Form 10KSB for PROTEIN POLYMER TECHNOLOGIES, INC., filed on March 27,
1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of Principal Executive Offices)
Issuer's Telephone Number: (619) 558-6064
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Redeemable Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were $755,751.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 17, 1997 was $17,059,000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 17, 1997, 9,141,228
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed no later than April 30, 1997 pursuant to
Regulation 14A with respect to the Registrant's 1996 Annual Meeting of
Stockholders (incorporated by reference in Part III).
Transitional Small Business Disclosure Format: Yes No X
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PROTEIN POLYMER TECHNOLOGIES, INC.
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FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page No.
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PART I.......................................................................... 2
Item 1. Business............................................................. 2
Item 2. Properties........................................................... 12
Item 3. Legal Proceedings.................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................. 13
PART II......................................................................... 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 15
Item 7. Financial Statements................................................. F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 18
PART III........................................................................ 18
Items 9, 10, 11 and 12 - Incorporated by Reference
Item 13. Financial Statements, Exhibits and Reports on Form 8-K............... 18
Signatures.................................................................... 21
i
PART I
Item 1. Business
Company Background
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the
Company"), is a development-stage biotechnology company engaged in the research,
development and production of proprietary protein-based biomaterials with
targeted applications in biomedical and specialty use markets. Since 1992, the
Company has primarily focused on developing materials technology and products to
be used in the surgical repair of tissue: tissue adhesives and sealants; wound
healing materials; and surgical adhesion barriers. The Company has also
developed technology that can efficiently modify and improve the surface
properties of traditional synthetic polymers used in the fabrication of
biomedical products. A common goal is to develop materials that beneficially
interact with human cells, enabling cell growth and the regeneration of tissues
with improved outcomes as compared to current products and practices.
Since late 1994, the Company has concentrated predominantly on the
development of its surgical tissue adhesive and sealant technology. As part of
this effort, the Company targeted the establishment of a strategic alliance with
a market leader in the field of surgical wound closure products, leading to the
execution of comprehensive license, supply, and development agreements in
September, 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). While PPTI continues to concentrate its development
efforts in this area, in late 1996 the PPTI initiated studies to identify its
most promising soft tissue augmentation product candidates for use in cosmetic
and reconstructive surgery. This product application is an extension of the
biomaterials platform developed in the tissue adhesives and sealants program.
The Company, to the extent resources are available, is researching the use of
its protein polymers for other surgical tissue repair and medical device
applications, including the potential development of delivery devices for the
targeted, controlled release of drugs to various body tissues.
Specialty use products currently being marketed by the Company include
SmartPlastic(TM) and ProNectin(R) F Cell Attachment Factor. ProNectin F was
launched commercially in 1991. SmartPlastic is ProNectin F Activated Cultureware
where ProNectin F is presented in ready to use form on the surfaces of
disposable plastic labware for culturing human and animal cells. SmartPlastic
was launched commercially in late 1994.
Prior to 1992, the Company's scientists had successfully demonstrated the
ability to create and produce novel protein polymer materials having important
physical, biological and chemical properties. During this period, most of the
Company's efforts were dedicated to supplying E. I. DuPont de Nemours & Co.
("DuPont") with materials under contract for its proprietary research and
testing purposes.
In early 1992, the Company raised approximately $8.9 million through its
initial public offering of common stock and redeemable warrants. The Company
used a major portion of these proceeds to generate substantive in vitro
laboratory evidence and in vivo animal test data demonstrating the
biocompatibility and performance of its protein polymers and derived
biomaterials, and to establish a materials science group which has developed
important materials modification and fabrication technology. In July 1994 the
Company raised approximately $2.1 million from the sale of its unregistered
Series C Preferred Stock to private investors. In September 1995, and related
to the signing of various development agreements with Ethicon, the Company
raised approximately $2.4 million from the sale of its unregistered Series D
Preferred Stock to the same private investors. Also at this time these
investors exchanged all of their holdings of Series C Preferred Stock and
accumulated dividends into Series D Preferred Stock.
2
The Company's Technology
Biomaterials are materials that are used to direct, supplement, or replace
the functions of living systems. The interaction between materials and living
systems is dynamic and involves the response of the living system to the
materials (e.g., an immune response) and the response of the materials to the
living system (e.g., degradation). This biological performance requirement has
been a critical factor in limiting the myriad of possible metal, polymer, and
ceramic compositions to a relatively small number that to date have been proven
useful as medical devices.
The goal of biomaterials development historically has been to produce inert
materials -- materials that elicit little or no response from the living system.
However, the Company believes that such conventional biomaterials are
constrained by their inability to convey appropriate messages to the cells which
surround them -- the same messages that are conveyed by proteins in normal human
tissues.
PPTI is focused on developing a new generation of biomaterials which are
recognized and accepted by human cells for directing their growth and,
ultimately, the regeneration of tissues. The Company believes that the
successful development of such biomaterials could substantially expand the role
that artificial devices can play in the prevention and treatment of human
disability and disease and enable the culture of native tissues for successful
reimplantation.
Through its proprietary core technology, the Company produces high
molecular weight polymers than can be processed into a variety of materials
forms such as gels, sponges, films, and fibers, with their physical strength and
rate of resorption tailored to each potential product application. These
polymers are constructed of the same amino acids as natural proteins found in
the body. The Company has demonstrated that its polymers can mimic the
biological and chemical functions of natural proteins, such as the attachment of
cells through specific membrane receptors and the bonding of tissues by
enzymatic cross-linking, thus overcoming a critical limitation of conventional
biomaterials. In addition, in animal tests the Company has conducted its
polymers have demonstrated excellent biocompatibility.
These attributes of PPTI's protein polymers are achieved by combining the
advantages of both modern biotechnology and traditional polymer science. The
techniques of biotechnology are used to create synthetic genes which direct the
biological synthesis of protein polymers in recombinant microorganisms. The
design concepts of traditional polymer science are used to create novel
materials for specific applications by combining the properties of individual
"building block" components.
In contrast to natural proteins, either isolated from natural sources or
produced using traditional genetic engineering techniques, PPTI's technology
results in the creation of new proteins with unique properties. PPTI has
demonstrated its capability to create materials that:
. combine properties of different proteins found in nature;
. reproduce and amplify selected activities of natural proteins;
. eliminate undesired properties of natural proteins; and
. incorporate synthetic properties via chemical modifications.
This capability is fundamental to PPTI's current primary product research
and development focus -- tissue repair and regeneration. Tissues are highly
organized structures made up of specific cells arranged in relation to an
extracellular matrix ("ECM"), which is principally composed of proteins. The
behavior of cells is determined largely by their interactions with the ECM.
Thus, through the ability to structure a cell's ECM environment, the cell's
activity can be controlled though the protein messages it receives. Similar to
what nature has demonstrated to be essential in creating, maintaining and
restoring the body's functions, PPTI's patented core technology enables messages
that direct activities of cells to be precisely formulated and presented in a
structured environment.
3
Product Candidates and Anticipated Markets
The Company's technology and materials have the potential to create
products and product applications in a variety of medical and specialty use
markets. Although the Company's current development efforts are principally
focused on tissue sealants and adhesives, efforts are also now being applied to
the development of gels for soft tissue augmentation. Additionally, PPTI
continues to evaluate opportunities for research and development of product
candidates for other medical and specialty uses. With the exception of the use
of ProNectin F for in vitro cell culture, all of the Company's product
candidates are in early stages of research and development.
The actual development of other product candidates, if any, will depend on
a number of factors, including: the availability of funds required to research,
develop, test and obtain necessary regulatory approvals; the anticipated time to
market; the potential revenues and margins that may be generated if a product
candidate is successfully developed and commercialized; and the Company's
assessment of the potential market acceptance of a product candidate.
Each of PPTI's principal targeted markets, and related product candidates,
are set forth below. There can be no assurance that such research and
development efforts will be successful or that any products, if developed, could
be effectively marketed or produce significant revenues. Further, additional
scientific progress depends upon the Company's ability to raise significant
amounts of additional capital (see "Management Discussion and Analysis -
Liquidity and Capital Resources", Item 6, below).
Tissue Adhesives and Sealants
Every surgical operation requires closure of a wound site. Current wound
closure techniques depend primarily on sutures and, in some applications,
staples. The principal inherent limitations with sutures and staples in certain
procedures are: lack of hemostatic and sealant properties to prevent fluid loss;
the length of time and difficulty in closing the wound site; and the need for
post-operative removal.
Certain tissue adhesives and sealants that seek to avoid these limitations,
such as fibrin glues and cyanoacrylates, have been developed and marketed
outside the United States. However, these adhesives and sealants have not been
approved by the FDA for domestic use in humans. Additionally, the Company
believes that these adhesives and sealants have their own limitations: fibrin
glues are derived from human and animal blood products, set slowly and have low
strength; cyanoacrylates that set fast and have high strength are toxic to
certain tissues, which have limited their use to date to bonding the outer
surfaces of skin together.
The Company is seeking to develop tissue adhesives and sealants that
combine the biocompatibility of fibrin glues (without the risks associated with
use of blood-derived products) with the high strength and desired setting times
of cyanoacrylates. The Company has successfully demonstrated the feasibility of
two different proprietary approaches to achieving biocompatibility, desired
strength and accelerated setting time.
In September 1995 PPTI entered into a licensing and development agreement
and a supply agreement with Ethicon regarding this program. (See "Collaborative
Agreements" section, below.) Tests performed by Ethicon have confirmed the
potential suitability of the Company's approach. Ethicon and the Company have
agreed to extend the time available for further development of candidate tissue
adhesives and sealants and, correspondingly, Ethicon's acceptance of such
candidates for clinical development, until December 14, 1997.
4
Soft Tissue Augmentation
Conditions where there is a need to augment the body's soft tissues include
both cosmetic and medical applications. In the former, for example, current
procedures include the injection of collagen-based materials to smooth out
facial wrinkles, acne scars and to modify lip contours. The latter segment
includes the repair of tissue defects associated with tumor removal, congenital
deformities, trauma, degenerative diseases and stress incontinence. PPTI
believes there is a lack of materials with suitable properties for these
applications, principally because materials having the required durability in
vivo either lack the requisite biocompatibility or the ability to be easily
applied.
The Company has developed protein polymers that demonstrate excellent
biocompatibility, are soluble in water at room temperature, and are easily
injected into body tissues, forming soft, durable gels at body temperature.
Previously, PPTI has shown gels to have persisted at least 18 months in an
animal model. Currently, the Company is conducting studies to identify specific
product formulations for the most attractive clinical indications.
Subsequently, formal preclinical testing will be initiated to obtain FDA
approval for beginning human clinical testing.
Wound Healing Matrices
The current market for wound care products is highly segmented, involving a
variety of different approaches to wound care. Products currently marketed and
being developed by third parties include fabric dressing (such as gauze),
synthetic materials (such as polyurethane films) and biological materials (such
as growth factors and living tissue skin graft substitutes). While the type of
product varies depending on the type of wound and extent of tissue damage, the
Company believes that a principal treatment goal in all instances is to
stimulate wound healing while regenerating functional (as opposed to scar)
tissue.
The Company has developed protein polymers which it believes may be useful
in the treatment of dermal wounds, particularly chronic wounds such as
decubitous ulcers, where both reconstruction of the ECM and re-establishment of
its function are desired. These polymers, based on key ECM protein sequence
blocks, are biocompatible, fully resorbable and have been processed into gels,
sponges, films and fibrous sheets. The Company believes that such materials, if
successfully developed, could improve the wound-healing process through their
inherent properties, as delivery systems for growth factors, and as scaffolds
for the production of living tissue skin graft substitutes. This program is in
the early stages of research.
Surgical Adhesion Barriers
Adhesions are essentially the formation of unwanted bonds or scar tissue,
occurring when surgically manipulated tissues are healing. They are a common
surgical complication causing post-operative discomfort and disability.
Adhesions occur in almost two out of three abdominal procedures, and if bowel
obstruction results, surgical repair is needed. Infertility can result from
adhesions, which occur in over 50% of gynecological procedures. A successful
anti-adhesion product has the potential of both reducing the cost of medical
care by reducing the number of necessary second surgeries, and easing the
suffering of surgical patients.
Two anti-adhesion products are currently marketed in the U.S., but their
efficacy is limited. The Company believes that other adhesion barrier products
currently in development are promising, but as with the currently marketed
products, have properties which may constrain their use -- rapid resorption by
the body and limited mechanical strength. PPTI has developed biocompatible
films from protein polymers that are "tough" and whose resorption by the body
can be controlled. In vivo studies of these protein polymer films have
demonstrated their ability to block cellular adhesions. The Company is working
to determine the clinical indications where its potential products would have
the greatest advantage versus competing technologies, so as to better focus
further research efforts.
5
Controlled Release Drug Delivery
Oral delivery of drugs is the most preferred route of administration.
However, for many drugs this is not possible and alternative drug delivery
routes are required. Alternative routes include transdermal, mucousal, and by
implantation or injection. For implantation or injection, it is often desirable
to extend the availability of the drug in order to minimize the frequency of
these invasive procedures. Materials exist, and in a few instances been
commercialized, which act as depots for a drug when implanted or injected,
releasing the drug over periods ranging from one month to several years. Other
material and drug combinations are being developed by third parties. PPTI
believes that the properties of these materials for such applications can be
substantially improved upon, making available the use of depot systems for a
wider range of drugs and applications.
The Company has developed unique and proprietary protein polymer material
systems that function as drug depots and can be implanted or injected. They
exhibit exceptional biocompatibility, provide for control over their rate of
resorption in the body, and are fabricated using aqueous solvent systems at low
temperatures -- attributes which can be critical in maintaining the activity of
the drug, particularly protein-based drugs emerging from the biotechnology
industry.
PPTI is collaboratively exploring the targeted delivery of FDA-approved
analgesic drugs in a controlled release format directly to nerve tissue for the
relief of chronic pain. Due to their particularly powerful and sometimes
addictive nature, such drugs are typically delivered by frequent injections of
relatively low dosage. PPTI's targeted approach may avoid systemic release of
these powerful drugs, thus potentially allowing for the delivery of a more
potent payload of pain-killer over a substantially longer time frame. Other
collaborations are also being considered.
Cell Culture Products
The market for products used to culture mammalian cells encompasses the
production of pharmaceuticals and vaccines, ex vivo cell therapy, and basic and
applied research on the cellular mechanisms of human and animal development and
disease. The common element is the need to culture cells outside the body in an
artificial, controlled environment. With the culture of many types of mammalian
cells, fetal bovine serum, animal sera factors or attachment factors must be
added to the culture medium or coated on the culture surface to enable cells to
attach and spread, initiating cell growth.
Unlike standard tissue culture treated labware, these products primarily
present to cells the RGD cell attachment ligand (protein sequence) of the serum
protein fibronectin, which is an essential requirement for the growth, proper
morphology and fully-differentiated function of many different cells. However,
the Company believes that there are disadvantages to using such products which,
depending on the application, result in variable performance, lack of storage
stability, undesirable contaminants, excessive media protein, high costs and
lost time.
PPTI developed ProNectin F to address these limitations. This product
presents multiple copies of the RGD ligand within a chemically and thermally
stable protein polymer. ProNectin F is free of animal-derived contaminants and
has a long shelf-life. Moreover, tests conducted by third parties and the
Company confirm that, compared with standard tissue culture treated labware,
labware coated with ProNectin F enhances the cell attachment process.
Since March 1991 the Company has commercially marketed ProNectin F as a
cell culture reagent for use by cell biologists and cell culture laboratories.
In December 1994 the Company launched SmartPlastic, where ProNectin F is
presented on the surfaces of disposable plastic labware in ready to use form for
culturing human and animal cells. To date, the Company has generated over
$450,000 in revenues and license fees from the marketing of these products. The
6
Company is seeking new marketing and distribution alliances to increase the
sales of the product line and to support the development of new products and
formats.
Manufacturing, Marketing and Distribution
ProNectin F
PPTI currently produces ProNectin F in its laboratory facilities, and
believes its current production facilities are sufficient for the anticipated
demand of ProNectin F in the foreseeable future. The Company markets and
distributes ProNectin F and SmartPlastic directly and through foreign and
domestic distribution arrangements.
Biomedical Product Candidates
To date, PPTI has manufactured limited amounts of its biomedical materials
and products for internal testing and, in certain cases, evaluation and testing
by corporate partners and other third parties. Preclinical and clinical testing
of potential medical device products, where the results will be submitted to the
United States Food and Drug Administration ("FDA"), requires compliance with the
FDA's Good Laboratory Practices ("GLP"). The Company is currently working to
implement polymer production and quality control procedures, including certain
facilities renovations, to conform to GLP requirements. It is anticipated that
these efforts will be sufficient for supplying a number of development programs
with the required quality and quantity of materials needed for preclinical and
clinical testing.
In addition, the Company is considering alternative methods for increasing
production of its biomedical and other product candidates to meet clinical and
commercial requirements. For example, the Company may expand its existing
facility to produce needed quantities of materials under FDA's Good
Manufacturing Practice ("GMP") regulations for clinical and commercial use.
However, there can be no assurance that, if desired, the Company could
adequately develop, fund, implement and manage such a manufacturing facility.
Alternatively, the Company may establish external contract manufacturing
arrangements for needed quantities; however, there can be no assurance that such
arrangements, if desired, could be entered into or maintained on acceptable
terms, if at all, or that the existence or maintenance of such arrangements
would not adversely affect the Company's margins or its ability to comply with
applicable governmental regulations. The actual method, or combination of
methods, that the Company may ultimately pursue will depend on a number of
factors, including availability, cost, and the Company's assessment of the
ability of such production methods to meet its commercial objectives.
The development and commercialization of certain biomedical products will
require the Company, pursuant to applicable governmental regulations, to upgrade
its manufacturing facilities and to obtain manufacturing approvals from the FDA
(see "Regulatory Matters", below).
The Company currently expects that its initial biomedical products, if any
are developed, would be marketed and distributed by a corporate partner. While
this arrangement would minimize the Company's marketing costs and facilitate
wider distribution of any biomedical products it may develop, these arrangements
may adversely affect the Company's profit margins with respect to these
products.
Research and Development
Information regarding Company-sponsored research and development activities
and contract research and development revenue is set forth below under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
7
Collaborative Agreements
Because of the highly technical focus of its business, the Company must
conduct extensive research and development prior to any commercial production of
its biomaterials. During this development stage, PPTI's ability to generate
revenues is limited. Because of this limitation, the Company does not have
sufficient resources to devote to extensive testing or marketing of its
products. The Company's primary method of expanding its product development,
testing and marketing capabilities is to form collaborative arrangements with
selected corporate partners with specific resources that the Company believes
complement its business strategies and goals.
The Ethicon Agreements
In September 1995 PPTI entered into a licensing and development agreement
and a supply agreement with Ethicon regarding its tissue adhesives and sealants
program. Under these agreements, Ethicon receives exclusive worldwide
development, marketing and distribution rights to such products under PPTI's
proprietary technology rights in exchange for contract research and development
payments, milestone fees, and manufacturing and royalty payments to PPTI. The
market for such products is considered large and potentially could replace the
use of sutures and staples in certain surgical procedures.
A total of almost $11 million could be paid to PPTI under these agreements;
$1.4 million has been received through December 31, 1996. The payments are
contractually segregated into two categories --ongoing research efforts and
milestone payments. A first milestone payment to the Company is due upon
achieving product candidate acceptance, which is determined solely by Ethicon,
and could range from $1.4 million to $1.9 million, depending on whether both an
adhesive candidate and a sealant candidate were accepted. Ethicon and the
Company have agreed to extend the time available for further development of
candidate tissue adhesives and sealants and, correspondingly, Ethicon's
acceptance of such candidates for clinical development, until December 14, 1997.
Although the Company believes it can develop suitable product candidates before
this date, there can be no assurance that it will actually do so, or that if it
does, Ethicon will accept such product candidates. In conjunction with this
extension, Ethicon committed additional funds to support the ongoing R & D
efforts. Subsequent to candidate acceptance, and during the ensuing year,
research payments of from $1.3 million to $1.7 million may be received; and from
$500,000 to $800,000 may be received in the year following that. Additional
milestone payments of from $575,000 to $1,075,000 would be received upon
initiation of clinical trials, from $750,000 to $1,375,000 upon filing of a PMA,
and from $1.0 million to $2.0 million upon FDA approval.
In addition to receiving a royalty on worldwide product sales, PPTI also
retains the option of manufacturing both the protein polymer component and a
portion or all of the final product. However, there is no guarantee that
Ethicon or PPTI will continue to meet their obligations under the terms of the
agreements, that a product will be successfully developed for commercial use or,
if having done so, that Ethicon will market the resulting product(s) to the
fullest extent possible. PPTI retains the right, under certain conditions and
after a certain number of years have elapsed, to make other marketing
arrangements in geographic areas Ethicon chooses to abandon.
Other Agreements
PPTI is a party to other agreements, and is discussing potential
agreements, with other entities regarding additional biomedical and specialty
use applications of its polymers and technology, including applications in areas
other than those identified as product candidates above. These agreements
provide, or are intended to provide, for the evaluation of product feasibility.
There can be no assurance that the Company will be able to establish such
arrangements at all, or do so in a timely manner and on reasonable terms, or
that such agreements will lead to joint product development and
commercialization agreements. Certain information regarding the Company's
collaborative agreements is set forth in Note 5 to the Company's Financial
Statements included herein.
8
Competition
The principal anticipated commercial uses of PPTI's biomaterials are as
components of end-use products for biomedical and other specialty applications.
End-use products using or incorporating the Company's biomaterials would compete
with other products which rely on the use of alternative materials. For
example, the use of ProNectin F in cell culture systems competes with the use of
fetal bovine serum, fibronectin, collagen and other compounds. Similarly, all
targeted applications of the Company's potential products will compete with
other products having the same or similar applications.
The areas of business in which the Company engages and proposes to engage
are characterized by rapidly evolving technology and intense competition;
competition in the biomedical and surgical repair markets is particularly
significant. The Company's competitors in the biomedical and surgical repair
markets include major pharmaceutical, surgical product, chemical and specialized
biopolymer companies, many of which have financial, technical, research and
development and marketing resources significantly greater than those of the
Company. Academic institutions and other public and private research
organizations are also conducting research and seeking patent protection, and
may commercialize products on their own or through joint ventures. The Company
believes that research into similar types of protein engineering technology is
currently being conducted by DuPont and several university laboratories.
The primary elements of competition in the biomedical and surgical repair
products market are performance, cost, safety, reliability, convenience and
commercial production capabilities. The Company believes that its ability to
compete in this market will be enhanced by its issued patent claims, the breadth
of its other pending patent applications, its early entry into its field and its
experience in protein engineering. However, the Company currently does not have
production capabilities or resources to compete commercially without the use of
collaborative agreements with third parties.
Patents and Trade Secrets
PPTI is aggressively pursuing domestic and international patent protection
for its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, and end-
use products incorporating such materials.
The United States Patent and Trademark Office ("USPTO") has issued five
patents to the Company. U.S. Patent 5,235,041 (1993) relates to the Company's
method for purifying structurally ordered recombinant protein polymers. U.S.
Patent 5,243,038 (1993) covers the Company's synthetic DNA compositions that
encode polymers and copolymers comprising the amino acid "building blocks" of
silk and elastin. U.S. Patent 5,496,712, issued in March 1996, covers the
Company's family of high molecular weight collagen like polymers and the DNA
sequences encoding them. U.S. Patent 5,514,581, issued in May 1996, covers DNA
sequences encoding silk-like structural building blocks with an intervening
sequence coding for the key cell attachment ligand from human fibronectin. One
of the claimed sequences encodes ProNectin F. U.S. Patent 5,606,019 issued in
February 1997, covers the protein compositions comprising copolymers of the
amino acid "building blocks" of silk and elastin. These are the primary
materials used in the Company's current product development efforts.
The Company also received notices of allowance from the USPTO in 1995 and
1996 on two other patent applications. Additionally, PPTI has fourteen U.S.
patent applications pending covering related aspects of its core technology.
Corresponding international patent applications based on PPTI's technology have
been submitted in major market areas worldwide and are beginning to issue.
9
Although the Company believes its existing issued patent claims may provide
a competitive advantage, there can be no assurance that the scope of the
Company's patent protection is or will be adequate to protect its technology or
that the validity of any patent issued will be upheld in the future.
Additionally, with respect to the Company's allowed and pending applications,
there can be no assurance that any patents will be issued, or that, if issued,
they will provide substantial protection or be of commercial benefit to the
Company. The two patents issued to PPTI in 1993 will expire in 2010, as will
one of the patents issued in 1996. The other patents issued in 1996 will expire
in 2013 and the patent issued in 1997 will expire in 2014.
Because of the uncertainty concerning patent protection and the
unavailability of patent protection for certain processes and techniques, PPTI
also relies upon trade secret protection and continuing technological innovation
to maintain its competitive position. Although all of the Company's employees
have signed confidentiality agreements, there can be no assurance that the
Company's proprietary technology will not be independently developed by other
parties, or that secrecy will not be breached. Additionally, the Company is
aware that substantial research efforts in protein engineering technology are
taking place at universities, government laboratories and other corporations and
that numerous patent applications have been filed. The Company cannot predict
whether it may have to obtain licenses to use any technology developed by third
parties or whether such licenses can be obtained on commercially reasonable
terms, or at all.
In the course of its business, PPTI employs various trademarks and trade
names in packaging and advertising its products. The Company has obtained
federal registration of its ProNectin(R) trademark and has applied for federal
registration of its SmartPlastic(TM) trademark for ProNectin F Activated
Cultureware. The Company intends to protect and promote all of its trademarks
and, where appropriate, will seek federal registration of its trademarks.
Regulatory Matters
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company's current operations and products
are, and anticipated products and operations will be, subject to substantial
regulation by a variety of agencies, particularly those products and operations
related to biomedical applications. Currently, the Company's activities are
subject to regulation primarily under the Occupational Safety and Health Act,
which requires the Company to provide a "material data safety sheet" to its
customers setting forth certain information regarding the Company's products.
Pre-market approval from the FDA is required for new medical devices, drugs
or vaccines, a generally costly and time-consuming process. If the Company does
not directly produce and sell medical devices, drugs or vaccines, it will not be
directly affected by these regulations. However, the Company's anticipated
customers and corporate partners would be required to obtain such approvals.
Additionally, the Company may be required to file and maintain with the FDA a
"Master File" containing information regarding the Company's products. There
can be no assurance that the Company's customers will be able to obtain or
maintain the necessary approvals from the FDA or that the Company will be able
to maintain a Master File in accordance with FDA regulations. In either case,
the Company's anticipated business could be adversely affected.
Because PPTI intends for its biomaterials to be used as medical devices, it
may be required to conform its operations to the FDA's GMP regulations. GMP
regulatory requirements are rigorous, and there can be no assurance that GMP
status could be obtained in a timely manner and without the expenditure of
substantial resources, if at all. The Company may also be required to register
its facility with the FDA as an establishment involved in the manufacture of
medical devices.
The Company's research, development and production activities are, or may
be, subject to various federal and state laws and regulations relating to
environmental quality and the use,
10
discharge, storage, transportation and disposal of toxic and hazardous
substances. The Company's future activities may be subject to regulation under
the Toxic Substances Control Act, which requires the Company to obtain pre-
manufacturing approval for any new "chemical material" the Company produces for
commercial use that does not fall within the FDA's regulatory jurisdiction. The
Company believes it is currently in substantial compliance with all such laws
and regulations. Although the Company intends to use its best efforts to comply
with all environmental laws and regulations in the future, there can be no
assurance that the Company will be able to fully comply with such laws, or that
full compliance will not require substantial capital expenditures.
Executive Officers of the Registrant
Name Age Position with the Company
- ---- --- -------------------------
J. Thomas Parmeter 57 Chairman of the Board of Directors,
President and Chief Executive Officer
Joseph Cappello, Ph.D. 40 Vice President, Research and Development,
Chief Technical Officer and Director,
Polymer Research
Philip J. Davis 66 Corporate Secretary
Franco A. Ferrari, Ph.D. 45 Vice President, Laboratory Operations and
Polymer Production and Director, Molecular
Genetics
John E. Flowers 40 Vice President, Planning and Operations and
Director, Business Development
Janis Y. Neves 45 Controller and Assistant Secretary
Erwin R. Stedronsky, Ph.D. 52 Vice President, Product Formulation and
Engineering and Director, Materials Science
Aron P. Stern 43 Vice President, Finance and Administration,
and Chief Financial Officer
Mr. Parmeter has been the Company's President, Chief Executive Officer and
Chairman of the Board of Directors since its inception in July 1988 (and, from
July 1988 to July 1992, its Chief Financial Officer). From 1982 to November
1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to
June 1988, Chairman of the Board of Syntro Corporation.
Dr. Cappello has been the Company's Vice President, Research and
Development since February 1997 and Director, Polymer Research and Chief
Technical Officer since February 1993. From September 1988 to February 1993, he
was the Company's Senior Research Director, Protein Engineering.
Mr. Philip J. Davis has been the Company's Secretary since January 1989.
Mr. Davis has been a director of the Company since April 1994; he previously
served as a director of the Company from January 1989 until October 1991. Mr.
Davis has been a Senior Vice President with Donaldson, Lufkin & Jenrette since
March 1994. He was Director, Institutional Sales at Merrill Lynch, Inc.
(formerly Merrill Lynch Capital Markets) from February 1991 to March 1994, and
was a Vice President at Merrill Lynch, Inc. from 1986 to 1994.
11
Mr. Flowers has been the Company's Vice President, Planning and Operations,
since February 1993. From September 1988 to February 1993, he was the Company's
Vice President, Commercial Development.
Dr. Ferrari has been the Company's Vice President, Laboratory Operations
and Director, Molecular Genetics since February 1993. From September 1988 to
February 1993, he was the Company's Senior Research Director, Genetic
Engineering.
Ms. Neves has been the Company's Controller and Assistant Secretary since
January 1990. From July 1988 until January 1990, Ms. Neves was the Company's
Business Office Manager.
Dr. Stedronsky has been the Company's Vice President, Product Formulation
and Engineering since February 1997 and Director of Materials Science since
September 1992. For approximately 20 years prior to joining PPTI, Dr. Stedronsky
held increasingly responsible R&D positions in Corporate Research at Monsanto
Company.
Mr. Stern has been the Company's Vice President, Finance and Administration
and Chief Financial Officer since July 1992. Previously Mr. Stern served as
Director, Finance and Administration of Isis Pharmaceuticals, Inc. (a
biopharmaceutical company) from May 1989 to June 1992, and as Controller and
Assistant Treasurer of Teknowledge, Inc., an expert systems company, from
November 1985 to April 1989.
All executive officers of the Company were elected by the Board of
Directors and serve at its discretion. No family relationships exist between
any of the officers or directors of the Company.
Employees
As of March 21, 1997, PPTI has 26 full-time, two part-time and three
temporary employees, of whom four hold Ph.D. degrees in the chemical or
biological sciences. The Company is highly dependent on the services of its
management and scientific staff. The loss of the services of any of its staff
may significantly hinder the achievement of the Company's development
objectives. The recruitment and retention of additional qualified management
and scientific personnel is also critical to the Company's success. There can
be no assurance that the Company will be able to attract and retain required
personnel on acceptable terms, due to the competition for such experienced
personnel from other biotechnology, pharmaceutical, medical device and chemical
companies, universities and non-profit research institutions.
Item 2. Properties
PPTI does not own any real property. The Company rents approximately
21,000 square feet in San Diego, California from Sycamore/San Diego Investors
under two leases. The leased property includes the Company's administrative
offices, which encompass approximately 4,000 square feet, and its laboratory
facilities, which encompass approximately 17,000 square feet. The current
annual rent is approximately $410,000. The leases expire in December 1998.
The Company believes that its current facilities are adequate to meet its
needs until the end of 1998. The Company retains the option to extend its
leases for an additional five years.
Item 3. Legal Proceedings
On or about January 17, 1997, the Company received correspondence (the
"Letters") from or on behalf of persons who hold the Company's Underwriter Unit
Warrants (the "Unit Warrants"). The Letters allege that the Company is in
breach of its obligations under the
12
Underwriter Unit Warrant Certificates (the "Certificates"), particularly
concerning the calculation and notification of anti-dilution adjustments to be
made to the number of shares of the Company's common stock representred by each
Unit Warrant, the corresponding reduction of the per share exercise price for
such Unit Warrants, and notification of registration rights under the
Certificates. By their terms, the Unit Warrants expired on January 21, 1997. The
Company disagrees with the interpretation of the anti-dilution provisions cited
in the Letters and believes that this dispute will not have a material adverse
effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock trades on the Small-Cap market of NASDAQ under
the symbol "PPTI". The trade prices set forth below represent inter-dealer
prices without retail markups, markdowns or commissions.
Trade Prices
------------
1996 High Low
---- ------ ------
First Quarter $3.297 $1.563
Second Quarter 5.375 2.000
Third Quarter 4.500 2.125
Fourth Quarter 3.500 2.000
1995
----
First Quarter $0.750 $0.438
Second Quarter 0.625 0.156
Third Quarter 2.000 0.500
Fourth Quarter 2.125 1.500
As of March 21, 1997, the Company had approximately 156 shareholders of
record; it estimates it has approximately 1,868 beneficial holders. The Company
has never paid cash dividends on its Common Stock. The Company currently
intends to retain earnings, if any, for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Unregistered Offerings
On January 7, 1997, the Company received $4,760,000, less estimated
expenses of approximately $160,000, from a private placement of 1,904,000 shares
of the Company's common stock, at $2.50 per share, with a number of accredited
investors. No underwriters were engaged by the Company in connection with such
issuance and, accordingly, no underwriting discounts or commissions were paid.
The issuance was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), and met the requirements of Rule
506 of Regulation D promulgated under the Securities Act. The Company agreed to
register the shares with the Securities and Exchange Commission promptly after
the closing. The registration was declared effective on January 24, 1997.
13
On September 14, 1995, the Company issued 49,187 shares of its Series D
Convertible Preferred Stock in a private placement to certain accredited
investors. Of this amount, 24,139 shares of Series D Convertible Preferred Stock
were issued in exchange for 21,600 shares of the Company's Series C Convertible
Preferred Stock, plus accrued and unpaid dividends thereon. An additional 5,048
shares of the Series D Convertible Preferred Stock were issued in exchange for
cancellation of a $500,000 bridge loan, plus accrued interest thereon. The
remaining 20,000 shares of Series D Convertible Preferred Stock were issued to
the same investors for cash at a price of $100.00 per share. No underwriters
were engaged by the Company in connection with such issuance and, accordingly,
no underwriting discounts or commissions were paid. The issuance was exempt from
registration under Section 4(2) of the Securities Act and met the requirements
of Rule 506 of Regulation D promulgated under the Securities Act.
Each share of Series D Convertible Preferred Stock earns a cumulative
dividend at the annual rate of $10 per share, payable as and when declared by
the Company's Board of Directors in the form of cash, common stock or any
combination thereof. The Series D Convertible Preferred Stock is convertible
into common stock after two years from the date of issuance at the holder's
option. The conversion price at the time of conversion is the lesser of $3.75 or
the market price. The Series D Convertible Preferred Stock is redeemable at the
Company's option after four years from the date of issuance. Automatic
conversion of all of the Series D Convertible Preferred Stock will occur if: (a)
the Company completes a public offering of common stock at a price of $2.50 or
higher; or (b) the holders of a majority thereof elect to convert. The Company
has the option to demand conversion of the Series D Convertible Preferred Stock
if the average market price of its common stock equals or exceeds $5.00 per
share over a period of twenty business days. The Series D Convertible Preferred
Stock has a liquidation preference of $100.00 per share.
In addition, the Series D Convertible Preferred stockholders received
warrants to purchase, at an exercise price of $1.25 per share, twenty shares of
the Company's common stock for each share of Series D Convertible Preferred
Stock acquired for cash, or upon conversion of the outstanding bridge loan and
accrued interest thereon, described above. Warrants to acquire a total of
500,960 shares of common stock were issued. All of these warrants were exercised
during 1996, from which the Company received aggregate gross proceeds of
$626,200. The Series D Convertible Preferred stockholders were granted certain
registration rights relating to their shares of common stock issuable upon
conversion of the Series D Convertible Preferred Stock and upon the exercise of
their warrants.
In July 1994, the Company received $2,160,000 from a private placement of
the Company's Series C Convertible Preferred Stock with certain accredited
investors, consisting of 21,600 shares at $100.00 per share. No underwriters
were engaged by the Company in connection with such issuance and, accordingly,
no underwriter discounts or commissions were paid. The issuance was exempt from
registration under Section 4(2) of the Securities Act and met the requirements
under Rule 506 of Regulation D promulgated under the Securities Act. As
described above, the investors exchanged 21,600 shares of Series C Convertible
Preferred Stock, plus accrued and unpaid dividends thereon, for 24,139 shares of
Series D Convertible Preferred Stock. There are currently no shares of Series C
Convertible Preferred Stock outstanding.
Each share of Series C Convertible Preferred Stock earned a cumulative
dividend at the annual rate of $10 per share payable as and when declared by the
Company's Board of Directors in the form of cash, common stock or any
combination thereof. The Series C Convertible Preferred Stock was convertible
into common stock one year after issuance at the holder's option. The conversion
price ranged between $1.25 and $3.75 per share, depending on market price. The
Series C Convertible Preferred Stock was redeemable at the Company's option five
years after issuance. Automatic conversion of all of the Series C Convertible
Preferred Stock would have occurred if : (a) the Company completed a public
offering of common stock at a price of $2.50 or higher; or (b) holders of a two-
thirds majority thereof decided to convert their stock. The Company had the
option to demand conversion of the Series C Convertible Preferred Stock if the
average market price of its common stock equaled or exceeded $5.00 per share
over a period of twenty
14
business days. The Series C Convertible Preferred Stock had a liquidation
preference of $100.00 per share.
In connection with the issuance of the Series C Convertible Preferred
Stock, warrants were also issued to acquire a total of 432,000 shares of the
Company's common stock at a price of $1.25 per share. All of these warrants were
exercised during 1996, from which the Company received aggregate gross proceeds
of $540,000.
In July 1996, holders of warrants to acquire 322,663 shares of common stock
(all of whom were accredited investors) exercised such warrants at $2.50 per
share, resulting in approximately $807,000 in gross proceeds to the Company.
These warrants were originally issued in 1991 in connection with the issuance of
the Company's Series B Convertible Preferred Stock. The issuance upon exercise
of these warrants was exempt from registration under Section 4(2) of the
Securities Act and met the requirements under Rule 506 of Regulation D
promulgated under the Securities Act. The Company agreed to register the resale
of the common stock received upon exercise of these warrants, and the applicable
registration was declared effective on July 19, 1996.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
Incorporated in 1988, Protein Polymer Technologies, Inc. has concentrated
its research and development efforts on establishing a scientific and technical
leadership position in the manufacture of unique protein-based materials. The
Company has identified biomedical market and product opportunities for further
research and development that management believes will exploit the unique
properties of the Company's technology to competitive advantage. The Company
has been unprofitable to date, and as of December 31, 1996 has an accumulated
deficit of $19,207,000.
The Company's medical product candidates for surgical repair and
regeneration of tissues are in various stages of research and development. Its
more advanced programs are in the areas of tissue adhesives and sealants, and
tissue augmentation, where the company is devoting over 90% of its scientific
effort currently. The Company's first commercial products, ProNectin F and
SmartPlastic, are used by biologists and cell culture laboratories, principally
to grow mammalian cells for biomedical research purposes.
In 1995 the Company entered into a collaborative relationship with Ethicon
regarding its tissue adhesives and sealants program. The Company's strategy
with most of its other programs is to enter into similar collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships may provide significant near-term
revenues through up-front licensing fees, research and development
reimbursements and milestone payments, the Company expects to incur continuing
operating losses for the next several years.
Results of Operations
Contract research revenue for the year ended December 31, 1996 was
$610,000, compared to $810,000 and $100,000 for 1995 and 1994, respectively.
During 1996 the Company received research and development reimbursements
totaling $600,000 from Ethicon related to the Company's tissue adhesives and
sealants program. In September 1995 the Company received a payment of $800,000
from Ethicon upon the signing of the various agreements related to the Company's
tissue adhesives and sealants program. The 1994 revenues were derived from
materials evaluation agreements entered into with divisions of J&J.
Interest income was $87,000 for the year ended December 31, 1996, as
compared to $59,000 for 1995 and $95,000 for 1994. The year-to-year variability
resulted from timing
15
differences with regard to the receipt of equity capital and the amounts of
excess cash available for investment.
Product sales for the years ended December 31, 1996 were $58,000, compared
to $118,000 and $94,000 in 1995 and 1994, respectively. Product sales consist
of ProNectin F related product revenues and licensing fees. Sales in 1995
reflect the launch of the SmartPlastic line of ProNectin F Activated Cultureware
and the resultant distributor stocking orders. Additionally, during 1995 the
Company stopped promotional expenditures for these products.
Cost of sales was $47,000 for the year ended December 31, 1996, versus
$125,000 and $57,000 for the years 1995 and 1994, respectively. The 1996 and
1995 totals reflect certain inventory adjustments and reserves. Royalty expenses
paid to Stanford University and Telios Pharmaceuticals, Inc. aggregated $35,000
for each of the three years ended December 31, 1996, 1995 and 1994.
Research and development expenses for the year ended December 31, 1996 were
$2,021,000, compared to $1,722,000 in 1995, an increase of 17%. This increase in
1996 spending over 1995 was due to expanded activities, including the
establishment of a quality assurance department as part of the Company's efforts
to implement GLP. The 1995 expenses decreased 12% compared to $1,951,000
incurred in 1994. This decrease in 1995 spending versus 1994 resulted from the
continued focusing of the Company's research and development efforts, with fewer
programs sponsored and the consequent lowering of expenses incurred. The
Company expects its research and development expenses will increase in the
future due to the expansion of product directed research and development
efforts, an increased number of programs funded, laboratory upgrading and
expansion, and increased outside product testing.
Selling, general and administrative expenses for the year ended December
31, 1996 were $1,516,000, as compared to $1,329,000 for 1995, an increase of
14%. This increase in 1996 spending over 1995 was due to additional legal,
patent and risk insurance expenses, and increased investor relations activities.
The 1995 expenses decreased 12% compared to $1,512,000 incurred in 1994. This
decrease in 1995 spending versus 1994 was due to reduced product marketing,
legal and investor relations expenses. The Company expects its selling, general
and administrative expenses will increase in the future consistent with
supporting its research and development efforts and as business development,
patent and investor relations activities require.
For the year ended December 31, 1996, the Company recorded a net loss
applicable to common shareholders of $3,356,000, or $.51 per share, as compared
to $2,610,000, or $.45 per share for 1995, and $3,353,000, or $.58 per share for
1994. The 1996, 1995 and 1994 losses and per share calculations include
$492,000, $385,000 and $108,000, respectively, of accumulated and/or paid
dividends from the Company's Preferred Stock. The Company expects to incur
increasing operating losses for the next several years, to the extent additional
capital is raised, based upon the successful continuation of the tissue
adhesives program and the tissue augmentation program, as well as expected
increases in the Company's other research and development, manufacturing and
business development activities. The Company's results depend on its ability to
establish strategic alliances and generate contract revenues, increased
research, development and manufacturing efforts, preclinical and clinical
product testing and commercialization expenditures, expenses incurred for
regulatory compliance and patent prosecution, and other factors. The Company's
results will also fluctuate from period to period due to timing differences.
To date the Company believes that inflation and changing prices have not
had a material impact on its continuing operations. Effective January 1, 1994,
the Company adopted Statement No. 109, "Accounting for Income Taxes". There is
no current year or cumulative impact of the adoption of Statement No. 109.
Based upon Company earnings history, a valuation allowance of $7,363,000 is
required to reduce the Company's net deferred tax assets to the amount
realizable.
16
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash, cash equivalents and short-
term investments totaling $1,260,000, as compared to $2,011,000 at December 31,
1995. As of December 31, 1996, the Company had working capital of $840,000,
compared to $1,803,000 at December 31, 1995. These decreases in 1996 as
compared to 1995 were due to increased operating expenses, reduced revenues and
less equity capital raised. During the first week of January 1997 the Company
received $4,760,000 before expenses of approximately $160,000 from a private
placement of common stock to institutional and qualified individual investors.
Accounting on a pro forma basis as though this capital influx had occurred on
December 31, 1996, the Company's cash, cash equivalents and short-term
investments would have totaled $6,020,000, and working capital would have
increased to $5,600,000.
The Company had no long-term debt obligations as of December 31, 1996 and
December 31, 1995. For the twelve month period ending December 31, 1996 the
Company's expenditures for capital equipment and leasehold improvements totaled
$184,000, compared with $84,000 for the same period last year. The Company
anticipates that these expenditures will increase as laboratory renovations and
additional equipment are required to meet current GLP regulations and production
requirements. The Company currently has no equipment lease lines of credit,
although it may enter into such arrangements in the future if available at
appropriate rates and terms.
The Company believes its existing available cash, cash equivalents and
short-term investments, including the equity capital received during the first
week of January 1997, will be sufficient to meet its anticipated capital
requirements until mid 1998. Substantial additional capital resources will be
required to fund continuing expenditures related to the Company's research,
development, manufacturing and product marketing activities. The Company
believes there may be reasonable alternatives to meet the continuing financial
needs of its operations, such as additional collaborative agreements and public
or private financings, and is actively pursuing all available approaches.
However, there can be no assurance that the requisite fundings will be
consummated in the necessary time frame or on terms favorable to the Company.
If adequate funds are not available, the Company will be required to
significantly curtail its operating plans and may have to relinquish rights to
significant portions of the Company's technology or products.
17
Item 7. Financial Statements
Filed herewith are the following Audited Financial Statements for Protein
Polymer Technologies, Inc. (a development stage company):
Description Page
----------- ----
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets at December 31, 1996 and 1995................................ F-3
Statements of Operations for the years ended December 31, 1996, 1995
and 1994 and the period July 6, 1988 to December 31, 1996................ F-4
Statements of Stockholders Equity for the period July 6, 1988 (inception)
to December 31, 1996..................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994 and the period July 6, 1988 to December 31, 1996................ F-7
Notes to Financial Statements............................................... F-8
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Protein Polymer Technologies, Inc.
We have audited the accompanying balance sheets of Protein Polymer
Technologies, Inc. (a Development Stage Company) as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996 and for
the period July 6, 1988 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Protein Polymer
Technologies, Inc. (a Development Stage Company) at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 and for the period July 6, 1988
(inception) to December 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 30, 1997
F-2
Protein Polymer Technologies
(A Development Stage Company)
Balance Sheets
DECEMBER 31,
1996 1995
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 267,357 $ 471,296
Short-term investments (Note 2) 993,042 1,540,000
Inventory, net 20,694 54,534
Other current assets 56,561 48,277
-------------------------------
Total current assets 1,337,654 2,114,107
Deposits 22,257 22,257
Deferred offering costs 17,356 --
Equipment and leasehold improvements,
net (Note 1) 369,314 302,795
-------------------------------
$ 1,746,581 $ 2,439,159
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 251,321 $ 157,971
Accrued employee benefits 117,612 101,284
Other accrued expenses 53,525 51,598
Deferred revenue 75,000 --
-------------------------------
Total current liabilities 497,458 310,853
Commitments (Note 4) -- --
Stockholders' equity (Note 3):
Series D convertible preferred stock,
$.01 par value, 71,600 shares
authorized, 49,187 shares issued and
outstanding at December 31, 1996
and 1995, respectively - liquidation
preference $4,918,700 4,764,745 4,764,745
Common stock, $.01 par value,
25,000,000 shares authorized,
7,233,228 and 5,832,925 shares
issued and outstanding at
December 31, 1996 and 1995,
respectively 72,333 58,330
Additional paid-in capital 15,619,282 13,648,036
Deficit accumulated during
development stage (19,207,237) (16,342,805)
-------------------------------
Total stockholders' equity 1,249,123 2,128,306
-------------------------------
$ 1,746,581 $ 2,439,159
===============================
See accompanying notes.
F-3
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Operations
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
-------------------------------------------------------------
Revenues:
Contract revenue (Note 5) $ 610,000 $ 810,000 $ 100,000 $ 3,845,455
Interest income 87,317 58,702 94,941 759,420
Product and other income 58,434 117,991 114,294 482,251
-------------------------------------------------------------
Total revenues 755,751 986,693 309,235 5,087,126
Expenses:
Cost of sales 47,364 124,824 56,843 249,380
Research and development 2,021,413 1,721,776 1,951,120 14,120,011
Selling, general and administrative 1,516,406 1,329,497 1,511,631 9,440,926
Royalties 35,000 35,000 35,000 230,171
-------------------------------------------------------------
Total expenses 3,620,183 3,211,097 3,554,594 24,040,488
-------------------------------------------------------------
Net loss (2,864,432) (2,224,404) (3,245,359) (18,953,362)
Undeclared and/or paid dividends on
preferred stock (491,867) (385,143) (108,000) (985,010)
-------------------------------------------------------------
Net loss applicable to common
shareholders $(3,356,299) $(2,609,547) $(3,353,359) $(19,938,372)
=============================================================
Net loss per common share $ (.51) $ (.45) $ (.58)
===========================================
Shares used in computing net loss per
common share 6,638,814 5,831,446 5,830,925
===========================================
See accompanying notes.
F-4
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity
For the period July 6, 1988 (inception) to December 31, 1996
COMMON STOCK PREFERRED STOCK
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
Issuance of common stock at
$.01 per share for cash 400,000 $ 4,000 -- $ --
Issuance of common stock at
$.62 per share for cash and
receivables 1,116,245 11,162 -- --
Receivables from sale of
common stock -- -- -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1988 1,516,245 15,162 -- --
Repayment of receivables
from sale of common stock -- -- -- --
Issuance of common stock at
$.62 per share 359,136 3,594 -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1989 1,875,381 18,756 -- --
Exercise of common stock
options at $.01 per share
for cash 60,000 600 -- --
Issuance of common stock at
$.68 per share for cash and
compensation 5,000 50 -- --
Common stock repurchased at
$.01 per share for cash (25,000) (250) -- --
Common stock issued at $.68
per share for cash and
compensation 25,000 250 -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1990 1,940,381 19,406 -- --
Exercise of common stock
options at $.68 per share
for cash 5,000 50 -- --
Exercise of warrants for
common stock 483,755 4,837 -- --
Conversion of notes payable
to common stock 339,230 3,391 -- --
Conversion of notes payable
to preferred stock -- -- 278,326 2,783
Issuance of preferred stock
at $2.00 per share for
cash, net of
issuance costs -- -- 400,000 4,000
Issuance of warrants for cash -- -- -- --
Issuance of warrants in
connection with convertible
notes payable -- -- -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1991 2,768,366 27,684 678,326 6,783
Initial public offering at
$6.50 per unit, net of
issuance costs 1,667,500 16,676 -- --
Conversion of Series B
preferred stock into common
stock in connection with
initial public offering 678,326 6,783 (678,326) (6,783)
Conversion of Series A
preferred stock into common
stock at 1.13342 per share 713,733 7,137 -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1992 5,827,925 58,280 -- --
Exercise of common
stock options at $.68
per share 3,000 30 -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1993 5,830,925 58,310 -- --
Issuance of preferred stock
at $100 per share for cash,
net of issuance costs -- -- 21,600 2,073,925
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1994 5,830,925 58,310 21,600 2,073,925
Issuance of preferred stock
at $100 per share for cash,
net of issuance costs -- -- 25,000 2,432,150
Series C dividends paid in
Series D preferred stock -- -- 2,539 253,875
Interest paid in Series D
stock -- -- 48 4,795
Exercise of common stock
options at $.53 per share 2,000 20 -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1995 5,832,925 58,330 49,187 4,764,745
DEFICIT
ACCUMULATED
DURING RECEIVABLES FROM
ADDITIONAL DEVELOPMENT SALE OF COMMON TOTAL STOCKHOLDERS'
PAID-IN CAPITAL STAGE STOCK EQUITY
------------------------------------------------------------------
Issuance of common stock at
$.01 per share for cash $ -- $ -- $ -- $ 4,000
Issuance of common stock at
$.62 per share for cash and
receivables 681,838 -- -- 693,000
Receivables from sale of
common stock -- -- (86,000) (86,000)
Net loss -- (322,702) -- (322,702)
------------------------------------------------------------------
Balance at December 31, 1988 681,838 (322,702) (86,000) 288,298
Repayment of receivables
from sale of common stock -- -- 86,000 86,000
Issuance of common stock at
$.62 per share 219,358 -- -- 222,952
Net loss -- (925,080) -- (925,080)
------------------------------------------------------------------
Balance at December 31, 1989 901,196 (1,247,782) -- (327,830)
Exercise of common stock
options at $.01 per share
for cash -- -- -- 600
Issuance of common stock at
$.68 per share for cash and
compensation 3,350 -- -- 3,400
Common stock repurchased at
$.01 per share for cash -- -- -- (250)
Common stock issued at $.68
per share for cash and
compensation 16,750 -- -- 17,000
Net loss -- (1,501,171) -- (1,501,171)
------------------------------------------------------------------
Balance at December 31, 1990 921,296 (2,748,953) -- (1,808,251)
Exercise of common stock
options at $.68 per share
for cash 3,350 -- -- 3,400
Exercise of warrants for
common stock 295,493 -- -- 300,330
Conversion of notes payable
to common stock 508,414 -- -- 511,805
Conversion of notes payable
to preferred stock 553,869 -- -- 556,652
Issuance of preferred stock
at $2.00 per share for
cash, net of issuance costs 703,475 -- -- 703,475
Issuance of warrants for cash 3,000 -- -- 3,000
Issuance of warrants in
connection with convertible
notes payable 28,000 -- -- 28,000
Net loss -- (1,143,119) -- (1,143,119)
------------------------------------------------------------------
Balance at December 31, 1991 3,016,897 (3,892,072) -- (840,708)
Initial public offering at
$6.50 per unit, net of
issuance costs 8,911,024 -- -- 8,927,700
Conversion of Series B
preferred stock into common
stock in connection with
initial public offering -- -- -- --
Conversion of Series A
preferred stock into common
stock at 1.13342 per share 1,717,065 -- -- 1,724,202
Net loss -- (3,481,659) -- (3,481,659)
------------------------------------------------------------------
Balance at December 31, 1992 13,644,986 (7,373,731) -- 6,329,535
Exercise of common
stock options at $.68
per share 2,010 -- -- 2,040
Net loss -- (3,245,436) -- (3,245,436)
------------------------------------------------------------------
Balance at December 31, 1993 13,646,996 (10,619,167) -- 3,086,139
Issuance of preferred stock
at $100 per share for cash,
net of issuance costs -- -- -- 2,073,925
Net loss -- (3,245,359) -- (3,245,359)
------------------------------------------------------------------
Balance at December 31, 1994 13,646,996 (13,864,526) -- 1,914,705
Issuance of preferred stock
at $100 per share for cash,
net of issuance costs -- -- -- 2,432,150
Series C dividends paid in
Series D preferred stock -- (253,875) -- --
Interest paid in Series D
stock -- -- -- 4,795
Exercise of common stock
options at $.53 per share 1,040 -- -- 1,060
Net loss -- (2,224,404) -- (2,224,404)
------------------------------------------------------------------
Balance at December 31, 1995 13,648,036 (16,342,805) -- 2,128,306
F-5
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity
For the period July 6, 1988 (inception) to December 31, 1996
COMMON STOCK PREFERRED STOCK
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
Exercise of common stock
warrants at $1.25 per share 932,960 $ 9,330 -- $ --
Exercise of common stock
warrants at $2.50 per
share, net of issuance costs
of $25,020 322,663 3,226 -- --
Exercise of common stock
warrants at $1.00 per share 25,000 250 -- --
Exercise of common stock
options 136,000 1,360 -- --
Stock repurchases (16,320) (163) -- --
Net loss -- -- -- --
----------------------------------------------------------------
Balance at December 31, 1996 7,233,228 $ 72,333 49,187 $ 4,764,745
================================================================
DEFICIT
ACCUMULATED
DURING RECEIVABLES FROM
ADDITIONAL DEVELOPMENT SALE OF COMMON TOTAL STOCKHOLDERS'
PAID-IN CAPITAL STAGE STOCK EQUITY
------------------------------------------------------------------
Exercise of common stock
warrants at $1.25 per share $ 1,156,870 $ -- $ -- $ 1,166,200
Exercise of common stock
warrants at $2.50 per
share, net of issuance costs
of $25,020 779,413 -- -- 782,639
Exercise of common stock 24,750 -- -- 25,000
warrants at $1.00 per share
Exercise of common stock 91,650 -- -- 93,010
options
Stock repurchases (81,437) -- -- (81,600)
Net loss -- (2,864,432) -- (2,864,432)
------------------------------------------------------------------
Balance at December 31, 1996 $15,619,282 $(19,207,237) $ -- $ 1,249,123
===================================================================
See accompanying notes.
F-6
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Statements of Cash Flows
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (2,864,432) $ (2,224,404) $ (3,245,359) $(18,953,362)
Adjustments to reconcile net loss to
net cash used for operating activities:
Stock issued for
compensation -- -- -- 20,100
Stock issued for interest -- 4,795 -- 4,795
Increase in inventory
reserve 20,717 50,805 -- 71,522
Depreciation and
amortization 117,203 138,866 171,588 1,075,419
Write-off of purchased
technology -- -- -- 503,500
Changes in assets and
liabilities:
Inventory 13,123 (63,173) (36,006) (92,216)
Deposits -- 6,300 (6,300) (22,257)
Other current assets (8,284) (8,770) (3,061) (56,561)
Accounts payable 93,350 (75,189) 82,052 251,321
Accrued employee
benefits 16,328 21,977 18,361 117,612
Other accrued
expenses 1,927 (32,320) 56,661 53,525
Deferred revenue 75,000 (5,000) 834 75,000
----------------------------------------------------------------
Net cash used for operating
activities (2,535,068) (2,186,113) (2,961,230) (16,951,602)
INVESTING ACTIVITIES
Purchase of technology -- -- -- (570,000)
Purchase of equipment and improvements (183,722) (84,192) (209,320) (1,291,476)
Short-term investments 546,958 (1,052,972) 1,011,575 (993,042)
----------------------------------------------------------------
Net cash provided by (used for)
investing activities 363,236 (1,137,164) 802,255 (2,854,518)
FINANCING ACTIVITIES
Net proceeds from issuance of warrants
and sale of common stock 1,985,249 1,060 -- 11,843,051
Net proceeds from issuance and
conversion of preferred stock -- 2,432,150 2,073,925 6,937,752
Proceeds from convertible notes and
detachable warrants -- -- -- 1,068,457
Payment on note payable -- -- -- (92,750)
Proceeds from note payable -- -- -- 334,323
Deferred offering costs (17,356) -- -- (17,356)
----------------------------------------------------------------
Net cash provided by financing
activities 1,967,893 2,433,210 2,073,925 20,073,477
Net increase (decrease) in cash and
cash equivalents (203,939) (890,067) (85,050) 267,357
Cash and cash equivalents at beginning
of the period 471,296 1,361,363 1,446,413 --
----------------------------------------------------------------
Cash and cash equivalents at end of the
period $ 267,357 $ 471,296 $ 1,361,363 $ 267,357
================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ -- $ -- $ -- $ 63,473
Series D stock issued for Series C stock $ -- $ 2,073,925 $ -- $ 2,073,925
Series C dividends paid with Series D
stock $ -- $ 253,875 $ -- $ 253,875
================================================================
See accompanying notes.
F-7
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITIES
Protein Polymer Technologies, Inc. (the "Company") was incorporated in Delaware
on July 6, 1988. The Company was established for the purpose of designing,
producing and marketing genetically engineered protein polymers for a variety of
biomedical and specialty materials applications. For the period from its
inception to date, the Company has been a development stage enterprise, and
accordingly, the Company's operations have been directed primarily toward
developing business strategies, raising capital, exploring marketing channels,
recruiting personnel, and research and development activities.
LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In January 1997 the Company received
$4.76 million, before expenses of approximately $160,000, from a private
placement of common stock to certain qualified institutions and individuals (see
Note 8. Subsequent Event, below). The Company believes that these funds,
combined with its cash, cash equivalents and short-term investments of $1.26
million as of December 31, 1996, and anticipated contract revenues and interest
income, will be sufficient to meet its anticipated capital requirements until
mid 1998. Substantial additional capital resources will be required to fund
continuing expenditures related to the Company's research, development and
product marketing activities.
NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the period as adjusted for the effects of
certain rules of the Securities and Exchange Commission for the period prior to
the Company's initial public offering. For purposes of this calculation, net
loss in 1996 and 1995 have been adjusted for cumulative dividends on the Series
C and D Preferred Stock.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Research and development contract revenues are recorded as earned based on the
performance requirements of the contracts. Payments received in advance of
amounts earned are recorded as deferred revenue. Research and development costs
are expensed as incurred.
PRODUCT REVENUE RECOGNITION
Revenue from product sales are recognized when orders are shipped.
F-8
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the amount of revenue and expense reported during the period. Actual results
could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper, notes and short-
term U.S. Government securities with original maturities beyond three months and
are stated at estimated fair value. Similar items with original maturities of
three months or less are considered cash equivalents. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company has not experienced any losses on its short-
term investments.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated over the estimated useful life of the asset, typically one to seven
years, using the straight-line method.
Leasehold improvements are amortized over the shorter of the lease term or life
of the asset. Equipment and leasehold improvements consist of the following:
DECEMBER 31,
1996 1995
-----------------------
Laboratory equipment $1,079,945 $ 917,080
Office equipment 131,801 128,440
Leasehold improvements 79,730 62,234
-----------------------
1,291,476 1,107,754
Less accumulated depreciation and amortization 922,162 804,959
-----------------------
$ 369,314 $ 302,795
=======================
F-9
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. INVESTMENTS
The following is a summary of the estimated fair value of available-for-sale
securities by balance sheet classification:
DECEMBER 31,
1996 1995
----------------------
Cash and cash equivalents:
Commercial paper $250,000 $ -
Money market funds 17,357 471,296
----------------------
$267,357 $ 471,296
======================
Short-term investments:
Commercial paper $908,042 $1,200,000
U.S. Treasury obligations 85,000 340,000
----------------------
$993,042 $1,540,000
======================
All of the available-for-sale securities are due in one year or less.
The estimated fair value of each investment approximates the amortized cost, and
therefore, there are no unrealized gains or losses as of December 31, 1996.
3. STOCKHOLDERS' EQUITY
SERIES D PREFERRED STOCK
During 1995 a total of 49,187 shares of Series D Stock were issued, including
the exchange of Series C Stock for Series D Stock (see "Series C Preferred
Stock" below). Each share of Series D Stock earns a cumulative dividend at the
annual rate of $10 per share payable as and when declared by the Company in the
form of cash, common stock or any combination thereof. The Series D Stock is
convertible into common stock after two years at the stockholder's option. The
conversion price at the time of conversion is the lesser of $3.75 or the market
price. The Series D Stock is redeemable at the Company's option after four
years. Automatic conversion of all of the Series D Stock will occur if: (a)
the Company completes a public offering of common stock at a price of $2.50 or
higher; or (b) a majority of stockholders decide to convert their stock. The
Company has the option to demand conversion of the Series D Stock if the average
market price of its common stock equals or exceeds $5.00 per share over a period
of twenty business days. The Series D Stock has a liquidation preference value
of $100.00 per share.
F-10
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (CONTINUED)
In addition, the Series D stockholders received warrants to purchase, at an
exercise price of $1.25 per share, twenty shares of the Company's common stock
for each share of Series D Stock acquired. Warrants to acquire a total of
500,960 shares of common stock were issued. All of the warrants have been
exercised during 1996.
The Series D stockholders were granted certain registration rights relating to
their shares of common stock issuable upon conversion of the Series D Stock or
upon exercise of their warrants.
SERIES C PREFERRED STOCK
In July 1994 the Company received $2,160,000 from the sale of 21,600 shares of
unregistered Series C Convertible Preferred Stock ("Series C Stock") to JJDC and
certain investors. The terms of the sale were similar to those of the Company's
Series D Stock.
At the time of the sale of the Series D Stock, JJDC and these investors
exchanged 21,600 shares of Series C Stock, plus accumulated dividends, for
24,139 shares of Series D Stock. There are currently no remaining shares of
Series C Stock outstanding.
In connection with the Series C offering, warrants were also issued to acquire a
total of 432,000 shares of the Company's common stock at an exercise price of
$1.25 per share. All of the warrants have been exercised during 1996.
STOCK OPTION PLANS
The Company has elected to follow APB 25 and related accounting Interpretations.
Under APB 25 whenever the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant no
compensation expense is recognized. The effects of using the fair value
accounting method, as described in FASB Statement No. 123, "Accounting for
Stock-Based Compensation", are described below under its own subheading to Note
3.
The Company adopted the 1989 Stock Option Plan which provides for the issuance
of incentive and non-statutory stock options for the purchase of up to 500,000
shares of common stock to key employees and certain other individuals. The
options will expire ten years from their respective dates of grant. Options
become exercisable ratably over periods of up to five years from the date of
grant. At December 31, 1996, options for 310,500 shares were exercisable, and
179,500 shares were available for future grant.
F-11
Protein Polymer Technologies, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (CONTINUED)
The Company adopted the 1992 Stock Option Plan which provides for the issuance
of incentive and non-statutory stock options for the purchase of up to 1,000,000
shares of common stock to its key employees and certain other individuals. The
options will expire ten years from their respective dates of grant. Options
become exercisable ratably over periods of up to five years from the dates of
grant. At December 31, 1996, options for 93,500 shares were exercisable, and
279,000 shares were available for future grant.
Since inception, the Company has granted non-qualified options outside the Plan
to purchase a total of 525,100 shares of common stock (net of options cancelled)
to employees, directors and consultants of the Company. At December 31, 1996,
options for 293,100 shares were exercisable.
In June 1996 the Company adopted the 1996 Non-Employee Directors Stock Option
Plan ("Plan"), which provides for the granting of nonqualified options to
purchase up to 250,000 shares of common stock to directors of the Company. Such
grants shall be awarded automatically on the first business day of June during
each calendar year to every Participating Director then in office, and consist
of 5,000 shares of common stock, subject to certain adjustments. No
Participating Director shall receive more than one grant per year. The purchase
price of each option shall be the fair market value of the common stock on the
date of grant. Each option has a duration of ten years, and is exercisable six
months after the grant date. The Board (or a designated committee of the Board)
shall administer the Plan. On June 3, 1996, an initial grant of 35,000 shares
was made to all non-employee directors then eligible.
In September 1996 the Board of Directors approved, subject to stockholder
approval at the 1997 Annual Meeting of Stockholders, the Protein Polymer
Technologies, Inc. Employee Stock Purchase Plan ("Plan"). The Plan commences
January 2, 1997, and allows for offering peri 