<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the quarterly period ended March 31, 1999
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21134
PROCEPT, INC.
---------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2893483
---------- ------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
840 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139
- -------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (617) 491-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of latest practicable date.
CLASS OUTSTANDING AS OF MAY 11, 1999
----- ------------------------------
Common Stock, $.01 par value 11,190,208
Exhibit Index Appears on Page 19
<PAGE>
PROCEPT, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
March 31, 1999 and December 31, 1998
Statements of Operations 4
Three months ended March 31, 1999 and 1998
Statements of Cash Flows 5
Three Months ended March 31, 1999 and 1998
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 15
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROCEPT, INC.
BALANCE SHEETS
----------
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,586,685 $ 2,885,165
Marketable securities 1,001,754 2,003,755
Investment in Aquila 371,686 568,988
Prepaid expenses and other current assets 128,778 182,925
--------------- --------------------
Total current assets 7,088,903 5,640,833
Property and equipment, net 138,294 180,452
Deferred charges -- 176,025
Deposits 190,615 190,615
--------------- --------------------
Total assets $ 7,417,812 $ 6,187,925
=============== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $568,743 $268,815
Notes payable 200,000 --
Accrued compensation 434,737 54,511
Accrued acquisition costs 543,959 --
Other current liabilities 308,148 282,479
Current portion of capital lease obligations 5,149 --
--------------- --------------------
Total current liabilities 2,060,736 605,805
Deferred rent 161,835 185,615
Capital lease obligations 18,061 --
Total liabilities 2,240,632 791,420
--------------- --------------------
Minority interest 4,662,941 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized:
Series A, 0 and 1 share(s) designated at March 31, 1999 and
December 31, 1998; 0and 1 share(s) issued and outstanding
at March 31, 1999 and December 31, 1998 -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
7,304,357 and 3,001,832 shares issued at March 31, 1999 and
December 31, 1998, respectively 73,043 30,018
Additional paid-in capital 75,725,187 70,458,992
Deferred compensation (82,225) (88,716)
Accumulated deficit (75,254,520) (65,264,520)
Accumulated other comprehensive income 64,611 272,588
Treasury stock, at cost; 1,186 shares at March 31, 1999 and
December 31, 1998, respectively (11,857) (11,857)
---------------- ---------------------
Total shareholders' equity 514,239 5,396,505
--------------- --------------------
Total liabilities and shareholders' equity $ 7,417,812 $ 6,187,925
=============== ====================
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Research and development revenue
under collaborative agreements from
related party $ -- $ 109,375
Interest income 81,853 4,659
------------- -------------
Total revenues $ 81,853 $ 114,034
------------- -------------
Costs and expenses:
Research and development 219,493 813,237
General and administrative 490,081 522,262
Charge for purchased in process research and development 9,405,671 --
Restructuring -- 225,000
Other (income) expense, net (43,392) 224
-------------- -------------
Total costs and expenses 10,071,853 1,560,723
------------- -------------
Net loss $ (9,990,000) $ (1,446,689)
============== ==============
Basic and diluted net loss per common share $ (2.69) $ (2.69)
============== ==============
Weighted-average number of common
shares outstanding -- basic and diluted 3,719,797 537,321
============= =============
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,990,000) $ (1,446,689)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 37,589 183,697
Gain on sale of equipment (24,550) (62,952)
Non-cash settlement of litigation 38,127 --
Charge for purchased in process research and development 9,405,671 --
Compensatory stock option expense 6,491 --
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable -- (17,135)
Prepaid expense and other current assets 82,218 (92,387)
Accounts payable (145,606) 142,431
Accrued compensation (31,766) (21,739)
Deferred rent (23,780) (12,960)
Other current liabilities 19,954 14,039
------------- -------------
Net cash used in operating activities (625,652) (1,313,695)
-------------- --------------
Cash flows from investing activities:
Capital expenditures -- (14,345)
Proceeds from sale of equipment 29,119 18,000
Proceeds from maturity of marketable securities 991,326 --
Cash acquired in the acquisition of Pacific Pharmaceuticals 2,750,097 --
Merger costs (358,370) --
-------------- -------------
Net cash (used in) provided by investing activities 3,412,172 3,655
------------- -------------
Cash flows from financing activities:
Payment of note payable (85,000) --
Proceeds from private placement of common stock -- 3,422,500
Expenses from private placement of common stock -- (444,925)
Deferred financing charges -- (71,971)
Principal payments on capital leases -- (6,696)
------------- --------------
Net cash (used in) provided by financing activities (85,000) 2,898,908
-------------- -------------
Net change in cash and cash equivalents 2,701,520 1,588,868
Cash and cash equivalents at beginning of period 2,885,165 535,242
------------- -------------
Cash and cash equivalents at end of period $ 5,586,685 $ 2,124,110
============= =============
Supplement disclosure of cash flow information:
Cash paid for interest $ 549 $ 292
============= =============
Stock options issued for consulting services -- $ 18,000
============= =============
Supplemental disclosure of non-cash transactions:
Common stock issued to acquire Pacific Pharmaceuticals $ 3,766,913 --
============= =============
Common stock options issued in the Pacific acquisition $ 965,435 --
============= =============
Common stock issued to pay off loans $ 441,870 --
============= =============
Common stock issued in settlement of legal action $ 135,002 --
============= =============
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
NATURE OF BUSINESS
Procept, Inc. ("Procept" or the "Company") located in Cambridge, MA is a
biopharmaceutical company currently engaged in the development and
commercialization of novel drugs with a product portfolio focused on infectious
diseases and oncology. As discussed more fully in Note 7, on March 17, 1999,
Procept consummated its merger with Pacific Pharmaceuticals, Inc. ("Pacific") in
which Pacific became a subsidiary of Procept. The combined company has 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 broaden its drug development pipeline and
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 $75.3 million
through March 31, 1999. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to develop
drug candidates and from the associated administrative costs. The Company
expects to incur significant additional operating losses over the next several
years and expects cumulative losses to increase substantially due to preclinical
and clinical testing, and development of marketing, sales and production
capabilities. Procept's future plans will focus on drug development rather than
research. The Company is seeking strategic partnering opportunities for its lead
compounds to accelerate revenue and minimize the investment required for
marketing, sales and production capabilities.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements and/or strategic partnering,
there can be no assurance that additional funding will be available from any of
these sources or, if available, will be available on acceptable or affordable
terms. If the Company is unable to enter into an additional corporate
collaboration(s) that produce revenue for the Company, or secure additional
financing, the Company's financial condition will be adversely affected.
The accompanying financial statements for the three-month period ended March 31,
1999 and 1998 are unaudited and have been prepared by the Company in accordance
with generally accepted accounting principles. These interim financial
statements, in the opinion of management, reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
results for the interim periods ended March 31, 1999 and
6
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
1998. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998 which are
contained in the Company's 1998 Annual Report on Form 10-K.
2. SHAREHOLDERS' EQUITY
On December 31, 1998, the Company had a total of 3,001,832 shares of common
stock outstanding. During the quarter ended March 31, 1999, the Company issued
4,302,525 new shares of common stock. These issuances resulted from the
acquisition of Pacific Pharmaceuticals, Inc. ("Pacific") and contractual
obligations associated with the 1998 subscription agreement. The following
section summarizes the recent issuances of the Company's common stock.
On March 15, 1999, the Company issued 36,785 shares of its common stock to
Commonwealth Associates in connection with the settlement of the litigation
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. On the same date, the Company issued 2,724 shares of its
common stock to The Harvard School of Dental Medicine as partial satisfaction of
certain contractual obligations of Pacific.
On March 17, 1999, Pacific was merged with, and became a wholly owned subsidiary
of, the Company. In connection with the merger, each share of Pacific common
stock (including preferred stock on an as converted basis) was converted into
approximately 0.11 shares of Procept common stock or a total of 2,755,000
Procept shares; an additional 414,584 Procept shares were issued to holders of
Pacific's preferred stock, for a total of 3,169,584 shares (of which 1,558,587
shares of Procept common stock issued in the merger to holders of Pacific
preferred stock were accompanied by certain contractual rights identical to
contractual rights held by purchasers in Procept's 1998 private placement). The
Company also issued 88,374 shares of its common stock in exchange for the
cancellation of certain indebtedness of Pacific.
The issuance of common stock in connection with the Pacific merger was a
dilutive issuance under the terms of the Subscription Agreement entered into
in connection with the 1998 private placement (the "1998 Subscription
Agreement"). On March 17, 1999 pursuant to anti-dilution provisions of the
1998 Subscription Agreement, the Company issued 1,005,058 shares of its
common stock to purchasers in the 1998 private placement and certain other
stockholders with identical contractual rights. In addition, the exercise
price of the Company's Class C Warrants issued in connection with the 1998
private placement was reduced from $5.00 to $3.67 as a result of the dilutive
issuance.
On April 9, 1999, pursuant to the contractual reset provision contained in the
1998 Subscription Agreement, the Company issued 3,885,851 shares of its common
stock to the purchasers in the 1998 private placement and certain other
stockholders with identical contractual rights.
3. RESEARCH COLLABORATIONS
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"). Under the Sponsored Research Agreement, Procept
conducted specified research tasks on behalf of VacTex for which Procept
received a combination of cash and equity in VacTex based on the number of
full-time equivalent employees of
7
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
Procept engaged in the research, but subject to maximum cash and stock
limits. At December 31, 1997, the Company's investment in VacTex was
accounted for under the cost method since it was a restricted security, it
did not have a readily determinable fair value and Procept owned less than
twenty percent of VacTex.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
("Aquila"). The Company's investment in VacTex of 300,000 shares of common
stock was converted to 113,674 shares of Aquila common stock and $128,501
principal amount of 7% debentures. As a result, the Company is accounting for
its investment in Aquila under Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities" as an available for sale security and marked it to market by
recognizing an accumulated unrealized net gain of $64,611 as part of
Shareholders' Equity, based on Aquila's common stock closing price on March
31, 1999.
4. RESTRUCTURING
In order to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on all other research programs, except limited preclinical
support for its intracellular T-cell enzyme ("DHODH") program, and underwent a
significant downsizing, reducing its staff to 10 people. Due to the
restructuring and focus on the development of PRO 2000, the Company has sold and
plans to continue to sell most of its research and development equipment. For
the three months ended March 31, 1999, the Company received approximately
$29,000 from the sale of equipment and has recorded a gain of approximately
$25,000 in other expenses.
5. BASIC AND DILUTED NET (LOSS) PER COMMON SHARE
In the quarter ended December 31, 1997, the Company adopted SFAS 128, "Earnings
Per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is based upon the
weighted average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed exercises of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock options using the treasury stock method. For the three-month period ended
March 31, 1999, there were no dilutive securities.
8
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements and will provide such information annually in
its Statement of Shareholders' Equity and in a footnote disclosure for interim
periods. Accumulated other comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss $ (9,990,000) $ (1,446,689)
Change in unrealized gain
on investments (207,977) --
--------------- ----------------
Comprehensive loss $ (10,197,977) $ (1,446,689)
=============== ================
Unrealized gain on investments:
Balance at December 31, 1998 $ 272,588
Change during the three months
ended March 31, 1999 (207,977)
---------------
Balance at March 31, 1999 $ 64,611
==============
</TABLE>
7. ACQUISITION OF PACIFIC PHARMACEUTICALS, INC.
On December 10, 1998, Procept entered into a definitive Agreement and Plan of
Merger (the Merger Agreement) 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
Pharmaceuticals closed on March 17, 1999.
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 $5.7 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 $9.4 million of the purchase price has been allocated to
in-process research and development and expensed in the quarter ended March
31, 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 which there is no alternative future use. The value assigned to these
programs has been developed by determining the fair value of these programs,
as provided by an independent valuation of the Pacific business.
The valuation methodology was based on estimated discounted cash flows. 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.
9
<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 holders of Pacific preferred stock were accompanied by certain
contractual rights identical to contractual rights held by purchasers in
Procept's 1998 private placements). In addition, Procept assumed an
approximately $6.5 million, net obligation (payable in cash or common stock
of Procept, at the sole option of the Company) 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 $1,005,058 shares of its common
stock to purchasers in Procept's 1998 private placement and certain other
stockholders pursuant to certain contractual anti-dilution rights.
PRO FORMA RESULTS OF OPERATION
The following unaudited pro forma results of operations for the three months
ended March 31, 1999 and 1998 give effect to the Company's acquisition of
Pacific Pharmaceuticals, Inc. as if the transaction had occurred at the
beginning of each period. The pro forma results of operation exclude the charge
for in process research and development of $9.4 million that was recorded with
the acquisition in 1999, and do not purport what the Company's results of
operations actually would have been if the acquisition has occurred as of the
beginning of the periods, or what such results will be for any future period.
The financial data are based upon financial assumptions that the Company
believes are reasonable and should be read in conjunction with the consolidated
financial statements and accompanying notes thereto included elsewhere in this
report.
<TABLE>
<CAPTION>
Pro Forma Results for the
QUARTER ENDED MARCH 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues $118,931 $167,818
Net loss $ (1,393,097) $ (2,669,095)
=============== ===============
Basic and diluted net loss per common share $ (0.19) $ (1.41)
=============== ===============
</TABLE>
10
<PAGE>
8. 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 effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
11
<PAGE>
ITEM 2. 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 with a product portfolio
focused on infectious diseases and oncology. This includes three compounds in
human clinical trials which may be candidates for accelerated regulatory
approval. On March 17, 1999 Procept consummated its merger with Pacific
Pharmaceuticals, Inc. ("Pacific") in which Pacific became a subsidiary of
Procept. Procept is also continuing its search to acquire or in-license new drug
development candidates to broaden its drug development pipeline and 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. Procept has generated no revenues from product sales,
has not been profitable since inception, and has incurred an accumulated deficit
of $75.3 million through March 31, 1999. The Company is dependent upon research
and development collaborations, equity financing and interest on invested funds
to provide the working capital required to pursue its intended business
activities. Losses have resulted principally from costs incurred in research and
development activities related to the Company's efforts to develop drug
candidates and from the associated administrative costs required to support
these efforts. The Company expects to incur significant additional operating
losses over the next several years due to its ongoing development efforts and
expanded preclinical and clinical testings. The Company's potential for future
profitability is dependent on its ability to effectively develop its current
pharmaceutical compounds and in-license and develop new pharmaceutical products,
as well as obtain regulatory approvals and adequate financing for such products.
Future profitability will require that the Company establish agreements for
product development, commercialization and sales of its products with corporate
sponsors.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The Company's total revenues decreased by $32,000 in the first quarter of 1999
from the same period in 1998, principally as a result of the expiration of the
Sponsored Research Agreement with VacTex, Inc. (the "VacTex Agreement"). During
the period ended March 31, 1999, revenues consisted of $82,000 in interest
earned on invested funds. In 1998, first quarter revenues consisted of $109,000
earned under the VacTex Agreement and $4,600 in interest earned on invested
funds.
The Company's total operating expenses increased to $10.1 million primarily
resulting from an in process research and development charge of $9.4 million
relating to the acquisition of Pacific Pharmaceuticals, Inc. in the first
quarter of 1999. Without this charge, total operating expenses decreased to $0.7
million in the first quarter of 1999 from $1.6 million during the same period in
1998. Research and development expenses decreased 73% to $0.2 million in the
first quarter of 1999 from $0.8 million in the first quarter of 1998. This
expense decrease was due primarily to a decrease in personnel in the Company's
research and development organization and their related research costs. In order
to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on all other research programs, except preclinical support for
its intracellular T-cell enzyme ("DHODH") program, and underwent a significant
downsizing, reducing its staff to 10 people. General and administrative expenses
decreased 6% to approximately $0.5 million in the first quarter of 1999 from
approximately $0.5 million in the first quarter of 1998, reflecting the decrease
in administrative personnel for the full quarter and continued cost control
measures including subleasing activities. A gain of $43,392 is included in other
expenses in the first quarter of
12
<PAGE>
1999 which was generated from the sale of research and development equipment
and supplies. Due to the restructuring and focus on the development of PRO
2000, the Company has sold and plans to continue to sell most of its research
and development equipment.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's aggregate cash, cash equivalents and marketable
securities were $6.6 million, a net increase of $1.7 million since December 31,
1998. The increase in cash is primarily attributable to the acquisition of
Pacific Pharmaceuticals, Inc. ("Pacific") which resulted in a cash infusion of
$2.8 million, offset by $0.6 million cash used in operations. Included in cash
is $0.03 million from the sale of research and development equipment. Due to
downsizing and focus on the development of PRO 2000, the Company plans to
continue to sell most of its research and development equipment.
On March 17, 1999, Procept completed the acquisition of Pacific, a public
research and development company engaged in the development of cancer
therapies. Each of Pacific's shares of 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. An additional 414,584 shares of Procept common stock were
issued in the merger to the holders of Pacific's preferred stock as a result
of certain contractual rights identical to contractual rights held by
purchasers in Procept's 1998 private placement. In addition, Procept has
assumed an approximately $6.5 million, net obligation (payable in cash or
common stock of Procept, at the sole option of the Company) of Pacific's
subsidiary, BG Development Corp. and Procept agreed to exchange all of
Pacific's outstanding warrant, unit purchase option and stock option
obligations into like instruments of Procept.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to the Company. If the Company is unable
to enter into an additional corporate collaboration(s) that produce revenue for
the Company, or secure additional financing, the Company's financial condition
will be adversely affected. If additional funds are raised by issuing equity
securities, further dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the execution of new collaboration agreements for the Company's research and
development programs. Other important factors that may affect achieving the
Company's strategic goals and other forward-looking statements are set forth in
Exhibit 99.1 of the Company's 1998 Annual Report on Form 10-K.
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,
13
<PAGE>
competitive and technological advances, the process of obtaining United
States Food and Drug Administration or other regulatory approvals and other
factors.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the adoption will have a material effect.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
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.
14
<PAGE>
ITEM 3. 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 principals.
The Company is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The litigation previously disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 was settled on February 18, 1999. In
connection with the settlement of the claim, the Company paid to Commonwealth
Associates $45,000 in cash and 36,785 shares of the Company's common stock.
ITEM 2. CHANGE IN SECURITIES.
Pacific Pharmaceuticals, Inc. ("Pacific") was merged into, and became a wholly
owned subsidiary of, the Company on March 17, 1999. In connection therewith, on
March 17, 1999, the Company issued an aggregate of 88,374 shares of common stock
to Lindsay Rosenwald, The Aries Trust and the Aries Domestic Fund L.P. in
exchange for the cancellation of certain indebtedness of Pacific.
On March 15, 1999, the Company issued 2,724 shares of common stock to The
Harvard School of Dental Medicine as partial satisfaction of certain contractual
obligations of Pacific.
On March 15, 1999, the Company issued 36,785 shares of common stock to
Commonwealth Associates in connection with the settlement of litigation
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
All of the above issuances were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on Monday, March 15, 1999.
The shareholders voted on the following proposal:
"Proposal to issue approximately 4,257,728 shares of the Company's
common stock in connection with and as a result of the acquisition of
Pacific Pharmaceuticals, Inc. ("Pacific") pursuant to and in connection
with the Agreement and Plan of Merger dated as of December 10, 1998, as
amended, among the Company, Pacific and a wholly owned subsidiary of
the Company."
The shareholders adopted the proposal as follows:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
-------------- ------------------ -----------
<S> <C> <C>
2,232,644 2,887 1,723
</TABLE>
16
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27.1 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K.
Current report on Form 8-K dated March 30, 1999 filed with the
Securities and Exchange Commission on March 30, 1999 relating
to the completion of the Company's merger with Pacific
Pharmaceuticals, Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROCEPT, INC.
(Registrant)
Date: May 24, 1999 by: /s/ JOHN F. DEE
--------------------------------------
John F. Dee
President and Chief Executive Officer
/s/ MICHAEL E. FITZGERALD
--------------------------------------
Michael E. Fitzgerald
Vice President, Finance
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
-------- -----------
27.1 Financial Data Schedule. Filed herewith.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,586,685
<SECURITIES> 1,001,754
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,088,903
<PP&E> 1,963,386
<DEPRECIATION> 1,825,092
<TOTAL-ASSETS> 7,417,812
<CURRENT-LIABILITIES> 2,060,736
<BONDS> 0
0
0
<COMMON> 73,043
<OTHER-SE> 5,035,959
<TOTAL-LIABILITY-AND-EQUITY> 7,417,812
<SALES> 0
<TOTAL-REVENUES> 81,853
<CGS> 0
<TOTAL-COSTS> 5,476,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 549
<INCOME-PRETAX> (5,395,237)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,395,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,395,237)
<EPS-BASIC> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>