UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 31, 2000
OR
|_| TRANSITION REPORT UNDER 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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(Name of Small Business Issuer 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)
Issuer'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)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. |X|
The aggregate market value of shares of common stock held by non-affiliates of
the registrant on March 16, 2001 was $12,945,035.
The number of shares of common stock outstanding on March 16, 2001 was
26,266,770.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DOCUMENTS INCORPORATED BY REFERENCE
None.
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. Neoprobe is an innovator in gamma guided surgery dedicated to
improving the diagnosis, treatment and quality of life of cancer patients. 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. 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. Due to regulatory and financial considerations, the
Company suspended internal 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.
Precipitated primarily by the Company's failure to gain regulatory marketing
clearance of its initial RIGS product, the Company 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. Both subsidiaries are
in statutory liquidation or receivership at December 31, 2000.
During the fourth quarter of 1999, the Company entered into an arrangement with
Ethicon Endo-Surgery, Inc. (Ethicon), a Johnson & Johnson company, to market and
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 fee. The
Company also severed the majority of its internal marketing personnel subsequent
to entering into the Ethicon 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.
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
significant spending on research and development activities related to its RIGS
or ACT products until it finds partners who will take primary responsibility for
the clinical, regulatory and financial activities related to further product
development.
2
THE COMPANY'S TECHNOLOGY
GAMMA DETECTION SYSTEMS FOR LYMPHATIC MAPPING AND OTHER APPLICATIONS
The Company's principal focus is the manufacture and distribution of a line of
gamma radiation detection instruments used intraoperatively by surgeons in the
diagnosis and treatment of cancer and related diseases. The Company's currently
marketed line of gamma detection systems has been cleared to market by the U.S.
Food and Drug Administration (FDA) and other international regulatory agencies
for marketing and commercial distribution throughout most major global
commercial markets.
The Company's patented gamma detection systems consist of hand-held detector
probes and a 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. The neo2000(R) Gamma Detection System, originally released in 1998,
is the third generation of the Company's gamma detection systems. The neo2000 is
designed as a platform for future growth of the Company's instrument business.
The neo2000 is software upgradeable and has a common interface for all current
and planned surgical targeting probes.
Surgeons are using Neoprobe's gamma detection systems in the application of
lymphatic mapping to help trace the lymphatic patterns in a cancer patient to
evaluate potential tumor drainage and cancer spread in lymphatic tissue. The
technique does not detect cancer; it helps surgeons find the lymph node(s) to
which a tumor is likely to drain and spread. The lymph node(s) (sometimes
referred to as the "sentinel" node) may provide critical information about the
stage of a patient's disease. The technique, ILM, begins when a patient is
injected at the site of the main tumor with a commercially available radioactive
tracing agent. 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 a hand-held gamma-radiation-detection 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 indicated ILM is approximately 97% accurate
in predicting the presence or absence of disease spread in melanoma or breast
cancers. As a result, more than 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.
Lymphatic mapping has become the standard of care for treating patients with
melanoma at many institutions. For breast cancer, the technique appears to be
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 Cancer
Institute, and the American College of Surgeons. In addition to lymphatic
mapping, surgeons are investigating the use of 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 and penile cancers. Additional applications of the technology are
being investigated.
The Company, in conjunction with its distribution partner, Ethicon, 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.
3
The Company is actively selling the neo2000 instruments through Ethicon and is
working to expand 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 helped generate $8.8 million in revenue
for the Company during 2000. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The majority of the Company's current products are capital in nature and
generate revenue for the Company only on the initial sale. To complement the
one-time revenue stream related to its capital products, the Company is
researching and developing recurring revenue or "procedural" products that would
generate revenue for the Company based on each procedure in which they were
used. To that end, the Company has completed an option agreement with the
University of California San Diego (UCSD) for a proprietary compound that the
Company believes could be used as a lymph node locating agent in ILM procedures.
Neoprobe and UCSD have completed the preclinical evaluation of the compound to
support applications for the human clinical evaluation . UCSD researchers
received clearance from the U.S. Food and Drug Administration (FDA) to commence
human clinical studies. The initial Phase I human clinical study of the compound
is being funded by a research grant from the Susan G. Komen Breast Cancer
Research Foundation and is set to begin patient enrollment in April 2001.
Neoprobe's ILM business strategy has been 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 is an
investigational technology that combines a patented hand-held gamma radiation
detection probe, proprietary disease-specific 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
include humanized antibodies, monoclonal antibodies and 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.
The Company has conducted several clinical trials related to its RIGS technology
and in 1996, following Phase III trials with a colorectal agent, RIGScan(R)
CR49, submitted pre-marketing applications to regulatory authorities in the
United States and the European Union. Following requests from both groups for
additional information and subsequent discussions to clarify the requests, the
Company determined that additional clinical trials would be necessary to gain
approval. Because of the cost and risk of clinical trials, the Company
determined that it will not conduct clinical trials of RIGScan CR49 or a second
generation antibody unless it is able to find a partner who would take primary
responsibility for completing the regulatory and financial activities associated
with clinical trials, manufacturing validation and product commercialization.
The Company does not intend to fund any further significant RIGS-related
research and development on its own.
4
During 2000, the Company executed and amended an agreement with a third party,
NuRIGS Ltd. (NuRIGS), that provides for an option effective through December 31,
2001 to license the Company's RIGS technology for use in the diagnosis and
treatment of colorectal cancer. Under the terms of the option agreement, NuRIGS,
an Israeli entity organized specifically to further RIGS colorectal research,
will have access to the Company's prior research data and will use a second
generation humanized RIGS antibody in pre-clinical testing and in a Phase I
clinical trial for colorectal cancer. Pending the outcome of such testing and
trials, NuRIGS will evaluate whether or not to execute its license option.
NuRIGS paid the Company $75,000 in option fees during 2000 and is expected to
pay the Company an additional $75,000 in option fees during 2001. If NuRIGS
executes the license option prior to December 31, 2001, the Company will be
entitled to receive an additional $825,000 in up-front license fees and a 5%
royalty on sales resulting from the commercialization of RIGScan CR. In
addition, should NuRIGS or another 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 it would take at least four to five years
to complete development, regulatory and commercialization activities of a RIGS
product. However, there can be no assurance that NuRIGS will exercise its
license option, or if they do not, that the Company will be able to complete
license agreements with another development partner for the RIGS technology on
terms acceptable to the Company, or at all. There can be no assurance that the
regulatory authorities will approve the Company's RIGS products for marketing,
or that any such products will be successfully introduced or achieve market
acceptance. See also Risk Factors.
ACTIVATED CELLULAR THERAPY FOR CANCER AND VIRAL DISEASE
As a result of its RIGScan CR49 research, Neoprobe developed a technology
platform, ACT, which is intended to boost the patient's own immune system by
removing lymph nodes identified during surgery and then, in a cell processing
technique, 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 performed a preliminary evaluation of the application
of ACT therapy for the treatment of chronic viral diseases, the rights to which
had been originally licensed from Cira Technologies, Inc. (Cira) in 1996. ACT
for viral diseases uses peripheral lymph nodes that are obtained in an
out-patient setting as the initial starting culture material. After using ACT
activation and expansion procedures, the cells are infused into the patient in
10 to 14 days. Phase I studies were completed in 1998 with HIV/AIDS patients
with encouraging results.
Because of the cost and risk of additional clinical trials, the Company
determined during 1998 that it would not conduct additional clinical trials of
ACT for oncology or viral purposes unless it found a partner who would take
primary responsibility for completing the regulatory and financial activities
associated with clinical trials, manufacturing validation and product
commercialization. As a result, the Company granted the commercial rights to ACT
for viral diseases back to Cira in 1999 for potential future consideration.
As a result of both parties' inability to secure development partners for either
of their ACT technologies, Neoprobe and Cira entered into a participation
agreement in November 2000 in the hope of identifying a partner who potentially
would be interested in the combined oncology and viral applications of ACT.
Neither the Company nor Cira have entered into any agreements with a development
partner for the ACT technology. The Company does not know if a partner will be
identified on a timely basis, on terms acceptable to the Company, or at all. The
Company does not intend to fund any significant ACT-related research and
development by itself. 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 also Risk Factors.
5
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 indirect morbidity, and $59
billion for indirect mortality. The Company's line of gamma detection systems
are currently used primarily in the application of ILM in melanoma and breast
cancer.
NIH has 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 currently 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 widely 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. The overall oncology market is expected to increase
significantly in the coming years due to an aging population, longer life
expectancy and other factors.
MARKETING AND DISTRIBUTION
The Company began development of its first portable gamma radiation detection
device, the Neoprobe 1000, in 1987. 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 device,
the neo2000 Gamma Detection System. The heart of the neo2000 is a control unit
that is software-upgradeable, permitting the addition of product enhancements
without costly remanufacturing. In April 1998, the Company launched a new 14mm
reusable probe that has been optimized for lymphatic mapping procedures. During
1999, Neoprobe introduced a new line of reusable, sterilizable BlueTip(TM)
probes and accompanying disposable handles. The Company's current line of gamma
detection systems are marketed and distributed through an exclusive worldwide
arrangement with Ethicon Endo-Surgery, Inc.
The Company intends to continue developing additional ILM-related probes and
instrument products in connection with Ethicon to continue its leadership
position in the ILM field. Also, the Company intends to perform preliminary
investigations and early stage research on other ILM-procedural products during
2001 that could expand the scope of the Company's product line. However, there
can be no assurance that any such products will achieve regulatory approval or
if approved that such products will achieve market acceptance. See also Risk
Factors.
Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Neoprobe and Ethicon have established
relationships with the leaders in the ILM surgical community and have
established and supported training courses internationally for lymphatic
mapping. The Company intends to continue to work with Ethicon to expand the
number of ILM training courses available to surgeons.
Prior to its existing arrangement with Ethicon, the Company had devoted
substantial resources to developing a marketing and distribution channel for its
gamma detection systems. These efforts involved combinations of both internal
and external sales and marketing resources, one combination of which involved a
previous alliance with Ethicon. In April 1998, the Company executed a
non-exclusive Sales and Marketing Agreement with Ethicon to market and promote
the Company's current line of hand-held
6
gamma detection instruments. Under the terms of the agreement, the Company paid
Ethicon a commission based on sales. On January 29, 1999, the Company provided
Ethicon with notice of the Company's intent to terminate the agreement effective
March 1, 1999 due to differences in market focus and Ethicon's 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 Ethicon 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 Ethicon has since purchased from the
Company.
The Company entered into a Distribution Agreement (the Agreement) with Ethicon
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 Ethicon, who will
distribute the products globally. Ethicon agreed to purchase minimum quantities
of the Company's products over the first three years of the five-year original
term of the Agreement and to reimburse the Company for certain research and
development costs during the first three years and a portion of the Company's
warranty costs. Ethicon 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.
Ethicon 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, or becomes insolvent. If termination is due to failure to supply or
a material breach by the Company, Ethicon 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, Ethicon 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, Ethicon received a secondary non-exclusive, worldwide
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; however,
the secondary license to make may be enacted only in the event of failure to
supply. Ethicon paid the Company a non-refundable license fee of $4 million. The
Company is recognizing 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 Ethicon, Ethicon would be required to pay the Company a
royalty on all products developed and sold by Ethicon using the Company's ILM
intellectual property. In addition, the Company is entitled to a royalty on any
ILM product commercialized by Ethicon that does not infringe any of the
Company's existing intellectual property. See also Risk Factors.
MANUFACTURING
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 detection system products. See also Risk Factors. The
neo2000 system is comprised of a software-upgradeable neo2000 control unit, a
hand-held gamma detecting probe and some accessories. The Company currently
markets a 14mm reusable probe and a group of BlueTip re-useable probes that are
used with a disposable handle.
The Company has devoted significant resources to develop production capability
for its gamma detection systems at qualified contract manufacturers. Production
of the neo2000 control unit, the 14mm probe and
7
the BlueTip probes involve the manufacture of components by a combination of
subcontractors, including but not limited to eV Products, a division of II-VI
Corporation (eV); the MedTech Group Inc. (MedTech); and Plexus Corporation
(Plexus). Currently, the Company has manufacturing and supply agreements with eV
for the production of crystal modules used in the detector probes, with MedTech
for the manufacture of BlueTip probes and sterile disposable handles, and with
Plexus for the manufacture of 14mm probes and the neo2000 control unit. The
Company also purchases certain accessories for its line of gamma detection
systems from other qualified manufacturers.
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 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.
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.
There can be no assurances that the Company will be able to maintain agreements
with its subcontractors on terms acceptable to the Company, or at all, or that
the Company's subcontractors will be able to meet all of the Company's
production requirements on a timely basis, at the required levels of performance
and quality, or at all. In the event that any of the Company's subcontractors is
unable or unwilling to meet the Company's production requirements, there can be
no assurance that an alternate source of supply could be established without
significant interruption in product supply or without significant adverse impact
to product availability or cost. Any significant supply interruption or yield
problems experienced by the Company or its subcontractors 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 also Risk
Factors.
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
8
and intellectual property positions, in the United States as well as foreign
countries. Specifically, Neoprobe's ILM technology is protected by fourteen (14)
instrument patents that have been issued in the United States as well as major
foreign markets. In addition to the issued patents, several patent applications
have been filed in the United States and certain major foreign markets. The
patent applications cover the Company's 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 in major global markets such as the U.S. and
the European Union, which although not currently integral to the Company's
near-term business plans, may be important to a potential RIGS or ACT
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 also Risk Factors.
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, advisers, and suppliers to execute a confidentiality
agreement upon the commencement of an employment, consulting or manufacturing
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 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, purchasing, manufacture, labeling, packaging, marketing, distribution,
service 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 also Risk Factors.
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
9
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 (PMA) application 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.
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) clearances 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)
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/EN 46001 and maintain 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 13485.
PHARMA/BIOLOGIC 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
also Risk Factors.
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 Good Manufacturing Practices (GMP) regulations
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.
10
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.
Before marketing its products in Western Europe, the Company will be required to
submit a European Marketing Authorization Application to the Committee for
Proprietary Medicinal Products and 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. 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 European regulatory authorities, or that any such
products will be successfully introduced or achieve market acceptance. See also
Risk Factors.
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.
11
COMPETITION
Neoprobe faces competition from medical products and biotechnology companies, as
well as from universities and other non-profit research organizations in the
field of cancer diagnostics and treatment. Many emerging medical product
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 also Risk Factors.
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 on among other
things, product efficacy, safety, reliability, availability, price, and patent
position.
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 a gamma detection system marketed by US Surgical Corporation, a
subsidiary of Tyco International Ltd. Also, although the Company is not aware of
any specific plans to do so, Ethicon 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 also Risk Factors.
EMPLOYEES
As of February 28, 2001, 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.
NEOPROBE HAS SUFFERED SIGNIFICANT OPERATING LOSSES FOR SEVERAL YEARS IN ITS
HISTORY AND IT MAY NOT BE ABLE TO CONTINUE TO ACHIEVE PROFITABILITY.
Neoprobe had an accumulated deficit of approximately $118 million as of December
31, 2000. Although Neoprobe was profitable in 2000, it incurred substantial
operating losses in 1997, 1998 and 1999. Neoprobe's revenues are based on a
percentage of the end customer sales revenue realized by the Company's marketing
partner. The percentage of end customer revenue that Neoprobe is entitled to
receive is expected to decline in 2001 under the terms of the Company's
marketing agreement with
12
Ethicon. A decline in this percentage of end customer revenue received by
Neoprobe would hurt the Company's gross margins and net income. In addition,
Neoprobe must expend substantial resources to continue development and support
the marketing of its products and cannot assure investors that it will make an
operating profit in 2001.
NEOPROBE PRODUCTS MAY NOT ACHIEVE THE BROAD MARKET ACCEPTANCE THEY NEED IN ORDER
TO BE A COMMERCIAL SUCCESS.
Widespread use of Neoprobe's products is currently limited to the surgical
treatment and diagnosis of two primary types of cancer: melanoma and breast
cancer. Neoprobe's products are used by surgeons for intraoperative lymphatic
mapping. Neoprobe'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. The adoption rate
for ILM may not meet the Company's expectations. Although Neoprobe continues to
believe 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. These things may
not happen. The efforts of Neoprobe and its marketing and distribution partner
may not result in significant demand for Neoprobe's products, and the current
demand for Neoprobe's products may decline.
NEOPROBE RELIES ON A THIRD PARTY FOR THE WORLDWIDE MARKETING AND DISTRIBUTION OF
ITS DEVICES, WHO MAY NOT BE SUCCESSFUL IN SELLING NEOPROBE'S PRODUCTS.
Neoprobe has limited experience in sales, marketing and distribution of medical
devices. Neoprobe currently distributes its device products on a worldwide basis
through a partner who is solely responsible for marketing and distributing
Neoprobe's device products. The partner assumes direct responsibility for
business risks related to credit, currency exchange, foreign tax laws or tariff
and trade regulation. In the past five years, Neoprobe has terminated marketing
arrangements affecting major global markets three times, including once with its
current distribution partner. Neoprobe's current distribution partner has agreed
to purchase minimum quantities of Neoprobe's products during the first three
years of the initial five-year term of the agreement which began on October 1,
1999. While Neoprobe believes that its distribution partner intends to
aggressively market its products, there can be no assurance that the
distribution partner will succeed in marketing Neoprobe's products on a global
basis, that the partner will make purchases in excess of its minimum annual
purchase requirements or that the minimum purchases will generate profitability
or adequate cash flow for Neoprobe over the long run. Neoprobe may not be able
to maintain satisfactory arrangements with its marketing and distribution
partner, who may not devote adequate resources to selling Neoprobe's products.
If this happens, Neoprobe may not be able to successfully market its products,
which would decrease its revenues.
NEOPROBE RELIES ON THIRD PARTIES TO MANUFACTURE ITS PRODUCTS AND NEOPROBE WILL
SUFFER IF THEY DO NOT PERFORM.
Neoprobe relies on independent contract manufacturers for the manufacture of its
current line of gamma detection systems. Neoprobe's business will suffer if its
contract manufacturers have production delays or quality problems. Furthermore,
medical device manufacturers are subject to the GMP regulations of the FDA,
international quality standards, and other regulatory requirements. If
Neoprobe's contractors do not operate in accordance with regulatory requirements
and quality standards, Neoprobe's business will suffer. Neoprobe uses or relies
on components and services used in its devices that are provided by sole source
suppliers. The qualification of additional or replacement vendors is time
consuming and costly. If a sole source supplier has significant problems
supplying Neoprobe, its sales and revenues will be hurt until it could find a
new source of supply. In addition, Neoprobe's Distribution Agreement with
Ethicon contains failure to supply provisions which, if triggered, could have a
significant negative impact on Neoprobe.
13
NEOPROBE MAY HAVE DIFFICULTY RAISING ADDITIONAL CAPITAL, WHICH COULD DEPRIVE IT
OF NECESSARY RESOURCES.
Prior to 2000, Neoprobe depended on the proceeds of sales of its securities to
fund its losses, continue research and development and provide working capital.
Neoprobe expects to continue to devote substantial capital resources to fund
research and development of additional gamma guided surgery products and to
maintain existing and secure new manufacturing capacity. In order to support the
initiatives envisioned in the Company's business plan, Neoprobe may need to
raise additional funds through the sale of assets, public or private financing,
collaborative relationships or other arrangements. Neoprobe's ability to raise
additional financing may be dependent on many factors beyond Neoprobe's control,
including the state of capital markets, the market price of the Company's common
stock and the development or prospects for development of competitive technology
by others. Because common stock is not listed on a stock exchange many investors
may not be willing or allowed to purchase it or may demand steep discounts. The
necessary additional financing may not be available to Neoprobe or may be
available only on terms that would result in further dilution to the owners of
Neoprobe's common stock. If Neoprobe is unable to raise additional funds when it
needs them, it may have to curtail its operations.
NEOPROBE MAY LOSE OUT TO LARGER AND BETTER ESTABLISHED COMPETITORS.
The medical device and biotechnology industries are intensely competitive. Some
of Neoprobe's competitors have significantly greater financial, technical,
manufacturing, and distribution resources as well as greater experience in the
medical device industry than Neoprobe. The particular medical conditions that
can be treated using Neoprobe's ILM products can also be treated and diagnosed
by other medical devices, procedures or drugs. Many of these alternatives are
widely accepted by physicians and have a long history of use. Physicians may use
Neoprobe's competitors' products. Neoprobe's products may not be competitive
with other technologies. If these things happen, Neoprobe's sales and revenues
will decline.
NEOPROBE'S PRODUCTS MAY BE DISPLACED BY NEWER TECHNOLOGY.
The medical device and biotechnology industries are undergoing rapid and
significant technological change. Third parties may succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by Neoprobe, or that would make Neoprobe's technology and products
obsolete or noncompetitive. Additionally, researchers could develop new surgical
procedures and medications that replace or reduce the importance of the
procedures that use Neoprobe's products. Accordingly, Neoprobe'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. Neoprobe may
not have the resources to do this. If Neoprobe's products become obsolete and
its efforts to develop new products do not result in any commercially successful
products, Neoprobe's sales and revenues will decline.
NEOPROBE IS IN A HIGHLY REGULATED BUSINESS AND IT COULD FACE SEVERE PROBLEMS IF
DOES NOT COMPLY WITH ALL REGULATORY REQUIREMENTS IN THE GLOBAL MARKETS IN WHICH
ITS PRODUCTS ARE SOLD.
The FDA regulates Neoprobe's products in the United States. Foreign countries
also subject Neoprobe's products to varying government regulations. In addition,
such regulatory authorities may impose limitations on the use of Neoprobe's
products. FDA enforcement policy strictly prohibits the marketing of FDA
approved medical devices for unapproved uses. Within the European Union,
Neoprobe's products are required to display the CE mark in order to be sold.
Neoprobe has obtained FDA clearance to market its medical device products and
European certification to display the CE mark on its current line of gamma
detection systems. Neoprobe may not be able to obtain certification for any new
products in a timely manner, or at all. Failure to comply with these and other
current and emerging regulatory requirements in the global markets in which
Neoprobe's products are sold 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.
14
NEOPROBE'S INTELLECTUAL PROPERTY MAY NOT HAVE OR PROVIDE SUFFICIENT LEGAL
PROTECTIONS AGAINST INFRINGEMENT OR LOSS OF TRADE SECRETS.
Neoprobe'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. Neoprobe seeks to protect
its proprietary positions by filing United States and foreign patent
applications for its important inventions and improvements. But, domestic and
foreign patent offices may not issue these patents. Third parties may challenge,
invalidate, or circumvent Neoprobe's patents or patent applications in the
future. Competitors, many of which have substantially more resources than
Neoprobe and have made substantial investments in competing technologies, apply
for and obtain patents that will prevent, limit, or interfere with Neoprobe's
ability to make, use, or sell its products either in the United States or
abroad.
In the United States, patent applications are secret until patents issue, and in
foreign countries, patent applications are secret for a time after filing.
Publications of discoveries tend to significantly lag the actual discoveries and
the filing of related patent applications. Third parties may have already filed
applications for patents for products or processes that will make Neoprobe's
products obsolete or will limit Neoprobe's patents or invalidate its patent
applications.
Neoprobe typically requires its employees, consultants, advisers and suppliers
to execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, advisory, or supply relationships with
Neoprobe. They may breach these agreements and Neoprobe may not obtain an
adequate remedy for breach. Further, third parties may gain access to Neoprobe's
trade secrets or independently develop or acquire the same or equivalent
information.
Agencies of the United States government conducted some of the research
activities that led to the development of antibody technology that some of
Neoprobe's proposed antibody based surgical cancer detection products use. When
the United States government participates in research activities, it retains
rights that include the right to use the technology for governmental purposes
under a royalty-free license, as well as rights to use and disclose technical
data that could preclude Neoprobe from asserting trade secret rights in that
data and software.
NEOPROBE COULD BE DAMAGED BY PRODUCT LIABILITY CLAIMS.
Neoprobe's products are medical devices that are used during certain cancer
surgeries. If one of them malfunctions or a physician misuses it and injury
results to a patient or operator, the injured party could assert a product
liability claim against Neoprobe. Neoprobe currently has product liability
insurance with a $10 million per occurrence limit which, Neoprobe believes, is
adequate for its current activities. However, Neoprobe may not be able to
continue to obtain insurance at a reasonable cost. Furthermore, insurance may
not be sufficient to cover all of the liabilities resulting from a product
liability claim, and Neoprobe might not have sufficient funds available to pay
any claims over the limits of its insurance. Because personal injury claims
based on product liability in a medical setting may be very large, an
underinsured or an uninsured claim could financially damage Neoprobe.
NEOPROBE MAY HAVE TROUBLE ATTRACTING AND RETAINING QUALIFIED PERSONNEL AND ITS
BUSINESS MAY SUFFER IF IT DOES NOT.
Neoprobe's business has experienced developments the past two years which have
resulted in several significant changes in Neoprobe's strategy and business
plan, including downsizing to what Neoprobe considers to be the minimal level of
management and employees necessary to operate a publicly traded medical device
business. Neoprobe 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 Neoprobe's operations.
Neoprobe's success is dependent on its ability to
15
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 Neoprobe may not be
successful in hiring or retaining the requisite personnel. If Neoprobe is not
able to attract and retain qualified technical and management personnel, it will
suffer diminished chances of future success.
NEOPROBE'S COMMON STOCK IS TRADED OVER THE COUNTER, WHICH MAY DEPRIVE
STOCKHOLDERS OF THE FULL VALUE OF THEIR SHARES.
Unlisted securities may have fewer market makers, lower trading volumes and
larger spreads between bid and asked prices than listed securities. These
factors may result in higher price volatility and less market liquidity for the
common stock.
A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR NEOPROBE'S COMMON
STOCK.
Neoprobe's common stock is currently trading at a price substantially below
$5.00 per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
non-Nasdaq equity security that has a market price share of less than $5.00 per
share, subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. The broker-dealer also
must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the penny stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in Neoprobe common stock.
NEOPROBE'S STOCKHOLDER RIGHTS PLAN, AND SOME PROVISIONS OF NEOPROBE'S CHARTER
AND APPLICABLE CORPORATE LAWS MAY HAVE THE EFFECT OF DETERRING THIRD PARTIES
FROM MAKING TAKEOVER BIDS FOR CONTROL OF NEOPROBE OR MAY BE USED TO HINDER OR
DELAY A TAKEOVER BID.
Neoprobe's certificate of incorporation has "blank check" preferred stock. The
board of directors may divide this stock into series and set their rights. The
board of directors may, without prior stockholder approval, issue any of the
shares "blank check" preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the relative voting power or
other rights of the common stock. Preferred stock could be used as a method of
discouraging, delaying, or preventing a take-over of Neoprobe. If Neoprobe
issues "blank check" preferred stock, it could have a dilutive effect upon the
common stock. This would decrease the chance that Neoprobe's stockholders would
realize a premium over market price for their shares of common stock as a result
of a takeover bid.
BECAUSE NEOPROBE WILL NOT PAY DIVIDENDS, STOCKHOLDERS WILL ONLY BENEFIT FROM
OWNING COMMON STOCK IF IT APPRECIATES.
Neoprobe has never paid dividends on its common stock. Neoprobe intends to
retain any future earnings to finance its growth. Accordingly, any potential
investor who anticipates the need for current dividends from his investment
should not purchase common stock.
16
THERE IS A REMOTE POSSIBILITY THAT NEOPROBE MAY BE REQUIRED TO PAY CLAIMS
AGAINST LIQUIDATED FOREIGN SUBSIDIARIES.
Over the past two years Neoprobe has shut down subsidiaries in two foreign
countries. These subsidiaries are in statutory liquidation or receivership under
the laws of their respective countries. Neoprobe believes it has no ongoing
financial obligations for the debts of either subsidiary. However, it is
possible that creditors of a subsidiary could attempt to recover from Neoprobe
losses relating to claims they have asserted against the subsidiary. Management
of Neoprobe believes that the chance of a creditor of a subsidiary being able to
recover its claim directly from Neoprobe is remote.
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 $19,500
in 2001 and increases to $20,600 in 2003. During December 1998, February 1999,
and April 2000, the Company executed three lease agreements to sublease
approximately 2,600 square feet, 4,600 square feet, and 6,750 square feet of the
Company's office space, respectively. The three subleases are expected to
generate monthly sublease income of approximately $10,700 in 2001 increasing to
$11,200 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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
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 sales 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. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
HIGH LOW
---- ---
FISCAL YEAR 2000
First Quarter $ 3.50 $ 0.44
Second Quarter 1.47 0.63
Third Quarter 1.25 0.53
Fourth Quarter 0.78 0.38
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
As of March 16, 2001, the Registrant had approximately 700 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 6,
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 March 2000 and February 1999, the Board of Directors of the Company
authorized the issuance of 23,326 and 13,734 shares of common stock,
respectively, to the trustees of its 401(k) employee benefit plan (the 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.
18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Neoprobe is a leading innovator in the field of gamma guided surgery dedicated
to improving the diagnosis, treatment and quality of life of cancer patients. To
accomplish the Company's goals, we continue to seek improvement of our existing
gamma detection device products as well as cost-effective ways to expand into
new markets and further develop our other technology platforms while maintaining
our financial stability.
STRATEGIC TRANSFORMATION OVERVIEW
Neoprobe's successes during 2000 were a combined result of prior years'
restructuring activities and the Company's new marketing affiliation completed
in September 1999. Following disappointments related to failure to gain
regulatory approval for its initial diagnostic drug product for use in recurrent
colorectal cancer, RIGScan CR49, the Company embarked on a restructuring effort
in 1998 that began with the dismantling of a drug research and development group
and ended in the fourth quarter of 1999 with the outsourcing of marketing and
distribution responsibilities to Ethicon.
The Company's core staff now almost exclusively supports Neoprobe's
commercialized device business. The Company's strategy regarding RIGS and ACT
initiatives, as well as expanding the ILM business beyond devices, involves
efforts to outsource or partner, as appropriate, that would allow Neoprobe the
benefit of continuing to move these technologies forward without building costly
infrastructure.
RESULTS OF OPERATIONS
2000 was a milestone year for Neoprobe as the Company posted its first
profitable year in its seventeen-year history. Highlights for the year include:
- - Net income of $1.8 million as compared to a net loss of $4.2 million in
1999;
- - A nearly 50% increase in end customer device placements over 1999 as a
result of the Company's marketing affiliation with Ethicon; and
- - Positive earnings per share (before the non-cash loss on retirement of
preferred shares) of $0.07 in 2000.
Financial results for 2000 reflect fundamental changes in the way Neoprobe
conducted its business in 2000 as compared to prior years. Gross margins on
device product sales declined to 44% in 2000 from 51% in 1999 related to how
Neoprobe sells its products. Prior to the fourth quarter of 1999, Neoprobe sold
its products directly to the end customer at "retail" prices. Starting in the
fourth quarter of 1999, Neoprobe began selling its products on a "wholesale"
basis to Ethicon, which then marks up the product for resale to the end
customer. As a result Neoprobe's gross margin declined as the Company
transitioned from "retailer" to "wholesaler." However, as a result of prior year
restructuring activities, Neoprobe virtually eliminated marketing expenses
during 2000, thereby greatly improving the contribution of sales to the bottom
line.
Neoprobe's major expense categories as a percentage of sales have changed
dramatically. Research and development expenses, as a percentage of sales,
decreased to 5% in 2000 from 15% in 1999, primarily due to the reimbursement by
Ethicon of a portion of the Company's research and development costs. Marketing
expenses, as a percentage of sales, decreased to 3% from 48% as a result of
headcount reductions and related costs associated with the outsourcing of the
marketing function. General and administrative expenses, as a percentage of
sales, decreased to 30% in 2000 from 40% in 1999 due to continued application of
cost containment measures. Management believes these major expense categories,
as a percentage of sales, will increase slightly due to the decline in revenue
19
expected in 2001 as compared to 2000 coupled with incremental research and
development efforts to increase the Company's product pipeline.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES AND MARGINS. Net product sales decreased $410,000 or 4% to $8.8 million
in 2000 from $9.2 million in 1999. Sales during both periods were comprised
almost entirely of sales of the Company's gamma detection systems. Gross margins
decreased to 44% of net sales in 2000 from 51% of net sales in 1999. The
decrease in gross margins is primarily the result of the change in the type of
sales made by the Company related to entering the distribution agreement with
Ethicon at the end of September 1999. Under the terms of this agreement, the
Company's instrument products are sold to Ethicon at a wholesale transfer price.
Prior to entering the Ethicon agreement, the Company sold its instrument
products directly to end customers at retail prices during the first nine months
of 1999. The cost to manufacture the Company's products did not change
significantly from 1999 to 2000. The effect of the decrease in gross margins on
profitability is offset by the decline in marketing expenses discussed below.
Revenues in 2000 also included $800,000 from the pro-rata recognition of license
fees related to the distribution agreement with Ethicon and $75,000 from the
recognition of milestone fees related to the NuRIGS option agreement to license
certain of the Company's RIGS products. Revenues in 1999 included only $200,000
related to the pro-rata recognition of license fees from Ethicon.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
$916,000 or 66% to $473,000 in 2000 from $1.4 million in 1999. The decrease is
primarily due to the reimbursement of certain research and development expenses
associated with the Company's distribution agreement with Ethicon. Research and
development expenses in 2000 included approximately $40,000 in non-recurring
severance charges and $150,000 in unreimbursed costs for development of products
launched in fiscal year 2000.
MARKETING AND SELLING EXPENSES. Marketing and selling expenses decreased $3.4
million or 92% to $284,000 in 2000 from $3.7 million in 1999, excluding a
one-time $700,000 charge related to termination of the Company's agreement with
KOL. Marketing and selling expenses, as a percentage of sales, decreased to 3%
of sales in 2000 from 40% of sales in 1999. These results reflect lower internal
marketing headcount and out-of-pocket expense levels in 2000 as compared to 1999
as well as elimination of marketing partner commissions over the same periods,
due to entering the distribution agreement with Ethicon. Marketing and selling
expenses in 2000 also included approximately $40,000 in non-recurring severance
charges related to the separation of marketing personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $1.0 million or 28% to $2.7 million in 2000 from $3.7 million in 1999.
The decrease was primarily a result of reductions in overhead costs such as
professional services, space costs, taxes and insurance. General and
administrative expenses in 2000 also included abandonment charges of
approximately $250,000 related to patents and other intellectual property which
will no longer be supported by the Company.
LOSSES RELATED TO SUBSIDIARIES IN LIQUIDATION. The Company incurred certain
charges in 1999 related to interest and other overhead costs incurred during the
wind-down process of subsidiaries in liquidation. No such charges were incurred
in 2000.
OTHER INCOME. Other income decreased $330,000 or 37% to $553,000 in 2000 from
$883,000 in 1999. Other income in 2000 consisted primarily of $262,000 in
one-time gains from the forgiveness of royalties due under a research and
development agreement, interest income on the Company's investments, and $49,000
in gains on the sale of certain property and equipment. Other income in 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. The
20
Company's interest income increased in 2000 due to increased overall average
levels of cash and investments during 2000 as compared to 1999.
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 gamma detection systems. The increase in
instrument sales is the result of entering the distribution agreement with
Ethicon 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 51% 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. Revenues in 1999 also included $200,000 related to
the pro-rata recognition of license fees from Ethicon.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
$13.0 million or 90% to $1.4 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 quarter of 1998. Expenses in 1999 also included a
non-cash write-off of approximately $218,000 in capitalized pre-production costs
written off and $75,000 in separation charges related to personnel who were
severed in connection with the signing of the Ethicon Agreement.
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 $1.6 million or 30% to $3.7 million in 1999 compared to $5.3
million in 1998. Excluding the KOL charge, marketing expenses, as a percentage
of sales, decreased to 40% 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 $221,000 in separation charges
related to personnel who were severed in connection with the signing of the
Ethicon 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 Ethicon 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 overhead 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 AB (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) Ltd. (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. The gain on deconsolidation resulted
primarily from the removal of Neoprobe Israel from consolidation. Neoprobe
21
Israel owes approximately $900,000 to various trade creditors for which the
Company has no contractual obligation to pay. As a result of removing Neoprobe
Israel from consolidation, the liabilities to trade creditors were also removed
along with Neoprobe Israel's remaining assets, thereby creating a net gain of
$699,000 on the standalone books of the Company. 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.
LIQUIDITY AND CAPITAL RESOURCES
In 2000, cash generated from operations of $1.7 million and proceeds from the
sale of $1.5 million in investments were used to pay $2.5 million in retirement
of preferred stock and $650,000 in other short-term debt. The Company ended the
year with a cash balance of $4.6 million and debt of less than $150,000.
OPERATING ACTIVITIES -- Cash from operations decreased $300,000 in 2000 from
$2.0 million in 1999 and increased from $23.0 million used in operations in
1998. Working capital increased to $3.8 million at December 31, 2000 as compared
to $1.0 million at December 31, 1999. The current ratio increased to 2.6 at
December 31, 2000 from 1.2 at December 31, 1999. The increase in working capital
was primarily related to higher earnings in 2000 coupled with lower overall
working capital requirements.
Accounts receivable decreased modestly to $365,000 at December 31, 2000 from
$453,000 at December 31, 1999. Inventory levels declined to $941,000 at December
31, 2000 as compared to $1.1 million at December 31, 1999. Inventory at December
31, 1999 included approximately $640,000 of demonstrator units the Company had
repurchased from KOL. The KOL inventory was repurchased in accordance with the
termination of a marketing agreement with KOL. The repurchased KOL units were
then sold to Ethicon in 2000 as part of entering the distribution agreement.
Inventory at December 31, 2000 includes safety stock of finished goods as well
as critical component and long lead-time raw materials to ensure uninterrupted
product supply to Ethicon. The Company expects receivable levels to fluctuate in
2001 depending on the timing of purchases by Ethicon. Inventory may increase
slightly as the Company continues to evaluate appropriate safety stock levels
and endeavors to optimize production activities.
INVESTING ACTIVITIES -- Cash provided by investing activities in 2000 totaled
$1.4 million versus $370,000 in 1999. During January 2000, the Company sold an
investment in an Israeli biotechnology company for $1.5 million. Investing
activities in 1999 involved primarily the sale of short-term investments to fund
operations. Capital expenditures in 2000 were split between purchases of
production tools and equipment and technology infrastructure but were offset by
the sale of excess furniture and fixtures accumulated from prior year headcount
reductions. Capital needs for 2001 are expected to be consistent with those in
2000.
FINANCING ACTIVITIES -- Financing activities used $3.3 million in cash in 2000
versus providing cash of $1.9 million in 1999. During the first quarter of 2000,
the Company paid holders of Series B preferred stock $2.5 million in cash and
issued them 3 million each of common shares and warrants to purchase common
shares in exchange for retiring the outstanding preferred shares. The Series B
preferred stock had been originally issued in February 1999 for $2.8 million in
net proceeds. Also in 2000, the Company paid off debt totaling $812,000, leaving
the Company with less than $150,000 in debt at December 31, 2000.
During January 2001, the Company executed a revolving line of credit with a bank
that will provide the Company with access to up to $1.5 million to finance
general working capital needs, subject to certain terms and covenants. The
Company does not anticipate significant draws on the line of credit during 2001.
22
NEW 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 of fiscal
years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133
and a second related amendment, SFAS No. 138 effective January 1, 2001. 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
anticipates that the adoption of this Statement will have no impact on its
results of operations or financial position.
OTHER ITEMS AFFECTING FINANCIAL CONDITION -- At December 31, 2000, the Company
had U.S. net operating tax loss carryforwards and tax credit carryforwards of
approximately $93.0 million and $4.3 million, respectively, available to offset
or reduce future income tax liability, if any, through 2020. 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.
At December 31, 2000, the Company's balance sheet does not reflect any
obligations of Neoprobe Israel. However, it is possible, in the event any
proceeds of the liquidation of Neoprobe Israel do not fully satisfy the
outstanding obligations of Neoprobe Israel, that creditors could seek to pursue
claims directly against the Company under a judicial doctrine generally referred
to as "piercing the corporate veil." In the event the creditors were successful
in making a claim under this judicial doctrine, the Company may be required to
pay the creditors some or all of the amounts owed by Neoprobe Israel. Payment of
such an amount would severely deplete the Company's cash, and the Company might
not be able to continue operations without seeking relief from creditors.
However, management believes that the prospect that creditors would prevail if
such claims were brought against the Company is remote. As such, no provision
for such a contingent loss has been recorded in the Company's financial
statements at December 31, 2000.
OUTLOOK
This Outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
The Company's financial performance is highly dependent on the success of its
gamma detection instrument product line. While the Company remains optimistic
about the prospects for its other proprietary technologies, these technologies
are not anticipated to generate any significant revenue for the Company during
2001, with the possible exception of license fees related to the RIGS
technology. However, there can be no assurances that the Company will achieve
the volume of sales anticipated in connection with the Ethicon Agreement, or if
achieved that the margin on such sales will be adequate to produce positive
operating cash flow. There can also be no assurances that the Company will
receive any significant license fees related to the RIGS technology in 2001, if
at all. The Company believes its December 31, 2000 cash position and sources of
future cash flow are adequate for the Company to continue operating for the
foreseeable future. However, if the Company does not generate 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.
23
ILM
Numerous articles have been published in recent years on the topics of sentinel
lymph node biopsy and ILM in peer reviewed journals, and a number of thought
leaders and cancer treatment institutions have recognized and embraced the
technology as standard of care for melanoma and in some cases, for breast
cancer. However, as the melanoma market represents less than 10% of the breast
care market, standard of care recognition related to breast care is much more
critical for the Company. Standard of care designation for breast cancer is most
likely dependent on completion of several large multi-center clinical trials in
the U.S. and abroad. Final data from these studies likely will not be presented
for several years. However, the Company believes that the surgical community
will continue to adopt the ILM application while the standard of care
determination is still pending. The Company also believes the lymphatic
targeting agent being developed by UCSD for Neoprobe, if it should become
commercially available, could improve the adoption of ILM in future years.
Neoprobe is excited by the increased attention focused on ILM by the medical
community at surgical conferences, especially related to investigations into
other applications beyond melanoma and breast cancer. We are also encouraged by
an approximately 50% increase in end-customer device placements of our products
in 2000 over 1999. However, exact market penetration for the Company's products
is difficult to gauge as there are no widely published use statistics on this
specific type of device or the application of sentinel lymph node biopsy. The
Company believes, based on anecdotal information, that U.S. application of ILM
has increased steadily over the past few years but that the domestic adoption
rate for lymphatic mapping, exclusive of community hospitals, may be slowing.
However, the Company also believes market penetration in other major global
markets for hand-held gamma detection devices is still relatively low and
represents primarily thought leaders in the surgical community that have adopted
the procedure. Neoprobe believes the primary market potential for our products
in all major global markets in 2001 will continue to be at the local/community
hospital level that typically lag though leader research centers and major
hospitals in adapting to new technologies. A slower than anticipated adoption
rate may negatively impact the Company's sales volumes, and therefore, revenues
and net income in 2001.
In addition, under the terms of the Company's marketing agreement with Ethicon,
the transfer price on product sales that the Company receives is based on a
percentage of Ethicon's end-customer sales price, subject to a price floor. To
date, the Company's products have commanded a price premium in most of the
markets in which they are sold that we believe is due to their superior product
performance and ease of use. While Neoprobe continues to believe in the
technical and user-friendly superiority of its products, competitors continue to
innovate and the Company may not be able to command a premium price in all
markets. In addition, under the current agreement, Neoprobe will receive a lower
percentage of the end customer price in 2001 versus what was received in 2000
relating to existing products. The combination of potential price erosion and a
lower percentage share of the end-customer sales price is expected to result in
an overall negative impact to device revenue and may decrease the Company's
gross margin by as much as ten to fifteen percentage points in 2001. Such a
negative change in gross margin is expected to have a direct impact on net
income.
The Company expects operating results for 2001 to show modest profitability due
to the slower than anticipated adoption rate for ILM and a lower expected
transfer price to Ethicon. In addition, the Company expects to modestly increase
its research and development expenditures that have been curtailed over the past
two years. Having stabilized the Company's financial position, management
believes it is necessary to invest additional funds into research and
development during 2001 in order to maintain Neoprobe's leadership position in
the gamma detection arena. Incremental research in 2001 is also expected to
decrease net income for the year.
RIGS and ACT
The Company intends to continue to work with NuRIGS to further the development
of RIGScan CR. The Company may incur some costs during 2001 related to assisting
NuRIGS with their negotiations and submissions to regulatory authorities,
although such costs are not expected to be significant. In addition, the Company
expects to incur some costs during 2001 related to identification of a potential
partner for the ACT technology; however, these costs are not expected to be
significant.
24
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of our Company. Our
Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
other Company filings with the Securities and Exchange Commission and in our
reports to shareholders. Statements which related to other than strictly
historical facts, such as statements about the Company's plans and strategies,
expectations for future financial performance, new and existing products and
technologies, and markets for the Company's products are forward-looking
statements within the meaning of the Act. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "will" and other similar
expressions identify forward-looking statements. The forward-looking statements
are and will be based on management's then current views and assumptions
regarding future events and operating performance, and speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The following are some of the factors that could affect our financial
performance or could cause actual results to differ materially from estimates
contained in or underlying our Company's forward-looking statements:
- - Neoprobe has suffered significant operating losses for several years in its
history and it may not be able to continue to achieve the profitability it
enjoyed in 2000.
- - Neoprobe products may not achieve the broad market acceptance they need in
order to be a commercial success.
- - Neoprobe relies on a third party for its worldwide marketing and
distribution, who may not be successful in selling Neoprobe's products.
- - Neoprobe relies on third parties to manufacture its products and Neoprobe
will suffer if they do not perform.
- - Neoprobe may have difficulty raising additional capital, which could
deprive it of necessary resources.
- - Neoprobe may lose out to larger and better-established competitors.
- - Neoprobe's products may be displaced by newer technology.
- - Neoprobe is in a highly regulated business and it could face severe
problems if does not comply with all regulatory requirements in the global
markets in which Neoprobe's products are sold.
- - Neoprobe's intellectual property may not have or provide sufficient legal
protections against infringement or loss of trade secrets.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows, liquidity and
capital resources, please refer to the information on pages 22 through 23 of
this report.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, and the related notes, together with
the report of KPMG LLP dated February 21, 2001 are set forth at pages F-1
through F-26 attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2001 ANNUAL MEETING:
DAVID C. BUPP, age 51, 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 at Rutgers University.
JULIUS R. KREVANS, M.D., age 76, 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 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 67, has served as a director of the Registrant since November
1993. Mr. Zid also serves as a director of Net Med, Inc. 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 DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2002 ANNUAL MEETING:
NANCY E. KATZ, age 41, has served as a director of the Company since January
2001. Ms. Katz currently serves as President, Chief Executive Officer, Chief
Financial Officer and a director of Calypte Biomedical Corporation. Ms. Katz
joined Calypte in October 1999 as President, Chief Operating Officer and Chief
Financial Officer. Prior to joining Calypte, Ms. Katz served as President of
Zila Pharm Inc. From 1997 to 1998, Ms. Katz served as Vice President of Sales &
Marketing of LifeScan (the diabetes testing division of Johnson & Johnson) and
Vice President of U.S. Marketing, directing LifeScan's marketing and customer
call center departments from 1995 to 1997. During her seven-year career at
Schering-Plough Healthcare Products from 1987 to 1994, she held numerous
positions including Senior Director & General Manager, Marketing Director for
Footcare New Products, and Product Director of OTC New Products. Ms. Katz also
held various product management positions at American Home Products from 1981 to
1987. Ms. Katz received her B.A. in Business Administration from the University
of South Florida.
26
MICHAEL P. MOORE, M.D., PH.D., age 50, 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.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2003 ANNUAL MEETING:
JOHN S. CHRISTIE, age 51, 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 58, 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.
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
Rodger A. Brown 50 Vice President, Regulatory Affairs and Quality
Assurance
David C. Bupp 51 President, Chief Executive Officer and Director
Brent L. Larson 37 Vice President, Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
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
Lehigh University and a M.S. degree in Systems Engineering from the University
of Pennsylvania.
Rodger A. Brown has served as Vice President, Regulatory Affairs and Quality
Assurance since November 2000. From July 1998 through November 2000, Mr. Brown
served as Director, Regulatory Affairs for the Company. Prior to joining the
Company, Mr. Brown served as Director of Operations for Biocore Medical
Technologies, Inc. from April 1997 to April 1998. From 1981 through 1996, Mr.
Brown served as Director, Regulatory Affairs/Quality Assurance for E for M
Corporation, a subsidiary of Marquette Electronics, Inc.
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 served as Chief
27
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 multi-year course of study at Stonier Graduate
School of Banking at Rutgers University.
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.
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 10. 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 other three executive officers having annual compensation in excess of
$100,000 during the last fiscal year (the Named Executives) for the Company's
last three fiscal years.
LONG TERM
COMPENSATION
AWARDS
------------------------
SECURITIES
RESTRICTED UNDER-
ANNUAL COMPENSATION STOCK LYING
------------------- AWARDS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) (#) COMPENSATION
- --------------------------- ---- ------ ----- ---------- ---------- ------------
Carl M. Bosch, 2000 $125,625 $ 68,325 $ 42,180(f) 45,000 $ 1,643(b)
Vice President 1999 116,250 23,104 - 20,000 1,163(b)
Instrument Development(h) 1998 69,000 10,000 - 10,000 12,000(j)
Matthew F. Bowman, 2000 $ 51,603 $ - $ - - $202,117(g)
Senior Vice President 1999 232,389 10,259 12,500(c) 30,000 1,600(b)
Marketing and Operations(e) 1998 204,690 - 27,250(c) 136,900 1,600(b)
Rodger A. Brown, 2000 $ 83,534 $ 33,240 $ - 35,000 $ -
Vice President, Regulatory Affairs/ 1999 77,431 16,055 - 20,000 -
Quality Assurance(i) 1998 35,215 - - 14,500 -
David C. Bupp, 2000 $304,769 $106,300 $140,600(a) 180,000 $ 1,700(b)
President and Chief 1999 306,731 - 21,875(a) - 1,600(b)
Executive Officer 1998 297,222 - 270,000(a) 30,000 1,600(b)
Brent L. Larson, 2000 $126,250 $ 44,900 $ 56,240(d) 60,000 $ 1,313(b)
Vice President, Finance 1999 109,375 23,104 6,250(d) 25,000 1,325(b)
and Chief Financial Officer 1998 83,385 - 13,760(d) 32,200 888(b)
28
(a) The aggregate number of Mr. Bupp's restricted stock holdings at December
31, 2000 was 210,000 shares with an aggregate value of $88,599. 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 Neoprobe Corporation 401(k) Plan
(the 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 Internal Revenue 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, 2000 was 60,000 shares with an aggregate value of $25,314. 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. Mr. Bowman's restricted stock will be forfeited
effective March 31, 2001 absent a qualifying change in control of the
Company.
(d) The aggregate number of Mr. Larson's restricted stock holdings at December
31, 2000 was 70,000 shares with an aggregate value of $29,533. 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.
(e) Mr. Bowman began his employment with the Company in June 1996, and ended
his employment with the Company in March 2000.
(f) The aggregate number of Mr. Bosch's restricted stock holdings at December
31, 2000 was 30,000 shares with an aggregate value of $12,657. Mr. Bosch
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 Mr. Bowman relating to his separation from
the Company of $200,417 for severance; see Compensation Agreements With
Other Named Executive Officers--Severance Agreements. The remaining $1,700
was a matching contribution to Mr. Bowman's 401(k) account; see footnote
(b) to this table.
(h) Mr. Bosch began his employment with the Company in May 1998 and was
promoted to Vice President in March 2000.
(i) Mr. Brown began his employment with the Company in July 1998 and was
promoted to Vice President in November 2000.
(j) This amount represents the reimbursement of moving expenses related to Mr.
Bosch's relocation to Columbus, Ohio.
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 (2000).
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED (SHARES) FISCAL YEAR PER SHARE DATE
- ---- ------------------ --------------- -------------- ----------
Carl M. Bosch 45,000(a) 6% $0.50 01/04/10(b)
Rodger A. Brown 35,000(a) 5% $0.50 01/04/10(b)
David C. Bupp 180,000(a) 24% $0.50 01/04/10(b)
Brent L. Larson 25,000(a) 8% $0.50 01/04/10(b)
29
(a) Vests as to one-third of these shares on each of the first three
anniversaries of the date of grant.
(b) 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.
(c) The per share weighted average fair value of these stock options during
2000 was $0.40 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 6.37%, volatility of 143% and no
expected dividend rate.
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, 2000). There were no stock options exercised by the
named executives during the fiscal year ended December 31, 2000.
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
- ---- --------------------------- -------------------------
Carl M. Bosch 15,528/59,472 0/0
Rodger A. Brown 17,234/52,266 0/0
David C. Bupp 320,600/295,000 0/0
Brent L. Larson 43,133/81,567 0/0
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 2000.
NUMBER OF SHARES PERFORMANCE OR OTHER
UNITS OR OTHER PERIOD UNTIL MATURATION
NAME RIGHTS OR PAYOUT
- --------------------------- ---------------- -----------------------
Carl M. Bosch 30,000(a) 03/22/00
David C. Bupp 100,000(a) 03/22/00
Brent L. Larson 40,000(a) 03/22/00
(a) These awards are shares of restricted stock which the grantees purchased
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 an eighteen-month
employment agreement effective July 1, 2000. The employment agreement provides
for an annual base salary of $310,000.
30
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
$106,300 bonus to Mr. Bupp relating to fiscal year 2000.
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 of $697,500
(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).
If any such termination occurs after the substantial completion of the
liquidation of the assets of the Company, the severance payment shall be
increased by $77,500. 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
such transfer in the same relative proportions to each other as existed before
such event.
Mr. Bupp's compensation will continue for the full term of the agreement if his
employment is terminated without cause.
RESTRICTED STOCK. On March 22, 2000, the Company and Mr. Bupp entered into a
restricted stock purchase agreement under which Mr. Bupp purchased 100,000
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, or March 22, 2010. 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. Mr. Bupp also holds 35,000, 45,000 shares and 30,000 shares of
restricted stock granted under similar terms on April 30, 1999, May 20, 1998 and
June 1, 1996, respectively.
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.
31
The Company has not recognized any expense under the restricted stock agreements
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 2000. The Chairman received 45,000 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 2000. 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 on
an 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
- -----------------------------------------------------------
EMPLOYMENT AGREEMENT. Carl Bosch is employed under an eighteen-month employment
agreement effective April 1, 2000. The employment agreement provides for an
annual base salary of $127,000.
Mr. Bupp will, on an annual basis, review the performance of the Company and of
Mr. Bosch and the Company will pay a bonus to Mr. Bosch 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 $68,325 bonus to Mr. Bosch relating to
fiscal year 2000.
If a change in control occurs with respect to the Company and the employment of
Mr. Bosch is concurrently or subsequently terminated (i) without cause (cause is
defined as any willful breach of a material duty by Bosch in the course of his
employment or willful and continued neglect of his duty as an employee), (ii)
the term of Mr. Bosch's employment agreement expires or (iii) Mr. Bosch 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. Bosch will be paid a severance payment of $191,250
(less amounts paid as Mr. Bosch's salary and benefits that continue for the
remaining term of the agreement if his employment is terminated without cause).
If any such termination occurs after the substantial completion of the
liquidation of the assets of the Company, the severance payment shall be
increased by $31,875. 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
32
securities outstanding immediately before such transfer in the same relative
proportions to each other as existed before such event.
Mr. Bosch's compensation will continue for the full term of the agreement if his
employment is terminated without cause.
EMPLOYMENT AGREEMENT. Brent Larson is employed under an eighteen-month
employment agreement effective July 1, 2000. The employment agreement provides
for an annual base salary of $130,000.
Mr. Bupp will, on an annual basis, review the performance of the Company and of
Mr. Larson and the Company will pay a bonus to Mr. Larson 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 $44,900 bonus to Mr.
Larson relating to fiscal year 2000.
If a change in control occurs with respect to the Company and the employment of
Mr. Larson is concurrently or subsequently terminated (i) without cause (cause
is defined as any willful breach of a material duty by Larson in the course of
his employment or willful and continued neglect of his duty as an employee),
(ii) the term of Mr. Larson's employment agreement expires or (iii) Mr. Larson
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. Larson will be paid a severance payment of $195,000
(less amounts paid as Mr. Larson's salary and benefits that continue for the
remaining term of the agreement if his employment is terminated without cause).
If any such termination occurs after the substantial completion of the
liquidation of the assets of the Company, the severance payment shall be
increased by $32,500. 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
such transfer in the same relative proportions to each other as existed before
such event.
Mr. Larson's compensation will continue for the full term of the agreement if
his employment is terminated without cause.
SEVERANCE AGREEMENTS. Mr. Bowman ended his employment with the Company on March
31, 2000. Under the terms of a general release and waiver executed in connection
with the end of his term of employment, Mr. Bowman received $200,417 in 2000
related to his separation from the Company.
RESTRICTED STOCK. On March 22, 2000, the Company and Mr. Larson entered into a
restricted stock purchase agreement under which Mr. Larson purchased 40,000
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
33
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,
or March 22, 2010. 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. Mr. Larson also holds 20,000 shares
and 10,000 shares of restricted stock granted under similar terms on April 30,
1999 and October 23, 1998, respectively.
On March 22, 2000, the Company and Mr. Bosch entered into a restricted stock
purchase agreement under which Mr. Bosch purchased 30,000 shares of common stock
for a purchase price of $0.001 per share. The terms of Mr. Bosch'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.
34
ITEM 11. 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 28, 2001, 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 Item 10,
Executive Compensation--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
- ------------------------------------------------ --------------- -------------
Carl M. Bosch 82,255(a) (m)
Rodger A. Brown 36,168(b) (m)
David C. Bupp 618,692(c) 2.2%
John S. Christie 35,283(d) (m)
Nancy E. Katz -(e) (m)
Julius R. Krevans 60,183(f) (m)
Brent L. Larson 155,975(g) (m)
Michael P. Moore 49,183(h) (m)
J. Frank Whitley, Jr. 39,183(i) (m)
James F. Zid 47,283(j) (m)
All directors and officers as a group 1,124,205(k) 3.8%
(10 persons)
Paramount Capital Asset Management, Inc. 5,992,500(l) 20.5%
(*) 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 includes 38,334 shares issuable upon exercise of options which
are exercisable within 60 days, 30,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 3,921 shares in Mr.
Bosch's account in the 401(k) Plan, but does not include 81,666 shares
issuable upon exercise of options which are not exercisable within 60 days.
Mr. Bosch 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 66,787 shares of common stock. Mr. Bosch
disclaims any beneficial ownership of shares held by the 401(k) Plan that
are not allocated to his personal account.
(b) This amount includes 36,168 shares issuable upon exercise of options which
are exercisable within 60 days, 30,000 shares of restricted stock that vest
on a qualifying change in control of the Company, but does not include
78,332 shares issuable upon exercise of options which are not exercisable
within 60 days.
(c) This amount includes 388,100 shares issuable upon exercise of options which
are exercisable within 60 days, 210,000 shares of restricted stock that
vest on a qualifying change in control of the Company, 6,892 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 407,500 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 66,787
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 34,583 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 65,417 shares issuable
upon exercise of options which are not exercisable within 60 days.
(e) This amount excludes 30,000 shares issuable upon the exercise of options
which are not exercisable within 60 days.
35
(f) This amount includes 58,183 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 125,417 shares
issuable upon exercise of options which are not exercisable within 60 days.
(g) This amount includes 76,367 shares issuable upon exercise of options which
are exercisable within 60 days, 70,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 4,108 shares in Mr.
Larson's account in the 40l(k) Plan, but it does not include 108,333 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 ctock held in such plan. The 40l(k) Plan
holds an aggregate total of 66,787 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.
(h) This amount includes 43,183 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 65,417 shares issuable
upon exercise of options which are not exercisable within 60 days.
(i) This amount includes 38,183 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 65,417 shares issuable
upon exercise of options which are not exercisable within 60 days.
(j) This amount includes 45,683 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 65,417 shares issuable upon exercise of options which are
not exercisable within 60 days.
(k) This amount includes 728,784 shares issuable upon exercise of options which
are exercisable within 60 days 310,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 14,921 shares held in
the Company's 401(k) Plan, but it does not include 1,122,916 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 66,787 shares of common stock.
(l) This amount consists of 897,750 shares owned by the Aries Domestic Fund,
L.P. (Aries Domestic), 900,000 shares issuable upon the exercise of
warrants owned by Aries Domestic, 2,092,250 shares owned by The Aries
Master Fund II, a Cayman Island Exempted Company (Aries Master), and
2,100,000 shares issuable upon the exercise of warrants owned by Aries
Master. Paramount Capital Management, Inc., a 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. Roswenwald) has shared voting and
dispositive power over the shares of Aries Master and Aries Domestic
because he is 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 Pierson (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 Form 4 filed by Paramount Capital, Aries
Master, Aries Domestic and Dr. Rosenwald with the SEC on March 7, 2001.
(m) Less than 1 percent.
36
PART IV
ITEM 13. 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, March 17, 1999, and May 9,
2000 (incorporated by reference to Exhibit 3.1 to the Company's
March 31, 2000 Form 10-Q).
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 Company's Current Report on Form 8-K dated June 20,
1996).
3.3. Certificate of Elimination of Neoprobe Corporation filed on May
9, 2000 with the Secretary of State of the State of Delaware
(incorporated by reference to Exhibit 3.3 to the Company's March
31, 2000 Form 10-Q).
(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 Company (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 Company
(see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between the Company
and Continental Stock Transfer & Trust Company (incorporated by
reference to Exhibit 1 of the Company's registration statement on
Form 8-A).
4.4. Amendment Number 1 to the Rights Agreement between the Company
and Continental Stock Transfer & Trust Company dated February 16,
1999 (incorporated by reference to Exhibit 4.4 to the Company's
December 31, 1998 Form 10-K/A).
(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 Company 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 Company
and Continental Stock Transfer & Trust Company dated February
16, 1999 (see Exhibit 4.4).
10.1.32.--10.1.38. Reserved.
10.1.39. Settlement Agreement among the Company, The Aries Master Fund,
The Aries Domestic Fund, L.P., Paramount Capital, Inc., and
Paramount Capital Asset Management, Inc. dated January 20,
2000 (incorporated by reference to Exhibit 10.1.39 of the
Company's March 31, 2000 Form 10-Q).
37
10.1.40. Reserved.
10.2.1.--10.2.25. Reserved.
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 the Company's December 31, 1993 Form
10-KSB).*
10.2.27.--10.2.34. Reserved.
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Company and David C. Bupp (incorporated by reference to
Exhibit 10.2.35 to the Company's December 31, 1997 Form
10-K).*
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 Company's December 31, 1997 Form 10-K).*
10.2.38.--10.2.44. Reserved.
10.2.45. Restricted Stock Purchase Agreement between the Company and
David C. Bupp dated May 20, 1998 (incorporated by reference
Exhibit 10.2.45 to the Company's June 30, 1998 Form 10-Q).*
10.2.46.--10.2.47. Reserved.
10.2.48. Restricted Stock Agreement dated October 23, 1998 between the
Company and Brent L. Larson (incorporated by reference to
Exhibit 10.2.48 to the Company's December 31, 1998 Form
10-K/A).*
10.2.49. Reserved
10.2.50. Restricted Stock Agreement dated April 30, 1999 between the
Company 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 (incorporated by reference
to Exhibit 10.2.50 to the Company's June 30, 1999 Form 10-Q).*
10.2.51. Reserved.
10.2.52. Severance Agreement dated November 30, 1999 between the
Company and Patricia Coburn (incorporated by reference to
Exhibit 10.2.52 to the Company's December 31, 1999 Form
10-K/A).*
10.2.53. Reserved.
10.2.54. Restricted Stock Agreement dated March 22, 2000 between the
Company 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 (incorporated by reference
to Exhibit 10.2.54 of the Company's March 31, 2000 Form
10-Q).*
38
10.2.55. Agreement, Release and Waiver between the Company and Matthew
F. Bowman dated March 31, 2000 (incorporated by reference to
Exhibit 10.2.55 to the Company's March 31, 2000 Form 10-Q).*
10.2.56. Employment Agreement between the Company and Carl M. Bosch
dated April 1, 2000 (incorporated by reference to Exhibit
10.2.56 to the Company's March 31, 2000 Form 10-Q).*
10.2.57. Employment Agreement between the Company and Brent L. Larson
dated April 1, 2000 (incorporated by reference to Exhibit
10.2.57 to the Company's March 31, 2000 Form 10-Q).*
10.2.58. Employment Agreement between the Company and David C. Bupp
dated July 1, 2000 (incorporated by reference to Exhibit
10.2.58 to the Company's June 30, 2000 Form 10-Q).*
10.3.1. Technology Transfer Agreement dated July 29, 1992 between the
Company and The Dow Chemical Corporation (incorporated by
reference to Exhibit 10.10 to the Company's 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.--10.3.30. Reserved.
10.3.31. CooperativeResearch and Development Agreement between Company
and National Cancer Institute (incorporated by reference to
Exhibit 10.3.31 to the Company's September 30, 1995 Form
10-QSB).
10.3.32.--10.3.44. Reserved.
10.3.45. License dated May 1, 1996 between Company and The Dow Chemical
Company (incorporated by reference to Exhibit 10.3.45 to the
Company's June 30, 1996 Form 10-QSB).
10.3.46. License Agreement dated May 1, 1996 between Company and The
Dow Chemical Company (incorporated by reference to Exhibit
10.3.46 to the Company's June 30, 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 the Company and Cira
Technologies, Inc. dated April 1, 1998 (incorporated by
reference to Exhibit 10.3.47 to the Company's June 30, 1998
Form 10-Q).
10.3.48. Restated Subscription and Option Agreement between the
Company, 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
Company's June 30, 1998 Form 10-Q).
10.3.49. Restated Stockholders Agreement with the Company, 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
Company's June 30, 1998 Form 10-Q).
10.3.50. Share Purchase Agreement between the Company and Biomedical
Investments (1997) Ltd. dated January 19, 2000 (incorporated
by reference to Exhibit 10.3.50 to
39
the Company's March 31, 2000 Form 10-Q).
10.3.51. Option Agreement between the Company and Reico Ltd. dated
February 1, 2000 (incorporated by reference to Exhibit 10.1.40
of the Company's March 31, 2000 10-Q).
10.3.52. Participation Agreement between the Company and Cira, LLC
dated November 30, 2000.
10.4.1.--10.4.32. Reserved.
10.4.32. Supply Agreement between the Company and eV Products dated
December 8, 1997 (incorporated by reference to Exhibit 10.4.32
to Amendment 2 to the Company's December 31, 1997 Form 10-K,
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 Company and KOL Bio Medical Instruments, Inc.
(incorporated by reference to Exhibit 10.4.33 to the Company's
March 31, 1999 Form 10-Q , confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
10.4.34.--10.4.36. Reserved.
10.4.37. Termination Agreement between the Company and KOL Bio-Medical
Instruments, Inc. dated October 1, 1999 (incorporated by
reference to Exhibit 10.4.37 to the Company's September 30,
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 Company and KOL
Bio-Medical Instruments, Inc. dated October 1, 1999
(incorporated by reference to Exhibit 10.4.38 to the Company's
September 30, 1999 Form 10-Q, confidential portions of which
were omitted and filed separately with the Commission subject
to an order granting confidential treatment).
10.4.39. Distribution Agreement between the Company and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (incorporated by
reference to Exhibit 10.4.39 to the Company's September 30,
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.--10.4.44. Reserved.
10.4.45. Manufacturing and Supply Agreement between the Company and
Plexus Corporation dated March 30, 2000 (filed pursuant to
Rule 24b-2 under which the Company has requested confidential
treatment of certain portions of this Exhibit), (incorporated
by reference to Exhibit 10.4.45 to the Company's March 31,
2000 Form 10-Q).
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
11.1. Computation of Income (Loss) Per Share.
(21) SUBSIDIARIES OF THE COMPANY.
40
21.1. Subsidiaries of the Company.
(23) CONSENT OF EXPERTS AND COUNSEL.
23.1. Consent of KPMG LLP.
(24) POWERS OF ATTORNEY.
24.1. Powers of Attorney.
24.2. Certified resolution of the Company'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 Company
during the fourth quarter of fiscal 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2001
NEOPROBE CORPORATION
(the Company)
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 Company and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David C. Bupp Director, President and Chief February 2, 2001
- -------------------------------------- Executive Officer
David C. Bupp (principal executive officer)
41
/s/ Brent L. Larson* Vice President, Finance and February 2, 2001
- -------------------------------------- Chief Financial Officer
Brent L. Larson (principal financial officer)
/s/ John S. Christie* Director February 6, 2001
- --------------------------------------
John S. Christie
/s/ Nancy E. Katz* Director February 11, 2001
- --------------------------------------
Nancy E. Katz
/s/ Julius R. Krevans* Chairman, Director March ____, 2001
- --------------------------------------
Julius R. Krevans
/s/ Michael P. Moore* Director March ____, 2001
- --------------------------------------
Michael P. Moore
/s/ J. Frank Whitley, Jr.* Director February 6, 2001
- --------------------------------------
J. Frank Whitley, Jr.
/s/ James F. Zid* Director February 6, 2001
- --------------------------------------
James F. Zid
*By: /s/ David C. Bupp
------------------------------------------------
David C. Bupp, Attorney-in-fact
42
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
NEOPROBE CORPORATION
------------------------
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 2000
----------------------------
FINANCIAL STATEMENTS
----------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Neoprobe Corporation
We have audited the accompanying balance sheets of Neoprobe Corporation and
subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neoprobe Corporation
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Columbus, Ohio
February 21, 2001
F-1
NEOPROBE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
December 31, 2000 and 1999
ASSETS 2000 1999
------------------- ------------------
Current assets:
Cash and cash equivalents $ 4,643,347 $ 4,882,537
Accounts receivable, net 365,061 453,406
Inventory 941,120 1,134,427
Prepaid expenses 230,470 666,688
Other current assets 1,946 7,177
------------------- ------------------
Total current assets 6,181,944 7,144,235
------------------- ------------------
Investment in affiliates -- 1,500,000
Property and equipment 2,039,187 2,167,245
Less accumulated depreciation and amortization 1,174,167 1,264,299
------------------- ------------------
865,020 902,946
------------------- ------------------
Intangible assets, net 524,035 775,088
Other assets 1,816 300
------------------- ------------------
Total assets $ 7,572,815 $10,322,569
=================== ==================
CONTINUED
F-2
NEOPROBE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999
------------- -------------
Current liabilities:
Line of credit $ -- $ 480,000
Notes payable to finance company 105,332 154,626
Capital lease obligations, current 11,359 87,007
Accrued liabilities 725,674 1,365,649
Accounts payable 731,985 759,961
Deferred license revenue, current 800,000 800,000
Obligation to preferred stockholder, current -- 2,500,000
------------- -------------
Total current liabilities 2,374,350 6,147,243
------------- -------------
Capital lease obligations 32,926 68,809
Deferred license revenue 2,200,000 3,000,000
Obligation to preferred stockholder -- 1,245,536
------------- -------------
Total liabilities 4,607,276 10,461,588
------------- -------------
Commitments and contingencies -- --
Stockholders' equity (deficit):
Preferred stock; $.001 par value; 5,000,000 shares authorized at December 31,
2000 and December 31, 1999; none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at December 31,
2000 and 1999; none outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 26,264,103 shares issued and
outstanding at December 31, 2000; 23,046,644
shares issued and outstanding at December 31, 1999 26,264 23,047
Additional paid-in capital 120,668,639 119,407,204
Accumulated deficit (117,729,364) (119,569,270)
------------- -------------
Total stockholders' equity (deficit) 2,965,539 (139,019)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 7,572,815 $ 10,322,569
============= =============
See accompanying notes to consolidated financial statements
F-3
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Net sales $ 8,835,185 $ 9,245,664 $ 5,832,695
License revenue 875,000 200,000 --
------------ ------------ ------------
Total revenues 9,710,185 9,445,664 5,832,695
------------ ------------ ------------
Cost of goods sold 4,990,014 4,507,774 1,403,951
------------ ------------ ------------
Gross profit 4,720,171 4,937,890 4,428,744
------------ ------------ ------------
Operating expenses:
Research and development 472,730 1,388,375 14,364,539
Marketing and selling 284,399 4,396,207 5,267,617
General and administrative 2,676,053 3,734,697 6,088,823
Losses related to subsidiaries in liquidation -- 475,231 7,176,061
------------ ------------ ------------
Total operating expenses 3,433,182 9,994,510 32,897,040
------------ ------------ ------------
Income (loss) from operations 1,286,989 (5,056,620) (28,468,296)
------------ ------------ ------------
Other income (expense):
Gain on deconsolidation of subsidiaries -- 699,146 --
Interest income 205,964 103,672 598,834
Interest expense (24,880) (82,853) (189,785)
Other 371,833 162,668 26,495
------------ ------------ ------------
Total other income 552,917 882,633 435,544
------------ ------------ ------------
Net income (loss) 1,839,906 (4,173,987) (28,032,752)
------------ ------------ ------------
Conversion discount on preferred stock -- 1,795,775 --
Accretion to potential redemption value -- 1,804,225 --
Preferred stock dividend requirements -- 120,536 --
Loss on retirement of preferred stock 764,668 -- --
------------ ------------ ------------
Income (loss) attributable to common stockholders $ 1,075,238 $ (7,894,523) $(28,032,752)
============ ============ ============
Income (loss) per common share:
Basic $ 0.04 $ (0.34) $ (1.23)
Diluted $ 0.04 $ (0.34) $ (1.23)
Weighted average shares outstanding:
Basic 25,710,127 23,003,461 22,842,232
Diluted 26,440,363 23,003,461 22,842,232
See accompanying notes to consolidated financial statements
F-4
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, 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 share 76,587 77 196,221 196,298
Issued to 401(k) plan at $14.45 2,893 3 41,802 41,805
Issued restricted stock to
officers 45,000 45 45
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 40l(k) plan at $2.68 13,734 14 36,776 36,790
Issued restricted stock to
officers 145,000 145 145
Issued redeemable convertible
preferred stock and warrants,
net of costs 1,022,290 1,022,290
Accretion of redeemable
convertible preferred stock to
potential redemption value (1,804,225) (1,804,225)
Preferred stock dividend
requirements (120,536) (120,536)
Comprehensive income (loss):
Net loss (4,173,987) (4,173,987)
Foreign currency translation
adjustment due to
deconsolidation of
subsidiaries 75,080 75,080
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)
Exercise of employee stock
options at $1.25 to $1.50
per share 24,133 24 33,884 33,908
Issued to 401(k) plan at $0.79 23,326 23 18,290 18,313
Issued restricted stock to
officers 170,000 170 170
Issued common stock in redemption
of redeemable convertible
preferred stock and warrants,
net of costs 3,000,000 3,000 1,209,261 1,212,261
Net income and comprehensive
income 1,839,906 1,839,906
---------- ----------- ------------ ------------- ------------ ------------
Balance, December 31, 2000 26,264,103 $ 26,264 $120,668,639 $(117,729,364) $ -- $2,965,539
========== =========== ============ ============= ============ ============
See accompanying notes to consolidated financial statements.
F-5
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,839,906 $ (4,173,987) $(28,032,752)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation of property and equipment 358,843 506,916 1,081,676
Amortization of intangible assets 33,656 46,046 190,888
Provision for bad debts 1,670 16,005 134,249
Loss on disposal and abandonment of assets 201,088 369,580 1,100,704
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)
Other 18,313 34,844 17,815
Change in operating assets and liabilities:
Accounts receivable 86,675 1,491,098 (1,410,759)
Inventory 38,418 444,492 (1,165,258)
Prepaid expenses and other assets 559,933 269,927 1,144,128
Accrued liabilities and other liabilities (639,975) (1,132,745) (105,694)
Accounts payable (27,976) (1,469,070) (847,970)
Deferred revenue (800,000) 3,800,000 --
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,670,551 1,972,191 (23,064,889)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- -- (1,738,512)
Proceeds from sales of available-for-sale securities -- 443,729 4,955,601
Maturities of available-for-sale securities -- 4,467 11,050,000
Proceeds from sale of investment in affiliate 1,500,000 -- --
Purchases of property and equipment (168,165) (75,363) (3,428,811)
Proceeds from sales of property and equipment 102,516 24,202 --
Patent costs (32,984) (27,104) (239,400)
------------ ------------ ------------
Net cash provided by investing activities 1,401,367 369,931 10,598,878
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrants, net -- 2,818,065 --
Settlement of obligation to preferred stockholder (2,500,000) -- --
Proceeds from issuance of common stock, net 803 145 196,343
Proceeds from line of credit -- 480,000 1,275,750
Payments under line of credit (480,000) (1,000,000) (275,750)
Payment of notes payable (169,294) (263,787) (228,892)
Payments under capital leases (162,617) (99,539) (156,167)
Proceeds from long-term debt -- -- 3,129,499
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,311,108) 1,934,884 3,940,783
------------ ------------ ------------
Effect of exchange rate changes on cash -- -- 43,791
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (239,190) 4,277,006 (8,481,437)
Cash and cash equivalents, beginning of year 4,882,537 1,061,936 9,543,373
Change in beginning cash and cash equivalents due to
deconsolidation of subsidiaries -- (456,405) --
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,643,347 $ 4,882,537 $ 1,061,936
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation
(Neoprobe or 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.
(Ethicon), a Johnson & Johnson company.
For the year ended December 31, 2000, 100% of net sales were
made to Ethicon. The loss of this customer would have a
significant adverse effect on the Company's operating results.
For the year ended December 31, 1999, approximately $5.3
million (57%) of net sales were concentrated between two
customers, one of which was Ethicon. No individual customer
constituted over 10% of net sales in 1998.
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
11(b).). All significant intercompany accounts and
transactions were eliminated in consolidation for
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 11(b).) and control of the subsidiaries was
taken away from the Company. In connection with the
deconsolidation, the Company recorded a gain of
$699,000 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. In addition, it
is possible, in the event the liquidation of Neoprobe
Israel resulting from the receivership does not fully
satisfy the outstanding obligations of Neoprobe
Israel, that the creditors of Neoprobe Israel would
seek to pursue claims directly against the Company.
However, management believes the Company has no
contractual responsibility for the liabilities of
Neoprobe Israel and that the prospect that creditors
would prevail if claims were brought directly against
the Company is remote (See Note 16.).
(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:
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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) 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, 2000 and 1999, the
carrying values of these instruments approximate fair
value.
e. CASH AND CASH EQUIVALENTS: There were no cash equivalents at
December 31, 2000 or 1999. For 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. None of the cash presented in the December 31,
2000 and 1999 balance sheets is pledged or restricted in any
way.
f. INVESTMENTS: 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.
g. INVENTORY: The components of inventory at December 31, 2000
and 1999, are as follows:
2000 1999
---------------- ----------------
Materials and component parts $ 418,087 $ 104,441
Finished goods 523,033 1,029,986
---------------- ----------------
$ 941,120 $ 1,134,427
================ ================
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 are 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 2 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 $51,000 and $391,000 of
equipment under capital leases and accumulated amortization of
$9,000 and $257,000 at December 31, 2000 and 1999,
respectively. During 2000, 1999 and 1998, the Company recorded
gains (losses) of $49,000 ($60,000) and ($3,000),
respectively, on the disposal of property and equipment.
The major classes of property and equipment are as follows:
2000 1999
------------------ ------------------
Production machinery and equipment $ 823,770 $ 798,647
Other machinery and equipment, primarily
computers and research equipment 628,242 656,740
Furniture and fixtures 393,517 527,567
Leasehold improvements 98,353 91,513
Other 95,305 92,778
------------------ ------------------
$ 2,039,187 $ 2,167,245
================== ==================
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
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2000 and
1999 are as follows:
2000 1999
---------------- ---------------
Patents $ 622,856 $ 894,638
Accumulated amortization (98,821) (119,550)
---------------- ---------------
$ 524,035 $ 775,088
================ ===============
During 2000 and 1998, the Company recorded approximately
$250,000 and $148,000, respectively, 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 licensed technology.
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. Ethicon has no
right to return products purchased in the ordinary
course of business. Sales prices on products sold to
Ethicon are subject to retroactive annual adjustment
based on a fixed percentage of the actual sales
prices achieved by Ethicon 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 Ethicon, the Company records sales
to Ethicon 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 Ethicon, the Company records revenue related
to these product sales at the minimum price provided
for under its distribution agreement with Ethicon.
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 agreement
does not permit return of demonstration units in the
ordinary course of business nor does the Company have
any performance obligations 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.
The Company warrants its products against defects in
design, materials, and workmanship for a period of
one year from the date of sale by Ethicon. The
Company's accrual for warranty expenses is adjusted
periodically to reflect actual experience. Ethicon
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 Ethicon 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.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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): 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).
SFAS No. 130 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.
The accumulated balances for each classification of
accumulated other comprehensive income (loss) are as follows:
GROSS
FOREIGN UNREALIZED ACCUMULATED OTHER
CURRENCY GAINS (LOSSES) COMPREHENSIVE
TRANSLATION ON SECURITIES INCOME (LOSS)
ADJUSTMENT
------------------ ---------------- ---------------------
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 $ -- $ -- $ --
================== ================ =====================
The Company had no accumulated other comprehensive income
(loss) activity during the year ended December 31, 2000.
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.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During 2000, the Company recorded general and administrative
charges of $250,000 related to the abandonment of patents and
patent applications that no longer support the Company's
business strategy. 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. During 1998, the
Company recorded impairment charges of $222,000 related to
property and equipment and $1 million related to a technology
license no longer anticipated to be used in the RIGS(R)
(radioimmunoguided surgery) initiative. The 1998 impairment
charges were included in general and administrative expenses
and research and development expenses on the 1998 statement of
operations, respectively.
q. RECLASSIFICATION: Certain prior years' amounts have been
reclassified to conform with the 2000 presentation.
2. EARNINGS PER SHARE:
Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted
earnings per share is calculated using the weighted average number of
common shares outstanding during the periods, adjusted for the effects
of convertible securities, options and warrants, if dilutive.
YEAR ENDED
DECEMBER 31, 2000
--------------------------------------------
BASIC DILUTED
EARNINGS EARNINGS
PER SHARE PER SHARE
-------------------- --------------------
Outstanding shares 26,264,103 26,264,103
Effect of weighting changes
in outstanding shares (183,976) (183,976)
Contingently issuable shares (370,000) (370,000)
Stock options - 303,410
Warrants - 426,826
-------------------- --------------------
Adjusted shares 25,710,127 26,440,363
==================== ====================
The following table summarizes options to purchase common stock of the
Company which were outstanding during the year ended December 31, 2000,
but which were not included in the computation of diluted income per
share because their effect was anti-dilutive.
YEAR ENDED
DECEMBER 31, 2000
----------------------------------------------
EXERCISE OPTIONS
PRICE OUTSTANDING
----------------------- -------------------
$ 1.03 - $ 2.50 582,062
$ 3.00 - $ 6.00 372,352
$ 13.38 - $ 17.44 121,774
-------------------
1,076,188
===================
There are no differences in basic and diluted earnings per share for
the Company related to 1999 and 1998. The net loss per common share for
those periods excludes the number of common shares
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
issuable on exercise of outstanding stock options and warrants into the
Company's common stock since such inclusion would be antidilutive.
3. ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK:
Accounts receivable at December 31, 2000 and 1999, net of allowance for
doubtful accounts of $26,357 and $97,382, respectively, consist of the
following:
2000 1999
---------------- --------------
Trade $ -- $ 368,072
Other 365,061 85,334
---------------- --------------
$365,061 $ 453,406
================ ==============
Trade receivables consist of receivables from customers based on the
sale of the Company's products.
At December 31, 2000, approximately 73% of the Company's net accounts
receivable are due from Ethicon. The Company does not believe it is
exposed to significant credit risk related to Ethicon based on the
overall financial strength and credit worthiness of the customer. The
Company believes that it has adequately addressed other credit risks 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,
2000 and 1999 is as follows:
2000 1999
--------------- ---------------
Allowance for doubtful accounts at beginning of year $97,382 $ 77,000
Provision for bad debts 1,670 16,005
Writeoffs charged against the allowance (72,695) (27,057)
Recoveries of amounts previously charged off -- 31,434
--------------- ---------------
Allowance for doubtful accounts at end of year $26,357 $ 97,382
=============== ===============
4. INVESTMENT IN AFFILIATE:
Investment in affiliate at December 31, 1999 represents an investment
in XTL Biopharmaceuticals Ltd. (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.
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 12% interest, which is accounted for on the cost method and
is carried at zero at December 31, 2000.
5. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE:
Accrued liabilities at December 31, 2000 and 1999 consist of the
following:
2000 1999
-------------- ---------------
Contracted services and other $ 265,268 $ 713,079
Compensation 219,815 244,029
Royalties due under research and development agreement -- 261,952
Inventory purchases 120,591 61,952
Warranty reserve 120,000 84,637
-------------- ---------------
$ 725,674 $1,365,649
============== ===============
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued compensation at December 31, 2000 includes $206,889 of bonuses
due to employees. Accrued compensation at December 31, 1999 includes
$210,153 of separation-related payments due to former employees.
Accounts payable at December 31, 2000 and 1999 consist of the
following:
2000 1999
---------------- ---------------
Trade $ 676,610 $ 410,031
Other 55,375 349,930
---------------- ---------------
$ 731,985 $ 759,961
================ ===============
6. LINE OF CREDIT:
During August 1999, the Company negotiated a line of credit with a
bank. The line of credit provided for a maximum outstanding principal
of $500,000, bore interest at the bank's prime rate plus one percent,
and had an amended maturity date of August 15, 2000. The line of credit
was 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 this line of credit. This line of credit expired
under its terms on August 15, 2000.
7. INCOME TAXES:
As of December 31, 2000, the Company's net deferred tax assets in the
U.S. were approximately $37.2 million. Approximately $31.6 million of
the deferred tax assets relate principally to net operating loss
carryforwards of approximately $93.0 million available to offset future
taxable income, if any, through 2020. An additional $4.3 million
relates to tax credit carryforwards (principally research and
development) available to reduce future income tax liability after
utilization of tax loss carryforwards, if any, through 2020. The
remaining $1.3 million relates to temporary differences between the
carrying amount of assets and liabilities and their tax bases. 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 at December 31, 2000.
However, for the year ended December 31, 2000, the reversal of certain
temporary differences related to depreciation of property and equipment
and deferred revenue resulted in the generation of a loss for income
tax purposes. As a result, no income tax expense is reflected in the
2000 statement of operations.
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 under
certain circumstances such as a change in control of the Company.
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,
2000, the Company's international subsidiaries, which are both in the
process of liquidating and have been deconsolidated for financial
reporting purposes, 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.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. EQUITY:
a. REDEEMABLE PREFERRED STOCK: On February 16, 1999, the Company
executed a purchase agreement to complete the private
placement of 30,000 shares of 5% Series B redeemable
convertible preferred stock (the Series B) and 2.9 million
warrants for gross proceeds of $3 million ($2.8 million, net
of certain placement costs). The Series B and related warrants
had variable conversion provisions based on the market price
of the Company's common stock and were subject to certain
redemption provisions.
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. 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 was 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 $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 and the Class L
warrants. The letter of intent committed the Series B holders
to surrender the Series B shares and Class L warrants 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, the Company agreed to pay
the Series B holders a total of $2.5 million and to issue the
Series B holders 3 million shares of common stock and 3
million Class N warrants to purchase 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. On
January 20, 2000, the Company executed and completed a
definitive Settlement Agreement with the Series B holders on
terms consistent with the November 1999 letter.
In accordance with the aforementioned terms, the transaction
was reported in the Company's first quarter 2000 financial
statements and was 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
reflected a loss on the retirement of the preferred shares of
$765,000 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. The Company also reclassified the amount previously
recorded as a long-term liability to additional paid in
capital concurrent with the execution of the definitive
Settlement Agreement.
b. STOCK OPTIONS: At December 31, 2000, 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
income (loss) and income (loss) per share would have been
decreased/increased to the pro forma amounts indicated below:
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
--------------- ----------------- ------------------
Income (loss) attributable to As reported $1,075,238 $(7,894,523) $(28,032,752)
common stockholders Pro forma $ 677,437 $(8,551,024) $(30,843,828)
Income (loss) per common
share (basic and diluted) As reported $ 0.04 $ (0.34) $ (1.23)
Pro forma $ 0.03 $ (0.37) $ (1.35)
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, 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 2000, 1999, and 1998
respectively: average risk-free interest rates of 6.4%, 5.1%
and 5.0%; expected average lives of three to four years for
each of the years presented; no dividend rate for any year;
and volatility of 143% for 2000, 123% for 1999, and 103% for
1998. The weighted average fair value of options granted in
2000, 1999 and 1998 was $0.43, $0.91, and $2.44, respectively.
A summary of the status of stock options under the Company's
stock option plans as of December 31, 2000, 1999, and 1998,
and changes during the years ended on those dates is presented
below:
2000 1999 1998
---------------------------- --------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ----------- ----------- ----------- ------------- ------------
Outstanding at
beginning of year 1,484,002 $ 4.16 1,459,445 $ 5.31 2,194,103 $ 7.81
Granted 750,000 $ 0.52 544,500 $ 1.14 869,791 $ 3.88
Forfeited (574,596) $ 4.15 (519,943) $ 4.20 (1,527,862) $ 8.22
Exercised (24,133) $ 1.41 -- $ -- (76,587) $ 2.56
------------ ----------- -------------
Outstanding at
end of year 1,635,273 $ 2.54 1,484,002 $ 4.16 1,459,445 $ 5.31
============ =========== =============
Options exercisable
at end of year 624,465 809,736 912,546
============ =========== =============
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, 2000, are 100,000 options exercisable at an
exercise price of $2.50 per share which vest on the meeting of
certain Company achievements.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the Company's
stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER
OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AS WEIGHTED
OF REMAINING EXERCISE OF AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL PRICE DECEMBER 31, EXERCISE
PRICES 2000 LIFE 2000 PRICE
----------------------- ---------------- ---------------- ------------ ---------------- --------------
$ 0.50 - $ 0.50 640,000 9 years $ 0.50 -- $ --
$ 0.72 - $ 1.50 444,073 8 years $ 1.10 206,498 $ 1.19
$ 2.00 - $ 6.00 458,700 4 years $ 4.41 325,467 $ 4.90
$ 13.38 - $ 15.75 92,500 6 years $14.26 92,500 $ 14.26
---------------- ----------------
$ 0.50 - $ 15.75 1,635,273 7 years $ 2.54 624,465 $ 5.06
c. RESTRICTED STOCK: During 2000, 1999 and 1998, the Company
granted 170,000, 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 in 1998 subsequent to being granted but
prior to issuance, and 80,000 shares were not issued by the
Company's transfer agent until 1999. During 2000, 20,000 of
the 145,000 shares issued in 1998 were forfeited related to
the separation of an employee.
At December 31, 2000, the Company has 370,000 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 separate from a change
of control as defined in an officer's employment agreement
with the Company (See Note 12(f).).
d. STOCK WARRANTS: At December 31, 2000, there are approximately
3,050,000 warrants outstanding to purchase common stock of the
Company. The warrants are exercisable at prices ranging from
$0.74 to $5.00 per share with a weighted average exercise
price per share of $0.81. Three million of the warrants expire
in January 2003 with the remainder expiring in February 2004.
e. COMMON STOCK RESERVED: Shares of authorized common stock have
been reserved for the exercise of all options and warrants
outstanding.
9. 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
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28, 2005. The Board of Directors may amend the Shareholder Rights Plan,
from time to time, as considered necessary.
10. RESTRUCTURING AND SUBSIDIARY LIQUIDATION ACTIVITIES: The Company's
failure to gain marketing clearance related to its first generation
targeting agent for the detection of colorectal cancer, RIGScan(R)CR49,
forced the Company to initiate restructuring activities during the
first quarter of 1998. 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. As the Company has no
currently 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
subsequent adjustments to charges related to these items.
- During the first quarter of 1998, Neoprobe notified and
severed 16 individuals as a result of expected delays in the
approval process for the Company's initial targeting agent,
RIGScan(R) 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 17
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 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
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
reflected the associated charge in losses related to
subsidiaries in liquidation for the year ended December 31,
1998. (See Note 11(b).).
- In September 1999, based on entering into an exclusive
worldwide distribution agreement with Ethicon, the Company
notified two executives that they would be severed. The
Company recorded separation costs related to these severed
employees of $75,000 reflected in research and development
expenses, $75,000 reflected in marketing and selling expenses,
and $106,000 reflected in general and administrative expenses
for the year ended December 31, 1999. During 2000, the
severance arrangement with one of these employees was amended,
resulting in additional separation costs of $37,000 reflected
in research and development expenses and $37,000 reflected in
marketing and selling expenses for the year ended December 31,
2000.
- In October 1999, an additional six 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.
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 75,156 -- -- 75,156
Marketing and selling 220,522 -- -- 220,522
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
----------- ----------- ----------- -----------
2000:
Research and development 37,077 -- -- 37,077
Marketing and selling 37,077 -- -- 37,077
General and administrative -- -- -- --
Non-cash write-downs -- -- -- --
Paid in 2000 (284,307) -- -- (284,307)
----------- ----------- ----------- -----------
Balance accrued at
December 31, 2000 $ -- $ -- $ -- $ --
=========== =========== =========== ===========
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. 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 ILM, diagnostic radiopharmaceutical
products to be used in the Company's proprietary RIGS process, and
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. Gains and losses
incurred in 1999 associated with the RIGS initiative were related
to the Company's majority-owned subsidiary, Neoprobe Israel. (See
Note 11(b).) The Company incurred no significant development costs
in 2000 related to RIGS or ACT. The information in the following
table is derived directly from the segments' internal financial
reporting used for corporate management purposes. 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)
2000 RIGS ILM ACT UNALLOCATED TOTAL
----------------------------------------------------------------------------------------------------------------------
Net sales (United States) $ -- $ 8,835 $ -- $ -- $ 8,835
License revenue 75 800 -- -- 875
Research and development expenses -- (473) -- -- (473)
Marketing and selling expenses -- (284) -- -- (284)
General and administrative expenses -- -- -- (2,676) (2,676)
Other income -- -- -- 553 553
Total assets, net of depreciation and
amortization (United States) 165 2,124 -- 5,284 7,573
Capital expenditures -- 25 -- 143 168
1999
-----------------------------------------
Net sales
United States customers $ -- $ 8,124 $ -- $ -- $ 8,124
International customers -- 1,122 -- -- 1,122
License revenue -- 200 -- -- 200
Research and development expenses -- (1,388) -- -- (1,388)
Marketing and selling expenses -- (4,396) -- -- (4,396)
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
liquidation (7,176) -- -- -- (7,176)
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-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. SUBSIDIARIES: The Company's suspended RIGS initiative include the former
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 in 1998. 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. 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 2000 or
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
financed by an Israeli bank (the Bank).
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. The Company incurred no costs related to Neoprobe
Israel during 2000.
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 the 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
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 setoff. However, as the Company continues to believe it may be
required to relinquish legal title to the 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 sheets beginning at December 31,1999 (See Note 16.).
In addition, it is possible, in the event the liquidation of Neoprobe
Israel resulting from the receivership does not fully satisfy the
outstanding obligations of Neoprobe Israel, that the creditors of
Neoprobe Israel would seek to pursue claims directly against the
Company. However, Management believes the Company has no contractual
responsibility for the liabilities of Neoprobe Israel and that the
prospect that creditors would prevail if claims were brought directly
against the Company is remote (See Note 16.).
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 increasing quantities of crystal modules each year in
order to maintain exclusivity. Total purchases under the supply
agreement were $782,000, $587,000 and $478,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. The
Company expects to purchase $924,000 in crystal modules from eV
in 2001 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 BlueTipTM
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. Total purchases under the supply
agreement were $418,000 and $140,000 for the years ended
December 31, 2000 and 1999, respectively. The Company expects to
purchase a minimum of $280,000 in BlueTip probes and accessories
from MedTech through the first quarter of 2001. 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 Corporation (Plexus) for the
exclusive manufacture of the Company's 14mm probe and neo2000(R)
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
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.
Total purchases under the manufacturing and supply agreement
were $3.0 million for the year ended December 31, 2000. The
Company is currently committed to purchase $600,000 in 14mm
probes and neo2000 control units from Plexus during the first
quarter of 2001. 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. In the event the agreement is terminated by Neoprobe or
if Plexus ceases to be the exclusive supplier of the
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
b. MARKETING AND DISTRIBUTION AGREEMENTS: In April 1998, the
Company executed a non-exclusive Sales and Marketing Agreement
with Ethicon to market and promote certain of the Company's line
of hand-held gamma detection instruments. On January 29, 1999,
the Company provided Ethicon 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 included approximately $625,000 in refurbished
demonstration equipment which Ethicon had agreed to purchase,
but which had not yet shipped as of December 31, 1999, valued at
the lower of cost or market. The remaining equipment was
purchased by Ethicon during 2000, therefore, the Company's
inventory balance at December 31, 2000 does not include any of
the refurbished demonstration equipment.
The Company entered into a new Distribution Agreement (the
Agreement) with Ethicon 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 current line of ILM products (the
Products) exclusively to Ethicon, who will distribute the
Products globally. Ethicon 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. Ethicon 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.
Ethicon 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 Ethicon, or becomes insolvent. If termination is
due to failure to supply or a material breach by the Company,
Ethicon 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, Ethicon 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, Ethicon received a non-exclusive, worldwide
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. Ethicon paid the Company a
non-refundable license fee of $4 million. The Company is
recognizing 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 Ethicon, Ethicon would be required to pay the Company
a royalty on all products developed and sold by Ethicon using
the Company's ILM intellectual property. In addition, the
Company is entitled to a royalty on any ILM product
commercialized by Ethicon that does not infringe any of the
Company's existing intellectual property.
c. RESEARCH AND DEVELOPMENT AGREEMENT: In 1985, the Company
received $250,000 under a research and development agreement
between the Company, The Ohio State University, and the
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Department of Development of the State of Ohio. Under the terms
of the agreement, the Company was obligated to pay the State of
Ohio royalties calculated as a percentage of net sales of
certain products or share proceeds received from the sale or
license of the technology. At December 31, 1999, the Company had
accrued $262,000 in royalties it believed was due under the
agreement. During the fourth quarter of 2000, the State of Ohio
notified the Company it was waiving all rights to receive
royalties under the agreement. Accordingly, the Company recorded
a gain related to the waiver of such rights in its Statement of
Operations for the year ended December 31, 2000.
d. LICENSE AND TECHNOLOGY AGREEMENTS: In February 1996, the Company
and 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. In January 2000, the Company sold its equity
interest in XTL; 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
during 1998 related to research performed on its behalf by XTL.
Since 1996, the Company has entered into a series of technology
license and revenue sharing agreements with Cira that have been
modified from time to time. In connection with these agreements,
the Company incurred approximately $337,000 in research and
development expenses for the year ended December 31, 1998. The
Company incurred no expenses in 2000 or 1999 related to
technology for which Cira has rights. The Company holds a 15%
equity interest in Cira and a former chairman of the Company is
a director and principal shareholder of Cira. In November 2000,
the Company and Cira entered into a participation agreement to
endeavor to jointly seek commercial partners for their
respective oncology therapy products. Neoprobe has agreed to
provide up to $50,000 in funding to assist in the licensing
efforts. The Company retains certain milestone and revenue
sharing rights in the event Cira is successful in licensing or
commercializing certain technologies.
e. OPTION AGREEMENT: During the first quarter of 2000, the Company
entered into an option agreement for the development of its
initial RIGS compound, RIGScan CR. The option agreement is with
a newly-formed development entity, NuRIGS, Ltd. (NuRIGS). Based
in Tel Aviv, Israel, NuRIGS has been organized for the express
purpose of developing a second-generation humanized RIGScan CR
antibody fragment. During September 2000, NuRIGS and the Company
agreed to extend the term of the option for one year to December
31, 2001 in exchange for $100,000 in additional option milestone
fees to be paid in four equal quarterly installments beginning
December 31, 2000. The Company recognized a total of $75,000 in
option milestone revenue during 2000. The option agreement calls
for Neoprobe to receive, with the execution of a definitive
agreement, a license fee of up to $825,000 and a product royalty
of approximately 5 percent on NuRIGS' commercial sales of the
product. The Company and NuRIGS expect to begin negotiating a
definitive license agreement that may be completed during 2001,
at the earliest. However, there can be no assurance that a
definitive license agreement will be completed, on terms
consistent with the option agreement, or at all. Under the terms
of the option, NuRIGS will assume all clinical and other
development costs for RIGScan CR.
f. EMPLOYMENT AGREEMENTS: The Company maintains employment
agreements with three officers of the Company. The employment
agreements contain change in control provisions that would
entitle each of the officers to between 1.8 to 2.5 times their
current annual salaries, vests outstanding restricted stock and
options to purchase common stock, and continues certain benefits
if there is a change in control of the Company (as defined) and
their employment terminates. The maximum contingent liability to
the Company under these agreements in such an event is
approximately $1.2 million. The employment agreements also
provide for severance, disability and death benefits.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. LEASES:
The Company leases certain office equipment under a capital lease which
expires in 2004. 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
----------------- --------------------
2001 $ 16,417 $ 110,299
2002 16,417 117,080
2003 16,417 79,748
2004 5,472 1,236
2005 -- 1,030
---------------- -------------------
54,723 309,393
====================
Less amount representing
interest 10,438
----------------
Present value of net minimum
lease payments 44,285
Less current portion 11,359
----------------
Capital lease obligations,
excluding current portion $ 32,926
================
The Company expects rental income from subleases of $129,000, $132,000,
and $89,000 in 2001 through 2003, respectively, based on three subleases
executed in December 1998, February 1999, and April 2000. Total rental
expense, net of sublease rental income, was $124,000, $200,000, and
$529,000 for the years ended December 31, 2000, 1999, and 1998,
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 $17,000,
$24,000, and $42,000 during 2000, 1999, and 1998, 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
$25,000, $83,000, and $130,000 for the years ended December 31, 2000,
1999, and 1998, respectively. During 2000, the Company paid income taxes
of $32,000, based on estimates of 2000 taxable income.
During 2000, the Company transferred $164,000 in inventory to fixed
assets related to the creation of a pool of service loaner equipment.
Also during 2000, the Company prepaid $120,000 in insurance through the
issuance of notes payable. The Company also incurred capital lease
obligations of $51,000 in 2000 to finance equipment. During the fourth
quarter of 1999, in connection with the retirement of the Series B
preferred stock and Class L warrants (See Note 8(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 11b.), the Company recorded an adjustment
which removed $993,000 in both cash and related accrued liability from
the Company's
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
balance sheet. During 1998, a note receivable was converted into common
stock in XTL (See Note 12(d).).
16. CONTINGENCIES:
Following the Company's fourth quarter 1998 decision to liquidate
Neoprobe Israel, management of the Company attempted to sell Neoprobe
Israel's radiolabeling facility in order to satisfy Neoprobe Israel's
outstanding obligations to a bank and to various unsecured trade vendors
(collectively, the Creditors). The obligation to the bank was secured by
the facility and a limited financial guarantee of $993,000 made by the
Company. The Company's limited financial guarantee is fully secured
through restricted cash and investments on deposit with the bank. As a
result of the decision to liquidate Neoprobe Israel, the Company accrued
a loss in its 1998 Statement of Operations to reflect the likelihood
that it would ultimately be required to turn over the secured cash and
investments to the bank in the event of a settlement with the bank or
the statutory liquidation of Neoprobe Israel.
Following unsuccessful attempts made by the Company during the first
three quarters of 1999 to sell the facility, the bank petitioned the
courts in the State of Israel and was subsequently appointed Receiver
for Neoprobe Israel during the fourth quarter of 1999. As a result of
the loss of the Company's control of Neoprobe Israel that occurred as a
result of the initiation of receivership, the Company deconsolidated
Neoprobe Israel as of December 31, 1999. Management believes the
approximately $900,000 owed to the unsecured trade vendors of Neoprobe
Israel at December 31, 1999 represents direct obligations of Neoprobe
Israel without recourse to the Company. Therefore, management believes
the Company has no obligation to pay the unsecured trade vendors of
Neoprobe Israel. Management believes that the Company's limited
financial guarantee to the bank represents the Company's only obligation
related to Neoprobe Israel. However, as a consequence of Neoprobe Israel
entering receivership, the Company removed both the $993,000 in
restricted cash and investments and the corresponding accrued obligation
to the bank from its balance sheet at December 31, 1999.
At December 31, 2000, the Company's balance sheet does not reflect any
obligations of Neoprobe Israel. 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. However, it is possible, in the event the liquidation of
Neoprobe Israel resulting from the receivership does not fully satisfy
the outstanding obligations of Neoprobe Israel, that the Creditors would
seek to pursue claims directly against the Company under a judicial
doctrine generally referred to as "piercing the corporate veil." In the
event the Creditors were successful in making a claim under this
judicial doctrine, the Company may be required to pay the Creditors some
or all of the amounts owed by Neoprobe Israel. Payment of such an amount
would severely deplete the Company's cash, and the Company might not be
able to continue operations without seeking creditor relief. However,
management believes that the prospect that Creditors would prevail if
such claims were brought against the Company is remote. As such, no
provision for such a contingent loss has been recorded in the Company's
financial statements at December 31, 2000.
The Company is also subject to legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability, if any, with respect to these actions
will not materially affect the financial position of the Company.
17. SUBSEQUENT EVENT - LINE OF CREDIT:
On January 26, 2001, the Company entered into a revolving credit
facility with a bank. The facility provides for a maximum line of credit
of $1.5 million. Availability under the facility is based on an advance
formula of eligible accounts receivable and eligible inventory.
Borrowings under the facility bear interest based on the bank's prime
rate and are collateralized by accounts receivable, inventory and
general fixed assets of the Company. The facility contains financial
covenants, including, but not limited to current ratio and fixed charge
coverage ratio. The Company is required to maintain a compensating
balance of $250,000 and to pay a commitment fee of 0.25% per annum on
the unused portion of the maximum potential balance. The facility
matures on January 26, 2002.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. SUPPLEMENTAL INFORMATION (UNAUDITED):
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 Years Ended December 31,
data)
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Statement of Operations Data:
Net sales $ 8,835 $ 9,246 $ 5,833 $ 5,128 $ 1,171
Gross profit 4,720 4,938 4,429 3,552 494
Research and development expenses 473 1,388 14,364 19,657 16,083
Marketing and selling expenses 284 4,396 5,268 4,307 1,532
General and administrative expenses 2,676 3,735 6,089 6,853 6,222
Losses related to subsidiaries in
liquidation -- 475 7,176 -- --
--------- --------- --------- --------- ---------
Income (loss) from operations 1,287 (5,057) (28,468) (27,265) (23,342)
Other income 553 883 436 4,018 2,373
--------- --------- --------- --------- ---------
Net income (loss) $ 1,840 $ (4,174) $ (28,033) $ (23,247) $ (20,969)
========= ========= ========= ========= =========
Income (loss) attributable to common
stockholders $ 1,075 $ (7,895) $ (28,033) $ (23,247) $ (20,969)
========= ========= ========= ========= =========
Income (loss) per common share:
Basic $ 0.04 $ (0.34) $ (1.23) $ (1.02) $ (1.06)
Diluted $ 0.04 $ (0.34) $ (1.23) $ (1.02) $ (1.06)
Shares used in computing income (loss)
per common share: (1)
Basic 25,710 23,003 22,842 22,735 19,743
Diluted 26,440 23,003 22,842 22,735 19,743
As of December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 7,573 $ 10,323 $ 11,994 $ 41,573 $ 63,873
Long-term obligations 2,233 4,314 156 2,069 1,009
Accumulated deficit (117,729) (119,569) (115,395) (87,363) (64,116)
(1)Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted
earnings per share is calculated using the weighted average number of
common shares outstanding during the periods, adjusted for the effects
of convertible securities, options and warrants, if dilutive.
F-26
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
NEOPROBE CORPORATION
-----------------------
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 2000
-----------------------
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 11 *
Neoprobe Corporation, as corrected February 18,
1994 and as amended June 27, 1994, July 25, 1995, June
3, 1996, March 17, 1999, and May 9, 2000.
3.2. Amended and Restated By-Laws dated July 21, 1993, 15 *
as amended July 18, 1995 and May 30, 1996.
3.3. Certificate of Elimination of Neoprobe Corporation 1 *
filed on May 9, 2000 with the Secretary of State
of the State of Delaware.
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the 25 *
Restated Certificate of Incorporation of the Company
(see Exhibit 3.1).
4.2. See Articles II and VI and Section 2 of Article 13 *
III and Section 4 of Article VII of the Amended and
Restated By-Laws of the Company (see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between 47 *
the Company and Continental Stock Transfer & Trust
Company.
4.4. Amendment Number 1 to the Rights Agreement between 3 *
the Company and Continental Stock Transfer & Trust
Company dated February 16, 1999.
10.1.25. Rights Agreement between the Company and 47 *
Continental Stock Transfer & Trust Company dated
as of July 18, 1995 (see Exhibit 4.3).
_______________
+ The Company 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 Company's most recent Annual Meeting of Stockholders upon the payment
of a fee of fifty cents ($.50) a page.
* Incorporated by reference
10.1.31. Amendment Number 1 to the Rights Agreement between 3 *
the Company and Continental Stock Transfer & Trust
Company dated February 16, 1999 (see Exhibit 4.4).
10.1.39. Settlement Agreement among the Company, The Aries 35 *
Master Fund, The Aries Domestic Fund, L.P.,
Paramount Capital, Inc., and Paramount Capital
Asset Management, Inc. dated January 20, 2000.
10.2.26. Amended and Restated Stock Option and Restricted 11 *
Stock Purchase Plan dated March 3, 1994.
10.2.35. Restricted Stock Purchase Agreement dated June 5, 4 *
1996 between the Company and David C. Bupp.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 21 *
as amended March 13, 1997.
10.2.45. Restricted Stock Purchase Agreement between the 3 *
Company and David C. Bupp dated May 20, 1998.
10.2.48. Restricted Stock Agreement dated October 23, 1998 4 *
between the Company and Brent L. Larson.
10.2.50. Restricted Stock Agreement dated April 30, 1999 5 *
between the Company and David C. Bupp. This
Agreement is one of three substantially identical
agreements and is accompanied by a schedule
identifying the other agreements omitted and
setting forth the material details in which such
agreements differ from the one that is filed
herewith.
10.2.52. Severance Agreement dated November 30, 1999 5 *
between the Company and Patricia Coburn.
10.2.54. Restricted Stock Agreement dated March 22, 2000 4 *
between the Company and David C. Bupp. This
Agreement is one of three substantially identical
agreements and is
_______________
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection
with the Company's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference
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.
10.2.55. Agreement, Release and Waiver between the Company 6 *
and Matthew F. Bowman dated March 31, 2000.
10.2.56. Employment Agreement between the Company and Carl 5 *
M. Bosch dated April 1, 2000.
10.2.57. Employment Agreement between the Company and Brent 5 *
L. Larson dated April 1, 2000.
10.2.58. Employment Agreement between the Company and David 8 *
C. Bupp dated July 1, 2000.
10.3.1. Technology Transfer Agreement dated July 29, 1992 15 *
between the Company and The Dow Chemical.
10.3.31. Cooperative Research and Development Agreement 67 *
between Company and National Cancer Institute.
10.3.45. License dated May 1, 1996 between Company and The 9 *
Dow Chemical Company.
10.3.46. License Agreement dated May 1, 1996 between 27 *
Company and The Dow Chemical Company (subject to
an order granting portions thereof confidential
treatment).
10.3.47. License and Option Agreement between the Company 32 *
and Cira Technologies, Inc. dated April 1, 1998.
10.3.48. Restated Subscription and Option Agreement between 12 *
the Company, Cira Technologies, Inc., Richard G.
Olsen, John L. Ridihalgh, Richard McMorrow, James
R. Blakeslee, Mueller & Smith, Ltd., Pierre
Triozzi and
_______________
+ The Company 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 Company's most recent Annual Meeting of Stockholders upon the payment
of a fee of fifty cents ($.50) a page.
* Incorporated by reference
Gregory Noll, dated April 17, 1998.
10.3.49. Restated Stockholders Agreement with the Company, 5 *
Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee,
Mueller & Smith, Ltd., Pierre L. Triozzi and
Gregory Noll, dated April 17, 1998.
10.3.50. Share Purchase Agreement between the Company and 12 *
Biomedical Investments (1997) Ltd. dated January
19, 2000.
10.3.51. Option Agreement between the Company and Reico 9 *
Ltd. dated February 1, 2000.
10.3.52. Participation Agreement between the Company and 5 76
Cira, LLC dated November 30, 2000.
10.4.32. Supply Agreement between the Company and eV 17 *
Products dated December 8, 1997 (subject to an
order granting portions thereof confidential
treatment).
10.4.33. Sales and Marketing Agreement dated February 1, 20 *
1999 between the Company and KOL Bio Medical
Instruments, Inc (subject to an order granting
portions thereof confidential treatment).
10.4.37. Termination Agreement between the Company and KOL 13 *
Bio-Medical Instruments, Inc. dated October 1,
1999.
10.4.38. Amendment to Termination Agreement between the 2 *
Company and KOL Bio-Medical Instruments, Inc.
dated October 1, 1999.
10.4.39. Distribution Agreement between the Company and 48 *
Ethicon Endo-Surgery, Inc. dated October 1, 1999
(subject to an order granting portions thereof
confidential treatment).
10.4.45. Manufacturing and Supply Agreement between the 22 *
Company and Plexus Corporation dated March 30,
2000 (subject to an order granting portions
thereof confidential
_______________
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection
with the Company's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference
treatment).
11.1 Computation of Income (Loss) Per Share 1 81
21.1 Subsidiaries of the Company 1 82
23.1 Consent of KPMG LLP 1 83
24.1 Powers of Attorney 8 84
24.2 Certified resolution of the Company's Board of 1 92
Directors authorizing officers and directors
signing on behalf of the Company to sign pursuant
to a power of attorney.
_______________
+ The Company 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 Company's most recent Annual Meeting of Stockholders upon the
payment of a fee of fifty cents ($.50) a page.
* Incorporated by reference