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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, 1996
___ 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 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 24, 1996 was $13,222,987.
The number of shares of the registrant's common stock outstanding as of March
24, 1997 was 13,771,868
Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed
with the Securities and Exchange Commission relative to
the 1997 Annual Meeting of Stockholders are incorporated by reference into
Part III of this report.
PART I
ITEM 1. BUSINESS.
CORPORATE SUMMARY
Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company
engaged in the discovery and development of novel drugs for the treatment or
prevention of: (i) autoimmune diseases and organ transplant rejection and (ii)
infectious diseases, particularly AIDS and tuberculosis. The Company is
currently pursuing five principal research and product development programs in
these areas.
The Company's lead product candidate, PRO 2000, is currently being evaluated in
Phase I human clinical trials as a vaginal topical microbicide to prevent
transmission of HIV-1 and other sexually transmitted disease ("STD") pathogens.
Topical microbicides are designed to provide a chemical barrier to infection and
their development is now a high priority of the U.S. Government and
international agencies. As currently scheduled, Phase I clinical trials in
Antwerp, Belgium and in London, U.K. will be completed during the first half of
1997.
In addition to its PRO 2000 clinical development program, Procept is pursuing
four research programs that leverage the Company's expertise in T cell biology.
With respect to its three immunosuppression programs, Procept targets the CD4
receptor, the CD2 receptor and an intracellular T cell enzyme. In the area of
infectious disease, the Company is investigating the CD1 receptor system and its
role in tuberculosis.
Procept was founded on the basis of its knowledge in areas of cellular
immunology tied to a powerful platform technology centered on nuclear magnetic
resonance ("NMR") spectroscopy. Its immunology expertise derives from the
laboratories of scientists at Harvard who were the first to characterize the CD2
receptor on T cells and to fully characterize both the MHC-recognition domain
and the viral binding domain of the CD4 receptor borne by T cells. In the area
of immunosuppression, Procept continues to identify important new drug targets
involving the immune system. Procept also has accomplished, well-trained
personnel and outstanding laboratory facilities, including powerful NMR
equipment. These assets are now being leveraged by melding NMR with drug
screening technology, providing the Company with the potential of designing
compounds with the efficacy of large molecules but with the delivery advantage
of small molecules.
1
PROCEPT'S TECHNOLOGY AND DRUG DEVELOPMENT STRATEGY
The Company's approach to drug development is to (i) identify T cell drug
targets that are important in the regulation of the immune system, (ii) clone
express and purify these drug targets, (iii) determine the three-dimensional
structures and active sites of these proteins using x-ray crystallography and
NMR spectroscopy, (iv) employ proprietary high-throughput molecular, cellular,
and NMR-based screening assays to identify potential lead compounds and (v)
optimize lead compounds using medicinal chemistry as well as structure-based
design techniques.
[typeset representation of flow chart]
T-cell
Biology
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| | | |
Targets | Intracellular | |
CD1 Enzyme CD2 CD4
| | | |
| | | |
| | | ----------------
| | | | |
| | | | |
| | | | |
-----------------------------------------------------------------
Tools Medicinal Chemistry, Screening, Structure Determination, "SAR by NMR"
-----------------------------------------------------------------
| | | |
| | | |
| | | |
| | | |
\/ \/ \/ \/
Drugs Lipid TB Immunosuppressive PRO 2000
Vaccine Antiviral
|
|
--------------
| |
| |
\/ \/
Systemic HIV Topical STD
Therapy Barrier
- --------------------------------------------------------------------------------
Preclinical Development Clinical Trials
- --------------------------------------------------------------------------------
[end chart]
IMMUNE SYSTEM OVERVIEW
The immune system is composed of a complex variety of cells, each with a
specialized function, that contributes to the defense of the body by responding
to infectious agents. This immune response involves a sequence of events,
beginning with the recognition of foreign substances, known as antigens, by
lymphocytes, a type of white blood cell. Antigen-presenting cells are another
type of cell which, through their surface protein, the Major Histocompatibility
Complex ("MHC") or CD1 receptor, non-specifically recognize antigens and present
them to T cells, the "command center" of the immune system. In contrast to
antigen-presenting cells, T cells recognize specific antigens, become activated
and rapidly divide, producing an army of cells to fight foreign invasion.
Activated T cells either engage in the direct killing of infected cells or in
the secretion of lymphokines which recruit other cell types to respond.
Together, T cells and antigen-presenting cells provide the immune system with
the specificity and flexibility to respond to a wide array of infectious agents.
2
PROCEPT'S DRUG DEVELOPMENT TARGETS
Fundamental to research at Procept is a detailed knowledge of the T cell and its
role in the normal function of the immune system. With respect to its
immunosuppressive programs, Procept targets immune cell receptors (including CD2
& CD4) and intracellular T cell enzymes. In its infectious disease programs, the
Company has utilized its knowledge of the CD4 receptor system and has developed
an understanding of the CD1 receptor system.
Immune cell receptors are proteins, found on the surface of immune system cells,
that play a role in the antigen recognition process. These receptors perform a
variety of functions including cell-to-cell communication and identification of
foreign antigens. Normally, these functions endow these receptors with the
ability to modulate the body's immune response, and in many cases these
receptors have been shown to play a critical role as biological pathways leading
to initiation of the immune response. When the system does not function
properly, however, or is stimulated inappropriately, a multitude of autoimmune
disorders may result. One of these receptors, CD4, is also known to be the major
portal of entry for HIV, the virus that causes AIDS.
Procept's approach to developing drugs to prevent immune system disorders is to
gain an understanding of the role that certain T cell receptors and
intracellular enzymes play in the antigen recognition process. Procept has
focused on two types of receptors that play a key role in this process: CD4 and
CD2. In addition to T cell receptors and enzymes, Procept is studying the CD1
receptor system, which activates T cells by lipid antigen presentation. These
receptors are involved in the very first events of immune system stimulation and
can be used as targets for therapies that would allow physicians to treat the
cause of immune system disorders such as AIDS, rheumatoid arthritis,
insulin-dependent diabetes, multiple sclerosis, lupus, psoriasis and contact
dermatitis, and infectious diseases such as tuberculosis, leprosy and malaria,
not just the symptoms of such disorders and diseases.
PROCEPT'S DRUG DEVELOPMENT TOOLS
SAR by NMR
Since 1990, Procept has been developing the tools that allow it to capitalize on
an exciting new approach to drug discovery, Structure Activity Relationship by
NMR ("SAR by NMR"). To date, it has been difficult to obtain small molecule
inhibitors of protein-protein interactions, including receptors of the
immunoglobulin (Ig) super-family. The potential strength of SAR by NMR lies in
the ability to identify small molecule fragments that bind very weakly to the
protein, followed by enhancement of affinity through site optimization and
linking of adjacent fragments. The successful application of this new approach
to Ig-like receptors such as CD4 and CD2 would be a significant advance in drug
discovery. Procept has acquired the sophisticated instrumentation and staff
necessary for this program, has determined the three-dimensional structure of
important drug targets, and has a growing library of low molecular weight
compounds to screen for drug leads.
Compound Profiling Expertise
Procept currently utilizes a comprehensive battery of in vitro and in vivo
assays designed to identify and improve upon immunosuppressive compounds. These
assays focus on a given compound's ability to inhibit the activation of T cells.
T cell activation serves as the initiating step in specific immune/inflammatory
reactions. In pathological situations, such as autoimmune disease and organ or
bone marrow transplant rejection, unwanted T cell activation can lead to tissue
damage. Procept is able to quickly assess the effectiveness of selected
compounds in in vivo models for conditions of commercial importance, including
arthritis, multiple sclerosis, and organ transplant rejection.
3
PROCEPT'S DRUG DEVELOPMENT PROGRAMS
The Company has five research and development programs in various stages of
development and is developing two drug development platform technologies. The
following chart summarizes the target and status of each of the Company's five
drug development programs.
Status
------
Program Disease Targets Discovery | Research | Preclinical | Clinical
- ------- --------------- ---------------------------------------------
PRO 2000 Gel AIDS ----------------------------------------
CD4 Autoimmune diseases/transplant rejection ------------------
CD2 Autoimmune diseases/transplant rejection ------------------
T Cell Enzyme Autoimmune diseases/transplant rejection ------------------
CD1 Intracellular infectious diseases ----------------
IMMUNOSUPPRESSION DRUG DEVELOPMENT PROGRAMS
CD4 Receptor Program
Procept believes that molecules that inhibit CD4 receptor function will provide
fundamentally new approaches to immunosuppressive therapy. The CD4 molecule
functions as a "co-receptor" for the antigen-specific T cell receptor, or TCR,
during the immunological activation of T cells. CD4+ T cells play a major role
in the induction of graft rejection and autoimmune disease. Current T
cell-targeted drugs (such as cyclosporine) are potent immunosuppressives, but
suffer from severe side effects unrelated to their T cell activity. Thus, there
is a clear need for new and novel T cell-targeted therapies. The CD4 molecule is
also the receptor which binds the HIV-1 envelope protein gp120, thereby allowing
the infection of CD4-bearing T cells. Procept scientists and their collaborators
were the first to solve the three-dimensional structure of CD4, and have
recently used Procept's NMR capability to derive proprietary structural
information useful in a drug discovery approach.
The combination of Procept's structural and bioassay tools make the Company a
leader in CD4-targeted drug discovery. These tools include:
[bullet] The ability to produce large quantities of recombinant protein
reagents.
[bullet] Molecular assays (ELISA type and biophysical type) for detecting and
quantitating the binding of compounds to CD4, and for characterizing
their ability to inhibit the interaction of CD4 with its ligands.
[bullet] Cell-based assays to screen for inhibitors of CD4/class II dependent
function (e.g. cell-cell adhesion, T cell signaling, T cell
proliferation). Also, cell based assays to screen for inhibitors of
CD4-dependent HIV infection.
[bullet] Proprietary information on the solution NMR structure, and crystal
structure, of human 2-domain CD4.
[bullet] Extensive knowledge of sites of interaction of CD4 with both MHC
class II and HIV gp120, as determined by site directed mutagenesis.
[bullet] The capability to define details of CD4/inhibitor interactions at
the molecular level by NMR and crystallography.
4
CD2 Receptor Program
Procept was also the first to determine the three-dimensional structure of human
CD2. CD2 has recently been shown to play key roles in activating the immune
system and in the breaking of immunological anergy or tolerance. As with CD4,
the Company has initiated a drug discovery program using a combination of high
throughput screening and SAR by NMR to identify small molecules that inhibit CD2
function and thereby promote selective immunosuppression. Procept has an
extremely strong drug discovery "tool kit" for CD2, including proprietary
structural knowledge, robust receptor-based molecular drug screens and
scientific depth in T cell immunology, making it a leader in targeting drugs to
this receptor. Such molecules are expected to be effective in preventing graft
rejection and treating autoimmune disease.
Procept has achieved significant milestones in the area of CD2-targeted drug
discovery. These achievements include:
[bullet] The production of large quantities of recombinant protein reagents,
including glycosylated soluble CD2 receptor, CD58 receptor and
chimeric proteins.
[bullet] Development of a novel and robust ELISA-type molecular assay to
screen directly for inhibitors of the CD2/CD58 interaction. This
assay is capable of high-throughput, and accurately mimics the
targeted in vivo interaction.
[bullet] Establishment of cell lines and a panel of cellular screening assays
to assist in the characterization of lead molecules - certain of
these functional assays may also be suitable for use in
high-throughput screening.
[bullet] Development of hybridomas and tools for the production of monoclonal
antibodies with the appropriate biological properties.
[bullet] Determination of the proprietary 3D structure and active site data
for human CD2, and the capability to define details of CD2/inhibitor
interactions at the molecular level by (750 MHz) NMR.
[bullet] Murine models to investigate the ability of CD2 inhibitors to
perturb immune cell function in vivo, to profile analogs, and to
evaluate pharmacological properties.
New T cell target: Intracellular Enzyme
Procept has initiated work on a new therapeutic target that takes advantage of
the Company's extensive experience in T cell biology. Rather than targeting a T
cell surface receptor, the new program focuses on an intracellular enzyme. This
enzyme is now known to be critical for T cell division (expansion of "angry" T
cell populations), making it a good target for intervention in transplantation
and autoimmune disease. Procept has cloned and expressed the human enzyme. A
screening system which uses the recombinant enzyme is in place, and first
generation inhibitors have been identified.
INFECTIOUS DISEASE DRUG DEVELOPMENT PROGRAMS
PRO 2000 Topical Microbicide
By being the first to determine the three-dimensional structure of human CD4,
Procept's scientists laid the groundwork for a proprietary drug discovery
program to identify small molecules that inhibit the binding of HIV-1 to CD4.
Preclinical studies demonstrate that the Company's lead compound, PRO 2000,
binds with high affinity (~20 nM) to the binding domain on CD4 for HIV without
any measurable side-effect on immunological function.
5
PRO 2000, as a topically administered gel, is currently under development as a
female-controlled broad spectrum preventative for sexually transmitted diseases,
including HIV. Worldwide, approximately 70% of HIV transmission occurs through
heterosexual intercourse. Condoms can provide an effective barrier, but are not
used consistently due to their inconvenience and control by the male partner.
Procept has developed a topical formulation of PRO 2000 that is in Phase I
clinical testing as a vaginal gel. Preclinical studies demonstrate that PRO 2000
is a more effective anti-HIV agent than nonoxynol-9. In addition, in vitro
preclinical studies have demonstrated that PRO 2000 is potent against other
sexually transmitted agents such as herpes simplex type 1, herpes simplex type 2
and cytomegalovirus. Activity against other STDs is currently under evaluation.
Phase I clinical trials to assess vaginal irritation in healthy female
volunteers began in January, 1997 in Antwerp, Belgium (Institute of Tropical
Medicine) and London, U.K. (St. Mary's Hospital). If the gels are well
tolerated, Procept plans to conduct a series of Phase I/II studies to assess
safety in diverse populations, including groups at high risk for STD infection.
This would be followed by a Phase III trial to evaluate efficacy. Discussions
are underway with the National Institutes of Health and the British Medical
Research Council ("MRC") to secure support for the clinical program.
The Company's intentions with respect to the further development of PRO 2000 Gel
are forward looking statements, based on current management expectations.
Factors that could cause such expectations to change, resulting in the delay or
cancellation of the PRO 2000 research program and related preclinical and
clinical studies include the following: the availability of financing for the
Company's continued research operations; technical risks associated with the
development of PRO 2000; changes in regulatory requirements; anticipated market
acceptance of such new drug; and competitive factors and pricing pressures.
PRO 2000 Systemic Study
In September 1996, the Company began a Phase I/II study in Brussels, Belgium to
evaluate PRO 2000 as an injectable drug to treat HIV positive patients. In this
study, eight patients were administered drug intravenously. Although no
side-effects were observed, the Company has decided to postpone, indefinitely,
the development of this formulation and to concentrate all of its efforts on the
clinical development of PRO 2000 as a topical microbicide. This decision was
made based on several factors, including: 1) the rapid progress to date in the
development of PRO 2000 as a topical microbicide, 2) the ability to clearly
differentiate PRO 2000 gel as a leading drug candidate, 3) the rapidly changing
competitive environment for systemic drugs to treat AIDS, and 4) a mandate to
focus its efforts on its highest priority drug discovery programs.
CD1 Receptor
In January 1996, Procept entered into a sponsored research agreement with
VacTex, Inc. ("VacTex") to develop novel vaccines based on the CD1 antigen
presentation system. The program, conducted in conjunction with Dr. Michael
Brenner at Brigham & Women's Hospital and Harvard Medical School, focuses on a
novel receptor system for presentation of lipid antigens from infectious disease
pathogens. This CD1 receptor system is thought to be critical in mediating the
immune response to Tuberculosis bacteria ("TB") and other related bacteria.
TB kills more people than any other infectious agent. Over a third of the
world's population is infected with this bacterium. There is now no cure
for some multidrug resistant TB strains, and the current vaccine has been
ineffective in stopping the epidemic. VacTex is funding vaccine studies in in
vivo models involving presentation of lipids by the novel CD1 system.
6
Procept and VacTex have put in place a strong CD1 receptor/TB vaccine research
program:
[bullet] Studies are underway to determine which lipids would be the most
useful vaccine antigens, and to further clarify exactly how lipid
antigens stimulate T cells through via CD1 receptor.
[bullet] Vaccine studies in an in vivo model of TB are underway. These employ
CD1-presented lipids isolated from TB bacterial cell walls as the
primary antigen.
[bullet] Data from these studies will eventually be used to extend the CD1
receptor approach to other parasitic disease such as malaria, and to
autoimmune diseases such as multiple sclerosis which appears to have
a CD1 antigen presentation component.
DRUG DISCOVERY TOOLS
SAR by NMR
Recently, Procept scientists, in collaboration with the laboratory of Gerhard
Wagner of Harvard University, solved the three-dimensional structure of
w-terminal 2-domain CD4. This structure encompasses the binding regions of CD4
to MHC Class II and to the gp120 domain of HIV. The extensive set of CD4
resonance assignments obtained from this work will allow application of the new
SAR by NMR approach to the discovery of novel drug leads. To date, it has been
difficult to obtain small molecule inhibitors of protein-protein interactions,
including receptors of the immunoglobulin (Ig) super-family. The potential
strength of SAR by NMR lies in the ability to identify small molecule fragments
that bind very weakly to the protein (mM affinity), followed by enhancement of
affinity through site optimization and linking of adjacent fragments. The
successful application of this new approach to Ig-like receptors such as CD4
would be a major advance in drug discovery.
Procept scientists, in collaboration with the laboratory of Ellis Reinherz of
the Dana-Farber Cancer Institute, have also determined essential binding sites
on CD4 (for MHC II and gp120) using site-directed mutagenesis. This information
will help to establish the functional significance of small molecule binding
sites on CD4 which have been identified using SAR by NMR.
Because of the biological/clinical importance of CD4 and CD2, and because of the
significant "tool kits" the Company has developed, Procept believes that CD2 and
CD4 are excellent targets for the SAR by NMR approach. Moreover, success with
these targets could lead to an important new platform technology with far
broader application to new drug discovery.
IMMUNOSUPPRESSIVE COMPOUND PROFILING EXPERTISE AT PROCEPT
Rationale and Approach
Procept currently utilizes a comprehensive battery of in vitro and in vivo
assays designed to identify and improve upon immunosuppressive compounds. These
assays focus on a given compound's ability to inhibit the activation of T cells.
T cell activation serves as the initiating step in specific immune/inflammatory
reactions. In pathological situations, such as autoimmune disease and organ or
bone marrow transplant rejection, unwanted T cell activation can lead to tissue
damage. Taking advantage of a broad array of in-house assays, Procept is
developing low molecular weight molecules which are capable of inhibiting T cell
activation. In addition, these assays have been and will continue to be used to
test the biological activities of compounds identified in cell-free molecular
screens such as the CD2/CD58 ELISA, or SAR by NMR.
7
Additional Profiling Tools
Procept has in place the expertise and experimental systems to analyze the
effects of a given compound on T cell cytokine production, cytokine receptor
expression, cytokine/receptor interactions, cell cycle status, anergy/tolerance
induction, and protein kinase activity. These in vitro assays of T cell
activation are useful in optimization of an immunosuppressive compound's
activity profile. Procept also has in place the expertise to evaluate oral
bioavailability and pharmacokinetic parameters.
MARKET OPPORTUNITY
Procept's scientists believe that gaining control over the activity of T cells
will permit control of the disease progression at its initiation, long before
the cascade of lymphokines and massive proliferation of T cells. Procept is
exploiting its knowledge of the functions of the immune system and the role of
receptors on the surface of immune system cells to design therapeutic drugs
based on molecules targeted for AIDS and other viral diseases, autoimmune
diseases such as rheumatoid arthritis and insulin-dependent diabetes and organ
and bone marrow transplant rejection. The drugs currently on the market for
these diseases in general provide only symptomatic relief and have significant
limitations, including adverse side effects or limited efficacy. The following
chart summarizes the estimated patient populations for certain medical
conditions. There can be no assurance that the market size estimates for the
indications the Company hopes to address with its products under research will
reflect the actual market size at the time the Company's products, if any, are
being marketed.
U.S. Patient Population
-----------------------
HIV.......................................... 900,000
Autoimmune Disease
Rheumatoid Arthritis.................... 2,000,000
Insulin-Dependent Diabetes.............. 700,000
SLE (Lupus)............................. 1,400,000
Psoriasis............................... 1,000,000
Transplant Rejection......................... 18,000
AIDS
AIDS is an infectious disease caused by HIV infection and leads to 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. HIV infection usually leads to AIDS, although
progression to symptomatic disease may take many years.
The Centers for Disease Control recently estimated that there are approximately
200,000 individuals with AIDS in the United States. Up to 900,000 people in the
United States are estimated to be infected by HIV.
Autoimmune Disease
Autoimmune disease is caused by an overactive immune system, in which the body's
defense system mistakenly identifies "self" as "foreign" and mounts a
destructive attack against its own tissues. The most wide-spread chronic
autoimmune disease is rheumatoid arthritis, in which the immune system attacks
the joint tissue resulting in destruction of the body's joints, anatomical
changes in the hands and feet, joint swelling and chronic pain. Other autoimmune
diseases include insulin-dependent diabetes, in which the immune system attacks
the specialized pancreas cells (beta cells) that produce insulin, systemic lupus
erythematosus ("lupus") in which the immune system attacks the skin, joints,
kidneys and other organs of the body, and psoriasis in which the immune
8
system attacks skin and other tissues. Rheumatoid arthritis is estimated to
affect more than 2.0 million people in the United States. Insulin-dependent
diabetes is estimated to afflict approximately 700,000 people in the United
States who require daily insulin injections. Lupus is estimated to affect
approximately 1.4 million people in the United States. Approximately 5.0 million
people in the United States suffer from psoriasis with about 1.0 million
moderate-to-severe cases. Current treatments for autoimmune diseases focus on
the alleviation of the symptoms of these diseases but do not affect the disease
initiation and progression.
Transplant Rejection
Transplant rejection results from an immune response involving T cells in which
the immune system recognizes the transplanted organ as "foreign". Bone marrow
and organ transplants, skin grafts and related procedures are now limited by the
lack of availability of drugs that specifically suppress the part of the immune
system involved in transplant rejection. Rejection episodes occur in a majority
of the approximately 18,000 organ transplants performed annually in the U.S.
Current immunosuppressive drugs including azothiaprine, cyclosporine and
steroids, although widely used, may have serious side effects, including severe
toxicity to the patient and the transplanted organ.
STRATEGIC CORPORATE ALLIANCES
Strategy
A combination of large pharmaceutical partners and capital markets has provided
the financial support for Procept's research and development projects. The
Company's goal is to share the risk of product development while maintaining the
prospect of substantial rewards for our investors and partners. Procept has
collaborated with Sandoz, Bristol-Myers Squibb, and The Upjohn Company under
various sponsored research programs resulting in approximately $25 million in
cash payments to the Company. Procept continues to target the development of
research and product development partnerships with large pharmaceutical
companies as a high priority.
The Company has active discussions with several pharmaceutical companies
regarding potential collaborations. If agreements are successfully negotiated,
the Company would expect to receive ongoing research support combined with
up-front fees and milestone payments, in addition to royalties.
SANDOZ
In 1993, Procept and Sandoz entered into an agreement that provided for the two
companies to conduct a research program to screen Sandoz' library for compounds
that would bind to CD4 or CD2 and be useful as therapeutic agents for immune
suppression. In addition, both companies would collaborate in the development of
structure-based drug design techniques that could be used to identify potential
lead compounds and to optimize these leads into drug candidates.
Under the Sandoz Agreement, Procept received $14.2 million in license fees and
research payments. In September 1996, the companies completed their obligations
and the collaboration terminated as scheduled. During the collaboration, both
companies successfully developed a highly refined knowledge of the three
dimensional structure of CD2 and CD4 via NMR and a new arsenal of computer-aided
drug design tools that will be useful generally for lead discovery and
optimization. In addition, the companies developed an extensive panel of immune
cell and receptor-based assays for the screening of compounds that can be used
to regulate the immune system.
9
VACTEX, INC.
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc., an entity created by a group of executives and scientists from
leading biotechnology companies and academic institutions to provide research
services relating to the development of novel vaccines based on discoveries
licensed from the Brigham and Women's Hospital and Harvard Medical School. These
discoveries shed light on a previously unknown aspect of immunology, the CD1
system of lipid antigen presentation.
The initial research of the Company and VacTex focuses on developing novel
vaccine products to address tuberculosis, a disease that causes nearly three
million deaths each year worldwide. The Company believes that discoveries in
connection with this research may in the future become a material part of
Procept's research program.
Under the Sponsored Research Agreement, Procept will conduct specified research
tasks on behalf of VacTex for which Procept will receive a combination of cash
and equity in VacTex based on the number of full-time equivalent employees of
Procept engaged in the research, but subject to maximum cash and stock limits.
Currently, Procept has neither invested cash in, nor transferred technology to,
VacTex. At any time until the earlier of December 1997 or the termination of the
Sponsored Research Agreement by VacTex, Procept may exercise an option to
purchase all of the outstanding capital stock of VacTex at a fixed price.
LICENSES AND ACADEMIC COOPERATIVE AGREEMENTS
Dana-Farber Cancer Institute
Pursuant to a Research and Licensing Agreement between the Company and the
Dana-Farber Cancer Institute, as amended and restated as of February 19, 1987,
the Company has provided funding to support research being conducted in the
laboratory of Dr. Ellis L. Reinherz. In return for, among other things, future
royalty payments, the Company has obtained exclusive worldwide rights to
discoveries in the field of T cell activation made in Dr. Reinherz's laboratory
during any period in which the Company is providing funding under the Research
and Licensing Agreement and for a period ending six months after such funding is
terminated. Such rights will remain in effect until the last expiration date of
any patents relating to such discoveries. Procept has agreed to use its best
efforts to commercially develop, manufacture and distribute products in this
field throughout the world. In April 1993, the Company extended the funding
arrangement through April 1998.
For over fifteen years, Dr. Reinherz has specialized in the identification of
major proteins found on T cells involved in immune system functions and
diseases. In 1979, Dr. Reinherz was the first to identify and characterize CD4
on the surface of T cells. As Chief, Laboratory of Immunobiology at the
Dana-Farber Cancer Institute, with a group consisting of approximately thirty
professionals holding Ph.D. and M.D. degrees, Dr. Reinherz's laboratory is
conducting leading edge research in the areas of protein chemistry, cell biology
and genetic manipulation. Dr. Reinherz is a Director of the Company and also
serves as Chairman of its Scientific Advisory Board.
10
Harvard University
In March 1992, the Company entered into a research agreement with Dr. Gerhard
Wagner of Harvard University relating to the structural analysis of CD2. Under
the terms of the agreement, Dr. Wagner utilized high-resolution NMR spectroscopy
to solve the three-dimensional structure of the extra cellular polypeptide
regions of human CD2. The Company continues to use the CD2 structural data
obtained under this agreement as part of its CD2 drug development program. In
addition, Dr. Wagner remains a consultant to the Company and is a member of its
Scientific Advisory Board.
National Institutes of Allergy and Infectious Disease
In July 1992, the Company entered into an agreement with the Division of AIDS of
the National Institutes of Allergy and Infectious Disease under which the
Division of AIDS may screen and test the Company's products as possible
treatments for AIDS and AIDS-related infections. Under the terms of the
agreement, the Division of AIDS will screen and test, at the Division's expense,
products submitted by the Company as anti-viral, anti-bacterial, anti-fungal,
anti-parasitic, immunomodulating or biological modifying agents with potential
for the treatment of AIDS and associated infections.
Medical Research Council
In October 1996, the Company and the British Medical Research Council, London,
U.K. entered into an agreement to collaborate in the clinical development of PRO
2000 as a topical microbicide for the prevention of HIV infection. Under the
terms of the agreement, the MRC will evaluate PRO 2000 gel in its program of
Phase I (safety) clinical studies at St. Mary's Hospital, London, under the
direction of Professor J. Weber and Dr. Valerie Kitchen.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technology by, among other things, filing
or causing to be filed on its behalf, patent applications for technology
relating to the development of its business. Currently, the Company is awaiting
action on various patent applications relating to technology or the uses or
products thereof which it owns or which it has licensed.
The Company has been issued U.S. patents related to its small molecule
immunosuppressive program and to its AIDS program. The Company has filed patent
applications in the United States relating to (i) compounds and methods for
inhibiting immune response, (ii) compounds (which include PRO 2000) and methods
for inhibiting HIV 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.
In addition, the Company has received the exclusive worldwide rights, under the
Research and Licensing Agreement between the Company and the Dana-Farber Cancer
Institute, to discoveries in the fields of T cell activation and selection made
in the Laboratory of Dr. Ellis L. Reinherz at the Dana-Farber Cancer Institute.
Through its purchase option related to VacTex, the Company also has rights to
patents filed relating to the use of CD1 presented antigen technology and the
development of vaccines to prevent tuberculosis and other infectious diseases.
To protect its right to and to maintain the confidentiality of trade secrets and
proprietary information, the Company requires employees, Scientific Advisory
Board members, consultants, and collaborators to execute confidentiality and
invention assignment agreements upon
11
commencement of a relationship with the Company. These agreements prohibit the
disclosure of confidential information to anyone outside the company and require
disclosure and assignment to the Company of ideas, development, discoveries and
inventions made by employees, consultants, advisors and collaborators.
The Company's ability to compete effectively with other companies will depend,
in part, on the ability of the Company to maintain the proprietary nature of its
technology. Although the Company has been granted, has filed applications for
and has been licensed under a number of patents in the United States and foreign
countries, there can be no assurance as to the degree of protection offered by
these patents, as to the likelihood that pending patents will be issued or as to
the validity or enforceability of any issued patents.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. There can also be no assurance that
competitors will not infringe the Company's patents. Further, with respect to
licensed patents, which, in the case of the Company, represent a significant
portion of the Company's proprietary technology, the defense and prosecution of
patent suits may not be in the Company's control.
The Company also relies on unpatented proprietary technology which is
significant to the development of the Company's technology, and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. If
the Company is unable to maintain the proprietary nature of its technology, the
Company could be adversely affected.
GOVERNMENT REGULATION
Regulations imposed by U.S. federal, state and local authorities, as well as
their counterparts in other countries, are a significant factor in the conduct
of the research, development, manufacturing and marketing activities for the
Company's proposed products.
Before testing of any compounds with potential therapeutic value in human test
subjects may begin, stringent government requirements for pre-clinical data must
be satisfied. These data, obtained both from in vivo and in vitro studies, are
submitted in an Investigational New Drug Application or its equivalent in
countries outside the U.S. where clinical studies are to be conducted. These
pre-clinical data must provide an adequate basis for evaluating both the safety
and the scientific rationale for the initial (Phase I) studies in human
volunteers.
Phase I clinical studies are commonly performed in healthy human subjects or,
less commonly, selected patients with the targeted disease or disorder. Their
goal is to establish initial data about tolerance and safety of the drug in
humans. Also, the first data regarding the absorption, distribution, metabolism
and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought about the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of carefully selected patients. Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level and dosage schedule. Additional safety data are also gathered from
these studies.
12
The Phase III clinical development program consists of expanded, large-scale
studies of patients with the target disease or disorder, to obtain definitive
statistical evidence of the efficacy and safety of the proposed product and
dosage regimen. These studies may include investigation of the effects in
subpopulations of patients, such as the elderly.
At the same time that the human clinical program is being performed, additional
non-clinical in vivo studies are also conducted. Expensive, long duration
toxicity and carcinogenicity studies are done to demonstrate the safety of drug
administration for the extended period of time required for effective therapy.
Also, a variety of laboratory, and initial human studies are performed to
establish manufacturing methods for delivering the drug, as well as stable,
effective dosage forms.
All data obtained from a comprehensive development program are submitted in a
New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
and the corresponding agencies in other countries for review and approval.
Although the FDA policy is to review priority applications within 180 days of
their filing, in practice longer times may be required. The FDA also frequently
requests that additional information be submitted, requiring significant
additional review time. Any proposed product of the Company likely would be
subject to demanding and time-consuming NDA or PLA approval procedures in
virtually all countries where marketing of the products is intended. These
regulations define not only the form and content of safety and efficacy data
regarding the proposed product but also impose specific requirements regarding
manufacture of the product, quality assurance, packaging, storage, documentation
and record keeping, labeling, advertising and marketing procedures.
In addition to the regulations relating specifically to product approval, the
activities of the Company, its partners and licensees are subject to laws and
regulations regarding laboratory and manufacturing working conditions, handling
and disposition of potentially hazardous material, and use of laboratory
animals. In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial or institutional formularies or cost
reimbursement systems.
Completing the multitude of steps necessary before marketing can begin requires
the expenditure of considerable resources and can consume a long period of time.
Delay or failure in obtaining the required approvals, clearances, permits or
inclusions by the Company, its collaborators or its licensees would have an
adverse effect on the ability of the Company to generate sales or royalty
revenue. In addition, the impact of new or changed laws or regulations cannot be
predicted.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms and universities and
other research institutions. Competition may increase further as a result of
potential advances in the commercial application of biotechnology and greater
availability of capital for investment in these fields. Acquisitions of
competing companies and potential competitors by large pharmaceutical companies
or others could enhance financial, marketing and other resources available to
such competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including competitors of the Company, to market
commercial products. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
13
Company's technology obsolete and noncompetitive, or that such competitors will
not succeed in obtaining FDA or other regulatory approvals for products more
rapidly than the Company.
MANUFACTURING
The Company has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near term products. The Company believes that there
is currently substantial capacity worldwide for the production of its
anticipated products and that the Company will be able to establish
manufacturing arrangements on acceptable terms.
HUMAN RESOURCES
As of December 31, 1996, the Company had 38 full-time employees, 32 of whom were
engaged in research and development and six in management, administration and
finance. Doctorates are held by 17 of the Company's employees. Each of the
Company's employees has signed an agreement which prohibits the disclosure of
confidential information to anyone outside the Company and requires disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by the employee.
The Company's employees are not covered by a collective bargaining agreement.
The Company has never experienced employment-related work stoppage and considers
its employee relations to be excellent.
14
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The current Executive Officers of the Company are as follows:
Stanley C. Erck 48 President; Chief Executive Officer; Director
James C. Jenson, Ph.D. 49 Vice President, Research and Preclinical
Development; Chief Scientific Officer
Michael J. Higgins 34 Vice President, Finance; Chief Financial
Officer
The term of office of each officer extends until the meeting of the Board of
Directors following the next annual meeting of Stockholders and until his
successor is elected and qualified or until his earlier resignation or removal.
STANLEY C. ERCK has served as President, Chief Executive Officer and a member of
the Board of Directors of Procept since joining the Company in December 1988.
From 1983 to 1988, Mr. Erck was Vice President, Corporate Development, of
Integrated Genetics, Inc., a publicly-held biotechnology company developing
therapeutic and diagnostic products. Mr. Erck holds an M.B.A. from the
University of Chicago.
JAMES C. JENSON, Ph.D., has served as Vice President, Research since February
1992. From 1986 to 1991, Dr. Jenson was with Triton Biosciences, Inc., the human
health care subsidiary of Shell Oil Company, focusing on cancer therapeutics, as
Director of Protein Chemistry and Chairman of the Scientific Advisory Board,
and, from 1991, following the acquisition of Triton Biosciences Inc. by Schering
A.G. to February 1992, he was Director of Research Management and Administration
with responsibility for oncology research programs at Berlex Bioscience, a U.S.
subsidiary of Schering A. G. Prior to that, Dr. Jenson headed a molecular
immunology group at Hoffman-La Roche In., a pharmaceutical company. Dr. Jenson
received his Ph.D. from the Cornell University Graduate School of Medical
Sciences in 1981.
MICHAEL J. HIGGINS joined Procept in August 1990 as Director of Finance and
Administration and was elected Chief Financial Officer in January 1993 and Vice
President, Finance, in September 1995. Prior to joining Procept, Mr. Higgins was
employed by the Strategic Planning Group at Sterling Drug Inc. From 1985 to
1988, Mr. Higgins held sales/marketing positions with Schering-Plough
Corporation. Mr. Higgins holds an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College.
ITEM 2. PROPERTIES.
The Company's headquarters and research and development facilities are located
in Cambridge, Massachusetts in close proximity to Harvard University and MIT. At
its 840 Memorial Drive location, the Company leases a total of approximately
41,200 square feet of space, which includes approximately 34,800 square feet of
research laboratories. The Company also leases approximately 3,400 square feet
of space at 84 Hamilton Street, which includes approximately 1,100 square feet
of research laboratories. The Company believes such laboratory space will be
adequate for its existing research and drug development activities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Following the Company's February 17, 1994 initial public offering, the Common
Stock has been quoted on the Nasdaq National Market under the symbol "PRCT". The
following table sets forth the range of high and low closing sale prices for the
Common Stock as reported by the Nasdaq National Market for the periods indicated
below.
High Low
---- ---
1996
Fourth Quarter $1.406 $1.031
Third Quarter 2.375 1.313
Second Quarter 3.375 1.813
First Quarter 3.250 2.172
1995
Fourth Quarter $6.375 $2.125
Third Quarter 7.750 5.125
Second Quarter 6.375 2.375
First Quarter 2.813 2.063
As of December 31, 1996 there were 313 holders of record and approximately 2,600
beneficial holders of the Common Stock. On March 24, 1997 the closing price
reported on the Nasdaq National Market for the Common Stock was $1.03.
On May 17, 1996, pursuant to a Private Memorandum and Subscription Agreements
between the Company and investors meeting the definition of "accredited
investor" as set forth in the Securities Exchange Commission Regulation D, the
Company offered and sold 4,738,274 units (the "Units"), each composed of one
shares of Common Stock, $0.01 par value, and a Warrant for one share of Common
Stock, $0.01 par value (the "Warrants"). The Unit price was $2.44375 and
aggregate gross proceeds were $11,579,080. No commissions were paid. The Company
filed a Form D for this offering, claiming an exemption under Rule 506 of
Regulation D.
The Warrants issued in this offering were exercisable beginning November 17,
1996 at an intial exercise price per share of $2.50. The Warrants are suject to
redemption by the Company upon 30 days prior notice to the holders beginning May
17, 1998 at a price of $0.01 per underlying share in the event that the average
closing price of the Company's Common Stock for any 20 consecutive trading day
period exceeds $3.75.
Dividend Policy
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
16
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 are derived
from the Company's financial statements included elsewhere in this Report, which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
selected financial data set forth below as of December 31, 1994, 1993 and 1992
and for the years ended December 31, 1993 and 1992 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
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except share data)
Statement of Operations Data:
Revenues $ 2,278 $ 4,647 $ 7,571 $ 5,798 $ 2,960
Costs and expenses:
Research and development 9,925 12,406 11,559 7,957 5,867
General and administrative 3,176 3,723 3,805 2,532 2,018
Restructuring charges 273 -- -- -- --
Interest 139 230 171 130 103
------------ ----------- ----------- --------- --------
Total costs and expenses 13,513 16,359 15,535 10,619 7,988
------------ ----------- ----------- --------- --------
Net loss (11,235) (11,712) (7,964) (4,821) (5,028)
Accretion of discount on
preferred stock -- -- 20 160 --
------------ ----------- ----------- --------- --------
Net loss to common
stockholders $ (11,235) $ (11,712) $ (7,984) $ (4,981) $ (5,028)
============ =========== =========== ========= ========
Net loss per common share $ (.97) $ (1.82) $ (1.39) $ (10.98) $ (50.94)
============ =========== =========== ========= ========
Weighted average number of
common and common equivalent
shares outstanding 11,538,500 6,422,613 5,731,057 453,517 98,713
AS OF DECEMBER 31,
------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $1,962 $ 565 $ 7,450 $ 2,862 $ 151
Marketable securities 4,002 2,006 9,393 -- --
Total assets 8,917 6,397 19,704 5,777 2,257
Capital lease obligations net of
current portion and other
non-current liabilities 456 907 860 858 630
Redeemable convertible
preferred stock -- -- -- 21,039 10,778
Total stockholders' equity (deficit) 6,316 1,439 12,851 (17,792) (12,837)
Dividends - None
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Since its inception, the Company has generated no revenues from product sales.
The Company is dependent upon research and development collaborations, equity
financing and interest on invested funds to provide the working capital required
to pursue its intended business activities. The Company has not been profitable
since incorporation and has an accumulated deficit of $48,703,200 through
December 31, 1996. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to develop
drug candidates and from the associated administrative costs required to support
those efforts. The Company believes that operating losses will continue over the
next several years and expects these losses will increase as clinical trials
continue. The Company's potential for future profitability is dependent on its
ability to effectively develop pharmaceutical products and obtain regulatory
approvals for such products and obtain adequate financing. Future profitability
will require that the Company establish agreements for product development,
commercialization and sales of its products with corporate sponsors.
Years ended December 31, 1996 and 1995
The Company's 1996 total revenues decreased to $2,278,000 from $4,647,000 for
the same period of 1995, principally as a result of a decrease in research
revenue due to an amendment of the Sandoz Agreement. In 1996, revenues consisted
of $1,275,0000 earned under the Sandoz Agreement, $563,000 earned under the
VacTex Agreement, and $440,000 in earned interest on invested funds. In 1995,
revenues consisted of $3,925,000 earned under the Sandoz Agreement, $29,000
earned under the Bristol-Myers Squibb Agreement, $105,000 in grant revenue and
$588,000 in earned interest on invested funds.
The Company's total operating expenses decreased to $13,513,000 in 1996 from
$16,359,000 in 1995. Research and development expenses decreased 20% to
$9,925,000 from $12,406,000 in 1995. This decrease in research and development
expense reflects the restructuring which the Company completed in September
1996. The restructuring resulted in a decrease of 19 research employees. General
and administrative expenses decreased 15% to $3,176,000 from $3,723,000 in 1995.
This decrease of general and administrative expenses reflects management's
efforts to control and reduce discretionary spending and maximize the use of
cost effective resources. In 1996, the Company restructured its operations
resulting in a one-time expense charge of $273,000 consisting of salary and
benefit costs relating to the restructuring. There was no comparable charge in
1995. Interest expense decreased to $139,000 in 1996 from $230,000 in 1995 as a
result of the scheduled completion of many of the Company's capital equipment
leases.
Years ended December 31, 1995 and 1994
The Company's 1995 total revenues decreased to $4,647,000 from $7,571,000 for
the same period of 1994, principally as a result of a decrease in research
revenue due to the scheduled completion of the Bristol-Myers Squibb Agreement
and an amendment to the Sandoz Agreement. In 1995, revenues consisted of
$3,925,000 earned under the Sandoz Agreement, $29,000 earned under the
Bristol-Myers Squibb Agreement, $105,000 in grant revenue and $588,000 in earned
interest on invested funds. In 1994, revenues consisted of $5,000,000 earned
under the Sandoz Agreement, $1,702,000 earned under the Bristol-Myers Squibb
Agreement and $870,000 in interest earned on invested funds.
18
The Company's total operating expenses increased to $16,359,000 in 1995 from
$15,535,000 in 1994. Research and development expenses increased 7% to
$12,406,000 in 1995 from $11,559,000 in 1994. This expense growth was due
primarily to an increase in the Company's clinical trial development
expenditures. General and administrative expenses remained essentially unchanged
during 1995 decreasing to $3,723,000 from $3,805,000 in 1994. This leveling of
general and administrative expenses reflects management's efforts to control
discretionary spending and maximize the use of cost effective in-house
resources. Interest expense increased to $230,000 in 1995 from $170,000 during
1994 as a result of an increase in the utilization of equipment lease financing.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1985, the Company has financed its operations from the
sale of $55,121,000 of its securities, the receipt of $28,677,000 under
collaborative research agreements and $2,530,000 in interest income. At December
31, 1996, the Company's aggregate cash, cash equivalents and marketable
securities were $5,964,000, as compared to $2,571,000 at December 31, 1995. The
$3,393,000 increase in available funds was driven primarily by the Company's
financing activities (a follow-on offering and a private placement of units)
offset by its operating loss.
During the year ended December 31, 1996. The Company's significant uses of cash
included a net loss of $11,236,000, principal payments on capital leases of
$908,000, capital expenditures of $298,000 and financing costs of $856,000.
Offsetting these uses were successful equity financings of $5,283,000 from a
secondary offering and $11,579,000 from a private placement of units.
The Company expects that its current funds, interest income and equipment lease
financing will be sufficient to fund Procept's financial needs into the third
quarter of 1997. 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 cash flow for the Company, or secure additional
financing, the Company's financial condition will be materially adversely
affected. The Company's working capital and other cash needs will depend heavily
on the success of the Company's clinical trials. Success in early stage clinical
trials would lead to an increase in working capital requirements. The Company's
actual cash requirements may vary materially from those now planned because of
the results of research and development, clinical trials, product testing,
relationships with strategic partners, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the process of obtaining United States Food and Drug Administration or
other regulatory approvals and other factors.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
is effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier applications is not permitted. SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share
and is substantially similar to the standard recently issued by the
International Accounting Standards Committee entitled International Accounting
Standards, Earnings Per Share (IAS 33). The Company plans to adopt SFAS 128 in
1997 and has not yet determined the impact.
The Company will need to raise substantial additional funds to support its
operations. The Company intends to seek such additional funding through public
or private financing or collaborative or other arrangements with corporate
partners. If additional funds are raised by issuing equity securities, further
dilution to existing stockholders will result and future investors may be
granted rights superior to those of existing stockholders. Other important
factors which may impact upon the achievement of the Company's strategic goals
and other forward looking statements are set forth in Exhibit 99.1 to this Form
10-K, all of which are incorporated herein by reference.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants 21
Balance Sheets as of December 31, 1996 and 1995 22
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 23
Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1995 and 1994 24
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 25
Notes to Financial Statements 26-39
Financial statement schedules have been omitted
since they are not required or are inapplicable.
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Procept, Inc.:
We have audited the accompanying balance sheets of Procept, Inc. as of December
31, 1996 and 1995, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Procept, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and requires significant additional financing. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1997
21
PROCEPT, INC.
BALANCE SHEETS
----------------
December 31
-----------
ASSETS 1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 1,962,229 $ 565,521
Accounts receivable (Note F) 172,812 8,944
Marketable securities (Note C) 4,001,625 2,005,670
Prepaid expenses and other current assets 111,237 147,511
------------ ------------
Total current assets 6,247,903 2,727,646
Property and equipment, net (Notes D and I) 1,863,200 2,815,320
Restricted investment (Notes I and J) 469,000 522,000
Deferred financing charges (Note E) -- 152,773
Other assets (Note B) 337,163 178,920
------------ ------------
Total assets $ 8,917,266 $ 6,396,659
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 773,501 $ 888,700
Accrued compensation 122,712 194,115
Accrued contract research costs (Note I) 438,513 417,353
Other current liabilities (Note A) 196,610 250,819
Note payable (Note J) -- 115,851
Current portion of capital lease
obligations (Note I) 614,063 908,432
Deferred revenue (Note F) -- 1,275,000
------------ ------------
Total current liabilities 2,145,399 4,050,270
Capital lease obligations, less current
portion (Note I) 20,231 634,294
Other noncurrent liabilities (Note I) 435,529 273,139
Commitments and contingencies (Notes F and I)
Stockholders' equity (Note E):
Common stock, $.01 par value; 30,000,000 and 12,000,000 shares authorized at
December 31, 1996 and 1995 respectively; 13,680,399 and 6,476,062 shares
issued and outstanding at December 31, 1996 and 1995, respectively 136,804 64,761
Additional paid-in capital 54,960,583 38,882,654
Receivable from sale of stock (73,242) (42,107)
Accumulated deficit (48,703,200) (37,467,440)
Unrealized (loss) gain on securities available for sale (Note C) (4,838) 1,088
------------ ------------
Total stockholders' equity 6,316,107 1,438,956
------------ ------------
Total liabilities and stockholders' equity $ 8,917,266 $ 6,396,659
============ ============
The accompanying notes are an integral
part of the financial statements.
22
PROCEPT, INC.
STATEMENTS OF OPERATIONS
--------------
for the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Research and development revenue
under collaborative agreements
(Note F) $ 1,275,000 $ 3,925,000 $ 5,000,000
Research and development revenue
under collaborative agreements
from related party (Note F) 562,500 28,645 1,701,600
Revenue from grant -- 105,264 --
Interest income 440,075 587,964 869,525
------------ ------------ ------------
Total revenues 2,277,575 4,646,873 7,571,125
------------ ------------ ------------
Costs and expenses:
Research and development
(Notes F and I) 9,925,315 12,406,290 11,559,197
General and administrative 3,176,136 3,723,014 3,805,241
Restructuring charges (Note A) 273,324 -- --
Interest expense 138,560 229,856 170,433
------------ ------------ ------------
Total costs and expenses 13,513,335 16,359,160 15,534,871
------------ ------------ ------------
Net loss (11,235,760) (11,712,287) (7,963,746)
Accretion of discount on preferred stock -- -- 19,938
------------ ------------ ------------
Net loss to common stockholders $(11,235,760) $(11,712,287) $ (7,983,684)
============ ============ ============
Net loss per common share $ (.97) $ (1.82) $ (1.39)
============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding 11,538,500 6,422,613 5,731,057
============ ============ ============
The accompanying notes are an integral
part of the financial statements.
23
Procept, Inc.
Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1996, 1995, and 1994
--------------
Common Stock Additional Receivable
---------------------- Paid-in From
Shares Par Value Capital Sale of Stock
------ --------- --------- -------------
Balance at December 31, 1993 443,373 $ 4,433 -- $(25,022)
Accretion of Redeemable
Convertible Preferred Stock to
Redemption Value 19,938 --
Conversion of Redeemable
Convertible Preferred Stock
to Common Stock 3,477,377 34,774 21,004,342 --
Issuance of Common Stock
From Initial Public Offering (IPO) 2,415,000 24,150 18,588,134 --
Purchase of Common Stock
Warrants -- -- 560 --
Exercise of Stock Options 19,850 199 62,308 --
Payment of IPO Financing Costs -- -- (990,898) --
Unrealized Loss on Securities
Available for Sale -- -- -- --
Net Loss -- -- -- --
---------- -------- ------------ --------
Balance at December 31, 1994 6,355,600 63,556 38,684,384 (25,022)
Employee Stock Purchase Plan 72,928 730 131,001 --
Exercise of Stock Options 42,524 425 58,519 (23,092)
Issuance of Stock in Payment
of Bonus 3,400 34 8,466 --
Unrealized Gain on Securities for Sale -- -- -- --
Collection on Receivable from
Sale of Stock -- -- -- 6,007
Exercise of Common Stock Warrants 1,610 16 (16) --
Issuance of Common Stock Warrants -- -- 300 --
Net Loss -- -- -- --
---------- -------- ------------ --------
Balance at December 31, 1995 6,476,062 64,761 38,882,654 (42,107)
Employee Stock Purchase Plan 60,004 599 96,167 --
Issuance from Secondary Offering 2,350,000 23,500 5,239,998 --
Issuance from Private Placement 4,738,274 47,384 11,531,696 --
Payment of Costs of Financings -- -- (855,673) --
Exercise of Stock Options 56,059 560 65,521 (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 13,680,399 $136,804 $ 54,960,583 $(73,242)
========== ======== ============ ========
Unrealized
Gain (Loss) Total
on Securities Stockholders'
Accumulated Available Equity
Deficit For Sale (Deficit)
------- -------- ---------
Balance at December 31, 1993 $(17,771,469) -- $(17,792,058)
Accretion of Redeemable
Convertible Preferred Stock to
Redemption Value (19,938) --
Conversion of Redeemable
Convertible Preferred Stock
to Common Stock -- 21,039,116
Issuance of Common Stock
From Initial Public Offering (IPO) -- 18,612,284
Purchase of Common Stock
Warrants -- 560
Exercise of Stock Options -- 62,507
Payment of IPO Financing Costs -- (990,898)
Unrealized Loss on Securities
Available for Sale -- $ (116,356) (116,356)
Net Loss (7,963,746) -- (7,963,746)
------------ ------------ ------------
Balance at December 31, 1994 (25,755,153) (116,356) 12,851,409
Employee Stock Purchase Plan -- -- 131,731
Exercise of Stock Options -- -- 35,852
Issuance of Stock in Payment
of Bonus -- -- 8,500
Unrealized Gain on Securities for Sale -- 117,444 117,444
Collection on Receivable from
Sale of Stock -- -- 6,007
Exercise of Common Stock Warrants -- -- --
Issuance of Common Stock Warrants -- -- 300
Net Loss (11,712,287) -- (11,712,287)
------------ ------------ ------------
Balance at December 31, 1995 (37,467,440) 1,088 1,438,956
Employee Stock Purchase Plan -- -- 96,766
Issuance from Secondary Offering -- -- 5,263,498
Issuance from Private Placement -- -- 11,579,080
Payment of Costs of Financings -- -- (855,673)
Exercise of Stock Options -- -- 15,931
Unrealized Loss on Securities for Sale -- (5,926) (5,926)
Collection on 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
============ ============ ============
The accompanying notes are an integral
part of the financial statements.
24
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
-------------
for the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $(11,235,760) $(11,712,287) $ (7,963,746)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,234,448 982,637 871,294
Non-cash related party revenue (150,000) -- --
(Gain) loss on sale of equipment -- -- (32,586)
(Gain) loss on sale/leaseback of equipment -- 3,270 --
(Gain) loss on sale of marketable securities (1,359) -- --
Changes in operating assets and liabilities:
Accounts receivable (163,868) (8,944) --
Prepaid expenses and other current assets 36,274 8,512 (6,087)
Other assets (8,243) (8,923) (6,672)
Accounts payable (115,199) (689,365) 1,046,582
Accrued compensation (71,403) 1,005 12,523
Accrued contract research 21,160 71,606 (71,440)
Other current liabilities (54,210) 79,061 57,450
Deferred revenue (1,275,000) (1,725,000) 3,000,000
Other noncurrent liabilities 162,390 63,893 53,344
------------ ------------ ------------
Net cash used in operating activities (11,620,770) (12,934,535) (3,039,338)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (297,888) (533,855) (834,616)
Proceeds from sale/leaseback of equipment -- 116,784 440,850
Proceeds from sale of equipment -- -- 14,550
Proceeds from sale of marketable securities 2,004,070 5,485,252 --
Proceeds from maturity of marketable securities 3,000,000 2,000,000 --
Purchase of marketable securities (6,989,032) -- (9,509,836)
(Increase) decrease in restricted investment 53,000 (85,000) (32,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (2,229,850) 6,983,181 (9,921,052)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock from initial
public offering (IPO) -- -- 18,612,284
Proceeds from issuance of common stock 5,282,514 -- --
Payment of IPO and common stock financing costs (855,673) -- (990,898)
Proceeds from exercise of common stock options 15,931 41,859 62,507
Proceeds from employee stock purchase plan 96,766 131,731 --
Proceeds from issuance of warrants 220 300 560
Proceeds from private placement of stock 11,579,080 -- --
Payment on note payable (115,851) -- --
Proceeds from note payable -- 115,851 --
Deferred financing charges 152,773 (152,773) 402,012
Principal payments on capital lease obligations (908,432) (1,069,839) (537,980)
------------ ------------ ------------
Net cash provided by (used in) financing activities 15,247,328 (932,871) 17,548,485
------------ ------------ ------------
Net change in cash and cash equivalents 1,396,708 (6,884,225) 4,588,095
Cash and cash equivalents at beginning of year 565,521 7,449,746 2,861,651
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,962,229 $ 565,521 $ 7,449,746
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 146,772 $ 222,396 $ 171,322
============ ============ ============
Supplemental disclosure of noncash transactions:
Redeemable convertible preferred stock
converted to common stock -- -- $ 21,039,116
============ ============ ============
Property and equipment acquired under capital leases -- $ 1,266,772 $ 761,810
============ ============ ============
Accretion of redeemable convertible preferred
stock to redemption value -- -- $ 19,938
============ ============ ============
Unrealized (loss) gain on securities
available for sale $ (5,926) $ 117,444 $ (116,356)
============ ============ ============
The accompanying notes are an integral
part of the financial statements.
25
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
----------------
A. Nature of Business:
Procept, Inc. (the "Company") is engaged in the discovery and
development of novel, highly specific small molecule therapeutics for
the prevention and treatment of chronic and life-threatening immune
system disorders. The Company's research is based upon its
understanding of critical cell receptors responsible for modulating
immune responses. The Company is developing therapeutics for the
treatment of arthritis, diabetes, organ transplant rejection and
infectious diseases, including AIDS and tuberculosis.
The Company is subject to risks common to companies in the
Biotechnology industry including, but not limited to, development by
the Company or its competitors of new technological innovations,
dependence on key personnel, protection of proprietary technology,
compliance with FDA government regulations and the ability to obtain
financing.
Plan of Operations
Since its inception the Company has generated no revenue from product
sales. The Company has not been profitable since inception and has
incurred an accumulated deficit of $48,703,200 through December 31,
1996. 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 expanded research and development efforts,
preclinical and clinical testing and development of marketing, sales
and production capabilities.
Because of its continuing losses from operations, the Company will be
required to obtain additional funds in the short term to satisfy its
ongoing capital needs and to continue operations. Although management
continues to pursue additional funding arrangements and/or strategic
partnering there can be no assurance that additional funding will be
available from any of these sources or, if available, will be
available on acceptable or affordable terms. If the Company is unable
to obtain financing on acceptable terms, it could be forced to curtail
or discontinue its operations. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Restructuring
On September 1, 1996, the Company's management proposed and the
Company's Board of Directors approved a restructuring plan which was
effected on September 9, 1996. The restructuring resulted in twenty
employees of the Company being terminated. The amount of termination
benefits accrued and charged to restructuring cost in the Statement of
Operations for the year ended December 31, 1996 was $273,324. Almost
all of the employees terminated were from the Company's research
organization. The amount of termination benefits paid and charged
against the liability for the year ended December 31, 1996 was
$264,272.
26
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
B. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Cash Equivalents and Marketable Securities
The Company considers all short-term investments purchased with an
original maturity of three months or less at the date of acquisition
to be cash equivalents, all short-term investments with a scheduled
maturity date of less than twelve (12) months at the balance sheet
date are considered to be current marketable securities, and all
investments purchased with a scheduled maturity date greater than
twelve (12) months at the balance sheet date are noncurrent marketable
securities.
Restricted Investment
The Company maintains a certificate of deposit with a maturity of
three months for purposes of collateralizing a letter of credit
associated with its leased facilities and its corporate credit cards.
The certificate of deposit is recorded at cost, which approximates
market. Interest earned on the certificate of deposit is not
restricted; accordingly, any accrued interest is considered a cash
equivalent. See also Notes I and J.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:
Laboratory equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Equipment and furniture Estimated useful life or
under capital lease term of lease, if shorter
Leasehold improvements Estimated useful life or
term of lease, if shorter
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.
27
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
Income Taxes
The Company provides for income taxes under the liability method which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. The Company records a full valuation allowance.
Revenue Recognition
Revenue is recognized under collaborative research and development
agreements as earned based upon the performance requirements of each
agreement. Payments received in advance under these agreements are
recorded as deferred contract revenue until earned.
Financial Instruments
Cash, cash equivalents and marketable securities are financial
instruments which potentially subject the Company to concentrations of
credit risk. The Company invests its excess cash in corporate
obligations rated as A or better by Moody's Investment Rating Service,
U.S. Treasury securities, and money market instruments.
Computation of Net Loss Per Share
Net loss per common share is computed based upon the weighted average
number of common shares and common equivalent shares (using the
treasury stock method) outstanding after certain adjustments described
below. Common equivalent shares consist of common stock options and
warrants when dilutive. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common and common
equivalent shares issued during the twelve-month period prior to the
initial public offering ("cheap stock"), which was effective on
February 10, 1994, have been included in the calculation as if they
were outstanding for all periods prior to the IPO using the treasury
stock method and the initial public offering price of $8.50 per share.
During 1994, 42,122 shares of cheap stock was included in the weighted
average number of common and common equivalent shares outstanding
until February 10, 1994.
Fully diluted net loss per common share is not presented as it is the
same as primary net loss per share.
Related Parties
Certain members of the Company's Board of Directors are also retained
as consultants by the Company. Management believes the consulting
agreements have been negotiated at an "arms-length" basis and are
immaterial. Included in other assets is a note receivable from an
officer and shareholder in the amount of $30,000 at December 31, 1996
and 1995 bearing interest at prime plus 1% and payable upon
termination.
28
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128), which is effective for fiscal years ending after
December 15, 1997, including interim periods. Earlier application is
not permitted. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially
similar to the standard recently issued by the International
Accounting Standards Committee entitled International Accounting
Standards, Earnings Per Share (IAS 33). The Company plans to adopt
SFAS 128 in 1997 and has not yet determined the impact.
C. Marketable Securities:
The marketable securities of the Company, consisting of corporate
obligations and 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 stockholders' equity
account, except those losses that are deemed to be other than
temporary, which losses, if any, are reflected in the statement of
operations.
Fair values are estimated based on quoted market prices. Interest is
recognized when earned. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest
income.
The following table presents the amortized cost, fair value and
unrealized gains and losses of the marketable securities for the years
ended December 31, 1996 and 1995.
1996
----------------------------------------------------------------------------------------
Amortized Unrealized
Cost Fair Value (Loss)
---- ---------- ------
Marketable securities, current:
U.S. Government Agencies: $4,006,463 $4,001,625 $(4,838)
--------- --------- ------
$4,006,463 $4,001,625 $(4,838)
========= ========= =======
1995
-----------------------------------------------------------------------------------------
Amortized Unrealized
Cost Fair Value Gains
---- ---------- -----
Marketable securities, current:
Corporate Obligations $2,004,582 $2,005,670 $1,088
--------- --------- -----
$2,004,582 $2,005,670 $1,088
========= ========= =====
The contractual maturities of all securities available for sale was
one month.
29
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
D. Property and Equipment:
Property and equipment consisted of the following:
December 31,
------------
1996 1995
---- ----
Laboratory equipment $3,845,739 $4,055,403
Furniture and fixtures 147,123 151,044
Office equipment 547,476 476,387
Leasehold improvements 1,164,570 1,162,596
--------- ---------
$5,704,908 $5,845,430
Less: accumulated depreciation
and amortization $(3,841,708) $(3,030,110)
----------- -----------
Property and equipment, net $1,863,200 $2,815,320
========== ==========
Depreciation and amortization expense amounted to $1,250,008, $962,635
and $871,294 and for the years ended December 31, 1996, 1995 and 1994,
respectively.
Included above in property and equipment are the following assets that
were acquired pursuant to capital lease arrangements:
December 31,
------------
1996 1995
---- ----
Laboratory equipment $2,568,918 $2,972,492
Furniture and fixtures 119,557 123,478
Office equipment 213,570 244,484
Leasehold improvements 273,008 273,008
------- ----------
$3,175,053 $3,613,462
Less: accumulated amortization $(1,759,347) $(1,465,590)
----------- -----------
$1,415,706 $2,147,872
========== ==========
E. Stockholders' Equity:
Common Stock
On May 17, 1996, the Company completed a self-managed private
placement of units. Each Unit consisted of one share of the Company's
Common Stock and one callable warrant to purchase one share of the
Company's Common Stock. The Warrants are subject to redemption by the
Company upon 30 days prior notice to the holders of the Warrants
beginning May 17, 1998 at a price of $0.01 per Warrant Share in the
event that the average closing price of the Company's Common Stock for
any 20 consecutive trading day period exceeds $3.75. The initial
exercise price of the Warrants per share of common stock is $2.50. The
Company received proceeds of $11,579,080 for the issuance of 4,738,274
Units. The Company incurred additional costs in the amount of $550,789
related to this financing which were charged to additional paid-in
capital in 1996.
30
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
On February 8, 1996 the Company closed on a second public offering.
The Company received proceeds of $4,920,373 (net of underwriting
discount and underwriter's offering expenses) for the issuance of
2,200,000 shares of Common Stock. On March 27, 1996, the associated
overallotment option was partially exercised and the Company issued
and sold an additional 150,000 shares of the Company's Common Stock
resulting in net proceeds to the Company of $343,125. The Company
incurred costs in the amount of $152,773 related to this financing at
December 31, 1995. The deferred financing costs were charged to
additional paid-in capital in 1996.
On February 17, 1994, the Company closed its initial public offering.
The Company received proceeds of $18,612,284 (net of underwriting
discount and underwriter's offering expenses) for the issuance of
2,415,000 shares of common stock. In addition, all of the outstanding
shares of redeemable convertible preferred stock (the "Preferred
Stock") converted automatically into 3,477,377 shares of common stock.
Each holder of common stock is entitled to one vote for each share of
common stock held. Each share of common stock issued and outstanding
is identical in all respects to each other share. The Company has
reserved at December 31, 1996, and kept available out of the
authorized but unissued shares of common stock, 6,372,394 shares for
issuance upon the exercise of outstanding options and warrants.
1989 Stock Plan
Under the Company's 1989 Stock Plan (the "Plan") adopted by the Board
of Directors during 1989, and subsequently amended and restated, the
Company is permitted to sell or award common stock or to grant stock
options for the purchase of common stock to employees, officers and
consultants up to a maximum of 1,137,118 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 250,000, which amendment was
approved by the stockholders at the 1996 Annual Meeting of
Stockholders.
The Plan provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. In the case of ISOs, the exercise
price shall not be less than 100% (110% in certain cases) of the fair
market value per share of the common stock, on the date of grant. In
the case of nonqualified options, the exercise price shall be not less
than the lesser of (a) book value per share of common stock as of the
fiscal year of the Company immediately preceding the date of such
grant, or (b) 50% of the fair market value of the common stock on the
date of grant. All stock options under the Plan have been granted at
exercise prices at least equal to the fair market value of the common
stock.
The options either become exercisable immediately on the date of grant
or shall become exercisable in such installments as the Compensation
Committee may specify, generally over a 4 year period. Each option
shall expire on the date specified by the Compensation Committee, but
not more than ten years and one day from the date of grant in the case
of nonqualified options, and generally ten years from the date of
grant in the case of ISOs (five years in certain cases).
31
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", ("SFAS 123") issued in 1995, defined a fair value
method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at grant
date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company
elected to continue to apply the accounting provisions of APB Option
No. 25 for stock options. The required disclosures under SFAS 123 as
if the Company had applied the new method of accounting are made
below.
Activity under all stock plans related to all the ISOs and
nonqualified stock options for the three years ended December 31, 1996
was as follows:
ISO Nonqualified Weighted Avg.
Shares Shares Option Price Exercise Price
------ ------------ ------------ --------------
Outstanding at December 31, 1993 481,199 280,202 $1.00-$12.75 $3.63
------- -------
Granted 182,311 71,478 $2.63-$10.50 $7.86
Exercised (12,746) (7,104) $1.00-$5.60 $3.15
Canceled (83,535) (65,096) $1.00-$10.00 $7.29
------ -------
Outstanding at December 31, 1994 567,229 279,480 $1.00-$12.75 $4.77
------- -------
Granted 160,500 101,660 $2.13-$8.25 $3.21
Exercised (25,052) (17,472) $1.00-$5.35 $1.39
Canceled (67,548) (3,000) $1.00-$10.50 $5.84
-------- -------
Outstanding at December 31, 1995 635,129 360,668 $1.00-$12.75 $4.43
------- -------
Granted 466,850 51,806 $1.25-$3.25 $1.53
Exercised (51,059) (5,000) $1.00-$2.68 $1.18
Canceled (207,672) (238,360) $1.00-$12.75 $3.74
--------- ---------
Outstanding at December 31, 1996 843,248 169,114 $1.00-$12.75 $3.49
======= ======= ============ =====
Summarized information about stock options outstanding at December 31,
1996 is as follows:
Weighted Avg.
Range of No. of Options Remaining Weighted Avg. Number of Weighted Avg.
Exercise Prices Outstanding Contract. Life Exercise Price Options Exercise Price
--------------- -------------- -------------- -------------- --------- --------------
$1.00-$1.25 471,827 8.23 $ 1.19 120,132 $ 1.01
$2.13-$5.55 298,081 7.64 3.25 147,593 4.10
$5.60-$8.50 182,248 7.24 7.51 115,927 7.62
$10.00-$12.75 60,206 7.15 11.49 31,103 11.45
Options for the purchase of 414,755 shares, 572,398 shares, and 469,216
shares are exercisable at December 31, 1996, 1995 and 1994,
respectively. The total exercise proceeds for all options outstanding
at December 31, 1996 is approximately $3,533,143.
32
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
1996 1995
---- ----
Dividend yield None None
Expected volatility 75% 75%
Risk free interest rate 6.25% 6.96%
Expected life of option 5.0 5.0
All options granted in 1996 and 1995 were granted at fair value. The
weighted average fair value of options granted was $1.01 and $2.12 for
1996 and 1995, respectively.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards made in
1996 and 1995 consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been increased to the
pro forma amounts shown below:
1996 1995
---- ----
Net loss - as reported $(11,235,760) $(11,712,287)
Net loss - pro forma $(11,455,536) $(11,950,312)
Loss per share - as reported $(.97) $(1.82)
Loss per share - pro forma $(.99) $(1.86)
The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made
prior to 1995.
Director Stock Option Plan
In June 1994, the stockholders 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. The
aggregate number of shares of the Company's common stock which may be
optioned under this plan is 150,000 shares. There were 30,000 shares
granted under this plan in the year ended December 31, 1995.
No shares were granted in the year ended December 31, 1996.
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. A total of 250,000 shares have been reserved for issuance
under the 1994 Plan. Shares are granted twice yearly, on February 28
and August 31, and are exercisable upon issuance. The Company issued
60,004 and 72,906 shares in 1996 and 1995, respectively.
The weighted average fair values of options granted at fair value under
the 1994 Plan during 1996 and 1995 were $1.00 and $1.20, respectively.
Common Stock Warrants
On December 16, 1992, the Company issued warrants, which expire on
December 16, 1997, to purchase an aggregate of 4,151 shares of common
stock at an initial exercise price of $6.02 in connection with a bridge
loan to the Company in the amount of $250,000, which was subsequently
repaid with interest thereon. In January 1993, the Company
33
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
issued warrants, which expire on December 14, 1998, to purchase 80,331
shares of the Company's common stock to an underwriter at an initial
exercise price of $7.23 per share, in connection with the private
placement of the Class F Preferred Stock.
On February 10, 1994, in connection with the closing of the initial
public offering the Company's underwriter purchased for $210.00
warrants to purchase 210,000 shares of the Company's common stock at an
exercise price of $11.90 per share. The warrants expire on February 10,
1999.
On April 1, 1994, in connection with the Company's $2 million master
lease agreement, the Company issued common stock warrants for a
purchase price of $350.00 to purchase 35,000 shares of common stock at
a price of $8.50 per share 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 30,000 shares of the Company's
common stock to Oppenheimer & Co., Inc. at an exercise price of $7.00
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 January 6, 1997, the Company issued a common stock warrant to
purchase 75,000 shares of the Company's common stock to Furman Selz LLC
at an exercise price of $1.50 per share in connection with financial
advisory services to the Company. This warrant is exercisable beginning
January 6, 1997 and expires on January 6, 2002.
On February 14, 1996, the Company issued common stock warrants for a
purchase price of $220.00 to purchase up to 220,000 shares of the
Company's common stock to Commonwealth Associates at an exercise price
of $3.13 per share in connection with a public financing. These
warrants are exercisable beginning February 14, 1997 and expire on
February 13, 2001.
In August 1991 and September 1992, the Company issued warrants to
purchase up to 30,240 and 20,000 shares, respectively, of the Company's
Class D Preferred Stock (the "Class D Warrants") at a minimum exercise
price of $2.50 per share, in connection with leasing arrangements. The
Class D Warrants were automatically converted into 18,771 warrants to
purchase shares of common stock at an exercise price of $6.69 per share
upon the closing of the Company's initial public offering on February
17, 1994. The warrants expire on February 10, 1999.
In connection with promissory notes issued in September 1992, the
Company granted warrants to acquire an aggregate of 88,888 shares of
Class F Preferred Stock at an exercise price of $2.25 per share. Upon
conversion of all Class F Preferred Stock effected by the initial
public offering, the warrants converted into warrants to purchase
33,212 shares of common stock at an exercise price of $6.02 per share.
In the year ended December 31, 1995, 9,707 of these warrants were
exercised. The warrants expire on September 15, 1997.
F. Collaborative Research and Development Agreements:
In February 1990, the Company entered into a Research Collaboration and
License Agreement with E.R. Squibb & Sons, Inc., ("Bristol-Myers
Squibb") covering the development of a core technology based on the
understanding of T cell antigen receptors ("TCRs").
34
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
Bristol-Myers Squibb agreed to pay the Company approximately $10 million
in product research funding. This research funding was paid on a
quarterly basis for the 5 year period through fiscal year 1994 and
totaled approximately $10 million. The Company received $0, $28,645 and
$1,701,600 in funded research for the years ended December 31, 1996,
1995 and 1994 respectively. The Research Collaboration and License
Agreement ended as scheduled in February 1995.
In September 1993, the Company signed a Research and Development
Agreement with Sandoz Pharma Ltd. (the "Sandoz Agreement") to identify
and develop compounds which bind to CD4 or CD2, or their respective
ligands, and interfere with their interaction, as therapeutic agents for
immune suppression. Effective as of September 1, 1995, the Company's
sponsored research agreement with Sandoz Pharma Ltd. was amended to
focus the research program on compounds targeting CD4 and its ligand and
to limit the research program with respect to compounds that bind to CD2
and its ligand to certain screening activities being conducted by Sandoz
through the end of 1995. In connection with this amendment, the research
and license fees due for the third year of the research program were
reduced from $5 million to $2.2 million. Of the $2.2 million received,
$925,000 was recorded as revenue in 1995 and $1.275 million as deferred
revenue at December 31, 1995 and was subsequently recorded as revenue in
1996. Under the terms of the Sandoz Agreement, the Company has received
$14.2 million in initial license fees and research funding to date.
In 1994, the Company received $8,000,000 and recorded as revenue
$5,000,000 for research performed by the Company under the Sandoz
agreement. The $3,000,000 was advance payment for research to be
performed in fiscal year 1995 and is recorded as deferred revenue at
December 31, 1994 and was subsequently recorded as revenue in 1995.
In March 1994, the Company in conjunction with Dana-Farber Cancer
Institute and Harvard University received a four-year grant from the
National Cooperative Drug Discovery Group (NCDDG) of the National
Institutes of Health (NIH) to conduct AIDS research. The Company
received $105,264 in revenue in the year ended December 31, 1995 related
to this grant. In the years ended December 31, 1996 and 1994 the Company
received no revenue under this grant.
In January 1996, Procept entered into a Sponsored Research Agreement
with VacTex, Inc. ("VacTex"), an entity created by a group of executives
and scientists from leading biotechnology companies and academic
institutions to provide research services relating to the development of
novel vaccines based on discoveries licensed from the Brigham and
Women's Hospital and Harvard Medical School. These discoveries shed
light on a previously unknown aspect of immunology, the CD1 system of
lipid antigen presentation.
Under the Sponsored Research Agreement, Procept will conduct specified
research tasks on behalf of VacTex for which Procept will receive a
combination of cash and equity in VacTex based on the number of
full-time equivalent employees of Procept engaged in the research, but
subject to maximum cash and stock limits. Currently, Procept has neither
invested cash in, nor transferred technology to, VacTex. At any time
until the earlier of December 1997 or the termination of the Sponsored
Research Agreement by VacTex, Procept may exercise an option to purchase
all of the outstanding capital stock of VacTex at a fixed price. If
Procept does not exercise this option, it must issue Procept Common
Stock warrants to VacTex or its stockholders to purchase an aggregate of
100,000 shares of Common Stock at an
35
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
exercise price of $3.50 per share. The warrants will expire five years
after the date of issuance.
In the year ended December 31, 1996, the Company recorded revenue of
$562,500 which consisted of $412,500 in cash and 150,000 shares of
VacTex common stock. At December 31, 1996, the Company had an accounts
receivable of $172,812, which was subsequently paid in March 1997, and
an investment in VacTex of $150,000 included in its other assets.
G. Income Taxes:
No federal or state income taxes have been provided for as the Company
has incurred losses since its inception. At December 31, 1996, the
Company had Federal and State tax net operating loss ("NOL")
carryforwards of approximately $48,420,000 and $40,607,000 which will
expire beginning in the year 2000 through 2011 for Federal and beginning
in the year 1997 through 2001 for State, respectively. Additionally, the
Company had Federal and State research and experimentation credit
carryforwards of approximately, $1,209,000 and $738,000, respectively,
both of which will expire in the year 2011.
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 carry forwards
and tax credits are subject to these limitations.
The components of Procept's net deferred tax assets were as follows at
December 31:
1996 1995
---- ----
Net deferred tax assets:
Net operating loss carryforwards $19,021,000 $14,910,000
Tax credit carryforwards 1,947,000 1,390 ,000
Depreciation 1,057,000 780,000
Vacation and benefits 22,000 36,000
Capital leases and other (957,000) (670,000)
Valuation allowance (21,090,000) (16,446,000)
------------ ------------
Total net deferred tax assets $ 0 $ 0
========== ===========
As required by Financial Accounting Statement No 109, management of the
Company has evaluated the positive and negative evidence bearing upon
the realizability of its deferred tax assets which are comprised
principally of net operating loss and tax credit carryforwards.
Management has considered the Company's history of losses and concluded,
in accordance with the applicable accounting standards, that it is more
likely than not that the Company will not recognize the benefit of the
net deferred tax assets. Accordingly, the deferred tax assets have been
fully reserved. Management re-evaluates the positive and negative
evidence on an annual basis.
H. Savings and Retirement Plan:
On July 1, 1990, the Company established the Procept, Inc. Savings and
Retirement Plan (the "401(k) Plan"), a profit-sharing plan under Section
401 of the Code. Employees are
36
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
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, 1996, 1995 and 1994, the Company did not
contribute to the 401(k) Plan.
I. Commitments:
Operating Leases
On February 28, 1989, the Company entered into an operating lease
arrangement for its facility. The Company has made several amendments
to its operating lease arrangement for its facility to include
additional leased space and extension of the lease terms. The
commitment under the operating lease requires the Company to pay
monthly base rent and an allocable percentage of operating costs and
property taxes.
The monthly base rent is subject to increases during the course of
the lease term which are unrelated to increases in utilized space.
Accordingly, the Company is providing for rent expense based on an
amortization of the lease payments on a straight-line basis over the
life of the lease arrangement.
Pursuant to the aforementioned leasing arrangements, at December 31,
1996 and 1995, the Company has recorded noncurrent liabilities of
$285,529 and $273,179, respectively, for rent expense in excess of
cash expenditures for leased facilities.
Rent expense for leased facilities and equipment amounted to
approximately $1,574,000, $1,661,000 and $1,446,000, for the years
ended December 31, 1996, 1995 and 1994, respectively. The approximate
future minimum annual rental payments for leased facilities for the
next five years under the lease arrangements consist of the following
at December 31,1996:
1997 $1,349,138
1998 $1,392,261
1999 $1,435,379
2000 $739,455
Pursuant to the facility lease agreement, the Company has provided an
open letter of credit for the term of its leases in the amount of
$369,000 and $422,000 at December 31, 1996 and 1995, respectively,
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 is classified as a restricted investment (see also
Note J), solely for the purpose of collateralizing this letter of
credit in the amount of $369,000 and $422,000 at December 31, 1996
and 1995, respectively.
37
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
Capital Leases
In 1992, the Company entered into a leasing agreement which allowed
the Company to lease up to $1,000,000 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 $711,243 of
laboratory equipment, office equipment and furniture and fixtures
pursuant to this leasing arrangement. During fiscal year 1995, the
Company purchased and leased $1,266,773 of laboratory equipment,
office equipment and leasehold improvements pursuant to this leasing
arrangement. These equipment leasing agreements have been fully
utilized at December 31, 1996.
Future minimum lease payments with initial or remaining terms of one
year or more consist of the following at December 31, 1996:
1997 637,529
1998 20,519
------
Total future minimum lease payments 658,048
Less: amount representing interest (23,754)
Present value of future minimum lease
payments 634,294
Less: current portion (614,063)
Capital lease obligations, less current portion $20,231
=======
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 has agreed to fund
certain research and development projects conducted by Dana-Farber in
relation to the development and eventual commercialization of
products related to T cell activation. To the extent that an
invention is developed at Dana-Farber with principal support and
funding by the Company, the Company shall have the exclusive rights
to use the invention. As part of this arrangement, the Company is
required to pay to Dana-Farber, when product sales commence, certain
royalties based on a formula stipulated in the Agreement. In May
1993, the Company agreed to extend funding of the research through
April 1998.
The approximate future minimum annual research payments to be
provided to Dana-Farber consist of the following at December 31,
1996:
1997 $909,442
1998 $316,094
38
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
The amount of contract research costs under the Agreement incurred by
the Company and included in research and development expense amounted
to $809,000, $785,000 and $782,000 in 1996, 1995 and 1994,
respectively. The Company has accrued $414,888 and $394,278 at
December 31, 1996 and 1995, respectively, payable to Dana-Farber
under this Agreement.
J. Note Payable:
On February 15, 1995, the Company signed a term note with
Bristol-Myers Squibb Company in the amount of $115,851. The term note
provided for scheduled payments of $38,617 on April 1, July 1, and
October 1, 1996. The interest rate for the note was 8.0%. Upon the
occurrence of certain financing events, the entire balance of the
note, including all accrued and unpaid interest, became due and
payable. This Note was repaid in full in 1996 upon the closing of the
secondary offering.
Line of Credit:
The Company maintains a $100,000 line of credit through the use of
corporate credit cards. This line of credit is collateralized with a
certificate of deposit of $100,000 and is classified as a restricted
investment on the balance sheet. The certificate of deposit is
recorded at cost, which approximates market. Interest earned on the
certificate of deposit is not restricted; accordingly, any accrued
interest is considered a cash equivalent. See also Note B.
39
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.
(a) The information required by Item 10 with respect to the directors of the
Company is included under the caption "Election of Directors" in the Company's
definitive proxy statement for its 1997 Annual Meeting of Stockholders (the
"Proxy Statement") and is incorporated herein by reference.
(b) The information required by Item 10 concerning executive officers of the
Company is included under the caption "Executive Officers of the Registrant"
under Item 1A of this Report.
(c) 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.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included under the captions "Compensation
Committee Interlocks and Insider Participation", "Election of Directors-Director
Compensation" and "Executive Compensation" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included under the caption "Share
Ownership" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included under the caption "Certain
Transactions" in the Proxy Statement and is incorporated herein by reference.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The financial statements are listed under Part II, Item 8 of
this Report.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. EXHIBITS.
The exhibits are listed under Part IV, Item 14(c) of this
Report.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the last
quarter of 1996.
(c) EXHIBITS.
Exhibit
No. Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company. Filed as
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June
30, 1996 and incorporated herein by reference.
3.2 By-laws of the Company. Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.
4.1 Specimen Stock Certificate for Common Stock $.01 par value. Filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
4.2 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit
4.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.3 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated September 11, 1992, issued to Comdisco, Inc. Filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
4.4 Form of Warrant to Purchase Class F Convertible Preferred Stock
dated September 15, 1992 and Schedule of Holders. Filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
41
4.5 Form of Warrant to Purchase Common Stock dated December 16, 1992
and Schedule of Holders. Filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
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
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 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 herewith.
4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated
January 6, 1997. Filed herewith.
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.
42
10.4 The 1989 Stock Plan. Filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.
10.5 The 1994 Employee Stock Purchase Plan. Filed as Exhibit 99 to the
Company's Registration Statement on Form S-8, Commission File No.
33-81394, and incorporated herein by reference.
10.6 The 1994 Director Stock Option Plan. Filed as Exhibit 99 to the
Company's Registration Statement on Form S-8, Commission File No.
33-81392, and incorporated herein by reference.
10.7 Registration Rights Agreement dated as of January 5, 1993 among
the Company and certain of its security holders named therein.
Filed as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Commission File No. 33-51788, and incorporated herein
by reference.
10.8 Amendment No. 1 to Registration Rights Agreement dated as of
March 2, 1994 among the Company and certain of its security
holders named therein. Filed as Exhibit 10.3 to the Company's
Form 10-K for the year ended December 31, 1994, Commission File
No. 0-21134, and incorporated herein by reference.
10.9 Amendment No. 2 to Registration Rights Agreement dated as of
September 11, 1995 between the Company and Oppenheimer & Co.,
Inc. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
10.10 Lease for 840 Memorial Drive dated February 28, 1989 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust, as amended February 28, 1989 and April 4, 1989.
Filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated herein
by reference.
10.11 Lease for 840 Memorial Drive dated August 21, 1990 between the
Company and Robert Epstein et al., Trustee of 840 Memorial Drive
Trust. Filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.12 Lease for 840 Memorial Drive dated February 10, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.13 Lease for 840 Memorial Drive dated September 8, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.10 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.14 Lease for 840 Memorial Drive dated April 27, 1994 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q for
the quarter ended March 31, 1994, Commission File No. 0-21134,
and incorporated herein by reference.
43
10.15 Amended and Restated Research and Licensing Agreement dated as of
February 19, 1987 between the Company and the Dana-Farber Cancer
Institute, as amended by Letter Agreements between the Company
and Dana-Farber Cancer Institute dated as of October 17, 1987,
October 20, 1987, January 20, 1988, March 1, 1988, March 22,
1989, March 27, 1989, March 5, 1990, May 3, 1993, May 4, 1993,
May 10, 1993 and May 12, 1993 (as amended, the "DFCI Agreement").
Filed as Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated herein
by reference.
10.16 Letter Agreements between the Company and Dana-Farber Cancer
Institute dated April 29, 1994 and May 6, 1994, amending the DFCI
Agreement. Filed as Exhibit 10.16 to the Company's Form 10-K for
the year ended December 31, 1994, Commission File No. 0-21134,
and incorporated herein by reference.
10.17 Collaboration Agreement dated as of January 1, 1992 between the
Company and the Molecular Modeling and Design Unit of the
University of California, San Francisco. Filed as Exhibit 10.13
to the Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.
10.18 Confidential Screening Agreement dated as of July 24, 1992
between the Company and the Division of Acquired Immunodeficiency
Syndrome (AIDS), National Institute of Allergy and Infectious
Diseases. Filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.19 Extension of Consulting Agreement dated August 9, 1990 between
the Company and Dr. Ellis L. Reinherz. Filed as Exhibit 10.17 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.
10.20 Non-Competition Agreement dated as of August 21, 1990 between the
Company and Stanley C. Erck. Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.21 Non-Competition Agreement dated as of January 11, 1992 between
the Company and James C. Jenson. Filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.22 Key Employee Confidentiality, Inventions, and Non-Competition
Agreement dated January 13, 1993 between the Company and A. James
Ueberroth. Filed as Exhibit 10.20 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.23 Consulting and Confidentiality Agreement dated as of May 1, 1994
between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit
10 to the Company's Form 10-Q for the quarter ended June 30,
1994, Commission File No. 0-21134, and incorporated herein by
reference.
+10.24 Collaborative Research Agreement dated March 6, 1992 between the
Company and the President and Fellows of Harvard College (re:
Harrison). Filed as Exhibit
44
10.22 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
+10.25 Collaborative Research Agreement dated March 2, 1994 among the
Company, the President and Fellows of Harvard College and Howard
Hughes Medical Institute (re: Harrison). Filed as Exhibit 10.27
to the Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by
reference.
+10.26 Sponsored Research Agreement dated August 4, 1992 between the
Company and President and Fellows of Harvard College (re:
Wagner). Filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
+10.27 Research and Development Agreement between the Company and Sandoz
Pharma Ltd. dated as of September 16, 1993. Filed as Exhibit
10.24 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.
+10.28 Amendment No. 1 to Research and Development Agreement between the
Company and Sandoz Pharma Ltd. dated as of January 25, 1995.
Filed as Exhibit 10.30 to the Company's Form 10-K for the year
ended December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.
+10.29 The Second Amendment to Research and Development Agreement dated
March 31, 1995 between the Company and Sandoz Pharma Ltd. Filed
as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
March 31, 1995, Commission File No. 0-21134, and incorporated
herein by reference.
10.30 Consulting and Confidentiality Agreement dated as of April 20,
1995 between the Company and Max Link, Ph.D. Filed as Exhibit
10.30 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.
+10.31 Third Amendment to Research and Development Agreement dated
August 31, 1995 between the Company and Sandoz Pharma Ltd. Filed
as Exhibit 10.32 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96798, and incorporated herein by
reference.
+10.32 Research Agreement dated as of March 1, 1993 between the Company
and The General Hospital Corporation (re: Hirsh). Filed as
Exhibit 10.25 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
+10.33 Research Agreement dated as of March 1, 1993 between the Company
and The General Hospital Corporation (re: Drake). Filed as
Exhibit 10.26 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.
+10.34 Peptoid Library Screening Agreement dated September 27, 1994
between the Company and Chiron Corporation. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
1994, Commission File No. 0-21134, and incorporated herein by
reference.
45
10.35 Underwriting Agreement dated February 8, 1996 between the Company
and Commonwealth Associates. Filed as Exhibit 1 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96798,
and incorporated herein by reference.
10.36 Registration Rights Agreement dated January 6, 1997 between the
Company and Furman Sez LLC. Filed herewith.
23 Consent of Coopers & Lybrand L.L.P., independent accountants to
Procept, Inc. Filed herewith.
99.1 Important factors regarding forward-looking statements. Filed
herewith
- -----------------------
+ Confidential treatment has been granted for the deleted portions
Exhibits 10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29,
10.32, 10.33 and 10.34.
Exhibits 10.4 through 10.7, 10.19 through 10.23 and 10.30 are
management contracts or compensatory plans, contracts or arrangements
in which executive officers or directors of the Company participate.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by on this 28th day of March, 1997.
PROCEPT, INC.
(Registrant)
By: /s/ Stanley C. Erck
Stanley C. Erck,
President and Chief Executive Officer
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 28th day of March, 1997:
Capacity
--------
/s/ Stanley C. Erck President, Chief Executive Officer
- -------------------------- and Director (Principal Executive Officer)
Stanley C. Erck
/s/ Michael J. Higgins Chief Financial Officer
- -------------------------- (Principal Financial Officer and Principal
Michael J. Higgins Accounting Officer)
/s/ Zola P. Horovitz Director
- --------------------------
Zola P. Horovitz, Ph.D.
/s/ Max Link Director
- --------------------------
Max Link, Ph.D.
/s/ Ellis L. Reinherz Director
- --------------------------
Ellis L. Reinherz, M.D.