As filed with the Securities and Exchange Commission on February 9, 1999
Registration No. 333-69821
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Amendment No. 1 to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
PROCEPT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 2836 04-2893483
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
PROCEPT, INC.
840 Memorial Drive
Cambridge, Massachusetts 02139
(617) 491-1100
</TABLE>
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN F. DEE
PROCEPT, INC.
840 Memorial Drive
Cambridge, Massachusetts 02139
(617) 491-1100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies of all correspondence to:
LYNNETTE C. FALLON, ESQ. EDWARD F. COX, ESQ.
PALMER & DODGE LLP PATTERSON, BELKNAP, WEBB & TYLER LLP
ONE BEACON STREET 1133 AVENUE OF THE AMERICAS
BOSTON, MASSACHUSETTS 02108 NEW YORK, NEW YORK 10036
(617) 573-0100 (212) 336-2000
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
----------------
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
Proposed maximum
Title of each class of Amount to be aggregate offering Amount of registration
securities to be registered registered price fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $0.01
per share 2,755,000 (1) $2,572,912 (2) $715 (2)
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01
per share 1,453,796 (3) $3,038,434 (4) $845 (4)
==========================================================================================================
</TABLE>
(1) Represents the maximum number of shares of Common Stock of the Registrant,
$0.01 par value per share ("Common Stock"), to be issued in connection with
the merger (the "Merger") of Procept Acquisition Corp. ("Merger Sub") with
and into Pacific Pharmaceuticals, Inc. ("Pacific").
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, as
amended (the "Securities Act"), and estimated solely for the purpose of
calculating the registration fee, the proposed maximum aggregate offering
price is equal to the aggregate market value of Pacific Common Stock to be
exchanged in the Merger and is based upon $0.1015625, the average of the
high and low prices of Pacific Common Stock as reported in the OTC Bulletin
Board on December 23, 1998. This amount was paid on December 29, 1998.
(3) Represents shares of Common Stock of the Registrant to be issued as a
result of the Merger to existing stockholders of the Registrant pursuant to
contractual anti-dilution rights and to the holders of Pacific preferred
stock receiving similar contractual anti-dilution rights.
(4) Pursuant to Rule 457(c) under the Securities Act and estimated solely for
the purpose of calculating the registration fee, the maximum aggregate
offering price is equal to the aggregate market value of the Common Stock
to be issued to the existing stockholders of the Registrant and the holders
of Pacific preferred stock and is based upon $2.09, the average of the
high and low prices of the Registrant's Common Stock as reported by the
Nasdaq SmallCap Market on February 4, 1999. Of this amount, $534 was paid
on December 29, 1998.
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
================================================================================
<PAGE>
[PROCEPT, INC. LOGO]
840 Memorial Drive
Cambridge, Massachusetts 02139
Nasdaq: PRCT
www.Procept.com
February __, 1999
Dear Stockholder:
I am pleased to invite you to the Special Meeting of stockholders at
which you will be asked to approve the issuance of shares of Procept common
stock in connection with the proposed merger between Procept, Inc. and Pacific
Pharmaceuticals, Inc., a result of which Pacific will become a subsidiary of
Procept. I am also writing to request your assistance to review the enclosed
information regarding the conditions of the merger agreement and complete your
proxy today to vote "FOR" the approval of the issuance of the shares of Procept
common stock in the merger. The proposed transaction with Pacific will enable
Procept to acquire clinical stage technologies with the potential for both
significant medical advancement and accelerated regulatory approval.
The date, time and place of the Special Meeting:
March 15, 1999
11:30 a.m.
Procept, Inc. Conference Room
840 Memorial Drive, 5th Floor
Cambridge, Massachusetts
A Special Committee of your Board of Directors has determined that the
merger is fair to stockholders and is in their best interests. The Board of
Directors has delegated the authority to the Special Committee, which is made up
of the disinterested members of the Procept Board, to take all action necessary
to consummate the merger. The Special Committee has received an opinion from its
financial advisor, Oscar Gruss & Son Incorporated, as to the fairness of the
merger from a financial point of view to Procept stockholders. The Special
Committee unanimously recommends that the stockholders vote to approve the
issuance of the Procept shares in the merger. Such approval is required in
accordance with the rules of the National Association of Securities Dealers,
Inc. which are applicable to Procept because the Procept common stock is listed
on the Nasdaq SmallCap Market.
The business combination of Procept, Inc. and Pacific Pharmaceuticals,
Inc. should propel the Company's development agenda forward at a time when the
biotechnology industry, in general, is struggling in the marketplace. The
combination should also provide the ability to leverage its collective resources
of funding, research expertise and intellectual property to reach critical
milestones and improve the potential for securing corporate partnerships. The
union of the two companies provides an expanded product portfolio with a focus
on anti-infectives and oncology, including three novel technologies in Phase I
and Phase II stages of human clinical trials.
Procept's PRO 2000 Gel, a vaginal microbicide designed to provide
protection against human immunodeficiency virus (HIV) and other sexually
transmitted diseases (STDs), has successfully completed two Phase I human
clinical trials in healthy, sexually abstinent women. Early in 1999, Procept
plans to begin a clinical trial in healthy, sexually active women as well as
HIV-infected women, conducted by the National Institute of Allergy and
Infectious Diseases, a unit of the National Institute of Health. Pacific's O6
Benzyl Guanine, a proprietary chemosensitizer with the potential to overcome
cancer drug resistance in brain, melanoma, lymphoma and other cancers, is being
studied in Phase I trials sponsored by the National Cancer Institute under a
Cooperative Research and Development Agreement. Following the completion of
these trials, a Phase II develeopment program will be conducted in accordance
with the Cooperative Research and Development Agreement. Pacific's proprietary
photodynamic therapy BOPP compound is currently nearing completion in a Phase I
study in brain cancer patients at the Royal Melbourne Hospital, Australia under
a U.S. IND. In addition, Pacific's preclinical cancer immunotherapy program was
presented at a pre-IND meeting with the FDA which resulted in an accelerated
timetable to enter Phase II efficacy clinical trials.
Under the rules of the National Association of Securities Dealers, the
affirmative vote of the holders of a majority of the votes cast is required to
approve the issuance of Procept common stock in the merger. Assuming an
affirmative vote, the merger is expected to be completed shortly after the
Special Meeting.
In the event of a merger, and assuming no Pacific shareholders exercise
their appraisal rights under Delaware law as discussed in the accompanying Joint
Proxy Statement/Prospectus, 4,297,170 shares of Procept common stock will be
issued. Of this number of shares, 2,755,000 shares of Procept common Stock
represent 0.11 share for each Pacific share of common stock and preferred stock
on an "as converted" basis. Also, 417,137 additional shares of Procept common
stock will be issued to the Pacific preferred stockholders in connection with
certain anti-dilution contractual rights; and 1,125,033 shares of Procept common
stock will be issued to the Procept shareholders from the April 1998 private
placement pursuant to certain anti-dilution rights. The number of shares of
Procept common stock to be issued to holders of Pacific common stock and
preferred stock will represent approximately 43 percent of the outstanding
Procept common stock after the merger. Please refer to the Joint Proxy
Statement/Prospectus for additional information about these issuances.
<PAGE>
The following table summarizes the ownership of shares for the Procept
and Pacific shareholders prior to the merger and after the consummation of the
merger assuming its approval.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Procept Shares
Pacific Shares Outstanding Outstanding as of Procept Common Shares
as of February 5, 1999 February 3, 1999 Outstanding Upon
Shareholder (Pacific's Record Date (Procept's Record Date) Effectiveness of Merger
- ----------- -------------------------- ----------------------- -----------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific preferred (on an 10,529,054 - 1,568,185*
as-converted basis to Pacific
common)
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific common 14,671,924 - 1,603,952
- ------------------------------------------------------------------------------------------------------------------------------------
Procept common with Article VI - 2,890,554 3,927,213
rights (April 1998 private
placement)
- ------------------------------------------------------------------------------------------------------------------------------------
Procept common - 199,652 199,652
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 7,299,002
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The holders of Pacific preferred stock will also receive certain
contractual rights set forth in Section 10 of the Merger Agreement which
are similar to the Article VI rights of the Procept stockholders who
participated in the April 1998 private placement.
Please refer to the accompanying Joint Proxy Statement/Prospectus for
detailed information about the proposed merger. We encourage you to read this
entire document carefully. In addition, you may obtain other information about
Procept and Pacific from documents filed with the Securities and Exchange
Commission.
Whether or not you plan to attend the Special Meeting, we encourage you
to please take the time to vote by completing and mailing the enclosed proxy
card to us. If you sign, date and mail your proxy card without indicating how
you wish to vote, your proxy will be counted as a vote in favor of approving the
issuance of the Procept shares in the merger. Your vote is very important.
We appreciate your support in this very important transaction. We are
very enthusiastic about the merger with Pacific, and are confident that the
combined company will grow and prosper in a competitive marketplace. On behalf
of the Special Committee of the Board of Directors of Procept, we urge you to
vote "FOR" the approval of the proposal.
Sincerely,
John F. Dee
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Joint Proxy Statement/Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
Joint Proxy Statement/Prospectus dated February _, 1999, and first
mailed to shareholders on or about February __, 1999.
2
<PAGE>
[PROCEPT LOGO]
840 Memorial Drive
Cambridge, Massachusetts 02139
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 15, 1999
TO THE STOCKHOLDERS OF PROCEPT, INC.:
I am pleased to give you notice of and to cordially invite you to
attend the special meeting of shareholders (the "Special Meeting") of Procept,
Inc. ("Procept") which will be held:
March 15, 1999
11:30 a.m.
Procept, Inc. Conference Room
840 Memorial Drive, 5th Floor
Cambridge, Massachusetts
At our Special Meeting, common stockholders will take action on the
following:
1. To consider and vote on a proposal to issue shares (the "Stock
Issuance") of Procept common stock, $0.01 par value ("Procept Common Stock"), in
connection with and as a result of the merger of a wholly-owned subsidiary of
Procept ("Merger Sub") with and into Pacific Pharmaceuticals, Inc. ("Pacific")
pursuant to the Agreement and Plan of Merger, as amended, dated as of December
10, 1998 (the "Merger Agreement"), a copy of which is attached as Annex A and
Annex A-1 to the accompanying Joint Proxy Statement/Prospectus. The Merger
Agreement provides for the outstanding shares of common stock of Pacific, $0.02
par value ("Pacific Common Stock"), and the outstanding preferred stock of
Pacific $25 par value (the "Pacific Preferred Stock" and together with the
Pacific Common Stock, the "Pacific Stock"), to be converted in the merger into
the right to receive Procept Common Stock. The holders of Pacific Preferred
Stock will also receive additional contractual rights. Procept will issue
approximately 2,755,000 shares of Procept Common Stock to the holders of the
Pacific Stock in the merger and approximately 417,137 shares of Procept Common
Stock to the holders of Pacific Preferred Stock as a result of the contractual
rights given to the holders of Pacific Preferred Stock. In addition, the Merger
Agreement requires Procept to assume all outstanding options and warrants to
purchase Pacific Stock, by issuing Procept options and warrants for
approximately 1,795,595 shares of Procept Common Stock. Finally, as a result of
the merger, Procept will concurrently with the merger issue approximately
1,125,033 shares of Procept Common Stock to certain third parties and will
assume obligations of Pacific which may involve the issuance of additional
shares of Procept Common Stock.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
Holders of record of Procept Common Stock outstanding on February 3,
1999, the record date fixed by the Board of Directors for this purpose (the
"Record Date"), are entitled to receive notice of the Special Meeting. Only
holders of record of shares of Procept Common Stock on the Record Date are
entitled to vote at the Special Meeting. As of the Record Date, there were
3,001,832 shares of Procept Common Stock outstanding, each of which is
entitled to one vote in person or by proxy at the Special Meeting.
Under the rules of the National Association of Securities Dealers,
Inc., the affirmative vote of the holders of a majority of the votes cast is
required to approve the issuance of Procept Common Stock as a result of the
merger.
<PAGE>
A quorum, consisting of the holders of at least a majority of the
outstanding shares of Procept Common Stock entitled to vote on the Stock
Issuance, is required to act upon the Stock Issuance.
If your shares are held through a bank or brokerage firm and you plan
to vote your shares in person at the Special Meeting, please request a letter or
some other evidence of ownership from your bank or brokerage firm as well as
proper authorization.
All holders of Procept Common Stock are cordially invited to attend
the Special Meeting. However, to ensure your representation at the Special
Meeting, you are urged to complete, date and sign the enclosed proxy as promptly
as possible. A pre-addressed envelope is enclosed for that purpose. If no
instructions are indicated on your proxy card, your shares of Procept Common
Stock will be voted "FOR" approval of the Stock Issuance. Execution of a proxy
will not in any way affect a stockholder's right to attend the Special Meeting
and vote in person. Any stockholder giving a proxy has a right to revoke it at
any time before it is exercised by written notice to the Secretary of Procept.
In addition, stockholders attending the Special Meeting may revoke their proxies
at any time before they are exercised.
February __, 1999
By Order of the Board of Directors,
Lynnette C. Fallon
Secretary
2
<PAGE>
[Pacific Pharmaceuticals, Inc. Logo]
6730 Mesa Ridge Road
San Diego, California 92121
OTC Bulletin Board: PHAA
www.PacificPharm.com
February __, 1999
Dear Stockholder:
I am pleased to invite you to the Special Meeting of stockholders at
which you will be asked to approve the proposed merger of a subsidiary of
Procept, Inc. with and into Pacific Pharmaceuticals, Inc., as a result of which
Pacific will become a subsidiary of Procept. I am also writing to request your
assistance to review the enclosed information regarding the conditions of the
merger agreement and complete your proxy today to vote "FOR" the approval of the
merger. Pacific believes that the proposed transaction with Procept will enable
Pacific stockholders to benefit from Procept's expertise and potential for
further developing medical technologies to move them closer to the marketplace.
The date, time and place of the Special Meeting:
March 16, 1999
10:00 a.m.
The offices of Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
24th Floor
New York, New York
Since the December 11, 1998 announcement of the signed agreement
contemplating the merger of the two companies, the Board of Directors received
an opinion by its independent financial advisor Josephthal & Co., Inc. as to the
fairness of the merger from a financial point of view to Pacific stockholders,
determined that the proposed merger is fair to the stockholders and in their
best interests, and recommended that the stockholders approve the merger.
The business combination of Procept, Inc. and Pacific Pharmaceuticals,
Inc. should propel the Company's development agenda forward at a time when the
biotechnology industry, in general, is struggling in the marketplace. The
combination should also provide the ability to leverage its collective resources
of funding, research expertise and intellectual property to reach critical
milestones and improve the potential for securing corporate partnerships. The
union of the two companies provides an expanded product portfolio with a focus
on anti-infectives and oncology, including three novel technologies in Phase I
and Phase II stages of human clinical trials.
<PAGE>
Procept's PRO 2000 Gel, a vaginal microbicide designed to provide
protection against human immunodeficiency virus (HIV) and other sexually
transmitted diseases (STDs), has successfully completed two Phase I human
clinical trials in healthy sexually abstinent women. Early in 1999, Procept
plans to begin a clinical trial in healthy, sexually active women as well as
HIV-infected women, conducted by the National Institute of Allergy and
Infectious Diseases, a unit of the National Institute of Health. Pacific's O6
Benzyl Guanine, a proprietary chemosensitizer with the potential to overcome
cancer drug resistance in brain, melanoma, lymphoma and other cancers, is being
studied in Phase I trials sponsored by the National Cancer Institute under
a Cooperative Research and Development Agreement. Following the completion of
these trials, a Phase II development program will be conducted in accordance
with the Cooperative Research and Development Agreement. Pacific's proprietary
photodynamic therapy BOPP compound is currently nearing completion in a Phase I
study in brain cancer patients at the Royal Melbourne Hospital, Australia under
a U.S. IND. In addition, Pacific's preclinical cancer immunotherapy program was
presented at a pre-IND meeting with the FDA which resulted in an accelerated
timetable to enter Phase II efficacy clinical trials.
The merger is conditioned upon approval by the holders of at least
66.67% of the outstanding shares of Pacific preferred stock of an amendment to
the certificate of designations for the Series A preferred stock of Pacific
which would exclude the merger from the definition of "Liquidation Event" under
the certificate of designations. The Board of Directors believes that this
amendment is in the best interests of the stockholders of Pacific. The
affirmative vote of the holders of a majority of the outstanding shares of
Pacific common stock and preferred stock voting together as a single class on an
as-converted basis is required to approve the merger agreement. The affirmative
vote of the holders of at least 66.67% of the outstanding Pacific preferred
stock voting as a separate class is required to approve the merger agreement.
Assuming an affirmative vote, the merger is expected to be completed shortly
after the Special Meeting.
In the event of a merger, holders of Pacific common stock and holders
of Pacific preferred stock will receive Procept common stock. Assuming no
Pacific shareholders exercise their appraisal rights under Delaware law as
discussed in the accompanying Joint Proxy Statement/Prospectus and 25,200,978
shares of Pacific common stock are outstanding or issuable upon conversion of
outstanding preferred stock, each share of Pacific common stock will be entitled
to receive approximately 0.11 shares of Procept common stock, as a result of the
2,755,000 shares of Procept common stock to be issued in the merger. Each share
of outstanding Pacific preferred stock will be deemed converted into 290.89
shares of Pacific common stock. The holders of Pacific preferred stock will also
receive additional contractual rights as discussed in the accompanying Joint
Proxy Statement/Prospectus, which, based on current circumstances, would result
in the issuance of an additional 417,137 shares to the Pacific preferred
stockholders upon the consummation of the merger. In addition, all outstanding
options and warrants of Pacific will convert into options and warrants to
purchase Procept common stock according to the conversion formula described in
the accompanying Joint Proxy Statement/Prospectus. The number of shares of
Procept common stock to be issued to Pacific shareholders will represent
approximately 43 percent of the outstanding Procept common stock after the
merger.
<PAGE>
The following table summarizes the ownership of shares for the Procept
and Pacific shareholders prior to the merger and after the consummation of the
merger assuming its approval.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Procept Shares
Pacific Shares Outstanding Outstanding as of Procept Common Shares
as of February 5, 1999 February 3, 1999 Outstanding Upon
Shareholder (Pacific's Record Date (Procept's Record Date) Effectiveness of Merger
- ----------- -------------------------- ----------------------- -----------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific preferred (on an 10,529,054 - 1,568,185*
as-converted basis to Pacific
common)
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific common 14,671,924 - 1,603,952
- ------------------------------------------------------------------------------------------------------------------------------------
Procept common with Article VI - 2,890,554 3,927,213
rights (April 1998 private
placement)
- ------------------------------------------------------------------------------------------------------------------------------------
Procept common - 199,652 199,652
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 7,229,002
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The holders of Pacific preferred stock will also receive certain
contractual rights set forth in Section 10 of the merger agreement which are
similar to the Article VI rights of the Procept stockholders who participated
in the April 1998 private placement.
Once again, please refer to the accompanying Joint Proxy
Statement/Prospectus for detailed information about the proposed merger. In
addition, you may obtain other information about Procept and Pacific from
documents filed with the Securities and Exchange Commission. We encourage you to
read this entire document carefully.
Whether or not you plan to attend the Special Meeting, we
encourage you to please take the time to vote by completing and mailing the
enclosed proxy card to us. If you sign, date and mail your proxy card without
indicating how you wish to vote, your proxy will be counted as a vote in favor
of approving the issuance of the Procept shares in the merger. Your vote is very
important.
We appreciate your support in this very important transaction. We are
very enthusiastic about the merger with Procept, and are confident that the
combined company will grow and prosper in a competitive marketplace. On behalf
of the Board of Directors of Pacific, we urge you to vote "FOR" the approval of
the proposal.
Sincerely,
Anil Singhal
Interim Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Joint Proxy Statement/Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
Joint Proxy Statement/Prospectus dated February_, 1999, and first
mailed to shareholders on or about February __, 1999.
<PAGE>
PACIFIC PHARMACEUTICALS, INC.
6730 Mesa Ridge Road, Suite A
San Diego, California 92121
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 16, 1999
TO THE STOCKHOLDERS OF PACIFIC PHARMACEUTICALS, INC.:
I am pleased to give you notice of and to cordially invite you to
attend the Special Meeting of Stockholders (the "Special Meeting") of Pacific
Pharmaceuticals, Inc. ("Pacific") which will be held:
March 16, 1999
10:00 a.m.
The offices of Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
24th Floor
New York, New York
At our Special Meeting, stockholders will take action on the
following:
1. To consider and vote on a proposal to amend the Certificate of
Designations of Series A Convertible Preferred Stock of Pacific (the "Pacific
Certificate of Designations") to exclude the merger between Pacific and a
wholly-owned subsidiary of Procept, Inc. ("Merger Sub") from the definition of
"Liquidation Event" in the Pacific Certificate of Designations. A copy of the
amendment to the Pacific Certificate of Designations, substantially in the form
to be filed with the Delaware Secretary of State, is attached as Annex B to the
accompanying Joint Proxy Statement/Prospectus.
2. To consider and vote, conditioned on approval of the amendment to
the Pacific Certificate of Designations, on a proposal to merge Merger Sub with
and into Pacific by approving the Agreement and Plan of Merger, as amended,
dated as of December 10, 1998 among Pacific, Procept, Inc. ("Procept") and
Merger Sub (the "Merger Agreement"), a copy of which is attached as Annex A and
Annex A-1 to the accompanying Joint Proxy Statement/Prospectus. The Merger
Agreement provides that the outstanding shares of common stock of Pacific, $0.02
par value ("Pacific Common Stock"), and the outstanding Series A convertible
preferred stock of Pacific, $25 par value (the "Pacific Preferred Stock" and
together with the Pacific Common Stock, the "Pacific Stock"), will be converted
into the right to receive Procept common stock, $0.01 par value ("Procept Common
Stock"). A total of 2,755,000 shares of Procept Common Stock will be issued to
the holders of the Pacific Stock in the merger. The holders of Pacific Preferred
Stock also will receive additional contractual rights and as a result of such
contractual rights, the holders of Pacific Preferred Stock will receive
approximately 417,137 additional shares of Procept Common Stock. All outstanding
options and warrants of Pacific will be converted into options and warrants to
purchase shares of Procept Common Stock.
3. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
Holders of record of Pacific Stock outstanding on February 5, 1999,
the record date fixed by the Board of Directors for this purpose (the "Record
Date"), are entitled to receive notice of the Special Meeting. Only holders of
record of shares of Pacific Stock on the Record Date are entitled to vote at the
Special Meeting. As of the Record Date, there were 25,200,978 shares of
Pacific Common Stock outstanding or issuable upon conversion of Pacific
Preferred Stock, each of which is entitled to one vote in person or by proxy at
the Special Meeting. For the purpose of voting, each share of outstanding
Pacific Preferred Stock will be deemed converted into 290.89 shares of Pacific
Common Stock.
<PAGE>
Approval of the amendment to the Pacific Certificate of Designations
requires the affirmative vote of the holders of 66.67% of the outstanding shares
of Pacific Preferred Stock, voting as a separate class.
Approval of the Merger Agreement is conditioned on the approval of the
amendment to the Pacific Certificate of Designations and requires the
affirmative vote of (i) the holders of a majority of the outstanding shares of
Pacific Stock, voting together as a single class on an as-converted basis and
(ii) the holders of 66.67% of the outstanding shares of Pacific Preferred Stock,
voting as a separate class. A majority of the outstanding shares of Pacific
Stock entitled to vote, represented in person or by proxy, constitutes a quorum
for consideration of the Merger Agreement.
If your shares are held through a bank or brokerage firm and you plan
to vote your shares in person at the Special Meeting, please request a letter or
some other evidence of ownership from your bank or brokerage firm as well as
proper authorization.
In connection with the proposed merger and share exchange, appraisal
rights based on the value of the shares of Pacific Common Stock immediately
prior to the merger will be available to those shareholders of Pacific who do
not vote in favor of the Merger Agreement and who comply with the requirements
of Section 262 of the General Corporation Law of the State of Delaware (the
"DGCL"), the text of which is attached as Annex C to the accompanying Joint
Proxy Statement/Prospectus. Reference is made to the text of the DGCL and the
section in the accompanying Joint Proxy Statement/Prospectus entitled "The
Merger - Pacific Shareholder Appraisal Rights" for a discussion of the
procedures to be followed in asserting appraisal rights under Section 262 of the
DGCL in connection with the proposed merger and share exchange.
All holders of Pacific Stock are cordially invited to attend the
Special Meeting. However, to ensure your representation at the Special Meeting,
you are urged to complete, date and sign the enclosed proxy as promptly as
possible. A pre-addressed envelope is enclosed for that purpose. If no
instructions are indicated on your proxy card, your shares of Pacific Stock will
be voted "FOR" approval of the Merger Agreement and, in the case of your shares
of Pacific Preferred Stock, "FOR" approval of the amendment to the Pacific
Certificate of Designations. Execution of a proxy will not in any way affect a
stockholder's right to attend the Special Meeting and vote in person. Any
stockholder giving a proxy has a right to revoke it at any time before it is
exercised by written notice to the Secretary of Pacific. In addition,
stockholders attending the Special Meeting may revoke their proxies at any time
before they are exercised.
February __, 1999
By order of the Board of Directors
Jack Halperin
Secretary
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
QUESTIONS & ANSWERS ABOUT THE MERGER........................................................................................1
SUMMARY.....................................................................................................................5
COMPARATIVE PER SHARE DATA.................................................................................................14
COMPARATIVE MARKET PRICES AND DIVIDENDS....................................................................................15
RISK FACTORS...............................................................................................................17
FORWARD-LOOKING STATEMENTS.................................................................................................27
MEETINGS, VOTING AND PROXIES...............................................................................................28
The Procept Special Meeting............................................................................................28
The Pacific Special Meeting............................................................................................29
BUSINESS OF PROCEPT, INC...................................................................................................31
PROCEPT MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................................36
BUSINESS OF PACIFIC PHARMACEUTICALS, INC...................................................................................40
PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................................51
THE MERGER.................................................................................................................54
General Description of the Merger......................................................................................54
Background of the Merger...............................................................................................54
Procept's Reasons for the Merger; Recommendations of the Procept Board.................................................54
Opinion of Procept's Financial Advisor.................................................................................55
Pacific's Reasons for the Merger; Recommendation of the Pacific Board..................................................56
Opinion of Pacific's Financial Advisor.................................................................................58
Accounting Treatment...................................................................................................60
Certain Federal Income Tax Consequences................................................................................60
Pacific Shareholder Appraisal Rights...................................................................................61
Nasdaq Listing of Procept Common Stock.................................................................................62
Federal Securities Law Consequences....................................................................................62
Regulatory Matters.....................................................................................................63
Potential Conflicts and Interests of Certain Persons in the Merger.....................................................63
Management and Other Information.......................................................................................64
MERGER AGREEMENT...........................................................................................................64
Structure of the Merger................................................................................................64
Merger Consideration...................................................................................................64
Surrender of Certificates; Converting Pacific Stock into Procept Stock.................................................65
i
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Treatment of Pacific Common Stock Options and Warrants.................................................................66
Contractual Rights of Pacific Preferred Stock Converted to Procept Common Stock........................................67
Representations and Warranties.........................................................................................69
Certain Covenants......................................................................................................69
Conditions to the Merger...............................................................................................71
Amendments; Waivers....................................................................................................72
No Solicitation........................................................................................................72
Termination of the Merger Agreement....................................................................................73
Termination Fee........................................................................................................74
Payment of Expenses of the Merger......................................................................................74
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION...............................................................75
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION................................................................79
PRINCIPAL STOCKHOLDERS.....................................................................................................80
DESCRIPTION OF PROCEPT CAPITAL STOCK.......................................................................................84
General................................................................................................................84
Authorized and Outstanding Capital Stock...............................................................................84
Delaware Anti-Takeover Statute.........................................................................................84
Transfer Agent and Registrar...........................................................................................85
COMPARATIVE RIGHTS OF HOLDERS OF PACIFIC AND PROCEPT COMMON STOCK..........................................................85
Authorized Capital Stock...............................................................................................85
Boards of Directors....................................................................................................86
Removal of Directors...................................................................................................86
Special Meetings of Stockholders; Stockholder Action Without Meeting...................................................86
Stockholder Proposals..................................................................................................87
Shareholder's Voting Rights............................................................................................87
Dissenters' Rights.....................................................................................................88
Charter and By-law Amendments..........................................................................................88
Dividends..............................................................................................................88
Terms of Conversion....................................................................................................89
Liquidation Rights.....................................................................................................89
Shareholder Rights Plans...............................................................................................89
Business Combinations..................................................................................................90
LEGAL MATTERS..............................................................................................................90
EXPERTS....................................................................................................................90
FUTURE PROCEPT SHAREHOLDER PROPOSALS.......................................................................................91
FUTURE PACIFIC STOCKHOLDER PROPOSALS.......................................................................................91
OTHER MATTERS..............................................................................................................91
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WHERE YOU CAN FIND MORE INFORMATION........................................................................................91
INDEX OF DEFINED TERMS.....................................................................................................94
INDEX TO FINANCIAL STATEMENTS OF PROCEPT AND PACIFIC......................................................................F-1
Annex A Agreement and Plan of Merger Between Procept, Inc., Procept Acquisition Corp., and Pacific
Pharmaceuticals, Inc..................................................................................A-1
Annex A-1 Amendment to Agreement and Plan of Merger between Procept, Inc., Procept Acquisition
Corp. and Pacific Pharmaceuticals, Inc., dated February 8, 1999 .....................................A-58
Annex B Amendment to the Certificate of Designations of Series A Convertible Preferred Stock
of Pacific............................................................................................B-1
Annex C Section 262 of the Delaware General Corporation Law...................................................C-1
Annex D Opinion of Oscar Gruss & Son Incorporated.............................................................D-1
Annex E Opinion of Josephthal & Co. Inc. .....................................................................E-1
</TABLE>
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QUESTIONS & ANSWERS ABOUT THE MERGER
1. How Will These Two Companies Merge?
Procept and Pacific will combine under a merger agreement that
provides that a wholly-owned subsidiary of Procept will merge with and
into Pacific and, as a result, Pacific will become a wholly-owned
subsidiary of Procept.
2. What Will Pacific Stockholders Receive?
In the merger, holders of Pacific common stock and preferred stock
will receive a total of 2,755,000 shares of Procept common stock,
assuming no dissenting shareholders. Assuming 25,200,978 shares of
Pacific common stock are outstanding or issuable upon conversion of
outstanding Pacific preferred stock, each share of Pacific common
stock issued and outstanding or issuable upon conversion of
outstanding Pacific preferred stock will be converted into the right
to receive approximately 0.11 shares of Procept common stock, together
with cash in lieu of any fractional share otherwise issuable. Each
share of Pacific preferred stock will be deemed converted into 290.89
shares of Pacific common stock. The holders of Pacific preferred stock
will also receive additional contractual rights and as a result of
such contractual rights, the holders of Pacific preferred stock will
receive approximately 417,137 additional shares of Procept Common
Stock. For a discussion of the contractual rights, see "Contractual
Rights of Pacific Preferred Stock Converted into Procept Common
Stock."
Please read the more detailed description of the consideration to be
received in the merger on pages 64 to 65.
Procept will not issue any fractional shares of common stock in the
merger. Instead, you will receive cash for any fractional share that
you would otherwise receive.
On November 4, 1998 (the last full trading day before the public
announcement of the merger) and on February 5, 1999 (the most
recent practicable date prior to the printing of this Joint Proxy
Statement/Prospectus), the closing price of the Procept common stock
reported on the Nasdaq SmallCap Market was $1.19 and $2.00,
respectively.
3. What are the Federal Income Tax Consequences of the Merger?
No gain or loss will be recognized by Pacific, Procept or the merger
subsidiary by reason of the merger. Additionally, the merger is
intended to qualify as tax-free, in which case no gain or loss would
be recognized by Pacific stockholders on their receipt of shares of
Procept common stock in the merger. Pacific stockholders will,
however, recognize gain or loss in connection with any cash received
instead of fractional shares of Procept common stock. Pacific
stockholders should consult their tax advisors for a full
understanding of the tax consequences of the merger.
4. Who Must Approve the Merger?
In addition to the approvals by the Pacific Board of Directors and the
Procept Board of Directors, each of which has already been obtained,
the merger must be approved by the holders of Pacific common stock and
preferred stock. The holders of Procept common stock must approve the
issuance of the shares of Procept common stock in connection with the
merger. The holders of Pacific preferred stock must also approve the
amendment to the Pacific Certificate of Designations for the merger to
be approved.
5. Why is Procept's Special Committee of the Board of Directors
Recommending Approval of the Transaction?
Procept's Special Committee of the Board of Directors believes that
the merger represents an opportunity to acquire new technology and
obtain drug development candidates that would benefit from Procept's
scientific and medical expertise in various therapeutic areas. The
Special Committee of Procept's Board of
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Directors also believes that the terms of the merger are fair to, and
in the best interests of, Procept and its stockholders.
6. Why is Pacific's Board of Directors Recommending Approval of the
Transaction?
The Pacific Board of Directors believes that the merger will allow
Pacific to benefit from Procept's scientific and medical expertise in
various therapeutic areas and will provide Pacific stockholders with
an opportunity to participate in the future growth in the
pharmaceutical and biotechnology industries. The Pacific Board of
Directors also believes that the merger is advantageous to the Pacific
stockholders because of the greater liquidity available to the
stockholders of Procept, whose common stock is traded on the Nasdaq
SmallCap Market. The Pacific Board of Directors further believes that
the terms of the merger are fair to, and in the best interests of, the
Pacific stockholders.
7. When is the Procept Special Meeting?
The Procept Special Meeting will take place on March 15, 1999.
8. What Proposals are Procept Stockholders Voting on?
Procept stockholders are being asked to approve the issuance of
2,755,000 shares of Procept common stock in the merger and the
issuance of up to 1,542,170 additional shares as a result of the
merger.
9. When is the Pacific Special Meeting?
The Pacific Special Meeting will take place on March 16, 1999.
10. What Proposals are Pacific Stockholders Voting on?
Pacific stockholders are being asked to approve the merger agreement
and the amendment to the Pacific Certificate of Designations.
11. What Stockholder Vote is Required to Approve the Amendment to the
Pacific Certificate of Designations?
The holders of at least 66.67% of Pacific preferred stock voting as a
separate class must vote in favor of the amendment to the Pacific
Certificate of Designations.
12. What Stockholder Vote is Required to Approve the Merger?
The holders of at least a majority of the outstanding shares of
Pacific common and preferred stock voting together as a single class
on an as-converted basis and holders of at least 66.67% of Pacific
preferred stock voting as a separate class must vote in favor of the
merger agreement for it to be approved. The approval of the merger
agreement is subject to the approval of the amendment to the Pacific
Certificate of Designations. Under the rules of the National
Association of Securities Dealers, Inc., the affirmative vote of a
majority of votes cast at the Procept Special Meeting is required to
approve the Procept stock issuance. For both Pacific and Procept, a
majority of the outstanding stock entitled to vote constitutes a
quorum for each respective meeting.
13. Who is Entitled to Vote?
Holders of record of Pacific common stock and preferred stock on
February 5, 1999, the Pacific record date, are entitled to vote at the
Pacific stockholders meeting. As of February 5, 1999, 25,200,978
shares of Pacific common stock were outstanding or issuable upon
conversion of Pacific preferred stock. For the purpose of the vote,
each share of Pacific preferred stock will be deemed converted into
290.89 shares of Pacific common stock.
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Holders of record of Procept common stock on February 3, 1999, the
Procept record date, are entitled to vote at the Procept stockholders
meeting. As of February 3, 1999, 3,001,832 shares of Procept common
stock were outstanding.
14. When is the Merger Expected to be Completed?
We are working to complete all aspects of the merger transaction as
quickly as possible. We currently expect the merger to be completed
shortly after an affirmative vote is obtained at both the Pacific
stockholders meeting and the Procept stockholders meeting.
15. What do I Need to do Now?
After you have carefully read this Joint Proxy Statement/Prospectus,
just complete, sign and mail your proxy card in the enclosed return
envelope as soon as possible. That way, your shares can be represented
at the Procept or Pacific stockholders meeting.
In the case of the Pacific stockholders meeting, failure to return a
proxy card will have the same effect as a vote against the merger
agreement and in the case of holders of Pacific preferred stock, as a
vote against the amendment to the Pacific Certificate of Designations.
16. If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
Your broker will vote your shares only if you provide instructions on
how to vote. You should instruct your broker to vote your shares,
following the directions provided by your broker.
17. Can I Change My Vote After I Have Mailed in My Signed Proxy Card?
Yes, you may change your vote at any time before the vote takes place
at the applicable stockholders meeting. You can attend the applicable
stockholders meeting and vote in person to do so.
Or, if you are an Procept stockholder, you can complete a new proxy
card or send a written notice stating you would like to revoke your
proxy. These should be sent to: Procept, Inc., 840 Memorial Drive,
Cambridge, Massachusetts 02139, Attention: President.
Or, if you are a Pacific stockholder, you can complete a new proxy
card or send a written notice stating you would like to revoke your
proxy. These should be sent to: Pacific Pharmaceuticals, Inc., 6730
Mesa Ridge Road, Suite A, San Diego, California 92121, Attention:
President.
18. Should I Send in My Pacific Stock Certificates Now?
No. For now you should continue to hold your certificates for Pacific
common stock and preferred stock. If the merger is completed, a set of
materials will be sent to you with instructions on how to exchange
your shares of Pacific common stock and preferred stock for Procept
common stock. You should use these materials to submit your
certificates.
19. Where Will My Shares of Common Stock of Procept be Traded?
Procept common stock is listed and traded on the Nasdaq SmallCap
Market.
20. Will the Pacific Stock Options and Warrants be Exchanged in the
Merger?
Yes. Each outstanding option or warrant to purchase Pacific common
stock or Pacific preferred stock will be converted into a right to
purchase shares of Procept common stock. As a holder of an option or
warrant to purchase shares of Pacific common stock or Pacific
preferred stock, you will receive an option to purchase a number of
shares of Procept common stock equal to the number of shares you were
eligible to purchase under your Pacific option or warrant multiplied
3
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by a "conversion factor." The conversion factor equals the quotient
obtained by dividing the number of shares of Procept common stock to
be issued in the merger by the number of shares of Pacific common
stock either outstanding or issuable on conversion of outstanding
Pacific preferred stock at the effective date of the merger. The
exercise price for the options and warrants to purchase shares of
Procept common stock will be the exercise price under the Pacific
option or warrant divided by the conversion factor. In addition, all
outstanding options to purchase the common stock of Pacific held by
employees and certain former employees of Pacific which are not vested
as of the effective date of the merger will fully vest as of that date
and will be converted into options to purchase shares of Procept
common stock as set forth above. The holders of options to purchase
Pacific preferred stock, upon exercise of the options to purchase
Procept common stock received in the merger, will also receive the
contractual rights given to the holders of Pacific preferred stock as
a result of the merger. For a discussion of the contractual rights,
see "Contractual Rights of Pacific Preferred Stock Converted into
Procept Common Stock."
Options to purchase Pacific common stock will be considered options
granted under Procept's 1998 Equity Incentive Plan. Procept will file
a registration statement to register the Procept shares issuable upon
the exercise of these options. To the extent that the Pacific warrant
holders have the right to have the shares of Pacific common stock
registered under the Securities Act, Procept will file a registration
statement with the Securities and Exchange Commission covering the
sale to the holders of warrants of Procept common stock purchasable
thereunder.
21. What Will Happen to Pacific's Stock Option Plans?
All of Pacific's outstanding stock option plans will be terminated as
of the effective date of the merger.
22. Who Should I Call if I Have Any Additional Questions?
Procept stockholders may call Procept's Investor Relations, at
(908) 497-0160.
Pacific stockholders may call the Principal Accounting Officer,
at (619) 550-3900.
23. Are There Any Risks Associated with the Merger?
The merger does involve some risks. For a discussion of certain risks
factors that should be considered in evaluating the merger, see "Risk
Factors" beginning on page 17.
4
<PAGE>
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the other documents that we have referred you to. See "Where
You Can Find More Information" on page 91. We have included page references in
parentheses to direct you to a more complete description of the topics presented
in this summary.
The Companies
Procept
Procept is a biopharmaceutical company currently engaged in the development of
novel drugs with a focus on anti-infectives. Procept is also searching to
acquire or in-license drug development candidates that have the potential for
accelerated approval and that would represent a significant medical advance.
The lead product candidate from Procept'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. PRO 2000 Gel was recently selected for
safety testing in a human clinical trial supported by the National Institute of
Allergy and Infectious Diseases, a unit of the U.S. National Institutes of
Health. The U.S. Food and Drug Administration has allowed the study to proceed
following review of an Investigational New Drug application filed by Procept.
The trial, which will involve women in the U.S. and South Africa, is scheduled
to begin in the first quarter of 1999. Additional clinical studies are being
discussed with the British Medical Research Council.
In addition, through its research in immunomodulation, Procept discovered a
series of small molecule compounds, T cell enzyme inhibitors, that have
demonstrated significant immunosuppressive activity in animal models. Patent
applications have been filed for these compounds which may provide target
opportunities for treating immune system disorders such as rheumatoid arthritis,
and for preventing transplant rejection. Procept is currently seeking
out-licensing opportunities for these compounds.
The principal offices of Procept, a Delaware corporation, are located at 840
Memorial Drive, Cambridge, Massachusetts 02139 and its telephone number at such
offices is (617) 491-1100.
Pacific
Pacific, a development stage enterprise, is engaged primarily in the development
and commercialization of medical products based on biotechnological research
regarding the treatment and detection of cancer and other diseases.
Pacific and its subsidiaries are currently developing a chemosensitizing agent
to overcome cancer drug resistance in brain and other cancers, a photodynamic
therapy ("PDT") boronated porphyrin ("BOPP") molecule for use in brain cancer,
and an immunotherapy for the treatment of metastatic cancer. Human clinical
studies are in progress in various kinds of cancers with the chemosensitizing
agent and the PDT BOPP compound.
Pacific's mailing address is 6730 Mesa Ridge Road, Suite A, San Diego,
California 92121 and its general telephone number is (619) 550-3900.
Merger Subsidiary
The merger subsidiary has been organized as a corporation under the laws of
Delaware as a wholly-owned subsidiary of Procept formed solely for the purpose
of the merger.
5
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The Merger
Summary of the Transaction (See page 54)
The Merger Agreement (Annex A) and an amendment to the Merger Agreement (Annex
A-1) are attached at the back of this Joint Proxy Statement/Prospectus. We
encourage you to read the Merger Agreement, as amended, as it is the legal
document that governs the merger. In the proposed merger, Procept's merger
subsidiary will be merged into Pacific and, as a result, Pacific will become a
wholly-owned subsidiary of Procept.
The proposed merger as contemplated by the Merger Agreement will be effected
following: (i) the approval of the Merger Agreement by the stockholders of
Pacific, (ii) the approval of the issuance of Procept common stock by the
stockholders of Procept, and (iii) the satisfaction or waiver of all other
conditions to the merger.
What the Holders of Pacific Common Stock and Preferred Stock Receive in the
Merger (See page 64)
In the proposed merger, the holders of Pacific common stock and preferred stock
will receive a total of 2,755,000 shares of Procept common stock, assuming no
Pacific shareholders exercise their appraisal rights under Delaware law. At the
time the merger becomes effective, assuming 25,200,978 shares of Pacific common
stock are outstanding or issuable upon conversion of the outstanding shares of
Pacific preferred stock, each issued and outstanding share of Pacific stock will
be converted into a right to receive approximately 0.11 shares of Procept common
stock. Each share of Pacific preferred stock will be deemed converted into
290.89 shares of Pacific common stock. Each holder of Pacific preferred stock
will receive additional contractual rights as described on pages 67-69. As a
result of such contractual rights, for each share of Procept common stock
received by a holder of Pacific preferred stock in the merger, such holder will
also receive approximately 0.362 shares of Procept common stock, reflecting the
issuance of an additional 417,137 shares of Procept common stock to the holders
of Pacific preferred stock. Procept will not issue any fractional shares of
common stock in the merger. Instead, holders of Pacific common stock and
preferred stock will receive cash for any fractional share.
Obligations to Issue Additional Shares of Procept Common Stock (See page 59)
As a result of the consummation of the merger, Procept will issue shares of its
common stock to certain persons in addition to the shares of Procept common
stock issued to the Pacific stockholders in the merger. In addition, Procept
will assume certain obligations of Pacific to issue shares of Procept common
stock in the future.
Certain Federal Income Tax Consequences (See page 60)
The merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended. In the event
the merger so qualifies, no gain or loss will be recognized by Pacific, Procept
or the merger subsidiary by reason of the merger, and no gain or loss will be
recognized by the stockholders of Pacific on the exchange of their shares of
Pacific common stock and preferred stock for shares of Procept common stock,
except in connection with any cash that Pacific stockholders receive instead of
fractional shares of Procept common stock.
Because certain tax consequences of the merger may vary depending upon
the particular circumstances of each Pacific stockholder, Pacific
stockholders should consult their own tax advisors as to the federal
(and any state, local or foreign) tax consequences of the merger in
light of their particular circumstances. Neither Procept nor Pacific
is making any representation with respect to the tax consequences of
the merger.
The Procept Special Meeting
Date and Purpose (See page 28)
The Procept Special Meeting will be held at 11:30 a.m. on March 15, 1999 at the
offices of Procept at 840 Memorial Drive, Cambridge, Massachusetts. At the
Procept Special Meeting, holders of Procept common stock will be asked to
approve issuance of the Procept common stock in the merger.
6
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Procept Record Date; Voting Rights (See page 28)
If you owned shares of Procept common stock as of the close of business on
February 3, 1999, the Procept record date, you are entitled to vote on the
merger proposal.
On the Procept record date, there were 3,001,832 shares of Procept common
stock outstanding. Holders of Procept common stock will have one vote at the
Procept Special Meeting for each share of Procept common stock they own on the
Procept record date.
Quorum; Required Vote (See page 28)
The presence, in person or by proxy, at the Procept Special Meeting of the
holders of a majority of the shares of Procept common stock outstanding and
entitled to vote is necessary to constitute a quorum at the Procept Special
Meeting. The rules of the National Association of Securities Dealers, Inc.
require Procept to obtain stockholder approval of the stock issuance due to the
number of shares of Procept common stock expected to be issued in connection
with the merger. Such approval is required where the aggregate number of shares
to be issued will be equal to or greater than 20% of the total number of shares
of Procept common stock issued and outstanding immediately prior to the merger.
Under the rules of the National Association of Securities Dealers, Inc., the
affirmative vote of a majority of the votes cast at the Procept Special Meeting
is required to approve the issuance of Procept common stock as a result of the
merger. Brokers who hold shares of Procept common stock as nominees will not
have discretionary authority to vote such shares unless you provide them with
voting instructions.
Recommendation to Procept Common Stockholders (See page 55)
The Special Committee of the Procept Board of Directors believes that the merger
is in the best interests of Procept stockholders and unanimously recommends that
holders of Procept common stock vote "FOR" the issuance of the Procept common
stock in the merger.
Fairness Opinion of Procept's Financial Advisor (See page 55)
In deciding to approve the merger, the Special Committee of the Procept Board of
Directors considered an opinion from its financial advisor, Oscar Gruss & Son
Incorporated, to the effect that, as of the date of the Merger Agreement, the
consideration to be paid by Procept pursuant to the merger was fair from a
financial point of view to Procept. This opinion is attached as Annex D to this
Joint Proxy Statement/Prospectus. We encourage you to read this opinion.
The Pacific Special Meeting
Date and Purpose (See page 29)
The Pacific Special Meeting will be held at 10:00 a.m. on March 16, 1999 at the
offices of Patterson, Belknap, Webb & Tyler LLP, 1133 Avenue of the Americas,
24th Floor, New York, New York. At the Pacific Special Meeting, holders of
Pacific common stock and preferred stock will be asked to approve the Merger
Agreement, and the holders of Pacific preferred stock will be asked to approve
the amendment to the Pacific Certificate of Designations.
Pacific Record Date; Voting Rights (See page 29)
If you owned shares of Pacific common stock and/or preferred stock as of the
close of business on February 5, 1999, the Pacific record date, you are entitled
to vote on the approval of the Merger Agreement and, as a Pacific preferred
stockholder, the approval of the amendment to the Pacific Certificate of
Designations.
On the record date, there were 25,200,978 shares of Pacific common stock
outstanding or issuable upon conversion of outstanding Pacific preferred stock.
Holders of Pacific common stock and Pacific preferred stock will have one vote
at the Pacific Special Meeting for each share of Pacific common stock they own
or are entitled to
7
<PAGE>
receive on the Pacific record date. As of the record date, each holder of
Pacific preferred stock was entitled to receive 290.89 shares of Pacific common
stock for each share of Pacific preferred stock held.
Quorum; Required Votes (See pages 29-30)
The presence, in person or by proxy, at the Pacific Special Meeting of the
holders of a majority of the shares of Pacific common stock and preferred stock
outstanding and entitled to vote is necessary to constitute a quorum at the
Pacific Special Meeting. The affirmative vote of the holders of 66.67% of the
outstanding shares of Pacific preferred stock voting as a separate class is
required to approve the amendment to the Pacific Certificate of Designations.
The affirmative vote of the holders of a majority of the outstanding shares of
Pacific common stock and preferred stock is required to approve the Merger
Agreement as well as the affirmative vote of the holders of 66.67% of the
outstanding shares of Pacific preferred stock voting as a separate class. Your
failure to vote or your abstention will have the effect of a vote against
approval of the Merger Agreement and, in the case of Pacific preferred
stockholders, as a vote against the approval of the amendment to the Pacific
Certificate of Designation. Brokers who hold shares of Pacific common stock and
preferred stock as nominees will not have discretionary authority to vote such
shares unless you provide them with voting instructions.
Recommendation to Pacific Stockholders (See page 57)
The Pacific Board of Directors believes that the merger and the amendment to the
Pacific Certificate of Designations are in the best interests of Pacific
stockholders and unanimously recommends that holders of Pacific common stock and
preferred stock vote "FOR" approval of the Merger Agreement and the amendment to
the Pacific Certificate of Designations.
Fairness Opinion of Pacific's Financial Advisor (See page 58)
In deciding to approve the merger and approve the amendment to the Pacific
Certificate of Designations, the Pacific Board of Directors considered an
opinion from its financial advisor, Josephthal & Co. Inc. as to the fairness,
from a financial point of view, of the merger to the Pacific stockholders. This
opinion is attached as Annex E to this Joint Proxy Statement/Prospectus. We
encourage you to read this opinion.
Summary of Other Selected Information
Potential Conflicts of Interest of Officers and Directors in the Merger (See
page 63)
The officers and directors of Pacific may have interests in the transaction that
are different from, or in addition to, those of Pacific stockholders. For
example, Michael Weiss and Elliot Vernon serve on both the Boards of Directors
of Procept and Pacific and were initially appointed to these respective Board
positions pursuant to contractual rights of Paramount Capital LLC or its
affiliates ("Paramount"). In addition, Michael Weiss is an employee of
Paramount. Paramount controls significant stockholders of both Procept and
Pacific and is entitled to receive a fee in connection with the merger as well
as certain milestone payments in the future, pursuant to a Financial Advisory
Agreement and an Introduction Agreement, both between Pacific and Paramount.
Those individuals were not on the Procept Special Committee, and they abstained
from voting when the Pacific Board voted on the merger.
Pursuant to an employment agreement between H. Laurence Shaw and Pacific, the
merger would have constituted a change in control of Pacific, entitling Dr.
Shaw, who was an officer and who is a director of Pacific, to receive severance
benefits. On November 19, 1998, Dr. Shaw and Pacific entered into a severance
agreement which terminated the employment agreement and provided Dr. Shaw with
certain benefits, see page 63.
The Board of Directors of Pacific and the Procept Special Committee were aware
of these and other interests and considered them in approving the merger
agreement and approving the amendment to the Pacific Certificate of
Designations.
As of the record date, directors and officers of Pacific and its affiliates as a
group owned approximately 8.0% of shares of Pacific common stock outstanding
or issuable upon conversion of the Pacific preferred stock. They have each
indicated that they intend to vote in favor of approval of the merger agreement
and, to the extent they own Pacific preferred stock, to vote in favor of the
approval of the amendment to the Pacific Certificate of Designations.
8
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Treatment of Stock Options and Warrants in the Merger (See page 66)
Each outstanding option to purchase shares of Pacific common stock issued
pursuant to Pacific's stock option plans will be assumed by Procept and will
constitute an option to acquire Procept common stock with the number of shares
and exercise price adjusted to reflect the conversion factor of shares of
Pacific stock for Procept common stock in the merger. Each outstanding option to
purchase shares of Pacific preferred stock will be assumed by Procept and will
constitute an option to acquire Procept common stock, with the number of shares
(on an as-converted basis to Pacific common stock) and the exercise price
adjusted to reflect the conversion factor of the merger. The shares of Procept
common stock issued upon the exercise of these options will receive the
contractual rights given to the Pacific preferred stockholders in the merger.
Regulatory Approvals (See page 63)
No filings are required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations thereunder with respect to
the merger. Procept and Pacific are aware of no other governmental or regulatory
approvals required for consummation of the merger, other than compliance with
applicable "blue sky" laws of the various states.
Conditions to the Merger (See page 71)
Completion of the merger depends on the satisfaction of certain conditions,
including but not limited to:
o Approval of the amendment to the Pacific Certificate of
Designations by the holders of Pacific preferred stock.
o Approval of the merger agreement by the holders of Pacific common
stock and preferred stock.
o Approval of the issuance of Procept shares of common stock as a
result of the merger by the holders of Procept common stock.
o Effectiveness of the Registration Statement in which this Joint
Proxy Statement/Prospectus is included.
o All required third-party consents and approvals.
o Approval for quotation on the National SmallCap Market of the
Procept shares to be issued in the merger.
o Completion of a merger between a subsidiary of Pacific and Binary
Therapeutics, Inc., which occurred on February 4, 1999.
Termination of the Merger Agreement (See page 73)
Procept and Pacific may mutually terminate the Merger Agreement without
completing the merger. The Merger Agreement may also be terminated by either
Procept or Pacific if the merger is not completed by June 30, 1999 and in
certain other circumstances, including failure of Pacific's stockholders and
Procept's stockholders to approve the merger proposal at their respective
special meetings.
Termination Fees and Expenses (See page 74)
If the Merger Agreement is terminated under circumstances involving an
alternative acquisition proposal, Procept or Pacific may be required to pay the
other a termination fee of $150,000.
If the merger is not consummated, each party will pay its own expenses. If the
merger is consummated, the surviving company, as a successor to Pacific, will be
liable for Pacific's unpaid expenses.
Comparative Stockholder Rights (See page 85)
When the merger is completed, holders of Pacific common stock and preferred
stock who receive Procept common stock in the merger will be stockholders of
Procept, and their rights will be governed by the Procept Restated Certificate
of Incorporation, as amended and By-laws. Certain differences between the rights
of holders of the Pacific common stock and preferred stock and those of holders
of Procept common stock are summarized on pages
9
<PAGE>
85-90. In addition, the holders of Pacific preferred stock will receive
certain additional contractual rights which are summarized on pages 67-69.
Accounting Treatment (See page 60)
Procept will account for the merger as a purchase of a business, which means
that the assets and liabilities of Pacific, including intangible assets, will be
recorded at their fair value.
Statutory Appraisal Rights (See page 61)
Holders of Pacific common stock and preferred stock who comply with the
conditions of Section 262 of the Delaware General Corporation Law and who do not
vote in favor of the merger will, if the merger is consummated, be entitled to
assert the rights afforded dissenting stockholders pursuant to Section 262.
Failure to follow the required procedure under Section 262 on a timely basis in
connection with the exercise of such rights may nullify such rights. This
Section 262 of the Delaware General Corporation Law is attached as Annex C to
this Joint Proxy Statement/Prospectus. We encourage you to read Annex C in full.
Comparative Per Common Stock Market Price Information (See page 15)
Procept common stock is listed on the Nasdaq SmallCap Market. The Pacific common
stock is not currently traded on a stock exchange but is traded on the Over the
Counter Bulletin Board. On November 4, 1998, the last full trading day prior to
the public announcement of the proposed merger, Procept common stock closed at
$1.19 and Pacific common stock was last traded at $0.27. On February 5, 1999,
Procept common stock closed at $2.00.
Listing of Procept Common Stock (See page 62)
Procept will list the shares of its common stock to be issued in the merger on
the Nasdaq SmallCap Market.
10
<PAGE>
Selected Historical Financial Information of Procept
The annual financial information set forth below has been derived from the
audited consolidated financial statements of Procept. The data for the
nine-month periods ending September 30, 1998 and 1997 has been derived from the
unaudited financial statements of Procept. The information should be read in
connection with, and is qualified in its entirety by reference to, Procept's
financial statements and notes thereto incorporated by reference herein. See
"Where You Can Find More Information." The interim data reflect all adjustments
that, in the opinion of management of Procept, are necessary to present fairly
such information for the interim periods. The results of operations for the
nine-month periods are not necessarily indicative of the results expected for a
full year or any other interim period.
<TABLE>
<CAPTION>
(In thousands, except share data)
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ........................... $ 5,798 $ 7,571 $ 4,647 $ 2,278 $ 781 $ 569 $ 265
-------- ------- -------- -------- -------- -------- ----------
Costs and Expenses:
Research and Development ......... 7,957 11,559 12,406 9,925 6,619 5,166 1,707
General and administrative ....... 2,532 3,805 3,723 3,176 2,715 2,017 1,412
Restructuring charges (1) ........ -- -- -- 273 460 221 225
Other ............................ 130 171 230 139 40 38 (203)
-------- ------- -------- -------- -------- -------- ----------
Total costs and expenses ......... 10,619 15,535 16,359 13,513 9,834 7,442 3,141
-------- ------- -------- -------- -------- -------- ----------
Net loss ........................... (4,821) (7,964) (11,712) (11,236) (9,053) (6,873) (2,876)
Accretion of discount on
preferred stock ................. (160) (20) -- -- -- -- --
Less: dividends on preferred
stock (2) ........................ -- -- -- -- (4,217) (4,217) --
-------- ------- -------- -------- -------- -------- ----------
Net loss available to common
stockholders ..................... $ (4,981) $(7,984) $(11,712) $(11,236) $(13,270) $(11,090) $ (2,876)
======== ======= ======== ======== ======== ======== ==========
Basic and diluted loss per
share ............................ $(847.54) $(98.24) $(127.65) $ (68.16) $ (63.68) $ (52.12) $ (1.35)
======== ======= ======== ======== ======== ======== ==========
Weighted average number of
common shares-basic and
diluted ......................... 5,877 81,271 91,752 164,836 208,371 212,780 2,126,651
======== ======= ======== ======== ======== ======== ==========
<CAPTION>
As of December 31, As of September 30,
----------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........ $ 2,862 $ 7,450 $ 565 $ 1,962 $ 535 $ 2,419 $ 3,569
Marketable securities ............ -- 9,393 2,006 4,002 -- -- 2,003
Total assets ..................... 5,777 19,704 6,397 8,917 2,168 4,315 6,476
Capital lease obligations
net of current portion and
other non-current
liabilities .................... 858 860 907 456 355 367 208
Redeemable convertible
preferred stock ................ 21,039 -- -- -- -- -- --
Total shareholders' equity
(deficit) ...................... (17,792) 12,851 1,439 6,316 260 2,379 5,655
Common stock dividends ........... -- -- -- -- -- -- --
</TABLE>
- -----------------------------
See accompanying Notes to Selected Historical and Unaudited Pro Forma Combined
Condensed Financial Data.
(1) Restructuring Charges
In September 1996, the Company implemented a restructuring plan that
resulted in the elimination of 20 positions, mostly from the research
organization, incurring a charge of $273,000.
In July 1997, the Company reduced staffing in its research organization
through the elimination of six senior research positions, incurring a
charge of $221,000 for the nine months ended September 30, 1997 and
$460,000 for the year ended December 31, 1997.
In January 1998, the Company reduced its staff to ten people, incurring
a charge of $225,000 for the nine month period ended September 30, 1998.
(2) Dividends on Preferred Stock
In 1997 the Company recorded a preferred stock dividend in the amount of
$4,217,000 which reflects the intrinsic value of the beneficial conversion
feature based upon the difference between the $26.25 per share fair market
value of the Company's common stock on the date of issuance and the $10.90
per share adjusted conversion price.
11
<PAGE>
Selected Historical Financial Information of Pacific
The annual financial information set forth below has been derived from the
audited financial statements of Pacific. The data for the six-month periods
ended September 30, 1998 and 1997 have been derived from the unaudited financial
statements of Pacific. The information should be read in connection with, and is
qualified in its entirety by reference to, Pacific's financial statements and
notes thereto incorporated by reference herein. See "Where You Can Find More
Information." The interim data reflect all adjustments that, in the opinion of
management of Pacific, are necessary to present fairly such information for the
interim periods. The results of operations for the six-month periods are not
necessarily indicative of the results expected for a full year or any other
interim period.
<TABLE>
<CAPTION>
Sept. 23,
1983
(inception)
Six Months Ended to
Years Ended March 31, September 30, September
-------------------------------------------------- ------------------- 30,
(In thousands, except share amount) 1994 1995 1996 1997 1998 1997 1998 1998
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
(as restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ....................... $ 585 $ 1,201 $ 379 $ 275 $ 348 $ 167 $ 103 $ 6,103
-------- -------- -------- -------- -------- -------- -------- --------
Costs and Expenses:
Cost of product sales .............. 698 419 125 95 141 36 28 3,166
Product develpment costs ........... 1,218 2,118 $ 1,854 2,566 2,196 1,022 980 18,141
General and administrative costs ... 2,624 1,571 1,258 1,155 2,085 1,199 778 18,630
Business development and marketing . 578 790 372 291 219 122 22 3,799
Interest and other ................. 80 58 26 66 78 54 19 653
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses ........... 5,198 4,956 3,635 4,173 4,719 2,433 1,827 44,389
-------- -------- -------- -------- -------- -------- -------- --------
Loss applicable to minority interest.. -- -- -- -- -- -- 86 86
Net loss ............................. (4,613) (3,755) (3,256) (3,898) (4,371) (2,266) (1,638) (38,200)
Convertible preferred stock dividends. -- -- -- (1,696) (7,227) (3,428) (3,294) (12,217)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss applicable to common
stockholders ...................... $ (4,613) $ (3,755) $(3,256) $ (5,594) $(11,598) $ (5,694) $ (4,932) $(50,417)
======== ======== ======== ======== ======== ======== ======== ========
Net loss per share of common
stock-basic and diluted ........... $ (1.10) $ (0.74) $ (0.52) $ (0.69) $ (1.25) $ (0.68) $ (0.44)
======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding ....................... 4,180 5,106 6,223 8,115 9,274 8,363 11,257
======== ======== ======== ======== ======== ======== ========
<CAPTION>
As of March 31, As of September 30,
--------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(as restated)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents, and
short-term investments ............ $ 4,504 $ 1,820 $ 1,698 $ 6,766 $ 3,290 $ 4,899 $ 4,285
Total assets ......................... 5,168 2,305 2,174 7,234 3,591 5,353 4,642
Long-term liabilities ................ 70 24 21 13 23 25 20
Minority interest .................... -- -- -- -- -- -- 4,732
Stockholders' equity ................. 3,942 1,884 1,548 6,331 2,702 4,566 (953)
Preferred stock dividends ............ -- -- -- 1,696 7,227 3,428 3,294
</TABLE>
See accompanying Notes to Selected Historical and Unaudited Pro
Forma Combined Condensed Financial Data.
12
<PAGE>
Selected Unaudited Pro Forma Combined Condensed Financial Data
The following selected unaudited pro forma combined condensed financial data
presents the combined financial data of Procept and Pacific, including their
respective subsidiaries, after giving effect to the merger, assuming the merger
had been effective for the periods indicated. The selected unaudited pro forma
combined condensed financial data for the year then ended December 31, 1997 and
as of September 30, 1998 and for the nine months then ended was derived from,
and should be read in conjunction with, the unaudited pro forma combined balance
sheet and unaudited pro forma combined statements of operations, including the
notes thereto, which are included elsewhere in this Joint Proxy
Statement/Prospectus. The selected unaudited pro forma combined condensed
financial data should also be read in conjunction with the historical financial
statements of both Procept and Pacific which are incorporated herein by
reference. See "Where You Can Find More Information." The selected unaudited pro
forma combined condensed financial data is presented for illustration purposes
only in accordance with the assumptions set forth below, and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated nor is it necessarily indicative of
future operating results or financial position of the combined enterprise. The
selected unaudited pro forma combined condensed financial data does not reflect
any adjustments to reflect any cost savings or other synergies anticipated as a
result of the merger.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1997 September 30, 1998 (2)
---------------------- ----------------------
(In thousands, except share data)
<S> <C> <C>
Statements of Operations (1)
Revenues $ 1,130 $ 422
Cost and expenses 14,614 6,285
Net loss (13,484) (5,778)
Less: dividends on preferred stock (4,217) (2,920)
Net loss available to common shareholders (17,701) (8,698)
Basic and diluted net loss per common share (3.93) (1.35)
Weighted average number of common shares
-- basic and diluted 4,506 6,424
As of
September 30, 1998
------------------
Balance Sheet Data
Current assets $10,198
Total assets 10,722
Current liabilities 3,058
Noncurrent liabilities 4,960
Shareholders' equity 2,704
</TABLE>
- -----------------
(1) The pro forma combined financial statements of operations includes the
Procept operating results for the year ended December 31, 1997, combined
with the Pacific operating results for the fiscal year ended March 31,
1998.
(2) The Pacific operating results for the three months ended March 31, 1998 are
included in the pro forma combined operating results for both the year
ended December 31, 1997 and the nine months ended September 30, 1998.
See accompanying Notes to Selected Unaudited Pro Forma Combined
Condensed Financial Data
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data of
Procept and Pacific and the combined per share data on an unaudited pro forma
basis after giving effect to the merger using the purchase method of accounting
for business combinations and giving effect to the issuance of 2,755,000 shares
of Procept common stock in the merger in exchange for Pacific Stock. This data
should be read in conjunction with the selected financial data and the unaudited
pro forma combined condensed financial statements included elsewhere in this
Joint Proxy Statement/Prospectus and the separate historical financial
statements of Procept and Pacific incorporated by reference herein. The pro
forma combined financial data is not necessarily indicative of the operating
results or financial position that would have been achieved if the merger had
been consummated as of the beginning of the periods presented, nor is it
necessarily indicative of the future operating results or financial position of
Procept or Pacific.
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months Ended
1997 September 30, 1998
--------------------- ------------------
<S> <C> <C>
Procept--Historical
Loss per common share:
Basic.................................. ($63.68) ($1.35)
Diluted................................ ($63.68) ($1.35)
Book value per share at period end....... $ 1.15 $1.88
<CAPTION>
Fiscal Year Ended
March 31, Six Months Ended
1998 September 30, 1998
--------------------- ------------------
<S> <C> <C>
Pacific--Historical
Loss per common share:
Basic.................................. ($1.25) ($0.44)
Diluted................................ ($1.25) ($0.44)
Book value per share at period end....... $0.25 ($0.08)
<CAPTION>
Year Ended
December 31, Nine Months Ended
1997 September 30, 1998
--------------------- ------------------
<S> <C> <C>
Procept/Pacific--
Pro Forma Combined (1)
Loss per common share:
Basic.................................. ($3.93) ($1.35)
Diluted................................ ($3.93) ($1.35)
Book value per share at period end (1)... N/A $0.37
Equivalent Pro Forma
Per share data imputed to existing
stockholders (1)(2)
Loss per common share:
Basic.................................. ($0.43) ($0.15)
Diluted................................ ($0.43) ($0.15)
Book value per share at period end....... N/A $0.04
</TABLE>
- -----------------------------
(1) Includes 3,001,832 shares of Procept stock outstanding at September 30,
1998 plus 4,297,170 shares issued in connection with the merger for a total
of 7,299,002 shares outstanding on a pro forma basis.
(2) Calculated based upon a fixed conversion rate of 0.11 shares of Pacific
stock for each share of Procept stock.
14
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
Procept
From February 17, 1994, the date of Procept's initial public offering, until
March 26, 1998, Procept's common stock had been quoted on the Nasdaq National
Market under the symbol "PRCT." Since March 27, 1998, Procept's common stock has
been quoted on the Nasdaq SmallCap Market under the symbol "PRCT." Procept has
never paid cash dividends on its common stock and does not anticipate paying
such dividends in the foreseeable future. Procept currently intends to retain
any future earnings for use in Procept's business. As of December 14, 1998,
there were 397 holders of record of Procept common stock.
The following table sets forth the range of high and low closing sale prices for
Procept's common stock as reported by the Nasdaq National Market and the Nasdaq
SmallCap Market for the periods indicated below. The dollar values in these
tables have been adjusted to reflect the one-for-ten reverse split of Procept's
common stock effected on June 1, 1998 and the seven-for-one reverse split of
Procept's common stock effected on October 14, 1997.
<TABLE>
<CAPTION>
Price Range
----------------------
High Low
-------- --------
<S> <C> <C>
Year Ended December 31, 1996
First Quarter...................................... $ 227.50 $ 152.04
Second Quarter..................................... $ 236.25 $ 126.91
Third Quarter...................................... $ 166.25 $ 91.91
Fourth Quarter..................................... $ 98.42 $ 72.17
Year Ended December 31, 1997
First Quarter...................................... $ 135.66 $ 56.91
Second Quarter..................................... $ 67.83 $ 32.83
Third Quarter...................................... $ 41.58 $ 21.91
Fourth Quarter.................................... $ 31.25 $ 10.00
Year Ended December 31, 1998
First Quarter...................................... $ 11.86 $ 6.25
Second Quarter..................................... $ 5.75 $ 3.38
Third Quarter...................................... $ 4.06 $ 0.94
Fourth Quarter..................................... $ 3.50 $ 0.31
</TABLE>
Pacific
Pacific's common stock had been traded on the American Stock Exchange ("AMEX")
under the symbol "PHA." The last day of trading of Pacific's common stock on
AMEX was September 18, 1998. On September 21, 1998, Pacific began trading on the
Over the Counter Bulletin Board under the ticker symbol "PHAA". Pacific has
never paid any cash dividends and does not contemplate the payment of cash
dividends in the foreseeable future. As of December 14, 1998, there were
approximately 419 holders of record of Pacific's common stock.
15
<PAGE>
The following presents the high and low closing prices for the periods indicated
as reported by the AMEX through September 18, 1998 and thereafter, the high and
low bids as reported by the Over the Counter Bulletin Board.
<TABLE>
<CAPTION>
Price Range
----------------------
High Low
-------- --------
<S> <C> <C>
Year Ended March 31, 1997
First Quarter...................................... $ 3.69 $ 1.63
Second Quarter..................................... $ 2.50 $ 1.75
Third Quarter...................................... $ 2.06 $ 1.06
Fourth Quarter..................................... $ 1.75 $ 1.06
Year Ended March 31, 1998
First Quarter...................................... $ 1.88 $ 1.00
Second Quarter..................................... $ 2.13 $ 1.13
Third Quarter...................................... $ 1.88 $ 0.75
Fourth Quarter..................................... $ 1.00 $ 0.56
Year Ended March 31, 1999
First Quarter...................................... $ 1.00 $ 0.25
Second Quarter..................................... $ 0.56 $ 0.05
Third Quarter...................................... $ 0.34 $ 0.05
</TABLE>
The following table sets forth the market value of Pacific common stock (on a
historical and equivalent per share basis) and the market value of Procept
common stock (on a historical basis) as of December 9, 1998, the last business
day preceding the day that the Merger Agreement was entered into.
<TABLE>
<CAPTION>
Procept Pacific
-------------------------------- --------------------------------- Equivalent Per
Date High Low Closing High Low Closing Share Value
----- ----- ------- ----- ----- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 9, 1998 $2.44 $2.31 $2.38 $0.22 $0.20 $0.20 $0.26
</TABLE>
Procept and Pacific stockholders are encouraged to obtain current market
quotations for Procept common stock and Pacific common stock.
16
<PAGE>
RISK FACTORS
In addition to the other information included in the Joint Proxy
Statement/Prospectus (including the other matters addressed in "Forward-Looking
Statements" on page 27), the risk factors described below should be considered
carefully by the holders of Procept common stock in determining whether to vote
to approve the issuance of Procept common stock and by the holders of Pacific
common stock and preferred stock in determining whether to vote to approve the
merger agreement and the amendment to the Pacific Certificate of Designations.
Risks Relating to the Merger
Fixed Exchange Ratio Despite Potential Changes in Stock Prices
The merger consideration to be delivered in connection with the merger
will be paid in shares of Procept common stock. It is anticipated that in the
merger, holders of Pacific common stock and preferred stock will receive a total
of 2,755,000 shares of Procept common stock, assuming no dissenting
shareholders. Assuming 25,200,978 shares of Pacific common stock are outstanding
or issuable upon conversion of outstanding Pacific preferred stock, each share
of Pacific common stock issued and outstanding or issuable upon conversion of
outstanding Pacific preferred stock will be converted into the right to receive
0.11 shares of Procept common stock. Since all other amounts used to calculate
the exchange ratio are fixed, the number of shares of Procept common stock to be
issued in connection with the Merger will vary only depending upon the number of
dissenting shareholders and not for any changes in the market price of Procept
common stock.
The number of shares received in the Merger by holders of Pacific
Stock will not be adjusted in the event of any increase or decrease in the price
of either Procept common stock or Pacific common stock. The price of either
Procept common stock or Pacific common stock at the effective date of the Merger
may vary from such price at the date the merger agreement was entered into, the
date of this Joint Proxy Statement/ Prospectus and at the dates of the special
meetings, possibly by a material amount, and the risk of any decline or benefit
of any increase in the market price of Procept common stock will be borne by the
holders of Pacific common stock, Pacific preferred stock, and Pacific warrants
and options. Such variations may be the result of changes in the business,
operations or prospects of Procept or Pacific, market assessments of the
likelihood that the Merger will be consummated and the timing thereof,
regulatory considerations, general market and economic conditions, factors
affecting the biotechnology and pharmaceutical industries in general and other
factors. Because the effective date of the merger may occur at a date later than
the special meetings, there can be no assurance that the price of either Procept
common stock or Pacific common stock on the date of the special meetings will be
indicative of such price at the effective date of the merger. The effective date
of the merger is expected to occur as soon as practicable following the special
meetings. Shareholders of Procept and Pacific are urged to obtain current market
quotations for Procept common stock. See "Comparative Market Data."
Integration of Operations
The merger involves the integration of two different companies that have
previously operated independently. No assurance can be given that Procept will
be able to integrate the operations of Pacific without encountering difficulties
or experiencing the loss of key employees, or that the benefits expected from
such integration will be realized.
Stock Ownership in Procept
Upon completion of the merger, holders of Pacific common stock and preferred
stock will become holders of Procept common stock. Procept's business and
strategy are somewhat different from that of Pacific, and Procept's results of
operations, as well as the price of Procept common stock, will be affected by
various factors different from those affecting Pacific's results of operations
and the price of Pacific common stock. See "Forward-Looking Statements" for a
summary of many of the key factors that might affect Procept and the price at
which the Procept common stock may trade from time to time. See "Comparative Per
Share Data" and "Comparative Dividends and Market Prices."
Special Considerations For Pacific Preferred Stockholders
As holders of preferred stock, Pacific preferred stockholders are presently
entitled to certain special rights, preferences, and privileges, including
without limitation, the right to receive $260 per share plus an amount equal to
all declared and unpaid dividends
17
<PAGE>
thereon out of the assets of Pacific prior to the holders of Pacific common
stock receiving any payment in the event of a liquidation of Pacific. Because
the preferred stockholders will become Procept common stockholders upon
completion of the merger, they will no longer have such special rights,
preferences, and privileges as stockholders of Procept except as may be provided
in the additional Section 10 Rights more fully described in "Contractual Rights
of Pacific Preferred Stock Converted to Procept Common Stock." Accordingly,
under certain circumstances, the holders of Procept common stock who were
formerly holders of Pacific preferred stock would be in a relatively less
favorable position than they would have been as holders of Pacific preferred
stock, including in the event of the liquidation of Procept.
Risk of Unenforceability of Contractual Rights to Holders of Pacific Preferred
Stock
The holders of Pacific preferred stock receiving Procept common stock in the
merger will have similar contractual rights as those discussed below and as more
specifically discussed in the section entitled "Contractual Rights of Holders of
Pacific Preferred Stock Receiving Procept Common Stock." Such rights are
contractual in nature and are subject to applicable laws including Delaware
General Corporation Law. Procept is not certain that, if challenged, such rights
(including the liquidation "preference") will be enforced.
Risks Relating to Procept and the Surviving Corporation
Early Stage of Product Development; Uncertainty of Successful Commercialization
Procept was incorporated in May 1992 and has a limited operating
history. Procept has never made a profit in any fiscal period and, as of
September 30, 1998, has an accumulated deficit of approximately $60.6 million.
Procept had a net loss in 1996 of $11.2 million, a net loss in 1997 of $9.1
million before dividends on preferred stock of $4.2 million, and a net loss for
the nine months ended September 30, 1998 of $2.9 million. In addition, Procept
expects to incur operating losses over the next several years. To date,
Procept's only source of revenue has been up-front payments and research and
development funding from its corporate partners. For the foreseeable future,
Procept expects that its level of revenues and profitability will depend upon
its ability to enter into new collaborations. Procept has not received any
revenues from the discovery, development or sale of a commercial product; and
Procept may not realize any such revenues in the future. Procept is not able to
predict when, or if, it will become profitable, nor is it able to predict
whether such profitability will be sustained if it is achieved.
Drug discovery and development involves a broad range of
technological, managerial and commercial risks. To date, while Procept has
identified compounds it believes will have clinical value, it has developed only
one of these into a candidate drug, PRO 2000 Gel. In addition, while Procept is
developing PRO 2000 Gel, it has not yet obtained regulatory approval for or
marketed this or any other product. PRO 2000 Gel will require significant
additional research and development efforts, including extensive clinical
testing and regulatory approval, before commercial use. Although PRO 2000 Gel
has advanced to the clinical trial phase, it is not yet ready for commercial
production.
It will be several years, if at all, before any products resulting
from Procept's research and development programs could be commercially
available. Procept's potential products may fail because of the inherent risks
in the development of pharmaceutical products based on new technologies. These
risks include the possibility that:
o Procept's therapeutic approach will not be successful;
o any or all of its potential products will be found to be unsafe,
ineffective or toxic;
o any or all of its potential products fail applicable regulatory
standards or receive necessary regulatory clearances;
o the potential products, if safe and effective, will be difficult to
develop into commercially viable products or to manufacture on a large
scale or will be uneconomical to market;
o the potential products may have undesirable and unintended side effects
or other characteristics that may prevent or limit their commercial
use;
o proprietary rights of third parties will preclude Procept from
marketing the products; or
o third parties will market superior or equivalent products.
Need for Additional Funds; Risk of Insolvency
Procept's operations to date have consumed substantial amounts of
cash. Procept will require substantial funds to: (i) fulfill research and
development obligations to any corporate partners; (ii) continue its internal
research and development programs; (iii) in-license or acquire additional
technologies to conduct research and development; and (iv) conduct preclinical
studies and clinical trials. Procept may need to repeatedly raise additional
capital to continue its operations. Procept may raise this capital through
public or private equity financings, collaborative arrangements, debt
financings, bank borrowings, or other sources.
18
<PAGE>
Procept's capital requirements depend upon numerous factors, including the
following:
o the establishment of collaborative arrangements;
o the development of competing technologies or products;
o changing market conditions;
o the cost of protecting its intellectual property rights;
o the purchase of capital equipment;
o the progress of its drug discovery and development programs;
o the progress of any collaborations and receipt of any option/license,
milestone and royalty payments resulting from those collaborations; and
o in-licensing and acquisition opportunities.
Additional funding may not be available on favorable terms or at all.
If adequate funds are not available, Procept may need to curtail operations
significantly. To obtain additional funding, Procept may need to enter into
arrangements that require it to relinquish rights to certain technologies, drug
candidates and/or potential markets. To the extent that Procept raises
additional capital through the sale of equity, or securities convertible into
equity, you may experience dilution of your proportionate ownership in Procept.
Procept's losses resulted principally from research and development
costs of drug candidates and associated administrative costs. Procept 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, Procept's
revenues, if any, will likely be limited to amounts received under newly
established research or product development relationships. Procept's future
profitability depends on its ability:
o to identify and acquire commercially viable products;
o to enter into agreements for product development and commercialization
with corporate sponsors;
o to develop and obtain patent protection and regulatory approvals for
its products; and
o to develop the capability to manufacture and sell our products.
Procept is not certain that it will successfully identify, develop, acquire,
commercialize, patent, manufacture or market its products, obtain required
regulatory approvals or ever achieve profitability. Furthermore, Procept may be
unable to establish corporate partnerships on acceptable terms. If Procept is
unable to get additional financing, or to enter into profitable collaborations,
its financial condition will be materially adversely affected.
Uncertainty Regarding Success of Clinical Trials
Procept must independently demonstrate through preclinical testing and
clinical trials that each product is safe and effective for its intended use
before it obtains the required regulatory approvals for the commercial sale of
any drug candidates. Results of preclinical studies are not necessarily
indicative of results that will be obtained in clinical trials. Furthermore,
during such studies and trials, Procept may discover significant technological
obstacles that must be overcome before continuing the drug development effort.
Procept's product development efforts may fail because:
o the potential product is not shown to be safe and effective;
o the required regulatory approvals are not obtained;
o the potential product can not be produced in commercial quantities at
an acceptable cost; or
o the product does not gain market acceptance.
The rate of completion of clinical trials depends 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 Procept's business.
A number of pharmaceutical companies have suffered significant
setbacks in advanced clinical trials even after promising results in earlier
trials. Generally, only a small percentage of the new pharmaceutical products
initially developed is approved for sale. Even products which are approved
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for sale have no assurance of commercial success. Any drug candidate Procept
develops may produce undesirable side effects in humans. The occurrence of side
effects could interrupt, delay or halt clinical trials of the drug candidate and
could ultimately prevent its approval by the U.S. Food and Drug Administration
or foreign regulatory authorities.
Even after clinical trials, Procept may encounter unanticipated
problems relating to development, manufacturing, distribution and marketing,
some of which Procept may not be financially or technically able to solve. The
failure to adequately address such problems could prevent Procept from ever
becoming a viable business or generating profits. Furthermore, products of
Procept's competitors may render Procept's products obsolete.
Potential Future Dilution
As of February 3, 1999, 4,964,840 shares of Procept common stock
were issuable upon exercise of options and warrants to purchase Procept common
stock that either are currently outstanding or Procept has an obligation to
issue, including (a) Class C warrants to purchase an aggregate of 2,802,180
shares of Procept common stock and (b) unit purchase options to purchase an
aggregate of 481,381 shares of Procept common stock and Class C warrants to
purchase an aggregate of 481,381 shares of common stock. In the merger, Procept
will assume the outstanding options and warrants issued by Pacific, after which
7,543,154 shares of Procept common stock will be issuable upon exercise of
options and warrants, including shares issuable in connection with certain
anti-dilution rights of such warrant and option holders. In addition, as a
result of the merger, Procept will assume obligations of Pacific to issue
additional shares of Procept common stock in the future. See "The Merger -
Obligations to Issue Additional Shares of Procept Common Stock."
Potential Dilutive Effect and Liquidation Preference Under Rights of Certain
Stockholders
Certain Procept stockholders who acquired their shares in Procept's
1998 private placement, or who will acquire shares directly upon exercise of
outstanding unit purchase options, are entitled to certain contractual rights
requiring contingent additional issuances of Procept common stock (x) based on
the market price of Procept common stock on April 9, 1999, (y) to protect them
against future dilutive sales of securities, and (z) as a dividend substitute
beginning October 9, 1999. After the merger, the former holders of Pacific
preferred stock and certain Pacific indebtedness will also be entitled to these
rights. As a result of the merger, pursuant to these anti-dilution rights,
Procept will issue approximately 1,453,796 shares of its common stock to the
stockholders of Procept having these contractual rights including the former
holders of Pacific preferred stock. In the event of (i) a liquidation,
dissolution or winding up of Procept, (ii) the sale or other disposition of all
or substantially all of Procept's assets, or (iii) any consolidation, merger,
combination, reorganization or other transaction in which Procept is not the
surviving entity, these stockholders are entitled to receive an aggregate of
$28,235,355 as a liquidation "preference." Except in the case of a liquidation,
dissolution or winding up, such payment will be in the form that equity holders
will receive in the acquisition transaction. In the event of a liquidation,
dissolution or winding up, such payment is contingent upon Procept's having
available resources to make such payment. These contractual rights will
terminate after April 9, 1999 if Procept's common stock trades at approximately
$11.25 per share or more.
Concentration of Ownership and Control
The Aries Trust, the Aries Domestic Fund, L.P., the Aries Master Fund
and Dr. Lindsay Rosenwald (collectively, the "Aries Purchasers"), together are
the holders of (i) an aggregate of 1,355,280 shares of Procept common stock,
(ii) Class C warrants to purchase an aggregate of 1,341,680 shares of Procept
common stock, (iii) additional warrants to purchase an aggregate of 5,845 shares
of Procept common stock, and (iv) unit purchase options to purchase (x) an
aggregate of 328,844 shares of Procept common stock and (y) Class C warrants to
purchase an aggregate of 328,844 shares of Procept common stock, representing
approximately 67.1% of Procept common stock outstanding and assuming the
exercise of all the warrants and the unit purchase options held by the Aries
Purchasers. The Aries Purchasers are also significant stockholders of Pacific
and will receive
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additional shares of Procept common stock in the merger. After giving effect to
the merger, the Aries Purchasers will own 57.3% of the outstanding common stock
of Procept, assuming only the Aries Purchasers exercise all their convertible
securities. In addition, The Aries Trust and the Aries Domestic Funds, L.P. have
the right to designate a majority of the members of the Board of Directors.
Accordingly, these entities may effectively control matters requiring approval
by Procept's stockholders, including electing directors, adopting or amending
certain provisions of Procept's certificate of incorporation or by-laws and
approving or preventing certain mergers or other similar transactions, such as a
sale of substantially all of Procept's assets (including transactions that could
give holders of Procept common stock the opportunity to realize a premium over
the then-prevailing price for their shares).
Furthermore, the control rights of these entities and their affiliates
may effectively discourage a third party from making an acquisition proposal and
thereby inhibiting a change of control in circumstances that could give the
holders of Procept common stock the opportunity to realize a premium over the
then-prevailing market price of such stocks or affect the market price of the
common stock, or both. The Pacific stockholders other than the Aries Purchasers
receiving Procept common stock will be minority equity holders and will be
unable to control Procept's management or business policies. Moreover, subject
to contractual restrictions and general fiduciary obligations, Procept is not
prohibited from engaging in transactions with its management and principal
stockholders, or with entities in which such persons are interested.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity
for Procept Securities
If Procept common stock is not listed on a national securities
exchange or listed on a qualified automated quotation system, it may become
subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended,
which imposes additional sales practice requirements on broker-dealers that sell
such securities. Rule 15g-9 defines a "penny stock" to be any equity security
that has a market price (as therein defined) of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions including the securities being quoted on the Nasdaq SmallCap Market.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser, have delivered the Securities and
Exchange Commission's required disclosure statement regarding "penny stock" and
have received the purchaser's written consent to the transaction prior to sale.
In addition, Rule 15g-4 requires that a broker-dealer must disclose the sales
commission payable to it and its registered representative and current
quotations for the security. Finally, Rule 15g-6 requires that a broker-dealer
send its customers who hold penny stock in their accounts monthly statements
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stock. Consequently, such rules may
affect the ability of broker-dealers to sell Procept's securities and may affect
the ability of holders of Procept common stock to sell any of their shares.
The foregoing required penny stock restrictions will not apply to
Procept's securities if Procept meets certain minimum net tangible assets or
average revenue criteria. Procept cannot be certain that its securities will
qualify for exemption from the penny stock restrictions. In any event, even if
its securities were exempt from such restrictions, Procept would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Securities and Exchange
Commission the authority to restrict any person from participating in a
distribution of penny stock, if the Securities and Exchange Commission finds
that such a restriction would be in the public interest. If Procept's securities
were subject to the rules on penny stocks, the market liquidity for its
securities would be materially adversely affected.
Uncertainty Regarding Future Collaborations
Procept has no experience with obtaining government approvals,
marketing pharmaceutical products or clinical testing and manufacturing and, as
a result, intends to depend on collaborators for expertise. Additionally,
Procept's strategy for identifying and developing compounds and drug candidates
includes entering into partnerships with third parties. Procept is currently
seeking corporate partners to assist in the development of the PRO 2000 Gel.
Although Procept plans to continue to fund this program, Procept cannot be
certain that it will be able to continue such program without a partner.
Furthermore, Procept may not be successful in forming or maintaining any such
alliances, its partners may not devote adequate resources to its product
candidates, and the contemplated benefits from such alliances may never be
realized.
The efforts of Procept's collaborators will affect Procept's revenues.
Not all aspects of drug discovery and development will be under Procept's
control. To the extent Procept's partners control
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aspects of drug discovery, development and commercialization, Procept will
depend upon the expertise and resources of its collaborators. Some of the
collaborative, license or other arrangements that Procept may enter into may
place responsibility on its 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, Procept's business may be
materially adversely affected. Furthermore, Procept's future partners may
develop alternative technologies or products outside their collaboration with
Procept, and such technologies or products may be used to develop treatments for
the diseases targeted by Procept's collaborative arrangements. This could have a
material adverse effect on Procept's business.
If Procept 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.
Volatility of Stock Price
The market price of Procept common stock has been highly volatile and
may be so in the future. Many factors may have a significant adverse effect on
the market price of the Procept common stock, including:
o announcements of technological innovations or new commercial products
by Procept or its competitors;
o developments concerning proprietary rights, including patent and
litigation matters;
o publicity regarding actual or potential results of development products
or compounds of Procept or its collaborative partners;
o unexpected terminations of collaborative partnerships;
o regulatory developments in the United States and other countries;
o general market conditions; and
o quarterly fluctuations in Procept's revenues and other financial
results.
As of December 31, 1998, Procept had 3,001,832 shares of common stock
outstanding. The issuance of shares of Procept common stock in connection with
the merger and future issuances of Procept common stock as well as sales of
Procept common stock by existing stockholders and option and warrant holders
also could adversely affect the market price of Procept common stock.
Absence of Dividends on Common Stock
Procept has never declared or paid any dividends on Procept common
stock and does not anticipate paying any cash dividends in the foreseeable
future.
Certain Anti-Takeover Provisions
Certain provisions of Procept's certificate of incorporation and
by-laws may have the effect of discouraging a third party from making an
acquisition proposal for Procept and thereby inhibit a change in control of
Procept in circumstances that could give the holders of Procept common stock the
opportunity to realize a premium over the then-prevailing market price of such
stock. Such provisions may affect the market price of Procept common stock. For
example, Procept's certificate of incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by its Board of Directors. Such preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control. The future issuance of
such preferred stock may adversely affect the voting and dividend rights, rights
under liquidation and other rights of the holders of Procept's other equity
securities. In addition to the impact of a future issuance of preferred stock,
Section 203 of the Delaware General Corporation Law contains certain provisions
that may delay or prevent an attempt by a third party to acquire control of
Procept. Furthermore, Procept has contractual obligations to certain of its
security holders that may prevent potential takeovers. See "Concentration of
Ownership" and "Potential Dilutive Effect and Liquidation Preference Under
Rights of Certain Stockholders."
Competition and Technological Change
Procept competes against major pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions. Competition may increase as a result of advances in the commercial
application of biotechnology and greater availability of capital for
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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 Procept's competitors, to market commercial products. Furthermore,
Procept's competitors may succeed in developing technologies and products that
are more effective than any that are being developed by Procept or that would
render its technology and products obsolete and noncompetitive. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than Procept has. In addition, some of
Procept's competitors have greater experience than Procept does in conducting
preclinical testing and human clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, Procept's competitors may succeed in
obtaining FDA or other regulatory approvals for products more rapidly than
Procept does.
Moreover, Procept's products may be unable to compete successfully
with Procept's competitors' existing products or products under development, and
Procept may not be able to obtain regulatory approval for its products in the
United States or elsewhere. If Procept 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
Because of the 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. Procept's success will depend, in large part, on Procept's ability to
obtain and maintain patent or other proprietary protection for Procept's
technologies, products, and processes, and Procept's ability to operate without
infringing the proprietary rights of other parties. Procept may not be able to
obtain patent protection for the composition of matter of discovered compounds,
processes developed by its employees, or uses of compounds discovered through
its technology.
Procept may not receive any issued patents based on currently pending
or any future applications. Any issued patents may not contain claims
sufficiently broad to protect against competitors with similar technology. In
addition, Procept's patents, Procept's collaborative partners' patents, and
those patents for which Procept has license rights may be challenged, narrowed,
invalidated or circumvented. Furthermore, rights granted under patents may not
provide Procept with any competitive advantage.
Procept may have to initiate litigation to enforce its patent and
license rights. If Procept's competitors file patent applications that claim
technology also claimed by Procept, it may have to participate in interference
or opposition proceedings to determine the priority of invention. The cost to
Procept of any litigation or proceeding, even if favorably resolved, could be
substantial. An adverse outcome could subject Procept to significant liabilities
to third parties, and require it to cease using the technology or to license the
disputed rights from third parties. Procept may not be able to obtain any
required licenses on commercially acceptable terms or at all.
Dependence on Confidentiality Agreements
Procept relies on certain proprietary trade secrets and know-how that
are not patentable and it is possible that others may independently develop the
same or similar technology or otherwise obtain access to its unpatented
technology. Procept has taken measures to protect its unpatented trade secrets
and know-how, including the use of confidentiality agreements with its
employees, consultants, advisors and collaborators. It is possible that the
agreements may be breached, that Procept would have inadequate remedies for any
such breach, or that its trade secrets will otherwise become known or be
independently developed or discovered by competitors. If Procept is unable to
maintain the proprietary nature of its technologies, its business could be
adversely affected.
Impact of Government Regulation; Product Clearance and Approval
Procept cannot yet accurately predict when it might first submit new
drug applications for FDA or other regulatory review. Before the FDA and
comparable foreign agencies introduce therapeutic pharmaceutical products, they
require lengthy and detailed laboratory and clinical testing, sampling
activities and other costly and time-consuming
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procedures. It typically takes several years or more to satisfy these
requirements. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from jurisdiction to
jurisdiction. The process of obtaining these approvals and subsequent compliance
with appropriate statutes and regulations are time consuming and require the
expenditure of substantial resources. Even if Procept obtains regulatory
clearances, a marketed product is subject to continual review.
Government regulation also affects the manufacturing and marketing of
pharmaceutical products. The effect of government regulation may be to delay
marketing of Procept's products for a considerable or indefinite period of time,
to impose costly procedural requirements upon Procept's activities and to
furnish a competitive advantage to larger companies or companies more
experienced in regulatory affairs. Approvals may not be granted on a timely
basis and may not be granted at all. Additionally, approvals may not cover all
the clinical indications for which Procept is seeking approval or may 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 Procept's ability to
generate revenue. Even if initial regulatory approvals for Procept's products
are obtained, Procept, 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 Procept's
products or further regulate the prices at which Procept 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 that 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.
Uncertainty of Health Care Reform Measures and Third Party Reimbursement
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 affect the business and financial
condition of pharmaceutical and biotechnology companies. In the United States
and in certain foreign jurisdictions, there have been, and Procept expects that
there will continue to be, a number of legislative and regulatory proposals
aimed at changing the health care system. While Procept 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 of Procept common stock issued in the merger, or its
ability to raise capital or to obtain collaborative partners. The adoption of
such proposals could have a material adverse effect on Procept's business,
financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of
Procept's potential products 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. Procept cannot be certain that its potential products will be
considered cost-effective or that adequate third-party reimbursement will be
available to enable it 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 Procept might develop. If government
and other third-party payers of Procept's potential products do not provide
adequate reimbursement, there would be a material adverse effect on Procept's
business, financial condition and results of operations.
Management Transition; Need for Additional Personnel; Dependence on Qualified
Personnel
Financial constraints have dictated that Procept terminate a
significant number of employees
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during the last year. The loss of such individuals has decreased the scope of
Procept's activities and may, therefore, have reduced the prospects for
commercially successful product development. In February 1998, Procept's Board
of Directors appointed John F. Dee as the Company's President and Chief
Executive Officer. Until the Company recruits additional administrative
personnel, Mr. Dee, in addition to serving as Procept's Principal Executive
Officer, will serve as Procept's Principal Financial Officer and Principal
Accounting Officer. If Mr. Dee were not able to continue in these capacities,
Procept could be adversely affected.
Procept is highly dependent upon the efforts of Mr. Dee and its
remaining scientific team. The loss of the services of one or more of these
individuals might impede the achievement of Procept's development objectives.
Because of the specialized scientific nature of Procept's business, Procept is
highly dependent upon its ability to attract and retain qualified scientific and
technical personnel. Major pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions intensely
compete for qualified personnel in the areas of Procept's activities, and
Procept cannot be certain that it 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 Procept's product development programs.
Limited Manufacturing, Marketing and Sales Capability and Experience
Procept has not yet invested in the development of manufacturing,
marketing or sales capabilities. Procept lacks the facilities and personnel to
manufacture products in accordance with quality system (formerly, current good
manufacturing practice) requirements as prescribed by the FDA or to produce an
adequate supply of compounds to meet future requirements for clinical trials. If
Procept is unable to develop or contract for manufacturing capabilities on
acceptable terms, its ability to conduct human clinical testing with PRO 2000
Gel 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. Such delays could materially impair Procept's competitive
position and the possibility of achieving profitability. Procept also will need
to hire additional personnel skilled in marketing and sales as it develops
products with commercial potential or enters into arrangements with third
parties for sales and marketing. Procept cannot be certain that it 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
Procept's business exposes Procept to potential liability risks that
are inherent in the testing, manufacturing and marketing of medical products.
The use of Procept's products in clinical trials may expose Procept to product
liability claims and possible adverse publicity. These risks will expand with
respect to Procept's products, if any, that receive regulatory approval for
commercial sale. Procept 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.
Procept 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, product liability coverage is becoming increasingly expensive
and it is possible that Procept's coverage is inadequate or that Procept will be
unable 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 its business or financial condition.
Furthermore, Procept's collaborators or licensees may not agree to indemnify
Procept or be sufficiently insured or have a net worth sufficient to satisfy any
such product liability claims. In addition, a product may be subject to recall
for unforeseen reasons. Such a recall could have a material adverse effect on
Procept's business.
Limited Availability of Net Operating Loss Carry Forwards
For Federal income tax purposes, net operating loss and tax credit
carryforwards as of December 31, 1997 are approximately $57.3 million and $1.6
million, respectively. These carryforwards will expire beginning in 2000. The
Tax Reform Act of 1986 provided for a limitation on the annual use of net
operating loss and tax credit carryforwards following certain ownership changes.
Procept believes that certain recent issuances of its securities, including
those shares of Procept common stock being issued in the merger, are likely to
restrict
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severely its ability to utilize these net operating losses and tax credits in
any particular year. Additionally, because the U.S. tax laws limit the time
during which net operating loss may be applied against future taxable income and
tax credit carryforwards may be applied against tax liabilities, Procept may
never be fully able to use its net operating loss and tax credits for federal
income tax purposes.
Hazardous Materials; Environmental Matters
Procept's research and development and manufacturing processes involve
the controlled storage, use and disposal of hazardous materials, biological
hazardous materials and radioactive compounds. Procept 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
Procept 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 an accident, Procept may be held
liable for any damages that result; and any such liability could exceed its
resources. Procept may be required to incur significant costs to comply with
environmental laws and regulations in the future and its operations, business or
assets may be materially adversely affected by current or future environmental
laws or regulations.
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FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus, and documents which are incorporated by
reference, include various forward-looking statements about Procept, Pacific and
the combined company that are subject to risks and uncertainties.
Forward-looking statements include the information concerning future financial
performance, business strategy, projected costs and plans and objectives of
Procept, Pacific and the combined company set forth under "Questions and Answers
About the Merger," "Summary," "--Background of the Merger," "--Common Reasons
for the Merger" "--Procept's Reasons for the Merger; Recommendation of the
Procept Board," "--Opinion of Procept's Financial Advisor," "--Pacific's Reasons
for the Merger; Recommendation of the Pacific Board," and those preceded by,
followed by or that otherwise include the words "believes," "expects,"
"anticipates," "intends," "estimates" or similar expressions.
Procept and Pacific participate in an industry that is characterized by rapidly
evolving technology and intense competition. You should understand that the
following important factors, in addition to those discussed elsewhere in this
Joint Proxy Statement/Prospectus and the documents which are incorporated by
reference (see "Where You Can Find More Information"), could affect the future
results of Procept, Pacific and the combined company and could cause actual
results to differ materially from those expressed in forward-looking statements
contained or incorporated by reference in this Joint Proxy Statement/Prospectus:
o The effect of the merger and Procept's other strategic initiatives
on earnings and cash flow.
o The successful integration of Procept and Pacific's operations and
research and development programs.
o The uncertainty regarding pre-clinical and clinical trials of new
products.
o The need to obtain future collaborations for expertise in areas
such as obtaining government approval, marketing pharmaceutical
products, conducting clinical trials and manufacturing products.
o Uncertainties regarding new product development.
o Regulatory approval for commercial sale of products.
o Obtaining U.S. and foreign patent protection for its products.
o Efforts of third party payers, such as government health
administration authorities, private health insurers and other
organizations, to reduce the costs of health care.
o Risk of product liability claims.
o The fact that financial results in any particular fiscal period
are not necessarily indicative of results for future periods.
o A significant delay in the expected completion of the merger.
Most of these factors are difficult to accurately predict and are generally
beyond the control of Procept and Pacific.
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MEETINGS, VOTING AND PROXIES
This Joint Proxy Statement/Prospectus is furnished to (i) the holders of the
outstanding shares of Procept common stock, $0.01 par value ("Procept Common
Stock"), in connection with the solicitation of proxies by the Procept Board of
Directors (the "Procept Board") from the holders of Procept Common Stock for use
at the special meeting of the Procept shareholders on the date and at the time
and place set forth below (the "Procept Special Meeting"), and (ii) the holders
of the outstanding shares of (a) Pacific common stock, $0.02 par value ("Pacific
Common Stock"), and (b) Pacific preferred stock, $25 par value ("Pacific
Preferred Stock," together with Pacific Common Stock, "Pacific Stock"), in
connection with the solicitation of proxies by the Pacific Board of Directors
(the "Pacific Board") from the holders of Pacific Stock for use at the special
meeting of the Pacific shareholders on the date and at the time and place set
forth below (the "Pacific Special Meeting," together with the Procept Special
Meeting, the "Special Meetings"). Procept and Pacific anticipate that mailing of
proxy materials to their stockholders entitled to notice of and to vote at the
Special Meetings will begin on or about February 12, 1999.
The Procept Special Meeting
General. The purpose of the Procept Special Meeting is to consider and vote upon
a proposal to approve the issuance of shares of Procept Common Stock (the "Stock
Issuance") pursuant to the Agreement and Plan of Merger dated December 10, 1998,
as amended, (the "Merger Agreement") providing for the merger of a subsidiary of
Procept ("Merger Sub") with and into Pacific, and in connection with such merger
and such other matters, if any, as may properly be presented for consideration.
The Procept Board does not know, as of the date of mailing of this Joint Proxy
Statement/Prospectus, of any other business to be brought before the Procept
Special Meeting. The enclosed proxy card authorizes the voting of shares
represented by the proxy on all other matters that may properly come before the
Procept Special Meeting, and any adjournment or postponement thereof and the
proxy holders intend to take such action in accordance with their best judgment.
A Special Committee of the Procept Board, by a unanimous vote, has approved the
Stock Issuance and recommends that Procept shareholders vote FOR the Stock
Issuance.
Date, Place and Time; Record Date. The Procept Special Meeting is scheduled to
be held on March 15, 1999 at 11:30 a.m. Holders of record of shares of Procept
Common Stock at the close of business on February 3, 1999 (the "Procept Record
Date") will be entitled to receive notice of and vote at the Procept Special
Meeting.
Voting Rights. At the close of business on February 3, 1999, 3,001,832
shares of Procept Common Stock were issued and outstanding. Each share of
Procept Common Stock outstanding as of the Procept Record Date is entitled to
one vote upon each matter properly submitted at the Procept Special Meeting.
Under the rules of the National Association of Securities Dealers, Inc. (the
"NASD"), the affirmative vote of a majority of the votes cast at the Procept
Special Meeting is required to approve the Stock Issuance.
The presence in person or by proxy at the Procept Special Meeting of the holders
of at least a majority of the outstanding shares of Procept Common Stock
entitled to vote is necessary to constitute a quorum for the transaction of
business at the Procept Special Meeting. Abstentions and broker non-votes (i.e.,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
as to a matter with respect to which brokers or nominees do not have
discretionary power to vote) will be considered as present for the purposes of
establishing a quorum. Under the NASD rules, brokers and nominees are precluded
from exercising their voting discretion with respect to the approval of the
Stock Issuance. Accordingly, without specific instructions from the beneficial
owner of such shares, brokers and nominees do not have the power to vote such
shares on the Stock Issuance. As a result, abstentions and broker non-votes will
be counted as present for purposes of a quorum but neither abstentions nor
broker non-votes will have any effect on the outcome of voting on the matter.
As of the Procept Record Date, directors and executive officers of Procept and
their affiliates owned beneficially an aggregate of 205,411 outstanding shares
of Procept Common Stock or 6.4% of the shares of Procept Common Stock
outstanding on such date, assuming the directors and executive officers exercise
certain options. Directors and executive officers of Procept have indicated that
they intend to vote their shares of Procept Common Stock in favor of the merger
proposal.
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Voting and Revocation of Proxies. Shares of Procept Common Stock represented by
a proxy properly signed and received at or before the Procept Special Meeting,
unless later revoked, will be voted in accordance with the instructions thereon.
If a proxy is signed and returned without indicating any voting
instructions, the shares of Procept Common Stock represented by the
proxy will be voted in favor of the Stock Issuance.
Procept proxy holders may in their discretion vote shares voted in favor of the
merger proposal to adjourn the Procept Special Meeting to solicit additional
proxies in favor of such proposal. Any proxy given pursuant to this solicitation
may be revoked by the person giving it at any time before the proxy is voted by
the filing of an instrument revoking it or filing a properly executed proxy
bearing a later date with the Secretary of Procept, before or at the Procept
Special Meeting, or by voting in person at the Procept Special Meeting. All
written notices of revocation and other communications with respect to
revocation of proxies should be addressed as follows: Procept, Inc., 840
Memorial Drive, Cambridge, Massachusetts 02139, Attention: President. Attendance
at the Procept Special Meeting will not in and of itself constitute revocation
of a proxy.
The Procept Special Meeting may be adjourned to another date and/or place for
any proper purpose (including, without limitation, for the purpose of soliciting
additional proxies).
Solicitation of Proxies. In addition to solicitation by mail, directors,
officers and employees of Procept may solicit proxies from the shareholders of
Procept, personally or by telephone, telecopy or telegram or other forms of
communication. Officers, directors and employees of Procept will not be
specifically compensated for such services. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy materials to beneficial owners.
The Pacific Special Meeting
General. The purpose of the Pacific Special Meeting is to consider and vote upon
(i) a proposal to amend the Pacific Certificate of Designations, (ii) a proposal
to approve the Merger Agreement, and (iii) such other matters, if any, as may
properly be presented for consideration. The Pacific Board does not know, as of
the date of mailing of this Joint Proxy Statement/Prospectus, of any other
business to be brought before the Pacific Special Meeting. The enclosed proxy
card authorizes the voting of shares represented by the proxy on all other
matters that may properly come before the Pacific Special Meeting, and any
adjournment or postponement thereof, and the proxy holders intend to take such
action in accordance with their best judgment.
The Pacific Board, by a unanimous vote of disinterested directors, has approved
the Merger Agreement and the amendment to the Pacific Certificate of
Designations and recommends that Pacific stockholders vote FOR approval of the
Merger Agreement and the holders of Pacific Preferred Stock vote FOR approval of
the amendment to the Pacific Certificate of Designations.
Date, Place and Time; Record Date. The Pacific Special Meeting is scheduled to
be held on March 16, 1999 at 10:00 a.m. Holders of record of shares of Pacific
Stock at the close of business on February 5, 1999, (the "Pacific Record Date")
will be entitled to receive notice of and vote at the Pacific Special Meeting.
Voting Rights. At the close of business on the Pacific Record Date,
25,200,978 shares of Pacific Common Stock were issued and outstanding or
issuable upon conversion of Pacific Preferred Stock. Each share of Pacific
Common Stock outstanding or issuable upon conversion of Pacific Preferred Stock
as of the Record Date is entitled to one vote upon each matter properly
submitted at the Pacific Special Meeting. Each share of outstanding Pacific
Preferred Stock will be deemed converted into 290.89 shares of Pacific Common
Stock for voting purposes. The affirmative vote of the holders of at least a
majority of the outstanding shares of Pacific Stock is required to approve the
Merger Agreement at the Pacific Special Meeting. The affirmative vote of the
holders of at least 66.67% of the Pacific Preferred Stock voting as a separate
class is also required to approve the Merger Agreement and the amendment to the
Pacific Certificate of Designations at the Pacific Special Meeting.
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The presence in person or by proxy at the Pacific Special Meeting of the holders
of at least a majority of the outstanding shares of Pacific Stock is necessary
to constitute a quorum for the transaction of business at the Pacific Special
Meeting. Abstentions and broker non-votes (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares as to a matter with
respect to which brokers or nominees do not have discretionary power to vote)
will be considered present for the purpose of establishing a quorum. Under the
NASD rules, brokers and nominees are precluded from exercising their voting
discretion with respect to the approval of the Merger Agreement or approval of
the amendment to the Pacific Certificate of Designations. Accordingly, without
specific instructions from the beneficial owner of such shares, brokers and
nominees do not have the power to vote such shares with respect to the approval
of the Merger Agreement or the approval of the amendment to the Pacific
Certificate of Designations. Therefore, since the affirmative vote in person or
by proxy of the holders of a majority of the outstanding shares of Pacific Stock
on the Pacific Record Date and 66.67% of the holders of Pacific Preferred Stock
on the Record Date voting as a separate class are required to approve the Merger
Agreement and 66.67% of the holders of Pacific Preferred Stock on the Record
Date voting as a separate class are required to approve the amendment to the
Pacific Certificate of Designations, abstentions and broker non-votes will have
the effect of a vote against the Merger Agreement and the amendment to the
Pacific Certificate of Designations.
As of the Pacific Record Date, directors and executive officers of Pacific and
their affiliates owned beneficially an aggregate of 2,191,533 shares of Pacific
Common Stock outstanding or issuable upon conversion of Pacific Preferred Stock,
or 8.0% percent of the shares of Pacific Common Stock outstanding or issuable
upon conversion of Pacific Preferred Stock on such date. Directors and executive
officers of Pacific have indicated that they intend to vote their shares of
Pacific Stock in favor of approval of the Merger Agreement and approval of the
amendment to the Pacific Certificate of Designations.
Voting and Revocation of Proxies. Shares of Pacific Stock represented by a proxy
properly signed and received at or before the Pacific Special Meeting, unless
later revoked, will be voted in accordance with the instructions thereon.
If a proxy is signed and returned without indicating any voting
instructions, shares of Pacific Common Stock and Preferred Stock
represented by the proxy will be voted for approval of the Merger
Agreement and the amendment to the Pacific Certificate of
Designations.
Pacific proxy holders may in their discretion vote shares voted in favor of
approval of the Merger Agreement and/or the amendment to the Pacific Certificate
of Designations to adjourn the Pacific Special Meeting to solicit additional
proxies in favor of such proposals. Any proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before the proxy
is voted by the filing of an instrument revoking it or filing of a properly
executed proxy bearing a later date with the President of Pacific before or at
the Pacific Special Meeting, or by voting in person at the Pacific Special
Meeting. All written notices of revocation and other communications with respect
to revocation of proxies should be addressed as follows: Pacific
Pharmaceuticals, Inc., 6730 Mesa Ridge Road, Suite A, San Diego, California
92121, Attention: President. Attendance at the Pacific Special Meeting will not
in and of itself constitute a revocation of a proxy.
The Pacific Special Meeting may be adjourned to another date and/or place for
any proper purpose (including, without limitation, for the purpose of soliciting
additional proxies).
Solicitation of Proxies. In addition to solicitation by mail, directors,
officers and employees of Pacific, may solicit proxies from the stockholders of
Pacific, personally or by telephone, telecopy or telegram or other forms of
communication. Officers, directors and employees of Pacific will not be
specifically compensated for such services. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy materials to beneficial owners.
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BUSINESS OF PROCEPT, INC.
Corporate Summary
Procept is a biopharmaceutical company currently engaged in the development of
novel drugs with a focus on anti-infectives. Procept is also searching to
acquire or in-license drug development candidates that have the potential for
accelerated approval and that would represent a significant medical advance.
The lead product candidate from Procept'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. PRO 2000 Gel was recently selected for
safety testing in a human clinical trial supported by the National Institute of
Allergy and Infectious Diseases, a unit of the U.S. National Institutes of
Health. The U.S. Food and Drug Administration has allowed the study to proceed
following review of an Investigational New Drug application filed by Procept.
The trial, which will involve women in the U.S. and South Africa, is scheduled
to begin in the first quarter of 1999. Additional clinical studies are being
discussed with the British Medical Research Council ("MRC").
In addition, through its research in immunomodulation, Procept discovered a
series of small molecule compounds, T cell enzyme inhibitors, that have
demonstrated significant immunosuppressive activity in animal models. Patent
applications have been filed for these compounds which may provide target
opportunities for treating immune system disorders such as rheumatoid arthritis,
and for preventing transplant rejection. Procept is currently seeking
out-licensing opportunities for these compounds.
PRO 2000 Gel: A Topical Microbicide To Prevent HIV Infection
The lead product candidate from Procept'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 Gel 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 Gel 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 Gel 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.
Procept 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. Estimates by the Joint United Nations
Programme on HIV/AIDS and the World Health Organization indicate that 5.8
million new HIV infections occurred worldwide in 1997 alone. 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 Gel is a more effective anti-HIV
agent than nonoxynol-9. In addition, in vitro preclinical studies have
demonstrated that PRO 2000 Gel is active against other sexually transmitted
agents including herpes simplex type 2 and Chlamydia trachomatis. Furthermore,
intravaginally applied PRO 2000 Gel was shown to prevent vaginal HSV-2 infection
in mice. The contraceptive potential of PRO 2000 Gel also has been confirmed in
a study in which PRO 2000 Gel blocked fertilization in rabbits. Procept believes
that PRO 2000 Gel is ideally suited for use as a topical microbicide to prevent
infection by HIV and other sexually transmitted pathogens.
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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 Gel 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 MRC.
Preliminary results indicate that PRO 2000 Gel was safe and well tolerated, and
that no PRO 2000 Gel was absorbed into the circulation. Furthermore,
participants generally found the product to be aesthetically acceptable. PRO
2000 Gel was recently selected for safety testing in a human clinical trial
supported by the National Institute of Allergy and Infectious Diseases, a unit
of the U.S. National Institutes of Health. The U.S. Food and Drug Administration
has allowed the study to proceed following review of an Investigational New Drug
application filed by Procept. The trial, which will involve women in the U.S.
and South Africa, is scheduled to begin in the first quarter of 1999. Additional
clinical studies are being discussed with the MRC.
Procept holds two U.S. issued patents on the use of PRO 2000 Gel to prevent HIV
infection. Additional U.S. and international patent applications have been
filed.
Procept'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 Gel research program and related preclinical and
clinical studies include the following: the availability of financing for
Procept's continued research and development operations; technical risks
associated with the development of PRO 2000 Gel; changes in regulatory
requirements; anticipated market acceptance of such new drug; and competitive
factors and pricing pressures.
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. Significant progress has
also been made in determining the three-dimensional structure of DHODH which
would be critical in development of second generation compounds. Procept is
seeking 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 efforts.
The Vactex Drug Development Program -- TB Vaccine
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"). Under the Sponsored Research Agreement, Procept
conducted specified research tasks on behalf of VacTex for which Procept
received a combination of cash and equity in VacTex based on the number of
full-time equivalent employees of Procept engaged in the research, but subject
to maximum cash and stock limits. On December 31, 1997, Procept's investment in
VacTex was accounted for under the cost method since (i) it was a restricted
security, (ii) it did not have a readily determinable fair value, and (iii)
Procept owned less than twenty percent of VacTex.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
("Aquila"). Procept's investment in VacTex of 300,000 shares of common stock was
converted to 113,674 shares of Aquila common stock and $128,501 principal amount
of 7% debentures. As a result, Procept is accounting for its investment in
Aquila under the "Statement of Financial Accounting Standards" ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities" as an
available for sale security and marked it to market by recording an unrealized
gain of $0.2 million as part of shareholders' equity, based on Aquila's common
stock closing price on September 30, 1998.
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Strategic Corporate Alliances
A combination of large pharmaceutical partners and capital markets has provided
the financial support for Procept's research and development projects. Procept's
goal is to share the risk of product development while maintaining the prospect
of substantial rewards for its investors and partners. Procept is engaged in
discussions with several pharmaceutical companies regarding potential licensing
agreements for Procept's PRO 2000 Gel and DHODH programs. If agreements are
successfully negotiated, Procept would expect to receive up-front fees and
milestone payments in addition to royalties.
Patents And Proprietary Technology
Procept'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, Procept is awaiting action on
various patent applications relating to technology or the uses or products
thereof which it owns or which it has licensed.
Procept has been issued U.S. patents related to its AIDS program and to its
small molecule immunosuppressive program. Procept has filed patent applications
in the United States relating to (i) compounds and methods for inhibiting immune
response, (ii) compounds (which include PRO 2000 Gel) 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, Procept requires employees, Scientific Advisory Board
members, consultants, and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with Procept. 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.
Procept's ability to compete effectively with other companies will depend, in
part, on the ability of Procept to maintain the proprietary nature of its
technology. Although Procept 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
Procept's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against Procept or that
such claims will not be successful. There can also be no assurance that
competitors will not infringe Procept's patents. Further, with respect to
licensed patents, which, in the case of Procept, represent a significant portion
of Procept's proprietary technology, the defense and prosecution of patent suits
may not be in Procept's control.
Procept also relies on unpatented proprietary technology which is significant to
the development of Procept's technology, and there can be no assurance that
others may not independently develop the same or similar technology or otherwise
obtain access to Procept's unpatented technology. If Procept is unable to
maintain the proprietary nature of its technology, Procept 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
Procept's proposed products.
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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.
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 Procept 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 Procept, 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 Procept, its collaborators or its licensees would have an adverse
effect on the ability of Procept to generate sales or royalty revenue. In
addition, the impact of new or changed laws or regulations cannot be predicted.
Competition
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of Procept 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
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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
Procept, to market commercial products. There can be no assurance that Procept's
competitors will not succeed in developing technologies and products that are
more effective than any which are being developed by Procept or which would
render Procept's technology obsolete and noncompetitive, or that such
competitors will not succeed in obtaining FDA or other regulatory approvals for
products more rapidly than Procept.
Manufacturing
Procept has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near term products. Procept believes that there is
currently substantial capacity worldwide for the production of its anticipated
products and that Procept will be able to establish manufacturing arrangements
on acceptable terms.
Human Resources
As of December 1, 1998, Procept had 10 full-time employees, 3 of whom were
engaged in research and development and 7 in administration and finance. Each of
Procept's employees has signed an agreement which prohibits the disclosure of
confidential information to anyone outside Procept and requires disclosure and
assignment to Procept of ideas, developments, discoveries and inventions made by
the employee.
Procept's employees are not covered by a collective bargaining agreement.
Procept has never experienced employment-related work stoppage and considers its
employee relations to be excellent.
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PROCEPT MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Procept, Inc., located in Cambridge, Massachusetts, is a biopharmaceutical
company currently engaged in the development of novel drugs with a focus on
anti-infectives and immunosuppressants. Procept is also actively seeking the
acquisition or in-license of drug development candidates that would benefit from
Procept's expertise in various therapeutic areas.
PRO 2000 Gel. The lead candidate from Procept's AIDS program, PRO 2000 Gel, is a
vaginal, topical microbicide providing protection against HIV infection and
other sexually transmitted diseases ("STDs"). In the absence of both an
effective HIV vaccine and consistent condom use, vaginal microbicides offer an
alternative, female-controlled prevention technology. Estimates by the Joint
United Nations Programme on HIV/AIDS and the World Health Organization indicate
that 5.8 million new HIV infections occurred worldwide in 1997 alone. In
addition the New York Times reported that an estimated 10-12 million new cases
of STDs occur in the U.S. each year. The momentum for HIV and STD prevention
will accelerate as this epidemic becomes more visible. Extensive preclinical
studies have shown PRO 2000 Gel is active against HIV-1 and HIV-2. The
contraceptive potential of PRO 2000 Gel also has been confirmed in a study in
which PRO 2000 Gel blocked fertilization in rabbits. In human trials, 70 healthy
female volunteers completed two Phase I clinical trials that showed PRO 2000 Gel
to be safe and well tolerated. PRO 2000 Gel was recently selected for safety
testing in a human clinical trial supported by the National Institute of Allergy
and Infectious Diseases, a unit of the U.S. National Institutes of Health. The
U.S. Food and Drug Administration has allowed the study to proceed following
review of an Investigational New Drug application filed by Procept. The trial,
which will involve women in the U.S. and South Africa, is scheduled to begin in
the first quarter of 1999. Additional clinical studies are being discussed with
the MRC.
DHODH. Procept is currently seeking to partner or outlicense its
immunosuppressive research program. This program focuses on an intracellular
T-cell enzyme ("DHODH") that is known to be critical for the activation of the
immune response, which may provide target opportunities for treating immune
system disorders, such as rheumatoid arthritis, and for preventing transplant
rejection. Patent applications have been filed for a series of lead compounds.
Procept has also made significant progress in determining the three dimensional
structure of the DHODH enzyme.
New Technology Search. In addition to focusing on PRO 2000's development,
Procept is proactively seeking opportunities to acquire additional novel
technologies that address key healthcare needs. Procept is most interested in
acquiring technologies that have reached the stage of human clinical trials and
have the potential for accelerated approval. Procept's scientific and
development expertise would advance the clinical development, and then bring the
technology to market by partnering with a larger corporation, thereby focusing
its resources on development rather than research programs.
Results of Operations
Since its inception in 1985, Procept has devoted its principal efforts to drug
discovery and research. Procept has generated no revenues from product sales,
has not been profitable since inception, and has incurred an accumulated deficit
of $60.6 million through September 30, 1998. Procept is dependent upon research
and development collaborations, equity financing and interest on invested funds
to provide the working capital required to pursue its intended business
activities. Losses have resulted principally from costs incurred in research and
development activities related to Procept's efforts to develop drug candidates
and from the associated administrative costs required to support these efforts.
Procept expects to incur significant additional operating losses over the next
several years due to its ongoing development efforts and expanded preclinical
and clinical testings. Procept's potential for future profitability is dependent
on its ability to effectively develop its current pharmaceutical compounds and
in-license and develop new pharmaceutical products, as well as obtain regulatory
approvals and adequate financing for such products. Future profitability will
require that Procept establish agreements for product development,
commercialization and sales of its products with corporate sponsors.
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Three Months Ended September 30, 1998 and 1997
Procept's total revenues decreased by $0.1 million in the third quarter of 1998
from the same period in 1997, principally as a result of the expiration of the
Sponsored Research Agreement with VacTex, Inc. (the "VacTex Agreement"). In the
third quarter of 1998, revenues consisted of $75,000 in interest earned on
invested funds. In 1997, third quarter revenues consisted of $0.1 million earned
under the VacTex Agreement and $23,000 in interest earned on invested funds.
Procept's total operating expenses decreased to $0.6 million in the third
quarter of 1998 from $2.1 million during the same period in 1997. Research and
development expenses decreased 71% to $0.4 million in the third quarter of 1998
from $1.3 million in the third quarter of 1997. This expense decrease was due
primarily to a decrease in personnel in Procept's research and development
organization and their related research costs. In order to focus its limited
resources on PRO 2000, in January 1998 Procept terminated work on all other
research programs, except preclinical support for its DHODH program, and
underwent a significant downsizing, reducing its staff to 10 people. General and
administrative expenses decreased 61% to $0.2 million in the third quarter of
1998 from $0.6 million in the third quarter of 1997, reflecting a decrease in
administrative personnel and continued cost control measures including
subleasing activities. Interest expense, included in other expenses, decreased
to $600 in the third quarter of 1998 from $11,000 in the third quarter of 1997
as a result of the scheduled completion of Procept's lease financing
arrangements. Also included in other expenses in the third quarter of 1998 is a
gain of $39,000 from the sale of research and development equipment. Due to the
restructuring and focus on the development of PRO 2000, Procept has sold and
plans to continue to sell most of its research and development equipment.
Nine Months Ended September 30, 1998 and 1997
Procept's total revenues decreased to $0.3 million in the first nine months of
1998 from $0.6 million during the same period in 1997. In the first nine months
of 1998, revenues consisted of $0.1 million earned under the VacTex Agreement
and $0.2 million in interest earned on invested funds. In 1997, first nine
months revenues consisted of $0.4 million earned under the VacTex Agreement,
$0.1 million under a grant from the National Cooperative Drug Discovery Group
and $0.1 million in interest earned on invested funds.
Procept's total operating expenses decreased to $3.1 million in the first nine
months of 1998 from $7.4 million during the same period in 1997. Research and
development expenses decreased 67% to $1.7 million in the first nine months of
1998 from $5.2 million in the same period in 1997, due primarily to a decrease
in personnel in Procept's research and development organization and their
related research costs. In order to focus its limited resources on PRO 2000, in
January 1998 Procept terminated work on all other research programs, except
preclinical support for its DHODH program, and underwent a significant
downsizing, reducing its staff to 10 people. The amount of termination benefits
accrued and charged to restructuring costs in the statement of operations for
the nine-month period ended September 30, 1998 was $0.2 million. Also, in the
fourth quarter of 1997, Procept accrued $0.3 million in restructuring costs. The
amount of termination benefits paid and charged against the 1998 and 1997
liability for the nine months ended September 30, 1998 was $0.4 million. The
remaining liability of $0.1 million is expected to be utilized by March 31,
1999.
General and administrative expenses decreased 30% to $1.4 million in the nine
months of 1998 from $2.0 million in the first nine months of 1997, reflecting a
decrease in administrative personnel and continued cost control measures
including subleasing activities. Interest expense, included in other expenses,
decreased to $5,000 in the first nine months of 1998 from $39,000 in the first
nine months of 1997 as a result of the scheduled completion of Procept's lease
financing arrangements. Also included in other expenses in the first nine months
of 1998 is a gain of $0.2 million from the sale of research and development
equipment. Due to the restructuring and focus on the development of PRO 2000,
Procept has sold and plans to continue to sell most of its research and
development equipment.
Liquidity and Capital Resources
On September 30, 1998, Procept's aggregate cash, cash equivalents and marketable
securities were $5.6 million, a net increase of $5.0 million since December 31,
1997. The increase in cash is primarily attributable to initial, interim and
final closings of Procept's private placement in January, February and April of
1998, which resulted in
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net proceeds of $8.1 million, offset by $3.4 million used in operations
principally to fund research and development activities and $0.3 million
invested in property and equipment. Included in cash is $0.6 million from the
sale of research and development equipment. Due to downsizing and focus on the
development of PRO 2000, Procept plans to continue to sell most of its research
and development equipment.
On December 10, 1998, Procept entered into an Agreement and Plan of Merger to
merge with Pacific Pharmaceuticals, Inc. ("Pacific"), a public research and
development company engaged in the development of cancer therapies. The Merger
Agreement provides, as more fully discussed elsewhere in this Joint Proxy
Statement/Prospectus, that each outstanding share of Pacific common stock will
be converted into approximately 0.11 shares of Procept Common Stock (on an "as
converted" basis for the Pacific preferred stock). The Merger will result in the
issuance of approximately 2,755,000 shares of Procept common stock to Pacific
shareholders on the closing date of the transaction. In addition, all
outstanding options and warrants of Pacific will convert into Procept options
and warrants based upon the above described exchange ratio. As contemplated by
the transaction, (a) Procept will also assume a contractual obligation in
connection with a Pacific subsidiary, B-G Development Corp. ("BGDC") which,
under certain circumstances, could result in Procept's purchasing up to
approximately $7.3 million (assuming the exercise of warrants resulting in
$800,000 gross proceeds to Procept) of outstanding BGDC preferred stock in June
2000 with cash or shares of Procept common stock; and (b) in exchange for the
waiver of certain liquidation rights, Pacific preferred shareholders will
receive certain contractual rights from Procept similar to those received by
investors in Procept's April 1998 private placement. The merger is subject to
several conditions, including the final approval of the transaction by both
companies' shareholders. The companies anticipate the transaction to close in
the first calendar quarter of 1999, subject to satisfaction of all necessary
conditions.
Procept expects that its current funds and interest income will be sufficient to
fund Procept's operations through June 2000. Although management continues to
pursue additional funding arrangements, no assurance can be given that such
financing will be available to Procept. If Procept is unable to enter into an
additional corporate collaboration(s) that produce revenue for Procept, or
secure additional financing, Procept's financial condition will be adversely
affected. If additional funds are raised by issuing equity securities, further
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders.
Procept'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 Procept and the
execution of new collaboration agreements for Procept's research and development
programs. Other important factors that may affect achieving Procept's strategic
goals and other forward-looking statements are set forth in Exhibit 99.1 of
Procept's 1997 Annual Report on Form 10-K/A. Procept's working capital and other
cash needs will depend heavily on the success of Procept's clinical trials and
the rate of acquisition of new products and technologies. Success in early-stage
clinical trials or acquisition of new products and technologies would lead to an
increase in working capital requirements. Procept's actual cash requirements may
vary materially from those now planned because of the results of research and
development, clinical trials, product testing, relationships with strategic
partners, acquisition of new products and technologies, changes in the focus and
direction of Procept's research and development programs, competitive and
technological advances, the process of obtaining United States Food and Drug
Administration or other regulatory approvals and other factors.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement specifies new guidelines for determining a company's operating
segments and related requirements for disclosure. SFAS 131 will become effective
for fiscal years beginning after December 15, 1997. Procept does not believe
that the adoption will have a material effect.
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
is effective for periods beginning after December 15, 1997, but excludes interim
periods during 1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans by requiring
additional information on changes in the benefit obligations and fair values of
the plan assets and eliminating certain disclosures that are no longer useful.
It does not change the measurement or recognition of those plans. Procept does
not believe that the adoption will have a material effect.
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In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
Procept does not believe that the adoption will have a material effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on Procept.
Year 2000
Procept has completed its assessment of the potential impact of the year 2000 on
its information technology and non-information technology systems. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of Procept's programs or
systems that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in a miscalculation or
system failures. Based on Procept's assessment, there is no year 2000 impact on
Procept's information technology systems. Operating systems and applications
used by Procept are year 2000 compliant. At this time, Procept is not aware of
any year 2000 issues relating to its third party vendors. Procept has replaced
several non-information technology systems and believes that it is now year 2000
compliant. The cost of year 2000 compliant non-technology information systems
was approximately $8,000. Procept's most critical uncertainty relates to its
third parties' information technology systems not being year 2000 compliant.
This may result in inaccurate information from banks, government agencies,
contracted research organizations, vendors, etc. Procept believes it has in
place an adequate internal control structure to handle these issues if they were
to occur.
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BUSINESS OF PACIFIC PHARMACEUTICALS, INC.
Summary
Pacific Pharmaceuticals, Inc. and its subsidiaries, a development stage
enterprise, is engaged primarily in the development and commercialization of
medical products based on biotechnological research regarding the treatment and
detection of cancer and other diseases.
O(6) Benzylguanine
During the fiscal year ended March 31, 1998, Pacific acquired a worldwide
exclusive license for O(6) Benzylguanine ("BG"), a series of related compounds
and a gene therapy which Pacific believes to enhance the effectiveness of a
class of currently used chemotherapeutic agents ("O(6) alkylators"). These
technologies are licensed to Pacific from Pennsylvania State University, the
National Institutes of Health ("NIH"), the University of Chicago, and Case
Western Reserve University (collectively, the "Co-Owners"). Pacific, in turn,
assigned the license to its subsidiary, B-G Development Corp. ("BGDC").
See--"B-G Development Corp.; Proprietary Rights; Research and Development."
BG and related compounds are small molecules for intravenous administration in
the treatment of cancer. Pacific believes BG to be capable of destroying the
resistance of cancer cells to a class of chemotherapeutic agents,
O(6)-alkylating agents, which include carmustine ("BCNU"), lomustine ("CCNU"),
dacarbazine ("DTIC"), streptozotocin, procarbazine, fomustine, and temozolomide.
Pacific believes that the effectiveness of alkylating chemotherapeutic agents
against various tumors such as brain, prostate, colon cancers, melanoma and
lymphoma is limited due to the ability of tumor cells to repair the DNA damage
caused by the alkylating agents, because the DNA repair protein, AGT
("O(6)-alkylguanine-DNA alkyltransferase"), protects tumor cells by repairing
the tumor cell DNA. Pacific believes that BG inactivates the AGT protein in a
variety of cancers thereby overcoming resistance to the O(6)-alkylating agents.
A Phase I clinical trial of BG has been completed at Duke University Medical
Center, and three other Phase I trials are currently being conducted at the
University of Chicago, Case Western Reserve University, and Duke University
Medical Center, respectively. A study in brain cancer patients has established
the dose of BG at which the levels of tumor AGT protein are depleted by more
than 90%. The other studies are currently examining the safety of a combination
of BG and BCNU in a variety of tumors. Pacific plans to initiate a Phase II
clinical trial with a combination of BG and BCNU initially in brain cancer.
Pacific intends to pursue clinical trials with BG in melanoma, lymphoma and
colon cancer and to pursue the use of BG in combination with alkylating agents
in cancer patients undergoing bone marrow transplantation.
O(6)-Alkylating Chemotherapeutic Agents. The treatments for most cancers include
surgery, chemotherapy and/or radiation therapy. O(6)-alkylators are
chemotherapeutic agents that are primarily used to treat brain cancer, melanoma,
lymphoma and certain gastrointestinal cancers. BCNU and DTIC remain important in
the chemotherapeutic treatment of brain cancer and advanced melanoma.
Procarbazine has become an important agent in the treatment of Hodgkin's disease
and brain tumors. Temozolomide has shown potential for the treatment of
lymphomas, melanoma and brain tumors. In general, although there is a small
percentage of patients who have achieved long-term remission, the
O(6)-alkylators are generally not considered curative. The critical factor
contributing to the poor prognosis is the resistance of cancers to the
chemotherapeutic agents.
Potential Role Of BG In Abrogating Cancer Drug Resistance. Tumor cells display a
variety of mechanisms of resistance to many drugs. Alkylating agents act by
causing damage to the DNA by binding to the O(6)-position of guanine on the DNA
strand. AGT is believed to play a significant role in cancer resistance to the
O(6)-alkylators by removing this chemical bond. A published study in 226
patients with brain cancer (high-grade astrocytoma) receiving BCNU therapy
showed that the patients with low levels of AGT responded better to treatment
and had increased survival relative to patients with high levels of AGT.
Conversely, the patients with high levels of tumor AGT protein had poor disease
prognosis. Since it appears that BG temporarily destroys AGT, Pacific believes
that BG may reduce the resistance that is commonly observed in cancer cells
following treatment with O(6)-alkylating agents.
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O(6)-alkylating agents such as BCNU and CCNU are believed to cause a number of
different damages to the tumor DNA, including an interstrand cross-link between
guanine and cytosine (building blocks of DNA) on the opposite strand. Pacific
believes that there is a strong correlation between the number of strand
cross-links and tumor cells killed. AGT protein protects tumor cells from damage
by removing the damage from the O(6)-position of guanine. Pacific believes that
there are no other proteins involved in the repair process, and that the AGT
protein is inactivated in the repair process. Pacific believes that BG binds to
the AGT protein, thereby blocking the tumor DNA repair and believes that
inactivation of the AGT protein in a variety of human tumors by non-toxic doses
of BG could render these tumors more sensitive to the cytotoxic effects of
O(6)-alkylating agents.
Efficacy Of BG In Animal Studies. Results of in vitro testing have led to an
evaluation of O(6)-alkylating agents in animal tumor models. Upon administration
of BG to mice carrying two different human brain tumors prior to the
administration of BCNU, 80% and 100% tumor regression was observed compared to
0% and 10% suppression in animals treated with BCNU alone. Combinations of BG
and BCNU were also found to be effective in mice bearing human colon cancers,
showing 96% tumor regression compared to 35% tumor regression with BCNU alone.
Growth inhibition was also observed in a rat prostate model after treatment with
BG and BCNU, which inhibition was not observed in animals treated with BCNU
alone.
Human Clinical Trials With BG. To date BG has been entered into four different
Phase I dose escalation clinical trials. Pacific believes that a completed
clinical study at the Duke University Medical Center has shown that BG, injected
intravenously, crosses the blood-brain barrier and effectively blocks the
activity of human brain tumor AGT protein. Pacific believes that the study at
Duke University Medical Center has demonstrated BG to be nontoxic when
administered alone, and to be effective in inhibiting over 90% of AGT activity
in brain cancer specimens surgically removed from patients 18 hours after the
intravenous administration of BG. Clinical studies at the University of Chicago,
Case Western Reserve University, and Duke University Medical Center are
examining the use of BG in combination with BCNU in brain, colon and renal
cancer. In these studies, BG is administered over a one-hour period by
intravenous infusion, followed by an infusion of BCNU one hour after completion
of the BG infusion. At the conclusion of these Phase I clinical studies, Pacific
anticipates entering a Phase II efficacy study for BG in brain cancer, followed
by studies in other cancers. Pacific plans to pursue the use of BG in
combination with the alkylating agents in cancer patients undergoing bone marrow
transplantation.
Gene Therapy. Standard therapy with O(6)-alkylating chemotherapeutic agents
commonly results in bone marrow suppression. Through the BG license, Pacific has
also acquired a proprietary gene therapy that may result in the production of an
altered AGT protein in bone marrow cells. A gene for an altered AGT protein is
introduced to the bone marrow hematopoietic stem cells in vitro, followed by the
introduction of the modified stem cells to the host. Pacific believes that the
concomitant use of an O(6)-alkylating agent plus BG in the presence of the
altered AGT protein may result in reduced resistance of the cancer cells with
less toxicity to the bone marrow.
Related Technologies. In addition to BG, a considerable number of additional
compounds have been tested for AGT protein inactivation. Pacific believes that a
number of next generation compounds have been found to be effective in
inhibiting the activity of tumor AGT protein. Pacific also believes that it has
a proprietary interest in these compounds. Pacific believes that it is possible
that these compounds will offer complementary properties to that of BG in
further abrogation of cancer resistance to O(6)-alkylating agents.
Patents And Proprietary Technologies. Four patents including the composition of
matter and use for BG and related compounds have been issued. Four additional
applications provide protection for the next generation compounds. A patent
application currently under prosecution is intended to provide protection for
the use of gene therapy to introduce AGT mutant into the stem cells.
B-G Development Corp.; Proprietary Rights; Research And Development
Pacific and Pennsylvania State University (the "Licensor") entered into an
exclusive, worldwide, royalty bearing license agreement (the "BG License") with
the right to grant sublicenses to certain patents and patent applications
relating to the manufacture and use of proposed products incorporating BG.
Pacific, in turn, assigned the BG License to BGDC, then a wholly owned
subsidiary of Pacific, pursuant to an Assignment and Assumption Agreement dated
April 20, 1998 (the "Assignment"). In accordance with the Assignment, BGDC has
assumed the
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obligations of Pacific under the BG License, including royalty and other
payments more fully described below, provided that Pacific guarantees such
payments.
During the six months ended September 30, 1998, Pacific entered into a placement
agency agreement with Paramount Capital, Inc. ("Paramount"). Under the terms of
the agreement, Paramount was to use its best efforts to sell up to 60 Units
(with an overallotment option for an additional 40 Units) for $100,000 each,
which consist of 50,000 shares of Series A Convertible Preferred Stock ("BGDC
Units"), valued at $2.00 per share of BG Development Corp. ("BGDC"). The BGDC
Units are redeemable in cash by BGDC and the BGDC Units may be exchanged for
cash or common stock of Pacific under the circumstances described in the
subscription agreement between Pacific and shareholders of BGDC. Pursuant to the
subscription agreement, seventy-five percent of the net proceeds are allocated
to BGDC for development costs associated with O6 Benzylguanine technology.
Twenty-five percent of the net proceeds of the BGDC private placement went to
Pacific to be used for general purposes.
The BGDC Units accrue dividends as follows:
<TABLE>
<CAPTION>
Dividend Date Dividend Amount
------------- ---------------
<S> <C>
Upon final closing $1.99 per share
30-36 Months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
48-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
</TABLE>
On June 22, 1998, Pacific completed a closing on 29.35 BGDC Units of the private
placement for gross proceeds of $2,900,000 (net proceeds of $2,455,000).
Paramount, who is affiliated with certain significant shareholders of Pacific,
received an aggregate dollar commission of $264,000 and a non-accountable
expense allowance of $117,000 as compensation for the BGDC private placement.
Additionally, Paramount received warrants to purchase 10% of the number of BGDC
Units issued in private placement at $110,000 per unit. BGDC and Paramount also
entered into a 24 month Financial Advisory Services Agreement in which BGDC will
pay Paramount $3,000 per month for such services plus warrants ("Advisory
Warrants") to purchase 15% of the number of BGDC Units issued in the private
placement at $110,000 per Unit. Pacific valued the Advisory Warrants at $88,000
and is amortizing these advisory services over a 24 month period ending in June
2000.
Subsequent to the closing of the private placement, BGDC Preferred Stockholders
own 16.4% of voting rights in BGDC. This minority interest, as reflected in the
Consolidated Balance Sheet as of September 30, 1998, includes the initial net
proceeds to BGDC of $1,886,000, plus the initial dividend of $2,920,000, or
$1.99 per preferred share outstanding, paid in capital associated with the
amortization of the Advisory Warrants and 16.4% of BGDC's operating loss through
September 30, 1998.
BGDC and Pacific have entered into a one-year renewable Corporate Services and
Management Agreement pursuant to which Pacific will provide
financial/accounting, administrative, advisory, and managerial support to BGDC.
For such services, Pacific will receive from BGDC a management fee equal to
$500,000 per year, payable in equal monthly installments. Pacific does not
expect any further closings to occur for the private placement.
In September 1998, Pacific paid to the Licensor $150,000 as an up-front
licensing fee. Pacific has also agreed to pay to the Licensor a percentage of
sales of Licensed Products as well as certain performance-based milestones. In
accordance with the terms of such sales, Pacific has agreed to pay to the
Licensor a non-refundable minimum annual royalty (the "Minimum Annual Royalty")
equal to $75,000 per year creditable against future milestone payments and third
party payments, subject to certain deferrals. Pacific may fulfill up to 75% of
its payment obligations resulting from Minimum Annual Royalties or performance
milestones through the issuance of a number of shares of Pacific's Common Stock
equal to the cash value of such payments. Pacific is obligated to reimburse the
Licensor approximately $200,000 for prior patent costs by March 17, 1999. In
accordance with the Assignment, BGDC has agreed to assume the above described
obligations of Pacific. To the extent that Pacific satisfies any of the
obligations through the issuance of shares of its Common Stock, BGDC has agreed
to reimburse Pacific for fair market value of Pacific's Common Stock.
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Pacific entered into a Cooperative Research and Development Agreement ("CRADA").
Pursuant to the CRADA the N.I.H. will, among other things, make available to the
Company (a) all N.I.H. clinical data relating to any potential products
incorporating BG ("Licensed Products") developed or generated by the N.I.H.
prior to the date of the CRADA and (b) all subsequent data developed under such
CRADA. Pacific is required to pay the N.I.H. $125,000 per year for five years,
payable in quarterly installments.
Photodynamic Therapy - Binary Therapeutics, Inc.
On January 12, 1999, pursuant to the terms of the Agreement and Plan of Merger
by and among Pacific, Binary Therapeutics, Inc. ("BTI"), and XYX Acquisition
Corp. (the "BTI Merger Agreement"), Pacific exercised its option to acquire BTI
by providing a closing notice in accordance with the BTI Merger Agreement.
Effective February 4, 1999, BTI merged with and into XYX Acquisition Corp., a
wholly-owned subsidiary of Pacific; and Pacific issued 2,158,268 shares of
Pacific Common Stock to the former BTI shareholders. In addition, Pacific
assumed a warrant to purchase 4,399 shares of Pacific Common Stock and assumed
an obligation to issue 5,557 shares of Pacific Common Stock to the University of
California upon NDA approval of boronated protoporphyrin compound, a
photosensitizing drug for PDT treatment of brain cancer.
Photodynamic Therapy Overview. Photodynamic Therapy ("PDT") is an emerging mode
of treatment for cancer which uses the combination of light-activated drugs and
nonthermal light to achieve selective, photochemical destruction of cancer cells
with minimal effect on surrounding normal tissues. PDT typically has two primary
components:
1. Drug Administration: A light-absorbing dye or other "photosensitizing
drug" is injected into the patient. (PDT drugs are designed to be
"selective," i.e., taken up and retained in cancerous cells while,
conversely, quickly clearing from normal cells.
2. Illumination With Light: After administration of the PDT drug, a laser
or other source is used to illuminate the area of treatment with light
at the specific wavelength required for absorption by the drug. The
light is non-thermal and, similar to the drug, has no therapeutic
effect by itself.
The absorption of light energy by the drug generates biochemical
reactions which destroy the cancer cells; the reaction is highly
controlled and will end upon cessation of the light energy.
The potential advantages of PDT in the treatment of cancer are expected to be as
follows:
o Selectivity: Selective to cancer cells with minimal effect on
normal healthy tissue, a significant benefit over chemotherapy and
radiation treatment.
o More Extensive Eradication: Facilitates the treatment of not only
the larger, easily identifiable tumors but also other cancerous
cells which are in the field of illumination.
o Controllable: The photosensitizing drugs are inactive until
excited by light within their specific absorption band.
Photodynamic activity begins only when the drug-saturated cells
are exposed to light and ends when the light is terminated.
Among the clinical applications expected for PDT is as an adjunct to surgery;
PDT has the potential of increasing the effectiveness of surgery by destroying
cancerous cells missed by surgery. In other instances, PDT might serve as an
alternative to surgery. PDT may represent a less invasive technique for primary
removal of a tumor where surgery is not indicated (for example, inoperable
tumors located close to nerves, major blood vessels or other critical tissue).
PDT may be integrated with the patient's total treatment regimen, used in
combination with or as an alternative to traditional treatment to palliate more
advanced disease. Pacific expects that the applications will develop as PDT
becomes more proven and the range of clinical utility is demonstrated.
A limited number of drug compounds and systems have been approved by the
applicable regulatory agencies both in the United States and internationally.
PDT products or systems currently approved for use, however, are limited to
treatment of superficial or surface tumors due to inherent limitations in the
technologies.
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Boronated Protoporphyrin Compound ("BOPP") For Treatment Of Brain And Other
Cancers. BOPP is currently undergoing a Phase I human clinical trial as a
photosensitizing drug for PDT treatment of brain cancer under a company-directed
Investigational New Drug ("IND"). Pacific believes, based upon the results of
preclinical studies, that BOPP may be useful as a photosensitizing drug for PDT
treatment of other tumors. BOPP is also suitable for use in another form of
cancer treatment, Boron Neutron Capture Therapy, in which a neutron radiation
beam is used instead of light as the activating energy source. However, in this
case, the neutron beam causes the disintegration of the boron atoms within BOPP
and the release of alpha particles which are lethal to the cancer cells.
Patents. Patents encompassing the BOPP technology have been issued to the
Regents of the University of California in the United States, Australia, Ireland
and South Africa. Patent applications are pending in Canada, the European Patent
Organization, Japan, Norway and Israel. Rights related to the above patents were
licensed to BTI under an exclusive license agreement dated July 1, 1992, as
amended August 29, 1995 (the "UC License Agreement"), pursuant to which BTI is
obligated to make certain payments. As a result of the merger between Pacific
and BTI, Pacific has assumed the license and obligations under the UC License
Agreement.
Preclinical Testing Of BOPP. Preclinical testing of BOPP in the United States
and Australia, including testing of the compound with various animal models, has
indicated that BOPP has the following advantages over certain existing PDT
agents (including hematoporphyrin derivative, or "HpD") in the treatment of
certain cancers:
o Selective (as much as 200 in tumors to 1 in healthy tissue)
retention of BOPP in brain tumor models, compared to a 30 to 1 or
less for existing known compounds.
o Intracellular localization in mitochondria (the energy center of
the cell) for more efficient tumor cell killing.
o Highly water soluble and stable under physiological conditions.
BOPP is selectively taken up in rapidly growing tissues and may find
applications in many hyperproliferative disorders, such as vascular and coronary
restenosis following angioplasty or bypass surgery, psoriasis and rheumatoid
arthritis. PDT therapy is being studied in academic centers for conditions as
diverse as acute macular degeneration of the retina, removing microbial
contaminants from blood and cleansing bone marrow of leukemic cells.
Human Clinical Studies. BTI and Pacific filed an IND application with the FDA in
March 1998. Human clinical trials began in May 1998 and BTI and Pacific agreed
to target brain cancer for the initial human clinical studies, which is being
conducted at the Royal Melbourne Hospital in Melbourne, Australia, in part
because one of the world's experts in PTD for the treatment of brain cancer will
oversee the clinical trials.
Cancer Immunotherapy
Cancer Immunotherapy Overview. Pacific's proprietary cancer immunotherapy
treatment is in preparation for human clinical trials and may initially target
breast cancer. Cancer immunotherapy treatment consists of the co-injection of an
infrared absorbing dye (photosensitizing drug) and an immunoadjuvant directly
into a tumor followed by illumination with an infrared laser. Pacific believes
that the potential of cancer immunotherapy therapy to destroy metastatic tumors
offers an improved methodology for treatment of cancers such as breast, lung and
prostate, particularly when in the more advanced stages. Cancer immunotherapy
therapy is intended to produce tumor tissue destruction in the primary area of
treatment. An important distinction of cancer immunotherapy treatment, however,
is that this therapy is also intended to trigger an immune reaction in the
patient to complete the destruction of the primary tumor and to also
concomitantly destroy any metastases.
Many experts believe that long-term control or elimination of cancer requires
the utilization of the patient's own immune surveillance and defense systems. An
optimal cancer treatment would be one that fully restores and stimulates the
body's normal immunobiological responses against the growth of malignant cells.
For reasons not completely understood, the body's immune response in cancer
patients is not fully stimulated or developed to the extent necessary to halt
the proliferation of malignant cells. Attempts have been made using stimulants
(immunoadjuvants) to activate the immune system. However, the use of a
nonspecific immunoadjuvant may only
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"activate" the body's immune system without specifically targeting the cancer
cells. Immunotherapy using an immunoadjuvant alone appears to achieve only
limited success in the treatment of cancer.
Preclinical Studies Of Cancer Immunotherapy Treatment. Preclinical studies of
cancer immunotherapy treatment conducted with animals indicate that the therapy
induces a specific immune response which appears to destroy primary and
metastatic tumors, and may provide longer-term protection against recurrence of
the cancer. As indicated above, cancer immunotherapy treatment is initiated with
the injection of a combination of an infrared absorbing dye and an
immuno-adjuvant directly into a tumor. The light absorbed by the dye raises the
temperature within the tumor and produces photothermal destruction of tumor
tissue. This photothermal destruction is only the precursor of what is believed
to be the more significant component of cancer immunotherapy therapy, the immune
response.
The hypothesis of Pacific's scientific collaborators is that this response
proceeds as follows: The immuno-adjuvant stimulates an immune response directed
against the specific antigen unmasked by the photothermal treatment of the
tumor, resulting in an immunological attack against the tumor cell population.
Even more significantly, a systemic immune response can also stimulated, which
may destroy tumors distant from the site of treatment, namely metastases. The
immune response appears to provide long-term immunity toward the cancer and the
prospect for a "true cure."
Preclinical testing of cancer immunotherapy therapy has included treatment of
rats inflicted with a sub-surface chemically-induced breast cancer tumor. The
breast cancer model tested, the DMBA-4 cell line, is an extremely challenging
model which is characterized by rapid proliferation of the primary tumor and the
formation of metastatic tumors throughout the body. Of the untreated rats, 99%
die within 30 days of tumor implantation. The model has proven to be
unresponsive to traditional treatments including surgery, chemotherapy,
radiation and laser therapy.
With the application of what the principal researchers currently believe to be
optimal dosing, cancer immunotherapy treatment has generated success (measured
by both tumor eradication and long-term survival) in a proportion of the animals
treated. Importantly, tumor eradication appeared to be achieved for both the
primary tumor treated, and possibly the metastases which were not directly
subject to the injection treatment. This supports the hypotheses that the
regression of the metastases has been caused by stimulation of an immune
response. Upon rechallenge (reintroduction of tumor cells to the animals
subsequent to the original tumor eradication) the "second generation" tumors are
also eradicated, indicating the existence of longer-term immunity against
cancer.
Human Clinical Studies. Pacific has targeted breast cancer for the initial human
clinical studies, in part, because of the preclinical success achieved with
breast cancer studies in animals. Pacific's current plan is to commence a Phase
1 clinical study of breast cancer patients who have been nonresponsive to other
treatment methodologies.
Exclusive License To Cancer Immunotherapy From Wound Healing Of Oklahoma
("WHO"). Pacific obtained an exclusive worldwide license to the cancer
immunotherapy technology in May 1996 under an agreement with WHO, a privately
held company. The agreement calls for Pacific to pay WHO royalties based on
sales of products incorporating the cancer immunotherapy technology, including a
minimum royalty of $50,000 per year. Pacific has also entered into a research
agreement (see "Product Development Strategy") with WHO under which the
principal developers of the cancer immunotherapy technology are assisting with
the preparation of the IND application to the FDA and performing additional
studies to investigate the mechanism of action of cancer immunotherapy.
Patents. WHO was assigned the rights by the holders thereof to patent
applications encompassing the cancer immunotherapy technology in the United
States and the countries covered by the Patent Cooperative Treaty ("PCT") by the
holders.
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AST Technology - Periodontal Tissue Monitor (PTM)
The Company holds the rights to a proprietary Periodontal Tissue Monitor
("PTM"). PTM is an eye-readable, chairside disposable test designed for use
within the dental office to assist practitioners (dentists and periodontists) in
the diagnosis of periodontitis and in the monitoring of the effectiveness of
their efforts to treat the disease. The PTM works by identifying the enzyme
aspartate aminotransferase ("AST") which is found in crevicular fluid when cells
die.
In June 1997, the Company received approval from the FDA to begin commercial
sales and distribution in the United States of the PTM product. The Company also
has two distribution agreements with Steri-Oss, Inc. for the exclusive
distribution of PTM worldwide, except in Japan. To date, there have been no
significant sales under the distributions agreements with Steri-Oss. The Company
also has an agreement with Shofu, Inc. covering distribution of the PTM in
Japan. The product is currently undergoing clinical trials in Japan and is in
the regulatory approval process.
During the quarter ended December 31, 1998, Pacific determined that it would no
longer continue to sell its PTM product.
Product Development Strategy
Pacific conducts its research and other product development efforts through a
combination of internal and collaborative programs. Pacific currently does and
will rely upon research arrangements with universities, contract research
organizations, and similar institutions and persons for a significant portion of
its product development efforts, particularly for preclinical work being for all
of it's products under development. Pacific expects to increase its internal
product development resources in the BG, cancer immunotherapy and PDT areas,
reflecting Pacific's refocus toward the development and commercialization of
medical products based on biopharmaceutical research regarding the treatment of
cancer. Product development efforts related to the PTM have previously been
conducted primarily by Pacific's internal personnel. No further product
development work is underway for PTM. Pacific incurred product development costs
of $2,196,000, $2,566,000 and $1,854,000 in the years ended March 31, 1998, 1997
and 1996, respectively. BTI relies almost exclusively on such collaborative
research arrangements for its PDT product development efforts. Pacific has
relied upon licensing and other transactions to gain access to proprietary
technologies. See - "Cancer Immunotherapy", "Photodynamic Therapy (PDT)-Binary
Therapeutics, Inc.--.," and "AST Technology - Periodontal Tissue
Monitor"("PTM").
Patents And Proprietary Rights
Pacific believes that patents and other proprietary rights are important to its
business. Pacific's policy is to file patent applications to protect technology,
inventions and improvements to its inventions that are considered important to
the development of its business. Pacific also relies upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
To date, Pacific has received a number of patents, and filed a number of other
patent applications, relating to Pacific's technologies in the United States and
internationally. Pacific has also benefited from such issuances or filings of
others as a licensee.
The patent positions of biotechnology firms and other high-tech firms, including
Pacific, are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. In addition, the coverage
claimed in a patent application can be significantly reduced before a patent is
issued. Consequently, Pacific does not know whether any patent applications will
result in the issuance of patents. Additionally, Pacific does not know whether
its existing patents (and any patents related to its patent applications which
subsequently may be issued) will provide significant proprietary protection or
will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until foreign counterparts, if any, publish or
issue patents and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, Pacific cannot be certain that
it or any licenser was the first creator of inventions covered by existing
patents or pending patent applications or that it or such licenser was the first
to file patent applications for such inventions. Moreover, Pacific might have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of inventions, which could result in
substantial cost to Pacific, even if the eventual outcome were favorable to
Pacific. There can be no assurance that Pacific's current patents, or patents
relating to its patent
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applications, if issued, would be held valid by a court or that a competitor's
technology or product would be found to infringe such patents.
A number of biotechnology and high-tech companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to Pacific's business. Some
of these technologies, applications or patents may conflict with Pacific's
technologies, patents or patent applications. Such conflict could limit the
scope of the patents (if any) that Pacific has or may be able to obtain or
result in the denial of Pacific's patent applications. In addition, if patents
that cover Pacific's activities are issued to other companies, there can be no
assurance that Pacific would be able to obtain licenses to these patents at a
reasonable cost or be able to develop or obtain alternative technology.
Pacific also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Pacific's trade secrets or disclose such
technology or that Pacific can meaningfully protect its trade secrets.
It is Pacific's policy to require its employees, consultants, and other parties
to collaborative agreements to execute confidentiality agreements upon the
commencement of employment or consulting relationships or a collaboration with
Pacific. These agreements provide that all confidential information developed or
made known during the course of the relationship with Pacific is to be kept
confidential and not disclosed to third parities except in specific
circumstances. In the case of employees, the agreements provide that all
inventions resulting from work performed for Pacific, utilizing property of
Pacific or relating to Pacific's business and conceived or completed by the
individual during employment shall be the exclusive property of Pacific to the
extent permitted by applicable law. There can be no assurance, however, that
these agreements will provide meaningful protection of Pacific's trade secrets
or adequate remedies in the event of unauthorized use or disclosure of such
information.
Manufacturing And Marketing
Pacific engages primarily in the development of biotechnological products, and
intends, through marketing agreements, sublicenses or other means, to rely upon
relationships with domestic and/or international companies for the marketing of
such products. Pacific has relied upon contract manufacturers for its products
under development and for its limited commercial production requirements to
date, although Pacific has retained certain quality control and managerial
responsibility. Pacific may elect to internalize more of the manufacturing and
marketing responsibilities at such time as such a strategy is determined to be
economically advantageous and as its financial resources and personnel permit
such efforts. The commercial success of some of Pacific's products (if
successfully developed) may, to a large extent, depend upon the manufacturing
and marketing efforts of others.
Government Regulation And Government Approvals
The manufacturing and marketing of Pacific's medical products are subject to
regulation for safety and efficacy by governmental authorities in the United
States and other countries. In the United States, pharmaceuticals are subject to
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of Pacific's
medical products. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.
The steps required before a pharmaceutical agent, such as the proposed cancer
immunotherapy or PDT products, may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug, (iv) the submission of the New Drug Application
("NDA") to the FDA, and (v) the FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with
the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with current Good Manufacturing Practices
("GMP") for drugs. To supply products for use in the United States, foreign
manufacturing establishments must comply with GMP and are subject
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to periodic inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to assess the safety and efficacy of the product and its formulation.
The results of the preclinical tests are submitted to the FDA as part of an IND,
and unless the FDA objects, the IND will become effective 30 days following its
receipt by the FDA.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are conducted
in accordance with protocols previously submitted to the FDA as part of the IND
that detail the objectives of the study, the parameters used to monitor safety
and the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of the independent Institutional Review Board ("IRB") at the
institution at which the study is conducted. The IRB considers, among other
things, ethical factors, the safety of the human subjects and the possible
liability for the institution.
Clinical trials are typically in three sequential phases that may overlap. In
Phase I, the initial introduction of the pharmaceutical into healthy human
volunteers, the emphasis is on testing for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to determine the efficacy of
the pharmaceutical for specific targeted indications, to determine dosage
tolerance and optimal dosage and to identify possible adverse side effects and
safety risks. Once a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
evaluate clinical efficacy further and to further test for safety within an
expanded patient population at multiple clinical study sites. The FDA reviews
both the clinical plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.
The results of the preclinical and clinical trials are submitted to the FDA in
the form of an NDA for marketing approval. The testing and approval process is
likely to require substantial time, effort and cost and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review process and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials would be necessary to gain approval for the use of the product for any
additional indications. The FDA may also require post-marketing testing to
monitor for adverse effects, which can involve significant expense.
Pacific's Periodontal Tissue Monitor is categorized as a medical device under
the FDA regulations and therefore a Premarket Approval application was filed and
approved by the FDA. See - PTM Patents and Regulatory Approval - for a
description of the status of the FDA approval relating to the PTM.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on Pacific.
Competition
The cancer immunotherapy and PDT drugs and systems which Pacific is developing
will be competing with existing therapies. In addition, a number of companies
are pursuing the development of novel pharmaceuticals which target the same
diseases that Pacific is targeting. A number of pharmaceutical and biotechnology
companies, academic institutions, government agencies, and other public and
private organizations conducting research are pursuing PDT-related approaches to
cancer therapy. A number of such organizations are also developing potentially
competitive products for diagnosing periodontal disease. Furthermore, academic
institutions, government agencies, and other public and private organizations
conducting research may seek patent protection with respect to potentially
competing products or technologies and may establish collaborative arrangements
with competitors of Pacific.
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Many of Pacific's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than Pacific and may be better equipped to develop, manufacture
and market products. In addition, many of these companies have extensive
experience in preclinical testing and human clinical trials. These companies may
develop and introduce products and processes competitive with or superior to
those of Pacific. The development by others of new treatment methods for those
indications for which Pacific is developing products could render these products
noncompetitive or obsolete.
Pacific's products under development are expected to address a broad range of
markets. Pacific's competition will be determined in part by the potential
indications for which Pacific's products are developed and ultimately approved
by regulatory authorities. For certain of Pacific's potential products, an
important factor in competition may be the timing of market introduction of
Pacific's or competitors' products. Accordingly, the relative speed at which
Pacific or its existing or its future corporate partners can develop products,
complete the clinical trials and regulatory approval processes, and supply
commercial quantities of the products to the market are expected to be important
competitive factors. Pacific expects that competition among products approved
for sale will be based, among other things, on product efficacy, safety,
reliability, availability, price and patent position.
Pacific's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
Research And Development
Pacific incurred product development costs of $2,196,000, $2,566,000 and
$1,854,000 in the fiscal years ended March 31, 1998, 1997 and 1996, and $980,000
for the six months ended September 30, 1998, for work on all products under
development.
Compliance With Environmental Laws
Pacific believes that it is in compliance with all federal, state and local
environmental laws and regulations. To the extent that Pacific's management can
determine, there are no federal, state of local provisions regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment, with which compliance by Pacific has had or is
expected to have a material effect upon the capital expenditures, earnings or
competitive position of Pacific.
Personnel
As of January 31, 1999, Pacific had 4 full-time employees, none of whom were
covered by a collective bargaining agreement.
Year 2000 Compliance
Pacific recognizes the need to ensure its operations will not be adversely
impacted by the inability of Pacific's systems to process data having dates on
or after January 1, 2000 ("Year 2000"). Processing errors due to software
failure arising from calculations using the Year 2000 date are recognized as a
risk. Pacific is currently assessing the risk, with respect to the availability
and integrity of its financial systems and the reliability of its operating
systems, and is in the process of communicating with suppliers, customers,
financial institutions and others with whom it conducts business to assess
whether they are or will be Year 2000 compliant.
Pacific's information technology systems consist of a series of personal
computers which process data using purchased software programs produced and
maintained by large software vendors. All of the software presently installed on
Pacific's systems is Year 2000 compliant.
Pacific has contacted all of its vendors to determine each vendor's compliance
with Year 2000 issues. As of September 30, 1998, 60% of all of Pacific's vendors
have responded that they are now Year 2000 compliant. Pacific is continuing to
determine the Year 2000 compliance status of the remaining vendors. Pacific
hopes to have
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responses from all vendors and institutions with whom it does business by
December 31, 1998. Pacific's critical suppliers and financial institutions are
large organizations, and Pacific believes all are now or will be Year 2000
compliant by December 31, 1999.
Pacific believes its exposure to any material Year 2000 problems is relatively
small because its financial and operating systems have been produced and
maintained by large software vendors which are Year 2000 compliant and Pacific
relies on very large Year 2000 compliant vendors for its critical services.
However, there can be no assurance that Pacific's systems or systems of other
companies on which Pacific's operations rely will be converted on a timely basis
and will not have a material effect on Pacific.
The cost of Pacific's Year 2000 initiatives has not been or is not expected to
be material to Pacific's results of operations or financial position.
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PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
Quarter Ended September 30, 1998 Compared To September 30, 1997
Total revenues aggregated $57,000 for the quarter ended September 30, 1998, an
$8,000 increase from revenues of $65,000 recorded during the same period of the
prior year. Current and prior year quarter revenues relate primarily to interest
income generated on Pacific's cash balances.
Cost of product sales in the current quarter were $8,000 or a $14,000 decrease
from the same quarter in the prior year. The current year cost of product sales
are fixed costs which relate to Pacific's Periodontal Tissue Monitor ("PTM")
product, even though Pacific had no sales of the PTM product in the current
quarter. During the same quarter of the prior year, Pacific completed product
validation studies required by the FDA and began producing PTM kits in
anticipation of the U. S. product launch in October 1997. Currently, Pacific is
not pursuing further development of its PTM product.
Product development costs totaled $595,000 for the current quarter, a decrease
of $66,000 or 10% over the prior year second quarter costs of $661,000. The
decrease relates to the following areas: (i) decrease of $337,000 in funding of
product development expenses in accordance with the Agreement and Plan of Merger
with BTI, as amended on February 27, 1997, the holder of certain technologies
in the PDT area for the treatment of cancer; (ii) a decrease of $72,000 in
expenses related to Cancer Immunotherapy technology; (iii) a decrease of $53,000
in expenses related PTM product development; (iv) an increase of $408,000 in
expenses related to the development of Pacific's BG technology acquired in March
1998 and (v) a decrease of $5,000 in general product development expenses.
General and administrative expenses for the current quarter were $376,000, a
decrease of $287,000 from the same period of the prior year. In the prior year,
Pacific incurred significant legal and accounting fees related to the
registration of the securities sold in the recent private placement and began
the recognition of an 18 month financial advisory agreement in which Pacific has
granted a preferred stock purchase option in exchange for such services. Also
during the same quarter, Pacific also incurred $181,000 of relocation expenses
in connection with the relocation of its Chairman, President and Chief Executive
Officer from New Jersey to California. There were no such expenses incurred
during the same quarter of the current year.
Business development costs for the current quarter totaled $5,000, a decrease of
$44,000, from the same quarter of the prior year. Expenses decreased as Pacific
spent less time and resources in developing corporate partnerships for its
various products compared to the prior year.
Net loss for the quarter ended September 30, 1998 totaled $847,000 or a 36%
decrease over the prior year's second quarter loss of $1,330,000. This decrease
is primarily the result of lower general and administrative and product
development expenses described above. Basic and diluted net loss per share of
common stock for the quarter ended September 30, 1998 was $.07 compared to $.34
in the same quarter in the previous year. During the quarter ended September 30,
1997, Pacific recognized a non-cash convertible preferred stock dividend of
$1,613,000, as restated. No such dividend was recognized during the current year
quarter.
Six Months Ended September 30, 1998 Compared To September 30, 1997
Total revenues were $103,000 for the six months ended September 30, 1998, a
$64,000 decrease from revenues of $167,000 recorded during the same period of
the prior year. Current and prior year revenues relate primarily to interest
income generated on Pacific's cash balances.
Cost of product sales was $28,000, relating to quality assurance and patent
amortization expenses on Pacific's PTM product. During the same quarter of the
prior year, Pacific completed product validation studies required by the FDA and
began producing PTM kits in anticipation of the U. S. product launch in October
1997.
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Pacific continued work on its first human clinical trial for its PDT cancer
treatment, BOPP. Pacific also completed its evaluation and due diligence of the
BG compound. Product development costs for the six months ended September 30,
1998 decreased by $42,000 or 4% to $980,000 compared to the same period of the
prior year. The decrease related to the following areas: (i) a decrease of
$415,000 in funding of product development expenses for BOPP; (ii) an increase
of $537,000 on expenses for the acquisition and development of BG (iii) $50,000
decrease in expenses related to Cancer Immunotherapy technology; (iv) a decrease
of $99,000 in expenses related to PTM product development.
General and administrative expenses for the current year were $777,000, a
decrease of $421,000 from the same period of the prior year. Pacific incurred
significant legal and accounting fees related to the registration of the
securities sold in the recent private placement and began the recognition of an
18-month financial advisory agreement in which Pacific has granted a preferred
stock purchase option in exchange for such services. Pacific also incurred
$181,000 in relocation expenses during the six months ended September 30, 1997
in connection with the relocation of its Chairman, President and Chief Executive
Officer from New Jersey to California. There were no such costs incurred during
the current year.
Business development costs for the current quarter totaled $23,000, a decrease
of $99,000, from the same quarter of the prior year. Expenses decreased as
Pacific spent less time and resources in developing corporate partnerships for
its various products compared to the prior year.
Net loss for the six months ended September 30, 1998 totaled $1,638,000 or a 28%
decrease over the prior year loss of $2,266,000. This decrease is primarily the
result of lower general and administrative and product development expenses
described above. Basic and diluted net loss per share of common stock for the
six months ended September 30, 1998 was $.44 compared to $.68 in the same period
in the previous year. During the six months ended September 30, 1998, Pacific
recognized a non-cash convertible preferred stock dividend of $3,294,000
compared to $3,248,000 (as restated) during the same period in the prior year.
Capital Resources And Liquidity
As described in this Joint Proxy Statement/Prospectus, Pacific's Board of
Directors have approved a merger agreement with Procept. The merger is subject
to approvals from both the Pacific and Procept shareholders.
Cash and cash equivalents at September 30, 1998 totaled $4,285,000, an increase
of $995,000 from the March 31, 1998 balance. Working capital at September 30,
1998 increased by $1,048,000 from March 31, 1998 to $3,595,000. These increases
were primarily due to the closing on net proceeds of $2,455,000 of the BGDC
private placement financing offset by the net loss before convertible preferred
stock dividends for the six months ending September 30, 1998. Seventy five
percent of the net proceeds of the BGDC private placement has or will be used by
BGDC for development costs associated with BG and 25% went to Pacific to be used
for general purposes. In order to conserve cash, Pacific has instituted a plan
to reduce its cash burn rate.
Since inception, Pacific has experienced negative cash flow from operations, and
Pacific considers it prudent to anticipate that negative cash flow from
operations will continue for the foreseeable future, and that outside sources of
funding will continue to be required. Without significant future revenues,
Pacific's financial resources are anticipated to be adequate through June 1999,
based on a continuation of the pattern of expenses which have prevailed during
fiscal years 1998 and 1997. Unanticipated expenses or working capital
requirements could, however, shorten that period.
In March 1998, Pacific signed the BG License Agreement, and in turn, assigned it
to its subsidiary BGDC.
Pacific entered into a Cooperative Research and Development Agreement ("CRADA")
with the NIH to fund studies and clinical trials. Under the terms of the CRADA,
Pacific is obligated to provide funding of $125,000 per year for five years for
joint research. Pacific is also obligated to make additional milestone, royalty
and patent reimbursement payments to the Co-Owners during the term of the
License Agreement. The CRADA also has a provision in which Pacific may make
certain portions of the aforementioned payments in common stock of Pacific.
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In connection with the BG License Agreement, Pacific entered into an
introduction agreement with Paramount Capital Investments LLC ("PCI"). Pacific
paid PCI a commission of $100,000 plus 100,000 shares of Pacific Common Stock
valued at $75,000 and reimbursed PCI $100,000 for its expenses in connection
with the acquisition of the BG technology. Pacific is also obligated to make
milestone payments to PCI in Pacific Common Stock of up to 900,000 shares if the
BG compound successfully reaches certain milestones. Pacific recorded $408,000
in product development expenses during the second quarter of fiscal year ("FY")
1999 and $837,000 since inception of the program to develop the BG technology.
In June 1996 Pacific entered into an agreement which granted Pacific the option
to acquire BTI. Under the agreement as amended, Pacific recorded expenses of
$153,000 during the second quarter of FY 1999 and $3,231,000 since inception of
the agreement. On January 12, 1999, pursuant to the terms of the Agreement and
Plan of Merger by and among Pacific, BTI, and XYX Acquisition Corp., as amended
February 27, 1997 (the "BTI Merger Agreement"), Pacific exercised its option to
acquire BTI by providing a closing notice in accordance with the BTI Merger
Agreement. Effective February 4, 1999, BTI merged with and into XYX Acquisition
Corp., a wholly-owned subsidiary of Pacific; and Pacific issued 2,158,268 shares
of Pacific Common Stock to the former BTI shareholders. In addition, Pacific
assumed a warrant to purchase 4,399 shares of Pacific Common Stock and assumed
an obligation to issue 5,557 shares of Pacific Common Stock to the University of
California upon NDA approval of boronated photoporphyrin compound, a
photosensitizing drug for PDT treatment of brain cancer.
Pacific has an agreement with Wound Healing of Oklahoma ("WHO") under which it
acquired an exclusive license to certain proprietary technology for Cancer
Immunotherapy. Pacific incurred $26,000 in product development expenses during
the first quarter of FY 1999 and $719,000 in product development expenses since
the acquisition of the license and expects to continue funding such efforts
associated with the commercialization of the licensed technology, including the
commencement of human clinical trials, which will increase Pacific's net
utilization of cash. However, there can be no assurance that FDA and other
regulatory approval required to commence such trials will be forthcoming.
On September 18, 1998, Pacific's Common Stock was removed from trading on the
AMEX because Pacific no longer satisfies all of the financial guidelines of the
AMEX for continued listing. Pacific's Common Stock began trading on the Over the
Counter Electronic Bulletin Board on September 21, 1998 under the ticker symbol
PHAA.
Year 2000 Compliance
Pacific recognizes the need to ensure its operations will not be adversely
impacted by the inability of Pacific's systems to process data having dates on
or after January 1, 2000 ("Year 2000"). Processing errors due to software
failure arising from calculations using the Year 2000 date are recognized as a
risk. Pacific is currently assessing the risk, with respect to the availability
and integrity of its financial systems and the reliability of its operating
systems, and is in the process of communicating with suppliers, customers,
financial institutions and others with whom it conducts business to assess
whether they are or will be Year 2000 compliant.
Pacific's information technology systems consist of a series of personal
computers which process data using purchased software programs produced and
maintained by large software vendors. All of the software presently installed on
Pacific's systems is Year 2000 compliant.
Pacific has contacted all of its vendors to determine each vendors' compliance
with Year 2000 issues. As of September 30, 1998, 60% of all of Pacific's vendors
have responded that they are now Year 2000 compliant. Pacific is continuing to
determine the Year 2000 compliance status of the remaining vendors. Pacific
hopes to have responses from all vendors and institutions with whom it does
business by December 31, 1998. Pacific's critical suppliers and financial
institutions are large organizations and Pacific believes all are now or will be
Year 2000 compliant by December 31, 1999.
Pacific believes its exposure to any material Year 2000 problems is relatively
small because its financial and operating systems have been produced and
maintained by large software vendors which are Year 2000 compliant and Pacific
relies on very large Year 2000 compliant vendors for its critical services.
However, there can be no assurance that Pacific's systems or systems of other
companies on which Pacific's operations rely will be converted on a timely basis
and will not have a material effect on Pacific.
The cost of Pacific's Year 2000 initiatives has not been or is not expected to
be material to Pacific's results of operations or financial position.
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THE MERGER
General Description of the Merger
A wholly-owned subsidiary of Procept (the "Merger Sub") will merge with and into
Pacific in accordance with the laws of the State of Delaware (the "Merger").
Pacific will be the surviving company (the "Surviving Company") in the Merger
and will continue as a Delaware corporation. On the date on which the Merger is
consummated (the "Effective Date"), at the time the Merger occurs (the
"Effective Time"): (a) the Certificate of Incorporation of Pacific, as in effect
immediately before the Effective Time, will be the Certificate of Incorporation
of the Surviving Company; (b) the Pacific By-laws, as in effect immediately
before the Effective Time, will be the By-laws of the Surviving Company and (c)
the director of the Merger Sub holding office immediately before the Effective
Time will be the director of the Surviving Company. Procept will issue 2,755,000
shares of its Common Stock to the holders of Pacific Preferred Stock and Pacific
Common Stock and an additional 417,137 shares of its Common Stock to the holders
of Pacific Preferred Stock as a result of certain contractual rights of such
holders. In addition, as a result of the consummation of the Merger, Procept may
issue additional shares of its Common Stock to other third parties. See
"Obligations to Issue Additional Shares of Procept Common Stock."
It is not anticipated that the Procept Board or management of Procept will
change as a result of the Merger.
Background of the Merger
On June 23, 1998, the Board of Directors of Pacific formed a Strategic
Committee, consisting of H. Laurence Shaw, Jack Halperin and Michael Weiss, to
address issues in connection with Pacific's status with the American Stock
Exchange, and to explore opportunities to enhance stockholder value, including
financing and strategic alliance options, business combinations and the
continuation of growing Pacific according to its business plan. After the
formation of the Strategic Committee, Pacific also authorized Paramount Capital,
Inc. in its capacity as Pacific's financial advisor, to assist Pacific in its
pursuit of strategic opportunities to best realize value for Pacific
stockholders. Between June 23, 1998 and November 2, 1998, Pacific met with five
companies in its efforts to pursue an appropriate strategic alliance or business
combination.
Officers of Procept first met the principals of Pacific on August 18, 1998 to
discuss the possibility of a business combination involving the two companies.
The meeting was arranged by Michael Weiss, a Senior Managing Director of
Paramount Capital, Inc. and a director serving on the boards of both Procept and
Pacific. The meeting was followed by a letter dated September 1, 1998 from the
president of Procept indicating its interest in pursuing a transaction. The
senior executives of Procept met with Pacific officials on September 14, 1998 to
conduct due diligence and negotiated the terms of the transaction during the
month of October 1998, which were included in a letter of intent which was
signed on November 2, 1998.
Procept and Pacific executed an extension to the letter of intent on November
30, 1998, extending the commitments thereunder to December 10, 1998.
The letter of intent was superseded by the Merger Agreement, which was signed on
December 10, 1998.
Procept's Reasons for the Merger; Recommendations of the Procept Board
The Special Committee of the Procept Board believes that the terms of the Merger
are fair to, and in the best interests of, Procept and its shareholders.
Accordingly, the Special Committee, by a unanimous vote, has approved the Merger
Agreement, and unanimously recommends that the Procept shareholders approve the
issuance of the Procept Common Stock in the Merger. The Special Committee of the
Procept Board believes that the Merger represents a significant strategic
opportunity for Procept.
The terms of the Merger Agreement, including the consideration consisting of
Procept Common Stock (the "Merger Consideration"), were the result of
arm's-length negotiations between Procept and Pacific. In fixing the Merger
Consideration in the negotiation process, Procept management considered the
relative trading values of the two companies. Subsequently, the Special
Committee received the financial analyses of Oscar Gruss & Son Incorporated. The
Oscar Gruss & Son Incorporated fairness opinion address to the Special Committee
of the
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Procept Board, dated as of January 21, 1999, is discussed below under "Opinion
of Procept's Financial Advisor." The Special Committee of the Procept Board
consulted with its financial advisor and the legal advisors and management of
Procept. After careful review and consideration, the Special Committee of the
Procept Board determined that the Merger is a desirable transaction from the
standpoint of the holders of Procept Common Stock.
In reaching its decision to approve the Merger Agreement, the Special Committee
of the Procept Board considered the following factors:
o The current and historical market prices of the Procept Common
Stock and the Pacific Common Stock (including the fact that the
closing prices of Procept Common Stock and Pacific Common Stock on
October 16, 1998 were $1.19 and $0.15, respectively).
o Information concerning the financial performance, condition,
business operations and prospects of each of Procept and Pacific.
o The effects of the Merger on Procept's shareholders, including the
opportunity to share in the anticipated benefits to be achieved
from ownership in the combined enterprise and the potential
development of Pacific's proprietary technology.
o The terms of the Merger Agreement, which provide for balanced
representations and warranties, conditions to closing and rights
upon termination.
o The opinion of Procept's financial advisor, Oscar Gruss & Son
Incorporated, that as of the date thereof and based upon the
assumptions made, matters considered and limits of review set
forth in such opinion, the proposed Merger Consideration to be
paid by Procept pursuant to the Merger was fair from a financial
point of view to Procept.
The Special Committee of the Procept Board considered the above factors as a
whole and did not assign specific or relative weights to them. In the view of
the Special Committee of the Procept Board, each of the factors listed above
reinforced its belief that the combined entity would have excellent business
prospects going forward.
The Special Committee of the Procept Board, by unanimous vote, has
approved the Merger Agreement, believes that the terms of the Merger
are fair to Procept's shareholders and unanimously recommends that the
Procept shareholders vote to approve the Stock Issuance.
Opinion of Procept's Financial Advisor
Procept retained Oscar Gruss & Son Incorporated ("Oscar Gruss") pursuant to an
engagement letter dated December 14, 1998 (the "Engagement Letter") to advise
the Special Committee of Independent Directors of the Board of Directors of
Procept (the "Committee") as to the fairness to Procept, as a corporate entity,
of the Merger Consideration--implied by the exchange ratio-- to be paid by
Procept in connection with the Merger, from a financial point of view.
Under the Engagement Letter, upon delivery of its fairness opinion, Oscar Gruss
became entitled to $ 60,000 in cash and $25,000 in cash or Common Stock of
Procept, at Procept's option, as a fee payable for rendering its fairness
opinion. Oscar Gruss was also paid a retainer fee of $15,000 upon the signing of
the Engagement Letter. In addition, pursuant to the Engagement Letter, Procept
agreed to reimburse Oscar Gruss for its out-of-pocket expenses, including fees
and expenses of legal counsel of up to $5,000, other than fees and expenses
related to indemnification of Oscar Gruss by Procept against certain
liabilities, including liabilities under the federal securities laws.
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In rendering its opinion, Oscar Gruss has, among other things: (i) reviewed the
Merger Agreement and this Joint Proxy Statement/Prospectus; (ii) reviewed
Procept's Annual Reports to Shareholders and Procept's Annual Reports on Form
10-K for the two years ended December 31, 1997 and Procept's Quarterly Reports
on Form 10-Q for each of the three months ended March 31, 1998, June 30, 1998
and September 30, 1998, and Pacific's Annual Reports to Shareholders and
Pacific's Annual Reports on Form 10-K for the two years ended March 31, 1998 and
Pacific's Quarterly Reports on Form 10-Q for each of the three months ended June
30, 1998, and September 30, 1998; (iii) reviewed certain internal financial
analyses and estimates of future financial performance for Procept and Pacific
prepared by their respective managements; (iv) conducted discussions with senior
members of the managements of both Procept and Pacific concerning the financial
condition, business operations, financial forecasts, and prospects of their
respective companies; (v) reviewed the reported price and volume trading
activity for Procept Common Stock and Pacific Common Stock; (vi) compared
certain financial results and stock market information of Procept and Pacific
with those of certain publicly traded companies which were deemed by Oscar Gruss
to be reasonably similar to Procept and Pacific, respectively; (vii) analyzed
the theoretical valuation using an unleveraged discounted cash flow analysis
based on stand-alone income statement projections prepared by the management of
each company; (viii) reviewed the financial terms of certain recent business
combinations which involved companies that were deemed by Oscar Gruss to be
reasonably similar to Procept and Pacific; and (ix) performed such other
financial studies and analyses as Oscar Gruss deemed appropriate.
On the basis of the foregoing, taken as a whole, Oscar Gruss concluded that the
Merger Consideration, which is implied by the exchange ratio, to be paid by
Procept in connection with the Merger is fair to Procept as a corporate entity
from a financial point of view. In reaching such conclusion, Oscar Gruss relied
on the accuracy and completeness of all information supplied or otherwise made
available by Pacific and Procept and did not independently verify such
information or undertake an independent appraisal of the assets of Pacific or
Procept. Among other things, Oscar Gruss reviewed and relied upon certain
information derived from discussions with Pacific's and Procept's senior
management regarding the strategic rationale for the Merger, assessment of the
prospects of their technologies and their future products, the validity of their
patents, the potential markets for their products, and the timing and
introduction of such products.
The preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. Oscar Gruss believes
that its analyses must be considered as a whole and that selecting portions of
its analyses, without considering all analyses, would create an incomplete view
of the process underlying its opinion. In its analyses, Oscar Gruss made
numerous assumptions with respect to industry performance, general business and
economic conditions, and other matters, many of which are beyond Procept's
control. In arriving at its opinion, Oscar Gruss did not attribute any
particular quantitative weight to any analyses or factors that it considered.
Rather, it made a qualitative judgment about the significance and relevance of
each analysis factor. Any estimate contained therein are not necessarily
indicative of actual values, which may be significantly more or less favorable
than as set forth therein. Estimates of the financial value of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
actually may be sold. Because such estimates inherently are subject to
uncertainty, neither Procept, nor Oscar Gruss, nor any other person assumes
responsibility for their accuracy.
A copy of Oscar Gruss's written opinion is included with this Joint Proxy
Statement/Prospectus as Annex D and should be read in its entirety. The
information herein regarding Oscar Gruss's fairness opinion is expressly
qualified by reference to the full text thereof set forth in Annex D hereto.
Oscar Gruss is a nationally recognized investment banking firm. As part of its
investment banking business, Oscar Gruss is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and other purposes.
Pacific's Reasons for the Merger; Recommendation of the Pacific Board
The Pacific Board believes that the terms of the Merger are fair to, and in the
best interests of, Pacific and its stockholders. Accordingly, the Pacific Board
has unanimously approved the Merger Agreement and the amendment to the Pacific
Certificate of Designations and unanimously recommends approval by the Pacific
stockholders. The Pacific Board believes that the Merger represents a
significant strategic opportunity for Pacific and its stockholders.
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In response to increasing competition in the pharmaceutical and biotechnology
industries and Pacific's inability to raise sufficient equity capital to develop
its products, the Pacific Board has been conducting an ongoing evaluation of
potential strategic alternatives. Those alternatives have included remaining as
an independent entity and reducing Pacific's cash burn rate in order to conserve
Pacific's resources, developing a corporate partnership for one or all of
Pacific's products under development and merging with another entity. As a
result of its ongoing evaluation, however, the Pacific Board subsequently
concluded that the proposed Merger represented a preferable strategic
alternative to either remaining an independent entity or other opportunities
available to Pacific. If the Merger is completed, Pacific will be able to
benefit from Procept's expertise in various therapeutic areas. Accordingly,
Pacific has suspended the process of evaluating strategic alternatives pending
the Merger.
The Pacific Board also believes the Merger is advantageous to the Pacific
stockholders because of the greater liquidity available to the stockholders of
Procept, which has a greater market capitalization than Pacific, and whose
common stock is traded on the Nasdaq SmallCap Market.
The terms of the Merger Agreement, including the Merger Consideration, were the
result of arm's-length negotiations between Pacific and Procept. In fixing the
consideration consisting of Procept Common Stock in the negotiation process,
Pacific management considered the relative trading values of the two companies.
Subsequently, the Pacific Board of Directors received the financial analysis of
Josephthal & Co. Inc. The Josephthal & Co. Inc. fairness opinion address to the
Pacific Board dated as of January 21, 1999, is discussed below under "Opinion of
Pacific's Financial Advisor." The Pacific Board consulted with its financial
advisor and legal advisors and management of Pacific and after careful review
and consideration, the Pacific Board determined that the Merger is a desirable
transaction from the standpoint of holders of Pacific Common Stock and Preferred
Stock.
In reaching its decision to approve the Merger Agreement and the amendment to
the Pacific Certificate of Designations and recommend their approval to the
Pacific stockholders, in addition to the factors described above, the Pacific
Board considered the following factors:
o The current and historical market prices of the Pacific Common
Stock and the Procept Common Stock.
o Information concerning the financial performance, condition,
business operations and prospects of each of Pacific and Procept.
o The effects of the Merger on Pacific's stockholders, including the
opportunity to share in the anticipated benefits of ownership of
the combined enterprise.
o The belief that Procept's expertise in various therapeutic areas
will further develop Pacific's drug candidates.
o The terms of the Merger Agreement, which provide for balanced
representations and warranties, conditions to closing and rights
upon termination.
o The opinion of Pacific's financial advisor, Josephthal & Co. Inc.,
that, as of the date thereof, based upon the assumptions made,
matters considered and limits of review in connection with such
opinion, the Merger Consideration was fair to Pacific stockholders
from a financial point of view.
In determining that the Merger and the amendment to the Pacific Certificate of
Designations are fair to Pacific's stockholders, the Pacific Board considered
the above factors as a whole and did not assign specific or relative weights to
them. In the view of the Pacific Board, each of the factors listed above
reinforced its belief that the transaction was in the best interests of Pacific
and its stockholders.
The Pacific Board, by unanimous vote of disinterested directors, has
approved the Merger Agreement and the amendment to the Pacific
Certificate of Designations, believes that the terms of the Merger and
the amendment are fair to Pacific's stockholders and unanimously
recommends that the Pacific stockholders vote to approve the Merger
Agreement and approve the amendment to the Pacific Certificate of
Designations.
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In considering the recommendation of the Pacific Board with respect to the
Merger Agreement and the amendment to the Certificate of Designations, Pacific
stockholders should be aware that certain members of Pacific's management and
the Pacific Board have certain interests in the Merger that are different from,
or in addition to, the interests of stockholders of Pacific generally and that
could potentially represent conflicts of interest. The Pacific Board was aware
of these interests and considered them, among other matters, in approving the
Merger Agreement. See "--Potential Conflicts and Interests of Certain Persons in
the Merger."
Opinion of Pacific's Financial Advisor
Pacific retained Josephthal & Co. Inc. ("Josephthal") pursuant to an engagement
letter dated December 15, 1998 (the "Engagement Letter") to advise Pacific as to
whether the Merger Consideration is fair to Pacific's shareholders from a
financial point of view.
Josephthal was entitled to $37,500 as a retainer upon execution of the Merger
Agreement under the Engagement Letter, and was paid such amount. In addition,
under the Engagement Letter, upon delivery of the Fairness Opinion to Pacific,
Josephthal will be entitled to a fee equal to $37,500 plus $25,000 in Pacific
Common Stock. In addition, pursuant to the Engagement Letter, Pacific agreed
to reimburse Josephthal for its out-of-pocket expenses, including fees and
expenses of legal counsel, and to indemnify Josephthal against certain
liabilities, including liabilities under the federal securities laws.
In rendering its opinion, Josephthal has among other things: (i) reviewed the
Merger Agreement; (ii) reviewed this Joint Proxy Statement/Prospectus; (iii)
reviewed certain historical financial, operating and other data that are
publicly available or were furnished to Josephthal by Pacific and Procept
including, but not limited to: (a) financial projections prepared by the
managements of Pacific and Procept; (b) Pacific's Form 10-K for the two years
ended and as of March 31, 1998; (c) Procept's Form 10-K for the two years ended
as of December 31, 1997; (d) Pacific's Form 10-Q for the periods ended as of
June 30, 1998 and September 30, 1998; and (e) Procept's Form 10-Q for the
periods ended as of March 31, 1998, June 30, 1998, and September 30, 1998; (f)
Pacific's and Procept's internally generated operating reports; (iv) compared
publicly available financial, operating and stock market data for companies
engaged in businesses Josephthal deemed comparable to Pacific and Procept; (v)
reviewed publicly available financial, operating and stock market data for
companies in the biotechnology industry which have been involved in a recent
merger or acquisition; (vi) reviewed reported prices and trading activity for
the common stock of Pacific and Procept; (vii) conducted interviews with senior
officers of Pacific and Procept to discuss their respective businesses and their
estimates of future financial performance; and (vii) such other factors as
Josephthal deemed appropriate.
On the basis of the foregoing, taken as a whole, Josephthal concluded that the
Merger Consideration is fair to the shareholders of Pacific from a financial
point of view. In reaching such conclusion, Josephthal relied on the accuracy
and completeness of all information supplied or otherwise made available by
Procept and did not independently verify such information or undertake an
independent appraisal of the assets of Procept. Among other things, Josephthal
reviewed and relied upon, with Procept's approval, certain information derived
from discussions with Procept's senior management regarding the strategic
rationale for the Merger and assessment of the prospects of Procept's technology
and future products, the validity of its patents, the context of the markets for
its products and the timing and introduction of such products.
The preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. Josephthal believes that
its analyses must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion. In its analyses, Josephthal made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond Pacific's
control. Any estimate contained therein are not necessarily indicative of actual
values, which may be significantly more or less favorable than as set forth
therein. Estimates of the financial value of companies do not purport to be
appraisals or necessarily reflect the prices at which companies actually may be
sold. Because such estimates inherently are subject to uncertainty, none of
Pacific, Josephthal, or any other person assumes responsibility for their
accuracy.
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A copy of Josephthal's written opinion is included with this Joint Proxy
Statement/Prospectus as Annex E and should be read in its entirety. The
information herein regarding Josepthal's "fairness opinion" is expressly
qualified by reference to the full text thereof set forth in Annex E hereto.
Josephthal is a nationally recognized investment banking firm. As part of its
investment banking business, Josephthal is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
Obligations to Issue Additional Shares of Procept Common Stock
Issuances Concurrent With the Merger. As a result of the consummation of the
Merger, Procept will issue shares of Common Stock to certain persons in addition
to the Merger Consideration, as follows:
o Stock Issuance Pursuant to Anti-Dilution Provisions. Procept will issue
approximately 1,453,796 shares of Procept Common Stock to (i) certain
stockholders who participated in a private placement consummated by Procept
in 1998 pursuant to contract anti-dilution rights contained in Article VI
of the Subscription Agreements executed in connection with the private
placement (the "Article VI Rights") and (ii) the holders of Pacific
Preferred Stock in connection with the contractual rights set forth in
Section 10 of the Merger Agreement.
o Stock Issuance to Creditors of Pacific. Procept will issue an aggregate of
approximately 88,374 shares of Procept Common Stock to Lindsay Rosenwald,
The Aries Trust and the Aries Domestic Fund L.P., each of whom is a
stockholder of Procept and Pacific, in cancellation of certain indebtedness
incurred by Pacific to such stockholders through Pacific's merger with BTI.
o Stock Issuance to Procept's Financial Advisor. Pursuant to the engagement
letter between Procept and Oscar Gruss & Son Incorporated, Procept may
either pay $25,000 in cash or issue 11,765 shares of Procept Common Stock,
which have a value of $25,000, based on the closing price of Procept Common
Stock on January 21, 1999, the date Oscar Gruss Son & Incorporated rendered
its fairness opinion to Procept with respect to the Merger.
Contingent Future Issuances. In addition, Procept will assume certain
liabilities of Pacific to issue shares of Procept Common Stock in the future.
Such future issuances are:
o Employee Stock Options. Procept will be obligated to issue up to
approximately 245,190 shares of Procept Common Stock upon the exercise of
options originally issued by Pacific to employees, directors and
consultants.
o Warrants and Options to Investors. Procept will be obligated to issue up to
approximately 1,550,405 shares of Procept Common Stock on exercise of
warrants and options originally issued by Pacific to investors and
corporate partners.
o Milestone Stock Payments to Paramount. Pursuant to an introduction
agreement entered into by Pacific with Paramount Capital Investments, LLC
in February 1998, Procept will be obligated to issue up to approximately
99,000 shares of Procept Common Stock upon the occurrence of certain
milestone events.
o Payments to Penn State in Stock. Pursuant to a License Agreement between
Pacific and Penn State Research Foundation ("Penn State") entered into in
March 1998, Procept will have the option of paying a portion of license,
royalty and milestone obligations due to Penn State in the form of shares
of Procept Common Stock, valued at their market price at the time of the
issuance.
o Payments to Holders of BGDC Preferred Stock. Pursuant to Subscription
Agreements entered into by Pacific with the purchasers of Preferred Stock
of B-G Development Corp. (the "BGDC Preferred Stockholders") on various
dates in 1998, if the BGDC Preferred Stockholders elect to put their shares
of Preferred Stock to Procept during a 60 day period in each of 1999 and
2000, Procept will have the option of issuing shares of Procept Common
Stock in exchange for the shares of B-G Development Corp. Preferred Stock
in lieu of cash. The number of shares of Procept Common Stock will be
valued for this purpose at their market price at the time of the issuance.
The maximum cash obligation to the BGDC Preferred Stockholders is
approximately $7,300,000 which assumes the exercise of outstanding warrants
pursuant to which Procept would receive $800,000 in gross proceeds.
o Payment to University of California in Stock. As a result of the
acquisition of BTI by Pacific, Pacific assumed an obligation under a
License Agreement between BTI and the University of California to issue
5,557 shares of Pacific Common Stock upon NDA approval of the boronated
protoporphyrin compound. This obligation will be assumed by Procept upon
consummation of the Merger and, assuming the conversion factor in the
merger, would result in the issuance of 611 shares of Procept Common
Stock.
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In the event any of the foregoing issuances trigger the anti-dilution provisions
of the Article VI Rights or Section 10 of the Merger Agreement, there may be
additional shares issuable to the holders of such anti-dilution rights.
Accounting Treatment
The Merger will be accounted for by Procept using the purchase method of
accounting for a business combination. Under this method of accounting, the
assets and liabilities of Pacific, including intangible assets, will be recorded
at their fair market values. The results of operations and cash flows of Pacific
will be included in Procept's financials prospectively as of the consummation of
the Merger.
Certain Federal Income Tax Consequences
The following is a summary of the material anticipated federal income tax
consequences of the Merger. This summary is limited to United States Persons (as
defined below) who hold their Pacific Common Stock as a "capital asset" within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), and whose "functional currency" as defined in the Code is the U.S.
dollar ("United States Holders"). This discussion does not address the federal
income tax consequences to certain persons subject to special treatment under
the federal income tax laws, including, but not limited to, tax-exempt
organizations, dealers in securities or currencies, regulated investment
companies, real estate investment trusts, real estate mortgage investment
conduits, financial asset securitization investment trusts, financial
institutions, persons subject to alternative minimum tax, non-United States
persons, insurance companies, persons holding their stock as a part of a
hedging, conversion, short sale, or integrated transaction or a straddle, or
stockholders who acquired their Pacific Common Stock pursuant to the exercise of
an employee stock option or otherwise as compensation. In addition, this summary
does not discuss the tax consequences of the Merger under state, local, or
foreign laws.
"United States Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized in or under the laws of
the United States or any state thereof, or (iii) an estate or trust that is
subject to United States federal income taxation without regard to the source of
its income.
This summary is based upon the provisions of the Code and the regulations
thereunder, administrative rulings, and judicial decisions now in effect. All
the foregoing are subject to change (possibly with retroactive effect) or
different interpretations. Any such changes could affect the continuing validity
of the statements and conclusions set forth herein. No ruling has been (nor will
be) sought from the Internal Revenue Service (the "IRS") as to anticipated tax
consequences of the Merger. This summary does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision
whether to approve the Merger. This summary is provided for general information
purposes only, and does not constitute, and should not be considered as, legal
or tax advice.
Neither Procept nor Pacific is hereby making any representation with
respect to the tax consequences of the Merger. Procept and Pacific
stockholders should consult their own tax advisors concerning the
federal income tax consequences of the Merger, as well as concerning
any consequences arising under the laws of any other tax jurisdiction,
including any state, local, or foreign jurisdiction, and any estate or
gift tax considerations.
Tax Consequences of the Merger. Based upon and subject to the assumptions and
limitations stated above, the Merger should constitute a reorganization within
the meaning of Section 368(a) of the Code, and the material federal income tax
consequences of the Merger should be as follows:
(i) no gain or loss will be recognized by Pacific, Procept or Merger
Sub by reason of the Merger;
(ii) no gain or loss will be recognized by United States Holders of
Pacific Common Stock or Preferred Stock on account of their receipt of Procept
Common Stock in exchange for their Pacific stock in the Merger;
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(iii) a United States Holder of Pacific Common Stock or Preferred
Stock who receives cash in lieu of fractional shares of Procept Common Stock
will be treated as if the fractional shares were distributed as part of the
exchange and then redeemed by Procept; such holder will recognize gain or loss
as a result of this deemed redemption in an amount equal to the difference
between the cash received and the portion of the basis of such holder's Pacific
stock allocable to the fractional shares deemed received; such gain or loss
generally will be capital gain or loss and will be long-term capital gain or
loss if the holding period of the Pacific Common Stock or Preferred Stock
surrendered in the Merger is more than one year as of the Effective Date;
(iv) the aggregate tax basis of the Procept Common Stock received by a
U.S. Holder of Pacific Common Stock or Preferred Stock in the Merger (including
any fractional shares deemed received, as described above) will be equal to the
aggregate tax basis of the Pacific Common Stock or Preferred Stock surrendered
in exchange therefor;
(v) the holding period of the Procept Common Stock received by a U.S.
Holder of Pacific Common Stock or Preferred Stock in the Merger will include the
holding period of the Pacific Common Stock or Preferred Stock surrendered in
exchange therefor;
(vi) U.S. Holders of Pacific Common Stock or Preferred Stock who
exercise dissenters' rights with respect to their shares will generally
recognize gain or loss measured by the difference between their basis in their
Pacific Common Stock or Preferred Stock and the amount of cash received; such
gain or loss generally will be capital gain or loss and will be long-term
capital gain or loss if the holding period of the Pacific Common Stock or
Preferred Stock surrendered in the Merger is more than one year as of the
Effective Date.
If, for any reason, the Merger is not treated as a reorganization within the
meaning of Section 368(a) of the Code, no gain or loss will be recognized by
Pacific, Procept or Merger Sub by reason of the Merger. However, exchanges of
Pacific Common Stock or Preferred Stock pursuant to the Merger will be taxable
transactions. In that event, each exchanging U.S. Holder of Pacific Common Stock
or Preferred Stock will recognize capital gain or loss equal to the difference
between such holder's adjusted basis in the Pacific stock exchanged and the sum
of the fair market value of the Procept Common Stock received by such holder in
the Merger and the amount of any cash received in lieu of fractional shares.
The foregoing discussion is included for general information purposes
only. The above summary does not purport to be a complete analysis of
all the United States federal income tax consequences of the Merger.
In the event of a successful IRS challenge to the Merger's
qualification as a reorganization under Section 368(a) of the Code,
there would be significant tax consequences. Stockholders should
consult their own tax advisors as to the particular tax consequences
to them of the Merger, including the application of state, local, and
foreign tax laws. Neither Procept nor Pacific is making any
representations as to the tax consequences of the Merger.
Pacific Shareholder Appraisal Rights
Appraisal rights under the Delaware General Corporation Law ("DGCL") may be
available in connection with the Merger. Under Delaware law, stockholders who do
not vote to approve a merger and who follow certain procedures may, under
certain circumstances, be entitled to exercise appraisal rights and receive cash
for the "fair value" of their shares of an acquired company.
In the event that appraisal rights under the DGCL are available to Pacific
stockholders in the Merger, a summary of the relevant sections of the DGCL is
set forth below. Procept stockholders are not entitled to appraisal rights as a
result of the Merger.
The following summary of the provisions of Section 262 of the DGCL ("Section
262") is not intended to be a complete statement of such provisions and is
qualified in its entirety by reference to the full text of Section 262, a copy
of which is attached to this Joint Proxy Statement/Prospectus as Annex C and
incorporated herein by reference.
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If a holder of Pacific Stock exercises appraisal rights in connection with the
Merger under Section 262, any shares of Pacific Stock with respect to which such
rights have been exercised and perfected will not be converted into Procept
Common Stock ("Dissenting Shares") but, instead, will be converted into the
right to receive such consideration as may be determined by the Delaware Court
of Chancery (the "Delaware Court") to be due with respect to such shares
pursuant to the DGCL. A stockholder electing to exercise appraisal rights must,
prior to the vote concerning the Merger proposal at the Pacific Meeting, perfect
his, her or its appraisal rights by demanding in writing from Pacific the
appraisal of his, her or its shares of Pacific Stock. A vote against the Merger
proposal will not constitute a demand for appraisal. A stockholder electing to
exercise appraisal rights also must not vote in favor of the Merger (a vote in
favor of the Merger will constitute a waiver of such stockholder's appraisal
rights). A holder who elects to exercise appraisal rights should mail or deliver
his, her or its written demand to Pacific. The demand should specify the
holder's name and mailing address and that such holder is demanding appraisal of
his, her or its shares. Only a holder of record as of the demand date and
continuing until the Effective Time of shares of Pacific Stock (or his, her or
its duly appointed representative) is entitled to assert appraisal rights for
the shares registered in that holder's name. This Joint Proxy
Statement/Prospectus is being sent by personal delivery or by mail to all
holders of record of Pacific Stock as of the Record Date and constitutes notice
of the appraisal rights under Section 262.
Within 10 days after the Effective Time, the Surviving Company shall notify
stockholders who have perfected their appraisal rights of the date that the
Merger has become effective. Within 120 days after the Effective Time, any
stockholder who has made a valid written demand and who has not voted in favor
of approval of the Merger proposal may (i) file a petition in the Delaware Court
demanding a determination of the value of shares of Pacific Stock and (ii) upon
written request, receive from the Surviving Company a statement setting forth
the aggregate number of shares of Pacific Stock not voted in favor of the Merger
proposal and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares.
If a petition for an appraisal is timely filed, at a hearing on such petition,
the Delaware Court is required to determine the holders of Dissenting Shares
entitled to appraisal rights and to determine the "fair value" of the Dissenting
Shares, taking into account all relevant factors, exclusive of any element of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any.
Any holder of Dissenting Shares who has demanded an appraisal under Section 262
will not, after the Effective Time, be entitled to vote the shares subject to
such demand for any purpose or to receive payment of dividends or other
distributions on such Dissenting Shares (except dividends or other distributions
payable to stockholders of record as of a date prior to the Effective Time).
The shares of any Pacific stockholder who demands appraisal under Section 262
and subsequently withdraws or loses his, her or its right to appraisal will be
converted into a right to receive that number of shares of Procept Common Stock
as is determined in accordance with the Merger Agreement. A Pacific stockholder
will effectively lose his right to appraisal if he, she or it votes in favor of
the Merger proposal, if no petition for appraisal is filed within 120 days after
the Effective Time, or if the holder withdraws such holder's demand for
appraisal within 60 days after the Effective Time. A holder of stock represented
by certificates may also lose his, her or its right to appraisal if he, she or
it fails to comply with the Court's direction to submit such certificates of
stock to the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings.
Nasdaq Listing of Procept Common Stock
Application will be made for the listing on the Nasdaq SmallCap Market of the
shares of Procept Common Stock to be issued in the Merger. So long as Procept
continues to meet the requirements of the Nasdaq SmallCap Market, Procept Common
Stock will continue to be listed on the Nasdaq SmallCap Market until the
Effective Time.
Federal Securities Law Consequences
All shares of Procept Common Stock received by Pacific stockholders in the
Merger will be freely transferable, except that shares of Procept Common Stock
received by individuals and entities who are deemed to be "affiliates" (as such
term is defined under the Securities Act) of Pacific before the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act (or Rule 144 under the Securities Act, in the case
of individuals and entities who become affiliates of Procept) or as otherwise
permitted
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under the Securities Act. Persons who may be deemed to be affiliates of Pacific
or Procept generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal stockholders
of such party. The Merger Agreement also requires Pacific to use all reasonable
efforts to cause each of its affiliates to execute and deliver to Procept a
written agreement to the effect that such affiliate will not offer or sell or
otherwise dispose of Procept Common Stock issued to such affiliate in or
pursuant to the Merger in violation of the Securities Act or the rules and
regulations adopted by the Securities Exchange Commission (the "SEC")
thereunder. The delivery of such agreements is also a condition to Procept's
obligation to complete the Merger.
This Joint Proxy Statement/Prospectus does not cover resales of Procept Common
Stock received by any person who may be deemed to be an affiliate of Pacific
and/or Procept.
Regulatory Matters
Procept and Pacific are not aware of any material governmental or regulatory
requirements that must be complied with in connection with the Merger, other
than applicable securities and "blue sky" laws of the various states and the
filing of the Certificate of Merger, setting forth the principal terms of the
Merger Agreement, with the Secretary of State of the State of Delaware.
Potential Conflicts and Interests of Certain Persons in the Merger
In considering the recommendation of the Pacific Board with respect to the
Merger, Pacific stockholders should be aware that certain members of Pacific's
management and the Pacific Board have certain interests in the Merger that are
in addition to the interests of stockholders of Pacific generally and represent
inherent conflicts of interest, including those set forth below. The Pacific
Board was aware of these interests and considered them, among other things, in
approving the Merger.
Common Directors between Procept and Pacific. Messrs. Vernon and Weiss are both
members of Pacific's Board of Directors and Procept's Board of Directors. Given
these individuals' interests in Pacific, they did not participate in the Special
Committee of the Procept Board that authorized the Merger. These individuals
also abstained from voting when the Pacific Board voted on the Merger.
Interests of Paramount Capital and Aries Funds. Michael S. Weiss, a member of
both Pacific's and Procept's Board of Directors, is a Senior Managing Director
of Paramount Capital, Inc. ("Paramount"), an investment banking firm, which will
receive a 6% commission upon consummation of the Merger in accordance with the
terms of a Financial Advisory Agreement and an Introduction Agreement, both by
and between Pacific and Paramount. As discussed above, Mr. Weiss did not
participate in the Special Committee of the Procept Board that authorized the
Merger and abstained from voting when the Pacific Board approved the Merger. In
addition, Paramount manages The Aries Trust and the Aries Domestic Fund, L.P.,
which, in addition to being stockholders of both Pacific and Procept, were
creditors and stockholders of BTI and will receive repayment of indebtedness and
additional shares of Procept Common Stock as a result of the Merger.
Employment Agreement. At the time of approval of the Merger Agreement, Dr. H.
Laurence Shaw, Chairman of Pacific's Board, President and Chief Executive
Officer, was a party to an employment agreement with Pacific (the "Employment
Agreement"), which provided that, if following a Change in Control of Pacific
(as defined in such agreement and which will be deemed to have occurred for
purposes thereof at the Effective Time), Dr. Shaw is terminated or terminates
his own employment as a result of such Change of Control, he shall receive a
severance amount, beginning at that time, equal to his annual base salary and
bonus and his options to purchase 1,057,000 shares of Pacific Common Stock
granted to him in connection with the Employment Agreement would fully vest (all
such benefits, the "Change in Control Benefits"). On November 19, 1998, Dr. Shaw
and Pacific entered into a severance agreement which terminated the Employment
Agreement and provided Dr. Shaw with the Change in Control Benefits and certain
other benefits at that time.
Indemnification and Insurance for Pacific Officers and Directors. Procept has
agreed to cause the Surviving Company to honor Pacific's indemnification
obligations under Pacific's Certificate of Incorporation and By-laws as
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in effect before the Effective Time, and not to modify such indemnification
obligations in a manner that would have an adverse effect on the indemnified
parties for a period of six years after the Effective Time. The indemnification
obligations include those arising out of the Merger or that occurred prior to
the Effective Time. Procept and Pacific also agreed to either purchase or keep
in effect directors' and officers' liability insurance coverage for such
indemnification obligations in the amount of at least $ 5,000,000.
Management and Other Information
After the Merger, Procept will continue to be managed by the same Board of
Directors and officers of Procept as before the Merger. Certain information
relating to the management, executive compensation, voting securities, certain
relationships and related transactions and other related matters pertaining to
Procept and Pacific is set forth in or incorporated by reference in their
respective Annual Reports on Form 10-K for the year ended December 31, 1997, as
amended and March 31, 1998, respectively. Such Annual Reports are incorporated
by reference into this Joint Proxy Statement/Prospectus. See "Where You Can Find
More Information."
MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement,
as amended, which is attached as Annex A and Annex A-1 and incorporated into
this Joint Proxy Statement/Prospectus by reference. The following summary is
qualified by and made subject to the more complete information set forth in the
Merger Agreement.
Structure of the Merger
The Merger Agreement provides that following the approval of the Merger
Agreement by the stockholders of Pacific and the approval of the issuance of
Procept Common Stock by the stockholders of Procept, and the satisfaction or
waiver of all other conditions to the Merger, Merger Sub will merge with and
into Pacific. After the Merger, Pacific will continue as the Surviving Company
under the name "Pacific Pharmaceuticals, Inc." and will be a wholly-owned
subsidiary of Procept.
Merger Consideration
As a result of the Merger, each outstanding share of Pacific Common Stock and
Pacific Preferred Stock (other than Dissenting Shares) shall be automatically
converted into the right to receive shares of Procept Common Stock. Assuming no
Dissenting Shares, 2,755,000 shares of Procept Common Stock will be issued in
the Merger (the "Merger Consideration"). The Merger Consideration will be
reduced by the number of shares of Procept Common Stock that would otherwise be
allocable to holders of Pacific Common Stock and Preferred Stock who perfect
dissenters' rights under Delaware law. Assuming (i) the number of shares of
Pacific Stock outstanding immediately prior to the Effective Time is the same as
the number of such shares outstanding as of the Record Date and (ii) that each
share of Pacific Preferred Stock is converted into 290.89 shares of Pacific
Common Stock, each share of Pacific Common Stock outstanding or issuable upon
conversion of Pacific Preferred Stock would be converted into approximately 0.11
shares of Procept Common Stock. At the time of the Merger, each former Pacific
stockholder's entitlement to Procept Common Stock will be rounded down to the
nearest whole share and the fraction of a Procept share to which such
stockholder would have been entitled will be paid in cash, as described below.
Holders of Pacific Preferred Stock will receive, in addition to shares of
Procept Common Stock, certain contractual rights. As a result of such
contractual rights, the holders of Pacific Preferred Stock will also receive
approximately 417,137 shares of Procept Common Stock. See "Contractual Rights of
Pacific Preferred Stock Converted to Procept Common Stock." All outstanding
options and warrants of Pacific will be converted into options and warrants to
purchase shares of Procept Common Stock. In addition, Procept will assume
certain obligations of Pacific to issue shares of Procept Common Stock.
No fractional shares of Procept Common Stock will be issued in the Merger.
Instead of fractional shares, holders will receive cash in an amount equal to
the value of their fractional shares based on the average closing price of
Procept Common Stock on the Nasdaq SmallCap Market for the ten trading days
ending on the fifth trading day prior to the closing date. Following
consummation of the Merger, no former holder of Pacific Common Stock shall be
entitled to dividends or any other rights in respect of any such fraction. After
the Effective Time, the outstanding
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shares of Pacific Common Stock or Pacific Preferred Stock will not represent any
ownership interest in Pacific but will only represent the right to receive a
portion of the Merger Consideration.
Surrender of Certificates; Converting Pacific Stock into Procept Stock
The conversion of Pacific Stock into Procept Common Stock will occur
automatically at the Effective Time. As soon as practicable after the Effective
Time, Pacific shall deliver to Procept a list of all record holders of Pacific
Stock immediately prior to the Effective Time, setting forth each stockholder's
name, address and number of shares of Pacific Stock held prior to the Effective
Time. Any Pacific stockholders holding certificates representing shares of
Pacific Common Stock or Pacific Preferred Stock must deliver such Pacific
certificates to Procept's exchange agent (the "Exchange Agent") in exchange for
certificate(s) representing Procept Common Stock.
Promptly after the Effective Time, the Exchange Agent will mail the following
materials to each person who held shares of Pacific Stock as of the Effective
Time:
o a letter of transmittal to be used by the holder to surrender his,
her or its shares to the Exchange Agent to be exchanged for the
Merger Consideration; and
o instructions explaining what the holder has to do to effect the
exchange of shares of Pacific Stock for the Merger Consideration.
Such holder should complete and sign the letter of transmittal and return it to
the Exchange Agent in accordance with the instructions provided by the Exchange
Agent, together with any certificates for Pacific Stock held by such holder.
If certificates for any shares of Pacific Stock have been lost, stolen or
destroyed, the holder must submit an affidavit to that effect to the Exchange
Agent. The Exchange Agent may prescribe the form of affidavit required and may
also require the holder to deliver a bond to the Exchange Agent in an amount
reasonably required to indemnify the Exchange Agent against claims with respect
to the lost certificates.
If a record holder of Pacific Stock at the Effective Time wishes the Merger
Consideration to be issued to some other person, then, before the Merger
Consideration can be issued to the designated recipient, the Exchange Agent must
be provided with the following documentation:
o a properly endorsed certificate for the shares of Pacific Stock
being exchanged;
o properly completed and signed originals of any other documents
required by the Exchange Agent to show that the transfer occurred;
and
o evidence that any transfer taxes resulting from the issuance of a
certificate(s) for Procept Common Stock to a person(s) other than
the record holder of Pacific Stock have been or will be paid.
Holders of Pacific Stock Should Not Send in Their Stock Certificates Until They
Receive a Letter of Transmittal.
Upon surrender of a duly executed certificate for exchange and cancellation to
the Exchange Agent, the holder of such certificate shall be entitled to receive
in exchange therefor a certificate representing the number of whole shares of
Procept Common Stock to which such holder of Pacific Stock shall have become
entitled under the Merger Agreement, and a check representing the amount of cash
payable in lieu of a fractional share, as described above, and the certificate
so surrendered shall forthwith be cancelled. No interest payable to holders of
certificates, if any, will be paid or accrued on unpaid dividends and
distributions.
At the Effective Time, there shall be no transfers on the stock transfer books
of Pacific of the shares of Pacific Stock. If, after the Effective Time,
certificates representing such shares are presented for transfer to the Exchange
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Agent, they shall be cancelled and exchanged for certificates representing
shares of Procept Common Stock and cash as provided above.
Treatment of Pacific Common Stock Options and Warrants
Options. At the Effective Time, each outstanding option to purchase shares of
Pacific Common Stock, whether or not exercisable, will be assumed by Procept.
Each Pacific option so assumed will continue to have, and be subject to, the
same terms and conditions set forth in the applicable Pacific stock option plan
immediately prior to the Effective Time, except that (i) each option will be
exercisable (or will become exercisable in accordance with its terms) for that
number of shares of Procept Common Stock equal to the product of the number of
shares of Pacific Common Stock that were issuable upon exercise of such option
immediately prior to the Effective Time multiplied by the Conversion Factor,
rounded down to the nearest whole number of Procept Common Stock, (ii) the per
share exercise price for the Procept Common Stock issuable upon exercise of such
assumed option will be equal to the quotient determined by dividing the exercise
price per share of Pacific Common Stock at which such option was exercised
immediately prior to the Effective Time by the Conversion Factor, rounded down
to the nearest whole cent, (iii) all options held by H. Laurence Shaw vested
upon execution of his severance agreement dated November 19, 1998, and (iv) all
outstanding options to purchase Pacific Common Stock held by employees of
Pacific at the Effective Time which are not vested as of the Effective Time of
the Merger shall fully vest as of that date, will be converted into options to
purchase Procept Common Stock as set forth above, and will remain outstanding
for their stated term notwithstanding the termination of the employee after the
Effective Time. The Conversion Factor shall mean the quotient determined by
dividing the Merger Consideration by the number of shares of Pacific Common
Stock outstanding and issuable on conversion of outstanding shares of Pacific
Preferred Stock immediately prior to the Effective Time.
After the Effective Time, Procept will deliver to each holder of a Pacific
option a notice setting forth the holder's rights pursuant to its Procept
option.
Procept has agreed to file a registration statement on Form S-8 for the shares
of Procept Common Stock issuable upon the exercise of the Procept options. The
registration statement will be effective as of the Effective Time, and Procept
has agreed to use its best efforts to maintain the effectiveness of such
registration statement for so long as such Procept options are outstanding.
As of February 5, 1999, 2,229,000 shares of Pacific Common Stock were issuable
upon the exercise of outstanding Pacific options, which options, assuming a
Conversion Factor of 0.11 Procept Common Stock per Pacific share, will be
converted to become approximately 245,190 Procept options at the Effective Time.
The weighted average exercise price per share of all Pacific options outstanding
as of February 5, 1999 is $1.21 per share. Assuming a 0.11 Conversion Factor,
the weighted average exercise price per share of all Procept Options to be
issued upon the assumption of the Pacific options will be $10.18.
Warrants and Options to Investors. At the Effective Time, each outstanding
warrant to purchase shares of Pacific Common Stock and each outstanding option
to purchase Pacific Common Stock or Preferred Stock held by investors and
corporate partners of Pacific, whether or not exercisable, will be assumed by
Procept. Each such warrant and option so assumed by Procept will continue to
have, and be subject to, the same terms and conditions set forth in the
applicable warrant or option immediately prior to the Effective Time except that
(i) each warrant or option will be exercisable (or will become exercisable in
accordance with its terms) for that number of shares of Procept Common Stock
equal to the product of the number of shares of Pacific Common Stock that are
issuable upon exercise of such Pacific warrant and option immediately prior to
the Effective Time multiplied by the Conversion Factor, rounded down to the
nearest whole number of Procept Common Stock, and (ii) the per share exercise
price for the Procept Common Stock issuable upon exercise of such assumed
warrant and option will be equal to the quotient determined by dividing the
exercise price per share of Pacific Common Stock at which such warrant and
option was exercisable immediately prior to the Effective Time by the Conversion
Factor rounded down to the nearest whole cent.
Procept has agreed to the extent required by the terms of the Pacific warrant
and permitted under the Securities Act to file a registration statement on the
appropriate form covering the offering and sale to the holders of Pacific
warrants of the shares of Procept Common Stock purchasable upon exercise
thereof. Procept has agreed to use its best efforts to file the registration
statement within 60 days of the Effective Time and maintain its effectiveness
until all Pacific warrants have been exercised or terminated by their terms.
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On February 5, 1999, 14,194,571 Pacific shares were issuable upon the exercise
of outstanding Pacific warrants to purchase Pacific Common Stock and certain
options to purchase Pacific Common and Preferred Stock, which will be converted,
assuming a Conversion Factor of 0.11 into approximately 1,561,405 Procept
warrants and options at the Effective Time. The weighted average exercise price
per Pacific share of all Pacific warrants outstanding as of February 5, 1999 and
certain options to purchase Pacific Common and Preferred Stock outstanding as of
February 5, 1999 is $1.49. Assuming a 0.11 Conversion Factor, the weighted
average exercise price per share of all Procept warrants and certain options to
be issued upon the assumption of Pacific warrants and certain options will be
$13.53.
Contractual Rights of Pacific Preferred Stock Converted to Procept Common Stock
The following is a brief summary of certain provisions of the Merger Agreement
regarding additional contractual rights ("Section 10 Rights") to be granted to
(i) holders of Pacific Preferred Stock receiving Procept Common Stock in the
Merger, or to their permitted assignees of such Section 10 Rights or (ii) the
former holders of indebtedness of Binary Therapeutics, Inc. ("BTI") which merged
into Pacific on February 4, 1999, who receive shares of Procept Common Stock
pursuant to Section 7.7 of the Merger Agreement (collectively, the "Rights
Holders"). This summary does not purport to be complete and is qualified in all
respects by reference to the actual text of the Merger Agreement.
Certain Defined Terms
"Change of Shares" shall mean any event that necessitates an adjustment to the
Dilution Value (as defined below) in the event Procept shall, at any time or
from time to time after the date hereof (i) issue any shares of Procept Common
Stock as a stock dividend to the holders of Procept Common Stock or (ii)
subdivide or combine the outstanding shares of Procept Common Stock into a
greater or lesser number of shares (any such issuances, subdivision or
combination being herein called a "Change of Shares").
The "Closing Bid Price" of any security, for any trading day, shall be the
reported per share closing bid price, regular way, of such security on the
relevant Stock Market (as defined below) on such trading day (as defined below)
or, if there were no transactions on such trading day, the average of the
reported closing bid and asked prices, regular way, of such security on the
relevant Stock Market on such trading day.
The "Dilution Value" initially shall be $3.67. The Dilution Value is subject to
adjustment.
"Fair Market Value" of any asset (including any security) means the fair market
value thereof as mutually determined by Procept and the financial advisor,
Paramount Capital, Inc. (the "Financial Advisor"). If Procept and the Financial
Advisor are unable to reach agreement on any valuation matter, such valuation
shall be submitted to and determined by a nationally recognized independent
investment bank selected by the Board of Directors of Procept and the Financial
Advisor (or, if such selection cannot be agreed upon promptly, or in any event
within ten days, then such valuation shall be made by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in New York City in accordance with its rules), the costs of which
valuation shall be paid by Procept.
The "Issuance Base Amount" for each Rights Holder, at any time, means the sum of
(i) the number of shares of Procept Common Stock acquired by the Rights Holder
in the Merger in respect of such shares of Pacific Preferred Stock, (ii) the
number of shares of any Reset Issuance (as defined below) made to such Rights
Holder occurring before such time, (iii) the number of shares of any Semi-Annual
Issuances (as defined below) made to such Rights Holder occurring before such
time and (iv) the number of shares of any Dilution Issuances (as defined below)
made to such Rights Holder occurring before such time (with certain
adjustments). For any transferee Rights Holder, the Issuance Base Amount, at any
time, shall be the number of shares of Procept Common Stock related to such
Section 10 Rights as were transferred to such Rights Holder plus the number of
shares of any Reset Issuance, Semi-Annual Issuance and Dilution Issuance made to
such Rights Holder occurring subsequent to such transfer but before such time.
"Liquidation Event" shall mean any (i) liquidation, dissolution or winding up of
Procept, whether voluntary or involuntary, (ii) sale or other disposition of all
or substantially all of the assets of Procept or (iii) any consolidation,
merger, combination, reorganization or other transaction in which Procept is not
the surviving entity or shares of
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Procept Common Stock constituting more than 50% of the voting power of Procept
are exchanged for or changed into stock or securities of another entity, cash
and/or any other property (clause (iii) of this sentence being referred to as a
"Merger Transaction"). Notwithstanding the above, any consolidation, merger,
combination, reorganization or other transaction in which Procept is not the
surviving entity but the stockholders of Procept immediately prior to such
transaction own in excess of 50% of the voting power of the corporation
surviving such transaction and own such interest in substantially the same
proportions as prior to such transaction, shall not be considered a Liquidation
Event, or a Merger Transaction, provided that the surviving corporation has made
appropriate provisions acceptable to the Financial Advisor to ensure that the
Section 10 Rights survive any such transaction.
"Market Price" per share of Procept Common Stock shall mean the average Closing
Bid Price (adjusted, where appropriate, for any stock dividend to the holders of
Procept Common Stock or subdivision or combination of the outstanding shares of
Procept Common Stock) for twenty (20) consecutive trading days, ending with the
trading day prior to the date as of which the Market Price is being determined,
provided that if the prices referred to in the definition of Closing Bid Price
cannot be determined on any trading day, "Market Price" for such trading day
shall mean the Fair Market Value.
The "Stock Market" shall mean, with respect to any security, the principal
national securities exchange on which such security is listed or admitted to
trading or, if such security is not listed or admitted to trading on any
national securities exchange, shall mean The Nasdaq National Market System or
The Nasdaq SmallCap Market (collectively, "Nasdaq") or, if such security is not
quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security is not
quoted on the OTC Bulletin Board, shall mean the over-the-counter market as
furnished by any NASD member firm selected from time to time by Procept for that
purpose.
"Trading Price" shall mean the lower of (i) the average Closing Bid Price of the
Procept Common Stock for the thirty (30) consecutive trading days immediately
preceding the date as of which the trading price is being determined (with
appropriate adjustments for Change of Shares) and (ii) the average Closing Bid
Price of the Procept Common Stock for the five (5) consecutive trading days
immediately preceding the date as of which the Trading Price is being determined
with appropriate adjustments for the Change of Shares.
Reset Issuances and Adjustments
If the Market Price (as defined above) immediately prior to April 9, 1999 (the
"Reset Date") is less than 140% of the then applicable Dilution Value (as
defined above) (a "Reset Event") then: the Dilution Value will be reduced to the
greater of (x) the Market Price at such time divided by 1.40 and (y) 25% of the
then applicable Dilution Value. If there is any change in the Dilution Value as
a result of a Reset Event, then, on such date, Procept shall issue to the Rights
Holders a number of shares of Procept Common Stock (the "Reset Issuance") equal
to the difference between (x) the quotient of (A) the product of the Issuance
Base Amount times the Dilution Value immediately preceding the Reset Event
divided by (B) the Dilution Value immediately following the Reset Event and (y)
the Issuance Base Amount.
Semi-Annual Issuance
On each six month anniversary of the Reset Date (or the next succeeding business
day), Procept shall issue (each a "Semi-Annual Issuance") to each Rights Holder
a number of shares of Procept Common Stock equal to 5% of such Rights Holder's
Issuance Base Amount on the applicable six month anniversary date.
Dilution Issuances and Anti-Dilution Adjustments
The Rights Holders will be entitled to receive additional shares of Procept
Common Stock ("Dilution Issuances") in the event Procept sells or issues any
shares of Procept Common Stock for a consideration per share less than the
Dilution Value or the Market Price (each a "Dilutive Issuance"), provided that
certain such events, as more fully described in the Merger Agreement, will not
trigger such Dilution Issuances.
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Liquidation Put
Each Rights Holder shall have the right (the "Liquidation Put") to require
Procept to repurchase with cash any number (not to exceed such Rights Holder's
Issuance Base Amount) of shares of Procept Common Stock then owned by such
Rights Holder for 140% of the aggregate Dilution Value of such shares; provided,
however, in the event of a Merger Transaction (as defined in the Merger
Agreement), any such repurchase may be paid in cash, property and/or securities
(valued as provided in the Merger Agreement) of the entity surviving such Merger
Transaction. However, pursuant to the Merger Agreement, each Rights Holder
covenants not to exercise the Liquidation Put unless a Liquidation Event has
occurred. See "RISK FACTORS - Risk of Unenforceability of Contractual Rights to
Holders of Pacific Preferred Stock."
Transfer of Section 10 Rights
No Rights Holder's Section 10 Rights are transferable until after April 9, 1999.
No Rights Holder's Section 10 Rights may be transferred unless the transferee
will be both the record and beneficial owner of the related Procept Common Stock
and executes and delivers to Procept a counterpart of Section 10 agreeing to be
bound by the obligations of the Rights Holder thereunder. Furthermore, any
transfer of Procept Common Stock and related Section 10 Rights must be performed
in accordance with applicable securities laws and regulations, and the
transferor must provide Procept with an opinion of counsel, satisfactory to
Procept, to that effect. Moreover, no transfer of Section 10 Rights may be made
relating to fewer shares of Procept Common Stock than the quotient of 25,000
divided by the Dilution Value. Any purported transfer of Section 10 Rights not
in compliance with the above restrictions shall be null and void and the Rights
Holder shall forfeit all Section 10 Rights related to such transferred Procept
Common Stock. Furthermore, upon, and to the extent of, any transfer of Procept
Common Stock to which Section 10 Rights relate, without the transfer of such
related Section 10 Rights, such related Section 10 Rights shall terminate.
Mandatory Termination
At any time after the Reset Date, Procept may cause the Rights Holders' Section
10 Rights to be terminated if the Market Price of the Procept Common Stock shall
have exceeded 300% of the then applicable Dilution Value as of the third day
prior to the date of notice of termination, which notice shall be given in
accordance with the terms of the Merger Agreement.
Representations and Warranties
Pacific and Procept have each made customary representations and warranties to
the other in the Merger Agreement relating to, among other things: (a) their
organization, the organization of their subsidiaries and similar corporate
matters; (b) their capital structure; (c) authorization, execution, delivery and
performance of the Merger Agreement and the absence of any conflicts, violations
or defaults under their respective organizational documents and other agreements
and documents, conflicts with or violations of any laws as a result of executing
the Merger Agreement; (d) governmental consents and filings; (e) the absence of
any undisclosed liabilities (f) reports and financial statements filed with the
SEC and the accuracy of the information contained in such reports and financial
statements; (g) absence of any change, event or effect that is materially
adverse to the business, assets, financial condition or results of operations of
such party and its respective subsidiaries taken as a whole and certain other
events since March 31, 1998 for Pacific and December 31, 1997 for Procept; (h)
the payment of taxes and the filing of tax returns; (i) compliance with
applicable laws and agreements and maintenance of licenses and permits; (j) the
absence of litigation proceedings; (k) their material contracts; (l) their
leased properties; (m) title to their assets; (n) employee benefit plans and
employee relations; (o) insurance; and (p) hazardous wastes.
Certain Covenants
Interim Operations of Pacific. From the date of the execution of the Merger
Agreement until the closing date, Pacific has agreed to carry on its business
and the businesses of its subsidiaries diligently in the ordinary course.
Pacific has also agreed to use reasonable efforts consistent with past practice
to preserve intact the business organization of Pacific and its subsidiaries,
keep available the services of their employees, maintain their properties
69
<PAGE>
and assets in good operating condition, maintain its insurance policies,
preserve and protect its proprietary rights and to preserve their relationships
with third parties. These obligations are subject to exceptions that are agreed
to in writing by Procept. In particular, during the period before the closing
date, Pacific will not do or permit its subsidiaries to do or agree to do any of
the following:
o Sell or transfer, or mortgage, pledge, or create any encumbrances
on, any assets other than those in the ordinary course of
business.
o Incur or guaranty any liabilities other than in the ordinary
course of business (with certain exceptions provided in the Merger
Agreement) or incur any indebtedness for borrowing money or enter
into certain contracts or commitments involving payments by
Pacific or its subsidiaries of $5,000 or more (except in the
ordinary course).
o Change the compensation or fringe benefits of any officer,
director or employee, or enter into, or modify, any employee plan,
employment agreement, severance agreement or any other agreement
with any officer, director or employee of Pacific.
o Grant or accelerate the exercisability of any option or other
right to purchase shares of capital stock, declare or pay any
dividends or make any distribution with respect to its capital
stock or issue any shares of its capital stock except as for the
exercise of options as described in the Merger Agreement.
o Amend its Certificate of Incorporation or By-laws.
o Make any material acquisition of property other than in the
ordinary course of business.
o Enter into or modify any material agreement other than in the
ordinary course of business involving payments by Pacific of less
than $5,000.
Interim Operations of Procept. From the date of the execution of the Merger
Agreement until the closing date, Procept has agreed to carry on its business
and the business of its material subsidiaries diligently in the ordinary course
and consistent with good commercial practice. Procept has also agreed to use
reasonable efforts consistent with past practices to preserve intact the
business organization of Procept and its material subsidiaries, keep available
the services of their employees, maintain their properties and assets in good
condition and to preserve their relationships with third parties. These
obligations are subject to exceptions that are agreed to in writing by Pacific.
Procept agreed that it will not do or permit its subsidiaries to do those
activities Pacific and its subsidiaries are not permitted to do, other than the
restrictions regarding capital stock discussed above and except that Procept is
not bound by the specific dollar limitations applicable to Pacific.
Pacific Special Meeting and Procept Special Meeting; Recommendations of the
Pacific Board and Procept Board. Pacific has agreed in accordance with the
Delaware General Corporation Law and its Certificate of Incorporation and
By-laws, to cause the Pacific Special Meeting to be held as promptly as
practicable after the signing of the Merger Agreement for the purpose of
considering the approval of the Merger Agreement. Procept has agreed, in
accordance with the NASD rules, to cause the Procept Special Meeting to be held
as promptly as possible following the signing of the Merger Agreement for the
purpose of considering the approval of the Stock Issuance. The Pacific Board and
the Procept Board have each agreed, subject to their respective fiduciary
duties, to use their reasonable efforts to solicit from their stockholders
proxies in favor of the approval of the Merger Agreement and the Stock Issuance,
respectively, and to take all other actions necessary or advisable to secure the
vote or consent of their stockholders required to obtain such approval.
Indemnification and Insurance for Pacific Officers and Directors. Procept has
agreed to cause the Surviving Company to honor Pacific's indemnification
obligations under Pacific's Certificate of Incorporation and By-laws as in
effect before the Effective Time and not to modify such indemnification
obligations in a manner that would have an adverse effect on the indemnified
parties for a period of six years after the Effective Time. The indemnification
obligations include those arising out of the Merger or that occurred prior to
the Effective Time. Procept and Pacific
70
<PAGE>
also agreed to either purchase or keep in effect directors' and officers'
liability insurance coverage for such indemnification obligations in the amount
of at least $5,000,000. See "The Merger--Potential Conflicts and Interests of
Certain Persons in the Merger" on page 63.
Certain Other Covenants. The Merger Agreement contains certain mutual covenants
of the parties, including covenants relating to: public announcements; access to
information; qualification of the Merger as a reorganization within the meaning
of Section 368 of the Internal Revenue Code; best efforts and further
assurances; compliance with legal requirements and cooperation in connection
with obtaining consents and approvals; and confidential treatment of non-public
information.
The Merger Agreement also contains a covenant by Pacific to provide Procept with
a list of individuals and entities which may be affiliates of Pacific within the
meaning of Rule 145 under the Securities Act, and to use reasonable commercial
efforts to cause such individuals and entities to sign and deliver to Procept an
agreement in a form to be provided by Procept.
The Merger Agreement also contains certain covenants of Procept including
covenants requiring Procept to take all actions necessary to list the Procept
Common Stock to be issued in connection with the Merger on the Nasdaq SmallCap
Market.
Conditions to the Merger
Conditions to Each Party's Obligations to Effect the Merger. The obligation of
Procept, Pacific and Merger Sub to consummate the Merger are subject to the
satisfaction of the following conditions:
o The approval of the amendment to the Pacific Certificate of
Designations by the holders of Pacific Preferred Stock.
o The approval of the Merger Agreement by the holders of Pacific
Stock, by the Merger Sub and approval of the Stock Issuance by the
holders of Procept Common Stock.
o The Registration Statement of which this Joint Proxy
Statement/Prospectus is a part having become effective under the
Securities Act and not being subject to any stop order or related
proceedings by the SEC.
o No applicable law or regulation, judgment, injunction, order or
decree of a court of competent jurisdiction prohibiting or
enjoining the consummation of, or having a material adverse affect
on, the Merger.
o The shares of Procept Common Stock to be issued in the Merger
having been approved for quotation on the Nasdaq SmallCap Market.
o All other third party consents and approvals required to be
obtained by either Pacific or Procept having been obtained.
o The Boards of Directors of each of Procept and Pacific have
received opinions from Oscar Gruss & Son Incorporated and
Josephthal & Co. Inc., respectively, to the effect that the
Merger is fair from a financial point of view to each
respective company and its shareholders and neither opinion
has been withdrawn as of the closing date of the Merger.
Conditions to the Obligations of Procept and Merger Sub. The obligations of
Procept and Merger Sub to effect the Merger are further subject to the
satisfaction of the following conditions:
o The representations and warranties of Pacific contained in the
Merger Agreement being true in all material respects at and as of
the Effective Time as if made at and as of such time.
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<PAGE>
o The performance in all material respects by Pacific of its
obligations under the Merger Agreement at or prior to the
Effective Time.
o Each of the individuals and entities who are "affiliates" of
Pacific within the meaning of Rule 145 under the Securities Act
having delivered to Procept an agreement in a form prescribed by
Procept.
o The acquisition of BTI by Pacific as contemplated by an Agreement
and Plan of Merger dated June 4, 1996, as amended which was
consummated on February 4, 1999.
o Lindsay Rosenwald, President of Paramount Capital Asset
Management, Inc, The Aries Trust, and the Aries Domestic Fund,
L.P. (collectively, "Aries") as holders of promissory notes
payable by BTI have entered into agreements with Procept and
Pacific which provide for the conversion of those notes into
Procept Common Stock at a rate of $5.00 per share with contractual
rights set forth in Section 10 of the Merger Agreement and that
either Procept or Pacific pay $100,000 to Mr. Rosenwald and
$100,000 to Aries.
o The Dissenting Shares shall not exceed 5% of the outstanding
shares of Pacific Common Stock or issuable on the closing date.
o Certain other conditions as set forth in the Merger Agreement.
Conditions to the Obligations of Pacific. The obligation of Pacific to effect
the Merger is further subject to the satisfaction of the following conditions:
o The representations and warranties of Procept contained in the
Merger Agreement being true in all material respects at and as of
the Effective Time as if made at and as of such time.
o The performance in all material respects by Procept of its
obligations under the Merger Agreement at or prior to the
Effective Time.
o Certain other conditions set forth in the Merger Agreement.
Amendments; Waivers
Any provisions of the Merger Agreement may be amended or waived before the
Effective Time only if the amendment or waiver is in writing and signed, in the
case of an amendment, by Procept and Pacific and, in the case of a waiver, by
the party against whom the waiver is to be effective.
No Solicitation
Procept and Pacific have agreed in the Merger Agreement that, from the date of
execution of the Merger Agreement until the termination thereof, neither party
nor any of their authorized representatives will, directly or indirectly: (a)
solicit any proposal relating to the acquisition by another party of any capital
stock or substantially all of the assets of such company or (b) engage in
negotiations or discussions with another party regarding such acquisition or
encourage any efforts by another party in such an acquisition, or (c) sell,
transfer or dispose of all or any portion of the capital stock of such company
or substantially all of the assets of such company. Notwithstanding the
foregoing, each company may participate in such discussions or negotiations if
such discussions or negotiations had commenced prior to the date of the Merger
Agreement or were not solicited by or on behalf of such company and that the
Board of Directors of the involved company determines in good faith, based on
the advice of outside legal counsel, that continuing such action is necessary to
comply with its fiduciary duties under applicable law.
If (i) either party breaches its No Solicitation obligations as discussed above
or (ii) the Board of Directors of either party withdraws its recommendation to
the stockholders as discussed above and the Merger has not occurred by June 30,
1999, then such party has agreed to make a cash payment of $150,000 to the other
party.
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<PAGE>
Termination of the Merger Agreement
The Merger Agreement may be terminated at any time before the Closing Date,
whether before or after approval of the Merger by Pacific's stockholders:
o By mutual written consent of Procept and Pacific.
o By either Pacific or Procept:
-- if the Merger has not been consummated by June 30, 1999
(which date may be extended by mutual consent of the
parties); provided, however, that neither Procept or Pacific
may terminate if its breach is the reason that the Merger
has not been consummated;
-- if a court of competent jurisdiction or governmental body
has issued an order, decree or ruling or taken any other
action, in any case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger,
which order, decree or ruling is final and nonappealable;
-- if the Pacific's stockholders vote and do not approve the
Merger Agreement as required by Delaware law; or
-- if the shareholders of Procept vote and do not approve the
Stock Issuance.
o By Procept:
-- if the Pacific Board failed to recommend any required
approval of the Merger Agreement and the Merger in this
Joint Proxy Statement/Prospectus or has withheld or
withdrawn its recommendation in favor of any required
approval of the Merger; or
-- if any representation, warranty, covenant or agreement on
the part of Pacific set forth in the Merger Agreement was
not true and correct in all material respects when made; or
-- if Pacific has materially breached any covenant in the
Merger Agreement and such breach has not been cured by
Pacific within thirty business days following receipt by
Pacific of written notice of such breach from Procept or by
the closing date, whichever occurs first.
o By Pacific:
-- if the Procept Board has failed to recommend any required
approval of the Merger in this Joint Proxy
Statement/Prospectus or has withheld or withdrawn its
recommendation in favor of any required approval of the
Merger;
-- if any representation, warranty, covenant or agreement on
the part of Procept set forth in the Merger Agreement was
not true and correct in all material respects when made; or
-- if Procept has materially breached any covenant in the
Merger Agreement and such breach shall not have been cured
by Procept within thirty business days following receipt by
Procept of written notice of such breach from Pacific or by
the closing date, whichever occurs first.
If the Merger Agreement is validly terminated, no provision of the Merger
Agreement shall survive (except for the provisions relating to expenses,
termination fees, publicity, confidentiality and miscellaneous provisions of
general application) and such termination shall eliminate or reduce any party's
liability to another party for any breach of the Merger Agreement occurring
before such termination.
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<PAGE>
Termination Fee
If either party breaches its No Solicitation obligations mentioned above or if
either Board withdraws its recommendation to approve the Merger and the Merger
has not occurred prior to June 30, 1999, then the company so breaching or
withdrawing shall pay the other a termination fee in the amount of $150,000 on
the earlier to occur of the consummation of any such transaction with a third
party or June 30, 1999.
Payment of Expenses of the Merger
If the Merger is not consummated, each of Pacific and Procept shall bear its
respective expenses incurred in connection with the Merger Agreement. If the
Merger is consummated, the Surviving Company, as the successor to Pacific, shall
be liable for all unpaid expenses of Pacific.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma financial statements of Procept and the
related notes are presented to give effect to (i) the acquisition of Binary
Therapeutics, Inc. ("BTI") by Pacific through a merger of BTI with and into a
wholly-owned subsidiary of Pacific using shares of Pacific and the cancellation
of BTI's notes payable to Pacific and (ii) the subsequent acquisition of Pacific
by Procept through a merger of a wholly-owned subsidiary of Procept with and
into Pacific (as described in Note 1). Pro forma statements of operations have
been presented for Procept assuming that the mergers discussed above occurred as
of January 1, 1997, using the purchase accounting method. A pro forma balance
sheet has been presented for Procept assuming that the merger occurred as of
September 30, 1998.
The unaudited pro forma financial statements are based on the historical
consolidated financial statements for Procept, Pacific and BTI and the
assumptions and adjustments described in the accompanying notes. The unaudited
pro forma financial statements for the period ended September 30, 1998 include
the nine months then ended for Procept, Pacific and BTI. The unaudited pro forma
financial statements for the year ended December 31, 1997 include the twelve
months then ended for Procept and BTI and the twelve month year ended March 31,
1998 for Pacific. Accordingly, the results for the three months ended March 31,
1998 of Pacific have been included in both statements of operations.
The unaudited pro forma financial statements do not (i) purport to represent
what Procept's results of operations and financial condition actually would have
been if the events described above had occurred as of the dates indicated or
what such results and financial condition will be for any future periods or (ii)
give effect to certain non-recurring charges which resulted from these events.
Future non-recurring charges related to the mergers include approximately $8.1
million which will be taken as a charge in the first quarter of 1999. The
unaudited pro forma financial statements are based upon assumptions that Procept
believes are reasonable and should be read in conjunction with the Consolidated
Financial Statements and accompanying notes thereto included elsewhere in this
Joint Proxy Statement/Prospectus.
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<PAGE>
PROCEPT, INC.
PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Historical Historical
Pacific Binary Purchase Pro Pro
Pharmaceutical Therapeutics, Price Historical Forma Forma
Inc. Inc. Adjustments Total Procept, Inc. Adjustments Procept, Inc.
----------- -------- --------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,285,460 $ 1,715 $ 4,287,175 $ 3,568,890 $ (285,000)(G) $ 7,571,065
Marketable securities 0 2,003,254 2,003,254
Inventory 54,587 54,587 54,587
Investment in Aquila 0 455,313 455,313
Other current assets 98,269 98,269 15,406 113,675
----------- -------- --------- ----------- ----------- ---------- ------------
Total current assets 4,438,316 1,715 0 4,440,031 6,042,863 (285,000) 10,197,894
----------- -------- --------- ----------- ----------- ---------- ------------
Property and equipment, net 59,658 2,754 $ 1,334 (C) 63,746 235,645 (144,274)(E) 299,391
Other assets 144,274 49,885 (49,885)(D) 144,274 197,026 28,000 (E) 225,026
----------- -------- --------- ----------- ----------- ---------- ------------
Total assets $ 4,642,248 $ 54,354 $ (48,551) $ 4,648,051 $ 6,475,534 $ (401,274) $ 10,722,311
=========== ======== ========= =========== =========== ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 620,444 $ 102,045 $ 722,489 $ 301,643 $ 1,024,132
Accrued expenses 218,287 630 218,917 138,202 $ 1,500,000(F) 1,857,119
Current portion of capital
lease obligations 4,271 4,271 4,271
Accrued interest 457,443 $ (272,000)(G) 185,443 (185,443)(G) 0
Notes payable 3,499,117 (2,671,117)(G) 528,000 (285,000)(G) 0
(300,000)(G) (243,000)(G)
Other current liabilities 0 173,033 173,033
----------- -------- --------- ----------- ----------- ---------- ------------
Total current liabilities 843,002 4,059,235 (3,243,117) 1,659,120 612,878 786,557 3,058,555
----------- -------- --------- ----------- ----------- ---------- ------------
Deferred rent 0 207,624 207,624
Capital lease obligations 20,396 20,396 20,396
Minority interest 4,731,594 4,731,594 4,731,594
Shareholders' equity:
Preferred stock 922,088 922,088 (922,088)(I) 0
Common stock 244,516 16,855 (16,855)(I) 287,516 30,018 (287,516)(I) 62,596
43,000 (B) 31,721 (A)
857 (G)
Additional paid-in capital 48,298,469 1,192,340 (1,192,340)(I) 48,685,469 66,110,013 (48,685,469)(I) 71,238,226
387,000 (B) 3,735,192 (A)
427,586 (G)
965,435 (L)
Accumulated deficit (50,417,817) (5,211,018) 5,211,018 (I) (51,658,132) (60,631,556) 51,658,132 (I) (68,743,237)
(1,240,315)(B) (8,111,681)(A)
Unrealized gain on investments 0 158,414 158,414
Subscriptions receivable on sale
of common stock (3,058) 3,058 (I) 0 0
Treasury stock 0 (11,857) (11,857)
----------- -------- --------- ----------- ----------- ---------- ------------
Total shareholders' equity (952,744) (4,004,881) 3,194,566 (1,763,059) 5,655,032 (1,187,831) 2,704,142
----------- -------- --------- ----------- ----------- ---------- ------------
Total liabilities and
shareholders' equity $ 4,642,248 $ 54,354 $ (48,551) $ 4,648,051 $ 6,475,534 $ (401,274) $ 10,722,311
=========== ======== ========= =========== =========== ========== ============
</TABLE>
See notes to unaudited pro forma financial statements.
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<PAGE>
PROCEPT, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Historical Historical
Pacific Binary Purchase Pro Pro
Pharmaceutical Therapeutics, Price Historical Forma Forma
Inc. Inc. Adjustments Total Procept, Inc. Adjustments Procept, Inc.
----------- -------- --------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 4,016 $ 4,016 $ 4,016
License fees and royalties 5,073 5,073 5,073
Research and development revenue
under collaborative agreements
from related party 0 $ 109,375 109,375
Revenue from grant 0 0
Interest and other 148,065 148,065 155,530 303,595
----------- ---------- --------- ----------- ----------- ----------- -----------
Total revenues 157,154 0 0 157,154 264,905 0 422,059
----------- ---------- --------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of product sales 45,246 45,246 45,246
Marketing 82,031 82,031 82,031
Research and development 1,743,595 $ 474,234 $ (498,710)(K) 1,719,119 1,707,256 3,426,375
General and administrative 1,191,035 24,476 1,215,511 1,411,786 2,627,297
Restructuring charges 0 225,000 225,000
Interest and other 41,075 431,613 (54,000)(G) 82,688 (203,356) (120,668)
(336,000)(G)
----------- ---------- --------- ----------- ----------- ----------- -----------
Total costs and expenses 3,102,982 930,323 (888,710) 3,144,595 3,140,686 0 6,285,281
----------- ---------- --------- ----------- ----------- ----------- -----------
Loss applicable to minority interest 85,475 85,475 85,475
Net loss (2,860,353) (930,323) 888,710 (2,901,966) (2,875,781) 0 (5,777,747)
Less: dividends on preferred stock (6,161,110) (6,161,110) $ 3,240,785 (H) (2,920,325)
=========== ========== ========= =========== =========== =========== ===========
Net loss available to common
shareholders $(9,021,463) $ (930,323) $ 888,710 $(9,063,076) $(2,875,781) $ 3,240,785 $(8,698,072)
=========== ========== ========= =========== =========== =========== ===========
Basic and diluted net loss per
common share $ (0.80) $ (0.68) $ (1.35) $ (1.35)
=========== =========== =========== ===========
Weighted average number of common (13,407,469)(J)
shares - basic and diluted 11,257,469 2,150,000 13,407,469 2,126,651 4,297,170 (J) 6,423,821
=========== ========= =========== =========== =========== ===========
</TABLE>
See notes to unaudited pro forma financial statements.
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<PAGE>
PROCEPT, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Historical
Pacific Binary Purchase Pro Pro
Pharmaceuticals Therapeutics, Price Historical Forma Forma
Inc. Inc. Adjustments Total Procept, Inc. Adjustments Procept, Inc.
----------- -------- --------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 69,510 $ 69,510 $ 69,510
License fees and royalties 5,405 5,405 5,405
Research and development revenue
under collaborative agreements
from related party 0 $ 519,552 519,552
Revenue from grant 0 113,854 113,854
Interest and other 273,545 273,545 147,766 421,311
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenues 348,460 0 0 348,460 781,172 0 1,129,632
------------ ----------- ----------- ------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales 140,460 140,460 140,460
Marketing 218,603 218,603 218,603
Research and development 2,196,433 $ 1,199,603 $(1,279,501)(K) 2,116,535 6,618,836 8,735,371
General and administrative 2,086,249 79,898 2,166,147 2,714,678 4,880,825
Restructuring charges 0 459,969 459,969
Interest and other 78,178 792,007 (72,000)(G) 138,185 40,264 178,449
(660,000)(G)
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total costs and expenses 4,719,923 2,071,508 (2,011,501) 4,779,930 9,833,747 0 14,613,677
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net loss (4,371,463) (2,071,508) 2,011,501 (4,431,470) (9,052,575) 0 (13,484,045)
Less: dividends on preferred
stock (7,226,887) (7,226,887) (4,217,388) $7,226,887(H) (4,217,388)
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net loss available to
common shareholders $(11,598,350) $(2,071,508) $ 2,011,501 $(11,658,357) $(13,269,963) $7,226,887(H)$(17,701,433)
============ =========== =========== ============ ============ ============ ============
Basic and diluted net loss
per common share $ (1.25) $ (1.02) $ (63.68) $ (3.93)
============ ============ ============ =============
Weighted average number of common (11,423,717)(J)
shares - basic and diluted 9,273,717 2,150,000 11,423,717 208,371 4,297,170 (J) 4,505,541
============ =========== ============ ============ ============ ============
</TABLE>
See notes to unaudited pro forma financial statements.
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<PAGE>
PROCEPT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) THE MERGER
Procept entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") dated December 10, 1998 to acquire Pacific, a Delaware corporation
engaged in the development of cancer therapies, based in San Diego, California,
through a merger of a wholly-owned subsidiary of Procept with and into Pacific.
The business of Pacific will be allocated to Procept upon consummation of the
merger. Pursuant to the Merger Agreement, each share of Pacific common stock
(including preferred stock on an as converted basis into common stock) will
convert into approximately 0.11 shares of Procept common stock or a total of
2,755,000 Procept shares and an additional 417,064 Procept shares will be issued
to holders of Pacific's preferred stock accompanied by certain contractual
rights for a total of 3,172,137 Procept shares (of which 1,568,185 shares of
Procept common stock to be issued in the merger to the holders of Pacific's
preferred stock shall be accompanied by certain contractual rights identical to
contractual rights held by purchasers in Procept's 1998 Private Placement). In
addition, Procept has agreed to assume an approximately $7.3 million obligation
(payable in cash or common stock of Procept) of Pacific's subsidiary, BG
Development Corp., and Procept has agreed to exchange all Pacific's outstanding
warrant, unit purchase option and stock option obligations into approximately
1,806,000 like instruments of Procept.
The pro forma balance sheet as of September 30, 1998 gives effect to the Merger
as of September 30, 1998, using the purchase accounting method and assumes that
the Procept Stock issued has a fair market value of $1.19 per share or
approximately $3.8 million total value and the allocation of the purchase price
was determined through a combination of an independent valuation of the business
of Pacific and an internal review of the market potential for the Pacific
programs. The allocation of the purchase price is discussed further in Note 2.
Prior to the merger of Pacific with Procept, Pacific acquired BTI using shares
of Pacific and the cancellation of BTI's note payable to Pacific. The pro forma
balance sheet as of September 30, 1998 gives effect to this merger as of
September 30, 1998, using the purchase accounting method and assumes that the
Pacific Stock issued will be valued at approximately $.4 million which was
determined through a combination of an independent valuation of the business of
BTI and an internal review of the market potential for the BTI programs. The
allocation of the purchase price is discussed in Note 2.
(2) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION
(A) Purchase Price Allocation - Procept/Pacific
Upon consummation of the Merger, Procept will issue 3,172,137 shares of its $.01
par value common stock to acquire all of the outstanding common stock of Pacific
and therefore has credited common stock for $31,721 and additional paid-in
capital for $3,735,192. The aggregate purchase price of $3.8 million, plus
estimated acquisition costs of $1.5 million, assumed liabilities of $6.4 million
and $965,435 for the value of the stock options and warrants being issued to the
Pacific holders will be allocated to the acquired tangible and intangible assets
based on their estimated respective fair values:
<TABLE>
<S> <C>
Cash $ 4,287,175
Inventory 54,587
Other current assets 98,269
Property and equipment, net 63,746
Workforce 28,000
Charge for incomplete technology 8,111,681
-----------
$12,643,458
===========
</TABLE>
The charge for in-process technology of $8.1 million represents the value
assigned to Pacific's programs which are still in the development stage and for
which there is no alternative future use. The value assigned to these programs
has been determined by selecting the fair value of these programs, as provided
by an independent valuation of the Pacific business, based on comparable
technologies. The pro forma adjustments to the pro forma statements of
operations for the year ended December 31, 1997 do not give effect to the charge
for in-process technology in the amount of $8.1 million which will be charged to
operations upon consummation of the Merger, presently anticipated to occur in
the first quarter of 1999.
Pacific has three key cancer programs that are in various stages of development,
all of which require significant expense and several years of development before
they could become marketable pharmaceutical products.
Benzylguanine (BG) for the treatment of brain and other cancers has completed
one Phase I safety clinical study at the Duke University Medical Center. Two
other Phase I clinical studies at the University of Chicago and the Case Western
University are nearing completion. This compound still requires Phase II and
Phase III efficacy clinical studies which will require three to five years and
$7 million to $10 million in development costs, the range dependent on the
number of trials required by the FDA for approval. Procept/Pacific will seek
corporate partnerships and government funding to help defray these costs.
Boronated Protoporphyrin Compound (BOPP) for the treatment of brain and other
cancers is currently undergoing Phase I clinical trials at the Royal Melbourne
Hospital under the direction of Dr. Andrew Kaye for the treatment of brain
cancer. This compound still requires Phase II and Phase III efficacy clinical
studies which will require three to five years and $7 million to $10 million in
development costs, the range dependent on the number of trials required by the
FDA for approval. Procept/Pacific will seek corporate partnerships and
government funding to help defray these costs.
Cancer Immunotherapy for metastatic breast and other cancers is in preparation
for human clinical trials, having completed most pre-clinical work. This
compound still requires Phase II and Phase III efficacy clinical studies which
will require three to five years and $7 million to $10 million in development
costs, the range dependent on the number of trials required by the FDA for
approval. Procept/Pacific will seek corporate partnerships and government
funding to help defray these costs.
Key risks for all these compounds include uncertainty of clinical trial safety
and efficacy results, dependence on others for marketing and manufacturing,
obsolescence by competitive products and the potential need for additional
funds.
79
<PAGE>
(B) Purchase Price Allocation - Pacific/BTI
Upon consummation of the Merger, Pacific will issue approximately 2,150,000
shares of its $.02 par value common stock to acquire all of the outstanding
common stock of BTI, plus the assumption of $800,000 of debt and accrued
interest and therefore has credited common stock for $43,000 and additional
paid-in capital for $387,000. The aggregate purchase price of $.4 million plus
assumed liabilities of $.8 million (net of loan and loan interest adjustments of
$3.2 million) will be allocated to the acquired tangible and intangible assets
based on their estimated respective fair values:
<TABLE>
<S> <C>
Cash $ 1,715
Property and equipment, net 4,088
Charge for incomplete technology 1,240,315
----------
$1,246,118
==========
</TABLE>
The charge for in-process technology of $1.2 million represents the value
assigned to BTI's programs which are still in the development stage and for
which there is no alternative future use. The value assigned to these programs
has been determined by selecting the fair value of these programs, as provided
by an independent valuation of the BTI business, based on comparable
technologies. The pro forma adjustments to the pro forma statements of
operations for the year ended December 31, 1997 do not give effect to the charge
for in-process technology in the amount of $1.2 million which will be charged to
operations upon consummation of the Merger, presently anticipated to occur in
the first quarter of 1999.
BTI has one cancer program that will require significant expense and several
years of development before it could become a marketable pharmaceutical product.
Boronated Protoporphyrin Compound (BOPP) for the treatment of brain and other
cancers is currently undergoing Phase I clinical trials at the Royal Melbourne
Hospital under the direction of Dr. Andrew Kaye for the treatment of brain
cancer. This compound still requires Phase II and Phase III efficacy clinical
studies which will require three to five years and $7 million to $10 million in
development costs, the range dependent on the number of trials required by the
FDA for approval. Pacific/BTI will seek corporate partnerships and government
funding to help defray these costs.
Key risks for this compound includes uncertainty of clinical trial safety and
efficacy results, dependence on others for marketing and manufacturing,
obsolescence by competitive products and the potential need for additional
funds.
(C) The adjustment of $1,334 to increase BTI's historical property and equipment
is made to reflect its fair market value based upon an independent valuation.
This amount has not been reflected in the historical balances as of September
30, 1998.
(D) The adjustment of $49,885 to decrease BTI's historical patent costs is made
to reflect its fair market value based upon an independent valuation whereby the
patent value is included as part of the in-process technology. This amount has
not been reflected in the historical balances as of September 30, 1998.
(E) The adjustment of $144,274 to decrease Pacific's historical patent costs is
made to reflect its fair market value based upon an independent valuation
whereby the patent value is included as part of the in-process technology. The
adjustment of $28,000 is to reflect the fair value of the workforce based upon
an independent valuation. These amounts have not been reflected in the
historical balances as of September 30, 1998.
(F) The adjustment in the amount of $1,500,000 to accrued expenses reflects the
accrual of the estimated acquisition costs which have not been reflected in the
historical balances as of September 30, 1998.
(G) As part of the acquisition of BTI by Pacific, the loan amount of $2,671,117
due to Pacific is converted into equity. BTI's convertible notes payable of
$300,000 and accrued interest of $272,000 at September 30, 1998 are converted to
BTI common stock. Interest on the $300,000 loans of $390,000 and $732,000 has
been eliminated in the Pro Forma Combined Statements of Operations for the nine
months ended September 30, 1998 and year ended December 31, 1997, respectively,
as if these loans were converted to Pacific common stock on January 1, 1997.
As part of the Merger Agreement, Procept is required to pay off, in cash, loans
originally entered into by BTI in the amounts of $100,000, $100,000 and $85,000
or a total of $285,000. Also, additional loans for $100,000 and $143,000 plus
accrued interest of $185,443 is to be settled by issuing approximately 85,700
shares of Procept common stock with Article VI rights at $5.00 per share.
Therefore, $857 was credited to common stock and $427,586 was credited to
additional paid in capital.
(H) All of Pacific's preferred stock dividends related to its 1997 private
placement are assumed to have been triggered by the mergers and therefore
recorded prior to the earliest period presented and eliminated from the pro
forma financials.
(I) To eliminate BTI's and Pacific's historical stockholders' equity amounts.
<TABLE>
<CAPTION>
BTI Pacific
--- -------
<S> <C> <C>
Preferred stock $ 922,088
Common stock $ 16,855 287,516
Additional paid-in capital 1,192,340 48,685,469
Accumulated deficit (5,211,018) (51,658,132)
Subscriptions receivable on
sale of common stock (3,058)
---------- -----------
$(4,004,881) $(1,763,059)
========== ===========
</TABLE>
(J) To eliminate Pacific's weighted average shares outstanding, issue 3,172,137
shares of common stock of the Registrant as proceeds of the merger and issue
an additional 1,004,632 shares of common stock of the Registrant as a result
of the merger to existing shareholders of the Registrant pursuant to
contractual anti-dilution rights as well as the issuance of approximately
120,401 shares issued to satisfy certain liabilities as described in Note G.
(K) Pacific is funding BTI and records that funding as R&D expense. BTI utilizes
these funds for R&D and G&A expense. Accordingly, the Pacific expense is
being eliminated in these pro forma financials.
(L) The adjustment of $965,435 to increase Procept's additional paid-in capital
is made to reflect the fair value of stock options and warrants issued by
Procept to acquire all the Pacific stock options and warrants.
80
<PAGE>
PRINCIPAL STOCKHOLDERS
Procept Share Ownership
The following table and footnotes set forth certain information regarding the
beneficial ownership of Procept's Common Stock as of February 3, 1999 and the
percentage which such ownership bears to the total number of outstanding shares
as of that date by (i) persons known by Procept to be beneficial owners of more
than 5% of the Procept Common Stock, (ii) the executive officers of Procept,
(iii) each director of Procept, and (iv) all executive officers and directors of
Procept as a group.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Before the Beneficially Owned
Merger (1) After the Merger
----------------------------- -------------------------
Beneficial Owner Shares Percent Shares Percent
---------------- -------------- ------------ --------- --------
<S> <C> <C> <C> <C>
The Aries Trust (2)................................. 3,360,493 67.1% 6,215,848 57.3%
Aries Domestic Fund, L.P.
Aries Master Fund
Paramount Capital Asset Management, Inc.
Dr. Lindsay A. Rosenwald
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, New York 10019
John F. Dee (3)..................................... 103,850 3.3% 141,449 1.9%
Michael S. Weiss (4)................................ 44,122 1.4% 147,657 2.0%
Zola P. Horovitz, Ph.D (5).......................... 21,755 * 24,926 *
Max Link, Ph.D (6).................................. 17,898 * 21,069 *
Mark C. Rogers, M.D (7)............................. 8,893 * 12,064 *
Elliott H. Vernon (8)............................... 8,893 * 12,064 *
All executive officers and directors as a group
(6 persons) (9) .................................... 205,411 6.4% 359,229 4.74%
</TABLE>
- -----------------------------
* Indicates less than 1%
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares of Procept Common
Stock shown as beneficially owned by such stockholder, subject to community
property laws where applicable. Shares of Procept Common Stock issuable
upon the exercise of options or warrants currently exercisable or
exercisable within 60 days of February 3, 1999 are treated as outstanding
solely for the purpose of calculating the amount and percentage of shares
beneficially owned by the holder of such options or warrants. For the
purpose of determining the number of shares beneficially owned after
the Merger, in addition to 3,001,832 shares outstanding on February 3,
1999, (i) 2,755,000 shares to be issued in the Merger (ii) 1,453,796 shares
to be issued in connection with anti dilution rights and (iii) 88,374
shares to be issued in connection with the conversion of certain BTI
loans, are deemed outstanding.
(2) Pre-merger ownership consists of the following shares and shares that may
be acquired within 60 days of February 3, 1999 upon the exercise of
warrants and options: 882,092 shares, warrants to purchase 886,184 shares
and options to purchase units consisting of (i) 33,500 shares and (ii)
Class C Warrant to purchase 33,500 shares held by The Aries Trust (the
"Trust"); 459,588 shares, warrants to purchase 461,341 shares and options
to purchase units consisting of (i) 16,500 shares and (ii) Class C Warrants
to purchase 16,500 shares held by the Aries Domestic Fund, L.P. (the
"Partnership" and together with the Trust and the Aries Master Fund, the
"Aries Funds"). The Aries Funds acquired a controlling interest in the
Company in June 1997. Paramount Capital Asset Management, Inc. ("PCAM"),
Dr. Lindsay A. Rosenwald, The Trust and the Partnership (collectively with
PCAM, Dr. Rosenwald and the Aries Funds, the "Aries Purchasers") filed a
Statement on Schedule 13D with the Securities and Exchange Commission
reflecting the Aries Purchasers' acquisition of certain securities on June
30, 1997 (the "Original Schedule 13D"). The Aries Purchasers filed an
amendment to the Original Schedule 13D on September 3, 1997 to report the
conversion of their holdings of Procept Common Stock to Series A
Convertible Preferred Stock. On April 21, 1998, the Aries Purchasers filed
a second amendment to the Original 13D to report: (i) the exchange of their
holdings of Procept Series A Convertible Preferred Stock and warrants to
purchase Common Stock for an
81
<PAGE>
aggregate of 841,680 shares of Common Stock and warrants to purchase an
additional 841,680 shares of Common Stock and (ii) the acquisition of (A)
335,000 shares of Common Stock and warrants to purchase 335,000 shares of
Common Stock by the Trust and (B) 165,000 shares of Common Stock and
warrants to purchase 165,000 shares of Common Stock by the Partnership, in
each case on April 9, 1998. The Aries Purchasers and Mr. Weiss filed a
third amendment to the Original Schedule 13D to report: (i) the receipt by
the Trust of Placement Options to purchase units consisting of an aggregate
of 33,500 shares of Common Stock and Class C Warrants to purchase 33,500
shares of Common Stock; (ii) the receipt by Partnership of Placement
Options to purchase units consisting of an aggregate of 16,500 shares of
Common Stock and Class C Warrants to purchase 16,500 shares of Common
Stock; and (iii) the receipt by Dr. Rosenwald of (A) Placement Options to
purchase units consisting of an aggregate of approximately 59,337 shares of
Common Stock and Class C Warrants to purchase approximately 59,337 shares
of Common Stock and (B) Advisory Options to purchase units consisting of an
aggregate of 219,507 shares of Common Stock and Class C Warrants to
purchase 219,507 shares of Common Stock. According to the Original Schedule
13D, Dr. Rosenwald and PCAM may be deemed to have shared voting and
investment power over the shares of Common Stock that may be deemed to be
beneficially owned by the Aries Purchasers. The Aries Funds purchased an
additional 13,600 shares of Common Stock in December of 1998. As
stockholders of BTI, Dr. Rosenwald and the Aries Funds received 323,796 and
611,282 shares of Pacific Common Stock, respectively, in connection with
the acquisition by Pacific of BTI, which will convert into 35,618 and
67,242 shares of Procept Common Stock, respectively, in the merger. Upon
effectiveness of the merger, the Aries Purchasers will also receive
approximately 664,810 shares of Common Stock pursuant to anti-dilution
rights and will receive approximately 88,374 shares of Common Stock in
connection with the conversion of BTI loans. Pursuant to the Securities
Purchase Agreement dated June 30, 1997 with the Company, the Aries
Purchasers have the right to appoint a majority of the members of the Board
of Directors of the Company.
(3) Pre-merger ownership includes 100 shares of Common Stock and optioins
currently exercisable to purchase 103,750 shares of Common Stock. Upon
effectiveness of the merger, Mr. Dee will receive options to purchase
approximately 37,599 shares of Common Stock in connection with anti-
dilution rights.
(4) Pre-merger ownership includes options to purchase 8,576 shares of Common
Stock and options to purchase units consisting of an aggregate of (i)
13,398 shares of Common Stock-and (ii) Class c Warrants to purchase 13,398
shares of Common Stock; does not include (i) options held by Hawkins Group,
LLC to purchase units consisting of an aggregate of (A) 64,175 shares of
Common Stock and (B) Class C Warrants to purchase 64,175 shares of Common
Stock or (ii) shares held of record or issuable to the Aries Purchasers.
Mr. Weiss is a managing member of the Hawkins Group, LLC and a Senior
Managing Director of Paramount Capital, Inc., an affiliate of PCAM, which
is the investment manager of the Trust and the general partner of the
Partnership. Mr. Weiss disclaims beneficial ownership of the shares held by
the Hawkins Group, LLC and the Aries Purchasers. Upon the effectiveness of
the merger, Mr. Weiss will receive approximately 18,055 shares of Common
Stock, options to purchase 3,171 shares of Common Stock, options to
purchase units consisting of an aggregate of (i) 4,855 shares of Common
Stock and (ii) 4,855 warrants to purchase Common Stock pursuant to certain
anti-dilution rights. As a stockholder of BTI, Mr. Weiss has received
98,801 shares of Pacific Common Stock in connection with the acquisition by
Pacific of BTI, which will convert into 10,879 shares of Procept Common
Stock in the merger.
(5) Pre-merger ownership consists solely of shares issuable to Dr. Horovitz
upon the exercise of options currently exercisable or exercisable within 60
days of February 3, 1999. Upon effectiveness of the merger, Dr. Horovitz
will receive options to purchase approximately 3,171 shares of Common Stock
in connection with anti-dilution rights.
(6) Pre-merger ownership includes 17,683 shares issuable to Dr. Link upon the
exercise of options currently exercisable or exercisable within 60 days of
February 3, 1999.
(7) Pre-merger ownership consists solely of shares issuable to Dr. Rogers upon
the exercise of options currently exercisable or exercisable within 60 days
of February 3, 1999. Upon effectiveness of the merger, Dr. Rogers will
receive options to purchase approximately 3,171 shares of Common Stock in
connection with anti-dilution rights.
(8) Pre-merger ownership consists solely of shares issuable to Mr. Vernon upon
the exercise of options currently exercisable or exercisable within 60 days
of February 3, 1999. Upon effectiveness of the merger, Mr. Vernon will
receive options to purchase approximately 3,171 shares of Common Stock in
connection with anti-dilution rights.
(9) See notes (3) through (8).
82
<PAGE>
Pacific Share Ownership
The following table and footnotes sets forth certain information regarding the
beneficial ownership of Pacific's Common Stock and Preferred Stock as of
February 5, 1999 and the percentage which such ownership bears to the total
number of outstanding shares as of that date by (i) persons known to Pacific to
be beneficial owners of more than 5% of the Pacific Common Stock and Pacific
Preferred Stock; (ii) executive officers, and (iii) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Common Stock Preferred Stock % of Total
Name Shares (1)(2) Shares (1)(2) Voting Power
---- -------------------------- ------------------------ ------------
<S> <C> <C> <C> <C> <C>
The Aries Trust.................... 3,793,861(3) 20.55% 24,684 40.55% 43.55%
Aries Domestic Fund, L.P.
Paramount Capital Asset Management, Inc.
Dr. Lindsay A. Rosenwald
c/o Paramount Capital Asset
Management, Inc.
787 Seventh Avenue
New York, NY 10019
Lou Weisbach....................... 955,100 6.11% -- -- 3.79%
5980 West Touhy Ave.
Niles, IL 60714
Dr. H. Laurence Shaw............... 1,132,000 7.72% -- -- 2.94%
Anil K. Singhal.................... 237,000 1.62% -- -- *
Jack H. Halperin................... 83,000 * -- -- *
Elliott H. Vernon.................. 77,000 * -- -- *
Michael S. Weiss (4)............... 142,817 * 1,557 4.12% 2.36%
Robert A. Vukovich................. 66,800 * -- -- *
All executive officers and directors
as a group (7 persons).......... 1,738,617 11.85% 1,557 4.06% 8.00%
</TABLE>
- -----------------------------
* Less than 1%
(1) The inclusion of any shares deemed beneficially owned does not constitute
an admission by the person named that he is the beneficial owner of those
shares. Beneficial ownership also includes shares of Common Stock which may
be acquired within 60 days of February 5, 1999 through the exercise of
warrants or options as follows: Dr. Rosenwald, 2,458,783 shares; Aries
Domestic Fund, L.P., 781,150 shares; The Aries Trust, 1,245,250 shares; Dr.
Shaw, 1,057,000; Dr. Singhal, 225,000; Mr. Halperin, 83,000 shares; Mr.
Vernon, 77,000 shares; Mr. Weiss, 123,174 shares; and all Directors and
Executive Officers as a group 1,625,174 shares. Beneficial ownership also
includes shares of Preferred Stock which may be acquired within 60 days of
February 5, 1999 through the exercise of warrants as follows: Dr.
Rosenwald, 12,045 shares; Aries Domestic Fund, L.P., 578 shares; The Aries
Trust, 1,121 shares; and Mr. Weiss, 1,557 shares. Although the Preferred
Stock is convertible into Common Stock, it is not reflected on an
as-converted basis in the Common Stock Column because, as a voting
security, it is reflected in its own column.
(2) To the best of the Company's knowledge, unless otherwise indicated, the
beneficial owners names in column one have sole voting and investment power
with respect to the shares held.
(3) Consist of the following shares and shares that may be acquired within 60
days upon the exercise of warrants: (i) 1,751,515 shares of Common Stock
and 9,461 shares of Preferred Stock held by The Aries Trust (the "Trust");
(ii) 981,150 shares of Common Stock and 4,877 shares of Preferred Stock
held by Aries Domestic
83
<PAGE>
Fund, L.P. (the "Fund"); and (iii) 756,840 shares of Common Stock and
10,346 shares of Preferred Stock held by Dr. Rosenwald. Paramount Capital
Asset Management, Inc. is the general partner of the Fund, and is the
investment manager of the Trust, and therefore may be deemed to be the
beneficial owner of shares beneficially owned by each. Dr. Lindsey
Rosenwald is the President and sole shareholder of Paramount Capital Asset
Management, Inc. and may therefore deemed to be the beneficial owner of
shares beneficially owned by Paramount, and each of the Fund and the Trust,
although he disclaims such beneficial ownership except to the extent of his
primary interests.
(4) Includes warrants to purchase 46,174 shares of Common Stock and options to
purchase 77,000 shares of Common Stock and 1,557 shares of Preferred Stock.
Mr. Weiss disclaims beneficial ownership of all shares owned by other
employees of principals of Paramount or Paramount Capital.
84
<PAGE>
DESCRIPTION OF PROCEPT CAPITAL STOCK
General
The description of the capital stock below is qualified in its entirety by
reference to the Procept Restated Certificate of Incorporation, as amended (the
"Procept Charter") and the Procept By-laws, copies of which are on file with the
SEC.
Authorized and Outstanding Capital Stock
Procept is authorized to issue up to 30,000,000 shares of Procept Common Stock
with par value of $0.01 per share and 1,000,000 shares of Procept Preferred
Stock with a par value of $0.01 per share. On December 31, 1998, there were
3,001,832 shares of Procept Common Stock issued and outstanding. No shares of
Procept Preferred Stock are issued or outstanding. After giving effect to the
merger, approximately 7,299,002 shares of Procept will be outstanding. In
addition, after giving effect to the merger and including shares issuable in
connection with certain anti-dilution rights, warrants and options exercisable
for an aggregate of 7,543,154 shares of Procept Common Stock will be
outstanding.
Common Stock
Shares of Procept Common Stock which, by the provisions of the Procept Charter,
are entitled to vote upon any question shall be entitled to one vote per share
in person or by proxy and do not have cumulative voting rights. The Procept
shareholders are entitled to receive dividends only when and if declared by the
Procept Board out of any funds legally available of Procept for the payment of
such dividends. The Procept shareholders will have no preemptive rights to
purchase shares of capital stock of Procept. Shares of Procept Common Stock will
not be subject to any redemption provisions and will not be convertible into any
other securities or property. In the event of a liquidation, dissolution or
winding up of the affairs of Procept, the holders of Procept Common Stock are
entitled to share ratably in all assets of Procept which are legally available
for distribution, after payment of all debts and other liabilities and subject
to the prior rights of any holders of Procept Preferred Stock then outstanding.
All issued and outstanding shares of Procept Common Stock are fully-paid and
non-assessable and the shares of Procept Common Stock to be issued in connection
with the Merger, when authorized, approved, issued and delivered, subject to the
terms of the Merger Agreement, will be fully-paid and non-assessable. The
rights, preferences and privileges of holders of Procept Common Stock are
subject to the rights of the holders of shares of any series of Preferred Stock
which Procept may issue in the future.
Preferred Stock
Preferred Stock may be issued from time to time in one or more series and the
Procept Board, without further approval of the stockholders, is authorized to
fix the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, sinking funds and any other rights,
preferences, privileges and restrictions applicable to each such series of
Preferred Stock. The purpose of authorizing the Procept Board to determine such
rights and preferences is to eliminate delays associated with a stockholder vote
on specific issuances. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
holders of Procept Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of Procept.
Delaware Anti-Takeover Statute
Delaware has a law regulating corporate takeovers (the "Anti-Takeover Law"). In
certain circumstances, the Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq SmallCap
Market, from engaging in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with an "interested
stockholder" (a stockholder who owns 15% or more of the corporation's
outstanding voting stock) for three years following the date on which such
stockholder became an "interested stockholder" subject to certain exceptions,
unless the transaction is approved by the board of directors and the holders of
at least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). The statutory ban does not apply if,
upon consummation of the transaction in which any person becomes an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting
85
<PAGE>
stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain employee stock plans). A Delaware
corporation subject to the Anti-Takeover Law may "opt out" of the Anti-Takeover
Law with an express provision either in its Certificate of Incorporation or
By-laws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares; such an amendment is effective following
expiration of twelve months from adoption. Procept is a Delaware corporation
that is subject to the Anti-Takeover Law and has not "opted out" of its
provisions.
The foregoing provisions of Delaware law could have the effect of discouraging
others from attempting a hostile takeover of the Company and, as a consequence,
they may also inhibit temporary fluctuations in the market price of the Common
Stock that might result from actual or rumored hostile takeover attempts. Such
provisions may also have the effect of preventing changes in the management of
the Company. It is possible that such provisions could make it more difficult to
accomplish transactions which stockholders may otherwise deem to be in their
best interests.
The Procept Charter provides that Procept shall indemnify each of its directors
and officers against all liabilities and expenses reasonably incurred by such
director or officer in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, in which such director or
officer may be involved or with which such director or officer may be
threatened, while in office or thereafter. The rights accruing to any director
or officer under the foregoing provisions do not exclude any other right to
which such director or officer may be lawfully entitled and shall inure to the
benefit of such person's estate. No shareholder will be personally liable to any
person with respect to any claim for indemnity or reimbursement or otherwise.
The Procept Charter further provides that, notwithstanding any provision of law
or any other provision of the Procept Charter, a director shall not be liable to
Procept or any Procept shareholder for monetary damages for breach of such
director's fiduciary duties as a director, except with respect to any matter as
to which such liability is imposed by applicable law and he or she shall have
been adjudicated (i) to have breached his or her duty of loyalty to Procept or
its shareholders, (ii) to have acted not, or omitted to act, in good faith,
(iii) to have knowingly violated the law, (iv) to have intentionally engaged in
misconduct, (v) to have derived any improper personal benefit from a transaction
or (vi) pursuant to Section 174 of the DGCL.
Transfer Agent and Registrar
The transfer agent and registrar for the Procept Common Stock is American Stock
Transfer & Trust Company.
COMPARATIVE RIGHTS OF HOLDERS OF PACIFIC
AND PROCEPT COMMON STOCK
The following is a summary of the material differences between the rights of
Pacific stockholders and Procept stockholders. Because both Pacific and Procept
are organized under the laws of the State of Delaware, such differences arise
from differences between various provisions of Pacific's Certificate of
Incorporation, as amended ("Pacific Charter") and the Pacific By-laws and the
Procept Charter and the Procept By-laws. This summary does not purport to be
complete and is qualified in its entirety by reference to the relevant
provisions of Delaware law and to the organizational documents of both Pacific
and Procept. Upon consummation of the Merger, Pacific stockholders will become
shareholders of Procept and their rights as shareholders of Procept will be
governed by the Procept Charter, the Procept By-laws and the Delaware General
Corporation Law (the "DGCL").
Authorized Capital Stock
Pacific. The authorized capital stock of Pacific consists of 100,000,000 shares
of Common Stock, $.02 par value ("Pacific Common Stock"), and 2,000,000 shares
of convertible preferred stock, $25.00 par value. With respect to Pacific's
preferred stock, Pacific's Board of Directors is authorized, without stockholder
approval, to designate series of each such class and to determine the number of
shares included in such series and the designation, relative powers, preferences
and rights, and the qualifications, limitations or restrictions of such series.
As of the date hereof, there have been designated: (i) an aggregate of 100,000
shares of Pacific Series R Junior Participating Cumulative Preferred Stock,
$25.00 par value (of which no shares were issued and outstanding as of the date
hereof); (ii) an aggregate of 33,000 shares of Pacific Convertible Preferred
Stock, Series B, $25.00 par value (of which no shares
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were issued and outstanding as of the date hereof); and (iii) an aggregate of
78,125 shares of Series A Convertible Preferred Stock, $25.00 par value
("Pacific Series A Preferred Stock") (of which 36,196 shares were issued and
outstanding as of February 5, 1999). On February 5, 1999, there were 14,671,924
shares of Pacific Common Stock issued and outstanding.
Procept. Procept is authorized to issue up to 30,000,000 shares of Common Stock,
$.01 par value ("Procept Common Stock") and 1,000,000 shares of preferred stock,
$.01 par value. With respect to Procept's preferred stock, the Procept Board of
Directors is authorized, without stockholder approval, to designate series of
preferred stock and to determine the number of shares included in such series
and the designation relative powers, preferences and rights and the
qualifications, limitations or restrictions of such series. As of December 31,
1997, there had been designated 30,061 shares of the Series A Preferred Stock of
Procept, $.01 par value ("Procept Series A Preferred Stock"), of which 30,060
were issued and outstanding. These 30,060 shares of Procept Series A Preferred
Stock were converted into Procept Common Stock. As of December 31, 1998, one
share of Procept Series A Preferred Stock is designated as such, and it is not
issued nor outstanding. On December 31, 1998, there were 3,001,832 shares of
Procept Common Stock issued and outstanding.
Boards of Directors
Pacific. The Pacific Board of Directors currently consists of five members, with
the number of directors constituting the Pacific Board to be increased or
decreased from time to time by resolution adopted by vote of a majority of the
then authorized number of directors of Pacific. Directors shall be elected
annually by the stockholders. Each director elected shall hold office until his
or her successor shall have been duly elected and shall have qualified or until
his or her earlier death, resignation or removal.
Procept. The Procept Board of Directors currently consists of five members, with
the number of directors constituting the Procept Board to be fixed, from time to
time by resolution of the Procept Board of Directors, but in no event shall be
less than one. The number of the Board of Directors may be increased at any
time, such increase to be effective immediately, by vote of a majority of the
directors then in office. Each director shall hold office until the next annual
meeting and until their successors are elected and qualified or until their
earlier death, resignation or removal.
Removal of Directors
Pacific. Under the Pacific By-laws, a director may be removed with or without
cause by the affirmative vote or written consent of the holders of a majority of
the shares of capital stock of Pacific entitled to vote for the election of
directors.
Procept. Under the Procept By-laws, a director may be removed with or without
cause, by the holders of a majority of the shares entitled to vote at an
election of directors, provided that the directors of a class elected by a
particular class of stockholders may be removed only by the vote of a majority
of the shares of the particular class of stockholders entitled to vote for the
election of such directors.
Special Meetings of Stockholders; Stockholder Action Without Meeting
Pacific. Under the Pacific By-laws, special meetings of stockholders may only be
called by a resolution approved by a majority of the Pacific Board of Directors.
Business transacted at any special meeting shall be confined to the objects
stated in the call of such special meeting. Special meetings of stockholders may
be held at such time and place, within or without the State of Delaware, as
shall be determined by resolution of the Pacific Board or as may be specified in
the call of any such special meeting. If not otherwise designated, the place of
any special meeting shall be the principal office of Pacific in the State of
California. Any action required or permitted to be taken by the stockholders of
Pacific must be effected at an annual or special meeting of stockholders of
Pacific and may not be effected by any consent in writing by such stockholders.
Procept. Special meetings of the stockholders may be called at any time by
Procept's President, Chairman of the Board, if any, or Board of Directors, or by
the Secretary or any other officer upon the written request of one or more
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stockholders holding of record at least a majority of the outstanding shares of
stock of Procept entitled to vote at such meeting. Such written request shall
state the purpose or purposes of the proposed meeting. Business transacted at
any special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
Any action required or permitted to be taken at any annual or special meeting of
Procept's stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken, is
signed by the holders or by proxy for the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote on such
action were present and voted. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Stockholder Proposals
Pacific. For any item of business to be properly considered at an annual or
special meeting of Pacific's stockholders, the item of business must either (i)
be specified in the written notice of meeting (or any supplement thereto) given
by or at the direction of the Chairman of the Pacific Board or Pacific's
Secretary, (ii) be brought before the meeting by or at the direction of the
Pacific Board or the officer of Pacific presiding at the meeting, or (iii) have
been specified in a written notice given to Pacific, in accordance with
requirements set forth in Pacific's By-laws, by or on behalf of any stockholder
who is entitled to vote at such meeting. To be timely, a stockholder's notice
must be delivered to or mailed and received by Pacific's Secretary at the
principal executive offices of Pacific not less than 60 days nor more than 90
days prior to the annual meeting; provided, however, that in the event that less
than 70 days' notice or prior public disclosure of the date of the annual
meeting of stockholders is given or made to stockholders, to be timely, notice
by the stockholder of business to be conducted at a meeting must be received not
later than the close of business on the 10th day following the day on which
notice of the date of the annual meeting was mailed or such public disclosure
was made to the stockholders whichever occurs first.
Procept. Procept has no provisions in its charter or by-laws relating to
stockholder proposals.
Quorum for Meeting of Stockholders
Pacific. A majority of the shares of Pacific's capital stock entitled to vote,
represented in person or by proxy, shall constitute a quorum at any meeting of
Pacific's stockholders, notwithstanding the subsequent withdrawal of enough
stockholders to leave less than a quorum.
Procept. The holders of a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at the meeting
of Procept's, present in person or represented by proxy, shall constitute a
quorum for the consideration of such question.
Shareholder's Voting Rights
Pacific. The holders of shares of Pacific Series A Preferred Stock, the holders
of shares of Pacific Common Stock and the holders of any other class or series
of shares entitled to vote with the Pacific Common Stock shall vote together as
one class on all matters submitted to a vote of stockholders of Pacific. In any
such vote, each share of Pacific Common Stock entitles the holder to one vote
and each share of Pacific Series A Preferred Stock entitles the holder thereof
to cast the number of votes equal to the number of votes which could be cast in
such vote by a holder of Pacific Common Stock into which such share of Pacific
Series A Preferred Stock is convertible on the record date for such vote, or if
no record date has been established, on the date such vote is taken.
In addition, so long as 50% of the shares of Pacific Series A Preferred Stock
(including those shares issued or issuable upon the exercise of the warrants
issued to Paramount Capital, Inc., in connection with the offer and sale of
Pacific Series A Preferred Stock, shall be outstanding, Pacific shall not,
without the affirmative vote or consent of the holders of at least 66.67% of all
outstanding Pacific Series A Preferred Stock voting separately as a class, (i)
amend, alter or repeal any provision of Pacific's Charter or By-laws so as
adversely to affect the relative rights, preferences, qualifications,
limitations or restrictions of the Pacific Series A Preferred Stock, (ii)
declare or pay any
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dividend or distribution on any securities of Pacific other than the Pacific
Series A Preferred Stock, or authorize the repurchase of any securities of
Pacific, or (iii) authorize or issue, or increase the authorized amount of, any
security (A) ranking prior to, or on a parity with, the Pacific Series A
Preferred Stock (I) upon a Liquidation Event or (II) with respect to the payment
of any dividends or distributions or (B) having any voting rights separate from,
or other than on a share-equivalent basis with, the holders of Pacific Common
Stock (other than analogous voting rights with respect to any other series of
preferred stock). The vote as contemplated in this paragraph is not required for
(i) issuances of Pacific Common Stock, (ii) any consolidation or merger of
Pacific with or into another corporation in which Pacific is not the surviving
entity, a sale or transfer of all or part of Pacific's assets for cash,
securities or other property, or a compulsory share exchange.
Procept. The holders of shares of Procept Common Stock and the holders of any
other class or series of shares entitled to vote with the Procept Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of Procept. In any such vote, each share of Procept Common Stock
entitles the holder to one vote.
Dissenters' Rights
Pacific and Procept. The stockholders of Pacific and Procept are entitled to
appraisal rights under Section 262 of the DGCL.
Charter and By-law Amendments
Pacific. Pacific Charter amendments require a vote of a majority of the
outstanding stock entitled to vote thereon. Pacific's By-laws may be amended (i)
by the affirmative vote of the holders of not less than a majority of the voting
power of all outstanding shares of capital stock of Pacific entitled to vote
generally in the election of directors or (ii) by the affirmative vote of not
less than a majority of the entire Pacific Board at any Board meeting at which
there is a quorum present and voting. Provided, however, so long as 50% of the
shares of Series A Preferred Stock (including those shares of Series A Preferred
Stock issued or issuable upon the exercise of the warrants issued to Paramount
Capital, Inc., the placement agent, or its designees, in connection with the
offer and sale of the Series A Preferred Stock), shall be outstanding, Pacific
shall not, without the affirmative vote or consent of the holders of at least
66.67% of all outstanding Series A Preferred Stock voting separately as a class,
amend, alter or repeal any provision of Pacific's Charter or By-laws so as
adversely to affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series A Preferred Stock.
Procept. Procept's Charter may be amended by vote of a majority of the
outstanding stock entitled to vote thereon, Procept's By-laws may be amended (i)
by the affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present or (ii)
by the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote at any regular meeting of stockholders, or at any special
meeting of stockholders provided notice of such amendment was included in the
notice of such special meeting.
Dividends
Pacific. The holders of Series A Preferred Stock and Common Stock will be
entitled to receive dividends as, when and if declared by Pacific's Board of
Directors out of funds legally available therefor. No dividend or distribution,
as the case may be, shall be declared or paid on any junior stock unless first
the holders of the Series A Preferred Stock are paid a special dividend in the
amount of $260 per share, and the same dividend as proposed to be paid to the
junior stock is also paid to the Series A Preferred Stock.
Procept. Dividends are payable on Procept Common Stock only when, as and if
declared by Procept's Board of Directors, out of funds legally available
therefor. Dividends on Procept Common Stock may be paid only out of surplus
(within the meaning of the Delaware General Corporation Law) or, if there is not
such surplus, out of the net profits of Procept for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
Under the Article VI Rights and Section 10 of the Merger Agreement, certain
holders of Procept Common Stock are entitled to semi-annual dividends of Procept
Common Stock. See "The Merger Agreement--Contractual Rights of Pacific Preferred
Stock Converted to Procept Common Stock."
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Terms of Conversion
Pacific. Each share of Pacific Series A Preferred Stock may be converted at the
option of the holder into Pacific Common Stock at a conversion price of 290.89
of Pacific Common Stock for each share of Pacific Series A Preferred Stock. The
Company has the right to cause the Series A Preferred Stock to be converted in
whole or in part, on a pro rata basis, into shares of Pacific Common Stock if
the closing price of the Pacific Common Stock exceeds 200% of the conversion
price for at least 20 trading days in any 30 consecutive trading day period.
Procept. No convertible preferred stock is outstanding.
Liquidation Rights
Pacific. Upon (i) a liquidation, dissolution or winding up of Pacific, whether
voluntary or involuntary, (ii) a sale or other disposition of all or
substantially all of the assets of Pacific or (iii) any consolidation, merger,
combination, reorganization or other transaction in which Pacific is not the
surviving entity or in which shares of Pacific Common Stock constituting in
excess of 50% of the voting power of Pacific are exchanged for or changed into
other stock or securities, cash or any other property, after payment or
provision for payment of the debts and other liabilities of Pacific of the
holders of the Pacific Series A Preferred Stock then outstanding will first be
entitled to receive, pro rata (on the basis of the number of shares of Pacific
Series A Preferred Stock then outstanding), and in preference of the holders of
the Pacific Common Stock and any other series of preferred stock, an amount per
share equal to $260.00 plus accrued but unpaid dividends, if any.
Procept. Under the Article VI Rights and Section 10 of the Merger Agreement,
certain holders of Procept Common Stock are entitled to put their shares of
Procept Common Stock to Procept in exchange for a payment of cash or securities
having a value equal to 140% of the "Dilution Value" (as defined in such
agreements). See "The Merger Agreement--Contractual Rights of Pacific Preferred
Stock Converted to Procept Common Stock."
Shareholder Rights Plans
Pacific. The Pacific Rights Agreement, dated as of April 2, 1991, as amended
(the "Pacific Rights Agreement"), provides for the distribution of preferred
stock purchase rights to holders of Common Stock which separate from the Common
Stock ten business days following: (a) an announcement of an acquisition by a
person or group ("Acquiring Party") of 15% or more of the outstanding Common
Stock of Pacific, (b) the commencement of a tender offer or exchange offer for
15% or more of the Common Stock, or (c) a merger or asset sales as defined in
the Pacific Rights Agreement. Under the Pacific Rights Agreement, certain
related parties are not considered to be an Acquiring Party. In addition, the
plan was amended in November 1995 to allow Paramount (and its Affiliates)
associated with the November 1995 private placement to acquire up to 30% of the
outstanding Common Stock of Pacific without being characterized as an Acquiring
Party and was additionally amended on December 17, 1996 to provide that
Paramount (and its affiliates) would not be considered an Acquiring Party under
the plan. One right attached to each share of Common Stock outstanding as of
April 15, 1991 and attaches to all shares issued thereafter. Each right entitles
the holder to purchase one one-hundredth of one share of Series R junior
participating cumulative preferred stock, par value $25 per share ("unit of
preferred stock"), at an exercise price of $120 per unit of preferred stock. The
units of preferred stock are non redeemable, voting and are entitled to certain
preferential dividend and liquidation rights. The exercise price and the number
of units of preferred stock issuable are subject to adjustment to prevent
dilution.
If, after the rights have been distributed, Pacific is a party to a business
combination or other specifically defined transaction, each right (other than
those held by the Acquiring Party) will entitle the holder to receive, upon
exercise, units of preferred stock or shares of Common Stock of the surviving
company with a value equal to two times the exercise price of the right.
Alternatively, a majority of Pacific's independent directors may direct Pacific
to exchange all of the then outstanding rights for Common Stock at an exchange
ratio of one common share per right. The rights expire April 15, 2001 and are
redeemable (at the option of a majority of the Independent Directors of Pacific)
at $.01 per right at any time until the tenth day following an announcement of
the acquisition of 15% or more of Pacific's Common Stock.
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The Pacific Rights Plan will be amended so that it terminates upon consummation
of the merger with Procept and no rights will be distributed at that time.
Procept. Procept does not have a shareholders rights plan.
Business Combinations
Generally, Section 203 of the DGCL. prohibits certain Delaware corporations from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person became an interested stockholder, unless
(i) prior to such time the board approved either the business combination of the
transaction that resulted in the stockholder becoming an interested stockholder,
(ii) upon consummation of the transaction that resulted in such person becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain employee stock plans),
or (iii) on or after the time the stockholder became an interested stockholder,
the business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock excluding any stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale and certain
other transactions resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who (other than
the corporation and any direct or indirect majority owned subsidiary of the
corporation), together with affiliates and associates, owns (or, is an affiliate
or associate of the corporation and, within three years prior, did own) 15% or
more of the corporation's outstanding voting stock. A Delaware corporation may
"opt out" from the application of Section 203 of the DGCL. through a provision
in its certificate of incorporation. Neither the Pacific Certificate of
Incorporation nor the Procept Certificate of Incorporation contains any such
provision, and neither Pacific nor Procept has "opted out" from the application
of Section 203 of the DGCL.
LEGAL MATTERS
Certain legal matters relating to Procept in connection with the Merger,
including, among other things, certain legal matters with respect to the
validity of the securities to be issued, will be passed upon for Procept by
Palmer & Dodge LLP, Boston, Massachusetts. Lynnette C. Fallon, a partner at
Palmer & Dodge LLP, is the Secretary of Procept.
Certain legal matters relating to Pacific in connection with the Merger will be
passed upon for Pacific by Patterson, Belknap, Webb & Tyler LLP, New York, New
York.
EXPERTS
The balance sheets of Procept, Inc. as of December 31, 1997 and 1996 and the
related statements of operations, changes in shareholders equity, and cash flows
for each of the three years in the period ended December 31, 1997 included in
this Joint Proxy Statement/Prospectus, have been included herein in reliance on
the report, which includes an explanatory paragraph related to the restatement
of the financial statements for the year ended December 31, 1997, dated June 15,
1998, of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
Representative of PricewaterhouseCoopers LLP are expected to be present at the
Procept Special Meeting with the opportunity to make a statement, if they desire
to do so, and to be available to respond to appropriate questions.
The consolidated financial statements of Pacific Pharmaceuticals, Inc. as of
March 31, 1998 and 1997, and for each of the three years in the period ended
March 31, 1998 included in this Joint Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein by reference in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Binary Therapeutics, Inc. as of and for the year
ended December 31, 1997 and as of and for the nine months ended September 30,
1998 included in this Joint Proxy Statement/Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
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Representatives of Deloitte & Touche LLP are expected to be present at the
Pacific Special Meeting with the opportunity to make a statement, if they desire
to do so, and to be available to respond to appropriate questions.
FUTURE PROCEPT SHAREHOLDER PROPOSALS
As noted in Procept's proxy statement for the 1998 annual meeting, the deadline
to have shareholder proposals included in the proxy statement for Procept's 1999
annual meeting is December 29, 1998. Proposals must comply with the SEC's proxy
regulations relating to shareholder proposals in order to be considered for
inclusion in Procept's proxy materials. If a proponent fails to notify Procept
by March 15, 1999 of a proposal for consideration at the 1999 annual meeting,
then the proxies named by Procept management with respect to that meeting will
have discretionary voting authority with respect to that proposal.
FUTURE PACIFIC STOCKHOLDER PROPOSALS
Assuming the timing of the consummation of the Merger contemplated in the Merger
Agreement requires Pacific to hold an annual meeting in 1999, proposals of
stockholders intended to be presented at such meeting must be received by
Pacific at its offices at 6730 Mesa Ridge Road, Suite A, San Diego, California
92121, Attention: President, not later than sixty days prior to the meeting. As
noted in Pacific's proxy statement for Pacific's 1998 annual meeting, the
deadline to have stockholder proposals included in the proxy statement for the
1999 Pacific annual meeting is February 28, 1999. Proposals must comply with the
SEC's proxy regulations relating to stockholder proposals in order to be
considered for inclusion in Pacific's proxy materials.
OTHER MATTERS
Neither Procept nor Pacific presently intends to bring before the Procept
Special Meeting or the Pacific Special Meeting, respectively, any matters other
than those specified, and neither Procept nor Pacific has any knowledge of any
other matters which may be brought up by other persons. However, if any other
matters not now known properly come before the Procept Special Meeting or the
Pacific Special Meeting or any adjournments thereof, the persons named in the
enclosed forms of the Procept proxy or Pacific proxy, as the case may be,
including any substitutes, will vote such proxies in accordance with their
judgment on such matter.
WHERE YOU CAN FIND MORE INFORMATION
Procept and Pacific file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that the companies file at the SEC's public
reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661- 2511. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Procept's and Pacific's SEC filings should also be available to the public from
commercial document retrieval services and at the Internet web site maintained
by the SEC at http://www.sec.gov.
The SEC allows Procept and Pacific to "incorporate by reference" information
into this Joint Proxy Statement/Prospectus, which means that Procept and Pacific
can disclose important information to you by referring you to another document
filed separately with the SEC. The information incorporated by reference is
deemed to be part of this Joint Proxy Statement/Prospectus, except for any
information superseded by information contained directly in this Joint Proxy
Statement/Prospectus such as the Procept financial statements contained herein.
This Joint Proxy Statement/Prospectus incorporates by reference the documents
set forth below that were previously filed with the SEC by Procept (File No.
0-21134) or Pacific (File No. 1-9613). These documents contain important
information about Procept and Pacific and their financial condition.
Regarding Procept
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o Procept's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997.
o Procept's Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1998.
o Procept's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
o Procept's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
o Procept's Current Report on Form 8-K dated April 14, 1998 and
amended on June 23, 1998.
Regarding Pacific
o Pacific's Annual Report on Form 10-K/A for the year ended
March 31, 1998.
o Pacific's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
o Pacific's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
o Pacific's Current Reports on Form 8-K dated July 26, 1998 and
September 15, 1998 and a Current Report on Form 8-K/A dated
January 10, 1999, amending a Current Report on Form 8-K dated
March 23, 1998.
Procept and Pacific may be required by the SEC to file other documents pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, between the time this Joint Proxy Statement/Prospectus is sent and the
date the Procept Special Meeting and the Pacific Special Meeting are held. These
documents will be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be a part of it from the date they are filed with
the SEC.
If you are a stockholder, Procept and Pacific may have sent you some of the
documents incorporated by reference, but you can obtain any of them through
Procept and Pacific, the SEC or the SEC's Internet web site as described above.
Documents incorporated by reference are available from Procept and Pacific
without charge, excluding all exhibits except for exhibits which have been
specifically incorporated by reference an exhibit in this Joint Proxy
Statement/Prospectus. Stockholders may obtain documents incorporated by
reference in this Joint Proxy Statement/Prospectus by requesting them in writing
or by telephone from the appropriate company at the following addresses:
Procept, Inc Pacific Pharmaceuticals, Inc.
840 Memorial Drive 6730 Mesa Ridge Road, Suite A
Cambridge, Massachusetts 02139 San Diego, 92121
(617) 491-1100 (619) 550-3900
If you would like to request documents from Procept or Pacific, please do so
promptly in order to receive them before the Special Meetings; but you should do
so no later than five business days before the Special Meetings, which are on
March 15, 1999 and March 16, 1999, respectively.
All information contained in or incorporated by reference into this Joint Proxy
Statement/Prospectus with respect to Procept has been provided by Procept. All
information contained in or incorporated by reference into this Joint Proxy
Statement/Prospectus with respect to Pacific has been provided by Pacific.
Neither Procept nor Pacific assumes any responsibility for the accuracy or
completeness of the information provided by the other party.
You should rely only on the information contained or incorporated by reference
in this Joint Proxy Statement/Prospectus to vote on the Merger Agreement, the
amendment to the Pacific Certificate of Designations or the Stock Issuance.
Neither Procept nor Pacific has authorized anyone to provide you with
information that is different from what is contained in this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus is dated
February __, 1999. You
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should not assume that the information contained in this Joint Proxy
Statement/Prospectus is accurate as of any date other than that date, and
neither the mailing of this Joint Proxy Statement/Prospectus to stockholders nor
the issuance of Procept's Common Stock in the Merger shall create any
implication to the contrary.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Advisory Warrants, 42 Merger Consideration, 54, 64
affiliates, 62, 72 Merger Sub, 1, 28, 54
AMEX, 15 Minimum Annual Royalty, 42
Anti-Takeover Law, 84 MRC, 31
Aquila, 32 NASD, 28
Aries, 72 NDA, 34, 47
Aries Funds, 80 NIH, 40
Aries Purchasers, 20, 80 O(6) alkylators, 40
Article IV Rights, 59 O(6)-alkylguanine-DNA alkyltransferase, 40
Assignment, 41 Original Schedule 13D, 80
BCNU, 40 Pacific, 1
BG, 40 Pacific Board, 28
BG License, 41 Pacific Certificate of Designations, 1
BGDC, 38, 40, 42 Pacific Charter, 85
BGDC Units, 42 Pacific Common Stock, 1, 28, 85
blank check, 22 Pacific Preferred Stock, 1
BOPP, 5 Pacific Preferred Stock, 28
BTI, 43, 67, 75 Pacific Record Date, 1, 29
BTI Merger Agreement, 43 Pacific Series A Preferred Stock, 86
business combination, 84 Pacific Special Meeting, 28
capital asset, 60 Pacific Stock, 1
CCNU, 40 Paramount, 8
Change of Shares, 67 PCT, 45
Closing Bid Price, 67 PDT, 5, 43, 46
Code, 60 penny stock, 21
conversion factor, 4 PHAA, 15
CRADA, 43 photosensitizing drug, 43
Delaware Court, 62 PLA, 34
DGCL, 2, 61, 85 PRCT, 15
DHODH, 32 preference, 20
Dilution Value, 67 Procept, 1
Dissenting Shares, 62 Procept Board, 28
DTIC, 40 Procept Charter, 84
Effective Date, 54 Procept Common Stock, 1, 28, 86
Effective Time, 54 Procept Record Date, 28
Engagement Letter, 55 Procept Special Meeting, 28
Exchange Agent, 65 PTM, 46, 51
Fair Market Value, 67 Record Date, 1
fair value, 62 SEC, 63
Financial Advisor, 67 Section 262, 61
Forward-looking statements, 27 Securities Act, 1
functional currency, 60 selective, 43
Fund, 83 SFAS, 32
FY, 53 SOP 98-5, 39
GMP, 47 Special Meeting, 1
HpD, 44 Special Meetings, 28
incorporate by reference, 91 STD, 5, 31
IND, 44 Stock Issuance, 1, 28
interested stockholder, 84 Stock Market, 68
IRB, 48 Surviving Company, 54
Issuance Base Amount, 67 Topical microbicides, 31
Licensed Products, 43 Trading Price, 68
Licensor, 41 Trust, 80, 82
Liquidation Event, 67 United States Holders, 60
Market Price, 68 United States Person, 60
Merger, 1, 54 VacTex, 32
Merger Agreement, 1, 28 WHO, 45
Year 2000, 49
</TABLE>
95
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF PROCEPT AND PACIFIC
Consolidated Financial Statements of Procept
Page(s)
-------
Report of Independent Accountants .................................... F-2
Balance Sheets as of December 31, 1997 and 1996 ...................... F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................. F-4
Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995........................... F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................. F-6
Notes to Financial Statements......................................... F-7
Balance Sheet at December 31, 1997 and September 30, 1998
(unaudited)...................................................... F-27
Statement of Operations for the Three Months ended September
30, 1997 and September 30, 1998 (unaudited)...................... F-28
Statement of Cash Flows for the Three Months ended September
30, 1997 and 1998 (unaudited).................................... F-29
Notes to Financial Statements (unaudited)............................. F-30
Consolidated Financial Statements of Pacific
Independent Auditors' Report.......................................... F-36
Consolidated Balance Sheets as of March 31, 1998 and 1997
(as restated).................................................... F-37
Consolidated Statements of Operations for the years ended March 31,
1998, March 31, 1997 (as restated), March 31, 1996 and
September 23, 1983 (inception) to March 31, 1998................. F-38
Consolidated Statements of Stockholders' Equity from September 23,
1983 (inception) to March 31, 1998............................... F-39
Consolidated Statements of Cash Flow for the years ended March 31, 1998,
March 31, 1997, March 31, 1996 and September 23, 1983 (inception)
to March 31, 1998................................................ F-41
Notes to Consolidated Financial Statements............................ F-42
Consolidated Balance Sheet as of September 30, 1998 (unaudited) and
March 31, 1998................................................... F-56
Consolidated Statements of Operations for the Three Months and
Six Months ended September 30, 1998 (unaudited) and 1997 (as
restated) and from September 23, 1983 (inception) to
September 30, 1998............................................... F-57
Consolidated Statements of Stockholders' Equity/(Deficiency) for
the Six Months ended September 30, 1998 (unaudited) and 1997
(as restated).................................................... F-58
Consolidated Statements of Cash Flows for the Six Months ended
September 30, 1998 (unaudited) and 1997 and from September 23,
1983 (inception) to September 30, 1998........................... F-59
Notes to Consolidated Financial Statements (unaudited)................ F-60
Financial Statements of Binary Therapeutics, Inc
Independent Auditors' Report.......................................... F-64
Balance Sheets as of December 31, 1997 and September 30, 1998 ........ F-65
Statements of Operations for the year ended December 31, 1997,
the Nine Months ended September 30, 1998 and October 23, 1990
(inception) to September 30, 1998 (unaudited)..................... F-66
Statement of Stockholders' Equity from October 23, 1990 (inception)
to September 30, 1998 (balances prior to January 1, 1997
are unaudited)................................................... F-67
Statements of Cash Flow for the year ended December 31, 1997,
the Nine Months ended September 30, 1998 and October 23, 1990
(inception) to September 30, 1998 (unaudited).................... F-68
Notes to Financial Statements......................................... F-69
F-1
<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.
As disclosed in Note A to the financial statements, the Company restated its
financial statements for the year ended December 31, 1997.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 15, 1998
F-2
<PAGE>
PROCEPT, INC.
BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
December 31
-----------
ASSETS 1997 1996
---- ----
<S> <C> <C>
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; $4,208,400 at Dec. 31, 1997) 301 --
Common stock, $.01 par value; 30,000,000 shares authorized
at December 31, 1997 and 1996; 196,204 and 195,434
shares issued at December 31, 1997 and 1996,
respectively 1,962 1,954
Additional paid-in capital 62,242,741 55,095,433
Cumulative dividends on preferred stock (Note E) (4,217,388) --
Receivable from sale of stock -- (73,242)
Accumulated deficit (57,755,775) (48,703,200)
Unrealized loss on securities available for sale (Note C) -- (4,838)
Treasury stock, at cost; 1,186 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.
F-3
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
--------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1997 (restated) 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: dividends on preferred stock (Note E) (4,217,388) -- --
------------ ------------- ------------
Net loss available to common shareholders $(13,269,963) $(11,235,760) $(11,712,287)
============ ============= ============
Basic and diluted net loss per common share $(63.68) $(68.16) $(127.65)
======== ======== ========
Weighted average number of common
shares - basic and diluted 208,371 164,836 91,752
======= ======= ======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-4
<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 Receivable
------------ ------------------------ Paid-in From
Shares Par Value Shares Par Value Capital Sale of Stock
------ --------- ------ --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 90,794 $908 $38,747,032 $(25,022)
Employee stock purchase plan 1,042 10 131,721 --
Exercise of stock options 607 6 58,938 (23,092)
Issuance of stock in payment of bonus 49 1 8,499 --
Unrealized gain on securities for sale -- -- -- --
Collection on receivable from sale of stock -- -- -- 6,007
Exercise of common stock warrants 23 -- -- --
Issuance of common stock warrants -- -- 300 --
Net loss -- -- -- --
---------- ---------- ------------ -----------
Balance at December 31, 1995 92,515 925 38,946,490 (42,107)
Employee stock purchase plan 857 8 96,758 --
Issuance from secondary offering 33,571 336 5,263,162 --
Issuance from private placement 67,690 677 11,578,403 --
Payment of costs of financings -- -- (855,673) --
Exercise of stock options 801 8 66,073 (50,150)
Unrealized loss on securities for sale -- -- -- --
Collection on recivable from sale of stock -- -- -- 19,015
Issuance of common stock warrants -- -- 220 --
Net loss -- -- -- --
---------- ---------- ------------ -----------
Balance at December 31, 1996 195,434 1,954 55,095,433 (73,242)
Employee stock purchase plan 764 8 55,192 --
Exercise of stock options 6 -- 410 --
Issuance from private placement 85,333 853 2,799,147 --
Payment of private placement costs -- -- (131,382) --
Conversion of note payable and
common stock to preferred stock (85,333) (853) 30,060 $301 206,553 --
Cancellation of notes receivable -- -- -- -- -- 73,242
Dividends on preferred stock -- -- -- -- 4,217,388 --
Maturity of marketable securities -- -- -- --
Net loss -- -- -- -- -- --
----------- ------- ------- ---- ------------- ----------
Balance at December 31, 1997 196,204 $1,962 30,060 $301 $62,242,741 --
======= ====== ====== ==== =========== ==========
Procept, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
Cumulative Gain (Loss)
Dividends on Securities Total
on Preferred Accumulated Available Treasury Shareholders'
Stock Deficit For Sale Stock Equity
----- ------- -------- ----- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $(25,755,153) $(116,356) $12,851,409
Employee stock purchase plan -- -- 131,731
Exercise of stock options -- -- 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
Exercise of common stock warrants -- -- --
Issuance of common stock warrants -- -- 300
Net loss (11,712,287) -- (11,712,287)
------------ ------------ ------------
Balance at December 31, 1995 (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 -- -- 15,931
Unrealized loss on securities for sale -- (5,926) (5,926)
Collection on recivable from sale of stock -- -- 19,015
Issuance of common stock warrants -- -- 220
Net loss (11,235,760) -- (11,235,760)
------------ ------------ ------------
Balance at December 31, 1996 (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 -- -- $(11,857) 61,385
Dividends on preferred stock $(4,217,388) -- -- -- --
Maturity of marketable securites -- 4,838 4,838
Net loss -- (9,052,575) -- (9,052,575)
------------ ----------- ----------- ----------- -----------
Balance at December 31, 1997 $(4,217,388) $(57,755,775) $ -- $(11,857) $259,984
=========== ============= ============ ========= ========
</TABLE>
F-5
<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 $ 4,217,388 -- --
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-6
<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.
Restatement of Financial Statements
-----------------------------------
The Company restated its financial statements for the year ended December
31, 1997 to include the effects of recording non-cash dividends to the
preferred stockholders totaling $4,217,388 not previously recorded in the
financial statements for the year ended December 31, 1997. The preferred
stock dividend had the effect of increasing net loss available to common
shareholders by $4,217,388 and increasing net loss per share (basic and
diluted) by $19.73 from $(43.95) to $(63.68) for the year December 31, 1997
after effecting the one-for-ten reverse stock split.
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 $57.8 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. (Also see Note E.)
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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>
<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>
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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 and research grants as earned based upon the performance
requirements of each agreement. Payments received in advance under these
agreements are recorded as deferred revenue until earned. Amounts received
under research and development agreements and research grants are
non-refundable and are not contingent on the outcome of research efforts.
The Company does not incur future performance commitments from amounts
received.
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
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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 1,186 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 , at December 31,
1997, owned 30,060 shares of the outstanding Series A Preferred Stock of
the Company and "New Warrants" then exercisable for 328,314 shares of
Common Stock at $10.90 per share. Such shareholders exchanged their Series
A Preferred Stock, including accrued dividends, and the New Warrants in
F-10
<PAGE>
connection with the final closing of the Company's unit offering on April
9, 1998 (the "Final Closing Date"), for 814,680 shares of Common Stock and
Class C Warrants to purchase an equal number of shares of Common Stock at
an exercise price currently set at $5.00 per share. The number of shares of
Common Stock, the number of shares of Common Stock issuable upon exercise
of the Class C Warrants and the per-share exercise price of the Class C
Warrants are based on the minimum of $5.00 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 $5.00, the number of shares of Common Stock and the number of
shares of Common Stock issuable upon exercise of the Class C Warrants will
be adjusted upward and the per-share exercise price of the Class C Warrants
will be adjusted downward. However, as described in Note E, the per-share
price of the Final Closing was $5.00. As a result, no adjustments were made
to the number of shares of Common Stock, the number of shares of Common
Stock issuable upon exercise of the Class C Warrants or the per-share
exercise price of the Class C Warrants. 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.
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.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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)
---- ---------- ------
Marketable securities, current:
<S> <C> <C> <C>
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>
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: December 31, 1997 1996
<TABLE>
<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>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
E. Shareholders' Equity:
---------------------
Common and Preferred Stock
--------------------------
On May 18, 1998, Procept's shareholders approved a one-for-ten reverse
split of the Company's Common Stock (the "May 18, 1998 Reverse Stock
Split"). The May 18, 1998 Reverse Stock Split was effected on June 1, 1998.
Shareholders' equity has been restated to give retroactive application to
the May 18, 1998 Reverse Stock Split in prior periods by reclassifying from
Common Stock to additional paid in capital the par value of the eliminated
shares arising from the May 18, 1998 Reverse Stock Split. In addition, all
references in the financial statements to the number of shares, per share
amounts and stock option and warrant data of the Company's Common Stock
have been restated.
On September 29, 1997, Procept's shareholders approved a one-for-seven
reverse split of the Company's Common Stock (the "September 29, 1997
Reverse Stock Split"). The September 29, 1997 Reverse Stock Split was
effected on October 14, 1997. Shareholders' equity has been restated to
give retroactive application to the September 29, 1997 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 September
29, 1997 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 85,334 shares of Common Stock (the "Common Shares"). The Common
Shares contained certain contractual obligations including, but not limited
to, the right to convert the Common Shares into preferred stock (the
"Preferred Stock") upon Procept shareholder approval of such Preferred
Stock. The Company also received from Aries an additional $0.2 million for
the issuance of two convertible promissory notes. The notes accrued
interest at a rate of 12% per year and were due on or before September 30,
1997. In addition to the Common Shares and the notes, the Aries Funds
received (i) Class A Warrants exercisable for an aggregate of 39,182 shares
of Procept Common Stock at an initial exercise price of $0.70 and (ii)
Class B Warrants exercisable for an aggregate of 108,603 shares of Procept
Common Stock at an initial exercise price of $32.80. The Company did not
separately value the Class A and Class B Warrants from the Preferred Stock
since the resulting accounting treatment for both securities is to record
their value in Additional Paid in Capital within the equity section of the
balance sheet. Additionally, since the Preferred Stock and the Class A and
Class B Warrants are not redeemable, no accretion is required. All of the
Class A Warrants and the Class B Warrants contemplated that such warrants
would be converted on September 30, 1997 into "New Warrants" having the
same aggregate exercise price as the Class A and Class B Warrants
converted, but with a per share exercise price equal to the lesser of (i)
$20.30 or (ii) 50% of the trading price (determined per a formula) at
September 30, 1997. The Class A and Class B Warrants further provided that
the exercise price of the New Warrants would be adjusted at the time
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
of the Company's next equity financing to ensure that the exercise price of
the New Warrants was at least 50% of the pricing in such future equity
financing. The Class A and Class B Warrants were converted to New Warrants
for 328,314 shares of Procept Common Stock having a per share exercise
price of $10.90. In a negotiated transaction with the Aries Funds, the New
Warrants were exchanged in April 1998 for Class C Warrants for an aggregate
of 814,680 shares of Procept Common Stock having an exercise price of
$5.00.
At an adjourned session of the Company's 1997 annual meeting held on July
15, 1997, its shareholders approved an amendment and restatement of the
Company's Restated Certificate of Incorporation which authorized 1,000,000
shares of preferred stock. On August 1, 1997, the Board of Directors
established a series of 30,061 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock"). Upon the establishment of this
Series A Preferred Stock, the purchasers of the securities issued in the
June 1997 direct investment exercised the right to convert their Common
Shares to shares of Series A Preferred. On August 22, 1997, the Aries Funds
converted the 85,334 Common Shares into 28,000 shares of Series A Preferred
Stock. On September 30, 1997, the Aries Funds converted the convertible
promissory notes and the corresponding accrued interest into 2,060 shares
of Series A Preferred Stock.
The Series A Preferred Stock was initially convertible into Common Stock at
a conversion price equal to $32.80. The terms of the Series A Preferred
Stock provided that the conversion price would adjust on September 30, 1997
(or earlier, if certain events occurred) to a new conversion price equal to
the lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a
formula) at September 30, 1997. On September 30, 1997, the conversion price
of the Series A Preferred Stock adjusted to $10.90. In connection with this
adjustment, the Company recorded a preferred stock dividend in the amount
of $4,217,388 which reflects the intrinsic value of the beneficial
conversion feature based upon the difference between the $26.25 per share
fair market value of the Company's Common Stock on the date of issuance and
the $10.90 per share adjusted conversion price of the Series A Preferred
Stock. Additionally, since the Series A Preferred Stock is not redeemable,
no accretion is required. As of December 31, 1997, the conversion price of
the Series A Preferred Stock was $10.90, but remains subject to further
conversion rate adjustments based on future events. At December 31, 1997,
the Series A Preferred Stock was convertible into 274,748 shares of Common
Stock. After the September 30, 1997 conversion price adjustment, the terms
of the Series A Preferred Stock provided for further reduction of the
conversion price of the Series A Preferred Stock (i) on June 30, 1998 to
ensure that the market price at that time was at least 140% of the
conversion price, (ii) if equity securities were issued in the future with
a pricing reset feature, on the reset date of such future equity securities
(if such a reset date occurred on or prior to June 30, 1999), so that the
conversion price of the Series A Preferred Stock was reduced
proportionately to the price reduction in the future equity securities,
(iii) if no reset date for future equity securities occurred by June 30,
1999, to ensure that the market price at that time was at least 200% of the
conversion price, and (iv) on future issuances of equity securities at a
price below the then effective conversion price or the then market price,
to a
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
price determined by a weighted average formula reflecting such dilutive
issuance. Other significant features of the Series A Preferred Stock
include (1) a per share cumulative annual dividend, payable in cash or in
kind, of 10% of the sum of $140 per share plus accrued but unpaid
dividends, (ii) the right to participate in most subsequent dividend
distributions to Common Stock, (iii) the right to vote the Series A
Preferred Stock on an as converted to Common Stock basis reflecting the
then effective conversion price, and (iv) the right to a liquidation
preference of $140 per share plus accrued but unpaid dividends.
Furthermore, on September 30, 1997 in accordance with the original terms of
the Class A and Class B Warrants issued in the June 1997 private placement,
such warrants were exchanged for 328,314 "New Warrants" at an exercise
price of $10.90 per share. The $10.90 exercise price of the New Warrants
was determined based on a formula set forth in the Class A Warrants and
Class B Warrants. The formula provided that the exercise price of the New
Warrants would equal the lesser of (i) $20.30 or (ii) 50% of the trading
price (determined per a formula) at September 30, 1997. The formula trading
price at September 30, 1997 was $21.80, and the exercise price was fixed at
$10.90. The Company incurred costs in the amount of $0.1 million related to
the June 1997 private placement and the subsequent conversion events which
were charged to additional paid-in capital.
As a part of a unit offering, the Company sold an aggregate of 1,960,500
shares of Common Stock in January, February, and April of 1998 together
with five-year Class C Warrants to purchase 1,960,500 shares of Common
Stock at an exercise price of $5.00 per share (the "1998 Offering"). The
$5.00 per share exercise price of the Class C Warrants was determined as
part of the terms of the 1998 Offering in a negotiation between the Company
and the placement agent for the 1998 Offering. The Company did not
separately value the Class C Warrants from the Common Stock issued in the
1998 Offering since the resulting accounting treatment for both securities
is to record their value in Additional Paid in Capital within the equity
section of the balance sheet. These securities were sold for gross proceeds
of $9.8 million. The purchasers in the 1998 Offering are entitled to
certain contractual rights requiring contingent additional issuances of
Common Stock to the purchasers, (x) based on the market price (i) for the
5-day and 30-day periods immediately prior to the Final Closing Date of the
1998 Offering 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. In the event of (i) a liquidation,
dissolution or winding up of the Company, (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or
(iii) any consolidation, merger, combination, reorganization or other
transaction in which the Company is not the surviving entity, the
purchasers are entitled to receive an amount equal to 140% of such
purchaser's investment as a liquidation "preference." Except in the case of
a liquidation, dissolution or winding up, such payment will be in the form
that equity holders will receive such as in cash, property or securities of
the entity surviving the acquisition transaction. In the event of a
liquidation, dissolution or winding up, such payment is contingent upon the
Company having available resources to make such payment. These
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
contractual rights will terminate after the first anniversary of the Final
Closing Date if the Common Stock trades at $15.00 per share or more.
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 at the sole option of the Company
upon 30 days prior notice to the holders of the Warrants beginning May 17,
1998 at a price of $0.10 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 $262.50. The initial exercise price of the Warrants per
share of common stock is $175.00. The Company did not separately value the
warrants from the common stock issued in the May 17, 1996 private placement
of units since the resulting accounting treatment for both securities is to
record their value in Additional Paid-In Capital within the equity section
of the balance sheet. The Company received proceeds of $11.6 million for
the issuance of 67,690 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 31,429 shares of
Common Stock. On March 27, 1996, the associated over allotment option was
partially exercised and the Company issued and sold an additional 2,143
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 34,500 shares of
common stock. In addition, all of the then outstanding shares of redeemable
convertible preferred stock (the "Preferred Stock") converted automatically
into 49,677 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, 551,326 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 16,245 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 3,571 which amendment was approved by the shareholders at the 1996
Annual Meeting of Shareholders. In March 1997, the Board of
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Directors approved an amendment to the Plan to increase the number of
shares covered by the Plan by 7,143 shares to 26,959 shares, which
amendment was approved by the shareholders at the 1997 Annual Meeting of
Shareholders. In April 1998, 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, which amendment was approved at the 1998 Annual Meeting
of Shareholders. At December 31, 1997, there were 15,516 shares available
for future grants.
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 2,143 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 2,143 shares, which amendment was approved by the
shareholders at the 1997 Annual Meeting of Shareholders. In April 1998, the
Board of Directors approved an amendment to the Director Plan to increase
the number of shares covered by the Director Plan to 500,000, which
amendment was approved at the 1998 Annual Meeting of Shareholders.
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.
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 8,103 3,993 $70.00-$892.50 $333.90
Granted 2,293 1,452 $149.10-$577.50 $224.70
Exercised (358) (250) $70.00-$374.50 $97.30
Canceled (965) (43) $70.00-$735.00 $408.80
----- ----
Outstanding at December 31, 1995 9,073 5,152 $70.00-$892.50 $310.10
Granted 6,669 740 $87.50-$227.50 $107.10
Exercised (729) (71) $70.00-$187.60 $82.60
Canceled (2,967) (3,405) $70.00-$892.50 $261.80
------- -------
Outstanding at December 31, 1996 12,046 2,416 $70.00-$892.50 $244.30
Granted 110,943 13,214 $10.00-$96.30 $22.70
Exercised (6) -- $70.00 $70.00
Canceled (4,038) (91) $70.20-$892.50 $250.70
------- ----
Outstanding at December 31, 1997 118,945 15,539 $10.00-$892.50 $39.50
======= ======
</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>
$10.00-$18.80 2,272 9.91 $16.60 0 $--
$21.90 119,800 9.75 $21.90 16,293 $21.90
$32.80-$96.30 7,189 7.46 $76.80 3,230 $76.80
$148.80-$187.30 1,981 7.30 $169.10 1,273 $171.80
$201.30-$392.00 744 6.08 $307.70 684 $313.90
$402.50-$892.50 2,498 6.24 $608.40 2,057 $605.40
</TABLE>
Options for the purchase of 23,538 shares, 5,925 shares and 8,177 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.
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 $15.90, $70.70 and
$148.40 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 $(63.68) $(68.16) $(127.65)
Basic and diluted net loss per
common share - pro forma $(65.20) $(69.50) $(130.25)
</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 3,572 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 3,572 shares, which amendment was approved by the shareholders
at the 1997 Annual Meeting of Shareholders. In April 1998, the Board of
Directors approved an amendment to the 1994 Plan to increase the number of
shares covered by the 1994 Plan to 200,000, which amendment was approved at
the 1998 Annual Meeting of Shareholders. Shares are granted twice yearly,
on February 28 and August 31, and are exercisable upon issuance. The
Company issued 763 shares, 857 shares and 1,042 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 $14.10, $70.00
and $84.00, respectively.
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Common Stock Warrants
---------------------
On December 16, 1992, the Company issued warrants, which expired on
December 16, 1997, to purchase an aggregate of 59 shares of common stock at
an initial exercise price of $421.40 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 1,148 shares of the Company's
common stock to an underwriter at an initial exercise price of $506.10 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 3,000 shares of the Company's common stock at an exercise price of
$833.00 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 500 shares of common stock at a price of $595.00 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 425 shares of the Company's common
stock to Oppenheimer & Co., Inc. at an exercise price of $490.00 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 $3,143 shares of the Company's
common stock to Commonwealth Associates at an exercise price of $219.10 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
11,283 shares of the Company's common stock at an exercise price of $175.00
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
1,071 shares of the Company's common stock to Furman Selz LLC at an
exercise price of $105.00 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.
In August 1991 and September 1992, the Company issued warrants to purchase
up to 432 and 286 shares, respectively, of the Company's Class D Preferred
Stock (the "Class D Warrants") at a minimum exercise price of $175.00 per
share, in connection with leasing arrangements. The Class D Warrants were
automatically converted into warrants to purchase 268 shares of common
stock at an exercise price of $468.30 per share upon
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 1,270 shares of Class F
Preferred Stock at an exercise price of $157.50 per share. Upon conversion
of all Class F Preferred Stock effected by the initial public offering, the
warrants converted into warrants to purchase 475 shares of common stock at
an exercise price of $421.40 per share. In the year ended December 31,
1995, 139 of these warrants were exercised. The remaining warrants expired
on September 15, 1997.
At December 31, 1997 there were 416,841 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.
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 1,429 shares of Procept Common Stock at an
exercise price of $245.00 per share.
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
On April 13, 1998, VacTex, Inc. ("VacTex") was acquired by Aquila
Biopharmaceuticals, Inc. ("Aquila"). The Company's investment in VacTex of
300,000 shares of common stock was converted to 113,674 shares of Aquila
common stock and $128,501 of 7% debentures. As a result, the Company is
accounting for its investment under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" as an available for sale security and marked it to market by
recording an unrealized gain of $475,022 as part of Shareholders' Equity,
based on Aquila's common stock closing price on April 13, 1998. The
Company's investment in VacTex was originally accounted for under the cost
method since it was a restricted security, it did not have a readily
determinable fair value and Procept owned less than twenty percent of
VacTex.
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.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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:
<TABLE>
<S> <C>
1998 $1,392,000
1999 $1,435,000
2000 $706,000
</TABLE>
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:
<TABLE>
<S> <C> <C>
1998 $20,519
Less: amount representing interest (288)
-------
Present value of future minimum lease payments $20,231
=======
</TABLE>
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
F-26
<PAGE>
PROCEPT, INC.
UNAUDITED BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,568,890 $535,242
Marketable securities 2,003,254 --
Other current assets 15,406 132,062
Investment in Aquila (Note 3) 455,313 --
----------- ----------
Total current assets 6,042,863 667,304
Property and equipment, net 235,645 889,258
Deferred financing charges -- 54,424
Investment in VacTex (Note 3) -- 300,000
Other assets 197,026 257,026
------------ ----------
Total assets $6,475,534 $2,168,012
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $301,643 $1,069,952
Accrued compensation 138,202 320,463
Other current liabilities 173,033 142,680
Current portion of capital lease obligations -- 20,231
------------ ----------
Total current liabilities 612,878 1,553,326
Deferred rent 207,624 257,827
Other noncurrent liabilities -- 96,875
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized;
Series A 1 and 30,061 shares designated at September 30, 1998 and
December 31, 1997, respectively; 0 and 30,060 shares issued and
outstanding at September 30, 1998 and December 31, 1997, respectively -- 301
Common stock, $.01 par value; 30,000,000 shares authorized; 3,001,832
and 196,204 shares issued at September 30, 1998 and December 31,
1998 respectively 30,018 1,962
Additional paid-in capital 66,110,013 62,242,741
Cumulative dividends on preferred stock -- (4,217,388)
Accumulated deficit (60,631,556) (57,755,775)
Unrealized gain on investments 158,414 --
Treasury stock, at cost; 11,857 shares at September 30, 1998
and December 31, 1997 (11,857) (11,857)
------------ -----------
Total shareholders' equity 5,655,032 259,984
------------ -----------
Total liabilities and shareholders' equity $6,475,534 $2,168,012
============ ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-27
<PAGE>
PROCEPT, INC.
UNAUDITED STATEMENTS OF OPERATIONS
----------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative arrangements
with related party -- $118,750 $109,375 $389,062
Revenue from grant -- -- -- 55,811
Interest income $75,031 23,493 155,530 124,414
---------- ----------- ----------- ------------
Total revenues 75,031 142,243 264,905 569,287
---------- ----------- ----------- ------------
Costs and expenses:
Research and development 371,958 1,287,328 1,707,256 5,165,693
General and administrative 269,666 592,005 1,411,786 2,017,028
Restructuring charges -- 220,555 225,000 220,555
Other (38,444) 10,940 (203,356) 38,541
---------- ----------- ----------- -----------
Total costs and expenses 603,180 2,110,828 3,140,686 7,441,817
---------- ----------- ----------- ------------
Net loss (528,149) (1,968,585) (2,875,781) (6,872,530)
Less: dividends on preferred stock -- (4,217,388) -- (4,217,388)
---------- ----------- ----------- ------------
Net loss available to common shareholders $(528,149) $(6,185,973) $(2,875,781) $(11,089,918)
========== =========== =========== ============
Basic and diluted net loss per common share $(0.18) $(25.23) $(1.35) $(52.12)
========== =========== =========== ============
Weighted average number of common
shares outstanding - basic and diluted 3,001,832 245,227 2,126,651 212,780
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-28
<PAGE>
PROCEPT, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
----------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,875,781) $(6,872,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 525,951 774,683
Non-cash related party revenue -- (112,500)
Gain on sale of equipment (208,365) --
Savings and retirement plan stock contribution 43,238 --
Stock options issued for consulting services 12,192 --
Changes in operating assets and liabilities:
Other current assets 124,536 89,165
Other assets 60,000 (112,758)
Accounts payable (768,309) (46,603)
Accrued compensation (182,261) 43,674
Accrued contract research -- 8,703
Other current liabilities 30,353 (104,092)
Other noncurrent liabilities (96,875) (68,154)
Deferred rent (50,203) --
----------- -----------
Net cash used in operating activities (3,385,524) (6,400,412)
----------- -----------
Cash flows from investing activities:
Capital expenditures (319,669) (50,214)
Purchases of marketable securities (2,000,153) --
Proceeds from maturity of marketable securities -- 4,006,463
Decrease in restricted investments -- 469,000
Proceeds from sale of equipment 647,816 --
----------- -----------
Net cash (used in) provided by investing activities (1,672,006) 4,425,249
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (20,231) (497,962)
Proceeds from issuance of common stock -- 410
Proceeds from private placement of common stock 9,802,500 3,005,999
Expenses from private placement of common stock (1,691,091) (131,381)
Proceeds from employee stock purchase plan -- 55,201
----------- -----------
Net cash provided by financing activities 8,091,178 2,432,267
----------- -----------
Net change in cash and cash equivalents 3,033,648 457,104
Cash and cash equivalents at beginning of period 535,242 1,962,229
----------- -----------
Cash and cash equivalents at end of period $3,568,890 $2,419,333
=========== ===========
Supplemental disclosures and non-cash transactions:
Interest paid $5,120 $25,896
=========== ===========
Stock options issued for consulting services $30,192 $--
=========== ===========
Savings and retirement plan stock contribution $43,238 $--
=========== ===========
Dividends on preferred stock $-- $4,217,388
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-29
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
Nature of Business
- ------------------
Procept, Inc. ("Procept" or the "Company") located in Cambridge, MA is a
biopharmaceutical company currently engaged in the development of novel drugs
with a focus in anti-infectives and immunosuppressants. The Company is also
actively seeking the acquisition or inlicense of drug development candidates
that would benefit from Procept's expertise in various therapeutic areas.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with FDA government regulations
and the ability to obtain financing.
Plan of Operations
- ------------------
Since its inception in 1985, Procept has devoted its principal efforts to drug
discovery and research. Procept has generated no revenue from product sales, has
not been profitable since inception, and has incurred an accumulated deficit of
$60.6 million through September 30, 1998. Losses have resulted principally from
costs incurred in research and development activities related to the Company's
efforts to develop drug candidates and from the associated administrative costs.
The Company expects to incur significant additional operating losses over the
next several years and expects cumulative losses to increase substantially due
to preclinical and clinical testing, and development of marketing, sales and
production capabilities. Procept's future plans will focus on drug development
rather than research. The Company is seeking strategic partnering opportunities
for its lead compounds to accelerate revenue and minimize the investment
required for marketing, sales and production capabilities.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through March 2000. Although management
continues to pursue additional funding arrangements and/or strategic partnering,
there can be no assurance that additional funding will be available from any of
these sources or, if available, will be available on acceptable or affordable
terms. If the Company is unable to enter into an additional corporate
collaboration(s) that produce revenue for the Company, or secure additional
financing, the Company's financial condition will be adversely affected.
The accompanying financial statements for the three-month and nine-month periods
ended September 30, 1998 and 1997 are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles. These
interim financial statements, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the interim periods ended September 30, 1998 and
1997. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in
F-30
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
conjunction with the audited financial statements for the year ended December
31, 1997 which are contained in the Company's 1997 Annual Report on Form 10-K/A.
2. SHAREHOLDERS' EQUITY
--------------------
On May 18, 1998, Procept's shareholders approved a one-for-ten reverse split of
the Company's Common Stock (the "1998 Reverse Stock Split"), which was effected
on June 1, 1998. Shareholders' equity has been restated to give retroactive
application to the 1998 Reverse Stock Split in prior periods by reclassifying
from Common Stock to Additional Paid-In Capital the par value of the eliminated
shares arising from the 1998 Reverse Stock Split. In addition, all references in
the financial statements to number of shares, per share amounts, and stock
option and warrant data of the Company's Common Stock have been restated.
As part of a unit offering, the Company sold an aggregate of 1,960,500 shares of
Common Stock in January, February, and April of 1998 together with five-year
Class C Warrants to purchase 1,960,500 shares of Common Stock at an exercise
price of $5.00 per share (the "1998 Offering"). The Company completed the 1998
Offering on April 9, 1998 (the "Final Closing Date"). The $5.00 per share
exercise price of the Class C Warrants was determined as part of the terms of
the 1998 Offering in a negotiation between the Company and the placement agent
for the 1998 Offering. The Company did not separately value the Class C Warrants
from the Common Stock issued in the 1998 Offering since the resulting accounting
treatment for both securities is to record their value in Additional Paid-In
Capital within the equity section of the balance sheet. These securities were
sold for gross proceeds of $9.8 million. The purchasers in the 1998 Offering are
entitled to certain contractual rights requiring contingent additional issuances
of Common Stock to the purchasers, (x) based on a formula market price at April
9, 1999, (y) to protect them against future dilutive sales of securities and (z)
as a dividend substitute beginning on October 9, 1999. In the event of (i) a
liquidation, dissolution or winding up of the Company, (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or (iii)
any consolidation, merger, combination, reorganization or other transaction in
which the Company is not the surviving entity, the purchasers are entitled to
receive an amount equal to 140% of such purchaser's investment as a liquidation
"preference." Except in the case of a liquidation, dissolution or winding up,
such payment will be in the form that equity holders will receive, in the
applicable transaction, such as in cash, property or securities of the entity
surviving the acquisition transaction. In the event of a liquidation,
dissolution or winding up, such payment is contingent upon the Company having
available resources to make such payment. These contractual rights will
terminate after April 9, 1999 if the Common Stock trades at $15.00 per share or
more.
In connection with the Final Closing of the 1998 Offering on April 9, 1998 (the
"Final Closing") and certain advisory services, the Company sold to Paramount
Capital, Inc., the Company's placement agent in the 1998 Offering, for $0.001
per option, options to purchase an aggregate of 24.06875 units (each unit
consisting of 20,000 shares of Common Stock and warrants to purchase 20,000
shares of Common Stock at an exercise price of $5.00 per share) at an exercise
price of $110,000 per unit (i.e., $5.50 per share). Also on April 9, 1998, The
Aries Fund and the Aries Domestic Fund, L.P. exchanged an aggregate of 30,060
shares of Series A Convertible Preferred Stock and
F-31
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
related warrants for units in the 1998 Offering comprised of 841,680 shares of
Common Stock and five-year Class C Warrants to purchase 841,680 shares of Common
Stock at an exercise price of $5.00 per share. As part of the exchange of Series
A Convertible Preferred Stock and related warrants for units in the 1998
Offering, the cumulative dividends on Preferred Stock of $4.2 million was
reclassified to Additional Paid-In Capital.
3. RESEARCH COLLABORATIONS
-----------------------
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"). Under the Sponsored Research Agreement, Procept
conducted specified research tasks on behalf of VacTex for which Procept
received a combination of cash and equity in VacTex based on the number of
full-time equivalent employees of Procept engaged in the research, but subject
to maximum cash and stock limits. At December 31, 1997, the Company's investment
in VacTex was accounted for under the cost method since it was a restricted
security, it did not have a readily determinable fair value and Procept owned
less than twenty percent of VacTex.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
("Aquila"). The Company's investment in VacTex of 300,000 shares of common stock
was converted to 113,674 shares of Aquila common stock and $128,501 principal
amount of 7% debentures. As a result, the Company is accounting for its
investment in Aquila under Statement of Financial Accounting Standards ("SFAS")
115, "Accounting for Certain Investments in Debt and Equity Securities" as an
available for sale security and marked it to market by recording an unrealized
gain of $0.2 million as part of Shareholders' Equity, based on Aquila's common
stock closing price on September 30, 1998.
4. RESTRUCTURING
-------------
In order to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on all other research programs, except limited preclinical
support for its intracellular T-cell enzyme ("DHODH") program, and underwent a
significant downsizing, reducing its staff to 10 people. The amount of
termination benefits accrued and charged to restructuring costs in the statement
of operations for the nine-month period ended September 30, 1998 was $0.2
million. Also, in the fourth quarter of 1997, the Company accrued $0.3 million
in restructuring costs. For the three and nine months ended September 30, 1998,
the amount of termination benefits paid and charged against the 1998 and 1997
liability was $0.1 million and $0.4 million, respectively. The remaining
liability of $0.1 million is expected to be utilized by March 31, 1999. Due to
the restructuring and focus on the development of PRO 2000, the Company has sold
and plans to continue to sell most of its research and development equipment.
For the nine months ended September 30, 1998, the Company received $0.6 million
from the sale of equipment and has recorded a $0.2 million gain in other
expenses.
F-32
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
5. BASIC AND DILUTED NET (LOSS) PER COMMON SHARE
---------------------------------------------
In the quarter ended December 31, 1997, the Company adopted SFAS 128, "Earnings
Per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is based upon the
weighted average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed exercises of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock options using the treasury stock method. For the three- and nine-month
periods ended September 30, 1998, there were no anti-dilutive securities.
6. COMPREHENSIVE INCOME
--------------------
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements and will provide such information annually in
its Statement of Shareholders' Equity and in a footnote disclosure for interim
periods. Accumulated other comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(528,149) $(1,968,585) $(2,875,781) $(6,872,530)
Change in unrealized gain
on investments (146,154) -- 158,414 --
----------- ------------ ------------- ------------
Comprehensive loss $(674,303) $(1,968,585) $(2,717,367) $(6,872,530)
========== ============ ============ ============
</TABLE>
<TABLE>
<S> <C>
Unrealized gain on investments:
Balance at December 31, 1997 --
Change during the three months ended March 31, 1998 --
Change during the three months ended June 30, 1998 $304,568
Change during the three months ended September 30, 1998 (146,154)
---------
Balance at September 30, 1998 $158,414
========
</TABLE>
F-33
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
7. NEW ACCOUNTING STANDARDS
------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement specifies new guidelines for determining a company's operating
segments and related requirements for disclosure. SFAS 131 will become effective
for fiscal years beginning after December 15, 1997. The Company does not believe
that the adoption will have a material effect.
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
is effective for periods beginning after December 15, 1997, but excludes interim
periods during 1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans by requiring
additional information on changes in the benefit obligations and fair values of
the plan assets and eliminating certain disclosures that are no longer useful.
It does not change the measurement or recognition of those plans. The Company
does not believe that the adoption will have a material effect.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the adoption will have a material effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
8. SUBSEQUENT EVENT -- PROPOSED MERGER
-----------------------------------
On November 2, 1998, Procept entered into a non-binding Letter of Intent ("LOI")
to merge with Pacific Pharmaceuticals, Inc. ("Pacific"), a public research and
development company engaged in the development of cancer therapies. Both
companies will work together to enter into a definitive merger agreement by
November 19, 1998. The LOI provides that each of Pacific's shares of common
stock (including preferred stock on an as converted basis into common stock)
will convert into 0.12 shares of Procept common stock or a total of 2,755,000
Procept shares (of which 1,287,647 shares of Procept common stock to be issued
in the merger to the holders of Pacific's preferred stock shall be accompanied
by certain contractual rights identical to contractual rights held by purchasers
in Procept's 1998 private placement). In addition, Procept has agreed to assume
an approximately $7.3 million obligation (payable in common stock of Procept) of
Pacific's subsidiary, BG Development Corp., and Procept has agreed to
F-34
<PAGE>
UNAUDITED NOTES TO FINANCIAL STATEMENTS
exchange all of Pacific's outstanding warrant, unit purchase option and stock
option obligations into like instruments of Procept. The merger remains
contingent upon several conditions including (i) satisfactory due diligence by
Procept and Pacific; (ii) fairness opinions by independent investment bankers;
and (iii) the final approval by both companies' shareholders.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Pharmaceuticals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Pharmaceuticals, Inc. and Subsidiaries (collectively, the "Company", a
development stage enterprise) as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998 and the period from
September 23, 1983 (date of incorporation of Pacific Pharmaceuticals, Inc.) to
March 31, 1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Pharmaceuticals, Inc. and
Subsidiaries at March 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1998,
and for the period from September 23, 1983 (date of incorporation of Pacific
Pharmaceuticals, Inc.) to March 31, 1998 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of March 31, 1998. As discussed in
Note 1 to the consolidated financial statements, the Company's activities since
inception have been directed primarily toward the development and
commercialization of products based on biotechnological research.
As discussed in Note 9, the accompanying fiscal 1997 financial statements have
been restated.
DELOITTE & TOUCHE LLP
July 8, 1998
San Diego, California
F-36
<PAGE>
Consolidated Balance Sheets
Pacific Pharmaceuticals, Inc. and Subsidiaries (A Development Stage Enterprise)
<TABLE>
<CAPTION>
As of March 31,
--------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (as restated,
see Note 9)
Current Assets:
Cash and cash equivalents $3,290,176 $1,784,599
Short-term investments -- 4,981,435
Accounts receivable, net -- 99,066
Inventory 38,637 41,677
Prepaid expenses 85,053 87,311
- -----------------------------------------------------------------------------------------------
Total current assets 3,413,866 6,994,088
Property and equipment, net 71,840 82,563
Patent costs, net 104,981 157,597
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $3,590,687 $7,234,248
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $661,371 $723,523
Accrued expenses 201,125 161,574
Current portion of capital leases 4,066 4,670
- -----------------------------------------------------------------------------------------------
Total current liabilities 866,562 889,767
- -----------------------------------------------------------------------------------------------
Capital leases 22,584 13,072
- -----------------------------------------------------------------------------------------------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Convertible preferred stock, $25 par value, 2 ,000,000 shares
authorized 40,090 and 50,000 issued and outstanding
at March 31, 1998 and 1997, respectively
(liquidating preference $10,423,400) 1,002,288 1,250,038
Common stock, $.02 par value, 100,000,000 shares authorized;
10,777,234 and 8,151,029 shares issued and
outstanding at March 31, 1998 and 1997, respectively 215,545 163,021
Capital in excess of par value 46,969,197 38,805,489
Deficit accumulated during the development stage (45,485,489) (33,887,139)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 2,701,541 6,331,409
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,590,687 $7,234,248
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-37
<PAGE>
Consolidated Statements Of Operations
Pacific Pharmaceuticals, Inc. and Subsidiaries (A Development Stage Enterprise)
<TABLE>
<CAPTION>
Years Ended March 31, September 23, 1983
---------------------------------------------------------- (inception) to
1998 1997 1996 March 31, 1998
- --------------------------------------------------------------------------------------------------------------------
(as restated,
see Note 9)
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 69,510 $ 100,485 $ 13,657 $ 2,019,741
License fees and royalties 5,405 1,207 150,000 486,612
Contract research -- 39,172 45,000 268,063
Marketing rights -- 5,000 60,000 1,311,500
Interest and other 273,545 129,316 110,159 1,913,658
- -----------------------------------------------------------------------------------------------------------------
Total revenues 348,460 275,180 378,816 5,999,574
- -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product sales 140,460 95,200 124,530 3,138,395
Product development 2,196,433 2,565,664 1,853,899 17,160,961
General and administrative 2,086,249 1,155,515 1,257,722 17,851,747
Business development
and marketing 218,603 290,603 372,316 3,776,889
Interest and other 78,178 65,564 26,252 633,973
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,719,923 4,172,546 3,634,719 42,561,965
- -----------------------------------------------------------------------------------------------------------------
Net loss (4,371,463) (3,897,366) (3,255,903) (36,562,391)
Convertible preferred stock
dividends 7,226,887 1,696,211 -- 8,923,098
- -----------------------------------------------------------------------------------------------------------------
Net loss applicable to
common stockholders $(11,598,350) $ (5,593,577) $ (3,255,903) $ (45,485,489)
- -----------------------------------------------------------------------------------------------------------------
Net loss per share of common
stock-basic and diluted ($1.25) ($0.69) ($0.52)
- ------------------------------------------------------------------------------------------
Weighted average common
stock outstanding 9,273,717 8,115,139 6,222,832
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-38
<PAGE>
Consolidated Statements Of Stockholders' Equity
Pacific Pharmaceuticals, Inc. and Subsidiaries (A Development Stage Enterprise)
<TABLE>
<CAPTION>
Deficit
Preferred Stock Common Stock Accumulated
------------------------------ ------------------------------ Capital During the
in Excess Development
Shares Par Value Shares Par Value of Par Value Stage
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 23, 1983 -- $ -- -- $ -- $ -- $ --
Original issuance of common stock:
October 1983 at $.02 per share 597,500 11,950
October 1983 at $2.00 per share 55,000 1,100 108,900
Issuance for cash, January 1984
at $4.00 per share 383,625 7,672 1,325,817
Net loss (137,937)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1984 -- -- 1,036,125 20,722 1,434,717 (137,937)
Purchase of treasury stock (267)
Adjustment to capital in excess
of par value 5,600
Net loss (692,070)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1985 -- -- 1,036,125 20,722 1,440,050 (830,007)
Purchase of treasury stock (83)
Initial public offering, October 1985
at $6.00 per share 500,000 10,000 2,392,536
Net loss (994,767)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1986 -- -- 1,536,125 30,722 3,832,503 (1,824,774)
Purchase of treasury stock (5)
Preferred stock subscribed:
Series A 6,000 150,000 450,000
Net loss (1,445,191)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1987 6,000 150,000 1,536,125 30,722 4,282,498 (3,269,965)
Issuance of 8.5% convertible
subordinated notes warrants 62,500
Retirement of treasury stock (17,500) (350) 350
Preferred stock subscribed/(returned):
Series A (3,000) (75,000) (225,000)
Series B 1,600 40,000 120,000
Net loss (1,327,934)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1988 4,600 115,000 1,518,625 30,372 4,240,348 (4,597,899)
Conversion of 8.5% convertible
subordinated notes 39,999 800 249,193
Consultant's compensation 1,073 22 6,524
Preferred stock subscribed/(converted):
Series A (3,000) (75,000) 35,002 700 74,296
Series B 27,180 679,500 1,556,444
Dividends accrued - Series B (221,955)
Net loss (1,553,240)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1989 28,780 719,500 1,594,699 31,894 5,904,850 (6,151,139)
Private placement, November 1989
at $8.00 per share 75,000 1,500 538,500
Exercise of common stock options 3,500 70 13,930
Preferred stock subscribed/(converted):
Series B (28,780) (719,500) 719,500 14,390 705,111
Dividends accrued - Series B (141,158)
Reverse accrued dividends - Series B 363,113
Exercise of Series B warrants 463,088 9,262 1,611,546
Exercise of other warrants 2,000 40 14,360
Net loss (1,512,343)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1990 -- -- 2,857,787 57,156 9,010,252 (7,663,482)
</TABLE>
F-39
<PAGE>
Consolidated Statements Of Stockholders' Equity
Pacific Pharmaceuticals, Inc. and Subsidiaries(A Development Stage Enterprise)
<TABLE>
<CAPTION>
Deficit
Preferred Stock Common Stock Accumulated
-------------------------- ------------------------ Capital During the
in Excess Development
Shares Par Value Shares Par Value of Par Value Stage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of common stock options 7,100 142 28,258
Exercise of other warrants 98,000 1,960 743,640
Consultant's compensation 338 7 2,894
Private placement, October 1990
at $12.00 per share 257,500 5,150 2,765,446
Net loss (2,111,267)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1991 -- -- 3,220,725 64,415 12,550,490 (9,774,749)
Exercise of common stock options 10,950 218 40,932
Exercise of other warrants 10,000 200 104,800
Private placement, April 1991
at $17.50 per share 214,188 4,284 3,433,816
Net loss (3,156,803)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1992 -- -- 3,455,863 69,117 16,130,038 (12,931,552)
Exercise of common stock options 4,300 86 16,139
Private placement, May 1992
at $11.625 per share 277,100 5,542 2,889,461
Net loss (3,738,097)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1993 -- -- 3,737,263 74,745 19,035,638 (16,669,649)
Exercise of common stock options 70,227 1,405 292,406
Common stock retired as payment
for common stock options exercised (12,903) (258) (99,740)
Grant of stock option below fair market value 468,750
Private placements:
July 1993 at $5.50 per share 317,093 6,342 1,531,879
December 1993 at average of $6.12 per share 427,275 8,546 2,386,770
January 1994 at average of $6.24 per share 222,100 4,442 1,259,545
March 1994 at $5.30 per share 51,000 1,020 244,088
Common stock issued in payment of offering expenses 974 19 8,868
Net loss (4,613,042)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 -- -- 4,813,029 96,261 25,128,204 (21,282,691)
Private placements:
April 1994 at $4.00 per share 100,000 2,000 378,000
August 1994 at $4.485 per share 100,000 2,000 423,575
September 1994 at $3.80 per share 250,000 5,000 886,428
Net loss (3,754,968)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 -- -- 5,263,029 105,261 26,816,207 (25,037,659)
Private placements:
November 1995 at $1.25 per share 2,788,000 55,760 2,864,383
Net loss (3,255,903)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 8,051,029 161,021 29,680,590 (28,293,562)
Private placement of convertible preferred stock 50,000 $1,250,038 7,291,688
Warrants exercised 100,000 2,000 92,000
Issuance of warrants for services 45,000
Convertible preferred stock dividend (as restated, see Note 9) 1,696,211 (1,696,211)
Net loss (3,897,366)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 (as restated) 50,000 1,250,038 8,151,029 163,021 38,805,489 (33,887,139)
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants exercised 423,437 8,469 389,562
Issuance of common stock for services 13,110 262 11,737
Conversion of preferred stock into common stock (9,910) (247,750) 2,189,658 43,793 203,957
Preferred stock unit purchase options as compensation for
financial advisory services 331,565
Convertible preferred stock dividend 7,226,887 (7,226,887)
Net loss (4,371,463)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 40,090 $1,002,288 10,777,234 $215,545 $46,969,197 ($45,485,489)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-40
<PAGE>
Consolidated Statements Of Cash Flow
Pacific Pharmaceuticals, Inc. and Subsidiaries (A Development Stage Enterprise)
<TABLE>
<CAPTION>
Years Ended March 31, September 23, 1983
----------------------------------------------------- (inception) to
1998 1997 1996 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($4,371,463) ($3,897,366) ($3,255,903) ($36,562,391)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 81,257 109,731 123,427 1,665,001
Non-cash compensation expense upon issuance
of common stock, stock options and warrants 331,565 45,000 -- 851,861
Net book value of asset disposals 76,376 17,064 5,506 241,692
Option income from retirement of stock
or amounts previously advanced by customer -- -- -- (400,000)
Changes in assets and liabilities:
Accounts receivable 99,066 (96,398) 6,405 --
Inventory 3,040 (770) 7,060 (38,640)
Prepaid expenses and other assets 2,258 8,634 3,349 (96,028)
Accounts payable (62,152) 509,214 (2,505) 661,371
Accrued expenses 39,551 (217,353) 263,486 57,102
Customer advances -- -- (30,888) 140,863
Other liabilities -- (7,842) (11,895) (4,866)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (3,800,502) (3,530,086) (2,891,958) (33,484,035)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of short-term investments -- (4,981,435) (1,288,106) (10,461,867)
Maturities of short-term investments 4,981,435 1,288,106 992,326 10,461,867
Capital expenditures (16,502) (9,764) (51,596) (847,929)
Patent costs (64,945) (31,799) (61,823) (977,372)
Other -- 8,825 -- 7,829
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 4,899,988 (3,726,067) (409,199) (1,817,472)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of notes payable -- 524,467 325,426 2,183,867
Repayment of notes payable -- (524,467) (325,426) (1,965,124)
Repayment of capital lease obligations (3,940) (4,625) (37,087) (183,547)
Long-term customer advances -- -- -- 100,000
Issuance of common stock, convertible preferred
stock and stock warrants 410,031 8,635,726 2,920,143 38,456,487
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 406,091 8,631,101 2,883,056 38,591,683
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 1,505,577 1,374,948 (418,101) 3,290,176
Cash and cash equivalents at beginning of period 1,784,599 409,651 827,752 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $3,290,176 $1,784,599 $409,651 $3,290,176
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $2,682 $36,210 $18,804 $497,742
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE>
Notes To Consolidated Financial Statements
Pacific Pharmaceuticals, Inc. and Subsidiaries (A Development Stage Enterprise)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Consolidated Financial Statements include the
accounts of Pacific Pharmaceuticals, Inc. and its wholly owned subsidiaries,
Perio Test, Inc., XYX Acquisition Corp. and BG Development Corp. (collectively,
the "Company"). The Company was incorporated under the laws of the State of
Delaware on September 23, 1983. For the period of inception to date, the
Company's activities have been directed primarily toward the development and
commercialization of products based on biopharmaceutical research. On August 7,
1997, the Company's stockholders approved an amendment to the Certificate of
Incorporation to change the name of the Company to Pacific Pharmaceuticals, Inc.
The Company was formerly known as Xytronyx, Inc.
Principles of Consolidation - All significant intercompany balances and
transactions have been eliminated in consolidation.
Development Stage - The Company has not earned significant revenues from planned
principal operations. Accordingly, the Company's activities have been accounted
for as those of a "Development Stage Enterprise" as set forth in Financial
Accounting Standards Board Statement No. 7 ("FAS 7"). Among the disclosures
required by FAS 7 are that the Company's financial statements be identified as
those of a development stage enterprise, and that the consolidated statements of
operations, stockholders' equity and cash flows disclose activity since the date
of the Company's inception.
Since inception, the Company has experienced negative cash flow from operations,
and management considers it prudent to anticipate that negative cash flow from
operations will continue until such time as sales of its products under
development commence. The Company has initiated a private placement equity
financing to raise a maximum of $10 million assuming exercise of over-allotment
provision by the placement agent as described in Note 8. On June 22, 1998, the
Company closed on gross proceeds of $2.9 million ($2.6 net proceeds), for the
aforementioned private placement. The Company has also initiated contingency
plans to defer certain research and development expenditures and other non
essential costs until the Company has closed a more significant portion of the
aforementioned financing. Management believes the Company's financial resources
will be adequate, based on the assumption that no significant revenues are
generated through March 1999.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Cash Equivalents - Cash equivalents consist of money market instruments
purchased with an original maturity of three months or less.
Short-Term Investments - Short term investments represent marketable debt
securities and are carried at fair value in accordance with FAS 115. Unrealized
holding gains or losses have not been material.
Accounts Receivable, net - Accounts receivable consists of sales of products to
customers, net of allowances for doubtful accounts.
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventory - Inventory, which consists principally of raw materials and work in
process, is valued at the lower of cost (determined by the first-in, first-out
method) or market.
Property and Equipment - Depreciation and amortization of property and equipment
are provided using the straight-line method over the estimated useful lives of
the related assets, which are principally five and ten years. Property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31
1998 1997
-------------- -------------
<S> <C> <C>
Laboratory equipment $118,343 $357,139
Office furniture and equipment 166,860 157,966
Leasehold improvements 3,799 3,799
-------------- -------------
Total property and equipment 289,002 518,904
Less accumulated depreciation and amortization (217,162) (436,341)
-------------- -------------
Total $ 71,840 $82,563
============== =============
</TABLE>
Patent Costs - Legal expenses incurred in connection with applications for
patents on research and development projects are capitalized. The costs are
amortized using the straight-line method over five years. Patent costs which
have no further economic value are written off in the period in which such
impairment in value occurs. As a result of the Company's annual evaluation of
its capitalized patent costs, the Company wrote off patent and trademark costs
during Fiscal 1998 with a net book value of $68,000 which related primarily to
the Kephra technology. Patent costs are net of accumulated amortization of
$335,844 and $360,969 at March 31, 1998 and 1997, respectively.
Accrued Expenses - Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31
1998 1997
-------------- ---------------
<S> <C> <C>
Accrued compensation $ 67,687 $ 25,185
Accrued clinical trial expense 133,438 133,438
Other - 2,951
-------------- ---------------
Total $ 201,125 $ 161,574
============== ===============
</TABLE>
Revenue Recognition - Product sales revenue is generally recognized at the time
of product shipment. License fees and royalties, contract research, and
marketing rights income are all recognized as earned in accordance with their
respective agreements. Payments received in advance of shipments or prior to the
completion of the earnings process are recorded as deferred revenue.
Loss Per Share of Common Stock - Basic loss per share of common stock is
computed by dividing the net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share (EPS) during the current fiscal year. This statement
requires the presentation of earnings per share to reflect both "Basic EPS" as
well as "Diluted EPS" on the face of the statement of operations. In
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
general, Basic EPS is a function of weighted average number of common shares
outstanding for the periods. Diluted EPS does reflect the potential dilution
created by stock issuable pursuant to outstanding options, warrants, convertible
debt or equity securities and other contingently issuable shares. The
requirements of SFAS 128 have been applied retroactively to all periods
presented. There was no impact on reported net loss per common share as a result
of the adoption of this SFAS.
Concentration of Credit Risk - The Company invests its excess cash in money
market accounts and short-term investments, primarily in U. S. Treasury
securities. The Company has not experienced any significant losses on its cash
accounts or short-term investments.
Fair Value of Financial Instruments - The Company's carrying amounts of its
financial assets and liabilities approximate their fair value due to the
short-term nature of the assets and liabilities.
Major Customers - One customer accounted for 98% and 75% of product sales for
the years ended March 31, 1998 and 1997, respectively. Three customers
individually accounted for 21%, 26% and 46%, respectively, of fiscal year 1996
product sales. Export sales, which accounted for 2% in the current fiscal year,
were to one customer in Japan, and 81% of product sales for the year ended March
31, 1997 were primarily to one customer in Europe. Export sales, all of which
were to Japan, accounted for 51% of product sales in fiscal year 1996.
Supplemental Cash Flow Information - The Company had the following noncash
financing and investing activities for the period September 23, 1983 (inception)
through March 31, 1998: Common Stock issued upon the conversion of $720,000 of
Series B preferred stock during fiscal year 1990; Common Stock issued upon the
conversion of long-term debt in the amount of $250,000 in fiscal year 1996;
option income of $100,000 recognized from an amount previously classified as a
customer advance during fiscal year 1996; capital lease obligations incurred
totaling $229,000, of which $24,000 was incurred in fiscal year 1996 and $29,000
was incurred in fiscal year 1998, and; non-cash convertible preferred stock
dividends of $6,822,000 and $1,696,000 in fiscal years 1998 and 1997,
respectively.
Reclassifications - Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year's presentation.
2. STOCKHOLDERS' EQUITY
Private Placements of Equity Securities - In fiscal year 1997, the Company
completed a private equity financing ("1997 Private Placement") in two stages
with the initial closing completed on December 19, 1996 (the "Initial Closing")
and the final closing completed on March 7, 1997 (the "Final Closing") in which
it raised $8,542,000, net of offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 Common Stock Purchase
Warrants ("Warrants"), to accredited individuals and institutional investors
pursuant to Regulation D under the Securities Act of 1933, as amended. Each
Warrant entitles the holder to purchase one share of Common Stock at a price of
$1 per share and may be exercised until March 7, 2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of Common
Stock for each share of Preferred Stock. The 1997 Private Placement contained an
adjustment provision to reset the conversion ratio under certain conditions. For
Preferred Stock converted after March 7, 1998, the new conversion ratio is
290.89 shares of common stock for each share of Preferred Stock.
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The subscribers to the Private Placement purchased the Units at a discount from
the closing prices of the Company's common stock on the Initial Closing date of
23% and the Final Closing date of 36%. The detachable stock purchase warrants
issued as part of the Units had a fair value at the date of issuance of
$1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been recognized as a
return to the Preferred Stockholders from the date of issuance of the Preferred
Stock to the date in which the Preferred Stock was eligible for conversion into
Common Stock. The reset of the conversion ratio during March 1998 generated an
additional non-cash dividend of $2,576,000. Accordingly, non-cash dividends to
preferred stockholders totaled $9,297,000, of which $7,227,000 and $1,696,000
were recognized during the years ended March 31, 1998 and 1997, respectively.
Holders of the Preferred Stock will be entitled to receive dividends, when and
if declared by the Board of Directors. The Company does not intend to pay cash
dividends on the Preferred Stock or the underlying Common Stock for the
foreseeable future. Liquidating rights for preferred stockholders are $260 per
share plus accrued, but unpaid dividends.
Certain of the subscribers to the Private Placement entered into a Lock-up
Agreement ("Lock-up") with the Company. In the Lock-up, each subscriber agreed
not to sell or exercise any of the securities contained in the Units until the
underlying common stock is registered with the Securities and Exchange
Commission. The Company filed a registration statement with respect to resale of
the securities to be offered and the registration statement was effective on
September 4, 1997. As of March 31, 1998, 25% of the securities remain subject to
the Lock-up.
The placement agent, Paramount Capital Inc. ("Paramount"), who is affiliated
with certain significant shareholders of the Company, received an aggregate
dollar commission of $900,000 and a non-accountable expense allowance of
$410,753. The Company will also pay a commission to Paramount of 6% of the gross
proceeds received upon any exercise of the Warrants. Additionally, in connection
with the 1997 Private Placement and in connection with its provision of
financial advisory services to the Company, Paramount received a Unit Purchase
Option and an Advisory Option (the "Options") which, in the aggregate, entitle
Paramount to purchase 25 Units at $110,000 per unit. Accordingly, the Options
would entitle the holders thereof, upon exercise, to receive (i) 12,500 shares
of Preferred Stock, convertible into 3,636,125 shares of Common Stock, and (ii)
Warrants to purchase 1,250,000 shares of Common Stock.
Under the terms of the Placement Agency agreement the Company signed with
Paramount, Paramount will provide financial advisory services to the Company for
an 18 month period beginning after the final closing. The Company will pay
Paramount $2,500 per month and has agreed to sell 2.5 Units at $110,000 per unit
to Paramount. The convertible Preferred Stock contained in the Units convert
into 363,613 shares of the Company's common stock ("Advisory Stock"). There are
also warrants ("Advisory Warrants") to purchase 125,000 shares of the Company's
common stock at $1 per share attached to the Units, which are exercisable until
March 7, 2007. The Company valued the Advisory Stock at approximately $335,000
and the Advisory Warrants at approximately $162,000 using a valuation program in
accordance with SFAS 123. The Company is amortizing these advisory services over
18 months beginning in April 1997.
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During November 1995 the Company completed a private placement of 34.85 units at
$100,000 per unit to "accredited" investors as defined by federal securities
regulations. Each unit was comprised of 80,000 shares of the Company's common
stock and 100,000 warrants to purchase one share of common stock per warrant at
an exercise price of $1.00 per share for a period of ten years. The Company
received net proceeds of $2,920,000 after issuance costs of $565,000 Included
among the issuance costs was the payment of $314,000 in commissions and a
non-accountable expense allowance of $139,000 to Paramount. The Company will
also pay a commission to Paramount of 6% of the gross proceeds received upon any
exercise of the warrants. Additionally, Paramount received 4.35625 unit purchase
warrants at an exercise price $110,000 per unit, to purchase up to 784,125
shares of common stock.
Warrants and Placement Agent's Unit Purchase Options - The table below
summarizes the number of the Company's outstanding warrants and unit purchase
options at March 31, 1998:
<TABLE>
<CAPTION>
Placement
Agent's Other
Class A Class B Options and Compensation
Description Warrants Warrants Warrants Warrants Total
- ---------------------------------- ------------- ------------ ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 8,385,150 309,734 4,638,408 403,600 13,736,892
Issued 1,031,880 1,031,880
Exercised 423,437 423,437
Cancelled/Expired 153,600 153,600
------------- ------------ ----------------- ---------------- --------------
Balance at March 31, 1998 7,961,713 309,734 5,670,288 250,000 14,191,735
============= ============ ================= ================ ==============
Weighted Average Exercise Price $ 1.00 $ 22.00 $ 1.06 $ 1.48 $ 1.49
------------- ------------ ----------------- ---------------- --------------
</TABLE>
The Company may redeem the warrants if the market price of the Company's Common
Stock for the 20-day period exceeds $4 per share. 3,010,000 of the Class A
Warrants expire in November 2005 and 4,952,000 expire in March 2007.
As described in Note 4, a stipulated settlement agreement was completed in June
1994 under which the Company issued Class B warrants to purchase 309,734 shares
of common stock at an exercise price of $22 per share, exercisable for a period
of five years from date of issuance. The settlement warrants were issued on
August 11, 1996 and expire in August 2001. The Company valued the Class B
warrants using a generally accepted valuation program and determined that the
value was immaterial.
In May 1996, the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), under which the Company acquired an exclusive world-wide
license to a certain Cancer Immunotherapy technology. Under the agreement, the
Company granted WHO a ten-year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.25 per share valued at
$50,000, and must pay a minimum royalty of $50,000 per year. The value of the
warrant was based upon the negotiated terms of the agreement. The first year
royalty is payable in two stages, 1) $25,000 due upon execution of the agreement
and 2) $25,000 due upon submission of an Investigational New Drug ("IND")
application to the U. S. Food and Drug Administration ("FDA"). The initial
$25,000 was recognized as an expense upon execution of the agreement. The
Company will record the balance of the expense related to the issuance of the
warrant and pay the contingent portion of the minimum royalty if and when an IND
is filed with the FDA concerning this technology.
In September 1996, the Company entered into a line of credit agreement with two
of its stockholders under which the Company may borrow up to $500,000. The
agreement called for interest at the rate of
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12% per annum. In connection with the line of credit agreement, the Company
granted the stockholders five-year warrants to purchase a total of 150,000
shares of the Company's common stock at an exercise price of $0.96. The
warrants, which expire in October 2001, are valued at $20,000, which was
recorded as interest during the period the line of credit facility was
outstanding. The fair market value of the warrants was determined based upon
rates for lines of credit with similar terms available to the Company at the
date of grant. The line of credit was subsequently paid back in March 1997.
Stockholders' Rights Plan - In April 1991, the Company's Board of Directors
adopted a stockholders' rights plan. The plan provides for the distribution of
preferred stock purchase rights to common stockholders which separate from the
common stock ten business days following: (a) an announcement of an acquisition
by a person or group ("Acquiring Party") of 15% or more of the outstanding
common shares of the Company, (b) the commencement of a tender offer or exchange
offer for 15% or more of the common shares, or (c) a merger or asset sale as
defined in the agreement. Under the agreement, certain related parties are not
considered to be an Acquiring Party. In addition, the plan was amended in
November 1995 to allow Paramount (and its affiliates) associated with the
November 1995 private placement to acquire up to 30% of the outstanding common
shares of the Company without being characterized as an Acquiring Party and was
additionally amended on December 17, 1996 to provide that Paramount (and its
affiliates) would not be considered an Acquiring Party under the plan. One right
attached to each share of common stock outstanding as of April 15, 1991 and
attaches to all shares issued thereafter. Each right entitles the holder to
purchase one one-hundredth of one share of Series R junior participating
cumulative preferred stock, par value $25 per share ("unit of preferred stock"),
at an exercise price of $120 per unit of preferred stock. The units of preferred
stock are non redeemable, voting and are entitled to certain preferential
dividend and liquidation rights. The exercise price and the number of units of
preferred stock issuable are subject to adjustment to prevent dilution.
If, after the rights have been distributed, the Company is a party to a business
combination or other specifically defined transaction, each right (other than
those held by the Acquiring Party) will entitle the holder to receive, upon
exercise, units of preferred stock or shares of common stock of the surviving
company with a value equal to two times the exercise price of the right.
Alternatively, a majority of the independent Directors of the Company may direct
the Company to exchange all of the then outstanding rights for common stock at
an exchange ratio of one common share per right. The rights expire April 15,
2001 and are redeemable (at the option of a majority of the independent
Directors of the Company) at $.01 per right at any time until the tenth day
following an announcement of the acquisition of 15% or more of the Company's
Common Stock.
Common Stock Options - The Company is authorized to issue options of up to
6,418,000 common shares to directors, consultants and key employees under
various stock option plans or by direct grant by the Company's Board of
Directors. Incentive and non-qualified stock options are granted at prices not
less than the fair market value at the date of grant. There were no options
granted below fair market value during fiscal years 1998, 1997 and 1996.
However, during fiscal year 1998, two employees were issued 75,000 shares of
restricted stock at a fair market value of $0.875 per share which vest over a
two year period. Options become exercisable in various increments over two
through five years. Options expire if not exercised within 5-10 years from the
date of grant.
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes stock option activity for the fiscal years ended
March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
----------- ----------------
<S> <C> <C>
Outstanding April 1, 1995 1,051,640 $ 8.87
Granted 182,000 $ 2.21
Exercised - -
Canceled (320,340) $11.51
---------
Outstanding March 31, 1996 913,300 $ 6.59
Granted 1,054,000 $ 1.15
Exercised - -
Canceled (257,300) $ 5.10
---------
Outstanding March 31, 1997 1,710,000 $ 3.08
Granted 920,000 $ 1.17
Exercised - -
Canceled (597,500) $ 1.48
---------
Outstanding March 31, 1998 2,032,500 $ 2.24
---------
</TABLE>
As of March 31, 1998, 4,310,000 shares remained available for grant under all
plans. At March 31, 1998, options for 888,225 shares of common stock were
exercisable at a weighted average exercise price of $3.45 per share and the
remaining 1,144,275 become exercisable through 2002. At March 31, 1997, options
for 489,725 common shares were exercisable at a weighted average exercise price
of $6.78 per share.
The Company has adopted the disclosure only provisions of SFAS 123 and continues
to account for its stock-based awards using the intrinsic value method in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized during fiscal years 1998, 1997 and 1996 for employee stock option and
purchase plan arrangements. In fiscal year 1998, $5,000 of compensation expense
was recognized related to restricted stock awards.
Under SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected life of options. A change in those
assumptions could result in a significant change in the calculated values. Pro
forma disclosures as if the Company adopted the cost recognition requirements
under SFAS 123 in fiscal years 1998 and 1997 are presented below.
If the computed fair values of the fiscal year 1998, 1997 and 1996 awards had
been amortized to expense over the vesting period of the awards, the program
effect would have been an increase to compensation expense and net loss of
$383,000 or ($.04) per share, $113,000 or ($.01) per share and $40,000 or ($.01)
per share for the years ended March 31, 1998, 1997 and 1996, respectively. The
proforma effect on net loss for fiscal years 1998, 1997 and 1996 is not
representative of the proforma effect on net income or loss in future years
because it does not take into consideration proforma compensation expense
related to grants awarded prior to April 1, 1995.
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes significant ranges of outstanding and exercisable
options at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number Life Exercise Number Exercise
Prices Of Shares (yrs) Price Exercisable Price
----------------- --------- ----------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.75-$1.13 1,525,000 8.9 $1.05 528,125 $1.11
1.75-2.50 183,500 7.9 2.04 95,200 2.03
3.50-5.13 197,000 6.4 4.91 137,900 4.91
6.25-10.00 67,000 5.1 9.09 67,000 9.09
15.00-16.88 60,000 2.7 16.57 60,000 16.57
--------- -------
$0.75-16.88 2,032,500 8.3 $2.24 888,225 $3.45
========= =======
</TABLE>
The weighted average fair value of options granted during fiscal years 1998,
1997 and 1996 was estimated at $0.58, $0.57 and $1.42 respectively. The
Company's calculations were made using the Black Scholes option pricing model
recognizing forfeitures as they occur with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected Life 2.6 2.6 4.0
Interest Rate 5.8% 6.0% 6.0%
Volatility 75% 75% 84%
Dividend Yield 0% 0% 0%
</TABLE>
3. DISTRIBUTION AND MARKETING AGREEMENTS
In May 1996, the Company entered into a distribution agreement with a European
dental company for it to become the exclusive European distributor for the
Company's Periodontal Tissue Monitor ("the PTM") product. The Company made an
initial shipment to the distributor and recorded revenue of $76,000 during the
year ended March 31, 1997. No revenues were recorded in the current fiscal year
under this agreement and the agreement terminated in November 1997.
On June 23, 1997, the Company received approval from the United States Food and
Drug Administration ("FDA") to begin commercial sales and distribution in the
United States of its PTM product. During the current fiscal year, the Company
signed two agreements with an international dental company for the exclusive
five-year distribution of PTM worldwide, except in Japan. The company recorded
$68,000 in revenues under the agreements during the current fiscal year.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended March 31, 1996 the Company entered into an agreement under
which it granted exclusive rights relating to its Kephra(TM) photochromic
technology. The agreement relates to the exclusive use of Kephra in the U.S. and
Canadian soft-drink markets and expired in June 1997. The Company recorded
$150,000 of revenues during fiscal 1996 under this agreement.
In January 1996 the Company entered into an agreement under which it licensed
its Sun Alert technology for exclusive worldwide use. The Sun Alert license is
renewable each year with a minimum royalty payment of $5,000.
4. COMMITMENTS AND CONTINGENCIES
Technology License Agreements - The Company enters into agreements relating to
certain technologies which obligate the Company to pay royalties based on any
sales of products incorporating such technologies and upon achievement of
certain other milestones.
In March 1998, the Company signed a license agreement for a compound called O(6)
Benzylguanine ("BG") with the owners of the patents: Pennsylvania State
University, the National Institutes of Health (NIH), the University of Chicago,
and Case Western Reserve University, (collectively, the "Co-Owners"). Under the
terms of the agreement, the Company has a six month evaluation period ending on
September 17, 1998. The Company may terminate the agreement during the
evaluation period and pay $75,000 to the Co-Owners. Accordingly, the Company
recorded $75,000 in product development expenses under this agreement during
Fiscal 1998.
The Company may enter into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. If the Company were
to enter into a CRADA with the NIH, it would be obligated to provide funding of
$125,000 each year for five years for research. If the Company elects to
continue to develop the BG technology, it would be obligated to make additional
milestone, royalty and patent reimbursement payments to the Co-Owners during the
term of the License Agreement. The agreement also has a provision in which the
Company may elect to make payments in common stock of the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount. The agreement provides for cash
consideration of $100,000 plus reimbursement of expenses, as well as milestone
payments in the Company's common stock of up to 1,000,000 shares if the BG
compound successfully reaches certain milestones. The Company recorded $225,000
in product development expenses under this agreement during the current fiscal
year. Paramount is affiliated with certain significant shareholders of the
Company and a Paramount employee is a member of the Company's Board of
Directors.
In May 1996 the Company entered into an agreement with Wound Healing of Oklahoma
("WHO") under which it acquired an exclusive worldwide license to Cancer
Immunotherapy technology. The agreement requires the Company to pay WHO a
royalty ranging from 8% to 10% on any sales of products using the licensed
technology, or from the sale of marketing rights associated with the technology.
The Company also entered into a research agreement for one year, plus renewal
options, with WHO. During fiscal years 1998 and 1997, the Company incurred
research and development costs of $305,000 and $322,000, on developing this
technology.
The Company has an agreement with the Board of Trustees of the University of
Illinois ("U of I") which grants the Company an exclusive license to certain
technologies used in the PTM product and requires the Company to pay a royalty,
subject to reduction under certain circumstances, to U of I equal to 5% of any
sales of PTM. No royalties were recorded under the agreement in fiscal year
1998.
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases - The capitalized cost and accumulated depreciation of property under
capital lease obligations included in property and equipment is as follows:
<TABLE>
<CAPTION>
March 31
1998 1997
------- --------
<S> <C> <C>
Office furniture and equipment $28,393 $ 23,918
Less accumulated depreciation (3,155) (6,176)
------- --------
Net property under capital lease obligations $25,238 $ 17,742
======= ========
</TABLE>
Future minimum lease commitments and rental payments are summarized as follows
for the year ending March 31:
<TABLE>
<CAPTION>
Capital Operating
Leases Lease
------ -----
<S> <C> <C>
1999 $ 6,519 $34,078
2000 6,519 =======
2001 6,519
2002 6,519
2003 6,519
Thereafter 1,630
-------
34,225
Less imputed interest (7,575)
-------
Present value of minimum future lease payments $26,650
=======
</TABLE>
At March 31, 1998, the Company occupied approximately 3,400 square feet of
office and laboratory space in San Diego, California under a lease which expires
in February 1999. The lease has no renewal options. Total rent expense for the
fiscal years ended March 31, 1998, 1997 and 1996, and the period September 23,
1983 to March 31, 1998 was $45,472, $136,831, $132,766 and $1,559,483,
respectively.
Employment Agreement - The Company entered into an employment agreement with Dr.
H. Laurence Shaw, its Chairman, President and Chief Executive Officer for an
initial two year period beginning December 17, 1996, subject to renewal upon
mutual agreement. Pursuant to the agreement, the Company has agreed to pay Dr.
Shaw an initial base salary, subject to certain annual increases. Dr. Shaw will
also be entitled to receive a minimum annual bonus with an additional annual
milestone-based bonus at the discretion of the Board of Directors of up to an
additional 50% of base salary. In connection with the execution of the
agreement, Dr. Shaw was paid a signing bonus. Pursuant to the terms of
agreement, Dr. Shaw was granted qualified incentive stock options to purchase
675,000 shares of the common stock of the Company, exercisable for a period of
ten years, at an exercise price equal to the fair market value on the date of
issuance, with vesting ratably over a three year period from the date of grant.
Under the terms of Dr. Shaw's employment agreement, the Company is required to
pay all of Dr. Shaw's relocation expenses. The Board of Directors approved an
interest free bridge loan of $300,000 to Dr. Shaw for the purpose of acquiring a
new residence in California prior to the sale of his New Jersey residence. The
loan, which was made on May 1997, was paid back in September 1997. The Company
paid $182,000 in relocation expenses under the employment agreement during
fiscal year 1998.
Consulting Agreements - As compensation for services rendered, the Company paid
annual consulting fees to its former Chairman of $37,500 and $87,500 for fiscal
years 1997 and 1996, respectively.
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 1996, Dr. Jerry Weisbach was appointed to the Board of Directors of
the Company. The Company also entered into a consulting agreement with Dr.
Weisbach to provide advisory services to the Company. Dr. Weisbach was paid
$30,600 and $9,000 during the fiscal years 1998 and 1997, respectively. Dr.
Weisbach resigned from the Board of Directors in January 1998 and the consulting
agreement was terminated.
Litigation - During 1992, the Company was the target of a consolidated
stockholder class action complaint. Although management believed the claim to be
without merit, the Company concluded that it was in the best interest of the
Company to settle the matter. Such action was ultimately settled during fiscal
1995 with a cash payment of $2,800,000 to the plaintiff class, all of which was
paid by the Company's insurers. Additionally, in fiscal year 1997, the Company
issued to the plaintiff class five year Class B Warrants to purchase 309,734
shares of Common Stock at an exercise price of $22 per share. The Class B
Warrants were issued on August 11, 1997 and expire in August 2001. The Company
valued the Class B warrants using a generally accepted valuation model and
determined that the value was immaterial.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
March 31
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense $ 226,000 $ 276,000
Accruals not currently deductible 53,000 41,000
Net operating loss carryforwards 12,388,000 11,647,000
Capitalized technology 646,000 -
Research and development and other credits 577,000 634,000
-------------- --------------
Total deferred tax credits 13,890,000 12,598,000
Deferred tax liabilities-patent expense (44,000) (65,000)
-------------- --------------
Total net deferred tax assets 13,846,000 12,533,000
Valuation allowance for deferred tax assets (13,846,000) (12,533,000)
-------------- --------------
Net deferred tax assets $ - $ -
============== ==============
</TABLE>
A valuation allowance of $13,846,000 and $12,533,000 at March 31, 1998 and 1997,
respectively, has been recognized as an offset to the deferred tax assets as
realization of such assets is uncertain. At March 31, 1998, the Company has
federal and California tax net operating loss carryforwards of approximately
$33,077,000 and $9,175,000, respectively. The Company also has federal and
California research and other credit carryforwards of approximately $442,000 and
$135,000, respectively. The difference between the tax loss and credit
carryforwards for federal and California purposes is attributable to the
capitalization of research and development expenses for California tax purposes
and a required 50% limitation in the utilization of California tax loss
carryforwards. The federal and California tax loss carryforwards and the credit
carryforwards expire beginning in Fiscal 1999 through 2013, unless previously
utilized.
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Internal Revenue Code ("the Code") includes provisions which significantly
limit potential use of net operating losses in situations where there is a
change in ownership of more than 50% during a three-year period. Accordingly, if
a change in ownership occurs, the ultimate benefit realized from these
carryovers may be significantly reduced in total, and the amount that may be
utilized in any given year may be significantly limited. The State of California
has enacted similar legislation. The common stock issuance of November 27, 1995
in combination with other stock issuances completed by the Company during the
past three years have resulted in a change in ownership as of November 27, 1995
as defined in the Code. Accordingly, the Company has federal and California net
operating losses in the amount of $25,175,000 and $6,526,000 respectively that
are currently subject to the annual limitation. Approximately $605,000 of these
net operating losses become available for use each year. The remaining federal
and California net operating losses of approximately $7,902,000 and $2,649,000,
respectively, are not subject to the annual limitation since these losses
occurred after the ownership changes.
6. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary Therapeutics,
Inc. ("BTI") under which the Company was granted an option to acquire BTI, a
development stage company with certain technologies in the area of Photodynamic
Therapy ("PDT") for cancer. The agreement, as amended, gives the Company the
right to acquire BTI by a merger of BTI into a wholly-owned subsidiary of the
Company. In February 1997, the Company and BTI agreed to extend the period
during which the Company may exercise its option to acquire BTI from April 30,
1997 until such time as BTI has completed human clinical trials of Boronated
Porphyrin Compound ("BOPP") at an agreed upon dose level (the "Option Period").
The Option Period was extended at the Company's request to enable BTI to
complete preclinical studies, to commence clinical trials in humans and to
demonstrate that a given dose level of BOPP in humans would not cause certain
adverse events. Accordingly, the Company has deferred its election to exercise
the option.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued ranges from 1,000,000 to
3,000,000 shares, and is to be determined based upon the market price of the
Company's common stock prior to the date of exercise. The agreement has been
approved by a majority of the stockholders of BTI. The Company's Board of
Directors voted to approve the merger, however the merger is also subject to
shareholder approval for the issuance of additional shares of common stock. One
of the Company directors is also a director of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. The
Company pays substantially all of BTI's operating expenses which are comprised
primarily of product development costs. The Company is also required to advance
to BTI funds to repay $664,000 of indebtedness, including accrued interest as
part of the acquisition price of BTI. Certain holders of such indebtedness are
shareholders of the Company. In exchange for such funding, BTI will issue
convertible notes to the Company which may be converted into BTI equity at the
Company's option or if the merger is not consummated. The Company has elected to
record all advances to BTI as product development expense in the period incurred
due to uncertainties regarding the ultimate value to be realized from the
convertible notes. During the fiscal years ended March 31, 1998 and 1997, the
Company advanced $1,176,000 and $1,282,000, respectively to BTI.
7. OTHER RELATED PARTY TRANSACTIONS
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period September 23, 1983 to March 31, 1995, the Company incurred
expenses, principally for financial consulting services inclusive of finder's
fees on Company financing of $861,928 to related entities.
8. SUBSEQUENT EVENTS
Potential Delisting from the American Stock Exchange
On June 24, 1998, the Company received notice from the American Stock Exchange
("AMEX") that Amex intends to take action to remove the Company's Common Stock
from the AMEX because the Company no longer satisfies all of the financial
guidelines of the AMEX for continued listing. The Company notified the Board of
Governors of AMEX that intends to appeal the decision to remove the Company's
Common Stock from the AMEX. There can be no assurance that the appeal by the
Company will be successful, and that the listing will be continued. The Company
is taking measures to ensure that in the event of an unsuccessful appeal, an
orderly transition will occur and that its Common Stock will commence trading on
the NASD Electronic Bulletin Board.
Security Private Placement Financing
The Company entered into a Placement Agency agreement with Paramount to do an
additional private placement financing ("Private Placement"). Under the terms of
the agreement, the placement agent will use its best efforts to sell 60 Units
for $100,000 each, which consist of 50,000 shares of Series A Convertible
Preferred Stock ("Units"), valued at $2.00 per share of BG Development Corp.
("BGDC"), a wholly-owned subsidiary of the Company. The Units are redeemable in
cash or common stock of the Company under certain circumstances. The Private
Placement, as presently structured, would raise minimum gross proceeds of
$1,000,000 and maximum gross proceeds of $6,000,000 with a provision for the
placement agent to sell an additional 40 Units as an over-allotment of up to
$4,000,000. Seventy-five percent of the net proceeds of the Private Placement
will be used by BGDC for development costs associated with BG technology
acquired during fiscal 1998 (Note 4). Twenty-five percent of the net proceeds of
the Private Placement will go to the Company to be used for general purposes.
At all times while the Units remain outstanding, the preferred stock shall
accrue dividends as follows:
<TABLE>
<CAPTION>
Dividend Date Dividend Amount
------------- ---------------
<S> <C>
From final closing to 30 months $1.99 per share
30-36 months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
42-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company did an initial closing on 29 Units of the private
placement described above for gross proceeds of $2,900,000 (net proceeds of
$2,600,000).
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued in the fiscal year did not reflect the value of the
detachable stock purchase warrants issued in connection with the 1997 Private
Placement described in Note 2. The fair value of such warrants, as calculated by
an independent valuation consulting firm, was $1,967,000, and is being recorded
as a return to the Preferred Stockholders from the date of issue of the
Preferred Stock to the date in which the Preferred Stock was eligible for
conversion into Common Stock. As a result, net loss applicable to Common
Shareholders and net loss per share for Fiscal 1997 have been restated from the
amounts previously reported. Such restatement also resulted in a $530,950
increase in both capital in excess of par value and the deficit accumulated in
development stage.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
September 23,
1983 (inception) September 23,
Fiscal 1997 Fiscal 1997 To March 31, 1997 1983 (inception)
As Previously As As Previously to March 31, 1997
Reported Restated Reported As Restated
------------------ ------------------ -------------------------- -----------------------
<S> <C> <C> <C> <C>
Convertible
preferred stock
dividends $ 1,165,261 $ 1,696,211 $ 1,165,261 $ 1,696,211
------------------ ------------------ -------------------------- -----------------------
Net loss applicable
to common
shareholders $(5,062,627) $(5,593,577) $ (33,356,189) $ (33,887,139)
------------------ ------------------ -------------------------- -----------------------
Net loss per
share of
common stock-
basic and diluted $ (0.62) $ (0.69)
------------------ ------------------
</TABLE>
F-55
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
=====================================================================================================================
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,285,460 $ 3,290,176
Accounts receivable, net 201 --
Inventory 54,587 38,637
Prepaid expenses 98,068 85,053
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 4,438,316 3,413,866
Property and equipment, net 59,658 71,840
Patent costs, net 144,274 104,981
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,642,248 $ 3,590,687
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 620,444 $ 661,371
Accrued expenses 218,287 201,125
Current portion of capital leases 4,271 4,066
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 843,002 866,562
- ---------------------------------------------------------------------------------------------------------------------
Capital leases 20,396 22,584
Minority interest 4,731,594 --
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity/(Deficiency):
Convertible preferred stock, $25 par value, 2,000,000 shares authorized;
36,882 and 40,090 issued and outstanding at September 30, 1998
and March 31, 1998, respectively 922,088 1,002,288
(liquidation preference $9,589,320 and $10,423,400, respectively)
Common stock, $.02 par value, 100,000,000 shares authorized;
12,225,912 and 10,777,234 shares issued and outstanding at
September 30, 1998 and March 31, 1998, respectively 244,516 215,545
Capital in excess of par value 48,298,469 46,969,197
Deficit accumulated during the development stage (50,417,817) (45,485,489)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity/(deficiency) (952,744) 2,701,541
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICENCY) $ 4,642,248 $ 3,590,687
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-56
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30 September 23, 1983
--------------------------------- ---------------------------------- (inception) to
1998 1997 1998 1997 September 30, 1998
- ---------------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES (as restated) (as restated)
Product sales $ -- $ -- $ 4,016 $ 700 $ 2,023,757
License fees and royalties -- 92 -- 187 486,612
Contract research -- -- -- -- 268,063
Marketing rights -- -- -- -- 1,311,500
Interest and other 57,213 65,171 99,354 165,659 2,013,012
- ---------------------------------------------------------------------- ---------------------------------- ----------------------
Total revenues 57,213 65,263 103,370 166,546 6,102,944
- ---------------------------------------------------------------------- ---------------------------------- ----------------------
COSTS AND EXPENSES
Cost of product sales 7,561 21,319 27,578 35,321 3,165,973
Product development 594,825 661,365 980,468 1,022,264 18,141,429
General and administrative 376,238 663,469 777,568 1,198,244 18,629,315
Business development
and marketing 4,731 48,382 22,556 122,240 3,799,445
Interest and other 5,895 929 18,622 54,127 652,597
- ---------------------------------------------------------------------- ---------------------------------- ----------------------
Total costs and expenses 989,250 1,395,464 1,826,792 2,432,196 44,388,759
- ---------------------------------------------------------------------- ---------------------------------- ----------------------
Loss applicable to
minority interest 85,475 -- 85,475 -- 85,475
Net loss (846,562) (1,330,201) (1,637,947) (2,265,650) (38,200,340)
- ----------------------------------------------------- --------------- ----------------------------------------------------------
Convertible preferred stock
dividends -- 1,612,908 3,294,381 3,427,988 12,217,477
Net loss applicable to
common shareholders $ (846,562) $(2,943,109) $(4,932,328) $(5,693,638) $(50,417,817)
====================================================================== ==========================================================
Net loss per share of common
stock-basic and diluted ($0.07) ($0.34) ($0.44) ($0.68)
====================================================================== ==================================
Weighted average common
stock outstanding 11,444,811 8,566,292 11,257,469 8,363,374
====================================================================== ==================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-57
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) (unaudited)
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock
----------------------------- -----------------------------
Shares Par Value Shares Par Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997 (as restated) 50,000 $1,250,038 8,151,029 $163,021
Exercise of warrants 356,250 7,125
Conversion of preferred stock into common stock (5,882) (147,050) 1,225,419 24,508
Preferred stock unit purchase option
compensation for financial advisory services
Convertible preferred stock dividends (as restated)
Net loss
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (as restated) 44,118 $1,102,988 9,732,698 $194,654
===============================================================================================================================
Balance at March 31, 1998 40,090 $1,002,288 10,777,234 $215,545
Exercise of warrants 1,563 31
Common stock issued for services 482,979 9,660
Preferred stock unit purchase option as
compensation for financial advisory services
Conversion of preferred stock into common stock (3,208) (80,200) 964,136 19,280
Convertible preferred stock dividends
Proceeds from subsidiary preferred stock issuance
Net loss
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 36,882 $ 922,088 12,225,912 $244,516
===============================================================================================================================
<CAPTION>
Deficit
Accumulated
Capital During the
in Excess Development
of Par Value Stage Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 (as restated) $38,805,489 ($33,887,139) $6,331,409
Exercise of warrants 327,750 334,875
Conversion of preferred stock into common stock 122,542 --
Preferred stock unit purchase option
compensation for financial advisory services 165,800 165,800
Convertible preferred stock dividends (as restated) 3,427,988 (3,427,988) --
Net loss (2,265,650) (2,265,650)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (as restated) $42,849,569 ($39,580,777) $4,566,434
=================================================================================================================
Balance at March 31, 1998 $46,969,197 ($45,485,489) $2,701,541
Exercise of warrants 1,438 1,469
Common stock issued for services 177,840 187,500
Preferred stock unit purchase option as
compensation for financial advisory services 138,165 138,165
Conversion of preferred stock into common stock 60,920 --
Convertible preferred stock dividends 374,056 (3,294,381) (2,920,325)
Proceeds from subsidiary preferred stock issuance 576,853 576,853
Net loss (1,637,947) (1,637,947)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $48,298,469 ($50,417,817) ($952,744)
=================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-58
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30 September 23, 1983
---------------------------------- (inception) to
1998 1997 September 30, 1998
- ----------------------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,637,947) ($2,265,650) ($38,200,338)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,624 43,324 1,701,625
Loss allocated to minority interest (85,475) -- (85,475)
Non-cash expense upon issuance of common stock
options, common stock and warrants 325,665 165,800 1,177,526
Net book value of asset disposals 3,704 58,534 245,396
Option income from retirement of stock
or amounts previously advanced by customer -- -- (400,000)
Changes in assets and liabilities:
Accounts receivable (201) 84,879 (201)
Inventory (15,950) (27,895) (54,590)
Prepaid expenses and other assets (13,015) (74,070) (109,043)
Accounts payable (40,927) (185,460) 620,444
Accrued expenses 17,162 58,261 74,264
Customer advances -- -- 140,863
Other liabilities -- -- (4,866)
- ----------------------------------------------------------------------------------------------- ----------------------
Net cash used by operating activities (1,410,360) (2,142,277) (34,894,395)
INVESTING ACTIVITIES
Purchases of short-term investments -- -- (10,461,867)
Maturities of short-term investments -- 1,488,215 10,461,867
Capital expenditures (3,627) (12,776) (851,556)
Patent costs (68,812) (44,208) (1,041,184)
Other 206 -- 8,035
- ----------------------------------------------------------------------------------------------- ----------------------
Net cash provided (used) by investing activities (67,233) 1,431,231 (1,884,705)
FINANCING ACTIVITIES
Issuance of notes payable -- -- 2,183,867
Repayment of notes payable -- -- (1,965,124)
Repayment of capital lease obligations (2,188) (1,917) (185,735)
Long-term customer advances -- -- 100,000
Issuance of common and preferred stock 578,322 334,875 39,034,809
Minority interest investment in subsidiary 1,896,744 -- 1,896,744
- ----------------------------------------------------------------------------------------------- -------------------------
Net cash provided by financing activities 2,472,877 332,958 41,064,560
- ----------------------------------------------------------------------------------------------- -------------------------
Net increase (decrease) in cash
and cash equivalents 995,284 (378,088) 4,285,460
Cash and cash equivalents at beginning of period 3,290,176 1,784,599 --
- ----------------------------------------------------------------------------------------------- -------------------------
Cash and cash equivalents at end of period $4,285,460 $1,406,511 $4,285,460
=============================================================================================== =========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-59
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc., XYX
Acquisition Corp. and BG Development Corp., a majority owned subsidiary,
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("FAS 7"). Among the disclosures required by FAS
7 are that the Company's financial statements be identified as those of a
development stage enterprise, and that certain consolidated financial statements
disclose activity since the date of the Company's inception.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount 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 period. Actual results
may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial statements
contain all of the adjustments, consisting only of normal recurring adjustments
and accruals, necessary to present fairly the financial position of the Company
as of September 30, 1998 and March 31, 1998, results of operations for the six
months ended September 30, 1998 and 1997 (as restated) and from September 23,
1983 (inception) to September 30, 1998 and cash flows for the six months ended
September 30, 1998 and 1997 and from September 23, 1983 (inception) to September
30, 1998. The results of operations for the six months ended September 30, 1998
are not necessarily indicative of the results to be expected in subsequent
periods or for the year as a whole. For further information, refer to the
consolidated financial statements and footnotes thereto as set forth in the
Company's Annual Report on Form 10-K for the year ended March 31, 1998.
The Company adopted Financial Accounting Standards Board Statement No. 128 ("FAS
128"), Earnings Per Share (EPS). This statement requires the presentation of
earnings per share to reflect both "Basic EPS" as well as "Diluted EPS" on the
face of the statement of operations. In general, Basic EPS is a function of
weighted average number of common shares outstanding for the periods. Diluted
EPS does reflect the potential dilution created by stock issuable pursuant to
outstanding options, warrants, convertible debt or equity securities and other
contingently issuable shares. The requirements of FAS 128 have been applied
retroactively to all periods presented. There was no impact on reported net loss
per common share as a result of the adoption of this FAS.
2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST
During the six months ended September 30, 1998, the Company entered into a
placement agency agreement with Paramount Capital Inc. ("Paramount). Under the
terms of the agreement, Paramount was to use its best efforts to sell up to 60
Units ( with an overallotment option for an additional 40 Units) for
F-60
<PAGE>
$100,000 each, which consist of 50,000 shares of Series A Convertible Preferred
Stock ("BGDC Units"), valued at $2.00 per share of BG Development Corp.
("BGDC"). The BGDC Units are redeemable in cash by BGDC and the BGDC Units may
be exchanged for cash or common stock of the Company under the circumstances
described in the subscription agreement between the Company and shareholders of
BGDC. Pursuant to the subscription agreement, seventy-five percent of the net
proceeds are allocated to BGDC for development costs associated with O6
Benzylguanine technology. Twenty-five percent of the net proceeds of the BGDC
private placement went to the Company to be used for general purposes.
The BGDC Units accrue dividends as follows:
Dividend Date Dividend Amount
------------- ---------------
Upon final closing $1.99 per share
30-36 months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
48-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
On June 22, 1998, the Company completed a closing on 29.35 BGDC Units of the
private placement for gross proceeds of $2,900,000 (net proceeds of $2,455,000).
Paramount, who is affiliated with certain significant shareholders of the
Company, received an aggregate dollar commission of $264,000 and a
non-accountable expense allowance of $117,000 as compensation for the BGDC
private placement. Additionally, Paramount received warrants to purchase 10% of
the number of BGDC Units issued in private placement at $110,000 per unit. BGDC
and Paramount also entered into a 24 month Financial Advisory Services Agreement
in which BDGC will pay Paramount $3,000 per month for such services plus
warrants ("Advisory Warrants") to purchase 15% of the number of BGDC Units
issued in the private placement at $110,000 per Unit. The Company valued the
Advisory Warrants at $88,000 and is amortizing these advisory services over a 24
month period ending in June 2000.
Subsequent to the closing of the private placement, BGDC Preferred Stockholders
own 16.4% of voting rights in BGDC. This minority interest, as reflected in the
accompanying Consolidated Balance Sheet as of September 30, 1998, includes the
initial net proceeds to BGDC of $1,886,000, plus the initial dividend of
$2,920,000, or $1.99 per preferred share outstanding, paid in capital associated
with the amortization of the Advisory Warrants and 16.4% of BGDC's operating
loss through September 30, 1998.
BGDC and the Company have entered into a one-year renewable Corporate Services
and Management Agreement pursuant to which the Company will provide
financial/accounting, administrative, advisory and managerial support to BGDC.
For such services, the Company will receive from BGDC a management fee equal to
$500,000 per year, payable in equal monthly installments. The Company does not
expect any further closings to occur for the private placement.
3. DELISTING FROM THE AMERICAN STOCK EXCHANGE
On September 18, 1998, the Company's common stock was removed from trading on
the American Stock Exchange ("AMEX") because the Company no longer satisfied all
of the financial guidelines of the AMEX for continued listing. The Company's
common stock began trading on the NASD Electronic Bulletin Board on September
21, 1998 under the ticker symbol PHAA.
F-61
<PAGE>
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS
In fiscal year 1997, the Company completed a private equity financing ("1997
Private Placement") in two stages with the initial closing completed on December
19, 1996 (the "Initial Closing") and the final closing completed on March 7,
1997 (the "Final Closing") in which it raised $8,542,000, net of offering
expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 detachable Common Stock
Purchase Warrants ("Warrants"), to accredited individuals and institutional
investors pursuant to Regulation D under the Securities Act of 1933, as amended.
Each Warrant entitles the holder to purchase one share of Common Stock at a
price of $1 per share and may be exercised until March 7, 2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of Common
Stock for each share of Preferred Stock. The 1997 Private Placement contained an
adjustment provision to reset the conversion ratio under certain conditions. For
Preferred Stock converted after March 7, 1998, the new conversion ratio is
290.89 shares of common stock for each share of Preferred Stock.
The subscribers to the Private Placement purchased the Units at a discount from
the closing prices of the Company's common stock on the Initial Closing date of
23% and the Final Closing date of 36%. The detachable stock purchase warrants
issued as part of the Units had a fair value at the date of issuance of
$1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been recognized as a
return to the Preferred Stockholders from the date of issuance of the Preferred
Stock to the date in which the Preferred Stock was eligible for conversion into
Common Stock. The reset of the conversion ratio during March 1998 generated an
additional non-cash dividend of $2,576,000.
As discussed in Note 2, the BGDC private placement includes a provision that the
subscribers are entitled to receive $1.99 per share dividends declared by to
Board of Directors of BGDC. The dividends of $2,920,000, which have been
credited to minority interest during the six months ended September 30, 1998,
accumulate until paid in cash or common stock by BGDC.
Below is a summary of Preferred Stock Dividends recognized during the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30, September 23, 1983
-------------------------------- ----------------------------- (inception) to
Description 1998 1997 1998 1997 September 30, 1998
--------------- --------------- ------------- ------------- ------------------
(as restated) (as restated)
<S> <C> <C> <C> <C> <C>
Dividend from beneficial
conversion feature -- 1,152,031 128,036 2,448,393 4,754,075
Dividend from reset of
conversion -- -- 194,752 -- 2,576,077
Dividend from warrant valuation -- 460,877 51,268 979,595 1,967,000
BGDC Preferred Stock dividends --
-- -- 2,920,325 -- 2,920,325
------------ ------------- ------------- ------------- ---------------
Total -- 1,612,908 3,294,381 3,427,988 12,217,477
============ ============= ============= ============= ===============
</TABLE>
5. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued during the fiscal year did not
F-62
<PAGE>
reflect the value of the detachable stock purchase warrants issued in connection
with the 1997 Private Placement described in Note 4. The fair value of such
warrants, as calculated by an independent valuation consulting firm, was
$1,967,000, and is being recorded as a return to the Preferred Stockholders from
the date of issue of the Preferred Stock to the date in which the Preferred
Stock was eligible for conversion into Common Stock. As a result, net loss
applicable to Common Shareholders and net loss per share for the quarter ended
September 30, 1997 and six months ended September 30, 1997 have been restated
from the amounts previously reported. Such restatement resulted in increases of
$461,000 and $980,000 in both capital in excess of par value and the deficit
accumulated in development stage for the quarter and six months ended September
30, 1997, respectively.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
Quarter Six Months
ended Quarter ended Six Months
September 30, ended September 30, Ended
1997 September 30, 1997 September 30,
As Previously 1997 As Previously 1997
Reported As Restated Reported As Restated
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Convertible
preferred stock
dividends $ 1,152,031 $ 1,612,908 $ 2,448,393 $ 3,427,988
------------------ ----------------- ------------------ ------------------
Net loss applicable
To common
Shareholders $(2,482,232) $(2,943,109) $(4,714,043) $(5,693,638)
------------------ ----------------- ------------------ ------------------
Net loss per
Share of
Common stock-
Basic and diluted $ (0.29) $ (0.34) $ (0.56) $ (0.68)
------------------ ----------------- ------------------ ------------------
</TABLE>
6. PROPOSED MERGER
On November 2, 1998, the Company entered into a non-binding Letter of Intent
("LOI") to merge with Procept, Inc. ("Procept"), a biopharmaceutical company
engaged in the development of novel drugs for the prevention of infectious
diseases. Both companies will work together to enter into a definitive merger
agreement by November 19, 1998. The LOI provides that each of the Company's
shares of common stock (including preferred stock on an as converted basis into
common stock) will convert into 0.12 shares of Procept common stock or a total
of 2,755,000 Procept shares (of which 1,287,647 shares of Procept common stock
to be issued in the merger to the holders of the Company's preferred stock shall
be accompanied by certain contractual rights identical to contractual rights
held by purchasers in Procept's 1998 private placement). In addition, Procept
has agreed to assume an approximately $7.3 million obligation of the Company's
subsidiary, BG Development Corp., and Procept has agreed to exchange all of the
Company's outstanding warrant, unit purchase option and stock option obligations
into like instruments of Procept. The merger remains contingent upon several
conditions including (i) satisfactory due diligence by the Company and Procept;
(ii) fairness opinions by independent investment bankers; and (iii) the final
approval by both companies' shareholders.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Binary Therapeutics, Inc.:
We have audited the accompanying balance sheets of Binary Therapeutics, Inc. (a
development stage enterprise) as of September 30, 1998 and December 31, 1997,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the nine months ended September 30, 1998 and for the year 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, such financial statements present fairly, in all material
respects, the financial position of Binary Therapeutics, Inc. at September 30,
1998 and December 31, 1997, and the results of its operations and its cash flows
for the nine months ended September 30, 1998 and for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
The Company is in the development stage as of September 30, 1998. As discussed
in Note 1 to the financial statements, the Company has not yet completed
clinical trials, or verified the market acceptance or demand for its research
efforts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in research and development of medical products with a
primary focus on cancer treatment. As discussed in Note 1 to the financial
statements, the continued net loss and accumulated deficit at September 30, 1998
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 7. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
DELOITTE & TOUCHE LLP
San Diego, California
December 18, 1998
F-64
<PAGE>
BINARY THERAPEUTICS, INC. (A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,715 $ 1,214
Prepaid expenses - 333
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 1,715 1,547
Property and equipment, net of accumulated depreciation 2,754 3,567
Patent costs, net of accumulated amortization 49,885 54,607
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 54,354 $ 59,721
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 102,045 $ 125,458
Accrued expenses 630 30,630
Accrued interest 457,443 367,330
Notes payable 3,499,117 2,958,861
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,059,235 3,482,279
Stockholders' Deficit:
Preferred stock, $.001 par value, 5,000,000 shares authorized - -
Common stock, $.001 par value, 20,000,000 shares authorized;
16,854,740 and 14,994,740 shares issued and outstanding
September 30, 1998 and December 31, 1997, respectively 16,855 14,995
Capital in excess of par value 1,192,340 846,200
Deficit accumulated during the development stage (5,211,018) (4,280,695)
Subscriptions receivable on sale of common stock (3,058) (3,058)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (4,004,881) (3,422,558)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 54,354 $ 59,721
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-65
<PAGE>
BINARY THERAPEUTICS, INC. (A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Year Ended October 23, 1990
September 30, December 31, (inception) to
1998 1997 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COSTS AND EXPENSES
Product development $ 474,234 $ 1,199,603 $ 3,040,030
General and administrative 24,476 79,898 484,528
Interest and other 431,613 792,007 1,686,460
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 930,323 2,071,508 5,211,018
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $(930,323) $(2,071,508) $(5,211,018)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-66
<PAGE>
Binary Therapeutics, Inc. (A Development Stage Enterprise)
Statements Of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
----------------------------- Capital in During the
Excess of Development
Shares Par Value Par Value Stage
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 23, 1990 -- -- --
Original issuance of common stock:
October 1990 at $.001 per share 1,965,000 $ 1,965
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1990 1,965,000 1,965 --
Issuance of common stock:
September 1991 700,000 700
December 1991 40,000 40
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1991 2,705,000 2,705 --
Issuance of common stock:
January 1992 20,000 20
February 1992 2,024,500 2,025
August 1992 20,000 20
October 1992 2,325,000 2,325
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1992 7,094,500 7,095 --
Issuance of common stock:
January 1993 1,220,000 1,220
Repurchase of common stock (20,000) (20)
Net loss (351,311)
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1993 8,294,500 8,295 (351,311)
Repurchase of common stock (1,425,000) (1,425)
Receipt of stock subscription
Net loss (279,030)
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1994 6,869,500 6,870 (630,341)
Issuance of common stock:
May 1995 3,638,290 3,639
June 1995 686,950 686
Stock issued pursuant to Unit Purchase
Agreements 750,000 750 36,750
Net loss (526,576)
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1995 11,944,740 11,945 36,750 (1,156,917)
Collection of subscription receivable
Stock issued pursuant to Unit Purchase
Agreements 250,000 250 12,250
Stock issued in conjunction with
Senior Bridge Notes 400,000 400 139,600
Net loss (1,052,270)
------------------------------------------------------------------------------------------------------------
* Balance at December 31, 1996 12,594,740 12,595 188,600 (2,209,187)
Stock issued in conjunction with
Senior Bridge Notes 2,400,000 2,400 657,600
Net loss (2,071,508)
------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 14,994,740 14,995 846,200 (4,280,695)
------------------------------------------------------------------------------------------------------------
Issuance of common stock 60,000 60 11,940
Stock issued in conjunction with
Senior Bridge Notes 1,800,000 1,800 334,200
Net loss (930,323)
------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 16,854,740 $16,855 $1,192,340 $(5,211,018)
------------------------------------------------------------------------------------------------------------
<CAPTION>
Subscriptions
Receivable Total
-----------------------------------------------------------------------------
<S> <C> <C>
Balance at October 23, 1990 -- --
Original issuance of common stock:
October 1990 at $.001 per share $(1,875) $ 90
Net loss
-----------------------------------------------------------------------------
* Balance at December 31, 1990 (1,875) 90
Issuance of common stock:
September 1991 700
December 1991 40
Net loss
-----------------------------------------------------------------------------
* Balance at December 31, 1991 (1,875) 830
Issuance of common stock:
January 1992 20
February 1992 (1,680) 345
August 1992 20
October 1992 2,325
Net loss
-----------------------------------------------------------------------------
* Balance at December 31, 1992 (3,555) 3,540
Issuance of common stock:
January 1993 1,220
Repurchase of common stock (20)
Net loss (351,311)
-----------------------------------------------------------------------------
* Balance at December 31, 1993 (3,555) (346,571)
Repurchase of common stock (1,425)
Receipt of stock subscription 1,680 1,680
Net loss (279,030)
-----------------------------------------------------------------------------
* Balance at December 31, 1994 (1,875) (625,346)
Issuance of common stock:
May 1995 (839) 2,800
June 1995 (412) 274
Stock issued pursuant to Unit Purchase
Agreements 37,500
Net loss (526,576)
-----------------------------------------------------------------------------
* Balance at December 31, 1995 (3,126) (1,111,348)
Collection of subscription receivable 68 68
Stock issued pursuant to Unit Purchase
Agreements 12,500
Stock issued in conjunction with
Senior Bridge Notes 140,000
Net loss (1,052,270)
-----------------------------------------------------------------------------
* Balance at December 31, 1996 (3,058) (2,011,050)
Stock issued in conjunction with
Senior Bridge Notes 660,000
Net loss (2,071,508)
-----------------------------------------------------------------------------
Balance at December 31, 1997 (3,058) (3,422,558)
-----------------------------------------------------------------------------
Issuance of common stock 12,000
Stock issued in conjunction with
Senior Bridge Notes 336,000
Net loss (930,323)
-----------------------------------------------------------------------------
Balance at September 30, 1998 $(3,058) $(4,004,881)
-----------------------------------------------------------------------------
</TABLE>
* Balances prior to January 1, 1997 are unaudited
See Notes to Financial Statements.
F-67
<PAGE>
BINARY THERAPEUTICS, INC. (A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Year Ended October 23, 1990
September 30, December 31, (inception) to
1998 1997 September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($930,323) ($2,071,508) ($5,211,018)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 12,347 16,426 35,959
Issue of common stock for interest expense 336,000 660,000 1,186,000
Issue of common stock for royalty expense 12,000 -- 12,000
Changes in assets and liabilities:
Prepaid expenses 333 (333) --
Accounts payable (23,413) (42,427) 102,045
Accrued expenses (30,000) (219,930) 630
Accrued interest 90,113 125,447 457,443
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (532,943) (1,532,325) (3,416,941)
INVESTING ACTIVITIES
Patent costs (6,812) (5,074) (73,615)
Capital expenditures -- -- (5,421)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,812) (5,074) (79,036)
FINANCING ACTIVITIES
Issuance of notes payable 540,256 1,536,169 3,499,117
Repurchase of common stock -- -- (1,425)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 540,256 1,536,169 3,497,692
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 501 (1,230) 1,715
Cash at beginning of period 1,214 2,444 --
- -------------------------------------------------------------------------------------------------------------------------
Cash at end of period $1,715 $1,214 $ 1,715
- -------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 5,499 $ 6,089 $ 18,135
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-68
<PAGE>
Notes To Financial Statements
Binary Therapeutics, Inc. (A Development Stage Enterprise)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Company was incorporated under the laws of the State
of Delaware on October 23, 1990. For the period of inception to date, the
Company's activities have been directed toward research and development of
medical products with a primary focus on cancer treatment.
Development Stage - The Company has not earned revenues from operations.
Accordingly, the Company's activities have been accounted for as those of a
"Development Stage Enterprise" as set forth in Financial Accounting Standards
Board Statement No. 7.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the nine months ended September 30, 1998 and year ended
December 31, 1997, the Company incurred net losses of $930,323 and $2,071,508
respectively. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing or
refinancing as may be required, and ultimately to attain successful operations.
In June 1996, as described in Note 7, the Company entered into an agreement
under which it granted Pacific Pharmaceuticals, Inc. ("Pacific"), a development
stage biotechnology company, the right to acquire the Company at any time prior
to April 30, 1997. The agreement was amended in February 1997 and the Company
and Pacific agreed to extend the period during which the Company may exercise
its option to acquire the Company from April 30, 1997 until such time as the
Company has completed human clinical trials of Boronated Porphyrin Compound
("BOPP") at an agreed upon dose level (the "Option Period"). The Company is
currently dependent upon Pacific for funding of all of its operations during the
Option Period. There can be no assurance, however, that Pacific will continue to
provide funding to the Company or that funding provided by Pacific will be
adequate to sustain the Company's operations, or that the Company will be
successful in obtaining alternative financing in the event that Pacific
terminates its funding or if such funding is inadequate to sustain operations.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
F-69
<PAGE>
Research and Development - Research and development costs are expensed as
incurred.
Property and Equipment - Property is recorded at cost and is primarily office
furniture and equipment. Depreciation of property and equipment is provided
using the straight-line method over the estimated useful lives of the related
assets, which are principally five and ten years. Property and equipment are
summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Laboratory equipment $ 539 $ 539
Office furniture and equipment 4,882 4,882
--------- ---------
Total property and equipment 5,421 5,421
Less: accumulated depreciation (2,667) (1,854)
--------- ---------
Total $ 2,754 $ 3,567
========= =========
</TABLE>
Patent Costs - Legal expenses incurred in connection with applications for
patents on research and development projects are capitalized. The costs are
amortized using the straight-line method over five years. Patent costs which
have no further economic value are written off in the period in which such
impairment in value occurs. Patent costs are net of accumulated amortization of
$49,885 and $54,607 at September 30, 1998 and December 31, 1997, respectively.
2. EQUITY
In fiscal year 1995 and fiscal year 1996, the Company completed a private
placement of 2 units at $100,000 per unit to "accredited" investors, (the
"Units"). Each Unit consisted of a Senior Bridge Note with a face value of
$100,000 and 500,000 shares of common stock with par value of $.001 per share.
As a result of this transaction, the Company issued notes payable totaling
$200,000 (see Note 3) and 1,000,000 shares of common stock valued at $0.05 per
share. Notes payable at September 30, 1998 and December 31, 1997 consist of the
following:
In fiscal year 1995, the Company issued Senior Bridge Notes for $200,000 with
maturity dates in fiscal year 1996 (see Note 3). In fiscal year 1996, the
Company and the noteholders agreed to an extension of the maturity dates in
exchange for the issuance of 200,000 shares of common stock for each month the
notes remain outstanding. As of December 31, 1997 and September 30, 1998 the
Company issued 2,800,000 and 4,600,000 shares of common stock, respectively,
valued at between $0.35 and $0.17 per share.
In August 1998, the Company issued 60,000 shares of common stock, par value of
$0.001 per share, to the University of California at San Francisco ("UCSF") in
connection with a milestone payment under a license agreement (See Note
4-License Agreements). The Company valued the common stock at $0.20 per share
and recorded a royalty expense of $12,000 in conjunction with the issuance of
the common stock.
At September 30, 1998 options to purchase 47,500 shares of the Company's common
stock at an exercise price of $.001 per share were outstanding and exercisable.
Also, at September 30, 1998 and December 31, 1997 the Company had $588,049 and
$534,197, respectively, debt and accrued interest convertible into shares of the
Company's common stock at a conversion price of 75% of the market value of the
Company's common stock at the date of conversion (see Note 3). The convertible
debt automatically converts into common stock as described above upon any of the
following events: (i) initial public offering of the Company's common stock;
(ii) completion of a private placement of at least $2 million; (iii) merger,
consolidation, recapitalization or sale of substantially all of the Company's
assets.
F-70
<PAGE>
3. NOTES PAYABLE
Notes Payable at September 30, 1998 and December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- -------------------
<S> <C> <C>
Convertible notes payable, no interest, to
Pacific Pharmaceuticals, Inc. $ 2,671,117 $ 2,130,861
Notes payable to a stockholder, interest
at 10% per annum, principal and
interest due upon demand 243,000 243,000
Convertible notes payable to a stockholder,
interest at 24% per annum 200,000 200,000
Convertible notes payable, interest
at 24% per annum 100,000 100,000
Senior bridge notes payable, interest at 15%
per annum, principal and interest due
upon demand 200,000 200,000
Note payable to a bank with interest payable
monthly at the prime rate (bank prime rate
at September 30, 1998 and December 31,
1997 was 8.75 and 8.5%, receptively) loan
automatically renews for 60 days if not
paid 85,000 85,000
-------------- ---------------
$ 3,499,117 $ 2,958,861
============== ===============
</TABLE>
$643,000 of the debt outstanding at September 30, 1998 and December 31, 1997 is
payable to stockholders of the Company or their affiliates.
4. COMMITMENTS AND CONTINGENCIES
License Agreements - In July 1992 the Company entered into an exclusive license
agreement with the University of California at San Francisco ("UCSF"). Pursuant
to the license agreement, the Company paid an initial license fee of $15,000 and
received an exclusive world-wide license to commercially develop, manufacture,
use and distribute products covered under the license,
F-71
<PAGE>
BOPP. The license agreement obligates the Company to pay royalties to UCSF equal
to 4% of future sales and/or sublicensing arrangements. The Company made minimum
royalty payments of $10,000 for the year ended December 31, 1997 ("Fiscal 1997")
and $25,000 for the nine months ended September 30, 1998 ("Fiscal Period 1998").
The license agreement, as amended, requires minimum annual royalty payments of
$25,000 for future years. In addition, the agreement requires the Company to
issue 60,000 shares of its common stock upon the acceptance of the Company's
Investigational New Drug ("IND") application by the FDA and 60,000 shares upon
approval of the Company's New Drug Application. In August 1998, the Company
issued 60,000 shares of common stock as a result of the acceptance of it's IND
application by the FDA. The Company is also obligated to make additional cash
payments upon the achievement of certain FDA approval milestones and all ongoing
patent issue and maintenance costs.
In July 1992 the Company entered into a research agreement with UCSF to conduct
research related to the synthesis and biomedical applications of porphyrins. The
research agreement was not funded by the Company and was replaced by another
agreement (the "STAR Agreement") which became effective on January 1, 1997 and
is effective for two years. The Company paid $146,700 under the STAR Agreement
in Fiscal 1997 and $114,000 in Fiscal Period 1998. The Company is obligated to
make an additional payment of $38,000 in the remainder of 1998. The Company
retains any inventions or technology developed by UCSF under the STAR Agreement.
In October 1993 the Company entered into a five year license and research
agreement with the General Hospital Corporation, doing business as Massachusetts
General Hospital ("Mass General") to develop scientific information relating to
photodynamic diagnosis and therapy. The agreement required the Company to fund
research costs in the amount of $375,000 spread over three years commencing in
1996. In Fiscal 1997, the Company negotiated a termination settlement with Mass
General to pay $85,000 of its costs and the return of the license to Mass
General in exchange for the release of any further obligations under the
agreement. The Company paid $55,000 of the settlement in Fiscal 1997 and the
remaining $30,000 in Fiscal Period 1998.
Employment Agreement - In October 1994, the Company entered into a four-year
employment agreement to engage Dr. Joseph Chang as Chief Executive Officer of
the Company. The agreement provides for a guaranteed annual base salary of
$175,000. Pursuant to an amendment to the agreement dated May 10, 1995, the
Company issued 839,605 shares or 7.5% of the Company's common stock to Mr. Chang
at $.001 per share. The Company and Dr. Chang terminated the employment
agreement in April 1997 and effective in May 1997, entered into a month-to-month
consulting agreement for cash compensation of $3,000 per month. The Company and
Dr. Chang terminated the consulting agreement in November 1997.
Consulting Agreements - On May 23, 1995, the Company entered into a three year
consulting agreement with a researcher at UCSF commencing on September 30, 1995.
As compensation for services rendered, the Company agreed to pay an up-front
consulting fee of $30,000 and a monthly retainer in the amount of $4,000. The
Company also issued 47,500 stock options to the consultant exercisable at $0.001
per share (see Note 2). The consulting agreement was terminated in September
1998.
In March 1996, the Company entered into a one year consulting agreement with a
consultant to provide assistance with the development of the Company's
technologies. As compensation for services rendered, the Company agreed to pay
an up-front consulting fee of $18,000 and a
F-72
<PAGE>
monthly retainer of $6,000. The company terminated the consulting agreement in
September 1997.
Both consultants are stockholders of the Company.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between items which will have expected future tax consequences and which have
been recognized for financial reporting purposes. Valuation allowances of
$1,645,000 and $1,386,000 have been recognized as an offset to the deferred tax
asset as realization of such assets is uncertain. The significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- -------------------
<S> <C> <C>
Deferred Tax Assets
Net Operating Loss Carryforwards $ 1,550,000 $ 1,331,000
Research Credit Carryforwards 95,000 55,000
-------------- -------------
Total Deferred Tax Assets 1,645,000 1,386,000
Less: Valuation Allowance (1,645,000) (1,386,000)
-------------- -------------
Net deferred tax assets $ - $ -
============== =============
</TABLE>
At September 30, 1998, the Company had federal and Massachusetts tax net
operating carryforwards of approximately $3,875,000 and $3,328,000 respectively.
The federal tax loss will begin expiring in 2006 unless previously utilized. The
Massachusetts tax loss carryforward will begin expiring in 1999. The Company
also has federal research tax credit carryforwards totaling approximately
$95,000. These credits will expire in 2011.
If the merger which is disclosed in Note 7 takes place, then the company will
incur an ownership change, as defined by Internal Revenue Code Section 382. Such
change of ownership would limit the use of the net operating loss each year to
approximately $300,000. Losses incurred by the company after the ownership
change would not be subject to this annual limitation.
6. RELATED PARTY TRANSACTIONS
As described in Note 3, $643,000 of the notes payable outstanding at September
30, 1998 and December 31, 1997 are payable to stockholders of the Company or
their affiliates. The Company issued 4,600,000 and 2,800,000 shares of common
stock to entities affiliated with stockholders as compensation to extend the
maturity of Senior Bridge Notes as of September 30, 1998 and December 31, 1997,
respectively (see Note 3). Also, $2,671,117 and $2,130,861 in convertible notes
were payable to Pacific at September 30, 1998 and December 31, 1997,
respectively (see Note 7).
F-73
<PAGE>
Certain stockholders of the Company, or entities affiliated with stockholders,
are stockholders or entities affiliated with stockholders of Pacific.
7. MERGER AGREEMENT
In June 1996, the Company entered into an agreement under which it granted
Pacific, a development stage biotechnology company, the right to acquire the
Company at any time prior to April 30, 1997. The agreement was amended in
February 1997 and the Company and Pacific agreed to extend the period during
which the Company may exercise its option to acquire the Company from April 30,
1997 until such time as the Company has completed human clinical trials of BOPP
at an agreed upon dose level. The Company is currently dependent upon Pacific
for funding of all of its operations during the Option Period. If Pacific elects
to exercise its option, Pacific would issue approximately 2,150,000 shares
valued at $430,000. The agreement has been approved by a majority of the
stockholders of the Company. Pacific's Board of Directors voted to approve the
merger. One of Pacific's directors is also a director and shareholder of the
Company. There is no assurance that Pacific will continue to meet any funding
obligations under the agreement or will elect to exercise the option to acquire
the Company.
8. SUBSEQUENT EVENTS
In December 1998, Pacific agreed to merge with Procept, Inc. ("Procept"), a
publicly traded biopharmaceutical company, in which Pacific shareholders will
receive approximately .11 shares of Procept common stock for each share of
Pacific common stock. A condition of the merger with Procept is that Pacific is
required to complete the merger with the Company prior to the completion of
Pacific's merger with Procept.
F-74
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
PROCEPT, INC.
PROCEPT ACQUISITION CORP.
AND
PACIFIC PHARMACEUTICALS, INC.
-----------------------------
Dated as of December 10, 1998
-----------------------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 - THE MERGER...................................................................A-2
1.1 The Merger.......................................................................A-2
1.2 Effective Time...................................................................A-2
1.3 Effects of the Merger............................................................A-2
1.4 Certificate of Incorporation and Bylaws..........................................A-3
1.5 Directors and Officers...........................................................A-3
1.6 Conversion of Stock..............................................................A-3
1.7 Closing of Pacific Transfer Books................................................A-4
1.8 Pacific Dissenting Shares........................................................A-4
1.9 Issuance of Procept Certificates.................................................A-5
1.10 No Fractional Shares.............................................................A-5
SECTION 2 - REPRESENTATIONS AND WARRANTIES OF PAC........................................A-6
2.1 Organization and Corporate Power.................................................A-6
2.2 Corporate Authorization..........................................................A-6
2.3 Non-Contravention................................................................A-6
2.4 No Business Activities...........................................................A-6
SECTION 3 - REPRESENTATIONS AND WARRANTIES OF PACIFIC....................................A-6
3.1 Organization and Qualification...................................................A-6
3.2 Capitalization...................................................................A-6
3.3 Authority to Execute and Perform Agreements......................................A-7
3.4 Subsidiaries and Other Affiliates................................................A-7
3.5 Charter and By-laws; Books and Records...........................................A-7
3.6 SEC Reports......................................................................A-8
3.7 Financial Statements.............................................................A-8
3.8 Absence of Undisclosed Liabilities...............................................A-8
3.9 No Material Adverse Change.......................................................A-8
3.10 Tax Matters......................................................................A-9
3.11 Compliance with Laws............................................................A-11
3.12 Consents; No Breach.............................................................A-12
3.13 Actions and Proceedings.........................................................A-12
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
3.14 Contracts and Other Agreements..................................................A-13
3.15 Real Property; Leases...........................................................A-14
3.16 Tangible Property...............................................................A-15
3.17 Intellectual Property...........................................................A-15
3.18 Title to Assets; Liens..........................................................A-15
3.19 Employee Benefit Plans..........................................................A-16
3.20 Employee Relations..............................................................A-17
3.21 Relationships with Affiliates...................................................A-17
3.22 Insurance.......................................................................A-17
3.23 Brokerage.......................................................................A-17
3.24 Hazardous Materials.............................................................A-18
3.25 Full Disclosure.................................................................A-18
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF PROCEPT...................................A-18
4.1 Organization and Qualification..................................................A-19
4.2 Capitalization..................................................................A-19
4.3 Authority to Execute and Perform Agreements.....................................A-19
4.4 Subsidiaries and Other Affiliates...............................................A-20
4.5 Charter and By-laws; Books and Records..........................................A-20
4.6 SEC Reports.....................................................................A-20
4.7 Financial Statements............................................................A-20
4.8 Absence of Undisclosed Liabilities..............................................A-20
4.9 No Material Adverse Change......................................................A-21
4.10 Tax Matters.....................................................................A-22
4.11 Compliance with Laws............................................................A-23
4.12 Consents; No Breach.............................................................A-24
4.13 Actions and Proceedings.........................................................A-24
4.14 Contracts and Other Agreements..................................................A-25
4.15 Real Property; Leases...........................................................A-26
4.16 Tangible Property...............................................................A-27
4.17 Intellectual Property...........................................................A-27
</TABLE>
A-ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
4.18 Title to Assets; Liens..........................................................A-27
4.19 Employee Benefit Plans..........................................................A-28
4.20 Employee Relations..............................................................A-29
4.21 Relationships with Affiliates...................................................A-29
4.22 Insurance.......................................................................A-29
4.23 Brokerage.......................................................................A-29
4.24 Hazardous Materials.............................................................A-30
4.25 Full Disclosure.................................................................A-30
SECTION 5 - COVENANTS AND AGREEMENTS....................................................A-30
5.1 Conduct of Pacific Business.....................................................A-30
5.2 Conduct of Procept Business.....................................................A-32
5.3 Nasdaq Listing..................................................................A-33
5.4 Agreement not to Entertain other Offers.........................................A-33
5.5 Corporate Examinations and Investigations.......................................A-34
5.6 Expenses........................................................................A-34
5.7 Authorization from Others.......................................................A-34
5.8 Consummation of Agreement.......................................................A-35
5.9 Further Assurances..............................................................A-35
5.10 Securities Law Matters..........................................................A-35
5.11 Pacific Stockholder Meeting.....................................................A-35
5.12 Procept Stockholder Meeting.....................................................A-36
5.13 Public Announcements and Confidentiality........................................A-36
5.14 Affiliate Letters...............................................................A-36
5.15 Procept SEC Filings.............................................................A-37
5.16 Pacific SEC Filings.............................................................A-37
5.17 Fairness Opinions...............................................................A-37
5.18 Stock Options and Warrants......................................................A-37
5.19 Indemnification, Directors and Officer's Insurance..............................A-39
</TABLE>
A-iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
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SECTION 6 - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH
PARTY TO CONSUMMATE THE MERGER..............................................A-39
6.1 Approvals.......................................................................A-39
6.2 Absence of Order................................................................A-40
6.3 Nasdaq Stock Exchange Listing...................................................A-40
6.4 Effectiveness of Registration Statement.........................................A-40
6.5 Procept Fairness Opinion........................................................A-40
6.6 Pacific Fairness Opinion........................................................A-40
SECTION 7 - CONDITIONS PRECEDENT TO THE OBLIGATION OF
PROCEPT TO CONSUMMATE THE MERGER............................................A-40
7.1 Representations, Warranties and Covenants.......................................A-40
7.2 Certificate of Secretary of Pacific.............................................A-40
7.3 Affiliate Letters...............................................................A-40
7.4 Opinion of Counsel to Pacific...................................................A-41
7.5 Merger Certificate..............................................................A-41
7.6 BTI Merger Agreement............................................................A-41
7.7 Agreement with Lenders..........................................................A-41
7.8 Approvals.......................................................................A-41
7.9 Dissenting Shares...............................................................A-41
7.10 Bank Accounts...................................................................A-41
7.11 Certificates....................................................................A-41
SECTION 8 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PACIFIC
TO CONSUMMATE THE MERGER....................................................A-41
8.1 Representations, Warranties and Covenants.......................................A-41
8.2 Certificate of Secretary of Procept.............................................A-42
8.3 Certificate of Secretary of PAC.................................................A-42
8.4 Approvals.......................................................................A-42
8.5 Opinion of Counsel to Procept...................................................A-42
8.6 Certificates....................................................................A-42
SECTION 9 - TERMINATION, AMENDMENT AND WAIVER...........................................A-42
9.1 Termination.....................................................................A-42
9.2 Effect of Termination...........................................................A-43
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TABLE OF CONTENTS
(continued)
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SECTION 10 - ADDITIONAL CONTRACTUAL RIGHTS...............................................A-43
10.1 Definitions.....................................................................A-43
10.2 Reset...........................................................................A-46
10.3 Reset Issuance..................................................................A-46
10.4 Semi-Annual Issuances...........................................................A-46
10.5 Dilution Issuances..............................................................A-46
10.6 Anti-Dilution Adjustments.......................................................A-46
10.7 Change of Shares Adjustments....................................................A-50
10.8 Liquidation Put.................................................................A-51
10.9 Transfer of Rights Under This Section 10........................................A-51
10.10 Adjustments to Issuance Base Amount.............................................A-52
10.11 Notices.........................................................................A-52
10.12 Treasury Stock..................................................................A-53
10.13 Mandatory Termination of Section 10 Rights......................................A-53
10.14 Waiver of Section 10 Rights.....................................................A-53
10.15 Optional Exchange/Reset.........................................................A-53
SECTION 11 - MISCELLANEOUS...............................................................A-55
11.1 Notices.........................................................................A-55
11.2 Amendment.......................................................................A-56
11.3 Waiver..........................................................................A-56
11.4 Entire Agreement................................................................A-56
11.5 Governing Law...................................................................A-56
11.6 Binding Effect; No Assignment...................................................A-56
11.7 Variations in Pronouns..........................................................A-56
11.8 Counterparts....................................................................A-56
11.9 Exhibits and Disclosure Schedules...............................................A-56
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of December 10, 1998 (this
"Agreement") is among Procept, Inc. ("Procept"), a Delaware corporation, Procept
Acquisition Corp. ("PAC"), a Delaware corporation, and Pacific Pharmaceuticals,
Inc. ("Pacific"), a Delaware corporation. The parties wish to effect the
acquisition of Pacific by Procept through a merger of PAC into Pacific on the
terms and conditions hereof. This Agreement is intended to be a "plan of
reorganization" within the meaning of ss.368(a) of the Internal Revenue Code of
1986, as amended (the "Code").
Accordingly, in consideration of the mutual representations, warranties
and covenants contained herein, the parties hereto agree as follows:
SECTION 1 - THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), PAC shall be merged with and into Pacific (the "Merger"). The Merger
shall occur at the Effective Time (as defined herein). Following the Merger,
Pacific shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of PAC shall cease.
1.2 Effective Time. As soon as practicable after satisfaction or waiver
of all conditions to the Merger, the parties shall cause a Certificate of Merger
to be filed in accordance with Section 252 of the DGCL (the "Merger
Certificate") and shall take all such further actions as may be required by law
to make the Merger effective. The Merger shall be effective at such time as the
Merger Certificate is filed, as appropriate, with the Secretary of State with
the State of Delaware in accordance with the DGCL or at such later time as is
specified in such documents (the "Effective Time"). Immediately prior to the
filing of the Merger Certificate, a closing (the "Closing") will be held at the
offices of Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts (or such
other place as the parties may agree) for the purpose of confirming satisfaction
or waiver of all conditions to the Merger. Subject to satisfaction or waiver of
each of the conditions specified in Sections 5, 6 and 7 hereof, the Closing
shall take place within three business days after the last to occur of:
(a) the day the Merger is approved by the stockholders of Pacific
pursuant to Section 5.11; or
(b) the day the issuance of the Merger Consideration (as defined
below) is approved by the stockholders of Procept pursuant to Section 5.12;
or on such other date as the parties may agree, but not later than June 30,
1999. The date on which the Closing occurs is referred to herein as the "Closing
Date".
1.3 Effects of the Merger. The Merger shall have the effects set forth
in Section 259, 260 and 261 of the DGCL.
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1.4 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and Bylaws of Pacific, in each case as in effect immediately prior
to the Effective Time shall be the Certificate of Incorporation and Bylaws of
the Surviving Corporation immediately after the Effective Time, until duly
amended in accordance with applicable law.
1.5 Directors and Officers. The directors and officers of PAC
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation immediately after the Effective Time, each such
officer and director to hold office in accordance with their respective terms.
1.6 Conversion of Stock.
(a) For purposes of this Agreement, "Merger Consideration" means
2,755,000 shares of common stock, $0.01 par value per share, of Procept
("Procept Common Stock") reduced by the number of shares of Procept Common Stock
which would be issued but for the terms of Section 262 of the DGCL in respect of
Dissenting Shares (as defined in Section 1.8).
(b) At the Effective Time, by virtue of the Merger and without any
action on the part of Procept or Pacific:
(i) All shares of Common Stock of Pacific, $0.02 par value per
share (the "Pacific Common Stock") and all shares of Preferred Stock of Pacific,
$25 par value per share, (the "Pacific Preferred Stock" collectively, with the
Pacific Common Stock the "Pacific Stock") outstanding immediately prior to the
Effective Time, other than Dissenting Shares (as defined in Section 1.8), shall
be converted into and become the right to receive, (subject to the payment of
cash for fractional shares as provided in Section 1.10) shares of Procept Common
Stock in accordance with Section 1.6(c).
(ii) All options and warrants to purchase Pacific Stock
outstanding immediately prior to the Effective Time, shall be exercisable for
that number of shares of Procept Common Stock which such option or warrant
holder would have been entitled to receive if the underlying Pacific Stock had
converted in the Merger, at an exercise price per share equal to the aggregate
exercise price of the Pacific option or warrant exchanged divided by the number
of shares of Procept Common Stock subject to the new option or warrant, and
otherwise having the same terms and conditions as the Pacific option or warrant
and otherwise in accordance with the terms of Section 5.19.
(iii) All shares of Pacific Stock held at the Effective Time by
Pacific as treasury stock or by a subsidiary of Pacific shall be canceled and no
payment shall be made with respect thereto.
(iv) All Dissenting Shares shall be dealt with in accordance
with Section 1.8.
(v) All shares of Common Stock of PAC, $0.01 par value per
share, outstanding immediately prior to the Effective Time, shall be converted
into the right to receive the same number of shares of the Surviving
Corporation.
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(c) The Merger Consideration shall be allocated among the holders
of shares of Pacific Stock outstanding immediately prior to the Effective Time
by allocating to each such holder of Pacific Stock outstanding at the Effective
Time (other than the holders of Dissenting Shares) that number of shares of
Procept Common Stock determined by multiplying the number of shares of Pacific
Common Stock held by each such holder or issuable to a holder on conversion of
Pacific Preferred Stock held by such holder by the Conversion Factor (as defined
below).
(d) "Conversion Factor" means the quotient obtained by dividing (i)
2,755,000 by (ii) the number of shares of Pacific Common Stock either
outstanding or issuable on conversion of outstanding shares of Pacific Preferred
Stock immediately prior to the Effective Time. As of the date of this Agreement,
based on the shares of Pacific Common Stock currently outstanding or issuable
(i) on conversion of outstanding Pacific Preferred Stock and (ii) upon the
closing of the Agreement and Plan of Merger between Pacific and Binary
Therapeutics, Inc., the Conversion Factor is 0.11.
(e) The Merger Consideration shall be adjusted in the event of any
change in Procept Common Stock by reason of a stock splits, stock
recapitalizations, combinations or subdivisions of the Common Stock of Procept,
mergers or other exchanges of shares by operation of law or the like occurring
after the date of this Agreement and before the Effective Time, such that, after
the record date therefor the Merger Consideration shall be equal to the number
and class of shares or other securities or property that would have been
received in respect of a share of Procept Common Stock, as the case may be, if
the Effective Time had occurred immediately prior to such record date.
1.7 Closing of Pacific Transfer Books. At the Effective Time, the stock
transfer books of Pacific shall be closed and no transfer of Pacific Stock shall
thereafter be made. If, after the Effective Time, certificates representing
shares of Pacific Stock are presented to the Exchange Agent, they shall be
canceled and exchanged for certificates representing Procept Common Stock.
1.8 Pacific Dissenting Shares.
(a) Shares of Pacific Stock held by a stockholder who has properly
exercised appraisal rights with respect thereto in accordance with Section 262
of the DGCL are referred to herein as "Dissenting Shares". Shares of Pacific
Stock that constitute Dissenting Shares shall not be converted into Merger
Consideration and shares of Procept Stock shall not be issued pursuant to
Section 1.6(d) in exchange therefor. From and after the Effective Time, a
stockholder who has properly exercised such appraisal rights shall no longer
retain any rights of a stockholder of Pacific or the Surviving Corporation,
except those provided under the DGCL.
(b) Pacific shall give Procept (i) prompt notice of any written
notices and demands under Section 262 of the DGCL with respect to any shares of
capital stock of Pacific, any withdrawal of any such demands and any other
instruments served pursuant to the DGCL and received by Pacific and (ii) the
right to participate in all negotiations and proceedings with respect to any
demands under Section 262 with respect to any shares of capital stock of
Pacific. Pacific shall cooperate with Procept concerning, and shall not, except
with the prior written
A-4
<PAGE>
consent of Procept, voluntarily make any payment with respect to, or offer to
settle or settle, any such demands.
(c) In the event that a holder of Pacific Stock makes a demand
under Section 262 of the DGCL the Merger Consideration shall be reduced by the
number of shares of Procept Common Stock which would otherwise have been issued
to such holder.
1.9 Issuance of Procept Certificates. Prior to the Effective Time,
Procept shall authorize one or more persons to act as Exchange Agent hereunder
(the "Exchange Agent") and shall deposit with or for the account of the Exchange
Agent certificates representing the number of shares or Procept Common Stock
equaling the Merger Consideration and cash in lieu of fractional shares of
Procept Common Stock. As soon as practicable after the Effective Time, (i)
Pacific shall deliver to Procept a list of all record holders of Pacific Stock
immediately prior to the Effective Time (the "Record Holders"), setting forth
each stockholder's name, address and number of shares of Pacific Stock held
prior to the Effective Time and such other information as may be reasonably
requested by the Exchange Agent, certified by the Chief Executive Officer of
Pacific (the "Stockholder List") and (ii) the Exchange Agent shall be instructed
to mail to each Record Holder a form of letter of transmittal which shall
specify instructions for use in effecting the surrender of Pacific Stock
certificates in exchange for Merger Consideration. Upon the Exchange Agent's
receipt of the letter of transmittal and any certificate held by a stockholder,
each stockholder shall be entitled to receive a certificate representing that
number of whole shares of Procept Common Stock into which the shares of Pacific
Stock as set forth on the Stockholder List shall have been converted pursuant to
the provisions of this Agreement. The shares of Pacific Stock outstanding
immediately prior to the Effective Time (and any certificates representing such
shares) shall be deemed canceled as of the Effective Time. Procept Common Stock
into which Pacific Stock shall be converted in the Merger shall be deemed to
have been issued at the Effective Time. If any Procept Common Stock certificates
are to be issued in a name other than that in which the Pacific Stock was
registered immediately prior to the Effective Time, it shall be a condition of
such issuance that the person requesting such issuance shall deliver to the
Exchange Agent all documents necessary to evidence and effect such transfer and
shall pay to the Exchange Agent any transfer or other taxes required by reason
of the issuance of certificates for such shares of Procept Common Stock in a
name other than that of the registered holder of the certificate or surrendered
or establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. None of Procept, PAC or Pacific shall be liable to
any stockholder for shares of stock or any cash in lieu of fractional interests
delivered to a public official pursuant to applicable escheat or abandoned
property laws.
1.10 No Fractional Shares. No certificates representing fractional
shares of Procept Common Stock shall be issued upon the surrender for exchange
of Pacific Stock certificates. No fractional interest shall entitle the owner to
vote or to any rights of a security holder. In lieu of fractional shares, each
stockholder who would otherwise have been entitled to a fractional share of
Procept Common Stock, will receive from Procept at Closing an amount in cash
(without interest) determined by multiplying such fraction by the fair market
value of a share of Procept Common Stock. Such fair market value shall equal the
mean of the daily high and low sales prices of the Procept Common Stock on the
Nasdaq Small Cap Market, as reported by Nasdaq, averaged over the period of ten
(10) trading days ending on the fifth trading day prior to the Closing Date.
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SECTION 2 - REPRESENTATIONS AND WARRANTIES OF PAC
Procept and PAC hereby make the following representations and
warranties:
2.1 Organization and Corporate Power. PAC is a corporation duly
incorporated, validly existing and in good standing under the laws of Delaware.
2.2 Corporate Authorization. PAC has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by the PAC of this
Agreement and the consummation by PAC of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of PAC,
enforceable against it in accordance with its terms.
2.3 Non-Contravention. The execution, delivery and performance by PAC
of this Agreement and the consummation by PAC of the transactions contemplated
hereby do not and will not contravene or conflict with the Certificate of
Incorporation or By-Laws of PAC.
2.4 No Business Activities. PAC has not conducted any business
activities unrelated to the transactions contemplated hereby.
SECTION 3 - REPRESENTATIONS AND WARRANTIES OF PACIFIC
Except as set forth on the disclosure schedule (the "Pacific Disclosure
Schedule") delivered to Procept on the date hereof, (regardless of whether the
Pacific Disclosure Schedule is referenced in any particular subsection of this
Section 3), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer (provided that
disclosure thereon under any subsection number shall be disclosure for any
section hereof), Pacific represents and warrants to Procept as set forth below:
3.1 Organization and Qualification. Pacific and each of its
subsidiaries named on the Pacific Disclosure Schedule pursuant to Section 3.4
below (the "Subsidiaries") is a corporation duly organized, validly existing and
in good standing under the laws of the state or other jurisdiction of its
incorporation and has full corporate power and authority to own, lease and
operate its assets, properties and business and to carry on its business as now
being and as heretofore conducted. Pacific is qualified or is otherwise
authorized to transact business as a foreign corporation in each jurisdiction
(in the United States and outside of the United States) in which the failure to
so qualify would have a material adverse effect on the business or financial
condition of Pacific or its subsidiaries (other than changes that are the effect
of economic factors affecting the economy or the pharmaceutical industry as a
whole) (a "Pacific Material Adverse Effect"), all of which jurisdictions are
identified in Section 3.1 of the Pacific Disclosure Schedule.
3.2 Capitalization.
3.2.1 Outstanding Capital Stock. Pacific's authorized capital stock
consists of 100,000,000 shares of Common Stock, $0.02 par value per share, of
which 12,280,017 shares are issued and outstanding as of November 17, 1998, and
2,000,000 shares of Preferred Stock, $25 par value per share, of which 36,696
shares are issued and outstanding as of November, 1998
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<PAGE>
and convertible into 10,674,499 shares of Pacific Common Stock. Except as
disclosed in Pacific's proxy statement for its annual meeting of stockholders
held on August 13, 1998, Pacific is not aware of any record or beneficial holder
of more than five percent (5%) of the outstanding shares of Pacific Stock. The
outstanding shares of Pacific Stock are duly authorized, validly issued, fully
paid, and nonassessable and have been issued in compliance with all charter
documents of Pacific and all applicable federal and state laws. Except as set
forth in this Section 3.2.1, no other capital stock of Pacific is authorized or
outstanding.
3.2.2 Options or Other Rights. Except as set forth in the Pacific
Disclosure Schedule, (i) no subscription, warrant, option, preemptive right,
convertible security or other right (contingent or otherwise) to purchase or
acquire any shares of capital stock or other security of Pacific issued by
Pacific is authorized or outstanding, (ii) there is no commitment or offer by
Pacific to issue or provide any such subscription, warrant, option, preemptive
right, convertible security or other right or to issue or distribute to holders
of any shares of its capital stock any evidences of indebtedness or assets of
Pacific, (iii) Pacific has no obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof, (iv) there are no restrictions on the transfer of Pacific's capital
stock other than those arising from securities laws, and (v) there are no voting
trusts, proxies or other agreements, instruments or understandings with respect
to outstanding shares of Pacific's capital stock to which Pacific is a party.
3.3 Authority to Execute and Perform Agreements. Subject to the
requirement to obtain approval of its stockholders to consummate the Merger
under the DGCL, Pacific has the requisite corporate power and authority to
execute and deliver this Agreement and each agreement, document and instrument
contemplated by this Agreement to which it is a party, to consummate the
transactions contemplated hereby and thereby and to perform fully its respective
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and each such other agreement, document and instrument to which
it is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Pacific. This Agreement and each agreement, document and instrument to which
it is a party executed and delivered pursuant to this Agreement constitutes, or
when executed and delivered will constitute, valid and binding obligations of
Pacific, enforceable in accordance with their terms.
3.4 Subsidiaries and Other Affiliates. Except as set forth in the
Pacific Disclosure Schedule, Pacific does not have any subsidiary or directly or
indirectly own or have any investment in any of the capital stock of, or any
other interest in, any other person or entity. The Pacific Disclosure Schedule
indicates the number of shares of capital stock of each Subsidiary held by
Pacific and the total shares of capital stock outstanding for each Subsidiary.
The Pacific Disclosure Schedule also indicates whether any warrant, option or
other right to acquire an equity interest in any Subsidiary is outstanding. For
the purposes of the representations and warranties in this Section 3 and the
covenants set forth in Section 5, Binary Therapeutics, Inc. shall be deemed to
be a Subsidiary, unless the language of any particular provision clearly
indicates a contrary intent.
3.5 Charter and By-laws; Books and Records. Pacific has heretofore
delivered or made available to Procept true and complete copies of the
Certificate of Incorporation (certified
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<PAGE>
by the Secretary of State or comparable authority of its jurisdiction of
incorporation) and By-laws as in effect on the date hereof for itself and each
of its Subsidiary, and corporate minute books. None of Pacific or any Subsidiary
is in default in the performance, observation or fulfillment of either its
charter or By-laws. The minute books of Pacific and each Subsidiary contain true
and complete records of all meetings and consents in lieu of meetings of the
Board of Directors and of the stockholders prior to the date hereof, and
accurately reflect all transactions referred to in such minutes and consents in
lieu of meetings.
3.6 SEC Reports. Pacific has previously delivered to Procept its (i)
Annual Report on Form 10-K for the year ended March 31, 1998 (the "Pacific
10-K"), as filed with the Securities and Exchange Commission (the "SEC"), (ii)
the proxy statement relating to Pacific's annual meeting of stockholders held on
August 13, 1998 and (iii) all other reports filed by Pacific with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since
January 1, 1998. As of their respective dates, such reports complied in all
material respects with applicable SEC requirements and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Pacific has timely
filed with the SEC all reports required to be filed under Sections 13, 14 or
15(d) of the Exchange Act since becoming registered under the Exchange Act.
3.7 Financial Statements. The consolidated financial statements
contained in the Pacific 10-K and in Pacific's quarterly report on Form 10-Q for
the quarter ended September 30, 1998 (the "Pacific 10-Q") have been prepared
from, and are in accordance with, the books and records of Pacific and each
Subsidiary (required to be so consolidated) and fairly present the consolidated
financial condition, results of operations and cash flows of Pacific as of the
dates and for the periods presented therein, all in accordance with generally
accepted accounting principles applied on a consistent basis, except as
otherwise indicated therein and subject (in the case of the unaudited financial
statements included in the Pacific 10-Q) to normal year-end and audit
adjustments and footnote disclosures, which in the aggregate are not material.
3.8 Absence of Undisclosed Liabilities. Except as set forth in the
Pacific Disclosure Schedule at March 31, 1998, Pacific and its Subsidiaries have
no material liabilities of any nature, whether accrued, absolute, contingent or
otherwise (including without limitation, liabilities as guarantor or otherwise
with respect to obligations of others or liabilities for taxes due or then
accrued or to become due), required to be reflected or disclosed in the balance
sheet dated March 31, 1998 (or the notes thereto) included in the Pacific 10-K
(the "Pacific Balance Sheet") that were not adequately reflected or reserved
against on such balance sheet. Except as set forth in the Pacific Disclosure
Schedule, Pacific and its Subsidiaries have no such liabilities, except as and
to the extent (i) adequately reflected and reserved against in the Pacific
Balance Sheet, (ii) adequately reflected and reserved against in the Pacific
unaudited balance sheet dated September 30, 1998 included in the Pacific 10-Q
(the "Pacific Interim Balance Sheet"), or (iii) incurred since March 31, 1998 in
the ordinary course of business and not material in amount, either individually
or in the aggregate.
3.9 No Material Adverse Change. Since March 31, 1998, there has not
been:
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(i) any material adverse change in the assets, liabilities,
condition (financial or otherwise), results of operation, business or prospects
of Pacific or its Subsidiaries or any occurrence or circumstance which
reasonably could be expected to result in such a material adverse change;
(ii) any material change in the method of operating the business of
Pacific or its Subsidiaries, in the manner of keeping the books, accounts or
records of Pacific or its Subsidiaries, or in any accounting method or practice
of Pacific or its Subsidiaries;
(iii) any sale, lease, mortgage, pledge, encumber, abandonment or
disposition of, or agreement to sell, lease, mortgage, pledge, encumber, abandon
or dispose of, any material assets or properties of Pacific or its Subsidiaries,
other than in the usual and ordinary course of business;
(iv) any material transaction, commitment, contract or agreement
entered into by Pacific or its Subsidiaries, or any relinquishment or
abandonment by Pacific or its Subsidiaries of any material contract or right, or
any modification, waiver, amendment, release, recision, or termination of any
material term, condition or provision of any contract pertaining to Pacific or
its Subsidiaries (other than any satisfaction by performance in accordance with
the terms thereof), other than in the usual and ordinary course of business;
(v) any adverse relationships or conditions with employees,
suppliers, lenders, customers or governmental agencies that could reasonably be
anticipated to have a Pacific, or its Subsidiaries Material Adverse Effect on
Pacific or its business;
(vi) any acquisition by Pacific or its Subsidiaries (other than
property or interests therein acquired in the ordinary course of its lending
business) of all or any part of the assets, properties, capital stock or
business of any other person or entity;
(vii) any redemption or other acquisition by Pacific or its
Subsidiaries of any of its capital stock or any declaration, setting aside or
payment of any dividend or distribution of any kind with respect to shares of
its capital stock;
(viii) any loan or advance by Pacific or its Subsidiaries to any
stockholder, officers, director or consultant, or any other loan or advance
other than in the ordinary course of business; or
(ix) except as set forth in the Pacific Disclosure Schedule, any
new employment or consulting agreement, any increase in compensation, bonus or
other benefits payable or to become payable by Pacific or its Subsidiaries to
any director, officer or employee, other than regularly scheduled increases
consistent with past practice in the ordinary course of business, or any new
grant of severance or termination rights, or increase in rights or benefits
payable under existing severance or termination policies or agreements, to any
director, officer or employee of Pacific.
3.10 Tax Matters.
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(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes", means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities in the nature of a tax including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in the Pacific
Disclosure Schedule:
(i) Each of Pacific and its Subsidiaries has prepared and filed all
required federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") required to be filed relating to any and all
Taxes concerning or attributable to Pacific or such Subsidiary or its operations
and such Returns are true and correct in all material respects and have been
completed in all material respects in accordance with applicable law or, with
respect to any Taxes payable, an adequate reserve has been established on the
Pacific Interim Balance Sheet.
(ii) Each of Pacific and its Subsidiaries: (A) has paid or accrued
all Taxes set forth on its Returns, and (B) has withheld and paid (or will pay
at the time required) with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld.
(iii) Neither Pacific nor any of its Subsidiaries is delinquent in
any material respect in the payment of any Tax nor is there any material Tax
deficiency outstanding, proposed or assessed against Pacific or any of its
Subsidiaries, nor has Pacific or any Subsidiary executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) Other than the audits set forth in the Pacific Disclosure
Schedule, no audit or other examination of any Return of Pacific is currently in
progress, nor has Pacific or any Subsidiary been notified of any request for
such an audit or other examination.
(v) Pacific and its Subsidiaries did not have, as of September 30,
1998, any liabilities, whether asserted or unasserted, contingent or otherwise,
for unpaid federal, state, local and foreign Taxes which have not been accrued
or reserved against in accordance with GAAP on the Pacific Interim Balance
Sheet, and neither Pacific nor any of its Subsidiaries has incurred any such
liabilities since such date except in the ordinary course of business and
consistent with past practices.
(vi) There are (and as of immediately following the Effective Date
there will be) no liens, pledges, charges, claims, security interests or other
encumbrances of any sort ("Liens") of a material nature on the assets of Pacific
or any Subsidiary relating to or attributable to Taxes, except for Liens for
Taxes not yet due and payable or that are being contested in good faith by
appropriate proceedings.
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(vii) Neither Pacific nor any Subsidiary has received written or
oral notice of any claim relating or attributable to Taxes that, if adversely
determined, would result in any Lien on the assets of Pacific or any Subsidiary.
(viii) None of Pacific's or its Subsidiaries' assets are treated as
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of Pacific or any of
its subsidiaries that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Section 280G of
the Code or the limitations in Sections 162 of the Code.
(x) Neither Pacific nor any of its Subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by Pacific or such Subsidiary.
(xi) Neither Pacific nor any of its Subsidiaries is a party to a
tax sharing or allocation agreement nor does Pacific or any Subsidiary owe any
amount under any such agreement.
(xii) Neither Pacific nor any of its Subsidiaries is or has been at
any time during the period specified in Section 897(c)(1)(A)(ii) of the Code, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xiii) Neither Pacific nor any Subsidiary has agreed to, or is
required to, make any adjustments under Section 481(c) of the Code by reason of
a change in accounting method or otherwise.
3.11 Compliance with Laws.
3.11.1 None of Pacific or any Subsidiary is in violation in any
material respect of any order, judgment, injunction, award or decree, or any
federal, state, local or foreign law, ordinance or regulation or any other
requirement of any governmental or regulatory body, court or arbitrator, and is
in compliance in all material respects with all of the foregoing that are
applicable to it, its business or its assets. None of Pacific or any Subsidiary
has received notice of, and there has not been any citation, fine or penalty
imposed or asserted against any of them for, any such violation or alleged
violation that has not been favorably and fully resolved.
3.11.2 Each of Pacific and the Subsidiaries holds all licenses,
permits, certificates, franchises, orders or approvals of any federal, state,
local or foreign governmental or regulatory body, that are material to the
conduct of such company's business and the uses of its assets (collectively,
"Permits") necessary to operate its business as presently conducted. The Pacific
Disclosure Schedule contains a true and complete list of all such permits as of
the date hereof. Such Permits are in full force and effect and the validity and
effectiveness of such
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Permits will not be affected by the transactions contemplated hereby. No
violations are or have been recorded with any governmental or regulatory body in
respect of any Permit, no proceeding is pending or, to the best knowledge of
Pacific, threatened to revoke or limit any Permit, and Pacific knows of no
grounds for any such revocation or limitation.
3.12 Consents; No Breach. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by Pacific are set forth in Section 3.12 of the
Pacific Disclosure Schedule, other than those which the failure to obtain would
not affect the validity of this transaction or materially adversely affect the
business of the Surviving Corporation after the Effective Time. Subject to any
prior approval requirements set forth in Section 3.12 of the Pacific Disclosure
Schedule, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not (i) violate any
provision of the Certificate of Incorporation or By-laws of Pacific or any
Subsidiary; (ii) violate, conflict with or result in the breach of any of the
terms or conditions of, result in a material modification of, or otherwise give
any other contracting party the right to terminate, or constitute (or with
notice or lapse of time or both constitute) a default under, any material
instrument, contract or other agreement to which Pacific or any Subsidiary is a
party or to which Pacific or any Subsidiary or any of their assets or properties
is bound or subject; (iii) violate any statute, law or regulation of any
jurisdiction (which violation would affect the validity of the transaction
contemplated hereby or otherwise would materially adversely affect the business
of the Surviving Corporation after the Effective Time) or any order, judgment,
injunction, award or decree of any court, arbitrator or governmental or
regulatory body applicable to or binding upon Pacific or any Subsidiary or any
of their securities, properties, assets or business; (iv) violate any material
Permit; (v) except with respect to change of control provisions in customer
contracts, require any filing with, notice to, or approval or consent of any
foreign, federal, state, local or other governmental or regulatory body or any
other person or entity; (vi) give rise to any obligation to make any material
payment; or (vii) result in the creation of any Encumbrance on the assets or
properties of Pacific or any Subsidiary, excluding from the foregoing clauses
(ii), (iii), (iv) and (v) any exceptions to the foregoing that, in the
aggregate, would not have a Pacific Material Adverse Effect on the business of
Pacific or on the ability of Pacific to consummate the transactions contemplated
hereby, and the following: (a) the filing of the Merger Certificate with the
Secretary of State of Delaware (b) filings with various state blue sky
authorities, (c) the filing with Nasdaq of an application for listing of the
shares of Pacific Common Stock to be issued in the Merger and (d) the filing
with the SEC of a registration statement on Form S-4 to register the shares of
Pacific Common Stock to be issued in the Merger.
3.13 Actions and Proceedings. Except as set forth on the Pacific
Disclosure Schedule, there are no outstanding orders, judgments, injunctions,
awards or decrees of any court, governmental or regulatory body or arbitration
tribunal against or involving Pacific, any of the Subsidiaries or any of their
securities, assets, or properties. There are no actions, suits or claims or
legal, judicial, administrative or arbitral proceedings or investigations
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending or, to the best knowledge of Pacific, threatened
against or involving Pacific any of the Subsidiaries, or any of their
securities, assets or properties.
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3.14 Contracts and Other Agreements. Section 3.14 of the Pacific
Disclosure Schedule sets forth a correct and complete list all of the following
currently effective contracts:
(i) written contracts and other agreements with or for the benefit
of any current or former officer, director, stockholder or employee of Pacific
or any Subsidiary or any Subsidiary involving more than $5,000, (provided in the
case of a loan by Pacific or any Subsidiary to any such person, the Pacific
Disclosure Schedule shall list all such loan arrangements, whether or not in
writing, involving at least $1,000) and contracts and other agreements for the
payment of fees or other consideration to any entity in which Pacific or any
Subsidiary has an interest;
(ii) contracts and other agreements with any labor union or
association representing any employee of Pacific or any Subsidiary or otherwise
providing for any form of collective bargaining;
(iii) contracts and other agreements for the purchase or sale of
materials, supplies, equipment, merchandise or services that contain an
escalation, renegotiation or redetermination clause or that obligate Pacific or
any Subsidiary to purchase all or substantially all of its requirements of a
particular product from a supplier, or for periodic minimum purchases of a
particular product from a supplier;
(iv) contracts and other agreements for the sale of any of the
assets or properties of Pacific or any Subsidiary other than in the ordinary
course of business or for the grant to any person of any options, rights of
first refusal, or preferential or similar rights to purchase any of such assets
or properties;
(v) partnership or joint venture agreements;
(vi) contracts with agents or foreign representatives regarding
the sales or marketing of the services or products of Pacific or any Subsidiary;
(vii) contracts or other agreements under which Pacific or any
Subsidiary agrees to act as surety or guarantor for or to indemnify any party
(other than required indemnification provisions in customer contracts) or to
share the tax liability of any party;
(viii) contracts, options, outstanding purchase orders and other
agreements for the purchase of any material asset, tangible or intangible;
(ix) contracts and other agreements with customers, suppliers or
other parties for the sharing of fees, the rebating of charges or other similar
arrangements other than such contracts entered into in the normal course of
business;
(x) contracts and other agreements containing obligations or
liabilities of any kind to holders of the securities of Pacific or of any
Subsidiary as such (including, without limitation, an obligation to register any
of such securities under any federal or state securities laws) and contracts
obligating Pacific or any Subsidiary to issue or repurchase any securities;
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(xi) contracts and other agreements containing covenants of
Pacific or any Subsidiary not to compete in any line of business or with any
person or entity or covenants of any other person or entity not to compete with
Pacific or any Subsidiary in any line of business;
(xii) contracts and other agreements relating to the acquisition
by Pacific or any Subsidiary of any operating business or the capital stock of
any other person or entity;
(xiii) contracts and other agreements requiring the payment to any
party of a brokerage or sales commission or a finder's or referral fee;
(xiv) contracts, indentures, mortgages, promissory notes,
debentures loan agreements, guaranties, security agreements, pledge agreements,
and other agreements and instruments relating to the borrowing or lending of
money or securing any such liability;
(xv) any agreement or series of related agreements requiring
aggregate payments by or to Pacific or any Subsidiary of more than $5,000;
(xvi) contracts under which Pacific or any Subsidiary will acquire
or has acquired ownership of, or license to, intangible property, including
software other than commercially available end-user licenses; and
(xvii) any other material contract or other agreement whether or
not made in the ordinary course of business.
There have been delivered or made available to Procept true and
complete copies of all of the contracts and other agreements (and all
amendments, waivers or other modifications thereto) set forth in Section 3.14 of
the Pacific Disclosure Schedule. All of such contracts and other agreements are
valid, subsisting, in full force and effect, binding upon Pacific or a
Subsidiary (as the case may be), and to the best knowledge of Pacific, binding
upon the other parties thereto in accordance with their terms. Other than
defaults which would not, either singly or in the aggregate, have a Pacific
Material Adverse Effect, none of Pacific or any Subsidiary is not in default
under any of such scheduled contracts, nor, to the best knowledge of Pacific, is
any other party to any such contract or other agreement in default thereunder,
nor does any condition exist that constitutes or with notice or lapse of time or
both would constitute a default thereunder.
3.15 Real Property; Leases. None of Pacific or any Subsidiary does not
own any real property or any buildings or other structures and does not have any
options or any contractual obligations to purchase or acquire any interest in
real property except as set forth in Section 3.15 of the Pacific Disclosure
Schedule. Section 3.15 of the Pacific Disclosure Schedule sets forth a correct
and complete list of all leases of real property to which Pacific is a party
(collectively, the "Leases"). True and complete copies of the leases and all
amendments, modifications and supplemental agreements thereto have been
delivered by Pacific to Procept. The Leases are in full force and effect and to
the best knowledge of Pacific, are binding and enforceable against each of the
parties thereto in accordance with their respective terms. To the best knowledge
of Pacific no party to any Lease has given notice to any other party thereto
claiming the existence
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or occurrence of a breach or default thereunder and there has not occurred any
event or circumstances which constitutes, or with the passage of time or the
giving of notice would constitute, a breach or default thereunder other than
defaults which would not, either singly or in the aggregate, have a Pacific
Material Adverse Effect.
3.16 Tangible Property. Each of Pacific and the Subsidiaries has good
and marketable title to, free and clear of all Encumbrances, or otherwise has
the unrestricted right to use, each item of equipment, furniture, leasehold
improvements, fixtures, vehicles, structures, any related capitalized items and
other tangible property material to the business of Pacific or such Subsidiary
("Tangible Property"). All such Tangible Property is in good and sufficient
operating condition and repair, ordinary wear and tear excepted, and to the best
knowledge of Pacific, none of Pacific or such Subsidiary has received notice
that any of its Tangible Property is in violation of any existing law or any
building, zoning, health, safety or other ordinance, code or regulation.
3.17 Intellectual Property.
(a) To the knowledge of Pacific, each of Pacific and the
Subsidiaries owns, or is licensed to use, or otherwise has the right to use all
patents, trademarks, service marks, trade names, trade secrets, logos,
franchises, and copyrights, and all applications for any of the foregoing, and
all technology, inventions, trade secrets, know-how, computer software and
processes to the extent material to the conduct of its business as now conducted
(collectively, the "Proprietary Rights"). Pacific has previously delivered to
Procept a certified list of all such patents and registered copyrights and
trademarks, and all applications therefor (the "Pacific Registered Rights"). All
of the Pacific Registered Rights owned by Pacific or any Subsidiary, and to the
best knowledge of Pacific, all Pacific Registered Rights licensed to Pacific or
any Subsidiary have been registered in, filed in or issued by the United States
Patent and Trademark Office, the United States Register of Copyrights, or the
corresponding offices of other jurisdictions as identified in Section 3.17 of
the Pacific Disclosure Schedule, and have been properly maintained and renewed
in accordance with all applicable provisions of law and administrative
regulations in the United States and in each such other jurisdiction.
(b) To the best knowledge of Pacific, the businesses of Pacific
and the Subsidiaries as currently conducted does not infringe upon the
proprietary rights of others, nor has Pacific or any Subsidiary received any
notice or claim from any third party of such infringement by Pacific or any
Subsidiary. Pacific is not aware of any material unlicensed infringement by any
third party on, or any issued competing claim of right to use or own any of, the
Proprietary Rights of Pacific. To the best knowledge of Pacific, none of the
activities of the employees of Pacific or any Subsidiary on behalf of Pacific or
such Subsidiary violates any agreements or arrangements that any such employees
have with former employers.
3.18 Title to Assets; Liens. Each of Pacific and the Subsidiaries owns
outright, leases or rents, and has good title to all of its material assets and
properties, including, without limitation, all of the assets and properties
reflected on the Pacific Interim Balance Sheet, free and clear of any
Encumbrance, except for (i) assets and properties disposed of in the ordinary
course of business, (ii) Encumbrances securing the claims of materialmen,
carriers, landlords and like persons, all of which are not yet due and payable,
(iii) liens for taxes not yet due and payable or
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for taxes being contested in good faith by appropriate proceedings, or (iv)
Encumbrances reflected on the Pacific Interim Balance Sheet.
3.19 Employee Benefit Plans. Section 3.19 of the Pacific Disclosure
Schedule sets forth a correct and complete list of all pension, profit sharing,
retirement, deferred compensation, welfare, insurance, disability, bonus,
vacation pay, severance pay and similar plans, programs or arrangements,
including without limitation all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") with respect to which Pacific is the "Plan Sponsor" within the meaning
of Section 3(16)(B) of ERISA, or in which Pacific or any Subsidiary participates
(the "Plans"). None of Pacific or any Subsidiary has never maintained or
contributed to any "multiemployer plan" as defined in Section 4001(a)(3) of
ERISA, and none of Pacific or any Subsidiary has incurred any material liability
under Sections 4062, 4063 or 4201 of ERISA. Each Plan which is intended to be
qualified under Section 401(a) or 501(c)(9) of the Internal Revenue Code of
1986, as amended (the "Code"), has received a favorable determination letter
from the Internal Revenue Service. Each Plan has been administered in all
material respects in accordance with the terms of such Plan and the provisions
of any and all applicable statutes, orders or governmental rules or regulations,
including without limitation ERISA and the Code. To the knowledge of Pacific,
nothing has been done or omitted to be done with respect to any Plan which is
intended to comply with Section 401(a) of the Code that would adversely affect
the qualified status of such Plan or result in any material liability on the
part of Pacific including, without limitation, under Title I of ERISA or Section
4975 of the Code (other than an operational violation that could be corrected
through the Internal Revenue Service's Administrative Policy Regarding
Self-Correction). All material reports, returns, notices and documents required
to be filed with respect to all Plans, including without limitation annual
reports on Form 5500, have been timely filed. No "reportable event" as defined
at Section 4043 of ERISA, other than any such event for which the thirty-day
notice period has been waived, has occurred with respect to any Plan subject to
Title IV of ERISA, and no event has occurred requiring notices to be provided
under Section 4063(a) of ERISA. Except as set forth on the Pacific Disclosure
Schedule, all contributions required by law or the terms of any Plan have been
made. With respect to all Plans subject to Title IV of ERISA, such Plans have no
unfunded benefit liabilities and all premium payments to the Pension Benefit
Guaranty Corporation with respect to such Plans have been made. Except as set
forth on the Pacific Disclosure Schedule, all contributions to such Plans
subject to Section 412 of the Code required to be made under the minimum funding
requirements of Section 412 of the Code have been made or accrued. Except as set
forth on the Pacific Disclosure Schedule, all claims for welfare benefits
incurred by employees of Pacific or any Subsidiary on or before the Closing are
or will be fully covered by third-party insurance policies or programs. None of
the Plans is a defined benefit pension plan that is subject to Title IV of
ERISA, nor has Pacific ever maintained such a plan. Except for continuation of
health coverage to the extent required under Section 4980B of the Code or as
otherwise set forth in this Agreement, there are no obligations under any Plan
providing group health expense reimbursements benefits after termination of
employment. Complete copies of the following documents with respect to each Plan
(as applicable) have been delivered to Procept: (i) each relevant Plan document
and subsequent amendment thereto; (ii) each trust agreement, group annuity
contract, insurance policy or contract; (iii) each Form 5500 series annual
report with each required schedule and attachment for each of the three (3) most
recent plan years; (iv) the most recent IRS determination letter; and (v) the
most recent summary plan description and each summary of material modification
thereto. For purposes of this
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Section 3.19, references to Pacific include Pacific and its ERISA Affiliates. An
"ERISA Affiliate" of Pacific means any trade or business (whether or not
incorporated) that together with Pacific would have been deemed a "single
employer" within the meaning of Section 4001(b) of ERISA or Section 414(m) of
the Code at any time within the five-year period ending on the Closing Date.
3.20 Employee Relations. Pacific has approximately six full-time
equivalent employees and generally enjoys good employer-employee relations. The
number of employees of each Subsidiary is set forth on the Pacific Disclosure
Schedule. None of Pacific's or any Subsidiary's employees are represented by any
labor union. None of Pacific or any Subsidiary is delinquent in payments to any
of its employees or consultants for any wages, salaries, commissions, bonuses or
other direct compensation for any services performed by them to the date hereof
or amounts required to be reimbursed to such employees or consultants. Neither
Procept nor Pacific will by reason of the Merger or anything done prior to the
Closing be liable to any Pacific employees for severance pay or any other
payments (other than accrued salary, vacation or sick pay in accordance with
Pacific's normal policies) in the event any such employees are terminated.
Correct and complete information as to all current directors, officers,
employees or consultants of Pacific and the Subsidiaries including, in each
case, name, current job title and annual rate of compensation has been provided
by Pacific to Procept.
3.21 Relationships with Affiliates. Except as set forth in Section 3.21
of the Pacific Disclosure Schedule, to the best knowledge of Pacific, no officer
or director of Pacific or any Subsidiary has directly or indirectly any interest
in, (i) any property or assets of Pacific or any Subsidiary (except as a
stockholder of Pacific), (ii) any competitor or customer of Pacific or any
Subsidiary, (iii) any supplier or lender to Pacific or any Subsidiary, or (iv)
any party to any material contract or agreement with Pacific or any Subsidiary.
3.22 Insurance. Section 3.22 of the Pacific Disclosure Schedule sets
forth a correct and complete list of all policies or binders of fire, liability,
product liability, workmen's compensation, vehicular, directors' and officers'
and other insurance held by or on behalf of Pacific and the Subsidiaries
specifying in each case the type and scope of coverage, the amount of coverage,
the premium, the insurer, the expiration date and all claims made thereunder
within the past three years. Such policies and binders are in full force and
effect, are reasonably believed to be adequate for the businesses engaged in by
Pacific and the Subsidiaries, are in conformity with the requirements of all
leases or other agreements to which Pacific and the Subsidiaries are parties and
are valid and enforceable in accordance with their terms. All premiums due under
such policies and binders have been paid, and none of Pacific or any Subsidiary
is in default with respect to any provision contained in any such policy or
binder nor has Pacific failed to give any notice or present any claim under any
such policy or binder in due and timely fashion. There are no outstanding unpaid
claims under any such policy or binder. None of Pacific or any Subsidiary has
received notice of cancellation or non-renewal of, or any material amendment to,
or any material increase in deductibles or premiums under, any such policy or
binder. Correct and complete copies of certificates of insurance with respect to
all such policies and binders have been provided by Pacific to Procept.
3.23 Brokerage. Other than the brokerage fee disclosed on the Pacific
Disclosure Schedule, no broker, finder, agent or similar intermediary has acted
on behalf of Pacific in
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connection with this Agreement or the transactions contemplated
hereby, and there are no brokerage commissions, finders fees or similar fees or
commissions payable in connection therewith based on any agreement, arrangement
or understanding with, or any action taken by Pacific.
3.24 Hazardous Materials. None of Pacific or any Subsidiary has
generated, used or handled any Hazardous Materials (as defined below), nor has
Pacific treated, stored or disposed of any Hazardous Materials at any site owned
or leased at any time by Pacific or any Subsidiary or shipped any Hazardous
Materials for treatment, storage or disposal at any other site or facility,
except in compliance with all applicable laws. To the knowledge of Pacific, no
other person has generated, used, handled, stored or disposed of any Hazardous
Materials at any site owned or premises leased by Pacific or any Subsidiary at
any time or at any site in which Pacific or any Subsidiary presently holds a
mortgage or similar interest, nor has there been or is there threatened any
release of any Hazardous Materials on or at any such site or premises. None of
Pacific or any Subsidiary presently operates or leases nor have any of them
operated or leased any site on which, underground storage tanks are or were
located and which tanks are the responsibility of Pacific or such Subsidiary to
operate. To the knowledge of Pacific, without investigation, no lien has been
imposed by any governmental agency in connection with the presence of any
Hazardous Materials on any property, facility, machinery, or equipment operated
or leased by Pacific or any Subsidiary or in which Pacific or any Subsidiary
holds any mortgage, lien, or similar interest. For purposes of this Section
3.24, "Hazardous Materials" shall mean and include any "hazardous waste" as
defined in either the United States Resource Conservation and Recovery Act, 42
U.S.C. 6901, or regulations adopted pursuant to said Act, and also any
"hazardous substances" or "hazardous materials" as defined in the United States
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
9601, but excludes ordinary and customary materials in quantities reasonably
required to be used by Pacific or any Subsidiary in the ordinary course of such
company's business.
3.25 Full Disclosure. All documents and other papers delivered by or on
behalf of Pacific in connection with this Agreement and the transactions
contemplated hereby are true, complete and authentic. No representation,
warranty or statement of Pacific made in this Agreement or in any Exhibit or the
Pacific Disclosure Schedule hereto or in any document, statement or certificate
furnished to Procept pursuant to this Agreement contains any untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements made, in light of the circumstance under
which they were made, not false or misleading.
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF PROCEPT
Except as set forth on the disclosure schedule (the "Procept Disclosure
Schedule") delivered to Procept on the date hereof, (regardless of whether the
Procept Disclosure Schedule is referenced in any particular subsection of this
Section 4), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer (provided that
disclosure thereon under any subsection number shall be disclosure for any
section hereof), Procept represents and warrants to Procept as set forth below:
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4.1 Organization and Qualification. Procept is a corporation duly
organized, validly existing and in good standing under the laws of the state or
other jurisdiction of its incorporation and has full corporate power and
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being and as heretofore conducted. Procept is
qualified or is otherwise authorized to transact business as a foreign
corporation in each jurisdiction (in the United States and outside of the United
States) in which the failure to so qualify would have a material adverse effect
on the business or financial condition of Procept (other than changes that are
the effect of economic factors affecting the economy or the pharmaceutical
industry as a whole) (a "Procept Material Adverse Effect"), all of which
jurisdictions are identified in Section 4.1 of the Procept Disclosure Schedule.
4.2 Capitalization.
4.2.1 Outstanding Capital Stock. Procept's authorized capital stock
consists of 30,000,000 shares of Common Stock, $.01 par value per share, of
which 3,001,832 shares are issued and outstanding as of November 6, 1998, and
1,000,000 shares of Preferred Stock, $.01 par value per share, none of which
shares are issued and outstanding. Except as disclosed in Procept's proxy
statement for its annual meeting of stockholders held on May 18, 1998, Procept
is not aware of any record or beneficial holder of more than five percent (5%)
of the outstanding shares of Procept Stock. The outstanding shares of Procept
Stock are duly authorized, validly issued, fully paid, and nonassessable and
have been issued in compliance with all charter documents of Procept and all
applicable federal and state laws. Except as set forth in this Section 4.2.1, no
other capital stock of Procept is authorized or outstanding.
4.2.2 Options or Other Rights. Except as set forth in the Procept
Disclosure Schedule, (i) no subscription, warrant, option, preemptive right,
convertible security or other right (contingent or otherwise) to purchase or
acquire any shares of capital stock or other security of Procept issued by
Procept is authorized or outstanding, (ii) there is no commitment or offer by
Procept to issue or provide any such subscription, warrant, option, preemptive
right, convertible security or other right or to issue or distribute to holders
of any shares of its capital stock any evidences of indebtedness or assets of
Procept, (iii) Procept has no obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof, (iv) there are no restrictions on the transfer of Procept's capital
stock other than those arising from securities laws, and (v) there are no voting
trusts, proxies or other agreements, instruments or understandings with respect
to outstanding shares of Procept's capital stock to which Procept is a party.
4.3 Authority to Execute and Perform Agreements. Subject to the
requirement to obtain approval of its stockholders to consummate the Merger
under the DGCL, Procept has the requisite corporate power and authority to
execute and deliver this Agreement and each agreement, document and instrument
contemplated by this Agreement to which it is a party, to consummate the
transactions contemplated hereby and thereby and to perform fully its respective
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and each such other agreement, document and instrument to which
it is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Procept. This Agreement and each
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agreement, document and instrument to which it is a party executed and delivered
pursuant to this Agreement constitutes, or when executed and delivered will
constitute, valid and binding obligations of Procept, enforceable in accordance
with their terms.
4.4 Subsidiaries and Other Affiliates. Except as set forth on the
Procept Disclosure Schedule Procept does not have any subsidiary or directly or
indirectly own or have any investment in any of the capital stock of, or any
other interest in, any other person or entity.
4.5 Charter and By-laws; Books and Records. Procept has heretofore
delivered or made available to Procept true and complete copies of its
Certificate of Incorporation (certified by the Secretary of State or comparable
authority of its jurisdiction of incorporation) and By-laws as in effect on the
date hereof, and corporate minute books. Procept is not in default in the
performance, observation or fulfillment of either its charter or By-laws. The
minute books of Procept contain true and complete records of all meetings and
consents in lieu of meetings of the Board of Directors and of the stockholders
of Procept prior to the date hereof, and accurately reflect all transactions
referred to in such minutes and consents in lieu of meetings. The stock books of
Procept are true, complete and correct. The general ledgers and books of account
of Procept to which Procept and its representatives have been given access are
correct and complete in all material respects and have been maintained in
accordance with good business practice.
4.6 SEC Reports. Procept has previously delivered to Procept its (i)
Annual Report on Form 10-K/A for the year ended December 31, 1997 (the "Procept
10-K"), as filed with the Securities and Exchange Commission (the "SEC"), (ii)
the proxy statement relating to Procept's annual meeting of stockholders held on
May 18, 1998 and (iii) all other reports filed by Procept with the SEC under the
Exchange, since January 1, 1998. As of their respective dates, such reports
complied in all material respects with applicable SEC requirements and did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Procept
has timely filed with the SEC all reports required to be filed under Sections
13, 14 or 15(d) of the Exchange Act since becoming registered under the Exchange
Act.
4.7 Financial Statements. The consolidated financial statements
contained in the Procept 10-K and in Procept's quarterly report on Form 10-Q for
the quarter ended September 30, 1998 (the "Procept 10-Q") have been prepared
from, and are in accordance with, the books and records of Procept and fairly
present the consolidated financial condition, results of operations and cash
flows of Procept as of the dates and for the periods presented therein, all in
accordance with generally accepted accounting principles applied on a consistent
basis, except as otherwise indicated therein and subject (in the case of the
unaudited financial statements included in the Procept 10-Q) to normal year-end
and audit adjustments and footnote disclosures, which in the aggregate are not
material.
4.8 Absence of Undisclosed Liabilities. Except as set forth in the
Procept Disclosure Schedule at December 31, 1997, Procept had no material
liabilities of any nature, whether accrued, absolute, contingent or otherwise
(including without limitation, liabilities as guarantor or otherwise with
respect to obligations of others or liabilities for taxes due or then accrued or
to become due), required to be reflected or disclosed in the balance sheet dated
December 31, 1997
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(or the notes thereto) included in the Procept 10-K (the "Procept Balance
Sheet") that were not adequately reflected or reserved against on such balance
sheet. Except as set forth in the Procept Disclosure Schedule, Procept has no
such liabilities, except as and to the extent (i) adequately reflected and
reserved against in the Procept Balance Sheet, (ii) adequately reflected and
reserved against in the Procept unaudited balance sheet dated September 30, 1998
included in the Procept 10-Q (the "Procept Interim Balance Sheet"), or (iii)
incurred since December 31, 1997 in the ordinary course of business and not
material in amount, either individually or in the aggregate.
4.9 No Material Adverse Change. Since December 31, 1997, except as set
forth in the Procept Disclosure Schedule, there has not been:
(i) any material adverse change in the assets, liabilities,
condition (financial or otherwise), results of operation, business or prospects
of Procept or any occurrence or circumstance which reasonably could be expected
to result in such a material adverse change;
(ii) any material change in the method of operating the business of
Procept, in the manner of keeping the books, accounts or records of Procept, or
in any accounting method or practice of Procept;
(iii) any sale, lease, mortgage, pledge, encumber, abandonment or
disposition of, or agreement to sell, lease, mortgage, pledge, encumber, abandon
or dispose of, any material assets or properties of Procept, other than in the
usual and ordinary course of business;
(iv) any material transaction, commitment, contract or agreement
entered into by Procept, or any relinquishment or abandonment by Procept of any
material contract or right, or any modification, waiver, amendment, release,
recision, or termination of any material term, condition or provision of any
contract pertaining to Procept (other than any satisfaction by performance in
accordance with the terms thereof), other than in the usual and ordinary course
of business;
(v) any adverse relationships or conditions with employees,
suppliers, lenders, customers or governmental agencies that could reasonably be
anticipated to have a Pacific Material Adverse Effect on Procept or its
business;
(vi) any acquisition by Procept (other than property or interests
therein acquired in the ordinary course of its lending business) of all or any
part of the assets, properties, capital stock or business of any other person or
entity;
(vii) any redemption or other acquisition by Procept of any of its
capital stock or any declaration, setting aside or payment of any dividend or
distribution of any kind with respect to shares of its capital stock;
(viii) any loan or advance by Procept to any stockholder, officers,
director or consultant, or any other loan or advance other than in the ordinary
course of business; or
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(ix) except as set forth in the Procept Disclosure Schedule, any
new employment or consulting agreement, any increase in compensation, bonus or
other benefits payable or to become payable by Procept to any director, officer
or employee, other than regularly scheduled increases consistent with past
practice in the ordinary course of business, or any new grant of severance or
termination rights, or increase in rights or benefits payable under existing
severance or termination policies or agreements, to any director, officer or
employee of Procept.
4.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or, collectively, "Taxes", means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities in the nature of a tax including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in the Procept
Disclosure Schedule:
(i) Procept has prepared and filed all required federal,
state, local and foreign returns, estimates, information statements and reports
("Returns") required to be filed relating to any and all Taxes concerning or
attributable to Procept or its operations and such Returns are true and correct
in all material respects and have been completed in all material respects in
accordance with applicable law or, with respect to any Taxes payable, an
adequate reserve has been established on the Procept Interim Balance Sheet.
(ii) Procept: (A) has paid or accrued all Taxes set forth on
its Returns, and (B) has withheld and paid (or will pay at the time required)
with respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld.
(iii) Procept is not delinquent in any material respect in the
payment of any Tax nor is there any material Tax deficiency outstanding,
proposed or assessed against Procept, nor has Procept executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) Other than the audits set forth in the Procept Disclosure
Schedule, no audit or other examination of any Return of Procept is currently in
progress, nor has Procept been notified of any request for such an audit or
other examination.
(v) Procept did not have, as of September 30, 1998, any
liabilities, whether asserted or unasserted, contingent or otherwise, for unpaid
federal, state, local and foreign Taxes which have not been accrued or reserved
against in accordance with GAAP on the Procept Interim Balance Sheet, and
Procept has not incurred any such liabilities since such date except in the
ordinary course of business and consistent with past practices.
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(vi) There are (and as of immediately following the Effective
Date there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") of a material nature on the assets of
Procept relating to or attributable to Taxes, except for Liens for Taxes not yet
due and payable or that are being contested in good faith by appropriate
proceedings.
(vii) Procept has not received written or oral notice of any
claim relating or attributable to Taxes that, if adversely determined, would
result in any Lien on the assets of Procept.
(viii) None of Procept's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of Procept that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G of the Code or the limitations
in Sections 162 of the Code.
(x) Procept has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by Procept.
(xi) Procept is not a party to a tax sharing or allocation
agreement nor does Procept owe any amount under any such agreement.
(xii) Procept is not nor has been at any time during the
period specified in Section 897(c)(1)(A)(ii) of the Code, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of the
Code.
(xiii) Procept has agreed to, or is required to, make any
adjustments under Section 481(c) of the Code by reason of a change in accounting
method or otherwise.
4.11 Compliance with Laws.
4.11.1 Procept is not in violation in any material respect of any
order, judgment, injunction, award or decree, or any federal, state, local or
foreign law, ordinance or regulation or any other requirement of any
governmental or regulatory body, court or arbitrator, and is in compliance in
all material respects with all of the foregoing that are applicable to it, its
business or its assets. Procept has not received notice of, and there has not
been any citation, fine or penalty imposed or asserted against any of them for,
any such violation or alleged violation that has not been favorably and fully
resolved.
4.11.2 Procept holds all licenses, permits, certificates,
franchises, orders or approvals of any federal, state, local or foreign
governmental or regulatory body, that are material to the conduct of Procept's
business and the uses of its assets (collectively, "Permits") necessary to
operate its business as presently conducted. The Procept Disclosure Schedule
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contains a true and complete list of all such permits as of the date hereof.
Such Permits are in full force and effect and the validity and effectiveness of
such Permits will not be affected by the transactions contemplated hereby. No
violations are or have been recorded with any governmental or regulatory body in
respect of any Permit, no proceeding is pending or, to the best knowledge of
Procept, threatened to revoke or limit any Permit, and Procept knows of no
grounds for any such revocation or limitation.
4.12 Consents; No Breach. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by Procept are set forth in Section 4.12 of the
Procept Disclosure Schedule, other than those which the failure to obtain would
not affect the validity of this transaction or materially adversely affect the
business of the Surviving Corporation after the Effective Time. Subject to any
prior approval requirements set forth in Section 4.12 of the Procept Disclosure
Schedule, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not (i) violate any
provision of the Certificate of Incorporation or By-laws of Procept; (ii)
violate, conflict with or result in the breach of any of the terms or conditions
of, result in a material modification of, or otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default under, any material instrument, contract
or other agreement to which Procept is a party or to which Procept or any of its
assets or properties is bound or subject; (iii) violate any statute, law or
regulation of any jurisdiction (which violation would affect the validity of the
transaction contemplated hereby or otherwise would materially adversely affect
the business of the Surviving Corporation after the Effective Time) or any
order, judgment, injunction, award or decree of any court, arbitrator or
governmental or regulatory body applicable to or binding upon Procept or its
securities, properties, assets or business; (iv) violate any material Permit;
(v) except with respect to change of control provisions in customer contracts,
require any filing with, notice to, or approval or consent of any foreign,
federal, state, local or other governmental or regulatory body or any other
person or entity; (vi) give rise to any obligation to make any material payment;
or (vii) result in the creation of any Encumbrance on the assets or properties
of Procept, excluding from the foregoing clauses (ii), (iii), (iv) and (v) any
exceptions to the foregoing that, in the aggregate, would not have a Pacific
Material Adverse Effect on the business of Procept or on the ability of Procept
to consummate the transactions contemplated hereby, and the following: (a) the
filing of the Merger Certificate with the Secretary of State of Delaware (b)
filings with various state blue sky authorities, (c) the filing with Nasdaq of
an application for listing of the shares of Procept Common Stock to be issued in
the Merger and (d) the filing with the SEC of a registration statement on Form
S-4 to register the shares of Procept Common Stock to be issued in the Merger.
4.13 Actions and Proceedings. Except as set forth on the Procept
Disclosure Schedule, there are no outstanding orders, judgments, injunctions,
awards or decrees of any court, governmental or regulatory body or arbitration
tribunal against or involving Procept or any of its securities, assets, or
properties. There are no actions, suits or claims or legal, judicial,
administrative or arbitral proceedings or investigations (whether or not the
defense thereof or liabilities in respect thereof are covered by insurance)
pending or, to the best knowledge of Procept, threatened against or involving
Procept or any of its securities, assets or properties.
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4.14 Contracts and Other Agreements. Section 4.14 of the Procept
Disclosure Schedule sets forth a correct and complete list all of the following
currently effective contracts:
(i) written contracts and other agreements with or for the benefit
of any current or former officer, director, stockholder or employee of Procept
involving more than $5,000, (provided in the case of a loan by Procept to any
such person, the Procept Disclosure Schedule shall list all such loan
arrangements, whether or not in writing, involving at least $1,000) and
contracts and other agreements for the payment of fees or other consideration to
any entity in which Procept has an interest;
(ii) contracts and other agreements with any labor union or
association representing any employee of Procept or otherwise providing for any
form of collective bargaining;
(iii) contracts and other agreements for the purchase or sale of
materials, supplies, equipment, merchandise or services that contain an
escalation, renegotiation or redetermination clause or that obligate Procept to
purchase all or substantially all of its requirements of a particular product
from a supplier, or for periodic minimum purchases of a particular product from
a supplier;
(iv) contracts and other agreements for the sale of any of the
assets or properties of Procept other than in the ordinary course of business or
for the grant to any person of any options, rights of first refusal, or
preferential or similar rights to purchase any of such assets or properties;
(v) partnership or joint venture agreements;
(vi) contracts with agents or foreign representatives regarding
the sales or marketing of Procept's services or products;
(vii) contracts or other agreements under which Procept agrees to
act as surety or guarantor for or to indemnify any party (other than required
indemnification provisions in customer contracts) or to share the tax liability
of any party;
(viii) contracts, options, outstanding purchase orders and other
agreements for the purchase of any material asset, tangible or intangible;
(ix) contracts and other agreements with customers, suppliers or
other parties for the sharing of fees, the rebating of charges or other similar
arrangements other than such contracts entered into in the normal course of
business;
(x) contracts and other agreements containing obligations or
liabilities of any kind to holders of the securities of Procept as such
(including, without limitation, an obligation to register any of such securities
under any federal or state securities laws) and contracts obligating Procept to
issue or repurchase any Procept securities;
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(xi) contracts and other agreements containing covenants of
Procept not to compete in any line of business or with any person or entity or
covenants of any other person or entity not to compete with Procept in any line
of business;
(xii) contracts and other agreements relating to the acquisition
by Procept of any operating business or the capital stock of any other person or
entity;
(xiii) contracts and other agreements requiring the payment to any
party of a brokerage or sales commission or a finder's or referral fee;
(xiv) contracts, indentures, mortgages, promissory notes,
debentures loan agreements, guaranties, security agreements, pledge agreements,
and other agreements and instruments relating to the borrowing or lending of
money or securing any such liability;
(xv) any agreement or series of related agreements requiring
aggregate payments by or to Procept of more than $5,000;
(xvi) contracts under which Procept will acquire or has acquired
ownership of, or license to, intangible property, including software other than
commercially available end-user licenses; and
(xvii) any other material contract or other agreement whether or
not made in the ordinary course of business.
There have been delivered or made available to Pacific true and
complete copies of all of the contracts and other agreements (and all
amendments, waivers or other modifications thereto) set forth in Section 4.14 of
the Procept Disclosure Schedule. All of such contracts and other agreements are
valid, subsisting, in full force and effect, binding upon Procept, and to the
best knowledge of Procept, binding upon the other parties thereto in accordance
with their terms. Other than defaults which would not, either singly or in the
aggregate, have a Procept Material Adverse Effect, Procept is not in default
under any of such scheduled contracts, nor, to the best knowledge of Procept, is
any other party to any such contract or other agreement in default thereunder,
nor does any condition exist that constitutes or with notice or lapse of time or
both would constitute a default thereunder.
4.15 Real Property; Leases. Procept does not own any real property or
any buildings or other structures and does not have any options or any
contractual obligations to purchase or acquire any interest in real property
except as set forth in Section 4.15 of the Procept Disclosure Schedule. Section
4.15 of the Procept Disclosure Schedule sets forth a correct and complete list
of all leases of real property to which Procept is a party (collectively, the
"Leases"). True and complete copies of the leases and all amendments,
modifications and supplemental agreements thereto have been delivered by Procept
to Procept. The Leases are in full force and effect and to the best knowledge of
Procept, are binding and enforceable against each of the parties thereto in
accordance with their respective terms. To the best knowledge of Procept no
party to any Lease has given notice to any other party thereto claiming the
existence or occurrence of a breach or default thereunder and there has not
occurred any event or circumstances which constitutes, or with the passage of
time or the giving of notice would constitute, a breach or default thereunder
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other than defaults which would not, either singly or in the aggregate, have a
Procept Material Adverse Effect.
4.16 Tangible Property. Procept has good and marketable title to, free
and clear of all Encumbrances, or otherwise has the unrestricted right to use,
each item of equipment, furniture, leasehold improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible property material
to the business of Procept ("Tangible Property"). All such Tangible Property is
in good and sufficient operating condition and repair, ordinary wear and tear
excepted, and to the best knowledge of Procept, Procept has not received notice
that any of its Tangible Property is in violation of any existing law or any
building, zoning, health, safety or other ordinance, code or regulation.
4.17 Intellectual Property.
(a) To the knowledge of Procept, Procept owns, or is licensed to
use, or otherwise has the right to use all patents, trademarks, service marks,
trade names, trade secrets, logos, franchises, and copyrights, and all
applications for any of the foregoing, and all technology, inventions, trade
secrets, know-how, computer software and processes to the extent material to the
conduct of its business as now conducted (collectively, the "Proprietary
Rights"). Procept has previously delivered to Procept a certified list of all
such patents and registered copyrights and trademarks, and all applications
therefor (the "Procept Registered Rights"). All of the Procept Registered Rights
owned by Procept, and to the best knowledge of Procept, all Procept Registered
Rights licensed to Procept, have been registered in, filed in or issued by the
United States Patent and Trademark Office, the United States Register of
Copyrights, or the corresponding offices of other jurisdictions as identified in
Section 4.17 of the Procept Disclosure Schedule, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and in each such other
jurisdiction.
(b) To the best knowledge of Procept, the business of Procept as
currently conducted does not infringe upon the proprietary rights of others, nor
has Procept received any notice or claim from any third party of such
infringement by Procept. Procept is not aware of any material unlicensed
infringement by any third party on, or any issued competing claim of right to
use or own any of, the Proprietary Rights of Procept. To the best knowledge of
Procept, none of the activities of the employees of Procept on behalf of Procept
violates any agreements or arrangements that any such employees have with former
employers.
4.18 Title to Assets; Liens. Procept owns outright, leases or rents,
and has good title to all of its material assets and properties, including,
without limitation, all of the assets and properties reflected on the Procept
Interim Balance Sheet, free and clear of any Encumbrance, except for (i) assets
and properties disposed of in the ordinary course of business and as disclosed
in the Procept Disclosure Schedule, (ii) Encumbrances securing the claims of
materialmen, carriers, landlords and like persons, all of which are not yet due
and payable, (iii) liens for taxes not yet due and payable or for taxes being
contested in good faith by appropriate proceedings, or (iv) Encumbrances
reflected on the Procept Interim Balance Sheet.
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4.19 Employee Benefit Plans. Section 4.19 of the Procept Disclosure
Schedule sets forth a correct and complete list of all pension, profit sharing,
retirement, deferred compensation, welfare, insurance, disability, bonus,
vacation pay, severance pay and similar plans, programs or arrangements,
including without limitation all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") with respect to which Procept is the "Plan Sponsor" within the meaning
of Section 3(16)(B) of ERISA, or in which Procept participates (the "Plans").
Procept has never maintained or contributed to any "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA, and Procept has not incurred any
material liability under Sections 4062, 4063 or 4201 of ERISA. Each Plan which
is intended to be qualified under Section 401(a) or 501(c)(9) of the Internal
Revenue Code of 1986, as amended (the "Code"), has received a favorable
determination letter from the Internal Revenue Service. Each Plan has been
administered in all material respects in accordance with the terms of such Plan
and the provisions of any and all applicable statutes, orders or governmental
rules or regulations, including without limitation ERISA and the Code. To the
knowledge of Procept, nothing has been done or omitted to be done with respect
to any Plan which is intended to comply with Section 401(a) of the Code that
would adversely affect the qualified status of such Plan or result in any
material liability on the part of Procept including, without limitation, under
Title I of ERISA or Section 4975 of the Code (other than an operational
violation that could be corrected through the Internal Revenue Service's
Administrative Policy Regarding Self-Correction). All material reports, returns,
notices and documents required to be filed with respect to all Plans, including
without limitation annual reports on Form 5500, have been timely filed. No
"reportable event" as defined at Section 4043 of ERISA, other than any such
event for which the thirty-day notice period has been waived, has occurred with
respect to any Plan subject to Title IV of ERISA, and no event has occurred
requiring notices to be provided under Section 4063(a) of ERISA. Except as set
forth on the Procept Disclosure Schedule, all contributions required by law or
the terms of any Plan have been made. With respect to all Plans subject to Title
IV of ERISA, such Plans have no unfunded benefit liabilities and all premium
payments to the Pension Benefit Guaranty Corporation with respect to such Plans
have been made. Except as set forth on the Procept Disclosure Schedule, all
contributions to such Plans subject to Section 412 of the Code required to be
made under the minimum funding requirements of Section 412 of the Code have been
made or accrued. Except as set forth on the Procept Disclosure Schedule, all
claims for welfare benefits incurred by employees of Procept on or before the
Closing are or will be fully covered by third-party insurance policies or
programs. None of the Plans is a defined benefit pension plan that is subject to
Title IV of ERISA, nor has Procept ever maintained such a plan. Except for
continuation of health coverage to the extent required under Section 4980B of
the Code or as otherwise set forth in this Agreement, there are no obligations
under any Plan providing group health expense reimbursements benefits after
termination of employment. Complete copies of the following documents with
respect to each Plan (as applicable) have been delivered to Procept: (i) each
relevant Plan document and subsequent amendment thereto; (ii) each trust
agreement, group annuity contract, insurance policy or contract; (iii) each Form
5500 series annual report with each required schedule and attachment for each of
the three (3) most recent plan years; (iv) the most recent IRS determination
letter; and (v) the most recent summary plan description and each summary of
material modification thereto. For purposes of this Section 4.19, references to
Procept include Procept and its ERISA Affiliates. An "ERISA Affiliate" of
Procept means any trade or business (whether or not incorporated) that together
with Procept would have been deemed a "single employer" within the meaning of
Section
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4001(b) of ERISA or Section 414(m) of the Code at any time within the five-year
period ending on the Closing Date.
4.20 Employee Relations. Procept has approximately ten full-time
equivalent employees and generally enjoys good employer-employee relations. None
of Procept's employees are represented by any labor union. Procept is not
delinquent in payments to any of its employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees or consultants. Neither Pacific nor Procept will by reason of the
Merger or anything done prior to the Closing be liable to any Procept employees
for severance pay or any other payments (other than accrued salary, vacation or
sick pay in accordance with Procept's normal policies) in the event any such
employees are terminated. Correct and complete information as to all current
directors, officers, employees or consultants of Procept including, in each
case, name, current job title and annual rate of compensation has been provided
by Procept to Pacific.
4.21 Relationships with Affiliates. Except as set forth in Section 4.21
of the Procept Disclosure Schedule, to the knowledge of Procept, no officer or
director of Procept has directly or indirectly any interest in, (i) any property
or assets of Procept (except as a stockholder of Procept), (ii) any competitor
or customer of Procept, (iii) any supplier or lender to Procept, or (iv) any
party to any material contract or agreement with Procept.
4.22 Insurance. Section 4.22 of the Procept Disclosure Schedule sets
forth a correct and complete list of all policies or binders of fire, liability,
product liability, workmen's compensation, vehicular, directors' and officers'
and other insurance held by or on behalf of Procept specifying in each case the
type and scope of coverage, the amount of coverage, the premium, the insurer,
the expiration date and all claims made thereunder within the past three years.
Such policies and binders are in full force and effect, are reasonably believed
to be adequate for the businesses engaged in by Procept, are in conformity with
the requirements of all leases or other agreements to which Procept is a party
and are valid and enforceable in accordance with their terms. All premiums due
under such policies and binders have been paid, and Procept is not in default
with respect to any provision contained in any such policy or binder nor has
Procept failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. There are no outstanding unpaid claims under
any such policy or binder. Procept has not received notice of cancellation or
non-renewal of, or any material amendment to, or any material increase in
deductibles or premiums under, any such policy or binder. Correct and complete
copies of certificates of insurance with respect to all such policies and
binders have been provided by Procept to Pacific.
4.23 Brokerage. No broker, finder, agent or similar intermediary has
acted on behalf of Procept in connection with this Agreement or the transactions
contemplated hereby, and there are no brokerage commissions, finders fees or
similar fees or commissions payable in connection therewith based on any
agreement, arrangement or understanding with, or any action taken by Procept.
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4.24 Hazardous Materials. Procept has not generated, used or handled
any Hazardous Materials (as defined below), nor has Procept treated, stored or
disposed of any Hazardous Materials at any site owned or leased at any time by
Procept or shipped any Hazardous Materials for treatment, storage or disposal at
any other site or facility, except in compliance with all applicable laws. To
the knowledge of Procept, no other person has generated, used, handled, stored
or disposed of any Hazardous Materials at any site owned or premises leased by
Procept at any time or at any site in which Procept presently holds a mortgage
or similar interest, nor has there been or is there threatened any release of
any Hazardous Materials on or at any such site or premises. Procept does not
presently operate or lease nor has it operated or leased any site on which,
underground storage tanks are or were located and which tanks are the
responsibility of Procept to operate. To the knowledge of Procept, without
investigation, no lien has been imposed by any governmental agency in connection
with the presence of any Hazardous Materials on any property, facility,
machinery, or equipment operated or leased by Procept or in which Procept holds
any mortgage, lien, or similar interest. For purposes of this Section 2.24,
"Hazardous Materials" shall mean and include any "hazardous waste" as defined in
either the United States Resource Conservation and Recovery Act, 42 U.S.C. 6901,
or regulations adopted pursuant to said Act, and also any "hazardous substances"
or "hazardous materials" as defined in the United States Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, but
excludes ordinary and customary materials in quantities reasonably required to
be used by Procept in the ordinary course of Procept's business.
4.25 Full Disclosure. All documents and other papers delivered by or on
behalf of Procept in connection with this Agreement and the transactions
contemplated hereby are true, complete and authentic. No representation,
warranty or statement of Procept made in this Agreement or in any Exhibit or the
Procept Disclosure Schedule hereto or in any document, statement or certificate
furnished to Procept pursuant to this Agreement contains any untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements made, in light of the circumstance under
which they were made, not false or misleading.
SECTION 5 - COVENANTS AND AGREEMENTS
The parties covenant and agree as follows:
5.1 Conduct of Pacific Business. Except with the prior written consent
of Procept and except as otherwise contemplated herein, during the period from
the date hereof to the Closing Date, Pacific shall observe the following
covenants:
(a) Affirmative Covenants Pending Closing. Pacific and its
Subsidiaries will:
(i) Preservation of Personnel. Use all reasonable efforts to
preserve intact their business organizations and keep available the services of
present employees, in each case in accordance with past practice, it being
understood that termination of employees with poor performance ratings shall not
constitute a violation of this covenant;
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(ii) Insurance. Use all reasonable efforts to keep in effect
casualty, public liability, worker's compensation and other insurance policies
in coverage amounts not less than those in effect at the date of this Agreement;
(iii) Preservation of the Business; Maintenance of Properties,
Contracts. Use all reasonable efforts to preserve their businesses, advertise,
promote and market their services, keep their properties intact, preserve their
goodwill, and maintain all physical properties in good operating condition;
(iv) Intellectual Property Rights. Use all reasonable efforts
to preserve and protect Pacific's Proprietary Rights; and
(v) Ordinary Course of Business. Operate their businesses
diligently and solely in the ordinary course.
(b) Negative Covenants Pending Closing. Pacific and its Subsidiaries
will not:
(i) Disposition of Assets. Sell or transfer, or mortgage,
pledge or create or permit to be created any encumbrance on, any of their
assets, other than sales or transfers in the ordinary course of business and
liens existing under arrangements disclosed herein or permitted under Section
3.18;
(ii) Liabilities. Without the consent of Procept, (A) incur any
obligation or liability other than in the ordinary course of their business
(provided that Pacific may incur expenses in connection with this transaction of
up to $100,000), (B) incur any indebtedness for borrowed money or enter into any
contracts or commitments involving payments by Pacific or a Subsidiary of $5,000
or more, other than purchase orders or commitments for inventory materials and
supplies in the ordinary course of business;
(iii) Compensation. Without the consent of Procept, (A) change
the compensation or fringe benefits of any officer, director or employee, or (B)
enter into or modify any Plan or any employment, severance or other agreement
with any officer, director or employee of Pacific or any Subsidiary other than
changes required by law to maintain the tax-qualified status of any Plan or as
otherwise required by law;
(iv) Capital Stock. (A) Grant or accelerate the exercisability
of, any option, warrant or other right to purchase, or to convert any obligation
into, shares of its capital stock, (B) declare or pay any dividend or other
distribution with respect to any shares of its capital stock or (C) issue any
shares of its capital stock, except upon the exercise of options outstanding on
the date hereof or as contemplated by the Pacific Disclosure Schedule;
(v) Charter and Bylaws. Amend the Charter or Bylaws of Pacific
or any Subsidiary;
(vi) Acquisitions. Make any material acquisition of property
other than in the ordinary course of Pacific's or the Subsidiaries' business; or
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(vii) Material Agreements. Without the consent of Procept,
enter into or modify any material agreement with any other person or entity
(other than agreements in the ordinary course of its business involving payments
by Pacific of less than $5,000).
5.2 Conduct of Procept Business. Except with the prior written consent
of Pacific and except as otherwise contemplated herein, during the period from
the date hereof to the Closing Date, Procept shall observe the following
covenants:
(a) Affirmative Covenants Pending Closing. Procept will:
(i) Preservation of Personnel. Use all reasonable efforts to
preserve intact their business organizations and keep available the services of
present employees, in each case in accordance with past practice, it being
understood that termination of employees with poor performance ratings shall not
constitute a violation of this covenant;
(ii) Insurance. Use all reasonable efforts to keep in effect
casualty, public liability, worker's compensation and other insurance policies
in coverage amounts not less than those in effect at the date of this Agreement;
(iii) Preservation of the Business; Maintenance of Properties,
Contracts. Use all reasonable efforts to preserve their businesses, advertise,
promote and market their services, keep their properties intact, preserve their
goodwill, and maintain all physical properties in good operating condition;
(iv) Intellectual Property Rights. Use all reasonable efforts
to preserve and protect Procept's Proprietary Rights; and
(v) Ordinary Course of Business. Operate their businesses
diligently and solely in the ordinary course.
(b) Negative Covenants Pending Closing. Procept will not:
(i) Disposition of Assets. Sell or transfer, or mortgage,
pledge or create or permit to be created any Encumbrance on, any of their
assets, other than sales or transfers in the ordinary course of business and
liens existing under arrangements disclosed herein or of the type permitted
under Section 4.18 and disclosed in the Procept 10-K;
(ii) Liabilities. Except as disclosed to Pacific herein, incur
any obligation or liability other than in the ordinary course of Procept's
business;
(iii) Compensation. (A) Change the compensation or fringe
benefits of any officer, director or employee, or (B) enter into or modify any
Plan or any employment, severance or other agreement with any officer, director
or employee of Procept other than changes required by law to maintain the
tax-qualified status of any Plan or as otherwise required by law; or
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(iv) Charter and Bylaws. Amend the Charter or Bylaws of
Procept.
(v) Acquisitions. Make any material acquisition of property
other than in the ordinary course of Procept's business; or
(vi) Material Agreements. Without the consent of Pacific, enter
into or modify any material agreement with any other person or entity, other
than in the ordinary course of its business.
5.3 Nasdaq Listing. Procept shall take such actions as may be necessary
to cause the shares of Procept Common Stock to be issued hereunder to be
approved for quotation on the Nasdaq Small-Cap Market.
5.4 Agreement not to Entertain other Offers.
(a) In consideration of the efforts and expenses undertaken by both
parties in pursuing the Merger and other valuable consideration, the receipt and
adequacy of which are acknowledged, Procept and Pacific agree that until the
Closing Date or until this Agreement is otherwise terminated pursuant to Section
9, neither Procept nor Pacific nor any of their authorized representatives
shall:
(i) directly or indirectly, solicit any proposal relating to
the acquisition by another party of all or any portion of the capital stock of
such company or substantially all of the assets of such company (whether by
merger or otherwise);
(ii) directly or indirectly, engage in any discussions or
negotiations with any other party regarding any such acquisition, or otherwise
encourage or facilitate any efforts by any other party to engage in such an
acquisition; or
(iii) sell, transfer or dispose of all or any portion of the
capital stock of such company or substantially all of the assets of such company
(whether by merger or otherwise);
provided, however, that nothing in the foregoing shall restrict either company
from engaging in discussions with potential collaborative partners, subject to
such company disclosing to the other the identity of the party involved in such
discussions and the general nature thereof; and provided further that,
notwithstanding the foregoing, each such company and its authorized
representatives may participate in discussions or negotiations with, provide
information to, and consummate a transaction with, a third party which would
otherwise be prohibited by this section, if (A) such discussions or negotiations
had been commenced prior to the date hereof or if commenced after the date
hereof, were not solicited by or on behalf of such company and (B) such
discussions or negotiations were being continued or initiated after consultation
with and based upon written advice of independent legal counsel which determined
in good faith that such action is necessary for the Board of Directors of the
involved company to comply with its fiduciary duties to its stockholders under
applicable law.
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(b) In the event that either Pacific or Procept breaches its
obligations under Section 5.4 or engages in discussions or negotiations with,
provides information to, or consummates a transaction with a third party, which
activity would have been a breach of Section 5.4 but for the second proviso of
such section, then, unless the Merger subsequently occurs prior to June 30,
1999, on the earlier of (i) the consummation of any such transaction with a
third party or (ii) June 30, 1999, such company shall pay the other a
termination fee in the amount of $150,000, in immediately available funds to an
account designated by the recipient party. The parties acknowledge and agree
that the provisions for payment of such a termination fee are included herein in
order to induce each party to enter into this Agreement and to reimburse the
non-terminating party for incurring the costs and expenses related to the
contemplated Merger. No more than one termination fee shall be paid by any party
hereunder. The parties hereto agree that any termination fee that is paid or due
hereunder shall be deemed to be liquidated damages designed to reasonably
compensate the recipient party for the loss incurred by the terminating party's
actions.
5.5 Corporate Examinations and Investigations. Prior to the Effective
Time, each of Procept and Pacific shall be entitled, through its employees and
representatives, to have such access to the assets, properties, business, books,
records and operations of the other as Procept or Pacific, as the case may be,
shall reasonably request in connection with such party's investigation of the
other with respect to the transaction contemplated hereby. Any such
investigation and examination shall be conducted at reasonable times and the
party being investigated shall cooperate fully therein. No investigation by a
party shall diminish or obviate any of the representations, warranties,
covenants or agreements of any other party contained in this Agreement, provided
that any party having actual knowledge prior to the date hereof of an inaccuracy
in a representation or warranty of another party must have given notice thereof
to such other party prior to the date hereof to be entitled to make any recovery
hereunder for breach of such representation or warranty. For the purposes of
this Agreement, actual knowledge shall mean the conscious knowledge of the
executive officers of a party who have given substantive attention to this
transaction. In order that each of Procept and Pacific may have full opportunity
to make such investigation, the party being investigated shall furnish the
representatives of the other during such period with all such information and
copies of such documents concerning the affairs of the party being investigated
as such representatives may reasonably request and cause its officers,
employees, consultants, agents, accountants and attorneys to cooperate fully
with such representatives in connection with such investigation.
5.6 Expenses. Subject to Section 5.4, if the Merger is not consummated,
each of Pacific and Procept shall bear its respective expenses incurred in
connection with this Agreement and the transactions contemplated hereby. Pacific
represents and warrants that its good faith estimate of the fees and expenses of
its legal counsel, financial advisors and accountants to be incurred in
connection with this transaction are as set forth on the Pacific Disclosure
Schedule. If the Merger is consummated, the Surviving Corporation, as the
successor to Pacific, shall be liable for all unpaid expenses of Pacific.
5.7 Authorization from Others. Prior to the Closing Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits required to permit the consummation of the transactions contemplated by
this Agreement, including without limitation all consents required from third
parties who have contractual relationships with Pacific.
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5.8 Consummation of Agreement. Each party shall use all reasonable
efforts to perform and fulfill all conditions and obligations to be performed
and fulfilled by it under this Agreement and to ensure that to the extent within
its control or capable of influence by it, no breach of any of the respective
representations, warranties and agreements hereunder occurs or exists on or
prior to the Effective Time, all to the end that the transactions contemplated
by this Agreement shall be fully carried out in a timely fashion.
5.9 Further Assurances. Each of the parties shall execute such
documents, further instruments of transfer and assignment and other papers and
take such further actions as may be reasonably required or desirable to carry
out the provisions hereof and the transactions contemplated hereby.
5.10 Securities Law Matters. Procept shall prepare and file with the
SEC a Registration Statement on Form S-4 (or any other such form required by the
SEC) (the "Registration Statement") covering the shares of Procept Common Stock
comprising the Merger Consideration as soon as practicable following the date
hereof and will use all reasonable efforts to have such Registration Statement
filed within 45 days after the date hereof and declared and maintained
effective, as soon as practicable following such filing. Pacific will cooperate
with Procept in such preparation and, after such Registration Statement is
effective, Procept and Pacific shall facilitate the distribution of the proxy
statement and prospectus (the "Proxy Statement") contained in the Registration
Statement to the stockholders of Procept and the stockholders of Pacific. Prior
to the Effective Time, Procept shall use all reasonable efforts to qualify the
shares of Procept Common Stock to be issued in the Merger under the securities
or "blue sky" laws of every state necessary to offer and issue the Merger
Consideration to the stockholders at the Closing, except any such state with
respect to which counsel for Procept has determined that such qualification is
not required under the securities or "blue sky" laws of such state, and except
that in no event shall Procept be obligated to qualify as a foreign corporation
or to execute a general consent to service of process in any state in which it
has not previously so qualified or has not previously so consented.
5.11 Pacific Stockholder Meeting. Pacific, acting through its Board of
Directors, shall, in accordance with applicable law and its certificate of
incorporation and by laws:
(i) at a special meeting of stockholders of Pacific and at any
adjournment thereof, submit to the stockholders a proposal to consider and act
on this Agreement to obtain such approval required under the DGCL for the
consummation of the transactions contemplated hereby;
(ii) subject to the duties of the Board of Directors under
applicable law as advised in writing by independent legal counsel, include in
the Proxy Statement to be delivered to the stockholders of Pacific soliciting
their approval of the transactions contemplated hereby the recommendation of its
Board of Directors that the stockholders vote in favor of the adoption of this
Agreement; and
(iii) use all reasonable efforts (A) to obtain and furnish the
information required to be included by it in the Proxy Statement, (B) to cause
the Proxy Statement to be mailed to its stockholders at the earliest practicable
time after the effectiveness
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of the Registration Statement, and (C) to obtain the necessary approvals by its
stockholders of the transactions contemplated hereby.
5.12 Procept Stockholder Meeting. Procept, acting through its Board of
Directors, shall, in accordance with applicable law and its certificate of
incorporation and bylaws:
(i) at a special meeting of stockholders of Procept and at any
adjournment thereof, submit to the stockholders a proposal to consider and act
on this Agreement to obtain such approval required pursuant to the Nasdaq Market
Rules;
(ii) subject to the duties of the Board of Directors under
applicable law as advised in writing by independent legal counsel, include in
the Proxy Statement to be delivered to the stockholders of Procept soliciting
their approval of this Agreement and the transactions contemplated hereby the
recommendation of its Board of Directors that the stockholders vote in favor of
such transactions; and
(iii) use all reasonable efforts (A) to obtain and furnish the
information required to be included by it in the Proxy Statement, (B) to cause
the Proxy Statement to be mailed to its stockholders at the earliest practicable
time after the effectiveness of the Registration Statement, and (C) to obtain
the necessary approvals by its stockholders of this Agreement, the Merger and
the transactions contemplated hereby.
5.13 Public Announcements and Confidentiality. Any press release or
other information to the press or any third party with respect to this Agreement
or the transactions contemplated hereby shall require the prior approval of
Procept and Pacific, which approval shall not be unreasonably withheld, provided
that a party shall not be prevented from making such disclosure as it shall be
advised by counsel is required by law. Pacific shall also keep confidential and
shall not use in any manner any information or documents obtained from Procept
or its representatives concerning Procept's assets, properties, business and
operations, unless readily ascertainable from public information, already known
or subsequently developed by Pacific independently, received from a third party
not under an obligation to keep such information confidential or otherwise
required by law. If this Agreement terminates prior to the Closing, Procept
shall also keep confidential and shall not use in any manner any information or
documents obtained from Pacific or their representatives unless readily
ascertainable from public information, already known or subsequently developed
by Procept independently, received from a third party not under an obligation to
keep such information confidential or otherwise required by law. If this
Agreement terminates prior to the Closing all copies of any documents obtained
from another party or its representatives will be returned, except that one copy
thereof may be retained by counsel to the party returning such documents in
order to evidence compliance hereunder. The obligations set forth in the
previous three sentences of this Section 4.14 shall survive termination of this
Agreement.
5.14 Affiliate Letters. Prior to the Closing Date, Pacific shall
identify to Procept all persons who, at the time of the vote of Pacific's
stockholders on the Merger, Pacific believes may be "affiliates" of Pacific
within the meaning of Rule 145 under the Securities Act. Pacific shall use all
reasonable efforts to provide Procept with such information as Procept shall
reasonably request for purposes of making its own determination of persons who
may be deemed
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to be affiliates of Pacific. Pacific shall use all reasonable efforts to deliver
to Procept prior to the Closing Date a letter from each of the affiliates
specified by Procept in substantially the form exchanged by the parties (an
"Affiliate Letter") and each stockholder who is identified as an affiliate by
Pacific and Procept has delivered, or agrees to deliver to Procept prior to the
Closing Date, an Affiliate Letter. To the extent any stockholder is so
identified as an affiliate, such stockholder agrees to deliver an Affiliate
Letter at or prior to the Closing Date.
5.15 Procept SEC Filings. Until the Closing Date, Procept shall furnish
Pacific with a copy of each periodic or current report filed by Procept under
the Exchange Act promptly after filing the same. All filings made by Procept
after the date hereof pursuant to the Exchange Act will be made in a timely
fashion, will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
5.16 Pacific SEC Filings. Until the Closing Date, Pacific shall furnish
Procept with a copy of each periodic or current report filed by Pacific under
the Exchange Act promptly after filing the same. All filings made by Pacific
after the date hereof pursuant to the Exchange Act will be made in a timely
fashion, will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
5.17 Fairness Opinions. Each of Procept and Pacific shall use all
reasonable efforts to obtain a fairness opinion from the independent financial
advisers named in Sections 6.5 and 6.6 addressed to such company's Board of
Directors stating that the Merger is fair from a financial point of view to such
company and its stockholders.
5.18 Stock Options and Warrants.
(a) At the Effective Time, Procept will assume the obligations of
Pacific under the outstanding options to purchase Pacific Common Stock (the
"Pacific Stock Option") set forth on the Pacific Disclosure Schedule pursuant to
Section 3 whether vested or unvested, as contemplated by the agreements
representing the Pacific Stock Options. Each such Pacific Stock Option shall be
deemed to constitute an option granted under Procept's 1998 Equity Incentive
Plan, which amended and restated its 1989 Stock Plan (the "Procept Plan") to
acquire, on the same terms and conditions as were applicable under such Pacific
Stock Option prior to the Effective Time to the extent not in violation of the
Procept Plan that number of whole shares of Procept Common Stock equal to the
product of the number of shares of Pacific Common Stock covered by such Pacific
Stock Option immediately prior to the Effective Time multiplied by the
Conversion Factor (the "New Options"), provided that following such assumption
and adjustment, (A) all references in the New Options to Pacific shall (unless
the context otherwise requires) be deemed to be references to Procept and (B)
the exercise price per share of shares of Procept Common Stock under each New
Option shall be equal to the exercise price per share of
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Pacific Common Stock under such Pacific Stock Option immediately prior to the
Effective Time divided by the Conversion Factor (rounded down to the nearest
cent).
As soon as practicable after the Effective Time, Procept shall deliver
to each holder of an outstanding Pacific Stock Option an appropriate notice
setting forth such holder's rights pursuant to the New Options, and such New
Option shall continue in effect on the same terms and conditions (including
antidilution provisions) of the Pacific Stock Options, except to the extent in
violation of the Procept Plan.
Procept shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Procept Common Stock under the Procept
Plan for delivery pursuant to the terms set forth in this Section 5.18.
Subject to any applicable limitations under the Securities Act, at the
Effective Time, the shares issuable under the New Options shall be subject to an
effective Registration Statement on Form S-8 (or any successor form). Procept
shall use its reasonable best efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
relating thereto) for so long as any New Options shall remain outstanding.
(b) At the Effective Time, Procept will assume the obligations of
Pacific with respect to each outstanding warrant to subscribe for and purchase
Pacific Common Stock set forth on the Pacific Disclosure Schedule pursuant to
Section 3.2 (collectively, the "Pacific Warrants"). The Pacific Warrants shall
continue to have, and be subject to, the same terms and conditions as set forth
in the applicable warrant agreements and warrant certificates, as in effect on
the date of this Agreement, pursuant to which the Pacific Warrants were issued
(true and correct copies of which have been delivered to Procept), provided that
(i) all references in the Pacific Warrants to Pacific shall (unless the context
otherwise requires) be deemed to be references to Procept, (ii) each Pacific
Warrants shall be exercisable for (X) that number of whole shares of Procept
Common Stock equal to the product of the number of shares of Pacific Common
Stock covered by the Pacific Warrant immediately prior to the Effective Time
multiplied by the Conversion Factor and (iii) the exercise price per share of
shares of Procept Common Stock under each Pacific Warrant shall be equal to the
exercise price per share of Pacific Common Stock under the Pacific Warrant
immediately prior to the Effective Time divided by the Conversion Factor
(rounded down to the nearest cent). Procept shall (A) reserve for issuance the
number of shares of Procept Common Stock and Procept Warrants that will become
issuable upon the exercise of the Pacific Warrants pursuant to this Section
5.18(b), and (B) promptly after the Effective Time issue to each holder of an
outstanding Pacific Warrant a document evidencing the assumption by Procept of
Pacific's obligations with respect thereto under this Section 5.18(b). To the
extent required by the terms of the Pacific Warrants and subject to the
applicable limitations under the Securities Act, Procept shall file a
Registration Statement on the appropriate form prescribed by the SEC covering
the offering and sale to the holders of the Pacific Warrants of the shares of
Procept Common Stock purchasable upon exercise thereof, (the "Warrants Shelf").
Procept shall use its reasonable best efforts to file the Warrants Shelf within
60 days after the Effective Time and to cause the SEC to declare such
registration statement effective and to maintain the effectiveness of the
Warrants Shelf (and maintain the current status of the prospectus included
therein) until all Pacific Warrants have been exercised or have been terminated
in accordance with their terms.
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5.19 Indemnification, Directors' and Officers' Insurance.
(a) The Surviving Corporation's Certificate of Incorporation and
By-Laws contain provisions with respect to indemnification (the "Indemnification
Provisions"), which provisions shall not be amended, repealed or otherwise
modified for a period of six years from the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at or before the
Effective Time were directors, officers, employees, subject to Section 5.19(d),
or agents of Pacific (the "Pacific Indemnities"), unless such modification is
required by law and provided that (i) a merger of the Surviving Corporation into
Procept or (ii) the liquidation of the Surviving Corporation shall not be deemed
a violation of this Section 5.19.
(b) By virtue of the Merger the Surviving Corporation shall assume
all obligations of Pacific under the Indemnification Provisions, including such
indemnification obligations (i) arising out of or pertaining to the transactions
contemplated by this Agreement or (ii) otherwise with respect to any acts or
omissions occurring at or prior to the Effective Time.
(c) At or prior to the Effective Time, Pacific or Procept shall
purchase or keep in effect directors' and officers' liability insurance coverage
for Pacific's directors and officers in a form reasonably acceptable to Pacific
which shall provide such directors and officers with so-called "tail" or other
coverage sufficient to ensure the Indemnification Provisions in an amount of at
least $5,000,000.
(d) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person or
entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers or conveys all or substantially
all of its assets to any person or entity, then, and in each such case, proper
provision shall be made so that the successors and assigns assume the
obligations set forth in this Section 5.19.
SECTION 6 - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY TO
CONSUMMATE THE MERGER
The respective obligations of each party to consummate the Merger shall
be subject to the satisfaction or waiver, at or before the Effective Time, of
each of the following conditions:
6.1 Approvals. The holders of Pacific Preferred Stock shall have
approved an amendment to the Certificate of Designation relating to all
outstanding Pacific Preferred Stock in a manner necessary to preclude the Merger
from triggering any obligation of Pacific or Procept to pay a liquidation
preference to the holders of Pacific Preferred Stock, and such amendment to the
holders of Pacific Preferred Stock, and such amendment to the Certificate of
Designation shall have been filed with the Secretary of State of Delaware. All
required approvals of the stockholders of Pacific and Procept and all consents
and approvals referred to in Sections 3.12 and 4.12 of this Agreement, other
than those which, the failure to obtain would not affect the validity of this
transaction or materially adversely affect the business of the Surviving
Corporation after the Effective Time shall have been obtained; provided,
however, that if Procept waives the obtaining of any consent from a contracting
party set forth in Sections 3.12 or 4.12 of
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the Pacific Disclosure Schedule, such consent shall not be a condition to
Pacific's obligation to consummate the Merger.
6.2 Absence of Order. No restraining order or injunction of any court
which prevents consummation of the Merger shall be in effect.
6.3 Nasdaq Stock Exchange Listing. The shares of Procept Common Stock
to be issued in the Merger shall have been approved for quotation on the Nasdaq
Small-Cap Market.
6.4 Effectiveness of Registration Statement. The Registration Statement
shall have been declared effective by the SEC and there shall not be any stop
order in effect with respect to the Registration Statement.
6.5 Procept Fairness Opinion. The Board of Directors of Procept shall
have received the opinion of Oscar Gruss & Son Incorporated to the effect that
the merger is fair from a financial point of view to Procept and its
stockholders and such opinion shall not have been withdrawn as of the Closing
Date.
6.6 Pacific Fairness Opinion. The Board of Directors of Pacific shall
have received the opinion of Josephthal & Co. Inc. to the effect that the Merger
is fair from a financial point of view to Pacific and its stockholders and such
opinion shall not have been withdrawn as of the Closing Date.
SECTION 7 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PROCEPT TO
CONSUMMATE THE MERGER
The obligation of Procept to consummate the Merger is subject to the
satisfaction or waiver by Procept, at or before the Effective Time, of the
following conditions:
7.1 Representations, Warranties and Covenants. The representations and
warranties of Pacific contained in this Agreement shall be true and correct in
all material respects on and as of the Effective Time with the same force and
effect as though made on and as of the Effective Time (with such exceptions as
may be permitted under or contemplated by this Agreement, the Pacific Disclosure
Schedule). Pacific shall have performed and complied in all material respects
with all covenants and agreements required by this Agreement to be performed or
complied with by them on or prior to the Effective Time. Pacific shall have
delivered to Procept a certificate, dated the Closing Date, to the foregoing
effect, as applicable.
7.2 Certificate of Secretary of Pacific. Pacific shall have delivered
to Procept a certificate of the Secretary of Pacific dated as of the Closing
Date, certifying as to (i) the Articles of Incorporation and the Bylaws of
Pacific, (ii) the resolutions of the Board of Directors of Pacific authorizing
and approving the execution, delivery and performance by Pacific of this
Agreement and the transactions contemplated hereby and (iii) the resolutions of
the stockholders of Pacific authorizing and approving this Agreement and the
transactions contemplated hereby.
7.3 Affiliate Letters. Procept shall have received the Affiliate
Letters referred to in Section 5.15.
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7.4 Opinion of Counsel to Pacific. Procept shall have received an
opinion of Patterson, Belknap, Webb and Tyler LLP, counsel to Pacific, dated the
Closing Date and in form and substance reasonably acceptable to Procept.
7.5 Merger Certificate. Pacific shall have executed and delivered the
Merger Certificate referred to in Section 1.2.
7.6 BTI Merger Agreement. The acquisition of Binary Therapeutics, Inc.
("BTI") by Pacific (the "BTI Merger") shall have been consummated by the
issuance of Pacific Common Stock as contemplated by the Agreement and Plan of
Merger dated as of June 4, 1996, as amended.
7.7 Agreement with Lenders. Each of Lindsay Rosenwald, the Aries Trust
and the Aries Domestic Fund, L.P. (the "Aries Funds"), as holders of promissory
notes payable by BTI in the aggregate principal amount of $443,000, (the
"Pacific Notes"), shall have entered into an agreement with Pacific and Procept,
to Procept's reasonable satisfaction, providing for the conversion of all
outstanding principal and interest of indebtedness represented by demand notes
issued by BTI to Lindsay Rosenwald in the aggregate face amount of $143,000 and
by Senior Bridge Notes issued by BTI to the Aries Funds in the aggregate face
amount of $100,000, into shares of Procept Common Stock at the rate of $5.00 per
share, provided (i) such shares of Common Stock shall be entitled to contractual
rights substantially the same as those set forth in Section 10 of this Agreement
and (ii) Procept or Pacific shall have paid each of Lindsay Rosenwald and the
Aries Funds $100,000 to cancel such indebtedness in full.
7.8 Approvals. Pacific shall have received approval of their
stockholders and all other approvals, clearances and consents from any
governmental entities and other third parties necessary or desirable for the
consummation of the Merger and the Pacific shares shall be free and clear of any
liens or encumbrances.
7.9 Dissenting Shares. The Dissenting Shares of Common Stock shall not
exceed five percent (5%) of the shares of the Pacific Common Stock issued and
outstanding or issuable on the Closing Date.
7.10 Bank Accounts. Pacific shall have delivered to Procept
documentation necessary to change the authorized signatories for Pacific's bank
and brokerage accounts as specified by Procept.
7.11 Certificates. Pacific shall have furnished Procept with such
certificates of public officials as may be reasonably requested by Procept.
SECTION 8 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PACIFIC TO
CONSUMMATE THE MERGER
The obligation of Pacific to consummate the Merger is subject to the
satisfaction or waiver by them, at or before the Effective Time, of the
following conditions:
8.1 Representations, Warranties and Covenants. The representations and
warranties of Procept contained in this Agreement shall be true and correct in
all material respects on and as
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of the Effective Time with the same force and effect as though made on and as of
the Effective Time (with such exceptions as may be permitted under or
contemplated by this Agreement). Procept shall have performed and complied in
all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time. Procept shall have delivered to Pacific a certificate, dated the Effective
Time, to the foregoing effect.
8.2 Certificate of Secretary of Procept. Procept shall have delivered
to Pacific a certificate of the Secretary of Procept dated as of the Closing
Date, certifying as to (i) the Articles of Incorporation and the Bylaws of
Pacific, (ii) the resolutions of the Board of Directors of Procept authorizing
and approving the execution, delivery and performance by Procept of this
Agreement and the transactions contemplated hereby and (iii) the resolutions of
the stockholders of Procept authorizing and approving this Agreement and the
transactions contemplated hereby.
8.3 Certificate of Secretary of PAC. PAC shall have delivered to
Pacific a certificate of the Secretary of PAC dated as of the Closing Date,
certifying as to (i) the Certificate of Incorporation and the Bylaws of PAC, as
in effect on and as of the Closing Date and (ii) the resolutions of the Board of
Directors and Stockholder of PAC authorizing and approving the execution,
delivery and performance by PAC of this Agreement and the transactions
contemplated hereby.
8.4 Approvals. Procept shall have received approval of their
stockholders and all other approvals, clearances and consents from any
governmental entities and other third parties necessary or desirable for the
consummation of the Merger.
8.5 Opinion of Counsel to Procept. Pacific shall have received an
opinion of Palmer & Dodge LLP, counsel to Procept, dated the Closing Date and in
form and substance reasonably acceptable to Pacific.
8.6 Certificates. Procept shall have furnished Pacific with such
certificates of public officials as may be reasonably requested by Pacific.
SECTION 9 - TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated at any time on or
prior to the Closing Date, whether prior to or after approval by Pacific's
stockholders, as follows:
(a) by Pacific or Procept if, without fault of the terminating
party, the Closing Date shall not have occurred on or before June 30, 1999,
which date may be extended by mutual consent of the parties;
(b) by Pacific upon written notice to Procept if any representation
or warranty of Procept made herein was not true and correct in all material
respects when made or Procept has materially breached any covenant contained
herein and has not cured such breach within thirty (30) business days of receipt
of written notice from Pacific or by the Closing Date, whichever occurs first;
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(c) by Procept upon written notice to Pacific if any representation
or warranty made herein by Pacific was not true and correct in all material
respects when made or Pacific has materially breached any covenant contained
herein and has not cured such breach within thirty (30) business days of receipt
of written notice from Procept or by the Closing Date, whichever occurs first;
(d) by any party if any court of competent jurisdiction or
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and such
order, decree or ruling shall have become final and nonappealable;
(e) by either Procept or Pacific if the Procept or Pacific
stockholders vote and fail to approve the Merger as required by Delaware law;
(f) by Procept if Pacific's Board of Directors (i) fails to include
in the Proxy Statement its recommendation that Pacific stockholders vote in
favor of the adoption of this Agreement or (ii) withdraws its recommendation
that stockholders vote in favor (other than in connection with exercising
Pacific's rights to terminate this Agreement pursuant to subsection (b) or (d)
of this Section 9.1);
(g) by Pacific if Procept's Board of Directors (i) fails to include
in the Proxy Statement its recommendation that Procept stockholders vote in
favor of the adoption of this Agreement or (ii) withdraws its recommendation
that stockholders vote in favor (other than in connection with exercising
Procept rights to terminate this Agreement pursuant to Subsection (c) or (d) of
this Section 9.1);
(h) at any time with the written consent of Procept and Pacific.
9.2 Effect of Termination. If this Agreement is terminated as provided
in Section 9.1, this Agreement shall forthwith become void and have no effect,
without further obligation on the part of any party, its directors, officers or
stockholders following the date of such termination, other than the provisions
of this Section 9.2, Section 5.4 relating to a termination fee, Section 5.6
relating to expenses and Section 5.13 relating to publicity and confidentiality
to the extent provided therein. Nothing contained in Section 9.2 shall eliminate
or reduce any party's liability to another party for any breach of this
Agreement occurring before such termination.
SECTION 10 - ADDITIONAL CONTRACTUAL RIGHTS
10.1 Definitions. As used in this Agreement, the following terms shall
have the following meanings, unless the context otherwise requires:
10.1.1 "Section 10 Rights" shall mean the rights to receive all Reset
Issuances, Semi-Annual Issuances, Dilution Issuances and Qualified Offering
Issuances and the right to exercise the Liquidation Put and the Exchange Right,
as provided herein.
10.1.2 "Change of Shares" shall mean any event that necessitates an
adjustment to the Dilution Value (as defined below) pursuant to Section 10.7
below.
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10.1.3 The "Closing Bid Price" of any security, for any trading day (as
defined below), shall be the reported per share closing bid price, regular way,
of such security on the relevant Stock Market (as defined below) on such trading
day or, if there were no transactions on such trading day, the average of the
reported closing bid and asked prices, regular way, of such security on the
relevant Stock Market on such trading day.
10.1.4 "Dilution Event" shall mean any event that necessitates an
adjustment to the Dilution Value (as defined below) pursuant to Section 10.6
below.
10.1.5 The "Dilution Value" initially shall be identical to the
Dilution Value in effect immediately following the Effective Time under Article
VI of the Subscription Agreements between Procept and the purchasers in
Procept's 1998 private placement. The Dilution Value is subject to adjustment
pursuant to Sections 10.2, 10.6, 10.7 and 10.15. The Dilution Value immediately
following the Effective Time is currently anticipated to be $3.75.
10.1.6 "Fair Market Value" of any asset (including any security) means
the fair market value thereof as mutually determined by Procept and the
financial advisor engaged by Procept in connection with Procept's 1998 private
placement (the "Financial Advisor"). If Procept and the Financial Advisor are
unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
bank selected by the Board of Directors of Procept and the Financial Advisor
(or, if such selection cannot be agreed upon promptly, or in any event within
ten days, then such valuation shall be made by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in New York City in accordance with its rules), the costs of which
valuation shall be paid for by Procept.
10.1.7 The "Issuance Base Amount" for the Rights Holder, at any time,
means the sum of (i) the number of shares of Procept Common Stock acquired by
the Rights Holder in the Merger in respect of such Rights Holder's shares of
Pacific Preferred Stock (ii) the number of shares of any Reset Issuances (as
defined below) made to such Rights Holder occurring before such time, (iii) the
number of shares of any Semi-Annual Issuances (as defined below) made to such
Rights Holder occurring before such time, (iv) the number of shares of any
Dilution Issuances (as defined below) made to such Rights Holder occurring
before such time and (v) the number of shares of any Qualified Offering
Issuances (as defined below) made to such Rights Holder occurring before such
time (with appropriate adjustments for any Change of Shares and subject to
reduction pursuant to Section 10.10). For any transferee Rights Holder, the
Issuance Base Amount, at any time, shall be the number of shares of Procept
Common Stock related to such Section 10 Rights as were transferred to such
Rights Holder plus the number of shares of any Reset Issuance, Semi-Annual
Issuance, Dilution Issuance and Qualified Offering Issuance made to such Rights
Holder occurring subsequent to such transfer but before such time. The Issuance
Base Amount shall include Dilution Issuances which would have been required but
for the operation of Paragraph 10.6.2(a).
10.1.8 "Liquidation Event" shall mean any (i) liquidation, dissolution
or winding up of Procept, whether voluntary or involuntary, (ii) sale or other
disposition of all or substantially all of the assets of Procept or (iii) any
consolidation, merger, combination, reorganization or other transaction in which
Procept is not the surviving entity or shares of
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Procept Common Stock constituting more than fifty percent (50%) of the voting
power of Procept are exchanged for or changed into stock or securities of
another entity, cash and/or any other property (clause (iii) of this Subsection
being referred to as a "Merger Transaction"). Notwithstanding the above, any
consolidation, merger, combination, reorganization or other transaction in which
Procept is not the surviving entity but the stockholders of Procept immediately
prior to such transaction own in excess of 50% of the voting power of the
corporation surviving such transaction and own such interest in substantially
the same proportions as prior to such transaction, shall not be considered a
Liquidation Event or a Merger Transaction, provided that the surviving
corporation has made appropriate provisions acceptable to the Financial Advisor
to ensure that the Section 10 Rights survive any such transaction.
10.1.9 "Market Price" per share of Procept Common Stock shall mean the
average Closing Bid Price (adjusted, where appropriate, for any Change of
Shares) for twenty (20) consecutive trading days, ending with the trading day
immediately prior to the date as of which the Market Price is being determined;
provided, however, that if the prices referred to in the definition of Closing
Bid Price cannot be determined on any trading day, "Market Price" shall mean the
Fair Market Value.
10.1.10 The "Post-Dilution Common Quantity" means the quotient of the
Pre-Dilution Common Value (as defined below) divided by the Dilution Value
immediately following the relevant Dilution Event, Reset Event or Qualified
Offering Adjustment Event (as defined below).
10.1.11 The "Pre-Dilution Common Value" means the product of the
Issuance Base Amount multiplied by the Dilution Value immediately preceding the
relevant Dilution Event, Reset Event or Qualified Offering Adjustment Event (as
defined below).
10.1.12 "Rights Holder" shall mean (i) a holder of Pacific Preferred
Stock immediately prior to the Effective Time who receives shares of Procept
Common Stock on conversion of such shares of Pacific Preferred Stock, (ii) a
holder of BTI indebtedness prior to the effective time who receives shares of
Procept Common Stock pursuant to the debt conversion contemplated by Section 7.7
hereof or (iii) any Person who succeeds to such Rights Holder's Section 10
Rights pursuant to Section 10.9.
10.1.13 The "Stock Market" shall mean, with respect to any security,
the principal national securities exchange on which such security is listed or
admitted to trading or, if such security is not listed or admitted to trading on
any national securities exchange, shall mean The Nasdaq National Market System
or The Nasdaq SmallCap Market (collectively, "Nasdaq") or, if such security is
not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security is
not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as
furnished by any NASD member firm selected from time to time by Procept for that
purpose.
10.1.14 A "trading day" shall mean a day on which the Stock Market is
open for the transaction of business.
10.1.15 "Trading Price" shall mean the lower of (i) the average Closing
Bid Price of the Procept Common Stock for the thirty (30) consecutive trading
days immediately preceding
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the date as of which the Trading Price is being determined (with appropriate
adjustments for any Change of Shares) and (ii) the average Closing Bid Price of
the Procept Common Stock for five (5) consecutive trading days immediately
preceding the date as of which the Trading Price is being determined (with
appropriate adjustments for any Change of Shares).
10.1.16 The "Transfer Agent" shall mean American Stock Transfer & Trust
Company or the duly appointed successor thereto serving as the transfer agent
for the Procept Common Stock.
10.2 Reset.
10.2.1 The Dilution Value in effect immediately prior to April 9, 1999
(the "Reset Date") shall be adjusted and reset effective as of the Reset Date if
the Market Price of the Procept Common Stock as of the Reset Date (the "12-Month
Trading Price") is less than 140% of the then applicable Dilution Value (a
"Reset Event"). Upon the occurrence of a Reset Event, the Dilution Value shall
be reduced to be equal to the greater of (A) the 12-Month Trading Price divided
by 1.40, and (B) 25% of the then applicable Dilution Value.
10.2.2 Within fifteen (15) days of the Reset Date, Procept shall
prepare a certificate signed by the Chief Executive Officer or President, and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, of Procept setting forth the Dilution Value as of the Reset Date,
showing in reasonable detail the facts upon which such Dilution Value is based,
and such certificate shall forthwith be filed with the Transfer Agent. A notice
stating that the Dilution Value has been adjusted pursuant to this paragraph, or
that no adjustment is necessary, and setting forth the Dilution Value in effect
as of the Reset Date shall be mailed as promptly as practicable after the Reset
Date by Procept to all Rights Holders at their last addresses as they shall
appear in the Transfer Agent's record books.
10.3 Reset Issuance. If there is any change in the Dilution Value as a
result of Subsection 10.2.1, then, on such date, Procept shall issue to the
Rights Holder a number of shares of Procept Common Stock (the "Reset Issuance")
equal to the difference between the Post-Dilution Common Quantity minus the
Issuance Base Amount.
10.4 Semi-Annual Issuances. On each six month anniversary of the Reset Date
(or the next succeeding business day), Procept shall issue (each a "Semi-Annual
Issuance") to the Rights Holder a number of shares of Procept Common Stock equal
to 5% of the Issuance Base Amount on the applicable six month anniversary date.
10.5 Dilution Issuances. Upon the occurrence of any Dilution Event after
the Effective Time, Procept shall issue (each a "Dilution Issuance") to the
Rights Holder a number of shares of Procept Common Stock equal to the difference
of the Post-Dilution Common Quantity minus the Issuance Base Amount.
10.6 Anti-Dilution Adjustments.
10.6.1 Except as otherwise provided in Subsection 10.6.3, in the event
Procept shall, at any time or from time to time after the date hereof, sell or
issue any shares of Procept Common Stock for a consideration per share less than
either (i) the Dilution Value in effect on
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the date of such sale or issuance or (ii) the Market Price of the Procept Common
Stock as of the date of the sale or issuance (any such sale or issuance a
"Dilutive Issuance"), then, and thereafter upon each further Dilutive Issuance,
the Dilution Value in effect immediately prior to such Dilutive Issuance shall
be changed to a price (rounded to the nearest cent) determined by multiplying
the Dilution Value in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Procept Common
Stock outstanding immediately prior to the Dilutive Issuance and the number of
shares of Procept Common Stock which the aggregate consideration received
(determined as provided in Paragraph 10.6.2(e) below) for the issuance of such
additional shares would purchase at the greater of (x) the Dilution Value in
effect on the date of such issuance or (y) the Market Price of the Procept
Common Stock as of such date, and the denominator of which shall be the number
of shares of Procept Common Stock outstanding immediately after the Dilutive
Issuance. Such adjustment shall be made successively whenever such an issuance
is made.
10.6.2 For purposes of Subsection 10.6, the following Paragraphs (a) to
(e) shall also be applicable:
(a) No adjustment of the Dilution Value shall be made unless such
adjustment would require a decrease of at least $.01; provided that any
adjustments which by reason of this Paragraph 10.6.2(a) are not required to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with adjustments so carried
forward, shall require a decrease of at least $.01 in the Dilution Value then in
effect hereunder.
(b) In case of (A) the sale or other issuance by Procept (including as
a component of a unit) of any rights or warrants to subscribe for or purchase,
or any options for the purchase of, Procept Common Stock or any securities
convertible into or exchangeable for Procept Common Stock (such securities
convertible, exercisable or exchangeable into Procept Common Stock being herein
called "Convertible Securities"), or (B) the issuance by Procept, without the
receipt by Procept of any consideration therefor, of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Procept Common
Stock or Convertible Securities, whether or not such rights, warrants or
options, or the right to convert or exchange such Convertible Securities, are
immediately exercisable, and the consideration per share for which Procept
Common Stock is issuable upon the exercise of such rights, warrants or options
or upon the conversion or exchange of such Convertible Securities (determined by
dividing (x) the minimum aggregate consideration, as set forth in the instrument
relating thereto, without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount, payable to Procept
upon the exercise of such rights, warrants or options, plus the consideration
received by Procept for the issuance or sale of such rights, warrants or
options, plus, in the case of such Convertible Securities, the minimum aggregate
amount, as set forth in the instrument relating thereto, without regard to any
antidilution or similar provisions contained therein for a subsequent adjustment
of such amount, of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number, as set forth in the instrument relating thereto, without regard
to any antidilution or similar provisions contained therein for a subsequent
adjustment of such amount, of shares of Procept Common Stock issuable upon the
exercise of such rights, warrants or options or upon the conversion or exchange
of such
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Convertible Securities issuable upon the exercise of such rights, warrants or
options) is less than either the Dilution Value or the Market Price of the
Procept Common Stock as of the date of the issuance or sale of such rights,
warrants or options, then such total maximum number of shares of Procept Common
Stock issuable upon the exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities (as of the date of the
issuance or sale of such rights, warrants or options) shall be deemed to be
"Procept Common Stock" for purposes of Subsection 10.6.1 and shall be deemed to
have been sold for an amount equal to such consideration per share and shall
cause an adjustment to be made in accordance with Subsection 10.6.1.
(c) In case of the sale or other issuance by Procept of any Convertible
Securities, whether or not the right of conversion or exchange thereunder is
immediately exercisable, and the price per share for which Procept Common Stock
is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by
Procept for the sale of such Convertible Securities, plus the minimum aggregate
amount, as set forth in the instrument relating thereto, without regard to any
antidilution or similar provisions contained therein for a subsequent adjustment
of such amount, of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number, as set forth in the instrument relating thereto without regard
to any antidilution or similar provisions contained therein for a subsequent
adjustment of such amount, of shares of Procept Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is less than either the
Dilution Value or the Market Price of the Procept Common Stock as of the date of
the sale or other issuance of such Convertible Securities, then such total
maximum number of shares of Procept Common Stock issuable upon the conversion or
exchange of such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be "Procept Common Stock" for
purposes of Subsection 10.6.1 and shall be deemed to have been sold for an
amount equal to such consideration per share and shall cause an adjustment to be
made in accordance with Subsection 10.6.1.
(d) In case Procept shall modify the rights of conversion, exchange or
exercise of any of the securities referred to in Paragraphs (b) or (c) of this
Subsection 10.6.2 or any other securities of Procept convertible, exchangeable
or exercisable for shares of Procept Common Stock, for any reason other than an
event that would require adjustment to prevent dilution, so that the
consideration per share received by Procept after such modification is less than
either the Dilution Value or the Market Price of the Procept Common Stock as of
the date prior to such modification, then such securities, to the extent not
theretofore exercised, converted or exchanged, shall be deemed to have expired
or terminated immediately prior to the date of such modification and Procept
shall be deemed for purposes of calculating any adjustments pursuant to this
Section 10.6 to have issued such new securities upon such new terms on the date
of modification. Such adjustment shall become effective as of the date upon
which such modification shall take effect. On the expiration or cancellation of
any such right, warrant or option or the termination or cancellation of any such
right to convert or exchange any such Convertible Securities, the Dilution Value
then in effect hereunder shall forthwith be readjusted to such Dilution Value as
would have obtained (A) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities been made upon the
basis of the issuance of only the number of shares of Procept Common Stock
theretofore actually
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delivered (and the total consideration received therefor) upon the exercise of
such rights, warrants or options or upon the conversion or exchange of such
Convertible Securities and (B) had adjustments been made on the basis of the
Dilution Value as adjusted under clause (A) of this sentence for all
transactions (which would have affected such adjusted Dilution Value) made after
the issuance or sale of such rights, warrants, options or Convertible
Securities.
(e) In case of the sale of any shares of Procept Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or purchase, or
any options for the purchase of, Procept Common Stock or Convertible Securities,
the consideration received by Procept therefor shall be deemed to be the gross
sales price therefor without deducting therefrom any expense paid or incurred by
Procept or any underwriting discounts or commissions or concessions paid or
allowed by Procept in connection therewith. In the event that any securities
shall be issued in connection with any other securities of Procept, together
comprising one integral transaction in which no specific consideration is
allocated among the securities, then each of such securities shall be deemed to
have been issued for such consideration as the Board of Directors of Procept
determines in good faith; provided, however that if the Financial Advisor
disagrees with such determination, Procept shall retain, at its own expense, an
independent investment banking firm acceptable to the Financial Advisor for the
purpose of obtaining an appraisal.
10.6.3 Notwithstanding any other provision hereof, no adjustment to the
Dilution Value will be made:
(a) upon the exercise of any of the options outstanding on the date
hereof under Procept's existing stock option plans; or
(b) upon the issuance or exercise of options which may hereafter be
granted with the approval of Procept's Board of Directors, or exercised, under
any employee benefit plan of Procept to officers, directors, consultants or
employees, but only with respect to such options as are exercisable at prices no
lower than the Closing Bid Price (or, if the prices referenced in the definition
of Closing Bid Price cannot be determined, the Fair Market Value) of the Procept
Common Stock as of the date of grant thereof; or
(c) upon exercise of the Placement Options or the Advisory Options (as
defined in Exhibits B and C to the Securities Purchase Agreement dated as of
June 30, 1997 between Procept and certain stock purchasers), upon the exercise
of the Class C Warrants of Procept currently outstanding or issuable pursuant to
the exercise of the Placement and Advisory Options, as set forth in the Procept
Disclosure Schedule pursuant to Section 4.2 or upon the issuance or the
conversion of any Class C Warrants approved in writing by the Financial Advisor;
or
(d) upon the issuance or sale of Procept Common Stock or Convertible
Securities pursuant to the exercise of any rights, options or warrants to
receive, subscribe for or purchase, or any options for the purchase of, Procept
Common Stock or Convertible Securities, whether or not such rights, warrants or
options were outstanding on the Effective Time or were thereafter issued or
sold, provided that an adjustment was either made or not required to be made
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in accordance with Subsection 10.6.1 in connection with the issuance or sale of
such securities or any modification of the terms thereof; or
(e) upon the issuance or sale of Procept Common Stock upon conversion
or exchange of any Convertible Securities, provided that any adjustments
required to be made upon the issuance or sale of such Convertible Securities or
any modification of the terms thereof were so made, and whether or not such
Convertible Securities were outstanding on the Effective Time or were thereafter
issued or sold; or
(f) upon the issuance of stock that may hereafter be purchased or sold
with the approval of Procept's Board of Directors, under the 1993 Employee Stock
Purchase Plan of Procept to officers, directors, consultants or employees, but
only with respect to such shares as are purchased and/or sold in accordance with
the current plan and at the prices no lower than eighty-five percent (85%) of
the Closing Bid Price (or, if the prices referenced in the definition of Closing
Bid Price cannot be determined, 85% of the Fair Market Value) of the Procept
Common Stock as of the date of purchase and/or sale thereof;
Paragraph 10.6.2(d) shall nevertheless apply to any modification of the
rights of conversion, exchange or exercise of any of the securities referred to
in this Subsection 10.6.3, except that Paragraph 10.6.2(d) shall not apply to
any modification of the rights of conversion, exchange or exercise of the
securities excepted by Paragraph (c) of this Subsection 10.6.3 that are required
by the original terms of those respective instruments.
10.6.4 As used in this Section 10.6, the term "Procept Common Stock"
shall mean and include Procept's Common Stock authorized at the Effective Time
and shall also include any capital stock of any class of Procept thereafter
authorized which shall not be limited to a fixed sum or percentage in respect of
the rights of the holders thereof to participate in dividends and in the
distribution of assets upon the voluntary liquidation, dissolution or winding up
of Procept.
10.6.5 Procept from time to time may decrease the Dilution Value by any
amount for any period of time if the period is at least 20 days and if the
decrease is irrevocable during the period. Whenever the Dilution Value is so
decreased, Procept shall mail to the Rights Holders a notice of the decrease at
least 15 days before the date the decreased Dilution Value takes effect, and
such notice shall state the decreased Dilution Value and the period it will be
in effect.
Procept may make such decreases in the Dilution Value, in addition to those
required or allowed by this Section 10, as shall be determined by it, as
evidenced by a resolution of Procept's Board of Directors, to be advisable in
order to avoid or diminish any income tax to holders of Procept Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
10.7 Change of Shares Adjustments. In the event Procept shall, at any time
or from time to time after the date hereof (i) issue any shares of Procept
Common Stock as a stock dividend to the holders of Procept Common Stock or (ii)
subdivide or combine the outstanding shares of Procept Common Stock into a
greater or lesser number of shares (any such issuance,
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subdivision or combination being herein called a "Change of Shares"), then the
Dilution Value shall be changed to a price (rounded to the nearest cent)
determined by multiplying the Dilution Value in effect immediately prior to such
Change of Shares by a fraction, the numerator of which shall be the number of
shares of Procept Common Stock outstanding immediately prior to the Change of
Shares and the denominator of which shall be the number of shares of Procept
Common Stock outstanding immediately following the Change of Shares.
10.8 Liquidation Put.
10.8.1 The Rights Holder may require Procept to repurchase with cash
any number (not to exceed such Rights Holder's Issuance Base Amount) of shares
of Procept Common Stock then owned by such Rights Holder for 140% of the
aggregate Dilution Value of such shares; provided, however, in the event of a
Merger Transaction, any repurchase pursuant to this Section 10.8 may be paid in
cash, property (valued as provided in Subsection 10.8.4) and/or securities
(valued as provided in Subsection 10.8.4) of the entity surviving such Merger
Transaction.
10.8.2 The Rights Holder covenants not to exercise the Liquidation Put
unless a Liquidation Event has occurred.
10.8.3 The Rights Holder's Section 10 Rights shall be terminated to the
pro rata extent of any exercise of such Rights Holder's Liquidation Put.
10.8.4 Any securities or other property to be delivered to the Rights
Holder pursuant to this Section 10.8 shall be valued as follows:
(a) Securities not subject to an investment letter or other similar
restriction on free marketability:
(i) If actively traded on the Stock Market, the value shall be
deemed to be the Market Price of such securities as of the third day prior to
the date of valuation.
(ii) If not actively traded on the Stock Market, the value
shall be the Fair Market Value of such securities.
(b) For securities for which there is an active public market but which
are subject to an investment letter or other restrictions on free marketability,
the value shall be the Fair Market Value thereof, determined by discounting
appropriately the Market Price thereof.
(c) For all other securities, the value shall be the Fair Market Value
thereof.
10.9 Transfer of Rights Under This Section 10. A Rights Holder's Section 10
Rights are not transferable until after April 9, 1999. The Rights Holder's
Section 10 Rights are not transferable unless the transferee will be both the
record and beneficial owner of the related Procept Common Stock and executes and
delivers to Procept a counterpart to this Section 10 agreeing to be bound by the
obligations of the Rights Holder hereunder. Any such transferee must provide his
or her name and address, which name and address must be that of the beneficial
owner, to Procept. Any transfer of Procept Common Stock and related Section 10
Rights must
A-51
<PAGE>
be performed in accordance with applicable securities laws and regulations, and
the transferor must provide Procept with an opinion of counsel, satisfactory to
Procept, to that effect. Furthermore, no transfer of Section 10 Rights may be
made relating to fewer shares of Procept Common Stock than the quotient of
$25,000 divided by the Dilution Value. ANY PURPORTED TRANSFER OF SECTION 10
RIGHTS NOT IN COMPLIANCE WITH THIS SECTION 10.9 SHALL BE NULL AND VOID AND THE
RIGHTS HOLDER SHALL FORFEIT ALL SECTION 10 RIGHTS RELATED TO SUCH TRANSFERRED
PROCEPT COMMON STOCK. Upon, and to the extent of, any transfer of Procept Common
Stock without the related Section 10 Rights, such related Section 10 Rights
shall terminate.
10.10 Adjustments to Issuance Base Amount. Upon the termination of any of
the Rights Holder's Section 10 Rights, such Rights Holder's Issuance Base Amount
shall be proportionally reduced.
10.11 Notices.
10.11.1 After each adjustment of the Dilution Value pursuant to
Sections 10.2, 10.6, 10.7 and 10.15 Procept will promptly prepare a certificate
signed by the Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of Procept
setting forth: (i) the Dilution Value as so adjusted and (ii) a brief statement
of the facts accounting for such adjustment. Procept will promptly file such
certificate with the Transfer Agent and cause a brief summary thereof to be sent
by ordinary first class mail to each Rights Holder at his or her last address as
it shall appear on the Transfer Agent's record books. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of such adjustment. The affidavit of an officer of the Transfer Agent
or the Secretary or an Assistant Secretary of Procept that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
therein stated. The Transfer Agent may rely on the information in the
certificate as true and correct and has no duty nor obligation independently to
verify the amounts or calculations therein set forth.
10.11.2 After any adjustment in the Issuance Base Amount resulting from
(i) any Reset Issuances, Semi-Annual Issuances, Dilution Issuances or Qualified
Offering Issuance (ii) any Change in Shares or (iii) any termination of Section
10 Rights, Procept will promptly prepare a certificate signed by the Chief
Executive Officer or President, and by the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary, of Procept setting forth: (x) the
Issuance Base Amount immediately preceding and succeeding such adjustment and
(y) a brief statement of the facts accounting for such adjustment. Procept will
promptly file such certificate with the Transfer Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Rights Holder at his or
her last address as it shall appear on the Transfer Agent's record books. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of such adjustment. The affidavit of an officer of the
Transfer Agent or the Secretary or an Assistant Secretary of Procept that such
notice has been mailed shall, in the absence of fraud, be prima facie evidence
of the facts therein stated. The Transfer Agent may rely on the information in
the certificate as true and correct and has no duty nor obligation independently
to verify the amounts or calculations therein set forth.
A-52
<PAGE>
10.12 Treasury Stock. Any Reset Issuance, Semi-Annual Issuance and Dilution
Issuance shall be made with duly authorized, fully-paid and non-assessable
shares of Procept Common Stock, in accordance with the DGCL, and shall be drawn
from the treasury stock of Procept to the extent available.
10.13 Mandatory Termination of Section 10 Rights. At any time on or after
the Reset Date, Procept may cause the Rights Holder's Section 10 Rights to be
terminated if the Market Price of the Procept Common Stock shall have exceeded
300% of the then applicable Dilution Value as of the third business day prior to
the date of notice of termination. No greater than 60 nor fewer than 20 days
prior to the date of any such mandatory termination, notice by first class mail,
postage prepaid, shall be given to the Rights Holders, addressed to such Rights
Holders at their last addresses as they shall appear in the Transfer Agent's
record books. Each such notice shall specify the date fixed for termination. Any
notice which is mailed as herein provided shall be conclusively presumed to have
been duly given by Procept on the date deposited in the mail, whether or not the
Rights Holder receives such notice; and failure properly to give such notice by
mail, or any defect in such notice, to any Rights Holders shall not affect the
validity of the proceedings for the termination of any other Rights Holders'
Section 10 Rights.
10.14 Waiver of Section 10 Rights. With the written consent of Procept and
the stockholders holding at least a majority of the issued and outstanding
Procept Common Stock subject to Section 10 Rights or subject to Article VI
Rights (as defined below), any provision of this Section 10 may be waived
(either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely) or
amended. Upon the effectuation of each such waiver or amendment, Procept shall
promptly give written notice thereof to the Rights Holders, if any, who have not
previously received notice thereof or consented thereto in writing. "Article VI
Rights" are rights under a Subscription Agreement between a holder of Procept
Common Stock (or such holder's predecessor in interest) and Procept granting
rights referred to therein as "Article VI Rights", which rights are
substantially the same as the Section 10 Rights.
10.15 Optional Exchange/Reset.
10.15.1 Upon the receipt of requisite approvals, if any, from the
stockholders of Procept, the shares of Procept Common Stock acquired hereunder
may be exchanged (the "Exchange Right"), at the option of each Rights Holder,
upon the completion of a Qualified Offering (as defined below) into Qualified
Offering Securities (as defined below). Upon exchange of their shares of Procept
Common Stock, up to the Issuance Base Amount, the exchanging Rights Holders
shall receive an amount of Qualified Offering Securities equal to the quotient
of (i) the Issuance Base Amount being exchanged multiplied by the Dilution Value
at the time of the Qualified Offering, divided by (ii) the Qualified Offering
Securities Price (as defined below) multiplied by .75 (the "Exchange Price");
provided, however, that in the event that the Exchange Price divided by the
Underlying Procept Common Stock Amount (as defined below) is less than the
greater of (a) $2.50 and (b) 50% of the average closing bid price of the Procept
Common Stock for the twenty trading days immediately preceding the date of such
exchange (the "Floor Price"), then the Exchange Price shall equal the Floor
Price multiplied by the Underlying Procept Common Stock Amount.
A-53
<PAGE>
As used herein the following terms shall have the following meanings:
(a) "Underlying Procept Common Stock Amount" shall equal the number
of shares of Procept Common Stock and Procept Common Stock underlying
Convertible Securities included as part of each Qualified Offering Security but
shall not include Procept Common Stock underlying warrants or options to
purchase Procept Common Stock or to purchase a Convertible Security, whether or
not such warrant or option contains a right to exercise such warrant or option
by the delivery of shares deemed purchased thereunder, including, without
limitation, by a cashless exercise.
(b) "Qualified Offering Security" and "Qualified Offering Securities"
shall mean the security or securities (whether they are Procept Common Stock,
Convertible Securities, units of Procept Common Stock and/or Convertible
Securities (as defined below) and warrants or other similar rights) issued or
sold in the Qualified Offering (including any contractual rights granted to
investors in connection with the Qualified Offering).
(c) "Qualified Offering" shall mean the sale or series of sales of
equity securities of Procept next occurring after the Effective Time of this
Offering, including, without limitation, Procept Common Stock, warrants, units
of Procept Common Stock and warrants, other securities exchangeable, convertible
or exercisable for Procept Common Stock, alone or in units, whether in a public
offering or private placement, raising gross proceeds in excess of $2,500,000;
excluding, however, at Procept's option, a firm commitment underwritten public
offering.
(d) "Qualified Offering Securities Price" shall mean the selling
price to investors for each Qualified Offering Security.
(e) "Convertible Security" and "Convertible Securities" shall mean
any security convertible into or exchangeable for a share or shares of Procept
Common Stock without the payment of any additional consideration in such
conversion or exchange other than the delivery of such security, but shall not
include a warrant or option to purchase Procept Common Stock or to purchase a
Convertible Security, whether or not such warrant or option contains a right to
exercise such warrant or option by the delivery of shares deemed purchased
thereunder, including, without limitation, by a cashless exercise.
10.15.2 Upon and to the extent of any exchange into Qualified
Offering securities as set forth in Section 10.15.1 above, the Section 10 Rights
related to the exchanged Procept Common Stock shall terminate.
10.15.3 Upon the receipt of requisite approvals, if any, from the
stockholders of Procept, holders who elect not to exchange their Procept Common
Stock upon a Qualified Offering for Qualified Offering Securities, shall have
the Dilution Value with respect to their Section 10 Rights adjusted (a
"Qualified Offering Adjustment Event") to equal the Exchange Price and shall
receive an additional number of shares (the "Qualified Offering Issuance") of
Procept Common Stock equal to the difference between (i) the quotient of (a) the
Issuance Base Amount multiplied by the Dilution Value in effect prior to the
date of adjustment divided by (b) the (x) Exchange Price divided by (y) the
Underlying Procept Common Stock Amount, and (ii)
A-54
<PAGE>
the Issuance Base Amount prior to the date of adjustment; provided, however,
that no adjustment shall be made if it would result in an increase in the
Dilution Value. Holders receiving Qualified Offering Issuance shall have Section
10 Rights with respect to such shares.
SECTION 11 - MISCELLANEOUS
11.1 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
(i) if to Procept, to:
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Attention: John Dee
Tel: (617) 491-1100
Fax: (617) 491-9019
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: Lynnette C. Fallon, Esq.
Tel: (617) 573-0220
Fax: (617) 227-4420
(ii) if to Pacific, to:
Pacific Pharmaceuticals, Inc.
6730 Mesa Ridge Road, Suite A
San Diego, CA 92121
Attention: H. Laurence Shaw
Tel: (619) 550-3900
Fax: (619) 550-3929
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036-6710
Attention: Edward F. Cox, Esq.
Tel: (212) 336-2000
Fax: (212) 336-2222
A-55
<PAGE>
Any party may by notice given in accordance with this Section 11.1 to the other
parties designate another address or person for receipt of notices hereunder.
11.2 Amendment. Except as provided in Section 10.14, this Agreement may not
be amended except by an instrument signed by each party hereto.
11.3 Waiver. At any time prior to the Effective Time, any party hereto may,
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or any conditions to its own obligations, in each case only to
the extent such obligations, agreements and conditions are intended for its
benefit; provided that any such extension or waiver shall be binding upon a
party only if such extension or waiver is set forth in a writing executed by
such party. After the Effective Time, such extension or waiver may be made in
accordance with Section 10.
11.4 Entire Agreement. This Agreement contains the entire agreement among
the parties with respect to the Merger and related transactions, and supersedes
all prior agreements, written or oral, with respect thereto, including but not
limited to the Letter of Intent dated November 4, 1998.
11.5 Governing Law. This Agreement is governed by the laws of the State of
Delaware without regard to its conflict of law provisions.
11.6 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. The Rights Holders are intended to be, and shall be, third
party beneficiaries of Section 10 hereof. This Agreement is not assignable
without the prior written consent of the other parties hereto, provided that the
Section 10 Rights are assignable as set forth in Section 10.9.
11.7 Variations in Pronouns. All pronouns and any variations thereof refer
to the masculine, feminine or neuter, singular or plural, as the context may
require.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
11.9 Exhibits and Disclosure Schedules. The Exhibits and Disclosure
Schedules are a part of this Agreement as if fully set forth herein.
A-56
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date first stated above.
PROCEPT, INC.
By /s/ John F. Dee
-----------------------------
Name: John F. Dee
Title: President & CEO
PACIFIC PHARMACEUTICALS, INC.
By /s/ H. Laurence Shaw, M.D.
-----------------------------
Name: H. Laurence Shaw, M.D.
Title: Chairman, President & CEO
PROCEPT ACQUISITION CORP.
By /s/ John F. Dee
-----------------------------
Name: John F. Dee
Title: President & CEO
A-57
<PAGE>
ANNEX A-1
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
BETWEEN
PROCEPT, INC.,
PROCEPT ACQUISITION CORP.
AND
PACIFIC PHARMACEUTICALS, INC.
-----------------------------
Dated February 8, 1999
-----------------------------
<PAGE>
Procept, Inc.
Procept Acquisition Corp.
840 Memorial Drive
Cambridge, MA 02139
February 8, 1999
Pacific Pharmaceuticals, Inc.
6730 Mesa Ridge Road, Suite A
San Diego, CA 92121
Re: Amendment to Agreement and Plan of Merger
-----------------------------------------
Dear Sirs or Madams:
On December 10, 1998, Procept, Inc., a Delaware corporation ("Procept"),
Pacific Pharmaceuticals, Inc., a Delaware corporation ("Pacific"), and Procept
Acquisition Corp., a Delaware corporation ("PAC"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Capitalized terms used herein but not
otherwise defined shall have the meanings ascribed to them in the Merger
Agreement.
Pursuant to the merger contemplated by the Merger Agreement (the "Merger"),
each holder of Pacific's Series A Convertible Preferred Stock, $25.00 par value
("Pacific Preferred Stock"), shall receive shares of Procept Common Stock (the
"Merger Shares") and certain contractual rights set forth in Section 10 of the
Merger Agreement (the "Section 10 Rights"). It is the parties' understanding
that, under present circumstances, the issuance of Procept Common Stock to the
holders of Pacific Common Stock in the Merger will cause a Dilution Event (the
"Merger Dilution Event") under the anti-dilution rights contained in Article VI
of Subscription Agreements entered into by certain holders of Procept Common
Stock who purchased their shares in a 1998 private placement (the "Article VI
Rights Holders").
The parties hereby confirm that it is their intent that the Merger have the
equivalent effect for the holders of Pacific Preferred Stock and the Article VI
Rights Holders. Accordingly, notwithstanding anything to the contrary set forth
in the Merger Agreement, the parties hereby agree that the holders of Pacific
Preferred Stock shall receive such number of additional shares of Procept Common
Stock (the "Dilution Shares") as they would have received due to the Merger
Dilution Event had they been Article VI Rights Holders immediately prior to the
time of the Merger. (Under present circumstances, the parties understand and
agree that 417,137 Dilution Shares shall be issued to holders of Pacific
Preferred Stock due to the Merger Dilution Event.)
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to Procept a counterpart hereof, whereupon this
instrument, together with all counterparts, will become a binding agreement in
accordance with its terms.
Very truly yours,
PROCEPT, INC.
By: /s/ John F. Dee
------------------------------------
John F. Dee
President and CEO
PROCEPT ACQUISITION CORP.
By: /s/ John F. Dee
------------------------------------
John F. Dee
President and CEO
Confirmed, accepted and agreed to
as of the date first above written
PACIFIC PHARMACEUTICALS, INC.
By: /s/ Anil K. Singhal
------------------------------
Anil K. Singhal
Interim President and CEO
A-58
<PAGE>
ANNEX B
FORM OF
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
PACIFIC PHARMACEUTICALS, INC.,
It is hereby certified that:
1. The name of the corporation (hereinafter called
"Corporation") is Pacific Pharmaceuticals, Inc.
2. The Certificate of Designations of the Series A
Convertible Preferred Stock of the Corporation setting forth the designation and
number of shares thereof and the voting and other powers, preferences and
relative, participating, optional or other rights of the Series A Convertible
Preferred Stock of the Corporation is hereby amended to exclude the merger by
and among Procept, Inc., Procept Acquisition Corp. and the Corporation from
constituting a Liquidation Event under the terms of the Series A Certificate of
Designations by striking out Section 3 thereof and by substituting in lieu of
said Section the following:
"3. Liquidation Preference. (a) In the event of a
(I) liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary, (ii) a sale of other disposition of all or substantially all of
the assets of the Corporation or (iii) any consolidation, merger (other than
pursuant to the Agreement and Plan of Merger dated as of June 4, 1996, among the
Corporation, XYX Acquisition Corp. and Binary Therapeutics, Inc. (the "BTI
Agreement") and the Agreement and Plan of Merger dated as of December 10, 1998
by and among Procept, Inc., Procept Acquisition Corp. and the Corporation, as
the same may be amended (the "Procept Agreement"), combination, reorganization
or other transaction in which the Corporation is not the surviving entity or the
shares of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into stock or securities of another
entity, cash and/or any other property (a "Merger Transaction") (clauses (I),
(ii) and (iii) being collectively referred to as a "Liquidation Event"), after
payment or provision for payment of debts and other liabilities of the
Corporation, the holders of the Series A Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether such assets are capital, surplus, or
earnings, before any payment or declaration and setting apart for payment of any
amount shall be made in respect
B-1
<PAGE>
of any Junior Stock, an amount equal to $260.00 per share plus an amount equal
to all declared and unpaid dividends thereon; provided, however, in the case of
a Merger Transaction, such $260.00 per share may be paid in cash, property
(valued as provided in Section 3(b) and/or securities (valued as provided in
Section 3(b)) of the entity surviving such Merger Transaction. In the case of
property or in the event that any such securities are restricted, the value of
such property or securities shall be determined by agreement between the
Corporation and a majority of the Series A Preferred Stock then outstanding. If
upon any Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Series A Preferred Stock shall be insufficient
to permit the payment to such shareholders of the full preferential amounts
aforesaid, then all of the assets of the Corporation to be distributed shall be
so distributed ratably to the holders of the Series A Preferred Stock on the
basis of the number of shares of Series A Preferred Stock held. A consolidation
or merger of the Corporation with or into another corporation, other than in a
transaction described in Section 3(a) above, shall not be considered a
liquidation, dissolution or winding up of the Corporation or a sale or other
disposition of all or substantially all of the assets of the Corporation and
accordingly the Corporation shall make appropriate provision to ensure that the
terms of this Certificate of Designations survive any such transaction. All
shares of Series A Preferred Stock shall rank as to payment upon the occurrence
of any Liquidation Event senior to the Common Stock as provided herein and,
unless the terms of such series shall provide otherwise, senior to all other
series of the Corporation's preferred stock.
(b) Any securities or other property to be delivered to the
holders of the Series A Preferred Stock pursuant to Section 3(a) hereof shall be
valued as follows:
(I) Securities not subject to an investment letter or other
similar restriction on free marketability:
(A) If traded on a securities exchange or on Nasdaq
(as defined below), or if actively traded
over-the-counter, the value shall be deemed to be
the Market Price (as defined below) of the
securities as of the third day prior to the date of
valuation.
(B) If there is no such active public market for
the securities, the value shall be the Fair Market
Value (as defined below) of the securities.
"Market Price" of a security shall mean the average Closing
Bid Price of such security, for thirty (30) consecutive
trading days, ending with the day prior to the date as of
which the Market Price is being determined.
"Fair Market Value" of any asset (including any security)
means the fair market value thereof as mutually determined
by the Corporation and the holders of a majority (measured
in terms of voting power) of the outstanding Series A
Preferred Stock.
B-2
<PAGE>
The "Closing Bid Price" for any security for each trading
day shall be the reported closing bid price of such security
on the national securities exchange on which such security
is listed or admitted to trading, or, if such security is
not listed or admitted to trading on any national securities
exchange, shall mean the reported closing bid price of such
security on the Nasdaq SmallCap Market or the Nasdaq
National Market System (collectively referred to as,
"Nasdaq") or, if such security is not listed or admitted to
trading on any national securities exchange or quoted on
Nasdaq, shall mean the reported closing bid price of such
security on the principal securities exchange on which such
security is listed or admitted to trading (based on the
aggregate dollar value of all securities listed or admitted
to trading) or, if such security is not listed or admitted
to trading on any other securities exchange, shall mean the
closing bid price in the over-the-counter market as
furnished by any NASD member firm selected from time to time
by the Corporation for that purpose.
"Trading day" shall mean a day on which the securities
exchange of NASDAQ used to determine the Closing Bid Price
is open for the transaction of business or the reporting of
trades or, if the Closing Bid Price is not so determined, a
day on which such securities exchange is open for the
transaction of business.
(ii) For securities for which there is an active public
market but which are subject to investment letter or other
restrictions on free marketability, the value shall be the
Fair Market Value thereof, determined by discounting
appropriately the Market Price thereof.
(iii) For all other securities, the value shall be the Fair
Market Value thereof.
If the holders of a majority of the Series A Preferred Stock and the Corporation
are unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
banking firm selected by the Board of the Directors of the Corporation and the
holders of a majority of the Series A Preferred Stock (or, if such selection
cannot be agreed upon promptly, or in any event within ten days, then such
valuation shall be made by a nationally recognized independent investment
banking firm selected by the American Arbitration Association in New York City
in accordance with its rules)."
3. The amendment of the Certificate of Designations herein
certified has been duly adopted at a meeting of the Board of Directors of the
Corporation (the "Board"), pursuant to authority granted to the Board by the
Certificate of Incorporation of the Corporation, as amended, to fix by
resolution or resolutions providing for the issue of any series the number of
shares included in such series and the designation, relative, powers,
preferences and rights, and the qualifications, limitations or restrictions of
such series.
B-3
<PAGE>
IN WITNESS WHEREOF, the Corporation has cause this
Certificate of Amendment of Certificate of Designations to be signed by a duly
authorized officer this ___day of December, 1998.
PACIFIC PHARMACEUTICALS, INC.
By: _________________________
Anil Singhal
Interim Chief Executive Officer
B-4
<PAGE>
ANNEX C
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
SECTION 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss. ss. 251, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
C-1
<PAGE>
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and case
in lieu of fractional shares or fractional depository receipts described in the
forgoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
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(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
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shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trail upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each
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such stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the surrender to
the corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this State
or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by
Ch. 120, L. '97, eff. 7-1-97.)
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ANNEX D
January 21, 1999
Committee of Independent Directors
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Members of the Committee of Independent Directors:
We understand that Procept, Inc. ("Procept" or the "Company") and
Pacific Pharmaceuticals, Inc. ("Pacific") plan to enter into an Agreement and
Plan of Merger dated December 10, 1998 (the "Agreement") pursuant to which a
newly-formed subsidiary of Procept will merge with and into Pacific and, upon
effectiveness of the merger, each holder of common stock of Pacific will receive
in exchange for each share of common stock of Pacific 0.11 shares of common
stock of Procept (the "Proposed Transaction" and the "Exchange Ratio",
respectively). The terms and conditions of the Proposed Transaction are set
forth in more detail in the Agreement.
We have been requested by the Committee of Independent Directors of
the Board of Directors of the Company (the "Committee") to render our opinion
with respect to the fairness to the Company as a corporate entity, of the
consideration - implied by the Exchange Ratio - to be paid by the Company in
connection with the Proposed Transaction, from a financial point of view. We
have not been requested to opine as to, and our opinion does not in any manner
address, the Company's underlying business decision to proceed with or effect
the Proposed Transaction.
In arriving at our opinion, we have, among other things:
(i) reviewed the Agreement and the Joint Proxy
Statement/Prospectus on Form S-4;
(ii) reviewed Procept's Annual Reports to Shareholders and
Procept's Annual Reports on form 10-K for the two years
ended December 31, 1997 and Procept's Quarterly Reports on
Form 10-Q for each of the three months ended March 31, 1998,
June 30, 1998, and September 30, 1998, and Pacific's Annual
Reports to Shareholders and Pacific's Annual Reports on Form
10-K for the two years ended March 31, 1998 and Pacific's
Quarterly Reports on Form 10-Q for each of the three months
ended June 30, 1998, and September 30, 1998;
(iii) reviewed certain internal financial analyses and estimates
of future financial performance for Procept and Pacific
prepared by their respective management;
(iv) conducted discussions with senior members of the management
of both Procept and Pacific concerning the financial
condition, business operations, financial forecasts, and
prospects of their respective companies;
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(v) reviewed the reported price and volume trading activity for
Procept common stock and Pacific common stock;
(vi) compared certain financial results and stock market
information of Procept and Pacific with those of certain
publicly traded companies which were deemed by us to be
reasonably similar to Procept and Pacific, respectively;
(vii) analyzed the theoretical valuation using an unleveraged
discounted cash flow analysis based on stand-alone income
statement projections prepared by the management of each
company;
(viii) reviewed the financial terms of certain recent merger and
acquisition transactions which involved companies that were
deemed by us to be reasonably similar to Procept and
Pacific; and
(ix) performed such other financial studies and analyses as we
deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information used by us
without assuming any responsibility for independent verification of such
information and have further relied upon the assurances of the management of
both the Company and Pacific that they are not aware of any facts or
circumstances that would make such information inaccurate or misleading. In
arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of the Company or Pacific and have not made or
obtained any evaluations or appraisals of the assets or liabilities of the
Company or Pacific. Our opinion necessarily is based upon market, economic and
other conditions as they exist on, and can be evaluated as of, the date of this
letter.
Based upon and subject to the foregoing, we are of the opinion as of
the date hereof that, from a financial point of view, the consideration, which
is implied by the Exchange Ratio, to be paid by the Company in the Proposed
Transaction is fair to the Company as a corporate entity.
This opinion is for the use and benefit of the Committee and is
rendered to the Committee in connection with its consideration of the Proposed
Transaction. This opinion is not intended to be and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Proposed Transaction.
Very truly yours,
OSCAR GRUSS & SON INCORPORATED
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January 21, 1999
PRIVATE AND CONFIDENTIAL
The Board of Directors
Pacific Pharmaceuticals, Inc.
6730 Mesa Ridge Road, Suite A
San Diego, CA 92121
Gentlemen:
Josephthal & Co. Inc. ("Josephthal") understands that Procept, Inc., a
Delaware corporation ("Procept"), its wholly owned subsidiary, Procept
Acquisition Corp., a Delaware corporation ("PAC"), and Pacific Pharmaceuticals,
Inc., a Delaware corporation ("Pacific"), are considering a proposed transaction
in which Pacific will merge with and into PAC (the "Merger") pursuant to the
Agreement and Plan of Merger dated December 10, 1998 (the "Agreement") by and
among Pacific, PAC and Procept. As more specifically set forth in the Agreement,
and subject to the terms and conditions thereof, each holder of common stock,
$0.02 par value, of Pacific (the "Common Shares") and preferred stock, $25.00
par value, of Pacific (the "Preferred Shares" and, together, the "Shares")
issued and outstanding immediately prior to the record date of the Merger (other
than Common Shares held as treasury shares by Pacific or its subsidiaries) shall
by virtue of the Merger receive for each of Pacific's Common Shares (including
Common Shares issuable upon conversion of outstanding Preferred Shares) 0.11 of
Procept's common stock (the "Consideration"). Furthermore, the holders of
Preferred Stock will receive additional contractual rights and Procept will
assume the assets and liabilities of Pacific. Unless otherwise defined herein,
capitalized terms used herein shall have the meaning ascribed to such terms in
the Agreement.
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Josephthal further understands that prior to the Effective Time Pacific will
have completed the merger by and among Pacific, its wholly owned subsidiary, XYX
Acquisition Corp., a Delaware corporation ("XYX"), and Binary Therapeutics,
Inc., a Delaware corporation ("BTI" and the "BTI Merger"). Josephthal has not
been involved in forming XYX or in the BTI Merger and has not assumed any
responsibility for making or obtaining an independent evaluation or appraisal of
BTI's assets or liabilities.
You have requested our opinion as to the fairness of the consideration to be
received by the holders of Pacific Shares from a financial point of view. As you
know, we have not been requested to explore any alternatives to the Merger. In
addition, we were not requested to nor did we make any recommendation to the
Pacific Board of Directors regarding the form or amount of such consideration.
In conducting our analyses and arriving at the opinion expressed
herein, we have reviewed those materials and considered those financial and
other factors that we deemed relevant under the circumstances, including, among
others, the following: (i) the Agreement; (ii) a draft of Pacific's Joint Proxy
Statement/Prospectus Form S-4 dated December 29, 1998; (iii) certain historical
financial, operating and other data that are publicly available or were
furnished to us by Pacific and Procept including, but not limited to: (a)
financial projections prepared by the managements of Pacific and Procept; (b)
Pacific's Form 10-K for the two years ended and as of March 31, 1998; (c)
Procept's Form 10-K for the two years ended as of December 31, 1997; (d)
Pacific's Form 10-Q for the periods ended as of June 30, 1998 and September 30,
1998; and (e) Procept's Form 10-Q for the periods ended as of March 31, 1998,
June 30, 1998, and September 30, 1998; (f) Pacific's and Procept's internally
generated operating reports; (iv) publicly available financial, operating and
stock market data for companies engaged in businesses we deemed comparable to
Pacific and Procept; (v) publicly available financial, operating and stock
market data for companies in the biotechnology industry which have been involved
in a recent merger or acquisition; (vi) reported prices and trading activity for
the Common Stock of Pacific and Procept; and (vii) such other factors as we
deemed appropriate under the circumstances. We have met with senior officers of
Pacific and Procept to discuss their respective businesses and their estimates
of future financial performance, and such other matters as we believed relevant.
Our opinion is solely and necessarily based on economic, financial and market
conditions as they exist and can be evaluated as of the date hereof. We assume
no responsibility to update or revise our opinion upon circumstances or events
occurring after the date hereof.
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In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided us or publicly available and have neither
attempted independently to verify nor assumed responsibility for verifying any
of this information. We have not conducted a physical inspection of Pacific's or
Procept's properties or facilities, nor have we made or obtained or assumed any
responsibility for making or obtaining any independent evaluations or appraisals
of any of Pacific's or Procept's assets or liabilities. Furthermore, we express
no opinion as to the price or trading ranges at which the Pacific or Procept
common stock will trade after the date of the opinion. We have assumed that the
financial analyses have been prepared on a good faith reasonable basis
reflecting the best currently available estimates and judgments of both
Pacific's and Procept's managements. We have also assumed that the Conditions
Precedent described in Sections 6, 7 and 8 of the Agreement will be completed or
satisfied as the case may be. We do not perform legal services or render legal
advice. Our opinion necessarily is based upon conditions as they exist and can
be evaluated on the date hereof and we assume no responsibility to update or
revise our opinion based upon circumstances or events occurring after the date
hereof. Our opinion is limited to the fairness, from a financial point of view,
of the consideration to the holders of Pacific Shares in the Merger. Our opinion
does not address the BTI Merger or the potential future trading value or trading
volume of Procept nor does it address in any way Pacific's underlying business
decision to effect the Merger or the BTI Merger.
Josephthal has been retained by Pacific to render this opinion and
provide other financial advisory services, and will receive fees and other
consideration for these services. In addition, Pacific has agreed to indemnify
Josephthal for certain liabilities arising out of our engagement. In the
ordinary course of our business, Josephthal may actively trade the Common Shares
for its own account and for the accounts of customers, and, accordingly, may at
any time hold a long or short position in these securities.
This opinion is solely for the use of the Board of Directors of Pacific
and is not to be publicly-disclosed, used, excerpted, reproduced or
disseminated, quoted or referred to at any time, in any manner or for any
purpose, without the prior written consent of Josephthal provided that Pacific
may include this opinion as an annex to the Form S-4 to be filed with the
Securities and Exchange Commission and delivered to the stockholders of Pacific.
This opinion does not constitute a recommendation to any holder of Pacific
Shares as to how any such stockholder should vote on any aspect of the Merger
nor does this opinion address the relative merits of the Merger or any other
transactions or business strategies discussed by the Board of Directors of
Pacific as alternatives to the Merger or the decision of the Board of Directors
of Pacific to proceed with the Merger.
Based upon and subject to the foregoing it is our opinion that, as of the date
hereof, the consideration to be received by the holders of Pacific Shares in the
Merger is fair from a financial point of view.
Very truly yours,
JOSEPHTHAL & CO. INC.
Private and Confidential
January 21, 1999
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PROCEPT, INC.
840 Memorial Drive
Cambridge, Massachusetts 02139
(617) 491-1100
Proxy for Special Meeting of Shareholders
to be held on March 15, 1999
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints John F. Dee and Lynnette C. Fallon, and
each of them, the true and lawful attorneys and proxies, with full power of
substitution in the name, place and stead of the undersigned to vote at a
Special Meeting of Shareholders (the "Meeting") of Procept, Inc. (the "Company")
to be held on March 15, 1999 at the offices of the Company at 840 Memorial
Drive, Cambridge, Massachusetts, or at any adjournment or postponement thereof,
in the manner designated below, all of shares of the Company's common stock that
the undersigned would be entitled to vote if personally present upon the
following matters.
1. Proposal to approve the issuance of approximately 4,257,728 shares of the
Company's common stock in connection with and as a result of the
acquisition of Pacific Pharmaceuticals, Inc. ("Pacific") pursuant to and
in connection with the Agreement and Plan of Merger dated as of
December 10, 1998, as amended.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, upon such other business as may properly come before
the Meeting or any adjournment or postponement thereof.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTION GIVEN ABOVE. IF NO
INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
[NAME OF SHAREHOLDER]
Please sign and date as your name appear at
the left and return in the enclosed envelope.
When shares are held subject to community
property laws, both spouses should sign.
When signing as an attorney, executor,
administrator, trustee, guardian, or
corporate officer, please indicate the
capacity in which signing.
Date: _________________ __, 1999
________________________________
Signature
<PAGE>
PACIFIC PHARMACEUTICALS, INC.
6730 Mesa Ridge Road, Suite A
San Diego, California 92121
(619) 550-3900
Proxy for Special Meeting of Shareholders
to be held at 10:00 a.m. on March 16, 1999
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Anil Singhal and Jack Halperin, and
each of them, the true and lawful attorneys and proxies, with full power of
substitution in the name, place and stead of the undersigned to vote at a
Special Meeting of Shareholders (the "Meeting") of Pacific Pharmaceuticals, Inc.
(the "Company") to be held on March 16, 1999 at the offices of Patterson,
Belknap, Wells & Tyler LLP, 1133 Avenue of the Americas, 24th Floor, New York,
New York, or at any adjournment or postponement thereof, in the manner
designated below, all shares of the Company's Common Stock (the "Common Stock")
and Series A Convertible Preferred Stock (the "Preferred Stock") that the
undersigned would be entitled to vote if personally present upon the following
matters.
1. To amend the Company's Certificate of Designations of Series A
Convertible Preferred Stock (the "Certificate of Designations") to
exclude the merger by and among Procept, Inc. ("Procept"), Procept
Acquisition Corp. and the Company from constituting a "Liquidation
Event" under the terms of the Certificate of Designations.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve, conditioned on approval of the amendment to the
Certificate of Designations, the merger of a wholly owned subsidiary
of Procept with and into the Company by approving the Agreement and
Plan of Merger, dated as of December 10, 1998, by and among Procept,
Procept Acquisition Corp. and the Company, which provides that the
outstanding Common Stock and Preferred Stock will be converted into
the right to receive shares of Procept Common Stock and the Company
would become a wholly owned subsidiary of Procept. A total of
2,755,000 shares of Procept Common Stock will be issued to the holders
of Common Stock and Preferred Stock in the merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To consider and act upon such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTION GIVEN ABOVE. IF NO
INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
[NAME OF SHAREHOLDER]
Please sign and date as your name appear
at the left and return in the enclosed
envelope. When shares are held subject
to community property laws, both spouses
should sign. When signing as an
attorney, executor, administrator,
trustee, guardian, or corporate officer,
please indicate the capacity in which
signing.
Date: _________________ __, 199_
_______________________________________
Signature
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law grants Procept the power to
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 a director, officer, employee or agent of Procept, or is or was
serving at the request of Procept as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgements, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Procept,
and with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful, provided, however, no indemnification shall
be made in connection with any proceeding brought by or in the right of Procept
where the person involved is adjudged to be liable to Procept except to the
extent approved by a court. ARTICLE EIGHTH of Procept's Restated Certificate of
Incorporation as currently in effect provides that Procept shall, to the fullest
extent permitted by the Delaware General Corporation Law, 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 by
reason of the fact that he is or was, or has agreed to become, a director or
officer of Procept, or is or was serving, or has agreed to serve, at the request
of Procept, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided for in ARTICLE EIGHTH is expressly not exclusive of any
other rights to which those seeking indemnification may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and shall inure to the benefit of the heirs, executors and administrators of
such persons. ARTICLE EIGHTH permits the Board of Directors to authorize the
grant of indemnification rights to other employees and agents of Procept and
such rights may be equivalent to, or greater or less than, those set forth in
ARTICLE EIGHTH.
Article V, Section 1 of Procept's By-Laws provides that Procept shall have the
power to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Procept, or is or was serving at the
request of Procept, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against and incurred by such person
in any such capacity.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law, ARTICLE
NINTH of Procept's Restated Certificate of Incorporation eliminates a director's
personal liability for monetary damages to Procept and its stockholders for
breaches of fiduciary duty as a director, except in circumstances involving a
breach of a director's duty of loyalty to Procept or its stockholders, acts or
omissions not in good faith, intentional misconduct, knowing violations of the
law, self-dealing or the unlawful payment of dividends or repurchase of stock.
Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Description
2.1 Agreement and Plan of Merger dated December 10, 1998 between
Procept, Inc., Procept Acquisition Corp. and Pacific
Pharmaceuticals, Inc. (the "Merger Agreement") and Amendment to
the Merger Agreement dated February 8, 1999. Included as Annex A
and Annex A-1 hereto, respectively.
3.1 Restated Certificate of Incorporation of Procept, Inc. Filed as
Exhibit 3.1 to Procept's Form 10-Q for the quarter ended June 30,
1997, Commission File No. 0-21134, and incorporated herein by
reference.
3.2 Certificate of Designation of Series A Convertible Preferred
Stock. Filed as Exhibit 3.2 to Procept's Form 10-Q for the quarter
ended June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
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3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of Procept, filed with the Secretary of State of
Delaware on October 7, 1997, to be effective as of October 14,
1997. Filed as Exhibit 3.1 to Procept's Form 10-Q for the quarter
ended September 31, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
3.4 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation, filed with the Secretary of State of Delaware on
May 19, 1998, effective as of June 1, 1998. Filed as Exhibit 4.4
to Procept's Registration Statement on Form S-8, Commission File
No. 333-66885, and incorporated herein by reference.
3.5 By-laws of Procept, Inc. Filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.
4.6 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit
4.2 to Procept's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.
4.7 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated September 11, 1992, issued to Comdisco, Inc. Filed as
Exhibit 4.3 to Procept's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.8 Warrant to Purchase Common Stock dated January 5, 1993, issued to
Tucker Anthony Incorporated. Filed as Exhibit 4.6 to Procept's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.
4.9 Warrant to Purchase Common Stock dated as of February 17, 1994,
issued to D. Blech & Company, Incorporated. Filed as Exhibit 4.6
to Procept's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.
4.10 Warrant Agreement dated February 17, 1994 between the Company and
D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to
Procept's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.
4.11 Warrant to Purchase Common Stock dated as of April 1, 1994, issued
to Hambrecht & Quist Guaranty Finance, L.P. Filed as Exhibit 4 to
Procept's Form 10-Q for the quarter ended March 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.
4.12 Warrant to Purchase Common stock dated as of September 11, 1995,
issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to
Procept's Registration Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by reference.
4.13 Form of Warrant Agreement between the Company and Commonwealth
Associates. Filed as Exhibit 4.11 to Procept's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
4.14 Form of Warrant to Purchase Common Stock dated as of May 17, 1996,
and Schedule of Holders. Filed as Exhibit 4.11 to Procept's Form
10-K for the year ended December 31, 1996, Commission File No. 0-
21134, and incorporated herein by reference.
4.15 Warrant to Purchase Common Stock dated as of January 6, 1997,
issued to Furman Selz LLC. Filed as Exhibit 4.13 to Procept's Form
10-K for the year ended December 31, 1996, Commission File No. 0-
21134, and incorporated herein by reference.
II-2
<PAGE>
4.16 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to Procept's Form 10-Q for the
quarter ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
4.17 Form of Subscription Agreement between Procept and Subscribers of
Procept Common Stock listed on Schedule of Subscribers. Filed as
Exhibit 4.17 to Procept's Registration Statement on Form S-3,
Commission File No. 333-51245, and incorporated herein by
reference.
4.18 Form of Warrant to Purchase Common Stock dated April 9, 1998,
including Schedule of Holders. Filed as Exhibit 4.18 to Procept's
Registration Statement on Form S-3, Commission File No. 333-51245,
and incorporated herein by reference.
4.19 Form of Unit Purchase Option, including Schedule of Holders. Filed
as Exhibit 4.2 to Procept's Form 10-Q for the quarter ended June
30, 1998, Commission File No. 0-21134, and incorporated herein by
reference.
5.1 Opinion of Palmer & Dodge LLP. Filed herewith.
10.1* The 1998 Equity Incentive Plan, amending and restating the 1989
Stock Plan. Previously filed.
10.2* The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 4.2 to Procept's Form 10-Q for the quarter ended June 30,
1998, Commission File No. 0-21134, and incorporated herein by
reference.
10.3 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.
10.4 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.
10.5 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.
10.6 Registration Rights Agreement dated January 6, 1997 between the
Company and Furman Selz LLC. Filed as Exhibit 10.36 to Procept's
Form 10-K for the year ended December 31, 1996, Commission File
No. 0-21134, and incorporated herein by reference.
10.7 Placement Agency Agreement dated October 26, 1997 between the
Company and Paramount Capital, Inc. Filed as Exhibit 10.40 to
Procept's Form 10-K405 for the year ended December 31, 1997,
Commission File No. 0- 21134, and incorporated herein by
reference.
10.8* Key Employee Confidentiality, Inventions, and Non-Competition
Agreement dated March 3, 1998 between Procept, Inc. and John F.
Dee. Previously filed.
10.9* 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.
10.10* 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.
II-3
<PAGE>
10.11* Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Mark C. Rogers, M.D. Previously filed.
10.12* Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Elliott H. Vernon. Previously filed.
10.13* Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Michael S. Weiss. To be filed by
amendment.
10.14* 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.
10.15* Form of Indemnification Agreement between Procept, Inc. and its
Directors. Previously filed.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24* Employment Offer Letter to Dr. Nigel J. Rulewski from the Company
dated September 3, 1998. Previously filed.
II-4
<PAGE>
10.25* Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Mark C. Rogers, M.D.
Previously filed.
10.26* Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Elliott H. Vernon.
Previously filed.
10.27* Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Michael S. Weiss.
Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
23.2 Consent of Palmer & Dodge LLP. Included in Exhibit 5.1 hereto.
23.3 Consent of Deloitte & Touche LLP. Filed herewith.
23.4 Consent of Deloitte & Touche LLP. Filed herewith.
24.1 Power of Attorney. Previously filed.
- -----------
*Indicates management contracts or compensatory plans, contracts or arrangements
in which executive officers or directors of Procept participate.
Item 22. Undertakings
(a) Procept hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any reason or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) Procept hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11, or 13 of this form, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(c) Procept hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Procept pursuant to the foregoing provisions, or otherwise, Procept
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Procept of expenses incurred or paid
by a director, officer, or controlling person of Procept in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, Procept will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, the Commonwealth of
Massachusetts, on February 9, 1999.
PROCEPT, INC.
By: /s/ John Dee
-------------------------------------
John Dee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities indicated on the dates indicated
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John F. Dee President and Chief Executive Officer February 9, 1999
- --------------------------- (Principal Executive Officer and Principal
John F. Dee Financial and Accounting Officer)
* Chairman of the Board and a Director February 9, 1999
- ---------------------------
Michael S. Weiss
* Director February 9, 1999
- ---------------------------
Zola P. Horovitz
* Director February 9, 1999
- ---------------------------
Max Link
* Director February 9, 1999
- ---------------------------
Mark C. Rogers
*
- --------------------------- Director February 9, 1999
Elliott H. Vernon
*By: /s/ John F. Dee
----------------------
John F. Dee, Attorney-in-Fact
</TABLE>
PALMER & DODGE LLP
One Beacon Street, Boston, MA 02108-3190
TELEPHONE: (617) 573-0100 FACSIMILE: (617) 227-4420
February 8, 1999
Procept, Inc
840 Memorial Drive
Cambridge, Massachusetts 02139
We are rendering this opinion in connection with the Registration
Statement on Form S-4, as amended, (the "Registration Statement") filed by
Procept, Inc. (the "Company") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, on or about the date hereof. The
Registration Statement relates to (i) 2,755,000 shares of the Company's Common
Stock, $0.01 par value (the "Merger Shares"), to be issued in connection with
the merger of Procept Acquisition Corp. ("Merger Sub") with and into Pacific
Pharmaceuticals, Inc. ("Pacific") pursuant to the Agreement and Plan of Merger
dated as of December 10, 1998, as amended, (the "Agreement") among the Company,
Pacific and Merger Sub and (ii) 1,453,796 shares of the Company's Common Stock
(the "Anti-Dilution Shares" together with the Merger Shares, the "Shares") to be
issued as a result of the Merger to existing stockholders of the Company and to
former holders of Pacific preferred stock pursuant to contractual anti-dilution
rights of such stockholders.
We have acted as your counsel in connection with the preparation of the
Registration Statement and are familiar with the proceedings taken by the
Company in connection with the authorization and issuance of the Shares. We have
examined such documents as we consider necessary to render this opinion.
Based upon the foregoing, we are of the opinion that upon issuance of
(i) the Merger Shares in accordance with the Agreement and (ii) the
Anti-Dilution Shares pursuant to certain contractual rights, the Shares will be
duly authorized, validly issued, fully paid and nonassessable.
We hereby consent to the use of our name under the caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Palmer & Dodge LLP
PROCEPT, INC.
EXTENSION TO THE BOARD OF DIRECTORS
CONSULTING AND CONFIDENTIALITY AGREEMENT
THIS EXTENSION TO THE BOARD OF DIRECTORS CONSULTING AND CONFIDENTIALITY
AGREEMENT (the "Extension") is made as of this 3rd Day of December, 1998 (the
"Effective Date") by and between PROCEPT, INC., a Delaware corporation (the
"Company") and Michael S. Weiss (the "Consultant").
WHEREAS, the Company and the Consultant have entered into a Consulting and
Confidentiality Agreement dated as of January 1, 1998 (the "Agreement");
WHEREAS, the Company and the Consultant wish to extend the Initial Term for an
additional period of one year(s) commencing January 1, 1999 and ending on
December 31, 1999 (the "Extension Term");
NOW, THEREFORE, the Company and the Consultant, in consideration of the mutual
promises contained herein, hereby agree as follows:
1. DEFINITIONS
-----------
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Agreement.
2. EXTENSION
---------
2.1 Engagement. The Company hereby retains the Consultant and the
Consultant hereby agrees to perform the services described in
Sections 2.1 and 2.2 of the Agreement for the Extension Term.
2.2 Incorporation of Agreement Provisions. Except as modified herein,
the Company and Consultant agree that all of the provisions of
the Agreement are incorporated herein and shall apply to the
Consultancy during the Extension Term with the same force and
effect as if set forth herein.
3. REPRESENTATION, WARRANTIES AND COVENANTS
----------------------------------------
Consultant hereby represents, warrants and covenants to the Company that
the Consultant is under no contractual or other restriction or
obligation which is inconsistent with his execution of this Extension or
the performance of his duties hereunder and that, during the Extension
Term, Consultant will not enter into any agreement either written or
oral in conflict with this Extension.
The Consultant and the Company have executed and delivered this Extension as a
document under seal as of the Effective Date.
PROCEPT, INC. CONSULTANT:
By: /s/ John F. Dee /s/ Michael S. Weiss
------------------------------ ---------------------------------
John F. Dee, President and CEO Michael S. Weiss
SSN:
-------------------------
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the registration
statement of Procept, Inc. (the "Company") on Form S-4 (File No. 333-69821) of
our report, which includes an explanatory paragraph related to the restatement
of the financial statements for the year ended December 31, 1997, dated June 15,
1998, on our audits of the financial statements of the Company as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997. We also consent to the reference to our firm under the caption
"Experts".
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement of
Procept, Inc. on Form S-4 (File No. 333-69121) of our report dated July 8, 1998,
appearing in the Annual Report on Form 10-K of Pacific Pharmaceuticals, Inc. for
the year ended March 31, 1998 and to the reference to us under the heading
"Experts" in the Joint Proxy Statement/Prospectus, which is a part of this
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 8, 1999
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement of
Procept, Inc. on Form S-4 (File No. 333-69821) of our report on Binary
Therapeutics, Inc. dated December 18, 1998 appearing in the Joint Proxy
Statement/Prospectus and to the reference to us under the heading "Experts" in
the Joint Proxy Statement/Prospectus, which is part of this Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 8, 1999
