Back to GetFilings.com
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, 2000
Commission File Number: 0-21134
Paligent Inc.
-------------
(Exact name of registrant as specified in its charter)
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
Delaware 04-2893483
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
369 Lexington Avenue, New York, New York 10017
- ---------------------------------------- -----
(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: (212) 453-3111
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 21, 2001 was $1,342,000.
The number of shares of the registrant's Common Stock outstanding as of March
21, 2001 was 32,490,948.
Documents incorporated by reference:
None.
PART I
Note Regarding Forward-Looking Statement
Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements can generally can be identified
by the use of such terms as "anticipate," "believe," "continue," "expect,"
"may," "should," or similar variations or the negative thereof. These forward
looking statements involve risks and uncertainties, many of which are out of the
Company's control and which may affect its future business plans. Factors that
may affect the Company's future business plans include: (i) its ability to
identify, complete and integrate an acquisition of an operating business; (ii)
the viability of the Company's business strategy in connection with an
acquisition and its ability to implement such strategy; (iii) its ability to
secure financing for its operations; and (iv) its ability to generate revenues
sufficient to meet its operating costs. Such statements reflect the current view
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those discussed herein. The Company's
business, operations and financial conditions are subject to the risks,
uncertainties and assumptions as of the date of this report. The Company assumes
no obligation to update any such forward-looking statements.
Item 1. Business.
Corporate Summary
Paligent Inc. (formerly HeavenlyDoor.com, Inc. and Procept, Inc.), together with
its subsidiaries (collectively, "Paligent" or the "Company"), is currently
engaged in evaluating strategic alternatives to maximize value to existing
stockholders.
From its inception in 1985 through 1999, 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. In March 1999, the Company acquired Pacific Pharmaceuticals, Inc.
("Pacific"), a company engaged in the development of cancer therapies. In
January 2000, the Company consummated a major strategic change in its business
by acquiring Heaven's Door Corporation ("HDC"), a company that provided
business-to-business and business-to-consumer products and services for the
funeral service industry over the Internet. Effective with the acquisition of
HDC, the Company's name was changed from Procept, Inc. to HeavenlyDoor.com, Inc.
and the name of the Company's subsidiary, Pacific, was changed to Procept, Inc.
Subsequent to the merger with HDC, the Company sold its biopharmaceutical
equipment and closed its Cambridge, Massachusetts facility. Concurrently, the
Company established new offices in New York City and consolidated its Internet
business operations at the new location, closing the Florida office that had
been the center of Internet operations for HDC.
Also, subsequent to the merger with HDC, the Company out-licensed two
biotechnology compounds, Pro 2000 Gel and O6-Benzylguanine ("O6-BG"), which
had been under development by the Company for several years. Notwithstanding
the out-licensing, however, the Company retained certain future rights for
Pro 2000 Gel and O6-BG. All rights for a third compound, Periodontal Tissue
Monitor ("PTM"), were transferred.
Effective with the merger with HDC, the Company pursued an Internet strategy
that focused on promoting and facilitating transactions between consumers,
funeral industry providers and financing institutions. In this regard, the
Company developed a Web-based presence that provided consumers access to
information pertaining to the arrangement and handling of pre-arranged funeral
contracts. The Company's services to funeral industry providers included the
development of customized Web sites that were linked to the Company's Web site,
call center capabilities and marketing support.
2
During the fourth quarter of 2000, the Company decided to discontinue the
pursuit of its Internet strategy after a sustained period of deterioration in
the technology sector and related capital markets. Shortly thereafter, the
Company entered into an agreement to sell all of its Web-based assets and
Internet funeral service operations, including the name "HeavenlyDoor.com." On
December 31, 2000, the Company changed its name from HeavenlyDoor.com, Inc. to
Paligent Inc.
Paligent's Biotechnology Programs
Overview
PRO 2000 Gel
PRO 2000 Gel is under development as a vaginal, topical microbicide designed
to provide protection against human immunodeficiency virus ("HIV") infection,
as well as other sexually transmitted pathogens (e.g., herpes, chlamydia and
gonorrhea infection).
On June 14, 2000, the Company licensed to Interneuron Pharmaceuticals, Inc.
("Interneuron") the exclusive, worldwide rights to develop and market PRO
2000 Gel (see Item 13 - Certain Relationships and Related Transactions).
Under the licensing agreement, the Company received an up-front payment of
$500,000 and retains certain future rights to PRO 2000 Gel, including (i)
provisions for the receipt of additional payments based upon the achievement
of certain milestones; and (ii) royalties from future commercial sales of PRO
2000 Gel, if any. Interneuron is responsible for all remaining development
and commercialization activities for PRO 2000 Gel and has an option, for a
limited period of time, to purchase future royalty rights relating to Pro
2000 Gel.
O6-Benzylguanine
O6-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 O6-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 began in 1999
and continues to be conducted in accordance with a Cooperative Research and
Development Agreement ("CRADA") executed with the National Cancer Institute
("NCI") in August 1998.
On October 13, 2000, Pacific entered into an agreement with AOI
Pharmaceuticals Inc. ("AOI") to sublicense its exclusive, worldwide patent
rights and know-how relating to O6-BG (see Item 13 - Certain Relationships
and Related Transactions) in exchange for future royalties on net sales of
O6-BG. The agreement also provides for cash payments to Pacific based upon
the achievement of certain developmental milestones. In addition, AOI assumed
all financial obligations of Pacific relating to its licensing of worldwide
patent rights that are incurred subsequent to the effective date of the
agreement. On November 22, 2000, the Company was notified by The Penn State
Research Foundation ("PSRF") that the Company was in default of its material
obligations under the License Agreement between Pacific and PSRF and that
such default invalidates the Company's sublicensing agreement with AOI. The
Company believes that PSRF's claims are without merit. The Company and PSRF
are engaged in on-going discussions toward a satisfactory resolution of the
issues involved.
Periodontal Tissue Monitor
Paligent held 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.
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
3
distribution agreements with Steri-Oss, Inc. for the exclusive distribution of
PTM worldwide, except in Japan. There were no significant sales under the
distribution agreements. In addition, in 1998, Nobel Biocare AB acquired
Steri-Oss, Inc. and decided to terminate the agreement.
During the third quarter 2000, Pacific assigned its licensing rights to PTM, as
well as all of Pacific's intellectual property rights and assets related to
dental technology, including PTM, to Shofu, Inc., of Japan in exchange for
$50,000 and a future milestone payment, which is conditioned upon the adoption
of a PTM product by Japan's National Health Care System. Under the assignment
agreement for PTM, Pacific transferred all of its remaining licensing
obligations.
Biotechnology Drug Development Programs Under Out-License
PRO 2000 Gel: A Microbicide to Prevent 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. The World Health Organization estimates that 4.7 million new
adult HIV infections were acquired worldwide in 1999, the majority through
heterosexual intercourse. Heterosexual contact has also become the most common
route of HIV infection in U.S. women. Other STDs, such as genital herpes,
chlamydia and gonorrhea can lead to serious complications, especially in women,
and can increase the risk of HIV infection. Based on estimates by The Kaiser
Family Foundation and The World Health Organization, there are 15 million new
STD cases each year in the U.S. and more than 340 million worldwide. Topical
microbicides represent a new class of protective substance that are designed to
be applied vaginally before sexual contact. Topical microbicides have the
potential to offer an appealing, female-controlled alternative to condoms, the
only products currently known to prevent HIV transmissions.
The Company believes that PRO 2000 Gel is ideally suited for use as a topical
microbicide. Laboratory studies have shown that the drug is active against
HIV, herpes simplex virus, chlamydia and the bacteria that cause gonorrhea.
Moreover, in government sponsored tests, vaginally applied PRO 2000 Gel was
shown to be efficacious in a mouse model for genital herpes infection and a
monkey model for vaginal HIV infection. The product is also highly stable,
odorless and virtually colorless. PRO 2000 Gel differs from
nonoxynol-9-containing spermicides, which have failed to provide protection
against HIV infection in previous human clinical trials.
In October 2000, dosing and follow-up for a Phase 1/Phase 2 clinical trial of
PRO 2000 Gel was completed by the NIH at sites in the U.S. and South Africa.
This study was designed to assess safety and acceptability in healthy, sexually
active women and HIV-infected sexually abstinent women. No serious adverse
events were reported, and a full analysis of the data is underway. Previous
Phase 1 studies conducted in Europe (with support from the Medical Research
Council of the United Kingdom) showed a promising safety and acceptability
profile for the drug in healthy, sexually abstinent women. Phase 1 studies to
evaluate the safety of male exposure are planned for early 2001, and a European
Commission-funded Phase 2 safety trial in at-risk African women is scheduled to
begin later this year.
No comparable product to prevent sexually transmitted infections has been
approved for use in the U.S., Europe or Japan. Marketed vaginal spermicides
containing the detergent nonoxynol-9 have been found to be ineffective at
reducing HIV transmission, and may actually increase the risk of infection.
Approximately 60 new substances are being evaluated for this indication, but the
Company believes only a few have reached the stage of development of PRO 2000
Gel. These include BufferGel by Reprotect, LLC, Savvy by Biosyn, Inc., Emmelle
by ML Laboratories, PLC, Carraguard by The Population Council, and cellulose
sulfate gen by The CONRAD Program.
Interneuron is responsible for providing adequate amounts of PRO 2000 Gel for
use in government-sponsored clinical trials. Interneuron is also dependent upon
third-party contractors for the manufacture and delivery of these supplies in
accordance with current U.S. Good Manufacturing Practices regulations.
Interneuron intends to seek a partner for commercial manufacture, marketing and
distribution of the product.
4
O6-Benzylguanine: A Chemosensitizer to Enhance Chemotherapy
Pacific's wholly owned subsidiary, BG Development Corp. ("BGDC"), holds an
exclusive, worldwide license from PSRF and others for O6-BG, a series of
related compounds and a gene therapy that the Company believes will enhance
the effectiveness of a class of currently used chemotherapeutic agents known
as O6-alkylating agents.
O6-BG and related compounds are small molecules for intravenous administration
in the treatment of cancer. The Company believes O6-BG to be capable of
destroying the resistance of cancer cells to a class of chemotherapeutic agents,
O6-alkylating agents. The Company 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. The Company believes that O6-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
are a small percentage of patients who have achieved long-term remission; the
O6-alkylators are generally not considered curative. The critical 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. In a recent study published in the November 9, 2000 issue of
The New England Journal of Medicine, it was shown that glioma patients with
naturally inactive AGT had a response rate of approximately 60% to BCNU
therapy versus a response rate of approximately 4% for those patients that
had active AGT. It was also shown that approximately 60% of these patients
had active AGT and therefore made virtually all of these patients resistant
to BCNU therapy. Additionally, a published study in which 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 O6-BG temporarily destroys AGT, the Company
believes that O6-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. The
Company 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. The Company believes
that there are no other proteins involved in the repair process, and that the
AGT protein is inactivated in the repair process. The Company believes that
O6-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 O6-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 O6-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 O6-BG and BCNU were also found
5
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 O6-BG and BCNU,
but was not observed in animals treated with BCNU alone.
A Phase I clinical trial of O6-BG has been completed at Duke University
("Duke"). The Company believes that the study has shown that O6-BG, injected
intravenously, crosses the blood-brain barrier and effectively blocks the
activity of human brain tumor AGT protein. The Company also believes that the
study at Duke has demonstrated O6-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 O6-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 O6-BG in combination with BCNU in brain, colon and renal
cancer. In these studies, O6-BG was administered over a one-hour period by
intravenous infusion, followed by an infusion of BCNU one hour after completion
of the O6-BG infusion. The NCI of the NIH is sponsoring the trials under the
CRADA executed between the NCI and Pacific. From these studies, which involved
patients who had failed other cancer therapies, an O6-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 O6-BG. Through the CRADA, Johns
Hopkins University Medical Scool and Duke are conducting three Phase II clinical
studies in brain cancer utilizing O6-BG in combination with the Gliadel Wafer,
BCNU and temozolomide, respectively. The NCI and many investigators continue to
support the clinical development of O6-BG for a variety of cancer indications in
a series of additional Phase I and Phase II clinical studies.
Standard therapy with O6-alkylating chemotherapeutic agents commonly results in
bone marrow suppression. Through the O6-BG license, the Company 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. The Company believes that
the concomitant use of an O6-alkylating agent plus O6-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 O6-BG, the Company's collaborators have tested a considerable
number of additional compounds for AGT protein inactivation. The Company
believes that a number of next generation compounds are effective in inhibiting
the activity of tumor AGT protein. The Company also believes that it has a
proprietary interest in these compounds. The Company believes that it is
possible that these compounds will offer complementary properties to that of
O6-BG in further abrogation of cancer resistance to O6-alkylating agents.
Four patents including the composition of matter and use for O6-BG and
related compounds have been issued to PSRF and licensed to the Company. 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, the Company paid Penn State $150,000 as an up-front licensing
fee. Penn State will also be due (i) a royalty on sales of licensed products;
(ii) certain performance-based milestones; and (iii) a non-refundable, 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 Pacific 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 its common stock equal to the cash value of such payments.
Under the terms of the CRADA, the NIH will conduct research involving O6-BG and
will make available to the Company (i) NIH clinical data relating to any
potential products incorporating O6-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
6
installments. Pursuant to the agreement with AOI, the Company is entitled to
reimbursement for such costs beginning on the effective date of its agreement
with AOI.
Patents and Proprietary Technology
The Company'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.
The Company believes its copyrights, service marks, trademarks, trade dress,
trade secrets, proprietary technology and similar intellectual property are
critical to the success of the biotechnology under out-license. 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. To protect its right to
and to maintain the confidentiality of trade secrets and proprietary
information, the Company requires employees, 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, or its licensees, 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, or its licensee'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 its licensees, 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, the defense
and prosecution of patent suits may not be in the Company's, or its licensee's,
control.
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 the Company'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 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 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. This data, obtained both from in vivo studies and in vitro
studies, is submitted in an Investigational New Drug 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 is submitted in New
Drug Application or Product License Application to the FDA and the corresponding
agencies in other countries for review and approval.
In addition to the regulations relating specifically to product approval, there
are other laws and regulations regarding laboratory and manufacturing working
conditions, handling and disposition of
7
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
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors in these industries, 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, or its licensees,
to market commercial products. There can be no assurance that such competitors
will not succeed in developing technologies that are more effective than the
out-licensed biotechnology programs of the Company, or render such technologies
obsolete and non-competitive, or succeed in obtaining FDA or other regulatory
approvals for products more rapidly.
Employees
As of March 1, 2001, the Company employed 2 full-time and no part-time
employees. The Company also utilizes independent contractors to perform various
functions for the Company. The Company's employees are not represented by a
labor union. The Company regards its employee relations to be satisfactory.
Item 2. Properties.
The Company's offices are located at 369 Lexington Avenue, 10th Floor, New York,
New York. The Company leases 5,150 square feet under a five-year lease that
commenced in July 2000.
Item 3. Legal Proceedings.
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 and Binary Therapeutics Inc. ("Binary"), both subsidiaries of the
Company, as defendants (the "Complaint"). The Complaint alleged that Pacific and
Binary breached obligations to Richied under certain consulting agreements. On
August 7, 2000, Pacific and Binary settled the Complaint. In connection with the
settlement, the Company received a release from all claims and was not required
to pay any remuneration.
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. 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 Common Stock. In early 1999, the Company made these
payments.
8
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.
9
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 ("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 was quoted on the Nasdaq SmallCap
Market under the symbol "PRCT." Effective with the merger of HDC on January 28,
2000, and until January 3, 2001, the Company's shares were quoted on the Nasdaq
SmallCap Market under the trading symbol "HVDC." On January 3, 2001, the Company
received a letter from The Nasdaq Stock Market, Inc. ("Nasdaq") informing the
Company that the Nasdaq Listing Qualifications Panel had determined to delist
the Company's securities from the Nasdaq SmallCap Market, effective with the
open of business on January 4, 2001 (see Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Nasdaq Listing").
The Company's securities began to trade on the OTC Bulletin Board on that date
under the symbol "HVDC" until January 9, 2001. In connection with the name
change to Paligent, the Company's trading symbol was changed to "PGNT," under
which symbol the Company's securities have traded since January 10, 2001.
The following table sets forth the range of high and low closing sale prices for
the Common Stock as reported by the Nasdaq National Market and the Nasdaq
SmallCap Market for the periods indicated below.
High Low
---- ---
2000
Fourth Quarter $0.50 $0.06
Third Quarter $1.22 $0.31
Second Quarter $3.63 $0.66
First Quarter $7.41 $2.56
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
As of March 21, 2001, there were 535 holders of record. On March 21, 2001,
the closing price reported on the OTC Bulletin Board for the Common Stock was
$0.08.
Dividend Policy
The Company has never paid cash dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future. The Company intends
to retain any future earnings for use in its business.
10
Item 6. Selected Financial Data.
The selected financial data set forth below as of December 31, 2000 and 1999 and
for each of the three years ended December 31, 2000, 1999 and 1998 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, 1998, 1997 and 1996
and for the years ended December 31, 1997 and 1996 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
(contained in Item 14 of this Report) and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under Item 7 of this Report.
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(in thousands, except share data)
Statement of operations data:
Revenues $ 254 $ 280 $ 330 $ 781 $ 2,277
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Research and development(1) 4,696 1,320 1,990 6,619 9,925
Sales and marketing 1,135 -- -- -- --
General and administrative(1) (2) 23,409 3,881 1,610 2,715 3,176
Impairment of goodwill(2) 20,031 -- -- -- --
Charge for purchased in-process
research and development(3) -- 9,406 -- -- --
Restructuring charges(4) -- -- 225 460 273
----------- ----------- ----------- ----------- -----------
Total costs and expenses 49,271 14,607 3,825 9,794 13,374
----------- ----------- ----------- ----------- -----------
Loss from operations (49,017) (14,327) (3,495) (9,013) (11,097)
Other income (expense) 1,032 34 204 (40) (139)
----------- ----------- ----------- ----------- -----------
Net loss (47,985) (14,293) (3,291) (9,053) (11,236)
Less: Incremental charge associated
with the conversion of the minority
interest in a subsidiary, net(5) -- (502) -- -- --
Dividends on preferred stock(6) -- -- -- (4,217) --
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders $ (47,985) $ (14,795) $ (3,291) $ (13,270) $ (11,236)
=========== =========== =========== =========== ===========
Basic and diluted loss per share $ (1.55) $ (1.36) $ (1.40) $ (63.68) $ (68.16)
=========== =========== =========== =========== ===========
Weighted average number of
common shares outstanding 30,916,918 10,907,251 2,347,245 208,371 164,836
=========== =========== =========== =========== ===========
AS OF DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(in thousands)
Balance sheet data:
Cash and cash equivalents $ 2,972 $ 4,075 $ 2,885 $ 535 $ 1,962
Marketable securities -- -- 2,004 -- 4,002
Total assets 3,512 4,947 6,188 2,168 8,917
Capital lease obligations, net of
current portion and other
non-current liabilities 72 82 186 355 456
Total shareholders' equity 2,755 4,211 5,397 260 6,316
Common stock dividends -- -- -- -- --
11
- ------------------
(1) Includes compensation charges associated with stock options. During 1998
and 1999, the Company granted stock options to certain employees,
directors and consultants with the contractual rights (the "Contractual
Rights") contained in the unit offering (the "Variable Options"), whereby
the Company sold an aggregate of 1,960,500 shares of Common Stock in
January February and April 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 Contractual Rights require 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 "Contractual
Anti-Dilution Rights"); and (z) as a dividend substitute beginning October
1999 and each six months thereafter (the "Contractual Dividend Rights")
(see Note 5 - Notes to Consolidated Financial Statements). The Variable
Options had an initial exercise price of $5.00 per share. As the number of
options and the associated exercise price were subject to adjustment and
not fixed at the grant date, these stock options were accounted for under
variable stock option accounting. Accordingly, the Variable Options were
revalued on a quarterly basis by measuring the difference between the
current exercise price and the fair market value of the Common Stock on
the respective balance sheet date. There were no charges in 1998 or in the
first three quarters of 1999, since the fair market value of the Common
Stock was less than the then 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 Rights of the 1998 Offering. As
a result, the Company granted 819,064 additional options and the
associated exercise price of the Variable Options was reduced from $5.00
per share to $2.11 per share. As a result, the Company recorded a $2.5
million non-cash compensation charge during fiscal 1999, representing the
earned portion of the $4.6 million total compensation charge. Of the $2.5
million charge recorded in 1999, $2.3 million was allocated to general and
administrative expenses. The balance of $200,000 was allocated to research
and development costs. There were no charges in 1998 since the fair market
value of the Common Stock was less than the then current exercise price
with respect to the Variable Options.
On January 28, 2000, concurrent with the merger with HDC, the Company
granted an additional 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. The Board of Directors also accelerated the vesting of the
Variable Options in connection with the merger with HDC. As part of the
merger with HDC, the Company issued approximately 3.9 million shares of
Common Stock to terminate the Contractual Rights that were contained in
the 1998 Offering. After the termination of the Contractual Rights, the
number of options and the associated exercise price of the Variable
Options became fixed and accounted for accordingly. As a consequence, a
compensation charge of $14.7 million was recorded in fiscal 2000 resulting
from the final revaluation under variable plan accounting and the
acceleration of the vesting of the Variable Options. During fiscal 2000,
the Company also recorded a compensation charge of $4.5 million relating
to the fair value of Common Stock issued to consultants. Of the aggregate
$19.2 million of non-cash compensation charges recorded in fiscal 2000,
$15.4 million was allocated to general and administrative expenses and
$3.8 million was allocated to research and development costs.
(2) Amortization and impairment of goodwill. In January 2000, the Company
recorded goodwill of $24.5 million, representing the excess cost over the
fair value of net liabilities acquired in the HDC merger. During fiscal
2000, the Company amortized $4.5 million of such goodwill, which is
included in general and administrative expenses. In connection with the
Company's decision in December 2000 to discontinue the pursuit of its
Internet strategy and to sell its Internet service operations and
Web-based assets, the Company recorded a charge of $20.0 million as an
impairment of goodwill, representing the remaining unamortized balance of
goodwill relating to the HDC merger.
(3) 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 were still in the development stage
for which there was no alternative future use.
(4) 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 thirteen people, incurring a charge of
$225,000 for the year ended December 31, 1998.
(5) 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
Common Stock and 924,525 Class D Warrants to purchase Common Stock to
convert the minority interest in BGDC. The $502,000 charge represents the
fair value of the shares plus the fair value of the warrants less the book
value of the BGDC minority interest.
(6) Dividends on the Company's preferred stock. In 1997, the Company recorded
a preferred stock dividend in the amount of $4.2 million, 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 Common
Stock on the date of issuance and the $10.90 per share adjusted conversion
price.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
From its inception in 1985 through 1999, 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. In March 1999, the Company completed its merger with Pacific, a
company engaged in the development of cancer therapies. In January 2000, the
Company consummated a major strategic change in its business by acquiring HDC, a
company that provided business-to-business and business-to-consumer products and
services for the funeral service industry over the Internet. Effective with the
acquisition of HDC, the Company's name was changed from Procept, Inc. to
HeavenlyDoor.com, Inc.
During the fourth quarter of 2000, the Company decided to discontinue the
pursuit of its Internet strategy after a sustained period of deterioration in
the technology sector and related capital markets. Shortly thereafter, the
Company entered into an agreement to sell all of its Web-based assets and
Internet funeral service operations, including the name "HeavenlyDoor.com." On
December 31, 2000, the Company changed its name from HeavenlyDoor.com, Inc to
Paligent Inc. The Company is currently evaluating strategic alternatives and is
looking for new growth areas to maximize value to existing stockholders.
Results of Operations
From inception through December 31, 2000, the Company has generated no revenues
from product sales or services, has not been profitable, and has an accumulated
deficit of $152.2 million. During that period, the Company was dependent upon
corporate collaborations, equity financing and interest on invested funds to
provide the working capital necessary for its 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. In addition, since the acquisition of HDC, the Company has
incurred losses in connection with the development of the Company's Internet
business and related marketing activities. The Company expects to incur
additional losses as it considers its strategic alternatives, including
potential business investment.
Year ended December 31, 2000 as compared to the year ended December 31, 1999
The Company's total revenue, which is derived from interest income, was $300,000
for each of the years ended December 31, 2000 and 1999.
The Company's total operating expenses increased to $49.3 million during the
year ended December 31, 2000 from $14.6 million for the year ended December 31,
1999, an increase of $34.7 million. During fiscal 2000, the Company recorded
non-cash charges of $43.7 million, consisting of (i) $24.5 million of
amortization and impairment of goodwill recorded in connection with the
acquisition of HDC; and (ii) an aggregate of $19.2 million of non-cash
compensation charges, including $14.7 million relating to compensation expense
associated with variable stock options and a $4.5 million charge for the fair
value of Common Stock issued to consultants. During fiscal 1999, the Company
recorded non-cash charges of $11.9 million, including $9.4 million relating to
the acquisition of Pacific and a $2.5 million charge relating to compensation
expense associated with variable stock options. These non-cash charges excluded,
total operating expenses increased to $5.6 million from $2.7 million in the
years ended December 31, 2000 and 1999, respectively, an increase of $2.9
million.
Research and development costs increased by $3.4 million, to $4.7 million in
fiscal 2000 from $1.3 million in fiscal 1999. Research and development costs
include $3.8 million and $200,000 of non-cash compensation charges in the years
ended December 31, 2000 and 1999, respectively. Excluding the non-cash charges,
research and development costs decreased by $200,000, to $900,000 in the year
ended December 31, 2000 from $1.1 million in the similar period in 1999. This
decrease in research and development costs is comprised of a $400,000 reduction
in expenditures relating to biotechnology activities, partly offset by $200,000
of costs associated with developing the Company's Internet web site in 2000.
13
Sales and marketing expenses were $1.1 million for the year ended December 31,
2000. Sales and marketing expenditures reflect costs associated with the
Company's pursuit of an Internet business strategy and related sales and
marketing activities associated with promoting the Internet web site.
General and administrative expenses increased by $19.5 million, to $23.4 million
in fiscal 2000 from $3.9 million in fiscal 1999. General and administrative
expenses include $15.4 million of non-cash compensation charges and $4.5 million
of goodwill amortization in the year ended December 31, 2000 and $2.3 million of
non-cash compensation charges in the year ended December 31, 1999. Excluding the
non-cash charges, general and administrative expenses increased to $3.5 million
in fiscal 2000 from $1.6 million during the comparable period in 1999, an
increase of $1.9 million. This increase includes costs incurred to (i) exit the
Company's biopharmaceutical operations in Cambridge, Massachusetts; (ii)
relocate and consolidate the Company's business activities in New York City; and
(iii) close the Company's Florida operations, where the Company conducted its
Internet business operations prior to the establishment of its New York City
office. For the twelve months ended December 31, 2000, general and
administrative expenses relating to the biopharmaceutical operations were $1.2
million, as compared to $1.6 million during the similar period in 1999, a
decrease of $400,000. This decrease relates primarily to the absence of
biotechnology related general and administrative costs in the fourth quarter of
2000. The balance of fiscal 2000 general and administrative expenditures of $2.3
million, pertain to the Company's Internet business activities.
Impairment of goodwill reflects a charge of $20.0 million relating to the
balance of unamortized goodwill at the time of the Company's decision to
discontinue the pursuit of its Internet strategy and to sell all of its Internet
service operations and Web-based assets in December 2000.
The Company recorded a net gain of $1.0 million in other income for the year
ended December 31, 2000, consisting of (i) $500,000 relating to the agreement
with Interneuron for the out-licensing of PRO 2000 Gel; (ii) $200,000 of gain on
the sale of investment in Aquila Pharmaceuticals, Inc. ("Aquila"); (iii)
$150,000 on sales of biotechnology research and development equipment and fixed
assets in connection with the shutdown of its biopharmaceutical operations; (iv)
$100,000 relating to the sale of the Company's Internet operations and Web-based
assets; and (v) $50,000 relating to Pacific's assignment of its licensing rights
to PTM, as well as all of Pacific's intellectual property rights and assets
related to dental technology, including PTM.
Year ended December 31, 1999 as compared to the year ended December 31, 1998
The Company's total revenues decreased to $280,000 for the year ended December
31, 1999 from $330,000 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 to $280,000 for the year ended December 31, 1999 from $220,000
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 to $14.6 million for the year
ended December 31, 1999 from $3.8 million for the comparable period in 1998. The
$10.8 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 the
Variable Options. Without these charges, total operating expenses decreased to
$2.7 million for the year ended December 31, 1999 from $3.8 million for the
comparable period of 1998, a decrease of $1.1 million.
Research and development costs decreased by $700,000, to $1.3 million in fiscal
1999 from $2.0 million in fiscal 1998. Research and development costs include a
non-cash compensation charge of $200,000 in the year ended December 31, 1999.
Excluding the non-cash charge, research and development costs decreased by
$900,000, to $1.1 million for the year ended December 31, 1999 from $2.0 million
for the comparable period in 1998. The $900,000 decrease primarily resulted from
a decline in personnel in the Company's biotech research and development
organization and their related costs.
14
General and administrative expenses increased by $2.3 million, to $3.9 million
in fiscal 1999 from $1.6 million in fiscal 1998. General and administrative
expenses include a non-cash compensation charge of $2.3 million for the year
ended December 31, 1999. Excluding the non-cash charge, general and
administrative expenses were $1.6 million for each of the years ended December
31, 1999 and 1998.
During fiscal 1998, the Company terminated work on all research programs other
than PRO 2000 Gel and underwent a significant downsizing, reducing its staff to
thirteen people. This resulted in a restructuring charge of $200,000 relating to
termination benefits. The Company also recorded in fiscal 1998, a gain of
$200,000 from the sale of research and development equipment, which is included
in other income.
In fiscal 1999, the Company incurred a $500,000 non-cash charge associated with
the purchase of the minority interest in BGDC.
Liquidity and Capital Resources
Since disposing of its Internet assets and related operations in December 2000,
the Company has significantly reduced its operating costs. At its current rate
of spending, the Company expects that its current funds and interest income will
be sufficient to fund the Company's current operations beyond the next twelve
months while the Company evaluates strategic alternatives, including potential
business investments and related financing. No assurance can be given that such
financing will be available to the Company. If the Company is unable to generate
significant revenue from future operations, or obtain additional revenue in
connection with the existing licenses of the Company's biotechnology assets, or
secure additional financing, the Company's financial condition will be adversely
affected. Further, any potential strategic alignment and/or potential
acquisition could affect the Company's liquidity and financing requirements. If
additional funds are raised by issuing equity securities, further dilution to
existing stockholders will result and future investors may be granted rights
superior to those of existing stockholders.
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 such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the timing of payments received under the sublicenses of the biotechnology
assets.
Year ended December 31, 2000 as compared to the year ended December 31, 1999
Since its inception through December 31, 2000, the Company has financed its
operations from the issuance of $71.4 million of its securities, the receipt of
$29.4 million under collaborative research agreements and $3.5 million in
interest income.
For the year ended December 31, 2000, the Company incurred a net loss of $47.9
million. The net loss for fiscal 2000 reflects non-cash charges of $43.7
million, including $24.5 million of amortization and impairment of goodwill
recorded in connection with the acquisition of HDC, a charge of $14.7 million
relating to compensation expense associated with variable stock options and a
$4.5 million charge for the fair value of Common Stock issued to consultants.
During the year ended December 31, 2000, the Company used $4.6 million to fund
operating activities, as compared to $3.5 million during the year ended December
31, 1999. The $4.6 million of cash used to fund operations is net of $500,000 in
proceeds received in connection with the Company's out-licensing of PRO 2000 Gel
and $50,000 relating to the assignment of its licensing rights to PTM. The net
increase of $1.1 million in operating cash outflow is primarily the result of
the Company's increased operating activities associated with developing the
Internet business.
At December 31, 2000, the Company's aggregate cash and cash equivalents were
$3.0 million, a net decrease of $1.1 million from the end of the prior year.
This decrease is primarily attributable to $4.6 million of cash used to fund
operations, which was partly offset by cash provided by financing activities,
consisting of (i) $3.1 million in proceeds from the exercise of approximately
1.3 million Class C Warrants by The Aries Trust and Aries Domestic Fund, L.P.;
and (ii) $300,000 from the exercise of other
15
warrants and stock options. Cash used in financing activities during fiscal 2000
includes $300,000 paid in satisfaction of a note assumed in connection with the
HDC acquisition.
Also during fiscal 2000, the Company received net cash from investing activities
of $400,000, which is comprised of $400,000 from the sale of its investment in
Aquila and $200,000 from the sale of assets, primarily equipment used in its
biotechnology operations, which proceeds were partly offset by capital
expenditures of $200,000 during the year.
In connection with the acquisition of HDC in January 2000, each share of HDC
stock was converted into approximately 0.81 shares of Common Stock or a total of
10,919,655 Paligent shares. In accordance with the merger agreement, the Company
also issued 3,877,008 shares of Common Stock with a fair value of $23.0 million
to investors in the Company's 1998 Offering, former preferred stockholders of
Pacific, and certain other holders of Common Stock, in exchange for the
elimination of certain contractual obligations incurred in connection with the
1998 Offering, the Pacific acquisition and other transactions. In addition, the
Company issued 546,000 shares of Common Stock, at a fair market value of $1.1
million, as consideration for the fee due to the placement agent involved in the
HDC transaction.
Year ended December 31, 1999 as compared to the year ended December 31, 1998
For the year ended December 31, 1999, the Company incurred a net loss of
approximately $14.3 million. The fiscal 1999 net loss reflects non-cash charges
of $11.9 million, including a $9.4 million charge for purchased in-process
research and development and a $2.5 million charge relating to compensation
expense associated with variable stock options. During 1999, the Company used
$3.5 million to fund operating activities.
The acquisition of Pacific resulted in a cash infusion of $2.8 million. In
addition, during 1999 the Company received $2.0 million from the maturity of
marketable securities and $100,000 from the redemption of debentures. Total cash
received from investing activities was offset by $300,000 of merger costs
relating to the HDC acquisition, resulting in net cash received from investing
activities of $4.6 million.
During the year ended December 31, 1999, financing activities generated net cash
of $100,000, comprised of $200,000 of cash received from the exercise of Common
Stock purchase warrants offset by the payment of $100,000 in satisfaction of a
short-term note payable.
At December 31, 1999, the Company's aggregate cash, cash equivalents and
marketable securities were $4.1 million, representing an $800,000 decrease from
December 31, 1998.
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 ctock) converted into approximately 0.11
shares of Common Stock, or a total of 2,753,205 shares. An additional 414,584
shares of Common Stock were issued in the merger to the holders of Pacific's
preferred stock as a result of certain contractual rights identical to the
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 a $6.5 million net obligation (payable in cash
or Common Stock at the option of the Company) of BGDC. On June 30, 1999, the
Company issued 2,773,575 shares of Common Stock and 924,525 Class D Warrants in
exchange for the outstanding preferred stock of 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 Common Stock at $2.11 per share and expire on June 30, 2004.
Nasdaq Listing
By letter dated August 25, 2000, Nasdaq notified the Company that, based upon
the Company's failure to maintain a minimum bid price of $1.00 for thirty
consecutive trading days, as required for continued listing on The Nasdaq
SmallCap Market, the Common Stock was subject to delisting. Nasdaq provided
16
the Company 90 calendar days, or until November 27, 2000, to regain compliance,
or the common stock of the Company would be delisted at the opening of business
on November 29, 2000. The Company, however, was not able to regain compliance.
The Company was entitled to an oral or written hearing to appeal Nasdaq's
determination to delist its common stock on The SmallCap Market. The hearing was
held on December 19, 2000. On January 3, 2001, the Company was informed that the
Nasdaq Listing Qualifications Panel had determined to delist the Company's
securities from The Nasdaq Stock Market, effective with the open of business on
January 4, 2001. The Company's securities began to trade on the OTC Bulletin
Board on that date.
Recently Issued Financial and Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. ("SAB") 101, "Revenue Recognition in Financial
Statements," 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 SAB 101A, "Amendment: Revenue Recognition in Financial
Statements." SAB 101A delayed the implementation date of SAB 101 by one
quarter to the quarter ended June 30, 2000 for registrants with the fiscal
years that begin between December 16, 1999 and March 15, 2000. The Company's
adoption of SAB 101 did not have any effect on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000.
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.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon of
independent accountants, are included in Part IV, Item 14(a) and are
incorporated herein by reference.
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 2000.
This information is unaudited, but in the opinion of management, it has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this report, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations. The consolidated quarterly data should be read in
conjunction with the audited consolidated financial statements and the notes to
such statements appearing
17
elsewhere in this report. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
QUARTERLY FINANCIAL DATA
2000 Quarter Ended
-------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
-------- -------- -------- --------
Total revenue $49,170 $83,231 $69,540 $51,732
Net loss $(20,758,836) $(2,579,620) $(2,518,005) $(22,128,234)
Basic and diluted net loss
per common share $(0.79) $(0.08) $(0.08) $(0.68)
Weighted average number of
common shares outstanding 26,160,393 32,490,948 32,490,948 32,490,948
1999 Quarter Ended
-------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
-------- -------- -------- --------
Total revenue $81,853 $73,527 $65,845 $58,455
Net loss $(9,990,000) $(1,287,991) $(635,141) $(2,881,544)
Basic and diluted net loss
per common share $(2.69) $(0.12) $(0.05) $(0.19)
Weighted average number of
common shares outstanding 3,719,797 10,946,591 14,061,206 14,785,953
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
18
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the name, age and position of each person as of
March 1, 2001 who is a director and/or executive officer of the Company:
Michael S. Weiss .......... 34 Director, Chairman of the Board and Secretary
John F. Dee ............... 43 Director and Vice Chairman of the Board
Salvatore A. Bucci ........ 45 President and Chief Executive Officer
Elliott H. Vernon ......... 58 Director
Zola P. Horovitz, Ph.D .... 66 Director
Richard J. Kurtz .......... 60 Director
Howard Weiser ............. 61 Director
Michael S. Weiss has been a director of the Company and Chairman of its Board
of Directors since July 1997 and Secretary of the Company since October 2000.
Mr. Weiss is currently Chairman of the Board of Directors and Chief Executive
Officer of Access Oncology, Inc. From 1993 to 1999, Mr. Weiss was a Senior
Managing Director of Paramount Capital, Incorporated. 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
and a director of HealthCare Integrated Services, Inc., a publicly traded
health services company. Additionally, Mr. Weiss is currently a member of the
board of directors of Cardio Technologies, Inc., a privately held
biopharmaceutical company. 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.
John F. Dee has served as Vice Chairman of the Board of Directors since
February 2000 and as a director of the Company since February 1998. Mr. Dee
served as President and Chief Executive Officer of the Company from February
1998 until February 2000. Mr. Dee is currently Chief Executive Officer of
Hypnion, Inc., a privately held biotechnology company. 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.
Salvatore A. Bucci has been President and Chief Executive Officer of the
Company since February 2001. Mr. Bucci joined the Company in May 2000 as
Senior Vice President and Chief Financial Officer and was appointed Executive
Vice President and Chief Financial Officer in October 2000. Prior to joining
the Company, Mr. Bucci was Senior Vice President and Chief Financial Officer
of DeGeorge Financial Corporation, a publicly traded financial services and
contract fulfillment company and was also President and a director of
DeGeorge Capital Corp., its mortgage banking subsidiary. Prior to his 1995 to
1999 tenure at DeGeorge, Mr. Bucci served in senior financial roles in the
development of several emerging growth businesses, including as Chief
Financial Officer of MHI, Ltd., a privately held hospitality company and also
as Vice President, Financial Services for First National Realty Associates,
Inc., a publicly traded realty brokerage company, during its conversion to
public ownership. Previously, Mr. Bucci held management positions in mortgage
banking and realty brokerage divisions of Merrill Lynch. Mr. Bucci, a
Certified Public Accountant, began his career with Coopers & Lybrand, a
predecessor firm to PricewaterhouseCoopers LLP.
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 Integrated Services, Inc., a publicly held operator of
fixed-site magnetic resonance imaging centers in the Northeast, since its
inception in 1991. 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
19
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.
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 six other
publicly traded biotechnology and pharmaceutical companies: Avigen, Inc.,
BioCryst, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Shire
Pharmaceuticals, Inc. and Synaptic Pharmaceuticals, Inc. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.
Richard J. Kurtz has been a director of the Company since the acquisition of HDC
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.
Howard Weiser has been a director of the Company since the acquisition of HDC in
January 2000. Prior to becoming a director of the Company, Mr. Weiser was a
director of HDC from its inception in May 1999 until its acquisition by the
Company 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.
20
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth certain compensation information as to the
most highly compensated executive officers, including the chief executive
officer, of the Company (the "Named Executive Officers") for each of the years
ended December 31, 2000, 1999 and 1998:
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
------
Annual Compensation Securities
Name and --------------------- Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options(#) Compensation ($)
- ------------------ ---- ---------- --------- ---------- ----------------
Salvatore A. Bucci(1) 2000 90,968 18,750 325,000 0
President and Chief Executive Officer
Lloyd J. Kagin(2) 2000 211,218 75,000 2,400,000(3) 170,000(3)
former President and Chief Executive Officer
John F. Dee(4) 2000 33,333 0 0 77,436
Vice Chairman of the Board of Directors 1999 200,000 0 106,667(5) 0
formerly President and Chief Executive Officer 1998 181,667 0 1,330,128(6) 0
Michael E. Fitzgerald(7) 2000 75,000 0 0 42,308
former Chief Financial Officer 1999 150,000 9,075(8) 352,564(9) 0
Nigel J. Rulewski, M.D.(10) 2000 33,333 0 0 103,215
former Chief Medical Officer 1999 200,000 0 0 0
1998 16,669 55,000(11) 961,538(12) 0
- ------------------------
(1) Mr. Bucci has been the President and Chief Executive Officer of the
Company since February 2001. Mr. Bucci joined the Company in May 2000 as
Senior Vice President and Chief Financial Officer. In October 2000, Mr.
Bucci was named Executive Vice President and Chief Financial Officer. His
compensation arrangements are discussed under "Executive Employment
Contracts and Termination Agreements" below.
(2) Mr. Kagin served the Company as President and Chief Executive Officer from
February 2000 to December 2000. His employment, compensation and
termination arrangements are discussed under "Executive Employment
Contracts and Termination Agreements" below.
(3) Effective December 31, 2000, Mr. Kagin's options for the purchase of
Common Stock were cancelled in connection with his separation from the
Company. In January 2001, Mr. Kagin received a lump sum of $150,000 plus
other benefits valued at $20,000 under the terms of his separation from
the Company.
(4) Mr. Dee joined the Company as President and Chief Executive Officer in
February 1998 and resigned his office in February 2000. Mr. Dee continued
to receive his base salary through June 30, 2000. On June 30, Mr. Dee also
received $10,769 in severance benefits. Mr. Dee is currently serving as
the Company's Vice Chairman.
(5) Mr. Dee received an option to purchase 106,667 shares of Common Stock at
$1.125 per share for his services in 1998 in lieu of the annual cash bonus
that Mr. Dee was entitled to receive under his employment agreement.
(6) 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 of Common Stock at $5.00 per
share, but the number of shares and the exercise price were adjusted in
accordance with provisions that paralleled anti-dilution and reset rights
held by investors in the Company's 1998 Offering, thereby aligning the
executive's interests with those of the investors.
21
(7) Mr. Fitzgerald joined the Company as Vice President, Finance and Chief
Financial Officer in March 1999 and terminated his employment with the
Company on June 30, 2000. Mr. Fitzgerald received $42,308 in salary
continuation and severance benefits in connection with his termination.
(8) In lieu of a cash bonus, Mr. Fitzgerald received 5,000 shares of Common
Stock.
(9) This option was initially exercisable for 110,000 shares of Common Stock
at $5.00 per share, but the number of shares and the exercise price were
adjusted in accordance with provisions that paralleled anti-dilution and
reset rights held by investors in the Company's 1998 Offering, thereby
aligning the executive's interests with those of the investors.
(10) Dr. Rulewski joined the Company as Chief Medical Officer in December 1998
and resigned from this office in February 2000. Dr. Rulewski received
$103,215 in salary continuation and severance benefits in connection with
his termination.
(11) In lieu of a cash bonus, Dr. Rulewski received 10,000 shares of Common
Stock.
(12) This option was initially exercisable for 300,000 shares of Common Stock
at $5.00 per share, but the number of shares and the exercise price were
adjusted in accordance with provisions that paralleled anti-dilution and
reset rights held by investors in the Company's 1998 Offering, thereby
aligning the executive's interests with those of the investors.
Director Compensation
Certain members of the Company's Board of Directors received fees in connection
with their service to the Company as members of the Board of Directors and, in
certain cases, were also compensated as consultants by the Company.
Messrs. Weiss and Vernon and Drs. Horovitz and Rogers (a director of the Company
from December 1997 to August 2000) were paid cash compensation at the rate of
$10,000 per annum for their services as directors during fiscal 2000. In
addition, Messrs. Weiss, Vernon and Philip C. Pauze (a director of the Company
from January 2000 to December 2000), and Drs. Horovitz, Rogers and Glenn L.
Cooper (a director of the Company from June 1999 to August 2000) each received
an option to purchase 100,000 shares of Common Stock at $4.25 per share on
January 24, 2000.
Option Grant Table
The following table provides information concerning the grant of stock options
under the Company's 1998 Equity Incentive Plan to the Named Executive Officers
during the last fiscal year. In addition, the table shows hypothetical gains
that could be achieved for the respective options if exercised at the end of the
option term. These gains are based on assumed rates of stock price appreciation
of 5% and 10%, compounded annually, from the date the options were granted to
their expiration date. This table does not take into account any change in the
price of Common Stock to date, nor does the Company make any representation
regarding the rate of its appreciation.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of
Securities Total Options Stock Price Appreciation For
Underlying Granted to Exercise or Option Term ($)(1)
Name and Options Employees in Base Price Expiration -----------------------------
Principal Position Granted (#) Fiscal Year (%)(2) ($/Share) Date 5% 10%
- ------------------ ----------- ------------------ ----------- ---------- ------------- -------------
Salvatore A. Bucci 325,000 9.77 $1.094 5/25/2010 $0 $0
Lloyd J. Kagin 2,400,000(3) 72.18 $ 5.00 12/31/2000 $0 $0
- ----------------
(1) The dollar amounts under these columns include the results at the 5% and
10% rates set by the Securities and Exchange Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of the underlying Common Stock. No gain to the optionees is possible
without an increase in price of the Common Stock, which will benefit all
stockholders proportionately.
22
(2) Based on a total of 3,325,000 shares subject to options granted during
2000. This total does not include 1,004,224 options to purchase Common
Stock issued to optionees in accordance with provisions that paralleled
anti-dilution and reset rights held by investors in the Company's 1998
Offering, which rights terminated in conjunction with the merger with HDC
on January 28, 2000.
(3) These options were cancelled on December 31, 2000 in conjunction with Mr.
Kagin's termination of employment.
Fiscal Year-End Option Values
The following table provides information regarding exerciseable and
unexercisable stock options held by the Named Executive Officers as of December
31, 2000:
FISCAL YEAR-END OPTION VALUES
Value of Unexercised
In-the-Money
Options at
Shares Fiscal Year-End (#) Fiscal Year-End ($)
Name and Acquired on Value Exercisable/ Exercisable/
Principal Position Exercise (#)(1) Realized ($)(1) Unexercisable(1) Unexercisable(1)(2)
- ------------------ --------------- --------------- ------------------ ---------------------
Salvatore A. Bucci 0 0 0/325,000 0/0
Lloyd J. Kagin(3) 0 0 0/0 0/0
John F. Dee 0 0 1,436,795/0 0/0
Michael E. Fitzgerald 0 0 352,564/0 0/0
Nigel J. Rulewski, M.D. 0 0 961,538/0 0/0
- -------------
(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, 2000, which closing
price was $0.13.
(3) Mr. Kagin's options were cancelled on December 31, 2000 in conjunction
with his termination of employment.
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 had not entered into an
employment agreement with the company regarding his service as Chief Financial
Officer.
Salvatore A. Bucci. On May 25, 2000, the Company and Mr. Bucci entered into an
employment agreement (the "Original Agreement") providing for Mr. Bucci to serve
as Senior Vice President and Chief Financial Officer of the Company for a period
of two years. On October 6, 2000, Mr. Bucci was appointed Executive Vice
President and Chief Financial Officer and on February 9, 2001, Mr. Bucci was
named President and Chief Executive Officer. The Original Agreement entitled Mr.
Bucci to receive a minimum annual base salary of $150,000 and a minimum annual
bonus of $25,000, which minimum annual bonus was required to be paid to Mr.
Bucci in quarterly installments over the term of the Original Agreement. The
amount of Mr. Bucci's actual bonus is determined annually by the Compensation
Committee in light of his and the Company's performance over the prior year. Mr.
Bucci also received an option to purchase 325,000 shares of Common Stock, with
vesting to occur in quarterly installments over a four year period. If the
company terminates Mr. Bucci's employment without cause, or if Mr. Bucci
terminates his employment because there has been a change of control of the
Company, then Mr. Bucci is entitled to receive (i) severance payments in a lump
sum equal to one-half of his most recent base salary plus one-half of the amount
of cash bonus most recently awarded, and (ii) immediate vesting and
exercisability of any unvested options then held by Mr. Bucci. Effective with
Mr. Bucci's appointment
23
as President and Chief Executive Officer, the Company and Mr. Bucci amended the
terms of the Original Agreement (the "Amended Agreement"). The Amended Agreement
provides for (i) a minimum annual base salary of $200,000, effective January 1,
2001; (ii) a bonus of $25,000, which was paid upon execution of the Amended
Agreement; and (iii) the elimination of the minimum annual bonus.
Lloyd J. Kagin. On February 25, 2000, the Company and Mr. Kagin entered into an
employment agreement providing for Mr. Kagin to serve as President and Chief
Executive Officer of the Company until March 25, 2004. Mr. Kagin's employment
agreement entitled him to a minimum annual base salary of $250,000 and an annual
bonus of between $25,000 and $100,000. Mr. Kagin received a signing bonus of
$75,000 and options to purchase an aggregate of 2.4 million shares of Common
Stock at a price of $5.00 per share. Effective December 31, 2000, Mr. Kagin's
employment with the Company terminated. As part of his separation from the
Company, Mr. Kagin received a lump sum payment of $150,000 together with other
termination benefits valued at $20,000. The termination of Mr. Kagin's
employment agreement also provided for the cancellation of all vested and
unvested options to purchase Common Stock held by Mr. Kagin. Mr. Kagin also
resigned from the Board of Directors, effective December 31, 2000.
John F. Dee. The Company 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 entitled 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 was to be determined annually by the
Compensation Committee in light of his and the Company's performance over the
prior year. Mr. Dee was also granted an option to purchase shares of 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 resigned as President and Chief
Executive Officer, effective February 25, 2000. Mr. Dee continues to serve the
Company as Vice Chairman of the Board of Directors.
Nigel J. Rulewski, M.D. On September 3, 1998, the Company 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 was determined by the
Compensation Committee based upon the recommendation of the Company's President
and Chief Executive Officer and was subject to his achievement of agreed upon
milestones set at the beginning of each year. Dr. Rulewski was also granted an
option to purchase 961,538 shares of 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 fiscal 2000, the Compensation Committee of the Board of Directors
("Compensation Committee") consisted of Zola P. Horovitz, Ph.D., Mark C. Rogers,
M.D. (until his resignation from the Board in August 2000) and Michael S. Weiss.
The Compensation Committee's responsibilities include: (i) reviewing the
performance of the Chief Executive Officer and the other executive officers of
the Company 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 four times during fiscal 2000. The
Compensation Committee submits this report on compensation policies and actions
during fiscal 2000 with respect to Messrs. John F. Dee and Lloyd J. Kagin, in
their capacity as President and Chief Executive Officer of the Company; and
Salvatore A. Bucci, Executive Vice President and Chief Financial Officer;
Michael E. Fitzgerald, former Vice President, Finance and Chief Financial
Officer; and Nigel J. Rulewski, M.D., former Chief Medical Officer, the only
other executive officers of the Company whose combined salary and bonus for
fiscal 2000 exceeded $100,000.
Compensation Philosophy
24
The Company'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 the Company. Through its compensation
policy, the Company 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 Common Stock with the compensation of its executives.
The Company 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 Compensation Committee believes that an effective
compensation program also requires the application of judgment and subjective
determinations of individual performance. Accordingly, the Compensation
Committee members apply their judgment to reconcile the program's objectives
with the realities of retaining valued employees.
Chief Executive Officer Compensation
Lloyd J. Kagin served as the Chief Executive Officer from February 2000 to
December 2000. Pursuant to his employment agreement, Mr. Kagin's base salary for
his first year of service was fixed at $250,000. Mr. Kagin was also entitled to
a minimum annual bonus of $25,000. As part of his offer of employment, the
Compensation Committee also approved a signing bonus of $75,000 and an option
grant to purchase an aggregate of 2.4 million shares of Common Stock at $5.00
per share, subject to a vesting schedule.
Effective December 31, 2000, Mr. Kagin's employment with the Company terminated.
As part of his separation from the Company, Mr. Kagin received a lump sum
payment of $150,000 together with other termination benefits valued at $20,000.
The termination of Mr. Kagin's employment agreement also provided for the
cancellation of all vested and unvested options to purchase Common Stock held by
Mr. Kagin.
John F. 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 was subject to upward
adjustment at the discretion of the Compensation Committee for each consecutive
year of employment. Mr. Dee was also entitled to a performance bonus of up to
$200,000 annually, subject to the achievement of agreed upon milestones, with a
minimum annual bonus of $25,000.
The Committee also approved an option grant to Mr. Dee as part of his offer of
employment, which option was initially exercisable for 415,000 shares of Common
Stock at $5.00 per share. The exercise price of Mr. Dee's option was set at the
price per share paid by the investors in the Company's 1998 Offering, 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 anti-dilution and reset rights held by
investors in the Company's 1998 Offering, 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 grant 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. The vesting of this option grant has also
been accelerated and is exercisable in full.
Mr. Dee resigned, effective as of February 25, 2000, as the Company's President
and Chief Executive Officer and was replaced by Mr. Kagin. Mr. Dee continues to
serve the Company as Vice Chairman of the Board of Directors.
Compensation of Other Executive Officers
Base Salary. Mr. Bucci and Dr. Rulewski had employment agreements with the
Company that set their minimum annual base salary (see "Executive Employment
Contracts and Termination Agreements").
25
The Compensation Committee set Mr. Fitzgerald's annual base salary at $150,000
when the Company hired him in March 1999. The Company sets the annual base
salary for its executives based on each executive's salary history, the salaries
of other Company executives, and the compensation of executives at comparable
companies. The Compensation Committee periodically reviews the base salaries
paid to executive officers.
Bonuses. In addition to base salary, certain executive officers may receive
bonuses in the discretion of the Compensation Committee. Under the terms of his
employment agreement, Mr. Bucci was entitled to receive a minimum annual bonus
of $25,000, to be paid in quarterly installments throughout the term of his
employment. During 2000, Mr. Bucci received $18,750 in accordance with this
provision. On February 9, 2001, in connection with his appointment as President
and Chief Executive Officer, Mr. Bucci also received a cash bonus of $25,000.
The amended terms of his employment agreement eliminated future quarterly bonus
installments. No other bonuses were awarded to other executive officers with
regard to services performed during fiscal 2000.
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 fiscal 2000 is provided in the table
entitled "Option Grants in Last Fiscal Year."
Stock Options
Stock options generally are granted to the Company's executive officers at the
time of their hire and at such other times as the Compensation Committee may
deem appropriate, such as in connection with a promotion or upon nearing full
vesting of prior options. In determining option grants, the Compensation
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 the Company.
In addition, the stock option grants made by the Compensation Committee are
designed to align the interests of management with those of the stockholders. In
order to maintain the incentive and retention aspects of these grants, the
Compensation 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 Common Stock at any particular point in time accurately reflects
the Company's performance. However, each individual optionholder, and not the
Compensation 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.
Michael S. Weiss
26
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative stockholder returns on the Common
Stock over the five year period from December 31, 1995 to December 31, 2000, as
compared with that of the Hambrecht & Quist ("H&Q") Biotechnology Index and the
S&P 500 Composite Index during the same period. The graph assumes an initial
investment of $100 on December 31, 1995 in the Common Stock, the H&Q
Biotechnology Index and the S&P 500 Composite Index, with all dividends, if any,
being reinvested.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG PALIGENT INC., H&Q BIOTECHNOLOGY INDEX
AND S&P COMPOSITE INDEX
[LINE GRAPH]
ASSUMES $100 INVESTED ON DECEMBER 31, 1995
ASSUMES DIVIDENDS, IF ANY, REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------------------
12/31/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000
- -----------------------------------------------------------------------------------------------------------
PALIGENT INC. $100.00 $34.00 $4.57 $1.14 $1.69 $0.03
- -----------------------------------------------------------------------------------------------------------
H&Q BIOTECHNOLGY INDEX $100.00 $92.27 $93.40 $142.22 $304.01 $326.83
- -----------------------------------------------------------------------------------------------------------
S&P COMPOSITE INDEX $100.00 $122.96 $163.98 $210.84 $255.22 $231.98
- -----------------------------------------------------------------------------------------------------------
27
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table and footnotes set forth certain information regarding the
beneficial ownership of Common Stock as of March 1, 2001 by (i) the only persons
known to the Company to be beneficial owners of more than 5% of Common Stock,
(ii) the Named Executive Officers, (iii) each director, and (iv) all current
executive officers and directors as a group.
Common Stock
Beneficially Owned(1)
----------------------------
Beneficial Owner Shares Percent
- ---------------- -------------- -------
The Aries Trust 15,786,232(2) 41.98
Aries Domestic Fund, L.P.
Aries Master Fund
Aries Domestic Fund II, L.P.
Paramount Capital Investments, LLC
Paramount Capital, Incorporated
Paramount Capital Asset Management, Inc.
Lindsay A. Rosenwald, M.D.
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, New York 10019
John F. Dee 1,436,895(3) 4.24
Nigel J. Rulewski, M.D. 961,538(4) 2.87
Michael E. Fitzgerald 357,564(5) 1.09
Michael S. Weiss 838,170(6) 2.54
Elliott H. Vernon 304,858(7) *
Zola P. Horovitz, Ph.D. 206,645(8) *
Richard J. Kurtz 1,947,292 5.99
Howard Weiser 2,563,996(9) 7.89
Lloyd J. Kagin 3,000 *
Salvatore A. Bucci 0 -
All current executive officers and directors as a group (7 persons) 8,619,958(10) 23.64
- ------------------------
* 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 March 1, 2001 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) Collectively, the Paramount Affiliates. Reported ownership consists of:
(A) the following holdings of The Aries Trust: (i) 6,731,810 shares of
Common Stock; (ii) 486,685 shares issuable upon exercise of Class C
Warrrants; (iii) 112,564 shares issuable upon exercise of 1998 Unit
Purchase Options; (iv) 51,067 shares issuable upon exercise of Class
C Warrants issuable on exercise of 1998 Unit Purchase Options; (v)
88,568 shares issuable upon exercise of 1997 Unit Purchase Options
originally issued by Pacific; (vi) 9,061 shares issuable upon
exercise of Class A Warrants issuable upon exercise of 1997 Unit
Purchase Options originally issued by Pacific; (vii) 2,716 shares
issuable upon exercise of 1995 Unit Purchase Options originally
issued by Pacific; (viii) 3,395 shares issuable upon exercise of
Class A Warrants issuable upon exercise of 1995 Unit Purchase
Options originally issued by Pacific; (ix) 117,776 shares issuable
upon exercise of Class A Warrants originally issued by Pacific; (x)
441,000 shares issuable upon exercise of Class D Warrants; (xi)
11,408 shares issuable upon exercise of common stock Warrants
originally issued by Pacific; and (xii) 4,092 shares issuable upon
exercise of common stock Warrants originally issued by the Company;
(B) the following holdings of Aries Domestic Fund, L.P.: (i) 3,405,843
shares of Common Stock; (ii) 258,783 shares issuable upon exercise
of Class C Warrrants; (iii) 55,443 shares issuable upon exercise of
1998 Unit Purchase Options; (iv) 25,153 shares issuable upon
exercise of Class C Warrants issuable
28
on exercise of 1998 Unit Purchase Options; (v) 45,654 shares
issuable upon exercise of 1997 Unit Purchase Options originally
issued by Pacific; (vi) 4,671 shares issuable upon exercise of Class
A Warrants issuable upon exercise of 1997 Unit Purchase Options
originally issued by Pacific; (vii) 2,716 shares issuable upon
exercise of 1995 Unit Purchase Options originally issued by Pacific;
(viii) 3,395 shares issuable upon exercise of Class A Warrants
issuable upon exercise of 1995 Unit Purchase Options originally
issued by Pacific; (ix) 73,871 shares issuable upon exercise of
Class A Warrants originally issued by Pacific; (x) 189,000 shares
issuable upon exercise of Class D Warrants; (xi) 4,889 shares
issuable upon exercise of common stock Warrants originally issued by
Pacific; and (xii) 1,753 shares issuable upon exercise of common
stock Warrants originally issued by the Company;
(C) 26,962 shares of Common Stock held by Aries Master Fund;
(D) 1,021 shares of Common Stock held by Aries Domestic Fund II, L.P.;
(E) 10,865 shares held by Paramount Capital Investments, LLC;
(F) 216,288 shares held by Paramount Capital, Incorporated; and
(G) the following holdings of Lindsay A. Rosenwald, M.D.: (i) 276,258
shares of Common Stock; (ii) 936,954 shares issuable upon exercise
of 1998 Unit Purchase Options; (iii) 425,069 shares issuable upon
exercise of Class C Warrants issuable on exercise of 1998 Unit
Purchase Options; (iv) 843,445 shares issuable upon exercise of 1997
Unit Purchase Options originally issued by Pacific; (v) 86,292
shares issuable upon exercise of Class A Warrants issuable upon
exercise of 1997 Unit Purchase Options originally issued by Pacific;
(vi) 20,879 shares issuable upon exercise of 1995 Unit Purchase
Options originally issued by Pacific; (vii) 26,099 issuable upon
exercise of Class A Warrants issuable upon exercise of 1995 Unit
Purchase Options originally issued by Pacific; and (viii) 781,758
shares issuable upon exercise of Class E Warrants.
(3) Includes 1,436,795 shares issuable to Mr. Dee upon the exercise of options
currently exercisable or exercisable within 60 days of March 1, 2001.
(4) Represents shares issuable to Dr. Rulewski upon the exercise of options
currently exercisable.
(5) Represents shares issuable to Mr. Fitzgerald upon the exercise of options
currently exercisable.
(6) Consists of: (i) 17,893 outstanding shares of Common Stock; (ii) 201,352
shares issuable to Mr. Weiss upon the exercise of options currently
exercisable or exercisable within 60 days of March 1, 2001; (iii) 45,022
shares issuable upon exercise of 1998 Unit Purchase Options; (iv) 20,426
shares issuable upon the exercise of Class C Warrants issuable upon the
exercise of 1998 Unit Purchase Options; (v) 181,725 shares issuable upon
exercise of 1997 Unit Purchase Options originally issued by Pacific; (vi)
18,592 shares issuable upon exercise of Class A Warrants issuable on
exercise of 1997 Unit Purchase Options originally issued by Pacific; (vii)
2,230 shares issuable upon exercise of 1995 Unit Purchase Options
originally issued by Pacific; (viii) 2,787 shares issuable upon exercise
of Class A Warrants issuable upon exercise of 1995 Unit Purchase Options
originally issued by Pacific; (ix) 34,678 shares issuable upon exercise of
Class E Warrants; and (x) 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.
(7) Includes 195,658 shares issuable to Mr. Vernon upon the exercise of
options currently exercisable.
(8) Represents shares issuable to Dr. Horovitz upon the exercise of options
currently exercisable.
(9) 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 in which Mr. Weiser's wife is an affiliate.
Also includes 1,050,000 shares held by Weistana Investment Co., as to
which Mr. Weiser disclaims beneficial ownership.
(10) Includes 3,354,552 shares issuable to directors and executive officers
upon the exercise of options currently exercisable or exercisable within
60 days of March 1, 2001.
29
Item 13. Certain Relationships and Related Transactions.
Transactions with Directors
In November 1999, Howard Weiser, a director of the Company, borrowed $25,000
from HDC and executed a note in favor of HDC (the "HDC Note"). The Company
acquired HDC in January 2000, including Mr. Weiser's note, which was payable on
demand, with interest at the rate of nine and one-half percent per annum. As
part of the merger, the Company and Mr. Weiser entered into a consulting
arrangement whereby Mr. Weiser would provide consulting services for a one-year
period from the date of the merger for a fee of $100,000, payable in periodic
installments. During the course of the consulting period, the Company offset the
full amount of principal and accrued interest due under the HDC Note against
installment payments due under the consulting arrangement. The consulting
arrangement ended in January 2001.
In connection with the acquisition of HDC, the Company issued 375,000 shares of
Common Stock to each of Howard Weiser and Richard J. Kurtz, directors of the
Company, as payment for consulting services. The 750,000 shares of Common Stock
had a fair value of $4.5 million; accordingly, a charge of $4.5 million was
recorded during the year ended December 31, 2000.
As part of the acquisition of HDC, the Company assumed notes payable in the
amount of $290,019, payable to Richard J. Kurtz, a director of the Company and a
former stockholder of HDC. In May 2000, the Company paid $243,068 to Mr. Kurtz,
consisting of $235,019 of principal plus $8,049 of accrued interest. In
September 2000, the Company made principal and interest payments of $55,000 and
$3,841, respectively, to Mr. Kurtz in satisfaction of its remaining obligation.
On June 14, 2000, the Company entered into an agreement with Interneuron for
the out-licensing of PRO 2000 Gel. Glenn L. Cooper, M.D., a director of the
Company at the time of the agreement, is the President and Chief Executive
Officer of Interneuron. In addition, the principal stockholder of the Company
is a stockholder of Interneuron. Pursuant to this agreement, the Company
received a payment of $500,000 in June 2000, which is included in other
income for the year ended December 31, 2000. The Company retains certain
future rights to PRO 2000 Gel under the licensing agreement, including (i)
provisions for the receipt of additional payments based upon the achievement
of certain milestones; and (ii) royalties from future commercial sales of PRO
2000 Gel, if any. Interneuron has an option, for a limited period of time, to
purchase future royalty rights relating to PRO 2000 Gel. The Company,
however, has no further obligation to fund research and development for PRO
2000 Gel.
On June 30, 2000, the Company issued 34,678 Class E Warrants to Michael S.
Weiss, Chairman of the Board of Directors of the Company, in exchange for
warrants to purchase shares of Series A Convertible Preferred Stock of BGDC.
The Warrants are exercisable at $2.11 per share and expire on June 30, 2004.
On October 13, 2000, Pacific entered into an agreement with AOI to sublicense
its exclusive worldwide patent rights and know-how relating to O6-BG. Mr.
Weiss is the Chairman and Chief Executive Officer of AOI. In addition, the
principal stockholder of the Company is a stockholder of an affiliate of AOI.
Pursuant to this agreement, Pacific sublicensed all development and licensing
rights to AOI in exchange for future royalties on net sales of O6-BG. The
agreement also provides for cash payments to Pacific based upon the
achievement of certain developmental milestones. In addition, AOI assumed all
financial obligations of Pacific relating to its licensing of worldwide
patent rights as of the effective date of the agreement. On November 22,
2000, the Company was notified by The Penn State Research Foundation ("PSRF")
that the Company was in default of its material obligations under the License
Agreement between Pacific and PSRF and that such default invalidates the
Company's sublicensing agreement with AOI. The Company believes that PSRF's
claims are without merit; however, in the interim, the Company and AOI have
agreed to defer the reimbursement of costs that the Company has paid on
behalf of AOI until the matter is resolved. As of December 31, 2000, such
reimbursable costs amounted to $45,000. The Company and PSRF are engaged in
on-going discussions toward a satisfactory resolution of the issues involved.
On October 17, 2000, the Company entered into a non-binding letter of intent to
acquire WWH Insurance Services, Inc. ("WWH"). WWH is a privately held national
independent distributor of life and health insurance products. Philip C. Pauze,
then a director of the Company, is a director and stockholder of WWH. The
acquisition of WWH was expected to broaden the Company's reach into products and
services for senior citizens, beyond that originally anticipated with the
acquisition of HDC, whose
30
operations were primarily Web-centric. WWH targets consumers through direct
marketing channels; primarily, via cable television programs whose audience
meets the demographic profile of WWH's target market. During the due diligence
review period, the Company advanced $50,000 to WWH to pay for operating
expenses. In December 2000, the Company determined not to proceed with the
acquisition of WWH.
Transactions with Paramount Affiliates
Various entities affiliated with Paramount Capital Asset Management, Inc., as
set forth in Item 12. "Security Ownership of Certain Beneficial Owners and
Management" are significant stockholders of the Company. As of March 1, 2001,
The Aries Trust, Aries Domestic Fund, L.P., Aries Master Fund, Aries Domestic
Fund II, L.P., Paramount Capital Investments, LLC, Paramount Capital,
Incorporated, Paramount Capital Asset Management, Inc. and Lindsay A. Rosenwald,
M.D. (collectively, the "Paramount Affiliates"), are the holders of an aggregate
of approximately 10,672,076 shares of Common Stock, representing 32.9% of the
outstanding shares of Common Stock. In addition, the Paramount Affiliates hold
5,114,156 warrants and options to purchase Common Stock. Mark C. Rogers, M.D.,
President and Chief Executive Officer of Paramount Capital, Incorporated
("Paramount") was a member of the Company's Board of Directors from 1997 to
August 2000.
Certain Paramount Affiliates have a contractual right to designate a majority of
the members of the Company's Board of Directors, as long as the Paramount
Affiliates hold at least 5% of the voting stock of the Company. In addition,
during that period, the Company must obtain the consent of these Paramount
Affiliates prior to (i) making any payments in excess of $50,000; (ii) incurring
any indebtedness; (iii) engaging in transactions with other affiliates; or (iv)
increasing executive compensation or bonuses, except for bonuses guaranteed in
an employment contract.
Under an agreement dated October 26, 1999, the Company engaged Paramount as a
financial advisor in connection with its proposed transaction to acquire HDC. At
the time of merger with HDC, the Company issued 546,000 shares of Common Stock
as consideration for the fee due under this agreement, with a fair market value
of $1.1 million.
On April 9, 1998, the Company entered into a Financial Advisory Agreement with
Paramount pursuant to which Paramount was 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 assisted the Company with certain
financing and strategic transactions. During the year ended December 31, 1999,
the Company paid Paramount approximately $44,000 under this agreement. This
agreement was terminated by mutual agreement of the parties, effective September
30, 1999.
In connection with the acquisition of Pacific on March 17, 1999, the Company
issued an aggregate of 1,102,504 shares of Common Stock to the Paramount
Affiliates in exchange for their shares of Pacific common stock and pursuant to
the Contractual Anti-Dilution and Contractual Reset Rights contained in the 1998
Offering. The Company also issued to the Paramount Affiliates (i) an aggregate
of 160,160 shares of Common Stock as payment for brokerage services in
connection with the Pacific merger, and (ii) cash of $50,000 plus an aggregate
of 320,126 shares of Common Stock in connection with the cancellation of certain
indebtedness incurred by Pacific to the Paramount Affiliates through Pacific's
merger with Binary, and pursuant to the Contractual Anti-dilution and
Contractual Reset Rights contained in the 1998 Offering.
Also in connection with the acquisition of Pacific, the Company assumed a
$6.5 million net obligation of BGDC. As payment of this obligation, the
Company issued 2,773,575 shares of Common Stock and Class D Warrants to
purchase an aggregate of 924,525 shares of Common Stock in exchange for all of
31
the outstanding shares of BGDC Series A Convertible Preferred Stock. On June 30,
1999, the Paramount Affiliates exchanged their BGDC Series A Convertible
Preferred Stock for an aggregate of 1,890,000 shares of Common Stock and Class D
Warrants to purchase an aggregate of 630,000 shares of Common Stock.
On April 9, 1999, the Company issued 3,970,734 shares of Common Stock pursuant
to the Contractual Reset Rights contained in the 1998 Offering held by certain
of the Company's stockholders, including those who purchased their shares in the
1998 Offering. An aggregate of 1,842,813 shares were issued to the Paramount
Affiliates pursuant to the Contractual Reset Rights.
On October 9, 1999, the Company issued 562,961 shares of Common Stock pursuant
to the Contractual Dividend Rights held by certain holders of the Common Stock,
including those who purchased their shares in the 1998 Offering. An aggregate of
311,267 shares were issued to the Paramount Affiliates pursuant to this
Contractual Dividend Right.
On March 28, 2000, The Aries Trust and Aries Domestic Fund, L.P. exercised an
aggregate of 1,291,666 Class C Warrants in exchange for 1,291,666 shares of
Common Stock, which exercise generated $3.1 million in proceeds to the Company.
The Class C Warrants were exercised at $2.40 per warrant, representing a
discount of $0.88 to the contractual exercise price of $3.28 per warrant. The
Company recorded a charge of $155,000 directly to equity, representing the fair
market value of the discount given to the holders of certain exercised Class C
Warrants.
On June 30, 2000, the Company issued 781,758 Class E Warrants to the
Paramount Affiliates in exchange for warrants to purchase shares of Series A
Convertible Preferred Stock of BGDC. The Warrants are exercisable at $2.11
per share and expire on June 30, 2004.
32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements.
Page(s)
-------
Report of Independent Accountants 37
Consolidated Balance Sheets as of December 31, 2000 and 1999 38
Consolidated Statements of Operations
For the years ended December 31, 2000, 1999 and 1998 39
Consolidated Statements of Comprehensive (Loss) Income
For the years ended December 31, 2000, 1999, and 1998 40
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2000, 1999, and 1998 41-42
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999, and 1998 43-44
Notes to Consolidated Financial Statements 45-62
Financial Statement Schedules.
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the
schedule, or are included in the Notes to Consolidated Financial
Statements.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
No. Description
--- -----------
3.1 Amended and Restated Certificate of Incorporation of
HeavenlyDoor.com, Inc., filed with the Secretary of State of
Delaware on June 26, 2000. Filed as Exhibit 4.1 to
HeavenlyDoor.com's Registration Statement on Form S-8, Commission
File No. 333-45168, and incorporated herein by reference.
3.2 Certificate of Ownership and Merger of Paligent Inc. into
HeavenlyDoor.com, Inc., filed with the Secretary of State of
Delaware on December 28, 2000, to be effective as of December 31,
2000. Filed herewith.
3.3 By-laws of HeavenlyDoor.com, Inc. Filed as Exhibit 3.3 to the
Registrant's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.
4.1 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.
4.2 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
33
Statement on Form S-3, Commission File No. 333-51245, and
incorporated herein by reference.
4.3 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.
4.4 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.
4.5 Form of Warrant to Purchase Common Stock dated May 17, 1996 and
schedule of holders. Filed as Exhibit 4.12 to the Company's Form
10-K for the year ended December 31, 1996, Commission File No.
0-21134, and incorporated herein by reference.
4.6 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.
4.7 Class A Warrants (originally issued by Pacific Pharmaceuticals,
Inc.) held by a Schedule of Holders. Filed as Exhibit 4.3 to
Paligent Inc.'s Form 8-K filed on March 31, 1999, Commission File
No. 0-21134, and incorporated herein by reference.
4.8 Class B Warrants (originally issued by Pacific Pharmaceuticals,
Inc.) held by a Schedule of Holders. Filed as Exhibit 4.4 to
Paligent Inc.'s Form 8-K filed on March 31, 1999, Commission File
No. 0-21134, and incorporated herein by reference.
4.9 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 Paligent Inc.'s Form 8-K, filed on March 31, 1999,
Commission File No. 0-21134, and incorporated herein by reference.
4.10 1995 Unit Purchase Options (originally issued by Pacific
Pharmaceuticals, Inc.) held by a Schedule of Holders. Filed as
Exhibit 4.1 to Paligent Inc.'s Form 8-K filed on March 31, 1999,
Commission File No. 0-21134, and incorporated herein by reference.
4.11 1997 Unit Purchase Options (originally issued by Pacific
Pharmaceuticals, Inc.) held by a Schedule of Holders. Filed as
Exhibit 4.2 to Paligent Inc.'s Form 8-K filed on March 31, 1999,
Commission File No. 0-21134, and incorporated herein by reference.
4.12 Common Stock Purchase Warrant issued in June 1999 to Wound Healing
of Oklahoma. Filed as Exhibit 4.1 to Paligent Inc.'s Form 10-Q for
the quarter ended June 30, 1999, Commission File No. 0-21134, and
incorporated herein by reference.
4.13 Class D Warrants issued in June 1999 to a Schedule of Holders. Filed
as Exhibit 4.2 to Paligent Inc.'s Form 10-Q for the quarter ended
June 30, 1999, Commission File No. 0-21134, and incorporated herein
by reference.
4.14 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.
4.15 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.
34
4.16 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.
10.1 Lease for 369 Lexington Avenue, New York, New York, dated April 19,
2000 between the Company and 369 Lexington Avenue Co., L.P. Filed
herewith.
10.2 Consulting and Confidentiality Agreement dated January 24, 2000
between Paligent Inc. and Philip Pauze. Filed as Exhibit 10.19 to
the Company's Form 10-K for the year ended December 31, 1999,
Commission File No. 0-21134, and incorporated herein by reference.
10.3 Executive Employment Agreement dated as of February 25, 2000 between
Paligent Inc. and Lloyd Kagin. Filed as Exhibit 10.20 to the
Company's Form 10-K for the year ended December 31, 1999, Commission
File No. 0-21134, and incorporated herein by reference.
10.4 Licensing Agreement by and between Paligent Inc. and Interneuron
Pharmaceuticals, Inc. dated June 14, 2000. Filed as Exhibit 10.21 to
Paligent Inc.'s Form 10-Q for the quarter ended June 30, 2000,
Commission File No. 0-21134, and incorporated herein by reference.
(The Company submitted a confidentiality request for certain parts
of this exhibit.)
10.5 Executive Employment Agreement dated as of May 25, 2000, as amended
February 9, 2001, between Paligent Inc. and Salvatore A. Bucci.
Filed herewith.
10.6 Sublicense Agreement by and between Procept, Inc. (formerly Pacific
Pharmaceuticals, Inc.) and AOI Pharmaceuticals Inc., dated as of
October 13, 2000. Filed herewith.
21.1 Schedule of subsidiaries of the Company. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants to
the Company. Filed herewith.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PALIGENT INC.
(Registrant)
Dated: March 30, 2001 /s/ Salvatore A. Bucci
-------------------------------------
Salvatore A. Bucci
President and Chief Executive Officer
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 the 30th day of March, 2001:
Capacity:
/s/ Michael S. Weiss Chairman
- ------------------------------------
Michael S. Weiss
/s/ John F. Dee Vice Chairman
- ------------------------------------
John F. Dee
/s/ Salvatore A. Bucci President and Chief Executive Officer
- ------------------------------------ (Principal Executive, Financial and
Salvatore A. Bucci Accounting Officer)
/s/ Elliott H. Vernon Director
- ------------------------------------
Elliott H. Vernon
/s/ Zola P. Horovitz, Ph.D. Director
- ------------------------------------
Zola P. Horovitz, Ph.D.
/s/ Richard J. Kurtz Director
- ------------------------------------
Richard J. Kurtz
/s/ Howard Weiser Director
- ------------------------------------
Howard Weiser
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Paligent Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive (loss) income,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Paligent Inc. (formerly HeavenlyDoor.com, Inc. and
Procept, Inc.) at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 9, 2001
37
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $2,971,690 $4,074,525
Investment in Aquila -- 269,976
Prepaid expenses and other current assets 239,305 223,065
------------ ------------
Total current assets 3,210,995 4,567,566
Property and equipment, net 223,183 50,553
Deferred charges-- 321,544
Other assets 77,582 7,150
------------ ------------
Total assets $3,511,760 $4,946,813
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $188,587 $119,826
Accrued compensation 178,613 84,961
Accrued professional services 220,680 243,962
Other current liabilities 36,814 200,870
Current portion of capital lease obligations 60,505 4,832
Current portion of deferred rent -- 67,317
------------ ------------
Total current liabilities 685,199 721,768
------------ ------------
Deferred rent 5,811 --
------------ ------------
Capital lease obligations 65,877 14,384
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Stockholders' equity:
Common stock, $.01 par value; 75,000,000 shares authorized;
32,490,948 and 14,970,818 shares issued and outstanding
at December 31, 2000 and 1999, respectively 324,910 149,709
Additional paid-in capital 154,634,974 87,194,700
Deferred compensation -- (2,187,710)
Accumulated deficit (152,205,011) (81,044,361)
Accumulated other comprehensive income -- 98,323
------------ ------------
Total stockholders' equity 2,754,873 4,210,661
------------ ------------
Total liabilities and stockholders' equity $3,511,760 $4,946,813
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
38
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Research and development revenue
under collaborative agreements
from related party $ -- $ -- $109,375
Interest income 253,673 279,680 220,590
------------ ------------ ------------
Total revenues 253,673 279,680 329,965
------------ ------------ ------------
Costs and expenses:
Research and development (includes $3,809,587 and
$220,410 of non-cash compensation charges in
2000 and 1999, respectively) 4,695,892 1,320,087 1,990,640
Sales and marketing 1,135,522 -- --
General and administrative (includes $15,435,688 and
$2,306,150 of non-cash compensation charges in
2000 and 1999, respectively) 23,408,536 3,880,760 1,610,078
Impairment of goodwill 20,030,684 -- --
Charge for purchased in-process research
and development -- 9,405,671 --
Restructuring charges -- -- 225,000
------------ ------------ ------------
Total costs and expenses 49,270,634 14,606,518 3,825,718
------------ ------------ ------------
Loss from operations (49,016,961) (14,326,838) (3,495,753)
Other income 1,032,266 33,617 204,396
------------ ------------ ------------
Net loss (47,984,695) (14,293,221) (3,291,357)
Less: Incremental charge associated with the
conversion of the minority interest in a subsidiary, net -- (501,455) --
------------ ------------ ------------
Net loss applicable to common stockholders $(47,984,695) $(14,794,676) $(3,291,357)
============ ============ ============
Basic and diluted net loss per common share $(1.55) $(1.36) $(1.40)
====== ====== ======
Weighted average number of common
shares outstanding - basic and diluted 30,916,918 10,907,251 2,347,245
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
39
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the years ended December 31,
-------------------------------------------
2000 1999 1998
------------ ------------ -----------
Net loss $(47,984,695) $(14,293,221) $(3,291,357)
Other comprehensive (loss) income:
Unrealized (loss) gain on investments (98,323) (174,265) 272,588
------------ ------------ -----------
Comprehensive loss $(48,083,018) $(14,467,486) $(3,018,769)
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
40
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
Preferred Stock
Common Stock Series A Additional
--------------------- ------------------ Paid-in Deferred
Shares Par Value Shares Par Value Capital Compensation
------ --------- ------ --------- ------- ------------
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)
Shares issued in connection with:
Acquisition of Heaven's Door Corporation 10,919,655 109,197 -- -- 22,686,303 --
Relinquishment of contractual rights 3,877,008 38,770 -- -- 20,857,225 2,124,960
Payment of placement agent 546,000 5,460 -- -- 1,134,318 --
Exercise of options 76,560 766 -- -- 153,122 --
Exercise of warrants 59,241 591 -- -- 192,199 --
Payment to consultants 750,000 7,500 -- -- 4,446,000 --
Exercise of Class C warrants 1,291,666 12,917 -- -- 3,242,083 --
Compensation expense associated with
variable stock options -- -- -- -- 14,729,024 --
Amortization of deferred compensation -- -- -- -- -- 62,750
Unrealized loss on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- -------- ------- ----- ------------ ----------
Balance at December 31, 2000 32,490,948 $324,910 -- -- $154,634,974 $ --
========== ======== ======= ===== ============ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
41
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(continued)
Accumulated
Cumulative Other Total
Dividends On Accumulated Comprehensive Treasury Stockholders'
Preferred Stock Deficit Income Stock Equity
--------------- ------- ------ ----- ------
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:
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 subsidiary -- -- -- -- 4,160,363
Repayment of debt of subsidiary -- -- -- -- 441,870
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
Settle placement agent fees -- -- -- -- 365,522
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 -- (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
Shares issued in connection with the:
Acquisition of Heaven's Door Corporation -- -- -- -- 22,795,500
Relinquishment of contractual rights -- (23,020,955) -- -- --
Payment of placement agent -- -- -- -- 1,139,778
Exercise of options -- -- -- -- 153,888
Exercise of warrants -- -- -- -- 192,790
Payment to consultants -- -- -- -- 4,453,500
Exercise of Class C warrants -- (155,000) -- -- 3,100,000
Compensation expense associated with
variable stock options -- -- -- -- 14,729,024
Amortization of deferred compensation -- -- -- -- 62,750
Unrealized loss on investments -- -- (98,323) -- (98,323)
Net loss -- (47,984,695) -- -- (47,984,695)
----------- ------------- -------- -------- -----------
Balance at December 31, 2000 $(4,217,388) $(147,987,623) -- -- $2,754,873
=========== ============= ======== ======== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss $(47,984,695) $(14,293,221) $(3,291,357)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,600,013 125,331 449,808
Impairment of goodwill 20,030,684 -- --
Gain on sale of property and equipment, net of write-offs (122,330) (36,150) (209,439)
Gain on sale of investment (234,100) -- --
Savings and retirement plan stock contribution -- -- 43,237
Charge for purchased in-process research and development -- 9,405,671 --
Compensation charge associated with variable stock options 14,729,024 2,500,595 --
Compensatory stock and stock option expense 4,516,251 170,782 73,684
Deferred rent (61,506) (118,298) (72,212)
Changes in operating assets and liabilities, net of acquisitions:
Prepaid expenses and other current assets 128,108 (12,069) 30,649
Other assets (62,166) 183,465 66,411
Accounts payable 50,158 (594,523) (801,137)
Accrued expenses and other current liabilities (232,180) (838,501) (223,028)
------------ ------------ ------------
Net cash used in operating activities (4,642,739) (3,506,918) (3,933,384)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (160,598) -- (319,669)
Proceeds from sales of assets 158,166 40,718 706,594
Proceeds from redemption of debentures -- 128,501 --
Proceeds from sale of investment 405,753 -- --
Proceeds from maturity of marketable securities -- 2,000,001 --
Purchase of marketable securities -- -- (2,000,155)
Merger costs -- (321,544) (176,025)
Cash acquired in acquisitions 17,831 2,750,097 --
------------ ------------ ------------
Net cash provided by (used in) investing activities 421,152 4,597,773 (1,789,255)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 153,888 -- --
Proceeds from exercise of common stock warrants 3,292,790 187,500 --
Proceeds from private placement of stock -- -- 9,802,500
Payment of private placement securities costs -- -- (1,709,707)
Principal payments on notes payable (290,019) (85,000) --
Principal payments on capital lease obligations (37,907) (3,995) (20,231)
------------ ------------ ------------
Net cash provided by financing activities 3,118,752 98,505 8,072,562
------------ ------------ ------------
Net change in cash and cash equivalents (1,102,835) 1,189,360 2,349,923
Cash and cash equivalents at beginning of year 4,074,525 2,885,165 535,242
------------ ------------ ------------
Cash and cash equivalents at end of year $2,971,690 $4,074,525 $2,885,165
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
43
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the years ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Supplemental disclosure of cash flow information:
Interest paid $25,319 $7,628 $5,184
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Fair value of common stock issued to acquire Heaven's Door Corporation $23,935,275 -- --
=========== =========== ===========
Debt assumed from the acquisition of Heaven's Door Corporation $ 290,019 -- --
=========== =========== ===========
Fair value of common stock issued to acquire Pacific Pharmaceuticals -- $3,761,749 --
=========== =========== ===========
Debt assumed in the acquisition of Pacific Pharmaceuticals, Inc. -- $285,000 --
=========== =========== ===========
Fair value of common stock issued to acquire minority interest in subsidiary -- $4,160,363 --
=========== =========== ===========
Fair value of common stock issued in exchange for certain contractual
obligations $23,020,955 -- --
=========== =========== ===========
Fair value of common stock issued to consultants $4,453,500 -- --
=========== =========== ===========
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 --
=========== =========== ===========
Preferred stock converted to common stock -- -- $8,417
=========== =========== ===========
Savings and retirement plan stock contribution -- $740 $43,237
=========== =========== ===========
Stock options issued for services -- -- $73,684
=========== =========== ===========
Capital lease obligation incurred for the acquisition of equipment $145,072 -- --
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
44
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
From its inception in 1985 through 1999, Paligent Inc. (formerly
HeavenlyDoor.com, Inc. and Procept, Inc.), together with its subsidiaries
(collectively, "Paligent" 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. In March 1999,
the Company completed its merger with Pacific Pharmaceuticals, Inc. ("Pacific"),
a company engaged in the development of cancer therapies. In January 2000, the
Company consummated a major strategic change in its business by acquiring
Heaven's Door Corporation ("HDC"), a company that provided business-to-business
and business-to-consumer products and services for the funeral service industry
over the Internet. Effective with the acquisition of HDC, the Company's name was
changed from Procept, Inc. to HeavenlyDoor.com, Inc. and the name of the
Company's subsidiary, Pacific, was changed to Procept, Inc.
Since its inception in 1985 through 1999, the Company was engaged in drug
discovery and research. During 1998 and 1999, the Company's principal efforts
were devoted to drug development, human clinical trials and partnership
commercialization focusing on PRO 2000 Gel and 06-Benzylguanine ("O6-BG").
Commencing in January 1998, in order to focus its limited resources on PRO 2000
Gel, the Company terminated work on all other research programs and underwent a
significant downsizing, reducing its staff to thirteen people. This resulted in
a restructuring charge of $225,000 relating to termination benefits.
Beginning in 2000, effective with the merger with HDC, the Company pursued an
Internet strategy that focused on promoting and facilitating transactions
between consumers, funeral industry providers and financing institutions. In
this regard, the Company developed a Web-based presence that provided consumers
access to information pertaining to the arrangement and handling of pre-arranged
funeral contracts. The Company's services to funeral industry providers included
the development of customized Web sites that were linked to the Company's Web
site, call center capabilities and marketing support.
During the fourth quarter of 2000, the Company decided to discontinue the
pursuit of its Internet strategy after a sustained period of deterioration in
the technology sector and related capital markets. Shortly thereafter, the
Company entered into an agreement to sell all of its Web-based assets and
Internet funeral service operations, including the name "HeavenlyDoor.com." On
December 31, 2000, the Company changed its name from HeavenlyDoor.com, Inc. to
Paligent Inc.
From inception through December 31, 2000, the Company has generated no revenue
from product sales or services, has not been profitable, and has incurred an
accumulated deficit of $152.2 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. As the
Company evaluates various strategic alternatives in its quest for new growth
areas that will maximize value to existing stockholders, the Company expects to
incur additional losses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all of its subsidiaries, which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Risk and Uncertainties
The Company has entered into out-licensing arrangements with respect to two
compounds that had been under development by the Company. Accordingly, the
Company remains subject to risks common to
45
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
companies in the biotechnology industries including, but not limited to,
development by the Company, its licensees or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, compliance with United States Food and Drug
Administration government regulations and the ability to obtain financing.
Since disposing of its Internet assets and related operations in December
2000, the Company has significantly reduced its operating costs. At its
current rate of spending, the Company expects that its current funds and
interest income will be sufficient to fund the Company's current operations
beyond the next twelve months while the Company evaluates strategic
alternatives, including potential business investments and related financing.
No assurance can be given that such financing will be available to the
Company. If the Company is unable to generate significant revenue from future
operations, or obtain additional revenue in connection with the existing
licenses of the Company's biotechnology assets, or secure additional
financing, the Company's financial condition will be adversely affected.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 and Cash Equivalents
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.
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 3-5 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 and tax bases
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 weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
Revenue Recognition
Interest income is recognized as earned. In 1998, revenue under collaborative
research and development agreements was recognized based upon the performance
requirements of each agreement. Payments received in advance under these
agreements were recorded as deferred revenue until earned. Amounts received
under research and development agreements are non-refundable and are not
contingent on the outcome of research efforts.
46
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
Cash and cash equivalents are financial instruments that potentially subject the
Company to concentrations of credit risk. The Company invests its excess cash in
money market instruments.
Basic and Diluted Net Loss Per Common Share
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
(loss) income applicable to common stockholders 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 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
shares of common stock (the "treasury stock method").
For the years ended December 31, 2000, 1999 and 1998, the Company had stock
options and 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 (loss) income under Statement of
Financial Accounting Standards No. ("SFAS") 130, "Reporting Comprehensive
Income". SFAS 130 established standards for reporting and displaying
comprehensive income and its components (gains and losses) in a full set of
general-purpose financial statements. The statement required that all components
of comprehensive (loss) income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Business Segments
The Company follows 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.
During 2000, the Company embarked on the development of an Internet enterprise
while it concurrently shut down its biotechnology research and development
operations. By the close of the year, the Company had also shut down its
Internet operations. The results of operations for the periods presented
primarily reflect research and development activities relating to biotechnology
operations and, for fiscal 2000, also include development activities relating to
the Internet venture. Because all of its operations were developmental in
nature, and the Company has not generated any revenue from product sales or
services, the Company has determined that it has one operating segment for the
periods presented.
New Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. ("SAB") 101, "Revenue Recognition in Financial Statements," which
is effective no later than the quarter
47
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 SAB 101A, "Amendment: Revenue Recognition
in Financial Statements." SAB 101A delayed the implementation date of SAB 101 by
one quarter to the quarter ended June 30, 2000 for registrants with the fiscal
years that begin between December 16, 1999 and March 15, 2000. The Company's
adoption of SAB 101 did not have any effect on the Company's financial position
or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE 3 - ACQUISITIONS
Heaven's Door Corporation
HDC, a Delaware corporation that was engaged in providing a range of
funeral-related products and services through its web site www.HeavenlyDoor.com,
was acquired by the Company in January 2000, pursuant to the Agreement and Plan
of Merger dated as of November 8, 1999 (the "HDC Merger Agreement").
The acquisition of HDC was accounted for utilizing the purchase method of
accounting. The aggregate purchase price of $22.8 million (10,919,655 shares
with a fair value of $2.09 per share) plus the acquisition costs of $1.6 million
and assumed net liabilities of $100,000, were allocated to the acquired tangible
and intangible assets. As a result of this acquisition, the Company recorded
goodwill of $24.5 million, representing the excess cost over the fair value of
net liabilities acquired, which was initially amortized over a period of five
years. Pursuant to the HDC Merger Agreement, each share of HDC was converted
into approximately .81 shares of the Company's common stock ("Common Stock"), or
a total of 10,919,655 shares. As of December 31, 1999, the Company had recorded
on its consolidated balance sheet, as deferred charges, acquisition costs of
$321,544 associated with the HDC merger.
In accordance with the HDC Merger Agreement, the Company also issued 3,877,008
shares of Common Stock to investors in the 1998 Offering (as defined in Note 5),
former holders of Pacific preferred stock and certain other holders of Common
Stock in exchange for the elimination of the Contractual Rights (as defined in
Note 5) held by such investors. This transaction was accounted for by recording
a charge of $23,020,955 directly to equity during the year ended December 31,
2000.
The Company also issued, in connection with the acquisition of HDC, 546,000
shares of Common Stock as consideration for the fee due to the placement agent
involved in the HDC transaction at a fair market value of $1,139,778, which
amount was included in the purchase price (see Note 10).
On January 28, 2000, concurrent with the merger with HDC, the number and
exercise price of the Variable Options (as defined in Note 5) were further
adjusted according to the Contractual Rights of the 1998 Offering. As a result,
the Company granted an additional 1,004,224 options and reduced the exercise
price of the associated Variable Options from $2.11 per share to $1.56 per
share. In addition, the
48
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors also accelerated the vesting of the Variable Options.
Effective with the merger, the number and the associated exercise price of the
Variable Options became fixed and accounted for accordingly. As a consequence, a
compensation charge of $14,729,024 was recorded in fiscal 2000, resulting from
the revaluation under variable plan accounting and the acceleration of the
vesting of the Variable Options.
Pacific Pharmaceuticals, Inc.
On December 10, 1998, the Company entered into a definitive Agreement and Plan
of Merger (the "Pacific Merger Agreement") to acquire 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.
The acquisition of Pacific was accounted for under the purchase method of
accounting. 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 stockholder 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 stockholders were allocated to the acquired tangible and intangible
assets based on their estimated respective fair values. Approximately $9.4
million of the purchase price was 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 were still in the development stage for which there was no
alternative future use. The value assigned to these programs was 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.
Pursuant to the Pacific 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 Common Stock or a total of 2,753,205 shares of
Common Stock and an additional 414,584 shares of Common Stock were issued to
holders of Pacific's preferred stock for a total of 3,167,789 shares of Common
Stock (of which 1,558,587 shares of Common Stock issued in the merger to holders
of Pacific preferred stock were accompanied by certain contractual rights
identical to the Contractual Rights held by purchasers in the Company's 1998
Offering). In addition, all of Pacific's outstanding warrants, unit purchase
options and stock option obligations were exchanged for 1,916,730 like
instruments of the Company. The Company also assumed a $6.5 million, net
obligation (payable in cash or Common Stock, at the sole discretion of the
Company) of Pacific's wholly owned subsidiary, BG Development Corp. ("BGDC"). On
June 30, 1999, the Company issued 2,773,575 shares of 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 Common Stock at $2.11 per share and expire on June 30, 2004.
Pro Forma Results of Operations
The following unaudited pro forma results of operations for the years ended
December 31, 2000 and 1999 give effect to the Company's acquisitions of HDC and
Pacific as if the transactions had occurred at the beginning of each period. The
pro forma results of operation excludes the non-cash stock based compensation
charge of $19.2 million recorded in connection with the acquisition of HDC in
fiscal 2000 and the charge for in-process research and development of $9.4
million that was recorded with the acquisition of Pacific in fiscal 1999. The
pro forma results of operations do not purport to reflect what the Company's
results of operations actually would have been if the acquisitions 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 assumptions that the Company believes
are reasonable and should be read in conjunction with the consolidated financial
statements and accompanying notes thereto.
49
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Results for the
Year Ended December 31,
-----------------------
2000 1999
---- ----
Revenues $253,673 $317,558
Net loss $(29,241,852) $(8,369,354)
Basic and diluted net loss per common share $(0.95) $(0.30)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
----------------------
2000 1999
---- ----
Laboratory equipment $ -- $610,182
Furniture and fixtures 82,643 86,844
Office equipment 136,784 220,305
Leasehold improvements 47,032 1,035,019
-------- ----------
266,459 1,952,350
Less: accumulated depreciation and amortization (43,276) (1,901,797)
-------- ----------
Property and equipment, net $223,183 $50,553
======== ==========
During the years ended December 31, 2000 and 1999, the Company sold equipment
with a net book value of $0 and $5,000, respectively, for proceeds of $148,000
and $41,000, respectively, resulting in gains of $148,000 and $36,000,
respectively. These gains are included in other income in the accompanying
consolidated statements of operations.
Property and equipment includes the following assets that were acquired pursuant
to capital lease arrangements:
December 31,
----------------------
2000 1999
---- ----
Laboratory equipment $ -- $353,466
Furniture and fixtures 69,405 12,203
Office equipment 118,675 114,109
Leasehold improvements -- 459,410
-------- --------
188,080 939,188
Less: accumulated amortization (34,550) (939,188)
-------- --------
$153,530 $ --
======== ========
NOTE 5 - STOCKHOLDERS' EQUITY
Common and Preferred Stock
Year Ended December 31, 2000
On December 31, 2000, the Company had a total of 32,490,948 shares of Common
Stock outstanding. During fiscal 2000, the Company issued 17,520,130 new shares
of Common Stock, of which 16,092,663 were issued in connection with the
acquisition of HDC and 1,427,467 shares were issued in connection with the
exercise of warrants and options.
50
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of HDC in January 2000 (see Note 3), each
share of HDC stock was converted into approximately 0.81 shares of Common Stock
or a total of 10,919,655 shares of the Common Stock. In accordance with the HDC
Merger Agreement, the Company also issued 3,877,008 shares of Common Stock with
a fair value of $23,020,955 to investors in the Company's 1998 Offering, former
preferred stockholders of Pacific, and certain other holders of Common Stock, in
exchange for the elimination of certain contractual obligations incurred in
connection with the 1998 Offering, the Pacific acquisition and other
transactions. This transaction was accounted for by recording a charge of
$23,020,955 directly to equity, which represents the fair market value of the
Common Stock issued to those stockholders who relinquished their contractual
rights.
The Company also issued, in connection with the acquisition of HDC, 546,000
shares of Common Stock as consideration for the fee due to the placement agent
involved in the HDC transaction at a fair market value of $1,139,778, which
amount was included in the purchase price. In addition, on February 28, 2000,
the Company issued a total of 750,000 shares of its Common Stock with a fair
value of $4,453,500 to consultants and, accordingly, a charge of $4,453,500 was
recorded during the year ended December 31, 2000.
During the year ended December 31, 2000, the Company issued 76,560 shares of
Common Stock in exchange for proceeds of $153,888 in connection with the
exercise of options. The Company also issued 1,350,907 shares of Common Stock in
connection with the exercise of warrants, which generated proceeds of
$3,292,790. Total Common Stock issued in connection with the exercise of
warrants included (i) 1,291,666 shares of Common Stock for proceeds of
$3,100,000, related to the exercise of Class C Warrants, and (ii) 59,241 shares
of Common Stock for proceeds of $192,790, related to the exercise of other
warrants. The Class C Warrants were exercised at $2.40 per share representing a
discount of $0.88 to the contractual exercise price of $3.28 per share.
Consequently, during the year ended December 31, 2000, a charge of $155,000 was
recorded directly to equity, which represents the fair market value of the
discount given to the holders of certain Class C Warrants.
Year Ended December 31, 1999
On December 31, 1999, the Company had a total of 14,970,818 shares of Common
Stock outstanding. During fiscal 1999, the Company issued 11,968,986 new shares
of Common Stock.
On October 9, 1999, pursuant to the Contractual Dividend Rights (as defined
herein) contained in the 1998 Offering, the Company issued 562,961 shares of its
Common Stock to certain stockholders.
On September 1, 1999 and November 1, 1999, the Company contributed 319 shares
and 193 shares, respectively, of Common Stock to the Company's Savings and
Retirement Plan.
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 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 shares of Common Stock issued in the conversion were valued at $2.11
per share. The shares have contractual rights identical to those held by
purchasers in the 1998 Offering. The Class D Warrants are exercisable for an
aggregate of 924,525 shares of 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 per share.
51
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 22, 1999 and July 15, 1999, the Company issued 5,000 and 10,000 shares,
respectively, of Common Stock as bonuses to certain employees. In addition, on
June 22, 1999, the Company issued 11,725 shares of Common Stock as payment for
services rendered in connection with the acquisition of Pacific.
On May 18, 1999, the Company issued 51,087 shares of Common Stock in connection
with the exercise of Class C Warrants for proceeds of $187,500.
In April 1999, pursuant to the Contractual Reset Rights (as defined herein)
contained in the 1998 Offering (as defined herein), the Company issued a total
of 3,970,734 shares of Common Stock to certain stockholders.
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 1998 Offering.
On March 17, 1999 and November 10, 1999, the Company issued 88,374 and 109,778
shares of Common Stock, respectively, together with $50,000 in cash for the
cancellation of certain indebtedness of Pacific. In addition, the Company issued
160,160 shares of Common Stock and $50,000 in cash to Paramount Capital,
Incorporated, or its designees, as compensation for services performed in
conjunction with the merger with Pacific.
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 (as defined herein)
contained in the 1998 Offering, the Company issued a total of 1,017,742 shares
of 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 March 1999, the Company issued 36,785 shares of Common Stock to Commonwealth
Associates in connection with the settlement of litigation. On the same date,
the Company issued 2,764 shares of Common Stock to The Harvard School of Dental
Medicine as satisfaction of certain contractual obligations of Pacific.
Year Ended December 31, 1998
On December 31, 1998, the Company had a total of 3,001,832 shares of Common
Stock outstanding. During fiscal 1998, the Company issued 2,805,628 new shares
of Common Stock.
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 "Contractual 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
52
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company, (ii) the sale 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. The Class C Contractual Rights were
terminated on January 28, 2000, concurrent with the merger of Heaven's Door
Corporation.
In April 1998, all of the Company's outstanding Series A Preferred Stock was
converted into 841,680 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, warrants related to the Series A Preferred Stock were exchanged
for Class C Warrants to purchase an aggregate of 841,680 shares of 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.
During the year ended December 31, 1998, the Company contributed 3,448 shares of
Common Stock to the Company's Savings and Retirement Plan.
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, to 10,800,000, which amendment was
approved by the Company's stockholders at the June 19, 2000 Annual Meeting of
Stockholders. At December 31, 2000, there were 5,340,001 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 Company's 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 (the
"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 of the Board of
Directors 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).
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock option plans. SFAS 123, "Accounting for Stock-Based Compensation,"
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 to certain employees,
directors and consultants with Contractual Reset Rights, Contractual
Anti-Dilution Rights, and Class C Warrant
53
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual Rights contained in the 1998 Offering (the "Variable Options"). 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 were accounted for under
variable stock option accounting. Accordingly, the Variable Options were
revalued on a quarterly basis by measuring the difference between the current
exercise price and the fair market value of Common Stock on the respective
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 charge. There were no charges in 1998 or in the first three
quarters of 1999, since the fair market value of Common Stock was less than the
then 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 Reset Rights, the Contractual
Anti-Dilution Rights, and the Class C Warrant Contractual Rights contained in
the 1998 Offering. As a result, the Company granted 819,064 additional options
(586,218 incentive stock options and 232,846 non-qualified stock options) and
the associated exercise price of the Variable Options were reduced from $5.00
per share to $2.11 per share (see Note 3).
The exercise price with respect to the Variable Options was further reduced on
January 28, 2000, concurrent with the merger with HDC. On that date, the Company
granted an additional 1,004,224 options (820,424 incentive stock options and
183,800 non-qualified stock options) and also accelerated the vesting of the
Variable Options. Additionally, as a condition to the merger with HDC, the
Company issued approximately 3.9 million shares of its Common Stock to terminate
the contractual rights that were contained in the 1998 private placement. After
the termination of the contractual rights, the number of options and the
associated exercise price of the Variable Options became fixed and accounted for
accordingly. In connection with the final revaluation under variable plan
accounting and the acceleration of the vesting of the Variable Options, the
Company recorded a compensation charge of $14.7 million in the year ended
December 31, 2000.
Activity under all stock plans related to all the incentive stock options and
non-qualified stock options for the three years ended December 31, 2000 is
listed below:
Incentive Non-qualified Weighted
Stock Stock Average
Options Options Option Price Exercise Price
------- ------- ------------ --------------
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
Cancelled (118,945) (15,486) $10.00-$892.50 $37.87
--------- ----------
Outstanding at December 31, 1998 428,000 239,053 $0.70-$70.19 $4.98
Granted 2,033,418 980,993 $1.45-$138.12 $2.95
Cancelled ( 4,739) -- $2.11 $2.11
--------- ----------
Outstanding at December 31, 1999 2,456,679 1,220,046 $0.70 - $138.12 $2.66
Granted 1,145,424 3,183,800 $1.09-$5.00 $3.80
Exercised -- (76,560) $2.01 $2.01
Cancelled -- (2,565,927) $2.11-70.19 $4.81
--------- ----------
Outstanding at December 31, 2000 3,602,103 1,761,359 $0.70-$138.12 $2.27
========= ==========
Summarized information about stock options outstanding at December 31, 2000 is
as follows:
54
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Average Exercisable
Number of Remaining ----------------------------------
Range of Options Contract Life Weighted Average Number of Weighted Average
Exercise Prices Outstanding (in years) Exercise Price Options Exercise Price
- --------------- ----------- ---------- -------------- ------- --------------
$0.70 - $1.45 471,563 9.11 $1.08 146,563 $1.04
$1.56 3,852,561 7.92 $1.56 3,852,561 $1.56
$1.65 - $3.65 338,029 8.00 $1.93 287,733 $1.98
$4.25 600,000 9.07 $4.25 200,004 $4.25
$7.93 - $138.12 101,309 3.53 $24.33 101,309 $24.33
Options for the purchase of 4,588,155 shares, 1,275,466 shares, and 63,599
shares are exercisable at December 31, 2000, 1999 and 1998, 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:
2000 1999 1998
---- ---- ----
Dividend yield None None None
Expected volatility 100% 100% 104%
Risk free interest rate 4.83% 5.75% 5.25%
Expected life of option 5.0 5.0 5.0
All options granted in 2000, 1999 and 1998 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 $3.43, $1.56 and $1.62 for 2000, 1999 and
1998, 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 2000, 1999 and 1998
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:
2000 1999 1998
---- ---- ----
Net loss - as reported $(47,984,695) $(14,293,221) $(3,291,357)
Net loss - pro forma $(63,276,133) $(16,736,290) $(3,791,798)
Basic and diluted net loss per
common share - as reported $(1.55) $(1.36) $(1.40)
Basic and diluted net loss per
common share - pro forma $(2.05) $(1.53) $(1.62)
The effects of applying SFAS 123 in the pro forma disclosure are not indicative
of future amounts.
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 per share.
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 Common Stock at an exercise price of
$490.00 per share, in connection with investment banking services to the
Company. These warrants expired September 10, 2000.
55
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Common Stock to Commonwealth
Associates at an exercise price of $219.10 per share in connection with a public
financing. These warrants expired on February 14, 2001.
On May 17, 1996, the Company issued a Common Stock warrant to purchase 11,283
shares of 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 per share. 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 share in the event that the
average closing price of 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 Common Stock to Furman Selz LLC 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.
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 Common Stock for an aggregate of
42.084 Units (i.e., 841,680 shares of Common Stock and Class C Warrants to
purchase 841,680 shares of 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
Contractual Rights contained in the 1998 Offering).
In connection with the final closing of the Company's 1998 Offering on April 9,
1998 and certain advisory services, the Company sold to Paramount Capital,
Incorporated, the Company's placement agent in the 1998 Offering, unit purchase
options ("UPOs"), 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 UPOs 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
Contractual Rights. The UPOs 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 on March 17, 1999, the Company converted
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 Common Stock at
an exercise price of $9.20 per share. The Class A Warrants expire in November
2005 and March 2007. In addition, the Company converted 309,734 Pacific Class B
Warrants into 33,653 of the Company's Class B Warrants. Each Class B Warrant is
convertible into one share of Common Stock at an exercise price of $202.49 per
share. The Class B Warrants expire in August 2001. In addition, in conjunction
with the Pacific merger, the Company converted UPOs consisting of options
56
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase 3,984,625 shares of Common Stock and 1,683,663 Class A Warrants to
purchase Common Stock, into UPOs 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 UPOs by 587,935. The UPOs expire
on various dates beginning 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
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 at
$2.11 per share and expire on June 30, 2004.
On April 12, 2000, the Company issued 5,000 Warrants to purchase Common Stock to
369 Lexington Avenue Co., L.P. in connection with the Company's execution of a
lease for its New York City offices. The Warrants are exercisable at $2.50 per
share and expire on April 12, 2005.
On June 30, 2000, the Company issued 1,155,955 Class E Warrants in exchange for
warrants to purchase shares of Series A Convertible Preferred Stock of BGDC. The
Warrants are exercisable at $2.11 per share and expire on June 30, 2004.
At December 31, 2000, there were 9,670,944 warrants outstanding, all of which
are exercisable.
NOTE 6 - COLLABORATIVE RESEARCH AND DEVELOPMENT
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. The Sponsored Research Agreement
with VacTex expired on January 8, 1998. During the year ended December 31, 1998,
the Company recorded revenue of $100,000, which was received in cash.
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 accounted for its investment in Aquila
under SFAS 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 $100,000 and $300,000 on December 31,
1999 and 1998, respectively, as part of stockholders' equity, based on Aquila's
common stock 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, Aquila 7% debentures were redeemed for total
proceeds of $139,758, which represented the principal and accrued interest due
at the time of redemption. During the year ended December 31, 2000, the Company
liquidated all security interests in Aquila for total proceeds of $406,000
resulting in a gain on sale of $234,000 which is included in other income.
NOTE 7 - INCOME TAXES
No federal or state income taxes have been provided for as the Company has
incurred losses since its inception. At December 31, 2000, the Company had
federal and state tax net operating loss ("NOL") carryforwards of $108 million
and $60 million, respectively, which will expire beginning in the year 2001
57
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
through 2020 for federal income tax purposes and beginning in the year 2001
through 2020 for state income tax purposes. Additionally, the Company had
federal and state research and experimentation credit carryforwards of $2.0
million and $1.0 million, respectively, which will expire through 2020. The
Internal Revenue Code of 1986, as amended (the "Code"), contains provisions that
limit the NOL 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
acquisitions of HDC and Pacific, such changes in ownership, as defined in the
Code, have 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:
2000 1999 1998
---- ---- ----
Net deferred tax assets:
Net operating loss carryforwards $40,654,000 $37,058,000 $23,218,000
Tax credit carryforwards 2,863,000 2,868,000 2,192,000
Stock based compensation 1,389,000 250,000 --
Depreciation 139,000 274,000 363,000
Capitalized assets and other 1,121,000 1,171,000 (1,171,000)
Valuation allowance (46,166,000) (41,621,000) (24,602,000)
------------ ------------ ------------
Total net deferred tax assets $ -- $ -- $ --
============ ============ ============
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 NOL 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.
NOTE 8 - 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 were eligible to participate in the 401(k) Plan by meeting
certain requirements, including length of service and minimum age. For the year
ended December 31, 2000, the Company did not contribute to the 401(k) Plan. For
the years ended December 31, 1999 and 1998, the Company contributed 512 shares
and 3,448 shares, respectively, of its Common Stock to the 401(k) Plan with
values of $43,237 and $740, respectively. The 401(k) Plan was terminated during
fiscal 2000.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On April 19, 2000, the Company entered into a lease for its office in New York
City, commencing on July 1, 2000. The commitment under the operating lease
requires the Company to pay monthly base rent and an allocable percentage of
operating costs and property taxes throughout the five-year duration of the
lease.
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.
On June 30, 2000, the Company's lease for its former facility in Cambridge,
Massachusetts expired.
58
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the aforementioned leasing arrangements, at December 31, 2000 and
1999, the Company recorded deferred rent of $6,000 and $67,000, respectively,
for rent expense in excess of cash expenditures for leased facilities.
Gross rent expense for leased facilities and equipment was $800,000, $1.4
million and $1.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively. At December 31, 2000, the gross future minimum annual rental
payments for the New York City office for the balance of the lease term is as
follows:
2001 $206,000
2002 $212,000
2003 $218,000
2004 $224,000
2005 $114,000
The Company's office lease expires on June 30, 2005.
Capital Leases
On March 17, 1999, as part of the acquisition of Pacific, the Company assumed a
capital lease obligation for office equipment. In fiscal 2000, the Company
entered into capital leases for the purchase of office furniture and equipment.
The future minimum lease payments under capital leases outstanding at December
31, 2000 are as follows:
2001 $75,206
2002 29,827
2003 25,549
2004 18,291
2005 5,870
-------
Total future minimum lease payments 154,743
Less: amounts representing interest (28,361)
-------
Present value of future minimum
lease payments 126,382
Less: current portion (60,505)
-------
$65,877
=======
Legal Proceedings
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 and Binary, both subsidiaries of the Company, as defendants (the
"Complaint"). The Complaint alleged that Pacific and Binary breached obligations
to Richied under certain consulting agreements. On August 7, 2000, Pacific and
Binary settled the Complaint. In connection with the settlement, the Company
received a release from all claims and was not required to pay any remuneration.
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. 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 Common Stock. In early 1999, the Company made these
payments.
59
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTIES
Transactions with Directors
Certain members of the Company's Board of Directors received fees in connection
with their service to the Company as members of the Board of Directors and, in
certain cases, were also retained as consultants by the Company.
In November 1999, Howard Weiser, a director of the Company, borrowed $25,000
from HDC and executed a note in favor of HDC (the "HDC Note"). The Company
acquired HDC in January 2000, including Mr. Weiser's note, which was payable on
demand, with interest at the rate of nine and one-half percent per annum. As
part of the merger, the Company and Mr. Weiser entered into a consulting
arrangement whereby Mr. Weiser would provide consulting services for a one-year
period from the date of the merger for a fee of $100,000, payable in periodic
installments. During the course of the consulting period, the Company offset the
full amount of principal and accrued interest due under the HDC Note against
installment payments due under the consulting arrangement. The consulting
arrangement ended in January 2001.
In connection with the acquisition of HDC, the Company issued 375,000 shares of
Common Stock to each of Howard Weiser and Richard J. Kurtz, directors of the
Company, as payment for consulting services. The 750,000 shares of Common Stock
had a fair value of $4,453,500, and accordingly, a charge of $4,453,500 was
recorded during the year ended December 31, 2000.
As part of the acquisition of HDC, the Company assumed notes payable in the
amount of $290,019, payable to Richard J. Kurtz, a director of the Company and a
former stockholder of HDC. On May 31, 2000, the Company paid $243,068 to Mr.
Kurtz, consisting of $235,019 of principal plus $8,049 of accrued interest. On
September 22, 2000, the Company made principal and interest payments of $55,000
and $3,841, respectively, to Mr. Kurtz in satisfaction of its remaining
obligation.
On June 14, 2000, the Company entered into an agreement with Interneuron
Pharmaceuticals, Inc. ("Interneuron") for the out-licensing of PRO 2000 Gel.
Glenn L. Cooper, M.D., a director of the Company at the time of the
agreement, is the President and Chief Executive Officer of Interneuron. In
addition, the principal stockholder of the Company is a stockholder of
Interneuron. Pursuant to this agreement, the Company received a payment of
$500,000 in June 2000, which is included in other income for the year ended
December 31, 2000. The Company retains certain future rights to PRO 2000 Gel
under the licensing agreement, including (i) provisions for the receipt of
additional payments based upon the achievement of certain milestones; and
(ii) royalties from future commercial sales of PRO 2000 Gel, if any.
Interneuron has an option, for a limited period of time, to purchase future
royalty rights relating to Pro 2000 Gel. The Company, however, has no further
obligation to fund research and development for PRO 2000 Gel.
On June 30, 2000, the Company issued 34,678 Class E Warrants to Michael S.
Weiss, Chairman of the Board of Directors of the Company, in exchange for
warrants to purchase shares of Series A Convertible Preferred Stock of BGDC. The
Warrants are exercisable at $2.11 per share and expire on June 30, 2004.
On October 13, 2000, Pacific entered into an agreement with AOI Pharmaceuticals
Inc. ("AOI") to sublicense its exclusive worldwide patent rights and know-how
relating to O6-BG. Mr.Weiss is the Chairman and Chief Executive Officer of AOI.
In addition, the principal stockholder of the Company is a stockholder of an
affiliate of AOI. Pursuant to this agreement, Pacific sublicensed all
development and licensing rights to AOI in exchange for future royalties on net
sales of O6-BG. The agreement also provides for cash payments to Pacific based
upon the achievement of certain developmental milestones. In addition, AOI
assumed all financial obligations of Pacific relating to its licensing of
worldwide patent rights as of the effective date of the agreement. On November
22, 2000, the Company was notified by The Penn State Research Foundation
("PSRF") that the Company was in default of its material
60
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligations under the License Agreement between Pacific and PSRF and that
such default invalidates the Company's sublicensing agreement with AOI. The
Company believes that PSRF's claims are without merit; however, in the
interim, the Company and AOI have agreed to defer the reimbursement of costs
that the Company has paid on behalf of AOI until the matter is resolved. As
of December 31, 2000, such reimbursable costs, amounting to $45,000, are
included in prepaid expenses and other current assets. The Company and PSRF
are engaged in on-going discussions toward a satisfactory resolution of the
issues involved.
On October 17, 2000, the Company entered into a non-binding letter of intent to
acquire WWH Insurance Services, Inc. ("WWH"). WWH is a privately held national
independent distributor of life and health insurance products. Philip C. Pauze,
then a director of the Company, is a director and stockholder of WWH. The
acquisition of WWH was expected to broaden the Company's reach into products and
services for senior citizens, beyond that originally anticipated with the
acquisition of HDC, whose operations were primarily Web-centric. WWH targets
consumers through direct marketing channels; primarily, via cable television
programs whose audience meets the demographic profile of WWH's target market.
During the due diligence review period, the Company advanced $50,000 to WWH to
pay for operating expenses. In December 2000, the Company determined not to
proceed with the acquisition of WWH.
Transactions with Paramount Affiliates
Various entities affiliated with Paramount Capital Asset Management, Inc. are
significant stockholders of the Company. As of March 1, 2001, The Aries Trust,
Aries Domestic Fund, L.P., Aries Master Fund, Aries Domestic Fund II, L.P.,
Paramount Capital Investments, LLC, Paramount Capital, Incorporated, Paramount
Capital Asset Management, Inc. and Lindsay A. Rosenwald, M.D. (collectively, the
"Paramount Affiliates"), are stockholders of the Company. In addition, the
Paramount Affiliates hold warrants to purchase Common Stock. Mark C. Rogers,
M.D., President and Chief Executive Officer of Paramount Capital, Incorporated
("Paramount") was a member of the Company's Board of Directors from 1997 to
August 2000.
Certain Paramount Affiliates have a contractual right to designate a majority of
the members of the Company's Board of Directors, as long as the Paramount
Affiliates hold at least 5% of the voting stock of the Company. In addition,
during that period, the Company must obtain the consent of these Paramount
Affiliates prior to (i) making any payments in excess of $50,000; (ii) incurring
any indebtedness; (iii) engaging in transactions with other affiliates; or (iv)
increasing executive compensation or bonuses, except for bonuses guaranteed in
an employment contract.
Under an agreement dated October 26, 1999, the Company engaged Paramount as a
financial advisor in connection with its proposed transaction to acquire HDC. At
the time of merger with HDC, the Company issued 546,000 shares of Common Stock,
with a fair market value of $1,139,778, as consideration for the fee due under
this agreement.
On April 9, 1998, the Company entered into a Financial Advisory Agreement with
Paramount pursuant to which Paramount was 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 assisted the Company with certain
financing and strategic transactions. During the year ended December 31, 1999,
the Company paid Paramount approximately $44,000 under this agreement. This
agreement was terminated by mutual agreement of the parties, effective September
30, 1999.
In connection with the acquisition of Pacific on March 17, 1999, the Company
issued an aggregate of 1,102,504 shares of Common Stock to the Paramount
Affiliates in exchange for their shares of Pacific common stock and pursuant to
the Contractual Anti-Dilution and Contractual Reset Rights contained in the 1998
Offering. The Company also issued to the Paramount Affiliates (i) an aggregate
of 160,160 shares of Common Stock as payment for brokerage services in
connection with the Pacific merger, and
61
PALIGENT INC.
(formerly HeavenlyDoor.com, Inc. and Procept, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) cash of $50,000 plus an aggregate of 320,126 shares of Common Stock in
connection with the cancellation of certain indebtedness incurred by Pacific to
the Paramount Affiliates through Pacific's merger with Binary, and pursuant to
the Contractual Anti-dilution and Contractual Reset Rights contained in the 1998
Offering.
Also in connection with the acquisition of Pacific, the Company assumed a
$6.5 million net obligation of BGDC. As payment of this obligation, the
Company issued 2,773,575 shares of 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 Paramount Affiliates exchanged their BGDC Series A
Convertible Preferred Stock for an aggregate of 1,890,000 shares of Common
Stock and Class D Warrants to purchase an aggregate of 630,000 shares of
Common Stock.
On April 9, 1999, the Company issued 3,970,734 shares of Common Stock pursuant
to the Contractual Reset Rights contained in the 1998 Offering held by certain
of the Company's stockholders, including those who purchased their shares in the
1998 Offering. An aggregate of 1,842,813 shares were issued to the Paramount
Affiliates pursuant to the Contractual Reset Rights.
On October 9, 1999, the Company issued 562,961 shares of Common Stock pursuant
to the Contractual Dividend Rights held by certain holders of the Common Stock,
including those who purchased their shares in the 1998 Offering. An aggregate of
311,267 shares were issued to the Paramount Affiliates pursuant to this
Contractual Dividend Right.
On March 28, 2000, The Aries Trust and Aries Domestic Fund, L.P. exercised an
aggregate of 1,291,666 Class C Warrants in exchange for 1,291,666 shares of
Common Stock, which exercise generated $3.1 million in proceeds to the Company.
The Class C Warrants were exercised at $2.40 per warrant, representing a
discount of $0.88 to the contractual exercise price of $3.28 per warrant. The
Company recorded a charge of $155,000 directly to equity, representing the fair
market value of the discount given to the holders of certain exercised Class C
Warrants.
On June 30, 2000, the Company issued 781,758 Class E Warrants to the Paramount
Affiliates in exchange for warrants to purchase shares of Series A Convertible
Preferred Stock of BGDC. The Warrants are exercisable at $2.11 per share and
expire on June 30, 2004.
62
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
3.2 Certificate of Ownership and Merger of Paligent Inc. into
HeavenlyDoor.com, Inc., filed with the Secretary of State of Delaware
on December 28, 2000, to be effective as of December 31, 2000.
10.1 Lease for 369 Lexington Avenue, New York, New York, dated April 19,
2000 between the Company and 369 Lexington Avenue Co., L.P.
10.5 Executive Employment Agreement dated as of May 25, 2000, as amended
February 9, 2001, between Paligent Inc. and Salvatore A. Bucci.
10.6 Sublicense Agreement by and between Procept, Inc. (formerly Pacific
Pharmaceuticals, Inc.) and AOI Oharmaceuticals Inc., dated as of
October 13, 2000.
21.1 Schedule of subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants to the
Company.
63