes and other records of action by, and all written information
furnished to, the Board of Directors or any of its committees, and (D) promptly
furnished any other information requested by such observer or observers which a
member of the Board of Directors would be entitled to request to discharge his
or her duties. Such observers shall be entitled to the same rights to
reimbursement for the expense of attendance at meetings as any outside Director.
(iii) If the Placement Agent gives notice to the Company that the
Placement Agent desires to remove a Director proposed by the Placement Agent
pursuant to this Agreement, the Company shall, and shall use its best effort to
ensure that the stockholders of the Company shall, vote all of its or their
voting securities in favor of removing such Director if a vote of holders of
such securities shall be required to remove the Director, and the Company agrees
to take any action necessary to facilitate such removal.
(iv) Each Director nominated by the Placement Agent shall be
entitled to the same type of compensation, and an amount of compensation at
least equal to the highest amount, payable to any other Director for serving in
such capacity. As used in this paragraph 5(s)(iv), "compensation" shall include
Director and Officer insurance coverage among other things. The Company shall
cover the Directors nominated by the Placement Agent with Director and Officer
insurance that is at least as favorable to such persons as the most favorable
(from the prospective of the insured) Director and Officer insurance benefiting
any other member of the Board of Directors or management of the Company.
(v) Not later than three (3) business days after the Initial
Closing Date, the Company shall have (A) caused the appointment of the initial
Directors nominated by the Placement Agent to its Board of Directors in
accordance with the provisions of this Section 5(s), to the extent such
individuals have been identified in writing to the Company by such time, and (B)
taken such action as shall be necessary to cause the Board of Directors to be
composed of, and limited to, five members. The Company will use its best efforts
to ensure continuing compliance with the terms of Clause (B) of the preceding
sentence until such time as no Article VI Rights remain outstanding.
(vi) The Placement Agent's rights under this Section 5(s) shall be
exercisable only to the extent that the corresponding rights contained in
Section 7.19 of the Securities Purchase Agreement dated as of June 30, 1997 have
not been previously exercised by The Aries Trust, a Cayman Islands Trust (the
"Trust") or Aries Domestic Fund, L.P. (the "Partnership").
(t) Board of Directors.
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Paramount Capital, Inc.
Page 25
(i) The Company shall promptly reimburse each Director or observer
of the Company designated by the Trust, the Partnership or the Placement Agent
who is not an employee of the Company for all of his reasonable expenses
incurred in attending each meeting of the Board of Directors of the Company or
any committee thereof.
(ii) The Company shall at all times maintain provisions in its By-
laws and/or Certificate of Incorporation indemnifying all directors against
liability and absolving all directors from liability to the Company and its
stockholders to the maximum extent permitted under the laws of the State of
Delaware.
(iii) The By-laws of the Company shall always contain provisions
consistent with the provisions of this Section 5(t) except to the extent this
Section 5(t) deals with the possible observers.
(u) Placement Agent Approval Rights.
(i) Until such time as the Placement Agent, Partnership and the
Trust, and each of their respective affiliates, in the aggregate, own less than
five percent (5%) of the Total Voting Shares (as defined below) of the Company's
capital stock (taking into account shares issuable upon conversion or exercise
of shares held by them), the Company shall not do any of the following without
prior written consent of the Placement Agent to the extent such consent right is
not exercised by the Partnership or the Trust: (A) incur any indebtedness
outside the ordinary course of business, (B) incorporate, acquire, dissolve or
dispose of any subsidiaries (C) enter into any transactions with affiliates of
the Company nor (D) increase any executive compensation or bonuses, whether in
the form of cash, stock, stock equivalents or otherwise (except for bonuses
guaranteed in an employment contract). The "Total Voting Shares" shall mean all
outstanding shares of any class or classes (however designated) of capital stock
entitled to vote generally in the election of members of the Board of Directors.
(ii) In addition to the approval rights set forth in 5(u)(i) above,
so long as at least fifty percent (50%) of the shares of Common Stock included
in the Units (including those issuable upon exercise of the Placement and
Advisory Options) remain outstanding and subject to Article VI Rights, the
Company will not, without the prior written consent of the Placement Agent: (A)
issue or increase the authorized amount or alter any of the terms, of any
securities of the Company senior to, or on parity with, the Common Stock (other
than Common Stock to be issued pursuant to Article VI Issuances relating to
Common Stock (including the shares of Common Stock underlying the Units issuable
upon exercise of the Placement Options and Advisory Options) issued in this
Offering) with respect to voting, liquidation or dividends (except for class
voting rights required law), (B) alter any of the Company's charter documents or
take any action so as to adversely affect the relative rights,
<PAGE>
Paramount Capital, Inc.
Page 26
preferences, qualifications, limitations or restrictions of the Common Stock or
of the Article VI Rights (as defined in the Subscription Agreement), (C) enter
into any transactions with affiliates of the Company or (D) incorporate or
acquire any subsidiaries.
(v) Disposal of Assets. Pending completion or termination of the
Offering, the Company will not dispose of any assets of the Company (including,
without limitation, creating, suffering to exist or permitting the imposition of
any liens) other than in the ordinary course consistent with past practice.
(w) Consultants, Etc. The Placement Agent may, at its option, select
and appoint a public relations firm and consultants to assist the Company in its
affairs, the cost of which shall be borne by the Company.
(x) Reports. The Company shall provide the Placement Agent with (i)
written business and financial updates on a monthly basis and (ii) detailed
written quarterly reports ("Quarterly Reports") containing quarterly updates as
to product development, financial matters, clinical trials, corporate partnering
matters, and any other material events or business activities. The Quarterly
Reports shall contain sections (i) detailing the Company's objectives and
milestones for the upcoming quarter and (ii) comparing the Company's performance
in the previous quarter with the milestones and objectives set forth for such
quarter in the previous Quarterly Report.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Placement
Agent and each Selected Dealer, if any, and their respective partners,
affiliates, shareholders, directors, officers, agents, advisors,
representatives, employees, counsel and controlling persons within the meaning
of the Act (a "Paramount Indemnified Party") against any and all losses,
liabilities, claims, damages and expenses whatsoever (and all actions in respect
thereof), and to reimburse the such Paramount Indemnified Party for legal fees
and related expenses as incurred (including, but not limited to the costs of
giving testimony or furnishing documents in response to a subpoena or otherwise,
the costs of investigating, preparing, pursuing or defending any such action or
claim whether or not pending or threatened and whether or not the Placement
Agent or any Paramount Indemnified Party is a party thereto), in so far as such
losses, liabilities, claims, damages or expenses arise out of, relate to, are
incurred in connection with or are in any way a result of (i) the engagement of
the Placement Agent pursuant to this Agreement and in connection with the
transactions contemplated by this Agreement and the other Offering Documents
(the "Engagement"), including any modifications or future additions to such
Engagement and related activities prior to the date hereof, (ii) any act by the
Placement Agent or any Paramount Indemnified Party taken in connection with the
Engagement, (iii) a breach of any representation, warranty, covenant, or
agreement of the Company contained in this Agreement,
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Paramount Capital, Inc.
Page 27
(iv) the employment by the Company of any device, scheme or artifice to defraud,
or the engaging by the Company in any act, practice or course of business which
operates or would operate as a fraud or deceit, or any conspiracy with respect
thereto, in connection with the sale of the Units, or (v) any untrue statement
or alleged untrue statement of a material fact contained in the Offering
Documents or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, provided, however, that the Company
will not be liable in any such case if and to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by any such Paramount Indemnified Party in
writing specifically for use in the Offering Documents;
(b) The Company agrees to indemnify and hold harmless a Paramount
Indemnified Party to the same extent as the foregoing indemnity, and subject to
the limitations set forth therein, against any and all loss, liability, claim,
damage and expense whatsoever directly arising out of the exercise by any person
of any right under the Act or the Exchange Act or the securities or Blue Sky
laws of any state on account of violations of the representations, warranties or
agreements set forth in Section 2 hereof.
(c) The Placement Agent agrees to indemnify and hold harmless the
Company, the Company's directors, officers, employees, counsel, advisors,
representatives and agents and controlling persons within the meaning of the Act
(a "Company Indemnified Party") and each and all of them, to the same extent as
set forth in Section 6(a)(v) of the foregoing indemnity from the Company to the
Placement Agent, but only with reference to information, relating to the
Placement Agent, furnished in writing to the Company by the Placement Agent
specifically for inclusion in the Offering Documents and only to the extent that
any losses, claims, damages, and liabilities in respect of which indemnification
is claimed are finally judicially determined to have resulted primarily and
directly from the bad faith or gross negligence of the Placement Agent.
(d) Promptly after receipt by a person entitled to indemnification
pursuant to subsection (a), (b), or (c) (an "indemnified party") of this Section
of notice of the commencement of any action, the indemnified party will, if a
claim in respect thereof is to be made against a person granting indemnification
(an "indemnifying party") under this Section, notify in writing the indemnifying
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
the indemnified party otherwise than under this Section. In case any such action
is brought against an indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, subject to
the provisions herein stated, with counsel reasonably satisfactory to the
indemnified party, and after
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Paramount Capital, Inc.
Page 28
notice from the indemnifying party to the indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation incurred at the request of the indemnifying party. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both the indemnified party or parties and the
indemnifying party and, in the opinion of counsel of the indemnified party, a
conflict of interest exists between such parties in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the indemnified party or parties, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party or parties. No settlement, compromise, consent to entry of
judgment or other termination of any action (collectively, "Terminations") in
respect of which a Paramount Indemnified Party may seek indemnification
hereunder (whether or not any Paramount Indemnified Party is a party thereto)
shall be made without the prior written consent of the Paramount Indemnified
Party, which such consent may be withheld at the sole discretion of such
Paramount Indemnified Party, provided, however, that the foregoing requirement
of prior written consent for Terminations shall not apply to the Placement Agent
who may agree to such Terminations without the prior written consent of any
Paramount Indemnified Party.
(e) Notwithstanding any of the provisions of this Agreement, the
aggregate indemnification or contribution of the Placement Agent for or on
account of any losses, claims, damages, liabilities or actions under this
Section 6, Section 7 or any other applicable section of this Agreement, shall
not exceed the Cash Commissions actually paid to the Placement Agent. The
respective indemnity and contribution agreements by the Company and the
Placement Agent contained in subsections (a), (b), (c) and (d) of this Section 6
and Section 7, and the covenants, representations and warranties of the Company
and the Placement Agent set forth in Sections 1, 2, 3, 4 and 5 shall remain
operative and in full force and effect regardless of (i) any investigation made
by the Placement Agent, on the Placement Agent's behalf or by or on behalf of
any person who controls the Placement Agent, the Company or any controlling
person of the Company or any director or officer of the Company, (ii) acceptance
of any of the Units and payment therefor or (iii) any termination of this
Agreement, and shall survive the delivery of the Units, and any successor of the
Placement Agent or of the Company or of any person who controls the Placement
Agent or the Company, as the case may be, shall be entitled to the benefit
<PAGE>
Paramount Capital, Inc.
Page 29
of such respective indemnity and contribution agreements. The respective
indemnity and contribution agreements by the Company and the Placement Agent
contained in subsections (a), (b) and (c) of this Section 6 and Section 7 shall
be in addition to any liability which the Company and the Placement Agent may
otherwise have.
7. Contribution.
(a) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 6 but it
is found in a final judicial determination, by a court of competent
jurisdiction, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
officer, director, employee or agent for the Company, or any controlling person
of the Company), on the one hand, and the Placement Agent and any Selected
Dealers (including for this purpose any contribution by or on behalf of an
indemnified party), on the other hand, shall contribute to the losses,
liabilities, claims, damages, and expenses whatsoever to which any of them may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Placement Agent and
the Selected Dealers, on the other hand; provided, however, that if applicable
law does not permit such allocation, then other relevant equitable
considerations such as the relative fault of the Company and the Placement Agent
and the Selected Dealers in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses shall also be considered. In
no case shall the Placement Agent or a Selected Dealer be responsible for a
portion of the contribution obligation in excess of the compensation received by
it pursuant to Section 4 hereof or the Selected Dealer Agreement, as the case
may be. No person guilty of a fraudulent misrepresentation shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Placement Agent or a Selected Dealer within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act and each officer, director,
stockholder, employee and agent of the Placement Agent or a Selected Dealer,
shall have the same rights to contribution as the Placement Agent or the
Selected Dealer, and each person, if any who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each
officer, director, employee and agent of the Company, shall have the same rights
to contribution as the Company, subject in each case to the provisions of this
Section 7. Anything in this Section 7 to the contrary notwithstanding, no party
shall be liable for contribution with respect to the settlement of any claim or
action effected without its written consent. This Section 7 is intended to
supersede any right to contribution under the Act, the Exchange Act, or
otherwise.
8. Miscellaneous.
<PAGE>
Paramount Capital, Inc.
Page 30
(a) Survival. Any termination of the Offering without any Closing
shall be without obligation on the part of any party except that the provisions
regarding fees and expenses contained in Section 5(b), the indemnification
provided in Section 6 hereof and the contribution provided in Section 7 hereof
shall survive any termination and shall survive any Closing.
(b) Representations, Warranties and Covenants to Survive Delivery.
Except as provided in Section 8(a), the respective representations, warranties,
indemnities, agreements, covenants and other statements of the Company and the
Placement Agent as of the date hereof shall survive execution of this Agreement
and delivery of the Units and the termination of this Agreement.
(c) No Other Beneficiaries. This Agreement is intended for the sole
and exclusive benefit of the parties hereto and their respective successors and
controlling persons, and no other person, firm or corporation shall have any
third-party beneficiary or other rights hereunder.
(d) Governing Law. This Agreement shall be governed by and construed
in accordance with the law of the State of New York without regard to conflict
of law provisions.
(e) Counterparts. This Agreement may be signed in counterparts with
the same effect as if both parties had signed one and the same instrument.
(f) Notices. Any communications specifically required hereunder to
be in writing, if sent to the Placement Agent, will be mailed, delivered and
confirmed to it at Paramount Capital, Inc., 787 Seventh Avenue, 48th Floor,
New York, New York, 10019, Att: Michael S. Weiss and if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at Procept, Inc.,
840 Memorial Drive, Cambridge, Massachusetts 02139, Attn: Chief Executive
Officer.
(g) Termination. Subject to the general survival provisions
contained in Sections 8(a) and 8(b) and, in the event of a termination by the
Company, provided that the Company pays the one hundred thousand ($100,000)
termination fee and expenses set forth in Section 5(b), this Agreement may be
terminated by either party prior to the end of the Offering Period upon written
notice to the other party.
(h) Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter
<PAGE>
Paramount Capital, Inc.
Page 31
hereof. Neither this Agreement nor any term hereof may be changed, waived or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver or termination is sought.
(i) Nothing contained herein or otherwise shall create a partnership
or joint venture between the Placement Agent and the Company.
(j) The headings and captions of the various subdivisions of this
Agreement are for convenience or reference only and shall in no way modify or
affect the meaning or construction of any of the terms or provisions hereof.
<PAGE>
Paramount Capital, Inc.
Page 32
If you find the foregoing is in accordance with our understanding, kindly
sign and return to us a counterpart hereof, whereupon this instrument along with
all counterparts will become a binding agreement between us.
Very truly yours,
PROCEPT, INC.
By: /s/ Stanley C. Erck
---------------------------------
Name: Stanley C. Erck
Title: President
Agreed to by:
PARAMOUNT CAPITAL, INC.
By: /s/ Lindsay A. Rosenwald, M.D.
-------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: Chairman
<PAGE>
Paramount Capital, Inc.
Page 1
EXHIBIT A
PROCEPT, INC.
OFFICER'S CERTIFICATE
January 23, 1998
I, Stanley C. Erck, certify that I am the President of Procept, Inc., a
Delaware corporation (the "Company"), and that, as such, I am authorized to
execute this certificate on behalf of the Company. All capitalized terms used
herein but not otherwise defined herein shall the meanings ascribed to such
terms in the Placement Agency Agreement (as defined below). Reference is made
herein to the closing held on January 23, 1998 (the "Closing Date"). I do hereby
certify that I have carefully examined all of the Offering Documents (as defined
in the Placement Agency Agreement dated as of October 26, 1997 between the
Company and Paramount Capital, Inc. (the "Placement Agency Agreement")), and do
hereby further certify that:
1. All of the representations and warranties of the Company contained in
the subscription agreements (the "Subscription Agreements") between the Company
and the purchasers (the "Purchasers") of the Units of the Company contemplated
by the Company's Confidential Term Sheet, dated November 14, 1997 (as
supplemented, the "Term Sheet") are true and correct in all material respects on
the Closing Date with the same force and effect as if made on and as of the
Closing Date, and the Company has performed all covenants and agreements and has
satisfied all conditions in the Subscription Agreements to be performed or
satisfied on its part before the Closing Date in all material respects.
2. The Term Sheet does not contain any untrue statement of a material fact
or omit to state any fact required to be stated in order to make the statements
therein not misleading as of the Closing Date. Since the date of the Term Sheet,
no event has occurred concerning which information is required to be contained
in an amended or supplemented Term Sheet concerning which such information is
not contained therein.
3. All of the representations and warranties of the Company contained in
the Placement Agency Agreement are true and correct in all material respects on
the Closing Date, and the Company has performed all covenants and agreements and
has satisfied all conditions contained in the Placement Agency Agreement to be
performed and satisfied on its part at or
1
<PAGE>
Paramount Capital, Inc.
Page 2
prior to the Closing Date in all material respects.
4. All of the representations and warranties of the Company contained each
of the other Offering Documents are true and correct in all material respects on
the Closing Date, and the Company has performed all covenants and agreements and
has satisfied all conditions contained in such Offering Documents to be
performed and satisfied on its part at or prior to the Closing Date in all
material respects.
5. Since the date of the most recent financial statements and the
information included in the Term Sheet, there has been no material adverse
change in the condition (financial or other), earnings, business, properties or
prospects of the Company taken as a whole, whether or not arising from
transactions in the ordinary course of business, nor has there occurred any
material event required to be set forth in the Term Sheet, including, without
limitation, in accordance with Section 2(g) of the Placement Agency Agreement.
6. There is no litigation pending or threatened by or against the Company,
except as disclosed in the Term Sheet.
7. The Company shall promptly take all action necessary to list (i) the
Common Stock underlying the Units, (ii) the Common Stock issuable upon exercise
of the Class C Warrants underlying the Units, (iii) the Class C Warrants
(including the Class C Warrants underlying the Placement and Advisory Options),
(iv) the Common Stock constituting any Article VI Issuances relating to Common
Stock underlying the Units (including for each of (i), (ii), (iii) and (iv)
above, the Units issuable upon exercise of the Placement and Advisory Options)
on the Nasdaq National Market in accordance with the rules of the Nasdaq
National Market.
8. Since January 1, 1997, the Company has not offered to sell to or
solicited any offers to buy from any person shares of capital stock of the
Company, except in connection with the Offering contemplated by the Term Sheet.
This Certificate is made for the benefit of and may be relied upon by, the
Placement Agent, Kramer, Levin, Naftalis & Frankel, as counsel to the Placement
Agent, and each of the Purchasers.
IN WITNESS WHEREOF, I have executed this certificate on this 23rd day of
January, 1998.
/s/ Stanley C. Erck
------------------------------------
Name: Stanley C. Erck
Title: President
2
<PAGE>
Paramount Capital, Inc.
Page 1
EXHIBIT B
PROCEPT, INC.
SECRETARY'S CERTIFICATE
January 23, 1998
I, Lynette C. Fallon, certify that I am the duly elected, qualified and
acting Secretary of Procept, Inc., a Delaware corporation (the "Company"), and
as such, I am duly authorized to execute this Certificate on behalf of the
Company, and that I am familiar with the facts certified below. All capitalized
terms used herein but not otherwise defined herein shall the meanings ascribed
to such terms in the Placement Agency Agreement dated as of October 26, 1997
between the Company and Paramount Capital, Inc. (the "Placement Agency
Agreement"). Reference is made herein to the closing held on January 23, 1998
(the "Closing Date"). In connection with the offering and sale of up to 60 units
(the "Units"), each consisting of (a) the number of shares (rounded to the
nearest whole share with 0.5 of one share being rounded upward) (the "Offering
Quantity") of Common Stock of the Company, par value $.01 per share, (the
"Common Stock") determined by dividing 100,000 by the lesser of (i) $0.50 and
(ii) 75% of the Trading Price (as defined below) as of (x) the initial closing
date (the "Initial Closing Date", (y) any interim closing date (each an "Interim
Closing Date") or (z) the final closing date (the "Final Closing Date") of this
offering whichever is lowest (the "Offering Price"), and (b) warrants (the
"Class C Warrants") to purchase, at an exercise price per share equal to the
Offering Price, at any time prior to the fifth anniversary of the Final Closing
Date (as defined herein) a number of shares of Common Stock equal to the
Offering Quantity, for which Paramount Capital, Inc. ("Paramount") has acted as
placement agent, I do hereby further certify as follows:
1. Attached hereto as Attachment A is a true, correct and complete copy of
the Company's Certificate of Incorporation, as amended, which is in full force
and effect, no amendment to such certificate has been approved by the Board of
Directors or stockholders of the Company or filed with the Delaware Secretary of
State since October 26, 1997. As of the Closing Date, the Company is duly
incorporated and in good standing in its state of incorporation and has paid all
fees and taxes due and payable by it on or prior to the Closing Date necessary
for the maintenance or continuation of its corporate existence. As of the
Closing Date, except as
1
<PAGE>
Paramount Capital, Inc.
Page ii
disclosed in the Term Sheet, there are no proceedings or actions contemplated by
the Company, relating to the merger, liquidation, consolidation, or sale of all
or substantially all of the assets or business of the Company or which would
otherwise threaten or impair the Company's corporate existence.
2. Attached hereto as Attachment B is a true, correct and complete copy of
the By-laws of the Company, as in full force and effect on the Closing Date and
at all times from October 26, 1997 through the Closing Date.
3. As of the Closing Date, each of the Offering Documents is in the form
authorized by the board of directors of the Company pursuant to the resolutions
set forth in Attachment C.
4. Attached hereto as Attachment C is a true, correct and complete copy of
resolutions duly adopted at meetings of the Company's board of directors duly
called and held on January 13, 1998, which resolutions authorize the issuance
and sale of the Units and the Placement Options and Advisory Options in
accordance with the requirements of Delaware law, the Certificate and By-laws of
the Company, are the only resolutions in effect adopted by the board of
directors of the Company or any committee thereof with respect to the offering
and sale of the units and the transactions relating thereto, and which have not
been revoked, modified and amended or rescinded and are in full force and effect
on the Closing Date.
5. Attached hereto as Attachment D are true, correct and complete copies of
specimens of the certificates representing the Common Stock and Class C Warrants
heretofore approved and adopted by the board of directors of the Company. Each
of the certificates representing Common Stock and Class C Warrants delivered on
the Closing Date to each of the Purchasers pursuant to the Subscription
Agreements has been executed by the genuine or facsimile signature of officers
of the Company who have been duly elected or appointed, qualified and acting as
such officers on the date such certificates were executed and delivered, all in
accordance with the Certificate and By-laws of the Company and the requirements
of applicable law.
6. Attached hereto as Attachment E is a true, correct and complete copy of
the form of Placement and Advisory Options heretofore approved and adopted by
the Board of Directors of the Company. Each of the Placement and Advisory
Options delivered on the date hereof to each of the holders pursuant to the
Placement Agency Agreement has been executed by the genuine or facsimile
signature of officers of the Company who have been duly elected or appointed,
qualified and acting as such officers on the date such certificates were
executed and
2
<PAGE>
Paramount Capital, Inc.
Page 3
delivered, all in accordance with the Certificate and By-laws of the Company and
the requirements of applicable law.
7. The minute books and records of the Company, relating to all proceedings
of the stockholders, the Board of Directors of the Company and the Compensation
Committee, the Audit Committee and the Nominating Committee of such Board have
been made available to Kramer, Levin, Naftalis & Frankel, counsel to Paramount,
and, in such form, are the original minute books and records of the Company.
There have been no material changes, alterations or additions in such minutes or
records since their examination by Kramer, Levin, Naftalis & Frankel on behalf
of Paramount.
8. Each person who, as an officer or director of the Company, signed any of
the Offering Documents or any other document in connection with the offering and
sale of the Units, the Placement and the Advisory Options and the closing
relating thereto was duly elected or appointed, qualified and acting as such
officer or director at the respective times of the signing and delivery thereof
and was duly authorized to sign such document on behalf of the Company, and the
signature of each such person appearing on each such document is the genuine
signature of such officer, director or person duly appointed for the purpose of
executing such documents under valid powers of attorney, and each individual who
signed such signature pages, personally or by an attorney-in-fact, was then duly
elected, qualified and acting as an officer or director of the Company as stated
therein.
9. The following persons are, and have been at all times since October 26,
1997, duly qualified and acting officers of the Company, duly elected or
appointed to the offices set forth opposite their respective names, and the
signature opposite the name of each such officer is his or her, or a facsimile
of his or her, authentic signature, and the seal affixed hereto is the duly
adopted seal of the Company:
Name Office Signature
---- ------ ---------
Stanley C. Erck President, Chief Executive Officer
And Treasurer
This certificate is made for the benefit of, and may be relied
upon by, Paramount,
3
<PAGE>
Paramount Capital, Inc.
Page iv
Kramer, Levin, Naftalis & Frankel, as counsel to Paramount, and each of the
Purchasers.
IN WITNESS WHEREOF, I have hereunto set forth my hand this 23rd day of
January, 1998.
[SEAL]
/s/ Lynnette C. Fallon
-------------------------------------
Name: Lynnette C. Fallon
Title: Secretary
I, Stanley C. Erck, President of the Company, do hereby certify that
Lynette C. Fallon whose genuine signature appears above, is, and has been at all
times since October 26, 1997, the duly elected or appointed, qualified and
acting Secretary of the Company.
IN WITNESS WHEREOF, I have hereunto set forth my hand this 23rd day of
January, 1998.
/s/ Stanley C. Erck
-------------------------------
Name: Stanley C. Erck
Title: President
4
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Procept, Inc. on Form S-3 (File No. 333-09987) and Form S-8 (File Nos. 33-76252,
33-81394, 33-81392, 333-06035, 333-36145, 333-36147 and 333-36149) or our report
dated February 26, 1998, on our audits of the financial statements of Procept,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, which report is included in this Annual Report
on Form 10-K. We also consent to the reference to our firm under the caption
"Selected Financial Data".
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 30, 1998
Exhibit 99.1
PROCEPT, INC.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
March 1998
From time to time, Procept through its management may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning projected plans, performance, product development and
commercialization as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities Exchange
Act of 1934, as amended, in press releases or in oral statements made with the
approval of an authorized executive officer. The words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933, as enacted by the Private
Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements that speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events that may cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially form those projected in forward-looking statements
of the Company made by or on behalf of the Company.
Early Stage of Product Development; Uncertainty of Successful Commercialization
Since its inception the Company has generated no revenue from product sales. The
Company's research and development programs are at an early stage. Although the
Company has identified compounds that it believes will have clinical value,
there can be no assurance that such compounds will develop into commercial
products or that additional products will be discovered, developed or acquired
in the future. The products currently under development by the Company will
require significant additional research and development efforts, including
extensive clinical testing and regulatory approval, prior to commercial use.
Only one of the Company's product candidates has advanced to the clinical trial
phase and none have been scaled-up for commercial production. The Company's
potential products are subject to the risks of failure inherent in the
development of pharmaceutical products based on new technologies. These risks
include: (a) the possibilities that the Company's therapeutic approach will not
be successful; (b) that any or all of the Company's potential products will be
found to be unsafe, ineffective or toxic or otherwise fail to meet applicable
regulatory standards or receive necessary regulatory clearances; (c) that the
potential products, if safe and effective, will be difficult to develop into
commercially viable products or to
<PAGE>
manufacture on a large scale or will be uneconomical to market; (d) that
proprietary rights of third parties will preclude the Company from marketing
such products; or (e) that third parties will market superior or equivalent
products. Furthermore, the Company's products in research or development or to
be acquired may prove to have undesirable and unintended side effects or other
characteristics that may prevent or limit their commercial use. There can be no
assurance that the Company will be permitted to undertake human clinical testing
of any potential products or, if permitted, that such products will be
demonstrated to be safe and efficacious. In addition, there can be no assurance
that any of the Company's products will obtain United States Food and Drug
Administration ("FDA") or foreign regulatory approval for any indication or that
an approved compound would be capable of being produced in commercial quantities
at reasonable costs and successfully marketed. Products, if any, resulting from
the Company's research and development programs are not expected to be
commercially available, if at all, for a number of years at the earliest.
Need for Additional Funds; Risk of Insolvency
The Company's operations to date have consumed substantial amounts of cash.
Substantial additional sources of financing will be required in order for the
Company to continue its planned operations. The Company is currently dependent
upon research and development collaborations, external financings and interest
income to provide working capital to pursue its intended business activities.
There can be no assurance, however, that additional funding will be available
from any of these sources or, if available, will be available on acceptable or
affordable terms. The Company has not been profitable since inception and has
incurred an accumulated deficit of $57,860,985 million through December 31,
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 substantially due to continued research
and development efforts, preclinical and clinical testing and development of
marketing, sales and production capabilities. In the next few years, the
Company's revenues, if any, will likely be limited to amounts received under
research or product development relationships that the Company may establish.
There can be no assurance, however, that the Company will be able to establish
any additional relationships on terms acceptable to the Company, if at all. The
Company's future profitability is dependent on its ability to identify and
acquire commercially viable products, to enter into agreements for product
development and commercialization with corporate sponsors, to develop and obtain
patent protection and regulatory approvals for its products and to develop the
capability to manufacture and sell its products. There can be no assurance that
the Company will successfully identify, develop, acquire, commercialize, patent,
manufacture or market its products, obtain required regulatory approvals or ever
achieve profitability.
Uncertainty Regarding Success of Clinical Trials
Before obtaining required regulatory approvals for the commercial sale of any
drug candidates, the Company must independently demonstrate through preclinical
testing and clinical trials that each product is safe and effective for use in
each target indication. The results from preclinical testing and early clinical
trials may not be predictive of results that will be obtained in pivotal
clinical trials, and there can be no assurance that any clinical trials will
demonstrate sufficient safety and effectiveness to obtain required regulatory
approvals or will result in marketable products. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials even after promising results in earlier trials. Generally, only a very
small percentage of the number of new pharmaceutical products initially
developed is approved for sale. Even products which are approved for sale have
no assurance of commercial success. The
<PAGE>
administration of any drug candidate developed by the Company may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt, delay or halt clinical trials of such drug candidate and could
ultimately prevent its approval by the FDA or foreign regulatory authorities for
any and all target indications. There can be no assurance that clinical trials
will demonstrate that any drug candidate under development is safe or effective.
The Company may encounter unanticipated problems relating to development,
manufacturing, distribution and marketing, some of which may be beyond its
financial and technical capacity to solve. The failure to address such problems
adequately could prevent the Company from ever becoming a viable business or
generating profits. No assurance can be given that the Company will succeed in
the development and marketing of any new drug products, or that any such
products will not be rendered obsolete by products of competitors.
The rate of completion of clinical trials will depend upon, among other factors,
obtaining adequate clinical supplies and the rate of patient enrollment. Patient
enrollment is a function of many factors including the size of the patient
population, the nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the study. Delays in planned patient
enrollment can result in increased costs or delays or both, which could have a
material adverse effect on the Company's business.
Risk of Nasdaq Delisting
Effective as of March 27, 1998, Procept Common Stock is listed on the SmallCap
Market operated by The Nasdaq Stock Market, Inc. ("Nasdaq"). The Company
currently has an exception from Nasdaq's requirements for continued listing and
must satisfy certain conditions by June 2, 1998 to continue to be listed on the
SmallCap Market. The Company believes that it can meet these conditions. There
can be no assurance, however, that it will do so. If the Company fails to meet
these conditions, the Company will be delisted from Nasdaq and no longer will be
eligible for quotation on the SmallCap Market. Such a delisting could adversely
affect the ability of the Company to attract new investors, may result in
decreased liquidity of Procept Common Stock and, consequently, could reduce the
price at which such stock trades, the transactions costs inherent to trading
such stock and the value of such stock. In addition, if Procept Common Stock is
delisted from Nasdaq it will be subject to the penny stock restrictions of Rule
15g-9 under the Exchange Act, which may materially adversely affect the market
liquidity of such stock and the Company's ability to raise funds in the future.
Uncertainty Regarding Future Collaborations
The Company has no experience with receipt of government approvals, marketing
pharmaceutical products or clinical testing and manufacturing.
The Company is currently seeking corporate partners to assist in the development
of the Pro 2000 Gel and small molecule immunosuppressive research programs.
Although the Company currently plans to continue to fund each of these programs,
there can be no assurance that the Company will be able to continue such
programs without a partner. Furthermore, there can be no assurance that the
Company will be successful in forming or maintaining any such alliances or that
the Company's partners would devote adequate resources to the Company's product
candidates or that any or all of the contemplated benefits from such alliances
will be realized. Certain of the collaborative, license or other arrangements
that the Company may enter into may place responsibility on the collaborative
partners for preclinical testing and human clinical trials and for the
preparation and submission of applications for regulatory approval for other
technologies or products. Should any collaborative partner fail to develop or
commercialize successfully any future proprietary technologies or future product
to which it has rights, the Company may be
<PAGE>
materially adversely affected. There can be no assurance that collaborators will
not pursue alternative technologies or products either on their own or in
collaboration with others, including the Company's competitors, as a means for
developing treatments of the diseases sought to be addressed by the respective
company. If the Company instead performs such tasks itself, it will be required
to develop expertise internally or contract with third parties to perform these
tasks. This will place increased demands on its resources, requiring the
addition of new management personnel and the development of additional expertise
by existing management personnel. The failure to acquire such services or to
develop such expertise could materially adversely affect prospects for success.
Competition and Technological Change
Competitors of the Company in the United States and abroad are numerous and
include, among others, major pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions.
Biotechnology and pharmaceutical companies are subject to intense competition
and rapid and significant technological change. Competition may increase as a
result of potential advances in the commercial application of biotechnology and
greater availability of capital for investment in these fields. Acquisitions of
competing companies and potential competitors by large pharmaceutical companies
or others could enhance financial, marketing and other resources available to
such competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including competitors of the Company, to market
commercial products. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any that are being developed by the Company or that would render the
Company's technology and products obsolete and noncompetitive. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company. In addition, some of the
Company's competitors have greater experience than the Company in conducting
preclinical testing and human clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, the Company's competitors may succeed in
obtaining FDA or other regulatory approvals for products more rapidly than the
Company. There can be no assurance that the Company's products will be able to
compete successfully with competitors' existing products or products under
development or that they will obtain regulatory approval in the United States or
elsewhere. If the Company commences significant commercial sales of its
products, it also will be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it has limited or no experience.
Uncertainty of Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain United States
and foreign patent protection for its products, preserve its trade secrets and
operate without infringing on the proprietary rights of third parties. Because
of the length of time and expense associated with bringing new drugs through
development and regulatory approval to the marketplace, the health care industry
has traditionally placed considerable importance on obtaining patent and trade
secret protection for significant new technologies, products and processes.
There can be no assurance that any patents will issue from any of the patent
applications owned by, or licensed to, the Company. Further, there can be no
assurance that any rights the Company may have under issued patents will provide
the Company with significant protection against competitive products or
otherwise be commercially valuable. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions and the scope of
claims made under such patents are still developing. There can be no assurance
that any existing or future patents issued to, or licensed by, the Company will
not subsequently be challenged, infringed upon, invalidated or
<PAGE>
circumvented by others. If the Company's product candidates are found to
infringe upon the patents or otherwise impermissibly utilize the intellectual
property of others, the Company's development, manufacture and sale of such
product candidates could be severely restricted or prohibited. In such event,
the Company may be required to obtain licenses from third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. There can be
no assurance that the Company will be able to obtain such licenses on acceptable
terms, or at all.
Dependence on Confidentiality Agreements
The Company also relies on unpatented proprietary technology, and there can be
no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. To
protect its trade secrets and other proprietary information, the Company
requires employees, consultants, advisors and collaborators to enter into
confidentiality agreements. There can be no assurance that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
If the Company is unable to maintain the proprietary nature of its technologies,
the Company could be adversely affected.
Impact of Government Regulation; Product Clearance and Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of therapeutic pharmaceutical products
through lengthy and detailed laboratory and clinical testing procedures,
sampling activities and other costly and time-consuming procedures. Satisfaction
of these requirements, which includes demonstrating to the satisfaction of the
FDA and foreign regulatory agencies that the product is both safe and effective,
typically takes several years or more and can vary substantially based upon the
type, complexity and novelty of the product. There can be no assurance that such
testing will show any product to be safe or efficacious. The Company cannot yet
accurately predict when it might first submit new drug applications for products
for FDA or other regulatory review. Government regulation also affects the
manufacturing and marketing of pharmaceutical products.
The effect of government regulation may be to delay marketing of the Company's
products for a considerable or indefinite period of time, to impose costly
procedural requirements upon the Company's activities and to furnish a
competitive advantage to larger companies or companies more experienced in
regulatory affairs. There can be no assurance that FDA or other regulatory
approvals for any products developed by the Company will be granted on a timely
basis, if at all, or, if granted, that such approval will cover all the clinical
indications for which the Company is seeking approval or will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Any delay in obtaining or
any failure to obtain such approvals would adversely affect the Company's
ability to generate revenue. Even if initial regulatory approvals for the
Company's product candidates are obtained, the Company, its products and its
manufacturing facilities would be subject to continual review and periodic
inspection. Moreover, additional government regulation from future legislation
or administrative action may be established which could prevent or delay
regulatory approval of the Company's products or further regulate the prices at
which the Company's proposed products may be sold. The regulatory standards for
manufacturing are applied stringently by the FDA. Discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product, manufacturer or facility, including warning
letters, fines, suspensions of regulatory approvals, product recalls, operating
restrictions, delays in obtaining new product approvals, withdrawal of the
product from the market and criminal prosecutions. Other violations of FDA
requirements can result in similar penalties.
<PAGE>
Uncertainty of Health Care Reform Measures and Third Party Reimbursement
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of third-party payers,
such as government health administration authorities, private health insurers
and other organizations, to contain or reduce the cost of health care. In the
United States and in certain foreign jurisdictions there have been, and the
Company expects that there will continue to be, a number of legislative and
regulatory proposals aimed at changing the health care system. While the Company
cannot predict whether any such legislative or regulatory proposals will be
adopted or the effect that such proposals may have on its business, the
consideration or approval of such proposals could have a material adverse effect
on the value of its securities, including the Shares registered hereby, or its
ability to raise capital or to obtain additional collaborative partners, and the
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of potential
products of the Company will depend in part on the availability of reimbursement
from governmental and health administrative authorities, private health insurers
or other third-party payers. Third-party payers are increasingly challenging the
price and cost-effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. Future legislation and regulations affecting the pricing of
pharmaceuticals could further limit reimbursement for medical products and
services. There can be no assurance that any of the Company's potential products
will be considered cost-effective or that adequate third-party reimbursement
will be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on its investments. In addition, the trend toward
managed health care in the United States and the concurrent growth of managed
care organizations, such as health maintenance organizations, that could control
or significantly influence the purchase of health care services and products, as
well as legislative proposals to reduce government insurance programs, could
result in pricing pressure for any products that might be developed by the
Company. If adequate reimbursement is not provided by government and other
third-party payers of the Company's potential products, there would be a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Qualified Personnel
In February 1998, Procept's Board of Directors appointed John F. Dee as its
President and Chief Executive Officer. Until the Company recruits additional
administrative personnel, Mr. Dee, in addition to serving as Procept's Principal
Executive Officer, also will serve as its Principal Financial Officer and
Principal Accounting Officer. If Mr. Dee were not to be able to continue in
these capacities, the Company could be adversely affected.
The Company is highly dependent upon the efforts of its senior management and
scientific team, including its consultants. The loss of the services of one or
more of these individuals might impede the achievement of the Company's
development objectives. Because of the specialized scientific nature of the
Company's business, the Company is highly dependent upon its ability to attract
and retain qualified scientific and technical personnel. There is intense
competition among major pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. Loss of the
services of, or failure to recruit, key scientific and technical personnel would
be significantly detrimental to the Company's product development programs.
<PAGE>
Furthermore, financial constraints have dictated that the Company terminate a
significant number of employees during the last year. The loss of such
individuals has decreased the scope of the Company's activities and may,
therefore, have reduced the prospects for commercially successful product
development.
Limited Manufacturing, Marketing and Sales Capability and Experience
The Company has not yet invested in the development of manufacturing, marketing
or sales capabilities. The Company lacks the facilities and personnel to
manufacture products in accordance with Quality System ("QS," formerly current
good manufacturing practice, or "GMP") requirements as prescribed by the FDA or
to produce an adequate supply of compounds to meet future requirements for
clinical trials. If the Company is unable to develop or contract for
manufacturing capabilities on acceptable terms, the Company's ability to conduct
human clinical testing with PRO 2000 and preclinical and clinical testing with
respect to additional product candidates, if any, will be adversely affected,
resulting in delays in the submission of products for regulatory approvals and
in the initiation of new development programs, which in turn could materially
impair the Company's competitive position and the possibility of achieving
profitability. The Company also will need to hire additional personnel skilled
in marketing and sales as it develops products with commercial potential or
enter into arrangements with third parties for sales and marketing. There can be
no assurance that the Company will be able to acquire, or establish third-party
relationships to provide, any or all of these capabilities.
Product Liability; Availability of Insurance; Risk of Product Recalls
The Company's business exposes it to potential liability risks that are inherent
in the testing, manufacturing and marketing of medical products. The use of the
Company's products in clinical trials may expose the Company to product
liability claims and possible adverse publicity. These risks will expand with
respect to the Company's products, if any, that receive regulatory approval for
commercial sale. The Company currently has limited product liability coverage
for the clinical research use of its products, which management believes is
customary for a Company with products at this stage of clinical development. The
Company does not have product liability insurance for the commercial sale of its
products but intends to obtain such coverage if and when its products are
commercialized. However, such coverage is becoming increasingly expensive and
there can be no assurance that the coverage is adequate or that the Company will
be able to maintain its existing insurance coverage or obtain additional
insurance coverage at acceptable costs, if at all, or that a product liability
claim would not adversely affect the business or financial condition of the
Company. Furthermore, there can be no assurance that any collaborators or
licensees of the Company will agree to indemnify the Company or be sufficiently
insured or have a net worth sufficient to satisfy any such product liability
claims. In addition, a product of the Company may be subject to recall for
unforseen reasons. Such a recall could have a material adverse effect on the
Company.
Hazardous Materials; Environmental Matters
The Company's research and development and manufacturing processes involve the
controlled storage, use and disposal of hazardous materials, biological
hazardous materials and radioactive compounds. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such
<PAGE>
an accident, the Company may be held liable for any damages that result, and any
such liability could exceed the resources of the Company. There can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental laws and regulations in the future, nor that the
operations, business or assets of the Company will not be materially adversely
affected by current or future environmental laws or regulations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheet at December 31, 1997 and the statement of operations for the twelve months
ended December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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