UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended: December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________.
Commission file number: 0-26520
NEOPROBE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 31-1080091
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification
No.)
425 Metro Place North, Suite 300, Dublin, Ohio 43017-1367
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 793-7500 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
Rights to Purchase Series A Junior Participating Preferred Stock
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
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 to this
Form 10-K. |X|
The aggregate market value of shares of common stock held by non-affiliates of
the Registrant on March 24, 2000 was $41,171,517.
The number of shares of common stock outstanding on March 24, 2000 was
26,071,777.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
DEVELOPMENT OF THE BUSINESS
Neoprobe Corporation, a Delaware corporation ("Neoprobe" or the "Company"), was
incorporated in the State of Ohio in 1983 and reincorporated in the State of
Delaware in 1988. The Company's executive offices are located at 425 Metro Place
North, Suite 300, Dublin, Ohio 43017-1367. The telephone number at that address
is (614) 793-7500.
Since inception, substantially all of the Company's efforts and resources have
been devoted to research and clinical development of innovative systems for the
intraoperative diagnosis and treatment of cancers. Prior to 1998, the Company's
primary research and development efforts were related to its proprietary RIGS(R)
(radioimmunoguided surgery) technology. However, research and development
efforts since early 1997 have also included development as well as market launch
activities related to gamma radiation detection instrumentation used in the
application of intraoperative lymphatic mapping ("ILM") and development
activities related to an activated cellular therapy ("ACT") methodology for the
treatment of certain cancers and viral diseases. However, due to regulatory and
financial considerations, the Company suspended ongoing research and development
for RIGS and ACT during 1998 to allow the Company to focus its resources
primarily on its ILM initiative and related procedural product development and
commercialization activities while efforts were made to identify and secure
development partners to assume financial and regulatory responsibility for
developing and commercializing RIGS and/or ACT.
The Company entered into a distribution arrangement with Ethicon Endo-Surgery,
Inc. ("EES"), a Johnson & Johnson company, effective October 1, 1999 to
distribute the Company's line of gamma guided surgical instruments on an
exclusive worldwide basis. In connection with entering into this arrangement,
the Company received a $4 million nonrefundable up-front license payment that
significantly improved the Company's financial condition. The Company also
severed the majority of its internal marketing personnel subsequent to entering
into the EES arrangement to more correctly align the Company's staffing levels
with the research and development, regulatory and manufacturing responsibilities
inherent to a medical device manufacturer with a distribution alliance.
During 1998, the Company also undertook a series of restructuring activities
consistent with its change in strategic direction to focus corporate efforts on
ILM. These activities involved headcount reductions during the first and fourth
quarters of 1998 as well as the shutdown of the Company's two majority-owned
international subsidiaries. The 1998 restructuring activity was precipitated
primarily by the Company's failure to gain regulatory marketing clearance of its
proprietary RIGS technology. In 1995 and 1996, the Company completed a series of
clinical trials of its first generation targeting agent for the detection of
colorectal cancer, RIGScan(R) CR49. Also during 1996, the Company submitted
applications to European and U.S. regulatory agencies requesting approvals to
begin marketing RIGScan CR49 for the detection of metastatic colorectal cancer.
Late in the fourth quarter of 1997, the Company received requests for further
information from United States and European regulatory agencies following review
of its applications. Consequently, during the first half of 1998, the Company
initiated a series of changes to its business plan to reduce operating expenses
and refocus activities on ILM while efforts were made to identify and secure a
development partner to take in financial and regulatory responsibility for
continuing to develop RIGS and ACT.
Neoprobe's current strategy is to commercialize gamma-guided surgery products
based upon technologies that are patented or exclusively licensed by the Company
for diagnosis and treatment of patients with cancer. The Company has suspended
research and development activities related to its RIGS or ACT products until it
finds partners who will take on the clinical, regulatory and financial
activities related to further product development.
2
THE COMPANY'S TECHNOLOGY
Intraoperative Lymphatic Mapping and Other Gamma Guided Surgery Instrument
Applications
Surgeons use lymphatic mapping to help trace the lymphatic patterns in a cancer
patient to evaluate potential tumor drainage and cancer spread. The technique
does not detect cancer; it helps surgeons find the first lymph node(s) to which
tumor is likely to drain and spread. That node (sometimes referred to as the
"sentinel" node) may provide critical information about the stage of a patient's
disease. Intraoperative lymphatic mapping begins when a patient is injected at
the site of the main tumor with a commercially available radioactive tracing
agent; e.g., filtered sulfur colloid labeled with Technetium-99m, a radioactive
element. The agent is intended to follow the same lymphatic flow as the cancer
would if it had metastasized. The surgeon may then track the agent's path with
the probe, thus following the potential avenues of metastases and identifying
lymph nodes to be biopsied for evaluation and determination of cancer spread.
Lymphatic mapping gives surgeons a "road map" to find the sentinel nodes to
which tumor is likely to drain or spread. Numerous clinical studies involving
nearly two thousand patients, published in peer-review medical journals, have
shown ILM is 97% accurate in predicting the presence or absence of disease
spread in melanoma or breast cancers. As a result, over 80% of patients who
would have undergone lymphadenectomies can be spared this radical surgical
procedure.
Surgeons practicing ILM have found that the Company's gamma-detecting probes are
well suited to the procedure. The Company's patented instruments consist of
hand-held gamma-ray-detection probes and a software-driven control unit. The
detection device in the tip of the probe is a highly radiosensitive crystal that
relays a signal through a preamplifier to the control unit to produce both a
digital readout and an audible signal. The detector element fits in a housing
approximately the size of a pocket flashlight. During 1997, the Company launched
an enhanced gamma detector, the Neoprobe(R) 1500 portable radioisotope detector,
in response to the emergence of ILM, and in late 1998 the Company launched a new
system, the neo2000(TM). The neo2000 device is intended to be the cornerstone of
Neoprobe's future ILM instrument products.
Lymphatic mapping has become the standard of care for treating patients with
melanoma at many institutions. The Company has supported this initiative through
training support, technical expertise and device placement. For cutaneous
malignant melanoma, lymphatic mapping was recently declared the standard of care
by the World Health Organization. For breast cancer, the technique is moving
toward standard of care status in major cancer centers and is being confirmed in
several high profile, national, and international clinical trials. Several large
multi-center clinical trials are currently underway, including studies sponsored
by the U.S. Department of Defense and the National Institute of Health. In
addition to lymphatic mapping, surgeons are using Neoprobe's device for other
gamma guided surgery applications, such as evaluating the thyroid function, the
intraoperative localization of osteoid osteomas (small painful bone lesions) and
in the surgical biopsy of suspected spread of cancer to the bone (osseous
metastases). Surgeons have also found the technique useful in staging patients
with vulvar, prostate, and penile cancers. Additional applications of the
technology are being investigated.
The Company, in conjunction with its distribution partner, EES, continues to
work with thought leaders in the surgical community to set up and support
training courses internationally for lymphatic mapping. Courses showcasing the
Company's instruments have been held at many nationally and internationally
renowned cancer-specializing and teaching institutions such as M.D. Anderson
Cancer Center, the University of Washington, the Netherlands Cancer Institute,
the University of Louisville, and the University of California at San Francisco.
The Company is currently selling the Neoprobe 1500 and neo2000 instruments
through EES for use in lymphatic mapping and other gamma guided surgery
applications and is expanding its line of instruments to provide a variety of
gamma-detecting probes for other specialized uses. The growing use of the
lymphatic mapping technique by surgeons has helped generate revenue for the
Company of approximately $9.4 million in revenue during 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
3
Neoprobe's ILM business strategy will be designed around the following
objectives:
- - Providing cost effective technology to reduce patient morbidity and allow
the ILM procedure to be done in an outpatient setting.
- - Increasing the Company's market position in device sales for intraoperative
lymphatic mapping and other gamma guided surgery applications by expanding
and improving its ILM devices, and completing strategic marketing
partnerships to globalize its technology.
- - Evaluating procedural ILM product opportunities, including disposable
products and the development of minimally invasive radiation detection
devices. In addition, Neoprobe will support the activities of thought
leaders in evaluating the use of ILM in the treatment of prostate and other
cancers.
The RIGS Technology
From inception until 1998, Neoprobe devoted significant efforts and resources to
the development of its proprietary RIGS technology. The RIGS system combines a
patented hand-held gamma radiation detection probe, proprietary radiolabeled
cancer targeting agents, and a patented surgical method to provide surgeons with
real-time information to locate tumor deposits not detectable by conventional
methods, and to assist in more thorough removal of the cancer. The Company's
targeting agents are monoclonal antibodies or peptides, labeled with a
radioactive isotope that emits low energy gamma rays. Before surgery, a cancer
patient is injected with one of the targeting agents which circulates throughout
the patient's body and binds specifically to cancer cell antigens or receptors.
Concentrations of the targeting agent are then located during surgery by
Neoprobe's gamma-detecting instrument, which emits an audible tone to direct the
surgeon to targeted tissue.
From 1992 through 1996, more than 700 patients participated in several phases of
clinical trials for surgical detection of primary and metastatic colorectal
cancer using the Company's lead product, RIGScan(R) CR49. In 1996, Neoprobe
submitted applications to the European Agency for the Evaluation of Medicinal
Products ("EMEA") and the United States Food and Drug Administration ("FDA") for
marketing approval of RIGScan CR49 for the detection of metastatic colorectal
cancer. Following review of its applications, the Company received requests for
further information from the FDA and from the European Committee for Proprietary
Medicinal Products ("CPMP") on behalf of the EMEA. Both the FDA and EMEA
acknowledged that the Company's studies met the diagnostic endpoint of the Phase
III clinical study which was to provide incremental information to the surgeon
regarding the location of hidden tumor. However, both agencies wanted to know
how the finding of additional tumor provided clinical benefit that altered
patient management or outcome. The Company developed a clinical response plan
for both agencies during the first half of 1998. However, the formalized process
in Europe required Neoprobe, in November 1997, to withdraw its European
application from the EMEA.
During 1998, the Company discussed the FDA's request for additional information
with the FDA and with expert clinical and regulatory advisors. Based on these
discussions, the Company determined that the best plan for obtaining regulatory
approval of its RIGS technology would be to re-apply after conducting clinical
trials of a second-generation antibody. Because of the cost and risk of clinical
trials, the Company determined that it would not conduct clinical trials of
RIGScan CR49 or a second generation antibody unless it is able to find a partner
who would assume the regulatory and financial activities associated with
clinical trials, manufacturing validation and product commercialization. The
Company does not intend to fund any further RIGS-related research and
development by itself. The Company is involved in preliminary negotiations with
a party interested in commercializing a second-generation antibody for use in
colorectal cancer surgery. At this time, the Company has not reached definitive
agreement with any party that would ensure the continued development of the RIGS
process. In addition, should a party ultimately decide to move forward with
development of a RIGS product and be able to reach an agreement satisfactory to
the Company, the Company believes that the likely timeframe required for
continued development, regulatory and commercialization of a RIGS product would
likely take a minimum of four to five years before the Company received any
significant product-related royalties. However, there can be no assurance that
the Company will be able to complete definitive license agreements with a
development partner for
4
the RIGS technology and does not know if a partner will be obtained on a timely
basis, on terms acceptable to the Company, or at all. There can be no assurance
that the FDA or the EMEA will approve the Company's RIGS products for marketing,
or that any such products will be successfully introduced or achieve market
acceptance. See "Risk Factors -- Government Regulation."
Activated Cellular Therapy for Cancer and Viral Disease
As a result of its RIGScan CR49 research, Neoprobe developed a RIGS based
Activated Cellular Therapy ("ACT") for cancer, which boosts the patient's own
immune system by removing lymph nodes identified using the RIGS process during
surgery and then, in a cell processing facility, activating and expanding
"helper" T-cells found in the nodes. Within 10 to 14 days, the patient's own
immune cells, now activated and numbering more than 20 billion, are infused into
the patient in an attempt to trigger an effective immune response to the cancer.
An in-vitro research program has shown that soluble factors secreted by the
activated cells produce significant chemo-enhancement in a number of tumor cell
lines for a variety of chemotherapeutic agents. The in-vitro assessment
correlates with an observation of potential chemo-enhancement in an earlier
Phase I clinical study of unresectable colorectal patients performed at The Ohio
State University.
In addition, Neoprobe has preliminarily evaluated the application of a non-RIGS
based ACT therapy for the treatment of chronic viral diseases. ACT for viral
diseases uses peripheral lymph nodes, which are obtained in an out-patient
setting, as the initial starting culture material. After using Neoprobe's
activation and expansion procedures, the cells are infused in 10 to 14 days. A
Phase I study has been completed with HIV/AIDS patients at The Ohio State
University with encouraging results. During 1998, the Company completed a Phase
I trial in additional viral diseases, extending the use of activated cellular
therapy to patients co-infected with HIV/AIDS and chronic active hepatitis B or
C at the Miami VA Medical Center in Florida. Because of the cost and risk of
clinical trials, the Company determined that it will not conduct clinical trials
of ACT unless it finds a partner who will assume the financial burden of the
trials and manufacturing validation. The Company does not intend to fund any
further ACT-related research and development by itself. The Company has not
entered into any agreements with a development partner for the ACT technology
and does not know if a partner will be identified on a timely basis, on terms
acceptable to the Company, or at all. There can be no assurance that any ACT
products will be successfully developed, tested or licensed, or that any such
products will gain market acceptance. See "Risk Factors - Government
Regulation."
CANCER MARKET OVERVIEW
Cancer is the second leading cause of death in the U.S. and Western Europe and
is responsible for over half a million deaths annually in the U.S. alone. The
National Institutes of Health ("NIH") estimate the overall annual costs for
cancer, the primary focus of the Company's products, at $107 billion: $37
billion for direct medical costs, $11 billion for morbidity, and $59 billion for
mortality. NIH estimated that breast cancer will annually affect approximately
500,000 women in North America, Western Europe, and other major economic
markets. Approximately 80% of the patients diagnosed with breast cancer undergo
a lymph node dissection to determine if the disease has spread. While many
breast cancer patients are treated in large cancer centers or university
hospitals, regional and/or community hospitals treat the majority of breast
cancer patients. Over 10,000 hospitals are located in the markets targeted for
Neoprobe's breast cancer ILM products. Melanoma is the fastest increasing form
of cancer in the United States and Europe. The medical importance of ILM staging
has been accepted for melanoma. However, more melanoma patients are typically
treated at large cancer centers or university hospitals focusing the market
opportunity for Neoprobe's melanoma ILM products. An aging population, coupled
with longer survival rates, should increase the size of the overall oncology
market significantly in the coming years.
MARKETING AND DISTRIBUTION
The Company began development of its first portable gamma radiation detection
device, the Neoprobe 1000, in 1987. In 1996, Neoprobe began marketing its
devices into the emerging ILM field as a pre-marketing strategy for the
anticipated commercial launch of a RIGS product.
5
In October 1997, the Company launched an improved version of its gamma radiation
detection device, the Neoprobe 1500, in response to the expanding adoption of
the ILM technique in melanoma, breast and other cancers. In October 1998,
Neoprobe introduced a feature-enhanced component, the neo2000 control unit. The
neo2000 control unit is a software-upgradable product that permits the addition
of product enhancements without costly remanufacturing. In April 1998, the
Company launched a new 14mm reusable probe that has been optimized for breast
cancer procedures. During the first quarter of 1999, Neoprobe introduced a new
line of reusable, sterilizable BlueTip(TM) probes and accompanying disposable
handles.
The Company intends to continue developing additional ILM-related probes and
instrument products in connection with EES to continue its leadership position
in the ILM field. The Company intends to also preliminarily investigate and
perform early stage research on other ILM-procedural products during 2000 that
could expand the Company beyond a single product line. The Company does not
believe the expenditures, if any, for procedural product extensions will be
material to the results of operations for 2000. However, there can be no
assurance that any such products will achieve regulatory approval (See "Risk
Factors -- Government Regulation") or if approved that such products will
achieve market acceptance (See "Risk Factors -- Dependence on Principal Product
Line").
Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Neoprobe and EES have established
relationships with the leaders in the ILM surgeon community and has established
and supported training courses internationally for lymphatic mapping. The
Company intends to continue to work with EES to expand the number of training
courses available for surgeons to be trained in the ILM technique.
Since the Company began actively marketing its products into the ILM arena in
1996, it has marketed its products through a number of different internal and/or
external marketing arrangements. In September 1996, the Company executed a
License and Distributorship Agreement with United States Surgical Corporation
("USSC") under which USSC was paid commissions based on sales of the Company's
products. The Company agreed to terminate the agreement at USSC's request
effective October 1997. The parties also agreed to discharge and release each
other from all remaining claims and financial obligations relating to the
agreement, including license fees.
In April 1998, the Company executed a non-exclusive Sales and Marketing
Agreement with EES to market and promote certain of the Company's line of
hand-held gamma detection instruments. Under the terms of the agreement, the
Company paid EES a commission based on unit sales. On January 29, 1999, the
Company provided EES with notice of the Company's intent to terminate the
agreement effective March 1, 1999 due to differences in market focus and EES
intent at that time to develop a proprietary product line that would compete
directly with the Company's products.
Effective February 1, 1999, the Company executed an exclusive Sales and
Marketing Agreement with KOL BioMedical Instruments, Inc. ("KOL") to market the
Company's gamma guided surgery products in the U.S. The Company terminated the
agreement with KOL effective October 31, 1999 due to the Company's opportunity
to enter a new worldwide distribution arrangement with EES that offered the
Company broader opportunities to penetrate growing global markets in addition to
the U.S. market. In connection with the termination, the Company agreed to pay
KOL any outstanding commission amounts due as well as a $700,000 fee to
terminate the agreement. The Company repurchased approximately $850,000 in
demonstration equipment from KOL that EES has purchased or agreed to purchase.
The Company entered into a Distribution Agreement (the "Agreement") with EES
effective October 1, 1999 for an initial five-year term with options to extend
for two successive two-year terms. Under the Agreement, the Company will
manufacture and sell its ILM products exclusively to EES, who will distribute
the products globally. EES agreed to purchase minimum quantities of the
Company's products over the first three years of the term of the Agreement and
to reimburse the Company for certain research and development costs and a
portion of the Company's warranty costs. EES also agreed to purchase the
demonstration units returned from KOL at cost. The Company is obligated to
continue certain product maintenance activities and to provide ongoing
regulatory support for the products.
6
EES may terminate the Agreement if the Company fails to supply products for
specified periods, commits a material breach of the Agreement, suffers a change
of control of the Company, or becomes insolvent. If termination is due to
failure to supply or a material breach by the Company, EES would have the right
to use the Company's intellectual property and regulatory information to
manufacture and sell the products exclusively on a global basis for the
remaining term of the Agreement with no additional financial obligation to the
Company. If termination is due to insolvency or a change of control that does
not affect supply of the products, EES has the right to continue to sell the
products on an exclusive global basis for a period of six months or require the
Company to repurchase any unsold products in its inventory.
Under the Agreement, EES received a non-exclusive, worldwide paid-up license
(the "License") to the Company's ILM intellectual property to make and sell
other products that may be developed using the Company's ILM intellectual
property. The term of the License is the same as that of the Agreement. EES paid
the Company a non-refundable license fee of $4 million. The Company intends to
recognize the license fee as revenue over the five-year initial term of the
Agreement. If the Agreement is terminated by the Company as a result of a
material breach by EES, EES would be required to pay the Company a royalty on
all products developed and sold by EES using the Company's ILM intellectual
property. In addition, the Company is entitled to a royalty on any ILM product
commercialized by EES that does not infringe any of the Company's existing
intellectual property. See "Risk Factors -- Limited Marketing Experience."
MANUFACTURING
Neoprobe Instruments. The Company relies on independent contract manufacturers,
some of which are single source suppliers, for the manufacture of the principal
components of its current line of gamma guided surgery products, see "Risk
Factors--Limited Manufacturing Capacity and Experience". The Company's model
1000 and 1500 control unit and the 19mm probe were originally manufactured under
a 1996 Manufacturing and Supply Agreement with RELA, Inc. of Boulder Colorado
("RELA"), a developer and manufacturer of medical devices. The Company intends
to officially discontinue the Neoprobe 1000 control unit during fiscal year
2000; however, the model 1500 and 19mm probe continue to be available for
distribution through EES.
During 1998, the Company began manufacturing the 14mm probe and the neo2000
control unit. The neo2000 control unit and the 14mm probe involve the
manufacture of components by a variety of subcontractors, including but not
limited to Plexus Corporation ("Plexus"); and eV Products, a division of II-VI
Corporation ("eV"). eV produces the crystal used in the detector probes, and
Plexus performs assembly of the neo2000 control unit and final assembly of the
14mm probe. Currently, the Company has a Manufacturing and Supply Agreement with
eV for the production of crystals; however, work has been performed by Plexus
under terms of a letter of intent, pending completion of the final manufacturing
and supply agreement. During March 2000, the Company and Plexus executed a
supply and manufacturing agreement. During the first quarter of 1999, the
Company began manufacturing the BlueTip probes. The BlueTip probes also use
crystal assemblies produced by eV, but final assembly of the BlueTip probes is
done under a supply agreement by The MedTech Group, Inc. ("MedTech"). There can
be no assurance that the Company will be able to complete or maintain agreements
with its subcontractors on a timely basis, on terms acceptable to the Company,
or at all. Any significant supply interruption or yield problems experienced by
the Company would have a material adverse effect on the Company's ability to
manufacture its products and, therefore, a material adverse effect on its
business, financial condition, and results of operations until a new source of
supply is qualified. See "Risk Factors -- Limited Manufacturing Capacity and
Experience."
In December 1997, the Company entered into a supply agreement with eV for the
supply of certain crystals and associated electronics to be used in the
manufacture of the Company's proprietary line of hand-held gamma detection
probes. The original term of the agreement expires on December 31, 2002 but may
be automatically extended for an additional three years. The agreement calls for
the Company to purchase minimum quantities of crystals and associated
electronics based on annually forecasted production needs. eV supplies 100% of
the crystals used by the Company. While eV is not the only potential supplier of
such crystals, any prolonged interruption from this source could restrict the
availability of the Company's probe products, which would affect operating
results adversely.
7
In May 1999, the Company entered into a supply agreement with MedTech for the
supply of BlueTip probes and related accessories. The original term of the
agreement expires on December 31, 2003 but may be automatically extended for an
additional three years. The agreement calls for the Company to deliver annual
product forecasts to MedTech and for the Company to purchase at least 75% of
forecasted product demand on a quarterly basis. The agreement may be terminated
by the Company upon twelve months notice or in the event of failure to supply or
by either party due to material breach or insolvency.
In March 2000, the Company entered into a manufacturing and supply agreement
with Plexus for the exclusive manufacture of the Company's 14mm probe and
neo2000 control unit. The original term of the agreement expires on December 31,
2003 but may be extended for an additional year given six months notice prior to
December 31, 2003. The Company has the right to terminate the agreement upon six
months written notice. The agreement may be terminated by either party in the
event of material breach, insolvency or by the Company in the event of failure
to supply. The Company may also have the covered product manufactured by other
suppliers in the event of failure to supply or if the Company is able to secure
another source of supply significantly more favorable pricing terms than those
offered by Plexus. The agreement calls for the Company to deliver rolling
12-month product forecasts to Plexus and to place purchase orders 60 days prior
to requested delivery in accordance with the forecast. In the event the
agreement is terminated by Neoprobe or if Plexus ceases to be the exclusive
supplier of the covered products, the Company is required to purchase all
finished components on hand at Plexus plus raw materials not able to be
restocked with suppliers.
PATENTS AND PROPRIETARY RIGHTS
The Company regards the establishment of a strong intellectual property position
in its technology as an integral part of the development process. Each of the
Company's technologies is protected by patents and intellectual property
positions, in the United States as well as foreign countries. Specifically,
Neoprobe's ILM technology is protected by twelve (12) instrument patents that
have been issued in the United States as well as major foreign markets. In
addition to the issued patents, twenty (20) patent applications have been filed
in the United States and certain major foreign markets. The patent applications
cover the Company's newly introduced neo2000 systems, probes, and products that
the Company plans to introduce in the coming months and years.
The Company continues to attempt to maintain proprietary protection for the
products related to RIGS and ACT, which although not currently integral to the
Company's business plans, may be important to a potential development partner.
Certain aspects of Neoprobe's RIGS technology are claimed in the United States
in U.S. Patent No. 4,782,840, which expires in 2005, unless extended. The
Company believes that some of its RIGS technology will not be patentable in
certain foreign countries.
The patent position of biotechnology and medical device firms, including the
Company, generally is highly uncertain and may involve complex legal and factual
questions. Potential competitors may have filed applications for, or may have
been issued patents, or may obtain additional patents and proprietary rights
relating to products or processes in the same area of technology as that used by
the Company. The scope and validity of these patents and applications, the
extent to which Neoprobe may be required to obtain licenses thereunder or under
other proprietary rights, and the cost and availability of licenses are
uncertain. There can be no assurance that the Company's patent applications will
result in additional patents being issued or that any of the Company's patents
will afford protection against competitors with similar technology; nor can
there be any assurance that any of the Company's patents will not be designed
around by others or that others will not obtain patents that Neoprobe would need
to license or design around. See "Risk Factors -- Patents, Proprietary
Technology and Trade Secrets."
The Company also relies upon unpatented trade secrets. No assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Company's trade
secrets, or disclose such technology, or that the Company can meaningfully
protect its rights to its unpatented trade secrets. The Company requires its
employees, consultants, and advisers to execute a confidentiality agreement upon
the commencement of an employment or consulting relationship with Neoprobe. The
agreement provides that all confidential information developed or made known to
the individual during the course of the relationship will be kept confidential
and not disclosed to third parties except in specified
8
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual will be the exclusive property of
Neoprobe. There can be no assurance, however, that these agreements will provide
meaningful protection for Neoprobe's trade secrets in the event of an
unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The production and marketing of Neoprobe's products and its research and
development activities are subject to detailed and substantive regulation by
governmental authorities in the United States and other countries. In the United
States, drugs, biologic products, and medical devices are regulated by the FDA.
Federal and state statutes and regulations, govern, among other things, clinical
testing, manufacture, labeling, packaging, marketing, distribution, and record
keeping in order to ensure that the Company's products are safe and effective
for their intended use. Noncompliance with applicable requirements can result
in, among other things fines, injunctions, suspensions or loss of regulatory
approvals, recall or seizure of the Company's products, and criminal
prosecution. The FDA has the authority to revoke previously granted licenses.
See "Risk Factors -- Government Regulation."
Instrument Products. The FDA classifies medical devices into one of three
classes -- class I, II, or III. Class I devices are subject to general controls,
such as labeling, premarket notification (the "510(k)" process), and adherence
to FDA-mandated quality system regulations ("QSR"). Class II devices are subject
to general and special controls, such as performance standards, postmarket
surveillance, patient registries, and FDA guidelines. Class III devices are
generally life-sustaining, life-supporting, or implantable devices and must
receive pre-market approval by the FDA.
A premarket approval application ("PMA") must be filed if a proposed device is
not substantially equivalent to a legally marketed reserved Class I or Class II
device, or if it is a Class III device for which the FDA has called for PMAs.
The PMA process is much more expensive, uncertain and lengthy than the 510(k)
process. A PMA application must be supported by valid scientific evidence, which
typically includes extensive testing and manufacturing information, including
preclinical and clinical trial data to demonstrate the safety and effectiveness
of the device. The PMA process is not anticipated for the Company's instrument
products.
If a seller of medical devices can establish that a new device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III device for which the FDA has not required pre-market approval, the
seller may market the device without further approvals being granted by the FDA.
The FDA may, however, determine that the new device is not substantially
equivalent and require the seller to submit further information, such as
additional clinical test data, before it is able to make a determination
regarding substantial equivalence, which can substantially delay the market
introduction of the product. For a device that is cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device, or that constitute a major change to the
intended use of the device, will require a new 510(k) submission.
The Neoprobe 1000 instrument received 510(k) clearance in December 1986, and
modified versions received 510(k) clearance in June 1992 and February 1995. The
Neoprobe 1500 system received 510(k) clearance in June 1997. In February 1998,
the FDA reclassified "nuclear uptake detectors" as being exempt from the 510(k)
(premarket notification) process. The Company must continue to manufacture the
devices under QSR and maintain appropriate technical files and quality records.
The Company believes the neo2000 device is exempt from the 510(k) process
because it is substantially equivalent to the Neoprobe 1500 system.
The FDA ensures QSR compliance through periodic facility inspections.
Accordingly, manufacturers must commit ongoing substantial resources to
maintaining a high level of compliance with QSR. In addition, Neoprobe's
promotional and educational activities regarding its diagnostic instrument
products must comply with FDA policies and regulations regarding acceptable
device product promotion practices.
The Company's products are regulated in Europe according to the Medical Device
Directive (93/42/EEC). Under this regulation, the Company must obtain CE Mark
status for all products exported to Europe. The Company must continue to
manufacture the devices under a quality system compliant to the requirements of
ISO 9001 and maintain
9
appropriate technical files. The Company has obtained a license to import
devices into Canada. The Company has to continue to manufacture the devices
under a quality system compliant to the requirements of ISO 134888.
RIGS and ACT products. The Company's biologic products, if developed, would
require a regulatory license to market by the FDA and by comparable agencies in
foreign countries. The process of obtaining regulatory licenses and approvals is
costly and time consuming, and the Company has encountered significant
impediments and delays related to its previous proposed biologic products. See
"Risk Factors -- Government Regulation."
The steps required before a biologic agent may be marketed in the United States
include (i) preclinical laboratory and animal testing; (ii) submission to the
FDA of an Investigational New Drug ("IND") application, which must become
effective before human clinical trials may commence; (iii) adequate and well
controlled human clinical trials to establish the safety and efficacy of the
biologic for its intended use; (iv) submission of a Biologic License Application
("BLA") to the FDA; and (v) FDA approval of these applications.
In addition to reviewing information submitted in the BLA, each manufacturing
facility must undergo a pre-approval inspection by the FDA to assess its
suitability and compliance with GMP and periodic inspections thereafter. Once
approved, any significant changes in the manufacturing process, equipment,
facilities, or product specifications must be pre-approved by the FDA and may
require additional clinical data to validate the changes prior to allowing their
implementation.
The FDA may deny a BLA if applicable regulatory criteria are not satisfied,
require additional testing or information, or require postmarket testing and
surveillance to monitor the safety or efficacy of the Company's products.
Notwithstanding the submission of such data, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for approval. Finally,
product approvals may be withdrawn if compliance with regulatory standards is
not maintained, or if a problem occurs following initial marketing.
The process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources, and there can be no assurance
that any approval will be granted on a timely basis, if at all. Additionally,
the length of time it takes for the FDA to evaluate an application for marketing
approval varies considerably, as does the amount of preclinical and clinical
data required to demonstrate the safety and efficacy of a specific product. The
FDA may require additional clinical studies which may take several years to
perform. The length of the review period may vary widely depending upon the
nature and indications of the proposed product and whether the FDA has any
further questions or requests any additional data. Also, the FDA will require
postmarketing reporting and surveillance programs to monitor the side effects of
the products. There can be no assurance that any of the Company's potential
products will be approved by the FDA or approved on a timely or accelerated
basis, or that any approvals received will not subsequently be revoked or
modified.
The Company submitted a dossier to the European regulatory agencies in May 1996,
and a BLA to the FDA in December 1996, for its RIGScan CR49 product for the
detection of metastatic colorectal cancer. In November 1997, the Company
voluntarily withdrew its European Marketing Authorization Application after a
decision by the Committee for Proprietary Medicinal Products (CPMP) determined
that there was insufficient data to support the clinical utility of the product;
additional information has been requested. In December 1997, the FDA issued an
action letter to the Company stating that the BLA is "not approvable at this
time" and requested a formal response to the deficiencies listed in the letter.
This additional information must be submitted in the form of a BLA Amendment.
During 1998, the Company discussed the FDA's request for additional information
with the FDA and with expert clinical and regulatory advisers. Based on these
discussions, the Company determined that the best plan for obtaining regulatory
approval of its RIGS technology would be to re-apply after conducting clinical
trials of a second-generation antibody. Because of the cost and risk of clinical
trials, the Company has determined that it will not conduct clinical trials of
RIGScan CR49 or a second-generation antibody unless it finds a partner who will
assume the financial burden of the trials and manufacturing validation. The
Company does not intend to fund any further RIGS-related research and
development by itself. The Company is involved in preliminary due diligence with
parties interested in commercializing a second-generation antibody for use in
colorectal cancer surgery. At this time, the Company has not reached definitive
agreement with any party that would ensure the continued development of the RIGS
process. In addition, should a party ultimately decide to move forward with
development
10
of a RIGS product and be able to reach an agreement satisfactory to
the Company, the Company believes that the likely timeframe required for
continued development, regulatory clearance and commercialization
of a RIGS product would likely take a minimum of four to five years before the
Company received any significant product-related royalties. However, there can
be no assurance that the Company will be able to complete definitive license
agreements with a development partner for the RIGS technology and does not know
if a partner will be obtained on a timely basis, on terms acceptable to the
Company, or at all. There can be no assurance that the Company's RIGS products
will be approved for marketing by the FDA or the EMEA, or that any such products
will be successfully introduced or achieve market acceptance. See "Risk Factors
- -- Government Regulation."
Before marketing its products in Western Europe, the Company will be required to
receive the approval of the European Council or European Commission and the
appropriate governmental agencies in each of the respective countries. For
marketing outside the United States, the Company is also subject to foreign
regulatory requirements governing human clinical trials, pharmaceutical sales,
and marketing approval of its products. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commencement of manufacturing or marketing
of the product in those countries. The requirements governing the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country; however, foreign procedures are similar to those required by
the FDA. The Company intends, to the extent possible, to rely on foreign
distributors of its products to manage and obtain regulatory approval for those
products.
In addition to regulations enforced by the FDA, the manufacture, distribution,
and use of radioactive targeting agents, if developed, are also subject to
regulation by the Nuclear Regulatory Commission, the Department of
Transportation and other federal, state, and local government authorities.
Neoprobe or its manufacturer of the radiolabeled antibodies must obtain a
specific license from the Nuclear Regulatory Commission to manufacture and
distribute radiolabeled antibodies, as well as comply with all applicable
regulations. Neoprobe must also comply with Department of Transportation
regulations on the labeling and packaging requirements for shipment of
radiolabeled antibodies to licensed clinics, and must comply with federal,
state, and local governmental laws regarding the disposal of radioactive waste.
There can be no assurance that the Company will be able to obtain all necessary
licenses and permits and be able to comply with all applicable laws. The failure
to obtain such licenses and permits or to comply with applicable laws would have
a materially adverse effect on the Company's business, financial condition, and
results of operations.
COMPETITION
Neoprobe faces competition from medical device companies, as well as from
universities and other non-profit research organizations in the field of cancer
diagnostics and treatment. Many emerging medical device companies have corporate
partnership arrangements with large, established companies to support the
research, development, and commercialization of products that may be competitive
with those of the Company. In addition, a number of large established companies
are developing proprietary technologies or have enhanced their capabilities by
entering into arrangements with or acquiring companies with proprietary antibody
technology, or other technologies applicable to the detection or treatment of
cancer. Many of the Company's existing or potential competitors have
substantially greater financial, research and development, regulatory,
marketing, and production resources than those of the Company. Other companies
may develop and introduce products and processes competitive with or superior to
those of the Company. Further, the development by others of new cancer
diagnostic, or treatment methods or the development of a cure or vaccine for
cancer could render the Company's technology and products under development
noncompetitive or obsolete. See "Risk Factors -- Competition" and "-- Risk of
Technological Obsolescence."
For the Company's products, an important factor in competition may be the timing
of market introduction of its products or those of its competitors' products.
Accordingly, the relative speed with which Neoprobe can develop products,
complete the approval processes and supply commercial quantities of the products
to the market will be an important competitive factor. Neoprobe expects that
competition, among products approved for sale, will be based, among other
things, on product efficacy, safety, reliability, availability, price, and
patent position.
11
With the emergence of ILM, a number of companies have begun to market gamma
radiation detection instruments. Most of the competitive products have been
designed from a nuclear medicine perspective rather than developing products for
the surgeon. The principal competitive product in both the United States and
Europe has been the Navigator system which is marketed by US Surgical
Corporation, and a device manufactured and sold by Carewise Medical Products.
Also, although the Company is not aware of any specific plans to do so, EES
currently retains the right to develop its own proprietary line of hand-held
gamma detection equipment that could compete directly with the Company's
product. The Company believes its intellectual property portfolio will be a
barrier to competitive products; however, there can be no assurance that
competitive products will not be developed and be successful in eroding the
Company's market share for gamma guided surgery products. See -- "Risk Factors
Competition."
EMPLOYEES
As of February 29, 2000, Neoprobe had twenty full-time employees. Neoprobe
considers its relations with its employees to be satisfactory.
RISK FACTORS
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the prospects discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those listed below.
Limited Revenues; Continuing Net Losses; Accumulated Deficit
The Company's limited history of operations, the nature of its business, and its
limited marketing and manufacturing experience make the prediction of future
operating results difficult and highly unreliable. The Company's future
prospects, therefore, must be evaluated in light of the substantial risks,
expenses, delays and difficulties normally encountered by companies in the
medical device industry, which is characterized by an increasing number of
participants, intense competition and a high rate of failure. The Company began
active marketing of its ILM products in 1997 and has limited experience in
manufacturing, marketing and selling its ILM products. Since its inception in
1983, the Company expended the majority of its efforts and resources in the
research and development of its RIGS technology. During 1998, based on
disappointing regulatory feedback from the FDA and European regulatory
authorities, the Company revised its business plan to severely curtail research
and development of the RIGS technology and to focus on gamma guided surgery
products such as those used in ILM. The Company has experienced significant
operating losses in each year since inception, and had an accumulated deficit of
approximately $120 million as of December 31, 1999. For the years ended December
31, 1999, 1998 and 1997, the Company's net losses were $4.2 million, $28.0
million and $23.2 million, respectively. The Company expects to generate
operating profitability in fiscal 2000 as a result of sales of its products to
EES. However, there can be no assurance that the Company will achieve a
profitable level of operations in 2000, or that if achieved, that such
profitability can be sustained in future years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Future Capital Needs; Uncertainty of Capital Funding
To date, the Company's capital requirements have been significant. The Company
has depended on the proceeds of sales of its securities and other financing
vehicles to continue research and development and to fund its working capital
requirements. The Company's future capital requirements depend on numerous
factors, including the extent to which the Company's products achieve market
acceptance and generate revenue, the resources the Company devotes to
developing, manufacturing and marketing its products, the progress of future
development programs, and the time required to obtain additional regulatory
clearances or approvals. The Company expects to continue to devote capital
resources to fund research and development of additional gamma guided surgery
products, and to secure manufacturing capacity. The timing and amount of such
capital requirements cannot be accurately predicted. Consequently, the Company
may be required to raise additional funds through public or private financing,
collaborative relationships, or other arrangements. However, no assurance can be
given that the necessary
12
additional financing will be available to the Company on acceptable terms, if at
all, or that would not result in further dilution to the holders of the
Company's equity securities. The Company's ability to raise additional financing
may be dependent on many factors beyond the Company's control, including the
state of capital markets and the development or prospects for development of
competitive technology by others. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Dependence on exclusive distributor
The Company currently markets only a single line of medical instruments targeted
at the ILM market. These ILM instruments are marketed through a Distribution
Agreement with EES that began on October 1, 1999. Under the Agreement, the
Company will manufacture and sell its ILM products exclusively to EES, who will
distribute the products globally. EES agreed to purchase minimum quantities of
the Company's products over the first three years of the initial five-year term
of the Agreement. EES may terminate the Agreement if the Company fails to supply
products for specified periods, commits a material breach of the Agreement,
suffers a change of control of the Company, or becomes insolvent. While the
Company believes that EES intends to aggressively market the Company's products,
there can be no assurance that EES will purchase product from the Company in
excess of its minimum annual purchase requirements or that such purchases will
generate profitability or adequate cash flow to finance the Company's operations
in the long-term.
Dependence upon Gamma Guided Surgery Product Line; Uncertainty of Market
Acceptance
The Company's products, although being investigated for potential use in a
number of areas, are currently only widely used in the treatment and diagnosis
of two primary types of cancer: melanoma and breast cancer. The Company's
success is dependent on acceptance of ILM, and of its devices for use in ILM, by
the medical community as a reliable, safe and cost effective alternative to
current treatments and procedures. Although the Company believes that ILM has
significant advantages over other currently competing procedures, broad-based
clinical adoption of ILM will not occur until physicians outside the major
cancer centers and teaching hospitals determine that the ILM approach is an
attractive alternative to current treatments for use in melanoma and breast
cancer and expand its use to other types of cancer. There can be no assurance
that ILM will achieve significant market acceptance. There can be no assurance
that the Company's marketing efforts will result in significant demand for its
products, or that the current demand for the Company's products will be
maintained or continue to grow.
Competition
The medical device industry is intensely competitive. The Company's competitors
have significantly greater financial, technical, and manufacturing resources as
well as greater experience in the medical device industry than the Company. The
particular medical conditions that can be treated using the Company's ILM
products can also be treated and diagnosed by other medical devices, procedures,
or pharmaceuticals. Many of these alternatives are widely accepted in the
medical community and have a long history of use. The Company also believes that
its relationships with physicians and customer support are important competitive
factors. There can be no assurance that physicians will use the Company's
products or replace or supplement established treatments with the Company's
products, or that the Company's products will be competitive with other
technologies. There can be no assurance that the Company can achieve or maintain
a competitive position. In such event, the Company's business, operating
results, and financial condition could be materially adversely affected.
Limited Marketing Experience
The Company has limited experience in sales, marketing, or distribution of any
of its products. The Company currently markets its products through an exclusive
worldwide distribution arrangement with EES that began on October 1, 1999.
However, prior to this distribution arrangement, the Company marketed its
products through a number of different internal and/or external marketing
staffing arrangements with varying degrees of success. There can be no assurance
that the Company will be able to maintain its current distribution arrangement
with EES, or that EES will devote adequate resources to selling the Company's
products. Failure to maintain an effective
13
distribution relationship with EES could have a material adverse effect on the
Company's business, financial condition, and results of operations. There can be
no assurance that the Company will be able to, or its distribution partner will
be able to, market the Company's products successfully in the future. In such
event, the Company's business, operating results, and financial condition could
be materially adversely affected.
Risks of International Operations
EES markets the Company's products internationally. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or their trade
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. The international nature of the
Company's business is also expected to subject it and its distributors to laws
and regulations of the foreign jurisdictions in which they operate or the
Company's products are sold. The regulation of medical devices in a number of
such jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
Limited Manufacturing Capacity and Experience
The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of its
current line of gamma guided surgery products. Shortages of raw materials,
production capacity constraints or delays on the part of the Company's contract
manufacturers could negatively affect the Company's ability to ship products and
obtain revenue. The Company uses or relies on certain components and services
used in its devices that are provided by sole source suppliers. Although the
Company has identified primary and alternative vendors, the qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption or yield problems
experienced by the Company would have a material adverse effect on the Company's
ability to manufacture its products and, therefore, a material adverse effect on
its business, financial condition, and results of operations until a new source
of supply is qualified. Some of the components of the Company's products are
molded parts that require custom tooling that is manufactured and maintained by
third party vendors. Should such custom tooling be damaged, it could result in a
supply interruption that could have a material adverse effect on the Company's
ability to manufacture its products until a new tool is manufactured. Also, the
Company's new product development efforts and the timeliness of new product
launches can be significantly impacted by the tooling vendor's ability to meet
completion and quality commitments on the manufacture of custom tooling.
Companies often encounter difficulties in scaling up production, including
problems involving production yield, quality control and assurance, and
shortages of qualified personnel. As the Company increases production, it may,
from time to time, experience lower than anticipated yields or production
constraints, resulting in delayed product shipments which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company expects to manufacture its products based on forecasted product
orders. Lead times for materials and components ordered by the Company vary
significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times. As
a result, there is a risk of excess or inadequate inventory if orders do not
match forecasts.
In addition, medical device manufacturing facilities are subject to GMP
regulations, international quality standards, and other regulatory requirements.
The failure of the Company's contractors to implement and maintain their
facilities in accordance with GMP regulations, international quality standards,
or other regulatory requirements could entail a delay or termination of
production, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Patents, Proprietary Technology and Trade Secrets
The Company's success depends, in part, on its ability to secure and maintain
patent protection, to preserve its trade secrets, and on its ability to operate
without infringing on the patents of third parties. The Company seeks to protect
14
its proprietary positions by filing United States and foreign patent
applications related to its technology, inventions and improvements that are
important to the development of its business. There can be no assurance,
however, that the patents for which the Company has applied will be issued to
the Company. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated, or circumvented in the
future. In addition, there can be no assurance that competitors, many of which
have substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products either in the United States or internationally.
Patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publications of discoveries in the scientific or
patent literature tend to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous, and there can be no assurance that
current and potential competitors and other third parties have not filed or will
not file in the future applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company
also relies upon trade secrets, technical know-how, and continuing technological
innovation to develop and maintain its competitive position.
The Company typically requires its employees, consultants, and advisors to
execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Further, there
also can be no assurance that others will not gain access to the Company's trade
secret information or independently develop or acquire the same or equivalent
trade secret information. Certain of the research activities relating to the
development of antibody technology that may be components of the Company's
proposed RIGS system technology products were conducted by agencies of the
United States government. When the United States government participates in
research activities, it retains certain rights that include the right to use the
technologies for governmental purposes under a royalty-free license, as well as
rights to use and disclose technical data and computer software that could
preclude the Company from asserting trade secret rights in that data and
software.
The Company has not been notified by any third party that the Company's products
and procedures infringe any valid, enforceable claim of any patent owned by
others. Any such claim, however, whether with or without merit, could be time
consuming and expensive to respond to and could divert the Company's technical
and management personnel. The Company may become involved in litigation to
defend against claims of infringement made by others, to enforce patents issued
to the Company, or to protect trade secrets of the Company. If any relevant
claims of third-party patents are upheld as valid and enforceable in any
litigation or administrative proceeding against the Company, it could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from such patent owners, or to redesign its
products and processes to avoid infringement. There can be no assurance that the
Company will be able to obtain acceptable licenses or rights, if at all, to
other patents which the Company deems necessary for its operations. Accordingly,
an adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition, and results of operations. The Company
intends to vigorously protect and defend its intellectual property. Costly and
time consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope, and validity of the
proprietary rights of others. See "Item 1.
Business-- Patents and Proprietary Rights" and "-- Competition."
Government Regulation
The Company's products in the United States are regulated as medical devices by
the FDA. The process of obtaining United States regulatory approvals and
clearances may be lengthy, expensive, and uncertain. Commercial distribution of
the company's products in foreign countries is also subject to varying
government regulations which may delay or restrict marketing of the Company's
products in those countries. In addition, such regulatory authorities may impose
limitations on the use of the Company's products. FDA enforcement policy
strictly
15
prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Within the European Union, the Company's products are required
to display the CE mark in order to be sold. The Company has obtained
certification to display the CE mark on its currently available portable
radiation detection instruments. However, there can be no assurance that the
Company will be able to maintain certification for its current products or that
the Company will be able to obtain certification for any new products in a
timely manner, or at all.
The manufacturing operations of the Company's contract manufacturers are subject
to compliance with Good Manufacturing Practices ("GMP") regulations of the FDA
and similar regulations of the European Union. These regulations include
controls over design, testing, production, labeling, documentation, and storage
of devices. Enforcement of GMP regulations has increased significantly in the
last several years, and the FDA has publicly stated that compliance will be more
strictly scrutinized in the future. The Company's facilities and manufacturing
processes, as well as those of current and future third party suppliers, will be
subject to periodic inspection by the FDA, the Company's European Union notified
body, and other agencies. Failure to comply with these and other regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket clearance
or premarket approval for devices, withdrawal of clearances or approvals, and
criminal prosecution, which could have an adverse effect on the Company and its
operations.
The Company does not currently market any RIGS products or radioactive targeting
agent to be used in ILM applications. However, if a partner is identified to
fund and assist in the development of RIGS products, or if the Company were to
undertake development of a radioactive targeting agent for use in ILM, these
products would also be subject to detailed and substantive regulation by the FDA
and by comparable agencies in foreign countries. Various federal, state, and
foreign statutes also govern or influence the manufacture, safety, labeling,
storage, record keeping, and marketing of such products. The process of
obtaining regulatory licenses and approvals is costly, time consuming, and prone
to unexpected delay. The Company has encountered and may continue to encounter
delays in the completion of testing or in the application process for RIGS and
ACT products. Future delays could result from, among other things, a longer than
expected regulatory review process, slower than expected patient enrollment
rates, difficulties in analyzing data from clinical trials or in validating
manufacturing processes and changes in regulatory requirements. Moreover,
foreign and domestic approvals, if granted, may include significant limitations
on uses of the products. Further, even if such regulatory approval is obtained,
use of the Company's products could reveal side effects that, if serious, could
result in suspension of existing licenses and delays in obtaining licenses in
other jurisdictions. A marketed product, manufacturer, and manufacturing
facilities are subject to continual review and periodic inspections, and later
discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market. Noncompliance with applicable
governmental requirements can result in import detentions, fines, civil
penalties, injunctions, suspensions or loss of regulatory approvals, recall or
seizure of the Company's products, operating restrictions, government refusal to
approve product export applications or to allow the Company to enter into supply
contracts, and criminal prosecution. Additional governmental regulation may be
established which could prevent or delay regulatory approval of the Company's
products. Any delays or failure to receive required approvals or limiting
conditions on approvals could materially adversely affect the Company's
business, operating results, and financial condition. See "-- Government
Regulation."
Risk of Technological Obsolescence
The medical device industry is characterized by rapid and significant
technological change. There can be no assurance that third parties will not
succeed in developing or marketing technologies and products that are more
effective than those developed or marketed by the Company, or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
new surgical procedures and medications could be developed that replace or
reduce the importance of current procedures that use the Company's products.
Accordingly, the Company's success will depend, in part, on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. There can be no assurance that the Company's
products will not become obsolete and that its efforts to develop will result in
any commercially successful products. In such event, the Company's business,
operating results, and financial condition could be materially adversely
affected. See "-- Competition."
16
Limited Third Party Reimbursement
Medical Devices. During the past several years, the major third-party payers of
hospital services in the United States (Medicare, Medicaid, private health care
insurance and managed care plans) have substantially revised their policies,
methodologies and formulae in an attempt to contain health care costs. The
introduction of various Medicare cost containment incentives, combined with
closer scrutiny of health care expenditures by both private health insurers and
employers, has resulted in increased contractual adjustments and discounts in
hospital charges for services performed and in the shifting of services from
inpatient to outpatients settings. If hospitals respond to such pressures by
substituting lower cost products or therapies for the Company's products, the
Company could be adversely affected. Moreover, third-party payers may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payer or was experimental.
Similar initiatives to limit the growth of health care costs, including price
regulation, are also underway in several other countries in which the Company
does business. Implementation of health care reforms now under consideration in
other countries may limit the price of, or the level at which reimbursement is
provided for, the Company's products. The ability of customers to obtain
appropriate reimbursement for their products and services from government and
third-party payers is critical to the success of all medical device companies
around the world. Several foreign governments have attempted to dramatically
reshape reimbursement policies affecting medical devices. Further restrictions
on reimbursement of the Company's customers will likely have an impact on the
products purchased by customers and the prices they are willing to pay.
RIGScan and ACT. The Company does not currently have marketing approval for any
RIGScan or ACT products, However, if commercialized, these products will be
marketed to hospitals and other users that bill various third party payers,
including government programs, such as federal Medicare and state Medicaid, and
private insurance plans, for the health care services provided to their
patients. Third party payers carefully review and are increasingly challenging
the prices charged for medical products and services. Although the Company
intends to establish the prices for its products according to criteria believed
to be acceptable to third party payers, there can be no assurance that such
payers will not deny reimbursement on the basis that the Company's products are
not in accordance with established payer policies regarding cost effective
treatment methods, or on some other basis. There can be no assurance that the
Company would be able to provide economic and medical data to overcome any third
party payer objections. In foreign markets, reimbursement is obtained from a
variety of sources, including governmental authorities, private health insurance
plans, and labor unions. In most foreign countries, there are also private
insurance systems that may offer payments for alternative therapies. Although
not as prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. The Company may need to seek
international reimbursement approvals, although there can be no assurance that
any such approvals will be obtained in a timely manner or at all. Failure to
receive international reimbursement approvals could have an adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought. There can be no assurance, as to either United
States or foreign markets, that third party reimbursement and coverage of newly
approved products will be available or adequate, that current reimbursement
policies of third party payers will not be decreased in the future, or that
future legislation, regulation, or reimbursement policies of third party payers
will not otherwise adversely affect the demand for the Company's products, or
its ability to sell its products on a profitable basis. If third party payer
coverage or reimbursement is unavailable or inadequate, the Company's business,
financial condition, and results of operations could be materially adversely
affected. See "--Marketing and Distribution."
Product Liability
The testing, marketing and sale of the Company's products could expose the
Company to liability claims. The Company currently has product liability
insurance which, the Company believes, is adequate for its current activities.
There can be no assurance, however, that the Company will be able to continue to
obtain such additional insurance at a reasonable cost, if at all, or that such
insurance would be sufficient to cover any liabilities resulting from any
product liability claims, or that the Company will have funds available to pay
any claims over the limits of its insurance. Either an underinsured or an
uninsured claim could have a material adverse effect on the Company's business,
operating results, and financial condition.
17
Need to Manage a Changing Business
The Company's business has experienced certain developments since the beginning
of 1998, many of which have resulted in several significant changes in the
Company's strategy and business plan, including downsizing to what the Company
considers to be the minimal level of management and employees necessary to
operate a publicly traded medical device business. The Company believes its
restructured organization is appropriate to support modest growth over the next
few years. However, losing any members of the management team could have an
adverse effect on the Company's operations. The Company's success is dependent
on its ability to attract and retain technical and management personnel with
expertise and experience in the medical device business. The competition for
qualified personnel in the medical device industry is intense and, accordingly,
there can be no assurance that the Company will be successful in hiring or
retaining the requisite personnel. The Company's future success will depend, to
a significant extent, on the ability of its current and future management
personnel to operate effectively. There can be no assurance that the Company's
personnel, systems, procedures, and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial, and management systems or to expand, train, motivate or
manage employees could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company's future success
will depend, in part, on management's ability to manage future growth, and there
can be no assurance that these efforts will be successful. See "Item 9.
Directors, Executive Officers, Promoters, and Control Persons; Compliance with
Section 16(a) of the Exchange Act."
Low Stock Price
The Company's common stock traded for less than $1.00 per share for much of
1999. As a result of this low trading price, the Company's common stock was
delisted from the Nasdaq Stock Market ("Nasdaq") on July 27, 1999. Delisting may
adversely affect the ability of the Company to attract new investors.
Anti-Takeover Provisions
The Company has adopted a Shareholder Rights Plan. Certain provisions of the
Shareholder Rights Plan and certain of the Company's charter provisions and
applicable corporate laws could be used to hinder or delay a takeover bid for
the Company. Such provisions may inhibit takeover bids and decrease the chance
of stockholders realizing a premium over market price for their common stock as
a result of a takeover. The Board amended the Shareholder Rights Plan in
February 1999, to permit an equity investment in the Company.
Blank Check Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such terms as may be set by the Board of Directors.
500,000 shares of preferred stock have been designated as Series A Junior
Participating Preferred Stock and reserved for issuance under the Company's
Shareholder Rights Plan. If the Company issues preferred stock, the issuance
could be used to thwart a takeover bid and may have a dilutive effect upon the
Company's common stockholders
No Dividends
The Company has never paid dividends on its common stock. The Company intends to
retain any future earnings to finance its growth. Accordingly, any potential
investor who anticipates the need for current dividends from its investment
should not purchase any of the common stock offered hereby. See "Item 5. Market
for common Equity and Related Stockholders Matters."
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its office at 425 Metro Place North, Dublin, Ohio.
The Company executed a lease agreement, commencing on January 1, 1997 and ending
in August 2003, with the landlord of these facilities for approximately 25,000
square feet. The lease provides for a monthly base rent of approximately $19,100
in 2000
18
and increases to $21,000 in 2003. During December 1998 and February 1999 the
Company executed two lease agreements to sublease approximately 2,600 square
feet and 4,600 square feet of the Company's office space, respectively. The two
subleases are expected to generate monthly sublease income of approximately
$5,300 in 2000 increasing to $6,000 in 2003. The Company and its subtenants must
also pay a pro-rata portion of the operating expenses and real estate taxes of
the building. Neoprobe believes these facilities are in good condition and will
be adequate for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In June 1996, a lawsuit against the Registrant was terminated by dismissal. The
Registrant was named as an additional party defendant in the In Re Blech
Securities litigation pending in the United States District Court for the
Southern District of New York before Judge Robert Sweet in March 1995. The
plaintiffs were eight named individuals who were alleged to be representatives
of a class of securities purchasers. The defendants included David Blech, who
was a principal stockholder of the Registrant until September 1994, Mark
Germain, who was a director of the Registrant until September 1994, D. Blech &
Co., a registered broker-dealer owned by Mr. Blech, trustees of certain trusts
established by Mr. Blech, Bear Stearns & Co., Baird Patrick & Co., Parag Saxena
and Chancellor Capital Corp., as well as the Registrant and 10 other
corporations of which Mr. Blech was a principal stockholder (the "Corporate
Defendants"). The complaint alleged that David Blech and D. Blech & Co.
conducted a scheme intended to artificially inflate the prices of securities
issued by corporations Mr. Blech controlled; that Mr. Blech, D. Blech & Co. and
corporations controlled by Mr. Blech gave or sold cheap stock to fund managers
in order to induce them to participate in this scheme; and that David Blech, his
trusts, D. Blech & Co., Baird Patrick, Bear Stearns, the Corporate Defendants
and unnamed other persons engaged in sham transactions, including "round trip"
sales, for the purpose of artificially inflating trading volumes and securities
of corporations controlled by Mr. Blech and maintaining their trading prices.
The complaint alleged that David Blech was the controlling person and Mark
Germain was a director of the Corporate Defendants, and that the knowledge and
participation of Messrs. Blech and Germain in the alleged scheme were the
responsibility of the Corporate Defendants. The complaint also alleged that the
Corporate Defendants actively engaged in the alleged scheme and benefited from
it. The complaint further alleged that all of the defendants engaged in a
conspiracy to manipulate the market, and failed to disclose truthful information
about the true value of securities issued by corporations controlled by Mr.
Blech. The complaint alleged violations of Securities and Exchange Commission
Rule 10b-5 and common law fraud by all defendants, violations of the Racketeer
Influenced Corrupt Organizations Act (RICO) by defendants other than the
Corporate Defendants and liability under Securities Exchange Act 20(a), as the
liability of controlling persons, by Messrs. Blech and Germain and D. Blech &
Co., Baird Patrick and Bear Stearns. The amount of damages requested was not
specified in the complaint. In June 1996, Judge Sweet dismissed the allegations
against the Registrant and the other Corporate Defendants because the plaintiffs
had failed to identify the alleged fraudulent acts of the Registrant and the
other Corporate Defendants with the specificity required by federal law. The
dismissal terminated the action against the Registrant without any findings of
liability against Registrant in July 1996. The Judge's order can still be
appealed, and the time for appeal will not begin to run until a final judgment
has been entered in the entire multi-party proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company trades on the OTC Bulletin Board (since being
delisted from the Nasdaq Stock Market on July 27, 1999) under the trading symbol
"NEOP". The prices set forth below reflect the high and low sale prices for
shares of common stock during the last two fiscal years as reported by the
Nasdaq Stock Market through July 27, 1999 and Reuters Limited thereafter.
HIGH LOW
---- ---
Fiscal Year 1999
First Quarter $ 1.44 $ 0.78
Second Quarter 1.06 0.56
Third Quarter 1.25 0.31
Fourth Quarter 0.91 0.38
Fiscal Year 1998
First Quarter $ 6.75 $ 4.00
Second Quarter 6.56 2.38
Third Quarter 3.06 0.75
Fourth Quarter 2.50 0.44
As of March 24, 2000, the Registrant had approximately 691 holders of common
stock of record.
The Company has not paid any dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future. The Company intends
to retain any earnings to finance the growth of its business. There can be no
assurance that the Company will ever pay cash dividends, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Recent Sales of Unregistered Securities
The following sets forth certain information regarding the sale of equity
securities of the Company during the period covered by this Report that were not
registered under the Securities Act of 1933.
In February 1999 and July 1998, the Board of Directors of the Company authorized
the issuance of 13,734 and 2,893 shares of common stock, respectively, to the
trustees of its 401(k) employee benefit plan without registration. Such issuance
is exempt from registration under the Act under Section 3(a)(2). The Plan is a
pension, profit sharing or stock bonus plan that is qualified under Section 401
of the Internal Revenue Code. The assets of the Plan are held in a single trust
fund for the benefit of the employees of the Company which does not hold assets
for the benefit of the employees of any other employer. All of the contributions
to the plan from employees of Neoprobe have been invested in assets other than
common stock. All of the common stock held by the plan has been contributed to
the plan by the Company as a matching contribution and has been less in value at
the time it was contributed to the plan than the employee contributions which it
matches.
20
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial data are derived from consolidated financial
statements of the Company which have been audited by the Company's independent
public accountants. These data are qualified in their entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements and
Notes thereto included herein.
(Amounts in thousands, except per share data) Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ---------- ------------
Statement of Operations Data:
Net sales $ 9,246 $ 5,833 $ 5,128 $ 1,171 $ 960
Gross profit 4,938 4,429 3,552 494 454
Research and development expenses 1,313 14,364 19,657 16,083 7,829
Marketing and selling expenses 4,471 5,268 4,307 1,532
General and administrative expenses 3,735 6,089 6,853 6,222 4,148
Loss related to subsidiaries in 475 7,176 - - -
liquidation ---------- ----------- ----------- ---------- ------------
Loss from operations (5,057) (28,468) (27,265) (23,342) (11,523)
Other income 883 436 4,018 2,373 764
---------- ----------- ----------- ---------- ------------
Net loss $(4,174) $ (28,033) $(23,247) $(20,969) $ (10,759)
========== =========== =========== ========== ============
Loss attributable to common stockholders $ (7,895) $ (28,033) $(23,247) $(20,969) $ (10,759)
========== =========== =========== ========== ============
Net loss per common share from continuing
operations (basic and diluted)(1) $ (0.34) $ (1.23) $ (1.02) $ (1.06) $ (0.73)
========== =========== =========== ========== ============
Shares used in computing net loss per
common share (1) 23,003 22,842 22,735 19,743 14,726
========== =========== =========== ========== ============
As of December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ---------- ------------
Balance Sheet Data:
Total assets $ 10,323 $ 11,994 $ 41,573 $ 63,873 $ 24,145
Long-term obligations 4,314 156 2,069 1,009 1,182
Accumulated deficit (119,569) (115,395) (87,363) (64,116) (43,147)
(1) Net loss per common share is based on the weighted average number of common
shares outstanding during the year. The loss per share for all periods presented
excludes the number of common shares issuable upon the conversion of preferred
stock and the number of shares issuable upon exercise of outstanding stock
options and warrants since such inclusion would be anti-dilutive.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Management Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this Report that are not
purely historical or which might be considered an opinion or projection
concerning the Company or its business, whether express or implied, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may include statements regarding
the Company's expectations, intentions, plans or strategies regarding the future
which involve risks and uncertainties. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results in 2000
and future periods may differ significantly from the prospects discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, limited revenues, continuing net
losses, accumulated deficit, future capital needs, uncertainty of capital
funding, dependence on exclusive distributor, competition, limited marketing
experience, limited manufacturing experience, dependence on principal product
line, uncertainty of market acceptance, patents, proprietary technology and
trade secrets, government regulation, risk of technological obsolescence,
limited third party reimbursement, product liability, need to manage a changing
business, possible volatility of stock, anti-takeover provisions, dependence on
key personnel, and no dividends.
BUSINESS ENVIRONMENT
The global diagnostic and medical devices industries are going through a period
of transition. Unlike the pharmaceutical and biotechnology fields, the
diagnostic and medical device sectors have been hampered by maturity in product
demand, which has led to single digit growth rates over the past several years.
In addition to decreased volume demand, health care cost containment pressures
have limited top-line as well as bottom-line growth. As a result, the industry
has experienced a number of consolidated mergers, reorganizations, and
management changes. The business environment is more positive for the device
companies who have slightly higher growth and technological innovation.
Conditions will likely continue to be difficult for the diagnostic and medical
device industry in 2000 although some experts believe medical device companies
are likely to fair better with regard to growth and profitability than their
diagnostic counterparts.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Through December 31, 1999, the Company's activities have
resulted in an accumulated deficit of $120 million. Substantially all of the
Company's efforts and resources through early 1999 were devoted to research and
clinical development of innovative systems for the intraoperative diagnosis and
treatment of cancers. Prior to 1999, these efforts were principally related to
the Company's proprietary RIGS system. Efforts since early 1997 have also
included activities related to development of the Company's ACT process and ILM
products. To date, the Company's activities have been financed primarily through
the public and private sale of equity securities.
Beginning in the first half of 1998, due primarily to feedback received from
regulatory authorities in the U.S. and Europe related to the Company's
applications for marketing approval for its RIGScan CR49 product, the Company
began a series of changes to its business plan. Since that time, the Company has
continued to modify its business plan to one that is primarily focused on the
continued development of the Company's ILM business. During 1999, the Company
has continued the operating expense reduction efforts started in 1998 and has
almost entirely eliminated non-ILM-related research and development activities.
To further support the Company's goal of achieving operating profitability, the
Company entered into a multi-year Distribution Agreement with EES, a subsidiary
of Johnson & Johnson, effective October 1, 1999. As a result of entering the
agreement, the Company achieved its first quarter of operating profitability
during the fourth quarter of 1999. The Company expects to continue to achieve
operating profitability on an annual basis for 2000; however, the Company
anticipates there may be quarterly variations due to the timing of purchases by
EES. There can be no assurances that the Company will achieve the volume of
sales anticipated in connection with the agreement, or if achieved, that the
margin on such sales will be adequate to achieve operating profitability in the
near term, or at all.
Accounts receivable declined significantly at December 31, 1999 from the prior
year due primarily to the timing of fourth quarter sales in both years and the
transition from selling to multiple customers during the fourth quarter of 1998
versus selling only to EES during the fourth quarter of 1999. The majority of
fourth quarter 1998 sales were
22
made in December 1998 following the release of the neo2000 system as opposed to
more evenly over the quarter in 1999. Inventory levels also declined at December
31, 1999 from the prior year. This is primarily due to the Company producing
inventory to meet EES' specific forecasted needs during the fourth quarter of
1999 as opposed to the Company stocking inventory for anticipated customer
demand at the end of 1998. Inventory at December 31, 1999 includes approximately
$625,000 in demonstration equipment repurchased from KOL and refurbished but not
yet shipped to EES as of December 31, 1999. The Company expects receivable
levels to fluctuate in 2000 depending on the timing of purchases by EES;
however, inventory is expected to decrease over time as the strategic
relationship progresses and the Company manages its production and sales to meet
EES's forecasted needs.
Investing Activities. The Company's investing activities during 1999 involved
primarily the sale of certain available-for-sale securities to fund operations.
The Company engaged in similar activities in 1998. However, in 1998, the Company
also made significant capital expenditures on construction at Neoprobe Israel.
Neoprobe Israel was founded in 1994 to construct and operate a radiolabeling
facility near Dimona, Israel. Based on the status of the Company's marketing
applications in the U.S. and Europe, and the Company's inability to find a
development partner for its RIGS products, the Company decided during 1998 to
suspend construction and validation activities at Neoprobe Israel. Following
suspension of RIGS development activities at Neoprobe Israel and unsuccessful
attempts to market the facility, the Company initiated actions during the fourth
quarter of 1998 to liquidate Neoprobe Israel. The Company, therefore, adopted
the liquidation basis of accounting for Neoprobe Israel as of December 31, 1998.
The Company wrote down the value of the fixed assets of the facility and the
related debt to the net amount of zero as the assets were considered to
represent settlement of the debt. Approximately $4.9 million of the construction
of Neoprobe Israel's facility was financed in 1998 and prior years by an Israeli
bank (the "Bank"). During October 1999, a representative of the Bank was
appointed as Receiver for Neoprobe Israel. As a result of the receivership,
management believes that the Company no longer controls Neoprobe Israel. As a
result, Neoprobe Israel was deconsolidated as of December 31, 1999. The
Company's consolidated balance sheet at December 31, 1999, therefore, does not
reflect the financial position of Neoprobe Israel. A more detailed description
of the effects on cash flow related to Neoprobe Europe and Neoprobe Israel can
be found in footnotes 9 and 10 to the 1999 financial statements.
The Company expects the Receiver to attempt to sell the facility and/or its
equipment and to use any proceeds to repay the creditors of Neoprobe Israel to
the extent possible. Management of the Company continues to believe that
Neoprobe Corporation's only ongoing contractual obligation related to Neoprobe
Israel relates to the limited amount guarantee which is fully secured through
$993,000 on deposit with the bank. It is also possible that the Company may be
subject to additional claims related to Neoprobe Israel. Management does not
believe such claims, if any, would have a material adverse affect on the
Company's financial position or results of operations.
Financing Activities. On February 16, 1999, the Company executed a Purchase
Agreement (the "Purchase Agreement") to complete the private placement of 30,000
shares of 5% Series B convertible preferred stock (the "Series B") for gross
proceeds of $3 million ($2.8 million, net). The Series B were issued with a $100
per share stated value and were convertible into common stock of the Company. In
connection with the private placement, the Company also issued 2.9 million Class
L warrants to purchase common stock of the Company at an initial exercise price
of $1.03 per share. The Series B paid a 5% annual dividend payable in cash or
common stock. The Series B were convertible at variable prices based on the
market price of the Company's common stock, subject to a conversion price floor
of $0.55. The Class L warrants were also subject to variable exercise prices,
subject to an exercise price floor of $0.62. Holders of the Series B had certain
liquidation preferences over other shareholders under certain provisions as
defined in the Purchase Agreement and had the right to cast the same number of
votes as if the owner had converted on the record date. Pursuant to the private
placement, the Company entered into a financial advisory agreement with the
placement agent providing the agent with Unit Purchase Options ("UPOs")
entitling the placement agent to purchase approximately 150,000 shares of common
stock in the Company. Under certain conditions, the Company would have been
obligated to redeem outstanding shares of Series B for $120 per share (i.e., a
total of $3.6 million ) such as the delisting of the Company's common stock from
the Nasdaq Stock Market as occurred on July 27, 1999 and other conditions
outlined in the Purchase Agreement. In January, 2000, the Company negotiated a
settlement with the Series B holders whereby the Series B shares and the related
warrants
23
were retired in exchange for $2.5 million in cash, 3 million shares of common
stock and 3 million warrants to purchase common stock at an exercise price of
$0.74 per share.
The Series B were recorded by the Company during the first quarter of 1999 at
the amount of gross proceeds less the costs of the financing and the fair value
of the warrants and classified as mezzanine financing above the stockholders'
equity section on the Company's interim balance sheets for 1999. The calculated
conversion price at February 16, 1999, the first available conversion date, was
$1.03 per share. In accordance with the FASB's Emerging Issues Task Force Topic
D-60, the difference between the initial conversion price and the closing market
price on February 16, 1999 of $1.81 resulted in an implied incremental yield to
Series B holders of approximately $1.8 million that is reflected as conversion
discount in the Company's loss per share calculation for 1999. During the third
quarter of 1999, management assessed the likelihood of redemption of the Series
B as probable. As a result, the recorded book value of the Series B was accreted
by approximately $1.8 million to bring the book value of the Series B up to the
full redemption value of $3.6 million. This accretion is also reflected in the
Company's loss per share calculation for 1999.
On November 12, 1999, the Company entered into a binding letter of intent to
retire the Series B, the Class L warrants and the UPOs and to cancel the
financial advisory agreement with the placement agent (See Note 18(a).). The
letter of intent committed the Series B holders to surrender the Series B shares
and Class L warrants and for the placement agent to surrender the UPOs and
cancel the financial advisory agreement as well as to grant the Company general
releases from potential litigation associated with the transaction. In exchange
for the retirement of the Series B preferred shares and surrendering the Class L
warrants and UPOs, the Company paid the Series B holders a total of $2.5 million
and issued the Series B holders 3 million shares of common stock and 3 million
warrants to purchase common stock with an exercise price of $0.74 per share.
However, at December 31, 1999, final definitive agreements had not yet been
signed. Therefore, at December 31, 1999, the Company reclassified its
obligations to the Series B holders to reflect the $2.5 million payable in cash
as a current liability and the remaining book value of the Series B, including
dividends payable, as a long-term liability that will then be reclassified
during the first quarter of 2000 to additional paid-in capital concurrent with
the execution of the definitive agreement. The transaction will be reported in
the Company's financial statements for the first quarter of 2000. The Company
expects to report a loss on the retirement of the preferred shares of $1.2
million (approximately $0.05 per share) below net income during the first
quarter of 2000 . This amount is intended to represent the value of the cash
given up plus the market value of the stock and warrants issued as valued on
January 20, 2000 less the previously recorded book value of the Series B
preferred stock and warrants.
Operational Outlook. The Company's only approved products are instruments and
related products used in gamma guided surgery. The Company does not currently
have a RIGS drug or ACT product approved for commercial sale in any major
market. The Company entered into a Distribution Agreement (the "Agreement") with
EES effective October 1, 1999, for an initial five-year term with options to
extend for two successive two-year terms. Under the Agreement, the Company will
manufacture and sell its ILM products (the "Products") exclusively to EES who
will distribute the Products globally. EES agreed to purchase minimum quantities
of the Company's Products over the first three years of the term of the
Agreement and to reimburse the Company for certain research and development
costs and a portion of the Company's warranty costs. EES also agreed to purchase
the demonstration units repurchased from KOL at cost. The Company is obligated
to continue certain product maintenance activities and to provide ongoing
regulatory support for the Products. As a result of entering the Agreement, the
Company expects to achieve operating profitability on an annual basis in the
near term. However, there can be no assurances that the Company will achieve the
volume of sales anticipated in connection with the Agreement, or if achieved,
that the margin on such sales will be adequate to achieve operating
profitability on either an interim or annual basis in the near term, or at all.
Under the Agreement, EES received a non-exclusive, worldwide paid-up license
(the "License") to the Company's ILM intellectual property to make and sell
other products that may be developed using the Company's ILM intellectual
property. The term of the License is the same as that of the Agreement. EES paid
the Company a non-refundable license fee of $4 million. The Company intends to
recognize the license fee as revenue ratably over the five-year initial term of
the Agreement. If the Agreement is terminated by the Company as a result of a
material breach by EES, EES would be required to pay the Company a royalty on
all products developed and sold by EES
24
using the Company's ILM intellectual property. In addition, the Company is
entitled to a royalty on any ILM product commercialized by EES that does not
infringe any of the Company's existing intellectual property.
As of December 31, 1999, the Company had cash and cash equivalents of $4.9
million. The Company expects to generate positive cash flow from operations in
the near term as a result of the Agreement with EES. However, there can be no
assurances that the Company will achieve the volume of sales anticipated in
connection with the Agreement, or if achieved that the margin on such sales will
be adequate to produce positive operating cash flow. The Company expects to
continue to experience cost savings during 2000 as a result of the transfer of
marketing responsibilities for the Company's ILM products to EES. In January
2000, the Company sold its investment in XTL Biopharmaceuticals Ltd. for $1.5
million. The Company believes its year end 1999 cash balances and sources of
future cash flow are adequate for the Company to continue operating for the
foreseeable future. However, if the Company does not receive adequate funds from
operations, it may need to further modify its business plan and seek other
financing alternatives. Such alternatives may include asset dispositions that
could force the Company to further change its business plan.
In recent months, the Company has been approached by entities interested in
acquiring some or all of the assets of the Company. The Company is currently
engaged in discussions with certain entities; however, such discussions to this
point have been only preliminary in nature and none has resulted in a proposed
transaction for further consideration. The Company anticipates that it may, from
time to time, continue to be approached by such entities. At such time as a
definitive transaction is proposed, if any, it will be considered by management
and the Board of Directors, and if necessary, referred to the shareholders of
the Company for their consideration. However, there can be no assurances that
such a transaction will be proposed, or if proposed, that the terms would be
acceptable to the Company or its shareholders.
At December 31, 1999, the Company had U.S. net operating tax loss carryforwards
and tax credit carryforwards of approximately $93.3 million and $4.9 million,
respectively, available to offset or reduce future income tax liability, if any,
through 2019. However, under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended, use of prior tax loss and credit carryforwards may be
limited after an ownership change. As a result of ownership changes as defined
by Sections 382 and 383, which have occurred at various points in the Company's
history, management believes utilization of the Company's tax loss carryforwards
and tax credit carryforwards may be limited. The Company's international
subsidiaries also have net operating tax loss carryforwards in their respective
foreign jurisdictions. However, as the Company is in the process of liquidating
its interests in both foreign subsidiaries as of December 31, 1999, the Company
does not anticipate that the foreign loss carryforwards will ever be utilized.
Impact of Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 was originally required to be adopted in years beginning after June
15, 1999; however, SFAS No. 137 deferred the effective date to fiscal quarters
beginning after June 15, 2000. The Company expects to adopt SFAS No. 133
effective July 1, 2000. The Statement will require companies to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedge
asset, liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
Y2K. The Company addressed the Y2K issue through an assessment and readiness
plan initiated during 1998 and completed during the third quarter of 1999. The
total cost to the Company of completing the required modifications, upgrades, or
replacements of its internal systems and related software was approximately
$20,000, the majority of which was incurred during 1999. To date, the Company is
not aware of any significant Y2K-related problems that may have occurred with
its supply, manufacturing, or financial chains, or with the Company's own
business systems.
25
RESULTS OF OPERATIONS
During 1998, the Company began revising its business plan to focus on its ILM
technology and essentially suspended activities related to its RIGS and ACT
initiatives pending identification of a developing partner. The Company is
involved in preliminary due diligence with parties interested in commercializing
a second-generation antibody for use in colorectal cancer surgery. At this time,
the Company has not reached definitive agreement with any party that would
ensure the continued development of the RIGS process. In addition, should a
party or parties ultimately decide to move forward with development of a RIGS
product and be able to reach an agreement satisfactory to the Company, the
Company believes that the likely timeframe required for continued the
development, regulatory and commercialization of a RIGS product would likely
take a minimum of four to five years before the Company received any significant
product-related royalties. However, there can be no assurance that the Company
will be able to complete definitive license agreements with a development
partner for the RIGS technology and does not know if a partner will be obtained
on a timely basis, on terms acceptable to the Company, or at all. To date, a
partner for ACT has not been identified or secured. Until definitive agreements
with development partners are reached and the appropriate regulatory approvals
are received, the Company is limited in its ability to generate revenue from
RIGS or ACT. The Company therefore intends to continue to focus on further
development of the ILM market in conjunction with its new distribution partner,
EES.
Research and development expenses during 1999 were $1.3 million, or 13% of
operating expenses for the year. Marketing and selling expenses were $4.5
million, or 45% of operating expenses for the year, and general and
administrative expenses were $3.7 million, or 37% of operating expenses for the
year. Overall, operating expenses for 1999 decreased $22.9 million or 70% from
1998. The Company anticipates that total operating expenses for 2000 will also
decrease from 1999 levels. The Company expects research and development expenses
will increase moderately during 2000 as the Company performs instrument-related
research in connection with EES and investigates and evaluates potential
procedural product expansions related to ILM. The Company expects general and
administrative expenses to decrease from 1999 levels as a result of headcount
reductions and other modifications to the business plan adopted during 1999.
Marketing and selling expenses, as a percentage of sales, decreased to 48% of
sales in 1999 from 90% of sales in 1998. The Company expects marketing and
selling expenses for 2000 to decrease from 1999 levels as a result of severing
the majority of the Company's internal marketing team in connection with
entering into the distribution agreement with EES.
Years ended December 31, 1999 and 1998.
Revenues and Margins. Net sales increased $3.4 million or 59% to $9.2 million in
1999 from $5.8 million in 1998. Sales during both years were comprised almost
entirely of sales of the Company's hand-held gamma detection instruments. The
increase in instrument sales is the result of entering the distribution
agreement with EES effective October 1, 1999, sales of the neo2000 system for a
full year in 1999 versus one quarter in 1998, and the continuing growth of the
lymphatic mapping technique in the surgical oncology marketplace. Gross margins
decreased to 53% of net sales in 1999 from 76% of net sales in 1998 due to a
higher proportion of sales made in 1999 under various distributor arrangements
that were not in place in 1998. The Company expects gross margins in 2000 to
approximate gross margins experienced during 1999. In addition, approximately
25% of the Company's $4.2 million in fourth quarter revenues were related to the
sale of products to EES to be used for demonstration purposes. Fourth quarter
1999 product sales to EES likely also included some amount of inventory to
create a safety stock of inventory at EES distribution centers. As a result, the
Company does not expect quarterly sales during 2000 to reach fourth quarter 1999
levels. However, the Company does expect the overall gross margin on sales for
2000 to increase from the 37% gross margin experienced during the fourth quarter
of 1999. Revenues in 1999 also include recognition of $200,000 of license fees
by the Company during the fourth quarter.
Research and Development Expenses. Research and development expenses decreased
$13.1 million or 91% to $1.3 million in 1999 from $14.4 million in 1998.
Approximately $9.9 million of the decrease is due to the suspension during 1998
of substantially all research and development activities related to the
Company's RIGS and ACT initiatives. The remainder of the decrease is due to
expenses incurred during the first nine months of 1998 related to the
development of the neo2000 system and related instruments that were commercially
launched during the fourth
26
quarter of 1998. Expenses in 1999 also included a non-cash write-off of
approximately $218,000 in capitalized pre-production costs written off as a
result of recent accounting guidance issued by the Emerging Issues Task Force.
Marketing and Selling Expenses. Marketing and selling expenses, excluding a
one-time $700,000 charge related to termination of the Company's agreement with
KOL, decreased $1.5 million or 28% to $3.8 million in 1999 compared to $5.3
million in 1998. Excluding the KOL charge, marketing expenses, as a percentage
of sales, decreased to 41% of sales in 1999 from 90% of sales in 1998. These
results reflect lower internal marketing expense levels in 1999 as compared to
1998, offset by increases in marketing partner commissions over the same
periods. Marketing expenses in 1999 also included $296,000 in separation charges
related to personnel who were severed in connection with the signing of the EES
Agreement.
General and Administrative Expenses. General and administrative expenses
decreased $2.4 million or 39% to $3.7 million in 1999 from $6.1 million in 1998.
The decrease was primarily a result of reductions in headcount during 1998 and
declines in asset impairment charges and other headcount-related overhead costs
such as space costs, taxes and insurance. These cost decreases were offset by
$106,000 in severance charges in 1999 related to personnel who were severed in
connection with the signing of the EES Agreement in October, 1999.
Losses Related to Subsidiaries in Liquidation. The losses decreased $6.7 million
or 93% to $475,000 in 1999 from $7.2 million in 1998. During 1999, the losses
relate to interest and other over head costs incurred during the wind-down
process. Costs in 1998 include $1.7 million of asset impairment and $235,000 of
severance and other exit costs related to the decision in the third quarter of
1998 to shutdown and liquidate Neoprobe Europe, and $5.1 million of asset
impairment and $79,000 of severance and other exit costs related to the decision
in the fourth quarter of 1998 to shutdown and liquidate Neoprobe Israel.
Other Income. Other income increased $447,000 or 103% to $883,000 in 1999 from
$436,000 in 1998. Other income during 1999 included a $699,000 non-cash gain on
deconsolidation of subsidiaries, $226,000 in one-time gains from the settlement
of certain previously recorded liabilities at less than their original face
value, and interest income on the Company's investments, offset by $60,000 in
losses on the disposal of certain assets. Other income in 1998 consisted
primarily of interest income. The Company's interest income declined due to the
decline in overall average levels of investments during 1999 as compared to
1998.
Years ended December 31, 1998 and 1997
Revenue and Margins. Net sales increased $705,000 or 14% to $5.8 million in 1998
from $5.1 million in 1997. Net sales in both years were composed almost entirely
of instrument sales. Instrument sales in 1997 reflect contributions from the
Company's marketing arrangement with USSC which was terminated in October 1997.
Instrument sales during 1998 were based on leads generated primarily by the
Company's clinical specialist sales force with assistance from representatives
of EES under the terms of the Company's previous marketing relationship with
EES. Gross margins increased to 76% of net sales in 1998 from 69% of net sales
in 1997 due primarily to improved manufacturing efficiencies resulting in a
lower overall cost of production for the neo2000 control unit and the 14mm probe
as compared to the Neoprobe 1500 and the 19mm probe.
Research and Development Expenses. Research and development expenses decreased
$5.3 million or 27% to $14.4 million in 1998 from $19.7 million in 1997. The
decrease reflects the Company's efforts to reduce costs consistent with the
refocused business plan announced in February 1998, which was further modified
in the third and fourth quarters of 1998. Research and development costs in 1998
include approximately $1 million related to severance and other
separation-related costs and an impairment charge of $1 million related to
technology licensed from the Dow Chemical Company. Such costs were offset by
decreases in project expenses related to RIGScan CR49 pending identification of
a development partner and decreases in instrument-related project expenses due
to the wind-down of the design phase of neo2000 control unit and related
products. Pipeline projects also decreased related to the refocused business
plan.
27
Marketing and Selling Expenses. Marketing and selling expenses increased by
$960,000 or 22% to $5.3 million in 1998 from $4.3 million in 1997. The increase
in marketing expenses during 1998, as compared to the same period in 1997,
relates to an increased marketing effort to meet competitive pressure and
further penetrate the ILM market. The increased expenses were the result of a
greater number of sales and marketing personnel in 1998, coupled with relative
increases in travel and entertainment as well as promotional costs associated
with the launch of new products.
General and Administrative Expenses. General and administrative expenses
decreased $764,000 or 11% to $6.1 million in 1998 from $6.9 million in 1997.
Severance and other overhead and employee separation costs of $160,000 related
to 1998 restructuring activities were offset by an overall lower headcount
during 1998 as compared to 1997. In addition, the Company recorded charges
totaling $222,000 in 1998 related to impairing or writing off assets no longer
expected to be used as a result of the Company's restructuring efforts.
Losses Related to Subsidiaries in Liquidation. Losses related to subsidiaries in
liquidation increased to $7.2 million in 1998 from $0 in 1997. This increase is
due to changes in the Company's business plan which occurred throughout 1998
that ultimately resulted in the shutdown of both of the Company's international
subsidiaries, Neoprobe Europe and Neoprobe Israel. Related to the decision to
shutdown operations at these subsidiaries, the Company adopted the liquidation
basis of accounting for both subsidiaries as of December 31,1998. Included in
losses related to subsidiaries in liquidation for 1998 is $1.7 million related
to the non-cash impairment of assets and $235,000 related to severance and other
exit costs incurred due to the decision in the third quarter to shutdown and
liquidate Neoprobe Europe. Also included in losses related to subsidiaries in
liquidation for 1998 is $5.1 million related to the primarily non-cash
adjustment of assets and liabilities to their net realizable value and $79,000
related to severance and other exit costs incurred due to the decision to
shutdown and liquidate Neoprobe Israel.
Other Income. Other income during 1998 and 1997 was $436,000 and $4.0 million,
respectively. Other income in 1998 was comprised primarily of interest income of
$599,000 compared to interest income in 1997 of $2.2 million, both of which were
offset by interest expenses on the Company's outstanding debt. The change in
interest income is the result of lower overall funds available for investment in
1998. Other income in 1997 also included miscellaneous income of $2 million
representing recognition of income from a license fee received from USSC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use derivative financial instruments, such as
interest rate swaps, to manage its exposure to changes in interest rates for its
debt instruments or investment securities. As of December 31, 1999 and 1998, the
Company had outstanding debt instruments of $790,000 and $1.5 million,
respectively. Outstanding debt consisted primarily of a variable rate line of
credit as of December 31, 1999 and 1998, with average interest rates of 8% and
7%, respectively. At December 31, 1999 and 1998, the fair market values of the
Company's debt instruments approximated their carrying values. A hypothetical
100-basis point change in interest rates would not have a material effect on
cash flows, income or market values.
Prior to 1999, the Company maintained investment portfolios of
available-for-sale corporate and U.S. government debt securities purchased with
proceeds from the Company's public and private placements of equity securities.
The market value of these investments at December 31, 1998 was approximately
$449,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, and the related notes, together with
the reports of KPMG LLP and PricewaterhouseCoopers LLP dated February 14, 2000
and February 20, 1998, respectively, are set forth at pages F-1 through F-27
attached hereto.
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2000 ANNUAL MEETING:
MELVIN D. BOOTH, age 55, has served as a director of the Registrant since May
1997. He has been President, Chief Operating Officer and a director of
MedImmune, Inc. since October 1998. Mr. Booth was President, Chief Operating
Officer and a director of Human Genome Sciences, Inc. from July 1995 to October
1998. Mr. Booth was with Syntex Corporation and its subsidiaries from 1975 to
1995. Mr. Booth was the President of Syntex Laboratories, Inc. from 1993 to 1995
and served as a Vice President of Syntex Corporation from 1992 to 1995. From
1992 to 1993, he served as the President of Syntex Pharmaceuticals Pacific. From
1991 to 1992, he served as an area Vice President of Syntex, Inc. From 1986 to
1991, he served as the President of Syntex, Inc., Canada. Mr. Booth also serves
as a director of SpaceLab, Inc. He has been active in U.S. pharmaceutical
industry organizations and is also a past Chairman of the Pharmaceutical
Manufacturers Association of Canada. Mr. Booth has a B.S. degree from Northwest
Missouri State University and holds a Certified Public Accountant certificate.
JOHN S. CHRISTIE, age 50, has served as a director of the Registrant since May
1997. Mr. Christie has served as President and Chief Operating Officer of
Worthington Industries, Inc. since June 1999. Mr. Christie served as President
of JMAC, Inc., an investment holding company, from September 1995 to June 1999.
From August 1988 until September 1995, he was a Senior Vice President of
Battelle Memorial Institute. Mr. Christie also serves as a director of
Karrington Health, Inc. Mr. Christie has a B.S. degree in Business
Administration from Miami University and an MBA from Emory University.
J. FRANK WHITLEY, JR., age 57, has served as a director of the Registrant since
May 1994. Mr. Whitley was Director of Mergers, Acquisitions and Licensing at The
Dow Chemical Company ("Dow"), a multinational chemical company, from June 1993
until his retirement in June 1997. After joining Dow in 1965, Mr. Whitley served
in a variety of marketing, financial, and business management functions. Mr.
Whitley has a B.S. degree in Mathematics from Lamar State University.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2001 ANNUAL MEETING:
DAVID C. BUPP, age 50, has served as President and a director of the Registrant
since August 1992 and as Chief Executive Officer since February 1998. From
August 1992 to May 1993, Mr. Bupp served as Treasurer of the Registrant. In
addition to the foregoing positions, from December 1991 to August 1992, he was
Acting President, Executive Vice President, Chief Operating Officer and
Treasurer, and from December 1989 to December 1991, he was Vice President,
Finance and Chief Financial Officer. From 1982 to December 1989, Mr. Bupp was
Senior Vice President, Regional Manager for AmeriTrust Company National
Association, a nationally chartered bank holding company, where he was in charge
of commercial banking operations throughout Central Ohio. Mr. Bupp has a B.A.
degree in Economics from Ohio Wesleyan University. Mr. Bupp completed a course
of study at Stonier Graduate School of Banking.
JULIUS R. KREVANS, M.D., age 75, has served as a director of the Registrant
since May 1994 and as Chairman of the Registrant since February 1999. Dr.
Krevans served as Chancellor of the University of California, San Francisco from
July 1982 until May 1993, and now serves on the faculty of that institution's
School of Medicine. Prior to his appointment as Chancellor, Dr. Krevans served
as a Professor of Medicine and Dean of the School of Medicine at the University
of California, San Francisco from 1971 to 1982. Dr. Krevans is a member of the
Institute of Medicine, National Academy of Sciences, and led its committee for
the National Research Agenda on Aging until 1991. He is Chairman of the Bay Area
Economic Forum, a member of the Medical Panel of A.P. Giannini
30
Foundation, and a member of the Board of Directors of the Bay Area BioScience
Center. Dr. Krevans has a B.S. degree and a M.D. degree, both from New York
University.
JAMES F. ZID, age 66, has served as a director of the Registrant since November
1993. Mr. Zid also serves as a director of the Net Med Corporation. Now retired,
Mr. Zid was a partner from September 1981 until September 1993 (and served as
managing partner of the Columbus, Ohio office from September 1981 to September
1992) of Ernst & Young and its predecessors. Mr. Zid has a B.S. degree in
Accounting from St. Joseph's College.
THE FOLLOWING DIRECTOR'S TERM SHALL CONTINUE UNTIL THE 2002 ANNUAL MEETING:
MICHAEL P. MOORE, M.D., PH.D., age 49, has served as a director of the
Registrant since May 1994. Dr. Moore has been Attending Physician, Breast
Surgery, Columbia Presbyterian Medical Center since June 1986. Dr. Moore has a
B.S. degree from Boston College, a Ph.D. degree from Loyola University of
Chicago, and a M.D. degree from The Loyola Stritch School of Medicine.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions are as
follows:
NAME AGE POSITION
---- --- ---------
Carl M. Bosch 44 Vice President, Instrument Development
David C. Bupp 50 President, Chief Executive Officer and Director
Brent L. Larson 36 Vice President, Finance and Chief Financial Officer
Carl M. Bosch has served as Vice President, Instrument Development since March
2000. Mr. Bosch served as Director, Instrument Development from May 1998 to
March 2000. Prior to joining Neoprobe, Mr. Bosch was employed by GE Medical
Systems from 1994 to 1998 where he served as Manager, Nuclear Programs. From
1977 to 1994, Mr. Bosch was employed by GE Aerospace in several engineering and
management functions. Mr. Bosch has a B.S. degree in Electrical Engineering from
the University of Pennsylvania and a M.S. degree in Systems Engineering from
Lehigh University.
David C. Bupp has served as President and a director of the Company since August
1992 and as Chief Executive Officer since February 1998. From August 1992 until
February 1998, Mr. Bupp serve as Chief Operating Officer of the Company. From
August 1992 to May 1993, Mr. Bupp served as Treasurer of the Company. In
addition to the foregoing positions, from December 1991 to August 1992, he was
Acting President, Executive Vice President, Chief Operating Officer and Finance
and Chief Financial Officer. From 1982 to December 1989, Mr. Bupp was Senior
Vice President, Regional Manager for AmeriTrust Company National Association, a
nationally chartered bank holding company, where he was in charge of commercial
banking operations throughout Central Ohio. Mr. Bupp has a B.A. degree in
Economics from Ohio Wesleyan University. Mr. Bupp completed a course of study at
Stonier Graduate School of Banking.
Brent L. Larson has served as Vice President, Finance and Chief Financial
Officer since February 1999, as Vice President, Finance from July 1998 to
January 1999 and as Controller from July 1996 to June 1998. Prior to joining
Neoprobe, Mr. Larson was employed by Price Waterhouse LLP. Mr. Larson has a
B.B.A. degree in accounting from Iowa State University of Science and Technology
and is a Certified Public Accountant.
31
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
The Registrant does not know of any failure to make filings required by Section
16 on a timely basis by any of its directors, executive officers or beneficial
owners of 10% or more of its equity securities.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the annual and
long-term compensation of the chief executive officer of the Company and the
Company's three other executive officers having annual compensation in excess of
$100,000 during the last fiscal year (the "Named Executives") for the Company's
last three fiscal years.
LONG TERM
COMPENSATION
AWARDS
SECURITIES
RESTRICTED UNDERLYING
ANNUAL COMPENSATION STOCK AWARDS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) (#) COMPENSATION
--------------------------- ---- ------ ----- --- ---- ------------
David C. Bupp, 1999 $306,731 $58,000 $21,875 (a) 0 $1,600 (b)
President and Chief 1998 297,222 0 270,000 (a) 30,000 1,600 (b)
Executive Officer 1997 248,115 0 0 25,600 1,600 (b)
Matthew F. Bowman, 1999 $232,389 $10,259 $12,500 (c) 30,000 $1,600 (b)
Senior Vice President, 1998 204,690 0 27,250 (c) 136,900 1,600 (b)
Marketing and Operations 1997 161,163 28,000 0 7,200 1,600 (b)
1999 $109,375 $23,104 $6,250 (d) 25,000 $1,325 (b)
Brent L. Larson, Vice President, Finance 1998 83,385 0 13,760 (d) 32,200 888 (b)
and Chief Financial Officer 1997 70,065 5,368 0 7,500 787 (b)
Patricia A. Coburn, 1999 $118,167 $19,604 0 20,000 $106,600 (g)
Vice President, 1998 127,662 0 $13,760 (f) 33,400 1,421 (b)
General Counsel(e) 1997 117,832 14,394 0 8,400 588 (b)
(a) The aggregate number of Mr. Bupp's restricted stock holdings at
December 31, 1999 was 110,000 shares with an aggregate value of
$48,125. Mr. Bupp has the right to receive dividends other than
dividends on or distributions of shares of any class of stock issued by
Neoprobe which dividends or distributions will be delivered to Neoprobe
under the same restrictions on transfer and possibility of forfeitures
as the shares of Restricted Stock from which they derive.
(b) Amounts of matching contribution under the Company's 401(k) Plan.
Eligible employees may make voluntary contributions and the Company
may, but is not obligated to, make matching contributions based on 20
percent of the employee's contribution, up to five percent of the
employee's salary. Contributions by employees are invested by an
independent plan administrator in mutual funds and contributions, if
any, by the Company are made in the form of shares of Common Stock. The
401(k) Plan is intended to qualify under section 401 of the Code, which
provides that employee and Company contributions and income earned on
contributions are not taxable to the employee until withdrawn from the
plan, and that Company contributions will be deductible by the Company
when made.
(c) The aggregate number of Mr. Bowman's restricted stock holdings at
December 31, 1999 was 60,000 shares with an aggregate value of $26,250
Mr. Bowman has the right to receive dividends other than dividends on
or distributions of shares of any class of stock issued by Neoprobe
which dividends or distributions will be delivered to Neoprobe under
the same restrictions on transfer and possibility of forfeitures as the
shares of Restricted Stock from which they derive.
(d) The aggregate number of Mr. Larson's restricted stock holdings at
December 31, 1999 was 30,000 shares with an aggregate value of $13,125.
Mr. Larson has the right to receive dividends other than dividends on
or distributions of shares of any class of stock issued by Neoprobe
which dividends or distributions will be delivered to Neoprobe under
the same restrictions on transfer and possibility of forfeitures as the
shares of Restricted Stock from which they derive.
32
(e) Ms. Coburn began her employment with the Company in August, 1996, and
ended her employment with the Company in November, 1999.
(f) The aggregate number of Ms. Coburn's restricted stock holdings at
December 31, 1999 was 20,000 shares with an aggregate value of $ 8,750.
Ms. Coburn has the right to receive dividends other than dividends on
or distributions of shares of any class of stock issued by Neoprobe
which dividends or distributions will be delivered to Neoprobe under
the same restrictions on transfer and possibility of forfeitures as the
shares of Restricted Stock from which they derive.
(g) This amount includes payments to Ms. Coburn relating to her separation
from the Company of $105,000 for severance; see "Compensation of
Management-Departure of Named Executives." The remaining $1,600 was a
matching contribution to Ms. Coburn's 401(k) account; see footnote (b)
to this table.
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------
The following table presents certain information concerning stock options
granted to the Named Executives during the last fiscal year (1999).
INDIVIDUAL GRANTS GRANT DATE VALUE
- ---------------------------------------------------------------------------------------------------- ----------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME GRANTED (SHARES) FISCAL YEAR PER SHARE DATE PRESENT VALUE $
- ---- --------------- ----------- --------- ---- ---------------
David C. Bupp 0 0% n/a n/a n/a
Matthew F. Bowman 30,000(a) 5.5 % $1.25 02/11/09 (b) $1.00 (c)
Brent L. Larson 25,000(a) 4.6 % $1.25 02/11/09 (b) $1.00 (c)
Patricia A. Coburn 20,000(d) 3.7 % $1.25 02/11/09 (b) $1.00 (c)
(a) Vests as to one-third of these shares on each of the first three
anniversaries of the date of grant.
(b) The per share weighted average fair value of these stock options during
1999 was $1.00 on the date of grant using the Black Scholes option
pricing model with the following assumptions: an expected life of 4
years, an average risk-free interest rate of 4.83%, volatility of 123%
and no expected dividend rate.
(c) The options terminate on the earlier of the Expiration Date, nine
months after death or disability, 90 days after termination of
employment without cause or by resignation or immediately upon
termination of employment for cause.
(d) Ms. Coburn resigned effective November 30, 1999 and these options were
canceled without vesting.
FISCAL YEAR END OPTION NUMBERS AND VALUES
- -----------------------------------------
The following table sets forth certain information concerning the number and
value of unexercised options held by the Named Executives at the end of the last
fiscal year (December 31, 1999).
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END: AT FISCAL YEAR-END:
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------------------- -------------------------
David C. Bupp 329,567/131,033 0 / 0
Matthew F. Bowman 98,752/115,348 0 / 0
Brent L. Larson 19,901/44,799 0 / 0
Patricia A. Coburn 29,370/0 0 / 0
33
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
- ----------------------------------------------------
The following table sets forth certain information concerning restricted stock
awards to Named Executives during fiscal year 1999.
Number of Shares Performance or Other
Units or Other Period Until Maturation
Name Rights or Payout
----------------------------------------- ------------------------- ------------------------------
David C. Bupp (a) 35,000 04/30/09
Matthew F. Bowman (a) 20,000 04/30/09
Brent L. Larson (a) 10,000 04/30/09
Patricia A. Coburn 0 n/a
(a) These awards are shares of restricted stock which the grantees
purchases for $.001 per share. Grantees may not transfer or sell their
shares unless and until such shares vest. Each grantee forfeits his
unvested shares on the earliest of the termination of his employment
for any reason unless the Company is, at the time of termination for
death or disability, actively engaged in negotiations that could
reasonably be expected to lead to a change in control of the Company or
the tenth anniversary of the date of grant. The restricted shares that
have not been previously forfeited will vest if and when there is a
change in control of the Company. Except for these restrictions on
transfer and possibilities of forfeiture, the grantees have all other
rights with respect to their restricted shares, including the right to
vote such shares and receive cash dividends.
COMPENSATION OF MR. BUPP
- ------------------------
Employment Agreement. David C. Bupp is employed under a one-year employment
agreement effective July 1, 1999. The employment agreement provides for an
annual base salary of $290,000.
The Compensation Committee of the Board of Directors will, on an annual basis,
review the performance of the Company and of Mr. Bupp and will pay a bonus to
Mr. Bupp as it deems appropriate, in its discretion. Such review and bonus will
be consistent with any bonus plan adopted by the Compensation Committee which
covers the executive officers of the Company generally. The Company paid a
$58,000 bonus to Mr. Bupp relating to fiscal year 1999.
If a change in control occurs with respect to the Company and the employment of
Mr. Bupp is concurrently or subsequently terminated (i) without cause (cause is
defined as any willful breach of a material duty by Bupp in the course of his
employment or willful and continued neglect of his duty as an employee), (ii)
the term of Mr. Bupp's employment agreement expires or (iii) Mr. Bupp resigns
because his authority, responsibilities or compensation have materially
diminished, a material change occurs in his working conditions or the Company
breaches the agreement, Mr. Bupp will be paid a severance payment equal to twice
his annual base salary (less amounts paid as Mr. Bupp's salary and benefits that
continue for the remaining term of the agreement if his employment is terminated
without cause). A change in control includes (a) the acquisition, directly or
indirectly, by a person (other than the Company or an employee benefit plan
established by the Board of Directors) of beneficial ownership of 15 percent or
more of the Company's securities with voting power in the next meeting of
holders of voting securities to elect the Directors; (b) a majority of the
Directors elected at any meeting of the holders of the Company's voting
securities are persons who were not nominated by the Company's then current
Board of Directors or an authorized committee thereof; (c) the stockholders of
the Company approve a merger or consolidation of the Company with another
person, other than a merger or consolidation in which the holders of the
Company's voting securities outstanding immediately before such merger or
consolidation continue to hold voting securities in the surviving or resulting
corporation (in the same relative proportions to each other as existed before
such event) comprising eighty percent (80%) or more of the voting power for all
purposes of the surviving or resulting corporation; or (d) the stockholders of
the Company approve a transfer of substantially all of the assets of the Company
to another person other than a transfer to a transferee, eighty percent (80%) or
more of the voting power of which is owned or controlled by the Company or by
the holders of the Company's voting securities outstanding immediately before
34
such transfer in the same relative proportions to each other as existed before
such event. Mr. Bupp waived his rights to claim that the issuance of securities
described under the heading "Approval of Issuance of Securities" was a "change
in control."
Mr. Bupp's compensation will continue for the full term of the agreement if his
employment is terminated without cause.
Restricted Stock. On April 30, 1999, the Company and Mr. Bupp entered into a
restricted stock purchase agreement under which Mr. Bupp purchased 35,000 shares
of Common Stock for a purchase price of $0.001 per share. Mr. Bupp may not
transfer or sell any of the restricted shares unless and until they vest. Mr.
Bupp will forfeit any portion of the restricted shares that has not vested (and
the Company will refund the purchase price paid) on the earlier of the date of
the termination of his employment under his employment agreement with the
Company for any reason unless the Company is, at the time of termination for
death or disability, actively engaged in negotiations that could reasonably be
expected to lead to a change in control, and April 30, 2009. Restricted shares
that have not previously been forfeited will vest if and when there is a change
in control of the Company. Except for these restrictions on transfer and
possibilities of forfeiture, Mr. Bupp has all other rights with respect to the
restricted shares, including the right to vote such shares and receive cash
dividends.
The term "change in control" has the same meaning under Mr. Bupp's restricted
stock agreement as it does under Mr. Bupp's employment agreement; see the
definition of "change in control" under the heading "Compensation of Mr. Bupp;
Employment Agreement."
The Company has not recognized any expense under the restricted stock agreement
due to the contingent nature of the vesting provisions and the risk of
forfeiture.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
- --------------------------------------
Non-employee Directors who are not affiliated with a principal stockholder of
the Company elected to receive options to purchase common stock in lieu of cash
compensation for service during 1999. The Chairman received 30,000 options and
other non-employee Directors received 15,000 options each in lieu of cash
compensation. The Company reimbursed non-employee Directors for travel expenses
for meetings attended during 1999. In addition, each non-employee Director
received 15,000 options to purchase common stock as a part of the Company's
annual stock incentive grants. Options granted to purchase common stock vest
either on a monthly or annual basis over a three-year period and have an
exercise price equal to no less than the market price of common stock at the
date of grant.
Directors who are also officers or employees of the Company do not receive any
compensation for their services as Directors.
COMPENSATION AGREEMENTS WITH OTHER NAMED EXECUTIVE OFFICERS
- -----------------------------------------------------------
Severance Agreements. Pursuant to a Change in Control Severance Agreement dated
October 23, 1998 between the Company and Brent L. Larson, in the event of a
change in control of the Company and the termination of Mr. Larson's employment
with the Company within 4 months thereafter by the Company without cause or by
Mr. Larson's resignation, Mr. Larson would receive (i) one and one-half times
his salary as severance and (ii) the right to participate in the Company's life
and health insurance programs for 18 months.
Matthew F. Bowman and Patricia A. Coburn were parties to Change in Control
Severance Agreements with the Company dated October 23, 1998 and containing
terms similar to those contained in Mr. Larson's Change in Control Severance
Agreement discussed above. Ms. Coburn received $105,000 in 1999 related to her
35
resignation. Mr. Bowman will receive $200,417 in 2000 related to his
resignation. Both Ms. Coburn and Mr. Bowman are entitled to receive additional
payments in the event a qualifying change in control transaction occurs within
certain timeframes from the effective dates of their resignations as defined in
their agreements.
The term "change in control" has the same meaning under this heading as it does
under Mr. Bupp's employment agreement except that the change in beneficial
ownership is defined at 30% as compared to 15% in Mr. Bupp's agreement; see the
definition of "change in control" under the heading "Compensation of Mr. Bupp;
Employment Agreement."
Restricted Stock. On April 30, 1999, the Company and Mr. Larson entered into a
restricted stock purchase agreement under which Mr. Larson purchased 10,000
shares of common stock for a purchase price of $0.001 per share. Mr. Larson may
not transfer or sell any of the restricted shares unless and until they vest.
Mr. Larson will forfeit any portion of the restricted shares that has not vested
(and the Company will refund the purchase price paid) on the earlier of the date
of the termination of his employment under his employment agreement with the
Company for any reason unless the Company is, at the time of termination for
death or disability, actively engaged in negotiations that could reasonably be
expected to lead to a change in control, and April 30, 2009. Restricted shares
that have not previously been forfeited will vest if and when there is a change
in control of the Company. Except for these restrictions on transfer and
possibilities of forfeiture, Mr. Larson has all other rights with respect to the
restricted shares, including the right to vote such shares and receive cash
dividends.
On April 30, 1999, the Company and Mr. Bowman entered into a restricted stock
purchase agreement under which Mr. Bowman purchased 20,000 shares of common
stock for a purchase price of $0.001 per share. The terms of Mr. Bowman's
restricted stock purchase agreement are identical to those contained in Mr.
Larson's restricted stock purchase agreement discussed above regarding vesting,
forfeiture and rights of ownership. On March 2, 2000, the date of his
resignation, Mr. Bowman owned a total of 60,000 restricted shares (including the
20,000 issued on April 30, 1999) on terms similar to those discussed above. As
of March 30, 2000, these shares have neither vested nor been forfeited under the
terms of Mr. Bowman's Agreement, Release and Waiver.
On November 30, 1999, the date of her resignation, Ms. Coburn owned 20,000
restricted shares on terms similar to those discussed above regarding Mr.
Bowman's and Mr. Larson's restricted shares. As of March 30, 2000, these shares
have neither vested nor been forfeited under the terms of Ms. Coburn's Severance
Agreement.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table sets forth, as of February 29, 2000, certain information
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to be the beneficial owner of more than 5 percent of
the outstanding shares of Common Stock, (ii) each Director or nominee for
Director of the Company, (iii) each of the Named Executives (see "Compensation
of Management--Summary Compensation Table"), and (iv) the Company's Directors
and executive officers as a group.
NUMBER OF
SHARES
BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(*) OF CLASS
- ------------------------------------------- --------------- -----------
Melvin D. Booth 11,667(a) (m)
Matthew F. Bowman 208,526(b) (m)
David C. Bupp 473,662(c) 1.6 %
John S. Christie 12,367(d) (m)
Julius R. Krevans 22,267(f) (m)
Brent L. Larson 69,084(n) (m)
Michael P. Moore 26,267(g) (m)
J. Frank Whitley, Jr. 16,267(i) (m)
James F. Zid 28,367(j) (m)
All directors and officers as a group 868,329(k) 3.0 %
(10 persons)
Patricia A. Coburn 22,265(e) (m)
Kenneth R. McGuire 1,567,100(l) 5.4%
Paramount Capital Asset Management, Inc. 6,000,000(h) 20.7%
(*) Unless otherwise indicated, the beneficial owner has sole voting and
investment power over these shares subject to the spousal rights, if
any, of the spouses of those beneficial owners who have spouses.
(a) This amount consists of shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 58,333 shares
issuable upon exercise of options which are not exercisable within
60 days.
(b) This amount includes 145,837 shares issuable upon exercise of options
which are exercisable within 60 days and 2,689 shares in Mr. Bowman's
account in the Neoprobe Corporation 401(k) Plan (the "401(k) Plan"),
but does not include 68,263 shares issuable upon exercise of options
which are not exercisable within 60 days.
(c) This amount includes 345,600 shares issuable upon exercise of options
which are exercisable within 60 days, 4,362 shares in Mr. Bupp's
account in the 401(k) Plan and 2,200 shares held by Mr. Bupp's wife and
daughters, as to which latter shares he disclaims beneficial ownership,
but it does not include 295,000 shares issuable upon exercise of
options which are not exercisable within 60 days. Mr. Bupp is one of
three trustees of the 401(k) Plan and may, as such, share investment
power over Common Stock held in such plan. The 401(k) Plan holds an
aggregate total of 47,665 shares of Common Stock. Mr. Bupp disclaims
any beneficial ownership of shares held by the 401(k) Plan that are not
allocated to his personal account.
(d) This amount includes 11,667 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 58,833
shares issuable upon exercise of options which are not exercisable
within 60 days.
(e) This amount includes 2,625 shares in Ms. Coburn's account in the 401(k)
Plan.
37
(f) This amount includes 20,267 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 103,333
shares issuable upon exercise of options which are not exercisable
within 60 days.
(g) This amount includes 20,267 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 58,333
shares issuable upon exercise of options which are not exercisable
within 60 days.
(h) The amount consists of 900,000 shares owned by the Aries Domestic Fund,
L.P. ("Aries Domestic"), 900,000 shares issuable upon the exercise of
warrants owned by Aries Domestic, 2,100,000 shares owned by The Aries
Master Fund, a Cayman Island Exempted Company ("Aries Master"), and
2,100,000 shares issuable upon the exercise of warrants owned by Aries
Master. Paramount Capital Asset Management, Inc., Delaware corporation
("Paramount Capital") has shared voting and dispositive power over the
shares of Aries Master and Aries Domestic because Paramount Capital is
the investment manager of Aries Master and the general partner of Aries
Domestic. Lindsay A. Rosenwald, M.D. ("Dr. Rosenwald") has shared
voting and dispositive power over the shares of Aries Master and Aries
Domestic because he in the sole shareholder of Paramount Capital. The
address of Paramount Capital, Aries Domestic and Dr. Rosenwald is 787
Seventh Avenue, 48th Floor, New York, New York 10019. The address of
Aries Master is c/o Mees Peirson (Cayman) Limited, Post Office Box
2003, American Center, Phase 3, Dr. Roy's Drive, George Town, Grand
Cayman. The disclosure contained in this footnote is derived from a
Schedule 13D filed by Paramount Capital, Aries Master, Aries Domestic
and Dr. Rosenwald with SEC on February 4, 2000.
(i) This amount includes 15,267 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 58,333
shares issuable upon exercise of options which are not exercisable
within 60 days.
(j) This amount includes 22,767 shares issuable upon exercise of options
which are exercisable within 60 days and 1,600 shares held in Mr. Zid's
IRA, but does not include 58,333 shares issuable upon exercise of
options which are not exercisable within 60 days.
(k) This amount includes 629,806 shares issuable upon exercise of options
which are exercisable within 60 days and 9,168 shares held in the
Company's 401(k) Plan. This amount does not include 846,594 shares
issuable upon the exercise of options which are not exercisable within
60 days. Certain executive officers of the Company are the trustees of
the 401(k) Plan and may, as such, share investment power over Common
Stock held in such plan. Each trustee disclaims any beneficial
ownership of shares held by the 401(k) Plan that are not allocated to
his personal account. The 401(k) Plan holds an aggregate total of
47,665 shares of Common Stock.
(l) Mr. McGuire's address is 3000 North Clybourn, Hangar 34, Burbank,
California 91505. This amount includes 17,600 shares held by Mr.
McGuire as custodian under the Uniform Transfer to Minors Act of
California for his four children.
(m) Less than 1 percent.
(n) This amount includes 36,467 shares issuable upon exercise of options
which are exercisable within 60 days and 1,972 shares in Mr. Larson's
account in the 40l(k) Plan, but it does not include 88,333 shares
issuable upon exercise of options which are not exercisable within 60
days. Mr. Larson is one of three trustees of the 40l(k) Plan and may,
as such, share investment power over Common Stock held in such plan.
The 40l(k) Plan holds an aggregate total of 47,665 shares of Common
Stock. Mr. Larson disclaims any beneficial ownership of shares held by
the 40l(k) Plan that are not allocated to his personal account.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS AND FINANCIAL STATEMENTS FILED AS PART OF THIS
REPORT
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1. Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996 and March 17, 1999
(incorporated by reference to Exhibit 3.1 to Registrant's
annual report on Form 10-K for the year ending December 31,
1998; Commission File No. 0-26520 (the "1998 Form 10-K").
3.2. Amended and Restated By-Laws, dated July 21, 1993, as amended
July 18, 1995 and May 30, 1996 (incorporated by reference to
Exhibit 99.4 to the June 1996 Form 8-K).
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
4.2. See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 to the registration
statement on Form 8-A, Commission File No. 0-26520).
4.4. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999 (incorporated by reference to Exhibit
4.4 to the 1998 Form 10-K).
(10) MATERIAL CONTRACTS (*indicates management contract or compensatory
plan or arrangement).
10.1. 1.--10.1.24. Reserved.
10.1.25. Rights Agreement between the Registrant and Continental Stock
Transfer & Trust Company dated as of July 18, 1995 (see
Exhibit 4.3).
10.1.26.--10.1.30. Reserved.
10.1.31. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999 (see Exhibit 4.4).
10.1.32. Preferred Stock and Warrant Purchase Agreement dated February
16, 1999 among the Registrant, The Aries Master Fund, a Cayman
Island exempted company, and The Aries Domestic Fund, L.P.
(incorporated by reference to Exhibit 10.1.32 to the 1998 Form
10-K).
10.1.33. Warrant dated February 16, 1999 for the purchase of shares to
purchase Common Stock issued to The Aries Master Fund, a
Cayman Island exempted company (incorporated by reference to
Exhibit 10.1.33 to the 1998 Form 10-K). This exhibit is one of
two substantially identical instruments and is accompanied by
a schedule identifying the other instrument omitted and
setting forth the material details in which such instrument
differs from the one filed herewith.
39
10.1.34. Option Units dated February 16, 1999 for the purchase of
shares of 5% Series B Convertible Preferred Stock of the
Registrant and warrants to purchase shares of Common Stock
issued to Paramount Capital, Inc. (incorporated by reference
to Exhibit 10.1.34 to the 1998 Form 10-K).
10.1.35. Financial Advisory Agreement dated February 16, 1999 between
the Registrant and Paramount Capital, Inc. (incorporated by
reference to Exhibit 10.1.35 to the 1998 Form 10-K).
10.1.36. Letter agreement dated February 24, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P. (incorporated by reference to
Exhibit 10.1.36 to the 1998 Form 10-K).
10.1.37. Letter agreement dated March 12, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P. (incorporated by reference to
Exhibit 10.1.37 to the 1998 Form 10-K).
10.1.38. Letter Agreement dated April 1, 1999 among the Registrant, The
Aries Master Fund, a Cayman Island Exempted Company, and The
Aries Domestic Fund, L.P. (incorporated by reference to
Exhibit 10.1.38 to the 1998 Form 10-K).
10.2.1.--10.2.14. Reserved.
10.2.15. Option Agreements between the Registrant and David C. Bupp
(incorporated by reference to Exhibit 10.7 to the Registrant's
registration statement on Form S-1; No. 33-51446 (the "Form
S-1")).*
10.2.16.--10.2.17. Reserved.
10.2.18. Non-Qualified Stock Option Agreement dated May 3, 1993 between
the Registrant and David C. Bupp (incorporated by reference to
Exhibit 10.50 to the Registrant's Quarterly Report on Form
10--QSB for the quarterly period ended June 30, 1993;
Commission File No. 0-26520 (the "2nd Quarter 1993 Form
10-QSB")).*
10.2.19.--10.2.22. Reserved.
10.2.23. Non-Qualified Stock Option Agreement dated February 28, 1992
and amended and restated June 3, 1993 between the Registrant
and David C. Bupp (incorporated by reference to Exhibit 99.5
to Registrant's report on Form 8-K dated January 21, 1994;
Commission File No. 0-26520 (the "January 1994 Form 8-K")).*
10.2.24. Non-Qualified Stock Option Agreement dated July 1, 1990 and
amended and restated June 3, 1993 between the Registrant and
David C. Bupp (incorporated by reference to Exhibit 99.6 to
the January 1994 Form 8-K).*
10.2.25. Non-Qualified Stock Option Agreement dated June 1, 1992 and
amended and restated June 3, 1993 between the Registrant and
John L. Ridihalgh (incorporated by reference to Exhibit 99.7
to the January 1994 Form 8-K).*
10.2.26. Amended and Restated Stock Option and Restricted Stock
Purchase Plan dated March 3, 1994 (incorporated by reference
to Exhibit 10.2.26 to Registrant's annual report on Form
10-KSB for the year ending December 31, 1993; Commission File
No. 0-26520 (the "1993 Form 10-KSB")).*
10.2.27.--10.2.28. Reserved.
40
10.2.29. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.29 to the 1994 Form 10-KSB).*
10.2.30. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.30 to the 1994 Form 10-KSB).*
10.2.31.--10.2.33. Reserved.
10.2.34. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.32 to the Registrant's Annual Report
on Form 10-KSB for the year ending December 31, 1997 (the
"1997 Form 10-KSB"); Commission File No. 0-26520).*
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and David C. Bupp (incorporated by reference to
Exhibit 10.2.35 to the 1997 Form 10-KSB).*
10.2.36. Reserved.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as amended
March 13, 1997 (incorporated by reference to Exhibit 10.2.37
to the 1997 Form 10-K).*
10.2.38. Reserved.
10.2.39. Non-Qualified Stock Option Agreement dated January 18, 1996
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.39 to the 1997 Form 10-K).*
10.2.40. Reserved.
10.2.41. Non-Qualified Stock Option Agreement dated February 3, 1997
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.41 to the 1997 Form 10-K).*
10.2.42. Reserved.
10.2.43. Agreement, Release, and Waiver dated February 23, 1998 between
the Registrant and Dr. William Eisenhardt (incorporated by
reference to the Registrant's quarterly report on Form 10-Q
for the quarter ending March 31, 1998; Commission File No.
0-26520).*
10.2.44. Employment Agreement dated as of January 1, 1998 between the
Registrant and David C. Bupp. (incorporated by reference to
Exhibit 10.2.44 of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998; Commission
File No. 0-26520 (the "2nd Quarter 1998 Form 10-Q")).*
10.2.45. Restricted Stock Purchase Agreement between David C. Bupp and
the Registrant dated May 20, 1998 (incorporated by reference
Exhibit 10.2.45 to the 2nd Quarter 1998 Form 10-Q).*
10.2.46. Waiver by David Bupp dated February 16, 1999 of certain
provisions in the employment agreement between the Registrant
and David C. Bupp dated January 1, 1998 (incorporated by
reference to Exhibit 10.2.46 to the 1998 Form 10-K).*
10.2.47. Severance Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman (incorporated by reference to
Exhibit 10.2.47 to the 1998 Form 10-K). This agreement is one
of three substantially identical agreements and is accompanied
by a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith.*
41
10.2.48. Restricted Stock Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman (incorporated by reference to
Exhibit 10.2.48 to the 1998 Form 10-K). This agreement is one
of three substantially identical agreements and is accompanied
by a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith.*
10.2.49. Separation Agreement dated October 21, 1998 between the
Registrant and John L. Ridihalgh (incorporated by reference to
Exhibit 10.2.49 to the 1998 Form 10-K).*
10.2.50. Restricted Stock Agreement dated April 30, 1999 between the
Registrant and David C. Bupp (incorporated by reference to
Exhibit 10.2.50 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999; Commission
File No. 0-26520). This Agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details in which such agreements differ
from the one that is filed herewith.*
10.2.51. Employment Agreement between the Registrant and David C. Bupp
dated July 1, 1999 (incorporated by reference to Exhibit
10.2.51 to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999; Commission File
No. 0-26520 (the "3rd Quarter 1999 Form 10-Q").*
10.2.52. Severance Agreement dated November 30, 1999 between the
Registrant and Patricia Coburn.*
10.3.1. Technology Transfer Agreement dated July 29, 1992 between the
Registrant and The Dow Chemical Corporation (incorporated by
reference to Exhibit 10.10 to the Form S-1, confidential
portions of which were omitted and filed separately with the
Commission subject to an order granting confidential
treatment).
10.3.2.--10.3.29. Reserved.
10.3.30. Facility Agreement dated July 17, 1995 among Registrant,
Neoprobe (Israel) Ltd., and Rotem Industries, Ltd.
(incorporated by reference to Exhibit 10.3.30 to Registrant's
Quarterly Report on Form 10-QSB for the quarter ending
September 30, 1995, Commission File No. 0-26520 (the "3rd
Quarter 1995 Form 10-QSB"), confidential portions of which
were omitted and filed separately with the Commission subject
to an order granting confidential treatment).
10.3.31. Cooperative Research and Development Agreement between
Registrant and National Cancer Institute (incorporated by
reference to Exhibit 10.3.31 to the 3rd Quarter 1995 Form
10-QSB).
10.3.32. First Amendment to Facility Agreement dated July 17, 1995
among Registrant, Neoprobe (Israel), Ltd. and Rotem
Industries, Ltd (incorporated by reference to Exhibit 10.3.32
to the Registrant's Annual Report on Form 10-KSB for the year
ending December 31, 1995; Commission File No. 0-26520 (the
"1995 Form 10-KSB")).
10.3.33.--10.3.34. Reserved.
10.3.35. Investors' Rights Agreement dated February 5, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd. (incorporated by
reference to Exhibit 10.3.35 to the 1st Quarter 1996 Form
10-QSB).
10.3.36. Reserved.
10.3.37 Research and Development Agreement dated February 13, 1996
between Registrant and XTL Biopharmaceuticals, Ltd.
(incorporated by reference to Exhibit 10.3.37 to the 1st
Quarter 1996
42
Form 10-QSB, confidential portions of which were omitted and
filed separately with the Commission subject to an order
granting confidential treatment).
10.3.38 Sublicense Agreement dated February 13, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd. (incorporated by
reference to Exhibit 10.3.38 to the 1st Quarter 1996 Form
10-QSB, confidential portions of which were omitted and filed
separately with the Commission subject to an order granting
confidential treatment).
10.3.39.--10.3.44. Reserved.
10.3.45 License dated May 1, 1996 between Registrant and The Dow
Chemical Company (incorporated by reference to Exhibit 10.3.45
to the 2nd Quarter 1996 Form 10-QSB).
10.3.46 License Agreement dated May 1, 1996 between Registrant and The
Dow Chemical Company (incorporated by reference to Exhibit
10.3.46 to the 2nd Quarter 1996 Form 10-QSB, confidential
portions of which were omitted and filed separately with the
Commission subject to an order granting confidential
treatment).
10.3.47. License and Option Agreement between Cira Technologies, Inc.
and Neoprobe Corporation dated April 1, 1998 (incorporated by
reference to Exhibit 10.3.47 to the 2nd Quarter 1998 Form
10-Q).
10.3.48. Restated Subscription and Option Agreement between the
Registrant, Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre Triozzi and Gregory Noll, dated April 17,
1998 (incorporated by reference to Exhibit 10.3.48 to the 2nd
Quarter 1998 Form 10-Q).
10.3.49. Restated Stockholders Agreement with the Registrant, Cira
Technologies, Inc., Richard G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith, Ltd.,
Pierre L. Triozzi and Gregory Noll, dated April 17, 1998
(incorporated by reference to Exhibit 10.3.49 to the 2nd
Quarter 1998 Form 10-Q).
10.4.1.--10.4.15. Reserved.
10.4.16. Project Management Agreement dated May 17, 1995 between
Neoprobe (Israel) Ltd. and BARAN Project Construction Ltd.
(incorporated by reference to Exhibit 10.4.16 to the 2nd
Quarter 1995 Form 10-QSB).
10.4.17--10.4.21. Reserved.
10.4.22. Sales and Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(incorporated by reference to Exhibit 10.4.22 to the 2nd
Quarter 1998 Form 10-Q, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
10.4.23. Loan Agreement between the Registrant and Bank One, NA, dated
April 16, 1998 (incorporated by reference to Exhibit 10.4.23
to the 2nd Quarter 1998 Form 10-Q).
10.4.24. Variable Rate Cognovit Promissory Note, dated April 16, 1998,
issued by Registrant to Bank One, NA (incorporated by
reference to Exhibit 10.4.24 to the 2nd Quarter 1998 Form
10-Q).
10.4.25. Security Agreement between the Registrant and Bank One, NA,
dated April 16, 1998 (incorporated by reference to Exhibit
10.4.25 to the 2nd Quarter 1998 Form 10-Q).
43
10.4.26. Letter amendment dated October 14, 1998 to the Sales and
Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(incorporated by reference to Exhibit 10.4.26 to the
Registrant's quarterly report on Form 10-Q for the quarter
ending September 30, 1998, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment; Commission File No.
0-26520 (the "3rd Quarter 1998 Form 10-Q")).
10.4.27. Promissory Note, dated September 25, 1998, issued by
Registrant to Bank One, NA (incorporated by reference to
Exhibit 10.4.27 to the 3rd Quarter 1998 Form 10-Q).
10.4.28. Addendum to Promissory Note dated September 25, 1998 issued by
Registrant to Bank One, NA (incorporated by reference to
Exhibit 10.4.28 to the 3rd Quarter 1998 Form 10-Q).
10.4.29. Covenant Agreement dated September 25, 1998 between the
Registrant and Bank One, NA (incorporated by reference to
Exhibit 10.4.29 to the 3rd Quarter 1998 Form 10-Q).
10.4.30. Assignment of Deposit Account dated September 25, 1998 between
Registrant and Bank One, NA (incorporated by reference to
Exhibit 10.4.30 to the 3rd Quarter 1998 Form 10-Q).
10.4.31. Asset Purchase Agreement dated October 14, 1998 between the
Registrant, Neoprobe AB, a corporation organized and existing
under the laws of Sweden, and Bioinvent Production AB, a
corporation organized and existing under the laws of Sweden
(incorporated by reference to Exhibit 10.4.31 to the 3rd
Quarter 1998 Form 10-Q).
10.4.32. Supply Agreement between the Registrant and eV Products dated
December 8, 1997 (incorporated by reference to Exhibit 10.4.32
to Amendment 2 to the 1998 Form 10-K/A, confidential portions
of which were omitted and filed separately with the Commission
subject to an order granting confidential treatment).
10.4.33. Sales and Marketing Agreement dated February 1, 1999 between
the Registrant and KOL Bio Medical Instruments, Inc.
(incorporated by reference to Exhibit 10.4.33 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999, confidential portions of which
were omitted and filed separately with the Commission subject
to an order granting confidential treatment; Commission File
No. 0-26520)
10.4.34. Revolving Credit Note between the Registrant and The Provident
Bank dated August 31, 1999 (incorporated by reference to
Exhibit 10.4.34 to the 3rd Quarter 1999 Form 10-Q).
10.4.35. Tennessee Revolving Credit Agreement between the Registrant
and The Provident Bank dated August 31, 1999 (incorporated by
reference to Exhibit 10.4.35 to the 3rd Quarter 1999 Form
10-Q).
10.4.36. Security Agreement between the Registrant and The Provident
Bank dated August 31, 1999 (incorporated by reference to
Exhibit 10.4.36 to the 3rd Quarter 1999 Form 10-Q).
10.4.37. Termination Agreement between the Registrant and Kol
Bio-Medical Instruments, Inc. dated October 1, 1999
(incorporated by reference to Exhibit 10.4.37 to the 3rd
Quarter 1999 Form 10-Q, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
10.4.38. Amendment to Termination Agreement between the Registrant and
Kol Bio-Medical Instruments, Inc. dated October 1, 1999
(incorporated by reference to Exhibit 10.4.38 to the 3rd
Quarter 1999 Form 10-Q, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
44
10.4.39. Distribution Agreement between the Registrant and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (incorporated by
reference to Exhibit 10.4.39 to the 3rd Quarter 1999 Form
10-Q, confidential portions of which were omitted and filed
separately with the Commission subject to an order granting
confidential treatment).
10.4.40. Amended and Restated Revolving Credit Note between the
Registrant and The Provident Bank dated December 31, 1999.
10.4.41. Tennessee Revolving Credit Note between the Registrant and The
Provident Bank dated December 31, 1999.
10.4.42 Amended and Restated Security Agreement between the Registrant
and The Provident Bank dated December 31, 1999.
10.4.43 Amendment No. 1 to Amended and Restated Revolving Credit Note
Dated March 2, 2000.
10.4.44 Amendment No. 1 to Tennessee Revolving Credit Note dated as of
March 2, 2000.
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
11.1. Computation of Net Loss Per Share.
(21) SUBSIDIARIES OF THE REGISTRANT.
21.1. Subsidiaries of the Registrant.
(23) CONSENT OF EXPERTS AND COUNSEL.23.1
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
(24) POWERS OF ATTORNEY.
24.1. Powers of Attorney.
24.2. Certified resolution of the Registrant's Board of
Directors authorizing officers and directors signing
on behalf of the Company to sign pursuant to a power
of attorney.
(b) REPORTS ON FORM 8-K.
No current report on Form 8-K was filed by the Registrant during the
fourth quarter of fiscal 1999.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2000
NEOPROBE CORPORATION
(the "Registrant")
By: /s/ David C. Bupp
-------------------------------------
David C. Bupp, President and
Chief Executive Officer
Pursuant to the requirements of the Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/David C. Bupp Director, President and Chief March 30, 2000
- -------------------------------------- Executive Officer
David C. Bupp (principal executive officer)
/s/Brent L. Larson* Vice President, Finance and Chief March 30, 2000
- -------------------------------------- Financial Officer
Brent L. Larson Administration
(principal financial officer)
/s/Melvin D. Booth* Director March 30, 2000
- --------------------------------------
Melvin D. Booth
/s/John S. Christie* Director March 30, 2000
- --------------------------------------
John S. Christie
/s/Julius R. Krevans* Chairman, Director March 30, 2000
- --------------------------------------
Julius R. Krevans
/s/Michael P. Moore* Director March 30, 2000
- --------------------------------------
Michael P. Moore
/s/J. Frank Whitley, Jr.* Director March 30, 2000
- --------------------------------------
J. Frank Whitley, Jr.
/s/James F. Zid* Director March 30, 2000
- --------------------------------------
James F. Zid
*By: /s/ David C. Bupp
-------------------------------------------
David C. Bupp, Attorney-in-fact
46
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
NEOPROBE CORPORATION
-----------------------
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1999
-----------------------
FINANCIAL STATEMENTS
-----------------------
================================================================================
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
NEOPROBE CORPORATION
------------------------
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1999
----------------------------
FINANCIAL STATEMENTS
----------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Neoprobe Corporation
We have audited the accompanying consolidated balance sheets of Neoprobe
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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
accessing 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neoprobe Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 14, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
Neoprobe Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Neoprobe Corporation and subsidiaries for
the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Neoprobe Corporation and Subsidiaries for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
Coopers & Lybrand LLP
Columbus, Ohio
February 20, 1998
F-2
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------------------- --------------------
Current assets:
Cash and cash equivalents $ 4,882,537 $ 1,061,936
Restricted cash - 1,993,000
Available-for-sale securities - 448,563
Accounts receivable, net 453,406 2,069,633
Inventory 1,134,427 1,578,912
Prepaid expenses 666,688 720,420
Other current assets 7,177 147,008
------------------- --------------------
Total current assets 7,144,235 8,019,472
------------------- --------------------
Investment in affiliates 1,500,000 1,500,000
Property and equipment 2,167,245 3,073,931
Less accumulated depreciation and amortization 1,264,299 1,654,661
------------------- --------------------
902,946 1,419,270
------------------- --------------------
Intangible assets, net 775,088 773,863
Other assets 300 281,594
------------------- --------------------
Total assets $10,322,569 $ 11,994,199
=================== ====================
CONTINUED
F-3
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
------------------- -------------------
Current liabilities:
Line of credit $ 480,000 $ 1,000,000
Notes payable to finance company 154,626 242,163
Capital lease obligations, current 87,007 99,539
Accrued liabilities 1,365,649 2,813,321
Accounts payable 759,961 2,857,717
Deferred license revenue, current 800,000 -
Obligation to preferred stockholder, current 2,500,000 -
------------------- --------------------
Total current liabilities 6,147,243 7,012,740
------------------- --------------------
Capital lease obligations 68,809 155,816
Deferred license revenue 3,000,000 -
Obligation to preferred stockholder 1,245,536 -
------------------- --------------------
Total liabilities 10,461,588 7,168,556
------------------- --------------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock; $.001 par value; 5,000,000 shares
authorized at December 31, 1999 and December 31, 1998;
none issued and outstanding (500,000 shares designated as - -
Series A, $.001 par value, at December 31, 1999 and 1998;
none outstanding)
Common stock; $.001 par value; 50,000,000 shares
authorized; 23,046,644 shares issued and outstanding at
December 31, 1999; 22,887,910 shares issued and outstanding
at December 31, 1998 23,047 22,888
Additional paid-in capital 119,407,204 120,272,899
Accumulated deficit (119,569,270) (115,395,283)
Accumulated other comprehensive loss - (74,861)
------------------- --------------------
Total stockholders' equity (deficit) (139,019) 4,825,643
------------------- --------------------
Total liabilities and stockholders' equity (deficit) $ 10,322,569 $ 11,994,199
=================== ====================
See accompanying notes to consolidated financial statements
F-4
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ------------------
Revenues:
Net sales $ 9,245,664 $ 5,832,695 $ 5,127,917
License revenue 200,000 - -
---------------- ---------------- ------------------
Total revenues 9,445,664 5,832,695 5,127,917
---------------- ---------------- ------------------
Cost of goods sold 4,507,774 1,403,951 1,575,699
---------------- ---------------- ------------------
Gross profit 4,937,890 4,428,744 3,552,218
---------------- ---------------- ------------------
Operating expenses:
Research and development 1,313,219 14,364,539 19,656,804
Marketing and selling 4,471,363 5,267,617 4,306,717
General and administrative 3,734,697 6,088,823 6,853,283
Losses related to subsidiaries in liquidation 475,231 7,176,061 -
---------------- ---------------- ------------------
Total operating expenses 9,994,510 32,897,040 30,816,804
---------------- ---------------- ------------------
Loss from operations (5,056,620) (28,468,296) (27,264,586)
---------------- ---------------- ------------------
Other income (expense):
Gain on deconsolidation of subsidiaries 699,146 - -
Interest income 103,672 598,834 2,156,795
Interest expense (82,853) (189,785) (61,445)
Other 162,668 26,495 1,922,708
---------------- ---------------- ------------------
Total other income 882,633 435,544 4,018,058
---------------- ---------------- ------------------
Net loss (4,173,987) (28,032,752) (23,246,528)
---------------- ---------------- ------------------
Conversion discount on preferred stock 1,795,775 - -
Accretion to potential redemption value 1,804,225 - -
Preferred stock dividend requirements 120,536 - -
---------------- ---------------- ------------------
Loss attributable to common stockholders $ ( 7,894,523) $(28,032,752) $ (23,246,528)
================ ================ ==================
Loss per common share
(basic and diluted) $ (0.34) $ (1.23) $ (1.02)
================ ================ ==================
Weighted average number of shares
outstanding during the year
(basic and diluted) 23,003,461 22,842,232 22,734,642
================ ================ ==================
See accompanying notes to consolidated financial statements
F-5
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS)
Accumulated
Common Stock Additional Other
------------------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income(Loss) Total
---------- ---------- ------------ ------------- ------------- ------------
Balance, December 31, 1996 22,586,527 $ 22,587 $119,293,862 $(64,116,003) $76,602 $55,277,048
Exercise of employee stock
options at $2.50 to $15.75 per 85,510 85 361,500 361,585
share
Issued to 401(k) plan at $14.61 1,672 2 24,422 24,424
Exercise of stock warrants at 89,721 89 355,092 355,181
$3.32 to $6.05 per share
Comprehensive income (loss):
Net loss (23,246,528) (23,246,528)
Foreign currency translation
adjustment (237,887) (237,887)
Unrealized gain on available-
for-sale securities 20,569 20,569
------------
Total comprehensive loss (23,463,846)
---------- ---------- ------------ ------------- ------------- ------------
Balance, December 31, 1997 22,763,430 $ 22,763 $120,034,876 (87,362,531) $(140,716) $32,554,392
Exercise of employee stock
options at $2.50 to $3.88 per 76,587 77 196,221 196,298
share
Issued to 401(k) plan at $14.45 2,893 3 41,802 41,805
Issued restricted stock to 45,000 45 45
officers
Comprehensive income (loss):
Net loss (28,032,752) (28,032,752)
Foreign currency translation
adjustment 56,346 56,346
Unrealized gain on available-for-sale
securities 9,509 9,509
------------
Total comprehensive loss (27,966,897)
---------- ---------- ------------ ------------- ------------- ------------
Balance, December 31, 1998 22,887,910 $ 22,888 $120,272,899 $(115,395,283) $(74,861) $4,825,643
Issued to 401(k) plan at $2.68 13,734 14 36,776 36,790
Issued restricted stock to 145,000 145 145
officers
Issued redeemable convertible
preferred stock and warrants, 1,022,290 1,022,290
net of costs
Accretion of redeemable
convertible preferred stock
to potential redemption value (1,804,225) (1,804,225)
Preferred stock dividend (120,536) (120,536)
requirements
Comprehensive income (loss):
Net loss (4,173,987) (4,173,987)
Foreign currency translation
adjustment due to deconsolidation of 75,080 75,080
subsidiaries
Unrealized gain on available-for-sale
securities (219) (219)
------------
Total comprehensive loss (4,099,126)
---------- ---------- ------------ ------------- ------------- ------------
Balance, December 31, 1999 23,046,644 $ 23,047 $119,407,204 $(119,569,270) $ - $(139,019)
========== ========== ============ ============= ============= ============
See accompanying notes to consolidated financial statements.
F-6
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (4,173,987) $(28,032,752) $(23,246,528)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 506,916 1,081,676 778,663
Amortization of intangible assets 46,046 190,888 117,859
Provision for bad debts 16,005 134,249 130,660
Loss on disposal and abandonment of assets 369,580 1,100,704 664,068
Losses related to subsidiaries in liquidation 475,231 6,443,432 --
Gain on deconsolidation of subsidiaries (699,146) -- --
Change in restricted cash 1,993,000 (1,615,348) (187,627)
Other 34,844 17,815 (11,807)
Change in operating assets and liabilities:
Accounts receivable 1,491,098 (1,410,759) 315,406
Inventory 444,492 (1,165,258) (199,335)
Prepaid expenses and other assets 269,927 1,144,128 465,764
Accrued liabilities and other liabilities (1,132,745) (105,694) (121,324)
Accounts payable (1,469,070) (847,970) 1,404,095
Deferred revenue 3,800,000 -- (2,000,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,972,191 (23,064,889) (21,890,106)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (1,738,512) (13,489,774)
Proceeds from sales of available-for-sale securities 443,729 4,955,601 1,884,610
Maturities of available-for-sale securities 4,467 11,050,000 16,739,201
Purchases of property and equipment (75,363) (3,428,811) (4,689,681)
Proceeds from sales of property and equipment 24,202 -- --
Patent costs (27,104) (239,400) (197,873)
------------ ------------ ------------
Net cash provided by investing activities 369,931 10,598,878 246,483
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrants, net 2,818,065 -- --
Proceeds from issuance of common stock, net 145 196,343 716,766
Proceeds from line of credit 480,000 1,275,750 --
Payments under line of credit (1,000,000) (275,750) --
Payment of notes payable (263,787) (228,892) (177,039)
Payments under capital leases (99,539) (156,167) (125,202)
Proceeds from long-term debt -- 3,129,499 812,750
------------ ------------ ------------
Net cash provided by financing activities 1,934,884 3,940,783 1,227,275
------------ ------------ ------------
Effect of exchange rate changes on cash -- 43,791 (18,666)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,277,006 (8,481,437) (20,435,014)
Cash and cash equivalents, beginning of year 1,061,936 9,543,373 29,978,387
Change in beginning cash and cash equivalents due to
deconsolidation of subsidiaries (456,405) -- --
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,882,537 $ 1,061,936 $ 9,543,373
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation (the
"Company"), a Delaware corporation, is engaged in the development and
commercialization of gamma guided surgery products for the diagnosis
and treatment of cancers and other diseases. The Company currently
manufactures a line of gamma radiation detection equipment used in the
application of intraoperative lymphatic mapping ("ILM"). The Company's
ILM products are marketed through an exclusive worldwide distribution
arrangement with Ethicon Endo-Surgery, Inc. ("EES"), a Johnson &
Johnson company.
For the year ended December 31, 1999, approximately $5.3 million (57%)
of net sales were concentrated between two customers, one of which was
EES. The loss of one of those customers could have a significant
adverse effect on the Company's operating results. No individual
customer constituted over 10% of net sales in 1998 or 1997.
b. FINANCIAL STATEMENT PRESENTATION:
(1) Principles of consolidation: The consolidated financial
statements of the Company include the accounts of the Company and
its majority-owned subsidiaries through December 31, 1998 (See
Note 10(b).). All significant intercompany accounts and
transactions were eliminated in consolidation for 1997 and 1998.
During 1999, the Company deconsolidated both of its
majority-owned subsidiaries as both were placed in statutory
liquidation or receivership during 1999 (See Note 10(b).) and
control of the subsidiaries was taken away from the Company. In
connection with the deconsolidation, the Company recorded a gain
of $699,146 during the fourth quarter of 1999. The gain resulted
primarily from the removal from consolidation of vendor
liabilities owed by the Company's Israeli subsidiary, Neoprobe
Israel Ltd. ("Neoprobe Israel"). These liabilities are
liabilities of the subsidiary (i.e., Neoprobe Israel) and not of
the parent company (i.e., the Company). Therefore, by not
consolidating the net liabilities of Neoprobe Israel, the
Company, in effect, realized a gain in its unconsolidated
financial statements as presented for the year ended December 31,
1999.
(2) Adoption of liquidation basis of accounting: As of December 31,
1998, the Company presented both of its majority-owned
subsidiaries under the liquidation basis of accounting.
Accordingly, at December 31, 1998, the assets of these
subsidiaries were stated at their estimated net realizable value,
and liabilities were stated at amounts expected to settle
obligations due. During 1999, both of these subsidiaries were
deconsolidated as noted above.
c. FOREIGN CURRENCY TRANSLATION: In accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation, assets and liabilities denominated in foreign currencies
are translated at current exchange rates in effect at the balance
sheet dates, and revenues and expenses are translated at the average
monthly exchange rate. The differences resulting from such
translations are included in other comprehensive income (loss).
d. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:
(1) Cash and cash equivalents, accounts receivable, accounts payable,
and accrued liabilities: The carrying amounts approximate fair
value because of the short maturity of these instruments.
(2) Available-for-sale securities: The fair values of debt securities
and equity investments are based on quoted market prices at the
balance sheet date.
(3) Line of credit and notes payable to finance company: The fair
value of the Company's debt is estimated by discounting the
future cash flows of each instrument at rates currently offered
to the Company for similar debt instruments of comparable
maturities by banks or finance companies. At December 31, 1999,
the carrying values of these instruments approximate fair value.
e. CASH AND CASH EQUIVALENTS: Cash equivalents of $20,691 at December 31,
1998 consist of corporate debt securities with a term of less than
three months. There were no cash equivalents at December 31, 1999. For
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
purposes of the statements of cash flows, cash and cash equivalents
consist of demand deposits, money market funds, highly liquid debt
instruments and certificates of deposit with original maturities of
three months or less. At December 31, 1998, the use of $993,000 of
cash and cash equivalents was restricted under the terms of the
Company's debt agreement financing the construction of Neoprobe Israel
(See Note 10(b).) and $1 million was pledged as security related to
the Company's line of credit. None of the cash and cash equivalents
presented in the December 31, 1999 balance sheet are pledged or
restricted in any way.
f. INVESTMENTS:
(1) Investments of up to 20% in affiliated companies with no readily
determinable fair value are carried on the cost basis, and
investments greater than 20%, where management has determined the
Company does not exercise control, are carried on the equity
basis.
(2) Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of accumulated
other comprehensive income (loss) until realized. Realized gains
and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale security
below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted
over the life of the related available-for-sale sale security as
an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned.
Information related to amortized cost and fair value of
available-for-sale securities, utilizing the specific
identification method, at December 31, 1998 is provided below:
GROSS
AMORTIZED UNREALIZED
1998 COST GAINS FAIR VALUE
------------------------------------------------- ----------------- ----------------- -------------
Mortgaged-backed U.S. government securities $ 448,344 $ 219 $ 448,563
================= ================= =============
Available-for-sale securities are classified as current based on
the Company's intent to use them to fund short-term working
capital needs.
g. INVENTORY: The components of inventory at December 31, 1999 and 1998,
are as follows:
1999 1998
---------------- ------------------
Materials and component parts $ 104,441 $ 277,505
Finished goods 1,029,986 1,301,407
---------------- ------------------
$ 1,134,427 $ 1,578,912
================ ==================
All components of inventory are valued at the lower of cost (first-in,
first-out) or market. The Company adjusts inventory to market value
when the net realizable value is lower than the carrying cost of the
inventory. Market value is determined based on recent sales activity
and margins achieved.
h. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Property and equipment under capital leases is stated at the present
value of minimum lease payments. Depreciation is computed using the
straight-line method over the estimated useful lives of the
depreciable assets ranging from 3 to 7 years, and includes
amortization related to equipment under capital leases. Maintenance
and repairs are charged to expense as incurred, while renewals and
improvements are capitalized. Property and equipment includes $391,399
and $393,869 of equipment under capital leases and accumulated
amortization of $256,585 and $153,165 at December 31, 1999 and 1998,
respectively. During 1999, the Company recorded losses of
approximately $60,000
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
on the disposal of certain property and equipment primarily related to
the separation of the majority of the Company's internal marketing
force.
The major classes of property and equipment are as follows:
1999 1998
------------------ ---------------------
Production machinery and equipment $ 798,647 $ 680,189
Other machinery and equipment, primarily
computers and research equipment 656,740 1,270,034
Furniture and fixtures 527,567 866,602
Leasehold improvements 91,513 90,144
Other 92,778 166,962
------------------ ---------------------
$ 2,167,245 $ 3,073,931
================== =====================
i. INTANGIBLE ASSETS: Intangible assets consist primarily of cost of
patents. Patent costs are amortized using the straight-line method
over the remaining lives of the patents of up to 17 to 20 years.
Patent application costs are deferred pending the outcome of patent
applications. Costs associated with unsuccessful patent applications
and abandoned intellectual property are expensed when determined to
have no recoverable value. The Company evaluates the potential
alternative uses of intangible assets, as well as the recoverability
of the carrying values of intangible assets on a recurring basis.
The components of intangible assets at December 31, 1999 and 1998 are
as follows:
1999 1998
---------------- ------------------
Patents $894,638 $871,944
Accumulated amortization (119,550) (98,081)
---------------- ------------------
$775,088 $773,863
================ ==================
During 1998, the Company recorded approximately $148,000 in general
and administrative expense related to patents which will no longer be
supported based on changes in the Company's business plan. The Company
also recorded a $1 million impairment charge in 1998 related to
technology licensed from The Dow Chemical Company (See Note 12(d).).
j. REVENUE RECOGNITION
(1) PRODUCT SALES AND WARRANTY: The Company derives revenues
primarily from sales of its hand-held gamma detection
instruments. The Company recognizes sales revenue when the
products are shipped and the earnings process has been completed.
Sales prices on products sold to EES are subject to retroactive
annual adjustment based on a fixed percentage of the actual sales
prices achieved by EES on sales to end customers made during each
fiscal year. To the extent that the Company can reasonably
estimate the end customer prices received by EES, the Company
records sales to EES based upon these estimates. To the extent
that the Company is not able to reasonably estimate end customer
sales prices related to certain product sold to EES, the Company
records revenue related to these product sales at the minimum
price provided for under its distribution agreement with EES.
The Company recognizes revenue related to the sales of products
to be used for demonstration units when products are shipped and
the earnings process has been completed. The Company's
distribution agreements generally do not permit return of
demonstration units in the ordinary course of business or have
any performance obligations on the part of the Company other than
normal product warranty obligations. To the extent that the
earnings process has not been completed or that returns, if
allowed, cannot be reasonably estimated, revenue is deferred.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company warrants its products against defects in design,
materials, and workmanship for a period of one year from the date
of sale by EES. The Company's accrual for warranty expenses is
adjusted periodically to reflect actual experience. EES also
reimburses the Company for a portion of warranty expense incurred
based on end customer sales made during a given fiscal year.
(2) LICENSE REVENUE: The Company recognizes license revenue in
connection with its distribution agreement with EES on a
straight-line basis over the five year initial term of the
agreement based on the Company's obligations to provide ongoing
support for the intellectual property being licensed such as
patent maintenance and regulatory filings. As the license relates
to intellectual property held or in-licensed by the Company, the
Company incurs no significant cost associated with the
recognition of this revenue.
k. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.
l. INCOME TAXES: Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
m. STOCK OPTION PLANS: The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its stock options.
As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price.
n. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make 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 reporting period. Actual results could differ from
those estimates.
o. COMPREHENSIVE INCOME (LOSS): On January 1, 1998, the Company
adopted SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting and display of
comprehensive income in a full set of general purpose financial
statements. Comprehensive income consists of net income (loss),
net unrealized gains (losses) on securities and foreign currency
translation adjustments, and is presented in the consolidated
statements of stockholders' equity (deficit) and accumulated
other comprehensive income (loss). The Statement requires only
additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of
operations. Due to the Company's net operating loss position,
there are no income tax effects on comprehensive income
components for any of the years presented. Prior year financial
statements have been reclassified to conform to the requirements
of SFAS No. 130.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The accumulated balances for each classification of accumulated
other comprehensive income (loss) are as follows:
GROSS
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAINS OTHER
TRANSLATION (LOSSES) ON COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
---------- ---------- -------------
Balance, December 31, 1996 $ 106,461 $ (29,859) $ 76,602
Change during 1997 (237,887) 20,569 (217,318)
--------- --------- ---------
Balance, December 31, 1997 (131,426) (9,290) (140,716)
Change during 1998 56,346 9,509 65,855
--------- --------- ---------
Balance, December 31, 1998 (75,080) 219 (74,861)
Change during 1999 75,080 (219) 74,861
--------- --------- ---------
Balance, December 31, 1999 $ -- $ -- $ --
========= ========= =========
p. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF: The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
During 1999, the Company recorded an impairment charge of
$98,000, primarily related to property and equipment no longer
expected to be recoverable as a result of the transfer of
marketing responsibilities to the Company's new distribution
partner. This impairment charge was included in general and
administrative expenses on the 1999 statement of operations. In
addition, 1999 research and development expenses included a
non-cash write-off of $218,000 in capitalized pre-production
costs written off as a result of recent accounting
recommendations issued by the EITF. During 1998, the Company
recorded an impairment charge of $222,000, primarily related to
property and equipment no longer anticipated to be used in the
RIGS initiative. This impairment charge was included in general
and administrative expenses on the 1998 statement of operations.
q. NET LOSS PER COMMON SHARE: During 1997, the Company adopted SFAS
No. 128, Earnings Per Share. SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS") and
replaced the presentation of primary EPS with a presentation of
basic EPS and diluted EPS. There are no differences in basic and
diluted EPS for the Company related to any of the years
presented. The net loss per common share for all periods
presented excludes the number of common shares issuable on
exercise of outstanding stock options and warrants into the
Company's common stock since such inclusion would be
antidilutive.
r. SEGMENT REPORTING: On December 31, 1998, the Company adopted SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. This Statement establishes standards for the way
that public business enterprises report information about
products and services, geographic areas, and major customers.
This Statement supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to
report information about major customers.
s. RECLASSIFICATION: Certain prior years' amounts have been
reclassified to conform with the 1999 presentation.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK:
Accounts receivable at December 31, 1999 and 1998, net of allowance for
doubtful accounts of $97,382 and $77,000, respectively, consist of the
following:
1999 1998
---------------- --------------
Trade $ 368,072 $ 1,611,247
Other 85,334 458,386
---------------- --------------
$ 453,406 $ 2,069,633
================ ==============
Trade receivables consist of receivables from customers based on the sale
of the Company's products.
At December 31, 1999, approximately 41% of the Company's net accounts
receivable are due from EES, and another 44% of net accounts receivable are
due from several customers in European countries. The Company does not
believe it is exposed to significant credit risk related to EES based on
the overall financial strength and credit worthiness of the customer. The
Company believes its credit risk related to foreign exchange risk at
December 31, 1999 is not material and that it has adequately addressed
other credit risks related to its international customers in estimating the
allowance for doubtful accounts.
The Company estimates an allowance for doubtful accounts based on a review
and assessment of specific accounts receivable. The activity in the
allowance for doubtful accounts for the years ended December 31, 1999 and
1998 is as follows:
1999 1998
--------------- ---------------
Allowance for doubtful accounts at beginning of year $ 77,000 $ 130,660
Provision for bad debts 16,005 134,249
Writeoffs charged against the allowance (27,057) (187,909)
Recoveries of amounts previously charged off 31,434 -
--------------- ---------------
Allowance for doubtful accounts at end of year $ 97,382 $ 77,000
=============== ===============
3. INVESTMENT IN AFFILIATE:
Investment in affiliate at December 31, 1999 and 1998 represents an
investment in XTL Biopharmaceuticals Ltd. ("XTL"). Subsequent to December
31, 1999, the Company sold its equity interest in XTL for $1.5 million (See
Note 18(b).). During 1999, the Company dissolved its 50/50 joint venture
with Peptor Ltd., Neoprobe/Peptor JV LLC. The Company has one other
investment, Cira Technologies, Inc., ("Cira"), in which the Company has an
approximate 15% interest, which is accounted for on the cost method and is
carried at zero at December 31, 1999.
4. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE:
Accrued liabilities at December 31, 1999 and 1998 consist of the following:
1999 1998
---------------- --------------
Royalties due under research and development agreement $ 261,952 $ 319,693
Compensation 244,029 547,993
Warranty reserve 84,637 78,000
Inventory purchases 61,952 38,860
Accrued loan security (See Note 10(b.)) - 993,000
Contracted services and other 713,079 835,775
---------------- --------------
$1,365,649 $2,813,321
================ ==============
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued compensation at December 31, 1999 and 1998, includes $210,153 and
$242,351, respectively, of separation payments due to former employees.
Accounts payable at December 31, 1999 and 1998 consist of the following:
1999 1998
---------------- --------------
Trade $ 410,031 $ 1,050,472
Other 349,930 1,807,245
---------------- --------------
$ 759,961 $2,857,717
================ ==============
5. LINE OF CREDIT:
At December 31, 1998, the Company had a $1 million revolving line of credit
arrangement with a bank with an interest rate of 7.3%, which was secured by
$1 million in pledged cash and investments of the Company. This line of
credit expired under its terms on August 31, 1999. During August 1999, the
Company negotiated a new line of credit with another bank. The new line of
credit provides for a maximum outstanding principal of $500,000 and bears
interest at the bank's prime rate plus one percent. This line of credit had
an original maturity date of December 31, 1999, however, the maturity date
of the new line has been extended through May 31, 2000. The new line of
credit is secured by the assets of the Company, excluding intellectual
property and equipment related to the Company's ILM technology. As of
December 31, 1999, the interest rate was 9.5%, and $480,000 was outstanding
under the new line of credit.
6. INCOME TAXES:
As of December 31, 1999, the Company's net deferred tax assets in the U.S.
were approximately $38.3 million, related principally to net operating loss
carryforwards of approximately $93.3 million available to offset future
taxable income, if any, through 2019 and tax credit carryforwards of
approximately $4.9 million (principally research and development) available
to reduce future income tax liability after utilization of tax loss
carryforwards, if any, through 2019. Due to the uncertainty surrounding the
realization of these favorable tax attributes in future tax returns, all of
the net deferred tax assets have been fully offset by a valuation
allowance.
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986, as
amended, the utilization of U.S. net operating loss and tax credit
carryforwards may be limited under the change in stock ownership rules of
the IRC. As a result of ownership changes as defined by Sections 382 and
383, which have occurred at various points in the Company's history,
management believes utilization of the Company's net operating loss
carryfowards and tax credit carryforwards may be limited.
In general, it has been the intention of the Company to reinvest the
earnings of non-U.S. subsidiaries in those operations. At December 31,
1999, the Company's international subsidiaries have net operating loss
carryforwards of approximately $9.1 million available to offset future
statutory income in those jurisdictions. However, as both subsidiaries are
currently in loss position, and as both subsidiaries are either in
statutory liquidation or receivership, no amounts have been estimated to be
remitted. Accordingly, no amounts have been provided for income tax
consequences related to international subsidiaries. Due to the liquidation
status of these subsidiaries, it is unlikely the Company will realize any
benefit related to the net operating loss carryforwards within the foreign
jurisdictions. However, the Company may be able to realize some benefit
from these foreign losses under the U.S. tax laws.
7. EQUITY:
a. REDEEMABLE PREFERRED STOCK: On February 16, 1999, the Company executed
a purchase agreement (the "Purchase Agreement") to complete the
private placement of 30,000 shares of 5% Series B redeemable
convertible preferred stock (the "Series B") for gross proceeds of $3
million ($2.8 million, net of certain placement costs). The Series B
were issued with a $100 per share stated value and were convertible
into common stock of the Company at the option of the Series B
holders. In connection with the private placement, the Company also
issued 2.9 million Class L warrants to purchase common stock of the
Company at an initial exercise price of $1.03 per share. The Series B
paid a 5% annual dividend payable in cash or common stock.
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Series B were convertible at variable prices based on the market
price of the Company's common stock, subject to a conversion price
floor of $0.55. The Class L warrants were also subject to variable
exercise prices, subject to an exercise price floor of $0.62. Holders
of the Series B had certain liquidation preferences over other
stockholders under certain provisions as defined in the Agreement and
had the right to cast the same number of votes as if the owner had
converted on the record date. Pursuant to the private placement, the
Company entered into a financial advisory agreement with the placement
agent providing the agent with Unit Purchase Options ("UPOs")
entitling the placement agent to purchase approximately 150,000 shares
of common stock in the Company.
The Company would have been obligated to redeem outstanding shares of
Series B for $120 per share (i.e., a total of $3.6 million ) under
certain conditions such as the delisting of the Company's stock from
the NASDAQ Stock Market, as occurred on July 27, 1999 and other
conditions outlined in the Purchase Agreement.
The Series B were recorded by the Company during the first quarter of
1999 at the amount of gross proceeds less the costs of the financing
and the fair value of the warrants, and classified as mezzanine
financing above the stockholders' equity section on the Company's
interim balance sheets for 1999. The calculated conversion price at
February 16, 1999, the first available conversion date, was $1.03 per
share. In accordance with the FASB's Emerging Issues Task Force Topic
D-60, the difference between the initial conversion price and the
closing market price on February 16, 1999 of $1.81 resulted in an
implied incremental yield to Series B holders of approximately $1.8
million that is reflected as conversion discount in the Company's loss
per share calculation for 1999. During the third quarter of 1999,
management assessed the likelihood of redemption of the Series B as
probable. As a result, the recorded book value of the Series B was
accreted by approximately $1.8 million to bring the book value of the
Series B up to the full redemption value of $3.6 million. This
accretion is also reflected in the Company's loss per share
calculation for 1999.
On November 12, 1999, the Company entered into a binding letter of
intent to retire the Series B, the Class L warrants and the UPOs and
to cancel the financial advisory agreement with the placement agent
(See Note 18 (a).). The letter of intent committed the Series B
Holders to surrender the Series B shares and Class L warrants, and for
the placement agent to surrender the UPOs and cancel the financial
advisory agreement as well as to grant the Company general releases
from potential litigation associated with the transaction. In exchange
for the retirement of the Series B preferred shares and surrendering
the Class L warrants and UPOs, the Company paid the Series B holders a
total of $2.5 million and issued the Series B holders 3 million shares
of common stock and warrants to purchase 3 million shares of common
stock with an exercise price of $0.74 per share. However, at December
31, 1999, final definitive agreements had not yet been signed.
Therefore, at December 31, 1999, the Company reclassified its
obligations to the Series B holders to reflect the $2.5 million
payable in cash as a current liability and the remaining book value of
the Series B, including dividends payable, as a long-term liability
that will then be reclassified during the first quarter of 2000 to
additional paid-in capital concurrent with the execution of the
definitive agreement.
b. STOCK OPTIONS: At December 31, 1999, the Company has two stock-based
compensation plans. Had compensation cost for the Company's two
stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans, consistent with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net loss As reported $ (7,894,523) $ (28,032,752) $(23,246,528)
Pro forma $ (8,551,024) $ (30,843,828) $(25,273,241)
Net loss per common As reported $ (0.34) $ (1.23) $ (1.02)
share (basic
and diluted) Pro forma $ (0.37) $ (1.35) $ (1.11)
Under the Amended and Restated Stock Option and Restricted Stock
Purchase Plan (the "Amended Plan"), and under the 1996 Stock Incentive
Plan (the "1996 Plan"), the Company may grant incentive stock options,
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
nonqualified stock options, and restricted stock awards to full-time
employees, and nonqualified stock options and restricted awards may be
granted to consultants and agents of the Company. Total shares
authorized under each plan are 2 million shares and 1.5 million
shares, respectively. Under both plans, the exercise price of each
option is greater than or equal to the closing market price of the
Company's common stock on the day prior to the date of the grant.
Options granted under the Amended Plan and the 1996 Plan generally
vest on either a monthly basis over two to four years or on an annual
basis over three years. Outstanding options under the plans, if not
exercised, generally expire ten years from their date of grant or 90
days from the date of an optionee's separation from employment with
the Company.
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions for 1999, 1998, and 1997 respectively: average risk-free
interest rates of 5.1%, 5.0% and 6.4%; expected average lives of three
to four years for each of the years presented; no dividend rate for
any year; and volatility of 123% for 1999, 103% for 1998, and 72% for
1997. The weighted average fair value of options granted in 1999, 1998
and 1997 was $0.91, $2.44 and $7.88, respectively.
A summary of the status of stock options under Company's stock option
plans as of December 31, 1999, 1998, and 1997, and changes during the
years ended on those dates is presented below:
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ----------- -------------- ---------- ------------- ----------
Outstanding at
beginning of year 1,459,445 $ 5.31 2,194,103 $ 7.81 2,002,138 $ 5.60
Granted 544,500 1.14 869,791 3.88 427,900 13.50
Forfeited (519,943) 4.20 (1,527,862) 8.22 (150,425) 13.90
Exercised - - (76,587) 2.56 (85,510) 4.25
------------- -------------- -------------
Outstanding at
end of year 1,484,002 $ 4.16 1,459,445 $ 5.31 2,194,103 $ 7.81
============= ============== =============
Options exercisable
at end of year 809,736 912,546 1,369,557
============= ============== =============
On September 28, 1998, the Company repriced 367,000 outstanding
options held by non-officer employees of the Company. In exchange for
surrendering outstanding options with exercise prices of $5.06 to
$17.75, these employees were granted 183,440 new options with an
exercise price of $1.50 per share, and the vesting term of the new
options was extended by an average of one year from the original
vesting term of the surrendered options. No expense was recorded as a
result of this repricing. Included in outstanding options as of
December 31, 1999, are 100,000 options exercisable at an exercise
price of $2.50 per share which vest on the meeting of certain Company
achievements.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
--------------------- ---------------- -------------- ----------- ----------------- ------------
$ 0.72 - $ 1.50 590,802 9 Years $1.23 143,497 $1.44
$ 2.00 - $ 3.88 399,000 4 Years $2.72 292,334 $2.79
$ 5.63 - $ 17.44 494,200 6 Years $8.83 373,905 $9.31
---------------- ---------------
$ 0.72 - $17.44 1,484,002 7 Years $4.16 809,736 $5.56
================ ===============
c. RESTRICTED STOCK: During 1999 and 1998, the Company granted 65,000
and 145,000 shares of restricted common stock, respectively, to
officers of the Company under the 1996 Plan. However, of the 1998
shares granted, 20,000 shares were forfeited subsequent to being
granted but prior to issuance, and 80,000 shares were not issued
by the Company's transfer agent until 1999.
At December 31, 1999, the Company has 220,000 restricted shares
issued and outstanding under the 1996 Plan. All of the restricted
shares granted vest on a change of control of the Company as
defined in the specific grant agreements. As a result, the Company
has not recorded any deferred compensation due to the inability to
assess the probability of the vesting event. Of the shares issued
and outstanding, 75,000 also vest under certain conditions of
termination as defined in an officer's employment agreement with
the Company (See Note 12(e).).
d. STOCK WARRANTS: At December 31, 1999, there are approximately
2,978,216 warrants outstanding to purchase common stock of the
Company. The warrants are exercisable at prices ranging from $1.03
to $17.92 per share with a weighted average exercise price per
share of $1.17. The warrants expire on various dates from June
2000 through February 2004. Outstanding warrants include 2,912,621
warrants that were subject to variable conversion terms but that
were cancelled subsequent to December 31, 1999, subject to a
Settlement Agreement with the holder (See Note 18(a).).
e. COMMON STOCK RESERVED: Shares of authorized common stock have
been reserved for the exercise of all options and warrants
outstanding.
8. SHAREHOLDER RIGHTS PLAN:
During July 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, one "Right" is to be distributed for each
share of common stock held by shareholders on the close of business on
August 28, 1995. The Rights are exercisable only if a person and its
affiliate commences a tender offer or exchange offer for 15% or more of the
Company's common stock, or if there is a public announcement that a person
and its affiliate has acquired beneficial ownership of 15% or more of the
common stock, and if the Company does not redeem the Rights during the
specified redemption period. Initially, each Right, upon becoming
exercisable, would entitle the holder to purchase from the Company one unit
consisting of 1/100th of a share of Series A Junior Participating preferred
stock at an exercise price of $35 (which is subject to adjustment). Once
the Rights become exercisable, if any person, including its affiliate,
acquires 15% or more of the common stock of the Company, each Right other
than the Rights held by the acquiring person and its affiliate becomes a
right to acquire common stock having a value equal to two times the
exercise price of the Right. The Company is entitled to redeem the Rights
for $0.01 per Right at any time prior to the expiration of the redemption
period. The Shareholder Rights Plan and the Rights will expire on August
28, 2005. The Board of Directors may amend the Shareholder Rights Plan,
from time to time, as considered necessary (See Note 7(a).)
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. RESTRUCTURING AND SUBSIDIARY LIQUIDATION ACTIVITIES: In 1995 and 1996,
the Company completed a series of clinical trials of its first
generation targeting agent for the detection of colorectal cancer,
RIGScan(R) CR49. Also during 1996, the Company submitted applications
to European and U.S. regulatory agencies requesting approvals to begin
marketing RIGScan CR49 for the detection of metastatic colorectal
cancer. Late in the fourth quarter of 1997, the Company received
requests for further information from United States and European
regulatory agencies following review of its applications. The Company
negotiated with these regulatory agencies throughout the first half of
1998 regarding the best way to respond to the requests for additional
information.
As a result of the delays in approval anticipated as a result of the
information requests, the Company began to evaluate various options
during the first quarter of 1998 to cut operating costs and
restructure the Company around its core ILM business while suspending
the majority of ongoing research activities related to its
radio-immunoguided surgery ("RIGS") and activated cellular therapy
("ACT") initiatives. Further developments during 1998 and in 1999
forced the Company to continually reevaluate its strategic plan and to
implement additional cost cutting and restructuring activities
involving both RIGS and ACT that included a series of incremental
headcount reductions and the shutdown of the Company's two
majority-owned international subsidiaries. The Company is still
working to commercialize both RIGS and ACT through a development
partner; however, no such partner has been secured as of December 31,
1999. As the Company has no commercial RIGS or ACT products, the
effect of these restructuring activities on the Company's ongoing
operations involved primarily the elimination of research and
development activities and the impairment of facilities and equipment
anticipated to be used in the RIGS manufacturing process. A
description of each action committed to by the Company, its timing and
impact on the Company's financial statements is included below. Each
of the items presented represents a separate incremental action taken.
The Company made no significant adjustments to charges related to
these items subsequent to the initial recording.
- During the first quarter of 1998, the Company notified and
severed 16 individuals as a result of expected delays in the
approval process for RIGScan CR49. The Company recorded
separation costs related to these severed employees of $719,000
reflected in research and development expenses and $69,000
reflected in general and administrative expenses. At this time,
however, the Company believed it would still be able to raise
additional funding to restart its RIGS initiative or to find a
development partner to fund the initiative and engaged an
investment banking firm to assist the Company in identifying such
a partner.
- During the third quarter of 1998, following the determination
that the Company's Swedish subsidiary, Neoprobe Europe AB
("Neoprobe Europe") would no longer be needed in a revised
RIGScan CR49 manufacturing process and unsuccessful preliminary
attempts to sell the facility, the Company recorded an impairment
charge of $1.7 million determined in accordance with SFAS No. 121
to adjust the net book value of the facility and related assets
to their net realizable value based on preliminary negotiations
to sell the assets. The Company also recorded separation costs of
$235,000 related to the severing of Neoprobe Europe's fifteen
employees. Both charges are reflected in losses related to
subsidiaries in liquidation for the year ended December 31, 1998
- During the fourth quarter of 1998, the Company notified and
severed an additional 13 individuals from its U.S. operations due
to the lack of identification of a development partner and the
inability to raise additional capital. The Company recorded
separation costs related to these severed employees of $405,000
reflected in research and development expenses. The Company also
recorded impairment charges of $222,000 during the fourth quarter
of 1998 in accordance with SFAS No. 121 related to assets no
longer anticipated to be used in the RIGS initiative (reflected
in general and administrative expenses for the year ended
December 31, 1998).
- During the fourth quarter of 1998, due also to the lack of
identification of a RIGS development partner and inability to
raise additional capital, the Company decided to suspend
construction and validation activities at Neoprobe Israel and to
attempt to sell the facility or shut it down in the event no
buyer could be found. The Company recorded separation costs
related to notifying and severing Neoprobe Israel's seventeen
employees of $79,000 that were reflected in losses related to
subsidiaries in liquidation for the year ended December 31, 1998.
The Company also applied the methodology of SFAS No. 121 in
estimating the net realizable value of the assets of Neoprobe
Israel and recorded an impairment charge of $4.1 million
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 1998 that is reflected in losses
related to subsidiaries in liquidation. In addition, the Company
accrued its contractual commitment to guarantee a limited portion
of the debt of Neoprobe Israel and reflected the associated
charge in losses related to subsidiaries in liquidation for the
year ended December 31, 1998. (See Note 10(b).).
- In September 1999, based on entering into an exclusive worldwide
distribution agreement with EES, the Company notified two
executives that they would be severed. The Company recorded
separation costs related to these severed employees of $150,000
reflected in marketing and selling expenses and $106,000
reflected in general and administrative expenses for the year
ended December 31, 1999.
- In October 1999, an additional 6 employees representing the
majority of the Company's internal marketing staff were notified
and severed. The Company recorded separation costs related to
these severed employees of $145,000 reflected in marketing and
selling expenses for the year ended December 31, 1999. In
connection with severing these individuals, the Company recorded
a $98,000 impairment of assets in accordance with SFAS No. 121
and $60,000 in losses on disposal of assets included in general
and administrative expenses for the year ended December 31, 1999.
These restructuring activities were determined based on formal
actions approved by the Company's management using the best
information available to it at the time. The amounts the Company
may ultimately incur may change as certain of the activities
outlined above are brought to their completion. A summary of the
effects by financial statement line item, as well as changes in
the amounts accrued is summarized in the table below:
EMPLOYEE ASSET
SEPARATION IMPAIRMENTS/ CONTRACTUAL
COSTS DISPOSALS COMMITMENTS TOTAL
----------- ----------- ----------- -----------
1998:
Research and development $ 1,124,155 $ -- $ -- $ 1,124,155
Marketing and selling -- -- -- --
General and administrative 69,234 222,356 -- 291,590
Losses related to subsidiaries
in liquidation 314,152 5,868,909 993,000 7,176,061
Non-cash write-downs -- (6,091,265) -- (6,091,265)
Paid in 1998 (1,265,190) -- -- (1,265,190)
----------- ----------- ----------- -----------
Balance accrued at
December 31, 1998 $ 242,351 $ -- $ 993,000 $ 1,235,351
----------- ----------- ----------- -----------
1999:
Research and development -- -- -- --
Marketing and selling 295,678 -- -- 295,678
General and administrative 105,625 158,268 -- 263,893
Effects of deconsolidation -- -- (993,000) (993,000)
Non-cash write-downs -- (158,268) -- (158,268)
Paid in 1999 (433,501) -- -- (433,501)
----------- ----------- ----------- -----------
Balance accrued at
December 31, 1999 $ 210,153 $ -- $ -- $ 210,153
=========== =========== =========== ===========
As a result of these restructuring and subsidiary liquidation
activities, the Company achieved its first quarter of operating
profitability in the Company's history during the fourth quarter of
1999. The Company expects to continue to see benefits from these
restructuring activities during 2000 and subsequent years.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENTS AND SUBSIDIARIES INFORMATION:
a. SEGMENTS: The Company owns or has rights to intellectual property
involving three primary areas of cancer diagnosis and treatment
including: hand-held gamma detection instruments currently used
primarily in the application of Intraoperative Lymphatic Mapping
("ILM"), diagnostic radiopharmaceutical products to be used in the
Company's proprietary RIGS process, and Activated Cellular Therapy
("ACT"). During 1998, the Company's business plan suspended ongoing
research activities related to RIGS and ACT to allow the Company to
focus primarily on the hand-held gamma detection instruments while
efforts are carried out to find partners or licensing parties to
fund future RIGS and ACT research and development. The Company
incurred no costs in 1999 related to ACT. Gains and losses incurred
in 1999 associated with the RIGS initiative were related to the
Company's majority-owned subsidiary, Neoprobe (Israel) Ltd.
("Neoprobe Israel"; see Note 10(b).).
The information in the following table is derived directly from the
segments' internal financial reporting used for corporate management
purposes. Such segment reporting follows generally accepted accounting
principles. The expenses attributable to corporate activity, including
amortization and interest, and other general and administrative costs are
not allocated to the operating segments.
($ AMOUNTS IN THOUSANDS)
1999 RIGS ILM ACT UNALLOCATED TOTAL
==============================================================================================================================
Net sales
United States customers $ -- $ 8,124 $ -- $ -- $ 8,124
International customers -- 1,122 -- -- 1,122
License revenue -- 200 -- -- 200
Research and development expenses -- (1,313) -- -- (1,313)
Marketing and selling expenses -- (4,471) -- -- (4,471)
General and administrative expenses -- -- -- (3,735) (3,735)
Losses related to subsidiaries in
liquidation (475) -- -- -- (475)
Other income 699 -- -- 184 883
Total assets, net of depreciation and
amortization (United States) 240 2,717 -- 7,366 10,323
Capital expenditures -- 2 -- 73 75
1998
- -------------------------------------
Net sales
United States customers $ -- $ 5,333 $ -- $ -- $ 5,333
International customers -- 430 -- 70 500
Research and development expenses (8,470) (3,380) (1,467) (1,048) (14,365)
Marketing and selling expenses -- (5,268) -- -- (5,268)
General and administrative expenses -- -- -- (6,089) (6,089)
Losses related to subsidiaries in (7,176) -- -- -- (7,176)
liquidation
Other income -- -- -- 436 436
Total assets, net of depreciation and
amortization:
United States 187 4,839 -- 6,261 11,287
Neoprobe Europe 152 -- -- -- 152
Neoprobe Israel 555 -- -- -- 555
Capital expenditures 2,851 578 -- -- 3,429
F-20
1997
- -------------------------------------
Net sales
United States customers $ -- $ 4,677 $ -- $ -- $ 4,677
International customers -- 386 -- 65 451
Research and development expenses (12,814) (4,933) (1,910) -- (19,657)
Marketing and selling expenses -- (4,307) -- -- (4,307)
General and administrative expenses -- -- -- (6,853) (6,853)
Other income -- -- -- 4,018 4,018
Total assets, net of depreciation and
amortization:
United States 182 1,248 84 30,502 32,016
Neoprobe Europe 1,631 -- -- -- 1,631
Neoprobe Israel 7,926 -- -- -- 7,926
Capital expenditures 4,504 102 84 -- 4,690
b. SUBSIDIARIES: The Company's suspended RIGS initiative included the
operations of the Company's two majority-owned international
subsidiaries, Neoprobe Europe and Neoprobe Israel. Neoprobe Europe was
acquired in 1993 primarily to perform a portion of the manufacturing
process of the monoclonal antibody used in the first RIGS product to
be used for colorectal cancer, RIGScan CR49. Neoprobe Israel was
founded to radiolabel RIGScan CR49. Neoprobe Europe and Neoprobe
Israel also both performed limited research and development activities
related to the Company's RIGS process on behalf of the U.S. parent
company. Under SFAS No. 131, neither subsidiary is considered a
segment. Neoprobe Europe recorded intrasegment revenue for
RIGS-related research performed on behalf of the U.S. parent company
of $1.2 million and $2.7 million in 1998 and 1997, respectively.
During 1998, the Company initiated steps to liquidate both Neoprobe
Europe and Neoprobe Israel as a result of the suspension of RIGS
research and development activities.
Neoprobe Europe. As a result of shutting down Neoprobe Europe, selling
the majority of its assets and severing all its employees, the Company
adopted the liquidation basis of accounting with respect to Neoprobe
Europe for the year ended December 31, 1998. The Company's
consolidated balance sheet at December 31, 1998 therefore includes
approximately $150,000 in current assets of Neoprobe Europe at their
net realizable value, and $70,000 in liabilities at the amounts
expected to settle the obligations due. The assets of Neoprobe Europe
at December 31, 1998 included primarily accounts receivable related to
the sale of certain assets and cash. The liabilities of Neoprobe
Europe included primarily amounts due to operating vendors and
consultants for the liquidation process that were settled in 1999 at
their recorded values. Included in losses related to subsidiaries in
liquidation for 1998 is $1.7 million related to impairment of assets
and $235,000 related to severance and other exit costs. Losses from
operations incurred prior to the decision to liquidate include
$807,000 reflected in research and development and $393,000 reflected
in general and administrative expenses.
The Company incurred no costs related to Neoprobe Europe during 1999.
During 1999, the Company voluntarily placed Neoprobe Europe into
statutory liquidation under the laws of Sweden. As a result of the
loss of control due to the statutory liquidation, Neoprobe Europe was
deconsolidated and is therefore not included in the financial
statements of the Company as of December 31, 1999. The deconsolidation
of Neoprobe Europe had no material impact on the results of operations
for the year ended December 31, 1999.
Neoprobe Israel. Neoprobe Israel was founded by the Company and Rotem
Industries Ltd. ("Rotem") in 1994 to construct and operate a
radiolabeling facility near Dimona, Israel. Rotem currently has a 5%
equity interest in Neoprobe Israel. Based on the Company's inability
to attract a development partner for its RIGS products, the Company
decided during the fourth quarter of 1998 to suspend construction and
validation activities at Neoprobe Israel. Following suspension of RIGS
development activities at Neoprobe Israel and unsuccessful attempts to
sell the facility, the Company initiated actions during the fourth
quarter of 1998 to liquidate Neoprobe Israel. As of December 31, 1998,
the Company adopted the liquidation basis of accounting with respect
to Neoprobe Israel. The Company applied the valuation methodology of
SFAS No. 121 in recording an impairment of the value of the facility
(including installed isolation, water-for-injection and air handling
and vialing equipment) down to its estimated fair value less costs to
sell. However, approximately $4.9 million of the construction of the
facility was
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
financed by an Israeli bank (the "Bank"). In applying the liquidation basis
of accounting, the Company believes it appropriate to present assets net of
the related bank debt because of the following: Neoprobe Israel did not
have access to adequate resources to repay such debt and payables as of
December 31, 1998. If formal collection actions were initiated by any or
all of the creditors, the Company believes that the creditors would have
had no recourse against the Company, except for the Bank whose recourse
would be limited to the Company's limited financial guarantee and it
mortgage on Neoprobe's facility itself. Accordingly, the value of the
facility was offset by the balance of the debt. Management of the Company
consulted with legal counsel in Israel regarding the Company's obligations
in the event of voluntary or involuntary bankruptcy. Management believed at
December 31, 1998 based on the opinion of Israeli counsel that the Company
would not be required to make a capital contribution to pay off the bank
debt. As a result, the consolidated balance sheet at December 31, 1998
included approximately $555,000 in current assets of Neoprobe Israel at
their net realizable value, and $876,000 in liabilities at the amounts
expected to settle the obligations due. Current assets were comprised
primarily of cash and cash equivalents and current liabilities included
primarily amounts due trade creditors related to the construction of the
facility.
Included in losses related to subsidiaries in liquidation for 1998 is $5.1
million related primarily to non-cash adjustment of assets and liabilities
to their net realizable value and $79,000 related to severance and other
exit costs. Losses from operations incurred prior to the decision to
liquidate include $549,000 reflected in research and development and
$459,000 reflected in general and administrative expenses. During 1999,
Neoprobe Israel incurred approximately $475,000 in operating-related
charges, primarily interest, that is included in losses related to
subsidiaries in liquidation for the year ended December 31, 1999.
During October 1999, a representative of the Bank was appointed as receiver
for Neoprobe Israel. As a result of the receivership, management believes
that the Company no longer controls Neoprobe Israel. As a result, Neoprobe
Israel was deconsolidated as of December 31, 1999. The Company's
consolidated balance sheet at December 31, 1999, therefore, does not
reflect the financial position of Neoprobe Israel. At December 31, 1999,
Neoprobe Israel had outstanding debt to a bank of $4.9 million. The funds
were drawn from the Bank pursuant to an investment program approved by the
State of Israel's Finance Committee to construct and operate the
radiolabeling facility. Amounts received under the loan agreement are
secured by property obtained through the use of proceeds. The loans with
the bank are guaranteed by the State of Israel's Investment Centre. The
Company has also guaranteed a limited portion of the loan based on a
percentage of the loan drawn. The Company's guarantee is fully secured by
$993,000 in cash deposited in an account with the Bank for which the bank
has the right of set-off. However, as the Company continues to believe it
may be required to relinquish these funds currently deposited as security
for the loan for which the Bank has the right of setoff, the Company has
removed both the cash and the offsetting liability from its balance sheet
at December 31, 1999 (See Note 16.)
11. RELATED-PARTY TRANSACTIONS:
A partner of a law firm which provides various legal services to the
Company, including patent and trademark filings and prosecuting patent and
trademark applications, is a former director of the Company. The partner's
officer and director affiliations ended in May 1997. Costs incurred related
to services performed and patent maintenance fees paid by this firm
approximated $302,000 for the year ended December 31, 1997.
12. AGREEMENTS:
a. SUPPLY AGREEMENTS: In December 1997, the Company entered into an
exclusive supply agreement with eV Products ("eV"), a division of
II-VI Incorporated, for the supply of certain crystals and associated
electronics to be used in the manufacture of the Company's proprietary
line of hand-held gamma detection instruments. The original term of
the agreement expires on December 31, 2002, but may be automatically
extended for an additional three years. The agreement calls for the
Company to purchase minimum quantities of crystals used by the Company
in order to maintain exclusivity. Total purchases under the supply
agreement were $587,000, $478,000 and $5,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company expects to
purchase a minimum of $250,000 in crystals from eV in 2000 in order to
maintain the exclusivity provision. eV is not the only potential
supplier of such crystals; however, any prolonged interruption from
this source could restrict the availability of the Company's probe
products, which would affect operating results adversely.
In May 1999, the Company entered into a supply agreement with The
MedTech Group, Inc. ("MedTech") for the supply of BlueTip(TM) probes
and related accessories. The original term of the agreement expires on
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, but may be automatically extended for an additional
three years. The agreement calls for the Company to deliver annual
product forecasts to MedTech and for the Company to purchase at least
75% of forecasted product demand on a quarterly basis. Total purchases
under the supply agreement were $140,000 for the year ended December
31, 1999. The Company expects to purchase a minimum of $60,000 in
BlueTip probes and accessories from MedTech through the first quarter
of 2000. The agreement may be terminated by the Company upon twelve
months notice or in the event of failure to supply or by either party
due to material breach or insolvency.
b. MARKETING AND DISTRIBUTION AGREEMENTS: In September 1996, the Company
executed a License and Distributorship Agreement with the United
States Surgical Corporation ("USSC"). Effective October 17, 1997, the
Company and USSC agreed to terminate the agreement, as amended. In
connection with the termination, after receipt of payment, the Company
agreed to pay USSC net commissions on orders received prior to the
effective date of the termination and to continue to warranty and
service devices sold under the terms of the agreement. The parties
have also agreed to discharge and release the other from all remaining
claims and financial obligations relating to the agreement, including
license fees. The Company had also received $2 million from USSC on
execution of the agreement in 1996 and recognized this amount as
income in the fourth quarter of 1997 concurrent with the termination
of the agreement.
In April 1998, the Company executed a non-exclusive Sales and
Marketing Agreement with Ethicon Endo-Surgery, Inc. ("EES"), a Johnson
& Johnson company, to market and promote certain of the Company's line
of hand-held gamma detection instruments. On January 29, 1999, the
Company provided EES with notice of the Company's intent to terminate
the agreement effective March 1, 1999.
Effective February 1, 1999, the Company executed a Sales and Marketing
Agreement with KOL BioMedical Instruments, Inc. ("KOL") to market the
Company's current and future gamma guided surgery products in the U.S.
The Company terminated the agreement with KOL effective October 31,
1999. In connection with the termination, the Company agreed to pay
KOL any outstanding commission amounts due as well as a fee to
terminate the agreement. The $700,000 termination fee is included in
marketing and selling expenses for the year ended December 31, 1999.
The Company also agreed to repurchase any unsold demonstration units
that had been purchased by KOL up to a maximum of $1 million. The
Company repurchased a total of $860,000 in demonstration equipment
from KOL. The Company's inventory balance at December 31, 1999
includes approximately $625,000 in refurbished demonstration equipment
which EES has agreed to purchase, but which had not yet shipped as of
December 31, 1999, valued at the lower of cost or market.
The Company entered into a new Distribution Agreement (the
"Agreement") with EES effective October 1, 1999 for an initial
five-year term with options to extend for two successive two-year
terms. Under the Agreement, the Company will manufacture and sell its
ILM products (the "Products") exclusively to EES, who will distribute
the Products globally. EES agreed to purchase minimum quantities of
the Company's Products over the first three years of the term of the
Agreement and to reimburse the Company for certain research and
development costs and a portion of the Company's warranty costs. EES
also agreed to purchase the demonstration units repurchased from KOL
at cost. The Company is obligated to continue certain product
maintenance activities and to provide ongoing regulatory support for
the Products.
EES may terminate the Agreement if the Company fails to supply
Products for specified periods, commits a material breach of the
Agreement, suffers a change of control of the Company to a competitor
of EES, or becomes insolvent. If termination is due to failure to
supply or a material breach by the Company, EES would have the right
to use the Company's intellectual property and regulatory information
to manufacture and sell the Products exclusively on a global basis for
the remaining term of the Agreement with no additional financial
obligation to the Company. If termination is due to insolvency or a
change of control that does not affect supply of the Products, EES has
the right to continue to sell the Products on an exclusive global
basis for a period of six months or require the Company to repurchase
any unsold Products in its inventory.
Under the Agreement, EES received a non-exclusive, worldwide paid-up
license (the "License") to the Company's ILM intellectual property to
make and sell other products that may be developed using the
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company's ILM intellectual property. The term of the License is the
same as that of the Agreement. EES paid the Company a non-refundable
license fee of $4 million. The Company intends to recognize the
license fee as revenue on a straight-line basis over the five-year
initial term of the Agreement. If the Agreement is terminated by the
Company as a result of a material breach by EES, EES would be required
to pay the Company a royalty on all products developed and sold by EES
using the Company's ILM intellectual property. In addition, the
Company is entitled to a royalty on any ILM product commercialized by
EES that does not infringe any of the Company's existing intellectual
property.
c. RESEARCH AND DEVELOPMENT: Under a research and development agreement
between the Company, The Ohio State University, and the Department of
Development of the State of Ohio, the Company believes it is obligated
to pay the State of Ohio royalties calculated as a percentage of net
sales of certain products utilizing the results of the sponsored
research (i.e., the Neoprobe(R)1000 and Neoprobe(R) 1500 systems and
RIGScan CR49), a sharing of proceeds received from the sale of
technology, and a portion of the royalties collected from any license
the Company may grant. The Company has an option to terminate its
royalty obligation following completion of the research period by
making a termination payment to the State of Ohio.
d. LICENSE AND TECHNOLOGY AGREEMENTS: In February 1996, the Company and
XTL Biopharmaceuticals Ltd. ("XTL") executed a series of agreements,
including an Investment Agreement and a Research and Development
Agreement whereby XTL will perform specific research activities using
XTL's proprietary technology for the development of future products
for the Company. The Company has sold its equity interest in XTL (See
Note 18(b).); however, the Company retains certain technology rights
to research performed by XTL on the Company's behalf. The Company
recorded research and development expenses of $595,000 and $405,000
during 1998 and 1997, respectively, related to research performed on
its behalf by XTL.
In March 1996, the Company executed a Subscription and Option
Agreement with Cira Technologies, Inc. ("Cira"), under which the
Company received a 10% equity interest in Cira and an option to
increase its interest in Cira by 15%. A former chairman of the Company
is a director and shareholder of Cira. In April 1998, the Company and
Cira entered into a restated Subscription and Option Agreement that
terminated the March 1996 agreement. Under the new Subscription and
Option Agreement, the Company agreed to purchase additional shares of
Cira stock for $.001 per share. The purchase of the additional shares
by Neoprobe brought its interest in Cira to 15% of the total issued
and outstanding shares of Cira common stock. Since 1996, the Company
has entered into a series of technology license and revenue sharing
agreements that have been modified from time-to-time. In connection
with these agreements, the Company incurred approximately $337,000 and
$239,000 in research and development expenses for the years ended
December 31, 1998 and 1997. The Company incurred no expenses in 1999
related to technology for which Cira has rights and has no outstanding
obligations to incur future expenses as of December 31, 1999. The
Company does, however, retain certain milestone and revenue sharing
rights in the event Cira is successful in licensing or commercializing
certain technologies.
In May 1996, the Company executed two license agreements with The Dow
Chemical Company ("Dow"), whereby the Company was granted an exclusive
license to technology (including the right to sublicense) covered by
patents held by Dow. In exchange, the Company issued Dow 124,805
shares of common stock valued at $2 million. The Company agreed to
make payments to Dow following achievement of certain development and
commercial milestones by the Company. In addition, if the Company
sublicenses the technology, the Company must pay Dow a certain
percentage of all payments received by the Company. A portion of the
technology was used in the Company's RIGS research and development
initiatives. Accordingly, the $500,000 allocated to this portion of
the technology was recorded as research and development expense in
1996. During 1997, the Company determined that due to specific
clinical development achievements of competing technology, $500,000 of
the cost of this technology should be expensed as research and
development costs. At December 31, 1997, approximately $1 million was
included in intangible assets related to this technology assets with
alternative future uses. During the fourth quarter of 1998, the
Company determined, based on analysis of product failures for similar
technologies and unsuccessful attempts to market the technology to
other parties, that the remaining value of the technology
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
was impaired. Accordingly, the Company recorded an impairment charge
of $1 million which was included in research and development for the
year ended December 31, 1998.
e. EMPLOYMENT: The Company has an employment agreement through June 30,
2000 with one executive officer which provides for restricted stock
purchase agreements. The agreement provides that the officer is
entitled to receive up to an aggregate of 110,000 shares of the
Company's common stock at par value subject to vesting provisions.
Vesting of the shares does not commence unless there is a change in
control of the Company, or under certain conditions of termination as
defined in the agreement. Of the unvested portion of the restricted
shares, 30,000 shares, 45,000 shares, and 35,000 shares will be
forfeited no later than June 4, 2006, May 20, 2008 and April 23, 2009,
respectively. The Company has not recognized any expense under the
agreement due to the contingent nature of the vesting provision and
the risk of forfeiture.
13. LEASES:
The Company leases certain office and manufacturing equipment under capital
leases which expire on various dates through 2002. In December 1996, the
Company entered into a seventy-seven month operating lease agreement for
office space, commencing April 1, 1997.
The future minimum lease payments, net of sublease rental income, for the
years ending December 31 are as follows:
CAPITAL OPERATING
LEASES LEASES
----------------- --------------------
2000 $ 91,301 $ 205,129
2001 56,590 182,668
2002 14,148 177,201
2003 - 119,417
----------------- --------------------
162,039 $ 684,415
====================
Less amount representing
interest 6,223
-----------------
Present value of net minimum
lease payments $ 155,816
Less current portion 87,007
-----------------
Capital lease obligations,
excluding current portion $ 68,809
=================
The Company expects rental income from subleases of $65,400, $67,712,
$70,652, and $48,291 in 2000 through 2003, respectively, based on two
subleases executed in December 1998 and February 1999. Total rental expense
was approximately $200,000, $529,000, and $660,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
14. EMPLOYEE BENEFIT PLAN:
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions and
the Company may, but is not obligated to, match a portion of the employee's
contribution with the Company's common stock, up to a defined maximum. The
Company accrued expenses of approximately $23,900, $41,600, and $57,300
during 1999, 1998, and 1997, respectively related to common stock to be
subsequently contributed to the plan.
15. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:
The Company paid interest, net of amounts capitalized, aggregating $82,617,
$129,874 and $62,653 for the years ended December 31, 1999, 1998, and 1997,
respectively.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 1999, in connection with the retirement of the
Series B preferred stock and Class L warrants (See Note 7(a).), the Company
recorded a non-cash reclassification of amounts related to the Series B
preferred stock and accrued dividends (cumulatively, $3.7 million) to
current portion of obligation to preferred stockholder ($2.5 million) and
obligation to preferred stockholder ($1.2 million). Also during the fourth
quarter of 1999, in connection with the deconsolidation of Neoprobe Israel
(See Note 9.), the Company recorded an adjustment which removed $993,000 in
both cash and related accrued liability from the Company's balance sheet.
During 1998, a note receivable was converted into common stock in XTL (See
Note 12(d).). The Company also incurred capital lease obligations of
approximately $455,000 in 1997 to finance equipment.
16. CONTINGENCIES:
Pursuant to the Company's decision to liquidate Neoprobe Israel, management
of the Company believes Neoprobe Israel may be subject to claims from the
State of Israel, a bank, and various vendors (collectively, the
"Creditors"). The Company believes its only contractual obligation related
to Neoprobe Israel relates to the limited amount guarantee which is fully
secured with the bank (See Note 10(b).). However, it is possible that the
Company may be subject to additional claims related to Neoprobe Israel.
Management does not believe, based on advice from counsel, that such claims
would have a material adverse affect on the Company's financial position or
results of operations.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
17. LIQUIDITY:
The Company has experienced significant operating losses in each year since
inception, and had an accumulated deficit of approximately $120 million as
of December 31, 1999. For the years ended December 31, 1999, 1998, and
1997, the Company's net losses were $4 million, $28 million, and $23
million, respectively. As a result of these net losses, the Company has a
stockholders' deficit of approximately $140,000 at December 31, 1999. The
Company expects to achieve operating profitability for 2000 based on
forecast, but not fully committed, purchases of products from the Company
by EES. As of December 31, 1999, the Company had cash and cash equivalents
of $4.9 million available to finance its operating activities. The Company
believes its available cash balance, coupled with cash flow expected to be
generated from operations, should be adequate to finance its operations for
the forseeable future.
18. SUBSEQUENT EVENTS:
a. RETIREMENT OF SERIES B PREFERRED STOCK: On January 20, 2000, the
Company executed a definitive Settlement Agreement with the Series B
holders to retire the 30,000 shares of Series B preferred stock issued
in February 1999. In addition to retiring the preferred shares, the
Series B holders returned the Class L warrants issued in connection
with the Series B and the placement agent returned the UPOs. In
exchange for the retirement of the Series B preferred shares and
surrendering the Class L warrants and UPOs, the Company paid the
Series B holders $2.5 million and issued the Series B holders 3
million shares of common stock and 3 million warrants to purchase
common stock with an exercise price of $0.74 per share.
The transaction will be reported in the Company's first quarter 2000
financial statements and be measured based on the market price of the
Company's common stock as of the execution of the definitive agreement
(i.e., $0.59 per share). As a result, the Company expects to reflect a
loss on the retirement of the preferred shares of $1.2 million below
net income in its calculation of earnings per share during the first
quarter of 2000. This amount represents the value of the cash given up
plus the market value of the stock issued and the estimated market
value of the warrants issued as valued on January 20, 2000 less the
previously recorded book value of the Series B preferred stock and
warrants.
b. SALE OF INVESTMENT IN XTL: On January 19, 2000, the Company sold its
equity interest in XTL to a third party for $1.5 million. The Company
recorded no gain or loss associated with this transaction.
F-26
c. MANUFACTURING AND SUPPLY AGREEMENT: In March 2000, the Company entered
into a manufacturing and supply agreement with Plexus for the
exclusive manufacture of the Company's 14mm probe and neo2000 control
unit. The original term of the agreement expires on December 31, 2003
but may be extended for an additional year given six months notice
prior to December 31, 2003. The Company has the right to terminate the
agreement upon six months written notice. The agreement may be
terminated by either party in the event of material breach or
insolvency, or by the Company in the event of failure to supply. The
Company may also have the covered product manufactured by other
suppliers in the event of failure to supply or if the Company is able
to secure another source of supply with significantly more favorable
pricing terms than those offered by Plexus. The agreement calls for
the Company to deliver rolling 12-month product forecasts to Plexus
and to place purchase orders 60 days prior to requested delivery in
accordance with the forecast. In the event the agreement is terminated
by Neoprobe or if Plexus ceases to be the exclusive supplier of the
covered products, the Company is required to purchase all finished
components on hand at Plexus plus raw materials not able to be
restocked with suppliers.
F-27
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
NEOPROBE CORPORATION
-----------------------
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1999
-----------------------
EXHIBITS
-----------------------
================================================================================
EXHIBIT INDEX
-------------
EXHIBIT NUMBER OF PAGES PAGE IN MANUALLY
NUMBER DESCRIPTION IN ORIGINAL DOCUMENT+ SIGNED ORIGINAL
3.1. Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected and as amended 25 *
----
3.2. Amended and Restated By-Laws, as amended 15 *
----
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of Registrant 25 *
----
4.2. See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant 13 *
----
4.3. Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company. 47 *
----
4.4. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999. 3 *
----
10.1.1.--10.1.24. Reserved
10.1.25. Rights Agreement between the Registrant and Continental Stock
Transfer & Trust Company dated as of July 18, 1995. 47 *
----
10.1.26.--10.1.30. Reserved 18 *
----
10.1.31. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999. 3 *
----
10.1.32. Preferred Stock and Warrant Purchase Agreement dated February
16, 1999 among the Registrant, The Aries Master Fund, a Cayman
Island exempted company, and The Aries Domestic Fund, L.P. 44 *
----
10.1.33. Warrant dated February 16, 1999 for the purchase of shares to
purchase Common Stock issued to The Aries Master Fund, a
Cayman Island exempted company. This exhibit is one of two
substantially identical instruments and is accompanied by a
schedule identifying the other instrument omitted and setting
forth the material details in which such instrument differs
from the one filed herewith. 11 *
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner
of its securities or to any person from whom a proxy was solicited in connection
with the Registrant's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by refernce.
10.1.34. Option Units dated February 16, 1999 for the purchase of
shares of 5% Series B Convertible Preferred Stock of the
Registrant and warrants to purchase shares of Common Stock
issued to Paramount Capital, Inc. 15 *
----
10.1.35. Financial Advisory Agreement dated February 16, 1999 between
the Registrant and Paramount Capital, Inc. 8 *
----
10.1.36 Letter agreement dated February 24, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P. 2 *
----
10.1.37. Letter agreement dated March 12, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P. 2 *
----
10.1.38 Letter Agreement dated April 1, 1999 among the Registrant, The
Aries Master Fund, a Cayman Island Exempted Company, and The
Aries Domestic Fund, L.P. 3 *
----
10.2.1.--10.2.14. Reserved
10.2.15. Option Agreements between the Registrant and David C. Bupp 17 *
----
10.2.16.--10.2.17. Reserved
10.2.18. Non-Qualified Stock Option Agreement dated May 3, 1993 between
the Registrant and David C. Bupp 4 *
----
10.2.19.--10.2.22. Reserved
10.2.23. Non-Qualified Stock Option Agreement dated February 28, 1992
and amended and restated June 3, 1993 between the Registrant
and David C. Bupp 4 *
----
10.2.24. Non-Qualified Stock Option Agreement dated July 1, 1990 and
amended and restated June 3, 1993 between the Registrant and
David C. Bupp 4 *
----
10.2.25. Non-Qualified Stock Option Agreement dated June 1, 1992 and
amended and restated June 3, 1993 between the Registrant and
John L. Ridihalgh 4 *
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner
of its securities or to any person from whom a proxy was solicited in connection
with the Registrant's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.2.26. Amended and Restated Stock Option and Restricted Stock
Purchase Plan dated March 3, 1994 11 *
----
10.2.27.--10.2.28. Reserved.
10.2.29. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and John L. Ridihalgh 3 *
----
10.2.30. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and David C. Bupp 3 *
----
10.2.31.--10.2.33 Reserved.
10.2.34. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and John L. Ridihalgh 4 *
----
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and David C. Bupp 4 *
----
10.2.36. Reserved.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as amended
March 13, 1997 21 *
----
10.2.38. Reserved.
10.2.39. Non-Qualified Stock Option Agreement dated January 18, 1996
between the Registrant and David C. Bupp 3 *
----
10.2.40. Reserved.
10.2.41. Non-Qualified Stock Option Agreement dated February 3, 1997
between the Registrant and David C. Bupp 3 *
----
10.2.42. Reserved.
10.2.43. Agreement, Release, and Waiver dated February 23, 1998 between
the Registrant and Dr. William Eisenhardt. 7 *
----
10.2.44. Employment Agreement dated as of January 1, 1998 between the
Registrant and David C. Bupp. 7 *
----
10.2.45. Restricted Stock Purchase Agreement between David C. Bupp and
the Registrant dated May 20, 1998. 3 *
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner
of its securities or to any person from whom a proxy was solicited in connection
with the Registrant's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.2.46. Waiver by David Bupp dated February 16, 1999 of certain
provisions in the employment agreement between the Registrant
and David C. Bupp dated January 1, 1998. 1 *
----
10.2.47. Severance Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman. This agreement is one of
three substantially identical agreements and is accompanied by
a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith. 4 *
----
10.2.48. Restricted Stock Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman. This agreement is one of
three substantially identical agreements and is accompanied by
a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith. 4 *
----
10.2.49. Separation Agreement dated October 21, 1998 between the
Registrant and John L. Ridihalgh. 9 *
----
10.2.50. Restricted Stock Agreement dated April 30, 1999 between the
Registrant and David C. Bupp. This Agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details in which such agreements differ
from the one that is filed herewith. 5 *
----
10.2.51. Employment Agreement between the Registrant and David C. Bupp
dated July 1, 1999. 8 *
----
10.2.52. Severance Agreement dated November 30, 1999 between the
Registrant and Patricia Coburn. 5 47
----
10.3.1. Technology Transfer Agreement dated July 29, 1992 between the
Registrant and The Dow Chemical Corporation (subject to an
order granting portions thereof confidential treatment). 15 *
----
10.3.2.--10.3.29. Reserved.
10.3.30. Facility Agreement dated July 17, 1995 among Registrant,
Neoprobe (Israel) Ltd., and Rotem Industries, Ltd. (subject to
an order granting portions thereof confidential treatment) 12 *
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial
owner of its securities or to any person from whom a proxy was solicited in
connection with the Registrant's most recent Annual Meeting of Stockholders upon
the payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.3.31. Cooperative Research and Development Agreement between
Registrant and National Cancer Institute 67 *
----
10.3.32. First Amendment to Facility Agreement dated July 17, 1995
among Registrant, Neoprobe (Israel), Ltd. and Rotem
Industries, Ltd. 1 *
----
10.3.33.--10.3.34. Reserved.
10.3.35. Investors' Rights Agreement dated February 5, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd 19 *
----
10.3.36. Reserved.
10.3.37. Research and Development Agreement dated February 13, 1996
between Registrant and XTL Biopharmaceuticals, Ltd. (subject
to an order granting portions thereof confidential treatment) 14 *
----
10.3.38. Sublicense Agreement dated February 13, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd. (subject to an
order granting portions thereof confidential treatment) 8 *
----
10.3.39.--10.3.44. Reserved.
10.3.45. License dated May 1, 1996 between Registrant and The Dow
Chemical Company 9 *
----
10.3.46. License Agreement dated May 1, 1996 between Registrant and The
Dow Chemical Company(subject to an order granting portions
thereof confidential treatment) 27 *
----
10.3.47. License and Option Agreement between Cira Technologies, Inc.
and Neoprobe Corporation dated April 1, 1998. 32 *
----
10.3.48. Restated Subscription and Option Agreement between the
Registrant, Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre Triozzi and Gregory Noll, dated April 17,
1998. 12 *
----
10.3.49. Restated Stockholders Agreement with the Registrant, Cira
Technologies, Inc., Richard G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith, Ltd.,
Pierre L. Triozzi and Gregory Noll, dated April 17, 1998. 5 *
----
10.4.1.--10.4.15. Reserved
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial
owner of its securities or to any person from whom a proxy was solicited in
connection with the Registrant's most recent Annual Meeting of Stockholders upon
the payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.4.16. Project Management Agreement dated May 17, 1995 between
Neoprobe (Israel) Ltd. and BARAN Project Construction Ltd. 6 *
----
10.4.17.--10.4.21. Reserved.
10.4.22. Sales and Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(subject to an order granting portions thereof confidential
treatment) 13 *
----
10.4.23. Loan Agreement between the Registrant and Bank One, NA, dated
April 16, 1998 (incorporated by reference to Exhibit 10.4.23
to the 2nd Quarter 1998 Form 10-Q). 13 *
----
10.4.24. Variable Rate Cognovit Promissory Note, dated April 16, 1998,
issued by Registrant to Bank One, NA. 10 *
----
10.4.25. Security Agreement between the Registrant and Bank One, NA,
dated April 16, 1998. 5 *
----
10.4.26. Letter amendment dated October 14, 1998 to the Sales and
Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(subject to an order granting portions thereof confidential
treatment) 2 *
----
10.4.27. Promissory Note, dated September 25, 1998, issued by
Registrant to Bank One, NA. 2 *
----
10.4.28. Addendum to Promissory Note dated September 25, 1998 issued by
Registrant to Bank One, NA. 6 *
----
10.4.29. Covenant Agreement dated September 25, 1998 between the
Registrant and Bank One, NA. 3 *
----
10.4.30. Assignment of Deposit Account dated September 25, 1998 between
Registrant and Bank One, NA. 4 *
----
10.4.31. Asset Purchase Agreement dated October 14, 1998 between the
Registrant, Neoprobe AB, a corporation organized and existing
under the laws of Sweden, and Bioinvent Production AB, a
corporation organized and existing under the laws of Sweden. 8 *
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial
owner of its securities or to any person from whom a proxy was solicited in
connection with the Registrant's most recent Annual Meeting of Stockholders upon
the payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.4.32. Supply Agreement between the Registrant and eV Products dated
December 8, 1997 (filed pursuant to Rule 24b-2 under which the
Registrant has requested confidential treatment of certain
portions of this Exhibit). 17 *
----
10.4.33. Sales and Marketing Agreement dated February 1, 1999 between
the Registrant and KOL Bio Medical Instruments, Inc. (subject
to an order granting portions thereof confidential treatment). 20 *
----
10.4.34. Revolving Credit Note between the Registrant and The Provident
Bank dated August 31, 1999. 13 *
----
10.4.35. Tennessee Revolving Credit Agreement between the Registrant
and The Provident Bank dated August 31, 1999. 11 *
----
10.4.36. Security Agreement between the Registrant and The Provident
Bank dated August 31, 1999. 13 *
----
10.4.37. Termination Agreement between the Registrant and Kol
Bio-Medical Instruments, Inc. dated October 1, 1999 (subject
to an order granting portions thereof confidential treatment). 13 *
----
10.4.38. Amendment to Termination Agreement between the Registrant and
Kol Bio-Medical Instruments, Inc. dated October 1, 1999
(subject to an order granting portions thereof confidential
treatment). 2 *
----
10.4.39. Distribution Agreement between the Registrant and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (subject to an order
granting portions thereof confidential treatment). 48 *
----
10.4.40. Amended and Restated Revolving Credit Note between the
Registrant and The Provident Bank dated December 31, 1999. 13 52
----
10.4.41. Tennessee Revolving Credit Note between the Registrant and The
Provident Bank dated December 31, 1999. 13 65
----
10.4.42 Amended and Restated Security Agreement between the Registrant
and The Provident Bank dated December 31, 1999 14 78
----
10.4.43 Amendment No. 1 to Amended and Restated Revolving Credit Note
dated March 2, 2000 2 92
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial
owner of its securities or to any person from whom a proxy was solicited in
connection with the Registrant's most recent Annual Meeting of Stockholders upon
the payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.
10.4.44 Amendment No. 1 to Tennessee Revolving Credit Note dated as of
March 2, 2000 2 94
----
11.1. Computation of Net Loss Per Share 1 95
----
21.1. Subsidiaries of Registrant 1 96
----
23.1. Consent of PricewaterhouseCoopers LLP 1 97
----
23.2 Consent of KPMG LLP 1 98
----
24.1. Powers of Attorney 8 99
----
24.2. Certified resolution of the Registrant's Board of Directors
authorizing officers and directors signing on behalf of the
Company to sign pursuant to a power of attorney 1 107
----
- ----------
+ The Registrant will furnish a copy of any exhibit to a beneficial
owner of its securities or to any person from whom a proxy was solicited in
connection with the Registrant's most recent Annual Meeting of Stockholders upon
the payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference.