1
The following items were the
subject of a Form 12b-25 and
are included herein:
Item 8 KPMG LLP's Independent
Auditor's Report; Item 8
Coopers & Lybrand LLP's Report
of Independent Accountants
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K/A
Amendment Number 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
|| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________.
Commission file number: 0-26520
NEOPROBE CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 31-1080091
- ---------------------------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification
No.)
425 Metro Place North, Suite 300, Dublin, Ohio 43017-1367
- ---------------------------------------------------------------- ---------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 793-7500 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
-------------------------------------------------------------------------------
(Title of Class)
Rights to Purchase Series A Junior Participating Preferred Stock
-------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of shares of Common Stock held by non-affiliates of
the Registrant on March 19, 1999 was $24,212,375.
The number of shares of Common Stock outstanding on March 19, 1999 was
22,965,017.
The following documents have been incorporated by reference into this Form 10-K:
Document Part of Form 10-K
-------- -----------------
Registrant's Proxy Statement for its 1999 Part III
Annual Meeting of Stockholders
This Amendment Number 1 to Annual Report on Form 10-K ("Form 10-K") for the
fiscal year ended December 31, 1998 is being filed by the Registrant in order to
file KPMG LLP's Independent Auditor's Report ("KPMG Report") and Cooper &
Lybrand LLP's Report of Independent Accountants ("Coopers & Lybrand Report"), to
revise the Registrant's disclosure under Part II, Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations and to revise the
notes to the Registrant's consolidated financial statements. The KPMG Report and
the Coopers & Lybrand Report were omitted from the Form 10-K pursuant to Rule
12b-25(e)(i) because KPMG LLP had not completed its audit.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
DEVELOPMENT OF THE BUSINESS
Neoprobe Corporation, a Delaware corporation ("Neoprobe" or the "Company"), was
incorporated in the State of Ohio in 1983 and reincorporated in the State of
Delaware in 1988. The Company's executive offices are located at 425 Metro Place
North, Suite 300, Dublin, Ohio 43017-1367. The telephone number at that address
is (614) 793-7500.
Since inception, substantially all of the Company's efforts and resources have
been devoted to research and clinical development of innovative systems for the
intraoperative diagnosis and treatment of cancers. However, developments during
late 1997 and throughout 1998 have forced the Company to make significant
changes in its strategic direction and business plan. Before 1998, the Company's
primary research and development efforts were on the Company's proprietary
RIGS(R) (radioimmunoguided surgery) technology. However, research and
development efforts during 1997 and 1998 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. Beginning
in the fourth quarter of 1998, the Company's primary focus was changed to ILM
and related procedural product development and commercialization activities.
From 1983, when Neoprobe was organized, until 1998, Neoprobe was primarily
engaged in research and development of its RIGS technology, which consists of a
patented hand-held radiation detection probe, and proprietary cancer targeting
agents labeled with radioactive isotopes. In 1996, the Company completed a
series of clinical trials of its first generation targeting agent for the
detection of colorectal cancer, RIGScan(R) CR49. During 1996, the Company
submitted applications to European and U.S. regulatory agencies requesting
approvals to begin marketing RIGScan CR49 for the detection of metastatic
colorectal cancer. Late in the fourth quarter of 1997, the Company received
requests for further information from United States and European regulatory
agencies following review of its applications. Consequently, during the first
quarter of 1998, the Company implemented changes to its business plan to reduce
operating expenses and focus on three main business objectives: commercializing
its RIGScan CR49 diagnostic product for the surgical detection of metastatic
colorectal cancer, increasing the Company's market position in device sales for
intraoperative lymphatic mapping and other gamma guided surgery applications,
and developing activated cellular therapy products for cancer and viral
diseases. First quarter plan changes resulted in a 20% reduction in the
Company's domestic staff and the postponement of research projects for earlier
stage RIGS diagnostic products which were originally expected to be carried out
in 1998.
During the second quarter of 1998, the Company engaged the services of Lehman
Brothers to assist in securing development partners and in the strategic
assessment of the Company's business. The Company has not entered into any
definitive development agreements as a result of these efforts and terminated
the arrangement with Lehman Brothers during the fourth quarter of 1998. Also
during the second quarter of 1998, the Company determined that Neoprobe Europe
AB ("Neoprobe Europe"), the Company's biologics manufacturing and purification
facility located in Lund, Sweden, was no longer needed to implement the
Company's business plan, and put Neoprobe Europe up for sale.
During the third quarter of 1998, based on further assessments of its RIGScan
CR49 development plans with clinical and regulatory advisers and on assessments
of the Company's financial position by management and the Board of Directors,
the Company further modified its business plan. Third quarter modifications to
the business plan focused the Company's operating activities on its core gamma
guided surgery instrument business for use in intraoperative lymphatic mapping
("ILM") while management carries on efforts to identify business partners who
would assume financial responsibility for the development of RIGS and ACT. The
third quarter plan also involved steps to be taken to sell certain non-strategic
assets, and to limit activities at the Company's subsidiary, Neoprobe
2
3
(Israel) Ltd. ("Neoprobe Israel"), to the completion of certain construction
activities and the performance of only non-product specific plant validation.
During the fourth quarter of 1998, the Company made additional headcount
reductions and took action to begin winding down operations at Neoprobe Israel.
Since the beginning of 1998, the Company has decreased its worldwide headcount
by approximately 60% and has ended or is in the final stages of ending the
majority of its research and development activities that are not related to ILM.
Also, during the fourth quarter of 1998, the Board of Directors directed
management to initiate actions to shutdown the facility and validation
operations at Neoprobe Israel. These actions were taken to arrive at the minimum
support structure management believes is necessary to support the gamma guided
surgery business and to move the Company towards profitability.
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
any future research and development activities related to its RIGS or ACT
products until it finds partners who will take on the financial burden of
development.
THE COMPANY'S TECHNOLOGY
Intraoperative Lymphatic Mapping and Other Gamma Guided Surgery Instrument
Applications
Surgeons use lymphatic mapping to help trace the lymphatic patterns in a cancer
patient to evaluate potential tumor drainage and cancer spread. The technique
does not detect cancer; it helps surgeons find the first lymph node(s) to which
tumor is likely to drain and spread. That node (sometimes referred to as the
"sentinel" node) may provide critical information about the stage of a patient's
disease. Intraoperative lymphatic mapping begins when a patient is injected at
the site of the main tumor with a commercially available radioactive tracing
agent; e.g., filtered sulfur colloid labeled with Technetium-99m, a radioactive
element. The agent is intended to follow the same lymphatic flow as the cancer
would if it had metastasized. The surgeon may then track the agent's path with
the probe, thus following the potential avenues of metastases and identifying
lymph nodes to be biopsied for evaluation and determination of cancer spread.
Lymphatic mapping gives surgeons a "road map" to find the sentinel nodes to
which tumor is likely to drain or spread. Numerous clinical studies involving
nearly two thousand patients, published in the most prestigious peer-review
medical journals, have shown ILM is 97% accurate in predicting the presence or
absence of disease spread in melanoma or breast cancers. As a result, over 80%
of patients who would have undergone lymphadenectomies can be spared this
radical surgical procedure.
Surgeons practicing ILM have found that the Company's gamma-detecting probes are
very well suited to the procedure. The Company's first-generation
gamma-detecting probe, the Neoprobe(R) 1000 device, was originally developed for
use in RIGS clinical trials and other RIGS product clinical development. The
patented Neoprobe 1000 instrument consisted of a hand-held gamma-ray-detection
probe and a software-driven control unit. The reusable probe is a stainless
steel tube with an angled tip for ease of maneuverability. The detection device
in the tip of the probe is a highly radiosensitive crystal that relays a signal
through a preamplifier to the control unit to produce both a digital readout and
an audible signal. The detector element fits in a housing approximately the size
of a pocket flashlight. During 1997, the Company launched an enhanced gamma
detector, the Neoprobe(R) 1500 portable radioisotope detector, in response to
the emergence of ILM, and in late 1998 the Company launched a new system the
neo2000tm. The neo2000 is intended to be the cornerstone of Neoprobe's future
ILM instrument products.
Lymphatic mapping has become the standard of care for treating patients with
melanoma at many institutions. The Company has supported this initiative through
training support, technical expertise and device placement. For cutaneous
malignant melanoma, lymphatic mapping has become the standard of care in major
cancer centers and community hospitals in the U.S. and was recently declared the
standard of care for melanoma treatment by the World Health Organization. For
breast cancer, the technique is moving toward standard of care status in major
cancer centers and is being confirmed in several high profile, national, and
international clinical trials. Several large multi-center clinical trials began
in 1998, including studies sponsored by the U.S. Department of Defense and the
National Cancer Institute. In addition to lymphatic mapping, surgeons are using
Neoprobe's device for other gamma
3
4
guided surgery applications, such as locating enlarged parathyroid glands for
intraoperative localization of osteoid osteomas, small painful bone lesions, and
in surgical biopsy of suspected spread of cancer to the bone (osseous
metastases). Surgeons have also found the technique useful in staging patients
with vulvar, prostate, and penile cancers, and additional applications of the
technology are being investigated.
The Company continues to work with thought leaders in the surgical community to
set up and support training courses internationally for lymphatic mapping.
Courses were held for over 350 surgeons during 1998 at such institutions as M.D.
Anderson Cancer Center, the University of Washington, the Netherlands Cancer
Institute, the University of Louisville, and H. Lee Moffitt Cancer Center and
Research Institute. Additional training centers are expected to open during
1999.
The Company is currently selling the Neoprobe 1500 and neo2000 instruments for
lymphatic mapping and other gamma guided surgery applications and expanding its
line of instruments to provide a variety of gamma-detecting probes for
specialized uses. The growing use of the lymphatic mapping technique by surgeons
has helped generate revenue for the Company of approximately $5.9 million during
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Neoprobe's ILM business strategy will be designed around the following
objectives:
o Providing cost effective technology to reduce patient morbidity and allow
the ILM procedure to be done in an outpatient setting.
o 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.
o 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
Since inception, Neoprobe has devoted significant efforts and resources to the
development of its proprietary RIGS technology. The RIGS system combines a
patented hand-held gamma radiation detection probe, proprietary radiolabeled
cancer targeting agents, and a patented surgical method to provide surgeons with
real-time information to locate tumor deposits not detectable by conventional
methods, and to assist in more thorough removal of the cancer. The Company's
targeting agents are monoclonal antibodies or peptides, labeled with a
radioactive isotope that emits low energy gamma rays. Before surgery, a cancer
patient is injected with one of the targeting agents which circulates throughout
the patient's body and binds specifically to cancer cell antigens or receptors.
Concentrations of the targeting agent are then located during surgery by
Neoprobe's gamma-detecting instrument, which emits an audible tone to direct the
surgeon to targeted tissue.
Since 1992, more than 700 patients have participated in several phases of
clinical trials for surgical detection of primary and metastatic colorectal
cancer using the Company's lead product, RIGScan(R) CR49. In 1996, Neoprobe
submitted applications to the European Agency for the Evaluation of Medicinal
Products ("EMEA") and the United States Food and Drug Administration ("FDA") for
marketing approval of RIGScan CR49 for the detection of metastatic colorectal
cancer. Following review of its applications, the Company received requests for
further information from the FDA and from the European Committee for Proprietary
Medicinal Products ("CPMP") on behalf of the EMEA. Both the FDA and EMEA
acknowledged that the Company's studies met the diagnostic endpoint of the Phase
III clinical study which was to provide incremental information to the surgeon
regarding the location of hidden tumor. However, both agencies wanted to know
how the finding of additional tumor provided clinical benefit that altered
patient management or outcome. The Company developed a clinical response plan
for both agencies during the first half of 1998. However, the formalized process
in Europe required Neoprobe, in November 1997, to withdraw its European
application from the EMEA.
4
5
During 1998, the Company discussed the FDA's request for additional information
with the FDA and with expert clinical and regulatory advisors. Based on these
discussions, the Company determined that the best plan for obtaining regulatory
approval of its RIGS technology would be to re-apply after conducting clinical
trials of a second generation antibody. Because of the cost and risk of clinical
trials, the Company has determined that it will not conduct clinical trials of
RIGScan CR49 or a second generation antibody unless it finds a partner who will
assume the financial burden of the trials and manufacturing validation. The
Company does not intend to fund any further RIGS-related research and
development by itself. The Company has not entered into any agreements with a
development partner for the RIGS technology and does not know if a partner will
be identified on a timely basis, on terms acceptable to the Company, or at all.
There can be no assurance that the FDA or the EMEA will approve the Company's
RIGS products for marketing, or that any such products will be successfully
introduced or achieve market acceptance. See "Risk Factors -- Government
Regulation."
Activated Cellular Therapy for Cancer and Viral Disease
As a result of its RIGScan CR49 research, Neoprobe developed a RIGS based
Activated Cellular Therapy ("ACT") for cancer, which boosts the patient's own
immune system by removing lymph nodes identified using the RIGS process during
surgery and then, in a cell processing facility, activating and expanding
"helper" T-cells found in the nodes. Within 10 to 14 days, the patient's own
immune cells, now activated and numbering more than 20 billion, are infused into
the patient in an attempt to trigger an effective immune response to the cancer.
An in-vitro research program has shown that soluble factors secreted by the
activated cells produce significant chemo-enhancement in a number of tumor cell
lines for a variety of chemotherapeutic agents. The in-vitro assessment
correlates with an observation of potential chemo-enhancement in an earlier
Phase I clinical study of unresectable colorectal patients performed at The Ohio
State University.
In addition, Neoprobe has preliminarily evaluated the application of a non-RIGS
based ACT therapy for the treatment of chronic viral diseases. ACT for viral
diseases uses peripheral lymph nodes, which are obtained in an out-patient
setting, as the initial starting culture material. After using Neoprobe's
activation and expansion procedures, the cells are infused in 10 to 14 days. A
Phase I study has been completed with HIV/AIDS patients at The Ohio State
University with encouraging results. The Company also recently completed a Phase
I trial in additional viral diseases, extending the use of activated cellular
therapy to patients co-infected with HIV/AIDS and chronic active hepatitis B or
C at the Miami VA Medical Center in Florida. Because of the cost and risk of
clinical trials, the Company has determined that it will not conduct clinical
trials of ACT unless it finds a partner who will assume the financial burden of
the trials and manufacturing validation. The Company does not intend to fund any
further ACT-related research and development by itself. The Company has not
entered into any agreements with a development partner for the ACT technology
and does not know if a partner will be identified on a timely basis, on terms
acceptable to the Company, or at all. There can be no assurance that any ACT
products will be successfully developed, tested or licensed, or that any such
products will gain market acceptance. See "Risk Factors - Government
Regulation."
CANCER MARKET OVERVIEW
Cancer is the second leading cause of death in the U.S. and Western Europe and
is responsible for over half a million deaths annually in the U.S. The National
Cancer Institute estimates the overall annual costs for cancer, the primary
focus of the Company's products, at $104 billion: $35 billion for direct medical
costs, $12 billion for morbidity, and $57 billion for mortality. NCI estimated
that breast cancer will annually affect approximately 500,000 women in North
America, Western Europe, and other major economic markets. Approximately 80% of
the patients diagnosed with breast cancer undergo a lymph node dissection to
determine if the disease has spread. While many breast cancer patients are
treated in large cancer centers or university hospitals, regional and/or
community hospitals treat the majority of breast cancer patients. Over 10,000
hospitals are located in the markets targeted for Neoprobe's breast cancer ILM
products. Melanoma is the fastest increasing form of cancer in the United States
and Europe. The medical importance of ILM staging has been accepted for
melanoma. However, more melanoma patients are typically treated at large cancer
centers or university hospitals focusing the market opportunity for Neoprobe's
melanoma ILM products. An aging population, coupled with longer survival rates,
should increase the size of the overall oncology market significantly in the
coming years.
5
6
MARKETING AND DISTRIBUTION
The Company began development of its first portable gamma radiation detection
device, the Neoprobe 1000, in 1987. In 1996, Neoprobe began marketing a device
in the emerging ILM technology as a pre-marketing strategy for the anticipated
commercial launch of the first RIGS product. ILM has become a significant
stand-alone product. Significant marketing activity related to ILM products in
the U.S. did not begin until the fourth quarter of 1996 and in Europe until the
fourth quarter of 1998, following receipt in August, 1998 of the European CE
mark for the Neoprobe 1500.
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. Neoprobe intends to
market both the 1500 and 2000 systems as entry-level and feature-enhanced ILM
systems respectively. In April 1998, the Company launched a new 14mm reusable
probe that has been optimized for breast cancer procedures. Neoprobe intends to
introduce additional probe products in the first quarter of 1999. There can be
no assurance that such products will achieve regulatory approval (See "Risk
Factors -- Government Regulation") or if approved that such products will
achieve market acceptance (See "Risk Factors -- Dependence on Principal Product
Line").
To market its ILM products in the United States and Europe, Neoprobe has
established a corporate sales force consisting of product specialists and
physician-training specialists. Neoprobe currently has 10 product specialists in
the United States and 4 product specialists in Europe. To supplement the
activities of its direct sales force, the Company has developed a relationship
with KOL Bio-Medical Products ("KOL"). KOL will coordinate the efforts of
approximately 60 sales representatives throughout the United States. In
addition, the Company and KOL will jointly present Neoprobe's ILM products at
medical conferences and conduct and sponsor surgeon training courses at
thought-leader institutions and its surgeon training facilities.
Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Neoprobe has established relationships
with the leaders in the ILM surgeon community and has established and supported
training courses internationally for lymphatic mapping. Courses were held for
over 700 surgeons during 1997 and 1998 at such institutions as M.D. Anderson
Cancer Center, the University of Washington, the Netherlands Cancer Institute,
the University of Louisville, H. Lee Moffitt Cancer Center and Research
Institute, and University of California, San Francisco. Additional training
centers are expected to open during 1999 bringing the number of sites at which
Neoprobe participates to over 20.
In September 1996, the Company executed a License and Distributorship Agreement
with United States Surgical Corporation ("USSC"). Effective October 1997, the
Company and USSC agreed to terminate the agreement, as amended. In connection
with the termination, the Company agreed to pay USSC net commissions on orders
for devices received prior to the effective date of the termination and to
continue to warranty and service devices sold under the terms of the agreement.
The parties also agreed to discharge and release each other from all remaining
claims and financial obligations relating to the Agreement, including license
fees.
In April 1998, the Company executed a non-exclusive Sales and Marketing
Agreement with Ethicon Endo-Surgery, Inc. ("EES"), a Johnson & Johnson company,
to market and promote the Neoprobe 1500 Portable Radioisotope Detector and its
14mm and 19mm reusable probes in the United States. In October 1998, the
agreement with EES was amended to cover marketing of these products in Europe.
On January 29, 1999, the Company provided EES with notice of the Company's
intent to terminate the Agreement effective March 1, 1999.
Effective February 1, 1999, the Company executed a Sales and Marketing Agreement
with KOL Bio-Medical Instruments, Inc. ("KOL") to market the Company's current
and future gamma guided surgery products in the United States. In exchange for
marketing and selling the products and providing customer training, KOL will
receive commissions on net sales of applicable products and milestone payments
on the achievement of certain levels of product sales. The term of the agreement
is indefinite with provisions for both parties to terminate with a minimum of
six months notice under certain conditions or without cause. Under the terms of
the agreement, KOL is required to meet certain sales objectives and minimum
quotas related to sales of the Company's instrument
6
7
products. However, if the agreement is terminated by the Company without cause
or because of a change of control of the Company, KOL is entitled to receive a
termination fee of 15% based on monthly net sales for a maximum of twenty-four
months and the Company is obligated to buy back, at a discount, demonstration
units purchased by KOL during the nine-month period prior preceding termination.
In Europe, the Company intends to supplement its sales force through development
of marketing partner or distribution partner relationships. In other markets
such as South America and the Pacific Rim, Neoprobe intends to enter into
relationships with medical product distributors. Neoprobe recently completed
agreements for ILM product distribution in Brazil, Japan, and China. Each of the
agreements requires the distributor to annually purchase a minimum quantity of
product. During 1999, Neoprobe intends to complete similar agreements for
product distribution in other countries such as Australia, New Zealand,
Argentina, Mexico and Canada. There can be no assurances that the Company will
be able to enter or maintain marketing agreements on terms favorable to the
Company. See "Risk Factors -- Limited Marketing Experience."
MANUFACTURING
Neoprobe Instruments. The Company relies on independent contract manufacturers,
some of which are single source suppliers, for the manufacture of the principal
components of its current line of gamma guided surgery products, see "Risk
Factors--Limited Manufacturing Capacity and Experience". In August 1996, the
Company entered into a Manufacturing and Supply Agreement with RELA, Inc. of
Boulder Colorado ("RELA"), a developer and manufacturer of medical devices.
Under the agreement, RELA manufactured Neoprobe 1000 instruments for the
Company. During the fourth quarter of 1997, the Company introduced the Neoprobe
1500 system. The Company continues to use RELA for the production of the
Neoprobe 1500 instrument and the 19mm hand-held gamma detector probe.
During 1998, the Company began manufacturing the 14mm probe and the neo2000
control unit. The neo2000 and the 14mm probe involve the manufacture of
components by a variety of subcontractors, including but not limited to
Electronic Assembly Corporation, a subsidiary of Plexus Corporation ("EAC"); eV
Products, a division of II-VI Corporation ("eV"); and MedTech Corporation. eV
produces the crystal used in the detector probes, MedTech produces certain
molded parts and subassemblies used in the probe and the neo2000 control unit,
and EAC performs assembly of the neo2000 control unit and final assembly of the
14mm probe. Currently, the Company has a Manufacturing and Supply Agreement with
eV for the production of crystals; however, work being performed by EAC and
MedTech is being performed under terms of letters of intent, pending completion
of final manufacturing, and supply agreements. There can be no assurance that
the Company will be able to complete or maintain agreements with its
subcontractors on a timely basis, on terms acceptable to the Company, or at all.
Any significant supply interruption or yield problems experienced by the Company
would have a material adverse effect on the Company's ability to manufacture its
products and, therefore, a material adverse effect on its business, financial
condition, and results of operations until a new source of supply is qualified.
See "Risk Factors -- Limited Manufacturing Capacity and Experience."
During 1997, the Company entered into a supply agreement with eV for the supply
of certain crystals and associated electronics to be used in the manufacture of
the Company's proprietary line of hand-held gamma detection probes. The original
term of the agreement expires on December 31, 2002 but may be automatically
extended for an additional three years. The agreement calls for the Company to
purchase minimum quantities of crystals and associated electronics based on
annually forecasted production needs. eV supplies 100% of the crystals used by
the Company. While eV is not the only potential supplier of such crystals, any
prolonged interruption from this source could restrict the availability of the
Company's probe products, which would affect operating results adversely.
PATENTS AND PROPRIETARY RIGHTS
The Company regards the establishment of a strong intellectual property position
in its technology as an integral part of the development process. Each of the
Company's technologies is protected by patents and intellectual property
positions, in the United States as well as foreign countries. Specifically,
Neoprobe's ILM technology is protected by twelve (12) instrument patents that
have been issued in the United States as well as major foreign
7
8
markets. In addition to the issued patents, twenty (20) patent applications have
been filed in the United States and certain major foreign markets. The patent
applications cover the Company's newly introduced neo2000 systems, probes, and
products that the Company plans to introduce in the coming months and years.
The Company continues to attempt to maintain proprietary protection for the
products related to RIGS and ACT, which although not currently integral to the
Company's business plans, may be important to a potential development partner.
Certain aspects of Neoprobe's RIGS technology are claimed in the United States
in U.S. Patent No. 4,782,840, which expires in 2005, unless extended. The
Company believes that some of its RIGS technology will not be patentable in
certain foreign countries.
The patent position of biotechnology and medical device firms, including the
Company, generally is highly uncertain and may involve complex legal and factual
questions. Potential competitors may have filed applications for, or may have
been issued patents, or may obtain additional patents and proprietary rights
relating to products or processes in the same area of technology as that used by
the Company. The scope and validity of these patents and applications, the
extent to which Neoprobe may be required to obtain licenses thereunder or under
other proprietary rights, and the cost and availability of licenses are
uncertain. There can be no assurance that the Company's patent applications will
result in additional patents being issued or that any of the Company's patents
will afford protection against competitors with similar technology; nor can
there be any assurance that any of the Company's patents will not be designed
around by others or that others will not obtain patents that Neoprobe would need
to license or design around. See "Risk Factors -- Patents, Proprietary
Technology and Trade Secrets."
The Company also relies upon unpatented trade secrets. No assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Company's trade
secrets, or disclose such technology, or that the Company can meaningfully
protect its rights to its unpatented trade secrets. The Company requires its
employees, consultants, and advisers to execute a confidentiality agreement upon
the commencement of an employment or consulting relationship with Neoprobe. The
agreement provides that all confidential information developed or made known to
the individual during the course of the relationship will be kept confidential
and not disclosed to third parties except in specified circumstances. In the
case of employees, the agreements provide that all inventions conceived by the
individual will be the exclusive property of Neoprobe. There can be no
assurance, however, that these agreements will provide meaningful protection for
Neoprobe's trade secrets in the event of an unauthorized use or disclosure of
such information.
GOVERNMENT REGULATION
The production and marketing of Neoprobe's products and its research and
development activities are subject to detailed and substantive regulation by
governmental authorities in the United States and other countries. In the United
States, drugs, biologic products, and medical devices are regulated by the FDA.
Federal and state statutes and regulations, govern, among other things, clinical
testing, manufacture, labeling, packaging, marketing, distribution, and record
keeping in order to ensure that the Company's products are safe and effective
for their intended use. Noncompliance with applicable requirements can result
in, among other things fines, injunctions, suspensions or loss of regulatory
approvals, recall or seizure of the Company's products, and criminal
prosecution. The FDA has the authority to revoke previously granted licenses.
See "Risk Factors -- Government Regulation."
Instrument Products. The FDA classifies medical devices into one of three
classes -- class I, II, or III. Class I devices are subject to general controls,
such as labeling, premarket notification (the "510(k)" process), and adherence
to FDA-mandated quality system requirements ("QSR"). Class II devices are
subject to general and special controls, such as performance standards,
postmarket surveillance, patient registries, and FDA guidelines. Class III
devices are generally life-sustaining, life-supporting, or implantable devices
and must receive pre-market approval by the FDA.
If a seller of medical devices can establish that a new device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III device for which the FDA has not required pre-market approval, the
seller may market the device without further approvals being granted by the FDA.
The FDA may, however,
8
9
determine that the new device is not substantially equivalent and require the
seller to submit further information, such as additional clinical test data,
before it is able to make a determination regarding substantial equivalence,
which can substantially delay the market introduction of the product. For a
device that is cleared through the 510(k) process, modifications or enhancements
that could significantly affect the safety or effectiveness of the device, or
that constitute a major change to the intended use of the device, will require a
new 510(k) submission.
A premarket approval application ("PMA") must be filed if a proposed device is
not substantially equivalent to a legally marketed reserved Class I or Class II
device, or if it is a Class III device for which the FDA has called for PMAs.
The PMA process is much more expensive, uncertain and lengthy than the 510(k)
process. A PMA application must be supported by valid scientific evidence, which
typically includes extensive testing and manufacturing information, including
preclinical and clinical trial data to demonstrate the safety and effectiveness
of the device.
The Neoprobe 1000 instrument received 510(k) clearance in December 1986, and
modified versions received 510(k) clearance in June 1992 and February 1995. The
Neoprobe 1500 systems received 510(k) clearance in June 1997 . In February 1998,
the FDA reclassified "nuclear uptake detectors" as being exempt from the 510(k)
(premarket notification) process. The Company must continue to manufacture the
devices under QSR and maintain appropriate technical files; however, Neoprobe
will not need to submit 510(k) applications for modifications to the Neoprobe
device. The Company believes the neo2000 is exempt from the 510(k) process
because it is substantially equivalent to the Neoprobe 1500.
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.
RIGS and ACT products. The Company's biologic products, if developed, would
require a regulatory license to market by the FDA and by comparable agencies in
foreign countries. The process of obtaining regulatory licenses and approvals is
costly and time consuming, and the Company has encountered significant
impediments and delays related to its previous proposed biologic products. See
"Risk Factors -- Government Regulation."
The steps required before a biologic agent may be marketed in the United States
include (i) preclinical laboratory and animal testing; (ii) submission to the
FDA of an Investigational New Drug ("IND") application, which must become
effective before human clinical trials may commence; (iii) adequate and well
controlled human clinical trials to establish the safety and efficacy of the
biologic for its intended use; (iv) submission of a Biologic License Application
("BLA") to the FDA; and (v) FDA approval of these applications.
In addition to reviewing information submitted in the BLA, each manufacturing
facility must undergo a pre-approval inspection by the FDA to assess its
suitability and compliance with GMP and periodic inspections thereafter. Once
approved, any significant changes in the manufacturing process, equipment,
facilities, or product specifications must be pre-approved by the FDA and may
require additional clinical data to validate the changes prior to allowing their
implementation.
The FDA may deny a BLA if applicable regulatory criteria are not satisfied,
require additional testing or information, or require postmarket testing and
surveillance to monitor the safety or efficacy of the Company's products.
Notwithstanding the submission of such data, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for approval. Finally,
product approvals may be withdrawn if compliance with regulatory standards is
not maintained, or if a problem occurs following initial marketing.
The process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources, and there can be no assurance
that any approval will be granted on a timely basis, if at all. Additionally,
the length of time it takes for the FDA to evaluate an application for marketing
approval varies considerably, as does the amount of preclinical and clinical
data required to demonstrate the safety and efficacy of a specific product. The
FDA may require additional clinical studies which may take several years to
perform. The
9
10
length of the review period may vary widely depending upon the nature and
indications of the proposed product and whether the FDA has any further
questions or requests any additional data. Also, the FDA will require
postmarketing reporting and surveillance programs to monitor the side effects of
the products. There can be no assurance that any of the Company's potential
products will be approved by the FDA or approved on a timely or accelerated
basis, or that any approvals received will not subsequently be revoked or
modified.
The Company submitted a dossier to the European regulatory agencies in May 1996,
and a BLA to the FDA in December 1996, for its RIGScan CR49 product for the
detection of metastatic colorectal cancer. In November 1997, the Company
voluntarily withdrew its European Marketing Authorization Application after a
decision by the Committee for Proprietary Medicinal Products (CPMP) determined
that there was insufficient data to support the clinical utility of the product;
additional information has been requested. In December 1997, the FDA issued an
action letter to the Company stating that the BLA is "not approvable at this
time" and requested a formal response to the deficiencies listed in the letter.
This additional information must be submitted in the form of a BLA Amendment.
During 1998, the Company discussed the FDA's request for additional information
with the FDA and with expert clinical and regulatory advisers. Based on these
discussions, the Company determined that the best plan for obtaining regulatory
approval of its RIGS technology would be to re-apply after conducting clinical
trials of a second generation antibody. Because of the cost and risk of clinical
trials, the Company has determined that it will not conduct clinical trials of
RIGScan CR49 or a second generation antibody unless it finds a partner who will
assume the financial burden of the trials and manufacturing validation. The
Company does not intend to fund any further RIGS-related research and
development by itself. The Company has not entered into any agreements with a
development partner for the RIGS technology and does not know if a partner will
be identified on a timely basis, on terms acceptable to the Company, or at all.
There can be no assurance that the Company's RIGS products will be approved for
marketing by the FDA or the EMEA, or that any such products will be successfully
introduced or achieve market acceptance. See "Risk Factors -- Government
Regulation."
Before marketing its products in Western Europe, the Company will be required to
receive the approval of the European Council or European Commission and the
appropriate governmental agencies in each of the respective countries. For
marketing outside the United States, the Company is also subject to foreign
regulatory requirements governing human clinical trials, pharmaceutical sales,
and marketing approval of its products. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commencement of manufacturing or marketing
of the product in those countries. The requirements governing the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country; however, foreign procedures are similar to those required by
the FDA. The Company intends, to the extent possible, to rely on foreign
distributors of its products to manage and obtain regulatory approval for those
products.
In addition to regulations enforced by the FDA, the manufacture, distribution,
and use of radioactive targeting agents, if developed, are also subject to
regulation by the Nuclear Regulatory Commission, the Department of
Transportation and other federal, state, and local government authorities.
Neoprobe or its manufacturer of the radiolabeled antibodies must obtain a
specific license from the Nuclear Regulatory Commission to manufacture and
distribute radiolabeled antibodies, as well as comply with all applicable
regulations. Neoprobe must also comply with Department of Transportation
regulations on the labeling and packaging requirements for shipment of
radiolabeled antibodies to licensed clinics, and must comply with federal,
state, and local governmental laws regarding the disposal of radioactive waste.
There can be no assurance that the Company will be able to obtain all necessary
licenses and permits and be able to comply with all applicable laws. The failure
to obtain such licenses and permits or to comply with applicable laws would have
a materially adverse effect on the Company's business, financial condition, and
results of operations.
COMPETITION
Neoprobe faces competition from medical device companies, as well as from
universities and other non-profit research organizations in the field of cancer
diagnostics and treatment. Many emerging medical device companies have corporate
partnership arrangements with large, established companies to support the
research, development, and commercialization of products that may be competitive
with those of the Company. In addition, a number of
10
11
large established companies are developing proprietary technologies or have
enhanced their capabilities by entering into arrangements with or acquiring
companies with proprietary antibody technology, or other technologies applicable
to the detection or treatment of cancer. Many of the Company's existing or
potential competitors have substantially greater financial, research and
development, regulatory, marketing, and production resources than those of the
Company. Other companies may develop and introduce products and processes
competitive with or superior to those of the Company. Further, the development
by others of new cancer diagnostic, or treatment methods or the development of a
cure or vaccine for cancer could render the Company's technology and products
under development noncompetitive or obsolete. See "Risk Factors -- Competition"
and "-- Risk of Technological Obsolescence."
For the Company's products, an important factor in competition may be the timing
of market introduction of its products or those of its competitors' products.
Accordingly, the relative speed with which Neoprobe can develop products,
complete the approval processes and supply commercial quantities of the products
to the market will be an important competitive factor. Neoprobe expects that
competition, among products approved for sale, will be based, among other
things, on product efficacy, safety, reliability, availability, price, and
patent position.
With the emergence of ILM, a number of companies have begun to market gamma
radiation detection instruments. Most of the competitive products have been
designed from a nuclear medicine perspective rather than developing products for
the surgeon. The principal competitive product in both the United States and
Europe has been the Navigator system which is marketed by US Surgical
Corporation, and a device manufactured and sold by Carewise Medical Products.
The Company also anticipates that Ethicon Endo-Surgery, a former marketing
partner, is preparing to enter the gamma guided surgery marketplace with its own
hand-held gamma detector probe and system. The Company believes its intellectual
property portfolio will be a barrier to competitive products; however, there can
be no assurance that competitive products will not be developed and be
successful in eroding the Company's market share for gamma guided surgery
products. See -- "Risk Factors Competition."
EMPLOYEES
As of March 19, 1999, Neoprobe, including Neoprobe (Israel), had 43 full-time
employees. Neoprobe considers its relations with its employees to be
satisfactory.
RISK FACTORS
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the prospects discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those listed below.
Limited Revenues; Continuing Net Losses; Accumulated Deficit
The Company's limited history of operations, the nature of its business, and its
limited marketing and manufacturing experience make the prediction of future
operating results difficult and highly unreliable. The Company's future
prospects, therefore, must be evaluated in light of the substantial risks,
expenses, delays and difficulties normally encountered by companies in the
medical device industry, which is characterized by an increasing number of
participants, intense competition and a high rate of failure. The Company began
active marketing of its ILM products in 1997 and has limited experience in
manufacturing, marketing and selling its ILM products. Since its inception in
1983, the Company expended the majority of its efforts and resources in the
research and development of its RIGS technology. During 1998, based on
disappointing regulatory feedback from the FDA and European regulatory
authorities, the Company revised its business plan to severely curtail research
and development of the RIGS technology and to focus on gamma guided surgery
products such as those used in ILM. The Company has experienced significant
operating losses in each year since inception, and had an accumulated deficit of
approximately $115 million as of December 31, 1998. For the years ended December
31, 1996, 1997 and 1998, the Company's net losses were $21 million, $23.2
million and $28 million, respectively. The Company expects operating losses to
continue into 1999 as the Company expends substantial resources to continue
development of the Company's products, and build its marketing, sales,
manufacturing and finance organizations. There can be no
11
12
assurance that the Company will ever achieve a profitable level of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Future Capital Needs; Uncertainty of Capital Funding
To date, the Company's capital requirements have been significant. The Company
has depended on the proceeds of sales of its securities and other financing
vehicles to continue research and development and to fund its working capital
requirements. The Company's future capital requirements depend on numerous
factors, including the extent to which the Company's products achieve market
acceptance and generate revenue, the resources the Company devotes to
developing, manufacturing and marketing its products, the progress of future
development programs, and the time required to obtain additional regulatory
clearances or approvals. The Company expects to continue to devote substantial
capital resources to market and sell its products, to fund research and
development of additional gamma guided surgery products, and to secure
manufacturing capacity. The timing and amount of such capital requirements
cannot be accurately predicted. Consequently, the Company may be required to
raise additional funds through public or private financing, collaborative
relationships, or other arrangements. However, no assurance can be given that
the necessary additional financing will be available to the Company on
acceptable terms, if at all, or that would not result in further dilution to the
holders of the Company's equity securities. The Company's ability to raise
additional financing may be dependent on many factors beyond the Company's
control, including the state of capital markets and the development or prospects
for development of competitive technology by others. See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Dependence upon Gamma Guided Surgery Product Line; Uncertainty of Market
Acceptance
The Company's products, although being investigated for potential use in a
number of areas, are currently only widely used in the treatment and diagnosis
of two primary types of cancer: melanoma and breast cancer. The Company's
success is dependent on acceptance of ILM, and of its devices for use in ILM, by
the medical community as a reliable, safe and cost effective alternative to
current treatments and procedures. Although the Company believes that ILM has
significant advantages over other currently competing procedures, broad-based
clinical adoption of ILM will not occur until physicians outside the major
cancer centers and teaching hospitals determine that the ILM approach is an
attractive alternative to current treatments for use in melanoma and breast
cancer and expand its use to other types of cancer. There can be no assurance
that ILM will achieve significant market acceptance. There can be no assurance
that the Company's marketing efforts will result in significant demand for its
products, or that the current demand for the Company's products will be
maintained or continue to grow.
"Going Concern" Auditor's Opinion
Neoprobe has suffered recurring losses from operations and may need substantial
amounts of additional capital. Neoprobe's auditors, KPMG LLP, stated in their
report on Neoprobe's 1998 financial statements that these factors raise
substantial doubt, in their minds, about Neoprobe's ability to continue as a
going concern. The Company has obtained a waiver from the holders of the Series
B Preferred Stock of the redemption requirements associated with the issuance of
this going concern opinion related to Neoprobe's 1998 financial statements.
However, this opinion may make it much harder for Neoprobe to raise capital or
to market its products. It may also depress the price of common stock. See "Low
Stock Price." Furthermore, if Neoprobe's auditors materially qualify their
opinion on Neoprobe's financial statements again, Neoprobe would be required to
redeem the Selling Shareholders securities for $3.6 million dollars, which would
deplete its cash. If this happened, Neoprobe might not be able to continue
operations.
Competition
The medical device industry is intensely competitive. The Company's competitors
have significantly greater financial, technical, manufacturing, and distribution
resources as well as greater experience in the medical device industry than the
Company. The particular medical conditions that can be treated using the
Company's ILM products can also be treated and diagnosed by other medical
devices, procedures, or pharmaceuticals. Many of these alternatives are widely
accepted in the medical community and have a long history of use. The Company
also believes that its relationships with physicians and customer support are
important competitive factors. There can be no assurance that physicians will
use the Company's products or replace or supplement established treatments with
the Company's products, or that the Company's products will be competitive with
other technologies. There can be no assurance that the Company can achieve or
maintain a competitive position. In such event, the Company's business,
operating results, and financial condition could be materially adversely
affected. See "Item 1. Business -- Competition."
Limited Marketing Experience
The Company has limited experience in sales, marketing, or distribution of any
of its products. The Company currently employs a small sales and marketing
organization in the United States and Europe. The Company also currently markets
its products in the United States with the assistance of a marketing partner.
There can be no
12
13
assurance that the Company will be able to compete effectively in attracting,
motivating, and retaining qualified sales personnel.
The Company believes that in order to successfully penetrate the gamma guided
surgery market that it is necessary to supplement the efforts of its internal
marketing organization with those of a marketing partner with experience in the
medical device marketplace and who has a greater number of representatives to
reach potential customers. In certain international markets, the Company sells
its products through distributors. The Company has already terminated marketing
arrangements with two other companies. There can be no assurance that the
Company will be able to identify suitable distribution agreements on acceptable
terms, if at all, or that such distribution agreements will result in
significant sales. There can be no assurance that the Company will be able to
maintain agreements with distributors, or that such distributors will devote
adequate resources to selling the Company's products. Since the Company has
entered into distribution agreements for the sale of its product in certain
countries, it will be dependent on the efforts of these third parties, and there
can be no assurance that such efforts will be successful. Failure to maintain or
grow an effective direct sales and marketing organization or to maintain
effective distributors could have a material adverse effect on the Company's
business, financial condition, and results of operations. There can be no
assurance that the Company will be able to, or its marketing partners will be
able to, market the Company's products successfully in the future. In such
event, the Company's business, operating results, and financial condition could
be materially adversely affected.
Risks of International Operations
The Company markets its products internationally. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or their trade
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. The international nature of the
Company's business is also expected to subject it and its distributors to laws
and regulations of the foreign jurisdictions in which they operate or the
Company's products are sold. The regulation of medical devices in a number of
such jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
Limited Manufacturing Capacity and Experience
The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of its
current line of gamma guided surgery products. Shortages of raw materials,
production capacity constraints or delays on the part of the Company's contract
manufacturers could negatively affect the Company's ability to ship products and
obtain revenue. The Company uses or relies on certain components and services
used in its devices that are provided by sole source suppliers. Although the
Company has identified primary and alternative vendors, the qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption or yield problems
experienced by the Company would have a material adverse effect on the Company's
ability to manufacture its products and, therefore, a material adverse effect on
its business, financial condition, and results of operations until a new source
of supply is qualified. Some of the components of the Company's products are
molded parts that require custom tooling that is manufactured and maintained by
third party vendors. Should such custom tooling be damaged, it could result in a
supply interruption that could have a material adverse effect on the Company's
ability to manufacture its products until a new tool is manufactured. Also, the
Company's new product development efforts and the timeliness of new product
launches can be significantly impacted by the tooling vendor's ability to meet
completion and quality commitments on the manufacture of custom tooling.
Companies often encounter difficulties in scaling up production, including
problems involving production yield, quality control and assurance, and
shortages of qualified personnel. As the Company increases production, it may,
from time to time, experience lower than anticipated yields or production
constraints, resulting in delayed product shipments which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company expects to manufacture its products based on forecasted product
orders. Lead times for materials and components ordered by the Company vary
significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in
13
14
the Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
In addition, medical device manufacturing facilities are subject to GMP
regulations, international quality standards, and other regulatory requirements.
The failure of the Company's contractors to implement and maintain their
facilities in accordance with GMP regulations, international quality standards,
or other regulatory requirements could entail a delay or termination of
production, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Patents, Proprietary Technology and Trade Secrets
The Company's success depends, in part, on its ability to secure and maintain
patent protection, to preserve its trade secrets, and on its ability to operate
without infringing on the patents of third parties. The Company seeks to protect
its proprietary positions by filing United States and foreign patent
applications related to its technology, inventions and improvements that are
important to the development of its business. There can be no assurance,
however, that the patents for which the Company has applied will be issued to
the Company. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated, or circumvented in the
future. In addition, there can be no assurance that competitors, many of which
have substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products either in the United States or internationally.
Patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publications of discoveries in the scientific or
patent literature tend to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous, and there can be no assurance that
current and potential competitors and other third parties have not filed or will
not file in the future applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company
also relies upon trade secrets, technical know-how, and continuing technological
innovation to develop and maintain its competitive position.
The Company typically requires its employees, consultants, and advisors to
execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Further, there
also can be no assurance that others will not gain access to the Company's trade
secret information or independently develop or acquire the same or equivalent
trade secret information. Certain of the research activities relating to the
development of antibody technology that may be components of the Company's
proposed RIGS system technology products were conducted by agencies of the
United States government. When the United States government participates in
research activities, it retains certain rights that include the right to use the
technologies for governmental purposes under a royalty-free license, as well as
rights to use and disclose technical data and computer software that could
preclude the Company from asserting trade secret rights in that data and
software.
The Company has not been notified by any third party that the Company's products
and procedures infringe any valid, enforceable claim of any patent owned by
others. Any such claim, however, whether with or without merit, could be time
consuming and expensive to respond to and could divert the Company's technical
and management personnel. The Company may become involved in litigation to
defend against claims of infringement made by others, to enforce patents issued
to the Company, or to protect trade secrets of the Company. If any relevant
claims of third-party patents are upheld as valid and enforceable in any
litigation or administrative proceeding against the Company, it could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from such patent owners, or to redesign its
products and processes to avoid infringement. There can be no assurance that the
Company will be able to obtain acceptable licenses or rights, if at all, to
other patents which the Company deems necessary for its operations. Accordingly,
an adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent the Company from manufacturing
14
15
and selling its products, which would have a material adverse effect on the
Company's business, financial condition, and results of operations. The Company
intends to vigorously protect and defend its intellectual property. Costly and
time consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope, and validity of the
proprietary rights of others. See "Item 1. Business-- Patents and Proprietary
Rights" and "-- Competition."
Government Regulation
The Company's products in the United States are regulated as medical devices by
the FDA. The process of obtaining United States regulatory approvals and
clearances may be lengthy, expensive, and uncertain. Commercial distribution of
the company's products in foreign countries is also subject to varying
government regulations which may delay or restrict marketing of the Company's
products in those countries. In addition, such regulatory authorities may impose
limitations on the use of the Company's products. FDA enforcement policy
strictly prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Within the European Union, the Company's products are required
to display the CE mark in order to be sold. The Company has obtained
certification to display the CE mark on its current line of portable radiation
detection instruments. However, there can be no assurance that the Company will
be able to maintain certification for its current products or that the Company
will be able to obtain certification for any new products in a timely manner, or
at all.
The manufacturing operations of the Company's contract manufacturers are subject
to compliance with Good Manufacturing Practices ("GMP") regulations of the FDA
and similar regulations of the European Union. These regulations include
controls over design, testing, production, labeling, documentation, and storage
of devices. Enforcement of GMP regulations has increased significantly in the
last several years, and the FDA has publicly stated that compliance will be more
strictly scrutinized in the future. The Company's facilities and manufacturing
processes, as well as those of current and future third party suppliers, will be
subject to periodic inspection by the FDA, the Company's European Union notified
body, and other agencies. Failure to comply with these and other regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket clearance
or premarket approval for devices, withdrawal of clearances or approvals, and
criminal prosecution, which could have an adverse effect on the Company and its
operations.
The Company does not currently market any RIGS products or radioactive targeting
agent to be used in ILM applications. However, if a partner is identified to
fund and assist in the development of RIGS products, or if the Company were to
undertake development of a radioactive targeting agent for use in ILM, these
products would also be subject to detailed and substantive regulation by the FDA
and by comparable agencies in foreign countries. Various federal, state, and
foreign statutes also govern or influence the manufacture, safety, labeling,
storage, record keeping, and marketing of such products. The process of
obtaining regulatory licenses and approvals is costly, time consuming, and prone
to unexpected delay. The Company has encountered and may continue to encounter
delays in the completion of testing or in the application process for RIGS and
ACT products. Future delays could result from, among other things, a longer than
expected regulatory review process, slower than expected patient enrollment
rates, difficulties in analyzing data from clinical trials or in validating
manufacturing processes and changes in regulatory requirements. Moreover,
foreign and domestic approvals, if granted, may include significant limitations
on uses of the products. Further, even if such regulatory approval is obtained,
use of the Company's products could reveal side effects that, if serious, could
result in suspension of existing licenses and delays in obtaining licenses in
other jurisdictions. A marketed product, manufacturer, and manufacturing
facilities are subject to continual review and periodic inspections, and later
discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market. Noncompliance with applicable
governmental requirements can result in import detentions, fines, civil
penalties, injunctions, suspensions or loss of regulatory approvals, recall or
seizure of the Company's products, operating restrictions, government refusal to
approve product export applications or to allow the Company to enter into supply
contracts, and criminal prosecution. Additional governmental regulation may be
established which could prevent or delay regulatory approval of the Company's
products. Any delays or failure to receive required approvals or limiting
conditions on approvals could materially adversely affect the Company's
business, operating results, and financial condition. See "-- Government
Regulation."
15
16
Risk of Technological Obsolescence
The medical device industry is characterized by rapid and significant
technological change. There can be no assurance that third parties will not
succeed in developing or marketing technologies and products that are more
effective than those developed or marketed by the Company, or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
new surgical procedures and medications could be developed that replace or
reduce the importance of current procedures that use the Company's products.
Accordingly, the Company's success will depend, in part, on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. There can be no assurance that the Company's
products will not become obsolete and that its efforts to develop will result in
any commercially successful products. In such event, the Company's business,
operating results, and financial condition could be materially adversely
affected. See "-- Competition."
Limited Third Party Reimbursement
The Company's products will be marketed to hospitals and other users that bill
various third party payers, including government programs, such as federal
Medicare and state Medicaid, and private insurance plans, for the health care
services provided to their patients. Third party payers carefully review and are
increasingly challenging the prices charged for medical products and services.
Although the Company intends to establish the prices for its products according
to criteria believed to be acceptable to third party payers, there can be no
assurance that such payers will not deny reimbursement on the basis that the
Company's products are not in accordance with established payer policies
regarding cost effective treatment methods, or on some other basis. There can be
no assurance that the Company would be able to provide economic and medical data
to overcome any third party payer objections.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
There can be no assurance, as to either United States or foreign markets, that
third party reimbursement and coverage of newly approved products will be
available or adequate, that current reimbursement policies of third party payers
will not be decreased in the future, or that future legislation, regulation, or
reimbursement policies of third party payers will not otherwise adversely affect
the demand for the Company's products, or its ability to sell its products on a
profitable basis. If third party payer coverage or reimbursement is unavailable
or inadequate, the Company's business, financial condition, and results of
operations could be materially adversely affected. See "--Marketing and
Distribution."
Product Liability
The testing, marketing and sale of the Company's products could expose the
Company to liability claims. The Company currently has product liability
insurance which, the Company believes, is adequate for its current activities.
There can be no assurance, however, that the Company will be able to continue to
obtain such additional insurance at a reasonable cost, if at all, or that such
insurance would be sufficient to cover any liabilities resulting from any
product liability claims, or that the Company will have funds available to pay
any claims over the limits of its insurance. Either an underinsured or an
uninsured claim could have a material adverse effect on the Company's business,
operating results, and financial condition.
Need to Manage a Changing Business
The Company's business has experienced certain developments during 1998, which
have resulted in several significant changes in the Company's strategy and
business plan, including downsizing to what the Company considers to be the
minimal level of management and employees necessary to operate a publicly traded
medical device
16
17
business. The Company believes its restructured organization is appropriate to
support modest growth over the next few years. However, losing any members of
the management team could have an adverse effect on the Company's operations.
The Company's success is dependent on its ability to attract and retain
technical and management personnel with expertise and experience in the medical
device business. The competition for qualified personnel in the medical device
industry is intense and, accordingly, there can be no assurance that the Company
will be successful in hiring or retaining the requisite personnel. The Company's
future success will depend, to a significant extent, on the ability of its
current and future management personnel to operate effectively. There can be no
assurance that the Company's personnel, systems, procedures, and controls will
be adequate to support the Company's future operations. Any failure to implement
and improve the Company's operational, financial, and management systems or to
expand, train, motivate or manage employees could have a material adverse effect
on the Company's business, financial condition, and results of operations. The
Company's future success will depend, in part, on management's ability to manage
future growth, and there can be no assurance that these efforts will be
successful. See "Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange Act."
Low Stock Price
The Company's Common Stock traded for less than $5.00 per share during most of
the second half of 1998, and all of the first half of 1999 through the date of
this prospectus. Common Stock has traded as low as $0.44 during 1998. Common
Stock is listed on the Nasdaq Stock Market ("Nasdaq"), whose rules require that
all listed shares must have a minimum bid price of $1.00. If Common Stock trades
on 120 business days without meeting the minimum bid price requirement for at
least 10 consecutive trading days, Nasdaq may delist it. Common Stock traded for
less than $1.00 per share during the fourth quarter of 1998, and most of January
and February 1999. Nasdaq notified Neoprobe that the Common Stock would be
delisted, unless the minimum bid price of common stock rose above $1 for an
adequate period, which it has done. Delisting would adversely affect the ability
of the Company to attract new investors. If the common stock is delisted, the
Selling shareholders may require Neoprobe to redeem their securities for $3.6
million, which would deplete Neoprobe's cash. If this happened, Neoprobe might
not be able to continue operations.
Furthermore, if common stock trades below $5.00 per share, it may be designated
a "penny stock." The Securities Exchange Act of 1934 and SEC Rules impose
special requirements on the trading of "penny stock." These requirements include
that a broker give investment risk, penny stock price history and broker direct
and indirect compensation disclosures to his customer, that the broker make a
reasonable determination that the transactions in penny stock are suitable for
the customer, and that the customer has sufficient knowledge and experience in
financial matters to evaluate this risks of penny stock transactions before
effecting any penny stock transactions for the customer. If common stock is
designated to be a "penny stock," these requirements may diminish the market
for, and the price of, common stock.
Anti-Takeover Provisions
The Company has adopted a Shareholder Rights Plan. Certain provisions of the
Shareholder Rights Plan and certain of the Company's charter provisions and
applicable corporate laws could be used to hinder or delay a takeover bid for
the Company. Such provisions may inhibit takeover bids and decrease the chance
of stockholders realizing a premium over market price for their Common Stock as
a result of a takeover. The Board amended the Shareholder Rights Plan in
February 1999, to permit an equity investment in the Company.
Blank Check Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such terms as may be set by the Board of Directors.
500,000 shares of preferred stock have been designated as Series A Junior
Participating Preferred Stock and reserved for issuance under the Company's
Shareholder Rights Plan. If the Company issues preferred stock, the issuance
could be used to thwart a takeover bid and may have a dilutive effect upon the
Company's common stockholders. On February 16, 1999, the Company issued $3.0
million of 5% Series B Convertible Preferred Stock in a private placement. The
Company has the option to sell an additional $3.0 million Series B Preferred
Stock in the fourth quarter, at the earliest, subject to several conditions,
including shareholder approval of the transaction, and meeting operating revenue
and stock price targets. However, there can be no assurances that the
transaction will be approved by the shareholders or that the Company will be
able to achieve the required targets and close the additional placement on a
timely basis, on terms acceptable to the Company, or at all. If the shareholders
do not approve the transactions, the Company will be required to redeem the
preferred stock for $3.6 million. If this were to come to pass, the Company
would be in severe financial straights and might not be able to continue
operations. The terms of the Company's 5% Series B Convertible Preferred Stock
allow the holders to convert it into Common Stock at $1.03 per share. The
conversion price will be decreased to market values if the Common Stock is
trading at less than $1.03 per share subject to a floor price of $0.55 per
share. The dilutive effect of this provision could have a negative impact on
shareholders of the Company if the market price of Common Stock begins to
decline.
No Dividends
The Company has never paid dividends on its Common Stock. The Company intends to
retain any future earnings to finance its growth. Accordingly, any potential
investor who anticipates the need for current dividends from its investment
should not purchase any of the Common Stock offered hereby. See "Item 5. Market
for Common Equity and Related Stockholders Matters."
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its office at 425 Metro Place North, Dublin, Ohio.
The Company executed a lease agreement, commencing on January 1, 1997 and ending
in May 2003, with the landlord of these facilities for
17
18
approximately 25,000 square feet. The lease provides for a monthly base rent of
approximately $21,700 in 1999 and increases to $26,000. During December, 1998,
and February, 1999, the Company executed two lease agreements to sublease
approximately 2,600 square feet and 4,600 square feet of the Company's office
space, respectively. The two subleases are expected generate monthly sublease
income of approximately $5,000 in 1999 and increases to $6,000 per month in
2003. The Company and its subtenants must also pay a pro-rata portion of the
operating and real estate taxes of the building. Neoprobe believes these
facilities are in good condition and will be adequate for its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In June 1996 a lawsuit against the Registrant was terminated by dismissal. The
Registrant was named as an additional party defendant in the In Re Blech
Securities litigation pending in the United States District Court for the
Southern District of New York before Judge Robert Sweet in March 1995. The
plaintiffs were eight named individuals who were alleged to be representatives
of a class of securities purchasers. The defendants included David Blech, who
was a principal stockholder of the Registrant until September 1994, Mark
Germain, who was a director of the Registrant until September 1994, D. Blech &
Co., a registered broker-dealer owned by Mr. Blech, trustees of certain trusts
established by Mr. Blech, Bear Stearns & Co., Baird Patrick & Co., Parag Saxena
and Chancellor Capital Corp., as well as the Registrant and 10 other
corporations of which Mr. Blech was a principal stockholder (the "Corporate
Defendants"). The complaint alleged that David Blech and D. Blech & Co.
conducted a scheme intended to artificially inflate the prices of securities
issued by corporations Mr. Blech controlled; that Mr. Blech, D. Blech & Co. and
corporations controlled by Mr. Blech gave or sold cheap stock to fund managers
in order to induce them to participate in this scheme; and that David Blech, his
trusts, D. Blech & Co., Baird Patrick, Bear Stearns, the Corporate Defendants
and unnamed other persons engaged in sham transactions, including "round trip"
sales, for the purpose of artificially inflating trading volumes and securities
of corporations controlled by Mr. Blech and maintaining their trading prices.
The complaint alleged that David Blech was the controlling person and Mark
Germain was a director of the Corporate Defendants, and that the knowledge and
participation of Messrs. Blech and Germain in the alleged scheme were the
responsibility of the Corporate Defendants. The complaint also alleged that the
Corporate Defendants actively engaged in the alleged scheme and benefited from
it. The complaint further alleged that all of the defendants engaged in a
conspiracy to manipulate the market, and failed to disclose truthful information
about the true value of securities issued by corporations controlled by Mr.
Blech. The complaint alleged violations of Securities and Exchange Commission
Rule 10b-5 and common law fraud by all defendants, violations of the Racketeer
Influenced Corrupt Organizations Act (RICO) by defendants other than the
Corporate Defendants and liability under Securities Exchange Act 20(a), as the
liability of controlling persons, by Messrs. Blech and Germain and D. Blech &
Co., Baird Patrick and Bear Stearns. The amount of damages requested was not
specified in the complaint. In June 1996, Judge Sweet dismissed the allegations
against the Registrant and the other Corporate Defendants because the plaintiffs
had failed to identify the alleged fraudulent acts of the Registrant and the
other Corporate Defendants with the specificity required by federal law. The
dismissal terminated the action against the Registrant without any findings of
liability against Registrant in July 1996. The Judge's order can still be
appealed, and the time for appeal will not begin to run until a final judgment
has been entered in the entire multi-party proceeding.
The Company has one case, "Della Jules Bryant v. Neoprobe Corporation", pending
before the Court of Appeals for the State of Ohio. Ms. Bryant filed a complaint
on July 18, 1997 in Ohio Common Please Court against Neoprobe alleging racial
discrimination. On June 10, 1998, the trial judge granted Neoprobe's motion for
summary judgment. The plaintiff has appealed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
19
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages and positions are as
follows:
Name Age Position
---- --- --------
Matthew F. Bowman 48 Senior Vice President, Operations and Marketing
David C. Bupp 49 President, Chief Executive Officer and Director
Patricia A. Coburn 54 Vice President, General Counsel
Brent L. Larson 35 Vice President, Chief Financial Officer
Matthew F. Bowman has served as Senior Vice President, Operations and Marketing
of the Company since February 1998. From June 1996 until February 1998, Mr.
Bowman served as Vice President, Therapeutics of the Company. Prior to his
employment with the Company, Mr. Bowman was employed by Pharmacia Inc.
("Pharmacia") where he served as Vice President of the Therapeutic Products
Division from 1995 to 1996 and as Senior Director, Therapeutics, from 1993 to
1995. From 1988 to 1993, Mr. Bowman was employed by Adria Laboratories, Inc.
("Adria") where, in 1993, he served as Senior Director, New Business Development
and Licensing, from 1990 to 1992, he served as Director, New Business
Development and Licensing, and, from 1988 to 1990, he served as Associate
Director, New Business Development. Mr. Bowman has a B.A. degree in Political
Science from The Citadel.
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 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
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.
Patricia A. Coburn has served as Vice President, General Counsel of the Company
since February 1998. From August 1996 until February 1998, Ms. Coburn served as
Legal Counsel of the Company. Prior to her employment with the Company, Ms.
Coburn was employed by Pharmacia from 1994 until May 1996 where she served as
Assistant General Counsel. From September 1986 until 1994, Ms. Coburn was
employed by Adria where she served as Director, Intellectual Property until 1994
when Adria was acquired by Pharmacia. Ms. Coburn received a B.S. degree from the
University of Cincinnati in 1969 and a J.D. from the University of Toledo in
1977.
Brent L. Larson has served as Vice President, Chief Financial Officer since
February, 1999. Mr. Larson served as Vice President, Finance from June 1998 to
February 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.
19
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades on The Nasdaq Stock Market under the
trading symbol "NEOP". The prices set forth below reflect the high and low sale
prices for shares of Common Stock during the last two fiscal years as reported
by The Nasdaq National Market.
HIGH LOW
---- ---
Fiscal Year 1997
First Quarter $18.25 $12.88
Second Quarter 16.00 12.25
Third Quarter 15.00 10.50
Fourth Quarter 14.44 5.50
Fiscal Year 1998
First Quarter $ 6.75 $ 4.00
Second Quarter 6.56 2.38
Third Quarter 3.06 0.75
Fourth Quarter 2.50 0.44
As of March 19, 1999, the Registrant had approximately 678 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. The terms of the
Company's 5% Series B Convertible Preferred Stock forbid the Company from paying
any dividends on its Common Stock until it has paid a special dividend of $100
per share plus any portion of the accrued 5% cumulative dividend. This would
amount to at least $3 million, a sum that the Company is unlikely to be able to
use for this purpose in the foreseeable future, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Recent Sales of Unregistered Securities
The following sets forth certain information regarding the sale of equity
securities of the Company during the period covered by this Report that were not
registered under the Securities Act of 1933.
In July 1998, the Board of Directors of the Company authorized the issuance of
2,893 shares of common stock to the trustees of its 401(k) employee benefit plan
without registration. Such issuance is exempt from registration under the Act
under Section 3(a)(2). The Plan is a pension, profit sharing or stock bonus plan
that is qualified under Section 401 of the Internal Revenue Code. The assets of
the Plan are held in a single trust fund for the benefit of the employees of the
Company which does not hold assets for the benefit of the employees of any other
employer. All of the contributions to the plan from employees of Neoprobe have
been invested in assets other than Common Stock. All of the Common Stock held by
the plan has been contributed to the plan by the Company as a matching
contribution and has been less in value at the time it was contributed to the
plan than the employee contributions which it matches.
20
21
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial data are derived from consolidated financial
statements of the Company which have been audited by the Company's independent
public accountants. These data are qualified in their entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements and
Notes thereto included herein.
(Amounts in thousands, except per share data) Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- -------- -------- --------- --------
Statement of Operations Data:
Net sales $ 933 $ 960 $ 1,171 $ 5,128 $ 5,833
Gross profit 345 454 494 3,552 4,428
Research and development expenses 6,761 7,829 16,083 19,657 12,960
Marketing and selling expenses 1,532 4,307 5,268
General and administrative expenses 4,313 4,148 6,222 6,853 5,284
Loss related to subsidiaries in liquidation -- -- -- -- 9,385
-------- -------- -------- -------- --------
Loss from operations (10,730) (11,523) (23,342) (27,265) (28,468)
Other income 175 764 2,373 4,018 436
-------- -------- -------- -------- --------
Net loss $(10,555) $(10,759) $(20,969) $(23,247) $(28,033)
======== ======== ======== ======== ========
Net loss per common share from continuing
Operations (basic and diluted)(1) $ (1.18) $ (0.73) $ (1.06) $ (1.02) $ (1.23)
======== ======== ======== ======== ========
Shares used in computing net loss per
Common share (1) 8,926 14,726 19,743 22,735 22,842
======== ======== ======== ======== ========
As of December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- --------
Balance Sheet Data:
Total assets $ 7,839 $ 24,145 $ 63,873 $ 41,573 $ 11,994
Long-term obligations 300 1,182 1,009 2,069 156
Accumulated deficit (32,387) (43,147) (64,116) (87,363) (115,395)
(1) Net loss per common share is based on the weighted average number of common
shares outstanding during the year. The loss per share for all periods presented
excludes the number of common shares issuable upon the conversion of preferred
stock and the number of shares issuable upon exercise of outstanding stock
options and warrants since such inclusion would be anti-dilutive.
21
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained in this Management Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this Report that are not
purely historical or which might be considered an opinion or projection
concerning the Company or its business, whether express or implied, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may include statements regarding
the Company's expectations, intentions, plans or strategies regarding the future
which involve risks and uncertainties. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results in 1999
and future periods may differ significantly from the prospects discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, limited revenues, continuing net
losses, accumulated deficit, future capital needs, uncertainty of capital
funding, competition, limited marketing experience, limited manufacturing
experience, dependence on principal product line, uncertainty of market
acceptance, patents, proprietary technology and trade secrets, government
regulation, risk of technological obsolescence, limited third party
reimbursement, product liability, need to manage a changing business, possible
volatility of stock, anti-takeover provisions, dependence on key personnel, and
no dividends.
BUSINESS ENVIRONMENT
Operating activities related to the Company's medical device business to-date
have been predominantly related to the United States which enjoyed overall
strong economic conditions during 1998 despite concerns over the impact of the
Asian crisis on the U.S. market. The medical device industry appears to be
experiencing growth consistent with other U.S. economic conditions. According to
the U.S. Health Manufactures Association ("HIMA"), the U.S. market for medical
devices grew 8% in 1998 over 1997. HIMA estimates a 7% growth rate for medical
devices in the U.S. in 1999. HIMA also expects that emerging markets will
account for nearly 16% of the global medical technology market by the end of the
year. Neoprobe intends to take advantage of growth in Asian and South American
markets through expanding its distributor relationships in these markets.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities. During 1996, 1997, and 1998, the Company raised net
proceeds of $50 million, $717,000 and $196,000, respectively, through the public
and private sale of equity securities. On February 16, 1999, the Company
completed the private placement of $3.0 million of convertible preferred stock.
The Company has the option to close on an additional $3.0 million placement of
convertible preferred stock in the fourth quarter of 1999, at the earliest,
subject to the completion of several conditions, including shareholder approval
of the transaction and meeting certain sales and stock performance targets.
However, there can be no assurances that the transaction will be approved by the
shareholders or that the Company will be able to achieve the required targets
and close the additional placement on a timely basis, at terms acceptable to the
Company, or at all. If the shareholders do not approve the transactions, the
Company will be required to redeem the preferred stock for $3.6 million. If this
were to come to pass, the Company would be in severe financial straights and
might not be able to continue operations.
Investing Activities. During 1996, 1997, and 1998, the Company made capital
investments in property and equipment of $3.6 million, $4.7 million and $3.4
million, respectively. The majority of these capital investments related to the
construction of a radiolabeling facility at Neoprobe (Israel) Ltd.
The Company determined during the second quarter of 1998, that Neoprobe Europe
was no longer needed to implement the Company's business plan, and put Neoprobe
Europe up for sale. During October 1998, the Company reached an agreement to
sell substantially all of the assets of Neoprobe Europe to a Swedish company
which paid the Company $125,000 and assumed certain contractual obligations of
Neoprobe Europe, such as the lease commitment. To account for the sale, the
Company recorded a provision of approximately $2.0 million during the
22
23
third quarter of 1998, principally to write down the remaining assets of
Neoprobe Europe to their estimated realizable value. At December 31, 1998, the
Company has adopted the liquidation basis of accounting for Neoprobe Europe.
Accordingly, the consolidated balance sheet includes approximately $150,000 in
current assets of Neoprobe Europe at their net realizable value, and $70,000 in
liabilities at the amounts expected to settle the obligations due. Included in
operating results of subsidiaries in liquidation for 1998 is $1.7 million
related to the non-cash impairment of assets, $235,000 related to severance and
exit costs, and $1.2 million of losses from operations incurred prior to the
decision to liquidate.
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, the private arm of the Israeli atomic energy authority, currently has a
5% equity interest in Neoprobe Israel and has the right to acquire an additional
4% under certain conditions related to the completion of the facility. Based on
the status of the Company's marketing applications in the U.S. and Europe, and
the Company's inability to find a development partner for its RIGS products, the
Company decided during 1998 to suspend construction and validation activities at
Neoprobe Israel. Following suspension of RIGS development activities at Neoprobe
Israel and unsuccessful attempts to market the facility, the Company initiated
actions during the fourth quarter of 1998 to liquidate Neoprobe Israel. The
Company has, therefore, adopted the liquidation basis of accounting for Neoprobe
Israel as of December 31, 1998. As the Company may relinquish ownership of the
facility to the bank if a suitable buyer cannot be found on a timely basis, the
Company has written down the value of the fixed assets of the facility and
reduced the recorded balance of the related debt to zero on the basis that the
bank would assume ownership of the facility under the collateralization terms of
the debt agreement. Accordingly, the consolidated balance sheet includes
approximately $555,000 in current assets of Neoprobe Israel at their net
realizable value and $876,000 in liabilities at the amounts expected to settle
the obligations due. Included in operating results of subsidiaries in
liquidation for 1998 is $5.1 million related to the primarily non-cash
adjustment of assets and liabilities to their net realizable value, $79,000
related to severance and other exit costs, and $1.0 million related to losses
from operations incurred prior to the decision to liquidate.
Operating Activities. During 1996, 1997, and 1998, the Company experienced net
losses of $21.0 million, $23.2 million, and $28.0 million, respectively. During
each of these three years, substantially all of the Company's efforts and
resources were devoted to research and clinical development of innovative
systems for the intraoperative diagnosis and treatment of cancers. These efforts
were principally related to the Company's proprietary RIGS system; however,
efforts during 1997 and 1998 also included activities related to development of
ILM-related products. To-date, the Company has financed its operations primarily
through the public and private sale of equity securities.
Operational Outlook. The Company's only approved products are instruments and
related products used in gamma guided surgery. The Company does not currently
have a RIGS drug or ACT product approved for commercial sale in any major
market. Based on the Company's modified business plan that focuses Company
resources on ILM, the Company does not anticipate commercial sales of sufficient
volume to generate positive cash flow from operations until late fiscal year
1999, at the earliest. The Company has incurred, and will continue to incur,
substantial expenditures for research and development activities related to
enhancing and expanding its current gamma guided surgery product portfolio and
to fund marketing development in bringing its products to the commercial market.
The Company currently estimates it will require approximately $5.2 million to
fund research and development and general and administrative activities in 1999.
The Company anticipates a significant portion of the cash necessary to fund such
operating activities will be generated from sales of its gamma guided surgery
products. However, there can be no assurance that any additional gamma guided
surgery products will be successfully introduced, or achieve market acceptance.
As of December 31, 1998, the Company had cash and cash equivalents and
available-for-sale securities of $3.5 million. Of this amount, approximately
$1.0 million is pledged as security associated with the Company's revolving line
of credit and $1.0 million is restricted related to the debt outstanding under
the financing program for the construction of Neoprobe Israel. At December 31,
1998, the Company had access to approximately $1.5 million in unrestricted funds
to finance its operating activities for 1999. In the first quarter of 1999, the
Company
23
24
supplemented its cash on hand by issuing convertible preferred stock in a
private placement described above under "Financing Activities." The Company
currently anticipates that approximately $2.0 million in cash will be used to
finance operating activities during 1999. The Company anticipates an approximate
80% increase in sales during 1999 compared to 1998, due to increased sales
volumes of its gamma guided surgery products, at prices and margins similar to
what has been achieved in 1998. However, there can be no assurance that current
sales levels will be maintained or that increases in sales volumes and revenue
will occur, or that the prices and margins achieved on instrument sales in the
fourth quarter of 1998 will be maintained. The Company is attempting to sell
approximately $1.5 million in non-strategic assets. However, there can be no
assurance that these assets will be sold during 1999, on terms acceptable to the
Company, or at all. If the Company does not receive these anticipated funds, it
may need to further modify its business plan and seek other financing
alternatives. Such financing may require further sales of equity securities that
could be dilutive to current holders of common stock, debt financing which may
be on unfavorable terms, or asset dispositions that could force the Company to
further change its business plan. The Company also expects to experience cost
savings during 1999, as a result of modifications to its business plan regarding
RIGS and ACT.
At December 31, 1998, the Company had U.S. net operating tax loss carryforwards
of approximately $95.5 million to offset future taxable income through 2018.
Additionally, the Company has U.S. tax credit carryforwards of approximately
$3.3 million available to reduce future income tax liability through 2018. Under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, use of
prior tax loss and credit carryforwards is limited after an ownership change. As
a result of ownership changes as defined by Sections 382 and 383, which have
occurred at various points in the Company's history, management believes
utilization of the Company's tax loss carryforwards and tax credit carryforwards
may be limited. The Company's international subsidiaries also have net operating
tax loss carryforwards in their respective foreign jurisdictions. However, as
the Company is in the process of liquidating its interests in both foreign
subsidiaries as of December 31, 1998, the Company does not anticipate that the
foreign loss carryforwards will be utilized within their respective
jurisdictions.
The Company has executed various agreements with third parties that supplement
the technical and marketing capabilities of the Company. The Company is
generally obligated to such parties to pay royalties or commissions upon
commercial sale of the related product. The Company's estimate of its allocation
of cash resources is based on the current state of its business operations, its
current business plan, and current industry and economic conditions, and is
subject to revisions due to a variety of factors including without limitation,
additional expenses related to marketing and distribution, regulatory licensing
and research and development, and to reallocation among categories and to new
categories. The Company may need to supplement its funding sources from time to
time.
Impact of Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standard Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999. The
Company expects to adopt SFAS No. 133 effective January 1, 2000. The Statement
will require companies to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedge asset, liability or firm commitment through
earnings, or recognized in other comprehensive income until the hedge item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company does not
anticipate that the adoption of this Statement will have a significant effect on
its results of operations or financial position.
Y2K. As many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, they may be unable to process accurately certain data before, during
or after the year 2000. As a result, business and governmental entities are at
risk for possible miscalculations or system failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K") issue
or Century Date Change ("CDC") issue. The CDC issue can arise at any point in
the Company's supply, manufacturing, distribution, and financial chains. The
Company is in the process of implementing an
24
25
assessment and readiness plan with the objective of having all its significant
internal Business Systems functioning properly with respect to the Y2K issue
before January 1, 2000, and minimizing the possible disruptions to the Company's
business which could result from the Y2K problem.
As part of its readiness plan, the Company is in the process of conducting a
company-wide assessment of its Business Systems to identify elements that are
not Y2K compliant. Based on assessment activity to date, the Company presently
believes that the majority of its critical Business Systems have been purchased
and installed in recent years and are already Y2K compliant. The Company's
internal Business Systems do not have internally generated programmed software
coding to correct, as substantially all of the software utilized by the Company
has been recently purchased or licensed from external vendors. At the completion
of the assessment phase, the Company intends to perform comprehensive testing of
its Business Systems in early 1999.
Those Business Systems that are not presently Y2K compliant are anticipated to
be replaced, upgraded or modified in the normal replacement cycle prior to 2000.
The Company estimates the total cost to the Company of completing any required
modifications, upgrades, or replacements of its internal systems will not have a
material adverse effect on the Company's business. This estimate is being
monitored and will be revised, as additional information becomes available.
The Company has also initiated communications with third parties whose Business
Systems functionality could impact the Company. These communications will
facilitate coordination of Y2K solutions and will permit the Company to
determine the extent of which it may be vulnerable to failures of third parties
to address their own Y2K issues. Because the manufacturing and distribution of
the Company's products are almost entirely outsourced to other entities, the
failure of these third parties to achieve Y2K compliance could have a material
impact on the Company's business, financial position, results of operations and
cash flows. The Company has attempted, where possible, to establish contractual
requirements for Y2K compliance by such third parties. However, the Company has
limited control over the actions of these third parties on which the Company
directly or indirectly places reliance. There can be no guarantee that such
systems that are not now Y2K compliant will be timely converted to Y2K
compliance.
The Company has also assessed the potential Y2K related exposure it may have
with respect to gamma detection instrumentation which it has delivered to
customers. The Company does not believe products it has distributed to date or
that may be distributed in the future face any significant Y2K problems which
will affect their functionality or utility by the customer.
The Company does not yet have a comprehensive contingency plan with respect to
the Y2K issue but intends to establish such a plan during calendar 1999 as part
of its ongoing Y2K compliance effort.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time and could change
substantially. The assessment is based on numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimates if these assumptions prove
inaccurate.
RESULTS OF OPERATIONS
Since inception, the Company has dedicated substantially all of its resources to
research and development of its RIGS technology for the intraoperative diagnosis
and treatment of cancer. Until the appropriate regulatory approvals are
received, the Company is limited in its ability to generate revenue from these
sources. During 1998, the Company generated sales of gamma detection instruments
of $5.8 million. Results of operations for the year include approximately $1.2
million in costs associated with the restructuring domestic operating activities
of the Company during 1998 in addition to $9.4 million in expenses which were
recorded related to placing its two international subsidiaries in liquidation.
Research and development expenses during 1998 were $13.0 million, or 53% of
operating expenses for the year. Marketing and selling expenses were $5.3
million, or 16% of operating expenses during the year, and general and
25
26
administrative expenses were $5.1 million, or 16% of operating expenses for the
year. The Company recorded $9.3 million in charges during 1998 related to the
third quarter decision to close Neoprobe Europe and the fourth quarter decision
to shut down the facility at Neoprobe Israel. The Company anticipates that 1999
total operating expenses will decrease over 1998. The Company expects research
and development and general and administrative expenses to decrease from 1998
levels as a result of the modifications to the business plan adopted during the
fourth quarter of 1998. However, the Company also expects marketing and selling
expenses to increase from 1998 levels although such expenses are expected to
decrease as a percentage of sales.
Years ended December 31, 1997 and 1996.
Revenue. Net sales increased $3.9 million or 325% to $5.1 million in 1997 from
$1.2 million in 1996. In 1997, net sales included instrument sales of $5 million
and sales of blood serology products of $125,000. In 1996, net sales included
instrument sales of $780,000 and sales of blood serology products of $391,000.
Instrument sales increased as a result of the introduction of the Neoprobe 1500
system and the continuing growth of the lymphatic mapping technique. Sales of
serology products at Neoprobe Europe continued to decrease as a result of the
Company's efforts to develop the long-term production capacity for targeting
agents.
Research and Development Expenses. Research and development expenses increased
$3.6 million or 22% to $19.7 million in 1997 from $16.1 million in 1996. The
increase is a result of a substantial increase in instrument development and
design and in manufacturing validation activities during 1997. Clinical trial
costs decreased during the year as clinical trial activity related to RIGScan
CR49 declined following the submission of applications to regulatory bodies for
marketing approval. The decline in costs related to RIGScan CR49 was partly
offset by an increase in costs related to the development of ACT technology
during the period.
Marketing and Selling Expenses. Marketing and selling expenses increased $2.8
million or 187% to $4.3 million in 1997 from $1.5 million in 1996. The increase
was directly related to increased instrument sales during the year. The Company
was obligated to pay a commission to USSC for devices sold through the
termination of the Company's agreement with USSC in October 1997. In addition,
the Company hired additional marketing staff during the period to support the
lymphatic mapping business.
General and Administrative Expenses. General and administrative expenses
increased $630,000 or 10% to $6.9 million in 1997 from $6.2 million in 1996. The
increase was primarily a result of growth in staff and increased costs for rent,
leases, taxes, and other expenses. Other expenses increased primarily as a
result of greater travel and insurance costs.
Other Income. Other income increased $1.6 million or 67% to $4 million in 1997
from $2.4 million in 1996. Other income in 1997 consisted of interest income of
$2.2 million and miscellaneous income of $2 million representing recognition of
income of a license fee received from USSC, net of interest and other expenses.
During 1996, other income was $2.4 million and represented primarily interest
income earned during the period.
Years ended December 31, 1998 and 1997
Revenue and Other Income. Net sales increased $705,000 or 14% to $5.8 million
during 1998 from $5.1 million during 1997. Net sales in both years were composed
almost entirely of instrument sales. Instrument sales in 1997 reflect
contributions from the Company's marketing arrangement with USSC which was
terminated in October 1997. Instrument sales during 1998 were based on leads
generated primarily by the Company's clinical specialists' sales force with
assistance from representatives of Ethicon Endo-Surgery ("EES"), a Johnson &
Johnson company, subsequent to initial training of EES representatives in June
1998.
Research and Development Expenses. Research and development expenses decreased
$6.7 million or 34% during 1998 to $13 million from $19.7 million in 1997,
excluding approximately $1.5 million in 1998 research and development costs
related to Neoprobe Europe and Neoprobe Israel which were reclassified to losses
related to subsidiaries in liquidation in connection with the adoption of the
liquidation basis of accounting for these subsidiaries during the fourth quarter
of 1998. The decrease reflects the Company's efforts to reduce costs
26
27
consistent with the refocused business plan announced in February 1998, which
was further modified in the third and fourth quarters of 1998. Research and
development costs in 1998 include approximately $1 million related to severance
and other separation-related costs and an impairment charge of $1 million
related to technology licensed from the Dow Chemical Company. Such costs were
offset by decreases in project expenses related to RIGScan CR49 pending
identification of a development partner and decreases in instrument-related
project expenses due to the wind-down of the design phase of neo2000 and related
products. Pipeline projects also decreased related to the refocused business
plan.
Marketing and Selling Expenses. Marketing and selling expenses increased by
$960,000 or 22% to $5.3 million in 1998 from $4.3 million in 1997. The increase
in marketing expenses during 1998, as compared to the same period in 1997,
relates to an increased marketing effort to meet competitive pressure and
further penetrate the ILM market. The increased expenses were the result of a
greater number of sales and marketing personnel in 1998, coupled with relative
increases in travel and entertainment as well as promotional costs associated
with the launch of new products.
General and Administrative Expenses. General and administrative expenses
decreased $1.6 million or 23% to $5.2 million for 1998 from $6.8 million in
1997, excluding $1.0 million in 1998 general and administrative costs related to
Neoprobe Europe and Neoprobe Israel which were reclassified to losses related to
subsidiaries in liquidation in connection with the adoption of the liquidation
basis of accounting for these subsidiaries during the fourth quarter of 1998.
Severance and other overhead and employee separation costs of $160,000 related
to 1998 restructuring activities were offset by an overall lower headcount
during 1998 as compared to 1997.
Losses related to Subsidiaries in Liquidation. Losses related to subsidiaries in
liquidation increased to $9.4 million in 1998 from $0 in 1997. This increase is
due to changes in the Company's business plan which occurred throughout 1998
that ultimately resulted in the shutdown of both of the Company's international
subsidiaries, Neoprobe Europe and Neoprobe Israel. Related to the decision to
shutdown operations at these subsidiaries, the Company adopted the liquidation
basis of accounting for both subsidiaries as of December 31,1998. Included in
operating results of subsidiaries in liquidation for 1998 is $1.7 million
related to the non-cash impairment of assets, $235,000 related to severance and
exit costs, and $1.2 million of losses from operations incurred prior to the
decision to liquidate Neoprobe Europe. Included in operating results of
subsidiaries in liquidation for 1998 is $5.1 million related to the primarily
non-cash adjustment of assets and liabilities to their net realizable value,
$79,000 related to severance and other exit costs, and $1.0 million related to
operations incurred prior to the decision to liquidate Neoprobe Israel.
Other Income. Other income during 1998 and 1997 was $436,000 and $4.0 million,
respectively. Other income in 1998 was comprised primarily of interest income of
$598,000 compared to interest income in 1997 of $2.2 million, both of which were
offset by interest expenses on the Company's outstanding debt. The change in
interest income is the result of lower overall funds available for investment in
1998. Other income in 1997 also included miscellaneous income of $2 million
representing recognition of income of a license fee received from USSC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use derivative financial instruments, such as
interest rate swaps, to manage its exposure to changes in interest rates for its
debt instruments or investment securities. As of December 31, 1997 and 1998, the
Company had outstanding debt instruments of $2.4 million and $1.5 million,
respectively. Outstanding debt consisted primarily of variable rate long-term
debt and a variable rate line of credit as of December 31, 1997 and 1998,
respectively, with average interest rates of 7% for both years. At December 31,
1997 and 1998, the fair market values of the Company's debt instruments
approximated their carrying values. A hypothetical 100-basis point change in
interest rates would not have a material effect on cash flows, income or market
values.
The Company has maintained investment portfolios of available-for-sale corporate
and U.S. government debt securities purchased with proceeds from the Company's
public and private placements of equity securities. The market value of these
investments at December 31, 1997 and 1998 was approximately $14.7 million and
$449,000,
27
28
respectively. A hypothetical 10% decrease in the prices for these securities at
December 31, 1998 would decrease the fair value by approximately $45,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, and the related notes, together with
the reports of KPMG LLP and PricewaterhouseCoopers LLP dated March 29, 1999 and
February 20, 1998, respectively, are set forth at pages F-1 through F-24
attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 1, 1998, after discussions between the Registrant and
PricewaterhouseCoopers LLP ("PWC"), the Registrant's principal accountant, the
parties agreed that PWC would not conduct the Registrant's 1998 fiscal year-end
audit. Discussions between the parties were initiated by PWC; however, during
the Registrant's two most recent fiscal years and subsequent interim periods, no
reports or financial statements issued by PWC contained an adverse opinion or
disclaimer or were qualified or modified as to uncertainty, audit scope or
accounting principles. Further, during the Registrant's two most recent fiscal
years and subsequent interim periods, there were no disagreements between the
Registrant's management and PWC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC would have caused PWC
to make reference to the subject matter of the disagreements in connection with
PWC's reports. KPMG LLP was engaged as the Company's principal accountant on
December 8, 1998.
28
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Registrant's directors will be set forth at "ELECTION
OF DIRECTOR" in the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders (the "1999 Proxy Statement") which information is incorporated
herein by reference. Information required by this Item concerning compliance
with Section 16(a) of the Exchange Act will be set forth at "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the 1999 Proxy Statement which
information is incorporated herein by reference. Information regarding the
Registrant's executive officers is set forth in PART I of this report at
"Supplemental Item. Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be set forth at "COMPENSATION OF
MANAGEMENT" in the 1999 Proxy Statement which information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be set forth at "SECURITY OWNERSHIP
OF PRINCIPAL STOCKHOLDERS, DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" in the
1999 Proxy Statement which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be set forth at "CERTAIN
TRANSACTIONS" in the 1999 Proxy Statement which information is incorporated
herein by reference.
29
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF EXHIBITS AND FINANCIAL STATEMENTS FILED AS PART OF
THIS REPORT
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1. Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996 and March 17, 1999.
3.2. Amended and Restated By-Laws, dated July 21, 1993, as amended
July 18, 1995 and May 30, 1996 (incorporated by reference to
Exhibit 99.4 to the June 1996 Form 8-K).
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING
INDENTURES
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
4.2. See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 to the registration
statement on Form 8-A, Commission File No. 0-26520).
4.4. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999.
(10) MATERIAL CONTRACTS (*indicates management contract or
compensatory plan or arrangement).
10.1.1.--10.1.24. Reserved.
10.1.25. Rights Agreement between the Registrant and Continental Stock
Transfer & Trust Company dated as of July 18, 1995 (see
Exhibit 4.3).
10.1.26.--10.1.30. Reserved.
10.1.31. Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer & Trust Company
dated February 16, 1999 (see Exhibit 4.4).
10.1.32. Preferred Stock and Warrant Purchase Agreement dated February
16, 1999 among the Registrant, The Aries Master Fund, a Cayman
Island exempted company, and The Aries Domestic Fund, L.P.
10.1.33. Warrant dated February 16, 1999 for the purchase of shares to
purchase Common Stock issued to The Aries Master Fund, a
Cayman Island exempted company. This exhibit is one of two
substantially identical instruments and is accompanied by a
schedule identifying the other instrument omitted and setting
forth the material details in which such instrument differs
from the one filed herewith.
30
31
10.1.34. Option Units dated February 16, 1999 for the purchase of
shares of 5% Series B Convertible Preferred Stock of the
Registrant and warrants to purchase shares of Common Stock
issued to Paramount Capital, Inc.
10.1.35. Financial Advisory Agreement dated February 16, 1999 between
the Registrant and Paramount Capital, Inc.
10.1.36. Letter agreement dated February 24, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P.
10.1.37. Letter agreement dated March 12, 1999 among the Registrant,
The Aries Master Fund, a Cayman Island Exempted Company and
The Aries Domestic Fund, L.P.
10.1.38. Letter agreement dated April 1, 1999 among the Registrant, The
Aries Master Fund, a Cayman Island Exempted Company, and The
Aries Domestic Fund, L.P.
10.2.1.-- 10.2.14. Reserved.
10.2.15. Option Agreements between the Registrant and David C. Bupp
(incorporated by reference to Exhibit 10.7 to the Registrant's
registration statement on Form S-1; No. 33-51446 (the "Form
S-1")).*
10.2.16.--10.2.17. Reserved.
10.2.18. Non-Qualified Stock Option Agreement dated May 3, 1993 between
the Registrant and David C. Bupp (incorporated by reference to
Exhibit 10.50 to the Registrant's Quarterly Report on Form
10--QSB for the quarterly period ended June 30, 1993;
Commission File No. 0-26520 (the "2nd Quarter 1993 Form
10-QSB")).*
10.2.19.--10.2.20. Reserved.
10.2.21. Non-Qualified Stock Option Agreement dated May 3, 1993 between
the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.53 to the 2nd Quarter 1993 Form
10-QSB).*
10.2.22. Reserved.
10.2.23. Non-Qualified Stock Option Agreement dated February 28, 1992
and amended and restated June 3, 1993 between the Registrant
and David C. Bupp (incorporated by reference to Exhibit 99.5
to Registrant's report on Form 8-K dated January 21, 1994;
Commission File No. 0-26520 (the "January 1994 Form 8-K")).*
10.2.24. Non-Qualified Stock Option Agreement dated July 1, 1990 and
amended and restated June 3, 1993 between the Registrant and
David C. Bupp (incorporated by reference to Exhibit 99.6 to
the January 1994 Form 8-K).*
10.2.25. Non-Qualified Stock Option Agreement dated June 1, 1992 and
amended and restated June 3, 1993 between the Registrant and
John L. Ridihalgh (incorporated by reference to Exhibit 99.7
to the January 1994 Form 8-K).*
10.2.26. Amended and Restated Stock Option and Restricted Stock
Purchase Plan dated March 3, 1994 (incorporated by reference
to Exhibit 10.2.26 to Registrant's annual report on Form
10-KSB for the year ending December 31, 1993; Commission File
No. 0-26520 (the "1993 Form 10-KSB")).*
31
32
10.2.27.--10.2.28. Reserved.
10.2.29. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.29 to the 1994 Form 10-KSB).*
10.2.30. Non-Qualified Stock Option Agreement dated February 16, 1995
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.30 to the 1994 Form 10-KSB).*
10.2.31. Employment Agreement dated as of January 1, 1996 between the
Registrant and John L. Ridihalgh (incorporated by reference to
Exhibit 10.2.31 to the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1996;
Commission File No. 0-26520 (the "2nd Quarter 1996 Form
10-QSB")).*
10.2.32.-10.2.33. Reserved.
10.2.34. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.32 to the Registrant's Annual Report
on Form 10-KSB for the year ending December 31, 1997 (the
"1997 Form 10-KSB"); Commission File No. 0-26520).*
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Registrant and David C. Bupp (incorporated by reference to
Exhibit 10.2.35 to the 1997 Form 10-KSB).*
10.2.36. Reserved.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as amended
March 13, 1997 (incorporated by reference to Exhibit 10.2.37
to the 1997 Form 10-K).*
10.2.38. Non-Qualified Stock Option Agreement dated January 18, 1996
between the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.38 to the 1997 Form 10-K).*
10.2.39. Non-Qualified Stock Option Agreement dated January 18, 1996
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.39 to the 1997 Form 10-K).*
10.2.40. Non-Qualified Stock Option Agreement dated February 3, 1997
between the Registrant and John L. Ridihalgh (incorporated by
reference to Exhibit 10.2.40 to the 1997 Form 10-K).*
10.2.41. Non-Qualified Stock Option Agreement dated February 3, 1997
between the Registrant and David C. Bupp (incorporated by
reference to Exhibit 10.2.41 to the 1997 Form 10-K).*
10.2.42. Reserved.
10.2.43. Agreement, Release, and Waiver dated February 23, 1998 between
the Registrant and Dr. William Eisenhardt (incorporated by
reference to the Registrant's quarterly report on Form 10-Q
for the quarter ending March 31, 1998; Commission File No.
0-26520).*
10.2.44. Employment Agreement dated as of January 1, 1998 between the
Registrant and David C. Bupp. (incorporated by reference to
Exhibit 10.2.44 of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998; Commission
File No. 0-26520 (the "2nd Quarter 1998 Form 10-Q")).*
32
33
10.2.45. Restricted Stock Purchase Agreement between David C. Bupp and
the Registrant dated May 20, 1998 (incorporated by reference
Exhibit 10.2.45 to the 2nd Quarter 1998 Form 10-Q.*
10.2.46. Waiver by David Bupp dated February 16, 1999 of certain
provisions in the employment agreement between the Registrant
and David C. Bupp dated January 1, 1998.*
10.2.47. Severance Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman. This agreement is one of
four substantially identical agreements and is accompanied by
a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith.*
10.2.48. Restricted Stock Agreement dated October 23, 1998 between the
Registrant and Matthew F. Bowman. This agreement is one of
three substantially identical agreements and is accompanied by
a schedule identifying the other agreements omitted and
setting forth the material details in which such documents
differ from the one that is filed herewith.*
10.2.49. Separation Agreement dated October 21, 1998 between the
Registrant and John L. Ridihalgh.*
10.3.1. Technology Transfer Agreement dated July 29, 1992 between the
Registrant and The Dow Chemical Corporation (incorporated by
reference to Exhibit 10.10 to the Form S-1, confidential
portions of which were omitted and filed separately with the
Commission subject to an order granting confidential
treatment).
10.3.2.--10.3.29. Reserved.
10.3.30. Facility Agreement dated July 17, 1995 among Registrant,
Neoprobe (Israel) Ltd., and Rotem Industries, Ltd.
(incorporated by reference to Exhibit 10.3.30 to Registrant's
Quarterly Report on Form 10-QSB for the quarter ending
September 30, 1995, Commission File No. 0-26520 (the "3rd
Quarter 1995 Form 10-QSB"), confidential portions of which
were omitted and filed separately with the Commission subject
to an order granting confidential treatment).
10.3.31. Cooperative Research and Development Agreement between
Registrant and National Cancer Institute (incorporated by
reference to Exhibit 10.3.31 to the 3rd Quarter 1995 Form
10-QSB).
10.3.32. First Amendment to Facility Agreement dated July 17, 1995
among Registrant, Neoprobe (Israel), Ltd. and Rotem
Industries, Ltd (incorporated by reference to Exhibit 10.3.32
to the Registrant's Annual Report on Form 10-KSB for the year
ending December 31, 1995; Commission File No. 0-26520 (the
"1995 Form 10-KSB")).
10.3.33.-10.3.34. Reserved.
10.3.35. Investors' Rights Agreement dated February 5, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd. (incorporated by
reference to Exhibit 10.3.35 to the 1st Quarter 1996 Form
10-QSB).
10.3.36. Reserved.
10.3.37 Research and Development Agreement dated February 13, 1996
between Registrant and XTL Biopharmaceuticals, Ltd.
(incorporated by reference to Exhibit 10.3.37 to the 1st
Quarter 1996 Form 10-QSB, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
33
34
10.3.38 Sublicense Agreement dated February 13, 1996 between
Registrant and XTL Biopharmaceuticals, Ltd. (incorporated by
reference to Exhibit 10.3.38 to the 1st Quarter 1996 Form
10-QSB, confidential portions of which were omitted and filed
separately with the Commission subject to an order granting
confidential treatment).
10.3.39.-10.3.44. Reserved.
10.3.45 License dated May 1, 1996 between Registrant and The Dow
Chemical Company (incorporated by reference to Exhibit 10.3.45
to the 2nd Quarter 1996 Form 10-QSB).
10.3.46 License Agreement dated May 1, 1996 between Registrant and The
Dow Chemical Company (incorporated by reference to Exhibit
10.3.46 to the 2nd Quarter 1996 Form 10-QSB, confidential
portions of which were omitted and filed separately with the
Commission subject to an order granting confidential
treatment).
10.3.47. License and Option Agreement between Cira Technologies, Inc.
and Neoprobe Corporation dated April 1, 1998 (incorporated by
reference to Exhibit 10.3.47 to the 2nd Quarter 1998 Form
10-Q).
10.3.48. Restated Subscription and Option Agreement between the
Registrant, Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre Triozzi and Gregory Noll, dated April 17,
1998 (incorporated by reference to Exhibit 10.3.48 to the 2nd
Quarter 1998 Form 10-Q).
10.3.49. Restated Stockholders Agreement with the Registrant, Cira
Technologies, Inc., Richard G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith, Ltd.,
Pierre L. Triozzi and Gregory Noll, dated April 17, 1998
(incorporated by reference to Exhibit 10.3.49 to the 2nd
Quarter 1998 Form 10-Q).
10.4.1.--10.4.15. Reserved.
10.4.16. Project Management Agreement dated May 17, 1995 between
Neoprobe (Israel) Ltd. and BARAN Project Construction Ltd.
(incorporated by reference to Exhibit 10.4.16 to the 2nd
Quarter 1995 Form 10-QSB).
10.4.17-10.4.21. Reserved.
10.4.22. Sales and Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(incorporated by reference to Exhibit 10.4.22 to the 2nd
Quarter 1998 Form 10-Q, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment).
10.4.23. Loan Agreement between the Registrant and Bank One, NA, dated
April 16, 1998 (incorporated by reference to Exhibit 10.4.23
to the 2nd Quarter 1998 Form 10-Q).
10.4.24. Variable Rate Cognovit Promissory Note, dated April 16, 1998,
issued by Registrant to Bank One, NA (incorporated by
reference to Exhibit 10.4.24 to the 2nd Quarter 1998 Form
10-Q).
10.4.25. Security Agreement between the Registrant and Bank One, NA,
dated April 16, 1998 (incorporated by reference to Exhibit
10.4.25 to the 2nd Quarter 1998 Form 10-Q).
34
35
10.4.26. Letter amendment dated October 14, 1998 to the Sales and
Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(incorporated by reference to Exhibit 10.4.26 to the
Registrant's quarterly report on Form 10-Q for the quarter
ending September 30, 1998, confidential portions of which were
omitted and filed separately with the Commission subject to an
order granting confidential treatment; Commission File No.
0-26520 (the "3rd Quarter 1998 Form 10-Q")).
10.4.27. Promissory Note, dated September 25, 1998, issued by
Registrant to Bank One, NA (incorporated by reference to
Exhibit 10.4.27 to the 3rd Quarter Form 10-Q).
10.4.28. Addendum to Promissory Note dated September 25, 1998 issued by
Registrant to Bank One, NA (incorporated by reference to
Exhibit 10.4.28 to the 3rd Quarter Form 10-Q).
10.4.29. Covenant Agreement dated September 25, 1998 between the
Registrant and Bank One, NA (incorporated by reference to
Exhibit 10.4.29 to the 3rd Quarter Form 10-Q).
10.4.30. Assignment of Deposit Account dated September 25, 1998 between
Registrant and Bank One, NA (incorporated by reference to
Exhibit 10.4.30 to the 3rd Quarter Form 10-Q).
10.4.31. Asset Purchase Agreement dated October 14, 1998 between the
Registrant, Neoprobe AB, a corporation organized and existing
under the laws of Sweden, and Bioinvent Production AB, a
corporation organized and existing under the laws of Sweden
(incorporated by reference to Exhibit 10.4.31 to the 3rd
Quarter Form 10-Q).
10.4.32. Supply Agreement between the Registrant and eV Products dated
December 8, 1997 (filed pursuant to Rule 24b-2 under which the
Registrant has requested confidential treatment of certain
portions of this Exhibit).
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
11.1. Computation of Net Loss Per Share.
(21) SUBSIDIARIES OF THE REGISTRANT.
21.1. Subsidiaries of the Registrant.
(23) CONSENT OF EXPERTS AND COUNSEL.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
(24) POWERS OF ATTORNEY.
24.1. Powers of Attorney.
24.2. Certified resolution of the Registrant's Board of
Directors authorizing officers and directors signing on
behalf of the Company to sign pursuant to a power of
attorney.
35
36
(B) REPORTS ON FORM 8-K.
The Registrant filed a current Report on Form 8-K on December 8, 1998
to report information under Item 4. Changes in Registrant's
Certifying Accountant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 1, 1999
NEOPROBE CORPORATION
(the "Registrant")
By: /s/ David C. Bupp
---------------------------------
David C. Bupp, President and
Chief Executive Officer
36
37
Pursuant to the requirements of the Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/David C. Bupp Director, President and Chief April 1, 1999
- -------------------------------------- Executive Officer
David C. Bupp (principal executive officer)
/s/Brent L. Larson* Vice President, Finance and April 1, 1999
- -------------------------------------- Chief Financial Officer
Brent L. Larson (principal financial officer)
/s/Melvin D. Booth* Director April 1, 1999
- --------------------------------------
Melvin D. Booth
/s/John S. Christie* Director April 1, 1999
- --------------------------------------
John S. Christie
/s/Julius R. Krevans* Chairman, Director April 1, 1999
- --------------------------------------
Julius R. Krevans
/s/Michael P. Moore* Director April 1, 1999
- --------------------------------------
Michael P. Moore
/s/J. Frank Whitley, Jr.* Director April 1, 1999
- --------------------------------------
J. Frank Whitley, Jr.
/s/James F. Zid* Director April 1, 1999
- --------------------------------------
James F. Zid
*By: /s/ David C. Bupp
-------------------------------------------
David C. Bupp, Attorney-in-fact
37
38
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
NEOPROBE CORPORATION
------------------------
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1998
-----------------------
FINANCIAL STATEMENTS
-------------------------
===============================================================================
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
Neoprobe Corporation
We have audited the accompanying consolidated balance sheet of Neoprobe
Corporation and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neoprobe
Corporation and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1996 and 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand LLP
Columbus, Ohio
February 20, 1998
F-1
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Neoprobe Corporation:
We have audited the accompanying consolidated balance sheet of Neoprobe
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statement of operations, stockholders' equity and comprehensive
income (loss), and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neoprobe Corporation
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 16. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
Columbus, Ohio
March 31, 1999
F-2
41
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
ASSETS 1997 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 9,921,025 $ 3,054,936
Available-for-sale securities 14,672,496 448,563
Accounts receivable 793,376 2,069,633
Inventory 413,024 1,578,912
Prepaid expenses 1,211,598 720,420
Note receivable 1,500,000 --
Other current assets 789,780 147,008
------------ ------------
Total current assets 29,301,299 8,019,472
------------ ------------
Investment in affiliates -- 1,500,000
Property and equipment:
Equipment 9,264,222 3,073,931
Construction in progress 3,757,133 --
------------ ------------
13,021,355 3,073,931
------------ ------------
Less accumulated depreciation and amortization (2,596,459) (1,654,661)
------------ ------------
10,424,896 1,419,270
------------ ------------
Intangible assets 1,715,834 773,863
Other assets 131,375 281,594
------------ ------------
Total assets $ 41,573,404 $ 11,994,199
============ ============
CONTINUED
F-3
42
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
------------- -------------
Current liabilities:
Line of credit $ -- $ 1,000,000
Notes payable to finance company 202,615 242,163
Capital lease obligations, current 156,140 99,539
Accounts payable 3,848,172 2,857,717
Accrued liabilities 2,743,293 2,813,321
------------- -------------
Total current liabilities 6,950,220 7,012,740
------------- -------------
Long-term debt 1,813,437 --
Capital lease obligations 255,355 155,816
------------- -------------
Total liabilities 9,019,012 7,168,556
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at December 31, 1997 and 1998; none issued
and outstanding (500,000 shares designated as Series A,
$.001 par value, at December 31, 1997 and 1998; none
outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 22,763,430 shares issued and
outstanding at December 31, 1997; 22,887,910
shares issued and outstanding at December 31,1998 22,763 22,888
Additional paid-in capital 120,034,876 120,272,899
Accumulated deficit (87,362,531) (115,395,283)
Accumulated other comprehensive loss (140,716) (74,861)
------------- -------------
Total stockholders' equity 32,554,392 4,825,643
------------- -------------
Total liabilities and stockholders' equity $ 41,573,404 $ 11,994,199
============= =============
See accompanying notes to consolidated financial statements.
F-4
43
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
Net sales $ 1,171,186 $ 5,127,917 $ 5,832,695
Cost of goods sold 676,773 1,575,699 1,403,951
------------ ------------ ------------
Gross profit 494,413 3,552,218 4,428,744
------------ ------------ ------------
Operating expenses:
Research and development 16,082,761 19,656,804 12,960,208
Marketing and selling 1,531,589 4,306,717 5,267,617
General and administrative 6,221,981 6,853,283 5,284,462
Losses related to subsidiaries in liquidation -- -- 9,384,753
------------ ------------ ------------
Total operating expenses 23,836,331 30,816,804 32,897,040
------------ ------------ ------------
Loss from operations (23,341,918) (27,264,586) (28,468,296)
------------ ------------ ------------
Other income (expenses):
Interest income 2,179,345 2,156,795 598,834
Interest expense (83,436) (61,445) (189,785)
Other 276,866 1,922,708 26,495
------------ ------------ ------------
Total other income 2,372,775 4,018,058 435,544
------------ ------------ ------------
Net loss $(20,969,143) $(23,246,528) $(28,032,752)
============ ============ ============
Net loss per common share
(basic and diluted) $ (1.06) $ (1.02) $ (1.23)
============ ============ ============
Weighted average number of shares
outstanding during the year 19,743,649 22,734,642 22,842,232
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
44
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL
--------- --------- ---------- ------------ ------------- ------------
Balance, December 31, 1995 17,334,800 $ 17,335 $ 62,964,787 $(43,146,860) $ 213,387 $ 20,048,649
Exercise of employee stock
options at $2 to $6 per share 132,075 132 553,139 553,271
Exercise of stock warrants at
$3.32 to $12.60 per share 2,904,421 2,905 18,165,986 18,168,891
Issued to 401(k) plan at $3.46 5,426 5 18,792 18,797
Issued to employee in exchange
for services 10,000 10 121,240 121,250
Sale of common stock at $18.50
per share, net of costs 1,750,000 1,750 30,190,777 30,192,527
Issued in exchange for technology
licenses at $16.03 per share 124,805 125 1,999,875 2,000,000
Issued in exchange for note
receivable and development
activities at $20.25 per share 125,000 125 2,531,125 2,531,250
Issued in conversion of
debentures at $5.93 per share 200,000 200 1,185,641 1,185,841
Vesting of compensatory
employee options 1,562,500 1,562,500
Comprehensive income (loss):
Net loss (20,969,143) (20,969,143)
Foreign currency translation
adjustment (60,446) (60,446)
Unrealized loss on
available-for-sale
securities (76,339) (76,339)
------------
Total comprehensive loss (21,105,928)
---------- --------- ------------ -------------- --------- ------------
Balance, December 31, 1996 22,586,527 22,587 119,293,862 (64,116,003) 76,602 55,277,048
Exercise of employee stock
options at $2.50 to $15.75
per share 85,510 85 361,500 361,585
Issued to 401(k) plan at $14.61 1,672 2 24,422 24,424
Exercise of stock warrants at
$3.32 to $6.05 per share 89,721 89 355,092 355,181
Comprehensive income (loss):
Net loss (23,246,528) (23,246,528)
Foreign currency translation (237,887) (237,887)
adjustment
Unrealized gain on available-
for-sale securities 20,569 20,569
------------
Total comprehensive loss (23,463,846)
---------- --------- ------------ -------------- --------- ------------
Balance, December 31, 1997 22,763,430 $22,763 $120,034,876 $ (87,362,531) $(140,716) $ 32,554,392
Exercise of employee stock
options at $2.50 to $3.88 76,587 77 196,221 196,298
per share
Issued to 401(k) plan at $14.45 2,893 3 41,802 41,805
Issuance of restricted stock to 45,000 45 45
officers
Comprehensive income (loss):
Net loss (28,032,752) (28,032,752)
Foreign currency translation
adjustment 56,346 56,346
Unrealized gain on
available-for-sale 9,509 9,509
securities
------------
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
========== ========= ============ ============== ========= ============
See accompanying notes to consolidated financial statements.
F-6
45
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(20,969,143) $(23,246,528) $(28,032,752)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 628,015 778,663 1,081,676
Amortization of intangible assets 24,608 117,859 43,254
Provision for bad debts -- 130,660 134,249
Loss on disposal and abandonment of assets 10,199 664,068 1,266,153
Non-cash losses related to subsidiaries in liquidation -- -- 6,443,432
Non-cash expenditures for research and
development 500,000 -- --
Compensation expense under restricted stock
and stock option plans 1,683,750 -- --
Change in operating assets and liabilities:
Accounts receivable (1,002,799) 315,406 (1,410,759)
Inventory 248,734 (199,335) (1,165,258)
Prepaid expenses and other (566,291) 465,764 1,144,128
Accounts payable 905,883 1,404,095 (847,970)
Accrued liabilities 1,996,641 (133,131) (105,694)
Deferred revenue 2,000,000 (2,000,000) --
------------ ------------ ------------
Net cash used in operating activities (14,540,403) (21,702,479) (21,449,541)
Cash flows from investing activities:
Purchases of available-for-sale securities (50,061,144) (13,489,774) (1,738,512)
Proceeds from sales of available-for-sale securities 27,607,495 1,884,610 4,955,601
Maturities of available-for-sale securities 9,982,000 16,739,201 11,050,000
Purchases of property and equipment (3,616,297) (4,689,681) (3,428,811)
Patent costs (126,287) (197,873) (239,400)
------------ ------------ ------------
Net cash (used in) provided by investing activities (16,214,233) 246,483 10,598,878
Cash flows from financing activities:
Proceeds from issuance of common stock, net 50,117,201 716,766 196,343
Proceeds from line of credit -- -- 1,275,750
Payments under line of credit -- -- (275,750)
Proceeds from notes payable 180,242 -- --
Payment of notes payable (153,638) (177,039) (228,892)
Payments under capital leases (241,390) (125,202) (156,167)
Proceeds from long-term debt 1,000,687 812,750 3,129,499
------------ ------------ ------------
Net cash provided by financing activities 50,903,102 1,227,275 3,940,783
Effect of exchange rate changes on cash (13,027) (18,666) 43,791
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 20,135,439 (20,247,387) (6,866,089)
Cash and cash equivalents, beginning of year 10,032,973 30,168,412 9,921,025
------------ ------------ ------------
Cash and cash equivalents, end of year $ 30,168,412 $ 9,921,025 $ 3,054,936
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation ("the
Company"), a Delaware corporation, is engaged in the development and
commercialization of gamma guided surgery products for the diagnosis
and treatment of cancers and other diseases. Prior to 1998, the Company
had been considered to be a development stage enterprise. However, due
to changes in the Company's business plan that occurred during 1998,
the Company's strategic direction has changed to focus primarily on
gamma guided surgery products such as the Company's line of hand-held
gamma detection instruments. Management of the Company believes that
the principal operations of the restructured Company commenced in 1998
as evidenced by a second year of substantial revenue from the sale of
hand-held gamma detection instruments. Therefore, management believes
the Company should no longer be considered a development stage
enterprise.
As a result of the changes in the Company's strategic direction, the
Company recorded approximately $1.2 million in severance and other
employee-related exit costs, excluding severance costs of $314,000
related to subsidiaries in liquidation. At December 31, 1998, the
Company has accrued approximately $242,000 related to severance costs
of terminated employees.
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 (see Note 9). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(2) Adoption of liquidation basis of accounting: During 1998, the
Company adopted the liquidation basis of accounting for its two
international subsidiaries. Accordingly, assets of these
subsidiaries are stated at net realizable value, and liabilities
are stated at amounts expected to settle obligations due.
c. FOREIGN CURRENCY TRANSLATION: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation,
assets and liabilities denominated in foreign currencies are translated
at current exchange rates in effect at the balance sheet dates, and
revenues and expenses are translated at the average monthly exchange
rate. The differences resulting from such translations are included in
other comprehensive income (loss).
d. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:
(1) Cash and cash equivalents, accounts receivable, accounts payable,
and accrued liabilities: The carrying amounts approximate fair
value because of the short maturity of these instruments.
(2) Available-for-sale securities: The fair values of debt securities
and equity investments are based on quoted market prices at the
balance sheet date.
(3) Line of credit and notes payable to finance company: The fair
value of the Company's debt is estimated by discounting the future
cash flows of each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities by
banks or finance companies. At December 31, 1998, the carrying
value of these instruments approximates fair value.
e. CASH AND CASH EQUIVALENTS: Cash equivalents of $7,227,807 and $20,691
at December 31, 1997 and 1998, respectively, consist of corporate debt
securities and mortgage-backed U.S. government securities with a term
of less than three months. 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. At December
31, 1997 and 1998, the use of $377,652 and $993,000, respectively, of
cash and cash equivalents was restricted under the terms of the
Company's debt agreement financing the construction of Neoprobe
(Israel) Ltd. At December 31, 1998, $1 million was pledged as security
related to the Company's line of credit.
F-8
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
f. INVESTMENTS:
(1) Investments in affiliated companies with no readily determinable
fair value of up to 20% are carried on the cost basis, and
investments greater than 20%, where management has determined the
Company does not exercise control, are carried on the equity
basis.
(2) Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of accumulated
other comprehensive income until realized. Realized gains and
losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale security
below cost that is deemed to be other than temporary, results in a
reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted over
the life of the related available-for-sale security as an
adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned.
Information related to amortized cost and fair value of
available-for-sale securities, utilizing the specific
identification method, at December 31, 1997 and 1998, is provided
below:
AMORTIZED UNREALIZED
1997 COST GAINS(LOSSES) FAIR VALUE
----------------------------------------------- ----------------- ---------------- ---------------
Mortgage-backed U.S. government securities $ 993,214 $(6,508) $ 986,706
Corporate debt securities 13,688,572 (2,782) 13,685,790
----------- ------- -----------
$14,681,786 $(9,290) $14,672,496
=========== ======= ===========
1998
-----------------------------------------------
Mortgage-backed U.S. government securities $ 448,344 $ 219 $ 448,563
----------- ------- -----------
$ 448,344 $ 219 $ 448,563
=========== ======= ===========
The fair value of available-for-sale debt securities at December
31, 1997 and 1998, by contractual maturity, are shown below.
Available-for-sale securities are classified as current based on
the Company's intent to use them to fund short-term working
capital needs.
AMORTIZED
1997 COST FAIR VALUE
---------------------------------------- ------------------- ------------------
Due one year or less $11,278,897 $11,282,535
Due after one year through five years 3,402,889 3,389,961
----------- -----------
$14,681,786 $14,672,496
=========== ===========
1998
----------------------------------------
Due one year or less $ 18,870 $ 18,816
Due after one year through five years 429,474 429,747
----------- -----------
$ 448,344 $ 448,563
=========== ===========
F-9
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
g. INVENTORY: The components of inventory at December 31, 1997 and 1998,
are as follows:
1997 1998
-------------- --------------
Materials and component parts $36,890 $277,505
Work in process 145,234 -
Finished goods 230,900 1,301,407
-------- ----------
$413,024 $1,578,912
======== ==========
All components of inventory are valued at the lower of cost (first-in,
first-out) or market.
h. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of
minimum lease payments. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable
assets ranging from 3 to 20 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.
Equipment includes $518,507 and $393,869 of equipment under capital
leases and accumulated amortization of $119,432 and $153,165 at
December 31, 1997 and 1998, respectively.
i. INTANGIBLE ASSETS: Intangible assets consist primarily of the cost of
patents and acquired technology licenses. Patent costs are amortized
using the straight-line method over the remaining lives of the patents
of up to 17 to 20 years. Patent application costs are deferred pending
the outcome of patent applications. Costs associated with unsuccessful
patent applications and abandoned intellectual property are expensed
when determined to have no recoverable value. The Company evaluates the
potential alternative uses of intangible assets, as well as the
recoverability of the carrying values of intangible assets on a
recurring basis.
The components of intangible assets at December 31, 1997 and 1998 are
as follows:
1997 1998
--------- ---------
Patents $ 813,826 $ 871,944
Acquired technology licenses 1,000,000 -
--------- ---------
1,813,826 871,944
Accumulated amortization (97,992) (98,081)
----------
=========
$1,715,834 $ 773,863
========== =========
During 1998, the Company recorded $148,000 in general and
administrative expense related to patents which will no longer be
supported based on changes in the Company's business plan. The Company
also recorded a $1 million impairment charge in 1998 related to
technology licensed from The Dow Chemical Company (see Note 11).
j. REVENUE RECOGNITION AND PRODUCT WARRANTY: The Company derives revenues
primarily from sales of its hand-held gamma detection instruments.
However, revenues in prior years also included revenues from sales of
blood group serology products. The Company recognizes sales revenue
when the product is shipped. The Company warrants its products against
defects in design, materials, and workmanship for a period of one year.
The Company's provision for warranty expenses is adjusted periodically
to reflect actual experience.
k. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.
l. INCOME TAXES: Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities, and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or
F-10
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. 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 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 exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount of fair value less costs to sell.
p. COMPREHENSIVE INCOME (LOSS): On January 1, 1998, the Company adopted
SFAS No. 130, Reporting Comprehensive Income. This Statement
establishes standards for reporting and display of comprehensive income
in a full set of general purpose financial statements. Comprehensive
income consists of net income (loss), net unrealized gains (losses) on
securities and foreign currency translation adjustments, and is
presented in the consolidated statements of stockholders' equity and
accumulated other comprehensive income (loss). The Statement requires
only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of
operations. Due to the Company's net operating loss position, there are
no income tax effects on comprehensive income components for any of the
years presented. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAINS OTHER
TRANSLATION (LOSSES) ON COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
--------- --------- ---------
Balance, December 31, 1995 $ 166,907 $ 46,480 $ 213,387
Change during 1996 (60,446) (76,339) (136,785)
--------- -------- ---------
Balance, December 31, 1996 106,461 (29,859) 76,602
Change during 1997 (237,887) 20,569 (217,318)
--------- -------- ---------
Balance, December 31, 1997 (131,426) (9,290) (140,716)
Change during 1998 56,346 9,509 65,855
--------- -------- ---------
Balance, December 31, 1998 $ (75,080) $ 219 $ (74,861)
========= ======== =========
Q. NET LOSS PER COMMON SHARE: During 1997, the Company adopted SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and replaced the
presentation of primary EPS with a presentation of basic EPS and
diluted EPS. There are no differences in basic and diluted EPS for the
Company related to any of the years presented. The net loss per common
share
F-11
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for all periods presented excludes the number of common shares issuable
on exercise of outstanding stock options and warrants into the
Company's Common Stock since such inclusion would be antidilutive.
r. SEGMENT REPORTING: On December 31, 1998, the Company adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related
Information. This Statement establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements issued to stockholders. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about
major customers. The Company has reclassified prior year information to
conform to this revised segment reporting.
s. RECLASSIFICATIONS: Certain prior years' amounts have been reclassified
to conform with the 1998 presentation.
2. ACCOUNTS RECEIVABLE:
Accounts receivable at December 31, 1997 and 1998, net of allowance for
doubtful accounts of $130,660 and $77,000, respectively, consist of the
following:
1997 1998
-------- -----------
Trade $769,578 $1,611,247
Other 23,798 458,386
-------- ----------
$793,376 $2,069,633
======== ==========
The activity in the allowance for doubtful accounts for the years ended
December 31, 1997 and 1998 follows:
1997 1998
--------- ----------
Allowance for doubtful accounts at beginning of year $ - $ 130,660
Provision for bad debts 130,660 134,249
Writeoffs charged against the allowance - (187,909)
Recoveries of amounts previously charged off - -
-------- ---------
Allowance for doubtful accounts at end of year $130,660 $ 77,000
======== =========
3. INVESTMENT IN AFFILIATES:
Included in investment in affiliate at December 31, 1998, is an investment
in XTL Biopharmaceuticals Ltd. ("XTL"). The investment resulted from the
conversion of a note receivable from XTL, which was held by the Company
related to an Investment Research and Development Agreement (see Note 11).
The note receivable was due to mature on February 13, 1998, and bore
interest at 5% payable annually. On January 30, 1998, the Company exercised
its option to convert the note receivable into 443,690 shares of Class A
Common Stock of XTL. The Company has accounted for its investment in XTL on
the cost method. There is currently no publicly quoted market value for
shares of XTL; however, management believes, based on a recently completed
private placement, that the market value of its investment in XTL
approximates book value. The Company has approximately a 6% interest in XTL
as of December 31, 1998, on an "as if converted" basis. The Company also
has investment interests in two other entities which are carried at zero at
December 31, 1998.
F-12
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1997 and 1998 consist of the following:
1997 1998
---------- ----------
Royalties due under research and
development agreement $ 171,570 $ 319,693
Compensation 578,683 547,993
Inventory purchases 204,666 38,860
Accrued loan security (Note 5(b)) - 993,000
Contracted services and other 1,788,374 913,775
---------- ----------
$2,743,293 $2,813,321
========== ==========
Accrued compensation at December 31, 1998, includes $242,351 of separation
payments due to former employees, including those of subsidiaries in
liquidation.
5. DEBT:
a. LINE OF CREDIT: In September 1998, the Company renegotiated the terms
of its $3 million revolving line of credit arrangement with a bank. The
new line of credit expires on August 31, 1999. The maximum eligible
borrowing limit under the new line was decreased to $1 million and is
secured by $1 million in pledged cash and investments of the Company.
Interest on the line of credit is based on the prime rate or LIBOR, as
elected by the Company. At December 31, 1998, the interest rate was
7.3%, and $1 million was outstanding under the line of credit.
b. LONG-TERM DEBT: As of December 31, 1998, the Company's 95%-owned
subsidiary, Neoprobe (Israel) Ltd. ("Neoprobe Israel"), had outstanding
debt to a bank of $4.9 million. The funds were drawn pursuant to an
investment program approved by the State of Israel's Finance Committee
to construct a radiolabeling facility near Dimona, Israel. Under the
approved investment program, Neoprobe Israel was entitled to receive
government grants and government guarantees of loans to finance the
construction and operation of the facility up to a combined total
amount of $9.9 million. Neoprobe Israel is entitled to receive grants
based on a percentage of its investment and operating costs, and a
government guarantee of 75% to 85% of the principal balance of bank
loans taken to build and operate the facility. The loan portion of the
investment program expired in September 1998; however, the Company
received loan proceeds related to the majority of eligible capital
costs incurred prior to the expiration of the loan program. During
1998, the Company successfully negotiated an extension of the grant
portion of the program for an additional year. Through December 31,
1998, Neoprobe Israel has received $1.3 million in the form of grants
under the approved investment program.
Amounts received as loans bear interest at the LIBOR rate plus a
specified percentage based on the exchange rate differential between
the New Israeli Shekel and the U.S. dollar on the date of the loan
draw, or between 8.2% and 8.45% at December 31, 1998. Amounts received
under the agreement are secured by property obtained through the use of
proceeds. The loans with the bank are guaranteed by the State of
Israel's Investment Centre. The Company has also guaranteed a portion
of the loan based on a percentage of the loan drawn. The Company's
guarantee is fully secured by $993,000 in cash deposited in an account
with the bank for which the bank has the right of set-off.
In December 1998, Company initiated actions to liquidate Neoprobe
Israel. As a result, the Company has adopted the liquidation basis of
accounting with respect to Neoprobe Israel as of December 31, 1998 (see
also Note 9). Under the liquidation basis of accounting, assets are
stated at their net realizable value, and liabilities are stated at
amounts expected to settle obligations due. If a buyer for the facility
cannot be found on a timely basis, the Company believes Neoprobe Israel
may be required to relinquish ownership of the radiolabeling facility
in lieu of a cash settlement of the obligation to the bank. The
Company's consolidated balance sheet, therefore, does not
F-13
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
reflect any debt outstanding to the bank at December 31, 1998. In
addition, the Company believes it may be required to relinquish funds
currently deposited as security for the loan and has, therefore,
recorded an accrued liability at December 31, 1998, equal to the amount
of cash deposited as security.
6. INCOME TAXES:
As of December 31, 1998, the Company's net deferred tax assets in the
U.S. were approximately $45.3 million, related principally to net
operating loss carryforwards of approximately $95.5 million available
to offset future taxable income, if any, through 2018 and tax credit
carryforwards of approximately $3.3 million (principally research and
development) available to reduce future income tax liability after
utilization of tax loss carryforwards, if any, through 2018. Due to the
uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, all of the net deferred tax assets
have been fully offset by a valuation allowance.
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986,
as amended, the utilization of U.S. net operating loss and tax credit
carryforwards may be limited under the change in stock ownership rules
of the IRC. As a result of ownership changes as defined by Sections 382
and 383, which have occurred at various points in the Company's
history, management believes utilization of the Company's net operating
loss carryforwards and tax credit carryforwards may be limited.
In general, it has been the intention of the Company to reinvest the
earnings of non-U.S. subsidiaries in those operations. At December 31,
1998, the Company's international subsidiaries have net operating loss
carryforwards of approximately $9.1 million available to offset future
statutory income in those jurisdictions. However, as both subsidiaries
are currently in loss positions, and as the Company is in the process
of liquidating both foreign subsidiaries, 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. IRC.
7. EQUITY:
a. COMMON STOCK: The Company's research and development activities and
operating costs have been funded principally with cash generated from
the issuance of Common Stock. In April 1996, the Company completed the
sale of 1,750,000 shares of Common Stock at a price of $18.50 per share
in a secondary offering. Gross proceeds from this offering were $32.4
million, and proceeds net of underwriting discounts were $30.5 million.
In November 1992 and December 1993, the Company issued a total of
2,330,000 Class E Redeemable Common Stock Purchase Warrants ("Class E
Warrants"). The Class E Warrants were exercisable over a three-year
period beginning November 10, 1993 and expiring on November 12, 1996.
During 1996, the Company received proceeds from the exercise of Class E
Warrants of approximately $15.0 million.
During 1996, 1997, and 1998, cash generated from public offerings and
private placements of Common Stock is as follows:
1996 1997 1998
----------- -------- ---------
Public offerings, including exercise of warrants $47,988,930 $361,585 $ -
Private placements and exercise of options 2,128,271 355,181 196,343
----------- -------- --------
$50,117,201 $716,766 $196,343
=========== ======== ========
F-14
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. STOCK OPTIONS: At December 31, 1998, 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
Statement No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below:
1996 1997 1998
------------ ------------ ------------
Net loss As reported $(20,969,143) $(23,246,528) $(28,032,752)
Pro forma $(22,017,227) $(25,273,241) $(30,843,828)
Net loss per common As reported $ (1.06) $ (1.02) $ (1.23)
share (basic and diluted)
Pro Forma $ (1.12) $ (1.11) $ (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 1996, 1997, and 1998, respectively: average risk-free
interest rates of 5.7%, 6.4% 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 181% for 1996, 72% for 1997, and 103% for 1998.
A summary of the status of stock options under the Company's stock
option plans as of December 31, 1996, 1997, and 1998, and changes
during the years ended on those dates is presented below:
1996 1997 1998
------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- ----------- ----------- ------------- -----------
Outstanding at
beginning of year 1,723,543 $ 2.93 2,002,138 $ 5.60 2,194,103 $7.81
Granted 457,700 $15.38 427,900 $13.50 869,791 3.88
Forfeited (47,030) $ 6.92 (150,425) $13.90 (1,527,862) 8.22
Exercised (132,075) $ 4.19 (85,510) $ 4.25 (76,587) 2.56
--------- --------- ----------
Outstanding at
end of year 2,002,138 $ 5.60 2,194,103 $ 7.81 1,459,445 $5.31
========= ========= =========
Options exercisable
at end of year 1,265,893 1,369,557 912,546
========= ========= =======
F-15
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, are 100,000 options exercisable at an exercise price
of $2.50 per share which vest on the meeting of certain Company
achievements.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
PRICES 1998 LIFE PRICE 31, 1998 PRICE
-------------------- ----------------- -------------- ----------- --------------- ---------
$1.50 - $2.50 563,651 7 Years $ 1.91 234,482 $ 2.05
$3.00 - $5.63 298,600 6 Years $ 4.30 150,000 $ 3.15
$6.00 - $6.00 393,160 4 Years $ 6.00 393,160 $ 6.00
$13.38 - $17.44 204,034 8 Years $14.85 134,904 $15.20
--------- -------
$1.50 - $17.44 1,459,445 6 Years $ 5.31 912,546 $ 5.88
========= =======
c. RESTRICTED STOCK: During 1998, the Company granted 145,000 shares of
restricted Common Stock to officers of the Company under the Amended
Plan. However, of the 1998 shares granted, 20,000 shares were forfeited
subsequent to being granted but prior to issuance, and 80,000 shares
were not issued by the Company's transfer agent until 1999.
At December 31, 1998, the Company has 125,000 restricted shares issued
and outstanding under the Amended Plan. However, 50,000 of the 125,000
outstanding restricted shares were forfeited effective December 31,
1998, and are pending cancellation by the transfer agent.
All of the restricted shares granted vest on a change of control of the
Company as defined in the specific grant agreements. As a result, the
Company has not recorded any deferred compensation due to the inability
to assess the probability of the vesting event. Of the shares issued
and outstanding, 75,000 also vest under certain conditions of
termination as defined in an officer's employment agreement with the
Company (see Note 11 (e)).
d. STOCK WARRANTS: At December 31, 1998, there are approximately 67,922
warrants outstanding to purchase Common Stock of the Company. The
warrants are exercisable at prices ranging from $3.00 to $17.92 per
share with a weighted average exercise price per share of $6.34.
Approximately 45,000 of the warrants expired on February 28, 1999; the
remaining warrants expire on various dates from June 1999 through
December 2000.
e. COMMON STOCK RESERVED: Shares of authorized Common Stock have been
reserved for the exercise of all options and warrants outstanding.
F-16
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDER RIGHTS PLAN:
During July 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, one "Right" is to be distributed for each
share of Common Stock held by shareholders on the close of business on
August 28, 1995. The Rights are exercisable only if a person and its
affiliate commences a tender offer or exchange offer for 15% or more of the
Company's Common Stock, or if there is a public announcement that a person
and its affiliate has acquired beneficial ownership of 15% or more of the
Common Stock, and if the Company does not redeem the Rights during the
specified redemption period. Initially, each Right, upon becoming
exercisable, would entitle the holder to purchase from the Company one unit
consisting of 1/100th of a share of Series A Junior Participating Preferred
Stock at an exercise price of $35 (which is subject to adjustment). Once
the Rights become exercisable, if any person, including its affiliate,
acquires 15% or more of the Common Stock of the Company, each Right other
than the Rights held by the acquiring person and its affiliate becomes a
right to acquire Common Stock having a value equal to two times the
exercise price of the Right. The Company is entitled to redeem the Rights
for $0.01 per Right at any time prior to the expiration of the redemption
period. The Shareholder Rights Plan and the Rights will expire on August
28, 2005. The Board of Directors may amend the Shareholder Rights Plan,
from time to time, as considered necessary (see Note 17).
9. SEGMENTS AND SUBSIDIARIES INFORMATION:
Prior to the 1998 changes in the Company's business plan, the Company's
business was operated based on product development initiatives started
under the Company's prior business plan. These strategic initiatives
originally included development and commercialization of: hand-held gamma
detection instruments currently used primarily in the application of
Intraoperative Lymphatic Mapping ("ILM"), diagnostic radiopharmaceutical
products to be used in the Company's proprietary RIGS process, and
Activated Cellular Therapy ("ACT"). The Company's business plan as of
December 31, 1998 focuses primarily on the hand-held gamma detection
instruments while efforts are carried out to find partners or licensing
parties to fund RIGS and ACT research and development.
The Company's United States operations included activities for 1998 and
prior years that benefited all three strategic initiatives. The suspended
RIGS initiative included the operations of the Company's two subsidiaries,
Neoprobe Europe AB ("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. Both Neoprobe Europe and
Neoprobe Israel are in liquidation at December 31, 1998. The results of the
operations of Neoprobe Europe and Neoprobe Israel for 1998, as well as the
effects of adjustment of their related assets in conformity with the
liquidation basis of accounting, is presented as losses relating to
subsidiaries in liquidation in the consolidated statements of operations.
Due to changes in the potential production process for RIGScan CR49, the
Company determined during the second quarter of 1998, that Neoprobe Europe,
the Company's biologics manufacturing and purification facility located in
Lund, Sweden, was no longer critical to the manufacturing process, and that
research and development activities being carried on at the facility could
be performed more efficiently elsewhere. As a result, the Company took
action in the second quarter to initiate the sale of Neoprobe Europe. As of
June 30, 1998, activities regarding the potential sale were in the
preliminary stages, and management was unable to estimate the effect on the
Company's financial position. However, management did not believe the $2.5
million book value of the net assets of Neoprobe Europe to be impaired at
that time. During October 1998, the Company reached an agreement to sell
substantially all of the assets of Neoprobe Europe to a Swedish company. In
exchange for the assets, the Swedish company agreed to pay the Company
$125,000 and assume certain contractual obligations of Neoprobe Europe,
such as the lease commitment. In connection with this agreement, the
Company recorded a provision of approximately $2.0 million during the third
quarter of 1998, principally to write down the remaining assets of Neoprobe
Europe to their estimated realizable value. At December 31, 1998, the
Company has adopted the liquidation basis of accounting for Neoprobe
Europe. Accordingly, the consolidated balance sheet includes approximately
$150,000 in current assets of Neoprobe
F-17
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Europe at their net realizable value, and $70,000 in liabilities at the
amounts expected to settle the obligations due. Included in losses related
to subsidiaries in liquidation for 1998 is $1.7 million related to
impairment of assets, $235,000 related to severance and exit costs, and
$1.2 million of losses from operations incurred prior to the decision to
liquidate.
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
and has the right to acquire an additional 4% under certain conditions
related to the completion of the facility. Based on the status of the
Company's marketing applications in the U.S. and Europe, and 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. The Company has, therefore, adopted the
liquidation basis of accounting with respect to Neoprobe Israel as of
December 31, 1998. The Company has written down the value of the fixed
assets of the facility and the related debt to the net amount of zero as
the assets may represent settlement of the debt (see Note 5 (b)).
Accordingly, the consolidated balance sheet includes approximately $555,000
in current assets of Neoprobe Israel at their net realizable value, and
$876,000 in liabilities at the amounts expected to settle the obligations
due. Included in losses related to subsidiaries in liquidation for 1998 is
$5.1 million related to the primarily non-cash adjustment of assets and
liabilities to their net realizable value, $79,000 related to severance and
other exit costs, and $1.0 million related to losses from operations
incurred prior to the decision to liquidate.
The information in the following table is derived directly from the segments'
internal financial reporting used for corporate management purposes. The
expenses attributable to corporate activity, including amortization and
interest, and other general and administrative costs are not allocated to the
operating segments.
($ AMOUNTS IN THOUSANDS)
1996 RIGS ILM ACT UNALLOCATED TOTAL
--------------------------------------------- -------- -------- ------- ----------- ---------
Revenue
United States customers $ - $ 725 $ - $ - $ 725
International customers - 55 - 391 446
Research and development expenses (14,216) (1,783) (84) - (16,083)
Marketing and selling expenses - (1,532) - - (1,532)
General and administrative expenses - - - (6,222) (6,222)
Other income - - - 2,373 2,373
Total assets, net of depreciation and
amortization:
United States 351 1,234 - 56,738 58,323
Neoprobe Europe 2,072 - - - 2,072
Neoprobe Israel 3,477 - - - 3,477
Capital expenditures 3,616 - - - 3,616
F-18
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
($ AMOUNTS IN THOUSANDS)
1997 RIGS ILM ACT UNALLOCATED TOTAL
---------------------------------------------- -------- -------- ------- ----------- ---------
Revenue
United States customers $ - $ 4,677 $ - $ - $ 4,677
International customers - 386 - 65 451
Research and development expenses (12,814) (4,933) (1,910) - (19,657)
Marketing and selling expenses - (4,307) - - (4,307)
General and administrative expenses - - - (6,853) (6,853)
Other income - - - 4,018 4,018
Total assets, net of depreciation and
amortization:
United States 182 1,248 84 30,502 32,016
Neoprobe Europe 1,631 - - - 1,631
Neoprobe Israel 7,926 - - - 7,926
Capital expenditures 4,504 102 84 - 4,690
1998
----------------------------------------------
Revenue
United States customers $ - $ 5,333 $ - $ - $ 5,333
International customers - 430 - 70 500
Research and development expenses (7,113) (3,380) (1,467) (1,000) (12,960)
Marketing and selling expenses - (5,268) - - (5,268)
General and administrative expenses - - - (5,284) (5,284)
Losses related to subsidiaries in liquidation (9,385) - - - (9,385)
Other income - - - 436 436
Total assets, net of depreciation and
amortization:
United States 187 4,839 - 6,083 11,109
Neoprobe Europe 152 - - - 152
Neoprobe Israel 555 - - - 555
Capital expenditures 2,851 578 - - 3,429
Neoprobe Europe recorded intrasegment revenue for RIGS-related research
performed on behalf of the U.S. parent company of $735,000, $2.7 million,
and $1.2 million in 1996, 1997, and 1998, respectively.
For the year ended December 31, 1996, approximately $328,000 (28%) of net
sales were concentrated between two customers. These sales related to sales
of blood serology products by Neoprobe Europe. The Company discontinued the
sale of blood serology products during 1997. No individual customer
constituted over 10% of net sales in either 1997 or 1998.
10. RELATED-PARTY TRANSACTIONS:
A partner of a law firm which provides various legal services to the
Company, including patent and trademark filings and prosecuting patent and
trademark applications, is a former director of the Company. The partner's
officer and director affiliations ended in May 1997. Costs incurred related
to services performed and patent maintenance fees paid by this firm
approximated $201,000 and $302,000 for the years ended December 31, 1996
and 1997, respectively. The Company owed this law firm approximately
$21,800 at December 31, 1997.
F-19
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. AGREEMENTS:
a. SUPPLY AGREEMENTS: During 1997, the Company entered into a supply
agreement with eV Products ("eV"), a division of II-VI Incorporated,
for the supply of certain crystals and associated electronics to be
used in the manufacture of the Company's proprietary line of hand-held
gamma detection instruments. The original term of the agreement expires
on December 31, 2002, but may be automatically extended for an
additional three years. The agreement calls for the Company to purchase
minimum quantities of crystals used by the Company. The Company expects
to purchase a minimum of $500,000 in crystals from eV in 1999. 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.
b. MARKETING AGREEMENTS: In September 1996, the Company executed a License
and Distributorship Agreement ("Agreement") with the United States
Surgical Corporation ("USSC"). Effective October 17, 1997, the Company
and USSC agreed to terminate the Agreement, as amended. In connection
with the termination, after receipt of payment, the Company agreed to
pay USSC net commissions on orders received prior to the effective date
of the termination and to continue to warranty and service devices sold
under the terms of the Agreement. The parties have also agreed to
discharge and release the other from all remaining claims and financial
obligations relating to the Agreement, including license fees. The
Company had also received $2 million from USSC on execution of the
Agreement in 1996 and recognized this amount as income in the fourth
quarter of 1997 concurrent with the termination of the Agreement.
In April 1998, the Company executed a non-exclusive Sales and Marketing
Agreement (the "Agreement") with Ethicon Endo-Surgery, Inc. ("EES"), a
Johnson & Johnson company, to market and promote the Neoprobe(R) 1500
Portable Radioisotope Detector and its 14mm and 19mm reusable probes
for gamma guided lymphatic mapping and minimally invasive surgery in
the United States. During October 1998, the Agreement with EES was
amended to cover marketing and promotion of the aforementioned products
in Europe. During the initial one-year term of the Agreement, EES
agreed to promote and sell the aforementioned products and train
physicians in the use of the Company's devices. In exchange for
promoting and selling the device products, the Company agreed to pay
EES commissions based on qualifying net sales of the aforementioned
products. At December 31, 1998, the Company owed EES $142,000 under the
terms of the Agreement (see Note 17(b)).
c. RESEARCH AND DEVELOPMENT: Under a research and development agreement
between the Company, The Ohio State University, and the Department of
Development of the State of Ohio, the Company must pay the State of
Ohio periodic royalties calculated as a percentage of net sales of
products utilizing the results of the sponsored research, a sharing of
proceeds received from the sale of technology, and a portion of the
royalties collected from any license the Company may grant. The Company
has an option to terminate its royalty obligation following completion
of the research period by making a termination payment to the State of
Ohio.
d. LICENSE AND TECHNOLOGY AGREEMENTS: In February 1996, the Company and
XTL Biopharmaceuticals Ltd. ("XTL") executed a series of agreements,
including an Investment Agreement and a Research and Development
Agreement whereby XTL will perform specific research activities using
XTL's proprietary technology for the development of future products for
the Company. Under the terms of the agreement, the Company issued
125,000 shares of Common Stock to XTL in 1996 in exchange for a
convertible note receivable, a warrant to purchase stock of XTL, and
approximately $1 million of product development services. The Company
converted the note receivable in 1998 (see Note 3). The warrants
expired in February 1999. The Company recorded research and development
expenses of $405,000 and $595,000 during 1997 and 1998, respectively,
related to the usage of the product development services.
F-20
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In March 1996, the Company executed a Subscription and Option Agreement
with Cira Technologies, Inc. ("Cira"), under which the Company received
a 10% equity interest in Cira and an option to increase its interest in
Cira by 15%. A former chairman of the Company is a director and
shareholder of Cira. In April 1998, the Company and Cira entered into a
restated Subscription and Option Agreement that terminated the March
1996 agreement. Under the new Subscription and Option Agreement, the
Company agreed to purchase additional shares of Cira stock for $.001
per share. The purchase of the additional shares by Neoprobe brings its
interest in Cira to 15% of the total, issued and outstanding, shares of
Cira common stock.
In March 1996, Neoprobe and Cira entered into a Technology Option
Agreement under which the Company provided financial, clinical, and
technical support to conduct a clinical study using Cira's HIV
technology. In return, Neoprobe received an option to acquire an
exclusive global license for Cira's technologies. The Company's total
financial commitment for this clinical study was capped at $500,000,
and the Company had the right to terminate the agreement upon review of
interim results of the clinical study. In April 1998, the Company and
Cira entered into a License and Option Agreement that replaced the 1996
agreement. Under the terms of the new License and Option Agreement, the
Company received an exclusive, worldwide, royalty-bearing license to
use Cira technology for the treatment of HIV-infected patients
including HIV-infected patients co-infected with other viruses. In
consideration for the license, the Company agreed to grant-back to Cira
its option to use Cira technology to treat chronic viral conditions,
and also to pay Cira up to $50,000 to fund research activities at Cira
as incurred.
In connection with the 1996 and 1998 Cira agreements, the Company has
incurred expenses of approximately $125,000, $239,000, and $337,000 for
the years ended December 31, 1996, 1997, and 1998, respectively,
including a total of $431,000 related to the HIV pilot study. No
royalties are due to Cira until the Company recovers out-of-pocket
expenditures for research and development through net sales of licensed
product, up to a maximum of $2 million. Subsequent to December 31,
1998, the Company and Cira have entered into negotiations to further
revise the terms of the Agreement.
In May 1996, the Company executed two license agreements with Dow,
whereby the Company was granted an exclusive license to technology
(including the right to sublicense) covered by patents held by Dow. In
exchange, the Company issued Dow 124,805 shares of Common Stock valued
at $2 million. The Company agreed to make payments to Dow following
achievement of certain development and commercial milestones by the
Company. In addition, if the Company sublicenses the technology, the
Company must pay Dow a certain percentage of all payments received by
the Company. A portion of the technology was used in the Company's RIGS
research and development initiatives. Accordingly, the $500,000
allocated to this portion of the technology was recorded as research
and development expense in 1996. During 1997, the Company determined
that due to specific clinical development achievements of competing
technology, $500,000 of the cost of this technology should be expensed
as research and development costs. At December 31, 1997, approximately
$1 million was included in intangible assets related to this technology
assets with alternative future uses. During the fourth quarter of 1998,
the Company determined, based on analysis of product failures for
similar technologies and unsuccessful attempts to market the technology
to other parties, that the remaining value of the technology was
impaired. Accordingly, the Company recorded an impairment charge of $1
million which is included in research and development for the year
ended December 31, 1998.
e. EMPLOYMENT: The Company has an employment agreement through December
31, 1998, with one executive officer which provides for restricted
stock purchase agreements. The agreement provides that the officer is
entitled to receive up to an aggregate of 75,000 shares of the
Company's Common Stock at par value subject to vesting provisions.
Vesting of the shares does not commence unless there is a change in
control of the Company, or under certain conditions of termination as
defined in the agreement. Of the unvested portion of the restricted
shares, 30,000 shares and 45,000 shares, will be forfeited no later
than June 4, 2006 and May 20, 2008, respectively. The Company has not
recognized any expense under the agreement due to the contingent nature
of the vesting provision and the risk of forfeiture.
F-21
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. LEASES:
The Company leases certain office and manufacturing equipment under capital
leases which expire on various dates through 2002. In December 1996, the
Company entered into a seventy-seven month operating lease agreement for
office space, commencing April 1, 1997.
The future minimum lease payments, net of sublease rental income, for the
years ending December 31 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- --------
1999 $106,787 $223,073
2000 91,301 205,129
2001 56,590 182,668
2002 14,148 177,201
2003 -- 119,417
-------- --------
268,826 $907,488
========
Less amount representing
interest 13,471
--------
Present value of net minimum
lease payments $255,355
Less current portion 99,539
--------
Capital lease obligations,
excluding current portion $155,816
========
The Company expects rental income from subleases of $59,620, $65,400,
$67,712, $70,652, and $48,291 in 1999 through 2003, respectively, based on
two subleases executed in December 1998 and February 1999, respectively.
Total rental expense was approximately $515,000, $660,000, and $529,000 for
the years ended December 31, 1996, 1997, and 1998, respectively.
13. 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 recorded expenses of $19,500, $57,300, and $41,644 related to
Common Stock to be contributed to the plan in 1996, 1997, and 1998,
respectively.
14. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:
The Company paid interest, net of amounts capitalized, aggregating $35,917,
$62,653, and $129,874 for the years ended December 31, 1996, 1997, and
1998, respectively.
During 1996, the Company issued Common Stock valued at a total of $5.7
million in exchange for license rights, a convertible note receivable,
warrants, and product development activities. During 1998, the note
receivable was converted into common stock in XTL (see Note 3). The Company
also incurred capital lease obligations of approximately $455,000 in 1997
to finance equipment.
15. CONTINGENCIES:
Pursuant to the Company's decision to liquidate Neoprobe Israel, management
of the Company believes Neoprobe Israel may be subject to claims from the
State of Israel, a bank, and various vendors (collectively, the
"Creditors"). The Company believes its only contractual obligation related
to Neoprobe Israel relates to the limited amount guarantee which is fully
secured through restricted cash and investments (see Note 5 (b)).
F-22
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
However, it is possible that the Creditors would seek to pursue claims
against the Company related to potential defaults on the part of Neoprobe
Israel 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
liabilities of Neoprobe Israel of approximately $6 million. Payment of such
an amount would deplete the Company's cash, and the Company might not be
able to continue operations. Management believes, based on advice from
counsel, that it is unlikely that parties would prevail if such claims were
brought against the Company. As such, no provision for such a contingent
loss has been recorded at December 31, 1998.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
16. LIQUIDITY:
The Company has experienced significant operating losses in each year since
inception, and had an accumulated deficit of approximately $115 million as
of December 31, 1998. For the years ended December 31, 1996, 1997 and 1998,
the Company's net losses were $21 million, $23.2 million and $28 million,
respectively. The Company expects operating losses to continue into 1999 as
the Company expends resources to continue development of the Company's
products and support the growth of the Company's manufacturing, sales and
marketing capabilities. However, there can be no assurance that the Company
will ever achieve a profitable level of operations. During 1998, the
Company made significant changes to its business plan as a result of
unfavorable feedback from regulatory authorities regarding marketing
applications for RIGScan CR49. The Company's previous business plan
involved the expenditure of significant amounts of funds to finance
research and development for the Company's RIGS and ACT initiatives. These
expenditures severely depleted the Company's cash position. As of December
31, 1998, the Company had cash and cash equivalents and available-for-sale
securities of $3.5 million. Of this amount, approximately $1.0 million is
pledged as security associated with the Company's revolving line of credit
and $1.0 million is restricted related to the debt outstanding under the
financing program for the construction of Neoprobe Israel. At December 31,
1998, the Company had access to approximately $1.5 million in unrestricted
funds to finance its operating activities for 1999.
The Company expects its revised business plan, which focuses on gamma
guided surgery products such as the Company's line of hand-held gamma
detection instruments, will result in increases in sales during 1999 that
will improve the Company's liquidity position. The revised plan also
significantly reduces operating expenses compared to the previous plan
which was heavily focused on drug research and development activities. The
Company is actively pursuing other sources of improving its projected
liquidity position for 1999. Potential sources of capital include, but are
not limited to, sale of non-strategic assets and raising of funds through
private security placements. However, there can be no assurances that the
Company will be able to raise funds on a timely basis, in the amounts
required, at terms acceptable to the Company, or at all. However, in the
first quarter of 1999, the Company issued convertible preferred stock in a
private placement raising gross proceeds of $3 million (see Note 17). The
Company is also attempting to sell approximately $1.5 million in
non-strategic assets. If the Company does not achieve its business plan as
currently intended, it may need to further modify its business plan and
consummate other financing alternatives which have been presented to the
Company. Such financing alternatives may require further sales of equity
securities that could be dilutive to current holders of common stock, debt
financing which may be on unfavorable terms, or asset dispositions that
could force the Company to further change its business plan.
17. SUBSEQUENT EVENTS:
a. PRIVATE PLACEMENT: On February 16, 1999, the Company executed a
Purchase Agreement (the "Agreement") to complete the private placement
of 30,000 shares of 5% Series B Convertible Preferred Stock (the
"Series B") for gross proceeds of $3 million ($2.8 million, net). The
Series B have a $100 per share stated value and is convertible into
Common Stock of the Company. In connection with the private placement,
the Company also issued 2.9 million warrants to purchase Common Stock
of the Company at an initial exercise price of $1.03 per share.
The Company is required to pay a cumulative 5% annual dividend on the
Series B. Dividends accrue daily and are payable on each six-month and
one year anniversary of the initial closing. Neoprobe has the option of
paying these dividends in cash or in shares of Common Stock. On any day
the Common Stock trades below $0.55 per share, the annual dividend rate
will be 10%.
Generally, each share of the Series B may be converted, at the option
of the owner, into the number of shares of Common Stock calculated by
dividing the sum of $100 and any unpaid dividends on the share of
Series B by the conversion price. The initial conversion price of the
Series B sold is $1.03 per share of Common Stock. If, on February 16,
2000, the market value of Common Stock is less than $1.03, the
conversion price will be reset to the market value of a share on
February 16, 2000, but not less than $0.515. If the market value of
Common Stock is less than $1.03, the conversion price will be the
average of the three lowest closing bid prices for a share of Common
Stock during the previous 10 trading days. The Company may refuse to
convert a share of Series B that the Company sold if its conversion
price is less than $0.55. However, if the conversion price of a share
is less than $0.55 for more than 60 trading days in any 12-month
period, then the Company must either convert a share at the share's
conversion price or pay the owner cash based on the highest closing
price for Common Stock during the period from the date of the owner's
conversion request until the payment. The conversion price may also be
adjusted to prevent dilution of the economic interests of the owners
of Series B in the event certain other equity transactions are
consummated by the Company. The exercise price of the warrants is also
subject to adjustment based on terms defined in the Agreement, subject
to a floor price of $0.62 per share.
Holders of the Series B have certain liquidation preferences over other
shareholders under certain provisions as defined in the Agreement and
have the right to cast the same number of votes as if the owner had
converted on the record date.
Under the terms of the Agreement, the Company is not required to issue
shares of Common Stock representing more than 20% of the total number
of outstanding shares of Common Stock without shareholder approval or
if such issuance would violate the rules of the National Association of
Securities Dealers. If further issuances of shares of Common Stock upon
conversion of the Series B would violate those rules, then Neoprobe
will redeem the shares for cash instead of converting the shares to
Common Stock.
Under certain conditions, the Company may be obligated to redeem
outstanding shares of Series B for $120 per share. Conditions under
which redemption may be required include: failure to obtain stockholder
approval of the transaction, failure to meet filing deadlines for a
registration statement for Common Stock into which the Series B may be
converted, failure to keep the aforementioned registration statement
effective for three years, a material breach of the purchase agreement,
delisting from the NASDAQ Stock Market, a material qualification of the
audit opinion on the consolidated financial statements, or if the
Company is liquidated, merged, or sells significantly all of its
assets. The Company has obtained a waiver from the holders of the
Series B of the redemption requirements associated with the issuance by
the Company's auditors of a going concern opinion on the Company's
consolidated financial statements for the year ended December 31, 1998.
The Company also has the right to place an additional 30,000 shares of
Series B and warrants to purchase a like amount of Common Stock for $3
million on the achievement of certain quarterly sales milestones, as
defined in the agreement, stock price targets, and subject to
stockholder approval. The conversion price for the Series B for the
subsequent placement, as well as the exercise price for the related
warrants, will be based on the market prices of the Company's Common
Stock prior to the subsequent closing Series B and warrants for Common
Stock sold in a subsequent closing would also be subject to price and
dilution adjustments similar to the terms of the initial closing.
Pursuant to the private placement, the Company signed a financial
advisory agreement with the placement agent providing the agent with
the right to purchase 1,500 shares of Series B convertible into Common
Stock, initially at $1.03 per share, and warrants to purchase 145,631
shares of Common Stock of the Company initially exercisable at $1.03
per share. In addition, the Company agreed to pay the agent a monthly
financial advisory fee and success fees based on certain investment
transactions consummated during the 24-month term of the agreement.
The Series B will be recorded 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 balance sheet. The financing cost and warrants will be
accreted against additional paid-in capital-common stock if an event of
redemption is assessed as probable at the balance sheet date. The
calculated conversion price at February 16, 1999, the first available
conversion date, was $1.03 per share. In accordance with the FASB's
Emerging Issue Task Force Topic D-60, the difference between this
conversion price and the closing market price of $1.81 will be
reflected as incremental yield to preferred stockholders in the
Company's loss per share calculation for the quarter ended March 31,
1999.
b. MARKETING AGREEMENTS: On January 29, 1999, the Company provided EES
with notice of the Company's intent to terminate the Agreement
effective March 1, 1999.
Effective February 1, 1999, the Company executed a Sales and Marketing
Agreement with KOL Bio-Medical Instruments, Inc. ("KOL") to market the
Company's current and future gamma guided surgery products in the U.S.
In exchange for marketing and selling the products and providing
customer training, KOL will receive commissions on net sales of
applicable products and milestone payments on the achievement of
certain levels of product sales. The term of the agreement is
F-23
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
indefinite with provisions for both parties to terminate with a minimum
of six months notice under certain conditions such as non-performance
or without cause. However, if terminated by the Company without cause
or because of a change of control of the Company, KOL is entitled to
receive a termination fee of 15% based on monthly net sales for a
maximum of twenty-four months, and the Company is required to buy back,
at a discount, demonstration units purchased by KOL during the
nine-month period preceding termination.
F-24
63
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
NEOPROBE CORPORATION
-----------------------
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1998
-----------------------
EXHIBITS
-----------------------
===============================================================================
64
EXHIBIT INDEX
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
3.1. Complete Restated Certificate of Incorporation of
Neoprobe Corporation, as corrected and as amended 25 71
---
3.2. Amended and Restated By-Laws, as amended 15 *
---
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the
Restated Certificate of Incorporation of Registrant 25 71
---
4.2. See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated
By-Laws of the Registrant 13 *
---
4.3. Rights Agreement dated as of July 18, 1995 between
the Registrant and Continental Stock Transfer & Trust
Company. 47 *
---
4.4. Amendment Number 1 to the Rights Agreement
between the Registrant and Continental Stock Transfer
& Trust Company dated February 16, 1999. 3 96
---
10.1.1.-10.1.24. Reserved
10.1.25. Rights Agreement between the Registrant and
Continental Stock Transfer & Trust Company dated as
of July 18, 1995. 47 *
---
10.1.26.-10.1.30. Reserved 18 *
---
10.1.31. Amendment Number 1 to the Rights Agreement
between the Registrant and Continental Stock Transfer
& Trust Company dated February 16, 1999. 3 96
---
10.1.32. Preferred Stock and Warrant Purchase Agreement
dated February 16, 1999 among the Registrant, The
Aries Master Fund, a Cayman Island exempted
company, and The Aries Domestic Fund, L.P. 44 99
---
10.1.33. Warrant dated February 16, 1999 for the purchase of
shares to purchase Common Stock issued to The Aries
Master Fund, a Cayman Island exempted company.
This exhibit is one of two substantially identical
instruments and is accompanied by a schedule
identifying the other instrument omitted and setting
forth the material details in which such instrument
differs from the one filed herewith. 11 130
---
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.
65
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
10.1.34. Option Units dated February 16, 1999 for the purchase
of shares of 5% Series B Convertible Preferred Stock
of the Registrant and warrants to purchase shares of
Common Stock issued to Paramount Capital, Inc. 15 140
---
10.1.35. Financial Advisory Agreement dated February 16,
1999 between the Registrant and Paramount Capital,
Inc. 8 153
---
10.1.36. Letter agreement dated February 24, 1999 among the
Registrant, The Aries Master Fund, a Cayman Island
Exempted Company and The Aries Domestic Fund,
L.P. 2 160
---
10.1.37. Letter agreement dated March 12, 1999 among the
Registrant, The Aries Master Fund, a Cayman Island
Exempted Company and The Aries Domestic Fund, L.P. 2 162
---
10.1.38. Letter agreement dated April 1, 1999 among the
Registrant, The Aries Master Fund, a Cayman Island
Exempted Company, and The Aries Domestic Fund, L.P. 3 164
---
10.2.1.-10.2.14. Reserved
10.2.15. Option Agreements between the Registrant and David
C. Bupp 17 *
---
10.2.16.-10.2.17. Reserved
10.2.18. Non-Qualified Stock Option Agreement dated May 3,
1993 between the Registrant and David C. Bupp 4 *
---
10.2.19.-10.2.20. Reserved
10.2.21. Non-Qualified Stock Option Agreement dated May 3,
1993 between the Registrant and John L. Ridihalgh 4 *
---
10.2.22. Reserved
10.2.23. Non-Qualified Stock Option Agreement dated
February 28, 1992 and amended and restated June 3,
1993 between the Registrant and David C. Bupp 4 *
---
10.2.24. Non-Qualified Stock Option Agreement dated July 1,
1990 and amended and restated June 3, 1993 between
the Registrant and David C. Bupp 4 *
---
10.2.25. Non-Qualified Stock Option Agreement dated June 1,
1992 and amended and restated June 3, 1993 between
the Registrant and John L. Ridihalgh 4 *
---
10.2.26. Amended and Restated Stock Option and Restricted
Stock Purchase Plan dated March 3, 1994 11 *
---
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.
66
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
10.2.27.-10.2.28. Reserved.
10.2.29. Non-Qualified Stock Option Agreement dated February 16,
1995 between the Registrant and John L.
Ridihalgh 3 *
---
10.2.30. Non-Qualified Stock Option Agreement dated
February 16, 1995 between the Registrant and
David C. Bupp 3 *
---
10.2.31. Employment Agreement dated as of January 1, 1996
between the Registrant and John L. Ridihalgh 7 *
---
10.2.32.-10.2.33 Reserved.
10.2.34. Restricted Stock Purchase Agreement dated June 5,
1996 between the Registrant and John L. Ridihalgh 4 *
---
10.2.35. Restricted Stock Purchase Agreement dated June 5,
1996 between the Registrant and David C. Bupp 4 *
---
10.2.36. Reserved.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as
amended March 13, 1997
21 *
---
10.2.38. Non-Qualified Stock Option Agreement dated January
18, 1996 between the Registrant and John L. Ridihalgh 3 *
---
10.2.39. Non-Qualified Stock Option Agreement dated January
18, 1996 between the Registrant and David C. Bupp 3 *
---
10.2.40. Non-Qualified Stock Option Agreement dated
February 3, 1997 between the Registrant and John L.
Ridihalgh 3 *
---
10.2.41. Non-Qualified Stock Option Agreement dated
February 3, 1997 between the Registrant and David C.
Bupp 3 *
---
10.2.42. Reserved.
10.2.43. Agreement, Release, and Waiver dated February 23,
1998 between the Registrant and Dr. William
Eisenhardt. 7 *
---
10.2.44. Employment Agreement dated as of January 1, 1998
between the Registrant and David C. Bupp. 7 *
---
10.2.45. Restricted Stock Purchase Agreement between David
C. Bupp and the Registrant dated May 20, 1998. 3 *
---
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.
67
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
10.2.46. Waiver by David Bupp dated February 16, 1999 of
certain provisions in the employment agreement
between the Registrant and David C. Bupp dated
January 1, 1998. 1 167
---
10.2.47. Severance Agreement dated October 23, 1998 between
the Registrant and Matthew F. Bowman. This
agreement is one of three substantially identical
agreements and is accompanied by a schedule
identifying the other agreements omitted and setting
forth the material details in which such documents
differ from the one that is filed herewith. 4 168
---
10.2.48. Restricted Stock Agreement dated October 23, 1998
between the Registrant and Matthew F. Bowman. This
agreement is one of three substantially identical
agreements and is accompanied by a schedule
identifying the other agreements omitted and setting
forth the material details in which such documents
differ from the one that is filed herewith. 4 173
---
10.2.49. Separation Agreement dated October 21, 1998
between the Registrant and John L. Ridihalgh. 9 176
---
10.3.1. Technology Transfer Agreement dated July 29, 1992
between the Registrant and The Dow Chemical
Corporation (subject to an order granting portions
thereof confidential treatment) 15 *
---
10.3.2.-10.3.29. Reserved.
10.3.30. Facility Agreement dated July 17, 1995 among
Registrant, Neoprobe (Israel) Ltd., and Rotem
Industries, Ltd. (subject to an order granting portions
thereof confidential treatment) 12 *
---
10.3.31. Cooperative Research and Development Agreement
between Registrant and National Cancer Institute 67 *
---
10.3.32. First Amendment to Facility Agreement dated July 17,
1995 among Registrant, Neoprobe (Israel), Ltd. and
Rotem Industries, Ltd. 1 *
---
10.3.33.-10.3.34. Reserved.
10.3.35. Investors' Rights Agreement dated February 5, 1996
between Registrant and XTL Biopharmaceuticals, Ltd 19 *
---
10.3.36. Reserved.
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.
68
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
10.3.37. Research and Development Agreement dated
February 13, 1996 between Registrant and XTL
Biopharmaceuticals, Ltd. (subject to an order granting
portions thereof confidential treatment) 14 *
---
10.3.38. Sublicense Agreement dated February 13, 1996
between Registrant and XTL Biopharmaceuticals, Ltd.
(subject to an order granting portions thereof
confidential treatment) 8 *
---
10.3.39.-10.3.44. Reserved.
10.3.45. License dated May 1, 1996 between Registrant and
The Dow Chemical Company 9 *
---
10.3.46. License Agreement dated May 1, 1996 between Registrant
and The Dow Chemical Company(subject to an order granting
portions thereof confidential
treatment) 27 *
---
10.3.47. License and Option Agreement between Cira
Technologies, Inc. and Neoprobe Corporation dated
April 1, 1998. 32 *
---
10.3.48. Restated Subscription and Option Agreement between
the Registrant, Cira Technologies, Inc., Richard G.
Olsen, John L. Ridihalgh, Richard McMorrow, James
R. Blakeslee, Mueller & Smith, Ltd., Pierre Triozzi
and Gregory Noll, dated April 17, 1998. 12 *
---
10.3.49. Restated Stockholders Agreement with the Registrant,
Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee,
Mueller & Smith, Ltd., Pierre L. Triozzi and Gregory
Noll, dated April 17, 1998. 5 *
---
10.4.1.-10.4.15. Reserved
10.4.16. Project Management Agreement dated May 17, 1995
between Neoprobe (Israel) Ltd. and BARAN Project
Construction Ltd. 6 *
---
10.4.17.-10.4.21. Reserved.
10.4.22. Sales and Marketing Agreement dated April 21, 1998
between the Registrant and Ethicon Endo-Surgery,
Inc., an Ohio corporation (subject to an order granting
portions thereof confidential treatment) 13 *
---
10.4.23. Loan Agreement between the Registrant and Bank
One, NA, dated April 16, 1998 (incorporated by
reference to Exhibit 10.4.23 to the 2nd Quarter 1998
Form 10-Q). 13 *
---
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.
69
EXHIBIT Number of Pages Page in Manually
NUMBER Description in Original Document+ Signed Original
10.4.24. Variable Rate Cognovit Promissory Note, dated April
16, 1998, issued by Registrant to Bank One, NA. 10 *
---
10.4.25. Security Agreement between the Registrant and Bank
One, NA, dated April 16, 1998. 5 *
---
10.4.26. Letter amendment dated October 14, 1998 to the Sales
and Marketing Agreement dated April 21, 1998
between the Registrant and Ethicon Endo-Surgery,
Inc., an Ohio corporation (subject to an order granting
portions thereof confidential treatment) 2 *
---
10.4.27. Promissory Note, dated September 25, 1998, issued by
Registrant to Bank One, NA. 2 *
---
10.4.28. Addendum to Promissory Note dated September 25,
1998 issued by Registrant to Bank One, NA. 6 *
---
10.4.29. Covenant Agreement dated September 25, 1998
between the Registrant and Bank One, NA. 3 *
---
10.4.30. Assignment of Deposit Account dated September 25,
1998 between Registrant and Bank One, NA. 4 *
---
10.4.31. Asset Purchase Agreement dated October 14, 1998
between the Registrant, Neoprobe AB, a corporation
organized and existing under the laws of Sweden, and
Bioinvent Production AB, a corporation organized and
existing under the laws of Sweden. 8 *
---
10.4.32. Supply Agreement between the Registrant and eV
Products dated December 8, 1997 (filed pursuant to
Rule 24b-2 under which the Registrant has requested
confidential treatment of certain portions of this
Exhibit). 17 185
---
11.1. Computation of Net Loss Per Share 1 203
---
21.1. Subsidiaries of Registrant 1 204
---
23.1. Consent of PricewaterhouseCoopers LLP 1 205
---
23.2. Consent of KPMG LLP 1 206
---
24.1. Powers of Attorney 9 207
---
24.2. Certified resolution of the Registrant's Board of
Directors authorizing officers and directors signing on
behalf of the Company to sign pursuant to a power of
attorney 1 215
---
- -------------------
+ The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($.50) a page.
* Incorporated by reference.