SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-21134
Procept, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-2893483
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
840 Memorial Drive, Cambridge, Massachusetts 02139
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(Address of principal executive offices) (zip code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
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(Title of Class)
Registrant's telephone number, including area code: (617) 491-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1999 was $14,989,322.
The number of shares of the registrant's common stock outstanding as of March
25, 1999 was 7,296,449.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed
with the Securities and Exchange Commission relative to the
1999 Annual Meeting of Shareholders are incorporated by reference
into Part III of this report.
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PART I
ITEM 1. BUSINESS.
CORPORATE SUMMARY
Procept, Inc., together with its subsidiaries (collectively Procept or the
Company) is a biopharmaceutical company currently engaged in the development and
commercialization of novel drugs based on biotechnological research. On March
17, 1999, Procept consummated its merger with Pacific Pharmaceuticals, Inc.
(Pacific), in which Pacific became a subsidiary of Procept. The combined company
will have a product portfolio with a focus in anti-infectives and oncology,
including three compounds in human clinical trials that may be candidates for
accelerated regulatory approval. Procept continues its search to acquire or
in-license drug development candidates to expand its pipeline of potential
biopharmaceutical products.
The lead product candidate from Procept's AIDS program, PRO 2000 Gel, is a
vaginal microbicide designed to prevent the sexual transmission of human
immunodeficiency virus (HIV) and other sexually transmitted disease (STD)
pathogens. Procept recently announced that PRO 2000 Gel was shown to protect
female monkeys from infection by an AIDS-causing virus in a small study
conducted by the British Medical Research Center (MRC). In earlier studies, PRO
2000 Gel protected mice from genital herpes simplex virus type 2 (HSV-2)
infection. Laboratory studies have also shown that the product is active against
Chlamydia trachomatis and Neisseria gonorrhea, two other important STD
pathogens. These promising results offer hope that PRO 2000 Gel could protect
women from HIV and STD infections; they also provide support for conducting
Phase II and III human clinical studies on an accelerated basis to demonstrate
the safety and protective efficacy of the product. Two Phase I clinical trials,
completed in 1997, showed that daily intravaginal doses of 4% PRO 2000 Gel are
safe and well tolerated in healthy, sexually abstinent women. One of these
studies was supported by the British MRC. A larger study to evaluate the safety
and acceptability of PRO 2000 Gel in healthy, sexually active women and in
HIV-infected women is scheduled to begin shortly in the United States and South
Africa, with support from National Institute of Allergy and Infectious Diseases
(NIAID). Phase II safety studies are also under discussion with the British MRC.
Procept believes that safety data from these trials, coupled with the promising
animal protection results, will make PRO 2000 Gel an attractive candidate for
testing in a large, government-funded Phase III clinical trial designed to
demonstrate safety and protective efficacy.
Pacific and its majority owned subsidiary, BG Development Corp. (BGDC), have
three cancer therapies that are candidates for fast-track regulatory approval,
two of which are in the human clinical phase of development under Food and Drug
Administration (FDA) Investigational New Drug (IND) applications. These
therapies include:
o O(6)-benzylguanine (BG): a chemosensitizer to enhance chemotherapy;
o Boronated Protoporphyrin Compound (BOPP) for use in photodynamic therapy
(PDT); and
o A cancer immunotherapy for the treatment of metastatic cancer.
BG is a biomodulator that may break down tumor resistance to a significant class
of commonly used chemotherapeutic agents known as O(6)-alkylating agents. BG
inactivates tumor O(6)-alkylguanine-DNA alkyltransferase (AGT), a tumor DNA
repair protein, which interferes with the effectiveness of some alkylating
agents. Human clinical data show that a correlation exists between low levels of
AGT and responsiveness to some treatments. Preclinical animal data demonstrate
that treatment with BG increased the anti-tumor activity of some alkylating
agents. A
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Phase I clinical trial of BG in brain cancer patients has been completed at the
Duke University Medical Center (Duke University). This study established the
dose of BG at which the levels of tumor AGT protein are depleted by more than
90%. BG is being studied in three other Phase I trials to determine the optimum
dose of the O(6)-alkylating agent BCNU that can be combined with the previously
determined effective dose of BG. The trials are being sponsored by the National
Cancer Institute (NCI) of the NIH under a Cooperative Research and Development
Agreement (CRADA) executed between the NCI and Pacific. Following the completion
of these trials, a Phase II development program will be conducted in accordance
with the CRADA. The Company believes that BG has the potential to expand the
indications for O(6)-alkylating agents to other cancers, such as colon,
prostate, and breast, which are currently considered unresponsive to those
cancer drugs.
The proprietary PDT compound, BOPP, is currently in a Phase I study in brain
cancer patients at the Royal Melbourne Hospital, Australia under a United States
IND application filed with the FDA in March 1998. PDT is a technology which
might be suitable for use in a variety of disorders including cancers,
cardiovascular and gastrointestinal disorders, and pre-cancerous conditions such
as Barrett's esophagus and cervical dysplasia, but are as yet not proven. Light
is used to activate a photosensitizing drug selective to tumor cells, resulting
in tumor cell death. The Company believes that BOPP's apparent degree of
selectivity to tumor cells and low light activation requirements are a
significant competitive advantage and represent attractive properties for use in
PDT technology.
The cancer immunotherapy program is based on a unique treatment designed to
elicit an immune response against the cancer tumor. The treatment consists of
the co-injection of an infrared absorbing dye and an immunoadjuvant directly
into a tumor, followed by illumination with an infrared laser. Presentation of
preclinical data at a pre-IND meeting with the FDA resulted in an accelerated
timetable to enter Phase I/II efficacy clinical trials. Preclinical studies to
date have demonstrated a prolonged immune response resulting in the clearance of
metastatic tumor. Rechallenge of surviving animals with tumor has resulted in
tumor rejection in 100% of the tested survivors.
As a key component of its new corporate strategy, Procept continues to search
for additional in-licensing and acquisition candidates in the human clinical
phase of development. The Company will manage these technologies through
clinical development and regulatory approval to position them for successful
commercialization and/or corporate partnerships.
DRUG DEVELOPMENT PROGRAMS
PRO 2000 GEL: A MICROBICIDE TO PREVENT HIV AND STD INFECTION
PRO 2000 Gel is a topical microbicide designed to prevent the sexual
transmission of HIV and other STD pathogens.
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. In 1998, the HIV epidemic continued
with an estimated 5.8 million new infections worldwide. In addition, The Centers
for Disease Control estimates that there are 330 million new cases of other STDs
each year worldwide. Despite years of effort, an effective HIV vaccine remains
elusive. 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
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can use to protect themselves. Development of topical microbicides is a high
priority for both the United States government and international agencies.
Procept believes that its proprietary antiviral compound PRO 2000 Gel is ideally
suited for use as a topical microbicide. PRO 2000 was shown in laboratory
studies to be effective at preventing HIV infection of cultured T cells,
macrophages, and dendritic cells (dendritic cells are believed to be the first
cells infected during sexual transmission). PRO 2000 showed high activity
against HIV strains from both the developed and developing world; the virus did
not develop resistance to the compound even after prolonged exposure.
Preclinical studies also demonstrate that PRO 2000 is active against other STD
agents including HSV-2 and Chlamydia trachomatis. 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. In preclinical irritation studies, PRO 2000 Gel was shown
to be much safer than the marketed vaginal spermicide containing nonoxynol-9. In
other preclinical studies, PRO 2000 Gel was shown to be non-mutagenic,
non-sensitizing and compatible with latex condoms.
In the last year, collaborators at the Children's Hospital Medical Center,
Cincinnati, showed that vaginally applied PRO 2000 Gel can protect mice
completely from vaginal HSV infection. Moreover, unlike many other agents, PRO
2000 Gel provided significant protection even when applied up to an hour before
exposure to the virus. These results, which were presented at the XII World AIDS
Conference in Geneva, provide greater confidence that PRO 2000 Gel will prevent
STDs in humans. Genital herpes lesions are a significant public health problem
and are believed to promote HIV infection; therefore, preventing the
transmission of herpes may assist in the reduction of HIV infection.
The recently completed monkey study extends these results by showing that PRO
2000 Gel can also protect animals from infection by an HIV-like virus. The
hybrid simian/human immunodeficiency virus (SHIV) used in the study contains an
HIV envelope and a simian immunodeficiency virus (SIV) core, which allows it to
infect monkeys. Because it contains HIV elements, the use of SHIV rather than
SIV may provide a better indication of PRO 2000 Gel's potential effectiveness
against the human virus.
These promising results support accelerated human clinical evaluation of PRO
2000 Gel. Two Phase I clinical trials, completed in 1997, showed that daily
intravaginal doses of 4% PRO 2000 Gel were safe and well tolerated in healthy,
sexually abstinent women. One of these studies was supported by the MRC. A
larger study to evaluate the safety and acceptability of PRO 2000 Gel in
healthy, sexually active women and in HIV-infected women is scheduled to begin
shortly in the United States and South Africa, with support from NIAID, a unit
of the NIH. Phase II safety studies are also under discussion with the MRC.
Procept believes that safety data from these trials, coupled with the promising
animal protection results, will make PRO 2000 Gel an attractive candidate for
testing in a large, government-funded Phase III clinical trial designed to
demonstrate safety and protective efficacy.
The Company holds two issued patents on the use of PRO 2000 Gel to prevent HIV
infection. Procept recently announced that it has received two Notices of
Allowance from the United States Patent and Trademark Office relating to PRO
2000, the Company's lead anti-infective drug candidate. One patent contains
composition-of-matter claims covering PRO 2000 and similar compounds, while the
other covers the use of a PRO 2000-based vaginal gel formulation for the
prevention of pregnancy. A similar contraception patent was independently
allowed in South Africa. Additional international patent applications have been
filed.
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PACIFIC SUBSIDIARY
On March 17, 1999, Procept consummated its merger with Pacific, in which Pacific
became a subsidiary of Procept. Pacific is engaged primarily in the development
and commercialization of medical products based on biotechnological research
regarding the treatment and detection of cancer.
O(6)-BENZYLGUANINE (BG): A CHEMOSENSITIZER TO ENHANCE CHEMOTHERAPY
Pacific's majority owned subsidiary, BGDC, holds an exclusive worldwide license
from Pennsylvania State University (Penn State) and others for BG, a series of
related compounds and a gene therapy that Procept believes will enhance the
effectiveness of a class of currently used chemotherapeutic agents
(O(6)-alkylators).
BG and related compounds are small molecules for intravenous administration in
the treatment of cancer. Procept believes BG to be capable of destroying the
resistance of cancer cells to a class of chemotherapeutic agents,
O(6)-alkylating agents. Procept 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 O(6)-alkylating agents, because the DNA
repair protein, O(6)-alkylguanine-DNA alkyltransferase (AGT), protects tumor
cells by repairing the tumor cell DNA. Procept believes that BG inactivates the
AGT protein in a variety of cancers thereby overcoming resistance to the
O(6)-alkylating agents.
The treatments for most cancers include surgery, radiation therapy and/or
chemotherapy. O(6)-alkylators are chemotherapeutic agents that are primarily
used to treat brain cancer, melanoma, lymphoma and certain gastrointestinal
cancers. They include carmustine (BCNU), lomustine (CCNU), dacarbazine (DTIC),
procarbazine, fomustine, and temozolomide. BCNU, CCNU, fomustine 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.
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, Procept believes that BG may reduce the resistance
that is commonly observed in cancer cells following treatment with
O(6)-alkylating agents.
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. Procept
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. Procept believes that
there are no other proteins involved in the repair process, and that the AGT
protein is inactivated in the repair process. Procept 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-
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toxic doses of BG could render these tumors more sensitive to the cytotoxic
effects of O(6)-alkylating agents.
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, but was not observed in animals
treated with BCNU alone.
A Phase I clinical trial of BG has been completed at Duke University. Procept
believes that the study has shown that BG, injected intravenously, crosses the
blood-brain barrier and effectively blocks the activity of human brain tumor AGT
protein. Procept also believes that the study at Duke University 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. Three other
Phase I Clinical studies at the University of Chicago, Case Western Reserve
University and Duke University 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. The trials are being sponsored by the
NCI of the NIH under a CRADA executed between the NCI and Pacific. Following the
completion of these trials, a Phase II development program will be conducted in
accordance with the CRADA. At the conclusion of these Phase I clinical studies,
Procept anticipates entering a Phase II efficacy study for BG in brain cancer,
followed by studies in other cancers.
Standard therapy with O(6)-alkylating chemotherapeutic agents commonly results
in bone marrow suppression. Through the BG license, Procept 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. Procept 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.
In addition to BG, Procept has tested a considerable number of additional
compounds for AGT protein inactivation. Procept believes that a number of next
generation compounds are effective in inhibiting the activity of tumor AGT
protein. Procept also believes that Pacific has a proprietary interest in these
compounds. Procept 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.
Four patents including the composition of matter and use for BG and related
compounds have been issued to Penn State and licensed to BGDC. 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.
In September 1998, Pacific paid to Penn State $150,000 as an up-front licensing
fee. Penn State will also be due a (i) royalty on sales of licensed products,
(ii) certain performance-based milestones, and (iii) 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. The licensing agreement gave Pacific the option to fulfill up to 75%
of its obligations, to pay 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
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obligated to reimburse the Licensor approximately $200,000 for prior patent
costs. Procept may issue shares of its common stock in lieu of those of Pacific.
To the extent that Procept or Pacific satisfies any of the obligations through
the issuance of shares of its common stock, BGDC will be obligated to reimburse
Pacific for fair market value of such common stock.
In 1998, the NIH entered into a CRADA with Pacific under which the NIH will
conduct research involving BG and will make available to Pacific (i) all NIH
clinical data relating to any potential products incorporating BG developed or
generated by the NIH prior to the date of the CRADA and (ii) all subsequent data
developed under the CRADA. Pacific is required to pay the NIH $125,000 per year
for five years, payable in quarterly installments.
BORONATED PROTOPORPHYRIN COMPOUNDS (BOPP) -- FOR USE IN PHOTODYNAMIC THERAPY
(PDT)
BTI was acquired as a wholly owned subsidiary of Pacific in February 1999. BTI
holds a license from the University of California to develop BOPP, a
photosensitizing drug for PDT treatment of brain cancer. PDT is an emerging mode
of treatment for cancer that 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 that 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.
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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.
BOPP is currently undergoing a Phase I human clinical trial as a
photosensitizing drug for PDT treatment of brain cancer under a company-directed
IND. Procept 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 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.
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 retention of BOPP in brain tumor models (as much as 200
to 1 in tumors vs. healthy tissue), 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.
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 PDT for the treatment of brain cancer, Dr. Andrew Kaye, will
oversee the clinical trials.
CANCER IMMUNOTHERAPY
Pacific has also been developing a proprietary cancer immunotherapy 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. Procept believes that the potential of cancer immunotherapy treatment 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 treatment is intended to produce tumor
tissue destruction in the primary area of treatment. An important
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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 "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 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 immunoadjuvant 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.
Pacific's scientific collaborators have hypothesized that the immunoadjuvant
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 be 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 that 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.
Presentation of Preclinical data at a pre-IND meeting with the FDA resulted in
an accelerated plan to enter Phase I/II efficacy clinical trials. 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.
Procept is currently reviewing the clinical plan to determine the optimal
approach.
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Pacific obtained an exclusive worldwide license to the cancer immunotherapy
technology in May 1996 under an agreement with Wound Healing of Oklahoma (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 with WHO under which WHO employees 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.
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 by the holders.
The Company's intentions with respect to the further development of products 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 product research programs and related preclinical and
clinical studies include the following: the availability of financing for the
Company's continued research and development operations; technical risks
associated with the development; changes in regulatory requirements; anticipated
market acceptance of new drugs; and competitive factors and pricing pressures.
OTHER TECHNOLOGIES
ASPARTATE AMINOTRANSFERASE (AST) TECHNOLOGY -- PERIDONTAL TISSUE MONITOR (PTM)
Pacific holds the rights to a proprietary diagnostic test of periodontitis,
known as 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 AST
which is found in crevicular fluid when cells die.
In June 1997, Pacific received approval from the FDA to begin commercial sales
and distribution in the United States of the PTM product. Pacific also had 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 distribution agreements. In addition in 1998, Nobel Biocare AB
acquired Steri-Oss, Inc. and decided to terminate the agreement.
Shofu. Inc. of Japan is currently conducting clinical trials of PTM in Japan
under a Material Transfer Agreement with Pacific and may decide to market PTM in
Japan if the product is ultimately approved by Japanese regulators.
During the quarter ended December 31, 1998, Pacific determined that it would no
longer continue to sell its PTM product.
DHODH PROGRAM: INTRACEULLAR T CELL ENZYME INHIBITORS FOR AUTOIMMUNE DISEASES
In 1997, Procept implemented a new research program that focused on an
intracellular enzyme dihydroorotate dehydrogenase (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. Procept made
significant progress and achieved a number of important milestones in this
program, including 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 been made in the last year in
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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. In order to apply available resources to the PRO 2000 Gel
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 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 $0.3 million as part of shareholders' equity, based on Aquila's common
stock closing price on December 31, 1998.
PRODUCT DEVELOPMENT STRATEGY
Procept and Pacific conduct research and other product development efforts
through a combination of internal and collaborative programs. Procept currently
does and will rely upon research arrangements with universities, contract
research organizations, government institutions and similar institutions, as
well as individuals for a significant portion of its product development
efforts, particularly for preclinical work being conducted for all of its
products under development. Procept expects to increase its internal product
development resources in the PRO 2000, BG, BOPP and cancer immunotherapy areas,
reflecting Procept's refocus toward the development and commercialization of
anti-infectives and oncology. 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.
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 that it owns or that it has licensed.
Procept has been issued United States patents related to its PRO 2000 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 date, Procept's subsidiary 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.
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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
Procept 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 that 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 REGULATIONS
Regulations imposed by United States, 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.
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 United States 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.
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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 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.
In June 1997, Pacific received approval from the FDA to begin commercial sales
and distribution in the United States of the PTM product. Pacific also had 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 distribution agreements. In addition in 1998, Nobel Biocare AB
acquired Steri-Oss, Inc. and decided to terminate the agreement.
Shofu. Inc. of Japan is currently conducting clinical trials of PTM in Japan
under a Material Transfer Agreement with Pacific and may decide to market PTM in
Japan if the product is ultimately approved by Japanese regulators.
During the quarter ended December 31, 1998, Pacific determined that it would no
longer continue to sell its PTM product.
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
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universities and other research institutions. Competition may increase further
as a result of potential advances in the commercial application of biotechnology
and greater availability of capital for investment in these fields. Acquisitions
of competing companies and potential competitors by large pharmaceutical
companies or others could enhance financial, marketing and other resources
available to such competitors. As a result of academic and government
institutions becoming increasingly aware of the commercial value of their
research findings, such institutions are more likely to enter into exclusive
licensing agreements with commercial enterprises, including competitors of
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 AND MARKETING
Procept 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. Procept has relied upon contract manufacturers for its products
under development and for its limited commercial production requirements to
date, although Procept has retained certain quality control and managerial
responsibility. Procept 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 Procept's products (if
successfully developed) may, to a large extent, depend upon the manufacturing
and marketing efforts of others.
HUMAN RESOURCES
As of March 26, 1999, after giving effect to the Pacific Acquisition, Procept
had ten (10) full-time employees, three (3) of whom were engaged in research and
development and seven (7) in administration and finance. Procept's executive
team includes, John F. Dee, President and Chief Executive Officer; Michael E.
Fitzgerald, Vice President, Finance and Chief Financial Officer; Dr. Albert T.
Profy, Vice President, Research and Development; and Dr. Nigel J. Rulewski, Vice
President, Medical Affairs and Chief Medical Officer. Each of Procept's
employees has signed an agreement that 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.
ITEM 2. PROPERTIES.
Procept's headquarters and research and development facilities are located in
Cambridge, Massachusetts. At its 840 Memorial Drive location, Procept leases a
total of approximately 41,200 square feet of space, which includes approximately
34,800 square feet of research laboratories. Procept currently subleases
substantially all of the laboratory space at its headquarters to start-up
pharmaceutical or biotechnology companies. Procept also leases approximately
3,400 square feet of space at 84 Hamilton Street, which includes approximately
1,100 square feet of research laboratories. Procept believes such laboratory
space will be adequate for its existing research and drug development
activities.
The lease for Pacific will expire April 30, 1999.
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ITEM 3. LEGAL PROCEEDINGS.
On October 23, 1997, Commonwealth Associates (Commonwealth) filed a Complaint
with the United States District Court for the Southern District of New York
naming the Company as a defendant (the Complaint). The Complaint alleges that
the Company breached obligations to Commonwealth under the Underwriting
Agreement between Commonwealth and the Company dated February 8, 1996, giving
Commonwealth a right of first refusal to act as co-lead underwriter or
co-managing agent of a public offering or Private Placement of the Company's
securities during the period ended August 8, 1997. In the Complaint,
Commonwealth seeks aggregate compensatory damages in the amount of $375,000,
incidental and consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as the
court deems proper. The Company served an answer on or about March 16, 1998
denying Commonwealth's allegations and has engaged in substantial discovery. At
a court-sponsored mediation held on February 9, 1999, the Company and
Commonwealth reached an agreement in principle to settle this matter whereby
Commonwealth will agree to dismiss the suit in return for payment of $45,000 in
cash and 36,785 shares of the Company's common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 17, 1994, the date of Procept's initial public offering, until
March 26, 1998, Procept's common stock was 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". 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 this table have
been adjusted to reflect the one-for-ten reverse split of Procept's common stock
effected on June 1, 1998 and the one-for-seven reverse split of Procept's common
stock effected on October 14, 1997.
High Low
1998
Fourth Quarter $3.50 $0.31
Third Quarter $4.06 $0.94
Second Quarter $13.13 $3.63
First Quarter $11.86 $6.25
1997
Fourth Quarter $31.25 $10.00
Third Quarter $41.58 $21.91
Second Quarter $67.83 $32.83
First Quarter $135.66 $56.91
As of March 25, 1999 there were 899 holders of record. On March 25, 1999 the
closing price reported on the Nasdaq SmallCap Market for Procept Common Stock
was $3.25.
Dividend Policy
Procept has never paid cash dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future. Procept intends to
retain any future earnings for use in its business. See "Management Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 are derived
from the Company's financial statements included elsewhere in this Report, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected financial data set forth below as of December 31, 1996, 1995 and 1994
and for the years ended December 31, 1995 and 1994 are derived from audited
financial statements not included in this Report. This data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this report.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $330 $781 $2,278 $4,647 $7,571
---- ---- ------ ------ ------
Costs and expenses:
Research and development 1,990 6,619 9,925 12,406 11,559
General and administrative 1,610 2,715 3,176 3,723 3,805
Restructuring charges (1) 225 460 273 -- --
Other (204) 40 139 230 171
----- -- --- --- ---
Total costs and expenses 3,621 9,834 13,513 16,359 15,535
----- ----- ------ ------ ------
Net loss (3,291) (9,053) (11,236) (11,712) (7,964)
Less: accretion of discount on
preferred stock -- -- -- -- (20)
Less: dividends on preferred stock (2) -- (4,217) -- -- --
-- ------- --------- --------- --------
Net loss available to
common shareholders $(3,291) $(13,270) $(11,236) $(11,712) $(7,984)
======== ========= ========= ========= ========
Basic and diluted loss per share $(1.40) $(63.68) $(68.16) $(127.65) $(98.24)
======= ======== ======== ========= ========
Weighted average number of
common shares outstanding 2,347,245 208,371 164,836 91,752 81,271
========= ======= ======= ====== ======
AS OF DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $2,885 $535 $1,962 $565 $7,450
Marketable securities 2,062 -- 4,002 2,006 9,393
Total assets 6,188 2,168 8,917 6,397 19,704
Capital lease obligations net of
current portion and other
non-current liabilities 186 355 456 907 860
Total shareholders' equity 5,397 260 6,316 1,439 12,851
Common stock dividends -- -- -- -- --
</TABLE>
(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 positions, incurring a charge of $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 year ended
December 31, 1998.
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(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Procept, Inc. (Procept or the Company) is currently engaged in the development
and commercialization of novel drugs based on biotechnological research. On
March 17, 1999 Procept consummated its merger with Pacific Pharmaceuticals, Inc.
(Pacific) in which Pacific became a subsidiary of Procept. The combined company
will have a product portfolio with a focus in anti-infectives and oncology,
including three compounds in human clinical trials which may be candidates for
accelerated regulatory approval. Procept is continuing its search to acquire or
in-license drug development candidates to position itself as a successful
biopharmaceutical development company.
RESULTS OF OPERATIONS
Since its inception in 1985, Procept has devoted its principal efforts to drug
discovery and research. The Company is now devoting its principal efforts to
drug development, human clinical trials, partnership commercialization, and
in-licensing efforts. Procept has generated no revenues from product sales, has
not been profitable since inception, and has an accumulated deficit of $61.0
million through December 31, 1998. The Company is dependent upon research and
development collaborations, equity financing and interest on invested funds to
provide the working capital required to pursue its intended business activities.
Losses have resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop drug candidates and from
the associated administrative costs required to support these efforts. The
Company expects to incur significant additional operating losses over the next
several years due to its ongoing development efforts and expanded preclinical
and clinical testings. The Company's potential for future profitability is
dependent on its ability to effectively develop its current pharmaceutical
compounds and in-license and develop new pharmaceutical products, as well as
obtain regulatory approvals and adequate financing for such products. Future
profitability will require that the Company establish agreements for
development, commercialization and sales of its products with corporate
sponsors.
Years ended December 31, 1998 and 1997
The Company's 1998 total revenues decreased to $0.3 million from $0.8 million in
1997. In 1998, revenues consisted of $0.1 million earned under the Sponsored
Research Agreement with VacTex and $0.2 million in interest earned on invested
funds. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.1 million in interest earned on invested funds. The
decrease in revenue from VacTex is the result of the Company not renewing the
Sponsored Research Agreement in order to apply available resources to the PRO
2000 Gel development program.
The Company's 1998 total operating expenses decreased to $3.6 million from $9.8
million in 1997. Research and development expenses decreased 70% to $2.0 million
in 1998 from $6.6 million in 1997, due primarily to a decrease in personnel in
the Company's research and
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development organization and their related research costs. In order to focus its
limited resources on PRO 2000 Gel, in January 1998 the Company terminated work
on all other research programs, except preclinical support for its intracellular
T-cell enzyme (DHODH) program, and underwent a significant downsizing, reducing
its staff to 10 people. The amount of termination benefits accrued and charged
to restructuring costs in the statement of operations for the year ended
December 31, 1998 was $0.2 million. Also in 1997, the Company accrued $0.5
million in restructuring costs. The amount of termination benefits paid and
charged against the 1998 and 1997 liability for the year ended December 31, 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 for 1998 decreased 41% to $1.6 million from
$2.7 million in 1997, reflecting a decrease in administrative personnel and
continued cost control measures including subleasing of its facility. Interest
expense, included in other expenses, decreased to $5,000 in 1998 from $40,000
for 1997 as a result of the scheduled completion of the Company's equipment
lease financing arrangements. Also included in other expenses in 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 Gel, the Company has sold
and plans to continue to sell most of its research and development equipment.
Years ended December 31, 1997 and 1996
The Company's 1997 total revenues decreased to $0.8 million from $2.3 million in
1997, principally as a result of the scheduled completion of the Sandoz
Agreement. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.1 million in interest earned on invested funds. In 1996,
revenues consisted of $1.3 million earned under the Sandoz Agreement, $0.6
million earned under the Sponsored Research Agreement with VacTex and $0.4
million in interest earned on invested funds.
The Company's 1997 total operating expenses decreased to $9.8 million from $13.5
million in 1997, principally as a continuing result of a decrease in personnel
in the Company's research and development organization and their related
research costs. General and administrative expenses decreased 15% to $2.7
million in 1997 from $3.2 million in 1996 as a result of a $0.1 million savings
from a decrease in administrative personnel as well as a savings of $0.4 million
from cost control measures. In 1997, the Company restructured its operations
resulting in an expense charge of $0.5 million consisting of salary and benefit
costs relating to the restructuring. Interest expense decreased 71% to $40,000
in 1997 from $0.1 million in 1996 as a result of the scheduled completion of
many of the Company's lease financing arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1985, through December 31, 1998, the Company has financed
its operations from the sale of $67.8 million of its securities, the receipt of
$29.4 million under collaborative research agreements and $2.9 million in
interest income. At December 31, 1998, the Company's aggregate cash, cash
equivalents and marketable securities were $4.9 million, as compared with $0.5
million at December 31, 1997, an increase of $4.4 million.
For the year ended December 31, 1998, the Company's increase in cash of $2.3
million is primarily attributable to initial, interim and final closings of the
Company's private placement in January, February and April of 1998, which
resulted in net proceeds of $8.1 million, offset by $3.9 million used in
operations principally to fund research and development activities, $0.3 million
invested in property and equipment, $2.0 million used to purchase marketable
securities and $0.2 million in deferred financing costs related to the merger
with Pacific. Included in cash is the proceeds of $0.7 million from the sale of
research and development equipment. Due to
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downsizing and focus on the development of PRO 2000 Gel, the Company plans to
continue to sell most of its research and development equipment.
On March 17, 1999, Procept acquired Pacific under an Agreement and Plan of
Merger (the Merger Agreement) dated December 10, 1998. Pacific is engaged in the
development of cancer therapies and based in San Diego, California. The
acquisition of Pacific was accounted for under the purchase accounting method.
Pursuant to the Merger Agreement, each share of Pacific common stock (including
preferred stock on an as converted basis into common stock) converted into
approximately 0.11 shares of Procept common stock or a total of 2,755,000
Procept shares, and an additional 414,584 Procept shares were issued to holders
of Pacific's preferred stock for a total of 3,169,584 Procept shares (of
1,558,587 shares of Procept common stock issued in the merger to the holders of
Pacific's preferred stock were accompanied by certain contractual rights
identical to contractual rights held by purchasers in Procept's 1998 private
placement). In addition, Procept assumed an approximately $7.3 million
obligation (payable in cash or Procept common stock) of Pacific's subsidiary,
BGDC, and Procept exchanged all Pacific's outstanding warrant, unit purchase
option and stock option obligations into approximately 1,773,078 like
instruments of Procept. As a result of the merger with Pacific, Procept also
issued approximately 1,036,659 shares of its common stock to purchasers in
Procept's 1998 private placement and certain other stockholders pursuant to
certain contractual anti-dilution rights.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to the Company. If the Company is unable
to enter into an additional corporate collaboration(s) that produce revenue for
the Company, or secure additional financing, the Company's financial condition
will be adversely affected. If additional funds are raised by issuing equity
securities, further dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the execution of new collaboration agreements for the Company's research and
development programs. Other important factors that may affect achieving the
Company's strategic goals and other forward-looking statements are set forth in
Exhibit 99.1.
The Company's working capital and other cash needs will depend heavily on the
success of the Company's clinical trials and the rate of acquisition of new
products and technologies. Success in early-stage clinical trials or acquisition
of new products and technologies would lead to an increase in working capital
requirements. The Company's actual cash requirements may vary materially from
those now planned because of the results of research and development, clinical
trials, product testing, relationships with strategic partners, acquisition of
new products and technologies, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the process of obtaining United States Food and Drug Administration or
other regulatory approvals and other factors.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
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
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recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company does
not believe that the adoption will have a material effect on the Company.
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.
YEAR 2000
The Company has completed its assessment of the potential impact of the year
2000 on its information technology and non-information technology systems. The
year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs or systems that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in a
miscalculation or system failures. Based on the Company's assessment, there is
no year 2000 impact on Procept's information technology systems. Operating
systems and applications used by the Company are year 2000 compliant. At this
time, the Company is not aware of any year 2000 issues relating to its third
party vendors. The Company has replaced several non-information technology
systems and believes that it is now year 2000 compliant. The cost of year 2000
compliant non-technology information systems was approximately $8,000. The
Company's most critical uncertainty relates to its third parties' information
technology systems not being year 2000 compliant. This may result in inaccurate
information from banks, government agencies, contracted research organizations,
vendors, etc. The Company believes it has in place an adequate internal control
structure to handle these issues if they were to occur. The Company is in the
process of developing a contingency plan and expects it to be completed in the
second half of 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 (FRR 48), "Disclosure of Accounting Policies for Derivative
Financial Instruments and Derivative Commodity Instruments, and Disclosure of
Quantitative and Qualitative Information About Market Risk Inherent in
Derivative Financial Instruments, Other Financial Instruments and Derivative
Commodity Instruments." FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those already required under generally accepted accounting principles.
The Company is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants 23
Balance Sheets as of December 31, 1998 and 1997 24
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 25
Statements of Comprehensive Income (Loss) for the
years ended December 31, 1998, 1997 and 1996 25
Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 26
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 27
Notes to Financial Statements 28
Financial statement schedules have been omitted since they are not required or
are inappropriate.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of Procept, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, comprehensive income (loss), shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Procept,
Inc. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 1999
23
<PAGE>
PROCEPT, INC.
BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
December 31
-----------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,885,165 $535,242
Marketable securities (Note C) 2,003,755 --
Accounts receivable from VacTex (Note G) -- 81,951
Investment in Aquila (Note G) 568,988 --
Prepaid expenses and other current assets 182,925 50,111
---------- ----------
Total current assets 5,640,833 667,304
Property and equipment, net (Notes D and J) 180,452 889,258
Deferred charges (Note E) 176,025 54,424
Deposits (Note J) 190,615 250,615
Investment in VacTex (Note G) -- 300,000
Other assets -- 6,411
---------- ----------
Total assets $6,187,925 $2,168,012
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $268,815 $1,069,952
Accrued compensation 54,511 320,463
Accrued professional services 185,604 142,680
Other current liabilities 96,875 --
Current portion of capital lease obligations (Note J) -- 20,231
---------- ----------
Total current liabilities 605,805 1,553,326
Deferred rent (Note J) 185,615 257,827
Other noncurrent liabilities -- 96,875
Commitments and contingencies (Notes G and J)
Shareholders' equity (Note E):
Preferred stock, par value $.01 per share; 1,000,000 shares authorized:
Series A, 1 and 30,061 shares designated at December 31, 1998 and 1997,
respectively; 0 and 30,060 shares issued and outstanding at
December 31, 1998 and 1997, respectively -- 301
Common stock, $.01 par value; 30,000,000 shares authorized;
3,001,832 and 196,204 shares issued at December 31, 1998
and 1997, respectively 30,018 1,962
Additional paid-in capital 70,458,992 62,242,741
Deferred compensation (88,716) --
Cumulative dividends on preferred stock (Note E) (4,217,388) (4,217,388)
Accumulated deficit (61,047,132) (57,755,775)
Accumulated other comprehensive income (Note F) 272,588 --
Treasury stock, at cost; 1,186 shares at
December 31, 1998 and 1997, respectively (11,857) (11,857)
---------- ----------
Total shareholders' equity 5,396,505 259,984
---------- ----------
Total liabilities and shareholders' equity $6,187,925 $2,168,012
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
24
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
--------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative agreements
(Note G) $-- $-- $1,275,000
Research and development revenue
under collaborative agreements
from related party (Note G) 109,375 519,552 562,500
Revenue from grant (Note G) -- 113,854 --
Interest income 220,590 147,766 440,075
----------- ------------ ------------
Total revenues 329,965 781,172 2,277,575
----------- ------------ ------------
Costs and expenses:
Research and development
(Notes G and J) 1,990,640 6,618,836 9,925,315
General and administrative 1,610,078 2,714,678 3,176,136
Restructuring charges (Note A) 225,000 459,969 273,324
Other (income) expenses, net (204,396) 40,264 138,560
----------- ------------ ------------
Total costs and expenses 3,621,322 9,833,747 13,513,335
----------- ------------ ------------
Net loss (3,291,357) (9,052,575) (11,235,760)
Less: dividends on preferred stock (Note E) -- (4,217,388) --
----------- ------------ ------------
Net loss available to common shareholders $(3,291,357) $(13,269,963) $(11,235,760)
=========== ============ ============
Basic and diluted net loss per common share $(1.40) $(63.68) $(68.16)
======= ======== =======
Weighted average number of common
shares outstanding - basic and diluted 2,347,245 208,371 164,836
========= ======= =======
</TABLE>
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
--------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss $(3,291,357) $(9,052,575) $(11,235,760)
Other comprehensive income (loss):
Unrealized gain (loss) on investments 272,588 4,838 (5,926)
Income tax expense related to items of
other comprehensive income (loss) -- -- --
----------- ------------- ------------
Comprehensive loss, net of tax $(3,018,769) $(9,047,737) $(11,241,686)
=========== ============= ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
Procept, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
----------------------
Common Stock Preferred Stock Series A Additional Receivable
------------ ------------------------ Paid-in Deferred From
Shares Par Value Shares Par Value Capital Compensation Sale of Stock
------ --------- ------ --------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 receivable 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 --
Issuance from private placement 1,960,500 19,605 -- -- 9,782,895 --
Payment of private placement costs -- -- -- -- (1,764,131) --
Conversion of preferred stock to
common stock 841,680 8,417 (30,060) (301) (8,116) --
Common stock contribution to savings
and retirement plan 3,448 34 -- -- 43,203 --
Stock options issued for services -- -- -- -- 58,537 --
Deferred compensation related to stock
options -- -- -- -- 103,863 $(103,863) --
Amortization of deferred compensation -- -- -- -- -- 15,147 --
Unrealized gain on investments -- -- -- -- -- -- --
Net Loss -- -- -- -- -- -- --
--------- ------- ------- ----- ----------- --------- --------
Balance at December 31, 1998 3,001,832 $30,018 -- $ -- $70,458,992 $(88,716) $ --
========= ======= ======= ===== =========== ========= ========
<CAPTION>
Cumulative Accumulated
Dividends Other Total
on Preferred Accumulated Comprehensive Treasury Shareholders'
Stock Deficit Income Stock Equity
------------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
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 receivable 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 securities -- -- 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
Issuance from private placement -- -- -- -- 9,802,500
Payment of private placement costs -- -- -- -- (1,764,131)
Conversion of preferred stock to
common stock -- -- -- -- --
Common stock contribution to savings
and retirement plan -- -- -- -- 43,237
Stock options issued for services -- -- -- -- 58,537
Deferred compensation related to stock
options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 15,147
Unrealized gain on investments -- -- 272,588 -- 272,588
Net Loss -- (3,291,357) -- -- (3,291,357)
----------- ------------ -------- -------- -----------
Balance at December 31, 1998 $(4,217,388) $(61,047,132) $272,588 $(11,857) $5,396,505
=========== ============ ======== ======== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
26
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,291,357) $(9,052,575) $(11,235,760)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 449,808 1,057,952 1,234,448
Non-cash related party revenue -- (150,000) (150,000)
Compensation expense associated with cancellation
of notes receivable -- 112,789 --
Gain on sale of equipment (209,439) (40,895) --
Savings and retirement plan stock contribution 43,237 -- --
Compensatory stock and stock option expense 73,684 -- --
Gain on sale of marketable securities -- -- (1,359)
Changes in operating assets and liabilities:
Accounts receivable 81,951 90,861 (163,868)
Prepaid expenses and other current assets (51,302) 61,126 36,274
Deposits 60,000 (114,640) 10,000
Other assets 6,411 (6,627) (18,243)
Accounts payable (801,137) 296,451 (115,199)
Accrued compensation (265,952) 197,751 (71,403)
Accrued contract research -- (438,513) 21,160
Accrued professional services 42,924 (53,930) (54,210)
Other current liabilities 96,875 -- --
Deferred revenue -- -- (1,275,000)
Deferred rent (72,212) (27,702) 12,390
Other noncurrent liabilities (96,875) (53,125) 150,000
----------- ----------- ------------
Net cash used in operating activities (3,933,384) (8,121,077) (11,620,770)
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (319,669) (84,010) (297,888)
Proceeds from sale of equipment 706,594 40,895 --
Proceeds from sale of marketable securities -- -- 2,004,070
Proceeds from maturity of marketable securities -- 4,006,463 3,000,000
Purchase of marketable securities (2,000,155) -- (6,989,032)
Decrease in restricted investment -- 469,000 53,000
Merger costs (176,025) -- --
----------- ----------- ------------
Net cash (used in) provided by investing activities (1,789,255) 4,432,348 (2,229,850)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 5,282,514
Payment of common stock financing costs -- -- (855,673)
Proceeds from exercise of common stock options -- 410 15,931
Proceeds from employee stock purchase plan -- 55,200 96,766
Proceeds from issuance of warrants -- -- 220
Proceeds from private placement of stock 9,802,500 2,800,000 11,579,080
Payment of private placement securities costs (1,709,707) (131,382) --
Payment on note payable -- -- (115,851)
Proceeds from note payable -- 206,001 --
Deferred financing charges paid -- (54,424) 152,773
Principal payments on capital lease obligations (20,231) (614,063) (908,432)
----------- ----------- ------------
Net cash provided by financing activities 8,072,562 2,261,742 15,247,328
----------- ----------- ------------
Net change in cash and cash equivalents 2,349,923 (1,426,987) 1,396,708
Cash and cash equivalents at beginning of year 535,242 1,962,229 565,521
----------- ----------- ------------
Cash and cash equivalents at end of year $2,885,165 $535,242 $1,962,229
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid $5,184 $27,609 $146,772
=========== =========== ============
Unrealized gain (loss) on securities available for sale $272,588 -- $(5,926)
=========== =========== ============
Supplemental disclosure of non-cash transactions:
Preferred stock converted to common stock $ 8,417 -- --
=========== =========== ============
Common stock converted to preferred stock -- $2,800,000 --
=========== =========== ============
Savings and retirement plan stock contribution $43,237 -- --
=========== =========== ============
Stock options issued for services $73,684 -- --
=========== =========== ============
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.
27
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
A. Nature of Business
Procept, Inc. (Procept or the Company), located in Cambridge, MA, is
currently engaged in the development and commercialization of novel
drugs based on biotechnological research. As discussed more fully in
Note K, on March 17, 1999, Procept consummated its merger with Pacific
Pharmaceuticals, Inc. (Pacific) in which Pacific became a subsidiary of
Procept. The combined company will have a product portfolio with a
focus in anti-infectives and oncology, including three compounds in
human clinical trials which may be candidates for accelerated
regulatory approval. Procept is continuing its search to acquire or
in-license drug development candidates to position itself as a
successful biopharmaceutical development company.
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. The Company is now devoting its
principal efforts to drug development, human clinical trials,
partnership commercialization, and in-licensing efforts.
Procept has generated no revenue from product sales, has not been
profitable since inception, and has incurred an accumulated deficit of
$61.0 million through December 31, 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
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.
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 1997, the Company further reduced staffing in its research
organization through the elimination of six senior research positions
and the departure of one executive. 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 Gel, in January
1998 the Company terminated work on all other research programs and
underwent a significant downsizing, reducing its staff to 13 people.
The amount of termination benefits accrued and charged to
28
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
restructuring costs in the statement of operations for the year ended
December 31, 1998 was $0.2 million. The amount of termination benefits
paid and charged against the liability for the years ended December 31,
1998 and 1997, was $0.4 million. The remaining liability of $0.1
million is expected to be utilized by March 31, 1999. Due to the
restructuring and focus on development of PRO 2000 Gel, the Company has
sold and plans to continue to sell most of its research and development
equipment. For the year ended December 31, 1998, the Company received
$0.7 million from the sale of equipment and has recorded a $0.2 million
gain in other expenses.
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 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 12 months at the
balance sheet date are noncurrent marketable securities.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Laboratory equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Equipment and furniture under
capital lease Estimated useful life or term of lease, if shorter
Leasehold improvements Estimated useful life or term of lease, if shorter
</TABLE>
Major additions and improvements are capitalized, while repairs and
maintenance are expensed as incurred. Upon retirement or other
disposition, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in the
determination of net loss.
Research and Development
Research and development costs are expensed as incurred.
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
29
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 United States
Government securities and money market instruments.
Comprehensive (Loss) Income
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for periods
beginning after December 15, 1997. The statement establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The statement requires that all components of
comprehensive income be reported 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.
Business Segments
In June 1997, the Financial Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information,"
superseding SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way public business
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial statements.
It also requires disclosures about products and services, geographic
areas and major customers.
The Company is in the business of development and commercialization of
novel drugs based on biotechnological research. The Company evaluated
its business activities that are regularly reviewed by the executive
management team and the Board of Directors for which discrete financial
information is available. As a result of this evaluation, the Company
determined that it has one operating segment and, accordingly, one
reportable segment. The adoption of SFAS 131 did not affect the results
of operations, financial position, or require the disclosure of segment
information since the Company has one reportable segment.
30
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
New Accounting Standards
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 affect on the Company.
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.
Basic and Diluted Net (Loss) Per Common Share
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 years ended December 31, 1998 and 1996, the Company had stock
options and stock warrants outstanding that were anti-dilutive (see
Note E). 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). 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. On December 31, 1997, in connection with a severance
agreement with an officer and shareholder, three notes and the
associated accrued interest, in the amount of $124,646, were cancelled
in exchange for the surrender to the Company of 1,186 outstanding
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, a member of the Board of Directors is a Senior Managing
Director of Paramount Capital, Inc. (Paramount), and a member of the
Board of Directors is a President of 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
31
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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 connection with
the final closing of the Company's unit offering on April 9, 1998 (the
Final Closing Date), for 841,680 shares of Common Stock and Class C
Warrants to purchase an equal number of shares of Common Stock at an
exercise price of $5.00 per share. On the Final Closing Date, the
Company entered into a Financial Advisory Agreement with Paramount.
Under the Financial Advisory Agreement, Paramount receives a monthly
retainer for a minimum of 24 months, out-of-pocket expenses and certain
cash and equity success fees in the event Paramount assists the Company
with certain financing and strategic transactions.
As a result of the acquisition of Pacific, the Company issued an
additional 1,307,439 shares of common stock to the shareholders
affiliated with Paramount and the exercise price of the Class C
Warrants was reduced to $3.67. As of March 30, 1999, shareholders
affiliated with Paramount owned approximately 2,662,720 shares of
common stock, representing approximately 36% of the outstanding shares
of Procept common stock.
Reclassifications
Certain reclassifications may have been made to the prior years
financial statements to conform with current year 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.
The following is a summary of marketable securities as of December 31,
1998:
Fair Unrealized Amortized
Value Gains Cost
----- ---------- ---------
Marketable securities,
current:
United States Government
Securities $2,003,755 $3,600 $2,000,155
========== ====== ==========
The average maturity of the Company's marketable securities as of
December 31, 1998 was four months.
32
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
D. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Laboratory equipment $745,319 $3,784,184
Furniture and fixtures 86,844 147,123
Office equipment 264,862 570,954
Leasehold improvements 1,040,027 1,198,542
---------- ----------
2,137,052 5,700,803
Less: accumulated depreciation
& amortization (1,956,600) (4,811,545)
---------- ----------
Property and equipment, net $180,452 $889,258
========== ==========
</TABLE>
Depreciation and amortization expense amounted to $0.4 million, $1.1
million and $1.2 million for the years ended December 31, 1998, 1997
and 1996, respectively.
The Company sold equipment with a net book value of $0.5 million for
proceeds of $0.7 million, resulting in a $0.2 million gain which is
included in other (income) expense in the accompanying Statement of
Operations.
Included above in property and equipment are the following assets that
were acquired pursuant to capital lease arrangements:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Laboratory equipment $462,174 $2,480,802
Furniture and fixtures 12,203 119,557
Office equipment 151,803 213,570
Leasehold improvements 459,410 273,008
------- -------
1,085,590 3,086,937
Less: accumulated amortization (1,060,218) (2,265,522)
---------- ----------
$25,372 $821,415
======= ========
</TABLE>
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.
33
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 Company received net proceeds of $8.1 million, after offering costs
of $1.7 million. The purchasers in the 1998 Offering hold certain
contractual rights requiring contingent additional issuances of Common
Stock to the purchasers, (x) based on the market price on April 9, 1999
(y) to protect them against future dilutive sales of securities and (z)
as a dividend substitute beginning October 1999. As a result of the
acquisition of Pacific in March 1999, the purchasers in the 1998
Offering and certain other stockholders were issued an aggregate of
1,036,659 shares of Procept common stock pursuant to the anti-dilution
contractual rights. 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 contractual rights will terminate on or after April 9,
1999 if the Common Stock trades at more than $11.01 per share.
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 the Aries Funds 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 $41.00. 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
34
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
Warrants are not redeemable, no accretion is required. All of the Class
A Warrants and the Class B Warrants contemplated that such warrants
would be converted on September 30, 1997 into "New Warrants" having the
same aggregate exercise price as the Class A and Class B Warrants
converted, but with a per share exercise price equal to the lesser of
(i) $20.30 or (ii) 50% of the trading price (determined per a formula)
at September 30, 1997. The Class A and Class B Warrants further
provided that the exercise price of the New Warrants would be adjusted
at the time of the Company's next equity financing to ensure that the
exercise price of the New Warrants was at least 50% of the pricing in
such future equity financing. The Class A and Class B Warrants were
converted to New Warrants for 328,314 shares of Procept Common Stock
having a per share exercise price of $10.90. In a negotiated
transaction with the Aries Funds, the New Warrants were exchanged in
April 1998 for Class C Warrants for an aggregate of 841,680 shares of
Procept Common Stock having an exercise price of $5.00, which exercise
price was reduced to $3.67 in March 1999 as a result of anti-dilution
provisions.
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 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
35
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
In April 1998, all outstanding Series A Preferred Stock was converted
into shares of common stock having certain contractual rights, and in
March 1999, the Company eliminated the authorization of the Series A
Preferred Stock by a filing with the Secretary of the State of
Delaware. Also, in April 1998, all new warrants were converted to Class
C Warrants, as discussed above.
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 $0.01 per Warrant Share in the
event that the average closing price of the Company's Common Stock for
any 20 consecutive trading day period exceeds $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.
The Company has reserved at December 31, 1998, and kept available out
of the authorized but unissued shares of common stock, 4,519,366 shares
for issuance upon the exercise of outstanding options and warrants.
36
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
1998 Equity Incentive Plan
Under the Company's 1998 Equity Incentive Plan, formerly known as the
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 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. In November 1998, the Board
of Directors approved an amendment and restatement of the Plan as the
1998 Equity Incentive Plan (the 1998 Plan). In January 1999, the Board
of Directors approved an amendment to the plan to increase the number
of shares covered by the plan by 3,300,000 to 4,800,000. At December
31, 1998, there were 4,128,646 shares available for future grants under
the 1998 Plan.
The 1998 Plan provides for the granting of incentive stock options
(ISOs) and nonstatutory stock options. In the case of ISOs, the
exercise price shall not be less than 100% of the fair market value per
share of the common stock, on the date of grant. In the case of
nonstatutory options, the exercise price shall be determined by a
committee appointed by the Board of Directors. All stock options under
the 1998 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 of the Board of Directors 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. In
June 1998, the Board of Directors terminated the Director Plan.
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
37
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Activity under all stock plans related to all the ISOs and nonqualified
stock options for the three years ended December 31, 1998 is listed
below.
<TABLE>
<CAPTION>
ISO Nonqualified Weighted Avg.
Shares Shares Option Price Exercise Price
------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
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
Granted 428,000 239,000 $0.70-$10.00 $4.97
Canceled (118,945) (15,486) $10.00-$892.50 $37.87
-------- -------
Outstanding at December 31, 1998 428,000 239,053 $0.70-$70.19 $4.98
======= =======
</TABLE>
Summarized information about stock options outstanding at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Exercisable
Number of Weighted Average ------------------------------
Range of Options Remaining Weighted Avgerage Number of Weighted Average
Exercise Prices Outstanding Contract Life Exercise Price Options Exercise Price
--------------- ----------- ---------------- ----------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.70-$3.65 37,110 9.76 $1.03 37,110 $1.03
$5.00 598,000 9.65 $5.00 -- $--
$7.94-$70.19 31,943 2.53 $9.20 26,489 $9.20
</TABLE>
Options for the purchase of 63,599 shares, 23,538 shares and 5,925
shares are exercisable at December 31, 1998, 1997 and 1996,
respectively. The total exercise proceeds for all options outstanding
at December 31, 1998 is approximately $3.3 million.
During September 1998, the Board of Directors cancelled certain
individual's outstanding stock options under the Plan. The number of
stock options cancelled was 12,510 with exercise prices ranging from
$10.00 per share to $735.00 per share. Concurrent with the canceling
of the stock options, the Board of Directors reissued 248,000 stock
options to the same individuals with an exercise price of $5.00 per
share which was greater than the fair market value at the date of
grant.
38
<PAGE>
PROCEPT, INC.
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 104% 75% 75%
Risk free interest rate 5.25% 6.00% 6.25%
Expected life of option 5.0 5.0 5.0
</TABLE>
All options granted in 1998, 1997 and 1996 were granted at fair value
or at amounts greater than fair value. Options to consultants are
recorded at fair value and recognized as expense over the vesting
period. The weighted average fair value of options granted was $1.62,
$15.90 and $70.70 for 1998, 1997 and 1996, 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
1998, 1997 and 1996 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(3,291,357) $(9,052,575) $(11,235,760)
Net loss - pro forma $(3,791,798) $(9,368,531) $(11,455,536)
Basic and diluted net loss per
common share - as reported $(1.40) $(63.68) $(68.16)
Basic and diluted net loss per
common share - pro forma $(1.62) $(65.20) $(69.50)
</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. The Company is not currently offering shares under the
1994 Plan. The Company issued 763 shares and 857 shares in 1997 and
1996, respectively. The weighted average fair values of grants at fair
value under the 1994 Plan during 1997 and 1996 were $14.10 and $70.00,
respectively. No shares were issued during 1998 under the 1994 Plan.
Common Stock Warrants
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 expired on February
10, 1999.
39
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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 429 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 3,142 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 14, 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 16, 2001.
On May 17, 1996, the Company completed a self-managed private placement
of units. Each Unit consisted of one share of the Company's common
stock and one callable warrant to purchase one share of the Company's
common stock. The Warrants are subject to redemption by the Company
upon 30 days prior notice to the holders of the Warrants beginning May
17, 1998 at a price of $0.10 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
received proceeds of $11.6 million for the issuance of 67,690 Units
(i.e., 67,690 shares of Procept Common Stock and warrants to purchase
67,690 shares of Procept Common Stock). The warrants expire 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
the closing of the Company's initial public offering on February 17,
1994. The warrants expired on February 10, 1999.
On April 9, 1998, Procept issued an aggregate of 98.025 units, each
unit consisting of 20,000 shares of common stock, and Class C Warrants
to purchase 20,000 shares of the Company's common stock (i.e.,
1,960,500 shares of Procept common stock and warrants to purchase
1,960,500 shares of Procept common stock) at an exercise price of $5.00
per share. As part of the final closing of the unit offering, The Aries
Fund and the Aries Domestic Fund, L.P. exchanged an aggregate of 30,060
shares of Series A Convertible Preferred Stock, $0.01 par value per
share, and Class B Warrants to purchase an aggregate of 328,314 shares
of Procept common stock for an aggregate of 42.084 Units (i.e.,
40
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
841,680 shares of Procept common stock and Class C Warrants to purchase
841,680 shares of Procept common stock at an exercise price of $5.00
per share, which exercise price was reduced to $3.67 in March 1999 as a
result of anti-dilution provisions).
In connection with the final closing of the Company's 1998 private
placement on April 9, 1998 and certain advisory services, the Company
sold to Paramount Capital, Inc., the Company's placement agent in the
1998 private placement, 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 Class C Warrants to purchase 20,000 shares of common
stock at an exercise price of $5.00 per share, which exercise price was
reduced to $3.67 in March 1999 as a result of anti-dilution provisions)
at an exercise price of $110,000 per unit (i.e., $5.50 per share). 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.
At December 31, 1998 there were 3,852,313 warrants outstanding, all of
which are exercisable.
F. Comprehensive Income (Loss)
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. Accumulated other
comprehensive income (loss) currently consists of unrealized gain
(loss) on investments as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Accumulated other comprehensive
Income (loss), beginning balance $-- $(4,838) $1,088
Unrealized gain (loss) on investments 272,588 -- (5,926)
Maturity of investments -- 4,838 --
-------- ------- -------
Accumulated other comprehensive
Income (loss), ending balance $272,588 $ -- $(4,838)
======== ======== =======
</TABLE>
G. Collaborative Research and Development Agreements
In September 1993, the Company signed a Research and Development
Agreement with Sandoz Pharma Ltd. (the Sandoz Agreement). Effective as
of September 1, 1995, the Sandoz Agreement 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, $1.3
million was recorded as revenue in 1996. No further revenue is expected
under the Sandoz Agreement.
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
41
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
In the year ended December 31, 1998, the Company recorded revenue of
$0.1 million which was paid in cash. 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 Gel 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 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 in Aquila 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 $0.3 million as part of
Shareholders' Equity, based on Aquila's common stock closing price on
December 31, 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 received
$0.1 million in financial support in 1997. No further revenue is
expected under this grant.
H. Income Taxes
No federal or state income taxes have been provided for as the Company
has incurred losses since its inception. At December 31, 1998, the
Company had Federal and State tax net operating loss (NOL)
carryforwards of approximately $59.7 million and $46.5 million which
will expire beginning in the year 2000 through 2018 for Federal and
beginning in the year 1998 through 2003 for State, respectively.
Additionally, the Company had Federal and State research and
experimentation credit carryforwards of approximately, $1.4 million and
$0.9 million, respectively, both of which will expire in the year 2004.
42
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
The components of Procept's net deferred tax assets were as follows at
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards $23,218,000 $22,665,000 $19,021,000
Tax credit carryforwards 2,192,000 2,660,000 1,947,000
Depreciation 363,000 1,263,000 1,057,000
Capital leases and other (1,171,000) (1,253,000) (935,000)
Valuation allowance (24,602,000) (25,335,000) (21,090,000)
----------- ----------- -----------
Total net deferred tax assets $ 0 $ 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.
I. 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, 1998 and 1996, the
Company did not contribute to the 401(k) Plan. For the plan year 1997,
the Company contributed 4,324 shares of Procept common stock to the
401(k) Plan in 1998 with a value of $43,237.
J. Commitments 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.
43
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Pursuant to the aforementioned leasing arrangements, at December 31,
1998 and 1997, the Company has recorded noncurrent liabilities of $0.2
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 $1.4 million, $1.8 million and $1.6 million, for the
years ended December 31, 1998, 1997 and 1996, respectively. The
approximate gross future minimum annual rental payments for leased
facilities for the next two years under the lease arrangements consist
of the following at December 31,1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $1,435,000
2000 $706,000
</TABLE>
The Company has entered into sublease agreements which offset the
future minimum lease payments by $1.9 million in 1999 and $1.0 million
in 2000. The sublease agreements require that the Company provide
certain services including utilities. The Company expects sublease
income to continue to approximate its related costs.
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
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. All obligations under leasing agreements
have been fully satisfied at December 31, 1998.
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
44
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
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 and $0.8 million in 1997 and 1996, respectively.
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. The Company served an answer on or about March
16, 1998 denying Commonwealth's allegations and has engaged in
substantial discovery. At a court-sponsored mediation held on February
9, 1999, the Company and Commonwealth reached an agreement in principle
to settle this matter whereby Commonwealth will agree to dismiss the
suit in return for payment of $45,000 in cash and 36,785 shares of the
Company's common stock.
K. Subsequent Event -- Merger (Unaudited)
Procept entered into a definitive Agreement and Plan of Merger (the
Merger Agreement) dated December 10, 1998 to acquire Pacific
Pharmaceuticals, Inc. (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 acquisition of Pacific was accounted for under the purchase
accounting method. The aggregate purchase price of $3.8 million, plus
estimated acquisition costs of $1.5 million, assumed liabilities of
$6.4 million and $1.0 million for the value of the stock options and
warrants being issued to the Pacific shareholders were allocated to the
acquired tangible and intangible assets based on their estimated
respective fair values. Approximately $8.1 million of the purchase
price has been allocated to in-process research and development and
expensed in the first quarter of 1999. The charge for in-process
research and development represents the value assigned to Pacific's
programs which are still in the development stage and for 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 valuation methodology was based on estimated discounted cash flows.
The above purchase price accounting is based on the valuation which is
being finalized. Recent Securities and Exchange Commission (SEC)
guidelines on valuation methodologies for in-process research and
development are still evolving. The amount written off may be subject
to adjustment as the SEC continues to focus on accounting for acquired
in-process research and development.
45
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
Pursuant to the Merger Agreement, each share of Pacific common stock
(including preferred stock on an as converted basis into common stock)
converted into approximately 0.11 shares of Procept common stock or a
total of 2,755,000 Procept shares and an additional 414,584 Procept
shares were issued to holders of Pacific's preferred stock for a total
of 3,169,584 Procept shares (of which 1,558,587 shares of Procept
common stock issued in the merger to the holders of Pacific's preferred
stock were accompanied by certain contractual rights identical to
contractual rights held by purchasers in Procept's 1998 private
placement). In addition, Procept assumed an approximately $7.3 million
obligation (payable in cash or common stock of Procept) of Pacific's
subsidiary, BG Development Corp., and Procept exchanged all Pacific's
outstanding warrant, unit purchase option and stock option obligations
into approximately 1,773,078 like instruments of Procept. As a result
of the merger with Pacific, Procept also issued approximately 1,036,659
shares of its common stock to purchasers in Procept's 1998 private
placement and certain other stockholders pursuant to certain
contractual anti-dilution rights.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning disclosure pursuant to Item 405 of Regulation S-K is
included under the caption "Compliance with Section 16(a) of the Securities
Exchange Act" in the Proxy Statement and is incorporated herein by reference.
The current Executive Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
John F. Dee 41 President; Chief Executive Officer; Director
Michael S. Weiss 33 Director and Chairman of the Board
Michael E. Fitzgerald 45 Vice President, Finance; and
Chief Financial Officer
Zola P. Horovitz, Ph.D. 64 Director
Max Link, Ph.D. 58 Director
Albert T. Profy, Ph.D. 42 Vice President, Research and Development
Mark C. Rogers, M.D. 56 Director
Nigel J. Rulewski, M.D. 45 Vice President, Medical Affairs;
Chief Medical Officer; Director
Elliott H. Vernon 56 Director
</TABLE>
JOHN F. DEE has served as President, Chief Executive Officer and a member of the
Board of Directors of Procept since joining the Company in February 1998. From
April 1997 to October 1997, Mr. Dee was Interim Chief Executive Officer of Genta
Incorporated. From 1994 to 1997 and 1988 to 1992, Mr. Dee was a Senior
Management Consultant with McKinsey & Company, Inc. and from 1992 to 1994 served
as Chief Operating Officer, Chief Financial Officer, and Director of Walden
Laboratories, Inc. (now AVAX Technologies, Inc.). Mr. Dee holds an M.S. in
Engineering from Stanford University and an M.B.A. from Harvard University.
MICHAEL S. WEISS has been a director of the Company, and the Chairman of its
Board of Directors, since July 8, 1997. Mr. Weiss is presently a Senior Managing
Director of Paramount Capital, Inc. Prior to joining Paramount, Mr. Weiss was an
attorney with Cravath, Swaine & Moore. Mr. Weiss is currently Vice-Chairman of
the Board of Directors of Genta Incorporated, a director of AVAX Technologies,
Inc. and Palatin Technologies, Inc., and is the Secretary of Atlantic
Pharmaceuticals, Inc., each of which is a publicly traded biopharmaceutical
company. Additionally, Mr. Weiss is currently a member of the boards of
directors of several privately held biopharmaceutical companies. Mr. Weiss
received his J.D. from Columbia University School of Law and a B.S. in Finance
from the State University of New York at Albany. Mr. Weiss devotes only a
portion of his time to the business of the Company.
MICHAEL E. FITZGERALD has been Vice President, Finance and Chief Financial
Officer of the Company since March 1999. Mr. Fitzgerald was previously Vice
President and Chief Financial Officer of CytoMed, Inc. since March 1993 and
Treasurer since February 1992. From June 1991 to January 1992 he served as
Corporate Controller and Chief Accounting Officer of TSI Corporation, a life
sciences company. Mr. Fitzgerald served as Corporate Controller and Chief
Accounting Officer of BioTechnica International, Inc., an agricultural
biotechnology firm, from September 1986 to May 1991. From January 1975 to August
1986, he was employed by the
47
<PAGE>
Amicon Division of W.R. Grace, a life sciences company, most recently as
Manager, Corporate Accounting. Mr. Fitzgerald holds a B.S. in Economics and
Finance and an M.B.A. in Finance from Bentley College.
ZOLA P. HOROVITZ, Ph.D. has been a director of the Company since 1992. Dr.
Horovitz, currently a consultant to pharmaceutical companies, served as Vice
President - Business Development and Planning at Bristol-Myers Squibb
Pharmaceutical Group, from August 1991 to April 1994, and as Vice President -
Licensing, from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President - Research Planning. He is also a director of seven other
biotechnology and pharmaceutical companies: Avigen, Inc., BioCryst, Inc.,
Clinicor, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Roberts
Pharmaceutical Corporation and Synaptic Pharmaceuticals, Inc. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.
MAX LINK, Ph.D. has been a director of the Company since 1995. Dr. Link has held
a number of executive positions with pharmaceutical and healthcare companies.
Most recently, he served as Chief Executive Officer of Corange Limited, from May
1993 until June 1994. Prior to joining Corange, Dr. Link served in a number of
positions with Sandoz Pharma Ltd., including Chief Executive Officer, from 1987
until April 1992, and Chairman, from April 1992 until May 1993. Dr. Link
currently serves on the board of directors of six publicly traded life science
companies: Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Cell
Therapeutics, Inc., CytRx Corporation, Human Genome Sciences, Inc. and Protein
Design Labs, Inc. Dr. Link received his Ph.D. in Economics from the University
of St. Gallen in 1970.
ALBERT T. PROFY, Ph.D. has been Vice President, Research and Development since
March 1999. From 1996 to 1999, Dr. Profy was Vice President, Protein
Biochemistry and Preclinical Development and from 1994 to 1996, Dr. Profy was
Director, Protein Biochemistry. Prior to joining Procept, Dr. Profy was Director
of Peptide and Protein Biochemistry at Repligen Inc., from 1986 to 1994, where
he managed that company's HIV research program. From 1984 to 1986, Dr. Profy was
a Postdoctoral Research Associate at the Massachusetts Institute of Technology.
Dr. Profy received his Ph.D. and M.S. in Bio-Organic Chemistry from Cornell
University in 1984 and 1981 respectively, and a B.S. in Chemistry From Bates
College in 1978.
MARK C. ROGERS, M.D. has been a director of the Company since December 1997. Dr.
Rogers is presently the President of Paramount Capital, Inc. From 1996 until
1998, Dr. Rogers was Senior Vice President, Corporate Development and Chief
Technology Officer at The Perkin-Elmer Corporation. From 1992 to 1996, Dr.
Rogers was the Vice Chancellor for Health Affairs at Duke University, and
Executive Director and Chief Executive Officer of Duke University Hospital and
Health Network. Prior to his employment at Duke, Dr. Rogers was on the faculty
of Johns Hopkins University for 15 years where he served as a Distinguished
Faculty Professor and Chairman of the Department of Anesthesiology and Critical
Care Medicine, Associate Dean for Clinical Affairs, Director of the Pediatric
Intensive Care Unit and Professor of Pediatrics. Dr. Rogers currently serves on
the board of directors of three publicly traded companies: Discovery
Laboratories, Inc., Galileo Corporation and HCIA, Inc. Dr. Rogers received his
M.D. from Upstate Medical Center, State University of New York and has his
M.B.A. from The Wharton School of Business. He received his B.A. from Columbia
University and held a Fulbright Scholarship.
NIGEL J. RULEWSKI, M.D. has been Chief Medical Officer since December 1998.
Prior to joining Procept, Dr. Rulewski has served as Vice President, Clinical
Affairs and Chief Medical Officer for Astra USA from 1989 to 1998. He has also
served in clinical leadership positions at Serono Laboratories (USA), Fison
Corporation (USA), and Kali-Duphar Laboratories (USA). Dr. Rulewski received a
M.B. and a B.S. from St. Bartholomew's Hospital at the University of London. He
is also a Diplomate of the Royal College of Obstetricians and Gynecologists, as
well
48
<PAGE>
as a Diplomate of Child Health of the Royal College of Physicians. Dr. Rulewski
has been nominated to serve as a member of the Board of Directors.
ELLIOTT H. VERNON has been a director of the Company since December 1997. Mr.
Vernon has been the Chairman of the Board, President and Chief Executive Officer
of Healthcare Imaging Services, Inc., a publicly held operator of fixed-site
magnetic resonance imaging centers in the northeast, since its inception in
1991. For the past ten years, Mr. Vernon has also been the managing partner of
MR General Associates, a New Jersey general partnership which is the general
partner of DMR Associates, L.P., a Delaware limited partnership. Mr. Vernon was
also one of the founders of Transworld Nurses, Inc., the predecessor of
Transworld HealthCare, Inc., a publicly held regional supplier of a broad range
of alternate site healthcare services and products. Mr. Vernon is also a
principal of Healthcare Financial Corp., LLC, a healthcare financial consulting
company engaged primarily in FDA matters. From January 1990 to December 1994,
Mr. Vernon was a director, Executive Vice President and General Counsel of Aegis
Holdings Corporation, an international provider of financial services through
its investment management and capital markets consulting subsidiaries.
The term of office of each officer extends until the meeting of the Board of
Directors following the next annual meeting of Shareholders and until his
successor is elected and qualified or until his earlier resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included under the captions "Compensation
Committee Interlocks and Insider Participation," and "Executive Compensation" in
the Proxy Statement for the Company's 1999 Annual Meeting of Stockholders (the
Proxy Statement) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included under the caption "Share
Ownership" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The financial statements are listed under Part II, Item 8 of this Report.
2. FINANCIAL STATEMENT SCHEDULES.
49
<PAGE>
None.
3. EXHIBITS.
The exhibits are listed under Part IV, Item 14(c) of this
Report.
(b) REPORTS ON FORM 8-K.
None.
(c) EXHIBITS.
Exhibit
No. Description
------- -----------
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 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.
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation, as amended, 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.
3.4 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.
4.1 Specimen Stock Certificate for Common Stock $.01 par value.
Filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.
4.2 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated August 1, 1991, issued to Comdisco, Inc. Filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
4.3 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated September 11, 1992, issued to Comdisco, Inc.
Filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.
50
<PAGE>
4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q
for the quarter ended June 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.
4.5 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.
4.6 Warrant to Purchase Common Stock dated January 5, 1993,
issued to Tucker Anthony Incorporated. Filed as Exhibit 4.6
to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.7 Warrant to Purchase Common Stock dated as of February 17,
1994, issued to D. Blech & Company, Incorporated. Filed as
Exhibit 4.6 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
4.8 Warrant Agreement dated February 17, 1994 between the
Company and D. Blech & Company, Incorporated. Filed as
Exhibit 4.7 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
4.9 Warrant to Purchase Common Stock dated as of April 1, 1994,
issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as
Exhibit 4 to the Company's Form 10-Q for the quarter ended
March 31, 1994, Commission File No. 0-21134, and incorporated
herein by reference.
4.10 Warrant to Purchase Common Stock dated as of September 11,
1995, issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10
to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.
4.11 Form of Warrant Agreement between the Company and
Commonwealth Associates. Filed as Exhibit 4.11 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-96798, and incorporated herein by reference.
4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996
and schedule of holders. Filed as Exhibit 4.12 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC
dated January 6, 1997. Filed as Exhibit 4.13 to the Company's
Form 10-K for the year ended December 31, 1996, Commission
File No. 0-21134, and incorporated herein by reference.
51
<PAGE>
4.14 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.
4.15 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.
10.1 Master Lease Agreement (equipment) dated as of August 1, 1991
between the Company and Comdisco, Inc. Filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
10.2 Master Lease Agreement (equipment) dated as of September 11,
1992 between the Company and Comdisco, Inc. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
10.3 Master Lease Agreement (equipment) dated as of April 1, 1994
between the Company and Hambrecht & Quist Guaranty Finance
L.P. Filed as Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-21134,
and incorporated herein by reference.
10.4 The 1998 Equity Incentive Plan, amending and restating the
1989 Stock Plan. Filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.6 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.
10.7 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.
10.8 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
52
<PAGE>
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 Consulting and Confidentiality Agreement dated January 1,
1998 between Procept, Inc. and Mark C. Rogers, M.D. Filed as
Exhibit 10.11 to the Company's Registration Statement on Form
S-4, Commission File No. 33-369821, and incorporated herein
by reference.
10.16 Consulting and Confidentiality Agreement dated January 1,
1998 between Procept, Inc. and Elliott H. Vernon. Filed as
Exhibit 10.12 to the Company's Registration Statement on Form
S-4, Commission File No. 33-369821, and incorporated herein
by reference.
10.17 Consulting and Confidentiality Agreement dated January 1,
1998 between Procept, Inc. and Michael S. Weiss. Filed as
Exhibit
53
<PAGE>
10.13 to the Company's Registration Statement on Form S-4,
Commission File No. 33-369821, and incorporated herein by
reference.
10.18 Employment Offer Letter to Dr. Nigel J. Rulewski from the
Company dated September 3, 1998. Filed as Exhibit 10.24 to
the Company's Registration Statement on Form S-4, Commission
File No. 33-369821, and incorporated herein by reference.
10.19 Consulting and Confidentiality Agreement dated as of May 1,
1994 between the Company and Zola P. Horovitz, Ph.D. Filed as
Exhibit 10 to the Company's Form 10-Q for the quarter ended
June 30, 1994, Commission File No. 0-21134, and incorporated
herein by reference.
10.20 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.
10.21 Registration Rights Agreement dated January 6, 1997 between
the Company and Furman Selz LLC. Filed as Exhibit 10.36 to
the Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
10.22 Form of Indemnification Agreement between Procept, Inc. and
its Directors. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.23 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed as Exhibit
10.40 to the Company's Form 10-K for the year ended December
31, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.24 Extension to the Consulting and Confidentiality Agreement
dated December 3, 1998 between Procept, Inc. and Mark C.
Rogers, M.D. Filed as Exhibit 10.25 to the Company's
Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.25 Extension to the Consulting and Confidentiality Agreement
dated December 3, 1998 between Procept, Inc. and Elliott H.
Vernon. Filed as Exhibit 10.26 to the Company's Registration
Statement on Form S-4, Commission File No. 33-369821, and
incorporated herein by reference.
10.26 Extension to the Consulting and Confidentiality Agreement
dated December 3, 1998 between Procept, Inc. and Michael S.
Weiss. Filed as Exhibit 10.27 to the Company's Registration
Statement on
54
<PAGE>
Form S-4, Commission File No. 33-369821, and incorporated
herein by reference.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants to the Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important factors regarding forward-looking statements.
Filed herewith.
- - -----------------------
Exhibits 10.4 through 10.8, 10.15 through 10.20, 10.22 and 10.24 through 10.26
are management contracts or compensatory plans, contracts or arrangements in
which executive officers or directors of the Company participate.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, on this 30th day of March, 1999.
PROCEPT, INC.
(Registrant)
/s/ John F. Dee
-----------------------------
John F. Dee,
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 30th day of March, 1999:
<TABLE>
<CAPTION>
Capacity
--------
<S> <C>
/s/ Michael S. Weiss Chairman
- - -----------------------------
Michael S. Weiss
/s/ John F. Dee President, Chief Executive Officer
- - ----------------------------- and Director (Principal Executive Officer)
John F. Dee
/s/ Michael E. Fitzgerald Vice President, Finance and Chief Financial Officer
- - ----------------------------- (Principal Financial Officer and Principal Accounting Officer)
Michael E. Fitzgerald
/s/ Zola P. Horovitz, Ph.D. Director
- - -----------------------------
Zola P. Horovitz
/s/ Max Link, Ph.D. Director
- - -----------------------------
Max Link
/s/ Mark C. Rogers, M.D. Director
- - -----------------------------
Mark C. Rogers
/s/ Nigel J. Rulewski, M.D. Director
- - -----------------------------
Nigel J. Rulewski
/s/ Elliott H. Vernon Director
- - -----------------------------
Elliott H. Vernon
</TABLE>
56
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
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 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.
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation, as amended, 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.
3.4 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.
4.1 Specimen Stock Certificate for Common Stock $.01 par value. Filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
4.2 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit
4.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.3 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated September 11, 1992, issued to Comdisco, Inc. Filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
57
<PAGE>
4.5 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.
4.6 Warrant to Purchase Common Stock dated January 5, 1993, issued to
Tucker Anthony Incorporated. Filed as Exhibit 4.6 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
4.7 Warrant to Purchase Common Stock dated as of February 17, 1994,
issued to D. Blech & Company, Incorporated. Filed as Exhibit 4.6
to the Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by
reference.
4.8 Warrant Agreement dated February 17, 1994 between the Company and
D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to the
Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by
reference.
4.9 Warrant to Purchase Common Stock dated as of April 1, 1994,
issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as
Exhibit 4 to the Company's Form 10-Q for the quarter ended March
31, 1994, Commission File No. 0-21134, and incorporated herein by
reference.
4.10 Warrant to Purchase Common Stock dated as of September 11, 1995,
issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by reference.
4.11 Form of Warrant Agreement between the Company and Commonwealth
Associates. Filed as Exhibit 4.11 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996 and
schedule of holders. Filed as Exhibit 4.12 to the Company's Form
10-K for the year ended December 31, 1996, Commission File No.
0-21134, and incorporated herein by reference.
4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated
January 6, 1997. Filed as Exhibit 4.13 to the Company's Form 10-K
for the year ended December 31, 1996, Commission File No.
0-21134, and incorporated herein by reference.
4.14 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.
58
<PAGE>
4.15 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.
10.1 Master Lease Agreement (equipment) dated as of August 1, 1991
between the Company and Comdisco, Inc. Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
10.2 Master Lease Agreement (equipment) dated as of September 11, 1992
between the Company and Comdisco, Inc. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
10.3 Master Lease Agreement (equipment) dated as of April 1, 1994
between the Company and Hambrecht & Quist Guaranty Finance L.P.
Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended March 31, 1995, Commission File No. 0-21134, and
incorporated herein by reference.
10.4 The 1998 Equity Incentive Plan, amending and restating the 1989
Stock Plan. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-4, Commission File No. 33-369821, and
incorporated herein by reference.
10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.6 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.
10.7 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.
10.8 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.
10.9 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
59
<PAGE>
Form S-1, Commission File No. 33-57188, and incorporated herein
by reference.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Mark C. Rogers, M.D. Filed as Exhibit
10.11 to the Company's Registration Statement on Form S-4,
Commission File No. 33-369821, and incorporated herein by
reference.
10.16 Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Elliott H. Vernon. Filed as Exhibit
10.12 to the Company's Registration Statement on Form S-4,
Commission File No. 33-369821, and incorporated herein by
reference.
10.17 Consulting and Confidentiality Agreement dated January 1, 1998
between Procept, Inc. and Michael S. Weiss. Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-4,
Commission File No. 33-369821, and incorporated herein by
reference.
10.18 Employment Offer Letter to Dr. Nigel J. Rulewski from the Company
dated September 3, 1998. Filed as Exhibit 10.24 to the
60
<PAGE>
Company's Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.19 Consulting and Confidentiality Agreement dated as of May 1, 1994
between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit
10 to the Company's Form 10-Q for the quarter ended June 30,
1994, Commission File No. 0-21134, and incorporated herein by
reference.
10.20 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.
10.21 Registration Rights Agreement dated January 6, 1997 between the
Company and Furman Selz LLC. Filed as Exhibit 10.36 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
10.22 Form of Indemnification Agreement between Procept, Inc. and its
Directors. Filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-4, Commission File No. 33-369821, and
incorporated herein by reference.
10.23 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed as Exhibit
10.40 to the Company's Form 10-K for the year ended December 31,
1997, Commission File No. 0-21134, and incorporated herein by
reference.
10.24 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Mark C. Rogers, M.D.
Filed as Exhibit 10.25 to the Company's Registration Statement on
Form S-4, Commission File No. 33-369821, and incorporated herein
by reference.
10.25 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Elliott H. Vernon.
Filed as Exhibit 10.26 to the Company's Registration Statement on
Form S-4, Commission File No. 33-369821, and incorporated herein
by reference.
10.26 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between Procept, Inc. and Michael S. Weiss.
Filed as Exhibit 10.27 to the Company's Registration Statement on
Form S-4, Commission File No. 33-369821, and incorporated herein
by reference.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants to
the Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
61
<PAGE>
99.1 Important factors regarding forward-looking statements. Filed
herewith.
- - -----------------------
Exhibits 10.4 through 10.8, 10.15 through 10.20, 10.22 and 10.24 through 10.26
are management contracts or compensatory plans, contracts or arrangements in
which executive officers or directors of the Company participate.
62
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Procept, Inc. on Form S-3 (File Nos. 333-09987 and 333-51245) and Form S-8 (File
Nos. 33-76252, 33-81394, 33-81392, 333-06035, 333-36145, 333-36147, 333-36149,
333-66885, and 333-66887) of our report dated March 17, 1999 on our audits of
the financial statements of Procept, Inc. as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, which report
is included in this Annual Report on Form 10-K. We also consent to the reference
to our firm under the caption "Selected Financial Data".
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
Exhibit 99.1
PROCEPT, INC.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
March 1999
From time to time, Procept through its management may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning projected plans, performance, product development and
commercialization as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities Exchange
Act of 1934, as amended, in press releases or in oral statements made with the
approval of an authorized executive officer. The words "believes," "expects,"
"anticipates," "intends," "estimates" or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933,
as enacted by the Private Securities Litigation Reform Act of 1995.
Procept cautions readers not to place undue reliance on these forward-looking
statements that speak only as of the date on which they are made. In addition,
Procept would advise readers that the factors listed below, as well as other
factors not currently identified by management, could affect Procept's financial
or other performance and could cause its actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods or events in any current statement.
Procept will not undertake and specifically declines any obligation to publicly
release the result of any revisions that may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events that may
cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.
Early Stage of Product Development; Uncertainty of Successful Commercialization
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 December 31,
1998, has an accumulated deficit of approximately $61.0 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 in 1998 of $3.3
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
<PAGE>
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 and has acquired three other candidates through its
merger with Pacific Pharmaceuticals, Inc. In addition, while Procept is
developing these drugs, it has not yet obtained regulatory approval for or
marketed this or any other product. These compounds will require significant
additional research and development efforts, including extensive clinical
testing and regulatory approval, before commercial use. Although these compounds
have advanced to the clinical trial phase, they are 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 and in-licensing efforts 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.
-2-
<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 collaborative 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
-3-
<PAGE>
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 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.
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
-4-
<PAGE>
drug candidates includes entering into partnerships with third parties. Procept
is currently seeking corporate partners to assist in the development of PRO 2000
Gel, Benzyl Guanine, BOPP and its immunotherapy cancer program. 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 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.
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 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.
-5-
<PAGE>
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.
-6-
<PAGE>
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 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.
-7-
<PAGE>
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 dictated that Procept terminate a significant number of
employees in early 1998. 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. If Mr. Dee were not able to continue in such capacity,
Procept could be adversely affected.
Procept is highly dependent upon the efforts of Mr. Dee and its new executive
management team. In January 1999, Procept's Board of Directors appointed Dr.
Nigel Rulewski as Procept's Chief Medical Officer. In March 1999, Procept's
Board of Directors appointed Michael E. Fitzgerald as Procept's Chief Financial
Officer, Dr. Albert Profy is Procept's lead scientist and continues to serve as
Vice President of Pre-Clinical Development. 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
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<PAGE>
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.
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.
-9-
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