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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number: 0-21134
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
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(Exact name of registrant as specified in its charter)
Delaware 04-2893483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
840 Memorial Drive, Cambridge, Massachusetts 02139
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(Address of principal executive offices) (zip code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
(Title of Class)
Registrant's telephone number, including area code: (617) 491-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 2000 was $65,663,168.
The number of shares of the registrant's common stock outstanding as of March
22, 2000 was 31,264,634.
Documents incorporated by reference:
None
PART I
EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF THE COMPANY'S
BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
SET FORTH IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING THOSE SET FORTH IN EXHIBIT 99 TO THIS FORM 10-K.
ITEM 1. BUSINESS.
CORPORATE SUMMARY
HeavenlyDoor.com, Inc. together with its subsidiaries (collectively
"HeavenlyDoor.com" or the "Company"), currently provides business to business
and business to consumer products and services for the funeral service
industry over the Internet. The Company plans to enhance and expand its web
site to provide a broader range of products and services for senior citizens,
including life insurance, assisted living, estate management and more. As
such, the Company is positioning itself strategically as a senior life care
portal. From its inception in 1985 to 1999, HeavenlyDoor.com operated as a
biopharmaceutical company named Procept, Inc. ("Procept") that was engaged in
the development and commercialization of novel drugs with a focus on
infectious diseases and oncology. On March 17, 1999, Procept merged with
Pacific Pharmaceuticals, Inc. ("Pacific"), and Pacific became a wholly owned
subsidiary of Procept. On November 8, 1999 the Company announced a major
strategic change in its business with the signing of an Agreement and Plan of
Merger to acquire Heaven's Door Corporation. The merger with Heaven's Door
Corporation was completed on January 28, 2000, and Procept's name was changed
to HeavenlyDoor.com, Inc. The name of the Company's subsidiary, Pacific, was
changed to Procept. After stockholder approval at the 2000 Annual Meeting,
Procept will hold all of the biotechnology assets. The Company will now focus
on growing the Internet business, while maximizing the value of the
biotechnology assets.
Heaven's Door Corporation
The U.S. funeral industry is large and fragmented with approximately $15 billion
in revenues in 1999 and over 30,000 funeral homes and cemeteries. The worldwide
market is substantially larger with an estimated $50 billion in revenues. In
addition, the pre-planning of funerals has grown significantly. More Americans
are making their final resting plans ahead of time to spare family members the
burden and are entering into pre-need agreements to purchase funeral and burial
goods and services prior to death. Currently, funds in pre-need agreement exceed
$25 billion according to the Committee on Aging Statistics GAO on Pre-Need.
Industry analysts estimate the potential U.S. pre-need market at $85 billion.
HeavenlyDoor.com hopes to become the primary link between these pre-need
customers and funeral homes. The pre-need customer can find substantial
information on this difficult and sensitive topic from the privacy of his/her
own home, and funeral homes can have a customized web site designed to reach
these customers with computer set-up in their funeral homes, as well as
national advertising support. Potential benefits for funeral homes are: natural
access to additional customers, a web presence that most of them do not now
have, and valuable business to business connectivity within their industry.
Visitors to the HeavenlyDoor.com web site will find a comprehensive funeral home
search capability, interactive online obituaries and tributes, links to major
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newspaper obituaries, various e-commerce features including sympathy gifts,
flowers, cards, and detailed information concerning funerals and related
topics. HeavenlyDoor.com plans to offer additional features including a
bereavement chat room, grief and religious counseling, memorials for
veterans, firefighters and police, a bulletin board, and a resource center
for all funeral-related topics. Various business to business services are
also being planned for the benefit of the funeral home. The HeavenlyDoor.com
revenue model is multi-faceted and includes subscription fees from funeral
homes, online obituaries, transaction fees from many types of e-commerce
applications, and advertising fees.
Finally HeavenlyDoor.com is actively pursuing significant growth opportunities
internationally and outside of the funeral industry as well. HeavenlyDoor.com is
currently exploring expansion into the European funeral market and may develop
plans for a related web site focused on religion. As HeavenlyDoor.com grows, it
plans to expand its offerings to other products and services for the elderly and
aging baby boomer population, including, but not limited to, the life
care/assisted living industry and financial/estate planning.
Procept, Inc.'s Biotechnology Assets
Until the search for potential partners and acquirers of the biotechnology
assets is complete, Procept intends to continue the clinical development of its
two lead compounds, both of which have substantial government support.
PRO 2000 Gel. PRO 2000 Gel is being developed as a vaginal, topical microbicide
designed to provide protection against human immunodeficiency virus ("HIV")
infection, as well as herpes, chlamydial and gonorrhea infection. Two Phase I
clinical trials showed that PRO 2000 Gel is safe and well tolerated in healthy,
sexually abstinent women. A larger safety study in sexually active women and
HIV-infected women is ongoing in the United States and South Africa, with
support from the National Institute of Allergy and Infectious Diseases
("NIAID"), a unit of the National Institutes of Health ("NIH"). Procept
envisions that the current clinical trial will be followed by a pivotal Phase
II/III trial to demonstrate safety and protective efficacy in a population of
women at high risk for HIV infection. Recent independent surveys have shown that
the potential worldwide market for topical microbicides may exceed $1 billion
annually.
O6-Benzylguanine ("BG"). BG is a chemosensitizer that is designed to overcome
resistance to a significant class of commonly used chemotherapeutic agents known
as O6-alkylating agents. In preclinical animal studies, treatment with BG
increased the anti-tumor activity of these agents in brain, colon, and prostate
cancers, as well as in melanoma. A Phase II development program has recently
begun and will be conducted in accordance with a Cooperative Research and
Development Agreement ("CRADA") executed with the National Cancer Institute
("NCI"). In addition to multiple myeloma, brain cancer, and melanoma, Procept
hopes that BG may provide increased efficacy for O6-alkylating agents in other
cancers, such as colon and breast, for which these agents are not commonly used.
INTERNET BUSINESS
HeavenlyDoor.com seeks to be a leader in offering products and services to the
elderly and the aging baby boomer population through its web site. Currently,
our web site offers consumers information about funeral products and services
and Internet linking to funeral service providers, including funeral homes,
cemeteries and monument dealers. The Company believes that the sale of pre-need
and at-need products and services over the web offers attractive benefits to
consumers including, without limitation, enhanced selection, convenience,
ease-of-use, depth of content and information.
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In addition, the site provides Internet linking to third party vendors of
death-care products, such as books, flowers, and bereavement counseling. The
key services of the web site include browsing, searching, and at-home easy
one-stop guidance on the subject of death care. Over time, the Company
anticipates expanding its products and services to senior citizens in other
areas such as religion, life care/assisted living, and financial services. We
also believe that financial/estate planning will provide opportunities for
growth as well.
HeavenlyDoor.com offers to businesses participating in the funeral industry
customized web page development services as well as linkage to the
HeavenlyDoor.com site. The Company believes that its web site will offer funeral
industry participants a compelling method of increasing their visibility and
utilization. For the most part, the death-care industry has been subject to
limited advertising options. During the past one hundred years, death-care
providers have generally utilized regional trade magazines, yellow-page
telephone directories and community newspaper publications as advertising
outlets. We believe the HeavenlyDoor.com web site promises to enable death-care
providers to enjoy the most aggressive marketing opportunity ever presented to
the industry.
To date, our revenues have been derived from sales of our online products,
advertising sales and funeral industry participants' subscriptions. We will seek
to obtain revenue from our web site through:
o transaction fees on business to business applications;
o the sale of online products and services;
o commissions from third party e-commerce transactions; and
o sale of advertising space.
The Web Site
Overview. The Company's web site provides a simple, easy-to-use, online
experience. Visitors to the web site find substantial information on the
products and services from particular funeral industry providers, as well as
general information on the funeral industry. Our subscribing funeral homes have
customized web sites. We also provide lists of other funeral service providers
who are not currently subscribers.
Visitors to the HeavenlyDoor.com web site will find features that include a
comprehensive funeral home search capability, interactive online obituaries and
tributes, as well as detailed information concerning funerals and related
topics. We are developing additional features including a bereavement chat room,
grief and religious counseling, memorials for veterans, firefighters and police,
a bulletin board, and a resource center for all funeral-related topics. The key
capabilities of the HeavenlyDoor.com web site are:
o Browsing. The web site offers visitors a variety of highlighted subject
areas and special features arranged in a simple, easy-to-use fashion
intended to improve funeral home, cemetery, or other product search,
selection and discovery. In addition, the home page offers a menu of
buttons linking to information of topical interest.
o Searching. A leading feature of the web site is its searchable database of
more than 31,000 funeral homes, cemeteries, and monument dealers. In
addition, visitors may search the online obituaries, or various businesses
to business services.
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o Reviews and Content. The web site offers multiple forms of materials to
provide support, assistance, and information, to visitors. The content
includes featured news columns, newspaper articles, online obituaries of
various newspapers, and links to other sources.
Current Content. In addition to content resulting from the sale of our online
products and our funeral industry listings and Internet links, HeavenlyDoor.com
has sought to develop a broad array of content to attract visitors to the web
page. These proprietary content offerings include:
o Lists of Related Web Sites. We provide a list of web page addresses for
bereavement chat rooms, charities, hospices and other related web sites.
o Lists of Bereavement Related Books. We provide a list of books available
through Amazon.com and a web page link to purchase books.
o Newspaper Obituaries. We provide web page links to obituaries published by
major newspapers.
o Funeral Guide. We publish an Internet guide to the process of planning
for, purchasing and conducting funerals and related products and services.
Online Products. While all content on our web page is accessible without a fee,
we offer consumers the following online products at a fee. We have made
arrangements with credit card merchant accounts to process our e-commerce
transactions:
o Online Obituary. Consumers may purchase Online Obituaries, which are each
a one hundred-word message and photograph posted on our web page. These
obituaries are searchable and may be visited by interested users. While we
have adopted the concept of the newspaper obituary, the placement of an
obituary online allows friends and family members throughout the world to
access the obituary year after year. We price the online obituary at a
fraction of the cost of a one-time newspaper obituary. Viewers of online
obituaries may post a message on a bulletin board dedicated to that
obituary.
o Online Testimonial Announcements. Similarly, consumers can purchase
special testimonial messages to celebrate the life of deceased loved ones
or to commemorate anniversaries and special holidays. Testimonials can be
purchased for one month at a time or for postings on certain holidays.
In addition to these individual product offerings, the web site also offers a
wide selection of special package options to accommodate family needs.
Content Under Development. We are constantly investing in our web site content
in order to expand the types of content and to maintain current content to
attract return viewers. Our current development projects include:
o Bereavement Chat Room. We are developing an online chat room to provide a
support group service. The chat room will be moderated by professional
bereavement therapists, allowing participants from around the world to
interact with the bereavement therapists "live" via the Internet.
o Online Obituary Pages of Honor. Our Online Obituary presents various
marketing opportunities, particularly with regard to the concept of Honor
Pages. We are developing
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pages of Honor that memorialize Firefighters, Veterans from all wars and
Law Enforcement officers. The Veterans page of Honor is currently being
designed and organized under the direction of Major General Harry W.
Brooks, a retired three star army general. The Firefighter and Police
Honor pages are being developed under the direction of expert consultants
still active in their respective service. The Online Obituary Honor pages
will present an extended advertising opportunity for a variety of product
manufacturers and service providers to target advertising campaigns
directly to the 55 and over demographic markets. We believe that our Honor
page feature will attract vast numbers of Americans and people from around
the world, all of which are potential shoppers, to visit the web site in
support of those fallen heroes.
E-Commerce. In addition to our direct online product offerings, our web site
offers links to third party e-commerce web sites offering various products and
services. These products include religious jewelry, flowers, catering,
chocolates, books, sympathy cards, gift items, legal services, etc. We intend to
expand our e-commerce vendor offerings to offer specialized products and
services (which do not compete which the subscribing participants' offerings),
such as estate planning, insurance policies, specialty books, legal services,
etc. These additional offerings may be through linked web pages or direct custom
e-commerce offerings by HeavenlyDoor.com.
Business to Business Services
The Company currently provides web site development services to funeral industry
participants. In addition, we plan to implement a subscription program for
funeral industry participants, under which, in exchange for web site linking and
involvement in regional and national marketing activities, they will pay a
monthly subscription fee.
The Company is currently developing a comprehensive business to business feature
for its web site. This will enable industry vendors and death-care service
providers to market products and services to each other while utilizing password
protection to prevent consumers from accessing the business to business feature
of the web site. We plan to charge transaction fees, thereby participating at
multiple stages of the value-added chain on these business to business sales.
Sales and Marketing
While the HeavenlyDoor.com web site promises to enable death-care providers to
enjoy the most aggressive marketing opportunity ever presented to the industry,
promotion and advertising of the site itself may be the key to the overall
success of the programs. The Company's sales and marketing strategy is designed
to strengthen the HeavenlyDoor.com brand name, increase customer traffic to the
web site, build a strong customer database, maximize repeat purchases and to
develop incremental revenue opportunities. The Company seeks to build customer
loyalty by creatively applying technology to deliver personalized web presence,
as well as creative and flexible merchandising. The Company employs a variety of
media, business development and promotional methods to achieve these goals,
including online and traditional advertising and public relations activities.
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Conventions and Trade Shows. Our web site has been well received with thousands
of potential subscribers having visited the Company's show booth at the New
Jersey State Trade Show, the National Funeral Directors Convention and Trade
Show, and International Expo Trade Show. These trade shows are major industry
events and have marked the launch of a full-scale sales effort by the Company to
sign subscribers. The Company has received a significant number of inquiries
from death-care service providers about HeavenlyDoor.com business to business
and business to consumer capability. The Company has exhibited or plans to
exhibit at nine convention/trade shows throughout the United States during the
upcoming year.
Public Awareness National Seminar Program. We intend to implement a national
seminar program in the second quarter of 2000. HeavenlyDoor.com's sales teams
plan to visit key cities throughout the United States conducting public
awareness seminars at senior centers in adult communities to the 55 and over
demographic age groups. The Company believes that these seminars will enlighten
the public in the use and benefits of the HeavenlyDoor.com web site. Subscribers
will have the opportunity to be involved in organizing senior citizen groups to
attend the seminars. The Company believes that this program will capture the
interest of those so inclined to pre-plan as well as to enlighten other
potential pre-planners to consider the benefits, the ease and stress-free method
of reviewing their pre-need options while visiting the HeavenlyDoor.com web
site.
Advertising. The Company believes a national advertising campaign is the best
way to encourage visitors to use the web site and support the overall
concept. Our advertising campaign planned for 2000 will feature television
commercials, billboard and magazine ads. The campaign will focus on public
awareness of the HeavenlyDoor.com web site and enlighten the public that
pre-planning is easy, stress free, cost effective and a natural alternative
method. This will involve a national spokesperson.
Funeral Industry Association Offerings. The funeral industry is characterized by
several significant funeral industry associations. We believe that a key to
accelerating subscriptions to our web site is through developing and maintaining
relationships with these associations. For example, HeavenlyDoor.com is working
with funeral industry associations to install quick-links on the association's
member database to each HeavenlyDoor.com subscriber's web site, thereby allowing
the association to maintain a direct relationship with members by building a
mini-database with hyperlinks to each member. We currently do not charge any fee
for this linking service, offering the funeral industry association enhanced
communication, technology, and distribution services to the association and its
members.
Customer Service
The Company believes its ability to build long-term relationships with its
customers depends on offering an efficient service-oriented support team to
respond to new and repeat customers. The Company seeks to maintain communication
and respond to its customers while continually improving the web site. The
Company offers e-mail addresses and telephone contact numbers to enable
customers to request information and to receive feedback and suggestions. The
Company intends to actively pursue enhancements to its customer support and
service systems and operations.
Technology
The Company has implemented a range of site management, search, customer
interaction, transaction-processing and fulfillment services and systems using
commercially available, licensed technologies. The Company's current strategy is
to focus its development efforts on licensing commercially developed technology
for applications where available and appropriate.
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The Company uses various software programs for building a web presence and
processing customer orders with suppliers. The Company's transaction-processing
systems are capable of searching through databases, identifying the selected
products, and processing multiple orders. The software also allows access to
e-commerce transactions that process customer debit and credit cards. In
addition, the web site incorporates a variety of tools that allow the user to
search databases, and link to other sites.
The Company's technology team will monitor and operate the web site, network
operations and transaction-processing systems. The continued uninterrupted
operation of the Company's web site and transaction-processing systems is
essential to its business, and it is the job of the site technology team to
ensure their reliability. The Company uses the services of Interland, the
Company's current Internet service provider, to obtain connectivity to the
Internet over multiple dedicated lines.
Proprietary Rights
HeavenlyDoor.com regards its copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to its success. HeavenlyDoor.com
relies upon trademark and copyright law, trade secret protection and
confidentiality or license agreements with its employees, customers, partners
and others to protect its proprietary rights. HeavenlyDoor.com has obtained the
registration for certain of its trademarks, including "HeavenlyDoor." Effective
trademark, copyright, and trade secret protection may not be available in every
country in which its products and media properties are distributed or made
available through the Internet. HeavenlyDoor.com may license in the future
elements of its distinctive trademarks, trade dress, and similar proprietary
rights to third parties. While HeavenlyDoor.com attempts to ensure that the
quality of its brand is maintained by its licensees, its licensees may take
actions that could materially and adversely affect the value of its proprietary
rights or the reputation of its products and media properties. The distinctive
elements of HeavenlyDoor.com may not be subject to protection under copyright
law. HeavenlyDoor.com cannot guarantee that the steps the Company has taken to
protect its proprietary rights will be adequate. Many parties are actively
developing death-care specific web sites. HeavenlyDoor.com believes that such
parties will continue to take steps to protect these technologies, including
seeking patent protection. As a result, HeavenlyDoor.com believes that disputes
regarding the ownership of such technologies are likely to arise in the future.
In addition, more general Internet use proprietary rights may be asserted. For
example, HeavenlyDoor.com is aware that a number of patents have been issued in
the areas of electronic commerce, online auctions, web-based information
indexing and retrieval, online direct marketing, fantasy sports, common web
graphics formats and mapping technologies. HeavenlyDoor.com anticipates that
additional third-party patents will be issued in the future. To the extent that
HeavenlyDoor.com determines that licensing such patents is appropriate,
HeavenlyDoor.com cannot guarantee that it would be able to license such patents
on reasonable terms. HeavenlyDoor.com may incur substantial expenses in
defending against third-party patent claims regardless of the merit of such
claims. In the event that there is a determination that HeavenlyDoor.com has
infringed such third-party patent rights, HeavenlyDoor.com could incur
substantial monetary liability and be prevented from using the rights in the
future. In addition to patent claims, third parties may assert claims against
HeavenlyDoor.com alleging infringement of copyrights, trademark rights, trade
secret rights or other proprietary rights or alleging unfair competition.
There are no substantial barriers to entry in these markets, and
HeavenlyDoor.com expects that competition will continue to intensify.
In the area of advertising revenue, HeavenlyDoor.com competes with online
services, other web site operators and advertising networks, as well as
traditional offline media such as television, radio and print for a share of
advertisers' total advertising budgets. HeavenlyDoor.com believes
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that the number of companies selling web-based advertising and the available
inventory of advertising space has recently increased substantially.
Accordingly, HeavenlyDoor.com may face increased pricing pressure for the sale
of advertisements, which could reduce its advertising revenues. In addition, its
sales may be adversely affected to the extent that its competitors offer
superior advertising services that better target users or provide better
reporting of advertising results.
PROCEPT SUBSIDIARY: BIOTECHNOLOGY DRUG DEVELOPMENT PROGRAMS
PRO 2000 Gel: A Microbicide to Prevent Human Immunodeficiency Virus ("HIV") and
Sexually Transmitted Disease ("STD") Infection
PRO 2000 Gel is a topical microbicide designed to prevent the sexual
transmission of HIV and other STD pathogens.
HIV infection usually leads to AIDS, a severe, life threatening impairment of
the immune system. In 1999, the HIV epidemic continued with an estimated 5.8
million new infections worldwide. In addition, The Centers for Disease Control
estimates that there are 330 million new cases of other STDs each year
worldwide. "Topical microbicides," which are designed to provide a chemical
barrier to infection, are an attractive alternative to male condoms; they are
likely to be more acceptable than condoms and offer women a method they can use
to protect themselves. Development of topical microbicides is a high priority
for both the United States government and international agencies.
Procept believes that its proprietary antiviral compound PRO 2000 Gel is ideally
suited for use as a topical microbicide. PRO 2000 was shown in laboratory
studies to be effective at preventing HIV infection of cultured T cells,
macrophages, and dendritic cells (dendritic cells are believed to be the first
cells infected during sexual transmission). PRO 2000 showed high activity
against HIV strains from both the developed and developing world; the virus did
not develop resistance to the compound even after prolonged exposure.
Preclinical studies also demonstrate that PRO 2000 is active against other STD
agents including genital herpes simplex virus type 2 and Chlamydia trachomatis.
In addition to its broad antiviral activity, the compound is straightforward to
manufacture, highly stable, odorless and virtually colorless. PRO 2000 Gel has
also been formulated for intravaginal use. In preclinical irritation studies,
PRO 2000 Gel was shown to be much safer than the marketed vaginal spermicide
containing nonoxynol-9. In other preclinical studies, PRO 2000 Gel was shown to
be non-mutagenic, non-sensitizing and compatible with latex condoms.
Collaborators at the Children's Hospital Medical Center, Cincinnati, showed that
vaginally applied PRO 2000 Gel can protect mice completely from vaginal
infection from HIV infection. Moreover, unlike many other agents, PRO 2000 Gel
provided significant protection even when applied up to an hour before exposure
to the virus. These results, which were presented at the XII World AIDS
Conference in Geneva in July 1998, provide greater confidence that PRO 2000 Gel
will prevent STDs in humans. Genital herpes lesions are a significant public
health problem and are believed to promote HIV infection; therefore, preventing
the transmission of herpes may assist in the reduction of HIV infection.
The completed monkey study extends these results by showing that PRO 2000 Gel
can also protect animals from infection by a HIV-like virus. The hybrid
simian/HIV used in the study contains a HIV envelope and a simian
immunodeficiency virus core, which allows it to infect monkeys. Because it
contains HIV elements, the use of HIV rather than simian immunodeficiency may
provide a better indication of PRO 2000 Gel's potential effectiveness against
the human virus.
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These promising results support accelerated human clinical evaluation of PRO
2000 Gel. Two Phase I clinical trials, completed in 1997, showed that daily
intravaginal doses of 4% PRO 2000 Gel were safe and well tolerated in healthy,
sexually abstinent women. One of these studies was supported by the British
Medical Research Center ("MRC"). In July 1999, a Phase I/II clinical trial of
PRO 2000 Gel was initiated by the National Institute of Allergy and Infectious
Diseases ("NIAID"), a component of the National Institutes of Health ("NIH"), at
sites in the United States and South Africa. The trial is designed to evaluate
the safety, tolerance and acceptability of PRO 2000 Gel in healthy, sexually
active women and in sexually abstinent HIV-infected women. HIV-infected women
were included because the product is designed to inhibit both male-to-female and
female-to-male transmission. A total of approximately 60 volunteers in 4 urban
areas will be asked to apply the product up to twice a day for 2 weeks. Effects
on the genital mucosa will be carefully assessed, and perceptions about the
product will be ascertained through volunteer interviews and focus group
discussions. This information is expected to extend the findings of previous
Phase I clinical trials, and to aid in the selection of an appropriate dose for
testing in a pivotal efficacy trial involving women at high risk for HIV
infection. Phase II safety studies are also under discussion with the MRC.
Procept believes that safety data from these trials, coupled with the promising
animal protection results, will make PRO 2000 Gel an attractive candidate for
testing in a large, government-funded Phase III clinical trial designed to
demonstrate safety and protective efficacy.
The Company holds two issued patents on the use of PRO 2000 Gel to prevent HIV
infection. Procept announced that it had received two Notices of Allowance from
the United States Patent and Trademark Office relating to PRO 2000, the
Company's lead anti-infective drug candidate. One patent contains
composition-of-matter claims covering PRO 2000 and similar compounds, while the
other covers the use of a PRO 2000-based vaginal gel formulation for the
prevention of pregnancy. A similar contraception patent was independently
allowed in South Africa. Additional international patent applications have been
filed.
O6-benzylguanine ("BG"): A Chemosensitizer to Enhance Chemotherapy
Procept's wholly owned subsidiary, BG Development Corp. ("BGDC"), holds an
exclusive worldwide license from Pennsylvania State University ("Penn State")
and others for BG, a series of related compounds and a gene therapy that Procept
believes will enhance the effectiveness of a class of currently used
chemotherapeutic agents known as O6-alkylators agents.
BG and related compounds are small molecules for intravenous administration in
the treatment of cancer. Procept believes BG to be capable of destroying the
resistance of cancer cells to a class of chemotherapeutic agents, O6-alkylating
agents. Procept believes that the effectiveness of alkylating chemotherapeutic
agents against various tumors such as brain, prostate, colon cancers, melanoma
and lymphoma is limited due to the ability of tumor cells to repair the DNA
damage caused by the O6-alkylating agents, because the DNA repair protein,
O6-alkylguanine-DNA alkyltransferase ("AGT"), protects tumor cells by repairing
the tumor cell DNA. Procept believes that BG inactivates the AGT protein in a
variety of cancers thereby overcoming resistance to the O6-alkylating agents.
The treatments for most cancers include surgery, radiation therapy and/or
chemotherapy. O6-alkylators are chemotherapeutic agents that are primarily
used to treat brain cancer, melanoma, lymphoma and certain gastrointestinal
cancers. They include carmustine ("BCNU"), lomustine ("CCNU"), dacarbazine
("DTIC"), procarbazine, fomustine, and temozolomide. CCNU, fomustine and DTIC
remain important in the chemotherapeutic treatment of brain cancer and
advanced melanoma. Procarbazine has become an important agent in the
treatment of Hodgkin's disease and brain tumors. Temozolomide has shown
potential for the treatment of lymphomas, melanoma and brain tumors. In
general, although there is a small percentage of patients who have achieved
long-term remission, the O6-alkylators are generally not considered curative.
The critical
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factor contributing to the poor prognosis is the resistance of cancers to the
chemotherapeutic agents.
Tumor cells display a variety of mechanisms of resistance to many drugs.
Alkylating agents act by causing damage to the DNA by binding to the O6-position
of guanine on the DNA strand. AGT is believed to play a significant role in
cancer resistance to the O6-alkylators by removing this chemical bond. A
published study in 226 patients with brain cancer (high-grade astrocytoma)
receiving BCNU therapy showed that the patients with low levels of AGT responded
better to treatment and had increased survival relative to patients with high
levels of AGT. Conversely, the patients with high levels of tumor AGT protein
had poor disease prognosis. Since it appears that BG temporarily destroys AGT,
Procept believes that BG may reduce the resistance that is commonly observed in
cancer cells following treatment with O6-alkylating agents.
O6-alkylating agents such as BCNU and CCNU are believed to cause a
number of different damages to the tumor DNA, including an interstrand
cross-link between guanine and cytosine (building blocks of DNA) on the
opposite strand. Procept believes that there is a strong correlation between
the number of strand cross-links and tumor cells killed. AGT protein protects
tumor cells from damage by removing the damage from the O6-position of
guanine. Procept believes that there are no other proteins involved in the
repair process, and that the AGT protein is inactivated in the repair
process. Procept believes that BG binds to the AGT protein, thereby blocking
the tumor DNA repair and believes that inactivation of the AGT protein in a
variety of human tumors by non-toxic doses of BG could render these tumors
more sensitive to the cytotoxic effects of O6-alkylating agents.
Results of in vitro testing have led to an evaluation of O6-alkylating agents
in animal tumor models. Upon administration of BG to mice carrying two
different human brain tumors prior to the administration of BCNU, 80% and
100% tumor regression was observed compared to 0% and 10% suppression in
animals treated with BCNU alone. Combinations of BG and BCNU were also found
to be effective in mice bearing human colon cancers, showing 96% tumor
regression compared to 35% tumor regression with BCNU alone. Growth
inhibition was also observed in a rat prostate model after treatment with BG
and BCNU, but was not observed in animals treated with BCNU alone.
A Phase I clinical trial of BG has been completed at Duke University
("Duke"). Procept believes that the study has shown that BG, injected
intravenously, crosses the blood-brain barrier and effectively blocks the
activity of human brain tumor AGT protein. Procept also believes that the
study at Duke has demonstrated BG to be nontoxic when administered alone, and
to be effective in inhibiting over 90% of AGT activity in brain cancer
specimens surgically removed from patients 18 hours after the intravenous
administration of BG. Three other Phase I clinical studies at the University
of Chicago, Case Western Reserve University ("CWRU") and Duke University
Medical Center have examined the use of BG in combination with BCNU
in brain, colon and renal cancer. In these studies, BG was administered
over a one-hour period by intravenous infusion, followed by an infusion of
BCNU one hour after completion of the BG infusion. The
National Cancer Institute ("NCI") of the National Institutes of Health
("NIH") is sponsoring the trials under a Cooperative Research and Development
Agreement ("CRADA") executed between the NCI and Pacific. From these studies,
which involved patients who had failed other cancer therapies, a BG/BCNU dose
of 120/40 mg/m2 was chosen as the initial Phase II dose. Preliminary clinical
response data for the Phase I trial conducted at CWRU was presented by Dr.
Timothy P. Spiro at the 1999 Annual Meeting of the American Society of
Clinical Oncology. One metastatic colon carcinoma patient achieved a
sustained partial response for 13 months after failing other therapies. A
second patient with carcinoma of unknown primary had sustained stable disease
for 20 months. The Phase I trials have successfully demonstrated the safety
of BG, and the Company is eager to obtain efficacy data in Phase II. Procept
plans to test BG in several cancer indications, and with other
chemotherapeutic agents such as the Gliadel
11
Wafer and temozolomide. The NCI and many investigators continue to support
the clinical development of BG for a variety of cancer indications. In
addition to multiple myeloma, brain cancer and melanoma, Procept hopes that
BG may provide increased efficacy for O6-alkylating agents in other cancers,
such as colon and breast, for which O6-alkylating agents are not commonly
used.
Standard therapy with O6-alkylating chemotherapeutic agents commonly results in
bone marrow suppression. Through the BG license, Procept has also acquired a
proprietary gene therapy that may result in the production of an altered AGT
protein in bone marrow cells. A gene for an altered AGT protein is introduced to
the bone marrow hematopoietic stem cells in vitro, followed by the introduction
of the modified stem cells to the host. Procept believes that the concomitant
use of an O6-alkylating agent plus BG in the presence of the altered AGT protein
may result in reduced resistance of the cancer cells with less toxicity to the
bone marrow.
In addition to BG, Procept has tested a considerable number of additional
compounds for AGT protein inactivation. Procept believes that a number of next
generation compounds are effective in inhibiting the activity of tumor AGT
protein. Procept also believes that it has a proprietary interest in these
compounds. Procept believes that it is possible that these compounds will offer
complementary properties to that of BG in further abrogation of cancer
resistance to O6-alkylating agents.
Four patents including the composition of matter and use for BG and related
compounds have been issued to Penn State and licensed to BG. Four additional
applications provide protection for the next generation compounds. A patent
application currently under prosecution is intended to provide protection for
the use of gene therapy to introduce AGT mutant into the stem cells.
In September 1998, Procept paid to Penn State $150,000 as an up-front licensing
fee. Penn State will also be due a (i) royalty on sales of licensed products,
(ii) certain performance-based milestones, and (iii) a non-refundable, minimum
annual royalty (the "Minimum Annual Royalty") equal to $75,000 per year
creditable against future milestone payments and third party payments, subject
to certain deferrals. The licensing agreement gave Procept the option to fulfill
up to 75% of its obligations, to pay minimum annual royalties or performance
milestones through the issuance of a number of shares of Procept's common stock
equal to the cash value of such payments. Procept is obligated to reimburse the
Licensor approximately $200,000 for prior patent costs. Procept may issue shares
of its common stock in lieu of these payments.
In 1998, the NIH entered into a CRADA with Pacific. Under the terms of the
agreement, the NIH will conduct research involving BG and will make available to
the Company (i) NIH clinical data relating to any potential products
incorporating BG developed or generated by NIH prior to the date of the CRADA
and (ii) all subsequent data developed under the CRADA. The Company is required
to pay the NIH $125,000 per year for five years, payable in quarterly
installments.
Periodontal Tissue Monitor ("PTM")
Procept holds the rights to a proprietary diagnostic test of periodontitis,
known as PTM. PTM is an eye-readable, chairside disposable test designed for use
within the dental office to assist practitioners (dentists and periodontists) in
the diagnosis of periodontitis and in the monitoring of the effectiveness of
their efforts to treat the disease. The PTM works by identifying the enzyme AST
which is found in crevicular fluid when cells die.
12
In June 1997, Pacific received approval from the United States Food and Drug
Administration ("FDA") to begin commercial sales and distribution in the United
States of the PTM product. Pacific also had two distribution agreements with
Steri-Oss, Inc. for the exclusive distribution of PTM worldwide, except in
Japan. To date, there have been no significant sales under the distribution
agreements. In addition in 1998, Nobel Biocare AB acquired Steri-Oss, Inc. and
decided to terminate the agreement.
Shofu, Inc. of Japan is currently completing clinical trials of PTM in Japan
under a Material Transfer Agreement with Procept and may decide to market PTM in
Japan if the product is ultimately approved by Japanese regulators.
Patents and Proprietary Technology
Procept's policy is to protect its technology by, among other things, filing or
causing to be filed on its behalf, patent applications for technology relating
to the development of its business. Currently, the Company is awaiting action on
various patent applications relating to technology or the uses or products
thereof that it owns or that it has licensed.
The Company believes its copyrights, service marks, trademarks, trade dress,
trade secrets, proprietary technology and similar intellectual property is
critical to its success. The Company relies on trademark, copyright and trade
secret protection in conjunction with confidentiality and/or license agreements
with its employees, consultants, partners and others to protect its proprietary
rights. The Company pursues the registration of its trademarks and service marks
in the U.S. and internationally, and has applied for the registration of certain
of its trademarks and service marks. As the Company expands into overseas
markets, the Company will seek a best efforts approach for effective trademark,
service mark, copyright, and trade secret protection in countries in which the
Company's products and services are made available online.
To protect its right to and to maintain the confidentiality of trade secrets and
proprietary information, the Company requires employees, Scientific Advisory
Board members, consultants and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements prohibit the disclosure of confidential information to
anyone outside the Company and require disclosure and assignment to the Company
of ideas, developments, discoveries and inventions made by employees,
consultants, advisors and collaborators.
The Company's ability to compete effectively with other companies will depend,
in part, on the ability of the Company to maintain the proprietary nature of its
technology. Although the Company has been granted, has filed applications for
and has licensed a number of patents in the United States and foreign countries,
there can be no assurance as to the degree of protection offered by these
patents, as to the likelihood that pending patents will be issued or as to the
validity or enforceability of any issued patents.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. There can also be no assurance that
competitors will not infringe the Company's patents. Further, with respect to
licensed patents, which, in the case of the Company, represent a significant
portion of the Company's proprietary technology, the defense and prosecution of
patent suits may not be in the Company's control.
13
The Company also relies on unpatented proprietary technology that is significant
to the development of the Company's technology, and there can be no assurance
that others may not independently develop the same or similar technology or
otherwise obtain access to HeavenlyDoor.com's unpatented technology. If the
Company is unable to maintain the proprietary nature of its technology, the
Company could be adversely affected.
Government Regulations
Regulations imposed by United States, federal, state and local authorities, as
well as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing and marketing activities for
the Company's proposed pharmaceutical products.
Before testing of any compounds with potential therapeutic value in human test
subjects may begin, stringent government requirements for preclinical data must
be satisfied. These data, obtained both from in vivo studies and in vitro
studies, are submitted in an Investigational New Drug ("IND") Application or its
equivalent in countries outside the United States where clinical studies are to
be conducted.
All data obtained from a comprehensive development program are submitted in New
Drug Application ("NDA") or Product License Application ("PLA") to the FDA and
the corresponding agencies in other countries for review and approval.
In addition to the regulations relating specifically to product approval, the
activities of the Company, its partners and licensees are subject to laws and
regulations regarding laboratory and manufacturing working conditions, handling
and disposition of potentially hazardous material, and use of laboratory
animals. In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial or institutional formularies or cost
reimbursement systems.
Completing the multitude of steps necessary before marketing can begin requires
the expenditure of considerable resources and can consume a long period of time.
Delay or failure in obtaining the required approvals, clearances, permits or
inclusions by the Company, its collaborators or its licensees would have an
adverse effect on the ability of the Company to generate sales or royalty
revenue. In addition, the impact of new or changed laws or regulations cannot be
predicted.
COMPETITION
Internet
The world wide web currently has new start-up web sites evolving every day
generating competition in all areas including the funeral industry. The
e-commerce market via web sites is growing and intensely competitive. There are
no substantial barriers to entry in these markets, and HeavenlyDoor.com expects
that competition will continue to intensify. The Company's current or potential
competitors include (1) online web sites offering similar services, (2)
indirectly by corporate conglomerates, associations, or other groups of funeral
homes implementing similar services, (3) distributors and retail vendors of
funeral supplies with significant brand awareness, sales volume and customer
bases. The Company believes the principal competitive factors in its market are
brand recognition, quality selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of site
content, and reliability. Some of the Company's competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
Certain of the Company's competitors may be able to offer similar or additional
services with more favorable terms, devote larger resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote
14
substantially more resources to web site, web presence, and system development
than the Company. Increased competition may affect the Company's business plan
in areas of operating margins and market share. In the area of advertising
revenue, HeavenlyDoor.com competes with online services, other web site
operators and advertising networks, as well as traditional offline media such as
television, radio and print for a share of advertisers' total advertising
budgets. HeavenlyDoor.com believes that the number of companies selling
web-based advertising and the available inventory of advertising space has
recently increased substantially. Accordingly, HeavenlyDoor.com may face
increased pricing pressure for the sale of advertisements, which would reduce
its advertising revenues. In addition, its sales may be adversely affected to
the extent that is competitors offer superior advertising services that better
target users or provide better reporting of advertising results.
Biotechnology
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms and universities and
other research institutions. Competition may increase further as a result of
potential advances in the commercial application of biotechnology and greater
availability of capital for investment in these fields. Acquisitions of
competing companies and potential competitors by large pharmaceutical companies
or others could enhance financial, marketing and other resources available to
such competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including competitors of the Company, to market
commercial products. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
Company's technology obsolete and noncompetitive, or that such competitors will
not succeed in obtaining FDA or other regulatory approvals for products more
rapidly than the Company.
EMPLOYEES
As of March 18, 2000, the Company employed 20 full-time and 3 part-time
employees. The Company also utilizes independent contractors to perform various
functions for the Company. Currently, the Company's employees are not
represented by a labor union, and the Company regards its employee relations to
be in good standing. Due to the intense competition for qualified personnel in
the Company's industry, particularly for software development and other
technology personnel, the Company believes its future success depends in part on
the continued ability to hire and retain qualified personnel.
ITEM 2. PROPERTIES.
HeavenlyDoor.com's headquarters and research and development facilities are
located in Cambridge, Massachusetts. At its 840 Memorial Drive location,
HeavenlyDoor.com leases a total of approximately 41,200 square feet of space,
which includes approximately 34,800 square feet of research laboratories.
HeavenlyDoor.com currently subleases substantially all of the laboratory space
at its headquarters to start-up pharmaceutical or biotechnology companies.
HeavenlyDoor.com also leases approximately 3,400 square feet of space at 84
Hamilton Street, which includes approximately 1,100 square feet of research
laboratories. HeavenlyDoor.com believes such laboratory space will be adequate
for its existing research and drug development activities.
15
Heaven's Door Corporation leases approximately 3,000 square feet of office space
at 3300 N. University Drive, Coral Springs, Florida.
ITEM 3. LEGAL PROCEEDINGS.
On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a Complaint
with the United States District Court for the Southern District of New York
naming the Company as a defendant (the "Complaint"). The Complaint alleges that
the Company breached obligations to Commonwealth under the Underwriting
Agreement between Commonwealth and the Company dated February 8, 1996, giving
Commonwealth a right of first refusal to act as co-lead underwriter or
co-managing agent of a public offering or private placement of the Company's
securities during the period ended August 8, 1997. In the Complaint,
Commonwealth seeks aggregate compensatory damages in the amount of $375,000,
incidental and consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as the
court deems proper. The Company served an answer on or about March 16, 1998
denying Commonwealth's allegations and has engaged in substantial discovery. At
a court-sponsored mediation held on February 9, 1999, the Company and
Commonwealth reached an agreement in principle to settle this matter whereby
Commonwealth agreed to dismiss the suit in return for payment of $45,000 in cash
and 36,785 shares of the Company's common stock. In early 1999, the Company made
these payments.
On February 22, 1999, Christopher R. Richied ("Richied") filed a Complaint with
the United States District Court for the Southern District of New York naming
Pacific Pharmaceuticals, Inc. ("Pacific") and Binary Therapeutics Inc.
("Binary"), both subsidiaries of the Company, as defendants (the "Complaint").
The Complaint alleges that Pacific and Binary breached obligations to Richied
under certain consulting agreements. In the Complaint, Richied seeks
approximately $40,000 in cash and an indeterminate amount based upon the value
of certain equity components of the consulting agreements. The Company's answer
to the Complaint was filed on August 9, 1999. Based on facts alleged in the
Complaint, the Company does not believe this action will have a material adverse
effect on the Company's business, even in the event of a decision by the court
in the plaintiff's favor or other conclusion of the litigation in a manner
adverse to Pacific and Binary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matters were submitted to a vote of securityholders during the fourth quarter
of the fiscal year covered by this report.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 17, 1994, the date of the Company's initial public offering, until
March 26, 1998, the Company's common stock was quoted on the Nasdaq National
Market under the symbol "PRCT". From March 27, 1998 through January 27, 2000,
the Company's common stock has been quoted on the Nasdaq SmallCap Market under
the symbol "PRCT". Beginning January 28, 2000, effective with the merger with
Heaven's Door Corporation, the Company's shares are quoted on the Nasdaq
SmallCap market under the trading symbol "HVDC." The following table sets forth
the range of high and low closing sale prices for HeavenlyDoor.com's common
stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market
for the periods indicated below. The dollar values in this table have been
adjusted to reflect the one-for-ten reverse split of HeavenlyDoor.com's common
stock effected on June 1, 1998 and the one-for-seven reverse split of
HeavenlyDoor.com's common stock effected on October 14, 1997.
High Low
---- ---
1999
Fourth Quarter $3.68 $1.38
Third Quarter $2.28 $1.13
Second Quarter $2.50 $1.38
First Quarter $4.50 $2.00
1998
Fourth Quarter $3.50 $0.31
Third Quarter $4.06 $0.94
Second Quarter $13.13 $3.63
First Quarter $11.86 $6.25
As of March 22, 2000 there were 1,656 holders of record. On March 22, 2000 the
closing price reported on the Nasdaq SmallCap Market for HeavenlyDoor.com Common
Stock was $3.75.
Dividend Policy
The Company has never paid cash dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future. HeavenlyDoor.com
intends to retain any future earnings for use in its business. See "Management
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 are derived
from the Company's financial statements included elsewhere in this Report, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected financial data set forth below as of December 31, 1997, 1996 and 1995
and for the years ended December 31, 1996 and 1995 are derived from audited
financial statements not included in this Report. This data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report.
17
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except share data)
Statement of operations data:
Revenues ........................... $280 $330 $781 $2,277 $4,647
---------- --------- --------- --------- --------
Costs and expenses:
Research and development ...... 1,126 1,990 6,619 9,925 12,406
General and administrative .... 1,575 1,610 2,715 3,176 3,723
Charge for purchased in-process
research and development (1) 9,406 -- -- -- --
Compensation charge associated
with stock options (2) ...... 2,500 -- -- -- --
Restructuring charges (3) ..... -- 225 460 273 --
Other ......................... (34) (204) 40 139 230
---------- --------- --------- --------- --------
Total costs and expenses ...... 14,573 3,621 9,834 13,513 16,359
---------- --------- --------- --------- --------
Net loss ........................... (14,293) (3,291) (9,053) (11,236) (11,712)
Less: Charge associated
with the conversion of the
minority interest in a
subsidiary (4) .................. (502) -- -- -- --
Dividends on preferred stock (5) ... -- -- (4,217) -- --
---------- --------- --------- --------- --------
Net loss attributed to
common shareholders ............. $(14,795) $(3,291) $(13,270) $(11,236) $(11,712)
========== ========= ========= ========= ========
Basic and diluted loss per share ... $(1.36) $(1.40) $(63.68) $(68.16) $(127.65)
========== ========= ========= ========= ========
Weighted average number of
common shares outstanding ..... 10,907,251 2,347,245 208,371 164,836 91,752
========== ========= ========= ========= ========
AS OF DECEMBER 31,
------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Balance sheet data:
Cash and cash equivalents .......... $4,075 $2,885 $535 $1,962 $565
Marketable securities .............. -- 2,004 -- 4,002 2,006
Total assets ....................... 4,947 6,188 2,168 8,917 6,397
Capital lease obligations, net of
current portion and other
non-current liabilities ......... 82 186 355 456 907
Total shareholders' equity ......... 4,211 5,397 260 6,316 1,439
Common stock dividends ............. -- -- -- -- --
(1) Charge for purchased in-process research and development. On March 17,
1999, the Company completed the acquisition of Pacific. The aggregate
purchase price of approximately $12.2 million (including assumed
liabilities of $5.7 million) was allocated to the acquired tangible and
intangible assets based upon their estimated fair values. The $9.4 million
charge for in-process research and development represents the value
assigned to the Pacific programs that are still in the development stage
for which there is not alternative future use.
(2) Compensation charges associated with stock options. During 1998 and
1999, the Company granted stock options (the "Variable Options") to
certain employees, directors and consultants with the certain
contractual rights contained in the 1998 Offering. The Variable
Options had an initial exercise price of $5.00 per share. Since the
number of options and the associated exercise price were subject to
adjustment and not fixed at the grant date, these stock options are
accounted for under variable stock option accounting. Accordingly, the
Variable Options were re-valued on a quarterly basis by measuring the
difference between the current exercise price and the fair market value
of the Company's common stock on that balance sheet date. As a result,
the Company recorded a $2.5 million charge in the fourth quarter of
1999 representing the earned portion of the $4.6 million total
compensation
18
charge. There were no charges in 1998 or in the first three quarters of
1999, since the fair market value of the Company's common stock was less
then the current exercise price with respect to the Variable Options.
During 1999, the number and the exercise price of the Variable Options
were adjusted according to the certain contractual rights of the 1998
Offering. As a result, the Company granted 819,064 additional options and
the associated exercise price of the Variable Options were reduced from
$5.00 per share to $2.11 per share. Additionally, on January 28, 2000,
concurrent with the merger with Heaven's Door Corporation, the Company
granted 1,004,224 options and further reduced the exercise price from
$2.11 per share to $1.56 per share with respect to the Variable Options.
In conjunction with the closing of the merger with Heaven's Door
Corporation, the Board of Directors also accelerated the vesting of the
Variable Options. Additionally, as a condition to the merger with
Heaven's Door Corporation, the Company issued approximately 3.9 million
shares of its common stock to terminate the contractual rights that
were contained in the 1998 Offering. After the termination of certain
contractual rights, the number of options and the associated exercise
price of the Variable Options became fixed and accounted for
accordingly. Therefore, a compensation charge of $14.7 million will be
recorded in the first quarter of 2000 resulting from the final
revaluation under variable plan accounting and the acceleration of the
vesting of the Variable Options.
(3) Restructuring charges. In September 1996, the Company implemented a
restructuring plan that resulted in the elimination of 20 positions,
mostly from the research organization, incurring a charge of $273,000. In
July 1997, the Company reduced staffing in its research organization
through the elimination of six senior positions, incurring a charge of
$460,000 for the year ended December 31, 1997. In January 1998, the
Company reduced its staff to ten people, incurring a charge of $225,000
for the year ended December 31, 1998.
(4) Charge associated with the conversion of the minority interest in a
subsidiary, net. On June 30, 1999, the Company issued 2,773,575 shares of
its common stock and 924,525 Class D Warrants to purchase common stock to
convert the minority interest in its majority owned subsidiary BG
Development Corp. ("BGDC"). The $0.5 million charge represents the fair
value of the shares plus the fair value of the warrants less the book
value of the BGDC minority interest.
(5) Dividends on preferred stock. In 1997 the Company recorded a preferred
stock dividend in the amount of $4,217,000 which reflects the intrinsic
value of the beneficial conversion feature based upon the difference
between the $26.25 per share fair market value of the Company's common
stock on the date of issuance and the $10.90 per share adjusted conversion
price.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a product
portfolio focused on infectious diseases and oncology. On March 17, 1999,
Procept completed its merger with Pacific Pharmaceuticals, Inc. ("Pacific"), in
which Pacific became a subsidiary of the Company. On November 8, 1999, the
Company announced a major strategic change in its business with the signing of
an Agreement and Plan of Merger to acquire Heaven's Door Corporation, a company
that provides business to business and business to consumer products and
services for the funeral service industry over the Internet. The merger with
Heaven's Door Corporation closed on January 28, 2000. Effective with the merger
with Heaven's Door Corporation, the Company's name was changed from Procept,
Inc. to HeavenlyDoor.com, Inc. The Company will focus on growing the Internet
business, while maximizing the value of the biotechnology assets through
outlicense or disposition.
RESULTS OF OPERATIONS
From inception through December 31, 1999, the Company has generated no revenues
from product sales, has not been profitable since inception, and has an
accumulated deficit of $76.8 million. During that period, the Company was
dependent upon corporate collaborations, equity
19
financing and interest on invested funds to provide the working capital
necessary for the research and development activities. Losses have resulted
principally from costs incurred in research and development activities
related to the Company's efforts to develop drug candidates and from the
associated administrative costs required to support these efforts. The
Company expects to incur significant additional operating losses over the
next several years due to its ongoing efforts to develop the new Internet
business and its acceptance in the funeral services industry.
Years ended December 31, 1999 compared to the year ended December 31, 1998
The Company's total revenues decreased 15.2% to $0.28 million for the year ended
December 31, 1999 from $0.33 million during the comparable period of 1998. The
$50,000 decrease resulted primarily from the expiration of the Sponsored
Research Agreement with VacTex, Inc. offset by an increase in interest income.
Interest income increased 27.3% to $0.28 million for the year ended December 31,
1999 from $0.22 million for the comparable period of 1998. The $60,000 increase
in interest income resulted from additional cash balances available for
investment during the year ended December 31, 1999.
The Company's total operating expenses increased 305.6% to $14.6 million for
the year ended December 31, 1999 from $3.6 million for the comparable period
in 1998. The $11.0 million increase primarily resulted from a $9.4 million
in-process research and development charge associated with the acquisition of
Pacific, and a $2.5 million compensation charge associated with the
revaluation of variable stock options. Without these charges, total operating
expenses decreased $25.0% to $2.7 million for the year ended December 31,
1999 from $3.6 million for the comparable period of 1998. Research and
development decreased 45.0% to $1.1 million for the year ended December 31,
1999 from $2.0 million for the comparable period of 1998. The $0.9 million
decrease primarily resulted in a decline in personnel in the Company's
biotech research and development organization and their related costs. In
January 1998, the Company terminated work on all research programs other than
PRO 2000 and underwent a significant downsizing, reducing its staff to ten
people. General and administrative expenses decreased $35,000, or 2.2% to
$1.6 million for the year ended December 31, 1999. The decrease primarily
resulted from lower professional services expenditures. Other income of
$34,000 recorded during the year ended December 31, 1999 resulted primarily
from the gain on sale of pharmaceutical research and development equipment
and supplies. Based on the Company's strategy, the Company has sold or plans
to continue to sell its research and development equipment.
In June of 1999, the Company incurred a $0.5 million non-cash charge associated
with the purchase of the minority interest of its majority owned subsidiary, BG
Development Corp. ("BGDC").
Years ended December 31, 1998 and 1997
The Company's 1998 total revenues decreased to $0.3 million from $0.8 million in
1997. In 1998, revenues consisted of $0.1 million earned under the Sponsored
Research Agreement with VacTex and $0.2 million in interest earned on invested
funds. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.1 million in interest earned on invested funds. The
decrease in revenue from VacTex is the result of the Company not renewing the
Sponsored Research Agreement in order to apply available resources to the PRO
2000 Gel development program.
The Company's 1998 total operating expenses decreased to $3.6 million from $9.8
million in 1997. Research and development expenses decreased 70% to $2.0 million
in 1998 from $6.6 million in 1997, due primarily to a decrease in personnel in
the Company's research and development organization and their related research
costs. In order to focus its limited resources
20
on PRO 2000 Gel, in January 1998 the Company terminated work on all other
research programs, except preclinical support for its intracellular T-cell
enzyme (DHODH) program, and underwent a significant downsizing, reducing its
staff to 10 people. The amount of termination benefits accrued and charged to
restructuring costs in the statement of operations for the year ended December
31, 1998 was $0.2 million. Also in 1997, the Company accrued $0.5 million in
restructuring costs. The amount of termination benefits paid and charged against
the 1998 and 1997 liability for the year ended December 31, 1998 was $0.4
million. The remaining liability of $0.1 million was utilized by March 31, 1999.
General and administrative expenses for 1998 decreased 41% to $1.6 million from
$2.7 million in 1997, reflecting a decrease in administrative personnel and
continued cost control measures including subleasing of its facility. Interest
expense, included in other expenses, decreased to $5,000 in 1998 from $40,000
for 1997 as a result of the scheduled completion of the Company's equipment
lease financing arrangements. Also included in other expenses in 1998 is a gain
of $0.2 million from the sale of research and development equipment. Based on
the Company's current strategy, Company has sold and plans to continue to sell
most of its research and development equipment.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1999, the Company has financed its
operations from the issuance of $68.0 million of its securities, the receipt of
$29.4 under collaborative research agreements and $3.2 million in interest
income.
For the year ended December 31, 1999, the Company incurred a net loss of
approximately $14.3 million. The net loss included non-cash charges of
approximately $9.4 million for purchased in-process research and development
and an approximate $2.5 million charge associated with variable stock
options. During 1999, the Company used approximately $3.5 to fund operating
activities.
The acquisition of Pacific resulted in a cash infusion of approximately $2.8
million. In addition, during 1999 the Company received approximately $2.0
million from the maturity of marketable securities. For the period, investing
activities provided the Company with approximately $4.6 million of cash.
During the year ended December 31, 1999, the Company paid off a short-term note
payable of $85,000. The Company received approximately $0.2 million from the
exercise of common stock warrants. Net cash provided by financing activities
amounted to approximately $0.1 million.
At December 31, 1999, the Company's aggregate cash, cash equivalents and
marketable securities were $4.1 million, representing a $0.8 million decrease
from December 31, 1998. Included in cash is $41,000 from the sale of
pharmaceutical research and development equipment. Based on the Company's
current strategy, the Company plans to continue to sell most of its research
equipment.
On March 17, 1999, the Company completed the acquisition of Pacific, a
publicly held research and development company engaged in the development of
cancer therapies. Each of Pacific's shares of common stock (including
preferred stock on an as converted basis into common stock) converted into
approximately 0.11 shares of the Company's common stock or a total of
2,753,205 shares. An additional 414,584 shares of the Company common stock
were issued in the merger to the holders of Pacific's preferred stock as a
result of certain contractual rights identical to contractual rights held by
purchasers of the Company's 1998 Offering. In addition, the Company agreed to
exchange all of Pacific's outstanding warrants, unit purchase option and
stock option obligations into like instruments of the Company. The Company
also assumed an
21
approximately $6.5 million net obligation (payable in cash or common stock of
the Company at the option of the Company) of Pacific's subsidiary, BG
Development Corp ("BGDC"). On June 30, 1999, the Company issued 2,773,575
common shares and 924,525 Class D Warrants in exchange for outstanding
preferred stock of its subsidiary, BGDC. The shares have contractual rights
identical to those held by purchasers in the Company's 1998 Offering. The
Class D Warrants are exercisable for an aggregate of 924,525 shares of the
Company's common stock at $2.11 per share and expire on June 30, 2004.
On March 28, 2000, the Company received proceeds of approximately $3.1
million from the exercise of approximately 1.3 million warrants by The Aries
Trust and The Aries Domestic Fund, L.P. These warrants were exercised at a
discount to the contractual strike price. Accordingly, a charge of
approximately $1.1 million will be recorded in the first quarter of 2000. The
Company expects that its current funds, along with the proceeds generated
through the exercise of these warrants and interest income will be sufficient
to fund the Company's operations into the second quarter of 2001. Although
management continues to pursue additional funding arrangements, no assurance
can be given that such financing will be available to the Company. If the
Company is unable to produce revenue or secure additional financing, the
Company's financial condition will be adversely affected. If additional funds
are raised by issuing equity securities, further dilution to existing
shareholders will result and future investors may be granted rights superior
to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of its cash resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company,
the success of the Internet business, the execution of new partnership
agreements, or the sale or license of the Company's biotechnology programs.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement was originally effective for all fiscal year ends beginning after June
15, 1999. In June 1999, the FASB issued Statement 137, which delayed the
effective date of Statement 133 by one year. Statement 133 is currently
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company does not believe that
the adoption of SFAS 133 will have a significant effect on the Company's results
of operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101")
which is effective no later than the quarter ending March 31, 2000. SAB 101
clarifies the Securities and Exchange Commission's views regarding recognition
of revenue. In March 2000, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101A, "Amendment: Revenue Recognition in Financial
Statements" ("SAB 101A"). SAB 101A delays the implementation date of SAB 101 by
one quarter to the quarter ending June 30, 2000 for registrants with the fiscal
years that begin between December 16, 1999 and March 15, 2000. The Company does
not believe that the adoption of SAB 101 will have a significant effect on the
Company's results of operation or its financial position.
22
YEAR 2000
During 1998, the Company completed its assessment of the potential impact of the
year 2000 on its information technology and non-information technology systems.
The year 2000 problem as defined is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs or systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in a miscalculation or system failures. Based on the Company's
assessment, there is no year 2000 impact on the Company's information technology
systems. Operating systems and applications used by the Company are year 2000
compliant. At this time, the Company is not aware of any year 2000 issues
relating to its third party vendors. The Company replaced several
non-information technology systems. The cost of year 2000 compliant
non-technology information systems was approximately $8,000. The Company's most
critical uncertainty relates to its third parties' information technology
systems not being year 2000 compliant. This may result in inaccurate information
from banks, government agencies, contracted research organization, vendors, etc.
As of March 2000, the Company had not experienced any adverse effects as a
result of the year 2000 problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 ("FRR 48"), "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments." FRR 48 required disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those already required under generally accepted accounting principles.
The Company is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page(s)
------
Report of Independent Accountants 25
Consolidated Balance Sheets as of December 31, 1999 and 1998 26
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997 27
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1999, 1998, and 1997 27
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997 28-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 30-31
Notes to Financial Statements 32-53
Financial statement schedules have been omitted since they are not required or
are inappropriate.
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of HeavenlyDoor.com, Inc.
(formerly Procept, Inc.):
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of HeavenlyDoor.com, Inc. and its subsidiaries
(formerly Procept, Inc.) at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 29, 2000
25
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONSOLIDATED BALANCE SHEETS
----------------
December 31,
------------
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents $4,074,525 $2,885,165
Marketable securities -- 2,003,755
Investment in Aquila 269,976 568,988
Prepaid expenses and other current assets 223,065 182,925
------------ ------------
Total current assets 4,567,566 5,640,833
Property and equipment, net 50,553 180,452
Deferred charges 321,544 176,025
Deposits 7,150 190,615
------------ ------------
Total assets $4,946,813 $6,187,925
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $119,826 $268,815
Accrued compensation 84,961 54,511
Accrued professional services 243,962 185,604
Other current liabilities 200,870 96,875
Current portion of capital lease obligations 4,832 --
Current portion of deferred rent 67,317 118,298
------------ ------------
Total current liabilities 721,768 724,103
------------ ------------
Deferred rent -- 67,317
Capital lease obligations 14,384 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized:
Series A, 0 and 1 share(s) designated at December 31, 1999 and 1998,
respectively; 0 shares issued and outstanding at
December 31, 1999 and 1998, respectively -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
14,970,818 and 3,001,832 shares issued
at December 31, 1999 and 1998, respectively 149,709 30,018
Additional paid-in capital 87,194,700 70,458,992
Deferred compensation (2,187,710) (88,716)
Cumulative dividends on preferred stock (4,217,388) (4,217,388)
Accumulated deficit (76,826,973) (61,047,132)
Accumulated other comprehensive income 98,323 272,588
Treasury stock, at cost; 0 and 1,186 shares at
December 31, 1999 and 1998, respectively -- (11,857)
------------ ------------
Total shareholders' equity 4,210,661 5,396,505
------------ ------------
Total liabilities and shareholders' equity $4,946,813 $6,187,925
============ ============
The accompanying notes are an integral
part of the financial statements.
26
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------
For the years ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Research and development revenue
under collaborative agreements
from related party $-- $109,375 $519,552
Revenue from grant -- -- 113,854
Interest income 279,680 220,590 147,766
------------ ----------- ------------
Total revenues 279,680 329,965 781,172
------------ ----------- ------------
Costs and expenses:
Research and development (excludes $194,445 of
compensation charges in 1999) 1,125,642 1,990,640 6,618,836
General and administrative (excludes $2,306,150
of compensation charges in 1999) 1,574,610 1,610,078 2,714,678
Charge for purchased in-process research
and development 9,405,671 -- --
Compensation charge associated with
stock options 2,500,595 -- --
Restructuring charges -- 225,000 459,969
Other (income) expenses, net (33,617) (204,396) 40,264
------------ ----------- ------------
Total costs and expenses 14,572,901 3,621,322 9,833,747
------------ ----------- ------------
Net loss (14,293,221) (3,291,357) (9,052,575)
------------ ----------- ------------
Less: Charge associated with the
conversion of the minority interest in a
subsidiary, net (501,455) -- --
Dividends on preferred stock -- -- (4,217,388)
------------ ----------- ------------
Net loss attributed to common shareholders $(14,794,676) $(3,291,357) $(13,269,963)
============ =========== ============
Basic and diluted net loss per common share $(1.36) $(1.40) $(63.68)
============ =========== ============
Weighted average number of common
shares outstanding - basic and diluted 10,907,251 2,347,245 208,371
============ =========== ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
--------------
For the years ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Net loss $(14,293,221) $(3,291,357) $(9,052,575)
Other comprehensive income (loss):
Unrealized gain (loss) on investments (174,265) 272,588 4,838
------------ ----------- -----------
Comprehensive loss, net of tax $(14,467,486) $(3,018,769) $(9,047,737)
============ =========== ===========
The accompanying notes are an integral
part of the financial statements.
27
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998, and 1997
Common Stock Preferred Stock Series A Additional
------------ ------------------------ Paid-in Deferred
Shares Par Value Shares Par Value Capital Compensation
------ --------- ------ --------- ------- ------------
Balance at December 31, 1996 195,434 $1,954 -- -- $55,095,433 --
Employee stock purchase plan 764 8 -- -- 55,192 --
Exercise of stock options 6 -- -- -- 410 --
Issuance from private placement 85,333 853 -- -- 2,799,147 --
Payment of private placement costs -- -- -- -- (131,382) --
Conversion of note payable and
common stock to preferred stock (85,333) (853) 30,060 $301 206,553 --
Cancellation of notes receivable -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- 4,217,388 --
Maturity of marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- --------- ------- ----- ------------ -----------
Balance at December 31, 1997 196,204 1,962 30,060 301 62,242,741 --
Issuance from private placement 1,960,500 19,605 -- -- 9,782,895 --
Payment of private placement costs -- -- -- -- (1,764,131) --
Conversion of preferred stock to
common stock 841,680 8,417 (30,060) (301) (8,116) --
Common stock contribution to savings
and retirement plan 3,448 34 -- -- 43,203 --
Stock options issued for services -- -- -- -- 58,537 --
Deferred compensation related to
stock options -- -- -- -- 103,863 $(103,863)
Amortization of deferred compensation -- -- -- -- -- 15,147
Unrealized gain on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- --------- ------- ----- ------------ -----------
Balance at December 31, 1998 3,001,832 30,018 -- -- 70,458,992 (88,716)
----------- --------- ------- ----- ------------ -----------
Shares issued in connection with:
Acquisition of Pacific
Pharmaceuticals Inc. 3,167,789 31,677 -- -- 3,730,072 --
Contractual anti-dilution protection 1,017,742 10,178 -- -- (10,178) --
Payment of certain obligations 14,489 144 -- -- 34,941 --
Contractual reset obligations 3,970,734 39,708 -- -- (39,708) --
Purchase of minority interest in
subsidiary 2,773,575 27,736 -- -- 4,132,627 --
Repayment of debt of subsidiary 88,374 884 -- -- 440,986 --
Stock dividend 562,961 5,630 -- -- 979,535 --
Settlement of litigation 36,785 368 -- -- 134,633 --
Exercise of Class C warrants 51,087 511 -- -- 186,989 --
Employee stock awards 15,000 150 -- -- 10,402 --
Repayment of debt of subsidiary 109,778 1,098 -- -- 187,588 --
Settle placement agent fees 160,160 1,602 -- -- 363,920 --
Fair value of stock options issued
in the Pacific acquisition -- -- -- -- 965,435 --
Warrants issued in connection with the
purchase of the minority interest
in a subsidiary -- -- -- -- 1,004,034 --
Incremental charge associated with the
conversion of the minority interest
in a subsidiary, net -- -- -- -- -- --
Common stock contribution to savings
and retirement plan 512 5 -- -- 735 --
Retirement of treasury stock -- -- -- -- (11,857) --
Amortization of deferred compensation -- -- -- -- -- 2,526,560
Compensation expense associated with
variable stock options -- -- -- -- 4,625,554 (4,625,554)
Unrealized loss on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- --------- ------- ----- ------------ -----------
Balance at December 31, 1999 14,970,818 $149,709 -- -- $87,194,700 $(2,187,710)
=========== ========= ======= ===== ============ ===========
The accompanying notes are an integral
part of the financial statements.
28
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998, and 1997
(continued)
Accumulated
Receivable Cumulative Other Total
From Dividends On Accumulated Comprehensive Treasury Stockholders'
Sale of Stock Preferred Stock Deficit Income Stock Equity
------------- --------------- ------- ------ ----- ------
Balance at December 31, 1996 $(73,242) -- $(48,703,200) $(4,838) -- $6,316,107
Employee stock purchase plan -- -- -- -- -- 55,200
Exercise of stock options -- -- -- -- -- 410
Issuance from private placement -- -- -- -- -- 2,800,000
Payment of private placement costs -- -- -- -- -- (131,382)
Conversion of note payable and
common stock to preferred stock -- -- -- -- -- 206,001
Cancellation of notes receivable 73,242 -- -- -- $(11,857) 61,385
Dividends on preferred stock -- $(4,217,388) -- -- -- --
Maturity of marketable securities -- -- -- 4,838 -- 4,838
Net loss -- -- (9,052,575) -- -- (9,052,575)
-------- ----------- ------------ --------- -------- ------------
Balance at December 31, 1997 -- (4,217,388) (57,755,775) -- (11,857) 259,984
Issuance from private placement -- -- -- -- -- 9,802,500
Payment of private placement costs -- -- -- -- -- (1,764,131)
Conversion of preferred stock to
common stock -- -- -- -- -- --
Common stock contribution to savings
and retirement plan -- -- -- -- -- 43,237
Stock options issued for services -- -- -- -- -- 58,537
Deferred compensation related to
stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- 15,147
Unrealized gain on investments -- -- -- 272,588 -- 272,588
Net loss -- -- (3,291,357) -- -- (3,291,357)
-------- ----------- ------------ --------- -------- ------------
Balance at December 31, 1998 -- (4,217,388) (61,047,132) 272,588 (11,857) 5,396,505
-------- ----------- ------------ --------- -------- ------------
Shares issued in connection with the:
Acquisition of Pacific
Pharmaceuticals Inc. -- -- -- -- -- 3,761,749
Contractual anti-dilution protection -- -- -- -- -- --
Payment of certain obligations -- -- -- -- -- 35,085
Contractual reset obligations -- -- -- -- -- --
Purchase of minority interest in a
subsidiary -- -- -- -- -- 4,160,363
Repayment of debt of subsidiary -- -- -- -- -- 441,870
Contractual stock dividend -- -- (985,165) -- -- --
Settlement of litigation -- -- -- -- -- 135,001
Exercise of Class C warrants -- -- -- -- -- 187,500
Employee stock awards -- -- -- -- -- 10,552
Repayment of debt of subsidiary -- -- -- -- -- 188,686
Settlement of the placement agent fees -- -- -- -- -- 365,522
Fair value of stock options assumed
in the Pacific acquisition -- -- -- -- -- 965,435
Warrants issued in connection with the
purchase of the minority interest in
a subsidiary -- -- -- -- -- 1,004,034
Incremental charge associated with the
conversion of the minority interest
in a subsidiary, net -- -- (501,455) -- -- (501,455)
Common stock contribution to savings
and retirement plan -- -- -- -- -- 740
Retirement of treasury stock -- -- -- -- 11,857 --
Amortization of deferred compensation -- -- -- -- -- 2,526,560
Compensation expense associated with
variable stock options -- -- -- -- -- --
Unrealized loss on investments -- -- -- (174,265) -- (174,265)
Net loss -- -- (14,293,221) -- -- (14,293,221)
-------- ----------- ------------ --------- -------- ------------
Balance at December 31, 1999 -- $(4,217,388) $(76,826,973) $98,323 -- $4,210,661
======== =========== ============ ========= ======== ============
The accompanying notes are an integral
part of the financial statements.
29
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------
for the years ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss $(14,293,221) $(3,291,357) $(9,052,575)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 125,331 449,808 1,057,952
Non-cash related party revenue -- -- (150,000)
Compensation expense associated with cancellation
of notes receivable -- -- 112,789
Gain on sale of equipment (36,150) (209,439) (40,895)
Savings and retirement plan stock contribution -- 43,237 --
Compensatory stock and stock option expense 170,782 73,684 --
Charge for purchased in-process research and development 9,405,671 -- --
Compensation charge associated with variable stock options 2,500,595 -- --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable -- 81,951 90,861
Prepaid expenses and other current assets (12,069) (51,302) 61,126
Deposits 183,465 60,000 (114,640)
Other assets -- 6,411 (6,627)
Accounts payable (594,523) (801,137) 296,451
Accrued compensation 30,450 (265,952) 197,751
Accrued contract research -- -- (438,513)
Accrued professional services (642) 42,924 (53,930)
Other current liabilities (868,309) 96,875 --
Deferred rent (118,298) (72,212) (27,702)
Other noncurrent liabilities -- (96,875) (53,125)
------------ ----------- -----------
Net cash used in operating activities (3,506,918) (3,933,384) (8,121,077)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures -- (319,669) (84,010)
Proceeds from sale of equipment 40,718 706,594 40,895
Proceeds from redemption of debentures 128,501 -- --
Proceeds from maturity of marketable securities 2,000,001 -- 4,006,463
Purchase of marketable securities -- (2,000,155) --
Decrease in restricted investment -- -- 469,000
Merger costs (321,544) (176,025) --
Cash acquired in the acquisition of Pacific Pharmaceuticals 2,750,097 -- --
------------ ----------- -----------
Net cash (used in) provided by investing activities 4,597,773 (1,789,255) 4,432,348
------------ ----------- -----------
Cash flows from financing activities:
Payment of notes payable (85,000) -- --
Proceeds from exercise of common stock options -- -- 410
Proceeds from employee stock purchase plan -- -- 55,200
Proceeds from exercise of warrants 187,500 -- --
Proceeds from private placement of stock -- 9,802,500 2,800,000
Payment of private placement securities costs -- (1,709,707) (131,382)
Proceeds from note payable -- -- 206,001
Deferred financing charges paid -- -- (54,424)
Principal payments on capital lease obligations (3,995) (20,231) (614,063)
------------ ----------- -----------
Net cash provided by financing activities 98,505 8,072,562 2,261,742
------------ ----------- -----------
Net change in cash and cash equivalents 1,189,360 2,349,923 (1,426,987)
Cash and cash equivalents at beginning of year 2,885,165 535,242 1,962,229
------------ ----------- -----------
Cash and cash equivalents at end of year $4,074,525 $2,885,165 $535,242
============ =========== ===========
The accompanying notes are an integral
part of the financial statements.
30
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
-------------
for the years ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Supplemental disclosure of cash flow information:
Interest paid $ 7,628 $ 5,184 $ 27,609
=========== =========== ==========
Unrealized gain (loss) on securities available for sale $ (174,265) $ 272,588 4,838
=========== =========== ==========
Supplemental disclosure of non-cash transactions:
Preferred stock converted to common stock -- $ 8,417 --
=========== =========== ==========
Common stock converted to preferred stock -- -- $2,800,000
=========== =========== ==========
Savings and retirement plan stock contribution $ 740 $ 43,237 --
=========== =========== ==========
Stock options issued for services -- $ 73,684 --
=========== =========== ==========
Note payable converted to preferred stock -- -- $ 206,001
=========== =========== ==========
Debt assumed from acquisition of Pacific $ 285,000 -- --
=========== =========== ==========
Common stock received in exchange for cancellation of
notes receivable -- -- $ 11,857
=========== =========== ==========
Preferred stock dividends -- -- $4,217,388
=========== =========== ==========
Fair value of common stock issued to acquire Pacific Pharmaceuticals $ 3,761,749 -- --
=========== =========== ==========
Fair value of common stock issued to acquire minority interest in subsidiary $ 4,160,363 -- --
=========== =========== ==========
Fair value of common stock options assumed $ 965,435 -- --
=========== =========== ==========
Fair value of common stock issued to repay debt $ 630,556 -- --
=========== =========== ==========
Fair value of common stock issued for services $ 400,607 -- --
=========== =========== ==========
Fair value of common stock issued in settlement of legal action $ 135,001 -- --
=========== =========== ==========
Fair value of warrants issued to acquire minority interest in subsidiary $ 1,004,034 -- --
=========== =========== ==========
Fair value of common stock awarded to employees $ 10,552 -- --
=========== =========== ==========
The accompanying notes are an integral
part of the financial statements.
31
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
A. Nature of Business
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a
product portfolio focused on infectious diseases and oncology. On March
17, 1999, Procept completed its merger with Pacific Pharmaceuticals, Inc.
("Pacific"), in which Pacific became a subsidiary of the Company. On
November 8, 1999, the Company announced a major strategic change in its
business with the signing of an Agreement and Plan of Merger to acquire
Heaven's Door Corporation, a company that provides business to business
and business to consumer products and services for the funeral service
industry over the Internet. The merger with Heaven's Door Corporation
closed on January 28, 2000. Effective with the merger with Heaven's Door
Corporation, the Company's name was changed from Procept, Inc. to
HeavenlyDoor.com, Inc. The Company will focus on growing the Internet
business, while maximizing the value of the biotechnology assets through
outlicense or disposition.
The Company is subject to risks common to companies in the Internet and
biotechnology industries including but not limited to development by the
Company or its competitors of new technological innovations, dependence on
key personnel, protection of proprietary technology, compliance with
United States Food and Drug Administration ("FDA") government regulations
and the ability to obtain financing.
Plan of Operations
Since its inception in 1985 through 1999, the Company devoted its
principal efforts to drug discovery and research. Since 1998, the Company
has devoted its principal efforts to drug development, human clinical
trials and partnership commercialization focusing on PRO 2000 Gel and
O6-Benzylguanine ("BG").
Effective with the merger with Heaven's Door Corporation, the Company,
through its web site www.HeavenlyDoor.com will provide a range of products
and services specifically related to the funeral service industry. The
Company's current web site provides consumers access to information
concerning the arrangement and handling of funeral related services from
the privacy of their own homes. In addition, the web site offers funeral
homes and other service providers the ability to have an Internet presence
through a customized, linked web site designed by Heaven's Door
Corporation for the funeral home or other provider.
From inception through December 31, 1999, the Company generated no revenue
from product sales, has not been profitable since inception, and has
incurred an accumulated deficit of $76.8 million. Losses have resulted
primarily from costs incurred in research and development activities
related to the Company's efforts to develop drug candidates and from the
associated administrative costs. The Company expects to incur additional
operation losses over the next several years as it focuses on growing the
new Internet business, while maximizing the value of the biotechnology
assets.
On March 28, 2000, the Company received proceeds of approximately $3.1
million from the exercise of approximately 1.3 million warrants for
common stock (see Note M). These warrants were exercised at a discount
to the contractual exercise price. Accordingly, a charge of approximately
$1.1 million will be recorded in the first quarter of 2000. The Company
expects that its current funds along with the proceeds generated
through the exercise of these warrants and interest income will be
sufficient to fund the Company's operations into the second quarter of
2001.
32
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
Restructuring
In 1997, the Company reduced staffing in its research organization through
the elimination of six senior research positions and the departure of one
executive. The amount of termination benefits accrued and charged to
restructuring costs in the consolidated statement of operations for the
year ended December 31, 1997 was $0.5 million. The amount of termination
benefits paid and charged against the liability for the year ended
December 31, 1997 was $0.2 million.
In order to focus its limited resources on PRO 2000 Gel, in January 1998
the Company terminated work on all other research programs and underwent a
significant downsizing, reducing its staff to 13 people. The amount of
termination benefits accrued and charged to restructuring costs in the
consolidated statement of operations for the year ended December 31, 1998
was $0.2 million. Due to the restructuring, and the focus on the new
Internet business, the Company has sold and plans to continue to sell most
of its research and development equipment. For the years ended December
31, 1999 and 1998, the Company received approximately $41,000 and $0.7
million, respectively, from the sale of equipment and has recorded gains
of approximately $36,000 and $0.2 million, respectively, which are
included in other (income) expenses on the accompanying consolidated
statements of operations.
B. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all of its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from
those estimates.
Cash Equivalents and Marketable Securities
The Company considers all short-term investments purchased with an
original maturity of three months or less at the date of acquisition to be
cash equivalents, all short-term investments with a scheduled maturity
date of less than 12 months at the balance sheet date are considered to be
current marketable securities, and all investments purchased with a
scheduled maturity date greater than 12 months at the balance sheet date
are noncurrent marketable securities.
33
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
Property and Equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:
Laboratory equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Equipment and furniture under
capital lease Estimated useful life or term of lease,
if shorter
Leasehold improvements Estimated useful life or term of lease,
if shorter
Major additions and improvements are capitalized, while repairs and
maintenance are expensed as incurred. Upon retirement or other
disposition, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in the
determination of net loss.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company provides for income taxes under the liability method which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. A valuation allowance is provided for net deferred tax assets if,
based on the weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
Revenue Recognition
Revenue is recognized under collaborative research and development
agreements and research grants as earned based upon the performance
requirements of each agreement. Payments received in advance under these
agreements are recorded as deferred revenue until earned. Amounts received
under research and development agreements and research grants are
non-refundable and are not contingent on the outcome of research efforts.
Financial Instruments
Cash, cash equivalents and marketable securities are financial instruments
which potentially subject the Company to concentrations of credit risk.
The Company invests its excess cash in United States Government securities
and money market instruments.
Basic and Diluted Net (Loss) Per Common Share
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is based upon the weighted average
number of common shares outstanding during the period plus the additional
weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent
34
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
shares result from the assumed exercises of outstanding stock options and
warrants, the proceeds of which are then assumed to have been used to
repurchase outstanding stock options using the treasury stock method.
For the years ended December 31, 1999 and 1998, the Company had stock
options and stock warrants outstanding that were anti-dilutive. For the
year ended December 31, 1997, the Company had convertible preferred stock,
stock options and stock warrants outstanding that were anti-dilutive.
These securities could potentially dilute basic EPS in the future and were
not included in the computation of diluted EPS because to do so would have
been anti-dilutive for the periods presented. Consequently, there were no
differences between basic and diluted EPS for these periods.
Comprehensive (Loss) Income
The Company accounts for comprehensive income under the Financial
Accounting Standards Board ("FSAB") SFAS 130, "Reporting Comprehensive
Income". SFAS 130 established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
statement required that all components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements.
Business Segments
The Company follows FASB SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" with respect to business segments.
SFAS 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements
and required those enterprises to report selected information about
operating segments in interim financial statements. It also required
disclosures about products and services, geographic areas and major
customers.
From its inception in 1985 through 1999, the Company was in the business
of developing and commercializing novel drugs based on biotechnological
research. The Company evaluated its business activities that are regularly
reviewed by the executive management team and the Board of Directors for
which discrete financial information is available. As a result of this
evaluation, the Company determined that it has one operating segment
through 1999 and, accordingly, one reportable segment.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement was originally
effective for all fiscal year ends beginning after June 15, 1999. In June
1999, the FASB issued SFAS 137, which delayed the effective date of SFAS
133 by one year. SFAS 133 is currently effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company does not believe that the adoption
of SFAS 133 will have a significant effect on the Company's results of
operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") which is
35
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
effective no later than the quarter ending March 31, 2000. SAB 101
clarifies the Securities and Exchange Commission's views regarding
recognition of revenue. In March 2000, the Securities Exchange Commission
issued Staff Accounting Bulletin No. 101A, "Amendment: Revenue Recognition
in Financial Statements" ("SAB 101A"). SAB 101A delays the implementation
date of SAB 101 by one quarter to the quarter ending June 30, 2000 for
registrants with the fiscal years that begin between December 16, 1999 and
March 15, 2000. The Company does not believe that the adoption of SAB 101
will have a significant effect on the Company's results of operation or
its financial position.
36
Reclassifications
Certain reclassifications may have been made to the prior years' financial
statements to conform with current year presentation. These
reclassifications had no effect on net income of stockholders equity.
C. Acquisition of Pacific Pharmaceuticals, Inc.
On December 10, 1998, the Company entered into a definitive Agreement and
Plan of Merger (the "Merger Agreement") to acquire Pacific
Pharmaceuticals, Inc. ("Pacific"), a Delaware corporation engaged in the
development of cancer therapies, based in San Diego, California, through a
merger of a wholly owned subsidiary of the Company with and into Pacific.
The acquisition of Pacific closed on March 17, 1999 and Pacific became
a wholly owned subsidiary of the Company.
The acquisition of Pacific was accounted for under the purchase accounting
method. The aggregate purchase price of $3.8 million, plus estimated
acquisition costs of $1.7 million, assumed liabilities (including a
$200,000 note payable to a significant shareholder of the Company) of $5.7
million and $1.0 million for the value of the stock options and warrants
being issued to the Pacific shareholders were allocated to the acquired
tangible and intangible assets based on their estimated respective fair
values. Approximately $9.4 million of the purchase price has been
allocated to in-process research and development and expensed in the
quarter ended March 31, 1999. The charge for in-process research and
development represents the value assigned to Pacific's programs that are
still in the development stage for which there is no alternative future
use. The value assigned to these programs has been developed by
determining the fair value of these programs, as provided by an
independent valuation of the Pacific business. The valuation methodology
was based on estimated discounted cash flows. The Company had recorded
acquisition costs of $176,025 associated with the Pacific merger as
deferred charges on the December 31, 1998 balance sheet.
Pursuant to the Merger Agreement, each share of Pacific common stock
(including preferred stock on an as converted basis into common stock)
converted into approximately 0.11 shares of the Company's common stock or
a total of 3,167,789 of the Company's shares (of which 1,558,587
shares of the Company's common stock issued in the merger to holders of
Pacific preferred stock were accompanied by certain contractual rights
identical to contractual rights held by purchasers in the Company's 1998
Offering). In
37
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
addition, all of Pacific's outstanding warrants, unit purchase options
and stock option obligations were exchanged into approximately
1,916,730 like instruments of the Company. The Company also assumed an
approximately $6.5 million net obligation (payable in cash or common
stock of the Company, at the sole discretion of the Company) of
Pacific's subsidiary, BG Development Corp. ("BGDC"). On June 30, 1999,
the Company issued 2,773,575 shares of its common stock and 924,525
Class D Warrants in exchange for all of the BGDC outstanding preferred
stock holdings. The Class D Warrants are exercisable for an aggregate
of 924,525 shares of the Company's common stock at $2.11 per share and
expire on June 30, 2004 (see Note F).
Pro Forma Results of Operations
The following unaudited pro forma results of operations for the years
ended December 31, 1999 and 1998 give effect to the Company's acquisition
of Pacific as if the transaction had occurred at the beginning of each
period. The pro forma results of operation exclude the charge for
in-process research and development of $9.4 million that was recorded with
the acquisition in 1999, and does not purport to reflect what the
Company's results of operations actually would have been if the
acquisition had occurred as of the beginning of the periods, or what such
results would be for any future period. The financial data is based upon
financial assumptions that the Company believes are reasonable and should
be read in conjunction with the consolidated financial statements and
accompanying notes thereto included elsewhere in this report.
Pro Forma Results for the
Year Ended December 31,
-------------------------
1999 1998
------------ -----------
Revenues $317,558 $539,847
Net Loss $(5,696,867) $(7,300,848)
Basic and diluted net loss per common share $(0.53) $(2.23)
D. Marketable Securities
The marketable securities of the Company, consisting of United States
Government Agencies have been classified as available for sale. Realized
gains and losses on disposition of securities are determined on the
specific identification method and are reflected in the consolidated
statement of operations. Net unrealized gains and losses are recorded
directly in a separate shareholders' equity account, except those losses
that are deemed to be other than temporary, which losses, if any, are
reflected in the consolidated statement of operations.
Fair values are estimated based on quoted market prices. Interest is
recognized when earned. The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization and interest are included in interest income.
38
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
The following is a summary of marketable securities as of December 31,
1998:
Fair Unrealized Amortized
Value Gains Cost
----- ----- ----
Marketable securities, current:
United States Government Securities $2,003,755 $3,600 $2,000,155
========== ====== ==========
The average maturity of the Company's marketable securities as of December
31, 1998 was four months.
In 1999, all outstanding marketable securities matured, and the Company
received proceeds of approximately $2.0 million. As of December 31, 1999,
the Company had no outstanding marketable securities.
E. Property and Equipment
Property and equipment consisted of the following:
December 31,
------------
1999 1998
---- ----
Laboratory equipment $ 610,182 $ 745,319
Furniture and fixtures 86,844 86,844
Office equipment 220,305 264,862
Leasehold improvements 1,035,019 1,040,027
----------- -----------
1,952,350 2,137,052
Less: accumulated depreciation & amortization (1,901,797) (1,956,600)
----------- -----------
Property and equipment, net $ 50,553 $ 180,452
=========== ===========
In 1999 and 1998, the Company sold equipment with a net book value of
$5,000 and $0.5 million respectively, for proceeds of $41,000 and
$0.7 million, respectively, resulting in a $36,000 and $0.2 million
respectively, gain which is included in other (income) expense in the
accompanying consolidated statement of operations.
Included above in property and equipment are the following assets that
were acquired pursuant to capital lease arrangements:
December 31,
------------
1999 1998
---- ----
Laboratory equipment $ 353,466 $ 462,174
Furniture and fixtures 12,203 12,203
Office equipment 114,109 151,803
Leasehold improvements 459,410 459,410
----------- -----------
939,188 1,085,590
Less: accumulated amortization (939,188) (1,060,218)
----------- -----------
$ -- $ 25,372
=========== ===========
39
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
F. Shareholders' Equity
Common and Preferred Stock
On May 18, 1998, the Company's shareholders approved a one-for-ten reverse
split of the Company's Common Stock (the "May 18, 1998 Reverse Stock
Split"). The May 18, 1998 Reverse Stock Split was effected on June 1,
1998. Shareholders' equity has been restated to give retroactive
application to the May 18, 1998 Reverse Stock Split in prior periods by
reclassifying from Common Stock to additional paid-in capital the par
value of the eliminated shares arising from the May 18, 1998 Reverse Stock
Split. In addition, all references in the financial statements to the
number of shares, per share amounts and stock option and warrant data of
the Company's Common Stock have been restated.
On September 29, 1997, the Company's shareholders approved a one-for-seven
reverse split of the Company's Common Stock (the "September 29, 1997
Reverse Stock Split"). The September 29, 1997 Reverse Stock Split was
effected on October 14, 1997. Shareholders' equity has been restated to
give retroactive application to the September 29, 1997 Reverse Stock Split
in prior periods by reclassifying from Common Stock to additional paid-in
capital the par value of the eliminated shares arising from the September
29, 1997 Reverse Stock Split. In addition, all references in the financial
statements to number of shares, per share amounts, and stock option and
warrant data of the Company's Common Stock have been restated.
On June 30, 1997, The Aries Fund and the Aries Domestic Fund, L.P.
(collectively the Aries Funds) made a direct investment of $3.0 million
into the Company. The Company received proceeds of $2.8 million for the
issuance of 85,334 shares of Common Stock (the Common Shares). The Common
Shares contained certain contractual obligations including, but not
limited to, the right to convert the Common Shares into preferred stock
(the Preferred Stock) upon the Company's shareholder approval of such
Preferred Stock. The Company also received from the Aries Funds an
additional $0.2 million for the issuance of two convertible promissory
notes. The notes accrued interest at a rate of 12% per year and were due
on or before September 30, 1997. In addition to the Common Shares and the
notes, the Aries Funds received (i) Class A Warrants exercisable for an
aggregate of 39,182 shares of the Company's Common Stock at an initial
exercise price of $0.70 and (ii) Class B Warrants exercisable for an
aggregate of 108,603 shares of the Company's Common Stock at an initial
exercise price of $41.00. The Company did not separately value the Class A
and Class B Warrants from the Preferred Stock since the resulting
accounting treatment for both securities is to record their value in
additional paid-in capital within the equity section of the balance sheet.
Additionally, since the Preferred Stock and the Class A and Class B
Warrants were not redeemable, no accretion was required. All of the Class
A Warrants and the Class B Warrants contemplated that such warrants would
be converted on September 30, 1997 into "New Warrants" having the same
aggregate exercise price as the Class A and Class B Warrants converted,
but with a per share exercise price equal to the lesser of (i) $20.30 or
(ii) 50% of the trading price (determined per a formula) at September 30,
1997. The Class A and Class B Warrants further provided that the exercise
price of the New Warrants would be adjusted at the time of the Company's
next equity financing to ensure that the exercise price of the New
Warrants was at least 50% of the pricing in such future equity financing.
On September 30, 1997, the Class A and Class B Warrants were converted to
New Warrants for 328,314 shares of the Company's Common Stock having a per
share exercise price of $10.90 pursuant to a formula set forth in the
Class A and B Warrant. In a negotiated transaction with the Aries Funds,
the New Warrants were exchanged in April 1998 for Class C Warrants for an
aggregate of 841,680 shares of the Company's Common Stock having an
exercise price of $5.00, which exercise price was reduced to $3.67 in
March 1999 as a result of anti-dilution provisions.
40
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
At an adjourned session of the Company's 1997 annual meeting held on July
15, 1997, its shareholders approved an amendment and restatement of the
Company's Restated Certificate of Incorporation which authorized 1,000,000
shares of preferred stock. On August 1, 1997, the Board of Directors
established a series of 30,061 shares of Series A Convertible Preferred
Stock (the Series A Preferred Stock). Upon the establishment of this
Series A Preferred Stock, the purchasers of the securities issued in the
June 1997 direct investment exercised the right to convert their Common
Shares to shares of Series A Preferred. On August 22, 1997, the Aries
Funds converted the 85,334 Common Shares into 28,000 shares of Series A
Preferred Stock. On September 30, 1997, the Aries Funds converted the
convertible promissory notes and the corresponding accrued interest into
2,060 shares of Series A Preferred Stock.
The Series A Preferred Stock was initially convertible into Common
Stock at a conversion price equal to $32.80. The terms of the Series A
Preferred Stock provided that the conversion price would adjust on
September 30, 1997 (or earlier, if certain events occurred) to a new
conversion price equal to the lesser of (i) $20.30 or (ii) 50% of the
trading price (determined per a formula) at September 30, 1997. On
September 30, 1997, the conversion price of the Series A Preferred
Stock adjusted to $10.90. In connection with this adjustment, the
Company recorded a preferred stock dividend in the amount of $4,217,388
which reflects the intrinsic value of the beneficial conversion feature
based upon the difference between the $26.25 per share fair market
value of the Company's Common Stock on the date of issuance and the
$10.90 per share adjusted conversion price of the Series A Preferred
Stock. Additionally, since the Series A Preferred Stock is not
redeemable, no accretion is required. As of December 31, 1997, the
conversion price of the Series A Preferred Stock was $10.90, but
remains subject to further conversion rate adjustments based on future
events. At December 31, 1997, the Series A Preferred Stock was
convertible into 274,748 shares of Common Stock. After the September
30, 1997 conversion price adjustment, the terms of the Series A
Preferred Stock provided for further reduction of the conversion price
of the Series A Preferred Stock (i) on June 30, 1998 to ensure that the
market price at that time was at least 140% of the conversion price,
(ii) if equity securities were issued in the future with a pricing
reset feature, on the reset date of such future equity securities (if
such a reset date occurred on or prior to June 30, 1999), so that the
conversion price of the Series A Preferred Stock was reduced
proportionately to the price reduction in the future equity securities,
(iii) if no reset date for future equity securities occurred by June
30, 1999, to ensure that the market price at that time was at least
200% of the conversion price, and (iv) on future issuances of equity
securities at a price below the then effective conversion price or the
then market price, to a price determined by a weighted average formula
reflecting such dilutive issuance. Other significant features of the
Series A Preferred Stock include (i) a per share cumulative annual
dividend, payable in cash or in kind, of 10% of the sum of $140 per
share plus accrued but unpaid dividends, (ii) the right to participate
in most subsequent dividend distributions to Common Stock, (iii) the
right to vote the Series A Preferred Stock on an as converted to Common
Stock basis reflecting the then effective conversion price, and (iv)
the right to a liquidation preference of $140 per share plus accrued
but unpaid dividends.
Furthermore, on September 30, 1997 in accordance with the original terms
of the Class A and Class B Warrants issued in the June 1997 private
placement, such warrants were exchanged for 328,314 "New Warrants" at an
exercise price of $10.90 per share. The $10.90 exercise price of the New
Warrants was determined based on a formula set forth in the Class A
Warrants and Class B Warrants. The formula provided that the exercise
price of the New Warrants would equal the lesser of (i) $20.30 or (ii) 50%
of the trading price (determined per a formula) at September 30, 1997. The
formula trading price at September 30, 1997 was $21.80, and the exercise
price was fixed at $10.90. The Company incurred costs in the amount of
$0.1 million related to the June 1997 private placement and the subsequent
conversion events which were charged to additional paid-in capital.
41
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
In April 1998, all outstanding Series A Preferred Stock converted into
shares of common stock having certain contractual rights, and in March
1999, the Company eliminated the authorization of the Series A Preferred
Stock by a filing with the Secretary of the State of Delaware. Also, in
April 1998, all New Warrants were converted to Class C Warrants, as
discussed above.
As a part of a unit offering, the Company sold an aggregate of
1,960,500 shares of Common Stock in January, February, and April of
1998 together with five-year Class C Warrants to purchase 1,960,500
shares of Common Stock at an exercise price of $5.00 per share (the
1998 Offering). The $5.00 per share exercise price of the Class C
Warrants was determined as part of the terms of the 1998 Offering in a
negotiation between the Company and the placement agent for the 1998
Offering. The Company did not separately value the Class C Warrants
from the Common Stock issued in the 1998 Offering since the resulting
accounting treatment for both securities is to record their value in
additional paid-in capital within the equity section of the balance
sheet. These securities were sold for gross proceeds of $9.8 million.
The Company received net proceeds of $8.1 million, after offering costs
of $1.7 million. The purchasers in the 1998 Offering held certain
contractual rights (the "Contractual Rights")requiring contingent
additional issuances of Common Stock to the purchasers, (x) based on
the market price on April 9, 1999 (the "Contractual Reset Rights") (y)
in the event of future dilutive sales of securities (the "Contractural
Anti-dilution Rights") and (z) as a dividend substitute beginning
October 1999 and each six months thereafter (the "Contractual Dividend
Rights). Additionally the Class C Warrants have contractual rights
to reduce the exercise price in the event of future dilutive sales of
securities (the "Class C Warrant Contractual Rights"). In the event of
(i) a liquidation, dissolution or winding up of the Company, (ii) the
sale or other disposition of all or substantially all of the assets of
the Company, or (iii) any consolidation, merger, combination,
reorganization or other transaction in which the Company is not the
surviving entity, the purchasers are entitled to receive an amount
equal to 140% of such purchaser's investment as a liquidation
"preference." Except in the case of a liquidation, dissolution or
winding up, such payment will be in the form that equity holders will
receive such as in cash, property or securities of the entity surviving
the acquisition transaction. In the event of a liquidation, dissolution
or winding up, such payment is contingent upon the Company having
available resources to make such payment (see Note M).
In March 1999, the Company issued 36,785 shares of its common stock to
Commonwealth Associates in connection with the settlement of the
litigation described in Note K. On the same date, the Company issued 2,764
shares of its common stock to The Harvard School of Dental Medicine as
satisfaction of certain contractual obligations of Pacific.
In March 1999, Pacific was merged with and became a wholly owned
subsidiary of the Company. In connection with the merger, a total of
3,167,789 shares were issued to former Pacific stockholders; of these
shares, 1,558,587 shares had the Contractual Rights identical to those
held by purchasers in the Company's 1998 Offering. On March 17, 1999
and November 10, 1999, the Company issued 88,374 and 109,778, along
with $50,000 in cash for the cancellation of certain indebtedness of
Pacific. In addition, the Company issued 160,160 shares of its common
stock and $50,000 in cash to Paramount Capital, Inc. or its designees
as compensation for services performed in conjunction with the merger
with Pacific.
42
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
The issuance of common stock in connection with the Pacific merger was
a dilutive issuance under the terms of the 1998 Offering. As a result,
as of March 17, 1999 pursuant to the Contractual Anti-dilution rights
contained in the 1998 Offering the Company issued a total of 1,017,742
shares of its common stock to certain stockholders. In addition, the
Company issued an additional 1,015,504 Class C Warrants at an exercise
price of $3.67, and reduced the exercise price of the existing Class C
Warrants from $5.00 to $3.67 as a result of the dilutive issuance under
the Class C Warrant Contractual Rights.
In April 1999, pursuant to the Contractual Reset Rights contained in
the 1998 offering, the Company issued a total of 3,970,734 shares of
its common stock to certain stockholders.
On May 18, 1999, the Company issued 51,087 shares of its common stock in
connection with the exercise of Class C Warrants for proceeds of $187,500.
On June 22, 1999 and July 15, 1999, the Company issued 5,000 and 10,000
shares, respectively, of its common stock as bonuses to certain employees.
In addition, on June 22, 1999, the Company issued 11,765 of its common
stock as payment for services rendered in connection with the acquisition
of Pacific.
On June 30, 1999, the Company issued 2,773,575 shares of its common
stock and 924,525 Class D Warrants to purchase common stock in exchange
for outstanding preferred stock in its majority owned subsidiary BG
Development Corp. ("BGDC"), thereby eliminating a $6.5 million
obligation held by holders of this preferred stock while obtaining 100%
ownership of BGDC. The 2,773,575 common shares issued in the conversion
had a fair value of $2.11 per share. The shares have the Contractual
Rights identical to those held by purchasers in the Company's 1998
Offering. The Class D Warrants are exercisable for an aggregate of
924,525 shares of the Company's common stock at $2.11 per share and
expire June 30, 2004. The total value of the shares plus the warrants
(utilizing the Black-Scholes valuation method), less the book value in
the minority interest in BGDC resulted in a charge to net loss of
$501,000 during the period. This issuance was also a dilutive event
under the terms of the Class C Warrant Contractual Rights. Accordingly,
the Company issued an additional 447,858 Class C Warrants at an exercise
price of $3.28 and reduced the exercise price on the existing Class C
Warrants from $3.67 to $3.28.
On October 9, 1999 pursuant to the Contractual Dividend rights
contained in 1998 offering, the Company issued 562,951 shares of its
common stock to certain stockholders.
1998 Equity Incentive Plan
Under the Company's 1998 Equity Incentive Plan, which amended and restated
the 1989 Stock Plan (the "Plan"), the Company is permitted to sell or
award common stock or to grant stock options for the purchase of common
stock to employees, officers and consultants up to a maximum of 4,800,000
shares. In February 2000, the Board of Directors approved an amendment to
the Plan to increase the number of shares covered by the Plan by
6,000,000, which amendment is subject to approval by the shareholders at
the
43
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
2000 Annual Meeting of Shareholders. At December 31, 1999, there were
1,103,298 shares available for future grants under the 1998 Plan.
The 1998 Plan provides for the granting of incentive stock options
("ISOs") and nonstatutory stock options. In the case of ISOs, the exercise
price shall not be less than 100% of the fair market value per share of
the common stock, on the date of grant. In the case of nonstatutory
options, the exercise price shall be determined by a committee appointed
by the Board of Directors ("Compensation Committee"). All stock options
under the 1998 Plan have been granted at exercise prices at least equal to
the fair market value of the common stock on the date of grant.
The options either are exercisable immediately on the date of grant or
become exercisable in such installments as the Compensation Committee may
specify, generally over a four year period. Each option expires on the
date specified by the Compensation Committee, but not more than ten years
from the date of grant in the case of ISOs (five years in certain cases).
Director Stock Option Plan
In June 1994, the shareholders of the Company adopted the 1994 Director
Stock Option Plan (the "Director Plan"). The Director Plan was established
to attract and retain highly qualified, non-employee directors. The price
per share for each option granted under this plan shall be the current
fair market value at date of grant. The options vest over a period of
three years and have a term of ten years. As originally adopted, the
aggregate number of shares of the Company's common stock which may be
optioned under this plan is 2,143 shares. In March 1997, the Board of
Directors approved an amendment to the Director Plan to increase the
number of shares covered by the Director Plan by 2,143 shares, which
amendment was approved by the shareholders at the 1997 Annual Meeting of
Shareholders. In April 1998, the Board of Directors approved an amendment
to the Director Plan to increase the number of shares covered by the
Director Plan to 500,000, which amendment was approved at the 1998 Annual
Meeting of Shareholders. In June 1998, the Board of Directors terminated
the Director Plan.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
issued in 1995, defined a fair value method of accounting for stock
options and other equity instruments. Under the fair value method,
compensation cost is measured at grant date based on the fair value of the
award and is recognized over the service period, which is usually the
vesting period. The Company elected to continue to apply the accounting
provisions of APB Opinion No. 25 for stock options. The required
disclosures under SFAS 123 as if the Company had applied the new method of
accounting are made below.
During 1998 and 1999, the Company granted stock options (the "Variable
Options") to certain employees, directors and consultants with
Contractual Reset Rights, Contractual Anti-Dilution Rights, and Class C
Warrant Contractual Rights contained in the 1998 Offering. The Variable
Options had an initial exercise price of $5.00 per share. Since the
number of options and the associated exercise price were subject to
adjustment and not fixed at the grant date, these stock options are
accounted for under variable stock option accounting. Accordingly, the
Variable Options were re-valued on a quarterly basis by measuring the
difference between the current exercise price and the fair market value
of the Company's common stock on that balance sheet date. As a result,
the Company recorded a $2.5 million charge in the fourth quarter
44
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
of 1999 representing the earned portion of the $4.6 million total
compensation charge. There were no charges in 1998 or in the first three
quarters of 1999, since the fair market value of the Company's common
stock was less then the current exercise price with respect to the
Variable Options.
During 1999, the number and the exercise price of the Variable Options
were adjusted according to the Contractual Anti-dilution Rights, the
Contractual Reset Rights, and the Class C Warrant Contractual Rights
contained in the 1998 Offering. As a result, the Company granted
819,064 (586,218 incentive stock options and 232,846 nonqualified stock
options) additional options and the associated exercise price of the
Variable Options were reduced from $5.00 per share to $2.11 per share
(see Note M).
Activity under all stock plans related to all the incentive stock
options and nonqualified stock options for the three years ended
December 31, 1999 is listed below.
ISO Nonqualified Weighted Avg.
Shares Shares Option Price Exercise Price
------ ------------- ------------ --------------
Outstanding at December 31, 1996 12,046 2,416 $70.00-$892.50 $244.30
Granted 110,943 13,214 $10.00-$96.30 $22.70
Exercised (6) -- $70.00 $70.00
Canceled (4,038) (91) $70.20-$892.50 $250.70
--------- --------
Outstanding at December 31, 1997 118,945 15,539 $10.00-$892.50 $39.50
Granted 428,000 239,000 $0.70-$10.00 $4.97
Canceled (118,945) (15,486) $10.00-$892.50 $37.87
--------- --------
Outstanding at December 31, 1998 428,000 239,053 $0.70 - $0.19 $4.98
Granted 2,033,418 980,993 $1.45 - $138.12 $2.95
Canceled (4,739) -- $2.11 $2.11
--------- ---------
Outstanding at December 31, 1999 2,456,679 1,220,046 $0.70-$138.12 $2.66
========= =========
45
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
Summarized information about stock options outstanding at December 31, 1999 is
as follows:
Exercisable
Number of Weighted Average ------------------------------
Range of Options Remaining Weighted Average Number of Weighted Average
Exercise Prices Outstanding Contract Life Exercise Price Options Exercise Price
- --------------- ----------- ------------- -------------- ----------- --------------
$0.70 - $1.13 139,667 9.49 $1.02 139,667 $1.02
$1.45 - $2.01 308,176 8.51 $1.84 191,114 $1.94
$2.11 3,097,152 8.92 $2.11 812,955 $2.11
$2.13 - $138.12 131,730 5.66 $19.31 131,730 $19.31
Options for the purchase of 1,275,466 shares, 63,599 shares and 23,538
shares are exercisable at December 31, 1999, 1998 and 1997, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
1999 1998 1997
---- ---- ----
Dividend yield None None None
Expected volatility 100% 104% 75%
Risk free interest rate 5.75% 5.25% 6.00%
Expected life of option 5.0 5.0 5.0
All options granted in 1999, 1998 and 1997 were granted at fair value or
at amounts greater than fair value. Options to consultants are recorded at
fair value and recognized as expense over the vesting period. The weighted
average fair value of options granted was $1.56 $1.62, and $15.90 for
1999, 1998 and 1997, respectively.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards made in 1999, 1998
and 1997 consistent with the provisions of SFAS 123, the Company's net
loss and loss per share would have been increased to the pro forma amounts
shown below:
1999 1998 1997
---- ---- ----
Net loss - as reported $(14,293,221) $(3,291,357) $(9,052,575)
Net loss - pro forma $(16,736,290) $(3,791,798) $(9,368,531)
Basic and diluted net loss per
common share - as reported $(1.36) $(1.40) $(63.68)
Basic and diluted net loss per
common share - pro forma $(1.58) $(1.62) $(65.20)
The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts.
1994 Employee Stock Purchase Plan
In April 1994, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (the "1994 Plan"). Under the 1994 Plan, eligible employees
of the Company may purchase shares of Common Stock, through payroll
deductions, at the lower of 85% of fair market value of the stock at the
time of grant or 85% of fair market value at the time of exercise. As
amended, a total of 200,000 shares were reserved for issuance under the
1994 Plan. The Company is not currently offering shares under the 1994
Plan. The Company issued 763 shares under the 1994 Plan in 1997. The
weighted average fair values of grants at fair
46
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
value under the 1994 Plan during 1997 was $14.10. No shares were issued
during 1998 or 1999 under the 1994 Plan.
Common Stock Warrants
On February 10, 1994, in connection with the closing of the initial public
offering the Company's underwriter purchased for $210.00 warrants to
purchase 3,000 shares of the Company's common stock at an exercise price
of $833.00 per share. The warrants expired on February 10, 1999.
On April 1, 1994, in connection with the Company's $2 million master lease
agreement, the Company issued common stock warrants for a purchase price
of $350.00 to purchase 500 shares of common stock at a price of $595.00.
These warrants expired on April 1, 1999.
On September 11, 1995, the Company issued common stock warrants for a
purchase price of $300.00 to purchase 429 shares of the Company's common
stock at an exercise price of $490.00 per share, in connection with
investment banking services to the Company. These warrants expire
September 10, 2000.
On February 14, 1996, the Company issued common stock warrants for a
purchase price of $220.00 to purchase up to 3,142 shares of the Company's
common stock to Commonwealth Associates at an exercise price of $219.10
per share in connection with a public financing. These warrants expire on
February 14, 2001.
On May 17, 1996, the Company issued a common stock warrant to purchase
11,283 shares of the Company's common stock at an exercise price of
$175.00 per share in connection with financial advisory services to the
Company. This warrant expires on May 16, 2001.
On May 17, 1996, the Company issued to a number of investors warrants to
purchase an aggregate of 67,690 shares of common stock at $175.00. The
Warrants are subject to redemption by the Company upon 30 days prior
notice to the holders of the Warrants at a price of $0.10 per Warrant
Share in the event that the average closing price of the Company's Common
Stock for any 20 consecutive trading day period exceeds $262.50. The
warrants expire on May 17, 2001.
On January 6, 1997, the Company issued a common stock warrant to purchase
1,071 shares of the Company's common stock at an exercise price of
$105.00 per share in connection with financial advisory services to the
Company. This warrant expires on January 6, 2002.
In August 1991 and September 1992, the Company issued warrants to purchase
up to 432 and 286 shares, respectively, of the Company's Class D Preferred
Stock (the "Class D Warrants") at a minimum exercise price of $175.00 per
share, in connection with leasing arrangements. The Class D Warrants were
automatically converted into warrants to purchase 268 shares of common
stock at an exercise price of $468.30 per share upon the closing of the
Company's initial public offering on February 17, 1994. The warrants
expired on February 10, 1999.
As described earlier, the Company issued Class C Warrants which were
originally issued at an exercise price of $5.00 per share and were
subsequently reduced to an exercise price of $3.28 per share.
47
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
As part of the final closing of the unit offering, The Aries Fund and
the Aries Domestic Fund, L.P. exchanged an aggregate of 30,060 shares
of Series A Convertible Preferred Stock, $0.01 par value per share, and
Class B Warrants to purchase an aggregate of 328,314 shares of the
Company's common stock for an aggregate of 42.084 Units (841,680 shares
of the Company's common stock and Class C Warrants to purchase 841,680
shares of the Company's common stock at an exercise price of $5.00 per
share, which exercise price was reduced to $3.28 in June 1999 as a
result of the Class C Warrant Contractual Rights contained in the
1998 Offering).
In connection with the final closing of the Company's 1998 private
placement on April 9, 1998 and certain advisory services, the Company
sold to Paramount Capital, Inc., the Company's placement agent in the
1998 private placement, unit purchase options, options to purchase an
aggregate of 481,381 shares of common stock and Class C Warrants to
purchase 481,381 shares of common stock at an exercise price of $5.00
per share. Pursuant to the Contractual Rights contained in the
1998 Offering, the Company increased the number of shares underlying the
1998 UPO's by 716,366. The Company also issued an additional 252,431
Class C Warrants at an exercise price of $3.28 per share and reduced the
exercise price on the existing Class C Warrants from $5.00 to $3.28 as a
result of the Class C Warrant Contractual Rights. The unit purchase
options are exercisable at $5.50 per unit for 2.37 shares of common stock
and a Class C Warrant exercisable for 1.52 shares.
In conjunction with the Pacific merger, the Company converted
approximately 7,961,713 Pacific Class A Warrants into 864,870 of the
Company's Class A Warrants. Each Class A Warrant is convertible into
one share of the Company's common stock at an exercise price of $9.20
per warrant. The Class A Warrants expire in November 2005 and March
2007. In addition, the Company converted approximately 309,734 Pacific
Class B Warrants into 33,653 the Company's Class B Warrants. Each Class
B Warrant is convertible into one share of the Company's common stock
at an exercise price of $202.49 per warrant. The Class B Warrants
expire in August 2001. In addition, in conjunction with the Pacific
Merger, the Company converted Unit Purchase Options consisting of
options to purchase 3,984,625 shares of common stock and 1,683,663
Class A Warrants to purchase common stock, into Unit Purchase Options
consisting of options to purchase 432,943 shares of common stock and
183,147 Class A warrants to purchase common stock. Pursuant to the
Contractual Rights contained in the 1998 Offering, the Company increased
the number of shares underlying these Unit Purchase options by 587,935.
The Unit Purchase Options expire on various dates beginning in November
2005 through September 2007.
As previously described, on June 30, 1999, the Company issued 924,525
Class D Warrants to purchase common stock to the former holders of
preferred stock in its majority owned subsidiary BG Development Corp.
("BGDC"), thereby eliminating a $6.5 million obligation while obtaining
100% ownership in BGDC. The Class D Warrants are exercisable at $2.11
per share and expire on June 30, 2004. The total value of the shares
plus the warrants (utilizing the Black-Scholes valuation method), minus
the book value of the minority interest in BGDC resulted in an
incremental charge against earnings of $501,000 during the period.
On June 30, 1999, the Company issued 11,500 Warrants to purchase common
stock in exchange for certain contractual obligations. The Warrants are
exercisable for one share of common stock at $2.11 per share and expire
on June 30, 2004.
At December 31, 1999 there were 9,284,980 warrants and unit purchase
options outstanding, all of which are exercisable. The warrants and
unit purchase options have exercise prices ranging from $2.11 to
$490.00 and expiration dates ranging from 2000 to 2007.
48
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
G. Comprehensive Income (Loss)
The Company accounts for comprehensive income under SFAS 130, "Reporting
Comprehensive Income." This statement required changes in comprehensive
income to be shown in a financial statement that is displayed with the
same prominence as other financial statements. Accumulated other
comprehensive income (loss) currently consists of unrealized gain (loss)
on investments as follows:
Years Ended December 31,
------------------------
1999 1998 1997
-------- -------- ----------
Accumulated other comprehensive
income (loss), beginning balance $272,588 $ -- $ (4,838)
Unrealized gain (loss) on investments (174,265) 272,588 --
Maturity of investments -- -- 4,838
-------- -------- ----------
Accumulated other comprehensive
income (loss), ending balance $ 98,323 $272,588 $ --
======== ======== ==========
H. Collaborative Research and Development Agreements
In January 1996, the Company entered into a Sponsored Research Agreement
with VacTex, Inc. (VacTex), to provide research services relating to the
development of novel vaccines based on discoveries licensed from the
Brigham and Women's Hospital and Harvard Medical School. These discoveries
shed light on a previously unknown aspect of immunology, the CD1 system of
lipid antigen presentation.
Under the Sponsored Research Agreement, the Company conducted specified
research tasks on behalf of VacTex for which the Company received a
combination of cash and equity in VacTex based on the number of full-time
equivalent employees of the Company engaged in the research, but subject
to maximum cash and stock limits. The Sponsored Research Agreement also
includes a provision requiring the Company to issue to VacTex or its
shareholders warrants to purchase an aggregate of 1,429 shares of the
Company's Common Stock at an exercise price of $245.00 per share.
In the year ended December 31, 1998, the Company recorded revenue of $0.1
million which was paid in cash. In the year ended December 31, 1997, the
Company recorded revenue of $0.5 million which consisted of $0.4 million
in cash and 150,000 shares of VacTex common stock.
The Sponsored Research Agreement with VacTex expired on January 8, 1998.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
("Aquila"). The Company's investment in VacTex of 300,000 shares of common
stock was converted to 113,674 shares of Aquila common stock and $128,501
of 7% debentures. As a result, the Company is accounting for its
investment in Aquila under Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" as
an available for sale security and marked it to market by recording a
cumulative unrealized gain of $0.1 million and $0.3 million on December
31, 1999 and 1998, respectively, as part of Shareholders' Equity, based on
Aquila's common stock
49
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
closing price. The Company's investment in VacTex was originally accounted
for under the cost method since it was a restricted security, it did not
have a readily determinable fair value and the Company owned less than 20%
of VacTex. On July 15, 1999, the Company redeemed the Aquila 7% debentures
for the total proceeds of $139,758 which represented the principal and
accrued interest due at the time of redemption. Subsequent to December 31,
1999, the Company liquidated all security interests in Aquila for a total
proceeds of approximately $406,000.
I. Income Taxes
No federal or state income taxes have been provided for as the Company has
incurred losses since its inception. At December 31, 1999, the Company had
federal and state tax net operating loss ("NOL") carryforwards of
approximately $100.0 million and $51.0 million, which will expire
beginning in the year 2000 through 2019 for federal and beginning in the
year 2001 through 2006 for state, respectively. Additionally, the Company
had federal and state research and experimentation credit carryforwards of
approximately $2.0 million and $1.0 million, respectively, which will
expire through 2019. Internal Revenue Code of 1986 (the "Code") contains
provisions which limit the net operating loss carryforwards and tax
credits available to be used in any given year upon the occurrence of
certain events, including significant change in ownership interests. In
conjunction with the initial public offering and the acquisition of
Pacific Pharmaceuticals, Inc., such changes in ownership as defined in the
Code occurred. Accordingly, certain available NOL carryforwards and tax
credits are subject to these limitations.
The components of the Company's net deferred tax assets were as follows at
December 31:
1999 1998 1997
---- ---- ----
Net deferred tax assets:
Net operating loss carryforwards $37,058,000 $23,218,000 $22,665,000
Tax credit carryforwards 2,868,000 2,192,000 2,660,000
Depreciation 274,000 363,000 1,263,000
Capital leases and other 1,421,000 (1,171,000) (1,253,000)
Valuation allowance (41,621,000) (24,602,000) (25,335,000)
------------ ------------ ------------
Total net deferred tax assets $ 0 $ 0 $ 0
============ ============ ============
As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets which are comprised principally
of net operating loss and tax credit carryforwards. Management has
considered the Company's history of losses and concluded, in accordance
with the applicable accounting standards, that it is more likely than not
that the Company will not recognize the benefit of the net deferred tax
assets. Accordingly, the deferred tax assets have been fully reserved.
Management re-evaluates the positive and negative evidence on an annual
basis.
J. Savings and Retirement Plan
On July 1, 1990, the Company established the Procept, Inc. Savings and
Retirement Plan (the "401(k) Plan"), a profit-sharing plan under Section
401 of the Code. Employees are eligible to participate in the 401(k) Plan
by meeting certain requirements, including length of service and minimum
age. The Company may contribute to the 401(k) Plan, without regard to
current or accumulated net profits, in an amount not to exceed the maximum
allowable under applicable provisions of the Code. The amount is to be
allocated to active
50
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
participants based on their annual pay as a percentage of the total annual
pay of all such participants. Participants may also contribute to the
401(k) Plan, but no more than the maximum permissible amount allowed by
regulatory definitions. For the year ended December 31, 1998 and 1997, the
Company did not contribute to the 401(k) Plan. For the plan year 1999, the
Company contributed 512 shares of its common stock to the 401(k) Plan with
a value of $740.
K. Commitments and Contingencies
Operating Leases
On February 28, 1989, the Company entered into an operating lease
arrangement for its facility. The Company has made several amendments to
its operating lease arrangement for its facility to include additional
leased space and extension of the lease terms. The commitment under the
operating lease requires the Company to pay monthly base rent and an
allocable percentage of operating costs and property taxes.
The monthly base rent is subject to increases during the course of the
lease term which are unrelated to increases in utilized space.
Accordingly, the Company is providing for rent expense based on an
amortization of the lease payments on a straight-line basis over the life
of the lease arrangement.
Pursuant to the aforementioned leasing arrangements, at December 31, 1999
and 1998, the Company has recorded liabilities of approximately $67,000
and $0.2 million, respectively, for rent expense in excess of cash
expenditures for leased facilities.
Gross rent expense for leased facilities and equipment amounted to
approximately $1.4 million, $1.4 million and $1.8 million for the years
ended December 31, 1999, 1998 and 1997, respectively. The approximate
gross future minimum annual rental payments for leased facilities for the
next year under the lease arrangements consist of the following at
December 31, 1999:
2000 $706,000
The Company's facility lease expires June 30, 2000. The Company does not
intend to renew this lease.
The Company has entered into sublease agreements which offset the future
minimum lease payments by $1.0 million in 2000. The sublease agreements
require that the Company provide certain services including utilities. The
Company expects sublease income to continue to approximate its related
costs.
51
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
Capital Leases
On March 17, 1999, as part of the acquisition of Pacific, the Company
assumed a capital lease obligation for office equipment. The future
minimum lease payments under this capital lease are as follows:
December 31, 1999
-----------------
2000 $6,519
2001 6,519
2002 6,519
2003 3,259
-------
Total future minimum lease payments: 22,816
Less amounts representing interest: 3,600
-------
Present value of future minimum
lease payments: 19,216
Less current portion: 4,832
-------
$14,384
=======
Legal Proceedings
On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a
Complaint with the United States District Court for the Southern District
of New York naming the Company as a defendant (the "Complaint"). The
Complaint alleges that the Company breached obligations to Commonwealth
under the Underwriting Agreement between Commonwealth and the Company
dated February 8, 1996, giving Commonwealth a right of first refusal to
act as co-lead underwriter or co-managing agent of a public offering or
private placement of the Company's securities during the period ended
August 8, 1997. In the Complaint, Commonwealth seeks aggregate
compensatory damages in the amount of $375,000, incidental and
consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as
the court deems proper. The Company served an answer on or about March 16,
1998 denying Commonwealth's allegations and has engaged in substantial
discovery. At a court-sponsored mediation held on February 9, 1999, the
Company and Commonwealth reached an agreement in principle to settle this
matter whereby Commonwealth agreed to dismiss the suit in return for
payment of $45,000 in cash and 36,785 shares of the Company's common
stock. In early 1999, the Company made these payments.
On February 22, 1999, Christopher R. Richied ("Richied") filed a Complaint
with the United States District Court for the Southern District of New
York naming Pacific Pharmaceuticals, Inc. ("Pacific") and Binary
Therapeutics Inc. ("Binary"), both subsidiaries of the Company, as
defendants (the "Complaint"). The Complaint alleges that Pacific and
Binary breached obligations to Richied under certain consulting
agreements. In the Complaint, Richied seeks approximately $40,000 in cash
and an indeterminate amount based upon the value of certain equity
components of the consulting agreement. The Company's answer to the
Complaint was filed on August 9, 1999. Based on facts alleged in the
Complaint, the Company does not believe this action will have a material
adverse effect on the Company's business, even in the event of a decision
by the court in the plaintiff's favor or other conclusion of the
litigation in a manner adverse to Pacific and Binary.
L. Related Parties
Certain members of the Company's Board of Directors are also retained as
consultants by the Company. Management believes the consulting agreements
have been negotiated at an "arm-length" basis and are immaterial.
On December 31, 1997, in connection with the severance agreement with an
officer and shareholder, three notes and the associated accrued interest,
in the amount of $124,646, were cancelled in exchange for the surrender to
the Company of 1,186 outstanding shares of Common Stock resulting in
treasury stock of $11,857 recorded at cost and $112,789 of compensation
expense which is included in general and administrative expenses for 1997.
As of March 28, 2000 the Aries Trust, the Aries Domestic Fund, L.P.,
the Aries Master Fund, the Aries Domestic Fund II, L.P., Paramount
Capital Investments, LLC, Paramount Capital, Inc. and Dr. Lindsay
Rosenwald, who are referred to collectively as the Aries Purchasers,
are the holders of an aggregate of approximately 10,678,698 shares of
common stock, representing approximately 33% of the outstanding shares
of the Company's common stock. In addition, the Aries purchasers hold
approximately 4,340,413 warrants and options to purchase common stock.
Mark C. Rogers is a member of the Company's Board of Directors and is
the President of Paramount Capital, Inc.
On April 9, 1998, the Company entered into a Financial Advisory
Agreement with Paramount Capital, Inc. pursuant to which Paramount is
entitled to receive a monthly retainer of $3,000 for a minimum of 24
months, out-of-pocket expenses and certain cash and equity success fees
in the event Paramount assists the Company with certain financing and
strategic transactions. During the year ended December 31, 1999, the
Company paid Paramount Capital, Inc. approximately $44,000 under this
Agreement.
In connection with the acquisition of Pacific, the Company issued an
aggregate of approximately 1,102,504 shares of common stock to the
Aries Purchasers in exchange for their shares of Pacific common stock
and pursuant to the Contractual Anit-dilution and Contractual Reset
Rights contained in the 1998 Offering (see Note M). The Company also
issued to the Aries Purchasers (i) an aggregate of 160,160 shares of
common stock as payment for brokerage services in connection with the
Pacific merger and (ii) an aggregate of 320,126 shares of common stock
in cancellation of certain indebtedness incurred by Pacific to the
Aries Purchasers through Pacific's merger with Binary Therapeutics,
Inc., and pursuant to the Contractual Anti-dilution and Contractual
Reset Rights contained in the 1998 Offering (see Note M).
As described below in Footnote C, the Company also assumed an
approximately $6.5 million, net obligation of Pacific's subsidiary, BG
Development Corp. ("BGDC") in connection with the Company's merger with
Pacific. As payment of this obligation, the Company issued approximately
2,773,575 shares of its common stock and Class D Warrants to purchase an
aggregate of 924,525 shares of common stock in exchange for all of the
outstanding shares of BGDC Series A Convertible Preferred Stock. On June
30, 1999, the Aries Purchasers exchanged their BGDC Series A Convertible
Preferred Stock
52
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Financial Statements
for an aggregate of 1,890,000 shares of common stock and Class D Warrant
to purchase an aggregate of 630,000 shares of common stock.
On April 9, 1999, the Company issued 3,970,734 shares of its common
stock pursuant to the Contractual Reset Rights contained in the 1998
Offering (see Note M) held by certain holders of the Company's Common
Stock, including those who purchased their shares in the 1998 private
placement. An aggregate of 1,842,813 shares were issued to the Aries
Purchasers pursuant to the Contractual Reset Rights.
On October 9, 1999, the Company issued 562,961 shares of its common stock
pursuant to Contractual Dividend Rights held by certain holders of the
Company's Common Stock, including those who purchased their shares in the
1998 Offering. An aggregate of 311,267 shares were issued to the Aries
Purchasers pursuant to this Contractual Dividend Right.
M. Subsequent Events (Unaudited)
Merger
On November 8, 1999, the Company entered into the merger between Procept,
Inc. and Heaven's Door Corporation to acquire Heaven's Door Corporation
(the "Merger Agreement"), a Delaware corporation engaged in providing a
range of funeral-related products and services through its web site,
www.HeavenlyDoor.com.
The acquisition of Heaven's Door Corporation will be accounted for
utilizing the purchase accounting method. The aggregate purchase price of
$19.2 million plus estimated acquisition costs of $2.0 million and assumed
liabilities of $260,000 were allocated to the acquired tangible and
intangible assets. As a result of this acquisition, the Company has
recorded goodwill and other intangibles of approximately $21.4 million,
which represents the excess cost of net assets acquired and which will be
amortized over their respective lives. Pursuant to the Merger Agreement,
each share of Heaven's Door Corporation was converted into approximately
.81 shares of the Company's common stock, or a total of 10,920,000 shares.
The Company has recorded deferred charges of $321,544 as of December
31, 1999 associated with acquisition costs related to the Heaven's Door
Corporation merger.
In accordance with the Merger Agreement, the Company will also issue
3,876,887 shares to holders of common stock purchased in the 1998
Offering in exchange for the elimination of the Contractual Rights
contained in the 1998 Offering. This transaction will be accounted for
as an induced conversion and accordingly the Company will record a
charge of approximately $23.0 million during the first quarter of 2000.
On January 28, 2000, concurrent with the merger with Heaven's Door
Corporation, all Variable Options were adjusted by issuing an
additional 1,004,224 options at an exercise price of $1.56 per share,
the exercise price on the existing Variable Options was reduced from
$2.11 per share to $1.56 per share, and the Board of Directors
accelerated the vesting of the Variable Options. Following the
termination of the Contractual Rights including those associated with
the Variable Options, the number and the associated exercise price of
the Variable Options became fixed and accounted for accordingly.
Therefore, a compensation charge of approximately $14.7 million will be
recorded in the first quarter of 2000, resulting from the revaluation
under variable plan accounting and the acceleration of the vesting of the
Variable Options.
Exercise of Warrants
On March 28, 2000, the Company received proceeds of approximately $3.1
million by the Aries Trust and the Aires Domestic Fund L.P. from the
exercise of approximately 1.3 million common stock warrants. These
warrants were exercised at a discount to the contractual exercise price.
Accordingly, a charge of approximately $1.1 million will be recorded in
the first quarter of 2000.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning disclosure pursuant to Item 405 of Regulation S-K is
included under the caption "Compliance with Section 16(a) of the Securities
Exchange Act" in the Proxy Statement and is incorporated herein by reference.
The current Executive Officers, Key Employees and Directors of the Company are
as follows:
Glenn L. Cooper, M.D. 47 Director
John F. Dee 42 Director and Vice Chairman of the Board
Michael E. Fitzgerald 46 Vice President, Finance; and Chief Financial Officer
Lloyd J. Kagin 43 President; Chief Executive Officer; and Director
Richard J. Kurtz 59 Director
Zola P. Horovitz, Ph.D. 65 Director
Philip C. Pauze 58 Director
Albert T. Profy, Ph.D. 43 Vice President, Research and Development
Mark C. Rogers, M.D. 57 Director
Elliott H. Vernon 57 Director
Howard Weiser 60 Director
Michael S. Weiss 34 Director and Chairman of the Board
GLENN L. COOPER, M.D. has been a director of the Company since June 1999. Dr.
Cooper has served as President, Chief Executive Officer and a director of
Interneuron Pharmaceuticals, a public biotechnology company, since May 1993 and
was named Chairman of the Board in January 2000. He is also a director of Genta,
Inc., a public biotechnology company located in Lexington, Massachusetts. Dr.
Cooper received his M.D. from Tufts University School of Medicine, and his B.S.
from Harvard University. He performed his postdoctoral training at Massachusetts
General Hospital and New England Deaconess Hospital.
JOHN F. DEE has served as Vice Chairman of the Board of Directors since February
2000. Previously, Mr. Dee was President, Chief Executive Officer and a member of
the Board of Directors of Procept, Inc. since joining the Company in February
1998. From April 1997 to October 1997, Mr. Dee was Interim Chief Executive
Officer of Genta Incorporated. From 1994 to 1997 and 1988 to 1992, Mr. Dee was a
Senior Management Consultant with McKinsey & Company, Inc. and from 1992 to 1994
served as Chief Operating Officer, Chief Financial Officer, and Director of
Walden Laboratories, Inc. (now AVAX Technologies, Inc.). Mr. Dee holds an M.S.
in Engineering from Stanford University and an M.B.A. from Harvard University.
MICHAEL E. FITZGERALD has been Vice President, Finance and Chief Financial
Officer of the Company since March 1999. Mr. Fitzgerald was previously Vice
President and Chief Financial Officer of CytoMed, Inc. since March 1993 and
Treasurer since February 1992. From June 1991 to January 1992 he served as
Corporate Controller and Chief Accounting Officer of TSI Corporation, a life
sciences company. Mr. Fitzgerald served as Corporate Controller and Chief
Accounting Officer of BioTechnica International, Inc., an agricultural
biotechnology firm, from September 1986 to May 1991. From January 1975 to August
1986, he was employed by the Amicon Division of W.R. Grace, a life sciences
company, most recently as Manager, Corporate Accounting. Mr. Fitzgerald holds a
B.S. in Economics and Finance and an M.B.A. in Finance from Bentley College.
54
ZOLA P. HOROVITZ, Ph.D. has been a director of the Company since 1992. Dr.
Horovitz, currently a consultant to pharmaceutical companies, served as Vice
President - Business Development and Planning at Bristol-Myers Squibb
Pharmaceutical Group, from August 1991 to April 1994, and as Vice President -
Licensing, from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President - Research Planning. He is also a director of seven other
biotechnology and pharmaceutical companies: Avigen, Inc., BioCryst, Inc.,
Clinicor, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Roberts
Pharmaceutical Corporation and Synaptic Pharmaceuticals, Inc. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.
LLOYD J. KAGIN has served as President, Chief Executive Office and a member of
the Board of Directors since joining the Company in February 2000. From 1995 to
January 2000, Mr. Kagin was a Senior Managing Director and Director of Consumer
Markets Division of Josephthal & Co., Inc. From 1994 to 1995, Mr. Kagin was a
consultant with GKN Securities Corporation. From 1991 to 1994, he was employed
by Reich & Co., Inc., most recently as Senior Vice President. From 1990 to 1991,
Mr. Kagin served as a Vice President and Branch Manager for First Albany
Corporation. From 1983 to 1989, Mr. Kagin was employed by Paine Webber Inc.,
most recently as Vice President. Mr. Kagin holds a B.A. in Neurophysiology from
New York University.
RICHARD J. KURTZ, has been a director of HVDC since we acquired Heaven's Door
Corporation in January 2000. Mr. Kurtz has been the Chairman of the Board of
Directors of Urecoats Industries, Inc., a publicly-traded corporation in the
sealant and coating business, since February 1999. He has been the President and
Chief Executive Officer of the Kamson Corporation, a privately-held corporation,
for over twenty years. Kamson Corporation owns and operates real estate
investment properties in the northeastern United States. Mr. Kurtz received his
B.A. from the University of Miami in 1962.
PHILIP C. PAUZE has been a director of HVDC since we acquired Heaven's Door
Corporation in January 2000. Since 1993, Mr. Pauze has been the President of
Pauze Swanson Capital Management Co.(TM), which provides investment advice and
management services. Mr. Pauze also has been President and Trustee since 1993 of
the Pauze Funds(TM), a mutual fund company registered under the Investment
Company Act of 1940. Since 1999, Mr. Pauze has been President of Champion Fund
Services(TM), an accounting, administration, and transfer agency firm serving
the mutual fund industry. In 2000, Mr. Pauze formed and is President of Senior
Family Care, Inc.(TM), a firm providing pre-need funeral services via the
Internet. Mr. Pauze received his B.A. from Auburn University in 1963.
ALBERT T. PROFY, Ph.D. has been Vice President, Research and Development since
March 1999. From 1996 to 1999, Dr. Profy was Vice President, Protein
Biochemistry and Preclinical Development and from 1994 to 1996, Dr. Profy was
Director, Protein Biochemistry. Prior to joining HeavenlyDoor.com, Dr. Profy was
Director of Peptide and Protein Biochemistry at Repligen Inc., from 1986 to
1994, where he managed that company's HIV research program. From 1984 to 1986,
Dr. Profy was a Postdoctoral Research Associate at the Massachusetts Institute
of Technology. Dr. Profy received his Ph.D. and M.S. in Bio-Organic Chemistry
from Cornell University in 1984 and 1981 respectively, and a B.S. in Chemistry
From Bates College in 1978.
MARK C. ROGERS, M.D. has been a director of the Company since 1997. Dr. Rogers
is presently the President of Paramount Capital, Inc. From 1996 until 1998, Dr.
Rogers was Senior Vice President, Corporate Development and Chief Technology
Officer at The Perkin-Elmer Corporation. From 1992 to 1996, Dr. Rogers was the
Vice Chancellor for Health Affairs at Duke University, and Executive Director
and Chief Executive Officer of Duke University Hospital and Health Network.
Prior to his employment at Duke, Dr. Rogers was on the faculty of Johns
55
Hopkins University for 15 years where he served as a Distinguished Faculty
Professor and Chairman of the Department of Anesthesiology and Critical Care
Medicine, Associate Dean for Clinical Affairs, Director of the Pediatric
Intensive Care Unit and Professor of Pediatrics. Dr. Rogers currently serves on
the board of directors of three publicly traded companies: Discovery
Laboratories, Inc., Galileo Corporation and HCIA, Inc. Dr. Rogers received his
M.D. from Upstate Medical Center, State University of New York and has his
M.B.A. from The Wharton School of Business. He received his B.A. from Columbia
University and held a Fulbright Scholarship.
ELLIOTT H. VERNON has been a director of the Company since December 1997. Mr.
Vernon has been the Chairman of the Board, President and Chief Executive Officer
of Healthcare Imaging Services, Inc., a publicly held operator of fixed-site
magnetic resonance imaging centers in the northeast, since its inception in
1991. For the past ten years, Mr. Vernon has also been the managing partner of
MR General Associates, a New Jersey general partnership which is the general
partner of DMR Associates, L.P., a Delaware limited partnership. Mr. Vernon was
also one of the founders of Transworld Nurses, Inc., the predecessor of
Transworld HealthCare, Inc., a publicly held regional supplier of a broad range
of alternate site healthcare services and products. Mr. Vernon is also a
principal of Healthcare Financial Corp., LLC, a healthcare financial consulting
company engaged primarily in FDA matters. From January 1990 to December 1994,
Mr. Vernon was a director, Executive Vice President and General Counsel of Aegis
Holdings Corporation, an international provider of financial services through
its investment management and capital markets consulting subsidiaries.
HOWARD WEISER has been a director of HVDC since we acquired Heaven's Door
Corporation in January 2000. Prior to becoming a director of HVDC, Mr. Weiser
was a director of Heaven's Door Corporation from its inception in May 1999 until
its acquisition by HVDC in January 2000. From 1994 to 1999, Mr. Weiser was
Chairman, President, Chief Executive Officer, and Secretary of Urecoats
Industries Inc., a publicly traded sealant and coating business, and its
predecessors.
MICHAEL S. WEISS has been a director of the Company and Chairman of the Board
since July 8, 1997. He is the President of CancerEducation.com. Mr. Weiss was
formerly a Senior Managing Director of Paramount Capital, Inc. Prior to
joining Paramount, Mr. Weiss was an attorney with Cravath, Swaine & Moore.
Mr. Weiss is currently Vice-Chairman of the Board of Directors of Genta
Incorporated, a director of AVAX Technologies, Inc. and Palatin Technologies,
Inc., each of which is a publicly traded biopharmaceutical company.
Additionally, Mr. Weiss is currently a member of the boards of directors of
several privately held biopharmaceutical companies. Mr. Weiss received his
J.D. from Columbia University School of Law and a B.S. in Finance from the
State University of New York at Albany. Mr. Weiss devotes only a portion of
his time to the business of the Company.
The term of office of each officer extends until the meeting of the Board of
Directors following the next annual meeting of Shareholders and until his
successor is elected and qualified or until his earlier resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The table below sets forth certain
compensation information for the following executive officers of HVDC: Mr. Lloyd
J. Kagin, current President and Chief Executive Officer, Mr. John F. Dee,
President and Chief Executive Officer during fiscal year 1999, Nigel Rulewski,
Chief Medical Officer, and Michael Fitzgerald, Chief Financial Officer. Mr. Dee
resigned as an executive officer of HVDC as of February 25, 2000 and Mr. Kagin
was hired to fill his position. Mr. Fitzgerald became an executive officer of
HVDC in March of 1999. Dr. Rulewski resigned as Chief Medical Officer effective
February 29, 2000.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation
Compensation Awards
------------ -------------
Securities
Name and Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- ------------------ ---- ---------- --------- ----------- ----------------
Lloyd J. Kagin (1) 1999 0 0 0 0
President, Chief Executive Officer
John F. Dee (2) 1999 200,000 0 106,667 (3) 0
President, Chief Executive Officer 1998 181,667 0 1,330,128 (4) 0
Michael E. Fitzgerald (5)
Chief Financial Officer 1999 150,000 9,075 (6) 352,564 (7) 0
Nigel J. Rulewski, M.D. (8)
Chief Medical Officer 1999 200,000 0 0 0
1998 16,669 55,000 (9) 961,538 (10) 0
- ----------------
(1) Mr. Kagin joined HVDC as President and Chief Executive Officer
effective as of February 25, 2000. His compensation arrangements are
discussed under "Executive Employment Contracts and Termination
Agreements" below.
(2) Mr. Dee joined HVDC as President and Chief Executive Officer in
February 1998 and resigned his office effective February 25, 2000. Mr.
Dee is currently serving as HVDC's Vice Chairman.
(3) In lieu of the annual cash bonus Mr. Dee is entitled to under his
employment agreement, he received an option to purchase 106,667 shares
of HVDC common stock for his services in 1998.
(4) This option was granted in January 1999, but was approved in principle
in 1998 in connection with Mr. Dee's offer of employment. This option
was initially exercisable for 415,000 shares at $5.00 per share, but
the number of shares and the exercise price have been adjusted in
accordance with provisions that paralleled antidilution and reset
rights held by investors in HVDC's 1998 private placement, thereby
keeping the executive's interests in line with those of the investors.
(5) Mr. Fitzgerald joined HVDC as Vice President and Chief Financial
Officer in March of 1999.
(6) In lieu of a cash bonus, Mr. Fitzgerald received 5,000 shares of HVDC
common stock.
(7) This option was initially exercisable for 110,000 shares at $5.00 per
share, but the number of shares and the exercise price have been
adjusted in accordance with provisions that paralleled antidilution and
reset rights held by investors in HVDC's 1998 private placement,
thereby keeping the executive's interests in line with those of the
investors.
(8) Dr. Rulewski joined HVDC as Chief Medical Officer in December 1998 and
resigned from this office effective February 29, 2000.
(9) In lieu of a cash bonus, Dr. Rulewski received 10,000 shares of HVDC's
common stock.
(10) This option initially was exercisable for 300,000 shares at $5.00 per
share, but the number of shares and the exercise price have been
adjusted in accordance with provisions that paralleled antidilution and
reset rights held by investors in HVDC's 1998 private placement,
thereby keeping the executive's interests in line with those of the
investors.
OPTION GRANT TABLE. The following table provides information concerning
the grant of stock options under HVDC's 1998 Equity Incentive Plan to the named
executive officers during the last fiscal year. In addition, the table shows
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. These gains are based on assumed rates
of stock price appreciation of 5% and 10%, compounded annually, from the date
the options were granted to their expiration date. This table does not take into
account any change in the price of HVDC common stock to date, nor does HVDC make
any representation regarding the rate of its appreciation.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value At
Number of Percent of Assumed Annual Rates of
securities total options Stock Price Appreciation For
underlying granted to Exercise or Option Term ($) (1)
options employees in base price Expiration ------------------------------
Name granted (#) fiscal year(%)(2) ($/share) date 5% 10%
---- ----------- ----------------- --------- ---- -- ---
Lloyd J. Kagin 0 n/a n/a n/a n/a n/a
John F. Dee 106,667(3) 18.75 $1.125(3) 9/13/2009 $75,468 $197,250
Michael E. Fitzgerald 352,564(4) 61.99 $1.56(4) 3/8/2009 $345,892 $876,558
Nigel J. Rulewski, M.D. 0 n/a n/a n/a n/a n/a
- -----------------
(1) The dollar amounts under these columns include the results at the 5%
and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation,
if any, in the price of the underlying common stock. No gain to the
optionees is possible without an increase in price of the common stock,
which will benefit all stockholders proportionately.
(2) Based on a total of 568,771 shares subject to options granted during
1999, as adjusted through January 28, 2000. This total does not include
an option issued to John Dee in January 1999 to purchase an adjusted
total of 1,330,128 shares, because this option was approved in
principle in 1998 in connection with Mr. Dee's employment agreement.
(3) The exercise price and number of shares subject to this option reflect
adjustments pursuant to the original terms thereof through January 28,
2000 when the terms became fixed. The adjustment provisions were
designed to keep Mr. Dee's interests in line with the interests of
investors.
(4) The exercise price and number of shares subject to this option reflect
adjustments pursuant to the original terms thereof through January 28,
2000 when the terms became fixed. The adjustment provisions were
designed to keep Mr. Fitzgerald's interests in line with the interests
of investors.
FISCAL YEAR-END OPTION VALUES. The following table provides information
regarding exerciseable and unexerciseable stock options held by the named
executive officers as of December 31, 1999:
FISCAL YEAR-END OPTION VALUES
Value of Unexercised
Number of Securities in-the-Money
Underlying Unexercised Options at
Shares Options at Fiscal Year-End ($)
Acquired on Value Fiscal Year-End (#) Exercisable/
Name Exercise (#)(1) Realized ($)(1) Exercisable/ Unexercisable (1)(2)
---- --------------- --------------- Unexercisable (1) ---------------------
---------------------
Lloyd J. Kagin 0 0 0/0 0/0
John F. Dee 0 0 1,436,795/0 3,103,181/0
Michael E. Fitzgerald 0 0 352,564/0 750,080/0
Nigel J. Rulewski, M.D. 0 0 961,538/0 2,045,672/0
- -----------------
(1) These numbers reflect acceleration of vesting and adjustment of option
terms that occurred on January 28, 2000.
(2) Based on the difference between the option exercise price and the
closing price of the underlying common stock on December 31, 1999,
which closing price was $3.6875.
EXECUTIVE EMPLOYMENT CONTRACTS AND TERMINATION AGREEMENTS
Provided below is information concerning the employment and termination
arrangements that the company has entered into with its executive officers named
in the compensation table above. Mr. Fitzgerald has not entered into an
employment agreement with the company regarding his service as Chief Financial
Officer.
LLOYD J. KAGIN. On February 25, 2000, HVDC and Mr. Kagin entered into
an employment agreement providing for Mr. Kagin to serve as president and chief
executive officer on the company until March 25, 2004. Mr. Kagin's employment
agreement entitles him to a minimum annual base salary of $250,000 and an annual
bonus of between $25,000 and $100,000. The amount of Mr. Kagin's bonus is
determined annually by the compensation committee in light of his and the
company's performance over the prior year. Mr. Kagin received a signing bonus of
$75,000 and options to purchase an aggregate of 2.4 million shares of the
company's common stock at a price of $4.438 per share Half of these options
become exercisable in quarterly installments over a four-year period, and the
other half all become exercisable at the end of the four-year period, subject to
acceleration if certain performance goals are met. If the company terminates Mr.
Kagin's employment without cause, or if Mr. Kagin terminates his employment
because the company has breached its obligations to him or there has been a
change of control of the company, then Mr. Kagin is entitled to receive (i)
severance payments in a lump sum equal to his cash compensation from HVDC for
the twelve month period preceding the termination date and (ii) immediate
acceleration of the exercisability of any unvested options then held by Mr.
Kagin, except that the exercisability of his options to purchase 1.2 million
shares will not accelerate unless the company has attained a certain market
capitalization.
JOHN F. DEE. HVDC and Mr. Dee entered into an employment agreement
effective in February of 1998 providing for Mr. Dee to serve as the company's
President and Chief Executive Officer until such time as his employment is
terminated. Mr. Dee's employment agreement entitles him to a minimum annual base
salary of $200,000 and an annual bonus of a minimum of $25,000 and a maximum
$200,000. The amount of Mr. Dee's bonus is determined annually by the
compensation committee in light of his and the company's performance over the
prior year. As of the date of this proxy, the compensation committee had not yet
considered whether Mr. Dee will receive more than the minimum bonus for 1999.
Mr. Dee was also granted an option to purchase shares of the company's common
stock under the employment agreement. As adjusted through January 28, 2000, this
option entitles Mr. Dee to purchase 1,330,128 shares of common stock at $1.56
per share. This option became exercisable
in full in connection with the adjustment on January 28, 2000. Mr. Dee's
employment may be terminated by mutual agreement of the parties, by Mr. Dee if
the company breaches it's obligations to him, or by HVDC if Mr. Dee breaches his
obligations to the company. Although Mr. Dee ceased to serve as President and
Chief Executive Officer of HVDC in February 2000, he has continued to serve HVDC
through the date of this proxy statement as Vice Chairman of the Board of
Directors, and his annual compensation remains the same as before.
NIGEL J. RULEWSKI. On September 3, 1998, HVDC and Dr. Rulewski entered
into an employment agreement whereby Dr. Rulewski agreed to serve as the
company's Chief Medical Officer. Dr. Rulewski's employment agreement entitled
him to a minimum annual base salary of $200,000 and a performance bonus of up to
$225,000 each year. The amount of Dr. Rulewski's bonus is determined by the
compensation committee based upon the recommendation of the company's President
and is subject to his achievement of agreed upon milestones set at the beginning
of each year. As of the date of this proxy, the compensation committee had not
yet considered Dr. Rulewski's bonus award for 1999. Dr. Rulewski was also
granted an option to purchase 961,538 shares of the company's common stock at a
price of 1.56 per share, as adjusted through January 28, 2000. Dr. Rulewski
resigned as Chief Medical Officer effective February 29, 2000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 1999, the Compensation Committee of the Board of Directors
consisted of Dr. Zola P. Horovitz, Dr. Max Link, and Michael S. Weiss from
January until June, at which time Dr. Mark C. Rogers replaced Dr. Max Link on
the Committee. The Committee's responsibilities include: (i) reviewing the
performance of the Chief Executive Officer and the other executive officers of
HVDC and making determinations as to their cash and equity-based compensation
and benefits, and (ii) administration of employee stock option grants and stock
awards. The Committee met three times during 1999. The Committee submits this
report on compensation policies and actions during 1999 with respect to Mr. Dee,
in his capacity as President and Chief Executive Officer of the company, and Dr.
Nigel Rulewski and Michael Fitzgerald, the only other HVDC executive officers
whose combined salary and bonus for 1999 exceeded $100,000. Lloyd J. Kagin, who
is also named in the compensation tables, joined HVDC in February 2000. These
four executive officers are named in the compensation tables contained in this
proxy statement.
COMPENSATION PHILOSOPHY.
HVDC's executive compensation policy is comprised of three principal
elements: base salary, cash or stock bonuses based on performance and stock
option grants, and is designed to attract, retain and reward executive officers
who contribute to the long term success of HVDC. Through its compensation
policy, HVDC strives to provide total compensation that is competitive with
other companies in comparable lines of business. The compensation program
includes both motivational and retention-related compensation components.
Individual performance that meets and exceeds the company's plans and objectives
is encouraged through bonus awards, and stock options are granted to connect the
performance of the company's stock with the compensation of its executives.
HVDC endeavors to reward each executive's achievement of goals related
to the company's annual and long-term performances and individual fulfillment of
responsibilities. While compensation survey data provide useful guides for
comparative purposes, the Committee believes that an effective compensation
program also requires the application of judgment and subjective determinations
of individual performance. Accordingly, the Committee members apply their
judgment to reconcile the program's objectives with the realities of retaining
valued employees.
CHIEF EXECUTIVE OFFICER COMPENSATION
John Dee served as the Chief Executive Officer from February 1998
through February 2000. Pursuant to his employment agreement, Mr. Dee's base
salary for his first year of service was fixed at $200,000 and is subject to
upward adjustment in the discretion of the committee for each consecutive year
of employment. Mr. Dee is also entitled to a performance bonus of up to
$200,000, subject to the achievement of agreed upon milestones, with a
minimum bonus of $25,000. As of the date of this proxy statement, the
Compensation Committee has not yet considered whether Mr. Dee will receive more
than the minimum base salary and bonus for 1999.
The Committee approved an option grant to Mr. Dee as part of his offer
of employment, which option was initially exercisable for 415,000 shares at
$5.00. The exercise price of Mr. Dee's option was set at the price per share
paid by the investors in HVDC's 1998 private placement, which price exceeded the
fair market value of the common stock on the date of grant. Mr. Dee's option
grant included provisions to adjust the number of shares and the exercise price
which paralleled antidilution and reset rights held by investors in HVDC's 1998
private placement, thereby keeping Mr. Dee's interests parallel with those of
the investors. As of January 28, 2000, Mr. Dee's option was adjusted to cover
1,330,128 shares at an exercise price of $1.56 per share, at which time its
terms became fixed. At that same time, the exercisability schedule of the option
was accelerated, and it became exercisable in full. In addition, Mr. Dee was
granted an option in 1999 that entitles him to purchase 106,667 shares of common
stock at $1.125 per share, after giving effect to adjustments through January
28, 2000. This option also has been accelerated and is exercisable in full.
Mr. Dee has resigned, effective as of February 25, 2000, as the
company's President and Chief Executive Officer and has been replaced by Mr.
Kagin. Mr. Dee continues to serve the company as Vice Chairman.
COMPENSATION OF OTHER EXECUTIVE OFFICERS
BASE SALARY. Dr. Rulewski had an employment agreement with HVDC that
set his minimum annual base salary. (see "Executive Employment Contracts and
Termination Agreements"). The compensation committee set Mr. Fitzgerald's annual
base salary at $150,000 when HVDC hired him in 1999. HVDC sets the annual base
salary for its executives based on each executive's salary history, the salaries
of other HVDC executives, and the compensation of executives at comparable
companies. The Compensation Committee periodically reviews the base salaries
paid to executive officers. In addition, executive officers may receive bonuses
in the discretion of the compensation committee. No bonuses have been awarded
with regard to services performed during 1999.
STOCK OPTIONS. Executive officer compensation also includes long-term
incentives afforded by options to purchase shares of common stock. Information
pertaining to option grants to executive officers in 1999 is provided in the
table entitled "Option Grants in Last Fiscal Year."
STOCK OPTIONS
Stock options generally are granted to HVDC's executive officers at the
time of their hire and at such other times as the Committee may deem
appropriate, such as a promotion and upon nearing full vesting of prior options.
In determining option grants, the Committee considers the same industry survey
data as used in its analysis of base salaries and bonuses, and strives to make
awards that are in line with its competitors. In general, the number of shares
of common stock underlying the stock options granted to each executive reflects
the significance of that executive's current and anticipated contributions to
HVDC.
In addition, the stock option grants made by the Committee are designed
to align the interest of management with those of the shareholders. In order to
maintain the incentive and retention aspects of these grants, the Committee has
determined that a significant percentage of any officer's stock options should
be unvested option shares.
The value that may be realized from exercisable options depends on
whether the price of the company's common stock at any particular point in time
accurately reflects the company's performance. However, each individual
optionholder, and not the Committee, makes the determination as to whether to
exercise options that have vested in any particular year.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a public company for compensation over $1 million paid to its Chief
Executive Officer and its four other most highly compensated
executive officers. However, if certain performance-based requirements are met,
qualifying compensation will not be subject to this deduction limit.
By the Compensation Committee,
Zola P. Horovitz, Ph.D.
Mark C. Rogers, M.D.
Michael S. Weiss
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table and footnotes set forth certain information
regarding the beneficial ownership of HVDC's common stock as of April 1, 2000 by
(i) the only persons known by HVDC to be beneficial owners of more than 5% of
the common stock, (ii) the executive officers named in the Summary Compensation
Table, (iii) each director and nominee for election as a director, and (iv) all
current executive officers and directors as a group:
Common Stock
Beneficially Owned (1)
----------------------
Beneficial Owner Shares Percent
---------------- ------ -------
Aries Domestic Fund, L.P. ........................................... 15,007,566 (2) 46.08
The Aries Trust
Aries Master Fund
Aries Domestic Fund II, L.P.
Paramount Capital Investments, LLC
Paramount Capital, Inc.
Paramount Capital Asset Management, Inc.
Dr. Lindsay A. Rosenwald
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, New York 10019
John F. Dee.......................................................... 1,436,895 (3) 4.41
Michael Fitzgerald................................................... 357,564 (4) 1.10
Michael S. Weiss..................................................... 770,159 (5) 2.36
Zola P. Horovitz, Ph.D............................................... 173,312 (6) *
Mark C. Rogers, M.D.................................................. 12,543,083 (7) 38.51
Nigel J. Rulewski, M.D............................................... 961,538 (8) 2.95
Elliott H. Vernon.................................................... 271,525 (9) *
Glenn Cooper......................................................... 212,575(10) *
Richard Kurtz........................................................ 1,665,198 5.11
Philip C. Pauze...................................................... 36,159(11) *
Howard Weiser........................................................ 2,563,996(12) 7.87
Lloyd J. Kagin....................................................... 3,000 *
All current executive officers and directors as
a group (12 persons)................................................. 20,995,004(13) 64.47
- --------------
* Indicates less than 1%
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares of common stock
shown as beneficially owned by such stockholder, subject to community
property laws where applicable. Shares of common stock issuable upon the
exercise of options or warrants currently exercisable or exercisable
within 60 days of April 1, 2000 are treated as outstanding solely for the
purpose of calculating the amount and percentage of shares beneficially
owned by the holder of such options or warrants.
(2) Reported ownership consists of:
(A) the following holdings of The Aries Domestic Fund L.P.: (1) 3,404,259
outstanding shares of common stock, (2) 258,136 shares issuable on
exercise of Class C Warrants, (3) 55,443 shares issuable upon exercise of
1998 Unit Purchase Options, (4) 25,153 shares issuable upon exercise of
Class C Warrants issuable on exercise of 1998 Unit Purchase Options, (5)
45,654 shares issuable upon exercise of 1997 Unit Purchase Options
originally issued by Pacific Pharmaceuticals, Inc., (6) 4,671 shares
issuable upon exercise of Class A Warrants issuable on exercise of 1997
Unit Purchase Options originally issued by Pacific, (7) 2,716 shares
issuable upon exercise of 1995 Unit Purchase Options originally issued by
Pacific, (8) 3,395 shares issuable upon exercise of Class A Warrants
issuable on exercise of 1995 Unit Purchase Options originally issued by
Pacific, (9) 73,871 shares issuable upon exercise of Class A Warrants
originally issued by Pacific, (10) 189,000 shares issuable upon exercise
of Class D Warrants, (11) 4,889 shares issuable upon exercise of common
stock Warrants originally issued by Pacific, and (12) 1,754 shares
issuable upon exercise of common stock Warrants originally issued by
HVDC;
(B) the following holdings of the Aries Trust: (1) 6,731,810 shares of
common stock, (2) 495,442 shares issuable on exercise of Class C
Warrants, (3) 112,564 shares issuable upon exercise of 1998 Unit Purchase
Options, (4) 51,067 shares issuable upon exercise of Class C Warrants
issuable on exercise of 1998 Unit Purchase Options, (5) 88,568 shares
issuable upon exercise of 1997 Unit Purchase Options originally issued by
Pacific Pharmaceuticals, Inc., (6) 9,061 shares issuable upon exercise of
Class A Warrants issuable on exercise of 1997 Unit Purchase Options
originally issued by Pacific, (7) 2,716 shares issuable upon exercise of
1995 Unit Purchase Options originally issued by Pacific, (8) 3,395 shares
issuable upon exercise of Class A Warrants issuable on exercise of 1995
Unit Purchase Options originally issued by Pacific, (9) 117,757 shares
issuable upon exercise of Class A Warrants originally issued by Pacific,
(10) 441,000 shares issuable upon exercise of Class D Warrants, (11)
11,408 shares issuable upon exercise of Common stock Warrants originally
issued by Pacific, and (12) 4,092 shares issuable upon exercise of Common
stock Warrants originally issued by HVDC;
(C) the following holding of Aries Master Fund: 26,962 shares of common
stock;
(D) the following holding of Aries Domestic Fund II, L.P.: 634 shares of
common stock;
(E) the following holdings of Dr. Lindsay A. Rosenwald: (1) 276,258
shares of common stock, (2) 936,954 shares issuable upon exercise of 1998
Unit Purchase Options, (3) 425,069 shares issuable upon exercise of Class
C Warrants issuable on exercise of 1998 Unit Purchase Options, (4)
843,445 shares issuable upon exercise of 1997 Unit Purchase Options
originally issued by Pacific, (5) 86,292 shares issuable upon exercise of
Class A Warrants issuable on exercise of 1997 Unit Purchase Options
originally issued by Pacific, (6) 20,879 shares issuable upon exercise of
1995 Unit Purchase Options originally issued by Pacific, and (7) 26,099
shares issuable upon exercise of Class A Warrants issuable on exercise of
1995 Unit Purchase Options originally issued by Pacific;
(F) 10,865 shares of common stock held by Paramount Capital Investments
LLC; and
(G) 216,288 shares of common stock held by Paramount Capital, Inc.
(3) Includes 1,436,795 shares issuable to Mr. Dee upon the exercise of
options currently exercisable or exercisable within 60 days of April 1,
2000.
(4) Includes 352,564 shares issuable to Mr. Fitzgerald upon the exercise of
options currently exercisable or exercisable within 60 days of April 1,
2000.
(5) Consists of (1) 17,893 outstanding shares of common stock; (2) 168,019
shares issuable to Mr. Weiss upon the exercise of options currently
exercisable or exercisable within 60 days of April 1, 2000; (3) 45,022
shares issuable upon exercise of 1998 Unit Purchase Options, (4) 20,426
shares issuable upon exercise of Class C Warrants issuable on exercise of
1998 Unit Purchase Options, (5) 181,725 shares issuable upon exercise of
1997 Unit Purchase Options originally issued by Pacific Pharmaceuticals,
Inc., (6) 18,592 shares issuable upon exercise of Class A Warrants
issuable on exercise of 1997 Unit Purchase Options originally issued by
Pacific, (7) 2,230 shares issuable upon exercise of 1995 Unit Purchase
Options originally issued by Pacific, (8) 2,787 shares issuable upon
exercise of Class A Warrants issuable on exercise of 1995 Unit Purchase
Options originally issued by Pacific and (9) options held by Hawkins
Group, LLC to purchase units consisting of an aggregate of 215,637 shares
of common stock, plus Class C Warrants to purchase 97,828
shares of common stock. Mr. Weiss is a managing member of the Hawkins
Group, LLC and disclaims beneficial ownership of its shares except to
the extent of his pecuniary interest therein, if any.
(6) Consists solely of shares issuable to Dr. Horovitz upon the exercise of
options currently exercisable or exercisable within 60 days of April 1,
2000.
(7) Consists of (A) 10,390,818 shares and 2,001,752 shares issuable upon
exercise of options and warrants held by The Aries Trust, Aries Domestic
Fund, L.P., Aries Master Fund, Aries Domestic Fund II, L.P., Paramount
Capital Investments LLC and Paramount Capital Asset Management Inc. (the
"Paramount" Entities") and (B) 150,513 shares issuable to Dr. Rogers upon
the exercise of options currently exercisable or exercisable within 60
days of April 1, 2000. Dr. Rogers is the President of Paramount Capital,
Inc., an affiliate of the Paramount Entities. Dr. Rogers disclaims
beneficial ownership of the shares held by the Paramount Entities except
to the extent of his pecuniary interest therein, if any.
(8) Consists of shares issuable to Mr. Rulewski upon the exercise of options
currently exercisable or exercisable within 60 days of April 1, 2000.
(9) Includes 162,325 shares issuable to Mr. Vernon upon the exercise of
options currently exercisable or exercisable within 60 days of April 1,
2000.
(10) Consists of shares issuable to Dr. Cooper upon the exercise of options
currently exercisable or exercisable within 60 days of April 1, 2000.
(11) Includes 33,334 shares issuable to Mr. Pauze upon the exercise of options
currently exercisable or exercisable within 60 days of April 1, 2000.
(12) Mr. Weiser's ownership is calculated on the basis of his Form 3 filed
with the SEC in February 2000. Includes 1,250,000 shares held by J.E.
Holdings, Inc., a corporation of which Mr. Weiser's wife is an affiliate.
Also includes 1,050,000 shares held by Weistanta Investment Co., as to
which Mr. Weiser [disclaims?] beneficial ownership.
(13) Includes 3,650,975 shares issuable to directors and executive officers
upon the exercise of options currently exercisable or exercisable within
60 days of April 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PARAMOUNT AFFILIATES. Various entities affiliated with Paramount
Capital Asset Management, Inc. (named in the table headed "Security Ownership
of Management and Five Percent Owners" set forth above) are significant
stockholders of HVDC. During 1999, HVDC had certain relationships and
transactions with these stockholders and their affiliates, known as
"Paramount Affiliates."
- - During 1999, two members of the HVDC Board of Directors had
relationships with the Paramount Affiliates. During part of 1999, Mr.
Weiss was a Senior Managing Director of Paramount Capital, Inc., a
Paramount Affiliate. In addition, Dr. Rogers was the President of
Paramount Capital, Inc. during all of 1999 to date.
- - Certain Paramount Affiliates have a contractual right to designate a
majority of the members of HVDC's Board of Directors, as long as these
Paramount Affiliates hold at least 5% of the voting stock of HVDC. In
addition, during that period, HVDC must obtain the consent of these
Paramount Affiliates prior to (1) making any payments in excess of
$50,000, (2) incurring any indebtedness, (3) engaging in transactions
with other affiliates or (4) increasing executive compensation or
bonuses, except for bonuses guaranteed in an employment contract.
- - During 1999, HVDC paid Paramount Affiliates (1) an aggregate of $44,000
in monthly advisory fees for financial advisory services, (2) $50,000
in cash and 160,160 shares of HVDC Common Stock as payment for a 6%
brokerage fee incurred by Pacific in connection with the merger, (3)
546,000 shares of HVDC common stock as a fee for services that
Paramount provided in structuring and negotiating the merger, (5)
27,615 shares of Common Stock in exchange for the cancellation of
indebtedness originally incurred by Pacific.
- - In addition, HVDC is obligated to pay Paramount a commission of 5% upon
the exercise of any Class C Warrants.
PACIFIC PHARMACEUTICALS. Mr. Weiss and Dr. Vernon, HVDC Board
members, were serving on the Board of Directors of Pacific Pharmaceuticals,
Inc. during the negotiation, execution and consummation of HVDC's acquisition
of Pacific. The HVDC Board of Directors formed a Special Committee to
consider and approve any terms of the transaction with Pacific. Mr. Weiss
and Dr. Vernon were not members of the HVDC Special Committee.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The financial statements are listed under Part II, Item 8 of
this Report.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. EXHIBITS.
The exhibits filed as part of this Form 10-K are listed on an
Exhibit Index preceeding such exhibits.
(b) REPORTS ON FORM 8-K.
None.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, on this 30th day of March, 1999.
HEAVENLYDOOR.COM, INC.
(Registrant)
/s/ Lloyd J. Kagin
-----------------------------------------------
Lloyd J. Kagin,
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 30th day of March, 1999:
Capacity
/s/ Glenn L. Cooper, M.D. Director
- ------------------------------------
Glenn L. Cooper, M.D.
/s/ John F. Dee Vice Chairman
- ------------------------------------
John F. Dee
/s/ Michael E. Fitzgerald Vice President, Finance and
- ------------------------------------ Chief Financial Officer
Michael E. Fitzgerald (Principal Financial Officer
and Principal Accounting Officer)
/s/ Zola P. Horovitz, Ph.D. Director
- ------------------------------------
Zola P. Horovitz, Ph.D.
/s/ Lloyd J. Kagin President, Chief Executive
- ------------------------------------ Officer and Director
Lloyd J. Kagin (Principal Executive Officer)
/s/ Richard J. Kurtz Director
- ------------------------------------
Richard J. Kurtz
/s/ Philip C. Pauze Director
- ------------------------------------
Philip C. Pauze
58
/s/ Mark C. Rogers, M.D. Director
- ------------------------------------
Mark C. Rogers, M.D.
/s/ Elliott H. Vernon Director
- ------------------------------------
Elliott H. Vernon
/s/ Howard Weiser Director
- ------------------------------------
Howard Weiser
/s/ Michael S. Weiss Chairman
- ------------------------------------
Michael S. Weiss
59
EXHIBIT INDEX
Exhibit
No. Description
3.1 Restated Certificate of Incorporation of HeavenlyDoor.com, Inc.
Filed as Exhibit 3.1 to HeavenlyDoor.com's Form 10-Q for the
quarter ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of HeavenlyDoor.com, filed with the Secretary of
State of Delaware on October 7, 1997, to be effective as of
October 14, 1997. Filed as Exhibit 3.1 to HeavenlyDoor.com's
Form 10-Q for the quarter ended September 31, 1997, Commission
File No. 0-21134, and incorporated herein by reference.
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation, as amended, filed with the Secretary of State of
Delaware on May 19, 1998, effective as of June 1, 1998. Filed as
Exhibit 4.4 to HeavenlyDoor.com's Registration Statement on Form
S-8, Commission File No. 333-66885, and incorporated herein by
reference.
3.4 Certificate of Amendment of the Restated Certificate of
Incorporation, as amended, filed with the Secretary of State of
Delaware on January 26, 2000. Filed herewith.
4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-21134,
and incorporated herein by reference.
4.5 Form of Class C Warrant to Purchase Common Stock dated April 9,
1998, including Schedule of Holders. Filed as Exhibit 4.18 to
HeavenlyDoor.com's Registration Statement on Form S-3,
Commission File No. 333-51245, and incorporated herein by
reference.
4.10 Warrant to Purchase Common Stock dated as of September 11, 1995,
issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-1, Commission File
No. 33-96798, and incorporated herein by reference.
4.11 Form of Warrant Agreement between the Company and Commonwealth
Associates. Filed as Exhibit 4.11 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.
4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996 and
schedule of holders. Filed as Exhibit 4.12 to the Company's
60
Form 10-K for the year ended December 31, 1996, Commission
File No. 0-21134, and incorporated herein by reference.
4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated
January 6, 1997. Filed as Exhibit 4.13 to the Company's Form
10-K for the year ended December 31, 1996, Commission File No.
0-21134, and incorporated herein by reference. 4.14 Class A
Warrants (originally issued by Pacific Pharmaceuticals, Inc.)
held by a Schedule of Holders. Filed as Exhibit 4.3 to
HeavenlyDoor.com, Inc.'s Form 8-K filed on March 31, 1999,
Commission File No. 0-21134, and incorporated herein by
reference.
4.15 Class B Warrants (originally issued by Pacific Pharmaceuticals,
Inc.) held by a Schedule of Holders. Filed as Exhibit 4.4 to
HeavenlyDoor.com, Inc.'s Form 8-K filed on March 31, 1999,
Commission File No. 0-21134, and incorporated herein by
reference.
4.16 Aries Warrants (originally issued by Pacific Pharmaceuticals,
Inc.) held by the Aries Trust and Aries Domestic Fund, L.P.
Filed as Exhibit 4.5 to HeavenlyDoor.com, Inc.'s Form 8-K, filed
on March 31, 1999, Commission File No. 0-21134, and incorporated
herein by reference.
4.17 1995 Unit Purchase Options (originally issued by Pacific
Pharmaceuticals, Inc.) held by a Schedule of Holders. Filed as
Exhibit 4.1 to HeavenlyDoor.com, Inc.'s Form 8-K filed on March
31, 1999, Commission File No. 0-21134, and incorporated herein
by reference.
4.18 1997 Unit Purchase Options (originally issued by Pacific
Pharmaceuticals, Inc.) held by a Schedule of Holders. Filed as
Exhibit 4.2 to HeavenlyDoor.com, Inc.'s Form 8-K filed on March
31, 1999, Commission File No. 0-21134, and incorporated herein
by reference.
4.19 Common Stock Purchase Warrant issued in June 1999 to Wound
Healing of Oklahoma. Filed as Exhibit 4.1 to HeavenlyDoor.com,
Inc.'s Form 10-Q for the quarter ended June 30, 1999, Commission
File No. 0-21134, and incorporated herein by reference.
4.20 Class D Warrants issued in June 1999 to a Schedule of Holders.
Filed as Exhibit 4.2 to HeavenlyDoor.com, Inc.'s Form 10-Q for
the quarter ended June 30, 1999, Commission File No. 0-21134,
and incorporated herein by reference.
4.21 Form of Unit Purchase Option, including Schedule of Holders.
Filed as Exhibit 4.2 to HeavenlyDoor.com's Form 10-Q for the
quarter ended June 30, 1998, Commission File No. 0-21134, and
incorporated herein by reference.
61
10.1 The 1998 Equity Incentive Plan, as amended through June 30,
1999. Filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended June 30, 999, Commission File No. 0-21134, and
incorporated herein by reference.
10.2 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.
10.3 Lease for 840 Memorial Drive dated February 28, 1989 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust, as amended February 28, 1989 and April 4, 1989.
Filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated herein
by reference.
10.4 Lease for 840 Memorial Drive dated August 21, 1990 between the
Company and Robert Epstein et al., Trustee of 840 Memorial Drive
Trust. Filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.5 Lease for 840 Memorial Drive dated February 10, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.
10.6 Lease for 840 Memorial Drive dated September 8, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
10.7 Lease for 840 Memorial Drive dated April 27, 1994 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q for
the quarter ended March 31, 1994, Commission File No. 0-21134,
and incorporated herein by reference.
10.8 Consulting and Confidentiality Agreement dated January 1, 1998
between HeavenlyDoor.com, Inc. and Mark C. Rogers, M.D. Filed as
Exhibit 10.11 to the Company's Registration Statement on Form
S-4, Commission File No. 33-369821, and incorporated herein by
reference.
10.9 Consulting and Confidentiality Agreement dated January 1, 1998
between HeavenlyDoor.com, Inc. and Elliott H. Vernon. Filed as
Exhibit 10.12 to the Company's Registration Statement on Form
S-4, Commission File No. 33-369821, and incorporated herein by
reference.
62
10.10 Consulting and Confidentiality Agreement dated January 1, 1998
between HeavenlyDoor.com, Inc. and Michael S. Weiss. Filed as
Exhibit 10.13 to the Company's Registration Statement on Form
S-4, Commission File No. 33-369821, and incorporated herein by
reference.
10.11 Consulting and Confidentiality Agreement dated as of May 1, 1994
between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit
10 to the Company's Form 10-Q for the quarter ended June 30,
1994, Commission File No. 0-21134, and incorporated herein by
reference.
10.12 Registration Rights Agreement dated January 6, 1997 between the
Company and Furman Selz LLC. Filed as Exhibit 10.36 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.
10.13 Form of Indemnification Agreement between HeavenlyDoor.com, Inc.
and its Directors. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.14 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed as Exhibit
10.40 to the Company's Form 10-K for the year ended December 31,
1997, Commission File No. 0-21134, and incorporated herein by
reference.
10.15 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between HeavenlyDoor.com, Inc. and Mark C.
Rogers, M.D. Filed as Exhibit 10.25 to the Company's
Registration Statement on Form S-4, Commission File No.
33-369821, and incorporated herein by reference.
10.16 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between HeavenlyDoor.com, Inc. and Elliott H.
Vernon. Filed as Exhibit 10.26 to the Company's Registration
Statement on Form S-4, Commission File No. 33-369821, and
incorporated herein by reference.
10.17 Extension to the Consulting and Confidentiality Agreement dated
December 3, 1998 between HeavenlyDoor.com, Inc. and Michael S.
Weiss. Filed as Exhibit 10.27 to the Company's Registration
Statement on Form S-4, Commission File No. 33-369821, and
incorporated herein by reference.
10.18 Executive Employment Agreement dated as of February 4, 1998
between HeavenlyDoor.com, Inc. and John F. Dee. Filed as Exhibit
10.3 to HeavenlyDoor.com, Inc.'s Form 10-Q for the quarter ended
June 30, 1999, Commission File No. 0-21134, and incorporated
herein by reference.
63
10.19 Consulting and Confidentiality Agreement dated January 24, 2000
between HeavenlyDoor.com, Inc. and Philip Pauze. Filed herewith.
10.20 Executive Employment Agreement dated as of February 25, 2000
between HeavenlyDoor.com, Inc. and Lloyd Kagin. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
to the Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important factors regarding forward-looking statements. Filed
herewith.
- -----------------------
Exhibits 10.1, 10.2, 10.8 through 10.10, and 10.15 through 10.20 are management
contracts or compensatory plans, contracts or arrangements in which executive
officers or directors of the Company participate.
64