-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UwP23Bll1OYjihVIZorUC6V/HbHBklxVxtsNF1AYsoS4Wx+aDqF/ySdtNj3eYT2d PE/bAWVa8xloaD5BKG6m+Q== 0001029869-98-000436.txt : 19980401 0001029869-98-000436.hdr.sgml : 19980401 ACCESSION NUMBER: 0001029869-98-000436 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCEPT INC CENTRAL INDEX KEY: 0000885475 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 042893483 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21134 FILM NUMBER: 98582495 BUSINESS ADDRESS: STREET 1: 840 MEMORIAL DR CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6174911100 10-K405 1 PROCEPT, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number: 0-21134 Procept, Inc. (Exact name of registrant as specified in its charter) Delaware 04-2893483 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 840 Memorial Drive, Cambridge, Massachusetts 02139 - -------------------------------------------- ----- (Address of principal executive offices) (zip code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share -------------------------------------- (Title of Class) Registrant's telephone number, including area code: (617) 491-1100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES_X_ NO___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. __X__ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 25, 1998 was $8,804,033. The number of shares of the registrant's common stock outstanding as of March 25, 1998 was 8,807,435. Documents incorporated by reference: Portions of the Definitive Proxy Statement to be filed with the Securities and Exchange Commission relative to the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS. CORPORATE SUMMARY Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company currently engaged in the development of novel drugs for the prevention of HIV and other infectious diseases. The Company is also seeking the acquisition or in-license of drug development candidates that would benefit from Procept's expertise in various therapeutic areas. The Company was recently pursuing three principal research and development programs. In order to focus its limited resources on its lead drug candidate, PRO 2000 Gel, the Company suspended work in 1998 on its other research programs, which it hopes to out-license, and underwent a significant downsizing, reducing its staff from 38 on January 1, 1997 to 13 by March 13, 1998. The lead product candidate from the Company's AIDS program, PRO 2000 Gel, is a vaginal topical microbicide designed to prevent the sexual transmission of HIV and other sexually transmitted disease ("STD") pathogens. The results of recently completed Phase I clinical trials indicated that PRO 2000 Gel is safe and well tolerated by healthy women. In addition, through the Company's research in immunomodulation, the Company discovered a series of small molecule compounds, T cell enzyme inhibitors, that have demonstrated significant immunosuppressive activity in animal models. The Company is currently seeking out-licensing opportunities for these compounds. In addition to the continued development of PRO 2000, Procept is seeking to identify strategic opportunities to in-license drug development candidates which would benefit from Procept's expertise, thereby focusing its resources on "development" rather than "research" programs. PRO 2000 GEL: A TOPICAL MICROBICIDE TO PREVENT HIV INFECTION The lead product candidate from the Company's AIDS program, PRO 2000 Gel is a vaginal topical microbicide designed to prevent the sexual transmission of HIV and other STD pathogens. PRO 2000 was shown in laboratory studies to be effective at preventing HIV infection of cultured T cells, macrophages, and dendritic cells (dendritic cells are believed to be the first cells infected during sexual transmission). PRO 2000 showed high activity against HIV strains from both the developed and developing world, and the virus did not develop resistance to the compound even after prolonged exposure. Recently, PRO 2000 was also shown to be active against herpes viruses including herpes simplex virus type 2, the major cause of genital herpes infection. Genital herpes lesions are a significant public health problem, and are believed to promote HIV infection. The Company first evaluated PRO 2000 as an injectable therapy for HIV infection. Early stage clinical testing showed that single injections of the drug are well tolerated, but that doses are limited by side effects directly related to the presence of PRO 2000 in the circulation. This, coupled with the competitive environment for AIDS therapies, prompted the Company to suspend development of PRO 2000 as an injectable therapy. 2 The Company believes there is a need for new technologies to prevent the sexual transmission of HIV and other STDs. HIV infection usually leads to AIDS, a severe, life-threatening impairment of the immune system. HIV causes immunosuppression by attacking and destroying T cells, which coordinate much of the network of normal immune responses. The progression from HIV infection to symptomatic disease may take many years. The Centers for Disease Control recently estimated that there are approximately 240,000 individuals with AIDS in the United States. Up to 900,000 people in the United States are estimated to be infected by HIV. Despite years of effort, an effective HIV vaccine remains elusive. Worldwide, approximately 70% of HIV transmission occurs through heterosexual intercourse. In addition, The New York Times reported that an estimated 10-12 million new cases of sexually transmitted diseases are reported to the disease center each year, particularly human papillomavirus, chlamydia and herpes. Male condoms are known to prevent STD transmission, but rates of consistent and correct use are low, perhaps because they are unacceptable for many couples and their use is controlled by the male partner. "Topical microbicides," which are designed to provide a chemical barrier to infection, are an attractive alternative: they are likely to be more acceptable than condoms, and offer women a method they can use to protect themselves. Development of topical microbicides is a high priority for both the U.S. government and international agencies. Preclinical studies demonstrate that PRO 2000 is a more effective anti-HIV agent than nonoxynol-9. In addition, in vitro preclinical studies have demonstrated that PRO 2000 is active against other sexually transmitted agents including herpes simplex type 2 and Chlamydia trachomatis. The Company believes that PRO 2000 is ideally suited for use as a topical microbicide to prevent infection by HIV and other sexually transmitted pathogens. In addition to its broad antiviral activity, the compound is straightforward to manufacture, highly stable, odorless and virtually colorless. PRO 2000 Gel has also been formulated for intravaginal use. Preclinical studies suggest that PRO 2000 Gel will be safe. Importantly, no PRO 2000 was detected in the circulation following repeated vaginal application of the gel. In other studies, PRO 2000 Gel was shown to be non-mutagenic, non-sensitizing, and compatible with latex condoms. Procept recently completed two Phase I clinical trials to assess the safety and tolerance of PRO 2000 Gel in healthy, female volunteers. The trials were conducted at the Institute of Tropical Medicine in Antwerp, Belgium and at St. Mary's Hospital in London, England, the latter with funding from the British Medical Research Council ("MRC"). Preliminary results indicate that PRO 2000 Gel was safe and well tolerated, and that no PRO 2000 was absorbed into the circulation. Furthermore, participants generally found the product to be aesthetically acceptable. The Company is now preparing to conduct a series of Phase II clinical trials to assess safety and tolerance of PRO 2000 Gel in more diverse populations, including groups at high risk for infection. Upon completion of Phase II clinical trials, if successful, a Phase III clinical trial may be conducted to evaluate efficacy. Discussions are underway with the NIH and British MRC regarding financial and logistical support for this clinical program. The Company holds two issued patents on the use of PRO 2000 to prevent HIV infection. Additional patent applications have been filed. The Company's intentions with respect to the further development of PRO 2000 Gel are forward looking statements, based on current management expectations. Factors that could cause such expectations to change, resulting in the delay or cancellation of the PRO 2000 research program and related preclinical and clinical studies include the following: the availability of financing for the Company's continued research and development operations; technical risks associated with the development of PRO 2000; changes in regulatory requirements; anticipated market acceptance of such new drug; and competitive factors and pricing pressures. 3 DHODH PROGRAM: INTRACELLULAR T CELL ENZYME INHIBITORS FOR AUTOIMMUNE DISEASES In 1997, Procept implemented a new research program that focused on an intracellular enzyme ("DHODH") that is known to be critical for the activation of the immune response, thus making it a possible target for intervention in transplantation and autoimmune disease. The potential market sizes for such indications are immense, over $1 billion in size. Procept has made significant progress and achieved a number of important milestones in this program in the past year, including the cloning and expression of the human recombinant enzyme and the identification of lead compounds with potent enzyme inhibitory properties. Initial studies indicate that several lead compounds also possess oral activity in animal models of immunosuppression. The Company intends to out-license this program to a major pharmaceutical or biotechnology company. However, there can be no assurance regarding the success of such out-licensing effect. THE VACTEX DRUG DEVELOPMENT PROGRAM -- TB VACCINE In January 1996, Procept entered into a Sponsored Research Agreement with VacTex, Inc. ("VacTex") to develop novel vaccines based on the CD1 antigen presentation system. The program, conducted in conjunction with Dr. Michael Brenner at Brigham & Women's Hospital and Harvard Medical School, focuses on a novel receptor system for presentation of lipid antigens from infectious disease pathogens. This CD1 receptor system is thought to be critical in mediating the immune response to tuberculosis bacteria ("TB") and other related bacteria. TB kills more people than any other infectious agent. Over a third of the world's population is infected with this bacterium. There is now no cure for some multidrug resistant TB strains, and the current vaccine has been ineffective in stopping the epidemic. VacTex is funding vaccine studies in in vivo models involving presentation of lipids by the novel CD1 system. During 1997, under the Sponsored Research Agreement, Procept received $0.5 million in research funding from VacTex and 150,000 shares of VacTex Common Stock. In order to apply available resources to the PRO 2000 development program, Procept did not seek to renew the Sponsored Research Agreement with VacTex, which expired on January 8, 1998. The Company retains its equity position in VacTex. STRATEGIC CORPORATE ALLIANCES A combination of large pharmaceutical partners and capital markets has provided the financial support for Procept's research and development projects. The Company's goal is to share the risk of product development while maintaining the prospect of substantial rewards for our investors and partners. In addition to discussions relating to PRO 2000 to actively partner this program, the Company is engaged in discussions with several pharmaceutical companies regarding potential licensing agreements for the Company's other research programs with respect to which the Company ceased activities in 1998. If agreements are successfully negotiated, the Company would expect to receive up-front fees and milestone payments in addition to royalties. PATENTS AND PROPRIETARY TECHNOLOGY The Company's policy is to protect its technology by, among other things, filing or causing to be filed on its behalf, patent applications for technology relating to the development of its business. Currently, the Company is awaiting action on various patent applications relating to technology or the uses or products thereof which it owns or which it has licensed. 4 The Company has been issued U.S. patents related to its AIDS program and to its small molecule immunosuppressive program. The Company has filed patent applications in the United States relating to (i) compounds and methods for inhibiting immune response, (ii) compounds (which include PRO 2000) and methods for inhibiting HIV infection and (iii) methods for making compounds that inhibit HIV. Corresponding foreign patent applications have been filed on certain compounds and will be filed on other compounds, as appropriate. To protect its right to and to maintain the confidentiality of trade secrets and proprietary information, the Company requires employees, Scientific Advisory Board members, consultants, and collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements prohibit the disclosure of confidential information to anyone outside the company and require disclosure and assignment to the company of ideas, development, discoveries and inventions made by employees, consultants, advisors and collaborators. The Company's ability to compete effectively with other companies will depend, in part, on the ability of the Company to maintain the proprietary nature of its technology. Although the Company has been granted, has filed applications for and has licensed a number of patents in the United States and foreign countries, there can be no assurance as to the degree of protection offered by these patents, as to the likelihood that pending patents will be issued or as to the validity or enforceability of any issued patents. Competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with the Company's ability to make and sell its products. There can be no assurance that other third parties will not assert infringement claims against the Company or that such claims will not be successful. There can also be no assurance that competitors will not infringe the Company's patents. Further, with respect to licensed patents, which, in the case of the Company, represent a significant portion of the Company's proprietary technology, the defense and prosecution of patent suits may not be in the Company's control. The Company also relies on unpatented proprietary technology which is significant to the development of the Company's technology, and there can be no assurance that others may not independently develop the same or similar technology or otherwise obtain access to the Company's unpatented technology. If the Company is unable to maintain the proprietary nature of its technology, the Company could be adversely affected. GOVERNMENT REGULATION Regulations imposed by U.S. federal, state and local authorities, as well as their counterparts in other countries, are a significant factor in the conduct of the research, development, manufacturing and marketing activities for the Company's proposed products. Before testing of any compounds with potential therapeutic value in human test subjects may begin, stringent government requirements for pre-clinical data must be satisfied. These data, obtained both from in vivo studies and in vitro studies, are submitted in an Investigational New Drug Application or its equivalent in countries outside the U.S. where clinical studies are to be conducted. These pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initial (Phase I) studies in human volunteers. 5 Phase I clinical studies are commonly performed in healthy human subjects or, less commonly, selected patients with the targeted disease or disorder. Their goal is to establish initial data about tolerance and safety of the drug in humans. Also, the first data regarding the absorption, distribution, metabolism and excretion of the drug in humans are established. In Phase II human clinical studies, preliminary evidence is sought about the pharmacological effects of the drug and the desired therapeutic efficacy in limited studies with small numbers of carefully selected patients. Efforts are made to evaluate the effects of various dosages and to establish an optimal dosage level and dosage schedule. Additional safety data are also gathered from these studies. The Phase III clinical development program consists of expanded, large-scale studies of patients with the target disease or disorder, to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen. These studies may include investigation of the effects in subpopulations of patients, such as the elderly. At the same time that the human clinical program is being performed, additional non-clinical in vivo studies are also conducted. Expensive, long duration toxicity and carcinogenicity studies are done to demonstrate the safety of drug administration for the extended period of time required for effective therapy. Also, a variety of laboratory, and initial human studies are performed to establish manufacturing methods for delivering the drug, as well as stable, effective dosage forms. All data obtained from a comprehensive development program are submitted in a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA and the corresponding agencies in other countries for review and approval. Although the FDA policy is to review priority applications within 180 days of their filing, in practice longer times may be required. The FDA also frequently requests that additional information be submitted, requiring significant additional review time. Any proposed product of the Company would likely be subject to demanding and time-consuming NDA or PLA approval procedures in virtually all countries where marketing of the products is intended. These regulations define not only the form and content of safety and efficacy data regarding the proposed product but also impose specific requirements regarding manufacture of the product, quality assurance, packaging, storage, documentation and record keeping, labeling, advertising and marketing procedures. In addition to the regulations relating specifically to product approval, the activities of the Company, its partners and licensees are subject to laws and regulations regarding laboratory and manufacturing working conditions, handling and disposition of potentially hazardous material, and use of laboratory animals. In many markets, effective commercialization also requires inclusion of the product in national, state, provincial or institutional formularies or cost reimbursement systems. Completing the multitude of steps necessary before marketing can begin requires the expenditure of considerable resources and can consume a long period of time. Delay or failure in obtaining the required approvals, clearances, permits or inclusions by the Company, its collaborators or its licensees would have an adverse effect on the ability of the Company to generate sales or royalty revenue. In addition, the impact of new or changed laws or regulations cannot be predicted. 6 COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Competitors of the Company in the United States and abroad are numerous and include, among others, major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Competition may increase further as a result of potential advances in the commercial application of biotechnology and greater availability of capital for investment in these fields. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including competitors of the Company, to market commercial products. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which are being developed by the Company or which would render the Company's technology obsolete and noncompetitive, or that such competitors will not succeed in obtaining FDA or other regulatory approvals for products more rapidly than the Company. MANUFACTURING The Company has no manufacturing facilities and plans to rely upon outside manufacturers to produce any near term products. The Company believes that there is currently substantial capacity worldwide for the production of its anticipated products and that the Company will be able to establish manufacturing arrangements on acceptable terms. HUMAN RESOURCES As of December 31, 1997, the Company had 35 full-time employees, 25 of whom were engaged in research and development and 10 in management, administration and finance. Doctorates were held by 12 of the Company's employees. On January 19, 1998, 15 full-time employees were terminated in an effort to conserve cash and focus the Company's research and development efforts on its lead drug candidate, PRO 2000. Each of the Company's employees has signed an agreement which prohibits the disclosure of confidential information to anyone outside the Company and requires disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by the employee. The Company's employees are not covered by a collective bargaining agreement. The Company has never experienced employment-related work stoppage and considers its employee relations to be excellent. ITEM 2. PROPERTIES. The Company's headquarters and research and development facilities are located in Cambridge, Massachusetts. At its 840 Memorial Drive location, the Company leases a total of approximately 41,200 square feet of space, which includes approximately 34,800 square feet of research laboratories. The Company currently licenses approximately 50% of the laboratory space at its headquarters to start-up pharmaceutical companies and is negotiating to license an additional 75% of the remaining available space to start-up pharmaceutical companies. The Company also leases approximately 3,400 square feet of space at 84 Hamilton Street, which includes approximately 1,100 square feet of research laboratories. The Company believes such laboratory space will be adequate for its existing research and drug development activities. 7 ITEM 3. LEGAL PROCEEDINGS. On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a Complaint with the United States District Court for the Southern District of New York naming the Company as a defendant (the "Complaint"). The Complaint alleges that the Company breached obligations to Commonwealth under the Underwriting Agreement between Commonwealth and the Company dated February 8, 1996, giving Commonwealth a right of first refusal to act as co-lead underwriter or co-managing agent of a public offering or Private Placement of the Company's securities during the period ended August 8, 1997. In the Complaint, Commonwealth seeks aggregate compensatory damages in the amount of $375,000, incidental and consequential damages in an amount to be proven at trial, costs, disbursements and accrued interest and such other and further relief as the court deems proper. Discovery has commenced in this action. The Company believes that Commonwealth's claims are without factual or legal merit. The Company does not believe this action will have a material adverse effect on the Company's business and it intends to vigorously defend this action. However, given the early stage of this litigation, no assurance may be given that the Company will be successful in its defense. A decision by the court in Commonwealth's favor or any other conclusion of this litigation in a manner adverse to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is not a party to any material legal proceedings, except as set forth above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. From February 17, 1994, the date of the Company's initial public offering, until March 26, 1998, the Common Stock has been quoted on the Nasdaq National Market under the symbol "PRCT". Since March 27, 1998, the Common Stock has been quoted on the Nasdaq Small Cap Market under the symbol "PRCTC." The following table sets forth the range of high and low closing sale prices for the Common Stock as reported by the Nasdaq National Market for the periods indicated below. High Low ---- --- 1997 Fourth Quarter $3.125 $1.000 Third Quarter $4.158 $2.191 Second Quarter $6.783 $3.283 First Quarter $13.566 $5.691 1996 Fourth Quarter $9.842 $7.217 Third Quarter $16.625 $9.191 Second Quarter $23.625 $12.691 First Quarter $22.750 $15.204 As of March 25, 1998 there were 298 holders of record. On March 25, 1998 the closing price reported on the Nasdaq National Market for the Common Stock was $1.00. 8 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." 9 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 are derived from the Company's financial statements included elsewhere in this Report, which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected financial data set forth below as of December 31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 are derived from audited financial statements not included in this Report. This data should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of this report. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except share data) Statement of Operations Data: Revenues $781 $2,278 $4,647 $7,571 $5,798 ---- ------ ------ ------ ------ Costs and expenses: Research and development 6,619 9,925 12,406 11,559 7,957 General and administrative 2,715 3,176 3,723 3,805 2,532 Restructuring charges 460 273 -- -- -- Interest 40 139 230 171 130 -- --- --- --- --- Total costs and expenses 9,834 13,513 16,359 15,535 10,619 ----- ------ ------ ------ ------ Net loss (9,053) (11,236) (11,712) (7,964) (4,821) Preferred stock dividends (105) -- -- -- -- Accretion of discount on preferred stock -- -- -- (20) (160) -------- --------- --------- -------- -------- Net loss to common shareholders $(9,158) $(11,236) $(11,712) $(7,984) $(4,981) ======== ========= ========= ======== ======== Basic and diluted loss per share $(4.40) $(6.82) $(12.77) $(9.82) $(84.75) ======= ======= ======== ======= ======== Weighted average number of common shares outstanding 2,083,705 1,648,357 917,516 812,705 58,771 ========= ========= ======= ======= ======
AS OF DECEMBER 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Balance Sheet Data: Cash and cash equivalents $535 $1,962 $565 $7,450 $2,862 Marketable securities -- 4,002 2,006 9,393 -- Total assets 2,168 8,917 6,397 19,704 5,777 Capital lease obligations net of current portion and other non-current liabilities 355 456 907 860 858 Redeemable convertible preferred stock -- -- -- -- 21,039 Total shareholders' equity (deficit) 260 6,316 1,439 12,851 (17,792) Common stock dividends -- -- -- -- --
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Since its inception, the Company has generated no revenues from product sales. The Company is dependent upon research and development collaborations, equity financing and interest on invested funds to provide the working capital required to pursue its intended business activities. The Company has not been profitable since incorporation and has an accumulated deficit of $57.9 million through December 31, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop drug candidates and from the associated administrative costs required to support those efforts. The Company expects to incur significant additional operating losses over the next several years due to its ongoing development efforts and expanded preclinical and clinical testings. The Company's potential for future profitability is dependent on its ability to effectively license-in and develop pharmaceutical products and obtain regulatory approvals and adequate financing for such products. Future profitability will require that the Company establish agreements for product development, commercialization and sales of its products with corporate sponsors. Years ended December 31, 1997 and 1996 The Company's 1997 total revenues decreased to $0.8 million from $2.3 million in 1996, principally as a result of the scheduled completion of the Sandoz Agreement. In 1997, revenues consisted of $0.5 million earned under the VacTex Agreement, $0.1 million under a grant from the National Cooperative Drug Discovery Group and $0.1 million in interest earned on invested funds. In 1996, revenues consisted of $1.3 million earned under the Sandoz Agreement, $0.6 million earned under the VacTex Agreement and $0.4 million in interest earned on invested funds. The Company's 1997 total operating expenses decreased to $9.8 million from $13.5 million in 1996, principally as a continuing result of a decrease in personnel in the Company's research and development organization and their related research costs. General and administrative expenses decreased 18% to $2.7 million in 1997 from $3.2 million in 1996 as a result of a decrease in administrative personnel as well as cost control measures. In 1997, the Company restructured its operations resulting in an expense charge of $0.5 million consisting of salary and benefit costs relating to the restructuring. Interest expense decreased 71% to $40,000 in 1997 from $0.1 million in 1996 as a result of the scheduled completion of many of the Company's lease financing arrangements. Years ended December 31, 1996 and 1995 The Company's 1996 total revenues decreased to $2.3 million from $4.6 million in 1995, principally as a result of a decrease in research revenue due to an amendment of the Sandoz Agreement. In 1996, revenues consisted of $1.3 million earned under the Sandoz Agreement, $0.6 million earned under the VacTex Agreement, and $0.4 million in earned interest on invested funds. In 1995, revenues consisted of $3.9 million earned under the Sandoz Agreement, $29,000 earned under the Bristol-Myers Squibb Agreement, $0.1 million in grant revenue and $0.6 million in earned interest on invested funds. The Company's 1996 total operating expenses decreased to $13.5 million from $16.4 million in 1995. Research and development expenses decreased 20% to $9.9 million in 1996 from $12.4 million in 1995 as a result of the restructuring that the Company completed in September 1996. The restructuring resulted in a decrease of 19 research employees. General and administrative expenses decreased 15% to $3.2 million in 1996 from $3.7 million in 1995 as a result of management's efforts to control and reduce discretionary spending and maximize the use of cost- 11 effective resources. In 1996, the Company restructured its operations resulting in an expense charge of $0.3 million consisting of salary and benefit costs relating to the restructuring. There was no comparable charge in 1995. Interest expense decreased 40% to $0.1 million in 1996 from $0.2 million in 1995 as a result of the scheduled completion of many of the Company's capital equipment leases. LIQUIDITY AND CAPITAL RESOURCES Since its inception in 1985, through December 31, 1997, the Company has financed its operations from the sale of $58.0 million of its securities, the receipt of $29.3 million under collaborative research agreements and $2.7 million in interest income. At December 31, 1997, the Company's aggregate cash, cash equivalents and marketable securities were $0.5 million, as compared with $6.0 million at December 31, 1996, a decrease of $5.5 million. For the year ended December 31, 1997, the Company's decrease in cash is primarily attributable to $8.1 million used in operations and $0.6 million applied to principal payments on capital leases, offset by an equity financing of $2.7 million. In July 1997, the Company reduced staffing in its research organization through the elimination of six senior research positions. As a result of this reduction in force and other cost control measures, the Company reduced its cash burn rate to approximately $0.5 million per month by year end. In order to focus its limited resources on PRO 2000, in January 1998 the Company terminated work on most other research programs and underwent a significant downsizing, reducing its staff to 13 people. This is expected to reduce the Company's cash burn rate to approximately $0.2 million per month by the end of 1998. In the first quarter of 1998, the Company has accrued $0.2 million for costs associated with this downsizing. As part of a unit offering targeted at raising up to $6.0 million in the first quarter of 1998, the Company has received net proceeds of $3.0 million through the sale of units of Common Stock and warrants to purchase Common Stock. In addition, The Aries Funds have committed to invest up to $2.0 million in the Company. The Company expects that its current funds, the funds raised in the Company's unit offering of which The Aries Funds have committed to invest up to $2.0 million, interest income and equipment lease financing will be sufficient to fund Procept's operations through March of 1999. Although management continues to pursue additional funding arrangements, no assurance can be given that such financing will be available to the Company. If the Company is unable to enter into an additional corporate collaboration(s) that produce revenue for the Company, or secure additional financing, the Company's financial condition will be materially adversely affected. The Company's expectations regarding its rate of spending and the sufficiency of its cash resources over future periods are forward-looking statements. The rate of spending and sufficiency of such resources will be affected by numerous factors including the rate of planned and unplanned expenditures by the Company and the execution of new collaboration agreements for the Company's research and development programs. The Company will need to raise substantial additional funds to support its operations. The Company intends to seek such additional funding through public or private financing or collaborative or other arrangements with corporate partners. If additional funds are raised by issuing equity securities, further dilution to existing shareholders will result and future investors may be granted rights superior to those of existing shareholders. Other important factors that may affect achieving the Company's strategic goals and other forward-looking statements are set forth in Exhibit 99.1 to this Form 10-K, all of which are incorporated herein by reference. 12 The Company's working capital and other cash needs will depend heavily on the success of the Company's clinical trials. Success in early-stage clinical trials would lead to an increase in working capital requirements. The Company's actual cash requirements may vary materially from those now planned because of the results of research and development, clinical trials, product testing, relationships with strategic partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, the process of obtaining United States Food and Drug Administration or other regulatory approvals and other factors. RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ended December 31, 1998. The Company does not believe that the adoption will have a material effect on results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. The Company does not believe that the adoption will have a material effect. YEAR 2000 The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculation or system failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in the future periods. However, if the Company or its vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS Page(s) ------- Report of Independent Accountants 15 Balance Sheets as of December 31, 1997 and 1996 16 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 17 Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 18 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 19 Notes to Financial Statements 20 Financial statement schedules have been omitted since they are not required or are inapplicable. 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Procept, Inc.: We have audited the accompanying balance sheets of Procept, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Procept, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts February 26, 1998 15 PROCEPT, INC. BALANCE SHEETS ----------------
December 31 ----------- 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents $535,242 $1,962,229 Accounts receivable (Note F) 81,951 172,812 Marketable securities (Note C) -- 4,001,625 Prepaid expenses and other current assets 50,111 111,237 ---------- ---------- Total current assets 667,304 6,247,903 Property and equipment, net (Notes D and I) 889,258 1,863,200 Restricted investment (Notes I and J) -- 469,000 Deferred financing charges (Note E) 54,424 -- Deposits (Note I) 250,615 135,975 Investment in VacTex (Note F) 300,000 150,000 Other assets 6,411 51,188 ---------- ---------- Total assets $2,168,012 $8,917,266 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,069,952 $773,501 Accrued compensation 320,463 122,712 Accrued contract research costs (Note I) -- 438,513 Other current liabilities 142,680 196,610 Current portion of capital lease obligations (Note I) 20,231 614,063 ---------- ---------- Total current liabilities 1,553,326 2,145,399 Capital lease obligations, less current portion (Note I) -- 20,231 Deferred rent (Note I) 257,827 285,529 Other noncurrent liabilities 96,875 150,000 Commitments and contingencies (Notes F and I) Shareholders' equity (Note E): Preferred stock, par value $.01 per share; 1,000,000 shares authorized Series A 30,061 shares designated; 30,060 shares issued and outstanding at December 31, 1997 (Liquidation preference; $4,313,610 at December 31, 1997) 301 -- Common stock, $.01 par value; 30,000,000 shares authorized at December 31, 1997 and 1996; 1,962,036 and 1,954,343 shares issued at December 31, 1997 and 1996, respectively 19,620 19,543 Additional paid-in capital 58,112,905 55,077,844 Receivable from sale of stock -- (73,242) Accumulated deficit (57,860,985) (48,703,200) Unrealized loss on securities available for sale (Note C) -- (4,838) Treasury stock, at cost; 11,857 and 0 shares at December 31, 1997 and 1996, respectively (11,857) -- ---------- ---------- Total shareholders' equity 259,984 6,316,107 ---------- ---------- Total liabilities and shareholders' equity $2,168,012 $8,917,266 ========== ==========
The accompanying notes are an integral part of the financial statements. 16 PROCEPT, INC. STATEMENTS OF OPERATIONS --------------
For the years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Research and development revenue under collaborative agreements (Note F) $-- $1,275,000 $3,925,000 Research and development revenue under collaborative agreements from related party (Note F) 519,552 562,500 28,645 Revenue from grant (Note F) 113,854 -- 105,264 Interest income 147,766 440,075 587,964 ------- ------- ------- Total revenues 781,172 2,277,575 4,646,873 ------- --------- --------- Costs and expenses: Research and development (Notes F and I) 6,618,836 9,925,315 12,406,290 General and administrative 2,714,678 3,176,136 3,723,014 Restructuring charges (Note A) 459,969 273,324 -- Interest expense 40,264 138,560 229,856 ------ ------- ------- Total costs and expenses 9,833,747 13,513,335 16,359,160 --------- ---------- ---------- Net loss (9,052,575) (11,235,760) (11,712,287) Less: preferred stock dividends (105,210) -- -- ------------ ------------ ------------ Net loss available to common shareholders $(9,157,785) $(11,235,760) $(11,712,287) ============ ============ ============ Basic and diluted net loss per common share $(4.40) $(6.82) $(12.77) ======= ======= ======== Weighted average number of common shares - basic and diluted 2,083,705 1,648,357 917,516 ========= ========= =======
Theaccompanying notes are an integral part of the financial statements. 17 Procept, Inc. Statements of Shareholders' Equity For the Years Ended December 31, 1997, 1996 and 1995 --------------------
Common Stock Preferred Stock Series A Additional ------------ ------------------------ Paid-in Shares Par Value Shares Par Value Capital ------ --------- ------ --------- --------- Balance at December 31, 1994 907,943 $9,079 $38,738,861 Employee stock purchase plan 10,418 104 131,627 Exercise of stock options 6,075 61 58,883 Issuance of stock in payment of bonus 486 5 8,495 Unrealized gain on securities for sale -- -- -- Collection on receivable from sale of stock -- -- -- Exercise of common stock warrants 230 2 (2) Issuance of common stock warrants -- -- 300 Net loss -- -- -- ---------- ---------- ----------- Balance at December 31, 1995 925,152 9,251 38,938,164 Employee stock purchase plan 8,572 86 96,680 Issuance from secondary offering 335,714 3,357 5,260,141 Issuance from private placement 676,896 6,769 11,572,311 Payment of costs of financings -- -- (855,673) Exercise of stock options 8,009 80 66,001 Unrealized loss on securities for sale -- -- -- Collection on recivable from sale of stock -- -- -- Issuance of common stock warrants -- -- 220 Net loss -- -- -- ---------- ---------- ----------- Balance at December 31, 1996 1,954,343 19,543 55,077,844 Employee stock purchase plan 7,634 76 55,124 Exercise of stock options 59 1 409 Issuance from private placement 853,334 8,533 2,791,467 Payment of private placement costs -- -- (131,382) Conversion of note payable and common stock to preferred stock (853,334) (8,533) 30,060 $301 214,233 Cancellation of notes receivable -- -- -- -- -- Preferred stock dividends -- -- -- -- 105,210 Maturity of marketable securites -- -- -- Net loss -- -- -- -- -- ---------- ------- ------- ---- ----------- Balance at December 31, 1997 1,962,036 $19,620 30,060 $301 $58,112,905 ========== ======= ======= ==== ===========
Unrealized Gain (Loss) Receivable on Securities Total From Accumulated Available Treasury Shareholders' Sale of Stock Deficit For Sale Stock Equity ------------- ------- -------- ----- ------ Balance at December 31, 1994 $(25,022) $(25,755,153) $(116,356) $12,851,409 Employee stock purchase plan -- -- -- 131,731 Exercise of stock options (23,092) -- -- 35,852 Issuance of stock in payment of bonus -- -- -- 8,500 Unrealized gain on securities for sale -- -- 117,444 117,444 Collection on receivable from sale of stock 6,007 -- -- 6,007 Exercise of common stock warrants -- -- -- -- Issuance of common stock warrants -- -- -- 300 Net loss -- (11,712,287) -- (11,712,287) ----------- ------------ --------- ----------- Balance at December 31, 1995 (42,107) (37,467,440) 1,088 1,438,956 Employee stock purchase plan -- -- -- 96,766 Issuance from secondary offering -- -- -- 5,263,498 Issuance from private placement -- -- -- 11,579,080 Payment of costs of financings -- -- -- (855,673) Exercise of stock options (50,150) -- -- 15,931 Unrealized loss on securities for sale -- -- (5,926) (5,926) Collection on recivable from sale of stock 19,015 -- -- 19,015 Issuance of common stock warrants -- -- -- 220 Net loss -- (11,235,760) -- (11,235,760) ----------- ------------ --------- ----------- Balance at December 31, 1996 (73,242) (48,703,200) (4,838) 6,316,107 Employee stock purchase plan -- -- -- 55,200 Exercise of stock options -- -- -- 410 Issuance from private placement -- -- -- 2,800,000 Payment of private placement costs -- -- -- (131,382) Conversion of note payable and common stock to preferred stock -- -- -- 206,001 Cancellation of notes receivable 73,242 -- -- $(11,857) 61,385 Preferred stock dividends -- (105,210) -- -- -- Maturity of marketable securites -- -- 4,838 4,838 Net loss -- (9,052,575) -- (9,052,575) ----------- ------------ --------- --------- ----------- Balance at December 31, 1997 -- $(57,860,985) $ -- $(11,857) $259,984 =========== ============ ========= ========= ===========
The accompanying notes are an integral part of the financial statements 18 PROCEPT, INC. STATEMENTS OF CASH FLOWS -------------
for the years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net loss $(9,052,575) $(11,235,760) $(11,712,287) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,057,952 1,234,448 982,637 Non-cash related party revenue (150,000) (150,000) -- Compensation expense associated with cancellation of notes receivable 112,789 -- -- Gain on sale of equipment (40,895) -- -- Loss on sale/leaseback of equipment -- -- 3,270 Gain on sale of marketable securities -- (1,359) -- Changes in operating assets and liabilities: Accounts receivable 90,861 (163,868) (8,944) Prepaid expenses and other current assets 61,126 36,274 8,512 Deposits (114,640) 10,000 -- Other assets (6,627) (18,243) (8,923) Accounts payable 296,451 (115,199) (689,365) Accrued compensation 197,751 (71,403) 1,005 Accrued contract research (438,513) 21,160 71,606 Other current liabilities (53,930) (54,210) 79,061 Deferred revenue -- (1,275,000) (1,725,000) Deferred rent (27,702) 12,390 -- Other noncurrent liabilities (53,125) 150,000 63,893 ----------- ----------- ---------- Net cash used in operating activities (8,121,077) (11,620,770) (12,934,535) ----------- ----------- ---------- Cash flows from investing activities: Capital expenditures (84,010) (297,888) (533,855) Proceeds from sale of equipment 40,895 -- -- Proceeds from sale/leaseback of equipment -- -- 116,784 Proceeds from sale of marketable securities -- 2,004,070 5,485,252 Proceeds from maturity of marketable securities 4,006,463 3,000,000 2,000,000 Purchase of marketable securities -- (6,989,032) -- (Increase) decrease in restricted investment 469,000 53,000 (85,000) ----------- ----------- ---------- Net cash provided by (used in) investing activities 4,432,348 (2,229,850) 6,983,181 ----------- ----------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock -- 5,282,514 -- Payment of IPO and common stock financing costs -- (855,673) -- Proceeds from exercise of common stock options 410 15,931 41,859 Proceeds from employee stock purchase plan 55,200 96,766 131,731 Proceeds from issuance of warrants -- 220 300 Proceeds from private placement of stock 2,800,000 11,579,080 -- Expenses from private placement securities (131,382) -- -- Payment on note payable -- (115,851) -- Proceeds from note payable 206,001 -- 115,851 Deferred financing charges (54,424) 152,773 (152,773) Principal payments on capital lease obligations (614,063) (908,432) (1,069,839) ----------- ----------- ---------- Net cash provided by (used in) financing activities 2,261,742 15,247,328 (932,871) ----------- ----------- ---------- Net change in cash and cash equivalents (1,426,987) 1,396,708 (6,884,225) Cash and cash equivalents at beginning of year 1,962,229 565,521 7,449,746 ----------- ----------- ---------- Cash and cash equivalents at end of year $535,242 $1,962,229 $565,521 =========== =========== ========== Supplemental disclosure of cash flow information: Interest paid $27,609 $146,772 $222,396 ======= ======== ========== Property and equipment acquired under capital leases -- -- $1,266,772 ======= ======== ========== Unrealized gain (loss) on securities available for sale -- $(5,926) $117,444 ======= ======== ========== Supplemental disclosure of non-cash transactions: Common stock converted to preferred stock $2,800,000 -- -- ========== ============== ============= Note payable converted to preferred stock $206,001 -- -- ======== ============== ============= Common stock received in exchange for cancellation of notes receivable $11,857 -- -- ======= ============== ============= Preferred stock dividends $105,210 -- -- ======== ============== =============
Theaccompanying notes are an integral part of the financial statements. 19 NOTES TO FINANCIAL STATEMENTS A. Nature of Business: Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company currently engaged in the development of novel drugs for the prevention of HIV and other infectious diseases. The Company is also seeking the acquisition or in-license of drug development candidates that would benefit from Procept's expertise in various therapeutic areas. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with FDA government regulations and the ability to obtain financing. Plan of Operations Since its inception the Company has generated no revenue from product sales. The Company has not been profitable since inception and has incurred an accumulated deficit of $57.9 million through December 31, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop drug candidates and from the associated administrative costs. The Company expects to incur significant additional operating losses over the next several years and expects cumulative losses to increase substantially due to preclinical and clinical testing and development of marketing, sales and production capabilities. Because of its continuing losses from operations, the Company will be required to obtain additional funds in the short term to satisfy its ongoing capital needs and to continue operations. Although management continues to pursue additional funding arrangements and/or strategic partnering there can be no assurance that additional funding will be available from any of these sources or, if available, will be available on acceptable or affordable terms. If the Company is unable to obtain financing on acceptable terms in order to maintain operations through the next fiscal year, it could be forced to curtail or discontinue its operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Aries Funds have committed to invest up to $2.0 million in the Company which will, together with cash on hand at December 31, 1997, $3.0 of net proceeds from the Company's private placement offering of common stock units in January and February of 1998, and/or any additional funds raised from the Company's private placement, fund the operations of the Company through March of 1999. Restructuring In September 1996, the Company implemented a restructuring plan that resulted in the elimination of 20 positions, mostly from the research organization. The amount of termination benefits accrued and charged to restructuring costs in the statement of operations for the year ended December 31, 1996 was $0.3 million. The amount of termination benefits paid and charged against the liability for the year ended December 31, 1996 was $0.3 million. In July 1997, the Company further reduced staffing in its research organization through the elimination of six senior research positions. The amount of termination benefits accrued and charged to restructuring costs in the statement of operations for the year ended December 31, 1997 was $0.5 million. The amount of termination benefits paid and charged against the liability for the year ended December 31, 1997 was $0.2 million. 20 NOTES TO FINANCIAL STATEMENTS, CONTINUED In order to focus its limited resources on PRO 2000, in January 1998 the Company terminated work on all other research programs and underwent a significant downsizing, reducing its staff to 13 people. In the first quarter of 1998, the Company has accrued $0.2 million for costs associated with this restructuring. B. Summary of Significant Accounting Policies: Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash Equivalents and Marketable Securities The Company considers all short-term investments purchased with an original maturity of three months or less at the date of acquisition to be cash equivalents, all short-term investments with a scheduled maturity date of less than twelve (12) months at the balance sheet date are considered to be current marketable securities, and all investments purchased with a scheduled maturity date greater than twelve (12) months at the balance sheet date are noncurrent marketable securities. Property and Equipment Property and equipment is recorded at cost and depreciated on a straight-line basis over the following estimated useful lives:
Laboratory equipment 5 years Furniture and fixtures 5 years Office equipment 5 years Equipment and furniture under capital lease Estimated useful life or term of lease, if shorter Leasehold improvements Estimated useful life or term of lease, if shorter
Major additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon retirement or other disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the determination of net loss. Research and Development Research and development costs are expensed as incurred. 21 NOTES TO FINANCIAL STATEMENTS, CONTINUED Income Taxes The Company provides for income taxes under the liability method which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided for net deferred tax assets if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Revenue Recognition Revenue is recognized under collaborative research and development agreements as earned based upon the performance requirements of each agreement. Payments received in advance under these agreements are recorded as deferred contract revenue until earned. Financial Instruments Cash, cash equivalents and marketable securities are financial instruments which potentially subject the Company to concentrations of credit risk. The Company invests its excess cash in corporate obligations rated as A or better by Moody's Investment Rating Service, U.S. Treasury securities and money market instruments. New Accounting Standards The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ended December 31, 1998. The Company does not believe that the adoption will have a material effect on results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. The Company does not believe that the adoption will have a material effect. Net Loss Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share". This statement specifies the computation, presentation and disclosure requirements for earnings per share ("EPS") to simplify the existing computational guidelines and increase comparability on an international basis. This statement replaces primary EPS with basic EPS, the principal difference being the exclusion of common stock equivalents in the computation of basic EPS. In addition, this statement requires the dual presentation of basic and diluted EPS on the face of the statement of operations. 22 NOTES TO FINANCIAL STATEMENTS, CONTINUED Under SFAS 128, the Company is required to present two EPS amounts, basic and diluted. Basic EPS is calculated based on income available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS may include additional dilution from potential common stock, such as stock issuable pursuant to the exercise of shareholders options and warrants outstanding and the conversion of preferred stock. For the year ended December 31, 1997, the Company had convertible preferred stock, stock options and stock warrants outstanding that were anti-dilutive (see Note E). For the years ended December 31, 1996 and 1995, the Company had stock options and stock warrants outstanding that were anti-dilutive (see Note E). These securities could potentially dilute basic EPS in the future and were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented. Consequently, there were no differences between basic and diluted EPS for these periods. Related Parties Certain members of the Company's Board of Directors are also retained as consultants by the Company. Management believes the consulting agreements have been negotiated at an "arms-length" basis and are immaterial. Included in other assets is a note receivable from an officer and shareholder in the amount of $30,000 at December 31, 1996. Included in shareholders' equity are two notes receivable from the same officer and shareholder in the amount of $73,242 at December 31, 1996. All three notes bear interest at prime plus 1% and are payable upon termination. On December 31, 1997, in connection with a severance agreement with the officer and shareholder, all three notes and the associated accrued interest, in the amount of $124,646, were canceled in exchange for 11,857 shares of Common Stock resulting in treasury stock of $11,857 recorded at cost and $112,789 of compensation expense which is included in general and administrative expenses for 1997. In addition, Michael Weiss, who became a member of the Board of Directors in July 1997, is a Senior Managing Director of Paramount Capital, Inc. ("Paramount") which may be deemed an affiliate of Paramount Capital Asset Management, the general partner and investment manager, respectively of two significant shareholders of the Company who together own 30,060 shares of the outstanding Preferred Stock of the Company and warrants currently exercisable for 3,283,132 shares of Common Stock. Such shareholders have agreed to exchange their Preferred Stock, including accrued dividends, and warrants upon the earlier of the completion of the Company's current private placement offering of $6.0 million or upon the termination of the offering period, which will be no later than May 11, 1998 (the "Final Closing Date"), for an estimated 8,146,800 shares of Common Stock and warrants to purchase an equal number of shares of Common Stock at an exercise price currently set at $0.50 per share. The number of shares of Common Stock, the number of shares of Common Stock issuable upon exercise of the warrants and the per-share exercise price of the warrants are based on the minimum of $0.50 and 75% of the average closing bid price of Procept Common Stock for the 5 days and the 30 days immediately prior to the Final Closing Date. If 75% of either average is less than $0.50, the number of shares of Common Stock and the number of shares of Common Stock issuable upon exercise of the warrants will be adjusted upward and the per-share exercise price of the warrants will be adjusted downward. Upon the Final Closing Date, the Company will enter into a Financial Advisory Agreement with Paramount. Reclassifications Certain reclassifications have been made to the 1995 and 1996 financial statements to conform with 1997 presentation. 23 NOTES TO FINANCIAL STATEMENTS, CONTINUED C. Marketable Securities: The marketable securities of the Company, consisting of U. S. Government Agencies have been classified as available for sale. Realized gains and losses on disposition of securities are determined on the specific identification method and are reflected in the statement of operations. Net unrealized gains and losses are recorded directly in a separate shareholders' equity account, except those losses that are deemed to be other than temporary, which losses, if any, are reflected in the statement of operations. Fair values are estimated based on quoted market prices. Interest is recognized when earned. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in interest income. The following table presents the amortized cost, fair value and unrealized gains and losses of the marketable securities for the year ended December 31, 1996. All marketable securities were held until January 27, 1997, which was the maturity date.
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) ========= ========= =======
The contractual maturities of all securities available for sale was one month. D. Property and Equipment: Property and equipment consisted of the following:
December 31, ------------ 1997 1996 ---- ---- Laboratory equipment $3,784,184 $3,845,739 Furniture and fixtures 147,123 147,123 Office equipment 570,954 547,476 Leasehold improvements 1,198,542 1,164,570 ----------- ----------- 5,700,803 5,704,908 Less: accumulated depreciation & amortization (4,811,545) (3,841,708) ----------- ----------- Property and equipment, net $889,258 $1,863,200 =========== ===========
24 NOTES TO FINANCIAL STATEMENTS, CONTINUED Depreciation and amortization expense amounted to $1.1 million, $1.3 million and $1.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Included above in property and equipment are the following assets that were acquired pursuant to capital lease arrangements:
December 31, ------------ 1997 1996 ---- ---- Laboratory equipment $2,480,802 $2,568,918 Furniture and fixtures 119,557 119,557 Office equipment 213,570 213,570 Leasehold improvements 273,008 273,008 ----------- ----------- 3,086,937 3,175,053 Less: accumulated amortization (2,265,522) (1,759,347) ----------- ----------- $821,415 $1,415,706 =========== ===========
E. Shareholders' Equity: Common and Preferred Stock On September 29, 1997, Procept's shareholders approved a one-for-seven reverse split of the Company's Common Stock (the "Reverse Stock Split"). The Reverse Stock Split was effected on October 14, 1997. Shareholders' equity has been restated to give retroactive application to the Reverse Stock Split in prior periods by reclassifying from Common Stock to additional paid in capital the par value of the eliminated shares arising from the Reverse Stock Split. In addition, all references in the financial statements to number of shares, per share amounts, and stock option and warrant data of the Company's Common Stock have been restated. On June 30, 1997, The Aries Fund and The Aries Domestic Fund L.P. (collectively the "Aries Funds") made a direct investment of $3.0 million into the Company. The Company received proceeds of $2.8 million for the issuance of 853,334 shares of Common Stock (the "Common Shares"). The Common Shares contained certain contractual obligations including, but not limited to, the right to convert the Common Shares into preferred stock upon Procept shareholder approval of such preferred stock. In addition to the Common Shares, the Aries Funds received Class A and Class B warrants to purchase 1,477,834 shares of Common Stock. These warrants contained reset and conversion features tied to the performance of the Company's Common Stock. The Company also received from Aries an additional $0.2 million for the issuance of two convertible promissory notes. The notes accrued interest at a rate of 12% per year and were due on or before September 30, 1997. 25 NOTES TO FINANCIAL STATEMENTS, CONTINUED At an adjourned session of the Company's 1997 annual meeting held on July 15, 1997, its shareholders approved an amendment and restatement of the Company's Restated Certificate of Incorporation which authorized 1,000,000 shares of preferred stock. On August 1, 1997, the Board of Directors established a series of 30,061 shares of Series A Convertible Preferred Stock (the "Series A Preferred"). Upon the establishment of this Series A Preferred, the purchasers of the securities issued in the June 1997 direct investment exercised the right to convert their Common Stock to shares of Series A Preferred. On August 22, 1997, the Aries Funds converted their Common Stock holdings of 853,334 shares into 28,000 shares of Series A Preferred. On September 30, 1997, the Aries Funds converted the convertible promissory notes and the corresponding accrued interest into 2,060 shares of Series A Preferred. The Series A Preferred was initially convertible into Common Stock at a conversion price equal to the price paid by the purchasers for the Common Shares. As of December 31, 1997, the conversion price of the Series A Preferred was $1.09, but remains subject to further conversion rate adjustments based on future events. At December 31, 1997, the Series A Preferred was convertible into 2,747,484 shares of Common Stock. Other significant features of the Series A Preferred include (1) a per share cumulative annual dividend, payable in cash or in kind, of 10% of the sum of $140 per share plus accrued but unpaid dividends, (ii) the right to participate in most subsequent dividend distributions to Common, (iii) the right to vote the Series A Preferred shares on an as converted to Common Stock basis reflecting the then effective conversion price, and (iv) the right to a liquidation preference of $140 per share plus accrued but unpaid dividends. Furthermore, on September 30, 1997 the Class A and Class B warrants issued in the June 1997 private placement were exchanged for 3,283,132 new warrants at an exercise price of $1.09 per share. The Company incurred costs in the amount of $0.1 million related to the June 1997 private placement and the subsequent conversion events which were charged to additional paid-in capital. As a part of a unit offering, the Company sold an aggregate of 6,845,000 shares of Common Stock in January and February of 1998 together with five-year warrants to purchase 6,845,000 shares of Common Stock at an exercise price of $0.50 (the "1998 Offering"). These securities were sold for gross proceeds of $3.4 million. The purchasers in the 1998 Offering are entitled to certain contractual rights requiring contingent additional issuances of Common Stock to the purchasers, (x) based on the market price (i) for the 5-day and 30-day periods immediately prior to the Final Closing Date and (ii) on the first anniversary of the final closing date of the 1998 Offering, (y) to protect them against future dilutive sales of securities and (z) as a dividend substitute beginning 18 months after the final closing date of the 1998 Offering. The purchasers also may put the purchased shares back to the Company at 140% of the original purchase price in the event of a liquidation or merger. These contractual rights will terminate after the first anniversary of the final closing if the Common Stock trades at three times the original purchase price per share. 26 NOTES TO FINANCIAL STATEMENTS, CONTINUED On May 17, 1996, the Company completed a self-managed private placement of units. Each Unit consisted of one share of the Company's Common Stock and one callable warrant to purchase one share of the Company's Common Stock. The Warrants are subject to redemption by the Company upon 30 days prior notice to the holders of the Warrants beginning May 17, 1998 at a price of $0.01 per Warrant Share in the event that the average closing price of the Company's Common Stock for any 20 consecutive trading day period exceeds $26.25. The initial exercise price of the Warrants per share of common stock is $17.50. The Company received proceeds of $11.6 million for the issuance of 676,896 Units. The Company incurred additional costs in the amount of $0.6 million related to this financing which were charged to additional paid-in capital in 1996. On February 8, 1996 the Company closed on a second public offering. The Company received proceeds of $4.9 million (net of underwriting discount and underwriter's offering expenses) for the issuance of 314,286 shares of Common Stock. On March 27, 1996, the associated over allotment option was partially exercised and the Company issued and sold an additional 21,429 shares of the Company's Common Stock resulting in net proceeds to the Company of $0.3 million. The Company incurred costs in the amount of $0.2 million related to this financing at December 31, 1995. The deferred financing costs were charged to additional paid-in capital in 1996. On February 17, 1994, the Company closed its initial public offering. The Company received proceeds of $18.6 million (net of underwriting discount and underwriter's offering expenses) for the issuance of 345,000 shares of common stock. In addition, all of the then outstanding shares of redeemable convertible preferred stock (the "Preferred Stock") converted automatically into 496,768 shares of common stock. Each holder of common stock is entitled to one vote for each share of common stock held. Each share of common stock issued and outstanding is identical in all respects to each other share. The Company has reserved at December 31, 1997, and kept available out of the authorized but unissued shares of common stock, 5,513,255 shares for issuance upon the exercise of outstanding options and warrants. 1989 Stock Plan Under the Company's 1989 Stock Plan (the "Plan") adopted by the Board of Directors during 1989, and subsequently amended and restated, the Company is permitted to sell or award common stock or to grant stock options for the purchase of common stock to employees, officers and consultants up to a maximum of 162,445 shares. In March 1996, the Board of Directors approved an amendment to the Plan to increase the number of shares covered by the Plan by 35,714 which amendment was approved by the shareholders at the 1996 Annual Meeting of Shareholders. In March 1997, the Board of Directors approved an amendment to the Plan to increase the number of shares covered by the Plan by 71,429 shares to 269,588 shares, which amendment was approved by the shareholders at the 1997 Annual Meeting of Shareholders. In October 1997, the Board of Directors approved an amendment to the Plan to increase the number of shares covered by the Plan to 1,500,000 shares. This amendment is subject to shareholder approval at the 1998 Annual Meeting of Shareholders. At December 31, 1997, there were 155,160 shares available for future grant. 27 NOTES TO FINANCIAL STATEMENTS, CONTINUED The Plan provides for the granting of incentive stock options (ISOs) and nonqualified stock options. In the case of ISOs, the exercise price shall not be less than 100% (110% in certain cases) of the fair market value per share of the common stock, on the date of grant. In the case of nonqualified options, the exercise price shall be not less than the lesser of (a) book value per share of common stock as of the fiscal year of the Company immediately preceding the date of such grant, or (b) 50% of the fair market value of the common stock on the date of grant. All stock options under the Plan have been granted at exercise prices at least equal to the fair market value of the common stock. The options either become exercisable immediately on the date of grant or shall become exercisable in such installments as the Compensation Committee may specify, generally over a 4 year period. Each option shall expire on the date specified by the Compensation Committee, but not more than ten years and one day from the date of grant in the case of nonqualified options, and generally ten years from the date of grant in the case of ISOs (five years in certain cases). Director Stock Option Plan In June 1994, the shareholders of the Company adopted the 1994 Director Stock Option Plan (the "Director Plan"). The Director Plan was established to attract and retain highly qualified, non-employee directors. The price per share for each option granted under this plan shall be the current fair market value at date of grant. The options vest over a period of three years and have a term of ten years. As originally adopted, the aggregate number of shares of the Company's common stock which may be optioned under this plan is 21,429 shares. In March 1997, the Board of Directors approved an amendment to the Director Plan to increase the number of shares covered by the Director Plan by 21,428 shares, which amendment was approved by the shareholders at the 1997 Annual Meeting of Shareholders; currently, the aggregate number of shares that may be subject to grants under the Director Plan is 42,857 shares. Supplemental Disclosures for Stock-Based Compensation The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plans. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", ("SFAS 123") issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company elected to continue to apply the accounting provisions of APB Option No. 25 for stock options. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are made below. 28 NOTES TO FINANCIAL STATEMENTS, CONTINUED Activity under all stock plans related to all the ISOs and nonqualified stock options for the three years ended December 31, 1997 is listed below.
ISO Nonqualified Weighted Avg. Shares Shares Option Price Exercise Price ------- ------ ------------ -------------- Outstanding at December 31, 1994 81,033 39,926 $7.00-$89.25 $33.39 Granted 22,929 14,523 $14.91-$57.75 $22.47 Exercised (3,579) (2,496) $7.00-$37.45 $9.73 Canceled (9,650) (429) $7.00-$73.50 $40.88 ------- ----- Outstanding at December 31, 1995 90,733 51,524 $7.00-$89.25 $31.01 Granted 66,693 7,401 $8.75-$22.75 $10.71 Exercised (7,294) (714) $7.00-$18.76 $8.26 Canceled (29,668) (34,052) $7.00-$89.25 $26.18 -------- -------- Outstanding at December 31, 1996 120,464 24,159 $7.00-$89.25 $24.43 Granted 1,109,426 132,142 $1.00-9.63 $2.27 Exercised (59) -- $7.00 $7.00 Canceled (40,380) (912) $7.02-$89.25 $25.07 -------- ----- Outstanding at December 31, 1997 1,189,451 155,389 $1.00-$89.25 $3.95 ========= =======
Summarized information about stock options outstanding at December 31, 1997 is as follows:
Exercisable Weighted Avg. ---------------------------- Range of No. of Options Remaining Weighted Avg. Number of Weighted Avg. Exercise Prices Outstanding Contract. Life Exercise Price Options Exercise Price --------------- -------------- -------------- -------------- ---------- ------------ $1.00-$1.88 22,715 9.91 $1.66 0 $-- $2.19 1,198,000 9.75 $2.19 162,928 $2.19 $3.28-$9.63 71,891 7.46 $7.68 32,304 $7.68 $14.88-$18.73 19,814 7.30 $16.91 12,732 $17.18 $20.13-$39.20 7,440 6.08 $30.77 6,842 $31.39 $40.25-$89.25 24,980 6.24 $60.84 20,571 $60.54
Options for the purchase of 235,378 shares, 59,251 shares and 81,771 shares are exercisable at December 31, 1997, 1996 and 1995, respectively. The total exercise proceeds for all options outstanding at December 31, 1997 is approximately $5.3 million. 29 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:
1997 1996 1995 ---- ---- ---- Dividend yield None None None Expected volatility 75% 75% 75% Risk free interest rate 6.00% 6.25% 6.96% Expected life of option 5.0 5.0 5.0
All options granted in 1997, 1996 and 1995 were granted at fair value. The weighted average fair value of options granted was $1.59, $7.07 and $14.84 for 1997, 1996 and 1995, respectively. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards made in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts shown below:
1997 1996 1995 ---- ---- ---- Net loss - as reported $(9,052,575) $(11,235,760) $(11,712,287) Net loss - pro forma $(9,368,531) $(11,455,536) $(11,950,312) Basic and diluted net loss per common share - as reported $(4.40) $(6.82) $(12.77) Basic and diluted net loss per common share - pro forma $(4.55) $(6.95) $(13.02)
The effects of applying SFAS 123 in the pro forma disclosure are not indicative of future amounts. 1994 Employee Stock Purchase Plan In April 1994, the Board of Directors adopted the 1994 Employee Stock Purchase Plan (the "1994 Plan"). Under the 1994 Plan, eligible employees of the Company may purchase shares of Common Stock, through payroll deductions, at the lower of 85% of fair market value of the stock at the time of grant or 85% of fair market value at the time of exercise. As originally adopted, a total of 35,714 shares were reserved for issuance under the 1994 Plan. In March 1997, the Board of Directors approved an amendment to the 1994 Plan to increase the number of shares covered by the 1994 Plan by 35,714 shares, which amendment was approved by the shareholders at the 1997 Annual Meeting of Shareholders; currently, the aggregate number of shares that may be purchased under the 1994 plan is 71,428 shares. Shares are granted twice yearly, on February 28 and August 31, and are exercisable upon issuance. The Company issued 7,634 shares, 8,572 shares and 10,418 shares in 1997, 1996 and 1995, respectively. The weighted average fair values of grants at fair value under the 1994 Plan during 1997, 1996 and 1995 were $1.41, $7.00 and $8.40, respectively. 30 NOTES TO FINANCIAL STATEMENTS, CONTINUED Common Stock Warrants On December 16, 1992, the Company issued warrants, which expired on December 16, 1997, to purchase an aggregate of 593 shares of common stock at an initial exercise price of $42.14 in connection with a bridge loan to the Company in the amount of $0.3 million, which was subsequently repaid with interest thereon. In January 1993, the Company issued warrants, which expire on December 14, 1998, to purchase 11,476 shares of the Company's common stock to an underwriter at an initial exercise price of $50.61 per share, in connection with the private placement of the Class F Preferred Stock. On February 10, 1994, in connection with the closing of the initial public offering the Company's underwriter purchased for $210.00 warrants to purchase 30,000 shares of the Company's common stock at an exercise price of $83.30 per share. The warrants expire on February 10, 1999. On April 1, 1994, in connection with the Company's $2 million master lease agreement, the Company issued common stock warrants for a purchase price of $350.00 to purchase 5,000 shares of common stock at a price of $59.50 at any time on or after April 1, 1995 and on or before April 1, 1999. On September 11, 1995, the Company issued common stock warrants for a purchase price of $300.00 to purchase 4,251 shares of the Company's common stock to Oppenheimer & Co., Inc. at an exercise price of $49.00 per share, in connection with the engagement of Oppenheimer & Co., Inc. to provide investment banking services to the Company. These warrants are exercisable beginning September 11, 1996 and expire September 10, 2000. On February 14, 1996, the Company issued common stock warrants for a purchase price of $220.00 to purchase up to 31,428 shares of the Company's common stock to Commonwealth Associates at an exercise price of $21.91 per share in connection with a public financing. These warrants are exercisable beginning February 14, 1997 and expire on February 13, 2001. On May 17,1996, the Company issued a common stock warrant to purchase 112,832 shares of the Company's common stock at an exercise price of $17.50 per share to David Blech in connection with financial advisory services to the Company. This warrant is exercisable beginning May 17, 1996 and expires on May 17, 2001. On January 6, 1997, the Company issued a common stock warrant to purchase 10,714 shares of the Company's common stock to Furman Selz LLC at an exercise price of $10.50 per share in connection with financial advisory services to the Company. This warrant is exercisable beginning January 6, 1997 and expires on January 6, 2002. 31 NOTES TO FINANCIAL STATEMENTS, CONTINUED In August 1991 and September 1992, the Company issued warrants to purchase up to 4,320 and 2,857 shares, respectively, of the Company's Class D Preferred Stock (the "Class D Warrants") at a minimum exercise price of $17.50 per share, in connection with leasing arrangements. The Class D Warrants were automatically converted into warrants to purchase 2,681 shares of common stock at an exercise price of $46.83 per share upon the closing of the Company's initial public offering on February 17, 1994. The warrants expire on February 10, 1999. In connection with promissory notes issued in September 1992, the Company granted warrants to acquire an aggregate of 12,698 shares of Class F Preferred Stock at an exercise price of $15.75 per share. Upon conversion of all Class F Preferred Stock effected by the initial public offering, the warrants converted into warrants to purchase 4,745 shares of common stock at an exercise price of $42.14 per share. In the year ended December 31, 1995, 1,387 of these warrants were exercised. The remaining warrants expired on September 15, 1997. At December 31, 1997 there were 4,168,411 warrants outstanding, all of which are exercisable. F. Collaborative Research and Development Agreements: In September 1993, the Company signed a Research and Development Agreement with Sandoz Pharma Ltd. (the "Sandoz Agreement") to identify and develop compounds which bind to CD4 or CD2, or their respective ligands, and interfere with their interaction, as therapeutic agents for immune suppression. Effective as of September 1, 1995, the Company's sponsored research agreement with Sandoz Pharma Ltd. was amended to focus the research program on compounds targeting CD4 and its ligand and to limit the research program with respect to compounds that bind to CD2 and its ligand to certain screening activities being conducted by Sandoz through the end of 1995. In connection with this amendment, the research and license fees due for the third year of the research program were reduced from $5 million to $2.2 million. Of the $2.2 million received, $0.9 million was recorded as revenue in 1995 and $1.3 million as deferred revenue at December 31, 1995 and was subsequently recorded as revenue in 1996. Under the terms of the Sandoz Agreement, the Company has received $14.2 million in initial license fees and research funding to date. Procept remains eligible to receive $12 million in milestone payments as compounds discovered in these research programs progress through clinical development. In 1994, the Company received $8.0 million and recorded as revenue $5.0 million for research performed by the Company under the Sandoz agreement. The $3.0 million was advance payment for research to be performed in fiscal year 1995 and is recorded as revenue in 1995. In January 1996, Procept entered into a Sponsored Research Agreement with VacTex, Inc. ("VacTex"), to provide research services relating to the development of novel vaccines based on discoveries licensed from the Brigham and Women's Hospital and Harvard Medical School. These discoveries shed light on a previously unknown aspect of immunology, the CD1 system of lipid antigen presentation. 32 NOTES TO FINANCIAL STATEMENTS, CONTINUED Under the Sponsored Research Agreement, Procept conducted specified research tasks on behalf of VacTex for which Procept received a combination of cash and equity in VacTex based on the number of full-time equivalent employees of Procept engaged in the research, but subject to maximum cash and stock limits. The Sponsored Research Agreement also includes a provision requiring Procept to issue to VacTex or its shareholders warrants to purchase an aggregate of 14,286 shares of Procept Common Stock at an exercise price of $24.50 per share. In the year ended December 31, 1997, the Company recorded revenue of $0.5 million which consisted of $0.4 million in cash and 150,000 shares of VacTex common stock. In the year ended December 31, 1996, the Company recorded revenue of $0.6 million which consisted of $0.4 million in cash and 150,000 shares of VacTex common stock. At December 31, 1997, the Company had an accounts receivable of $21,000, which was subsequently paid in January 1998, and an investment in VacTex of $0.3 million. In order to apply available resources to the PRO 2000 development program, the Company did not seek to renew the Sponsored Research Agreement with VacTex, which expired on January 8, 1998. In July 1997, the Company announced that it had been awarded a Phase I Small Business Innovation Research Grant from the National Institutes of Health to support the development of novel vaccines for tuberculosis. Under the terms of the Phase I Grant, Procept will receive $0.1 million in financial support. The Company proposes to identify and develop an effective tuberculosis vaccine by utilizing the CD1 system of lipid antigen presentation. The Company plans to apply for additional funding under a Phase II SBIR grant late in 1997. G. Income Taxes: No federal or state income taxes have been provided for as the Company has incurred losses since its inception. At December 31, 1997, the Company had Federal and State tax net operating loss ("NOL") carryforwards of approximately $57.3 million and $50.7 million which will expire beginning in the year 2000 through 2012 for Federal and beginning in the year 1998 through 2002 for State, respectively. Additionally, the Company had Federal and State research and experimentation credit carryforwards of approximately, $1.6 million and $1.0 million, respectively, both of which will expire in the year 2012. The Internal Revenue Code of 1986 (the "Code") contains provisions which limit the net operating loss carryforwards and tax credits available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interests. In conjunction with the initial public offering, such a change in ownership as defined in the Code occurred. Accordingly, certain available NOL carryforwards and tax credits are subject to these limitations. 33 NOTES TO FINANCIAL STATEMENTS, CONTINUED The components of Procept's net deferred tax assets were as follows at December 31:
1997 1996 ---- ---- Net deferred tax assets: Net operating loss carryforwards $22,665,000 $19,021,000 Tax credit carryforwards 2,660,000 1,947,000 Depreciation 1,263,000 1,057,000 Vacation and benefits 4,000 22,000 Capital leases and other (1,257,000) (957,000) Valuation allowance (25,335,000) (21,090,000) ----------- ----------- Total net deferred tax assets $ 0 $ 0 =========== ===========
As required by Financial Accounting Statement No. 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets which are comprised principally of net operating loss and tax credit carryforwards. Management has considered the Company's history of losses and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company will not recognize the benefit of the net deferred tax assets. Accordingly, the deferred tax assets have been fully reserved. Management re-evaluates the positive and negative evidence on an annual basis. H. Savings and Retirement Plan: On July 1, 1990, the Company established the Procept, Inc. Savings and Retirement Plan (the "401(k) Plan"), a profit-sharing plan under Section 401 of the Code. Employees are eligible to participate in the 401(k) Plan by meeting certain requirements, including length of service and minimum age. The Company may contribute to the 401(k) Plan, without regard to current or accumulated net profits, in an amount not to exceed the maximum allowable under applicable provisions of the Code. The amount is to be allocated to active participants based on their annual pay as a percentage of the total annual pay of all such participants. Participants may also contribute to the 401(k) Plan, but no more than the maximum permissible amount allowed by regulatory definitions. For the years ended December 31, 1997, 1996 and 1995, the Company did not contribute to the 401(k) Plan. I. Commitment and Contingencies: Operating Leases On February 28, 1989, the Company entered into an operating lease arrangement for its facility. The Company has made several amendments to its operating lease arrangement for its facility to include additional leased space and extension of the lease terms. The commitment under the operating lease requires the Company to pay monthly base rent and an allocable percentage of operating costs and property taxes. The monthly base rent is subject to increases during the course of the lease term which are unrelated to increases in utilized space. Accordingly, the Company is providing for rent expense based on an amortization of the lease payments on a straight-line basis over the life of the lease arrangement. 34 NOTES TO FINANCIAL STATEMENTS, CONTINUED Pursuant to the aforementioned leasing arrangements, at December 31, 1997 and 1996, the Company has recorded noncurrent liabilities of $0.3 million and $0.3 million, respectively, for rent expense in excess of cash expenditures for leased facilities. Gross rent expense for leased facilities and equipment amounted to approximately $1.8 million, $1.6 million and $1.7 million, for the years ended December 31, 1997, 1996 and 1995, respectively. The approximate future minimum annual rental payments for leased facilities for the next five years under the lease arrangements consist of the following at December 31,1997: 1998 $1,392,000 1999 $1,435,000 2000 $706,000 Pursuant to the facility lease agreement, the Company had provided an open letter of credit for the term of its leases in the amount of $0.4 million which would provide for payment to the lessor of its main facility in the event of default by the Company. The Company held a certificate of deposit, which was classified as a restricted investment (see also Note J), solely for the purpose of collateralizing this letter of credit in the amount of $0.4 million. During September 1997, in substitution of the letter of credit and restricted investment arrangement, the Company increased its rent deposit with the lessor to $0.2 million. Capital Leases In 1992, the Company entered into a leasing agreement which allowed the Company to lease up to $1.0 million of capital equipment at implicit interest rates ranging from approximately 11% to 13% for a 42 month term. In 1994, the Company entered into a $2 million master lease agreement for the lease and sale/leaseback of certain equipment and leasehold improvements. The implicit interest rates for the leases under this agreement range from approximately 5.5% to 7% for a 36 month term. During fiscal year 1994, the Company purchased and leased $0.7 million of laboratory equipment, office equipment and furniture and fixtures pursuant to this leasing arrangement. During fiscal year 1995, the Company purchased and leased $1.3 million of laboratory equipment, office equipment and leasehold improvements pursuant to this leasing arrangement. These equipment leasing agreements have been fully utilized at December 31, 1996. Future minimum lease payments with initial or remaining terms of one year or more consist of the following at December 31, 1997: 1998 $20,519 Less: amount representing interest (288) ------- Present value of future minimum lease payments $20,231 ======= 35 NOTES TO FINANCIAL STATEMENTS, CONTINUED Contract Research In February 1987, the Company entered into a Research and Licensing Agreement with Dana-Farber, a Massachusetts not-for-profit corporation. As part of the Agreement, the Company had agreed to fund certain research and development projects conducted by Dana-Farber in relation to the development and eventual commercialization of products related to T cell activation in exchange for exclusive rights to technologies developed. The Research and Licensing Agreement expired on March 31, 1997, as the Company chose not to extend funding. The amount of contract research costs under the Agreement incurred by the Company and included in research and development expense amounted to $0.2 million, $0.8 million and $0.8 million in 1997, 1996 and 1995, respectively. The Company has accrued $0 and $0.4 million at December 31, 1997 and 1996, respectively, payable to Dana-Farber under this Agreement. Legal Proceedings On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a Complaint with the United States District Court for the Southern District of New York naming the Company as a defendant (the "Complaint"). The Complaint alleges that the Company breached obligations to Commonwealth under the Underwriting Agreement between Commonwealth and the Company dated February 8, 1996, giving Commonwealth a right of first refusal to act as co-lead underwriter or co-managing agent of a public offering or Private Placement of the Company's securities during the period ended August 8, 1997. In the Complaint, Commonwealth seeks aggregate compensatory damages in the amount of $375,000, incidental and consequential damages in an amount to be proven at trial, costs, disbursements and accrued interest and such other and further relief as the court deems proper. Discovery has commenced in this action. The Company believes that Commonwealth's claims are without factual or legal merit. The Company does not believe this action will have a material adverse effect on the Company's business and it intends to vigorously defend this action. However, given the early stage of this litigation, no assurance may be given that the Company will be successful in its defense. A decision by the court in Commonwealth's favor or any other conclusion of this litigation in a manner adverse to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. J. Note Payable: On February 15, 1995, the Company signed a term note with Bristol-Myers Squibb Company in the amount of $0.1 million. The term note provided for scheduled payments of $38,617 on April 1, July 1, and October 1, 1996. The interest rate for the note was 8.0%. Upon the occurrence of certain financing events, the entire balance of the note, including all accrued and unpaid interest, became due and payable. This Note was repaid in full in 1996 upon the closing of the secondary offering. 36 NOTES TO FINANCIAL STATEMENTS, CONTINUED Line of Credit: The Company maintained a $0.1 million line of credit through the use of corporate credit cards. This line of credit was collateralized with a certificate of deposit of $0.1 million and was classified as a restricted investment on the balance sheet. The certificate of deposit was recorded at cost, which approximated market. Interest earned on the certificate of deposit was not restricted; accordingly, any accrued interest was considered a cash equivalent. See also Note B. In September 1997, the Company reduced its line of credit to $35,000 and was no longer required to maintain the line of credit and certificate of deposit. 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning disclosure pursuant to Item 405 of Regulation S-K is included under the caption "Compliance with Section 16(a) of the Securities Exchange Act" in the Proxy Statement and is incorporated herein by reference. The current Executive Officers and Directors of the Company are as follows: John F. Dee 40 President; Chief Executive Officer; Director Michael S. Weiss 32 Director, Chairman of the Board Zola P. Horovitz, Ph.D. 63 Director Max Link, Ph.D. 57 Director Ellis L. Reinherz, M.D. 47 Director Mark C. Rogers, M.D. 55 Director Elliott H. Vernon 54 Director JOHN F. DEE has served as President, Chief Executive Officer and a member of the Board of Directors of Procept since joining the Company in February 1998. From April 1997 to October 1997, Mr. Dee was Interim Chief Executive Officer of Genta Incorporated. From 1994 to 1997 and 1988 to 1992, Mr. Dee was a Senior Management Consultant with McKinsey & Company, Inc. and from 1992 to 1994 served as Chief Operating Officer, Chief Financial Officer, and Director of Walden Laboratories, Inc. (now AVAX Technologies, Inc.). Mr. Dee holds an M.S. in Chemical Engineering from Stanford University and an M.B.A. from Harvard University. MICHAEL S. WEISS has been a director of the Company, and the Chairman of its Board of Directors, since July 8, 1997. Mr. Weiss is presently a Senior Managing Director of Paramount Capital, Inc. Prior to joining Paramount, Mr. Weiss was an attorney with Cravath, Swaine & Moore. Mr. Weiss is currently Vice-Chairman of the Board of Directors of Genta Incorporated, a director of Pacific Pharmaceuticals, Inc., AVAX Technologies, Inc. and Palatin Technologies, Inc., and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a publicly traded biopharmaceutical company. Additionally, Mr. Weiss is currently a member of the boards of directors of several privately held biopharmaceutical companies. Mr. Weiss received his J.D. from Columbia University School of Law and a B.S. in Finance from the State University of New York at Albany. Mr. Weiss devotes only a portion of his time to the business of the Company. ZOLA P. HOROVITZ, Ph.D. has been a director of the Company since 1992. Dr. Horovitz, currently a consultant to pharmaceutical companies, served as Vice President - Business Development and Planning at Bristol-Myers Squibb Pharmaceutical Group, from August 1991 to April 1994, and as Vice President - Licensing, from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years as a member of the Squibb Institute for Medical Research, most recently as Vice President - Research Planning. He is also a director of seven other biotechnology and pharmaceutical companies: Avigen, Inc., BioCryst, Inc., Clinicor, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Roberts Pharmaceutical Corporation and Synaptic Pharmaceuticals, Inc. Dr. Horovitz received his Ph.D. from the University of Pittsburgh. 38 MAX LINK, Ph.D. has been a director of the Company since 1995. Dr. Link has held a number of executive positions with pharmaceutical and healthcare companies. Most recently, he served as Chief Executive Officer of Corange Limited, from May 1993 until June 1994. Prior to joining Corange, Dr. Link served in a number of positions with Sandoz Pharma Ltd., including Chief Executive Officer, from 1987 until April 1992, and Chairman, from April 1992 until May 1993. Dr. Link currently serves on the board of directors of six publicly traded life science companies: Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Cell Therapeutics, Inc., CytRx Corporation, Human Genome Sciences, Inc. and Protein Design Labs, Inc. Dr. Link received his Ph.D. in Economics from the University of St. Gallen in 1970. ELLIS L. REINHERZ, M.D. has been a director of the Company since 1985. Dr. Reinherz is a founder of Procept and has served as Chairman of its Scientific Advisory Board since October 1985. Since 1984, he has served as Chief, Laboratory of Immunobiology at the Dana-Faber Cancer Institute and as Professor of Medicine at Harvard Medical School. He received his M.D. from Harvard Medical School in 1975. Dr. Reinherz serves on the editorial and review boards of key medical and scientific publications in hematology and immunology. MARK C. ROGERS, M.D. has been a director of the Company since December 1997. Dr. Rogers has been Senior Vice President, Corporate Development and Chief Technology Officer at The Perkin-Elmer Corporation since joining Perkin-Elmer in 1996. From 1992 to 1996, Dr. Rogers was the Vice Chancellor for Health Affairs at Duke University Medical Center, and Executive Director and Chief Executive Officer of Duke University Hospital and Health Network. Prior to his employment at Duke, Dr. Rogers was on the faculty of Johns Hopkins University for 15 years where he served as a Distinguished Faculty Professor and Chairman of the Department of Anesthesiology and Critical Care Medicine, Associate Dean for Clinical Affairs, Director of the Pediatric Intensive Care Unit and Professor of Pediatrics. Dr. Rogers currently serves on the board of directors of three publicly traded companies: Discovery Laboratories, Inc., Galileo Corporation and HCIA, Inc. Dr. Rogers received his M.D. from Upstate Medical Center, State University of New York and has his M.B.A. from The Wharton School of Business. He received his B.A. from Columbia University and held a Fulbright Scholarship. ELLIOTT H. VERNON has been a director of the Company since December 1997. Mr. Vernon has been the Chairman of the Board, President and Chief Executive Officer of Healthcare Imaging Services, Inc., a publicly held operator of fixed-site magnetic resonance imaging centers in the northeast, since its inception in 1991. For the past ten years, Mr. Vernon has also been the managing partner of MR General Associates, a New Jersey general partnership which is the general partner of DMR Associates, L.P., a Delaware limited partnership. Mr. Vernon was also one of the founders of Transworld Nurses, Inc., the predecessor of Transworld HealthCare, Inc., a publicly held regional supplier of a broad range of alternate site healthcare services and products. Mr. Vernon is also a principal of Healthcare Financial Corp., LLC, a healthcare financial consulting company engaged primarily in FDA matters. From January 1990 to December 1994, Mr. Vernon was a director, Executive Vice President and General Counsel of Aegis Holdings Corporation, an international provider of financial services through its investment management and capital markets consulting subsidiaries. Mr. Vernon is currently a director of Pacific Pharmaceuticals, Inc., a publicly held medical products company. The term of office of each officer extends until the meeting of the Board of Directors following the next annual meeting of Shareholders and until his successor is elected and qualified or until his earlier resignation or removal. 39 ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is included under the captions "Compensation Committee Interlocks and Insider Participation," and "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is included under the caption "Share Ownership" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is included under the caption "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The financial statements are listed under Part II, Item 8 of this Report. 2. FINANCIAL STATEMENT SCHEDULES. None. 3. EXHIBITS. The exhibits are listed under Part IV, Item 14(c) of this Report. (b) REPORTS ON FORM 8-K. Current Report dated December 10, 1997 filed with the Securities and Exchange Commission on December 12, 1997 relating to the Company's private placement of common stock units. (c) EXHIBITS. Exhibit No. Description ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended and restated by Certificate of Amendment dated July 15, 1997. Filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 3.2 By-laws of the Company. Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.1 Specimen Stock Certificate for Common Stock $.01 par value. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.2 Warrant Agreement to Purchase Class D Convertible Preferred Stock dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.3 Warrant Agreement to Purchase Class D Convertible Preferred Stock dated September 11, 1992, issued to Comdisco, Inc. Filed as Exhibit 4.3 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 41 4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 4.5 [Reserved.] 4.6 Warrant to Purchase Common Stock dated January 5, 1993, issued to Tucker Anthony Incorporated. Filed as Exhibit 4.6 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.7 Warrant to Purchase Common Stock dated as of February 17, 1994, issued to D. Blech & Company, Incorporated. Filed as Exhibit 4.6 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.8 Warrant Agreement dated February 17, 1994 between the Company and D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.9 Warrant to Purchase Common Stock dated as of April 1, 1994, issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as Exhibit 4 to the Company's Form 10-Q for the quarter ended March 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.10 Warrant to Purchase Common Stock dated as of September 11, 1995, issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 4.11 Form of Warrant Agreement between the Company and Commonwealth Associates. Filed as Exhibit 4.11 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996 and schedule of holders. Filed as Exhibit 4.12 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated January 6, 1997. Filed as Exhibit 4.13 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 42 4.14 "New Warrant" dated September 30, 1997 issued to the Aries Fund. Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 4.15 "New Warrant" dated September 30, 1997 issued to Aries Domestic Fund, L.P. Filed as Exhibit 4.2 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.1 Master Lease Agreement (equipment) dated as of August 1, 1991 between the Company and Comdisco, Inc. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.2 Master Lease Agreement (equipment) dated as of September 11, 1992 between the Company and Comdisco, Inc. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.3 Master Lease Agreement (equipment) dated as of April 1, 1994 between the Company and Hambrecht & Quist Guaranty Finance L.P. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-21134, and incorporated herein by reference. 10.4 The 1989 Stock Plan, as amended. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.6 The 1994 Director Stock Option Plan, as amended. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.7 Registration Rights Agreement dated as of January 5, 1993 among the Company and certain of its security holders named therein. Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1, Commission File No. 33-51788, and incorporated herein by reference. 10.8 Amendment No. 1 to Registration Rights Agreement dated as of March 2, 1994 among the Company and certain of its security holders named therein. Filed as Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 43 10.9 Amendment No. 2 to Registration Rights Agreement dated as of September 11, 1995 between the Company and Oppenheimer & Co., Inc. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 10.10 Lease for 840 Memorial Drive dated February 28, 1989 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust, as amended February 28, 1989 and April 4, 1989. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.11 Lease for 840 Memorial Drive dated August 21, 1990 between the Company and Robert Epstein et al., Trustee of 840 Memorial Drive Trust. Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.12 Lease for 840 Memorial Drive dated February 10, 1992 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.13 Lease for 840 Memorial Drive dated September 8, 1992 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.14 Lease for 840 Memorial Drive dated April 27, 1994 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended March 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.15 Amended and Restated Research and Licensing Agreement dated as of February 19, 1987 between the Company and the Dana-Farber Cancer Institute, as amended by Letter Agreements between the Company and Dana-Farber Cancer Institute dated as of October 17, 1987, October 20, 1987, January 20, 1988, March 1, 1988, March 22, 1989, March 27, 1989, March 5, 1990, May 3, 1993, May 4, 1993, May 10, 1993 and May 12, 1993 (as amended, the "DFCI Agreement"). Filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.16 Letter Agreements between the Company and Dana-Farber Cancer Institute dated April 29, 1994 and May 6, 1994, amending the DFCI Agreement. Filed as Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 44 +10.17 Collaboration Agreement dated as of January 1, 1992 between the Company and the Molecular Modeling and Design Unit of the University of California, San Francisco. Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.18 Confidential Screening Agreement dated as of July 24, 1992 between the Company and the Division of Acquired Immunodeficiency Syndrome (AIDS), National Institute of Allergy and Infectious Diseases. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.19 Extension of Consulting Agreement dated August 9, 1990 between the Company and Dr. Ellis L. Reinherz. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.20 Non-Competition Agreement dated as of August 21, 1990 between the Company and Stanley C. Erck. Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.21 Non-Competition Agreement dated as of January 11, 1992 between the Company and James C. Jenson. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.22 Key Employee Confidentiality, Inventions, and Non-Competition Agreement dated January 13, 1993 between the Company and A. James Ueberroth. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.23 Consulting and Confidentiality Agreement dated as of May 1, 1994 between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended June 30, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.24 Collaborative Research Agreement dated March 6, 1992 between the Company and the President and Fellows of Harvard College (re: Harrison). Filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.25 Collaborative Research Agreement dated March 2, 1994 among the Company, the President and Fellows of Harvard College and Howard Hughes Medical Institute (re: Harrison). Filed as Exhibit 10.27 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 45 +10.26 Sponsored Research Agreement dated August 4, 1992 between the Company and President and Fellows of Harvard College (re: Wagner). Filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.27 Research and Development Agreement between the Company and Sandoz Pharma Ltd. dated as of September 16, 1993. Filed as Exhibit 10.24 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.28 Amendment No. 1 to Research and Development Agreement between the Company and Sandoz Pharma Ltd. dated as of January 25, 1995. Filed as Exhibit 10.30 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.29 The Second Amendment to Research and Development Agreement dated March 31, 1995 between the Company and Sandoz Pharma Ltd. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-21134, and incorporated herein by reference. 10.30 Consulting and Confidentiality Agreement dated as of April 20, 1995 between the Company and Max Link, Ph.D. Filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. +10.31 Third Amendment to Research and Development Agreement dated August 31, 1995 between the Company and Sandoz Pharma Ltd. Filed as Exhibit 10.32 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. +10.32 Research Agreement dated as of March 1, 1993 between the Company and The General Hospital Corporation (re: Hirsch). Filed as Exhibit 10.25 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.33 Research Agreement dated as of March 1, 1993 between the Company and The General Hospital Corporation (re: Drake). Filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.34 Peptoid Library Screening Agreement dated September 27, 1994 between the Company and Chiron Corporation. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1994, Commission File No. 0-21134, and incorporated herein by reference. 46 10.35 Underwriting Agreement dated February 8, 1996 between the Company and Commonwealth Associates. Filed as Exhibit 1 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 10.36 Registration Rights Agreement dated January 6, 1997 between the Company and Furman Selz LLC. Filed as Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 10.37 Executive Severance and Indemnification Agreement between the Company and Stanley C. Erck dated as of June 25, 1997. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.38 Executive Severance and Indemnification Agreement between the Company and Michael J. Higgins dated as of June 25, 1997. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.39 Form of Indemnification Agreement filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.40 Placement Agency Agreement between the Company and Paramount Capital, Inc. dated as of October 26, 1997. Filed herewith. 23.1 Consent of Coopers & Lybrand L.L.P., independent accountants to the Company. Filed herewith. 27.1 Financial Data Schedule. Filed herewith. 99.1 Important factors regarding forward-looking statements. Filed herewith. - ----------------------- + Confidential treatment has been granted for the deleted portions Exhibits 10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, 10.32, 10.33 and 10.34. Exhibits 10.4 through 10.7, 10.19 through 10.23, 10.30 and 10.37 through 10.39 are management contracts or compensatory plans, contracts or arrangements in which executive officers or directors of the Company participate. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by on this 27th day of March, 1998. PROCEPT, INC. (Registrant) /s/ John F. Dee --------------- John F. Dee, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 27th day of March, 1998: Capacity -------- /s/ Michael A. Weiss Chairman - -------------------- Michael A. Weiss /s/ John F. Dee President, Chief Executive Officer - --------------- and Director (Principal Executive Officer, Principal John F. Dee Financial Officer and Principal Accounting Officer) /s/ Zola P. Horovitz Director - ----------------------- Zola P. Horovitz, Ph.D. /s/ Ellis L. Reinherz Director - ----------------------- Ellis L. Reinherz, M.D. /s/ Elliott H. Vernon Director - --------------------- Elliott H. Vernon 48 EXHIBIT INDEX ------------- Exhibit No. Description - ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended and restated by Certificate of Amendment dated July 15, 1997. Filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 3.2 By-laws of the Company. Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.1 Specimen Stock Certificate for Common Stock $.01 par value. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.2 Warrant Agreement to Purchase Class D Convertible Preferred Stock dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.3 Warrant Agreement to Purchase Class D Convertible Preferred Stock dated September 11, 1992, issued to Comdisco, Inc. Filed as Exhibit 4.3 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 4.5 [Reserved.] 4.6 Warrant to Purchase Common Stock dated January 5, 1993, issued to Tucker Anthony Incorporated. Filed as Exhibit 4.6 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 4.7 Warrant to Purchase Common Stock dated as of February 17, 1994, issued to D. Blech & Company, Incorporated. Filed as Exhibit 4.6 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.8 Warrant Agreement dated February 17, 1994 between the Company and D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.9 Warrant to Purchase Common Stock dated as of April 1, 1994, issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as Exhibit 4 to the Company's Form 10-Q for the quarter ended March 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 4.10 Warrant to Purchase Common Stock dated as of September 11, 1995, issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 4.11 Form of Warrant Agreement between the Company and Commonwealth Associates. Filed as Exhibit 4.11 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996 and schedule of holders. Filed as Exhibit 4.12 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated January 6, 1997. Filed as Exhibit 4.13 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 4.14 "New Warrant" dated September 30, 1997 issued to the Aries Fund. Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 4.15 "New Warrant" dated September 30, 1997 issued to Aries Domestic Fund, L.P. Filed as Exhibit 4.2 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.1 Master Lease Agreement (equipment) dated as of August 1, 1991 between the Company and Comdisco, Inc. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.2 Master Lease Agreement (equipment) dated as of September 11, 1992 between the Company and Comdisco, Inc. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.3 Master Lease Agreement (equipment) dated as of April 1, 1994 between the Company and Hambrecht & Quist Guaranty Finance L.P. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-21134, and incorporated herein by reference. 10.4 The 1989 Stock Plan, as amended. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.6 The 1994 Director Stock Option Plan, as amended. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.7 Registration Rights Agreement dated as of January 5, 1993 among the Company and certain of its security holders named therein. Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1, Commission File No. 33-51788, and incorporated herein by reference. 10.8 Amendment No. 1 to Registration Rights Agreement dated as of March 2, 1994 among the Company and certain of its security holders named therein. Filed as Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. 10.9 Amendment No. 2 to Registration Rights Agreement dated as of September 11, 1995 between the Company and Oppenheimer & Co., Inc. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 10.10 Lease for 840 Memorial Drive dated February 28, 1989 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust, as amended February 28, 1989 and April 4, 1989. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.11 Lease for 840 Memorial Drive dated August 21, 1990 between the Company and Robert Epstein et al., Trustee of 840 Memorial Drive Trust. Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.12 Lease for 840 Memorial Drive dated February 10, 1992 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.13 Lease for 840 Memorial Drive dated September 8, 1992 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.14 Lease for 840 Memorial Drive dated April 27, 1994 between the Company and Robert Epstein et al., Trustee of the 840 Memorial Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended March 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.15 Amended and Restated Research and Licensing Agreement dated as of February 19, 1987 between the Company and the Dana-Farber Cancer Institute, as amended by Letter Agreements between the Company and Dana-Farber Cancer Institute dated as of October 17, 1987, October 20, 1987, January 20, 1988, March 1, 1988, March 22, 1989, March 27, 1989, March 5, 1990, May 3, 1993, May 4, 1993, May 10, 1993 and May 12, 1993 (as amended, the "DFCI Agreement"). Filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.16 Letter Agreements between the Company and Dana-Farber Cancer Institute dated April 29, 1994 and May 6, 1994, amending the DFCI Agreement. Filed as Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.17 Collaboration Agreement dated as of January 1, 1992 between the Company and the Molecular Modeling and Design Unit of the University of California, San Francisco. Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.18 Confidential Screening Agreement dated as of July 24, 1992 between the Company and the Division of Acquired Immunodeficiency Syndrome (AIDS), National Institute of Allergy and Infectious Diseases. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.19 Extension of Consulting Agreement dated August 9, 1990 between the Company and Dr. Ellis L. Reinherz. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.20 Non-Competition Agreement dated as of August 21, 1990 between the Company and Stanley C. Erck. Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.21 Non-Competition Agreement dated as of January 11, 1992 between the Company and James C. Jenson. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.22 Key Employee Confidentiality, Inventions, and Non-Competition Agreement dated January 13, 1993 between the Company and A. James Ueberroth. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. 10.23 Consulting and Confidentiality Agreement dated as of May 1, 1994 between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended June 30, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.24 Collaborative Research Agreement dated March 6, 1992 between the Company and the President and Fellows of Harvard College (re: Harrison). Filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.25 Collaborative Research Agreement dated March 2, 1994 among the Company, the President and Fellows of Harvard College and Howard Hughes Medical Institute (re: Harrison). Filed as Exhibit 10.27 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.26 Sponsored Research Agreement dated August 4, 1992 between the Company and President and Fellows of Harvard College (re: Wagner). Filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.27 Research and Development Agreement between the Company and Sandoz Pharma Ltd. dated as of September 16, 1993. Filed as Exhibit 10.24 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.28 Amendment No. 1 to Research and Development Agreement between the Company and Sandoz Pharma Ltd. dated as of January 25, 1995. Filed as Exhibit 10.30 to the Company's Form 10-K for the year ended December 31, 1994, Commission File No. 0-21134, and incorporated herein by reference. +10.29 The Second Amendment to Research and Development Agreement dated March 31, 1995 between the Company and Sandoz Pharma Ltd. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-21134, and incorporated herein by reference. 10.30 Consulting and Confidentiality Agreement dated as of April 20, 1995 between the Company and Max Link, Ph.D. Filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. +10.31 Third Amendment to Research and Development Agreement dated August 31, 1995 between the Company and Sandoz Pharma Ltd. Filed as Exhibit 10.32 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. +10.32 Research Agreement dated as of March 1, 1993 between the Company and The General Hospital Corporation (re: Hirsch). Filed as Exhibit 10.25 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.33 Research Agreement dated as of March 1, 1993 between the Company and The General Hospital Corporation (re: Drake). Filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1, Commission File No. 33-57188, and incorporated herein by reference. +10.34 Peptoid Library Screening Agreement dated September 27, 1994 between the Company and Chiron Corporation. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1994, Commission File No. 0-21134, and incorporated herein by reference. 10.35 Underwriting Agreement dated February 8, 1996 between the Company and Commonwealth Associates. Filed as Exhibit 1 to the Company's Registration Statement on Form S-1, Commission File No. 33-96798, and incorporated herein by reference. 10.36 Registration Rights Agreement dated January 6, 1997 between the Company and Furman Selz LLC. Filed as Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1996, Commission File No. 0-21134, and incorporated herein by reference. 10.37 Executive Severance and Indemnification Agreement between the Company and Stanley C. Erck dated as of June 25, 1997. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.38 Executive Severance and Indemnification Agreement between the Company and Michael J. Higgins dated as of June 25, 1997. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.39 Form of Indemnification Agreement filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September 30, 1997, Commission File No. 0-21134, and incorporated herein by reference. 10.40 Placement Agency Agreement between the Company and Paramount Capital, Inc. dated as of October 26, 1997. Filed herewith. 23.1 Consent of Coopers & Lybrand L.L.P., independent accountants to the Company. Filed herewith. 27.1 Financial Data Schedule. Filed herewith. 99.1 Important factors regarding forward-looking statements. Filed herewith. - ----------------------- + Confidential treatment has been granted for the deleted portions Exhibits 10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, 10.32, 10.33 and 10.34. Exhibits 10.4 through 10.7, 10.19 through 10.23, 10.30 and 10.37 through 10.39 are management contracts or compensatory plans, contracts or arrangements in which executive officers or directors of the Company participate. EX-10.40 2 PLACEMENT AGENCY AGREEMENT PROCEPT, INC. PLACEMENT AGENCY AGREEMENT October 26, 1997 Paramount Capital, Inc. 787 Seventh Avenue New York, New York 10019 Dear Sirs: Procept, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement to retain Paramount Capital, Inc. (the "Placement Agent") on an exclusive basis to introduce the Company to, and to procure subscriptions from,"accredited investors" as that term is defined in Regulation D under the Securities Act of 1933, as amended (the "Act") as prospective purchasers ("Purchasers") of a minimum (the "Minimum Offering") of twenty-five (25) Units (the "Units") and a maximum (the "Maximum Offering") of one hundred (100) Units, with an option in favor of the Placement Agent to offer up to an additional one hundred fifty (150) Units to cover over-allotments at a purchase price of $100,000 per Unit, with each "Unit" consisting of (a) a number of shares of Common Stock (rounded to the nearest whole share, with one-half (0.5) of one share being rounded upward) (the "Offering Quantity") of the Company, par value $.01 per share (the "Common Stock"), determined by dividing one hundred thousand dollars ($100,000) by the lesser of (A) $2.00 and (B) fifty percent (50%) of the Trading Price (as defined in the Subscription Agreement (as defined below)) of the Common Stock on the Nasdaq National Market immediately preceding (i) the Initial Closing Date (as defined below), (ii) any Interim Closing Date (as defined below), or (iii) the Final Closing Date (as defined below) of this Offering, whichever is lowest (the "Offering Price") and (b) warrants (the "Class C Warrants") to purchase at any time prior to the fifth anniversary of the Final Closing Date, a number of shares of Common Stock equal to (x) the Offering Quantity multiplied by (y) 0.5 (rounded to the nearest whole share, with one-half (00.5) of one share being rounded upward). The Units shall have the terms set forth in the Term Sheet (as defined below). The sale to such Purchasers (the "Offering") will be made through a private placement by the Placement Agent (or its designated selected dealers) on a "best efforts" basis pursuant to the Confidential Term Sheet dated November 14, 1997, and all supplements, amendments and exhibits thereto and documents incorporated therein by reference, all of which constitute an integral part thereof (the "Term Sheet"), separate subscription agreements between the Company and each purchaser of Units in the Offering (collectively "Purchasers") and related documents (the "Subscription Agreements") in accordance with Section 4(2) of the Act and Regulation D promulgated thereunder. The Term Sheet and the exhibits attached thereto, the Subscription Agreements, the exhibits to the Subscription Agreements, the Warrant Agreement to be entered into by and between the Company, American Stock Transfer and Trust Company, as warrant agent, and the Paramount Capital, Inc. Page 2 Placement Agent (the "Warrant Agreement"), the Escrow Agreement (the "Escrow Agreement") among the Company, the Placement Agent and Fleet Bank, N.A. (the "Escrow Agent"), the Financial Advisory Agreement (as defined in Section 5(k) below), the Placement Options (as defined in Section 4(d) below), the Advisory Options (as defined in Section 5(k) below ) and this Placement Agency Agreement are collectively referred to herein as the "Offering Documents." The Company, at its sole cost, shall prepare and deliver to the Placement Agent a reasonable number of copies of the Offering Documents in form and substance satisfactory to the Placement Agent. Each prospective investor subscribing to purchase Units shall be required to deliver, among other things, a Subscription Agreement, which shall include a Confidential Investor Questionnaire ("Questionnaire"). The Company shall make available to each prospective purchaser at a reasonable time prior to the purchase of the Units the opportunity to ask questions of, and to receive answers from, the Company concerning the terms and conditions of the Offering and the opportunity to obtain additional information necessary to verify the accuracy of the documents delivered in connection with the purchase of the Units to the extent it possesses such information or can acquire it without unreasonable effort or expense. After the investors shall have had an opportunity to review the Offering Documents, and have had the opportunity to address all inquiries to the Company, separate Subscription Agreements shall be completed by each prospective investor. The Company, with the consent of the Placement Agent, and the Placement Agent, in its sole discretion, shall have the right to reject subscriptions in whole or in part. The Company shall evidence its acceptance of a subscription by countersigning a copy of the applicable Subscription Agreement and returning the same to the Placement Agent. Capitalized terms used in this Agreement, unless otherwise defined herein or unless the context otherwise indicates, shall have the same meanings provided in the Offering Documents. 1. Appointment of Placement Agent. (a) The Placement Agent is hereby appointed exclusive placement agent of the Company (subject to the Placement Agent's right to have Selected Dealers, as defined in Section 1(c) hereof, participate in the Offering) during the Offering Period herein specified for the purposes of assisting the Company in finding qualified subscribers pursuant to the Offering described in the Offering Documents. The Placement Agent shall not be deemed an agent of the Company for any other purpose. The "Offering Period" shall commence on the day the Offering Documents are first made available to the Placement Agent by the Company for delivery in connection with the offering for the sale of the Units (the "Commencement Date"). Upon receipt of the Minimum Offering amount, the Placement Agent may conduct a closing (the Paramount Capital, Inc. Page 3 "Initial Closing Date") and may conduct subsequent closings on an interim basis until the Maximum Offering amount (and any over-allotment amount) has been reached or the Offering is terminated (the "Final Closing Date"). Each such closing may be referred to herein as a "Closing". If not terminated earlier pursuant to this Agreement, the Offering Period shall terminate at 11:59 p.m. New York City Time on January, [ ] 1998, subject to an extension, at the option of the Placement Agent, for an additional sixty (60) days (the "Termination Date"), accordingly, the Offering Period shall terminate on the Final Closing Date or the Termination Date, as the case may be. If subscriptions for the Minimum Offering amount of 25 Units are not received prior to the end of the Offering Period, the Offering will be terminated and all funds received from Subscribers will be returned, without interest and without any deduction. (b) Subject to the performance by the Company of all of its obligations to be performed under this Agreement and to the completeness and accuracy of all representations and warranties of the Company contained in this Agreement, the Placement Agent hereby accepts such agency and agrees to use its best efforts to assist the Company in finding qualified subscribers pursuant to the Offering described in the Offering Documents. It is understood that the Placement Agent has no commitment to sell the Units. The Placement Agent's agency hereunder is not terminable by the Company prior to the Termination Date except as set forth in Section 8(g). (c) The Placement Agent may engage other persons, selected by it in its sole discretion, who are members of the National Association of Securities Dealers, Inc., ("NASD") or who are located outside the United States and that have executed a Selected Dealers Agreement (each such person being hereinafter referred to as a "Selected Dealer") and the Placement Agent may allow such persons such part of the compensation and payment of expenses payable to the Placement Agent hereunder as the Placement Agent shall determine; provided, however, that any such compensation shall be received pursuant to Section 4(d) hereof. (d) Subscriptions for Units shall be evidenced by the execution by qualified subscribers of a Subscription Agreement. No Subscription Agreement shall be effective unless and until it is accepted by the Company. Until a closing is held, all subscription funds received shall be held in escrow as described in the Escrow Agreement. The Placement Agent shall not have any independent obligation to verify the accuracy or completeness of any information contained in any Subscription Agreement or the authenticity, sufficiency, or validity of any check delivered by any prospective investor in payment for Units, nor shall the Placement Agent incur any liability with respect to any such check. 2. Representations and Warranties of the Company. The Company represents and warrants to the Placement Agent and each Selected Dealer, if any, as follows: (a) Securities Law Compliance. The Offering Documents, as of their Paramount Capital, Inc. Page 4 respective dates do, and as of the date of the Term Sheet and each Closing, shall describe the material aspects of an investment in the Company and conform in all respects with the requirements of Section 4(2) of the Act and Regulation D promulgated thereunder and with the requirements of all other published rules and regulations of the Securities and Exchange Commission (the "Commission") currently in effect relating to "private offerings" to "accredited investors"(as that term is defined in Regulation D under the Act). The Offering Documents shall not, as of the date of the Term Sheet and each Closing, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that no representation is made with respect to information relating to the Placement Agent which is provided in writing by the Placement Agent to the Company specifically for inclusion in the Offering Documents. If at any time prior to the completion of the Offering or other termination of this Agreement any event shall occur as a result of which it might become necessary to amend or supplement the Offering Documents so that they do not include any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then existing, not misleading, the Company will promptly notify the Placement Agent and will supply the Placement Agent (or the prospective Purchasers designated by the Placement Agent) with amendments or supplements correcting such statement or omission. The Company shall also provide the Placement Agent for delivery to all offerees and Purchasers and their representatives, if any, any information, documents and instruments which the Placement Agent and the Company's counsel reasonably deem necessary to comply with applicable state and federal law. The Company acknowledges that the Placement Agent (i) has not supplied any information for inclusion in the Offering Documents other than information relating to the Placement Agent furnished in writing to the Company by the Placement Agent specifically for inclusion in the Offering Documents; (ii) has no obligation independently to verify any of the information in the Offering Documents; and (iii) has no responsibility for the accuracy or completeness of the Offering Documents, except for the information, relating to the Placement Agent, furnished in writing by the Placement Agent to the Company specifically for inclusion in the Offering Documents. (b) Organization. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, is duly qualified or licensed to do business as a foreign corporation and is in good standing in Massachusetts and in each jurisdiction in which the nature of the business conducted, or as proposed to be conducted in the Term Sheet, by it or the properties owned, leased or operated by it, makes such qualification or licensing necessary and where the failure to be so qualified or licensed would have a material adverse effect upon the business, prospects and financial condition of the Company and has all requisite corporate power and authority to own and lease its respective properties, to carry on its respective business as currently conducted and as proposed to be Paramount Capital, Inc. Page 5 conducted, to execute and deliver this Agreement and to carry out the transactions contemplated by this Agreement, as appropriate and is duly licensed or qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business or ownership or leasing of its properties requires it to be so qualified, except where the failure to be so qualified would not have a material adverse effect on the business, financial condition or prospects of the Company. (c) Capitalization. The authorized, issued and outstanding capital stock of the Company prior to the consummation of the transactions contemplated hereby is as set forth in the Term Sheet. All issued and outstanding shares of the Company are validly issued, fully paid and nonassessable and have not been issued in violation of the preemptive rights of any stockholder of the Company. The Common Stock, when issued, will have the rights, preferences and privileges substantially as set forth in the Subscription Agreements. All prior sales of securities of the Company were either registered under the Act and applicable state securities laws or exempt from such registration, and no security holder has any rescission rights with respect thereto. Except as set forth in the Term Sheet, there are no outstanding options, warrants, agreements, convertible securities, preemptive rights or other rights to subscribe for or to purchase any shares of capital stock of the Company. Except as set forth in the Term Sheet and as otherwise required by law, there are no restrictions on the voting or transfer of any shares of the Company's capital stock pursuant to the Company's Certificate of Incorporation, By-laws or other governing documents or any agreement or other instruments to which the Company is a party or by which the Company is bound. (d) Warrants, Preemptive Rights, Etc. Except as set forth in or contemplated by the Term Sheet, there are not, nor will there be immediately after any Closing (as hereinafter defined), any outstanding warrants, options, agreements, convertible securities, rights of first refusal, rights of first offer, preemptive rights or other rights to subscribe for or to purchase or other commitments pursuant to which the Company is, or may become, obligated to issue any shares of its capital stock or other securities of the Company and this Offering will not cause any anti-dilution adjustments to such securities or commitments except as reflected in the Term Sheet. (e) Subsidiaries and Investments. Other than as disclosed in the Term Sheet and 225,000 shares of common stock of VacTex, Inc., a Delaware corporation, the Company does not own, directly or indirectly, capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity. (f) Financial Statements. The financial information contained in the Offering Documents is accurate in all material respects. The Company's financial statements have been prepared in conformity with generally accepted accounting principles consistently applied and show all material liabilities, absolute or contingent, of the Company required to be Paramount Capital, Inc. Page 6 recorded thereon and present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated, subject in the case of unaudited interim financial statements, to normal year-end adjustments. (g) Absence of Changes. Since the date of the Term Sheet, except as has been or will be reflected in the Term Sheet prior to each Closing, the Company has not incurred any liabilities or obligations, direct or contingent, other than those that were incurred in the ordinary course of business, nor has the Company entered into any transaction that is material to the business of the Company, and there has not been any change in the capital stock of, or any incurrence of long-term debt by, the Company, or any issuance of options, warrants or other rights to purchase the capital stock of the Company, or any adverse change or any development involving a prospective adverse change in the condition (financial or otherwise), net worth, results of operations, business, key personnel or properties which would be material to the business, prospects or financial condition of the Company, and the Company has not become a party to, and neither the business nor the property of the Company has become the subject of, any material litigation whether or not in the ordinary course of business. (h) Title. The Company has good and marketable title to all tangible properties and assets owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are not materially significant or important in relation to the Company's business. Except as has been or will be reflected in the Term Sheet prior to each Closing, all of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee or sublessee are in full force and effect, and the Company is not in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no material claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continued possession of the leased or subleased premises or assets under any such lease or sublease. The Company owns or leases all such tangible properties as are necessary to its operations as now conducted and proposed to be conducted and except to the extent described in the Term Sheet, the Company presently does not anticipate the need for any capital expenditures. (i) Proprietary Rights. Except as has been or will be reflected in the Term Sheet prior to each Closing, the Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, trade names, corporate names, copyrights, trade secrets, processes, mask works, licenses, inventions, formulations, technology and know-how and other intangible property used or proposed to be used in the conduct of its business as described in or contemplated by the Term Sheet (the "Proprietary Rights"). Except as has been or will be reflected in the Term Sheet prior to each Closing, the Company or the entities from whom the Company has acquired rights, has taken all necessary Paramount Capital, Inc. Page 7 action to protect all of the Company's Proprietary Rights. Except as set forth in the Term Sheet, the Company has not received any notice of, and there are not any facts known to the Company that indicate the existence of (i) any infringement or misappropriation by any third party of any of the Proprietary Rights or (ii) any claim by a third party contesting the validity of any of the Proprietary Rights; the Company has not received any notice of any infringement, misappropriation or violation by the Company or any of its employees of any Proprietary Rights of third parties, and, to the best of the Company's knowledge, the Company nor any of its employees has infringed, misappropriated or otherwise violated any Proprietary Rights of any third parties; and, to the best of the Company's knowledge, no infringement, illicit copying, misappropriation or violation of any intellectual property rights of any third party has occurred or will occur with respect to any products currently being sold by the Company or with respect to any products currently under development by the Company or with respect to the conduct of the Company's business as currently contemplated. Except as described in the Term Sheet, the Company is not aware that any of its employees are obligated under any contract (including licenses, covenants or commit ments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of the employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted or as proposed to be conducted. To the best of the Company's knowledge, neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business, as currently conducted or as proposed to be conducted, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. (j) Litigation. Except as set forth in the Term Sheet, there is no material action, suit, claim or proceeding at law or in equity, or to the Company's knowledge, investigation or customer complaint, by or before any arbitrator, governmental instrumentality or other agency now pending or, to the knowledge of the Company, threatened against the Company (or basis therefor known to the Company which the Company believes will result in the foregoing) the adverse outcome of which would materially adversely affect the Company's business, prospects or financial condition. The Company is not subject to any judgment, order, writ, injunction or decree of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign which would materially adversely affect the Company's business, prospects or financial condition. (k) Non-Defaults, Non-Contravention. The Company is not in violation of or default under, nor will the execution and delivery of this Agreement or any of the Offering Documents, or consummation of the transactions contemplated herein or therein result in a violation of or constitute a default in the performance or observance of any obligation (i) under its Certificate of Incorporation, its By-laws, or any indenture, mortgage, material purchase order or other agreement or instrument to which the Company is a party or by which it Paramount Capital, Inc. Page 8 or its property is bound or affected or (ii) with respect to any material order, writ, injunction or decree of any court of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and there is no existing condition, event or act which constitutes, nor which after notice, the lapse of time or both, could constitute, a default under any of the foregoing, which in either case would have a material adverse effect on the business, prospects or financial condition of the Company. (l) Taxes. The Company has filed all Federal, state, local and foreign tax returns required to be filed by it and all such returns are true and correct in all material respects. The Company has paid all taxes pursuant to such returns or pursuant to any assessments received by it or which it is obligated to withhold from amounts owing to any employee, creditor or third party. The Company has properly accrued all taxes required to be accrued. The tax returns of the Company have never been audited by any state, local or Federal authorities. The Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to any tax assessment or deficiency. (m) Compliance With Laws, Licenses, Etc. The Company has not received notice of any violation of, or non-compliance with, any Federal, state, local or foreign, laws, ordinances, regulations and orders applicable to its business, the violation of, or noncompliance with which, would have a materially adverse effect on the business, financial condition, prospects or operations of the Company. The Company has all governmental licenses and permits and other governmental certificates, authorizations and permits and approvals (collectively, "Licenses") required by every Federal, state and local government or regulatory body for the operation of its business as currently conducted and the use of its properties, except where the failure to be licensed would not have a material adverse effect on the business of the Company. The Company's Licenses are in full force and effect and no violations are or have been recorded in respect of any License and no proceeding is pending or, to the best knowledge of the Company, threatened to revoke or limit any thereof. (n) Authorization of Documents and Units. Each of the Offering Documents, has been, or prior to any Closing will be, duly and validly authorized, executed and delivered by the Company and the execution, delivery and performance by the Company of the Offering Documents has been duly authorized by all requisite corporate action by the Company and when delivered, constitute or will constitute (assuming that such agreements are countersigned, if necessary) the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to the availability and enforceability of equitable remedies and to applicable bankruptcy and other laws relating to the rights of creditors generally and except as the enforcement of the rights to indemnification and contribution hereunder and under any other Offering Documents may be limited by federal or state securities laws or public policy. The Company has full corporate power and lawful authority to authorize, issue and sell the Units to be sold to the Purchasers and the securities underlying the Units Paramount Capital, Inc. Page 9 (as defined below). No consent is required by the Company or from any third party (other than the SEC, but only insofar as such consent relates to the Company's obligation to register the Registrable Securities (as defined below)) to perform any of its obligations under this Agreement or any of the Offering Documents. Any increase to the number of authorized shares of Common Stock will require, among other things, the approval of the holders of a majority of the outstanding Common Stock of the Company. (o) Exemption from Registration. Assuming (i) the accuracy of the information provided by the respective Purchasers in the Subscription Agreements, and (ii) the timely filing of a Form D by the Company, the offer and sale of the Units and the granting of the Placement Options and the Advisory Options (as defined below) pursuant to the terms of this Agreement are exempt from the registration requirements of the Act and the rules and regulations promulgated thereunder (the "Regulations"). The Company is not disqualified from the exemption under Regulation D by virtue of the disqualification contained in Rule 507 promulgated thereunder. There exists no fact or set of facts known to the Company or its counsel that might cause the Offering to be integrated with any other offering of the Company's securities which would cause this offering to lose its exemption under Regulation D. (p) Registration Rights. Except as set forth in the Term Sheet or Section 5 of the Subscription Agreement, no person has any right to cause the Company to effect the registration under the Act of any securities of the Company. (q) Brokers. Neither the Company nor any of its officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions contemplated by this Agreement other than the Placement Agent. (r) Title to Units. When certificates representing the Common Stock and Class C Warrants shall have been duly delivered to the Purchasers and payment shall have been made for the Units, the several Purchasers shall have good and valid title to the Common Stock and the Class C Warrants and, upon exercise of such Class C Warrants, will have good and valid title to the Common Stock issuable upon such exercise (the "Conversion Shares"), in each case, free and clear of all liens, encumbrances and claims and adverse claims, whatsoever (except as arising from applicable Federal and state securities laws), and the Company shall have paid all taxes, if any, in respect of the original issuance thereof. When certificates representing the Placement Options and Advisory Options shall have been duly delivered to the Placement Agent, the Placement Agent or its designees shall have good and valid title to the Placement Options and Advisory Options, upon exercise of such Placement Options and/or Advisory Options, will have good and valid title to the Common Stock and Class C Warrants issuable upon such exercise, and upon exercise of such Class C Warrants issuable upon exercise of such Placement Options and/or Advisory Options, will have good and valid title to the Common Stock into which such Class C Warrants are converted, in each case, free and clear of all liens, Paramount Capital, Inc. Page 10 encumbrances and adverse claims, whatsoever (except as arising from applicable Federal and state securities laws), and the Company shall have paid all taxes, if any, in respect of the original issuance thereof. When certificates representing the Common Stock issuable pursuant to Article VI of the Subscription Agreement (the "Article VI Issuances") shall have been duly delivered to the Purchasers, the several Purchasers shall have good and valid title to the Common Stock constituting such Article VI Issuances free and clear of all liens, encumbrances and claims and adverse claims, whatsoever (except as arising from applicable Federal and state securities laws), such Common Stock shall be duly authorized, validly issued, fully paid and non-assessable, and the Company shall have paid all taxes, if any, in respect of the original issuances thereof. (s) Non-Affiliated Directors. The Company's Board of Directors has not less than two (2) directors who are independent from, and unaffiliated with, management of the Company. (t) Accuracy of Reports. All material reports required to be filed by the Company within the two years prior to the date of this Agreement under the Securities and Exchange Act of 1934 as amended (the "Exchange Act"), have been duly filed with the SEC, complied at the time of filing in all material respects with the requirements of their respective forms and, except to the extent updated or superseded by the Term Sheet or any subsequently filed report, were complete and correct in all material respects as of the dates at which the information was furnished, and contained (as of such dates) no untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. (u) Reservation of Shares; Transfer Taxes, Etc. The Company shall at all times reserve and keep available, out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting any exercises of Class C Warrants, and any Reset Issuance (as defined in the Subscription Agreement), Semi-Annual Issuance (as defined in the Subscription Agreement) and Dilution Issuance (as defined below and, together with Reset Issuances and Semi-Annual Issuances, referred to herein as "Article VI Issuances"), such number of shares of its Common Stock free of preemptive rights as shall be sufficient to effect such exercises and Article VI Issuances from time to time required or reasonably anticipated. The Company shall use its best efforts from time to time, in accordance with the laws of the State of Delaware to increase the authorized number of shares of Common Stock if at any time the number of shares of authorized, unissued and unreserved Common Stock shall not be sufficient to permit any required or reasonably anticipated exercises of Class C Warrants or Article VI Issuances. In the event, and to the extent, that the company does not have sufficient authorized but unissued shares of Common Stock to effect any exercise of Class C Warrants or any Article VI Issuance (collectively a "Common Issuance Event"), the Company shall pay the Subscriber cash. 3. Representations and Warranties of the Placement Agent. The Placement Paramount Capital, Inc. Page 11 Agent represents and warrants as follows: (a) The Placement Agent is duly organized and validly existing and in good standing as a corporation under the laws of the State of New York with full and adequate power and authority to enter into and perform this Agreement. (b) In offering the Units, the Placement Agent shall deliver (or direct the Company to deliver) to each prospective purchaser, prior to the Company's acceptance of any subscription from such prospective purchaser, the appropriate Offering Documents. The Placement Agent will not engage in a general solicitation or employ general advertising in connection with the Offering. (c) The Placement Agent shall use its reasonable efforts to conduct the Offering in material compliance with applicable federal and state securities laws so as to preserve the exemption provided in Section 4(2) of the Act and any applicable rules or regulations promulgated thereunder or under such state securities laws. The Placement Agent shall use reasonable efforts to make offers only to persons who the Placement Agent has reasonable grounds to believe are "accredited investors" (as defined in Regulation D under the Act). The final acceptance of any subscription shall be made only after the Company has reviewed the Subscription Agreement and agreed to such final acceptance and determination as to the status of such subscriber which such acceptance and determination shall remain solely the responsibility of the Company. (d) The Placement Agent is, and at each closing shall be, (i) a securities broker-dealer registered with the Commission and any jurisdiction where broker-dealer registration is required in order for the Company to sell the Units in such jurisdiction and (ii) a member in good standing of the NASD. 4. Closing; Placement and Fees. (a) Closing. Provided that the Placement Agent has received subscriptions for the Minimum Offering amount, the Placement Agent may conduct, in its sole discretion, closings (the date of each a "Closing Date") at the offices of the Placement Agent, 787 Seventh Avenue, New York, New York, until the Final Closing Date. On each Closing Date, payment for the Units issued and sold by the Company shall be made to the Company in immediately available funds against delivery of certificates evidencing the Common Stock and Class C Warrants comprising such Units. (b) Conditions to Placement Agent's Obligations. The obligations of the Placement Agent hereunder are subject to the accuracy of the representations and warranties Paramount Capital, Inc. Page 12 of the Company herein contained as of the date hereof and as of each Closing Date, to the performance by the Company of its obligations hereunder and to the following additional conditions: (i) Due Qualification or Exemption. (A) The Offering contemplated by this Agreement shall become qualified or be exempt from qualification under the securities laws of the several states pursuant to paragraph 4(c) below not later than the Closing Date, subject to any filings to be made thereafter, and (B) at the Closing Date, no stop order suspending the sale of the Units shall have been issued, and no proceeding for that purpose shall have been initiated or threatened; (ii) No Material Misstatements. Neither the Blue Sky qualification materials, the Offering Documents, nor the Term Sheet, nor any supplement thereto, will contain an untrue statement of a fact which in the opinion of the Placement Agent is material, or omit to state a fact, which in the opinion of the Placement Agent is material and is required to be stated therein, or is, in the opinion of the Placement Agent, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) Compliance with Agreements. The Company shall have complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder and under the Subscription Agreements at or prior to each Closing; (iv) Corporate Action. The Company shall have taken all corporate action necessary to permit the valid execution, delivery and performance of the Offering Documents by the Company, including, without limitation, obtaining the approval of the Company's board of directors for the execution and delivery of the Offering Documents and the performance by the Company of its obligations hereunder and the offering contemplated hereby; (v) Opinion of Counsel to the Company. The Placement Agent shall receive the opinion of counsel to the Company (stating that each of the Purchasers may rely thereon as though addressed directly to such Purchaser), dated as of each Closing Date, substantially to the effect that: (A) the Company is duly incorporated, validly existing and in corporate good standing under the laws of the State of Delaware, has all requisite corporate power and lawful authority necessary to own or hold its properties and conduct its business as described in the Term Sheet and is duly qualified or licensed to do business as a foreign corporation and is in good standing in Massachusetts and in each jurisdiction in which the nature of the business conducted, or as proposed to be conducted in the Term Sheet, by it or the properties owned, leased or operated by it, makes such qualification or licensing necessary and where the failure to be so qualified or licensed would have a material adverse effect upon the Paramount Capital, Inc. Page 13 business, prospects and financial condition of the Company. To such counsel's knowledge except with respect to VacTex, Inc., the Company does not own, directly or indirectly, any capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity; (B) the execution, delivery and performance of each of the Offering Documents to which the Company is a signatory, and the issuance of (I) the Units, the Common Stock and Class C Warrants included in the Units and the Placement and Advisory Options, (II) the Common Stock and Class C Warrants issuable upon exercise of the Placement and Advisory Options and (III) the shares of Common Stock issuable upon exercise of the Class C Warrants (the "Exercise Shares") (including the Exercise Shares underlying the Class C Warrants issuable upon exercise of the Placement and Advisory Options), have been duly authorized by all necessary corporate action on the part of the Company; provided, however, that shareholder consent is required for any increase in authorized shares. Each of the Offering Documents to which the Company is a signatory has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to such limitations on enforceability as such counsel shall specify in the opinion and that shall be acceptable to the Placement Agent; (C) the authorized, issued and outstanding capital stock of the Company as of the date set forth therein (before giving effect to the transactions contemplated by this Agreement) is as set forth in the Term Sheet. To such counsel's knowledge, there are no outstanding warrants, options, agreements, convertible securities, preemptive rights or other commitments pursuant to which the Company is, or may become, obligated to issue any shares of its capital stock or other securities of the Company other than as set forth in the Term Sheet. To such counsel's knowledge, all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and nonassessable and have not been issued in violation of the preemptive rights of any security holder; (D) assuming (x) the accuracy of the information provided by the Subscribers in the Subscription Documents and (y) the timely filing with the Securities and Exchange Commission and any applicable state securities authorities of a Form D and amendments thereto containing accurate and complete information, the issuance and sale of the Units is exempt from registration under the Act and Rule 506 of Regulation D promulgated thereunder and is not subject to integration with any other offering of the Company's securities which will undermine the exempt status of the Offering; (E) neither the execution and delivery of the Offering Documents nor compliance with the terms hereof or thereof, nor the consummation of the transactions herein or therein contemplated, has, conflicts with, results in a breach of, or Paramount Capital, Inc. Page 14 constitutes a default under the Certificate of Incorporation (provided that such counsel may note that the Company may not issue shares in excess of the authorized capital stock) or By-laws of the Company, or any material contract, instrument or document known to such counsel after due inquiry to which the Company is a party, or by which it or any of its properties is bound (provided such counsel need express no opinion with respect to the satisfaction of the stockholder approval requirement under the Company's existing agreement with Nasdaq) or, to the best knowledge of such counsel, violate any applicable order or decree of any governmental agency or court having jurisdiction over the Company or any of its properties or business; (F) except as disclosed in the Term Sheet, to such counsel's best knowledge and without conducting a search of court documents, there are no claims, actions, suits, investigations or proceedings before or by any arbitrator, court, governmental authority or instrumentality pending or threatened against the Company which could, if adversely determined, materially and adversely affect the business, properties or financial condition of the Company, the transactions or other acts contemplated by the Offering Documents or the validity or enforceability of the Offering Documents. Except as disclosed in the Term Sheet, to such counsel's knowledge, the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that names the Company; (G) upon the issuance of the Units, the Common Stock (including the Common Stock issuable pursuant to any Article VI Issuances) and Class C Warrants (including the shares of Common Stock and the Class C Warrants issuable upon exercise of the Placement and Advisory Options), the Placement and Advisory Options and the Exercise Shares (including the Exercise Shares underlying the Class C Warrants issuable upon exercise of Placement and Advisory Options), each of the Purchasers or the Placement Agent and its designees, as the case may be, shall acquire such securities, free and clear of all pledges, liens, claims, encumbrances, preemptive rights, rights of first offer or right of first refusal and restrictions known to such counsel after due inquiry, except for the transfer restrictions set forth in the Subscription Agreements and any action taken to encumber such securities by the holders thereof; (H) the Common Stock included in the Units, when issued in accordance with the terms of the Subscription Agreement for the consideration expressed therein will have been duly authorized, fully paid, validly issued and non-assessable. The Class C Warrants, the Placement Options and the Advisory Options, when issued in accordance with the terms of this Agreement and/or the Subscription Agreement, as applicable, for the consideration expressed therein, will have been validly issued and will constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to such limitations on enforceability as such counsel shall specify in the opinion and that shall be acceptable to the Placement Agent. The Common Stock Paramount Capital, Inc. Page 15 (x) constituting Article VI Issuances and (y) issuable upon exercise of the Class C Warrants and the Placement and Advisory Options (including the shares of Common Stock issuable upon exercise of the Class C Warrants underlying the Placement and Advisory Options) (the securities referred to in clauses (x) and (y) above collectively the "Additional Shares"), when issued in accordance with the terms thereof for the consideration expressed therein, will have been duly authorized, validly issued, fully paid, and non-assessable. The Additional Shares have been duly authorized by all necessary corporate action on the part of the Company and, to the extent such shares are available and as such shares become, from time to time available, shall be reserved for issuance by the Board of Directors. (I) the Company's Restated Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become a director of the Company. The Company's Restated Certificate of Incorporation also provides that no director shall be personally liable to the Company or its stockholders for monetary damages for any breach of a fiduciary duty by such director as a director, to the fullest extent permitted by the Delaware General Corporation Law, as from time to time amended. Such counsel shall state, in opining on any matter stated to be subject to the knowledge of such counsel, that such knowledge shall include the actual knowledge of such counsel who have given substantive attention to the Company's affairs in connection with the Offering and that such counsel has made due inquiry, including, but not limited to, appropriate inquiries of officers of the Company with respect to the subject matter of such opinion and has reviewed all documents the existence of which is disclosed by such inquiries or of which such counsel is otherwise aware of as a result of its representation of the Company. In addition, such counsel shall state that in the course of the preparation of the Offering Documents, which involved, among other things, discussions and inquiries concerning the various legal matters and the review of certain corporate records, documents and proceedings, counsel participated in conferences with certain officers and other representatives of the Company and the Placement Agent during which the contents of the Offering Documents and related matters were discussed. Such counsel shall advise the Placement Agent in the form of an opinion of counsel that such counsel has no reason to believe that, as of the date of such opinion, the Term Sheet including any document incorporated by reference therein contained any untrue statement of a material fact relating to the Company or omitted to state a material fact relating to the Company required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were Paramount Capital, Inc. Page 16 made. (vi) Opinion of Patent Counsel. The Placement Agent shall receive (unless waived in writing by the Placement Agent) the opinion of patent counsel to the Company (which such counsel shall be satisfactory to the Placement Agent), dated the Closing Date in the form and substance satisfactory to counsel for the Placement Agent. (vii) Comfort Letter. The Company shall cause Coopers & Lybrand, L.L.P., the Company's independent public accountants, to address and deliver to the Company and the Placement Agent a letter or letters (which letters are frequently referred to as "Comfort Letters") dated as of each Closing Date and the effective date of the registration statement required to be filed in connection with the Subscription Agreements. (viii) Officer's Certificate. The Placement Agent shall receive an Officer's Certificate substantially in the form of Exhibit A hereto and a Secretary's Certificate substantially in the form of Exhibit B hereto, signed by the appropriate parties and dated as of each Closing Date. These certificates shall state, among other things, that the representations and warranties contained in Section 2 hereof are true and accurate in all material respects at such Closing Date with the same effect as though expressly made at such Closing Date. (ix) Escrow Agreement. The Placement Agent shall receive a copy of a duly executed Escrow Agreement with Fleet Bank, N.A. (x) Transmittal Letters. The Placement Agent shall receive copies of all letters from the Company to the investors transmitting the Common Stock and Class C Warrants and shall receive a letter from the Company confirming transmittal of the securities to the investors. (c) Blue Sky. A summary blue sky survey, at the sole cost of the Company (including, without limitation, the legal fees and disbursements in connection therewith), shall be prepared by counsel to the Placement Agent stating the extent to which and the conditions upon which offers and sales of the Units may be made in certain jurisdictions. It is understood that such survey may be based on or rely upon (i) the representations of each Subscriber set forth in the Subscription Agreement delivered by such Subscriber, (ii) the representations, warranties and agreements of the Company set forth in Section 2 of this Agreement, (iii) the representations and warranties of the Placement Agent, and (iv) the representations of the Company set forth in the certificate to be delivered at each Closing pursuant to paragraph (viii) of Section 4(b). (d) Placement Fees and Expenses. (i) Simultaneously with payment for and delivery of the Units at each Closing as provided in paragraph 4(a) above, the Company Paramount Capital, Inc. Page 17 shall at such Closing pay to the Placement Agent (i) a commission (the "Cash Commission") equal to nine percent (9%) of the aggregate purchase price of the Units sold and (ii) a non-accountable expense allowance (the "Expense Allowance") equal to four percent (4%) of the aggregate purchase price of the Units sold. The Company shall also pay all expenses in connection with the qualification of the Units under the securities or Blue Sky laws of the states which the Placement Agent shall designate. In addition, the Company shall pay to the Placement Agent a commission of five percent (5%) upon the exercise of the Class C Warrants. In addition, upon each Closing of the sale of the Units being offered, the Company will sell to the Placement Agent and/or its designees, for $.001 per option, options (the "Placement Options") to acquire a number of newly issued Units equal to ten percent (10%) of the number of Units issued in the Offering, exercisable for a period of five (5) years commencing six (6) months after the Final Closing Date at an exercise price equal to one hundred ten percent (110%) of the initial offering price of the Units. The Company agrees with the Placement Agent and its successors and assigns that the securities underlying the Placement Options will not be subject to redemption by the Company nor will they be callable or mandatorily convertible by the Company. The Placement Options cannot be transferred, sold, assigned or hypothecated for six months except that they may be assigned in whole or in part during such period to any NASD member participating in the Offering or any officer or employee of the Placement Agent or any such NASD member. The Placement Options will contain a cashless exercise feature, a provision for payment of the exercise price by promissory note, antidilution provisions and the right to have the Common Stock issuable upon exercise of the Placement Options included on the Shelf Registration Statement. (ii) The Cash Commission, Expense Allowance, and Placement Options and Advisory Options as set forth in this Agreement shall be paid to the Placement Agent with respect to any investment by any investors introduced to the Company by the Placement Agent ("Covered Investors") in the event that any such Covered Investor purchases securities from the Company during the twelve (12) months following the Final Closing Date of the Offering. (e) No Adverse Changes. There shall not have occurred, at any time prior to the Closing (i) any domestic or international event, act or occurrence which has materially disrupted, or in the Placement Agent's determination will in the immediate future materially disrupt, the securities markets of the United States; (ii) a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market, or in the over-the-counter market; (iii) any outbreak of major hostilities or other national or international calamity; (iv) any banking moratorium declared by a state or federal authority; (v) any moratorium declared in foreign exchange trading by major international banks or other persons; (vi) any material interruption in the mail service or other means of communication within the United States; (vii) any material adverse change in the business, properties, assets, Paramount Capital, Inc. Page 18 results of operations, financial condition or prospects of the Company; or (viii) any change in the market for securities in general or in political, financial, or economic conditions which, in the Placement Agent's reasonable judgment, makes it inadvisable to proceed with the offering, sale, and delivery of the Units. 5. Covenants of the Company. (a) Use of Proceeds. The net proceeds of the Offering will be used by the Company substantially as set forth in the Term Sheet. The Company shall not use any of the proceeds from this Offering to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or repay any indebtedness of the Company including but not limited to any indebtedness to current executive officers or principal stockholders of the Company, but excluding accounts payable to non-affiliates incurred in the ordinary course of business, without the prior written consent of the Placement Agent. (b) Expenses of Offering. The Company shall be responsible for and shall bear all expenses incurred in connection with the proposed Offering, including but not limited to, the costs of preparing and duplicating the Term Sheet and all exhibits thereto; the costs of preparing, printing and filing with the Securities and Exchange Commission (the "SEC") the Shelf Registration Statement and amendments, post-effective amendments and supplements thereto; preparing, duplicating and delivering exhibits thereto and copies of the preliminary, final and supplemental prospectus; preparing, duplicating and delivering (including by facsimile) all selling documents, including but not limited to the Term Sheet, the Placement Agency Agreement, Subscription Agreements, Warrant agreements, blue sky memorandum and stock and warrant certificates; blue sky fees, filing fees and legal fees and disbursements of the Placement Agent's counsel in connection with blue sky matters; fees and disbursements of the transfer and warrant agent; the cost of a total of two sets of bound closing volumes for the Placement Agent and its counsel; and the cost of three tombstone advertisements, at least one of which shall appear in a national business newspaper and one of which shall appear in a major New York newspaper (or, at the option of the Placement Agent, forty (40) lucite deal mementos) (collectively, the "Company Expenses"). The Company agrees to use a printer designated by the Placement Agent and which is reasonably acceptable to the Company. The Company shall pay to the Placement Agent a non- accountable expense allowance equal to 4% of the total proceeds of the Offering (the "Expense Allowance"), of which twenty thousand dollars ($20,000) shall be due and payable upon the date the Term Sheet is completed, to cover the cost of the Placement Agent's mailing, telephone, telecopy, travel to due diligence meetings and other similar expenses including legal fees of the Placement Agent's counsel (other than legal fees in connection with blue sky matters as to which fees the Company shall be responsible and any items designated above as Company Expenses). Such prepaid expense allowances shall be non-refundable. If the proposed financing is not completed because the Company prevents it or because of a breach by the Company of any covenants, representations or warranties contained herein, then the Company shall pay to the Paramount Capital, Inc. Page 19 Placement Agent a fee of one hundred thousand dollars ($100,000) against which the $20,000, if previously paid, shall be credited (in addition to the Company Expenses for which the Company shall in all events remain liable). (c) Notification. The Company shall notify the Placement Agent immediately, and in writing, (A) when any event shall have occurred during the period commencing on the date hereof and ending on the Final Closing Date as a result of which the Offering Documents would include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made and (B) of the receipt of any notification with respect to the modification, rescission, withdrawal or suspension of the qualification or registration of the Units, or of any exemption from such registration or qualification, in any jurisdiction. The Company will use its best efforts to prevent the issuance of any such modification, rescission, withdrawal or suspension and, if any such modification, rescission, withdrawal or suspension is issued and the Placement Agent so requests, to obtain the lifting thereof as promptly as possible. (d) Blue Sky. The Company will use its best efforts to qualify the Units for offering and sale under exemptions from qualification or registration requirements under the securities or "blue sky" laws of such jurisdictions as the Placement Agent may reasonably request; provided however, that the Company will not be obligated to qualify as a dealer in securities in any jurisdiction in which it is not so qualified. The Company will not consummate any sale of Units in any jurisdiction in which it is not so qualified or in any manner in which such sale may not be lawfully made. (e) Registration Statement Filing. The Company will, as soon as practicable, but not later than thirty (30) days after the Final Closing Date, (i) file a shelf registration statement (the "Shelf Registration Statement") with respect to the resale of (A) the Common Stock underlying the Units (including the Units issuable upon exercise of the Placement Options and Advisory Options, (B) the Class C Warrants (including the Class C Warrants underlying the Placement and Advisory Options, (C) the Exercise Shares (including the Exercise Shares underlying the Class C Warrants issuable upon exercise of Placement Options and the Advisory Options) and (D) the shares of Common Stock constituting any Article VI Issuances (together the "Registrable Capital Stock") with the SEC and use its best efforts to have such Shelf Registration Statement declared effective by the SEC prior to the date that is seventy-five (75) days after the Final Closing Date (subject to penalties for failure to effect such registration in the time frames required) and (b) cause such Shelf Registration Statement to remain effective until such date as the holders of the securities (including the securities issued or then required to be issued by the Company pursuant to any Article VI Issuances, whether pursuant to Reset Issuances (as defined in the Subscription Agreement), Semi-Annual Issuances (as defined in the Subscription Agreements) or Dilution Issuances (as defined in the Subscription Agreement) have Paramount Capital, Inc. Page 20 completed the distribution described in the Shelf Registration Statement or at such time that such shares are no longer, by reason of Rule 144(k) under the Act, required to be registered for the sale thereof by such holders who are not affiliates of the Company. In the event that the Shelf Registration Statement is not declared effective within the 75 day period described above, the Company shall declare and pay, for no additional consideration, to the Purchasers additional Units, equal to .25% of the Units, then held by such Purchaser for each whole month in which the Shelf Registration Statement remains ineffective. If requested by the Placement Agent, and in accordance with applicable securities laws, the Shelf Registration Statement shall cover the direct sale of such Registerable Capital Stock to the holders of such securities. The Registerable Capital Stock will be subject to a staggered "lock-up" as may be deemed advisable by the Placement Agent. (f) Form D Filing. The Company shall file five (5) copies of a Notice of Sales of Securities on Form D with the Commission no later than fifteen (15) days after the first Closing Date. The Company shall file promptly such amendments to such Notices on Form D as shall become necessary and shall also comply with any filing requirement imposed by the laws of any state or jurisdiction in which offers and sales are made. The Company shall furnish the Placement Agent with copies of all such filings. (g) Press Releases, Etc. Except as otherwise required by applicable law or the rules of a regulatory body, the Company shall not, during the period commencing on the date hereof and ending thirty (30) days after the Final Closing Date, issue any press release or other communication, make any written or oral statement to any media organization or publication or hold any press conference, presentation or seminar, or engage in any other publicity with respect to the Company, its financial condition, results of operations, business, properties, assets, or liabilities, or the Offering, without the prior written consent of the Placement Agent. Upon the request of the Placement Agent, the Company shall make a Rule 135c (under the Act ) announcement with respect to the commencement of the Offering. (h) Public Documents. Following the Final Closing Date of the Offering, the Company will furnish to the Placement Agent: (i) as soon as practicable (but in the case of the annual report of the Company to its stockholders, within one hundred twenty (120) days after the end of each fiscal year of the Company) one copy of: (A) its annual report to its stockholders (which annual report shall contain financial statements audited in accordance with generally accepted accounting principles in the United States of America by a firm of certified public accountants of recognized standing), (B) if not included in substance in its annual report to stockholders, its annual report on Form 10-K, (C) each of its quarterly reports to its stockholders, if any, and if not included in substance in its quarterly reports to stockholders, its quarterly report on Form 10-Q, (D) each of its current reports on Form 8-K, and (E) a copy of the full Shelf Registration Statement, (the foregoing, in each case, excluding exhibits); and (ii) upon reasonable request, all exhibits excluded by the parenthetical to the immediately preceding Paramount Capital, Inc. Page 21 clause 5(h)(i)(E) and any other information that is generally available to the public. In addition, the Company upon reasonable request will meet with the and any other information that is generally available to the public. In addition, the Company upon reasonable request will meet with the Placement Agent or its representatives to discuss all information relevant for disclosure in any Shelf Registration Statement covering shares purchased by Purchasers from the Company and offered by them for resale and will cooperate in any reasonable investigation undertaken by the Placement Agent for the purpose of confirming the accuracy of the Shelf Registration Statement, including the production of information at the Company's offices. (i) Restrictions on Securities. During the thirty-six (36) months following June 30, 1997, the Company shall not, without the prior written consent of the Placement Agent, offer or sell any of its securities in reliance on Regulation S of the Act. During the twenty-four (24) month period following October 1, 1997, the Placement Agent shall have the right of first refusal to act as placement agent for the offering of any securities of the Company issued for fund raising purposes. During the thirty-six (36) month period following June 30, 1997 the Company will not extend the expiration date or decrease the exercise price of any options, warrants, convertible securities or other similar security purchase rights without the prior written consent of the Placement Agent. (j) Listing. The Company will take all action necessary promptly to file an Application for Listing of Additional Shares with the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market, or the OTC Electronic Bulletin Board and/or take any other necessary action to enable the (i) Common Stock (including the Common Stock issuable (A) upon exercise of the Class C Warrants, (B) upon exercise of the Placement and Advisory Options (including the shares of Common Stock issuable upon exercise of the Class C Warrants underlying the Placement Options and (C) pursuant to any Article VI Issuances) and (ii) the Class C Warrants to trade on such market. (k) Financial Advisory Agreement. Upon the Final Closing Date, the Company and the Placement Agent will enter into an advisory agreement (the "Financial Advisory Agreement") whereby the Placement Agent will act as the Company's non-exclusive financial advisor. Such engagement will provide that the Placement Agent receive (i) a monthly retainer of four thousand ($4,000) Dollars (minimum engagement of 24 months and $20,000 of which shall be payable upon the execution of the Financial Advisory Agreement), (ii) out-of-pocket expenses and (iii) standard cash and equity success fees in the event the Placement Agent assists the Company in connection with certain financing and strategic transactions. In addition, upon the execution of the Financial Advisory Agreement, the Company will sell to the Placement Agent and/or its designees, for $.001 per option, options (the "Advisory Options") to acquire a number of newly issued Units equal to fifteen percent (15%) of the Units issued in the Offering, exercisable for a period of five (5) years commencing six (6) months after the Final Paramount Capital, Inc. Page 22 Closing Date at an exercise price equal to 110% of the initial offering price of the Units. The Company has agreed to register certain of the securities underlying the Advisory Options for resale under the Act on the Registration Statement. The securities underlying the Advisory Options will not be subject to mandatory conversion or redemption by the Company nor will they be callable by the Company. The Advisory Options will contain a cashless exercise feature, a provision for payment of the exercise price by promissory note, and antidilution provisions. (l) Company Insiders. Officers, directors or principal stockholders of the Company may invest in the Offering. Any such investments will be included in calculating whether the 25 Units have been sold in the Minimum Offering, whether the 100 Units have been sold in the Maximum Offering, and whether the 150 Units have been sold pursuant to the over-allotment option. (m) Placement Agent Insiders. Certain affiliates of the Placement Agent may purchase Units in the Offering. Affiliates of the Placement Agent will invest net of cash commissions and expenses. Accordingly, the Placement Agent will not receive a commission on the Units purchased by its affiliates and the Company will receive net proceeds equivalent to the net proceeds received from the purchase of Units by persons not affiliated with the Placement Agent. The aggregate offering price of any such investments will be included in calculating whether the 25 Units have been sold in the Minimum Offering, whether the 100 Units have been sold in the Maximum Offering, and whether the 150 Units have been sold pursuant to the over-allotment option. (n) Subscription Checks. All subscription checks and funds shall be promptly and directly delivered without offset or deduction to the bank account at the Escrow Agent described in the Escrow Agreement. (o) No Offerings. Pending completion or termination of the Offering in accordance with the terms of this Agreement, the Company agrees that it will not enter into an agreement (whether binding or not) with any other person or entity relating to a possible public or private offering or placement of its securities (other than in connection with a corporate partnership, strategic alliance or government funding). (p) Lock-Up Agreement. If requested by the Placement Agent, the Company will obtain from its directors, executive officers and beneficial owners of five percent (5%) or more of the Company's outstanding common stock, an agreement that, for a period of twenty-four (24) months from the Final Closing Date, they will not sell, assign or transfer any of their shares of the Company's securities without the Placement Agent's prior written consent. (q) No Statements. The Company shall not use the name of the Placement Agent or any officer, director, employee or shareholder thereof without the express Paramount Capital, Inc. Page 23 written consent of the Placement Agent. In the event the Placement Agent has refused to give consent and the Company has been advised upon in a written opinion of counsel that any such disclosure is required as a matter of law, the Company may make such disclosure (to the extent that such opinion states that it is required) without the Placement Agent's consent. (r) Company Advisors. The Company covenants and represents that it shall immediately notify its independent accountants and patent, regulatory and outside corporate counsel of the pendency of the Offering and that comfort letters and legal opinions will be required prior to any closing. The Company agrees and represents that it will provide (i) preliminary drafts of the Term Sheet to such firms for their review and comment and (ii) final drafts of the Term Sheet to such firms immediately upon its completion. (s) Directors and Observers. (i) For a period of five (5) years after June 30, 1997, the Placement Agent shall be entitled to designate a number of directors that would constitute a majority of the Board of Directors for nomination as voting directors ("Directors") of the Company. In no event shall the Board of Directors exceed seven (7) members without the Placement Agent's consent. If necessary, the Directors of the Company will elect each such person to the Board of Directors of the Company (A) on the Initial Closing Date, by causing an existing Director of the Company to resign and (B) thereafter, by creating a new position on the Board of Directors promptly following such person's nomination by the Placement Agent. The Board of Directors of the Company shall nominate each such person for election in connection with any stockholder vote for Directors, and the Company will use its best efforts to ensure that the stockholders of the Company agree to vote all their securities in favor of each such person's election. The Company agrees to vote all voting securities for which the Company holds proxies granting it voting discretion, or which the Company is otherwise entitled to vote, in favor of, and to use its best efforts in all respect to cause, the election of each such individual proposed by the Placement Agent. In the event that a vacancy is created on the Board of Directors at any time by the death, disability, resignation or removal (with or without cause) of any such individual proposed and nominated by the Placement Agent pursuant to this Agreement, the Company shall, and shall use its best efforts to ensure that the stockholders of the Company, vote all its or their voting securities to elect each individual proposed by the Placement Agent and nominated for election by the Placement Agent to fill such vacancy and serve as a voting Director. (ii) At the Placement Agent's option, in addition to or in lieu of proposing for nomination and election the majority of the Directors of the Company to be proposed by the Placement Agent as set forth in Section 5(s)(i), the Placement Agent may, until such time as no Article VI Rights (as defined in the Subscription Agreement) remain outstanding, designate a nonvoting observer or observers who shall be entitled to attend all meetings of the Board of Directors and any of its committees and who shall be (A) provided reasonable prior Paramount Capital, Inc. Page 24 notice of all meetings of the Board of Directors and any of its committees, (B) provided reasonable prior notice of any action that the Board of Directors or any of its committees may take by written consent, (C) promptly delivered copies of all minutes and other records of action by, and all written information furnished to, the Board of Directors or any of its committees, and (D) promptly furnished any other information requested by such observer or observers which a member of the Board of Directors would be entitled to request to discharge his or her duties. Such observers shall be entitled to the same rights to reimbursement for the expense of attendance at meetings as any outside Director. (iii) If the Placement Agent gives notice to the Company that the Placement Agent desires to remove a Director proposed by the Placement Agent pursuant to this Agreement, the Company shall, and shall use its best effort to ensure that the stockholders of the Company shall, vote all of its or their voting securities in favor of removing such Director if a vote of holders of such securities shall be required to remove the Director, and the Company agrees to take any action necessary to facilitate such removal. (iv) Each Director nominated by the Placement Agent shall be entitled to the same type of compensation, and an amount of compensation at least equal to the highest amount, payable to any other Director for serving in such capacity. As used in this paragraph 5(s)(iv), "compensation" shall include Director and Officer insurance coverage among other things. The Company shall cover the Directors nominated by the Placement Agent with Director and Officer insurance that is at least as favorable to such persons as the most favorable (from the prospective of the insured) Director and Officer insurance benefiting any other member of the Board of Directors or management of the Company. (v) Not later than three (3) business days after the Initial Closing Date, the Company shall have (A) caused the appointment of the initial Directors nominated by the Placement Agent to its Board of Directors in accordance with the provisions of this Section 5(s), to the extent such individuals have been identified in writing to the Company by such time, and (B) taken such action as shall be necessary to cause the Board of Directors to be composed of, and limited to, five members. The Company will use its best efforts to ensure continuing compliance with the terms of Clause (B) of the preceding sentence until such time as no Article VI Rights remain outstanding. (vi) The Placement Agent's rights under this Section 5(s) shall be exercisable only to the extent that the corresponding rights contained in Section 7.19 of the Securities Purchase Agreement dated as of June 30, 1997 have not been previously exercised by The Aries Trust, a Cayman Islands Trust (the "Trust") or Aries Domestic Fund, L.P. (the "Partnership"). (t) Board of Directors. Paramount Capital, Inc. Page 25 (i) The Company shall promptly reimburse each Director or observer of the Company designated by the Trust, the Partnership or the Placement Agent who is not an employee of the Company for all of his reasonable expenses incurred in attending each meeting of the Board of Directors of the Company or any committee thereof. (ii) The Company shall at all times maintain provisions in its By- laws and/or Certificate of Incorporation indemnifying all directors against liability and absolving all directors from liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Delaware. (iii) The By-laws of the Company shall always contain provisions consistent with the provisions of this Section 5(t) except to the extent this Section 5(t) deals with the possible observers. (u) Placement Agent Approval Rights. (i) Until such time as the Placement Agent, Partnership and the Trust, and each of their respective affiliates, in the aggregate, own less than five percent (5%) of the Total Voting Shares (as defined below) of the Company's capital stock (taking into account shares issuable upon conversion or exercise of shares held by them), the Company shall not do any of the following without prior written consent of the Placement Agent to the extent such consent right is not exercised by the Partnership or the Trust: (A) incur any indebtedness outside the ordinary course of business, (B) incorporate, acquire, dissolve or dispose of any subsidiaries (C) enter into any transactions with affiliates of the Company nor (D) increase any executive compensation or bonuses, whether in the form of cash, stock, stock equivalents or otherwise (except for bonuses guaranteed in an employment contract). The "Total Voting Shares" shall mean all outstanding shares of any class or classes (however designated) of capital stock entitled to vote generally in the election of members of the Board of Directors. (ii) In addition to the approval rights set forth in 5(u)(i) above, so long as at least fifty percent (50%) of the shares of Common Stock included in the Units (including those issuable upon exercise of the Placement and Advisory Options) remain outstanding and subject to Article VI Rights, the Company will not, without the prior written consent of the Placement Agent: (A) issue or increase the authorized amount or alter any of the terms, of any securities of the Company senior to, or on parity with, the Common Stock (other than Common Stock to be issued pursuant to Article VI Issuances relating to Common Stock (including the shares of Common Stock underlying the Units issuable upon exercise of the Placement Options and Advisory Options) issued in this Offering) with respect to voting, liquidation or dividends (except for class voting rights required law), (B) alter any of the Company's charter documents or take any action so as to adversely affect the relative rights, Paramount Capital, Inc. Page 26 preferences, qualifications, limitations or restrictions of the Common Stock or of the Article VI Rights (as defined in the Subscription Agreement), (C) enter into any transactions with affiliates of the Company or (D) incorporate or acquire any subsidiaries. (v) Disposal of Assets. Pending completion or termination of the Offering, the Company will not dispose of any assets of the Company (including, without limitation, creating, suffering to exist or permitting the imposition of any liens) other than in the ordinary course consistent with past practice. (w) Consultants, Etc. The Placement Agent may, at its option, select and appoint a public relations firm and consultants to assist the Company in its affairs, the cost of which shall be borne by the Company. (x) Reports. The Company shall provide the Placement Agent with (i) written business and financial updates on a monthly basis and (ii) detailed written quarterly reports ("Quarterly Reports") containing quarterly updates as to product development, financial matters, clinical trials, corporate partnering matters, and any other material events or business activities. The Quarterly Reports shall contain sections (i) detailing the Company's objectives and milestones for the upcoming quarter and (ii) comparing the Company's performance in the previous quarter with the milestones and objectives set forth for such quarter in the previous Quarterly Report. 6. Indemnification. (a) The Company agrees to indemnify and hold harmless the Placement Agent and each Selected Dealer, if any, and their respective partners, affiliates, shareholders, directors, officers, agents, advisors, representatives, employees, counsel and controlling persons within the meaning of the Act (a "Paramount Indemnified Party") against any and all losses, liabilities, claims, damages and expenses whatsoever (and all actions in respect thereof), and to reimburse the such Paramount Indemnified Party for legal fees and related expenses as incurred (including, but not limited to the costs of giving testimony or furnishing documents in response to a subpoena or otherwise, the costs of investigating, preparing, pursuing or defending any such action or claim whether or not pending or threatened and whether or not the Placement Agent or any Paramount Indemnified Party is a party thereto), in so far as such losses, liabilities, claims, damages or expenses arise out of, relate to, are incurred in connection with or are in any way a result of (i) the engagement of the Placement Agent pursuant to this Agreement and in connection with the transactions contemplated by this Agreement and the other Offering Documents (the "Engagement"), including any modifications or future additions to such Engagement and related activities prior to the date hereof, (ii) any act by the Placement Agent or any Paramount Indemnified Party taken in connection with the Engagement, (iii) a breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement, Paramount Capital, Inc. Page 27 (iv) the employment by the Company of any device, scheme or artifice to defraud, or the engaging by the Company in any act, practice or course of business which operates or would operate as a fraud or deceit, or any conspiracy with respect thereto, in connection with the sale of the Units, or (v) any untrue statement or alleged untrue statement of a material fact contained in the Offering Documents or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Paramount Indemnified Party in writing specifically for use in the Offering Documents; (b) The Company agrees to indemnify and hold harmless a Paramount Indemnified Party to the same extent as the foregoing indemnity, and subject to the limitations set forth therein, against any and all loss, liability, claim, damage and expense whatsoever directly arising out of the exercise by any person of any right under the Act or the Exchange Act or the securities or Blue Sky laws of any state on account of violations of the representations, warranties or agreements set forth in Section 2 hereof. (c) The Placement Agent agrees to indemnify and hold harmless the Company, the Company's directors, officers, employees, counsel, advisors, representatives and agents and controlling persons within the meaning of the Act (a "Company Indemnified Party") and each and all of them, to the same extent as set forth in Section 6(a)(v) of the foregoing indemnity from the Company to the Placement Agent, but only with reference to information, relating to the Placement Agent, furnished in writing to the Company by the Placement Agent specifically for inclusion in the Offering Documents and only to the extent that any losses, claims, damages, and liabilities in respect of which indemnification is claimed are finally judicially determined to have resulted primarily and directly from the bad faith or gross negligence of the Placement Agent. (d) Promptly after receipt by a person entitled to indemnification pursuant to subsection (a), (b), or (c) (an "indemnified party") of this Section of notice of the commencement of any action, the indemnified party will, if a claim in respect thereof is to be made against a person granting indemnification (an "indemnifying party") under this Section, notify in writing the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to the indemnified party otherwise than under this Section. In case any such action is brought against an indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel reasonably satisfactory to the indemnified party, and after Paramount Capital, Inc. Page 28 notice from the indemnifying party to the indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to the indemnified party for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation incurred at the request of the indemnifying party. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both the indemnified party or parties and the indemnifying party and, in the opinion of counsel of the indemnified party, a conflict of interest exists between such parties in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party or parties, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for the indemnified party or parties. No settlement, compromise, consent to entry of judgment or other termination of any action (collectively, "Terminations") in respect of which a Paramount Indemnified Party may seek indemnification hereunder (whether or not any Paramount Indemnified Party is a party thereto) shall be made without the prior written consent of the Paramount Indemnified Party, which such consent may be withheld at the sole discretion of such Paramount Indemnified Party, provided, however, that the foregoing requirement of prior written consent for Terminations shall not apply to the Placement Agent who may agree to such Terminations without the prior written consent of any Paramount Indemnified Party. (e) Notwithstanding any of the provisions of this Agreement, the aggregate indemnification or contribution of the Placement Agent for or on account of any losses, claims, damages, liabilities or actions under this Section 6, Section 7 or any other applicable section of this Agreement, shall not exceed the Cash Commissions actually paid to the Placement Agent. The respective indemnity and contribution agreements by the Company and the Placement Agent contained in subsections (a), (b), (c) and (d) of this Section 6 and Section 7, and the covenants, representations and warranties of the Company and the Placement Agent set forth in Sections 1, 2, 3, 4 and 5 shall remain operative and in full force and effect regardless of (i) any investigation made by the Placement Agent, on the Placement Agent's behalf or by or on behalf of any person who controls the Placement Agent, the Company or any controlling person of the Company or any director or officer of the Company, (ii) acceptance of any of the Units and payment therefor or (iii) any termination of this Agreement, and shall survive the delivery of the Units, and any successor of the Placement Agent or of the Company or of any person who controls the Placement Agent or the Company, as the case may be, shall be entitled to the benefit Paramount Capital, Inc. Page 29 of such respective indemnity and contribution agreements. The respective indemnity and contribution agreements by the Company and the Placement Agent contained in subsections (a), (b) and (c) of this Section 6 and Section 7 shall be in addition to any liability which the Company and the Placement Agent may otherwise have. 7. Contribution. (a) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 6 but it is found in a final judicial determination, by a court of competent jurisdiction, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any officer, director, employee or agent for the Company, or any controlling person of the Company), on the one hand, and the Placement Agent and any Selected Dealers (including for this purpose any contribution by or on behalf of an indemnified party), on the other hand, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, in such proportions as are appropriate to reflect the relative benefits received by the Company, on the one hand, and the Placement Agent and the Selected Dealers, on the other hand; provided, however, that if applicable law does not permit such allocation, then other relevant equitable considerations such as the relative fault of the Company and the Placement Agent and the Selected Dealers in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses shall also be considered. In no case shall the Placement Agent or a Selected Dealer be responsible for a portion of the contribution obligation in excess of the compensation received by it pursuant to Section 4 hereof or the Selected Dealer Agreement, as the case may be. No person guilty of a fraudulent misrepresentation shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Placement Agent or a Selected Dealer within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, stockholder, employee and agent of the Placement Agent or a Selected Dealer, shall have the same rights to contribution as the Placement Agent or the Selected Dealer, and each person, if any who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, employee and agent of the Company, shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 7. Anything in this Section 7 to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 7 is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 8. Miscellaneous. Paramount Capital, Inc. Page 30 (a) Survival. Any termination of the Offering without any Closing shall be without obligation on the part of any party except that the provisions regarding fees and expenses contained in Section 5(b), the indemnification provided in Section 6 hereof and the contribution provided in Section 7 hereof shall survive any termination and shall survive any Closing. (b) Representations, Warranties and Covenants to Survive Delivery. Except as provided in Section 8(a), the respective representations, warranties, indemnities, agreements, covenants and other statements of the Company and the Placement Agent as of the date hereof shall survive execution of this Agreement and delivery of the Units and the termination of this Agreement. (c) No Other Beneficiaries. This Agreement is intended for the sole and exclusive benefit of the parties hereto and their respective successors and controlling persons, and no other person, firm or corporation shall have any third-party beneficiary or other rights hereunder. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York without regard to conflict of law provisions. (e) Counterparts. This Agreement may be signed in counterparts with the same effect as if both parties had signed one and the same instrument. (f) Notices. Any communications specifically required hereunder to be in writing, if sent to the Placement Agent, will be mailed, delivered and confirmed to it at Paramount Capital, Inc., 787 Seventh Avenue, 48th Floor, New York, New York, 10019, Att: Michael S. Weiss and if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Procept, Inc., 840 Memorial Drive, Cambridge, Massachusetts 02139, Attn: Chief Executive Officer. (g) Termination. Subject to the general survival provisions contained in Sections 8(a) and 8(b) and, in the event of a termination by the Company, provided that the Company pays the one hundred thousand ($100,000) termination fee and expenses set forth in Section 5(b), this Agreement may be terminated by either party prior to the end of the Offering Period upon written notice to the other party. (h) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the matters herein referred and supersedes all prior agreements and understandings, written and oral, between the parties with respect to the subject matter Paramount Capital, Inc. Page 31 hereof. Neither this Agreement nor any term hereof may be changed, waived or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver or termination is sought. (i) Nothing contained herein or otherwise shall create a partnership or joint venture between the Placement Agent and the Company. (j) The headings and captions of the various subdivisions of this Agreement are for convenience or reference only and shall in no way modify or affect the meaning or construction of any of the terms or provisions hereof. Paramount Capital, Inc. Page 32 If you find the foregoing is in accordance with our understanding, kindly sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between us. Very truly yours, PROCEPT, INC. By: /s/ Stanley C. Erck --------------------------------- Name: Stanley C. Erck Title: President Agreed to by: PARAMOUNT CAPITAL, INC. By: /s/ Lindsay A. Rosenwald, M.D. ------------------------------- Name: Lindsay A. Rosenwald, M.D. Title: Chairman Paramount Capital, Inc. Page 1 EXHIBIT A PROCEPT, INC. OFFICER'S CERTIFICATE January 23, 1998 I, Stanley C. Erck, certify that I am the President of Procept, Inc., a Delaware corporation (the "Company"), and that, as such, I am authorized to execute this certificate on behalf of the Company. All capitalized terms used herein but not otherwise defined herein shall the meanings ascribed to such terms in the Placement Agency Agreement (as defined below). Reference is made herein to the closing held on January 23, 1998 (the "Closing Date"). I do hereby certify that I have carefully examined all of the Offering Documents (as defined in the Placement Agency Agreement dated as of October 26, 1997 between the Company and Paramount Capital, Inc. (the "Placement Agency Agreement")), and do hereby further certify that: 1. All of the representations and warranties of the Company contained in the subscription agreements (the "Subscription Agreements") between the Company and the purchasers (the "Purchasers") of the Units of the Company contemplated by the Company's Confidential Term Sheet, dated November 14, 1997 (as supplemented, the "Term Sheet") are true and correct in all material respects on the Closing Date with the same force and effect as if made on and as of the Closing Date, and the Company has performed all covenants and agreements and has satisfied all conditions in the Subscription Agreements to be performed or satisfied on its part before the Closing Date in all material respects. 2. The Term Sheet does not contain any untrue statement of a material fact or omit to state any fact required to be stated in order to make the statements therein not misleading as of the Closing Date. Since the date of the Term Sheet, no event has occurred concerning which information is required to be contained in an amended or supplemented Term Sheet concerning which such information is not contained therein. 3. All of the representations and warranties of the Company contained in the Placement Agency Agreement are true and correct in all material respects on the Closing Date, and the Company has performed all covenants and agreements and has satisfied all conditions contained in the Placement Agency Agreement to be performed and satisfied on its part at or 1 Paramount Capital, Inc. Page 2 prior to the Closing Date in all material respects. 4. All of the representations and warranties of the Company contained each of the other Offering Documents are true and correct in all material respects on the Closing Date, and the Company has performed all covenants and agreements and has satisfied all conditions contained in such Offering Documents to be performed and satisfied on its part at or prior to the Closing Date in all material respects. 5. Since the date of the most recent financial statements and the information included in the Term Sheet, there has been no material adverse change in the condition (financial or other), earnings, business, properties or prospects of the Company taken as a whole, whether or not arising from transactions in the ordinary course of business, nor has there occurred any material event required to be set forth in the Term Sheet, including, without limitation, in accordance with Section 2(g) of the Placement Agency Agreement. 6. There is no litigation pending or threatened by or against the Company, except as disclosed in the Term Sheet. 7. The Company shall promptly take all action necessary to list (i) the Common Stock underlying the Units, (ii) the Common Stock issuable upon exercise of the Class C Warrants underlying the Units, (iii) the Class C Warrants (including the Class C Warrants underlying the Placement and Advisory Options), (iv) the Common Stock constituting any Article VI Issuances relating to Common Stock underlying the Units (including for each of (i), (ii), (iii) and (iv) above, the Units issuable upon exercise of the Placement and Advisory Options) on the Nasdaq National Market in accordance with the rules of the Nasdaq National Market. 8. Since January 1, 1997, the Company has not offered to sell to or solicited any offers to buy from any person shares of capital stock of the Company, except in connection with the Offering contemplated by the Term Sheet. This Certificate is made for the benefit of and may be relied upon by, the Placement Agent, Kramer, Levin, Naftalis & Frankel, as counsel to the Placement Agent, and each of the Purchasers. IN WITNESS WHEREOF, I have executed this certificate on this 23rd day of January, 1998. /s/ Stanley C. Erck ------------------------------------ Name: Stanley C. Erck Title: President 2 Paramount Capital, Inc. Page 1 EXHIBIT B PROCEPT, INC. SECRETARY'S CERTIFICATE January 23, 1998 I, Lynette C. Fallon, certify that I am the duly elected, qualified and acting Secretary of Procept, Inc., a Delaware corporation (the "Company"), and as such, I am duly authorized to execute this Certificate on behalf of the Company, and that I am familiar with the facts certified below. All capitalized terms used herein but not otherwise defined herein shall the meanings ascribed to such terms in the Placement Agency Agreement dated as of October 26, 1997 between the Company and Paramount Capital, Inc. (the "Placement Agency Agreement"). Reference is made herein to the closing held on January 23, 1998 (the "Closing Date"). In connection with the offering and sale of up to 60 units (the "Units"), each consisting of (a) the number of shares (rounded to the nearest whole share with 0.5 of one share being rounded upward) (the "Offering Quantity") of Common Stock of the Company, par value $.01 per share, (the "Common Stock") determined by dividing 100,000 by the lesser of (i) $0.50 and (ii) 75% of the Trading Price (as defined below) as of (x) the initial closing date (the "Initial Closing Date", (y) any interim closing date (each an "Interim Closing Date") or (z) the final closing date (the "Final Closing Date") of this offering whichever is lowest (the "Offering Price"), and (b) warrants (the "Class C Warrants") to purchase, at an exercise price per share equal to the Offering Price, at any time prior to the fifth anniversary of the Final Closing Date (as defined herein) a number of shares of Common Stock equal to the Offering Quantity, for which Paramount Capital, Inc. ("Paramount") has acted as placement agent, I do hereby further certify as follows: 1. Attached hereto as Attachment A is a true, correct and complete copy of the Company's Certificate of Incorporation, as amended, which is in full force and effect, no amendment to such certificate has been approved by the Board of Directors or stockholders of the Company or filed with the Delaware Secretary of State since October 26, 1997. As of the Closing Date, the Company is duly incorporated and in good standing in its state of incorporation and has paid all fees and taxes due and payable by it on or prior to the Closing Date necessary for the maintenance or continuation of its corporate existence. As of the Closing Date, except as 1 Paramount Capital, Inc. Page ii disclosed in the Term Sheet, there are no proceedings or actions contemplated by the Company, relating to the merger, liquidation, consolidation, or sale of all or substantially all of the assets or business of the Company or which would otherwise threaten or impair the Company's corporate existence. 2. Attached hereto as Attachment B is a true, correct and complete copy of the By-laws of the Company, as in full force and effect on the Closing Date and at all times from October 26, 1997 through the Closing Date. 3. As of the Closing Date, each of the Offering Documents is in the form authorized by the board of directors of the Company pursuant to the resolutions set forth in Attachment C. 4. Attached hereto as Attachment C is a true, correct and complete copy of resolutions duly adopted at meetings of the Company's board of directors duly called and held on January 13, 1998, which resolutions authorize the issuance and sale of the Units and the Placement Options and Advisory Options in accordance with the requirements of Delaware law, the Certificate and By-laws of the Company, are the only resolutions in effect adopted by the board of directors of the Company or any committee thereof with respect to the offering and sale of the units and the transactions relating thereto, and which have not been revoked, modified and amended or rescinded and are in full force and effect on the Closing Date. 5. Attached hereto as Attachment D are true, correct and complete copies of specimens of the certificates representing the Common Stock and Class C Warrants heretofore approved and adopted by the board of directors of the Company. Each of the certificates representing Common Stock and Class C Warrants delivered on the Closing Date to each of the Purchasers pursuant to the Subscription Agreements has been executed by the genuine or facsimile signature of officers of the Company who have been duly elected or appointed, qualified and acting as such officers on the date such certificates were executed and delivered, all in accordance with the Certificate and By-laws of the Company and the requirements of applicable law. 6. Attached hereto as Attachment E is a true, correct and complete copy of the form of Placement and Advisory Options heretofore approved and adopted by the Board of Directors of the Company. Each of the Placement and Advisory Options delivered on the date hereof to each of the holders pursuant to the Placement Agency Agreement has been executed by the genuine or facsimile signature of officers of the Company who have been duly elected or appointed, qualified and acting as such officers on the date such certificates were executed and 2 Paramount Capital, Inc. Page 3 delivered, all in accordance with the Certificate and By-laws of the Company and the requirements of applicable law. 7. The minute books and records of the Company, relating to all proceedings of the stockholders, the Board of Directors of the Company and the Compensation Committee, the Audit Committee and the Nominating Committee of such Board have been made available to Kramer, Levin, Naftalis & Frankel, counsel to Paramount, and, in such form, are the original minute books and records of the Company. There have been no material changes, alterations or additions in such minutes or records since their examination by Kramer, Levin, Naftalis & Frankel on behalf of Paramount. 8. Each person who, as an officer or director of the Company, signed any of the Offering Documents or any other document in connection with the offering and sale of the Units, the Placement and the Advisory Options and the closing relating thereto was duly elected or appointed, qualified and acting as such officer or director at the respective times of the signing and delivery thereof and was duly authorized to sign such document on behalf of the Company, and the signature of each such person appearing on each such document is the genuine signature of such officer, director or person duly appointed for the purpose of executing such documents under valid powers of attorney, and each individual who signed such signature pages, personally or by an attorney-in-fact, was then duly elected, qualified and acting as an officer or director of the Company as stated therein. 9. The following persons are, and have been at all times since October 26, 1997, duly qualified and acting officers of the Company, duly elected or appointed to the offices set forth opposite their respective names, and the signature opposite the name of each such officer is his or her, or a facsimile of his or her, authentic signature, and the seal affixed hereto is the duly adopted seal of the Company: Name Office Signature ---- ------ --------- Stanley C. Erck President, Chief Executive Officer And Treasurer This certificate is made for the benefit of, and may be relied upon by, Paramount, 3 Paramount Capital, Inc. Page iv Kramer, Levin, Naftalis & Frankel, as counsel to Paramount, and each of the Purchasers. IN WITNESS WHEREOF, I have hereunto set forth my hand this 23rd day of January, 1998. [SEAL] /s/ Lynnette C. Fallon ------------------------------------- Name: Lynnette C. Fallon Title: Secretary I, Stanley C. Erck, President of the Company, do hereby certify that Lynette C. Fallon whose genuine signature appears above, is, and has been at all times since October 26, 1997, the duly elected or appointed, qualified and acting Secretary of the Company. IN WITNESS WHEREOF, I have hereunto set forth my hand this 23rd day of January, 1998. /s/ Stanley C. Erck ------------------------------- Name: Stanley C. Erck Title: President 4 EX-23.1 3 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Procept, Inc. on Form S-3 (File No. 333-09987) and Form S-8 (File Nos. 33-76252, 33-81394, 33-81392, 333-06035, 333-36145, 333-36147 and 333-36149) or our report dated February 26, 1998, on our audits of the financial statements of Procept, Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Selected Financial Data". COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 30, 1998 EX-99.1 4 CHARTER Exhibit 99.1 PROCEPT, INC. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS March 1998 From time to time, Procept through its management may make forward-looking public statements, such as statements concerning then expected future revenues or earnings or concerning projected plans, performance, product development and commercialization as well as other estimates relating to future operations. Forward-looking statements may be in reports filed under the Securities Exchange Act of 1934, as amended, in press releases or in oral statements made with the approval of an authorized executive officer. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, as enacted by the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on these forward-looking statements that speak only as of the date on which they are made. In addition, the Company wishes to advise readers that the factors listed below, as well as other factors not currently identified by management, could affect the Company's financial or other performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods or events in any current statement. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events that may cause management to re-evaluate such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially form those projected in forward-looking statements of the Company made by or on behalf of the Company. Early Stage of Product Development; Uncertainty of Successful Commercialization Since its inception the Company has generated no revenue from product sales. The Company's research and development programs are at an early stage. Although the Company has identified compounds that it believes will have clinical value, there can be no assurance that such compounds will develop into commercial products or that additional products will be discovered, developed or acquired in the future. The products currently under development by the Company will require significant additional research and development efforts, including extensive clinical testing and regulatory approval, prior to commercial use. Only one of the Company's product candidates has advanced to the clinical trial phase and none have been scaled-up for commercial production. The Company's potential products are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies. These risks include: (a) the possibilities that the Company's therapeutic approach will not be successful; (b) that any or all of the Company's potential products will be found to be unsafe, ineffective or toxic or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances; (c) that the potential products, if safe and effective, will be difficult to develop into commercially viable products or to manufacture on a large scale or will be uneconomical to market; (d) that proprietary rights of third parties will preclude the Company from marketing such products; or (e) that third parties will market superior or equivalent products. Furthermore, the Company's products in research or development or to be acquired may prove to have undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. There can be no assurance that the Company will be permitted to undertake human clinical testing of any potential products or, if permitted, that such products will be demonstrated to be safe and efficacious. In addition, there can be no assurance that any of the Company's products will obtain United States Food and Drug Administration ("FDA") or foreign regulatory approval for any indication or that an approved compound would be capable of being produced in commercial quantities at reasonable costs and successfully marketed. Products, if any, resulting from the Company's research and development programs are not expected to be commercially available, if at all, for a number of years at the earliest. Need for Additional Funds; Risk of Insolvency The Company's operations to date have consumed substantial amounts of cash. Substantial additional sources of financing will be required in order for the Company to continue its planned operations. The Company is currently dependent upon research and development collaborations, external financings and interest income to provide working capital to pursue its intended business activities. There can be no assurance, however, that additional funding will be available from any of these sources or, if available, will be available on acceptable or affordable terms. The Company has not been profitable since inception and has incurred an accumulated deficit of $57,860,985 million through December 31, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop drug candidates and from the associated administrative costs. The Company expects to incur significant additional operating losses over the next several years and expects cumulative losses to increase substantially due to continued research and development efforts, preclinical and clinical testing and development of marketing, sales and production capabilities. In the next few years, the Company's revenues, if any, will likely be limited to amounts received under research or product development relationships that the Company may establish. There can be no assurance, however, that the Company will be able to establish any additional relationships on terms acceptable to the Company, if at all. The Company's future profitability is dependent on its ability to identify and acquire commercially viable products, to enter into agreements for product development and commercialization with corporate sponsors, to develop and obtain patent protection and regulatory approvals for its products and to develop the capability to manufacture and sell its products. There can be no assurance that the Company will successfully identify, develop, acquire, commercialize, patent, manufacture or market its products, obtain required regulatory approvals or ever achieve profitability. Uncertainty Regarding Success of Clinical Trials Before obtaining required regulatory approvals for the commercial sale of any drug candidates, the Company must independently demonstrate through preclinical testing and clinical trials that each product is safe and effective for use in each target indication. The results from preclinical testing and early clinical trials may not be predictive of results that will be obtained in pivotal clinical trials, and there can be no assurance that any clinical trials will demonstrate sufficient safety and effectiveness to obtain required regulatory approvals or will result in marketable products. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials even after promising results in earlier trials. Generally, only a very small percentage of the number of new pharmaceutical products initially developed is approved for sale. Even products which are approved for sale have no assurance of commercial success. The administration of any drug candidate developed by the Company may produce undesirable side effects in humans. The occurrence of side effects could interrupt, delay or halt clinical trials of such drug candidate and could ultimately prevent its approval by the FDA or foreign regulatory authorities for any and all target indications. There can be no assurance that clinical trials will demonstrate that any drug candidate under development is safe or effective. The Company may encounter unanticipated problems relating to development, manufacturing, distribution and marketing, some of which may be beyond its financial and technical capacity to solve. The failure to address such problems adequately could prevent the Company from ever becoming a viable business or generating profits. No assurance can be given that the Company will succeed in the development and marketing of any new drug products, or that any such products will not be rendered obsolete by products of competitors. The rate of completion of clinical trials will depend upon, among other factors, obtaining adequate clinical supplies and the rate of patient enrollment. Patient enrollment is a function of many factors including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment can result in increased costs or delays or both, which could have a material adverse effect on the Company's business. Risk of Nasdaq Delisting Effective as of March 27, 1998, Procept Common Stock is listed on the SmallCap Market operated by The Nasdaq Stock Market, Inc. ("Nasdaq"). The Company currently has an exception from Nasdaq's requirements for continued listing and must satisfy certain conditions by June 2, 1998 to continue to be listed on the SmallCap Market. The Company believes that it can meet these conditions. There can be no assurance, however, that it will do so. If the Company fails to meet these conditions, the Company will be delisted from Nasdaq and no longer will be eligible for quotation on the SmallCap Market. Such a delisting could adversely affect the ability of the Company to attract new investors, may result in decreased liquidity of Procept Common Stock and, consequently, could reduce the price at which such stock trades, the transactions costs inherent to trading such stock and the value of such stock. In addition, if Procept Common Stock is delisted from Nasdaq it will be subject to the penny stock restrictions of Rule 15g-9 under the Exchange Act, which may materially adversely affect the market liquidity of such stock and the Company's ability to raise funds in the future. Uncertainty Regarding Future Collaborations The Company has no experience with receipt of government approvals, marketing pharmaceutical products or clinical testing and manufacturing. The Company is currently seeking corporate partners to assist in the development of the Pro 2000 Gel and small molecule immunosuppressive research programs. Although the Company currently plans to continue to fund each of these programs, there can be no assurance that the Company will be able to continue such programs without a partner. Furthermore, there can be no assurance that the Company will be successful in forming or maintaining any such alliances or that the Company's partners would devote adequate resources to the Company's product candidates or that any or all of the contemplated benefits from such alliances will be realized. Certain of the collaborative, license or other arrangements that the Company may enter into may place responsibility on the collaborative partners for preclinical testing and human clinical trials and for the preparation and submission of applications for regulatory approval for other technologies or products. Should any collaborative partner fail to develop or commercialize successfully any future proprietary technologies or future product to which it has rights, the Company may be materially adversely affected. There can be no assurance that collaborators will not pursue alternative technologies or products either on their own or in collaboration with others, including the Company's competitors, as a means for developing treatments of the diseases sought to be addressed by the respective company. If the Company instead performs such tasks itself, it will be required to develop expertise internally or contract with third parties to perform these tasks. This will place increased demands on its resources, requiring the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could materially adversely affect prospects for success. Competition and Technological Change Competitors of the Company in the United States and abroad are numerous and include, among others, major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Biotechnology and pharmaceutical companies are subject to intense competition and rapid and significant technological change. Competition may increase as a result of potential advances in the commercial application of biotechnology and greater availability of capital for investment in these fields. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including competitors of the Company, to market commercial products. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, some of the Company's competitors have greater experience than the Company in conducting preclinical testing and human clinical trials and obtaining FDA and other regulatory approvals. Accordingly, the Company's competitors may succeed in obtaining FDA or other regulatory approvals for products more rapidly than the Company. There can be no assurance that the Company's products will be able to compete successfully with competitors' existing products or products under development or that they will obtain regulatory approval in the United States or elsewhere. If the Company commences significant commercial sales of its products, it also will be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it has limited or no experience. Uncertainty of Patents and Proprietary Rights The Company's success will depend in part on its ability to obtain United States and foreign patent protection for its products, preserve its trade secrets and operate without infringing on the proprietary rights of third parties. Because of the length of time and expense associated with bringing new drugs through development and regulatory approval to the marketplace, the health care industry has traditionally placed considerable importance on obtaining patent and trade secret protection for significant new technologies, products and processes. There can be no assurance that any patents will issue from any of the patent applications owned by, or licensed to, the Company. Further, there can be no assurance that any rights the Company may have under issued patents will provide the Company with significant protection against competitive products or otherwise be commercially valuable. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under such patents are still developing. There can be no assurance that any existing or future patents issued to, or licensed by, the Company will not subsequently be challenged, infringed upon, invalidated or circumvented by others. If the Company's product candidates are found to infringe upon the patents or otherwise impermissibly utilize the intellectual property of others, the Company's development, manufacture and sale of such product candidates could be severely restricted or prohibited. In such event, the Company may be required to obtain licenses from third parties or otherwise obtain licenses to utilize patents or proprietary rights of others. There can be no assurance that the Company will be able to obtain such licenses on acceptable terms, or at all. Dependence on Confidentiality Agreements The Company also relies on unpatented proprietary technology, and there can be no assurance that others may not independently develop the same or similar technology or otherwise obtain access to the Company's unpatented technology. To protect its trade secrets and other proprietary information, the Company requires employees, consultants, advisors and collaborators to enter into confidentiality agreements. There can be no assurance that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If the Company is unable to maintain the proprietary nature of its technologies, the Company could be adversely affected. Impact of Government Regulation; Product Clearance and Approval The FDA and comparable agencies in foreign countries impose substantial requirements upon the introduction of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements, which includes demonstrating to the satisfaction of the FDA and foreign regulatory agencies that the product is both safe and effective, typically takes several years or more and can vary substantially based upon the type, complexity and novelty of the product. There can be no assurance that such testing will show any product to be safe or efficacious. The Company cannot yet accurately predict when it might first submit new drug applications for products for FDA or other regulatory review. Government regulation also affects the manufacturing and marketing of pharmaceutical products. The effect of government regulation may be to delay marketing of the Company's products for a considerable or indefinite period of time, to impose costly procedural requirements upon the Company's activities and to furnish a competitive advantage to larger companies or companies more experienced in regulatory affairs. There can be no assurance that FDA or other regulatory approvals for any products developed by the Company will be granted on a timely basis, if at all, or, if granted, that such approval will cover all the clinical indications for which the Company is seeking approval or will not contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use. Any delay in obtaining or any failure to obtain such approvals would adversely affect the Company's ability to generate revenue. Even if initial regulatory approvals for the Company's product candidates are obtained, the Company, its products and its manufacturing facilities would be subject to continual review and periodic inspection. Moreover, additional government regulation from future legislation or administrative action may be established which could prevent or delay regulatory approval of the Company's products or further regulate the prices at which the Company's proposed products may be sold. The regulatory standards for manufacturing are applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product, manufacturer or facility, including warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions, delays in obtaining new product approvals, withdrawal of the product from the market and criminal prosecutions. Other violations of FDA requirements can result in similar penalties. Uncertainty of Health Care Reform Measures and Third Party Reimbursement The business and financial condition of pharmaceutical and biotechnology companies will continue to be affected by the efforts of third-party payers, such as government health administration authorities, private health insurers and other organizations, to contain or reduce the cost of health care. In the United States and in certain foreign jurisdictions there have been, and the Company expects that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect that such proposals may have on its business, the consideration or approval of such proposals could have a material adverse effect on the value of its securities, including the Shares registered hereby, or its ability to raise capital or to obtain additional collaborative partners, and the adoption of such proposals could have a material adverse effect on the Company's business, financial condition and results of operations. In both domestic and foreign markets, successful commercial sales of potential products of the Company will depend in part on the availability of reimbursement from governmental and health administrative authorities, private health insurers or other third-party payers. Third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. Future legislation and regulations affecting the pricing of pharmaceuticals could further limit reimbursement for medical products and services. There can be no assurance that any of the Company's potential products will be considered cost-effective or that adequate third-party reimbursement will be available to enable the Company to maintain price levels sufficient to realize an appropriate return on its investments. In addition, the trend toward managed health care in the United States and the concurrent growth of managed care organizations, such as health maintenance organizations, that could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reduce government insurance programs, could result in pricing pressure for any products that might be developed by the Company. If adequate reimbursement is not provided by government and other third-party payers of the Company's potential products, there would be a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Qualified Personnel In February 1998, Procept's Board of Directors appointed John F. Dee as its President and Chief Executive Officer. Until the Company recruits additional administrative personnel, Mr. Dee, in addition to serving as Procept's Principal Executive Officer, also will serve as its Principal Financial Officer and Principal Accounting Officer. If Mr. Dee were not to be able to continue in these capacities, the Company could be adversely affected. The Company is highly dependent upon the efforts of its senior management and scientific team, including its consultants. The loss of the services of one or more of these individuals might impede the achievement of the Company's development objectives. Because of the specialized scientific nature of the Company's business, the Company is highly dependent upon its ability to attract and retain qualified scientific and technical personnel. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. Loss of the services of, or failure to recruit, key scientific and technical personnel would be significantly detrimental to the Company's product development programs. Furthermore, financial constraints have dictated that the Company terminate a significant number of employees during the last year. The loss of such individuals has decreased the scope of the Company's activities and may, therefore, have reduced the prospects for commercially successful product development. Limited Manufacturing, Marketing and Sales Capability and Experience The Company has not yet invested in the development of manufacturing, marketing or sales capabilities. The Company lacks the facilities and personnel to manufacture products in accordance with Quality System ("QS," formerly current good manufacturing practice, or "GMP") requirements as prescribed by the FDA or to produce an adequate supply of compounds to meet future requirements for clinical trials. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms, the Company's ability to conduct human clinical testing with PRO 2000 and preclinical and clinical testing with respect to additional product candidates, if any, will be adversely affected, resulting in delays in the submission of products for regulatory approvals and in the initiation of new development programs, which in turn could materially impair the Company's competitive position and the possibility of achieving profitability. The Company also will need to hire additional personnel skilled in marketing and sales as it develops products with commercial potential or enter into arrangements with third parties for sales and marketing. There can be no assurance that the Company will be able to acquire, or establish third-party relationships to provide, any or all of these capabilities. Product Liability; Availability of Insurance; Risk of Product Recalls The Company's business exposes it to potential liability risks that are inherent in the testing, manufacturing and marketing of medical products. The use of the Company's products in clinical trials may expose the Company to product liability claims and possible adverse publicity. These risks will expand with respect to the Company's products, if any, that receive regulatory approval for commercial sale. The Company currently has limited product liability coverage for the clinical research use of its products, which management believes is customary for a Company with products at this stage of clinical development. The Company does not have product liability insurance for the commercial sale of its products but intends to obtain such coverage if and when its products are commercialized. However, such coverage is becoming increasingly expensive and there can be no assurance that the coverage is adequate or that the Company will be able to maintain its existing insurance coverage or obtain additional insurance coverage at acceptable costs, if at all, or that a product liability claim would not adversely affect the business or financial condition of the Company. Furthermore, there can be no assurance that any collaborators or licensees of the Company will agree to indemnify the Company or be sufficiently insured or have a net worth sufficient to satisfy any such product liability claims. In addition, a product of the Company may be subject to recall for unforseen reasons. Such a recall could have a material adverse effect on the Company. Hazardous Materials; Environmental Matters The Company's research and development and manufacturing processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company may be held liable for any damages that result, and any such liability could exceed the resources of the Company. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future, nor that the operations, business or assets of the Company will not be materially adversely affected by current or future environmental laws or regulations. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from balance sheet at December 31, 1997 and the statement of operations for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 535,242 0 81,951 0 0 667,304 5,700,803 4,811,545 2,168,012 1,553,326 0 0 301 19,620 240,063 2,168,012 0 781,172 0 9,793,483 0 0 40,264 (9,052,575) 0 (9,052,575) 0 0 0 (9,052,575) (4.40) (4.40)
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