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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-92655
[LOGO]
840 Memorial Drive
Cambridge, Massachusetts 02139
Nasdaq: PRCT
www.Procept.com
December 22, 1999
Dear Procept Stockholder:
I am pleased to invite you to a special meeting of stockholders. At the meeting,
you will be asked to approve the issuance of 10.92 million shares of Procept
common stock in connection with the proposed merger between Procept, Inc. and
Heaven's Door Corporation and an additional 5.0 million shares to certain
existing Procept stockholders in exchange for the termination of anti-dilution
and dividend rights. You will also be asked to approve amendments to Procept's
restated certificate of incorporation to increase the number of authorized
shares of our common stock from 30.0 million to 50.0 million and the change of
Procept's name from Procept, Inc. to HeavenlyDoor.com, Inc. Concurrently with
the approval of the merger, Procept's subsidiary, Pacific Pharmaceuticals, Inc.
will be renamed Procept, Inc. and will own the biotechnology assets. As a
result, HeavenlyDoor.com, Inc. will become the parent company, and both Procept
and Heaven's Door will become wholly-owned subsidiaries. Current Procept
stockholders will own approximately sixty-five percent (65%) of the total
outstanding common stock after the merger, which is expected to be approximately
31.44 million common shares. The number of outstanding warrants and options is
expected to be approximately 12.39 million, necessitating our recommendation to
increase the number of authorized shares to 50.0 million. However, it is
important to note that if these warrants and options were exercised and
converted to common stock, over $25 million in cash would be raised,
dramatically strengthening Procept's balance sheet. Current Procept stockholders
would own seventy-five percent (75%) of the total outstanding common stock if
all warrants and options converted.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THESE PROPOSALS AND DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTEREST
OF PROCEPT AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE "FOR" THE ISSUANCE OF SHARES OF PROCEPT COMMON STOCK IN CONNECTION WITH THE
MERGER AND THE APPROVAL OF THE AMENDMENTS.
PLEASE REFER TO THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS FOR DETAILED
INFORMATION ABOUT THE PROPOSED MERGER. WE ENCOURAGE YOU TO READ THIS ENTIRE
DOCUMENT AND TO CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER "RISK FACTORS"
BEGINNING ON PAGE 12. IN ADDITION, YOU MAY OBTAIN OTHER INFORMATION ABOUT
PROCEPT FROM DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
The date, time, and place of the special meeting is:
January 25, 2000
11:30 a.m.
Procept, Inc.
840 Memorial Drive
5(th) Floor Conference Room
Cambridge, MA 02139
In the following paragraphs, I would like to present the rationale for this
major strategic change in Procept's business. In early 1998, I was hired as your
President to conduct a major "turnaround" of this small biotechnology company.
At the time, I was excited about the potential of PRO 2000 Gel and the potential
for in-licensing new compounds to grow Procept. Since that time, we have made
great
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progress in furthering the development of PRO 2000 Gel and of O(6)-Benzylguanine
after the acquisition of Pacific Pharmaceuticals, Inc. However, for reasons
described below, a dramatic change was needed to preserve and grow shareholder
value.
In today's equity markets, it has been difficult for early-stage biotechnology
companies to raise money, which has led to downward pressure on their stock
prices. This has been true for Procept as well, which was jeopardizing our
Nasdaq SmallCap listing. As Procept's clinical trials accelerate, particularly
for PRO 2000 Gel, the costs associated with the trials will increase. We remain
tremendously positive about the results of initial PRO 2000 Gel trials, and
government agencies are expected to fund many of the costs. However, the drug
manufacturing and preclinical toxicology work will be Procept's responsibility,
and PRO 2000 Gel and O(6)-Benzylguanine require four to five years of additional
clinical trials. If Procept raises capital for such costs over this time period,
it will involve significant dilution to our current shareholders and could cause
further issues with the Nasdaq minimum bid requirements. We concluded that these
biotechnology assets would be worth more to a larger, well-funded company that
can afford to fund development without significant shareholder dilution.
Therefore, we decided that in order to maximize shareholder value, we would
search for an appropriate licensee/acquirer of the biotechnology assets and
develop a new growth strategy for Procept, while retaining our valued Nasdaq
listing.
After careful research, it became clear that the Internet is offering dramatic
growth opportunities. Valuations of recent Internet initial public offerings
exemplify the continuing excitement in this area. So we began a search for such
an Internet company and identified Heaven's Door, which has the opportunity to
become the first publicly traded Internet company focused on funeral
pre-planning and other products and services for the elderly. A summary of the
key messages illustrating the potential for Heaven's Door's business follows:
- - The U.S. funeral industry is expected to have more than $30 billion in
revenues in 1999 according to estimates by Merrill Lynch, J.C. Bradford & Co.,
and other investment bankers. The worldwide market is likely substantially
larger. In addition, the pre-planning of funerals has grown substantially.
More Americans are making their final resting plans ahead of time to spare
family members the burden by entering into pre-need agreements to purchase
funeral and burial goods and services prior to death. Currently, funds in
pre-need agreement exceed $25 billion, up from $18 billion in 1995 according
to the Committee on Aging Statistics GAO on Pre-Need. Industry analysts
estimate the potential U.S. market at $85 billion. It is difficult to estimate
how much of this market will be conducted over the Internet, but Ernst & Young
and Forrester Research have projected that the total value of goods and
services purchased over the Web in the U.S. will increase from approximately
$100 billion in 1999 to approximately $1.3 trillion by 2003, illustrating its
potential.
- - Heaven's Door's business strategy is to cooperate with, not compete against,
funeral homes and therefore, become the primary link between pre-need
customers and thousands of funeral homes and cemeteries. The pre-need customer
can find substantial information on this difficult and sensitive topic from
the privacy of his/her own home, and funeral homes will have a customized
website designed to reach these customers, with computer set--up in their
funeral home, as well as national advertising support. Heaven's Door is
currently in partnership discussions with several of the large, publicly
traded funeral home companies, as well as several large privately-held
companies.
- - HeavenlyDoor.com is also attracting media interest. THE NEW YORKER, the
Associated Press, and THE INDUSTRY STANDARD (a leading Internet magazine), as
well as several regional media, have written detailed articles on Heaven's
Door. In addition, the website has attracted as many as 50,000 hits per day.
We expect this to increase substantially once Heaven's Door becomes a publicly
traded company.
- - Procept believes that Heaven's Door will capture significant first-mover
advantage by being the first publicly traded Internet company focusing on the
funeral industry. By changing Procept's name to HeavenlyDoor.com, Inc.,
Procept hopes to begin the establishment of the HeavenlyDoor.com brand name.
The website currently offers a comprehensive funeral home search capability,
online obituaries, virtual visits to a loved one's resting place, various
e-commerce features, and detailed information concerning funerals and related
topics. Heaven's Door plans to offer additional features,
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including a grief discussion room, grief and religious counseling, memorials
for veterans, firefighters, and police, a bulletin board, and a resource
center for all funeral related topics. Various business-to-business services
are also being planned. The redesign of the website should be ready for launch
in February 2000, soon after the shareholder meeting.
- - Finally, there are significant growth opportunities outside of the funeral
industry as well. As Heaven's Door grows, it plans to expand its offerings to
other products and services for the elderly and aging baby boomer population,
including, but not limited to, the life care and assisted living industry, and
financial/estate planning.
In summary, the new business strategy of the combined company, renamed
HeavenlyDoor.com, Inc. will focus on growing the Internet business, while
maximizing the value of the biotechnology assets. Procept intends to continue
the clinical development of its two lead compounds, PRO 2000 Gel and
O(6)-Benzylguanine, both of which have substantial government support, until the
appropriate partner is found. We believe the merger with Heaven's Door, if
approved, will help direct our future to a high-growth industry, preserve our
Nasdaq listing for our shareholders' liquidity, while at the same time offering
benefits from both the biotechnology and Internet industries.
Your board of directors has determined that the merger is fair to Procept's
stockholders and is in their best interests. The board of directors has received
an opinion from its financial advisor, Hempstead & Co. Inc., as to the fairness
of the merger from a financial point of view to Procept stockholders. The board
of directors unanimously recommends that the stockholders vote to approve the
issuance of the shares of Procept common stock in connection with the merger.
This approval is required in accordance with the rules of the National
Association of Securities Dealers, Inc. which are applicable to Procept because
our common stock is listed on the Nasdaq SmallCap Market. The board also
unanimously recommends that the stockholders vote to approve the amendments to
the restated certificate of incorporation to increase the authorized shares of
Procept common stock and to change Procept's name. The amendment to Procept's
restated certificate of incorporation to increase the authorized shares is
required to complete the merger with Heaven's Door. Assuming an affirmative vote
on all proposals, the merger is expected to be completed shortly after the
special meeting in February 2000.
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, WE ENCOURAGE YOU TO PLEASE TAKE THE TIME TO VOTE BY COMPLETING AND
MAILING THE ENCLOSED PROXY CARD TO US. IF YOU SIGN, DATE AND MAIL YOUR PROXY
CARD WITHOUT INDICATING HOW YOU WISH TO VOTE, YOUR PROXY WILL BE COUNTED AS A
VOTE IN FAVOR OF APPROVING THE AMENDMENTS TO THE RESTATED CERTIFICATE OF
INCORPORATION AND THE ISSUANCE OF PROCEPT COMMON STOCK IN CONNECTION WITH THE
MERGER.
We appreciate your support on this very important transaction. We are very
enthusiastic about the merger with Heaven's Door. On behalf of the board of
directors of Procept, we urge you to vote "FOR" the approval of the proposals.
Sincerely,
[SIGNATURE]
John F. Dee
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
Proxy statement/prospectus dated December 22, 1999,
and first mailed to stockholders on or about December 23, 1999.
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[LOGO]
840 Memorial Drive
Cambridge, Massachusetts 02139
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 25, 2000
TO THE STOCKHOLDERS OF PROCEPT, INC.:
I am pleased to give you notice of, and to cordially invite you to attend,
the special meeting of stockholders of Procept, Inc. which will be held:
January 25, 2000
11:30 a.m.
Procept, Inc. Conference Room
840 Memorial Drive, 5th Floor
Cambridge, Massachusetts 02139
At our special meeting, common stockholders will take action on the
following:
1. To consider and vote on a proposal to amend the Procept restated certificate
of incorporation to increase the number of authorized shares of common
stock, $0.01 par value, from 30,000,000 shares to 50,000,000 shares.
2. To consider and vote on a proposal to amend Procept's restated certificate
of incorporation to change Procept's name from "Procept, Inc." to
HeavenlyDoor.com, Inc.
3. To consider and vote on a proposal to issue shares of Procept common stock
in connection with and as a result of the merger of a wholly-owned
subsidiary of Procept with and into Heaven's Door Corporation pursuant to
the Agreement and Plan of Merger dated as of November 8, 1999, a copy of
which is attached as Annex A to the accompanying proxy statement/prospectus.
The merger agreement provides for the outstanding shares of Heaven's Door
common stock, $.001 par value, to be converted in the merger into the right
to receive Procept common stock. Procept will issue approximately 10,920,000
shares of Procept common stock to the holders of the Heaven's Door common
stock in the merger. In addition, contemporaneously with the merger, Procept
will issue up to 5,000,000 shares of common stock to some existing
stockholders in exchange for the termination of special rights inherent in
the ownership of the shares of Procept common stock that they hold.
4. To transact such other business as may properly come before the special
meeting or any adjournment(s) thereof.
Holders of record of Procept common stock outstanding on December 1, 1999,
the record date fixed by the board of directors for this purpose, are entitled
to receive notice of the special meeting. Only holders of record of shares of
Procept common stock on Procept's record date are entitled to vote at the
special meeting. As of Procept's record date, there were 14,970,037 shares of
Procept common stock outstanding, each of which is entitled to one vote in
person or by proxy at the special meeting.
A quorum, consisting of the holders of at least a majority of the
outstanding shares of Procept common stock entitled to vote at the special
meeting, is required to act upon the amendments to Procept's restated
certificate of incorporation and the issuance of shares of Procept common stock
in connection with the merger.
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If your shares are held through a bank or brokerage firm and you plan to
vote your shares in person at the special meeting, please request a letter or
some other evidence of ownership from your bank or brokerage firm as well as
proper authorization.
All holders of Procept common stock are cordially invited to attend the
special meeting. However, to ensure your representation at the special meeting,
you are urged to complete, date, and sign the enclosed proxy as promptly as
possible. A pre-addressed envelope is enclosed for that purpose. If no
instructions are indicated on your proxy card, your shares of Procept common
stock will be voted "FOR" approval of the amendments to Procept's restated
certificate of incorporation and the stock issuance in the merger. Execution of
a proxy will not in any way affect a stockholder's right to attend the special
meeting and vote in person. Any stockholder giving a proxy has a right to revoke
it at any time before it is exercised by written notice to the Secretary of
Procept. In addition, stockholders attending the special meeting may revoke
their proxies at any time before they are exercised.
December 22, 1999
By Order of the Board of Directors,
[SIGNATURE]
Lynnette C. Fallon
SECRETARY
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TABLE OF CONTENTS
<TABLE>
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PAGE
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QUESTIONS & ANSWERS ABOUT THE MERGER........................ iv
SUMMARY..................................................... 1
Selected Historical Financial Information of Procept........ 6
Selected Historical Financial Information of Heaven's
Door...................................................... 8
Selected Unaudited Pro Forma Combined Condensed Financial
Data...................................................... 9
COMPARATIVE PER SHARE DATA.................................. 10
COMPARATIVE MARKET PRICES AND DIVIDENDS..................... 11
RISK FACTORS................................................ 12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 20
THE PROCEPT SPECIAL MEETING................................. 21
BUSINESS OF PROCEPT, INC. .................................. 24
PROCEPT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 35
BUSINESS OF HEAVEN'S DOOR CORPORATION....................... 39
HEAVEN'S DOOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 40
THE MERGER.................................................. 42
General Description of the Merger......................... 42
Background of the Merger.................................. 42
Procept's Reasons for the Merger; Recommendations of the
Procept Board........................................... 42
Opinion of Procept's Financial Advisor.................... 43
Heaven's Door's Reasons for the Merger; Approval by
Heaven's Door Stockholders.............................. 44
Stock Issuances Concurrent With the Merger................ 45
Accounting Treatment...................................... 46
Certain Federal Income Tax Consequences................... 46
Stockholder Appraisal Rights.............................. 48
Nasdaq Listing of Procept Common Stock.................... 48
Post-Closing Trading Restrictions under Federal Securities
Laws and Lock-up Agreements............................. 48
Regulatory Matters........................................ 49
Interests of Certain Persons in the Merger................ 49
Management and Other Information.......................... 49
MERGER AGREEMENT............................................ 50
Structure of the Merger................................... 50
Merger Consideration...................................... 50
Surrender of Certificates; Converting Heaven's Door Stock
into Procept Stock...................................... 50
Representations and Warranties............................ 51
</TABLE>
i
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<TABLE>
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Certain Covenants......................................... 52
Conditions to the Merger.................................. 54
Amendments; Waivers....................................... 55
No Solicitation........................................... 55
Termination of the Merger Agreement....................... 56
Termination Fee........................................... 57
Payment of Expenses of the Merger......................... 57
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA....... 58
PRINCIPAL STOCKHOLDERS...................................... 65
Procept Share Ownership................................... 65
Heaven's Door Share Ownership............................. 67
DESCRIPTION OF PROCEPT CAPITAL STOCK........................ 68
General................................................... 68
Authorized and Outstanding Capital Stock.................. 68
Common Stock.............................................. 68
Preferred Stock........................................... 68
Options and Warrants...................................... 68
Delaware Anti-Takeover Statute............................ 69
Transfer Agent and Registrar.............................. 69
COMPARATIVE RIGHTS OF HOLDERS OF HEAVEN'S DOOR AND PROCEPT
COMMON STOCK.............................................. 70
LEGAL MATTERS............................................... 74
EXPERTS..................................................... 74
FUTURE PROCEPT STOCKHOLDER PROPOSALS........................ 75
OTHER MATTERS............................................... 75
WHERE YOU CAN FIND MORE INFORMATION......................... 76
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
INDEX TO FINANCIAL STATEMENTS OF PROCEPT, HEAVEN'S DOOR,
PACIFIC AND BTI........................................... F-1
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Annex A Agreement and Plan of Merger among Procept, Inc., Procept
Acquisition Corp., Heaven's Door Corporation and certain
stockholders of Heaven's Door Corporation................. A-1
Annex B Amendment to Procept Restated Certificate of
Incorporation............................................. B-1
Annex C Opinion of Hempstead & Co. Incorporated..................... C-1
</TABLE>
iii
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QUESTIONS & ANSWERS ABOUT THE MERGER
1. HOW WILL THESE TWO COMPANIES MERGE?
Procept and Heaven's Door will combine under a merger agreement that
provides that a wholly-owned subsidiary of Procept will merge with and into
Heaven's Door and, as a result, Heaven's Door will become a wholly-owned
subsidiary of Procept.
2. WHAT PROPOSALS ARE PROCEPT STOCKHOLDERS VOTING ON?
Procept stockholders are being asked to approve the issuance of an aggregate
of 15,920,000 shares of Procept common stock (10,920,000 to Heaven's Door's
stockholders and 5,000,000 to some existing shareholders) and to amend Procept's
restated certificate of incorporation to increase the authorized common stock
from 30,000,000 shares to 50,000,000 shares and to change Procept's name from
"Procept, Inc." to "HeavenlyDoor.com, Inc."
3. WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE PROPOSALS?
The holders of at least a majority of the outstanding shares of Procept
common stock must vote in favor of the amendments to Procept's restated
certificate of incorporation increasing the number of Procept's authorized
common stock and changing Procept's name. Under the rules of the National
Association of Securities Dealers, Inc., the affirmative vote of a majority of
votes cast at the Procept special meeting must approve the Procept stock
issuance. A majority of the outstanding stock entitled to vote constitutes a
quorum for the Procept stockholders meeting.
4. WHO IS ENTITLED TO VOTE?
Holders of record of Procept common stock on December 1, 1999, Procept's
record date, are entitled to vote at the Procept special meeting. As of
December 1, 1999, 14,970,037 shares of Procept common stock were outstanding.
5. WHEN IS THE PROCEPT SPECIAL MEETING?
The Procept special meeting will take place on Tuesday, January 25, 2000.
6. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
We are working to complete all aspects of the merger transaction as quickly
as possible. We currently expect the merger to be completed shortly after an
affirmative vote is obtained at the Procept special meeting and by written
consent of the Heaven's Door stockholders.
7. WHAT DO I NEED TO DO NOW?
After you have carefully read this proxy statement/prospectus, complete,
sign and mail your proxy card in the enclosed return envelope as soon as
possible. That way, your shares can be represented at the Procept special
meeting.
Failure to return a proxy card will have the same effect as a vote against
the proposal to increase the number of authorized shares of Procept common stock
and to change Procept's name. Approval of the proposal to increase the number of
authorized shares of Procept common stock is a condition to completing the
merger.
iv
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8. IF MY PROCEPT SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares, following the
directions provided by your broker.
If you do not give voting instructions to your broker, you will, in effect,
be voting against the proposals to amend the restated certificate of
incorporation unless you appear in person at the Procept special meeting and
vote in favor of the amendments.
9. CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
Yes, you may change your vote at any time before the vote takes place at the
Procept stockholders meeting. You can attend the Procept special meeting and
vote in person to do so. You can complete a new proxy card or send a written
notice stating you would like to revoke your proxy. These should be sent to:
Procept, Inc., 840 Memorial Drive, Cambridge, Massachusetts 02139, Attention:
President.
10. WHO SHOULD I CALL IF I HAVE ANY ADDITIONAL QUESTIONS?
You may call Procept's Investor Relations at (617) 491-1100.
v
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SUMMARY
This summary highlights what we believe to be the most important information
from this proxy statement/prospectus, but it may not contain all of the
information that is important to you. To understand the merger fully and for a
more complete description of the legal terms of the merger, you should read
carefully this entire document and the other documents that we have referred you
to. See "Where You Can Find More Information" on page 76. We have included page
references in parentheses to direct you to a more complete description of the
topics presented in this summary.
THE COMPANIES
PROCEPT (SEE PAGE 24)
Procept is a biopharmaceutical company currently engaged in the development
of novel drugs with a focus on anti-infectives and oncology.
PRO 2000 Gel, Procept's leading product candidate, is being developed as a
vaginal, topical microbicide designed to provide protection against human
immunodeficiency virus infection, as well as herpes, chlamydial and gonorrhea
infection. Two Phase I clinical trials showed that PRO 2000 Gel is safe and well
tolerated in healthy, sexually abstinent women. A larger safety study in
sexually active women and HIV-infected women is ongoing in the U.S. and South
Africa, with support from the National Institute of Allergy and Infectious
Diseases, a unit of the National Institutes of Health. Procept envisions that
the current clinical trial will be followed by a pivotal Phase II/III trial to
demonstrate safety and protective efficacy in a population of women at high risk
for HIV infection. Recent independent surveys have shown that the potential
worldwide market for topical microbicides may exceed $1 billion annually.
O(6)-Benzylguanine, or BG, is a chemosensitizer that is designed to overcome
resistance to a significant class of commonly used chemotherapeutic agents known
as O(6)-alkylating agents. In preclinical studies, treatment with BG increased
the anti-tumor activity of these agents in brain, colon and prostate cancers, as
well as in melanoma. A Phase II development program has recently begun and will
be conducted in accordance with the Cooperative Research and Development
Agreement executed with the National Cancer Institute. In addition to multiple
myeloma, brain cancer and melanoma, Procept hopes that BG may provide increased
efficacy for O(6)-alkylating agents in other cancers, such as colon and breast,
for which these agents are not commonly used.
The principal offices of Procept, a Delaware corporation, are located at 840
Memorial Drive, Cambridge, Massachusetts 02139 and its telephone number is
(617) 491-1100.
HEAVEN'S DOOR (SEE PAGE 39)
In May 1999, Heaven's Door launched its Internet website,
www.HeavenlyDoor.com, which provides a range of products and services
specifically related to the funeral services industry. HeavenlyDoor.com
currently provides consumers access to information concerning the arrangement
and handling of funeral-related services from the privacy of their homes. In
addition, the website offers funeral homes and other service providers the
ability to have an Internet presence through a customized, linked website
designed by Heaven's Door specifically for the funeral home or other provider.
Heaven's Door also will help arrange computer set-up in the funeral home.
Services now being provided by Heaven's Door through HeavenlyDoor.com
include: funeral arrangement information; website design, development and
support; on-line obituaries, visits and testimonials; and various e-commerce
opportunities.
New offerings on HeavenlyDoor.com are expected to include a grief discussion
room, grief and religious counseling, memorials for firefighters, police
officers and veterans, a bulletin board and a resource center for
funeral-related topics. Various business to business services are also being
planned to help funeral home directors take advantage of the Internet. Heaven's
Door's website is currently being redesigned to include many of these new
features with a launch date expected in the first quarter of 2000. In addition,
Heaven's Door plans to support is website with national advertising to enable
the
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Heavenly.Door.com subscribers to reach new markets. As Heaven's Door's business
grows, it expects to expand its offerings to included other products and
services for the elderly and aging baby boomer population, including the life
care and nursing home industry, and financial and estate planning.
The principal offices of Heaven's Door, a Delaware corporation, are located
at 3300 N. University Drive, Suite 403, Coral Springs, Florida 33065 and its
telephone number is (888) 828-6270.
PROCEPT ACQUISITION CORP.
Procept formed Procept Acquisition Corp. as a wholly-owned subsidiary of
Procept under the laws of Delaware solely for the purpose of the merger. If we
complete the merger, Procept Acquisition Corp. will be merged into Heaven's
Door, and Heaven's Door will be the surviving corporation in the merger.
The principal offices of Procept Acquisition Corp., a Delaware corporation,
are located at 840 Memorial Drive, Cambridge, Massachusetts 02139 and its
telephone number is (617) 491-1100.
THE MERGER
SUMMARY OF THE TRANSACTION (SEE PAGE 42)
The merger agreement is attached at the back of this proxy
statement/prospectus as Annex A. We encourage you to read the merger agreement
because it is the legal document that governs the merger. In the proposed
merger, Procept Acquisition Corp. will be merged into Heaven's Door and, as a
result, Heaven's Door will become a wholly-owned subsidiary of Procept.
The proposed merger will occur following: (i) the approval by Heaven's
Door's stockholders of the merger agreement, (ii) the approval by Procept's
stockholders of the increase in Procept's authorized common stock and the
issuance of Procept common stock to Heaven's Door stockholders and to some
existing Procept stockholders and (iii) the satisfaction or waiver of all other
conditions to the merger.
Heaven's Door intends to obtain its stockholders' approval of the merger by
written consent executed by the holders of a majority of the outstanding shares
of Heaven's Door common stock.
WHAT THE HOLDERS OF HEAVEN'S DOOR COMMON STOCK RECEIVE IN THE MERGER (SEE PAGE
50)
In the proposed merger, the holders of Heaven's Door common stock will
receive a total of 10,920,000 shares of Procept common stock, assuming no
Heaven's Door stockholders exercise their appraisal rights under Delaware law.
At the time the merger becomes effective, assuming 13,029,063 shares of Heaven's
Door common stock are outstanding, each issued and outstanding share of Heaven's
Door stock will be converted into a right to receive approximately .8381 of a
share of Procept common stock. Procept will not issue any fractional shares of
common stock in the merger. Instead, holders of Heaven's Door common stock will
receive cash for any fractional share.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 46)
The merger is intended to qualify as a reorganization within the meaning of
Section 368 of the U.S. federal income tax code, although we make no
representation as to that qualification. Assuming the merger does qualify as a
reorganization, no gain or loss will be recognized by Heaven's Door, Procept, or
Procept Acquisition Corp. by reason of the merger. In addition, Heaven's Door's
stockholders will recognize no gain or loss on the exchange of their shares of
Heaven's Door common stock for shares of Procept common stock, except in
connection with any cash that they receive instead of fractional shares.
You are urged to consult your own tax advisor as to the federal and any
state, local, or foreign tax consequences of the merger.
2
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STOCKHOLDER APPRAISAL RIGHTS (SEE PAGE 48)
Procept stockholders are not entitled to appraisal rights as a result of the
merger.
THE PROCEPT SPECIAL MEETING
DATE AND PURPOSE (SEE PAGE 21)
The Procept special meeting will be held at 11:30 a.m. on January 25, 2000
at the offices of Procept at 840 Memorial Drive, Cambridge, Massachusetts. At
the Procept special meeting, holders of Procept common stock will be asked to
approve amendments to Procept's restated certificate of incorporation increasing
the number of authorized common shares of Procept common stock from 30,000,000
to 50,000,000 shares and changing our name from "Procept, Inc." to
"HeavenlyDoor.com, Inc." and the issuances of the Procept common stock in
connection with the merger.
PROCEPT RECORD DATE; VOTING RIGHTS (SEE PAGE 21)
If you owned shares of Procept common stock as of the close of business on
December 1, 1999, the Procept record date, you are entitled to vote at the
Procept special meeting.
On that date, there were 14,970,037 shares of Procept common stock
outstanding. Procept stockholders will have one vote at the Procept special
meeting for each share of stock they own on Procept's record date.
QUORUM; REQUIRED VOTE (SEE PAGE 21)
The holders of a majority of the shares of Procept common stock outstanding
must be present, in person or by proxy, at the Procept special meeting for there
to be a quorum. The rules of the National Association of Securities
Dealers, Inc. require Procept to obtain stockholder approval of the stock
issuance due to the number of shares of Procept common stock expected to be
issued in connection with the merger. This approval is required where the
aggregate number of shares to be issued will be equal to or greater than 20% of
the total number of shares of Procept common stock issued and outstanding
immediately prior to the merger. Under the rules of the National Association of
Securities Dealers, Inc., the affirmative vote of a majority of the votes cast
at the Procept special meeting must approve the issuance of Procept common stock
as a result of the merger. Your failure to vote or your abstention will not
affect the outcome of this proposal.
In addition, due to the number of shares to be issued to the Heaven's Door
stockholders and to some existing Procept stockholders in connection with the
merger, the Procept stockholders must approve an amendment to Procept's restated
certificate of incorporation to increase the number of authorized shares of
common stock. In addition, Procept would like to change its name from
"Procept, Inc." to "HeavenlyDoor.com, Inc." to reflect its change in business
focus. The holders of a majority of the outstanding shares of Procept common
stock must vote to approve the charter amendments. Your failure to vote or your
abstention will have the effect of a vote against approval of the amendments.
Brokers who hold shares of Procept common stock as nominees will not have
discretionary authority to vote those shares unless you provide the broker with
voting instructions.
RECOMMENDATION TO PROCEPT STOCKHOLDERS (SEE PAGE 21)
The Procept board of directors believes that the merger is in the best
interests of Procept stockholders and unanimously recommends that holders of
Procept common stock vote "FOR" the increase in the number of authorized shares
of common stock, the issuance of the Procept common stock in the merger and the
change of Procept's name.
3
<PAGE>
FAIRNESS OPINION OF PROCEPT'S FINANCIAL ADVISOR (SEE PAGE 43)
In deciding to approve the merger, the Procept board of directors considered
an opinion from its financial advisor, Hempstead & Co. Inc., to the effect that,
as of the date of the opinion, the consideration to be paid by Procept pursuant
to the merger was fair to Procept from a financial point of view. We encourage
you to read this opinion which is attached as Annex C to this proxy statement/
prospectus.
SUMMARY OF OTHER SELECTED INFORMATION
REGULATORY APPROVALS (SEE PAGE 49)
We are not aware of any governmental or regulatory approvals required for
consummation of the merger, other than compliance with applicable "blue sky"
laws of the various states in which the stockholders of Heaven's Door reside.
CONDITIONS TO THE MERGER (SEE PAGE 54)
The parties must satisfy certain conditions before the merger can be
completed, including:
- approval by Heaven's Door stockholders of the merger agreement;
- approval by Procept's stockholders of the increase in the number of
authorized shares of Procept common stock;
- approval by Procept's stockholders of the issuances of shares of Procept
common stock in connection with the merger;
- effectiveness of the registration statement filed with the Securities and
Exchange Commission in which this proxy statement/prospectus is included;
- receipt of all required third-party consents and approvals; and
- approval for quotation on the Nasdaq SmallCap Market of the shares of
Procept common stock to be issued in connection with the merger.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 56)
Procept and Heaven's Door may mutually terminate the merger agreement
without completing the merger. The merger agreement may also be terminated by
either Procept or Heaven's Door if the merger is not completed by January 31,
2000, or March 31, 2000 if the registration statement is reviewed by the SEC,
and in certain other circumstances, including failure to obtain required
stockholder approvals.
TERMINATION FEES AND EXPENSES (SEE PAGE 57)
If either party terminates the merger agreement under circumstances
involving an alternative acquisition proposal, Procept or Heaven's Door may be
required to pay the other a termination fee of $250,000.
If the parties do not complete the merger, each party will pay its own
expenses. If the parties do complete the merger, the surviving company, as a
successor to Heaven's Door, will be liable for Heaven's Door's unpaid expenses.
COMPARATIVE STOCKHOLDER RIGHTS (SEE PAGE 70)
When the parties complete the merger, Heaven's Door stockholders will be
stockholders of Procept, and their rights will be governed by the Procept
restated certificate of incorporation, as
4
<PAGE>
amended, the Procept by-laws and Delaware law. A description of certain
differences between the rights of holders of the Heaven's Door common stock and
those of holders of Procept common stock begins on page 70.
ACCOUNTING TREATMENT (SEE PAGE 46)
Procept will account for the merger as a purchase of a business, which means
that the assets and liabilities of Heaven's Door, including intangible assets,
will be recorded at their fair value.
The issuance of the additional shares of Procept common stock to terminate
the special rights that are inherent in some of the Procept common stock will be
accounted for as an induced conversion resulting in an approximate
$10.6 million charge to operations upon consummation of the merger.
COMPARATIVE PER COMMON STOCK MARKET PRICE INFORMATION (SEE PAGE 11 )
Procept common stock is listed on the Nasdaq SmallCap Market. On
September 14, 1999, the last full trading day prior to the public announcement
of the proposed merger, the last reported sale price of Procept common stock was
$2.28. On December 16, 1999, the last reported sale price of Procept common
stock was $2.00.
Heaven's Door common stock is not publicly traded.
LISTING OF PROCEPT COMMON STOCK (SEE PAGE 48)
Procept will list the shares of its common stock to be issued in the merger
on the Nasdaq SmallCap Market.
5
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF PROCEPT
The annual financial information set forth below has been derived from the
audited consolidated financial statements of Procept. The data for the nine
months ended September 30, 1999 and 1998 has been derived from the unaudited
financial statements of Procept. The information should be read in conjunction
with, and is qualified in its entirety by reference to, Procept's financial
statements and related notes, which are included elsewhere in this proxy
statement/prospectus. The interim data reflect all adjustments that, in the
opinion of management of Procept, are necessary to present fairly the
information for the interim periods. The results of operations for the
nine-month periods are not necessarily indicative of the results expected for a
full year or any other interim period.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................. $ 7,571 $ 4,647 $ 2,277 $ 781 $ 330 $ 265 $ 221
------- -------- -------- -------- --------- --------- ---------
Costs and expenses:
Research and development................. 11,559 12,406 9,925 6,619 1,990 1,707 1,034
General and administrative............... 3,805 3,723 3,176 2,715 1,610 1,412 1,219
Restructuring charges(1)................. 273 460 225 225
Charge for purchased in-process research
and development(2)..................... 9,406
Other.................................... $ 171 $ 230 $ 139 $ 40 $ (204) $ (203) $ (26)
------- -------- -------- -------- --------- --------- ---------
Total costs and expenses................. $15,535 $ 16,359 $ 13,513 $ 9,834 $ 3,621 $ 3,141 $ 11,633
------- -------- -------- -------- --------- --------- ---------
Net loss................................. $(7,964) $(11,712) $(11,236) $ (9,053) $ (3,291) $ (2,876) $ (11,412)
Less:
Accretion of discount on preferred
stock.................................. 20 -- -- -- -- -- --
Dividends on preferred stock(3)........ -- -- -- 4,217 -- -- --
Incremental charge associated with the
conversion of the minority interest
in a subsidiary, net(4)............ -- -- -- -- -- -- 501
------- -------- -------- -------- --------- --------- ---------
Net loss available to common
stockholders........................... $(7,984) $(11,712) $(11,236) $(13,270) $ (3,291) $ (2,876) $ (11,913)
======= ======== ======== ======== ========= ========= =========
Basic and diluted loss per share......... $(98.24) $(127.65) $ (68.16) $ (63.68) $ (1.40) $ (1.35) $ (1.24)
======= ======== ======== ======== ========= ========= =========
Weighted average number of common
shares--basic and diluted.............. 81,271 91,752 164,836 208,371 2,347,245 2,126,651 9,600,025
======= ======== ======== ======== ========= ========= =========
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Balance Sheet Data:
Cash and cash equivalents................ $ 7,450 $ 565 $ 1,962 $ 535 $ 2,885 $ 3,569 $ 5,269
Marketable securities.................... 9,393 2,006 4,002 -- 2,004 2,003 --
Total assets............................. 19,704 6,397 8,917 2,168 6,188 6,476 5,772
Capital lease obligations net of current
portion of other non-current
liabilities............................ 860 907 456 355 186 208 119
Total shareholders' equity............... 12,851 1,439 6,316 260 5,397 5,655 3,980
Common stock dividends................... -- -- -- -- -- -- --
</TABLE>
6
<PAGE>
- ------------------------------
(1) Restructuring charges:
In September 1996, Procept 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, Procept reduced staffing in
its research organizations through the elimination of six senior research
positions, incurring a charge of $460,000 for the year ended December 31,
1997. In January 1998, Procept reduced its staff to ten people, incurring a
charge of $225,000 for the nine month period ended September 30, 1998.
(2) Charge for purchased in-process research and development:
On March 17, 1999, Procept acquired Pacific Pharmaceuticals, Inc. The
acquisition of Pacific was accounted for under the purchase accounting
method. The aggregate purchase price of $3.8 million, plus estimated costs
of $1.5 million, assuming liabilities of $5.7 million and $1.0 million for
the value of options and warrants issued to the Pacific stockholders were
allocated to the acquired tangible and intangible assets based on their
estimated respective fair values. The $9.4 million charge in 1999
represents the portion of the purchase price that has been allocated to
in-process research and development. This amount was expensed in the
quarter ended March 31, 1999.
(3) Dividends on Preferred Stock:
In 1997 Procept recorded a preferred stock dividend in the amount of
$4,217,000 which reflects the intrinsic value of the beneficial conversion
feature based upon the difference between the $26.25 per share fair market
value of Procept's stock on the date of issuance and the $10.90 per share
adjusted conversion price.
(4) Conversion of Minority Interest in Subsidiary:
On June 30, 1999, Procept issued 2,773,575 shares of its common stock and
924,525 Class D Warrants to purchase common stock to convert the minority
interest in its majority owned subsidiary BG Development Corp., thereby
eliminating a $6.5 million obligation while obtaining 100% ownership in
BGDC. The 2,773,575 common shares issued in the conversion were valued at
$2.11 per share. The shares have contractual rights identical to those held
by purchasers in Procept's 1998 private placement. The Class D Warrants
exercisable for an aggregate of 924,525 shares of Procept's common stock at
$2.11 per share expire June 30, 2004. This transaction was accounted for as
an induced conversion of a minority interest in a subsidiary and
accordingly the total value of the shares plus the warrants (utilizing the
Black-Scholes valuation model), minus the book value of the minority
interest in BGDC resulted in an incremental charge against earnings of
$501,000 during the period. This issuance was a dilutive event under the
terms of the Class C Warrant Agreement. Accordingly the exercise price of
each Class C Warrant was reduced from $3.67 to $3.28.
See accompanying Notes to Selected Historical and Unaudited Pro Forma Combined
Condensed Financial Data.
7
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF HEAVEN'S DOOR
The annual financial information set forth below has been derived from the
audited financial statements of Heaven's Door. The data for the three-month
periods ended September 30, 1999 and 1998 have been derived from the unaudited
financial statements of Heaven's Door. The company was incorporated in the State
of Delaware on October 27, 1994 as Unitel Imaging Corp. On March 1, 1996, it
became inactive and was reactivated in Delaware on March 26, 1999. On April 12,
1999 the company changed its name to Heaven's Door Corporation. You should read
this information along with Heaven's Door's financial statements and related
notes included elsewhere in this proxy statement/ prospectus. The interim data
reflects all adjustments that, in the opinion of Heaven's Door's management, are
necessary to present fairly such information for the interim periods. The
results of operations for the three-month periods are not necessarily indicative
of the results expected for a full year or any other interim period.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 27,
THREE MONTHS 1994
ENDED (INCEPTION) TO
YEARS ENDED JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------- ------------------- --------------
1995 1996 1997 1998 1999 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................... $ -- $ -- $ -- $ -- $ -- $ -- $ 1 $ 1
Cost and expenses:
Cost of product sales.......... -- -- -- -- -- -- -- --
Product development costs...... -- -- -- -- 55 -- 84 139
General and administrative
costs........................ -- -- -- -- 194 -- 115 309
Business development and
marketing.................... 6 -- -- -- 215 -- 180 401
Interest and other expenses.... -- -- -- -- 7 -- 6 13
---- ---- ---- ---- ------ ---- ------ ------
Total costs and expenses..... $ 6 $ -- $ -- $ -- $ 471 $ -- $ 385 $ 862
---- ---- ---- ---- ------ ---- ------ ------
Net loss......................... $ (6) $ -- $ -- $ -- $ (471) $ -- $ (384) $ (861)
==== ==== ==== ==== ====== ==== ====== ======
Pro forma--basic and diluted
loss per share................. -- -- -- -- $(0.04) -- $(0.03)
==== ==== ==== ==== ====== ==== ======
Pro forma--weighted average
number of common shares--basic
and diluted.................... -- 4,943 4,943 4,943 12,117 4,943 12,111
==== ==== ==== ==== ====== ==== ======
AS OF SEPTEMBER 30,
AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ------ ---- ------
Balance Sheet Data:
Cash, cash equivalents, and
short-term investments....... -- -- -- -- $ 525 -- $ 89
Total assets................... -- -- -- -- 655 -- 275
Long-term liabilities.......... -- -- -- -- -- -- --
Stockholders' equity........... -- -- -- -- 636 -- 251
</TABLE>
See accompanying Notes to Selected Historical and Unaudited Pro Forma Combined
Condensed Financial Data.
8
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma combined condensed financial data
presents the combined financial data of Procept and Heaven's Door, including
Procept's subsidiaries, after giving effect to the merger, assuming the merger
had been effective for the periods indicated. The following selected unaudited
pro forma combined condensed financial data also gives effect to Procept's
merger with Pacific Pharmaceuticals, Inc. and Pacific's merger with Binary
Therapeutics, Inc. as if the acquisitions had been effective for the periods
indicated. The selected unaudited pro forma combined condensed financial data
for the year ended December 31, 1998 and as of September 30, 1999 and for the
nine months then ended was derived from, and should be read in conjunction with,
the unaudited pro forma combined balance sheet and unaudited pro forma combined
statements of operations, including the related notes, which are included
elsewhere in this proxy statement/prospectus. The selected unaudited pro forma
combined condensed financial data should also be read in conjunction with the
historical financial statements of Procept, Heaven's Door, Pacific and BTI,
which are included elsewhere in this proxy statement/prospectus. The pro forma
adjustments to the selected unaudited pro forma combined condensed financial
data for the year ended December 31, 1998 and the nine months ended
September 30, 1999 do not give effect to an approximate $10.6 million charge for
the induced conversion with respect to terminating the special rights that are
inherent in some of the Procept common stock shares in exchange for additional
shares of Procept common stock. The pro forma adjustments to the selected
unaudited pro forma combined condensed financial data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 do include the
4,235,742 shares to be issued to terminate the special rights that are inherent
in some of the Procept common stock shares. The selected unaudited pro forma
combined condensed financial data is presented for illustration purposes only,
and is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the periods indicated nor is it necessarily indicative of future operating
results or financial position of the combined enterprise. The selected unaudited
pro forma combined condensed financial data does not reflect any adjustments to
indicate any cost savings or other synergies anticipated as a result of the
merger.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Statement of Operations
Revenues................................................. $ 540 $ 222
Costs and expenses....................................... 7,938 4,168
Net loss................................................. (7,239) (3,946)
Net loss available to common shareholders................ (10,160) (3,946)
Basic and diluted net loss per common share.............. (0.45) (0.15)
Weighted average number of common shares--
basic and diluted........................................ 22,580 26,741
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
------------------
<S> <C>
Balance Sheet Data
Current assets............................................ $ 5,977
Total assets.............................................. 31,336
Current liabilities....................................... 2,111
Noncurrent liabilities.................................... 119
Shareholders' equity...................................... 29,107
</TABLE>
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data
of Procept including Pacific and BTI and the combined per share data on an
unaudited pro forma basis after giving effect to the merger using the purchase
method of accounting for business combinations, giving effect to the issuance of
10,920,000 shares of Procept common stock in the merger in exchange for Heaven's
Door common stock and giving effect to the issuance of 4,235,742 shares of
common stock to some existing stockholders in exchange for the termination of
special rights inherent in the shares of Procept common stock they hold. The pro
forma adjustments to the pro forma combined loss per common share and equivalent
pro forma loss per common share for the year ended December 31, 1998 and the
nine months ended September 30, 1999 do not give effect to an approximate
$10.6 million charge for the induced conversion with respect to terminating the
special rights that are inherent in some of the Procept common stock shares in
exchange for additional shares of Procept common stock. The pro forma
adjustments to the pro forma combined loss per common share and equivalent pro
forma loss per common share for the year ended December 31, 1998 and the nine
months ended September 30, 1999 do include the 4,235,742 shares to be issued to
terminate the special rights that are inherent in some of the Procept common
stock shares. You should read this data in conjunction with the selected
financial data and the unaudited pro forma combined condensed financial
statements included elsewhere in this proxy statement/prospectus and the
separate historical financial statements of Procept, Heaven's Door, Pacific and
BTI also included in this proxy statement/prospectus. The pro forma combined
financial data is not necessarily indicative of the operating results or
financial position that would have been achieved if the merger had been
consummated as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of Procept or
Heaven's Door.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
PROCEPT--HISTORICAL
Loss per common share:
Basic and Diluted........................ ($1.40) ($1.24)
Book value per share at period end......... $ 1.80 $ 0.28
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, 1999 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
HEAVEN'S DOOR--PRO FORMA
Loss per common share:
Basic and Diluted......................... ($0.04) ($0.03)
Book value per share at period end.......... $ 0.05 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
PROCEPT/HEAVEN'S DOOR--
PRO FORMA COMBINED
Loss per common share:
Basic and Diluted........................ ($0.45) ($0.15)
Book value per share at period end(1)...... $ 0.97
EQUIVALENT PRO FORMA
Per share data imputed to existing
stockholders(2)
Loss per common share:
Basic and Diluted........................ ($0.38) ($0.13)
Book value per share at period end......... $ 0.81
</TABLE>
- ------------------------------
(1) Includes 14,089,469 shares of Procept common stock outstanding at
September 30, 1998 plus 15,971,680 shares issued in connection with the
merger for a total of 30,061,149 shares outstanding on a pro forma basis.
(2) Calculated based upon a fixed conversion rate of .8381 of a share of Procept
common stock for each share of Heaven's Door common stock.
10
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
PROCEPT
From February 17, 1994, the date of Procept's initial public offering, until
March 26, 1998, Procept's common stock had been quoted on the Nasdaq National
Market under the symbol "PRCT." Since March 27, 1998, Procept's common stock has
been quoted on the Nasdaq SmallCap Market under the symbol "PRCT." Procept has
never paid cash dividends on its common stock and does not anticipate paying
cash dividends in the foreseeable future. Procept currently intends to retain
any future earnings for use in Procept's business. As of December 1, 1999, there
were approximately 706 holders of record of Procept common stock.
The following table sets forth the range of high and low closing sale prices
for Procept's common stock as reported by the Nasdaq National Market and the
Nasdaq SmallCap Market for the periods indicated below. The dollar values in
these tables have been adjusted to reflect the one-for-ten reverse split of
Procept's common stock effected on June 1, 1998 and the seven-for-one reverse
split of Procept's common stock effected on October 14, 1997.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------------
HIGH LOW
--------- --------
<S> <C> <C>
Year Ended December 31, 1997
First Quarter.................................... $ 135.66 $56.91
Second Quarter................................... $ 67.83 $32.83
Third Quarter.................................... $ 41.58 $21.91
Fourth Quarter................................... $ 31.25 $10.00
Year Ended December 31, 1998
First Quarter.................................... $ 11.86 $ 6.25
Second Quarter................................... $ 5.75 $ 3.38
Third Quarter.................................... $ 4.06 $ 0.94
Fourth Quarter................................... $ 3.50 $ 0.31
Year Ended December 31, 1999
First Quarter.................................... $ 5.1875 $ 1.75
Second Quarter................................... $ 2.4375 $ 1.375
Third Quarter.................................... $ 2.2812 $ 1.125
Fourth Quarter (through December 1, 1999)........ $ 2.4375 $ 1.375
</TABLE>
On September 14, 1999, the last business day before the merger was
announced, the last sale price of Procept common stock as reported on the Nasdaq
SmallCap Market was $2.28. On December 16, 1999 the last sale price of Procept
common stock as reported on the Nasdaq SmallCap Market was $2.00.
You are encouraged to obtain current market quotations for Procept common
stock.
HEAVEN'S DOOR
Heaven's Door common stock is not traded in any public market. Heaven's Door
has never paid any cash dividends and does not contemplate the payment of cash
dividends in the foreseeable future. As of December 1, 1999, there were
approximately 800 holders of record of Heaven's Door's common stock.
11
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT/ PROSPECTUS, YOU SHOULD CONSIDER CAREFULLY THE RISK
FACTORS DESCRIBED BELOW IN DECIDING HOW TO VOTE YOUR SHARES. THESE RISKS FACTORS
ARE PARTICULARLY IMPORTANT TO KEEP IN MIND WHEN YOU ARE READING FORWARD-LOOKING
STATEMENTS.
RISKS RELATING TO THE MERGER
THE VALUE OF THE SHARES OF PROCEPT COMMON STOCK TO BE RECEIVED BY THE HEAVEN'S
DOOR STOCKHOLDERS IS NOT FIXED AND MAY DECLINE FROM ITS CURRENT VALUE.
The aggregate number of shares of Procept common stock to be issued in the
merger is fixed and will not be adjusted in the event of any increases or
decreases in Procept's stock price. However, because Procept common stock is
publicly traded, the value of a share of Procept common stock may change on a
daily basis. The price of Procept common stock at the effective date of the
merger may vary significantly from the price at the date of this proxy
statement/prospectus and at the date on which you vote. Consequently, at the
time the stockholders of Heaven's Door vote on the proposal to approve the
merger agreement, they will not know the exact value of the Procept common stock
that they would be entitled to receive if the merger is completed. If Procept's
stock price declines, the value of the merger consideration to be received by
Heaven's Door stockholders will decline. In addition, some of Heaven's Door
larger stockholders, directors, executive officers and employees are signing
lock-up agreements which will restrict their ability to sell their shares after
the merger. This will prolong the period at which they are at risk for declining
value of Procept common stock.
PROCEPT'S STRATEGY TO SELL OR LICENSE ITS BIOTECHNOLOGY ASSETS AND ENTER INTO
THE INTERNET INDUSTRY MAY NOT BE SUCCESSFUL.
This merger involves Procept, a biotechnology company, acquiring Heaven's
Door, an Internet company offering funeral-related products and services.
Procept's current business strategy involves selling or licensing its
biotechnology assets to maximize their current value, and applying the proceeds
to grow the Internet business of Heaven's Door. Procept cannot predict when or
if it will be able to obtain value for its biotechnology assets. The timing and
terms of any disposition will impact Procept's ability to grow the Internet
business. Also, if Procept fails to sell or otherwise dispose of the
biotechnology assets, Procept may not have the resources to continue the
progress of its development programs and may cease those developments without
any current return.
In addition, the capital markets may be confused about Procept's business
and strategies in light of the diverse businesses, which confusion may result in
a failure to achieve full valuation in the public markets.
The lack of synergy between the two companies will require management, at
least until the biotechnology assets are sold or licensed to third parties, to
devote significant effort towards operating and growing separate businesses.
Procept's current management lacks experience in operating an Internet business.
While Procept is in the process of recruiting a new Chief Executive Officer, it
cannot be sure when, if and on what terms it will be able to hire an individual
with appropriate experience. Procept's future results will be impacted
negatively if it is unable to manage effectively its business after the merger.
PROCEPT FACES RISKS THAT ARE SIGNIFICANTLY DIFFERENT FROM THOSE FACED BY
HEAVEN'S DOOR, AND THESE RISKS MAY CAUSE THE VALUE OF PROCEPT SHARES ISSUED TO
HEAVEN'S DOOR STOCKHOLDERS TO DECLINE.
After the merger, Heaven's Door stockholders will become Procept
stockholders. As long as Procept retains its biotechnology assets, Procept's
business and strategy will be significantly different from that of Heaven's
Door, and Procept's results of operations, as well as the price of Procept
common stock, will be affected by various factors different from those affecting
Heaven's Door's results
12
<PAGE>
of operations. Future events that may not have affected the value of Heaven's
Door stock may cause the price of Procept common stock to decline.
THE STOCKHOLDERS OF HEAVEN'S DOOR HAVE NO ASSURANCE THAT THEY WILL NOT RECOGNIZE
A TAXABLE GAIN ON THE EXCHANGE OF THEIR SHARES OF HEAVEN'S DOOR COMMON STOCK FOR
PROCEPT COMMON STOCK.
Although the parties intend that the merger qualify as a tax-deferred
reorganization under the U.S. federal income tax code, which means that the
Heaven's Door stockholders would not recognize any loss or gain on the exchange
of their shares, except in connection with any cash received instead of
fractional shares, neither Procept nor Heaven's Door is making any
representation as to the tax effects of the transaction. In addition, no tax
opinions are required to be issued by either company's tax advisor.
Consequently, there could exist factual circumstances that may have been
discovered if tax opinions were required that could cause the merger not to
qualify as a tax-deferred reorganization. Accordingly, the stockholders of
Heaven's Door will need to consult with their own tax advisors to determine
whether they will need to recognize any taxable gain on their receipt of Procept
common stock in the merger.
RISKS RELATING TO THE COMBINED COMPANY
IF PROCEPT IS UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO CONTINUE TO
GROW ITS BUSINESS, PROCEPT MAY BE REQUIRED TO MODIFY ITS OPERATING PLANS.
Procept's operations to date have consumed substantial amounts of cash.
Procept will require substantial funds to:
- progress its drug development programs to the point where the
biotechnology assets will have optimal value in light of Procept's limited
development objectives; and
- complete development of Heaven's Door's Internet website and promote the
use of the site by consumers and subscribers.
Additional funding may not be available on favorable terms or at all. If
adequate funds are not available, Procept may need to curtail operations
significantly. To obtain additional funding, Procept may need to enter into
arrangements that require it to relinquish rights to some technologies and/or
potential markets. To the extent that Procept raises additional capital through
the sale of equity, or securities convertible into equity, you may experience
dilution of your proportionate ownership in Procept.
THE VOLATILITY IN THE PRICE OF PROCEPT STOCK COULD RESULT IN THE LOSS OF A
SIGNIFICANT AMOUNT OF YOUR INVESTMENT.
The market price of Procept common stock has been highly volatile and may be
so in the future. Many factors may have a significant adverse effect on the
market price of Procept common stock, including:
- announcements of technological innovations or new commercial products by
Procept or its competitors;
- indicia of market acceptance of the Heaven's Door products and services or
of consumer Internet purchasing generally;
- publicity regarding actual or potential clinical results, regulatory
developments and proprietary rights of owned or licensed biotechnology
products of Procept or its licensees;
- the terms of the disposition of the biotechnology assets;
- general market conditions affecting either the Internet industry or the
biotechnology industry, or both; and
- fluctuations in Procept's revenues and other financial results.
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As of December 1, 1999, Procept had 14,970,037 shares of common stock
outstanding. The issuance of shares of Procept common stock in connection with
the merger and future issuances of Procept common stock as well as sales of
Procept common stock by existing stockholders and option and warrant holders
also could adversely affect the market price of Procept common stock.
THE VALUE OF YOUR PROCEPT STOCK MAY DECLINE IF OTHER SECURITY HOLDERS EXERCISE
THEIR OPTIONS AND WARRANTS.
As of December 1, 1999, 12,386,903 shares of Procept common stock were
issuable upon exercise of options and warrants to purchase Procept common stock
that either are currently outstanding or Procept has an obligation to issue. The
issuance of shares of Procept common stock upon exercise of these outstanding
options and warrants will cause immediate dilution to Procept's stockholders. In
addition, the future sale of these shares may cause the market price of Procept
common stock to decline. So long as these options and warrants are outstanding,
it may be more difficult for Procept to obtain additional funds to finance its
operations.
BECAUSE CERTAIN STOCKHOLDERS OWN A LARGE PERCENTAGE OF PROCEPT'S STOCK, THEY MAY
BE ABLE TO CONTROL PROCEPT'S MANAGEMENT AND BUSINESS POLICIES AND PREVENT A
POTENTIALLY BENEFICIAL ACQUISITION OF PROCEPT.
The Aries Trust, the Aries Domestic Fund, L.P., the Aries Master Fund, the
Aries Domestic Fund II, L.P., Paramount Capital Investments, LLC and
Dr. Lindsay Rosenwald, who we refer to collectively as the Aries Purchasers, are
the holders of 6,990,098 shares of Procept common stock, and warrants and unit
purchase options to acquire 5,091,692 additional shares of Procept common stock.
After the merger, the Aries Purchasers will own 33.08% of the outstanding common
stock of Procept, assuming only the Aries Purchasers exercise all their
convertible securities. In addition, The Aries Trust and the Aries Domestic
Fund, L.P. have the right to designate a majority of the members of the board of
directors. Accordingly, these entities effectively may control matters requiring
approval by Procept's stockholders, including electing directors, adopting or
amending some provisions of Procept's restated certificate of incorporation or
by-laws and approving or preventing certain mergers or other similar
transactions, such as a sale of substantially all of Procept's assets. The
control rights of these entities and their affiliates may effectively discourage
a third party from making an acquisition proposal and thereby inhibit a change
of control in circumstances that could give the holders of Procept common stock
the opportunity to realize a premium over the then-prevailing market price of
the common stock or affect the market price of the common stock, or both.
Moreover, subject to contractual restrictions and general fiduciary obligations,
Procept is not prohibited from engaging in transactions with its management and
principal stockholders, or with entities in which those persons are interested.
IF PROCEPT COMMON STOCK BECOMES SUBJECT TO RESTRICTIVE SALES PRACTICES IMPOSED
ON PENNY STOCK, THE TRADING MARKET FOR PROCEPT SECURITIES WOULD BE LIMITED.
The listing of the Procept common stock on the Nasdaq SmallCap Market is
subject to Procept continuing to meet certain listing requirements, such as a
minimum bid price of $1.00. If Procept common stock is not listed on a national
securities exchange or on a qualified automated quotation system, such as the
Nasdaq SmallCap Market, it may become subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended, which imposes additional sales practice
requirements on broker-dealers that sell such securities. Rule 15g-9 defines a
"penny stock" to be any equity security that has a market price, as therein
defined, of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. If Procept's common stock was no
longer listed on the Nasdaq SmallCap Market, then transactions in Procept common
stock would require a broker-dealer to make a special suitability determination
for the purchaser, deliver the Securities and Exchange Commission's required
disclosure statement regarding "penny stock" and receive the purchaser's written
consent to the transaction prior to sale. In addition, Rule 15g-4 requires that
a broker-dealer must disclose the sales commission payable to it and its
registered representative and current quotations for the security. Finally,
Rule 15g-6 requires that a broker-dealer send its customers
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who hold penny stock in their accounts monthly statements disclosing recent
price information for the penny stock and information on the limited market in
penny stock. Consequently, these rules may affect the ability of broker-dealers
to sell Procept's securities and may affect the ability of holders of Procept
common stock to sell any of their shares.
The required penny stock restrictions discussed above will not apply to
Procept's securities if Procept meets certain minimum net tangible assets or
average revenue criteria. Procept cannot be certain that its securities will
qualify for exemption from the penny stock restrictions. In any event, even if
its securities were exempt from these restrictions, Procept would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to
restrict any person from participating in a distribution of penny stock, if the
SEC finds that a restriction would be in the public interest. If Procept's
securities were subject to the rules on penny stocks, the market liquidity for
its securities would be materially adversely affected.
PROCEPT'S BUSINESS STRATEGY REQUIRES THE RETENTION OF KEY PERSONNEL TO DISPOSE
OF THE BIOTECHNOLOGY ASSETS AND THE RECRUITMENT OF KEY INTERNET EXECUTIVES.
Procept is highly dependent upon the efforts of John F. Dee and Michael
Fitzgerald to manage the biotechnology business. Procept also is very dependent
on Procept's remaining scientific team to optimize the value of its
biotechnology assets through the completion of some clinical trials and the sale
or license of the biotechnology assets. The loss of the services of one or more
of these individuals might impede the achievement of Procept's business
strategy. Procept also is seeking to recruit management personnel with Internet
expertise. Key personnel with Internet experience are in high demand in the
labor marketplace, and Procept may not be able to successfully compete for this
personnel. If Procept is unable to maintain key biotechnology personnel until
its biotechnology assets are sold or licensed and recruit Internet executives,
its business strategy may not be implemented successfully.
SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE PROCEPT'S STOCKHOLDERS OF THE
OPPORTUNITY TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL.
Provisions of Delaware law, and Procept's restated certificate of
incorporation and by-laws may have the effect of discouraging a third party from
making an acquisition proposal for Procept. This could delay or prevent a change
in control of Procept in circumstances that could give Procept stockholders the
opportunity to receive a premium over the market price of their stock. In
addition, these provisions may cause the market price of Procept common stock to
be lower than it would be in the absence of these provisions.
IF PROCEPT IS UNABLE TO USE ITS NET OPERATING LOSS CARRY FORWARDS, ITS TAX
LIABILITY COULD INCREASE.
For Federal income tax purposes, Procept's net operating loss and tax credit
carryforwards as of December 31, 1998 are approximately $59.7 million and
$2.3 million, respectively. These carryforwards will expire beginning in 2000.
The Tax Reform Act of 1986 provided for a limitation on the annual use of net
operating loss and tax credit carryforwards following certain ownership changes.
Procept believes that some recent issuances of its securities, including those
shares of Procept common stock being issued in connection with the merger, are
likely to restrict severely its ability to utilize these net operating losses
and tax credits in any particular year. Additionally, because the U.S. tax laws
limit the time during which net operating loss may be applied against future
taxable income and tax credit carryforwards may be applied against tax
liabilities, Procept may never be fully able to use its net operating loss and
tax credits for federal income tax purposes.
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RISKS RELATING TO THE BIOTECHNOLOGY INDUSTRY
PROCEPT HAS INCURRED SUBSTANTIAL LOSSES SINCE IT BEGAN DOING BUSINESS AND IT MAY
NEVER BE PROFITABLE.
Procept has never made a profit in any fiscal period since its inception in
1992. Procept expects that its biotechnology development programs will continue
to incur operating losses over the next several years. As of September 30, 1999,
Procept had an accumulated deficit of approximately $77.2 million. Procept had a
net loss in 1997 of $9.1 million before dividends on preferred stock of
$4.2 million, a net loss in 1998 of $3.3 million, and a net loss for the nine
months ended September 30, 1999 of $11.4 million. To date, Procept's only source
of revenue has been up-front payments and research and development funding from
its corporate partners. For the foreseeable future, apart from the Internet
business of Heaven's Door, Procept expects that its level of revenues and
profitability will depend upon its ability to sell or license the biotechnology
assets. Procept has not received any revenues from the discovery, development or
sale of a commercial product, and Procept may not realize any such revenues in
the future. Procept is not able to predict when, or if, it will become
profitable, nor is it able to predict whether such profitability will be
sustained if it is achieved.
Procept's losses have resulted principally from research and development
costs of drug candidates and associated administrative costs. Procept expects to
incur significant additional operating losses for as long as it retains its
biotechnology assets. The terms of any sale or license of Procept's
biotechnology assets may continue to put Procept at risk for the successful
development of the products sold or licensed.
Procept is not certain that it will successfully sell or license its rights
in its biotechnology assets. Even if it is able to do so, the revenue from such
arrangements may not create stockholder value. If Procept is unable to dispose
of its biotechnology assets on profitable terms, its financial condition will be
materially adversely affected.
PROCEPT MAY NEVER SUCCESSFULLY DEVELOP A DRUG THAT CAN BE COMMERCIALIZED.
PRO 2000 Gel, BG, and Boronated Protoporphyrin Compound are currently in,
and several of Procept's preclinical stage products will require, clinical
trials to test their safety and effectiveness. Results of preclinical studies
are not necessarily indicative of results that will be obtained in clinical
trials and clinical trials are lengthy and expensive. Furthermore, Procept or
its licensees may encounter problems in clinical trials that cause delays or
suspend development of some products. In addition, Procept cannot be sure that
the clinical testing, if completed, will show these products to be safe and
effective.
RISKS RELATED TO THE INTERNET INDUSTRY
HEAVEN'S DOOR'S BUSINESS IS VERY DIFFICULT TO EVALUATE BECAUSE ITS OPERATING
HISTORY IS LIMITED.
Heaven's Door began operations as an Internet company in May 1999.
Accordingly, there is very limited information about Heaven's Door with which to
evaluate its business, strategies and performance. In assessing the risks
associated with Heaven's Door, consider the risks, expenses and uncertainties
that an early stage company like Heaven's Door faces, particularly in the new
and rapidly evolving Internet market.
HEAVEN'S DOOR'S SERVICES ARE NOVEL AND UNPROVEN.
Providing funeral-related products and services via the Internet is a novel
and unproven business strategy. If the assumptions underlying Heaven's Door's
business model are not valid or if it is unable to implement its business plan,
achieve the predicted level of market penetration, or generate the desired level
of revenues from advertising or sales, Heaven's Door will not be successful.
It is difficult to predict the extent and rate of user adoption of Heaven's
Door's services. Heaven's Door cannot be sure that widespread acceptance of its
products or services will ever occur. Heaven's
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Door may be unable to attract advertising or subscription revenues from
suppliers of funeral-related services. In addition, if its current services are
not well-received, Heaven's Door may never be able to expand its business to
offer additional products and services.
HEAVEN'S DOOR MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST ITS CURRENT AND
POTENTIAL COMPETITORS.
Heaven's Door competes with a number of other companies that provide
funeral-related products and services over the Internet. Some of these
competitors may have greater financial, technical and marketing resources than
Heaven's Door does. This may allow them to devote greater resources to the
development and promotion of their products and services. In addition, some of
these competitors may offer a broader base of products and services that may
attract consumers to their websites. This could result in reduced market
penetration for Heaven's Door's products and services. In addition, because the
barriers to entry are low, new competitors may emerge and rapidly acquire market
share.
HEAVEN'S DOOR FACES POTENTIAL ELECTRONIC COMMERCE RELATED LIABILITIES AND
EXPENSES THAT MAY BE COSTLY.
Arrangements with electronic commerce merchants may expose Heaven's Door to
legal risks and uncertainties, including potential liabilities to consumers of
third party products and services. Although Heaven's Door carries general
liability insurance, its insurance may not cover potential claims of this type
or may not be adequate to indemnify Heaven's Door for all liability that may be
imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- product liability or other tort claims relating to goods or services sold
through third-party commerce sites;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights, trademarks
or other intellectual property rights, or are libelous, defamatory or in
breach of third-party confidentiality or privacy rights; and
- claims relating to any failure of merchants to appropriately collect and
remit sales or other taxes arising from electronic commerce transactions.
Even if any asserted claims do not result in material liability,
investigating and defending claims could be costly and may have a material
adverse effect on Heaven's Door's business, operating results or financial
condition.
HEAVEN'S DOOR'S GROWTH WILL DEPEND ON ITS ABILITY TO DEVELOP ITS BRAND.
Heaven's Door believes that broader brand recognition and a favorable
consumer perception of the Heavenly Door brand are essential to its future
success. Accordingly, Heaven's Door intends to pursue an aggressive
brand-enhancement strategy, which will include mass market and multimedia
advertising, promotional programs and public relations activities. Heaven's Door
intends to incur significant expenditures, approximately $2 million to
$3 million in 2000, on these advertising and promotional programs and
activities. These expenditures may not result in a sufficient increase in
revenue to cover the advertising and promotional expenses. In addition, even if
brand recognition increases, the number of consumers, advertisers or subscribers
may not increase. If Heaven's Door brand enhancement strategy is unsuccessful,
these expenses may never be recovered and Heaven's Door may be unable to
increase future revenues.
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IF HEAVEN'S DOOR IS UNABLE TO EXPAND ITS PRODUCTS AND SERVICES, IT WILL NOT
BECOME PROFITABLE.
To increase its revenues, Heaven's Door will need to expand its operations
by promoting new or complementary products and by expanding the breadth and
depth of its services. In particular, Heaven's Door's future success will depend
largely on its ability to increase revenues through the facilitation of
electronic commerce transactions and through the increase in the number of
subscribing death care providers. The market for electronic commerce services is
extremely competitive. Because Heaven's Door only recently entered the
funeral-related services market and has little experience in it, Heaven's Door
may have limited success in attracting and maintaining subscribers to
HeavenlyDoor.com, Heaven's Door's website. The expansion of Heaven's Door's
business to include providing other products and services to the elderly and
aging baby boomer population via the Internet will require additional
development resources. This expansion may strain Heaven's Door's managerial,
financial and operational resources. Heaven's Door's expansion into new product
and service offerings may not be timely or may not generate sufficient revenues
to offset their cost. If this occurs, Heaven's Door's business, operating
results and financial condition will be materially adversely affected.
HEAVEN'S DOOR'S SUCCESS DEPENDS ON THE GROWTH OF ELECTRONIC COMMERCE AND
CONSUMER ACCEPTANCE OF HEAVEN'S DOOR'S PRODUCTS AND SERVICES.
The future success of Heaven's Door is dependent on the continued growth of
electronic commerce generally, and an increased demand for funeral-related
services offered via the Internet particularly. The continued growth of these
areas depends on various factors, many of which are outside Heaven's Door's
control. These factors include:
- the acceptance and effectiveness of the Internet as a medium for
transactions in funeral-related products and services;
- the performance and reliability of the Internet to facilitate electronic
commerce transactions;
- security and authentication concerns with respect to the transmission over
the Internet of confidential information, such as credit card numbers, and
attempts by unauthorized computer users, so-called hackers, to penetrate
online security systems; and
- privacy concerns, including those related to the ability of websites to
gather user information without the user's knowledge or consent.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES PERTAINING TO THE INTERNET COULD
HURT HEAVEN'S DOOR'S BUSINESS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for Heaven's Door
services, increase its cost of doing business or otherwise have a material
adverse effect on its business. There is, and will likely continue to be, an
increasing number of laws and regulations pertaining to the Internet. These laws
or regulations may relate to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy, taxation
and the quality of products and services. Furthermore, the growth and
development of electronic commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on electronic commerce
companies as well as companies like Heaven's Door that provide electronic
commerce services.
Recently adopted legislation provides that, prior to October 2001, a state
cannot impose sales taxes on products sold on the Internet unless those taxes
could be charged on non-Internet transactions involving the same products.
During this moratorium, it is possible that taxing mechanisms may be developed
that would, following the moratorium, impose increasing sales and similar tax
burdens on Heaven's Door. If these burdens are placed on Heaven's Door, it may
have a negative effect on its financial condition. In addition, foreign
jurisdictions may claim that Heaven's Door is subject to taxation because it
conducts transactions with their citizens.
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Heaven's Door cannot predict how its business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of these laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address these issues could create
uncertainty in the Internet market. This uncertainty could reduce demand for
Heaven's Door's services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
GOVERNMENT REGULATIONS PERTAINING TO THE DEATH CARE INDUSTRY MAY INCREASE
HEAVEN'S DOOR'S COST OF BUSINESS.
The death care industry is subject to regulation under federal, state and
local laws, including the regulation of pre-need sales of funeral and cemetery
products and the content of advertisements placed by death care providers.
Heaven's Door cannot be sure what effect, if any, these regulations and any
future regulations governing the products and services that Heaven's Door and
its subscribers provide may have on Heaven's Door's financial condition.
IF HEAVEN'S DOOR'S SYSTEMS AND SERVERS DO NOT OPERATE PROPERLY ITS BUSINESS AND
REPUTATION WILL BE HURT.
Any system failure, including network, software or hardware failure, that
causes slower response times and interruptions in service could result in
reduced user traffic on HeavenlyDoor.com. Reduced traffic could result in
reduced revenues from advertisers, subscribers and consumers. Although Heaven's
Door believes that its current back-up methods are adequate, Heaven's Door
cannot assure you that the back-up servers will not fail or cause an
interruption in its service.
In addition, Heaven's Door's services could be affected by computer viruses,
electronic break-ins or other similar disruptions. If Heaven's Door experiences
outages, frequent or persistent system failures or degraded response times, its
reputation could be harmed.
Heaven's Door users and customers depend on Internet service providers,
online service providers and other website operators for access to
HeavenlyDoor.com. Each of these providers has experienced significant outages in
the past and could experience outages, delays and other difficulties due to
system failures unrelated to Heaven's Door systems. Heaven's Door general
liability insurance policies may not adequately compensate it for losses that
may occur due to interruptions in its service.
IF HEAVEN'S DOOR FAILS TO IDENTIFY AND RESOLVE YEAR 2000 ISSUES, DISRUPTIONS IN
ITS OPERATIONS THAT HURT ITS BUSINESS COULD RESULT.
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by Heaven's Door and many other companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities. Heaven's Door has implemented a Year 2000 compliance program to
identify and minimize exposure to Year 2000 problems, which includes an
assessment of its internal readiness as well as the readiness of third parties
that are critical to its business. Heaven's Door does not anticipate
experiencing any material adverse effects on its business as a result of Year
2000 issues. However, Heaven's Door cannot be sure that its Year 2000 issues
have been fully and accurately identified. The failure of Heaven's Door, or
third parties that are significant to Heaven's Door's business, to identify and
resolve these issues could result in interruptions in, or failure of, certain
normal business activities or operations that may have an adverse effect on
Heaven's Door's business, results of operations and financial condition.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements about
our financial condition, results of operations, business strategies, competitive
positions, growth opportunities for existing and potential products and
services, plans and objectives of management and other matters. These forward-
looking statements involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the forward-looking
statements. Forward-looking statements, therefore, should be considered in light
of various important factors, including those set forth in this proxy
statement/prospectus under the heading "Risk Factors."
Words such as "estimate," "project," "plan," "intend," "expect," "believe,"
"may" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places
throughout this proxy statement/prospectus and the other documents incorporated
by reference, including, but not limited to, Procept's Annual Report on
Form 10-K for the year ended December 31, 1998, including any amendments.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this proxy statement/prospectus.
Procept does not undertake any obligation to publicly update or release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this proxy statement/prospectus or to reflect the occurrence
of unanticipated events.
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THE PROCEPT SPECIAL MEETING
This proxy statement/prospectus is furnished (i) as a proxy
statement/prospectus to the holders of the outstanding shares of Procept common
stock, $0.01 par value, in connection with the solicitation of proxies by the
Procept board of directors from the holders of Procept common stock for use at
the special meeting of the Procept stockholders on the date and at the time and
place set forth below and (ii) as a prospectus to holders of the outstanding
shares of Heaven's Door common stock, $0.001 par value, in connection with the
conversion of that stock into shares of Procept common stock in the merger.
Procept anticipates that mailing of proxy materials to its stockholders entitled
to notice of and to vote at the special meetings will begin on or about
December 23, 1999. Heaven's Door has informed Procept that it will ask its
stockholders to approve the merger by written consent. The written consent will
not be effective earlier than 20 business days after Procept delivers this
prospectus to Heaven's Door's stockholders.
GENERAL
The purpose of the Procept special meeting is to consider and vote upon:
- a proposal to approve the issuance of up to 10,920,000 shares of Procept
common stock to the stockholders of Heaven's Door pursuant to the
Agreement and Plan of Merger, dated as of November 8, 1999, providing for
the merger of Procept Acquisition Corp. with and into Heaven's Door, with
Heaven's Door being the surviving corporation, and the issuance of up to
5,000,000 shares of Procept common stock to some of Procept's existing
stockholders in cancellation of special rights inherent in the shares of
Procept common stock they hold;
- a proposal to approve an amendment to Procept's restated certificate of
incorporation to increase the authorized shares of Procept common stock
from 30,000,000 shares to 50,000,000 shares;
- a proposal to approve an amendment to Procept's restated certificate of
incorporation to change Procept's name from "Procept, Inc." to
"HeavenlyDoor.com, Inc."; and
- any other matters properly presented for consideration at the meeting.
The Procept board does not know, as of the date of mailing of this proxy
statement/prospectus, of any other business to be brought before the Procept
special meeting. The enclosed proxy card authorizes the voting of shares
represented by the proxy on all other matters that may properly come before the
Procept special meeting, and any adjournment or postponement thereof and the
proxy holders intend to take such action in accordance with their best judgment.
The Procept board of directors, by a unanimous vote, has approved the stock
issuance and the amendments to Procept's restated certificate of incorporation
and recommends that Procept stockholders vote FOR the stock issuance and the
amendments to the restated certificate of incorporation.
DATE, PLACE, AND TIME; RECORD DATE
The Procept special meeting is scheduled to be held at 11:30 a.m. on
January 25, 2000 at Procept's headquarters. Holders of record of shares of
Procept common stock at the close of business on December 1, 1999 will be
entitled to receive notice of and vote at the Procept special meeting.
VOTING RIGHTS
At the close of business on December 1, 1999, 14,970,037 shares of Procept
common stock were issued and outstanding. Each share of Procept common stock
outstanding as of Procept's record date is entitled to one vote upon each matter
properly submitted at the Procept special meeting. Under the
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rules of the National Association of Securities Dealers, Inc., commonly known as
NASD, the affirmative vote of a majority of the votes cast at the Procept
special meeting is required to approve the stock issuances in connection with
the merger. Under Delaware law, the affirmative vote of the majority of the
outstanding Procept common stock is required to approve the amendments to
Procept's restated certificate of incorporation increasing the authorized common
stock of Procept and changing the name of Procept.
The presence in person or by proxy at the Procept special meeting of the
holders of at least a majority of the outstanding shares of Procept common stock
entitled to vote is necessary to constitute a quorum for the transaction of
business at the Procept special meeting. Abstentions and broker non-votes, which
are proxies from brokers or nominees indicating that they have not received
instructions from the beneficial owners or other persons entitled to vote shares
as to a matter with respect to which brokers or nominees do not have
discretionary power to vote, will be considered as present for the purposes of
establishing a quorum. Under the NASD rules, brokers and nominees are precluded
from exercising their voting discretion with respect to the approval of the
stock issuance and the proposal to increase the authorized common stock.
Accordingly, without specific instructions from the beneficial owner of the
shares, brokers and nominees do not have the power to vote the shares on the
stock issuances or increase in authorized common stock. As a result, abstentions
and broker non-votes will be counted as present for purposes of a quorum but
neither abstentions nor broker non-votes will have any effect on the outcome of
voting on the matters.
As of the Procept record date, directors and executive officers of Procept
and their affiliates owned beneficially an aggregate of 1,622,731 outstanding
shares of Procept common stock or 4.91% of the shares of Procept common stock
outstanding on that date, assuming the directors and executive officers exercise
certain options and warrants. Directors and executive officers of Procept have
indicated that they intend to vote their shares of Procept common stock in favor
of the issuance of Procept common stock in the merger and in consideration of
the termination of the special rights inherent in shares of Procept common stock
held by some existing Procept stockholders, and both of the amendments to
Procept's charter.
VOTING AND REVOCATION OF PROXIES
Shares of Procept common stock represented by a proxy properly signed and
received at or before the Procept special meeting, unless later revoked, will be
voted in accordance with the instructions on the proxy.
If a proxy is signed and returned without indicating any voting
instructions, the shares of Procept common stock represented by the proxy will
be voted in favor of the stock issuances and the proposals to increase the
authorized common stock and to change Procept's name.
Procept proxy holders, in their discretion, may vote shares voted in favor
of the proposal to approve the stock issuances pursuant to the merger agreement,
or either of the proposals to amend Procept's charter, to adjourn the Procept
special meeting to solicit additional proxies in favor of any of the proposals.
You may revoke your proxy at any time before the proxy is voted by filing an
instrument revoking it or filing a properly executed proxy bearing a later date
with the Secretary of Procept, before or at the Procept special meeting, or by
voting in person at the Procept special meeting. All written notices of
revocation and other communications with respect to revocation of proxies should
be addressed as follows: Procept, Inc., 840 Memorial Drive, Cambridge,
Massachusetts 02139, Attention: President. Attendance at the Procept special
meeting will not in and of itself constitute revocation of a proxy.
Procept may adjourn the special meeting to another date and/or place for any
proper purpose, including, without limitation, for the purpose of soliciting
additional proxies.
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SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Procept may solicit proxies from the stockholders of Procept personally or by
telephone, telecopy or telegram or other forms of communication. Officers,
directors and employees of Procept will not be compensated specifically for
these services. Brokerage houses, nominees, fiduciaries, and other custodians
will be requested to forward soliciting materials to beneficial owners of
Procept common stock and Procept will reimburse them for their reasonable
expenses incurred.
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BUSINESS OF PROCEPT, INC.
CORPORATE SUMMARY
Procept, Inc., together with its subsidiaries, is a biopharmaceutical
company currently engaged in the development and commercialization of novel
drugs based on biotechnological research. On March 17, 1999, Procept completed
its merger with Pacific Pharmaceuticals, Inc., in which Pacific became a
subsidiary of Procept. The combined company has a product portfolio with a focus
in anti-infectives and oncology, including three compounds in human clinical
trials that may be candidates for accelerated regulatory approval.
The lead product candidate from Procept's AIDS program, PRO 2000 Gel, is a
vaginal microbicide designed to prevent the sexual transmission of human
immunodeficiency virus and other sexually transmitted disease pathogens. Procept
recently announced that PRO 2000 Gel was shown to protect female monkeys from
infection by an AIDS-causing virus in a small study conducted by the British
Medical Research Center. In earlier studies, PRO 2000 Gel protected mice from
genital herpes simplex virus type 2 infection. Laboratory studies have also
shown that the product is active against Chlamydia trachomatis and Neisseria
gonorrhea, two other important pathogens. These promising results offer hope
that PRO 2000 Gel could protect women from human immunodeficiency virus and
sexually transmitted disease infections; they also provide support for
conducting Phase II and III human clinical studies on an accelerated basis to
demonstrate the safety and protective efficacy of the product. Two Phase I
clinical trials, completed in 1997, showed that daily intravaginal doses of 4%
PRO 2000 Gel are safe and well tolerated in healthy, sexually abstinent women.
One of these studies was supported by the British Medical Research Center. We
have recently commenced a larger study to evaluate the safety and acceptability
of PRO 2000 Gel in healthy, sexually active women and in human immunodeficiency
virus-infected women in the United States and South Africa, with support from
the National Institute of Allergy and Infectious Diseases, called NIAID. Phase
II safety studies are also under discussion with the British Medical Research
Center. Procept believes that safety data from these trials, coupled with the
promising animal protection results, will make PRO 2000 Gel an attractive
candidate for testing in a large, government-funded Phase III clinical trial
designed to demonstrate safety and effectiveness.
Pacific has two cancer therapies that are candidates for fast-track
regulatory approval, both of which are in the human clinical phase of
development under Food and Drug Administration Investigational New Drug
applications. These therapies include:
- O(6)-benzylguanine, called BG, a chemosensitizer to enhance chemotherapy;
and
- Boronated Protoporphyrin Compound, called BOPP, for use in photodynamic
therapy.
BG is a chemosensitizer that is designed to overcome tumor resistance to a
significant class of commonly used chemotherapeutic agents known as
O(6)-alkylating agents. BG inactivates tumor AGT, a DNA repair protein, which
interferes with the effectiveness of some alkylating agents. Inactivation of AGT
in cells derived from 11 different human tumor types, including multiple
myeloma, rendered these cells more sensitive to the cytotoxic effects of several
alkylating agents. In preclinical animal studies, treatment with BG increased
the anti-tumor activity of some alkylating agents in brain, colon, and prostate
cancers and in glioma and melanoma. Published human clinical data show that a
correlation exists between low levels of AGT and survival in brain tumor
patients treated with some alkylating agents.
The dose of BG that effectively inactivates the DNA repair protein AGT in
solid tumors, and the amount of alkylating agent that can be safely administered
with this dose, was determined in National Cancer Institute, or NCI, sponsored
Phase I studies performed at the Duke University Medical Center, the University
of Chicago and Case Western Reserve University. Preliminary clinical response
data was presented 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
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therapies. A second patient with carcinoma of unknown primary had sustained
stable disease for 20 months. Procept is awaiting the results of five ongoing
Phase I trials in other cancer indications at other institutions to test safety
and dosing.
Procept recently announced the initiation of a human Phase II clinical trial
of BG in combination with the chemotherapeutic drug carmustine for the treatment
of multiple myeloma at the Ireland Cancer Center at University Hospitals of
Cleveland and Case Western Reserve University. This study is one of several
Phase II clinical trials that will be sponsored by the NCI in various cancer
indications including, but not limited to, colon cancer, glioma, melanoma and
sarcomas. The trials will be conducted in accordance with a Cooperative Research
and Development Agreement signed with the NCI in 1998.
The proprietary photodynamic therapy compound, BOPP, is currently in a Phase
I study in brain cancer patients at the Royal Melbourne Hospital, Australia
under a United States Investigational New Drug application filed with the FDA in
March 1998. Photodynamic therapy is a technology which might be suitable for use
in a variety of disorders including cancers, cardiovascular and gastrointestinal
disorders, and pre-cancerous conditions such as Barrett's esophagus and cervical
dysplasia, but are as yet not proven. Light is used to activate a
photosensitizing drug selective to tumor cells, resulting in tumor cell death.
Procept is awaiting the results of this trial to determine its competitive
position in the photodynamic therapy field and whether further development is
warranted.
DRUG DEVELOPMENT PROGRAMS
PRO 2000 GEL: A MICROBICIDE TO PREVENT HUMAN IMMUNODEFICIENCY VIRUS AND SEXUALLY
TRANSMITTED DISEASE INFECTION
PRO 2000 Gel is a topical microbicide designed to prevent the sexual
transmission of human immunodeficiency virus and other sexually transmitted
disease pathogens.
Procept believes there is a need for new technologies to prevent the sexual
transmission of human immunodeficiency virus and other sexually transmitted
diseases. Human immunodeficiency virus infection usually leads to AIDS, a
severe, life-threatening impairment of the immune system. Human immunodeficiency
virus causes immunosuppression by attacking and destroying T cells, which
coordinate much of the network of normal immune responses. The progression from
human immunodeficiency virus infection to symptomatic disease may take many
years. In 1998, the human immunodeficiency virus epidemic continued with an
estimated 5.8 million new infections worldwide. In addition, The Centers for
Disease Control estimates that there are 330 million new cases of other sexually
transmitted diseases each year worldwide. Despite years of effort, an effective
human immunodeficiency virus vaccine remains elusive. Male condoms are known to
prevent sexually transmitted disease transmission, but rates of consistent and
correct use are low, perhaps because they are unacceptable for many couples and
their use is controlled by the male partner. "Topical microbicides," which are
designed to provide a chemical barrier to infection, are an attractive
alternative; they are likely to be more acceptable than condoms, and offer women
a method they can use to protect themselves. Development of topical microbicides
is a high priority for both the United States government and international
agencies.
Procept believes that its proprietary antiviral compound PRO 2000 Gel is
ideally suited for use as a topical microbicide. PRO 2000 was shown in
laboratory studies to be effective at preventing human immunodeficiency virus
infection of cultured T cells, macrophages, and dendritic cells (dendritic cells
are believed to be the first cells infected during sexual transmission). PRO
2000 showed high activity against human immunodeficiency virus strains from both
the developed and developing world; the virus did not develop resistance to the
compound even after prolonged exposure. Preclinical studies also demonstrate
that PRO 2000 is active against other sexually transmitted disease agents
including genital herpes simplex virus type 2 and Chlamydia trachomatis. In
addition to its broad antiviral activity, the
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compound is straightforward to manufacture, highly stable, odorless and
virtually colorless. PRO 2000 Gel has also been formulated for intravaginal use.
In preclinical irritation studies, PRO 2000 Gel was shown to be much safer than
the marketed vaginal spermicide containing nonoxynol-9. In other preclinical
studies, PRO 2000 Gel was shown to be non-mutagenic, non-sensitizing and
compatible with latex condoms.
Collaborators at the Children's Hospital Medical Center, Cincinnati have
shown that vaginally applied PRO 2000 Gel can protect mice completely from
vaginal HIV infection. Moreover, unlike many other agents, PRO 2000 Gel provided
significant protection even when applied up to an hour before exposure to the
virus. These results, which were presented at the XII World AIDS Conference in
Geneva, provide greater confidence that PRO 2000 Gel will prevent sexually
transmitted diseases in humans. Genital herpes lesions are a significant public
health problem and are believed to promote human immunodeficiency virus
infection; therefore, preventing the transmission of herpes may assist in the
reduction of human immunodeficiency virus infection.
The completed monkey study extends these results by showing that PRO 2000
Gel can also protect animals from infection by an human immunodeficiency
virus-like virus. The hybrid simian/human immunodeficiency virus used in the
study contains an human immunodeficiency virus envelope and a simian
immunodeficiency virus core, which allows it to infect monkeys. Because it
contains human immunodeficiency virus elements, the use of human
immunodeficiency virus rather than simian immunodeficiency virus may provide a
better indication of PRO 2000 Gel's potential effectiveness against the human
virus.
These promising results support accelerated human clinical evaluation of PRO
2000 Gel. Two Phase I clinical trials, completed in 1997, showed that daily
intravaginal doses of 4% PRO 2000 Gel were safe and well tolerated in healthy,
sexually abstinent women. One of these studies was supported by the British
Medical Research Center. We have recently commenced a larger study to evaluate
the safety and acceptability of PRO 2000 Gel in healthy, sexually active women
and in human immunodeficiency virus-infected women in the United States and
South Africa, with support from NIAID, a unit of the National Institute of
Health. Phase II safety studies are also under discussion with the British
Medical Research Center. Procept believes that safety data from these trials,
coupled with the promising animal protection results, will make PRO 2000 Gel an
attractive candidate for testing in a large, government-funded Phase III
clinical trial designed to demonstrate safety and protective efficacy.
Procept holds two issued patents on the use of PRO 2000 Gel to prevent human
immunodeficiency virus infection. Procept recently announced that it has
received two Notices of Allowance from the United States Patent and Trademark
Office relating to PRO 2000, Procept's lead anti-infective drug candidate. One
patent contains composition-of-matter claims covering PRO 2000 and similar
compounds, while the other covers the use of a PRO 2000-based vaginal gel
formulation for the prevention of pregnancy. A similar contraception patent was
independently allowed in South Africa. Additional international patent
applications have been filed.
PACIFIC SUBSIDIARY
On March 17, 1999, Procept completed its merger with Pacific, in which
Pacific became a subsidiary of Procept. Pacific is engaged primarily in the
development and commercialization of medical products based on biotechnological
research regarding the treatment and detection of cancer.
O(6)-BENZYLGUANINE: A CHEMOSENSITIZER TO ENHANCE CHEMOTHERAPY
Pacific's wholly-owned subsidiary, BG Development Corp., holds an exclusive
worldwide license from Pennsylvania State University and others for
O(6)-benzylguanine, a series of related compounds and
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a gene therapy that Procept believes will enhance the effectiveness of a class
of currently used chemotherapeutic agents, known as O(6)-alkylating agents.
O(6)-benzylguanine and related compounds are small molecules for intravenous
administration in the treatment of cancer. Procept believes O(6)-benzylguanine
to be capable of destroying the resistance of cancer cells to a class of
chemotherapeutic agents, O(6)-alkylating agents. Procept believes that the
effectiveness of alkylating chemotherapeutic agents against various tumors such
as brain, prostate, colon cancers, melanoma and lymphoma is limited due to the
ability of tumor cells to repair the DNA damage caused by the O(6)-alkylating
agents, because the DNA repair protein, O(6)-alkylguanine-DNA alkyltransferase,
protects tumor cells by repairing the tumor cell DNA. Procept believes that
O(6)-benzylguanine inactivates the O(6)-alkylguanine-DNA alkyltransferase
protein in a variety of cancers thereby overcoming resistance to the
O(6)-alkylating agents.
The treatments for most cancers include surgery, radiation therapy and/or
chemotherapy. O(6)-alkylators are chemotherapeutic agents that are primarily
used to treat brain cancer, melanoma, lymphoma and certain gastrointestinal
cancers. They include carmustine, lomustine, dacarbazine, procarbazine,
fomustine, and temozolomide. O(6)-alkylating agents, lomustine, fomustine and
dacarbazine remain important in the chemotherapeutic treatment of brain cancer
and advanced melanoma. Procarbazine has become an important agent in the
treatment of Hodgkin's disease and brain tumors. Temozolomide has shown
potential for the treatment of lymphomas, melanoma and brain tumors. In general,
although there is a small percentage of patients who have achieved long-term
remission, the O(6)-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
O(6)-position of guanine on the DNA strand. O(6)-alkylguanine-DNA
alkyltransferase is believed to play a significant role in cancer resistance to
the O(6)-alkylators by removing this chemical bond. A published study in 226
patients with brain cancer (high-grade astrocytoma) receiving O(6)-alkylating
agent therapy showed that the patients with low levels of O(6)-alkylguanine-DNA
alkyltransferase responded better to treatment and had increased survival
relative to patients with high levels of O(6)-alkylguanine-DNA alkyltransferase.
Conversely, the patients with high levels of tumor O(6)-alkylguanine-DNA
alkyltransferase protein had poor disease prognosis. Since it appears that
O(6)-benzylguanine temporarily destroys O(6)-alkylguanine-DNA alkyltransferase,
Procept believes that O(6)-benzylguanine may reduce the resistance that is
commonly observed in cancer cells following treatment with O(6)-alkylating
agents.
O(6)-alkylating agents such as O(6)-alkylating agent and lomustine are
believed to cause a number of different damages to the tumor DNA, including an
interstrand cross-link between guanine and cytosine (building blocks of DNA) on
the opposite strand. Procept believes that there is a strong correlation between
the number of strand cross-links and tumor cells killed. O(6)-alkylguanine-DNA
alkyltransferase protein protects tumor cells from damage by removing the damage
from the O(6)-position of guanine. Procept believes that there are no other
proteins involved in the repair process, and that the O(6)-alkylguanine-DNA
alkyltransferase protein is inactivated in the repair process. Procept believes
that O(6)-benzylguanine binds to the O(6)-alkylguanine-DNA alkyltransferase
protein, thereby blocking the tumor DNA repair and believes that inactivation of
the O(6)-alkylguanine-DNA alkyltransferase protein in a variety of human tumors
by non-toxic doses of O(6)-benzylguanine could render these tumors more
sensitive to the cytotoxic effects of O(6)-alkylating agents.
Results of in vitro testing have led to an evaluation of O(6)-alkylating
agents in animal tumor models. Upon administration of O(6)-benzylguanine to mice
carrying two different human brain tumors prior to the administration of
O(6)-alkylating agent, 80% and 100% tumor regression was observed compared to 0%
and 10% suppression in animals treated with O(6)-alkylating agent alone.
Combinations of O(6)-benzylguanine and O(6)-alkylating agent were also found to
be effective in mice bearing human
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colon cancers, showing 96% tumor regression compared to 35% tumor regression
with O(6)-alkylating agent alone. Growth inhibition was also observed in a rat
prostate model after treatment with O(6)-benzylguanine and O(6)-alkylating
agent, but was not observed in animals treated with O(6)-alkylating agent alone.
A Phase I clinical trial of O(6)-benzylguanine has been completed at Duke
University. Procept believes that the study has shown that O(6)-benzylguanine,
injected intravenously, crosses the blood-brain barrier and effectively blocks
the activity of human brain tumor O(6)-alkylguanine-DNA alkyltransferase
protein. Procept also believes that the study at Duke University has
demonstrated O(6)-benzylguanine to be nontoxic when administered alone, and to
be effective in inhibiting over 90% of O(6)-alkylguanine-DNA alkyltransferase
activity in brain cancer specimens surgically removed from patients 18 hours
after the intravenous administration of O(6)-benzylguanine. Three other Phase I
clinical studies at the University of Chicago, Case Western Reserve University
and Duke University are examining the use of O(6)-benzylguanine in combination
with O(6)-alkylating agent in brain, colon and renal cancer. In these studies,
O(6)-benzylguanine is administered over a one-hour period by intravenous
infusion, followed by an infusion of O(6)-alkylating agent one hour after
completion of the O(6)-benzylguanine infusion. The trials are being sponsored by
the National Cancer Institute of the National Institute of Health under a
cooperative research and development agreement executed between the National
Cancer Institute and Pacific. We have recently commenced a human Phase II
clinical trial at the Ireland Cancer Center at University Hospitals of Cleveland
and Case Western Reserve University being sponsored by the National Cancer
Institute in accordance with a cooperative research and development agreement.
At the conclusion of these Phase I clinical studies, Procept anticipates
entering a Phase II efficacy study for O(6)-benzylguanine in brain cancer,
followed by studies in other cancers.
Standard therapy with O(6)-alkylating chemotherapeutic agents commonly
results in bone marrow suppression. Through the O(6)-benzylguanine license,
Procept has also acquired a proprietary gene therapy that may result in the
production of an altered O(6)-alkylguanine-DNA alkyltransferase protein in bone
marrow cells. A gene for an altered O(6)-alkylguanine-DNA alkyltransferase
protein is introduced to the bone marrow hematopoietic stem cells in vitro,
followed by the introduction of the modified stem cells to the host. Procept
believes that the concomitant use of an O(6)-alkylating agent plus
O(6)-benzylguanine in the presence of the altered O(6)-alkylguanine-DNA
alkyltransferase protein may result in reduced resistance of the cancer cells
with less toxicity to the bone marrow.
In addition to O(6)-benzylguanine, Procept has tested a considerable number
of additional compounds for O(6)-alkylguanine-DNA alkyltransferase protein
inactivation. Procept believes that a number of next generation compounds are
effective in inhibiting the activity of tumor O(6)-alkylguanine-DNA
alkyltransferase protein. Procept also believes that Pacific has a proprietary
interest in these compounds. Procept believes that it is possible that these
compounds will offer complementary properties to that of O(6)-benzylguanine in
further abrogation of cancer resistance to O(6)-alkylating agents.
Four patents including the composition of matter and use for
O(6)-benzylguanine and related compounds have been issued to Penn State and
licensed to O(6)-benzylguaninedc. 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 O(6)-alkylguanine-DNA alkyltransferase mutant into the stem cells.
In September 1998, Pacific paid to Penn State $150,000 as an up-front
licensing fee. Penn State will also be due a (i) royalty on sales of licensed
products, (ii) certain performance-based milestones, and (iii) a non-refundable,
minimum annual royalty (the Minimum Annual Royalty) equal to $75,000 per year
creditable against future milestone payments and third party payments, subject
to certain deferrals. The licensing agreement gave 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
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Pacific's common stock equal to the cash value of such payments. Pacific is
obligated to reimburse the Licensor approximately $200,000 for prior patent
costs. Procept may issue shares of its common stock in lieu of those of Pacific.
To the extent that Procept or Pacific satisfies any of the obligations through
the issuance of shares of its common stock, O(6)-benzylguaninedc will be
obligated to reimburse Pacific for fair market value of such common stock.
In 1998, the National Institute of Health entered into a cooperative
research and development agreement with Pacific under which the National
Institute Of Health will conduct research involving O(6)-benzylguanine and will
make available to Pacific (i) all National Institute of Health clinical data
relating to any potential products incorporating O(6)-benzylguanine developed or
generated by the National Institute of Health prior to the date of the
cooperative research and development agreement and (ii) all subsequent data
developed under the cooperative research and development agreement. Pacific is
required to pay the National Institute of Health $125,000 per year for five
years, payable in quarterly installments.
BORONATED PROTOPORPHYRIN COMPOUNDS--FOR USE IN PHOTODYNAMIC THERAPY
BTI was acquired as a wholly owned subsidiary of Pacific in February 1999.
BTI holds a license from the University of California to develop boronated
protoporphyrin compound, a photosensitizing drug for photodynamic therapy
treatment of brain cancer. Photodynamic therapy is an emerging mode of treatment
for cancer that uses the combination of light-activated drugs and nonthermal
light to achieve selective, photochemical destruction of cancer cells with
minimal effect on surrounding normal tissues. Photodynamic therapy typically has
two primary components:
- Drug Administration: A light-absorbing dye or other "photosensitizing
drug" is injected into the patient. (photodynamic therapy drugs are
designed to be "selective," i.e., taken up and retained in cancerous cells
while, conversely, quickly clearing from normal cells.)
- Illumination with Light: After administration of the photodynamic therapy
drug, a laser or other source is used to illuminate the area of treatment
with light at the specific wavelength required for absorption by the drug.
The light is non-thermal and, similar to the drug, has no therapeutic
effect by itself.
The absorption of light energy by the drug generates biochemical reactions
which destroy the cancer cells; the reaction is highly controlled and will end
upon cessation of the light energy.
The potential advantages of photodynamic therapy in the treatment of cancer
are expected to be as follows:
- Selectivity: Selective to cancer cells with minimal effect on normal
healthy tissue, a significant benefit over chemotherapy and radiation
treatment.
- More Extensive Eradication: Facilitates the treatment of not only the
larger, easily identifiable tumors but also other cancerous cells that are
in the field of illumination.
- Controllable: The photosensitizing drugs are inactive until excited by
light within their specific absorption band. Photodynamic activity begins
only when the drug-saturated cells are exposed to light and ends when the
light is terminated.
Among the clinical applications expected for photodynamic therapy is as an
adjunct to surgery; photodynamic therapy has the potential of increasing the
effectiveness of surgery by destroying cancerous cells missed by surgery. In
other instances, photodynamic therapy might serve as an alternative to surgery.
Photodynamic therapy may represent a less invasive technique for primary removal
of a tumor where surgery is not indicated (for example, inoperable tumors
located close to nerves, major blood vessels or other critical tissue).
Photodynamic therapy may be integrated with the patient's total treatment
regimen, used in combination with or as an alternative to traditional treatment
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to palliate more advanced disease. Pacific expects that the applications will
develop as photodynamic therapy becomes more proven and the range of clinical
utility is demonstrated.
A limited number of drug compounds and systems have been approved by the
applicable regulatory agencies both in the United States and internationally.
Photodynamic therapy products or systems currently approved for use, however,
are limited to treatment of superficial or surface tumors due to inherent
limitations in the technologies.
Boronated protoporphyrin compound is currently undergoing a Phase I human
clinical trial as a photosensitizing drug for photodynamic therapy treatment of
brain cancer under a company-directed IND. Procept believes, based upon the
results of preclinical studies, that boronated protoporphyrin compound may be
useful as a photosensitizing drug for photodynamic therapy treatment of other
tumors. Boronated protoporphyrin compound is also suitable for use in another
form of cancer treatment, Boron Neutron Capture Therapy, in which a neutron
radiation beam is used instead of light as the activating energy source.
However, in this case, the neutron beam causes the disintegration of the boron
atoms within boronated protoporphyrin compound and the release of alpha
particles, which are lethal to the cancer cells.
Patents encompassing the boronated protoporphyrin compound technology have
been issued to the Regents of the University of California in the United States,
Australia, Ireland and South Africa. Patent applications are pending in Canada,
the European Patent Organization, Japan, Norway and Israel. Rights related to
the above patents were licensed to BTI under an exclusive license agreement
dated July 1, 1992, as amended August 29, 1995 (the UC License Agreement),
pursuant to which BTI is obligated to make certain payments.
Preclinical testing of boronated protoporphyrin compound in the United
States and Australia, including testing of the compound with various animal
models, has indicated that boronated protoporphyrin compound has the following
advantages over certain existing photodynamic therapy agents (including
hematoporphyrin derivative, or HpD) in the treatment of certain cancers:
- Selective retention of boronated protoporphyrin compound in brain tumor
models (as much as 200 to 1 in tumors vs. healthy tissue), compared to a
30 to 1 or less for existing known compounds.
- Intracellular localization in mitochondria (the energy center of the cell)
for more efficient tumor cell killing.
- Highly water soluble and stable under physiological conditions.
Boronated protoporphyrin compound is selectively taken up in rapidly growing
tissues and may find applications in many hyperproliferative disorders, such as
vascular and coronary restenosis following angioplasty or bypass surgery,
psoriasis and rheumatoid arthritis. Photodynamic therapy is being studied in
academic centers for conditions as diverse as acute macular degeneration of the
retina, removing microbial contaminants from blood and cleansing bone marrow of
leukemic cells.
BTI and Pacific filed an IND application with the FDA in March 1998. Human
clinical trials began in May 1998 and BTI and Pacific agreed to target brain
cancer for the initial human clinical studies, which is being conducted at the
Royal Melbourne Hospital in Melbourne, Australia, in part because one of the
world's experts in photodynamic therapy for the treatment of brain cancer,
Dr. Andrew Kaye, will oversee the clinical trials. Procept is awaiting the
results of this trial to determine its competitive position in the photodynamic
therapy field and whether further development is warranted.
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Procept's intentions with respect to the further development of products are
forward looking statements, based on current management expectations. Factors
that could cause such expectations to change, resulting in the delay or
cancellation of the product research programs and related preclinical and
clinical studies include the following: the availability of financing for
Procept's continued research and development operations; technical risks
associated with the development; changes in regulatory requirements; anticipated
market acceptance of new drugs; and competitive factors and pricing pressures.
OTHER TECHNOLOGIES
ASPARTATE AMINOTRANSFERASE (AST) TECHNOLOGY--PERIDONTAL TISSUE MONITOR (PTM)
Pacific holds the rights to a proprietary diagnostic test of periodontitis,
known as PTM. PTM is an eye-readable, chairside disposable test designed for use
within the dental office to assist 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 FDA to begin commercial
sales and distribution in the United States of the PTM product. Pacific also had
two distribution agreements with Steri-Oss, Inc. for the exclusive distribution
of PTM worldwide, except in Japan. To date, there have been no significant sales
under the distribution agreements. In addition in 1998, Nobel Biocare AB
acquired Steri-Oss, Inc. and decided to terminate the agreement.
Procept is now searching for a new corporate partner to manufacture and
market PTM worldwide, other than in Japan. Shofu. Inc. of Japan is currently
completing clinical trials of PTM in Japan under a Material Transfer Agreement
with Pacific and may decide to market PTM in Japan if the product is ultimately
approved by Japanese regulators.
THE VACTEX DRUG DEVELOPMENT PROGRAM--TB VACCINE
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. Under the Sponsored Research Agreement, Procept conducted specified
research tasks on behalf of VacTex for which Procept received a combination of
cash and equity in VacTex based on the number of full-time equivalent employees
of Procept engaged in the research, but subject to maximum cash and stock
limits. In order to apply available resources to the PRO 2000 Gel development
program, Procept did not seek to renew the Sponsored Research Agreement with
VacTex, which expired on January 8, 1998.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
(Aquila). Procept's investment in VacTex of 300,000 shares of common stock was
converted to 113,674 shares of Aquila common stock and $128,501 principal amount
of 7% debentures. As a result, Procept is accounting for its investment in
Aquila under the "Statement of Financial Accounting Standards" (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities" as an
available for sale security and marked it to market by recording an unrealized
gain of $0.3 million as part of stockholders' equity, based on Aquila's common
stock closing price on December 31, 1998.
PRODUCT DEVELOPMENT STRATEGY
Procept and Pacific conduct research and other product development efforts
through a combination of internal and collaborative programs. Procept currently
does and will rely upon research arrangements with universities, contract
research organizations, government institutions and similar institutions, as
well as individuals for a significant portion of its product development
efforts, particularly for preclinical work being conducted for all of its
products under development. Procept expects to increase its internal product
development resources in the PRO 2000 and O(6)-benzylguanine
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areas, reflecting Procept's refocus toward the development and commercialization
of anti-infectives and oncology. Product development efforts related to the PTM
have previously been conducted primarily by Pacific's internal personnel. No
further product development work is underway for PTM or BOPP until the results
of current clinical trials are available.
PATENTS AND PROPRIETARY TECHNOLOGY
Procept's policy is to protect its technology by, among other things, filing
or causing to be filed on its behalf, patent applications for technology
relating to the development of its business. Currently, Procept is awaiting
action on various patent applications relating to technology or the uses or
products thereof that it owns or that it has licensed.
Procept has been issued United States patents related to its PRO 2000
program and to its small molecule immunosuppressive program. Procept has filed
patent applications in the United States relating to (i) compounds and methods
for inhibiting immune response, (ii) compounds (which include PRO 2000 Gel) and
methods for inhibiting human immunodeficiency virus infection and (iii) methods
for making compounds that inhibit human immunodeficiency virus. Corresponding
foreign patent applications have been filed on certain compounds and will be
filed on other compounds, as appropriate.
To date, Procept's subsidiary Pacific has received a number of patents, and
filed a number of other patent applications, relating to Pacific's technologies
in the United States and internationally. Pacific has also benefited from such
issuances or filings of others as a licensee.
To protect its right to and to maintain the confidentiality of trade secrets
and proprietary information, Procept requires employees, Scientific Advisory
Board members, consultants and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with
Procept. These agreements prohibit the disclosure of confidential information to
anyone outside Procept and require disclosure and assignment to Procept of
ideas, development, discoveries and inventions made by employees, consultants,
advisors and collaborators.
Procept's ability to compete effectively with other companies will depend,
in part, on the ability of Procept to maintain the proprietary nature of its
technology. Although Procept 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
Procept's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against Procept or that
such claims will not be successful. There can also be no assurance that
competitors will not infringe Procept's patents. Further, with respect to
licensed patents, which, in the case of Procept, represent a significant portion
of Procept's proprietary technology, the defense and prosecution of patent suits
may not be in Procept's control.
Procept also relies on unpatented proprietary technology that is significant
to the development of Procept's technology, and there can be no assurance that
others may not independently develop the same or similar technology or otherwise
obtain access to Procept's unpatented technology. If Procept is unable to
maintain the proprietary nature of its technology, Procept could be adversely
affected.
GOVERNMENT REGULATIONS
Regulations imposed by United States, federal, state and local authorities,
as well as their counterparts in other countries, are a significant factor in
the conduct of the research, development, manufacturing and marketing activities
for Procept's proposed products.
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Before testing of any compounds with potential therapeutic value in human
test subjects may begin, stringent government requirements for pre-clinical data
must be satisfied. These data, obtained both from in vivo studies and in vitro
studies, are submitted in an Investigational New Drug Application or its
equivalent in countries outside the United States where clinical studies are to
be conducted. These pre-clinical data must provide an adequate basis for
evaluating both the safety and the scientific rationale for the initial (Phase
I) studies in human volunteers.
Phase I clinical studies are commonly performed in healthy human subjects
or, less commonly, selected patients with the targeted disease or disorder.
Their goal is to establish initial data about tolerance and safety of the drug
in humans. Also, the first data regarding the absorption, distribution,
metabolism and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought about the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of carefully selected patients. Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level and dosage schedule. Additional safety data are also gathered from
these studies.
The Phase III clinical development program consists of expanded, large-scale
studies of patients with the target disease or disorder, to obtain definitive
statistical evidence of the efficacy and safety of the proposed product and
dosage regimen. These studies may include investigation of the effects in
subpopulations of patients, such as the elderly.
At the same time that the human clinical program is being performed,
additional non-clinical in vivo studies are also conducted. Expensive, long
duration toxicity and carcinogenicity studies are done to demonstrate the safety
of drug administration for the extended period of time required for effective
therapy. Also, a variety of laboratory and initial human studies are performed
to establish manufacturing methods for delivering the drug, as well as stable,
effective dosage forms.
All data obtained from a comprehensive development program are submitted in
NDA or Product License Application (PLA) to the FDA and the corresponding
agencies in other countries for review and approval. Although the FDA policy is
to review priority applications within 180 days of their filing, in practice
longer times may be required. The FDA also frequently requests that additional
information be submitted, requiring significant additional review time. Any
proposed product of Procept would likely be subject to demanding and
time-consuming NDA or PLA approval procedures in virtually all countries where
marketing of the products is intended. These regulations define not only the
form and content of safety and efficacy data regarding the proposed product but
also impose specific requirements regarding manufacture of the product, quality
assurance, packaging, storage, documentation and record keeping, labeling,
advertising and marketing procedures.
In addition to the regulations relating specifically to product approval,
the activities of Procept, its partners and licensees are subject to laws and
regulations regarding laboratory and manufacturing working conditions, handling
and disposition of potentially hazardous material, and use of laboratory
animals. In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial or institutional formularies or cost
reimbursement systems.
Completing the multitude of steps necessary before marketing can begin
requires the expenditure of considerable resources and can consume a long period
of time. Delay or failure in obtaining the required approvals, clearances,
permits or inclusions by Procept, its collaborators or its licensees would have
an adverse effect on the ability of Procept 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 of Procept in the United States
and abroad are numerous and include, among
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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
Procept, to market commercial products. There can be no assurance that Procept's
competitors will not succeed in developing technologies and products that are
more effective than any which are being developed by Procept or which would
render Procept's technology obsolete and noncompetitive, or that such
competitors will not succeed in obtaining FDA or other regulatory approvals for
products more rapidly than Procept.
MANUFACTURING AND MARKETING
Procept engages primarily in the development of biotechnological products,
and intends, through marketing agreements, sublicenses or other means, to rely
upon relationships with domestic and/or international companies for the
marketing of such products. Procept has relied upon contract manufacturers for
its products under development and for its limited commercial production
requirements to date, although Procept has retained certain quality control and
managerial responsibility. Procept may elect to internalize more of the
manufacturing and marketing responsibilities at such time as such a strategy is
determined to be economically advantageous and as its financial resources and
personnel permit such efforts. The commercial success of some of Procept's
products (if successfully developed) may, to a large extent, depend upon the
manufacturing and marketing efforts of others.
HUMAN RESOURCES
As of December 1, 1999, Procept had ten (10) full-time employees, three
(3) of whom were engaged in research and development and seven (7) in
administration and finance. Procept's executive team includes, John F. Dee,
President and Chief Executive Officer; Michael E. Fitzgerald, Vice President,
Finance and Chief Financial Officer; Dr. Albert T. Profy, Vice President,
Research and Development; and Dr. Nigel J. Rulewski, Vice President, Medical
Affairs and Chief Medical Officer. Each of Procept's employees has signed an
agreement that prohibits the disclosure of confidential information to anyone
outside Procept and requires disclosure and assignment to Procept of ideas,
developments, discoveries and inventions made by the employee.
Procept's employees are not covered by a collective bargaining agreement.
Procept has never experienced employment-related work stoppage and considers its
employee relations to be excellent.
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PROCEPT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Procept, Inc. currently is engaged in the development and commercialization
of novel drugs based on biotechnological research. On March 17, 1999 Procept
consummated its merger with Pacific Pharmaceuticals, Inc. in which Pacific
became a subsidiary of Procept. The combined company has a product portfolio
with a focus in anti-infectives and oncology, including three compounds in human
clinical trials which may be candidates for accelerated regulatory approval.
RESULTS OF OPERATIONS
Since its inception in 1985, Procept has devoted its principal efforts to
drug discovery and research. Procept is now devoting its principal efforts to
drug development, human clinical trials, partnership commercialization, and
in-licensing efforts. Procept has generated no revenues from product sales, has
not been profitable since inception, and has an accumulated deficit of
$77.2 million through September 30, 1999. Procept is dependent upon research and
development collaborations, equity financing and interest on invested funds to
provide the working capital required to pursue its intended business activities.
Losses have resulted principally from costs incurred in research and development
activities related to Procept's efforts to develop drug candidates and from the
associated administrative costs required to support these efforts. Procept
expects to incur significant additional operating losses over the next several
years due to its ongoing development efforts and expanded preclinical and
clinical testings. Procept's potential for future profitability is dependent on
its ability to effectively develop its current pharmaceutical compounds and
in-license and develop new pharmaceutical products, as well as obtain regulatory
approvals and adequate financing for such products. Future profitability will
require that Procept establish agreements for development, commercialization and
sales of its products with corporate sponsors.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Procept's total revenues decreased to $221,000 for the nine months ended
September 30, 1999 from $265,000 during the comparable period of 1998. The
$44,000, representing a 16.6% 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 $221,000 for the nine months ended
September 30, 1999 from $156,000 for the comparable period of 1998. The $65,000,
representing a 42.6% increase in interest income, resulted from additional cash
balances available for investment during the nine months ended September 30,
1999.
Procept's total operating expenses increased to $11,633,000 in the nine
months ended September 30, 1999 from $3,141,000 for the comparable period in
1998. The $8,492,000, representing a 270.4% increase, primarily resulted from an
in-process research and development charge of $9,406,000 associated with the
acquisition of Pacific. Without this charge, total operating expenses decreased
$914,000 or 29.1% to $2,227,000 in the nine months ended September 30, 1999 from
$3,141,000 for the comparable period of 1998. Research and development expenses
decreased to $1,034,000 in the nine months ended September 30, 1999 from
$1,707,000 for the comparable period of 1998. The $673,000, representing a 39.4%
decrease, primarily was due to a decrease in personnel in Procept's research and
development organization and their related costs. In January of 1998, Procept
terminated work on all research programs other than PRO 2000 and underwent a
significant downsizing, reducing its staff to 10 people. General and
administrative expenses decreased to $1,219,000 in the nine months ended
September 30, 1999 from $1,412,000 in the same period of 1998. The $193,000 or
13.7% decrease resulted primarily from lower professional services expenditures.
Other income of $26,000 recorded during the nine months ended September 30, 1999
resulted primarily from a gain on sale of research
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and development equipment and supplies. Due to the restructuring and focus on
the development of PRO 2000 Gel, Procept has sold or plans to continue to sell
most of its research and development equipment.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Procept's 1998 total revenues decreased to $0.3 million from $0.8 million in
1997. In 1998, revenues consisted of $0.1 million earned under the Sponsored
Research Agreement with VacTex and $0.2 million in interest earned on invested
funds. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.2 million in interest earned on invested funds. The
decrease in revenue from VacTex is the result of Procept not renewing the
Sponsored Research Agreement in order to apply available resources to the PRO
2000 Gel development program.
Procept's 1998 total operating expenses decreased to $3.6 million from
$9.8 million in 1997. Research and development expenses decreased 70% to
$2.0 million in 1998 from $6.6 million in 1997, due primarily to a decrease in
personnel in Procept's research and development organization and their related
research costs. In order to focus its limited resources on PRO 2000 Gel, in
January 1998 Procept terminated work on all other research programs, except
preclinical support for its intracellular T-cell enzyme (DHODH) program, and
underwent a significant downsizing, reducing its staff to 10 people. The amount
of termination benefits accrued and charged to restructuring costs in the
statement of operations for the year ended December 31, 1998 was $0.2 million.
Also in 1997, Procept accrued $0.5 million in restructuring costs. The amount of
termination benefits paid and charged against the 1998 and 1997 liability for
the year ended December 31, 1998 was $0.4 million. The remaining liability of
$0.1 million was utilized during the first quarter of 1999.
General and administrative expenses for 1998 decreased 41% to $1.6 million
from $2.7 million in 1997, reflecting a decrease in administrative personnel and
continued cost control measures including subleasing of its facility. Interest
expense, included in other expenses, decreased to $5,000 in 1998 from $40,000
for 1997 as a result of the scheduled completion of Procept's equipment lease
financing arrangements. Also included in other expenses in 1998 is a gain of
$0.2 million from the sale of research and development equipment. Due to the
restructuring and focus on the development of PRO 2000 Gel, Procept has sold and
plans to continue to sell most of its research and development equipment.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Procept's 1997 total revenues decreased to $0.8 million from $2.3 million in
1996, principally as a result of the scheduled completion of the Sandoz
Agreement. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.2 million in interest earned on invested funds. In 1996,
revenues consisted of $1.3 million earned under the Sandoz Agreement,
$0.6 million earned under the Sponsored Research Agreement with VacTex and
$0.4 million in interest earned on invested funds.
Procept's 1997 total operating expenses decreased to $9.8 million from
$13.5 million in 1996, principally as a continuing result of a decrease in
personnel in Procept's research and development organization and their related
research costs. General and administrative expenses decreased 15% to
$2.7 million in 1997 from $3.2 million in 1996 as a result of a $0.1 million
savings from a decrease in administrative personnel as well as a savings of
$0.4 million from cost control measures. In 1997, Procept restructured its
operations resulting in an expense charge of $0.5 million consisting of salary
and benefit costs relating to the restructuring. Interest expense decreased 71%
to $40,000 in 1997 from $0.1 million in 1996 as a result of the scheduled
completion of many of Procept's lease financing arrangements.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Procept's aggregate cash, cash equivalents and
marketable securities were $5.5 million representing no change from
December 31, 1998. The acquisition of Pacific resulted in a cash infusion of
$2.8 million, which offset the cash used in operations. Included in cash is
$29,000 from the sale of research and development equipment. Due to Procept's
focus on the clinical development, Procept plans to continue to sell most of its
research equipment.
On March 17, 1999, Procept completed the acquisition of Pacific, a publicly
held research and development company engaged in the development of cancer
therapies. Each of Pacific's shares of common stock (including preferred stock
on an as converted basis into common stock) converted into approximately 0.11
shares of Procept common stock or a total of 2,753,205 Procept shares. An
additional 414,584 shares of Procept common stock were issued in the merger to
the holders of Pacific's preferred stock as a result of certain contractual
rights identical to contractual rights held by purchasers in Procept's 1998
private placement. In addition, Procept agreed to exchange all of Pacific's
outstanding warrant, unit purchase option and stock option obligations into like
instruments of Procept. Procept also assumed an approximately $6.5 million, net
obligation (payable in cash or common stock of Procept, at the option of
Procept) of Pacific's subsidiary, BGDC. On June 30, 1999, Procept issued
2,773,575 common shares and 924,525 Class D Warrants to convert the minority
interest in BGDC. The shares have contractual rights identical to those held by
purchasers in Procept's 1998 private placement. The Class D Warrants are
exercisable for an aggregate of 924,525 shares of Procept's common stock at
$2.11 per share and expire on June 30, 2004. The conversion eliminated the net
obligation of BGDC shown on Procept's balance sheet.
Procept expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to Procept. If Procept is unable to enter
into an additional corporate collaboration(s) that produce revenue for Procept,
or secure additional financing, Procept's financial condition will be adversely
affected. If additional funds are raised by issuing equity securities, further
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders.
Procept's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of its cash resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by Procept, the
success of the Internet business, the execution of new partnership agreements,
or the sale or license of Procept's biotechnology programs.
Procept's working capital and other cash needs will depend heavily on the
success of Procept's clinical trials and its ability to out-license. Success in
early-stage clinical trials or acquisition of new products and technologies
would lead to an increase in working capital requirements. Procept's actual cash
requirements may vary materially from those now planned because of the results
of research and development, clinical trials, product testing, relationships
with strategic partners, acquisition of new products and technologies, changes
in the focus and direction of Procept's research and development programs,
competitive and technological advances, the process of obtaining United States
Food and Drug Administration or other regulatory approvals and other factors. In
addition, if the merger with Heaven's Door is completed, Procept will require
substantial amounts of cash to progress its drug development programs to the
point where the biotechnology assets will have optimal value in light of
Procept's limited development objectives, to complete the development of
Heaven's Door's website and to promote the use of the site by consumers and
subscribers.
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RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board, called FASB, issued
SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
which was issued in June 1998 and was to be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 137 defers the effective date
of SFAS 133 to June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. While management has not determined the impact
of the new standard, it is not expected to be material to Procept.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 requires
all costs of start-up activities (as defined by SOP 98-5) to be expensed as
incurred. This statement has no impact on Procept.
YEAR 2000 COMPLIANCE
Procept has completed its assessment of the potential impact of the year
2000 on its information technology and non-information technology systems. The
year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of Procept's
programs or systems that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in a
miscalculation or system failures. Based on Procept's assessment, there is no
year 2000 impact on its information technology systems. Operating systems and
applications used by Procept are year 2000 compliant. At this time, Procept is
not aware of any year 2000 issues relating to its third party vendors. Procept
has replaced several non-information technology systems and believes that it is
now year 2000 compliant. The cost of year 2000 compliant non-technology
information systems was approximately $8,000. Procept's most critical
uncertainty relates to its third parties' information technology systems not
being year 2000 compliant. This may result in inaccurate information from banks,
government agencies, contracted research organizations, vendors, etc. Procept
believes it has in place an adequate internal control structure to handle these
issues if they were to occur.
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BUSINESS OF HEAVEN'S DOOR CORPORATION
In May 1999, Heaven's Door launched its Internet website,
www.HeavenlyDoor.com, which provides a range of products and services
specifically related to the funeral services industry. Heaven's Door's current
website provides consumers access to information concerning the arrangement and
handling of funeral-related services from the privacy of their homes. In
addition, the website offers funeral homes and other service providers the
ability to have an Internet presence through a customized, linked website
designed by Heaven's Door specifically for the funeral home or other provider.
Heaven's Door also will help arrange computer set-up in the funeral home. A
description of the services currently provided by Heaven's Door includes:
- FUNERAL ARRANGEMENT INFORMATION: A database of over 31,000 funeral homes,
cemeteries and monument dealers, as well as a guide for the funeral
arrangement process, planning and related matters;
- WEBSITE DESIGN, DEVELOPMENT AND SUPPORT: Custom web presence for funeral
homes, e-mail account set-up, on-line funeral service scheduling,
e-commerce set-up and registration;
- ON-LINE OBITUARIES: Online obituaries, reaching friends and family members
throughout the world;
- ON-LINE VISITS AND TESTIMONIALS: "Virtual visits" to a burial site through
on-line photographs of the site and on-line bulletin boards on which the
user may post messages, commemorate an individual or remember an
anniversary or holiday; and
- E-COMMERCE: Access to internet purchases of flowers, gifts, cards, books
and related products.
Industry publications have reported that in 1998 the funeral industry
generated $25 to $30 billion in revenues in the U.S. alone. The industry is
highly fragmented, consisting of over 31,000 funeral homes, cemeteries, and
monument dealers, few of which have an Internet presence. There have also been
reports that the preplanning of funerals has grown substantially in recent
years, with over $25 billion invested in cumulative pre-need agreements in 1998.
Heaven's Door believes this increase reflects a growing trend in which Americans
are making their personal funeral plans to spare family members the burden and
expects this growth in pre-need investments to accelerate. One industry analyst
estimated the potential U.S. market for pre-need services to be $85 billion.
Heaven's Door hopes to become the primary link between these pre-need customers
and thousands of funeral homes.
Heaven's Door expects to generate revenue through subscription fees from
funeral homes and other services provided that sign up for a website presence on
HeaveanlyDoor.com. Additional revenues are expected to be generated through
commissions from product sold through its website and from site development
work, sales of on-line obituaries, "virtual burial sites" and on-line
testimonials. New offerings are expected to include a grief discussion room,
grief and religious counseling, memorials for firefighters, police officers and
veterans, a bulletin board and a resource center for funeral related topics.
Various business to business services are also being planned to help funeral
home directors take advantage of the Internet. Heaven's Door's website is
currently being redesigned to include many of these features with a launch date
expected in the first quarter of 2000. In addition, Heaven's Door plans to
support its website with national advertising, enabling the HeavenlyDoor.com
subscribers to reach new markets. As Heaven's Door's business grows, it expects
to expand these offerings to include other products and services for the elderly
and aging baby boomer population, including the life care and nursing home
industry, and financial and estate planning.
Heaven's Door leases real estate in Coral Springs, Florida and New York, New
York and currently employs 12 people.
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HEAVEN'S DOOR MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The company was incorporated in the State of Delaware on October 27, 1994 as
Unitel Imaging Corp. On March 1, 1996, it became inactive until its reactivation
in the State of Delaware on March 26, 1999. On April 14, 1999, the company
changed its name to Heaven's Door Corporation.
Heaven's Door is a privately held Internet company providing a website
offering a range of products and services related to the funeral industry. The
operations of Heaven's Door, through September 30, 1999, have been limited to
raising capital, marketing and developing a website, which was completed on
September 30, 1999. Through its website, Heaven's Door provides consumers access
to information concerning pre-need and at-need funeral arrangements and
funeral-related services, on-line obituaries and testimonials, and on-line
virtual visits to burial sites. In addition, Heaven's Door offers funeral homes
and other death care providers web presence on the Internet via customized web
design, support services and e-commerce.
RESULTS OF OPERATIONS
Heaven's Door recorded its first sale of $1,120 in September 1999 relating
to product sales.
Heaven's Door incurred operating costs of $862,004 since its inception
(October 27, 1994) through September 30, 1999. Of this amount, $385,576 was
incurred in the quarter ended September 30, 1999. These costs were incurred
primarily to raise capital and develop a website. Operating costs consisted
mainly of personnel costs, and consultants' and programming fees associated with
designing and launching Heaven's Door's website.
CAPITAL RESOURCES AND LIQUIDITY
Heaven's Door has financed its development stage operations and met its
capital expenditure requirements primarily through the sale of equity
securities. Cash flows used in operations were $700,367 for the period from
inception (October 27, 1994) through September 30, 1999.
Cash used in investing activities for the purchases of property and
equipment was $90,643.
Cash provided by financing activities was $950,174, $937,000 of which
represents the proceeds of a private placement of its common stock consummated
in 1999. Heaven's Door received $13,174 of additional paid-in capital from some
stockholders. In addition, some stockholders paid $108,028 in organizational
costs and $1,099 in franchise taxes and filing fees on behalf of Heaven's Door.
These payments have been recorded as additional paid-in capital.
As of September 30, 1999, Heaven's Door had $90,034 of net working capital,
including $89,164 of cash and cash equivalents, and had $23,988 in current
liabilities. Heaven's Door has no long-term debt and does not have any material
commitment for capital expenditures.
Heaven's Door believes that existing cash and cash equivalent balances and
the potential cash flow from future operations will satisfy its immediate
working capital and capital expenditure requirements. The expansion of its
electronic commerce services will require additional development and resources.
The expansion may impact Heaven's Door's current managerial, financial and
operating resources. If the merger with Procept is not consummated, management
will need to consider various alternatives for satisfying Heaven's Door's
working capital requirements. Heaven's Door cannot be sure that any financing
will be available on acceptable terms, if at all.
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YEAR 2000 COMPLIANCE
Heaven's Door recognizes the need to ensure its operations will not be
adversely impacted by the inability of Heaven's Door's systems to process data
having dates on or after January 1, 2000. Processing errors due to software
failure arising from calculations using the year 2000 date are recognized as a
risk. Heaven's Door has completed its assessment of the risk, with respect to
the availability and integrity of its financial systems and the reliability of
its operating systems, and has communicated with material suppliers, customers,
financial institutions and others with whom it conducts business to assess
whether they are or will be year 2000 compliant.
Heaven's Door views contingency planning as broader than the year 2000 issue
and believes that a comprehensive contingency plan should address any known
circumstance that may cause a disruption of operations or an adverse customer
experience. To that end, Heaven's Door is developing business continuity plans
to address each critical process and activity that it believes would cause a
significant disruption to operations if not functional for 24 hours.
Heaven's Door's website hosting service, Interland, has represented to
Heaven's Door that its hardware and software systems are year 2000 compliant.
Heaven's Door's information technology systems consist of a series of personal
computers which process data using purchased software programs produced and
maintained by large software vendors. All of the software presently installed on
Heaven's Door's systems is year 2000 compliant.
To date, Heaven's Door has not incurred any significant costs attributable
to year 2000 compliance. Heaven's Door is not currently aware of any material
operational issues or costs associated with preparing its systems for the year
2000. Nonetheless, Heaven's Door may experience material unexpected costs caused
by undetected errors or defects in the technology used in its systems or because
of the failure of a material vendor to be year 2000 compliant.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 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 requires 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.
Heaven's Door is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
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THE MERGER
GENERAL DESCRIPTION OF THE MERGER
Procept Acquisition Corp., a wholly-owned subsidiary of Procept, will merge
with and into Heaven's Door in accordance with the laws of the State of
Delaware. Heaven's Door will be the surviving company in the merger and will
continue as a Delaware corporation and as a wholly-owned subsidiary of Procept.
At the time of the merger, the certificate of incorporation of Heaven's Door and
the by-laws of Procept Acquisition Corp., as in effect immediately before the
merger, will be the certificate of incorporation and the by-laws of the
surviving company. The directors of Procept holding office immediately before
the merger, after giving effect to the resignation of three Procept directors
and the addition of three directors to be chosen jointly by Procept and Heaven's
Door, will be the directors of the surviving company. In the merger, Procept
will issue 10,920,000 shares of its common stock to the holders of Heaven's Door
common stock.
A condition of the merger is the termination of rights inherent in the
shares of Procept common stock held by some of Procept's current stockholders.
These rights, known as Article VI Rights, include the right to receive
additional shares of Procept common stock as semi-annual dividends and also as
anti-dilution issuances in connection with future issuances of equity securities
by Procept. The Article VI Rights will be terminated contemporaneously with the
merger, in exchange for a one time issuance of up to 5,000,000 shares of Procept
common stock to the holders of Article VI Rights. See "Stock Issuances
Concurrent with Merger."
BACKGROUND OF THE MERGER
On July 15, 1999, the board of directors of Heaven's Door decided to explore
opportunities to enhance stockholder value, including financing options,
business combinations and continuing to grow Heaven's Door according to its
business plan.
Officers of Procept first met the principals of Heaven's Door on August 17,
1999 to discuss the possibility of a business combination involving the two
companies. The meeting was arranged by Paramount Capital, Inc. The meeting was
followed by several telephone calls from the president of Procept indicating its
interest in pursuing a transaction. The senior executives of Procept met with
Heaven's Door officials again on August 26, 1999 to conduct due diligence and
negotiated the terms of the transaction during the months of August and
September, 1999, which terms were included in a letter of intent signed on
September 15, 1999.
The letter of intent was superseded by the merger agreement, which was
signed and dated as of November 8, 1999.
PROCEPT'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE PROCEPT BOARD
The Procept board of directors, by unanimous vote, has approved the merger
agreement, the related stock issuances and the Procept proposals to amend
Procept's restated certificate of incorporation by increasing the number of
authorized shares of Procept common stock and changing Procept's name. The
Procept board of directors believes that the terms of the merger are fair to
Procept's stockholders and unanimously recommends that the Procept stockholders
vote to approve the stock issuances related to the merger and the amendments to
Procept's restated certificate of incorporation. The Procept board of directors
believes that the merger represents a significant opportunity for Procept.
The terms of the merger agreement, including the consideration consisting of
Procept common stock, were the result of arm's-length negotiations between
Procept and Heaven's Door. In fixing the consideration for the merger in the
negotiation process, Procept management considered the relative values of the
two companies. Subsequently, the Procept board of directors received the
financial
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analyses of Hempstead & Co. Inc. The fairness opinion addressed to the Procept
board of directors, dated as of November 2, 1999, is discussed below under
"Opinion of Procept's Financial Advisor" and is attached as Appendix C to this
proxy statement/prospectus. The Procept board of directors consulted with its
financial advisor and the legal advisors and management of Procept. After
careful review and consideration, the Procept board of directors determined that
the merger is a desirable transaction from the standpoint of the holders of
Procept common stock.
In reaching its decision to approve the merger agreement, the Procept board
of directors considered the following factors:
- The current and historical market prices of the Procept common stock,
including the fact that Procept common stock continued to trade at low
values.
- Information concerning the financial performance, condition, business,
operations and prospects of each of Procept and Heaven's Door.
- The effects of the merger on Procept's stockholders, including the
opportunity to share in the anticipated benefits to be achieved from
ownership of an Internet company and the potential development of Heaven's
Door's products and services.
- The terms of the merger agreement, which provide for balanced
representations and warranties, conditions to closing and rights upon
termination.
- The opinion of Procept's financial advisor, Hempstead & Co. Inc., that as
of the date of its opinion and based upon the assumptions made, matters
considered and limits of review set forth in their opinion, the proposed
merger consideration to be paid by Procept pursuant to the merger was fair
from a financial point of view to Procept.
The Procept board of directors considered the above factors as a whole and
did not assign specific or relative weights to them. In the view of the Procept
board of directors, each of the factors listed above reinforced its belief that
the new entity would have excellent business prospects going forward.
OPINION OF PROCEPT'S FINANCIAL ADVISOR
Procept retained Hempstead & Co. Inc. pursuant to an engagement letter dated
September 22, 1999 to advise the board of directors of Procept as to the
fairness to Procept, as a corporate entity, of the merger consideration to be
paid by Procept in connection with the merger from a financial point of view.
Under the engagement letter, upon delivery of its fairness opinion,
Hempstead & Co. Inc. became entitled to $20,000 in cash as a fee payable for
rendering its fairness opinion. In addition, Procept has agreed to reimburse
Hempstead & Co. Inc. for its out-of-pocket expenses, including fees and expenses
of legal counsel as well as fees and expenses related to indemnification of
Hempstead & Co. Inc. by Procept against certain liabilities, including
liabilities under the federal securities laws.
In rendering its opinion, Hempstead & Co. Inc. has, among other things:
(i) reviewed a draft dated October 27, 1999 of the merger agreement;
(ii) reviewed Procept's annual reports to stockholders and Procept's annual
reports on Form 10-K for the two years ended December 31, 1998 and 1997 and
Procept's quarterly reports on Form 10-Q for each of the three months ended
March 31, 1999, June 30, 1999 and September 30, 1999; (iii) reviewed certain
internal financial analyses and estimates of future financial performance for
Procept and Heaven's Door prepared by their respective managements;
(iv) conducted discussions with senior members of the managements of both
Procept and Heaven's Door concerning the financial condition, business
operations, financial forecasts, and prospects of their respective companies;
(v) reviewed the reported price and trading history for Procept common stock;
(vi) reviewed Heaven's Door's audited financials for the fiscal years ending
June 30, 1998 and 1999 and unaudited financials for the period from July 1, 1999
through September 30, 1999; (vii) reviewed a
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draft dated October 29, 1999 of the Article VI Rights Termination and Exchange
Agreement among Procept and some of its stockholders; (vii) reviewed press
releases, promotional literature and other descriptive materials provided by
Procept and Heaven's Door; (viii) reviewed an October 4, 1999 independent
valuation analysis of Procept's biotechnology assets prepared by Liberty Tree
Advisors, LLC; (ix) reviewed Heaven's Door's February 15, 1999 private placement
offering and conducted discussions regarding that offering with Taylor Stewart,
Heaven's Door's investment bankers'; and (x) performed such other financial
studies and analyses as Hempstead & Co. Inc. deemed appropriate.
On the basis of the foregoing, taken as a whole, Hempstead & Co. Inc.
concluded that the merger consideration to be paid by Procept in connection with
the merger is fair to Procept as a corporate entity from a financial point of
view. In reaching such conclusion, Hempstead & Co. Inc. relied on the accuracy
and completeness of all information supplied or otherwise made available by
Heaven's Door and Procept and did not independently verify that information or
undertake an independent appraisal of the assets of Heaven's Door or Procept.
Among other things, Hempstead & Co. Inc. reviewed and relied upon information
derived from discussions with Heaven's Door's and Procept's senior management
regarding the strategic rationale for the merger, assessment of the prospects of
their technologies and their future products and the potential markets for their
products.
The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial analysis or summary description. Hempstead &
Co. Inc. believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In its
analyses, Hempstead & Co. Inc. made numerous assumptions with respect to
industry performance, general business and economic conditions, and other
matters, many of which are beyond Procept's control. In arriving at its opinion,
Hempstead & Co. Inc. did not attribute any particular quantitative weight to any
analyses or factors that it considered. Rather, it made a qualitative judgment
about the significance and relevance of each analysis factor. Any estimates
contained therein are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of the
financial value of companies do not purport to be appraisals or necessarily
reflect the prices at which companies actually may be sold. Because these
estimates inherently are subject to uncertainty, neither Procept nor
Hempstead & Co. Inc., nor any other person assumes responsibility for their
accuracy.
A copy of Hempstead & Co. Inc.'s written opinion is included with this proxy
statement/prospectus as Annex C and we encourage you to read it in its entirety.
The information in this proxy statement/ prospectus regarding Hempstead & Co.
Inc.'s fairness opinion is expressly qualified by reference to the full text of
the opinion set forth in Annex C.
Hempstead & Co. Inc. is a regional financial advisory firm. As part of its
business, Hempstead & Co. Inc. is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements, and valuations for corporate and other purposes.
HEAVEN'S DOOR'S REASONS FOR THE MERGER; APPROVAL BY HEAVEN'S DOOR STOCKHOLDERS
The Heaven's Door board of directors believes that the terms of the merger
are fair to, and in the best interests of, Heaven's Door and its stockholders.
Accordingly, the Heaven's Door board of directors has unanimously approved the
merger agreement. The Heaven's Door board of directors believes that the merger
represents a significant strategic opportunity for Heaven's Door and its
stockholders. Heaven's Door believes that it will obtain approval of the merger
by the holders of a majority of its outstanding common stock acting by written
consent after the delivery of this prospectus/ proxy statement.
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The Heaven's Door board of directors concluded that the merger was a
preferable strategic alternative to additional private financing followed by an
initial public offering. Accordingly, Heaven's Door has suspended the process of
evaluating strategic alternatives pending the merger.
The Heaven's Door board of directors believes the merger is advantageous to
the Heaven's Door stockholders because the merger will achieve greater liquidity
for its stockholders, since Procept's common stock is traded on the Nasdaq
SmallCap Market. The Heaven's Door board of directors also believes that the
merger would avoid some of the risks and delay involved in engaging in its own
initial public offering.
The terms of the merger agreement, including the merger consideration, were
the result of arm's-length negotiations between Heaven's Door and Procept. In
fixing the consideration consisting of Procept common stock in the negotiation
process, Heaven's Door management considered the relative values of the two
companies. The Heaven's Door board of directors consulted with its financial
advisor and legal advisors and management of Heaven's Door and after careful
review and consideration, the Heaven's Door board of directors determined that
the merger is a desirable transaction from the standpoint of holders of Heaven's
Door common stock.
In reaching its decision to approve the merger agreement, in addition to the
factors described above, the Heaven's Door board of directors considered the
following factors:
- The lack of liquidity for the Heaven's Door common stock and current and
historical market prices of the Procept common stock.
- The effects of the merger on Heaven's Door's stockholders.
- The terms of the merger agreement, which contains balanced representations
and warranties, conditions to closing and rights upon termination.
In determining that the merger is fair to Heaven's Door's stockholders, the
Heaven's Door board of directors considered the above factors as a whole and did
not assign specific or relative weights to them. In the view of the Heaven's
Door board of directors, each of the factors listed above reinforced its belief
that the transaction was in the best interests of Heaven's Door and its
stockholders.
STOCK ISSUANCES CONCURRENT WITH THE MERGER
PARAMOUNT ADVISORY FEE
As a result of the consummation of the merger, Procept will issue 546,000
shares of common stock to Paramount Capital, Inc. Pursuant to an engagement
letter between Procept and Paramount, Paramount provided assistance to Procept
in structuring and negotiating the transaction.
In addition, under a letter agreement dated November 10, 1999, Procept
issued 160,160 shares of Procept common stock to Paramount in partial
satisfaction of Procept's outstanding obligation in connection with services
that Paramount provided in structuring and negotiating the Pacific acquisition.
This issuance is a condition to the closing of the merger.
ARTICLE VI RIGHTS AND TERMINATION EXCHANGE AGREEMENT
Under the Article VI Rights Termination and Exchange Agreement to be entered
into among Procept and some of its stockholders prior to the completion of the
merger, Procept is obligated to issue up to 5,000,000 shares of Procept common
stock to the holders of shares of Procept common stock which have attached to
them certain rights, known as Article VI Rights. This issuance is a condition to
the closing of the merger.
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DEBT CONVERSIONS
Under a letter agreement dated November 10, 1999, Procept issued an
aggregate of 109,778 shares of Procept common stock to three of its current
stockholders, Dr. Lindsay Rosenwald, The Aries Trust and the Aries Domestic
Fund, L.P., in connection with the cancellation of Procept's indebtedness to
those stockholders. This issuance is a condition to the closing of the merger.
ACCOUNTING TREATMENT
The merger will be accounted for by Procept using the purchase method of
accounting for a business combination. Under this method of accounting, the
assets and liabilities of Heaven's Door, including intangible assets, will be
recorded at their fair market value. The results of operations and cash flows of
Heaven's Door will be included in Procept's financials prospectively as of the
consummation of the merger.
The issuance of the additional shares of Procept common stock to terminate
the special rights that are inherent in the shares of common stock held by some
Procept stockholders will be accounted for as an induced conversion resulting in
an approximate $10.6 million charge to operations upon completion of the merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated United States federal
income tax consequences of the merger. This summary is limited to United States
Persons (as defined below) who hold their Heaven's Door common stock as a
"capital asset" within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended, and whose "functional currency" as defined in the Internal
Revenue Code is the U.S. dollar. We refer to these persons as U.S. Holders. This
discussion does not address the anticipated U.S. federal income tax consequences
to certain persons subject to special treatment under the federal income tax
laws, including, but not limited to, tax-exempt organizations, dealers in
securities or currencies, regulated investment companies, real estate investment
trusts, real estate mortgage investment conduits, financial asset securitization
investment trusts, financial institutions, persons subject to alternative
minimum tax, non-United States Persons, insurance companies, persons holding
their stock as a part of a hedging, conversion, short sale, or integrated
transaction or a straddle, or stockholders who acquired their Heaven's Door
common stock pursuant to the exercise of an employee stock option or otherwise
as compensation. In addition, this summary does not discuss the anticipated tax
consequences of the merger under state, local, or foreign laws.
"United States Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized in or under the laws of
the United States or any state thereof, or (iii) an estate or trust that is
subject to United States federal income taxation without regard to the source of
its income.
This summary is based upon the provisions of the Internal Revenue Code and
the regulations thereunder, administrative rulings, and judicial decisions now
in effect. All the foregoing are subject to change (possibly with retroactive
effect) or different interpretations. Any such changes could affect the accuracy
of the statements set forth herein. No ruling has been (nor will be) sought from
the Internal Revenue Service as to anticipated tax consequences of the merger,
and the merger agreement does not require that any opinion of counsel be
delivered to Heaven's Door or its stockholders confirming the anticipated
federal income tax consequences of the merger as set forth herein. This summary
does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision whether to approve the merger.
This summary is provided for general information purposes only, and does not
constitute, and should not be considered as, legal or tax advice.
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PROCEPT IS NOT HEREBY MAKING ANY REPRESENTATION WITH RESPECT TO THE TAX
CONSEQUENCES OF THE MERGER. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR
CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS
CONCERNING ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAX
JURISDICTION, INCLUDING ANY STATE, LOCAL, OR FOREIGN JURISDICTION, AND ANY
ESTATE OR GIFT TAX CONSIDERATIONS.
TAX CONSEQUENCES OF THE MERGER
The merger is structured with the intent that it qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code. As a reorganization, the merger would have the following U.S. federal
income tax consequences:
- no gain or loss will be recognized by Heaven's Door, Procept or Procept
Acquisition Corp. by reason of the merger;
- no gain or loss will be recognized by U.S. Holders of Heaven's Door common
stock who exchange their Heaven's Door stock for Procept common stock in
the merger, except with respect to any cash received in lieu of a
fractional share of Procept common stock (as discussed below);
- the aggregate tax basis of the Procept common stock received in the merger
by a U.S. Holder of Heaven's Door common stock will be the same as the
aggregate tax basis of the Heaven's Door common stock surrendered in
exchange therefor, reduced by any amount of such tax basis allocable to a
fractional share interest in Procept common stock for which cash is
received;
- the holding period of the Procept common stock received in the merger by a
U.S. Holder of Heaven's Door common stock will include the holding period
of the Heaven's Door common stock surrendered in exchange therefor;
- cash received by a U.S. Holder of Heaven's Door common stock in lieu of a
fractional share of Procept common stock will be treated as received in
disposition of such fractional share; such holder will recognize gain or
loss as a result of this treatment in an amount equal to the difference
between the cash received and the portion of the basis of such holder's
Heaven's Door common stock allocable to the fractional share deemed
received; such gain or loss generally will be capital gain or loss and
will be long-term capital gain or loss if the holding period of the
Heaven's Door common stock surrendered in the merger is more than one
year;
- a U.S. Holder of Heaven's Door common stock who exercises appraisal rights
and receives solely cash in exchange for such holder's Heaven's Door
common stock will generally recognize gain or loss measured by the
difference between the amount of cash received and the tax basis of such
stock; such gain or loss generally will be capital gain or loss and will
be long-term capital gain or loss if the holding period of the Heaven's
Door common stock surrendered in the merger is more than one year as of
the consummation of the merger; however, dissenters that also own Procept
stock (directly or constructively) could possibly be subject to dividend
treatment on this cash payment.
If, for any reason, the merger were not treated as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, no gain or loss
would be recognized by Heaven's Door, Procept or Procept Acquisition Corp. by
reason of the merger. However, exchanges of Heaven's Door common stock for
Procept common stock pursuant to the merger would be taxable transactions. In
that event, each exchanging U.S. Holder of Heaven's Door common stock would
recognize capital gain or loss equal to the difference between such holder's
adjusted basis in the Heaven's Door stock exchanged and the sum of the fair
market value of the Procept common stock received by such holder in the merger
and the amount of any cash received in lieu of fractional shares.
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BACKUP WITHHOLDING
Unless a holder of Heaven's Door stock complies with certain reporting
and/or certification procedures or establishes that it is an exempt recipient,
cash payments in exchange for such holder's Heaven's Door common stock in the
merger may be subject to "backup withholding" at a rate of 31% for federal
income tax purposes. Any amounts withheld under the backup withholding rules may
be allowed as a refund or a credit against the holder's federal income tax
liability, provided the required information is furnished to the IRS.
The foregoing discussion is included for general information purposes only.
The above summary does not purport to be a complete analysis of all the
anticipated United States federal income tax consequences of the merger. In the
event of a successful IRS challenge to the merger's qualification as a
reorganization under Section 368(a) of the Internal Revenue Code, there would be
significant tax consequences. Stockholders are urged to consult their own tax
advisors as to the particular tax consequences to them of the merger, including
the application of state, local, and foreign tax laws. Procept is not making any
representations herein as to the tax consequences of the merger.
STOCKHOLDER APPRAISAL RIGHTS
Procept stockholders are not entitled to appraisal rights as a result of the
merger under the Delaware General Corporation Law because Procept common stock
is quoted on the Nasdaq SmallCap Market.
NASDAQ LISTING OF PROCEPT COMMON STOCK
Procept will apply for the listing on the Nasdaq SmallCap Market of the
shares of Procept common stock it is issuing in connection with the merger. So
long as Procept continues to meet the requirements of the Nasdaq SmallCap
Market, Procept common stock will continue to be listed on the Nasdaq SmallCap
Market until the consummation of the merger.
POST-CLOSING TRADING RESTRICTIONS UNDER FEDERAL SECURITIES LAWS AND LOCK-UP
AGREEMENTS
All shares of Procept common stock received by Heaven's Door stockholders in
the merger will be freely transferable, except that shares of Procept common
stock received by individuals and entities who are deemed to be "affiliates" of
Heaven's Door before the merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act, or
Rule 144 under the Securities Act in the case of individuals and entities who
become affiliates of Procept, or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of Heaven's Door or Procept
under the Securities Act of 1933 generally include individuals or entities that
control, are controlled by, or are under common control with, Heaven's Door or
Procept and may include certain officers and directors of Heaven's Door or
Procept as well as principal stockholders of either company.
The merger agreement requires Heaven's Door to use all reasonable efforts to
cause each of its executive officers, directors, holders of 5% or more of
Heaven's Door voting stock and certain employees, consultants and advisors of
Heaven's Door to sign a lock-up agreement providing that the holder will not
offer or sell or otherwise dispose of Procept common stock issued to the holder
in connection with the merger for a period of one year; provided that
individuals who are not executive officers, directors or holders of 5% or more
of Heaven's Door common stock will have the immediate right to sell up to 5% of
the Procept common stock they receive in the merger. In the second year after
closing of the merger, the individuals and entities who signed a lock-up
agreement will be able to sell up to 20% of the Procept common stock that they
received in the merger in each calendar quarter. The merger agreement also
requires Procept to use all reasonable efforts to cause each of its executive
officers, directors and holders of 5% or more of Procept common stock to sign a
lock-up agreement
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providing that the person will not offer or sell or otherwise dispose of any
shares of Procept common stock that they hold for one year after the closing of
the merger. Thereafter these holders will have the right to sell up to 20% of
their shares in each successive calendar quarter. The delivery of the lock-up
agreements is a condition to Procept's and Heaven's Door's obligation to
complete the merger.
This proxy statement/prospectus does not cover resales of Procept common
stock received by any person who may be deemed to be an affiliate of Heaven's
Door and/or Procept under Rule 145.
REGULATORY MATTERS
Procept is not aware of any material governmental or regulatory requirements
that must be complied with in connection with the merger, other than applicable
securities and "blue sky" laws of the various states and the filing of the
certificate of merger with the Secretary of State of the State of Delaware.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Mark C. Rogers, a member of Procept's Board of Directors, is President of
Paramount Capital, Inc. Paramount, an investment banking firm, will be receiving
546,000 shares of Procept common stock upon completion of the merger in
connection with the services that Paramount provided Procept in structuring and
negotiating the merger. Also, Paramount is the parent of The Aries Trust and the
Aries Domestic Fund, L.P., which in addition to being stockholders of Procept,
have each received 27,615 additional shares of Procept common stock as a result
of the merger in connection with the cancellation of Procept's indebtedness to
the stockholders.
MANAGEMENT AND OTHER INFORMATION
Following the completion of the merger, three of Procept's directors will be
replaced by three new directors to be picked jointly by Procept and Heaven's
Door. Information relating to the management, executive compensation, voting
securities, certain relationships and related transactions and other related
matters pertaining to Procept as well as the quantitative and qualitative
disclosure about market risk related to Procept's securities is set forth in or
incorporated by reference in its Annual Report on Form 10-K for the year ended
December 31, 1998. Procept's Annual Report is incorporated by reference into
this proxy statement/prospectus. See "Where You Can Find More Information."
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MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement
which is attached as Annex A and incorporated into this proxy
statement/prospectus by reference. The following summary is qualified by and
made subject to the more complete information set forth in the merger agreement.
STRUCTURE OF THE MERGER
The merger agreement provides that following the approval of the merger
agreement by the stockholders of Heaven's Door and the approval of the issuances
of Procept common stock by the stockholders of Procept, and the satisfaction or
waiver of all other conditions to the merger, Procept Acquisition Corp. will
merge with and into Heaven's Door. After the merger, Heaven's Door will continue
as the surviving company under the name "Heaven's Door Corporation" and will be
a wholly-owned subsidiary of Procept.
MERGER CONSIDERATION
As a result of the merger, each outstanding share of Heaven's Door common
stock (other than dissenting shares) will be converted automatically into the
right to receive shares of Procept common stock. Assuming no dissenting shares,
Procept will issue 10,920,000 shares of Procept common stock in the merger. The
merger consideration will be reduced by the number of shares of Procept common
stock that would otherwise be allocable to holders of Heaven's Door common stock
who perfect dissenters' rights under Delaware law. Assuming the number of shares
of Heaven's Door common stock outstanding immediately prior to the completion of
the merger equals 13,029,063, each outstanding share of Heaven's Door common
stock will be converted into approximately 0.8381 of a share of Procept common
stock. The number of shares of Procept common stock that a Heaven's Door
stockholder becomes entitled to in the merger will be rounded down to the
nearest whole share. Any fractional share of Procept common stock will be paid
in cash based on the mean of the daily high and low sales price of Procept
common stock on the Nasdaq SmallCap Market for the ten trading days ending on
the fifth trading day prior to the closing date of the merger.
No former holder of Heaven's Door common stock will be entitled to dividends
or any other rights in respect of any fractional share. After the merger is
completed, the outstanding shares of Heaven's Door common stock will not
represent any ownership interest in Heaven's Door but will represent only the
right to receive an appropriate portion of the merger consideration.
SURRENDER OF CERTIFICATES; CONVERTING HEAVEN'S DOOR STOCK INTO PROCEPT STOCK
The conversion of Heaven's Door common stock into Procept common stock will
occur automatically when the merger is effective. As soon as practicable after
the completion of the merger, Heaven's Door will deliver to Procept a list of
all record holders of Heaven's Door common stock immediately prior to the
merger, setting forth each stockholder's name, address and number of shares of
Heaven's Door common stock held immediately prior to the merger.
Promptly after the merger is effective, Procept's exchange agent will mail
the following materials to each Heaven's Door stockholder:
- a letter of transmittal to be used by the holder to surrender his, her or
its shares of Heaven's Door common stock to Procept's exchange agent, if
any, to be exchanged for shares of Procept common stock and cash in lieu
of fractional shares; and
- instructions explaining what the holder has to do to effect the exchange
of shares of Heaven's Door common stock for shares of Procept common stock
and cash in lieu of fractional shares.
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If you are a Heaven's Door stockholder, you must complete and sign the
letter of transmittal and return it to Procept's exchange agent in accordance
with the instructions provided by Procept's exchange agent, together with any
certificates for Heaven's Door common stock that you hold.
If your certificate for any shares of Heaven's Door common stock has been
lost, stolen or destroyed, you must submit an affidavit to that effect to
Procept's exchange agent. Procept's exchange agent may prescribe the form of
affidavit required and may also require you to deliver a bond in an amount
reasonably required to indemnify Procept's exchange agent against claims with
respect to the lost certificates.
If you are a record holder of Heaven's Door common stock and you wish the
merger consideration to be issued to some other person, then, before the merger
consideration can be issued to the designated recipient, you must provide
Procept's exchange agent with the following documentation:
- a properly endorsed certificate for the shares of Heaven's Door common
stock being exchanged if your shares are certificated;
- properly completed and signed originals of any other documents required by
Procept's exchange agent to show that the transfer occurred; and
- evidence that any transfer taxes resulting from the issuance of a
certificate(s) for Procept common stock to a person(s) other than the
record holder of Heaven's Door common stock have been or will be paid.
Holders of Heaven's Door stock should not send in their stock certificates
until they receive a letter of transmittal.
Each Heaven's Door stockholder will receive a certificate representing the
whole number of shares of Procept common stock to which the stockholder becomes
entitled to in the merger and a check representing the amount of cash payable in
lieu of a fractional share. To receive the merger consideration, Heaven's Door
stockholders who hold their shares in certificate form must first surrender a
duly executed certificate for exchange and cancellation to Procept's exchange
agent. Heaven's Door's stockholders will not receive any interest on unpaid
dividends and distributions.
Once the merger is completed, no transfers on the stock transfer books of
Heaven's Door of the shares of Heaven's Door common stock will be allowed. If,
after the completion of the merger, certificates representing shares of Heaven's
Door are presented for transfer to Procept's exchange agent, the certificates
will be cancelled and exchanged for certificates representing shares of Procept
common stock and cash instead of fractional shares.
REPRESENTATIONS AND WARRANTIES
Heaven's Door, and where appropriate the Heaven's Door stockholders signing
the merger agreement, Procept and Procept Acquisition Corp. have each made
customary representations and warranties to the other in the merger agreement
relating to, among other things: (a) their organization, the organization of
their subsidiaries (Procept only) and similar corporate matters; (b) their
capital structure; (c) authorization, execution, delivery and performance of the
merger agreement and the absence of any conflicts, violations or defaults under
their respective organizational documents and other agreements and documents,
conflicts with or violations of any laws as a result of executing the merger
agreement; (d) governmental consents and filings; (e) the absence of any
undisclosed liabilities; (f) reports and financial statements, if any, filed and
the accuracy of the information contained in those reports and financial
statements; (g) absence of any change, event or effect that is materially
adverse to the business, assets, financial condition or results of operations of
such party and its respective subsidiaries taken as a whole and certain other
events since June 30, 1999 for Heaven's Door and December 31, 1998 for Procept;
(h) the payment of taxes and the filing of tax returns; (i) compliance
51
<PAGE>
with applicable laws and agreements and maintenance of licenses and permits;
(j) the absence of litigation proceedings; (k) their material contracts;
(l) their leased properties; (m) title to their assets; (n) employee benefit
plans and employee relations; (o) insurance; and (p) environmental matters.
CERTAIN COVENANTS
TERMINATION OF ARTICLE VI CONTRACTUAL RIGHTS
Procept has agreed to use reasonable commercial efforts to terminate the
special rights of some Procept stockholders, known as Article VI Rights, to
receive additional shares of Procept common stock pursuant to provisions
contained in some subscription agreements and in the Agreement and Plan of
Merger dated as of December 10, 1998 between Procept and Pacific. In
consideration of the termination of these Article VI Rights, Procept is
obligated to issue up to 5,000,000 shares of Procept common stock to the holders
of Article VI Rights at the same time that it issues shares of Procept common
stock in the merger.
INTERIM OPERATIONS OF HEAVEN'S DOOR
From November 8, 1999, the date that the merger agreement was signed, until
the closing date, Heaven's Door has agreed to carry on its business diligently
in the ordinary course. Heaven's Door has also agreed to use reasonable efforts
consistent with past practice to preserve intact the business organization of
Heaven's Door, keep available the services of its employees, maintain its
properties and assets in good operating condition, maintain its insurance
policies, preserve and protect its proprietary rights and preserve its
relationships with third parties. Heaven's Door has also agreed to settle
certain contingent rights to receive Heaven's Door common stock held by some of
its employees and consultants according to the terms of their employment or
engagement arrangements so that those individuals will hold only issued and
outstanding shares of Heaven's Door common stock as of the effective time of the
merger. Also, Heaven's Door has agreed to conclude a convertible debt financing
with one of its current stockholders to provide $275,000 in additional capital
necessary to fund its operations pending completion of the merger. These
obligations are subject to exceptions that are agreed to in writing by Procept.
In addition, until the merger is completed, Heaven's Door has agreed, subject to
certain specific exceptions outlined in the merger agreement, not to do or agree
to do any of the following:
- sell or transfer, or mortgage, pledge, or create any encumbrances on, any
of its assets other than those in the ordinary course of business;
- incur or guaranty any liabilities other than in the ordinary course of
business or incur any indebtedness for borrowed money or enter into
certain contracts or commitments involving payments by Heaven's Door of
more than $10,000 or enter into any transaction with an officer, director
or 5% stockholder of Heaven's Door;
- change the compensation or fringe benefits of any officer, director or
employee, or enter into, or modify, any employee plan, employment
agreement, severance agreement or any other agreement with any officer,
director or employee of Heaven's Door;
- grant any option or other right to purchase shares of capital stock,
declare or pay any dividends or make any distribution with respect to its
capital stock or issue any shares of its capital stock;
- amend its certificate of incorporation or by-laws or make any material tax
election;
- make any material acquisition of property other than in the ordinary
course of business; and
- enter into, modify or cancel any material agreement, other than agreements
in the ordinary cause of business involving payments by Heaven's Door of
less than $10,000.
52
<PAGE>
INDEMNIFICATION
Procept has agreed to indemnify the stockholders of Heaven's Door executing
the merger agreement for material breaches of Procept's representations,
warranties or covenants. Procept's aggregate liability to the Heaven's Door
stockholders signing the merger agreement will not exceed $6,000,000. The
stockholders of Heaven's Door signing the merger agreement have agreed to
jointly and severally indemnify Procept for material breaches of the
representations, warranties and covenants made by Heaven's Door or the signing
stockholders, as well as tax liabilities. In addition, the signing stockholders
have specifically indemnified Procept for losses arising from past violations of
state securities laws by Heaven's Door in connection with its previous equity
financings. Aggregate liability of the signing stockholders for all claims other
than tax claims will not exceed $6,000,000.
AMENDMENT TO PROCEPT'S RESTATED CERTIFICATE OF INCORPORATION, HEAVEN'S DOOR
STOCKHOLDER ACTION AND PROCEPT SPECIAL MEETING; RECOMMENDATION OF THE PROCEPT
BOARD
Heaven's Door has agreed, in accordance with the Delaware General
Corporation Law and its amended certificate of incorporation and by-laws, to use
its best efforts to obtain the written consent of its stockholders approving the
merger agreement as soon as practicable after the Securities and Exchange
Commission has declared the registration statement effective. This consent will
not be effective until 20 business days following the delivery of this
prospectus to the Heaven's Door stockholders.
Procept has agreed to cause the Procept special meeting to be held as
promptly as possible following the effectiveness of the registration statement
for the purpose of considering the approval of the stock issuances in accordance
with the merger agreement as well as the proposed amendment to its restated
certificate of incorporation. The Procept board of directors has agreed, subject
to its fiduciary duties, to use best efforts to solicit from the Procept
stockholders proxies in favor of the approval of the stock issuances and take
all other actions necessary or advisable to secure the vote of the Procept's
stockholders required to obtain the necessary approval. After obtaining
stockholder approval of the amendment to its restated certificate of
incorporation, Procept has agreed to file the amendment with the Delaware
Secretary of State. A copy of the certificate of amendment to Procept's restated
certificate of incorporation is attached to this proxy statement/prospectus as
Annex B.
CERTAIN OTHER COVENANTS
The merger agreement contains certain mutual covenants of the parties,
including covenants relating to: public announcements; access to information;
best efforts and further assurances; compliance with legal requirements and
cooperation in connection with obtaining consents and approvals; confidential
treatment of non-public information; and allocation of responsibility regarding
certain tax matters.
In addition, the merger agreement contains covenants of Procept including
covenants requiring Procept to take all actions necessary to qualify the Procept
common stock being issued to the stockholders of Heaven's Door in the merger
under all applicable state securities laws and to list the Procept common stock
to be issued in connection with the merger on the Nasdaq SmallCap Market.
53
<PAGE>
CONDITIONS TO THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO COMPLETE THE MERGER
The obligations of Procept and Heaven's Door to complete the merger are
subject to the satisfaction of the following conditions:
- the registration statement of which this proxy statement/prospectus is a
part being declared effective by the SEC, not being subject to any stop
order or related proceedings by the SEC and the Procept common stock being
qualified under applicable state securities laws;
- the approval of the merger agreement by the holders of Heaven's Door
common stock and approval of the stock issuance and the amendment to
Procept's restated certificate of incorporation increasing the number of
authorized shares of Procept common stock by the holders of Procept common
stock;
- the filing with the Delaware Secretary of State of the amendment to
Procept's restated certificate of incorporation increasing its authorized
shares of common stock;
- no applicable law or regulation, judgment, injunction, order or decree of
a court of competent jurisdiction prohibiting or enjoining the
consummation of, or having a material adverse effect on, the merger;
- the shares of Procept common stock to be issued in the merger being
approved for quotation on the Nasdaq SmallCap Market;
- Procept having a minimum of $1,000,000 in net working capital and Heaven's
Door having positive net working capital; and
- all other third party consents and approvals required to be obtained by
either Heaven's Door or Procept being obtained.
CONDITIONS TO THE OBLIGATIONS OF PROCEPT
The obligation of Procept to complete the merger also is subject to the
satisfaction of the following conditions:
- the representations and warranties of Heaven's Door contained in the
merger agreement being true in all material respects at the time the
merger is effective as if made at that time;
- the performance in all material respects by Heaven's Door of its
obligations under the merger agreement at or prior to the time the merger
is effective;
- each of Heaven's Door's directors, executive officers, holders of 5% or
more of the outstanding voting stock of Heaven's Door and certain
employees, consultants and advisors of Heaven's Door having delivered to
Procept a lock-up agreement not to sell the shares of Procept common stock
that they receive in the merger for designated periods of time;
- the dissenting shares not exceeding 5% of the outstanding shares of
Heaven's Door common stock issued and outstanding on the closing date of
the merger;
- resolution to Procept's reasonable satisfaction by Heaven's Door of past
violations of state securities laws in connection with its previous equity
financings;
- three of Procept's current debt holders agreeing to cancel their remaining
debt in exchange for shares of Procept common stock and reduced cash
payments; and
- other conditions as set forth in the merger agreement.
54
<PAGE>
CONDITIONS TO THE OBLIGATIONS OF HEAVEN'S DOOR
The obligation of Heaven's Door to complete the merger also is subject to
the satisfaction of the following conditions:
- the representations and warranties of Procept contained in the merger
agreement being true in all material respects at the time the merger is
effective as if made at that time;
- the performance in all material respects by Procept of its obligations
under the merger agreement at or prior to the time the merger is
effective;
- each of Procept's directors, executive officers and holders of 5% or more
of Procept's common stock having entered into an agreement reasonably
satisfactory to Heaven's Door not to sell their shares of Procept common
stock for designated periods of time;
- the special rights inherent in the shares of Procept common stock held by
some Procept stockholders, known as Article VI Rights, being terminated
pursuant to a written agreement; and
- other conditions set forth in the merger agreement.
AMENDMENTS; WAIVERS
Any provisions of the merger agreement may be amended or waived before the
effective time of the merger only if the amendment or waiver is in writing and
signed, in the case of an amendment, by each of Procept, Procept Acquisition
Corp. and Heaven's Door and, in the case of a waiver, by the party against whom
the waiver is to be effective.
NO SOLICITATION
Procept and Heaven's Door have agreed in the merger agreement that, from the
date of the signing of the merger agreement until its termination, neither party
nor any of their authorized representatives will, directly or indirectly:
- solicit any proposal relating to the acquisition by another party of any
capital stock or substantially all of the assets of Procept or Heaven's
Door;
- engage in negotiations or discussions with another party regarding an
acquisition or encourage any efforts by another party in an acquisition;
nor
- sell, transfer or dispose of all or any portion of the capital stock of
Procept or Heaven's Door or substantially all of the assets of Procept or
Heaven's Door.
Notwithstanding the foregoing, Procept or Heaven's Door may participate in
discussions or negotiations if the discussions or negotiations had begun prior
to the date of the merger agreement or were not solicited by or on behalf of
Procept or Heaven's Door and the board of directors of the involved company
determines in good faith, based on the advice of outside legal counsel, that
continuing the action is necessary to comply with its fiduciary duties under
applicable law.
If either party breaches its obligations discussed above, or consummates a
transaction with a third party, and the merger has not occurred by January 31,
2000, or March 31, 2000 if the SEC reviews the registration statement of which
this proxy statement/prospectus forms a part, then that party will pay a cash
termination fee of $250,000 to the other party.
55
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time before the closing date,
whether before or after approval of the merger by Heaven's Door's stockholders:
- by mutual written consent of Procept and Heaven's Door;
- by either Heaven's Door or Procept:
- if the merger has not been completed by January 31, 2000, or March 31,
2000 if the SEC reviews the registration statement of which this proxy
statement/prospectus forms a part, which dates may be extended by mutual
consent of the parties; provided, however, that neither Procept or
Heaven's Door may terminate if its breach is the reason that the merger
has not been consummated;
- if a court with jurisdiction over the parties and the subject matter or a
governmental body has issued an order, decree or ruling or taken any
other action, in any case having the effect of permanently restraining,
enjoining or otherwise prohibiting the merger, which order, decree or
ruling is final and nonappealable;
- if the Heaven's Door's stockholders do not approve the merger agreement
as required by Delaware law; or
- if the stockholders of Procept vote and do not approve the amendment to
Procept's restated certificate of incorporation increasing the number of
authorized shares of Procept common stock and the stock issuance to
Heaven's Door stockholders in accordance with the merger agreement.
- by Procept:
- if the Heaven's Door board of directors fails to recommend approval of
the merger agreement or has withheld or withdrawn its recommendation in
favor of any required approval of the merger; or
- if any representation, warranty, covenant or agreement on the part of
Heaven's Door set forth in the merger agreement was not true and correct
in all material respects when made; or
- if Heaven's Door has materially breached any covenant in the merger
agreement and that breach has not been cured by Heaven's Door within
thirty days following receipt by Heaven's Door of written notice of the
breach from Procept or by the closing date, whichever occurs first.
- by Heaven's Door:
- if the Procept board of directors fails to recommend any required
approval of the merger in this proxy statement/prospectus or has withheld
or withdrawn its recommendation in favor of any required approval of the
merger;
- if any representation, warranty, covenant or agreement on the part of
Procept set forth in the merger agreement was not true and correct in all
material respects when made; or
- if Procept has materially breached any covenant in the merger agreement
and that breach has not been cured by Procept within thirty days
following receipt by Procept of written notice of the breach from
Heaven's Door or by the closing date, whichever occurs first.
If the merger agreement is terminated validly, the only provisions of the
merger agreement that will survive are the provisions relating to expenses,
termination fees, publicity, confidentiality and miscellaneous provisions of
general application. The termination of the merger agreement will not
56
<PAGE>
eliminate or reduce any party's liability to another party for any breach of the
merger agreement occurring before the termination.
TERMINATION FEE
If either party breaches its nonsolicitation obligations mentioned above,
and the merger has not occurred prior to January 31, 2000, or March 31, 2000 if
the SEC reviews the registration statement of which this proxy
statement/prospectus is a part, then the breaching company must pay the other
party a termination fee in the amount of $250,000 on the earlier to occur of the
completion of any acquisition transaction with a third party or January 31,
2000, or March 31, 2000 if the SEC reviews the registration statement of which
this proxy statement/prospectus is a part.
PAYMENT OF EXPENSES OF THE MERGER
If the parties do not complete the merger, Heaven's Door and Procept will
each bear its own expenses. If the parties complete the merger, the surviving
company, as the successor to Heaven's Door and as a wholly-owned subsidiary of
Procept, will be liable for all unpaid expenses of Heaven's Door.
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma financial statements of Procept and the
related notes are presented to give effect to the merger of Procept Acquisition
Corp. with and into Heaven's Door as if it had been completed on January 1, 1999
for statement of operations purposes, and as if it had been completed on
September 30, 1999 for balance sheet purposes, subject to assumptions and
adjustments in the accompanying notes to the pro forma information. Procept will
account for the merger under the purchase method of accounting. The unaudited
pro forma statements of operations for the year ended December 31, 1998 and the
nine months ended September 30, 1999 give effect to Procept's merger on
March 17, 1999 with Pacific Pharmaceuticals, Inc. and Pacific's merger on
February 5, 1999 with Binary Therapeutics, Inc. as if the acquisitions had been
completed on January 1, 1998. Procept's merger with Pacific and Pacific's merger
with BTI were also accounted for under the purchase method of accounting.
The unaudited pro forma financial statements are based on the historical
consolidated financial statements for Procept, Heaven's Door, Pacific and BTI
and the assumptions and adjustments described in the accompanying notes. The
unaudited pro forma financial statements for the period ended September 30, 1999
include the nine months then ended for Procept and Heaven's Door, Pacific for
the period from January 1, 1999 to March 16, 1999, and BTI for the period from
January 1, 1999 to February 5, 1999. The unaudited pro forma financial
statements for the year ended December 31, 1998 include the twelve months ended
for Procept, Heaven's Door, Pacific and BTI.
The unaudited pro forma financial statements do not purport to represent
what Procept's results of operations and financial condition actually would have
been if the events described above had occurred as of the dates indicated or
what such results and financial conditions will be for any future periods, or
give effect to certain non-recurring charges which resulted from these events.
The unaudited pro forma financial statements are based upon assumptions that
Procept believes are reasonable and should be read in conjunction with the
Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this proxy statement/prospectus.
58
<PAGE>
PROCEPT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PROCEPT WITH
HISTORICAL HEAVEN'S DOOR PRO FORMA HEAVEN'S DOOR
PROCEPT, INC. CORPORATION ADJUSTMENTS COMBINED
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 5,268,686 $ 89,164 $ 275,000 (B) $ 5,532,850
(50,000)(E)
(50,000)(F)
Accounts receivable............................. 0 23,023 0 23,023
Employee receivable............................. 0 1,835 0 1,835
Inventory....................................... 0 0 0 0
Other current assets................................ 419,485 0 0 419,485
----------- ---------- ------------ ------------
Total current assets............................ 5,688,171 114,022 175,000 5,977,193
----------- ---------- ------------ ------------
Property and equipment, net......................... 76,624 85,617 0 162,241
Goodwill, net....................................... 0 67,500 25,181,333 (A) 25,181,333
(67,500)(J)
Other assets........................................ 7,150 8,266 0 15,416
----------- ---------- ------------ ------------
Total assets.................................... $ 5,771,945 $ 275,405 $25,288,833 $ 31,336,183
=========== ========== ============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable................................ $ 440,026 $ 18,988 $ 0 $ 459,014
Accrued expenses................................ 518,671 0 (14,695)(E) 1,132,055
(371,921)(F)
1,000,000 (I)
Advances from related parties................... 0 5,000 0 5,000
Current portion of capital lease obligations.... 4,714 0 0 4,714
Notes payable................................... 200,000 0 (200,000)(E) 0
Other current liabilities....................... 510,138 0 0 510,138
----------- ---------- ------------ ------------
Total current liabilities..................... 1,673,549 23,988 413,384 2,110,921
----------- ---------- ------------ ------------
Other non-current liabilities................... 103,033 103,033
Capital lease obligations....................... 15,637 15,637
Convertible note................................ 275,000 (B) 0
(275,000)(C)
Shareholders' equity:
Preferred stock................................... 0 0 0 0
Common stock...................................... 140,895 12,117 1,098 (E) 302,811
1,601 (F)
2,200 (C)
109,200 (A)
5,460 (D)
42,357 (G)
(12,117)(H)
Additional paid-in capital........................ 81,063,143 1,100,184 232,180 (E) 116,721,676
320,320 (F)
272,800 (C)
23,095,800 (A)
10,582,643 (G)
1,154,790 (D)
(1,100,184)(H)
Accumulated deficit............................... (77,177,652) (860,884) 860,884 (H) (87,871,235)
(10,625,000)(G)
(68,583)(E)
Deferred compensation............................. (69,242) 0 0 (69,242)
Cumulative dividends on preferred stock........... 0 0 0 0
Unrealized gain on investments.................... 34,439 0 0 34,439
Treasury stock.................................... (11,857) 0 0 (11,857)
----------- ---------- ------------ ------------
Total shareholder's equity...................... 3,979,726) 251,417 24,875,449 29,106,592
----------- ---------- ------------ ------------
Total liabilities and shareholder's equity...... $ 5,771,945 $ 275,405 $25,288,833 $ 31,336,183
=========== ========== ============ ============
</TABLE>
See accompanying Notes to Selected Unaudited Pro Forma Combined Condensed
Financial Data
59
<PAGE>
PROCEPT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
BINARY PRO
HISTORICAL PACIFIC HISTORICAL BINARY FORMA
PHARMACEUTICALS, INC. THERAPEUTICS, INC. ADJUSTMENTS
--------------------- ------------------ -----------
<S> <C> <C> <C>
Revenues:
Product sales........................................... $ 0 $ 0 $ 0
License fees and royalties.............................. 0 0 0
Research and development revenue under collaborative
agreements from related party......................... 0 0 0
Interest and other...................................... $ 0 $ 0 $ 0
----------- -------- ----------
Total revenues........................................ $ 0 $ 0 $ 0
----------- -------- ----------
Costs and expenses:
Cost of product sales................................... 0 0 0
Research and development................................ 296,634 0 0
Purchased research...................................... 0 0 0
General and administrative.............................. 307,682 163 0
Business Development and Marketing...................... 0 0 0
Interest and other...................................... (24,834) 11,924 (8,000)(E)
----------- -------- ----------
Total costs and expenses.............................. $ 579,482 12,087 (8,000)
----------- -------- ----------
Loss applicable to minority interest...................... 0 0 0
Net loss.................................................. (579,482) (12,087) 8,000
Less: dividends on preferred stock........................ 0 0 0
----------- -------- ----------
Net loss available to common shareholders................. $ (579,482) $(12,087) $ 8,000
=========== ======== ==========
Basic and diluted net loss per common share............... $ (0.04)
===========
Weighted average number of common shares--basic and
diluted................................................. 13,664,732 1,007,192
=========== ==========
<CAPTION>
PRO FORMA PACIFIC PRO PRO FORMA
PACIFIC WITH HISTORICAL FORMA PROCEPT WITH
BINARY PROCEPT, INC. ADJUSTMENTS PACIFIC
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales........................................... $ 0 $ 0 $ 0 $ 0
License fees and royalties.............................. 0 0 0 0
Research and development revenue under collaborative
agreements from related party......................... 0 0 0 0
Interest and other...................................... $ 0 $ 221,225 $ 0 $ 221,225
----------- ------------ ----------- -----------
Total revenues........................................ $ 0 $ 221,225 $ 0 $ 221,225
----------- ------------ ----------- -----------
Costs and expenses:
Cost of product sales................................... 0 0 0 0
Research and development................................ 296,634 1,034,439 0 1,331,073
Purchased research...................................... 0 9,405,671 (9,405,671)(Q) 0
General and administrative.............................. 307,845 1,219,283 0 1,527,128
Business Development and Marketing...................... 0 0 0 0
Interest and other...................................... (20,910) 474,964 454,054
----------- ------------ ----------- -----------
Total costs and expenses.............................. 583,569 12,134,357 (9,405,671) 3,312,255
----------- ------------ ----------- -----------
Loss applicable to minority interest...................... 0 0 0 0
Net loss.................................................. (583,569) (11,913,132) 9,405,671 (3,091,030)
Less: dividends on preferred stock........................ 0 0 0 0
----------- ------------ ----------- -----------
Net loss available to common shareholders................. $ (583,569) $(11,913,132) $9,405,671 $(3,091,030)
=========== ============ =========== ===========
Basic and diluted net loss per common share............... $ (0.04) $ (1.24) $ 0.29
=========== ============ ===========
Weighted average number of common shares--basic and (14,671,924)(N)
diluted................................................. 14,671,924 9,600,025 1,169,370(O) 10,769,395
=========== ============ =========== ===========
<CAPTION>
PRO FORMA
PROCEPT, INC.,
HISTORICAL HEAVEN'S DOOR WITH PACIFIC
HEAVEN'S DOOR PRO FORMA AND HEAVEN'S
CORPORATION ADJUSTMENTS DOOR
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Product sales........................................... $ 1,120 $ 0 $ 1,120
License fees and royalties.............................. 0 0 0
Research and development revenue under collaborative
agreements from related party......................... 0 0 0
Interest and other...................................... $ 0 $ 0 $ 221,225
----------- ------------- -----------
Total revenues........................................ $ 1,120 $ 0 $ 222,345
----------- ------------- -----------
Costs and expenses:
Cost of product sales................................... 0 0 0
Research and development................................ 138,630 0 1,469,703
Purchased research...................................... 0 0 0
General and administrative.............................. 308,748 0 1,835,876
Business Development and Marketing...................... 394,973 0 394,973
Interest and other...................................... 13,625 0 467,679
----------- ------------- -----------
Total costs and expenses.............................. 855,976 0 4,168,231
----------- ------------- -----------
Loss applicable to minority interest...................... 0 0 0
Net loss.................................................. (854,856) 0 (3,945,886)
Less: dividends on preferred stock........................ 0 0 0
----------- ------------- -----------
Net loss available to common shareholders................. $ (854,856) $ 0 $(3,945,886)
=========== ============= ===========
Basic and diluted net loss per common share............... $ (0.07) $ (0.15)
=========== ===========
Weighted average number of common shares--basic and (12,116,564)(P)
diluted................................................. 12,116,564 15,971,680 26,741,075
=========== ============= ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
60
<PAGE>
PROCEPT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PACIFIC HISTORICAL BINARY BINARY PRO FORMA PACIFIC WITH HISTORICAL
PHARMACEUTICALS, INC. THERAPEUTICS, INC. ADJUSTMENTS BINARY PROCEPT, INC.
--------------------- ------------------ ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............. $ 6,136 $ 0 $ 0 $ 6,136 $ 0
License fees and
royalties............... 5,073 0 0 5,073 0
Research and development
revenue under
collaborative agreements
from related party...... 0 0 0 0 109,375
Interest and other........ $ 198,674 $ 0 $ 0 $ 198,674 $ 220,590
------------ ----------- ----------- ------------ -----------
Total revenues.......... $ 209,883 $ 0 $ 0 $ 209,883 $ 329,965
------------ ----------- ----------- ------------ -----------
Costs and expenses:
Cost of product sales..... 58,743 0 0 58,743 0
Marketing................. 86,376 0 0 86,376 0
Research and development.. 2,075,451 543,416 (726,132)(K) 1,892,735 1,990,640
General and
administrative.......... 2,003,759 100,269 0 2,104,028 1,610,078
Restructuring charges..... 0 0 0 0 225,000
Interest and other........ 154,038 555,055 (24,000)(E) 175,093 (204,396)
(510,000)(L)
------------ ----------- ----------- ------------ -----------
Total costs and
expenses.............. $ 4,378,367 1,198,740 (1,260,132) 4,316,975 3,621,322
------------ ----------- ----------- ------------ -----------
Loss applicable to minority
interest.................. 159,083 0 0 159,083 0
Net loss.................... (4,009,401) (1,198,740) 1,260,132 (3,948,009) (3,291,357)
Less: dividends on preferred
stock..................... 6,161,109 0 0 6,161,109 0
------------ ----------- ----------- ------------ -----------
Net loss available to common
shareholders.............. $(10,170,510) $(1,198,740) $ 1,260,132 $(10,109,118) $(3,291,357)
============ =========== =========== ============ ===========
Basic and diluted net loss
per common share.......... $ (0.90) $ (0.75) $ (1.40)
============ ============ ===========
Weighted average number of
common shares--basic and
diluted................... 11,328,108 2,158,268 13,486,376 2,347,245
============ =========== ============ ===========
<CAPTION>
PRO FORMA
PROCEPT, INC.
WITH PACIFIC
PRO FORMA HISTORICAL HEAVEN'S DOOR AND
PACIFIC PRO FORMA PROCEPT WITH HEAVEN'S DOOR PRO FORMA HEAVEN'S
ADJUSTMENTS PACIFIC CORPORATION ADJUSTMENTS DOOR
----------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............. $ 0 $ 6,136 $ 0 $ 0 $ 6,136
License fees and
royalties............... 0 5,073 0 0 5,073
Research and development
revenue under
collaborative agreements
from related party...... 0 109,375 0 0 109,375
Interest and other........ $ 0 $ 419,264 $ 0 $ 0 $ 419,264
------------ ----------- ---------- ----------- ------------
Total revenues.......... $ 0 $ 539,848 $ 0 $ 0 $ 539,848
------------ ----------- ---------- ----------- ------------
Costs and expenses:
Cost of product sales..... 0 58,743 0 0 58,743
Marketing................. 0 86,376 0 0 86,376
Research and development.. 0 3,883,375 0 0 3,883,375
General and
administrative.......... 0 3,714,106 0 0 3,714,106
Restructuring charges..... 0 225,000 0 0 225,000
Interest and other........ (29,303) 0 (29,303)
------------ ----------- ---------- ----------- ------------
Total costs and
expenses.............. 0 7,938,297 0 0 7,938,297
------------ ----------- ---------- ----------- ------------
Loss applicable to minority
interest.................. 0 159,083 0 0 159,083
Net loss.................... 0 (7,239,366) 0 0 (7,239,366)
Less: dividends on preferred
stock..................... (3,240,784)(M) 2,920,325 0 0 2,920,325
------------ ----------- ---------- ----------- ------------
Net loss available to common
shareholders.............. $ (3,240,784) $(10,159,691) $ 0 $ $(10,159,691)
============ =========== ========== =========== ============
Basic and diluted net loss
per common share.......... $ (1.54) $ 0.00 $ (0.45)
=========== ========== =========== ============
Weighted average number of
common shares--basic and (13,486,376)(N) (4,942,564)(P)
diluted................... 4,261,221 (N) 6,608,466 4,942,564 15,971,680 (P) 22,580,146
============ =========== ========== =========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
61
<PAGE>
PROCEPT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(1) THE MERGER
Procept entered into a definitive Agreement and Plan of Merger dated as of
November 8, 1999 to acquire Heaven's Door Corporation, a Delaware corporation
based in Coral Springs, Florida, through a merger of a wholly-owned subsidiary
of Procept with and into Heaven's Door. Heaven's Door, which is engaged in
providing funeral-related products and services through its website,
www.HeavenlyDoor.com, will be the surviving company in the merger and will
continue as a Delaware corporation. The business of Heaven's Door will be
allocated to Procept upon consummation of the merger. Pursuant to the merger
agreement, each share of Heaven's Door common stock will convert into
approximately .8381 of a share of Procept common stock or a total of 10,920,000
Procept shares. In addition, contemporaneously with the merger, Procept will
issue approximately 4,235,742 shares of common stock to some existing
shareholders in exchange for the termination of special rights inherent in the
shares of Procept common stock they hold, called Article VI Rights.
The pro forma combined balance sheet as of September 30, 1999 gives effect
to the merger as of September 30, 1999, using the purchase accounting method and
assumes that the Procept common stock issued has a fair market value of $2.13
per share (based upon the closing price on November 7, 1999) or approximately
$23.2 million of total value. The allocation of the purchase price is discussed
further in Note 2.
(2) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION
(A) Purchase Price Allocation
Upon consummation of the merger, Procept will issue 10,920,000 shares of
its $.01 par value common stock to acquire all of the outstanding common
stock of Heaven's Door and therefore has credited common stock for the
par value of $109,200 and credited additional paid-in capital for
$23,095,800. The aggregate purchase price of $23.2 million, plus
estimated acquisition costs of $1.0 million, a brokerage fee of
$1.2 million and assumed liabilities of approximately $24,000 will be
allocated to the acquired tangible and intangible assets based on their
estimated respective fair values:
<TABLE>
<S> <C>
Cash........................................................ $ 89,164
Receivables and other assets................................ 33,124
Property and equipment...................................... 85,617
Goodwill.................................................... 25,181,333
-----------
$25,389,238
===========
</TABLE>
(B) In November 1999, a shareholder of Heaven's Door loaned to Heaven's Door
$275,000 in cash and received a convertible promissory note. Immediately
prior to consummation of the merger, the convertible promissory note will
be converted into 262,499 shares of Heaven's Door common stock. The
adjustment in the amount of $275,000 represents the recording of the
convertible promissory note. This amount has not been reflected in the
historical balances as of September 30, 1999.
(C) As part of the merger of Heaven's Door with Procept, the convertible
promissory note in the principal amount of $275,000 due to a shareholder
of Heaven's Door will be converted into 262,499 shares of Heaven's Door
common stock which, in the merger, will be converted into 220,000 shares
of Procept common stock. Upon conversion, $2,200 was credited to common
stock for the par value and $272,800 was credited to additional paid in
capital.
62
<PAGE>
(D) Upon consummation of the merger, Procept will issue 546,000 shares of
its $.01 par value common stock, which has a value of $1,162,980, to
settle a brokerage fee to Paramount with respect to the merger resulting
in a credit to common stock of $5,460 for the par value and a credit to
additional paid in capital for $1,154,790. The debit for the $1,162,980
brokerage fee was included in the purchase price allocation as described
in adjustment (A).
(E) As part of the merger agreement, Procept is required to pay off the note
payable to BTI of $200,000 plus accrued interest of $14,695 by paying
cash in the amount of $50,000 and issuing approximately 109,778 shares of
Procept common stock at a price of $1.50 per share, which is a discount
when compared to $2.13 per share fair market value of Procept stock on
the date immediately prior to the date of the merger agreement.
Therefore, a charge of $68,583 was debited to accumulated deficit to
account for the 109,778 shares issued below fair market value and $1,098
was credited to common stock and $232,180 was credited to additional paid
in capital to account for the issuance of the 109,778 shares of Procept
common stock. Interest on this note payable of $8,000 and $24,000 has
been eliminated in the Pro Forma Combined Statements of Operations for
the nine months ended September 30, 1999 and the year ended December 31,
1998, respectively, as if these loans had been converted to Procept
common stock on January 1, 1998.
(F) As part of the merger agreement, Procept is required to settle a
liability which is a brokerage fee due to Paramount with respect to
Procept's acquisition of Pacific. This liability of $371,921 will be
settled by paying cash in the amount of $42,357 and issuing approximately
160,160 shares of Procept common stock. Therefore $1,601 was credited to
common stock and $320,320 was credited to additional paid in capital.
(G) Contemporaneously with the merger with Heaven's Door, Procept is
terminating the special rights that are inherent in some of its shares of
common stock, called Article VI Rights, in exchange for approximately
4,235,742 additional shares of Procept common stock. This transaction was
accounted for as an induced conversion by debiting accumulated deficit
for $10,625,000 and crediting common stock for the par value of $42,357
and crediting and additional paid-in capital, for $10,582,643. The pro
forma adjustments to the unaudited pro forma combined statements
operations for the year ended December 31, 1998 do not give effect to a
$10.6 million charge for the induced conversion with respect to
terminating the special rights that are inherent in some of the Procept
common stock shares in exchange for approximately 4,235,742 additional
shares of Procept common stock. The $10.6 million value of shares being
issued will be charged to operations upon the consummation of the merger,
however, this charge is not in the unaudited pro forma combined
statements of operations because it is non-recurring and directly related
to these transactions.
(H) To eliminate Heaven's Door's historical stockholders' equity amounts:
<TABLE>
<S> <C>
Common stock............................................ $ 12,117
Additional paid-in capital.............................. 1,100,184
Accumulated deficit..................................... (860,884)
----------
$ 251,417
==========
</TABLE>
(I) The adjustment in the amount of $1,000,000 to accrued expenses reflects
the accrual of the estimated acquisition costs which have not been
reflected in the historical balances as of September 30, 1999. The debit
for the $1,000,000 of accrued merger expenses have been included in the
purchase price allocation as described in adjustment (A) above.
63
<PAGE>
(J) The adjustment of $67,500 is made to reduce Heaven's Door's historical
goodwill to its fair market value of $0. This amount has not been
reflected in the historical balances as of September 30, 1999.
(K) Pacific is funding BTI and records the funding as R&D expense. BTI
utilizes these funds for R&D and G&A expense. Accordingly, the Pacific
expense is being eliminated in these pro forma financials.
(L) Before Procept's acquisition of Pacific, Pacific acquired BTI. As part
of the acquisition of BTI by Pacific, a loan, a note payable and the
related accrued interest were converted to BTI common stock. Interest on
the loan of $510,000 has been eliminated in the Pro Forma Combined
Statements of Operations for the year ended December 31, 1998 as if these
loans were converted to Pacific common stock on January 1, 1998.
(M) All of Pacific's preferred stock dividends related to its 1997 private
placement are assumed to have been triggered by the mergers and therefore
recorded prior to the earliest period presented and eliminated from the
pro forma financials.
(N) To eliminate Pacific's weighted average shares outstanding, issue
4,261,221 shares of common stock of Procept as proceeds for: merger
consideration, anti-dilution rights with respect to certain shareholders
of Procept and the satisfaction of certain liabilities.
(O) Procept's merger with Pacific closed on March 17, 1999; therefore, the
majority of the 4,261,221 shares issued are included in Procept's
weighted average shares outstanding for the nine month period ended
September 30, 1999. The 1,169,370 weighted average shares represent the
portion of the 4,261,221 shares issued in Procept's merger with Pacific
that were outstanding from January 1, 1999 to March 16, 1999 and were not
included in Procept's weighted average shares outstanding for the nine
month period ended September 30, 1999.
(P) To issue 15,155,742 shares of common stock of Procept as proceeds of the
merger, eliminate Heaven's Door's weighted average shares outstanding,
and to issue 815,938 shares issued to satisfy certain liabilities as
described in Notes D, E and F.
(Q) To eliminate the non-recurring charge for purchased in-process research
and development amount of $9,405,671 that resulted from Procept's
acquisition of Pacific and BTI.
64
<PAGE>
PRINCIPAL STOCKHOLDERS
PROCEPT SHARE OWNERSHIP
The following table and footnotes set forth information regarding the
beneficial ownership of Procept's common stock as of December 1, 1999 by
(i) persons known by Procept to be beneficial owners of more than 5% of Procept
common stock, (ii) each executive officer of Procept, (iii) each director of
Procept, and (iv) all current executive officers and directors of Procept as a
group:
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED (1)
-----------------------------------------
PERCENTAGE
------------------------
BENEFICIAL OWNER SHARES PRE-MERGER POST-MERGER
- ---------------- ---------- ---------- -----------
<S> <C> <C> <C>
The Aries Trust......................................... 12,081,790(2) 60.22% 33.08%
Aries Domestic Fund, L.P.
Aries Master Fund
Aries Domestic Fund II, L.P.
Paramount Capital Investments, LLC
Paramount Capital Asset Management, Inc.
Dr. Lindsay A. Rosenwald
c/o Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, New York 10019
John F. Dee............................................. 1,043,412(3) 6.52% 3.21%
Michael Fitzgerald...................................... 5,000(4) * *
Michael S. Weiss........................................ 260,738(5) 3.35% 1.62%
Zola P. Horovitz, Ph.D.................................. 37,610(6) * *
Max Link, Ph.D.......................................... 24,169(7) * *
Mark C. Rogers, M.D..................................... 10,006,200(8) 54.98 28.86
Nigel J. Rulewski, M.D.................................. 187,726(9) 1.24% *
Elliott H. Vernon....................................... 25,2111(10) * *
Glenn Cooper............................................ 0 * *
All current executive officers and directors as a group
(9 persons)........................................... 11,871,626(11) 59.26% 32.53%
</TABLE>
- --------------------------
* 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 the 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 December 1, 1999 are treated as outstanding solely for the
purpose of calculating the amount and percentage of shares beneficially
owned by the holder of the options or warrants.
(2) Reported ownership consists of:
(A) the following holdings of The Aries Trust: (1) 4,370,326 outstanding
shares of common stock, (2) 1,344,652 shares issuable on exercise of
Class C Warrants, (3) 83,353 shares issuable upon exercise of 1998 Unit
Purchase Options, (4) 51,067 shares issuable upon exercise of Class C
Warrants issuable on exercise of 1998 Unit Purchase Options, (5) 65,584
shares issuable upon exercise of 1997 Unit Purchase Options originally
issued by Pacific, (6) 9,061 shares issuable upon exercise of Class A
Warrants issuable on exercise of 1997 Unit Purchase Options originally
issued by Pacific, (7) 2,716 shares issuable upon exercise of 1995 Unit
Purchase Options originally issued by Pacific, (8) 3,395 shares issuable
upon exercise of Class A Warrants issuable on exercise of 1995 Unit
Purchase Options originally issued by Pacific, (9) 117,757 shares
issuable upon exercise of Class A Warrants originally issued by Pacific,
(10) 441,000 shares issuable upon exercise of Class D Warrants,
(11) 11,408 shares issuable upon exercise of Common Stock Warrants
originally issued by Pacific, and (12) 4,092 shares issuable upon
exercise of Common Stock Warrants issued by Procept;
65
<PAGE>
(B) the following holdings of the Aries Domestic Fund, L.P.: (1) 2,207,454
outstanding shares of common stock, (2) 700,592 shares issuable on
exercise of Class C Warrants, (3) 41,055 shares issuable upon exercise
of 1998 Unit Purchase Options, (4) 25,153 shares issuable upon exercise
of Class C Warrants issuable on exercise of 1998 Unit Purchase Options,
(5) 33,807 shares issuable upon exercise of 1997 Unit Purchase Options
originally issued by Pacific, (6) 4,671 shares issuable upon exercise of
Class A Warrants issuable on exercise of 1997 Unit Purchase Options
originally issued by Pacific, (7) 2,716 shares issuable upon exercise of
1995 Unit Purchase Options originally issued by Pacific, (8) 3,395
shares issuable upon exercise of Class A Warrants issuable on exercise
of 1995 Unit Purchase Options originally issued by Pacific, (9) 73,871
shares issuable upon exercise of Class A Warrants originally issued by
Pacific, (10) 189,000 shares issuable upon exercise of Class D Warrants,
(11) 4,889 shares issuable upon exercise of Common Stock Warrants issued
by Pacific, and (12) 1,754 shares issuable upon exercise of Common Stock
Warrants issued by Procept;
(C) the following holding of Aries Master Fund: 26,962 shares of common
stock;
(D) the following holding of Aries Domestic Fund II, L.P.: 634 shares of
common stock
(E) the following holdings of Dr. Lindsay A. Rosenwald: (1) 213,697
outstanding shares of common stock, (2) 693,809 shares issuable upon
exercise of 1998 Unit Purchase Options, (3) 425,069 shares issuable upon
exercise of Class C Warrants issuable on exercise of 1998 Unit Purchase
Options, (4) 624,556 shares issuable upon exercise of 1997 Unit Purchase
Options originally issued by Pacific, (5) 86,292 shares issuable upon
exercise of Class A Warrants issuable on exercise of 1997 Unit Purchase
Options originally issued by Pacific, (6) 20,879 shares issuable upon
exercise of 1995 Unit Purchase Options originally issued by Pacific, and
(7) 26,099 shares issuable upon exercise of Class A Warrants issuable on
exercise of 1995 Unit Purchase Options originally issued by Pacific; and
(F) the following holding of Paramount Capital Investments, LLC: 171,025
shares of common stock.
(3) Includes 1,043,412 shares issuable to Mr. Dee upon the exercise of options
currently exercisable or exercisable within 60 days of December 1, 1999.
(4) Consists solely of shares of common stock owned by Mr. Fitzgerald.
(5) Includes (A) 242,845 shares issuable to Mr. Weiss upon the exercise of
options currently exercisable or exercisable within 60 days of December 1,
1999 and (B) options held by Hawkins Group, LLC to purchase units
consisting of an aggregate of (i) 159,678 shares of common stock and
(ii) 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.
(6) Consists solely of shares issuable to Dr. Horovitz upon the exercise of
options currently exercisable or exercisable within 60 days of December 1,
1999.
(7) Includes 23,954 shares issuable to Dr. Link upon the exercise of options
currently exercisable or exercisable within 60 days of December 1, 1999.
(8) Includes (A) 9,991,389 shares held by The Aries Trust, Aries Domestic Fund,
L.P., Aries Master Fund, Aries Domestic Fund II, L.P., Paramount Capital
Investments LLC and Paramount Capital Asset Management Inc. (the "Paramount
Entities") and (B) shares issuable to Dr. Rogers upon the exercise of
options currently exercisable or exercisable within 60 days of December 1,
1999. Dr. Rogers is the President of Paramount Capital, Inc. which is
affiliated with the Paramount Entities. Dr. Rogers disclaims beneficial
ownership of the shares held by the Paramount Entities except to the extent
of his pecuniary interest therein if any.
(9) Includes 177,726 shares issuable to Dr. Rulewski upon the exercise of
options currently exercisable or exercisable within 60 days of December 1,
1999.
(10) Consists solely of shares issuable to Mr. Vernon upon the exercise of
options currently exercisable or exercisable within 60 days of December 1,
1999.
(11) Includes 1,589,523 shares of common stock subject to options that are
presently exercisable or will become exercisable within sixty (60) days of
December 1, 1999. See footnotes (3), (4), (5), (6), (7), (8), (9), and
(10).
66
<PAGE>
HEAVEN'S DOOR SHARE OWNERSHIP
The following table and footnotes sets forth information regarding the
beneficial ownership of Heaven's Door's common stock as of December 1, 1999 and
the percentage which such ownership bears to the total number of outstanding
shares as of that date by (i) persons known to Heaven's Door to be beneficial
owners of more than 5% of the Heaven's Door common stock; (ii) each executive
officer of Heaven's Door, (iii) each director of Heaven's Door and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED (1)
-----------------------
BENEFICIAL OWNER SHARES PERCENTAGE
- ---------------- ---------- ----------
<S> <C> <C>
Michael Mitchell............................................ 2,500,000 20.63%
Don Paradiso................................................ 1,621,996 13.39%
Richard Kurtz............................................... 1,482,499(2) 12.24%
GSII Corporation............................................ 1,421,996 11.74%
Howard Weiser............................................... 1,350,000(3) 11.14%
J.E. Holdings, Inc.......................................... 1,250,000 10.32%
Xavier "Sonny" Metichecchia................................. 150,000(4) 1.24%
Geoffrey Gazda.............................................. 100,000(4) *
Charlie Scheuerman.......................................... 100,000(4) *
Robert Weiser............................................... 100,000(4) *
Heinz E. Haselmann.......................................... 50,000(4) *
All current executive officer and directors as a group (7
persons).................................................. 4,350,000(5) 35.90%
</TABLE>
- ------------------------------
* 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 the stockholder, subject to community property laws
where applicable.
(2) Includes 400,000 shares owned by Argus Publishing of which Richard Kurtz is
the sole shareholder and 262,499 shares that Heaven's Door will issue prior
to the consummation of the merger upon conversion of a convertible debt
instrument in the principal amount of $275,000.
(3) Includes 1,250,000 shares owned by J.E. Holdings, a company with respect to
which Howard Weiser is the sole shareholder. Also includes 100,000 shares
which will be issued by Heaven's Door prior to the closing of the merger in
cancellation of contingent rights that the stockholder holds in connection
with his engagement as an advisor of Heaven's Door.
(4) These shares will be issued by Heaven's Door prior to the closing of the
merger in cancellation of contingent rights that the individuals hold in
connection with their employment or advisory relationships with Heaven's
Door.
(5) Includes 600,000 shares which will be issued by Heaven's Door prior to the
closing of the merger in cancellation of contingent rights that the
stockholders hold in connection with their employment or advisory
relationships with Heaven's Door.
67
<PAGE>
DESCRIPTION OF PROCEPT CAPITAL STOCK
GENERAL
The description of the capital stock below is qualified in its entirety by
reference to the Procept restated certificate of incorporation, as amended, and
the Procept by-laws, copies of which are on file with the SEC. We sometimes
refer to the Procept restated certificate of incorporation as the Procept
charter.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Procept is authorized to issue up to 30,000,000 shares of Procept common
stock with a par value of $0.01 per share and 1,000,000 shares of Procept
preferred stock with a par value of $0.01 per share. On December 1, 1999, there
were 14,970,037 shares of Procept common stock issued and outstanding. No shares
of Procept preferred stock are issued or outstanding. After giving effect to the
stock issuances related to the merger, approximately 31,436,037 shares of
Procept will be outstanding. In addition, after giving effect to the merger and
including shares issuable in connection with warrants and options exercisable
for an aggregate of 12,386,903 shares, 43,822,940 shares of Procept common stock
will be outstanding.
COMMON STOCK
Shares of Procept common stock which, by the provisions of the Procept
charter, are entitled to vote upon any question are entitled to one vote per
share in person or by proxy and do not have cumulative voting rights. The
Procept stockholders are entitled to receive dividends only when and if declared
by the Procept board of directors out of any funds legally available of Procept
for the payment of dividends. The Procept stockholders have no preemptive rights
to purchase shares of capital stock of Procept. Shares of Procept common stock
are not subject to any redemption provisions and are not convertible into any
other securities or property. In the event of a liquidation, dissolution or
winding up of the affairs of Procept, the holders of Procept common stock are
entitled to share ratably in all assets of Procept which are legally available
for distribution, after payment of all debts and other liabilities and subject
to the prior rights of any holders of Procept preferred stock then outstanding.
All issued and outstanding shares of Procept common stock are fully-paid and
non-assessable and the shares of Procept common stock to be issued in connection
with the merger, when authorized, approved, issued and delivered, subject to the
terms of the merger agreement, will be fully-paid and non-assessable. The
rights, preferences and privileges of holders of Procept common stock are
subject to the rights of the holders of shares of any series of preferred stock
that Procept may issue in the future.
PREFERRED STOCK
Procept may issue preferred stock from time to time in one or more series
and the Procept board of directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each series of preferred stock. The purpose of authorizing the
Procept board of directors to determine the rights and preferences of the
preferred stock is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting power of holders of Procept
common stock and, under certain circumstances, make it more difficult for a
third party to gain control of Procept.
OPTIONS AND WARRANTS
After giving effect to the merger, Procept will have options and warrants
outstanding for approximately 12,386,903 shares of Procept common stock, held by
employees and investors in Procept
68
<PAGE>
or Pacific having exercise prices ranging from $0.70 to $490.00. Some of these
warrants have anti-dilution protection, which provisions may cause the number of
shares issuable on exercise to increase in the event Procept issues shares of
common stock in the future at less than the exercise price or then market price.
DELAWARE ANTI-TAKEOVER STATUTE
Delaware has a law regulating corporate takeovers, commonly referred to as
the "anti-takeover law." In certain circumstances, the anti-takeover law
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq SmallCap Market, from engaging in a "business combination,"
including a merger or sale of more than 10% of the corporation's assets, with an
"interested stockholder" for three years following the date on which the
stockholder became an interested stockholder subject to certain exceptions,
unless the transaction is approved by the board of directors and the holders of
at least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). An "interested stockholder" is a
stockholder who owns 15% or more of corporation's outstanding voting securities.
The statutory ban does not apply if, upon consummation of the transaction in
which any person becomes an interested stockholder, the interested stockholder
owns at least 85% of the outstanding voting stock of the corporation (excluding
shares held by persons who are both directors and officers or by certain
employee stock plans). A Delaware corporation subject to the anti-takeover law
may "opt out" of the anti-takeover law with an express provision either in its
certificate of incorporation or by-laws resulting from a stockholders' amendment
approved by at least a majority of the outstanding voting shares; such an
amendment is effective following expiration of twelve months from adoption.
Procept is a Delaware corporation that is subject to the anti-takeover law and
has not "opted out" of its provisions.
The anti-takeover law could have the effect of discouraging others from
attempting a hostile takeover of Procept and, as a consequence, it may also
inhibit temporary fluctuations in the market price of the common stock that
might result from actual or rumored hostile takeover attempts. The anti-takeover
law may also have the effect of preventing changes in the management of Procept.
It is possible that the anti-takeover law could make it more difficult to
accomplish transactions which stockholders may otherwise deem to be in their
best interests.
The Procept charter provides that Procept will indemnify each of its
directors and officers against all liabilities and expenses reasonably incurred
by a director or officer in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which a director
or officer is involved or with which a director or officer is threatened, while
in office or thereafter. The rights accruing to any director or officer under
the foregoing provisions do not exclude any other right to which a director or
officer may be lawfully entitled and inure to the benefit of such person's
estate. No stockholder will be liable personally to any person with respect to
any claim for indemnity or reimbursement or otherwise.
The Procept charter further provides that, notwithstanding any provision of
law or any other provision of the Procept charter, a director will not be liable
to Procept or any Procept stockholder for monetary damages for breach of the
director's fiduciary duties as a director, except with respect to any matter as
to which the liability is imposed by applicable law and the director was
adjudicated (i) to have breached his or her duty of loyalty to Procept or its
stockholders, (ii) not to have acted in good faith or omitted to act in good
faith, (iii) to have knowingly violated the law, (iv) to have intentionally
engaged in misconduct, (v) to have derived any improper personal benefit from a
transaction or (vi) pursuant to Section 174 of the Delaware General Corporation
Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Procept common stock is American
Stock Transfer & Trust Company.
69
<PAGE>
COMPARATIVE RIGHTS OF HOLDERS OF HEAVEN'S DOOR
AND PROCEPT COMMON STOCK
Both Heaven's Door and Procept are organized under the laws of the State of
Delaware. If the merger is completed, holders of Heaven's Door common stock will
become holders of Procept common stock, and the rights of former Heaven's Door
common stockholders will be governed by the Delaware General Corporation Law,
referred to as the DGCL, and Procept's restated certificate of incorporation and
by-laws. The rights of Heaven's Door stockholders under Heaven's Door's amended
certificate of incorporation and by-laws differ in limited respects from the
rights of Procept stockholders under Procept's restated certificate of
incorporation and by-laws. The following table provides a summary of the
material differences between the rights of Heaven's Door stockholders and
Procept stockholders. This summary does not purport to be complete and is
qualified in its entirety by reference to the relevant provisions of the DGCL
and to the organizational documents of both Heaven's Door and Procept.
<TABLE>
<CAPTION>
HEAVEN'S DOOR CORPORATION
PROCEPT STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
<S> <C> <C>
CORPORATE GOVERNANCE The rights of Procept The rights of Heaven's Door
stockholders currently are stockholders currently are
governed by the DGCL and the governed by the DGCL and the
restated certificate of amended certificate of
incorporation and by-laws of incorporation and by- laws of
Procept. Heaven's Door.
Upon completion of the merger, Upon completion of the merger,
the rights of Procept the rights of the former
stockholders will continue to be Heaven's Door stockholders will
governed by the DGCL and the be governed by the DGCL and the
restated certificate of restated certificate of
incorporation and by-laws of incorporation and by- laws of
Procept. Procept.
AUTHORIZED CAPITAL STOCK The authorized capital stock of Heaven's Door is authorized to
Procept is set forth under the issue up to 20,000,000 shares of
"Description of Procept Capital common stock, $.001 par value.
Stock" above.
BOARD OF DIRECTORS Procept currently has seven Heaven's Door currently has
directors. The Procept by-laws three directors. The Heaven's
provide that the board of Door by- laws provide that the
directors cannot be comprised of board of directors cannot be
fewer than one director. The comprised of fewer than three or
number of directors is fixed by greater than five directors,
the board from time-to-time and unless a fewer number is allowed
may be enlarged by a vote of the by the DGCL.
majority of the directors then
in office.
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
HEAVEN'S DOOR CORPORATION
PROCEPT STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
<S> <C> <C>
REMOVAL OF DIRECTORS Under the Procept by-laws, a The Heaven's Door by-laws do not
director may be removed with or provide for removal of
without cause, by the holders of directors. Under the DGCL, any
a majority of the shares director or the entire board of
entitled to vote at an election directors may be removed, with
of directors, provided that the or without cause, by the holders
directors of a class elected by of a majority of the shares then
a particular class of entitled to vote at an election
stockholders may be removed only of directors.
by the vote of a majority of the
shares of the class entitled to
vote for the election of those
directors.
SPECIAL MEETINGS OF Special meetings of the Special meetings of the
STOCKHOLDERS; stockholders may be called at stockholders may be called at
STOCKHOLDER ACTION any time by Procept's President, any time by Heaven's Door's
WITHOUT MEETING Chairman of the board of President or board of directors
directors, if any, the board of and shall be called by the
directors, or by the Secretary President at the request of the
or any other officer upon the holders of not less than
written request of one or more one-tenth of all the outstanding
stockholders holding of record shares of the corporation
at least a majority of the entitled to vote at the meeting.
outstanding shares of Procept
stock entitled to vote at the
meeting. The written request
must state the purpose or
purposes of the proposed
meeting. Business transacted at
any special meeting of
stockholders is limited to
matters relating to the purpose
or purposes stated in the notice
of meeting.
The DGCL and the Procept by- The DGCL and the Heaven's Door
laws permit action to be taken by-laws permit action to be
without a meeting, without prior taken without a meeting, without
notice and without a vote, if a prior notice and without a vote,
consent in writing, setting if a consent in writing, setting
forth the action so taken, is forth the action so taken, is
signed by the holders of signed by the holders of
outstanding stock having not outstanding stock having not
less than the minimum number of less than the minimum number of
votes that would be necessary to votes that would be necessary to
authorize or take such action at authorize or take such action at
a meeting at which all shares a meeting at which all shares
entitled to vote on the action entitled to vote on the action
were present and voted. Under were present and voted. Under
the DGCL, prompt notice of the the DGCL, prompt notice of the
taking of corporate action taking of corporate action
without a meeting by less than without a meeting by less than
unanimous written consent must unanimous written consent must
be given to those be given to those
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
HEAVEN'S DOOR CORPORATION
PROCEPT STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
<S> <C> <C>
stockholders who have not stockholders who have not
consented in writing. consented in writing.
STOCKHOLDER PROPOSALS Procept has no provisions in its Heaven's Door has no provisions
charter or by-laws relating to in its charter or by-laws
stockholder proposals. relating to stockholder
proposals.
QUORUM FOR MEETING OF The holders of a majority in The holders of at least fifty
STOCKHOLDERS interest of all stock issued and one percent of all stock issued
outstanding and entitled to vote and outstanding and entitled to
upon a question to be considered vote upon a question to be
at a meeting, present in person considered at the meeting of
or represented by proxy, Heaven's Door, present in person
constitutes a quorum for the or represented by proxy,
consideration of that question. constitutes a quorum for the
consideration of that question.
STOCKHOLDER'S VOTING The holders of shares of Procept The holders of shares of
RIGHTS common stock vote together as Heaven's Door common stock vote
one class. Each share of Procept together as one class. Each
common stock entitles the holder share of Heaven's Door common
to one vote. stock entitles the holder to one
vote.
LIQUIDATION RIGHTS Upon liquidation or dissolution, Upon liquidation or dissolution,
after payment had been made to each outstanding common share is
any holder of the preferred entitled to share equally in the
stock of the full amount to assets legally available for
which they are entitled, the distribution to stockholders
holders of common stock are after payment of all debts and
entitled to share ratably other liabilities.
according to the number of
shares of common stock held by
them in all remaining assets of
the corporation available for
distribution to its
stockholders.
CONVERSION RIGHTS No convertible preferred stock No convertible preferred stock
is outstanding. has been authorized.
DIVIDEND RIGHTS Dividends are payable on Procept Dividends are payable on
common stock only when, as and Heaven's Door common stock only
if declared by Procept's board when, as and if declared by
of directors, out of funds Heaven's Door board of
legally available for directors, out of funds legally
distribution. The DGCL provides available for distribution. The
that dividends on Procept common DGCL provides that dividends on
stock may be paid only out of Heaven's Door common stock may
Procept's surplus or net profits be paid only out of Heaven's
for the fiscal year in which the Door's surplus or net profits
dividend is declared and/ or the for the fiscal year in which the
preceding fiscal year. dividend is declared and/or the
preceding fiscal year.
Procept has not paid dividends Heaven's Door has not paid
to date and it does not dividends to date and it is not
anticipate paying any dividends anticipated that any dividends
in the foreseeable future. will be paid in the foreseeable
future.
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
HEAVEN'S DOOR CORPORATION
PROCEPT STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
<S> <C> <C>
APPRAISAL RIGHTS Because Procept is quoted on the The DGCL governs the
Nasdaq SmallCap Market, Procept availability of appraisal rights
stockholders are not entitled to with respect to the merger with
appraisal rights under the DGCL Procept. Under Section 262 of
in connection with the merger. the DGCL, Heaven's Door
stockholders are entitled to an
appraisal by the Court of
Chancery of the fair value of
their shares, exclusive of any
element of value arising from
the merger if they:
(1) file written notice with
Heaven's Door of their
intention to exercise such
appraisal rights;
(2) continue to hold their
shares through the effective
time of the merger;
(3) do not vote in favor of the
merger; Stockholders who
follow the procedure set
forth in Section 262 are
entitled to have their
Heaven's Door stock
purchased by the surviving
corporation for cash at the
fair value of the shares of
Heaven's Door as determined
by the Delaware Court of
Chancery.
STOCKHOLDER RIGHTS PLAN Procept does not have a Heaven's Door does not have a
stockholders rights plan. stockholders rights plan.
CHARTER AND BY-LAW Procept's charter may be amended Heaven's Door's charter may be
AMENDMENTS by vote of a majority of the amended by vote of a majority of
outstanding stock entitled to the outstanding stock entitled
vote thereon. Procept's by-laws to vote thereon. Heaven's Door's
may be amended (i) by the by- laws may be amended (i) by
affirmative vote of a majority the affirmative vote of a
of the directors present at any majority of the directors
regular or special meeting of present at any regular or
the board of directors at which special meeting of the board of
a quorum is present or (ii) by directors at which a quorum is
the affirmative vote of the present or (ii) by the
holders of a majority of the affirmative vote of the holders
outstanding stock entitled to of a majority of the outstanding
vote at any regular meeting of stock entitled to vote at any
stockholders, or at any special regular meeting of stockholders,
meeting of stockholders provided or at any special meeting of
notice of such amendment was stockholders provided notice of
included in the notice of such such amendment was included in
special meeting. the notice of such special
meeting.
</TABLE>
73
<PAGE>
LEGAL MATTERS
Certain legal matters relating to Procept in connection with the merger,
including, among other things, certain legal matters with respect to the
validity of the securities to be issued, will be passed upon for Procept by
Palmer & Dodge LLP, Boston, Massachusetts. Lynnette C. Fallon, a partner at
Palmer & Dodge LLP, is the Secretary of Procept.
Certain legal matters relating to Heaven's Door in connection with the
merger will be passed upon for Heaven's Door by Todtman, Nachamie, Spizz &
Johns, P.C..
EXPERTS
The financial statements of Procept as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 included in this
proxy statement/prospectus have been so included in reliance on the report dated
March 17, 1999 of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Heaven's Door as of June 30, 1999 and 1998, and
for each of the three years in the period ended June 30, 1999 included in this
proxy statement/prospectus, have been so included in reliance on the report
dated August 11, 1999 of Rotenberg & Company, LLP, independent auditors, given
upon their authority as experts in accounting and auditing.
With respect to the Independent Accountants Report on the unaudited interim
financial information of Heaven's Door Corporation for the three month periods
ended September 30, 1999 and 1998 dated November 5, 1999, which is included in
this proxy statement/prospectus, Rotenberg & Company, LLP has applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in its report Rotenberg & Company LLP did not
audit and it did not express an opinion on that interim financial information.
Accordingly, the degree of reliance on its report on the unaudited interim
financial information should be restricted in light of the limited nature of the
review procedures applied. Rotenberg & Company, LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for its report
on the unaudited interim financial information because that report is not a
"report" or a "part" of the registration statement prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Securities Act.
The consolidated financial statements of Pacific Pharmaceuticals, Inc. as of
March 31, 1998 and 1997, and for each of the three years in the period ended
March 31, 1998 have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
restatement of 1997 financial statements), and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of Binary Therapeutics, Inc. as of and for the year
ended December 31, 1997 and as of and for the nine months ended September 30,
1998 included in this proxy statement/ prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
74
<PAGE>
FUTURE PROCEPT STOCKHOLDER PROPOSALS
As noted in Procept's proxy statement for the 1999 annual meeting, the
deadline to have stockholder proposals included in the proxy statement for
Procept's 2000 annual meeting is December 31, 1999. Proposals must comply with
the Securities and Exchange Commission's proxy regulations relating to
stockholder proposals in order to be considered for inclusion in Procept's proxy
materials. If a proponent fails to notify Procept in writing by March 15, 2000
of a proposal for consideration at the 2000 annual meeting, then the proxies
named by Procept management with respect to that meeting will have discretionary
voting authority with respect to that proposal.
OTHER MATTERS
Procept does not presently intend to bring before the Procept special
meeting any matters other than those specified in the notice of meeting, and
Procept does not know of any other matters which may be brought up by other
persons. However, if any other matters not now known properly come before the
Procept special meeting or any adjournments thereof, the persons named in the
enclosed forms of the Procept proxy, including any substitutes, will vote
proxies in accordance with their judgment on that matter.
75
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Procept files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that Procept files with the
SEC at the SEC's public reference rooms at the following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and
other information concerning Procept may also be inspected at the offices of The
Nasdaq Stock Market, which is located at 1735 K Street, N.W., Washington, D.C.
20006.
Procept filed a registration statement on Form S-4, to register with the SEC
the Procept common stock to be issued to Heaven's Door stockholders in the
merger. This proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Procept in addition to being a proxy statement
of Procept. As allowed by SEC rules, this proxy statement/prospectus does not
contain all the information you can find in Procept's registration statement or
the exhibits to the registration statement.
The SEC allows Procept to "incorporate by reference" information into this
proxy statement/ prospectus, which means that Procept can disclose important
information to you by referring you to other documents filed separately with the
SEC. The information incorporated by reference is considered part of this proxy
statement/prospectus, except for any information superseded by information
contained directly in this proxy statement/prospectus or in later filed
documents incorporated by reference in this proxy statement/ prospectus.
This proxy statement/prospectus incorporates by reference the documents set
forth below that Procept has previously filed with the SEC. These documents
contain important business and financial information about Procept that is not
included in or delivered with this proxy statement/prospectus.
<TABLE>
<CAPTION>
PROCEPT FILINGS (FILE NO.0-21134) PERIOD OR DATE FILED
<S> <C>
Annual Report on Form 10-K Fiscal year ended December 31, 1998, filed on April 1,
1999
Quarterly Reports on Form 10-Q Quarters ended March 31, 1999, filed on May 24, 1999, as
amended on June 7, 1999; June 30, 1999, filed on August
16, 1999; and September 30, 1999, filed on November 12,
1999
Current Reports on Form 8-K Filed on March 31, 1999
The description of Procept common stock Filed on January 21, 1993, as amended by Procept's
contained in Procept's Registration Registration Statements on Form 8-A/A, filed on November
Statement on Form 8-A 8, 1993 and February 7, 1994
</TABLE>
Procept also incorporates by reference additional documents that it may file
with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act between
the date of this proxy statement/ prospectus and the date of the Procept special
meeting. These include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
76
<PAGE>
If you are a Procept stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through Procept, the
SEC or the SEC's Internet web site as described above. Documents incorporated by
reference are available from Procept without charge, excluding all exhibits,
except that if Procept has specifically incorporated by reference an exhibit in
this proxy statement/prospectus, the exhibit will also be provided without
charge. Stockholders may obtain documents incorporated by reference in this
proxy statement/prospectus by requesting them in writing or by telephone from
Procept at the following address:
Procept, Inc.
840 Memorial Drive
Cambridge, Massachusetts 02139
(617) 491-1100
If you would like to request documents from Procept, please make your
request by January 18, 1999 so that you will receive them before the special
meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. We have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement/prospectus. This proxy statement/prospectus is dated
December 22, 1999. You should not assume that the information contained in this
proxy statement/ prospectus is accurate as of any date other than that date.
Neither the mailing of this proxy statement/ prospectus to stockholders nor the
issuance of Procept common stock to the Heaven's Door stockholders in the merger
creates any implication to the contrary.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF PROCEPT, HEAVEN'S DOOR, PACIFIC AND BTI
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
FINANCIAL STATEMENTS OF PROCEPT
Report of Independent Accountants......................... F-3
Balance Sheets as of December 31, 1998 and 1997........... F-4
Statements of Operations for the years ended December 31,
1998, 1997 and 1996..................................... F-5
Statements of Comprehensive Income (Loss)................. F-5
Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997
and 1996................................................ F-6
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996..................................... F-7
Notes to Financial Statements............................. F-8
Balance Sheet at December 31, 1998 and September 30, 1999
(unaudited)............................................. F-27
Statement of Operations for the Three and Nine Months
ended September 30, 1998 and September 30, 1999
(unaudited)............................................. F-28
Statement of Cash Flows for the Nine Months ended
September 30, 1998 and 1999 (unaudited)................. F-29
Notes to Financial Statements (unaudited)................. F-30
FINANCIAL STATEMENTS OF HEAVEN'S DOOR
Independent Auditors' Report.............................. F-36
Independent Accountant's Report on Interim Unaudited
Financial Information................................... F-37
Balance Sheets at June 30, 1999 and 1998 and
September 30, 1999 (Unaudited).......................... F-38
Statements of Changes in Stockholders' Equity for the
Period From Inception (October 27, 1994) through
June 30, 1999 and for the Three Months Ended
September 30, 1999 (Unaudited).......................... F-39
Statements of Operations for the Years Ended June 30,
1999, 1998 and 1997 and for the Period From Inception
(October 27, 1994) through June 30, 1999 and for the
Three Months Ended September 30, 1999 (Unaudited)....... F-40
Statements of Cash Flows for the Years Ended June 30,
1999, 1998 and 1997 and for the Period From Inception
(October 27, 1994) through June 30, 1999 and for the
Three Months Ended September 30, 1999 (Unaudited)....... F-41
Notes to Financial Statements............................. F-43
CONSOLIDATED FINANCIAL STATEMENTS OF PACIFIC
Independent Auditors' Report.............................. F-49
Consolidated Balance Sheets as of March 31, 1998 and 1997
(as restated)........................................... F-50
Consolidated Statements of Operations for the years ended
March 31, 1998, March 31, 1997 (as restated), March 31,
1996 and September 23, 1983 (inception) to March 31,
1998.................................................... F-51
Consolidated Statements of Stockholders' Equity from
September 23, 1983 (inception) to March 31, 1998........ F-52
Consolidated Statements of Cash Flow for the years ended
March 31, 1998, March 31, 1997, March 31, 1996 and
September 23, 1983 (inception) to March 31, 1998........ F-54
Notes to Consolidated Financial Statements................ F-55
Consolidated Balance Sheet as of December 31, 1998
(unaudited) and March 31, 1998.......................... F-69
Consolidated Statements of Operations for the Three Months
and Nine Months ended December 31, 1998 (unaudited) and
1997 (as restated) and from September 23, 1983
(inception) to December 31, 1998........................ F-70
Consolidated Statements of Stockholders'
Equity/(Deficiency) for the Nine Months ended
December 31, 1998 (unaudited) and 1997 (as restated).... F-71
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
Consolidated Statements of Cash Flows for the Nine Months
ended December 31, 1998 (unaudited) and 1997 and from
September 23, 1983 (inception) to December 31, 1998..... F-72
Notes to Consolidated Financial Statements (unaudited).... F-73
FINANCIAL STATEMENTS OF BINARY THERAPEUTICS, INC.
Independent Auditors' Report.............................. F-78
Balance Sheets as of December 31, 1997 and September 30,
1998.................................................... F-79
Statements of Operations for the year ended December 31,
1997, the Nine Months ended September 30, 1998 and
October 23, 1998 (inception) to September 30, 1998
(unaudited)............................................. F-80
Statement of Stockholders' Equity from October 23, 1990
(inception) to September 30, 1998 (balances prior to
January 1, 1997 are unaudited).......................... F-81
Statements of Cash Flow for the year ended December 31,
1997, the Nine Months ended September 30, 1998 and
October 23, 1990 (inception) to September 30, 1998
(unaudited)............................................. F-83
Notes to Financial Statements............................. F-84
Balance Sheets as of December 31, 1998 (unaudited) and
September 30, 1998...................................... F-90
Statement of Operations for the Three Months Ended
December 31, 1998 and 1997 (unaudited) and from
October 23, 1990 (inception) to December 31, 1998
(unaudited)............................................. F-91
Statement of Cash Flows for the Three Months Ended
December 31, 1998 and 1997 (unaudited) and from
October 23, 1990 (inception) to December 31, 1998
(unaudited)............................................. F-92
Notes to Financial Statements............................. F-93
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Procept, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, comprehensive income (loss), shareholders' equity and cash flows
present fairly, in all material respects, the financial position of
Procept, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 1999
F-3
<PAGE>
PROCEPT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,885,165 $ 535,242
Marketable securities (Note C).......................... 2,003,755 --
Accounts receivable from VacTex (Note G)................ -- 81,951
Investment in Aquila (Note G)........................... 568,988 --
Prepaid expenses and other current assets............... 182,925 50,111
----------- -----------
Total current assets.................................. 5,640,833 667,304
Property and equipment, net (Notes D and J)................. 180,452 889,258
Deferred charges (Note E)................................... 176,025 54,424
Deposits (Note J)........................................... 190,615 250,615
Investment in VacTex (Note G)............................... -- 300,000
Other assets................................................ -- 6,411
----------- -----------
Total assets.......................................... $ 6,187,925 $ 2,168,012
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 268,815 $ 1,069,952
Accrued compensation.................................... 54,511 320,463
Accrued professional services........................... 185,604 142,680
Other current liabilities............................... 96,875 --
Current portion of capital lease obligations (Note J)... -- 20,231
----------- -----------
Total current liabilities............................. 605,805 1,553,326
Deferred rent (Note J)...................................... 185,615 257,827
Other noncurrent liabilities................................ -- 96,875
Commitments and contingencies (Notes G and J)
Shareholders' equity (Note E):
Preferred stock, par value $.01 per share; 1,000,000
shares authorized: Series A, 1 and 30,061 shares
designated at December 31, 1998 and 1997,
respectively; 0 and 30,060 shares issued and
outstanding at December 31, 1998 and 1997,
respectively.......................................... -- 301
Common stock, $.01 par value; 30,000,000 shares
authorized; 3,001,832 and 196,204 shares issued at
December 31, 1998 and 1997, respectively.............. 30,018 1,962
Additional paid-in capital.............................. 70,458,992 62,242,741
Deferred compensation................................... (88,716) --
Cumulative dividends on preferred stock (Note E)........ (4,217,388) (4,217,388)
Accumulated deficit..................................... (61,047,132) (57,755,775)
Accumulated other comprehensive income (Note F)......... 272,588 --
Treasury stock, at cost; 1,186 shares at December 31,
1998 and 1997, respectively........................... (11,857) (11,857)
----------- -----------
Total shareholders' equity............................ 5,396,505 259,984
----------- -----------
Total liabilities and shareholders' equity............ $ 6,187,925 $ 2,168,012
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-4
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative agreements (Note G)................ $ -- $ -- $ 1,275,000
Research and development revenue under
collaborative agreements from related party (Note
G)............................................... 109,375 519,552 562,500
Revenue from grant (Note G)........................ -- 113,854 --
Interest income.................................... 220,590 147,766 440,075
----------- ------------ ------------
Total revenues................................. 329,965 781,172 2,277,575
----------- ------------ ------------
Costs and expenses:
Research and development (Notes G and J)........... 1,990,640 6,618,836 9,925,315
General and administrative......................... 1,610,078 2,714,678 3,176,136
Restructuring charges (Note A)..................... 225,000 459,969 273,324
Other (income) expenses, net....................... (204,396) 40,264 138,560
----------- ------------ ------------
Total costs and expenses....................... 3,621,322 9,833,747 13,513,335
----------- ------------ ------------
Net loss............................................. (3,291,357) (9,052,575) (11,235,760)
Less: dividends on preferred stock (Note E).......... -- (4,217,388) --
----------- ------------ ------------
Net loss available to common shareholders............ $(3,291,357) $(13,269,963) $(11,235,760)
=========== ============ ============
Basic and diluted net loss per common share.......... $ (1.40) $ (63.68) $ (68.16)
=========== ============ ============
Weighted average number of common shares
outstanding--basic and diluted..................... 2,347,245 208,371 164,836
=========== ============ ============
</TABLE>
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net loss............................................. $(3,291,357) $ (9,052,575) $(11,235,760)
Other comprehensive income (loss):
Unrealized gain (loss) on investments.............. 272,588 4,838 (5,926)
Income tax expense related to items of other
comprehensive income (loss)...................... -- -- --
----------- ------------ ------------
Comprehensive loss, net of tax....................... $(3,018,769) $ (9,047,737) $(11,241,686)
=========== ============ ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-5
<PAGE>
PROCEPT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK SERIES A ADDITIONAL RECEIVABLE
--------------------- -------------------- PAID-IN DEFERRED FROM
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION SALE OF STOCK
--------- --------- -------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... 92,515 $ 925 $38,946,490 $(42,107)
Employee stock purchase plan......... 857 8 96,758 --
Issuance from secondary offering..... 33,571 336 5,263,162 --
Issuance from private placement...... 67,690 677 11,578,403 --
Payment of costs of financings....... -- -- (855,673) --
Exercise of stock options............ 801 8 66,073 (50,150)
Unrealized loss on securities for
sale............................... -- -- -- --
Collection on recivable from sale of
stock.............................. -- -- -- 19,015
Issuance of common stock warrants.... -- -- 220 --
Net loss............................. -- -- -- --
--------- ------- ----------- --------
Balance at December 31, 1996........... 195,434 1,954 55,095,433 (73,242)
Employee stock purchase plan......... 764 8 55,192 --
Exercise of stock options............ 6 -- 410 --
Issuance from private placement...... 85,333 853 2,799,147 --
Payment of private placement costs... -- -- (131,382) --
Conversion of note payable and common
stock to preferred stock........... (85,333) (853) 30,060 $ 301 206,553 --
Cancellation of notes receivable..... -- -- -- -- -- 73,242
Dividends on preferred stock......... -- -- -- -- 4,217,388 --
Maturity of marketable securities.... -- -- -- -- -- --
Net loss............................. -- -- -- -- -- --
--------- ------- ------- ----- ----------- --------
Balance at December 31, 1997........... 196,204 1,962 30,060 301 62,242,741 --
Issuance from private placement...... 1,960,500 19,605 -- -- 9,782,895 --
Payment of private placement costs... -- -- -- -- (1,764,131) --
Conversion of preferred stock to
common stock....................... 841,680 8,417 (30,060) (301) (8,116) --
Common stock contribution to savings
and retirement plan................ 3,448 34 -- -- 43,203 --
Stock options issued for services.... -- -- -- -- 58,537 --
Deferred compensation related to
stock options...................... -- -- -- -- 103,863 $(103,863) --
Amortization of deferred
compensation....................... -- -- -- -- -- 15,147 --
Unrealized gain on investments....... -- -- -- -- -- -- --
Net Loss............................. -- -- -- -- -- -- --
--------- ------- ------- ----- ----------- --------- --------
Balance at December 31, 1998........... 3,001,832 $30,018 -- $ -- $70,458,992 $ (88,716) $ --
========= ======= ======= ===== =========== ========= ========
<CAPTION>
CUMULATIVE ACCUMULATED
DIVIDENDS OTHER TOTAL
ON PREFERRED ACCUMULATED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK DEFICIT INCOME STOCK EQUITY
------------ ------------ -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... $(37,467,440) $ 1,088 $ 1,438,956
Employee stock purchase plan......... -- -- 96,766
Issuance from secondary offering..... -- -- 5,263,498
Issuance from private placement...... -- -- 11,579,080
Payment of costs of financings....... -- -- (855,673)
Exercise of stock options............ -- -- 15,931
Unrealized loss on securities for
sale............................... -- (5,926) (5,926)
Collection on recivable from sale of
stock.............................. -- -- 19,015
Issuance of common stock warrants.... -- -- 220
Net loss............................. (11,235,760) -- (11,235,760)
------------ -------- ------------
Balance at December 31, 1996........... (48,703,200) (4,838) 6,316,107
Employee stock purchase plan......... -- -- 55,200
Exercise of stock options............ -- -- 410
Issuance from private placement...... -- -- 2,800,000
Payment of private placement costs... -- -- (131,382)
Conversion of note payable and common
stock to preferred stock........... -- -- 206,001
Cancellation of notes receivable..... -- -- $(11,857) 61,385
Dividends on preferred stock......... $(4,217,388) -- -- -- --
Maturity of marketable securities.... -- -- 4,838 -- 4,838
Net loss............................. -- (9,052,575) -- -- (9,052,575)
----------- ------------ -------- -------- ------------
Balance at December 31, 1997........... (4,217,388) (57,755,775) -- (11,857) 259,984
Issuance from private placement...... -- -- -- -- 9,802,500
Payment of private placement costs... -- -- -- -- (1,764,131)
Conversion of preferred stock to
common stock....................... -- -- -- -- --
Common stock contribution to savings
and retirement plan................ -- -- -- -- 43,237
Stock options issued for services.... -- -- -- -- 58,537
Deferred compensation related to
stock options...................... -- -- -- -- --
Amortization of deferred
compensation....................... -- -- -- -- 15,147
Unrealized gain on investments....... -- -- 272,588 -- 272,588
Net Loss............................. -- (3,291,357) -- -- (3,291,357)
----------- ------------ -------- -------- ------------
Balance at December 31, 1998........... $(4,217,388) $(61,047,132) $272,588 $(11,857) $ 5,396,505
=========== ============ ======== ======== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,291,357) $(9,052,575) $(11,235,760)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 449,808 1,057,952 1,234,448
Non-cash related party revenue.......................... -- (150,000) (150,000)
Compensation expense associated with cancellation of
notes receivable....................................... -- 112,789 --
Gain on sale of equipment............................... (209,439) (40,895) --
Savings and retirement plan stock contribution.......... 43,237 -- --
Compensatory stock and stock option expense............. 73,684 -- --
Gain on sale of marketable securities................... -- -- (1,359)
Changes in operating assets and liabilities:
Accounts receivable..................................... 81,951 90,861 (163,868)
Prepaid expenses and other current assets............... (51,302) 61,126 36,274
Deposits................................................ 60,000 (114,640) 10,000
Other assets............................................ 6,411 (6,627) (18,243)
Accounts payable........................................ (801,137) 296,451 (115,199)
Accrued compensation.................................... (265,952) 197,751 (71,403)
Accrued contract research............................... -- (438,513) 21,160
Accrued professional services........................... 42,924 (53,930) (54,210)
Other current liabilities............................... 96,875 -- --
Deferred revenue........................................ -- -- (1,275,000)
Deferred rent........................................... (72,212) (27,702) 12,390
Other noncurrent liabilities............................ (96,875) (53,125) 150,000
----------- ----------- ------------
Net cash used in operating activities................. (3,933,384) (8,121,077) (11,620,770)
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures.................................... (319,669) (84,010) (297,888)
Proceeds from sale of equipment......................... 706,594 40,895 --
Proceeds from sale of marketable securities............. -- -- 2,004,070
Proceeds from maturity of marketable securities......... -- 4,006,463 3,000,000
Purchase of marketable securities....................... (2,000,155) -- (6,989,032)
Decrease in restricted investment....................... -- 469,000 53,000
Merger costs............................................ (176,025) -- --
----------- ----------- ------------
Net cash (used in) provided by investing activities... (1,789,255) 4,432,348 (2,229,850)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. -- -- 5,282,514
Payment of common stock financing costs................. -- -- (855,673)
Proceeds from exercise of common stock options.......... -- 410 15,931
Proceeds from employee stock purchase plan.............. -- 55,200 96,766
Proceeds from issuance of warrants...................... -- -- 220
Proceeds from private placement of stock................ 9,802,500 2,800,000 11,579,080
Payment of private placement securities costs........... (1,709,707) (131,382) --
Payment on note payable................................. -- -- (115,851)
Proceeds from note payable.............................. -- 206,001 --
Deferred financing charges paid......................... -- (54,424) 152,773
Principal payments on capital lease obligations......... (20,231) (614,063) (908,432)
----------- ----------- ------------
Net cash provided by financing activities............. 8,072,562 2,261,742 15,247,328
----------- ----------- ------------
Net change in cash and cash equivalents..................... 2,349,923 (1,426,987) 1,396,708
Cash and cash equivalents at beginning of year.............. 535,242 1,962,229 565,521
----------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 2,885,165 $ 535,242 $ 1,962,229
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 5,184 $ 27,609 $ 146,772
=========== =========== ============
Unrealized gain (loss) on securities available for
sale................................................... $ 272,588 -- $ (5,926)
=========== =========== ============
Supplemental disclosure of non-cash transactions:
Preferred stock converted to common stock............... $ 8,417 -- --
=========== =========== ============
Common stock converted to preferred stock............... -- $ 2,800,000 --
=========== =========== ============
Savings and retirement plan stock contribution.......... $ 43,237 -- --
=========== =========== ============
Stock options issued for services....................... $ 73,684 -- --
=========== =========== ============
Note payable converted to preferred stock............... -- $ 206,001 --
=========== =========== ============
Common stock received in exchange for cancellation of
notes receivable....................................... -- $ 11,857 --
=========== =========== ============
Preferred stock dividends............................... -- $ 4,217,388 --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Procept, Inc. (Procept or the Company), located in Cambridge, MA, is
currently engaged in the development and commercialization of novel drugs based
on biotechnological research. As discussed more fully in Note K, on March 17,
1999, Procept consummated its merger with Pacific Pharmaceuticals, Inc.
(Pacific) in which Pacific became a subsidiary of Procept. The combined company
will have a product portfolio with a focus in anti-infectives and oncology,
including three compounds in human clinical trials which may be candidates for
accelerated regulatory approval. Procept is continuing its search to acquire or
in-license drug development candidates to position itself as a successful
biopharmaceutical development company.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with FDA government regulations
and the ability to obtain financing.
PLAN OF OPERATIONS
Since its inception in 1985, Procept has devoted its principal efforts to
drug discovery and research. The Company is now devoting its principal efforts
to drug development, human clinical trials, partnership commercialization, and
in-licensing efforts.
Procept has generated no revenue from product sales, has not been profitable
since inception, and has incurred an accumulated deficit of $61.0 million
through December 31, 1998. Losses have resulted principally from costs incurred
in research and development activities related to the Company's efforts to
develop drug candidates and from associated administrative costs. The Company
expects to incur significant additional operating losses over the next several
years and expects cumulative losses to increase substantially due to preclinical
and clinical testing, and development of marketing, sales and production
capabilities. Procept's future plans will focus on drug development rather than
research. The Company is seeking strategic partnering opportunities for its lead
compounds to accelerate revenue and minimize the investment required for
marketing, sales and production capabilities.
RESTRUCTURING
In September 1996, the Company implemented a restructuring plan that
resulted in the elimination of 20 positions, mostly from the research
organization. The amount of termination benefits accrued and charged to
restructuring costs in the statement of operations for the year ended
December 31, 1996 was $0.3 million. The amount of termination benefits paid and
charged against the liability for the year ended December 31, 1996 was
$0.3 million.
In 1997, the Company further reduced staffing in its research organization
through the elimination of six senior research positions and the departure of
one executive. The amount of termination benefits accrued and charged to
restructuring costs in the statement of operations for the year ended
December 31, 1997 was $0.5 million. The amount of termination benefits paid and
charged against the liability for the year ended December 31, 1997 was
$0.2 million.
In order to focus its limited resources on PRO 2000 Gel, in January 1998 the
Company terminated work on all other research programs and underwent a
significant downsizing, reducing its staff to 13 people. The amount of
termination benefits accrued and charged to restructuring costs in the statement
of operations for the year ended December 31, 1998 was $0.2 million. The amount
of termination
F-8
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A. NATURE OF BUSINESS (CONTINUED)
benefits paid and charged against the liability for the years ended
December 31, 1998 and 1997, was $0.4 million. The remaining liability of
$0.1 million is expected to be utilized by March 31, 1999. Due to the
restructuring and focus on development of PRO 2000 Gel, the Company has sold and
plans to continue to sell most of its research and development equipment. For
the year ended December 31, 1998, the Company received $0.7 million from the
sale of equipment and has recorded a $0.2 million gain in other expenses.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all short-term investments purchased with an original
maturity of three months or less at the date of acquisition to be cash
equivalents, all short-term investments with a scheduled maturity date of less
than 12 months at the balance sheet date are considered to be current marketable
securities, and all investments purchased with a scheduled maturity date greater
than 12 months at the balance sheet date are noncurrent marketable securities.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Laboratory equipment......................... 5 years
Furniture and fixtures....................... 5 years
Office equipment............................. 5 years
Equipment and furniture under capital Estimated useful life or term of lease, if
lease...................................... shorter
Estimated useful life or term of lease, if
Leasehold improvements....................... shorter
</TABLE>
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
F-9
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance is provided for net deferred tax assets if, based on the
weighted available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
REVENUE RECOGNITION
Revenue is recognized under collaborative research and development
agreements and research grants as earned based upon the performance requirements
of each agreement. Payments received in advance under these agreements are
recorded as deferred revenue until earned. Amounts received under research and
development agreements and research grants are non-refundable and are not
contingent on the outcome of research efforts.
FINANCIAL INSTRUMENTS
Cash, cash equivalents and marketable securities are financial instruments
which potentially subject the Company to concentrations of credit risk. The
Company invests its excess cash in United States Government securities and money
market instruments.
COMPREHENSIVE (LOSS) INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for periods beginning after
December 15, 1997. The statement establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The statement
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has adopted SFAS 130 in the accompanying financial
statements.
BUSINESS SEGMENTS
In June 1997, the Financial Standards Board issued SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information," superseding SFAS 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial statements. It also requires disclosures about products and services,
geographic areas and major customers.
The Company is in the business of development and commercialization of novel
drugs based on biotechnological research. The Company evaluated its business
activities that are regularly reviewed by the executive management team and the
Board of Directors for which discrete financial information is available. As a
result of this evaluation, the Company determined that it has one operating
segment and, accordingly, one reportable segment. The adoption of SFAS 131 did
not affect the results of operations, financial position, or require the
disclosure of segment information since the Company has one reportable segment.
F-10
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is permitted. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the adoption will have a material effect on
the Company.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 requires
all costs of start-up activities (as defined by SOP 98-5) to be expensed as
incurred. This statement has no impact on the Company.
BASIC AND DILUTED NET (LOSS) PER COMMON SHARE
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is based upon the weighted average number of common
shares outstanding during the period plus the additional weighted average common
equivalent shares during the period. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive. Common equivalent shares result from the assumed exercises of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding stock options using the treasury
stock method.
For the years ended December 31, 1998 and 1996, the Company had stock
options and stock warrants outstanding that were anti-dilutive (see Note E). For
the year ended December 31, 1997, the Company had convertible preferred stock,
stock options and stock warrants outstanding that were anti-dilutive (see
Note E). 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.
RELATED PARTIES
Certain members of the Company's Board of Directors are also retained as
consultants by the Company. Management believes the consulting agreements have
been negotiated at an "arms-length" basis and are immaterial. On December 31,
1997, in connection with a severance agreement with an officer and shareholder,
three notes and the associated accrued interest, in the amount of $124,646, were
cancelled in exchange for the surrender to the Company of 1,186 outstanding
shares of Common Stock resulting in treasury stock of $11,857 recorded at cost
and $112,789 of compensation expense which is included in general and
administrative expenses for 1997.
In addition, a member of the Board of Directors is a Senior Managing
Director of Paramount Capital, Inc. (Paramount), and a member of the Board of
Directors is a President of Paramount, which may be deemed an affiliate of
Paramount Capital Asset Management, the general partner and investment manager,
respectively of two significant shareholders of the Company who together, at
F-11
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1997, owned 30,060 shares of the outstanding Series A Preferred
Stock of the Company and "New Warrants" then exercisable for 328,314 shares of
Common Stock at $10.90 per share. Such shareholders exchanged their Series A
Preferred Stock, including accrued dividends, and the New Warrants in connection
with the final closing of the Company's unit offering on April 9, 1998 (the
Final Closing Date), for 841,680 shares of Common Stock and Class C Warrants to
purchase an equal number of shares of Common Stock at an exercise price of $5.00
per share. On the Final Closing Date, the Company entered into a Financial
Advisory Agreement with Paramount. Under the Financial Advisory Agreement,
Paramount receives a monthly retainer for a minimum of 24 months, out-of-pocket
expenses and certain cash and equity success fees in the event Paramount assists
the Company with certain financing and strategic transactions.
As a result of the acquisition of Pacific, the Company issued an additional
1,307,439 shares of common stock to the shareholders affiliated with Paramount
and the exercise price of the Class C Warrants was reduced to $3.67. As of
March 30, 1999, shareholders affiliated with Paramount owned approximately
2,662,720 shares of common stock, representing approximately 36% of the
outstanding shares of Procept common stock.
RECLASSIFICATIONS
Certain reclassifications may have been made to the prior years' financial
statements to conform with current year presentation.
C. MARKETABLE SECURITIES
The marketable securities of the Company, consisting of United States
Government Agencies have been classified as available for sale. Realized gains
and losses on disposition of securities are determined on the specific
identification method and are reflected in the Statement of Operations. Net
unrealized gains and losses are recorded directly in a separate shareholders'
equity account, except those losses that are deemed to be other than temporary,
which losses, if any, are reflected in the Statement of Operations.
Fair values are estimated based on quoted market prices. Interest is
recognized when earned. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and interest are included in interest income.
The following is a summary of marketable securities as of December 31, 1998:
<TABLE>
<CAPTION>
FAIR UNREALIZED AMORTIZED
VALUE GAINS COST
---------- ---------- ----------
<S> <C> <C> <C>
Marketable securities, current:
United States Government Securities........ $2,003,755 $3,600 $2,000,155
========== ====== ==========
</TABLE>
The average maturity of the Company's marketable securities as of
December 31, 1998 was four months.
F-12
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures............................. 86,844 147,123
Office equipment................................... 264,862 570,954
Leasehold improvements............................. 1,040,027 1,198,542
----------- -----------
2,137,052 5,700,803
Less: accumulated depreciation & amortization...... (1,956,600) (4,811,545)
----------- -----------
Property and equipment, net........................ $ 180,452 $ 889,258
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to $0.4 million,
$1.1 million and $1.2 million for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company sold equipment with a net book value of $0.5 million for
proceeds of $0.7 million, resulting in a $0.2 million gain which is included in
other (income) expense in the accompanying Statement of Operations.
Included above in property and equipment are the following assets that were
acquired pursuant to capital lease arrangements:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Laboratory equipment............................... $ 462,174 $ 2,480,802
Furniture and fixtures............................. 12,203 119,557
Office equipment................................... 151,803 213,570
Leasehold improvements............................. 459,410 273,008
----------- -----------
1,085,590 3,086,937
Less: accumulated amortization..................... (1,060,218) (2,265,522)
----------- -----------
$ 25,372 $ 821,415
=========== ===========
</TABLE>
E. SHAREHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
On May 18, 1998, Procept's shareholders approved a one-for-ten reverse split
of the Company's Common Stock (the May 18, 1998 Reverse Stock Split). The
May 18, 1998 Reverse Stock Split was effected on June 1, 1998. Shareholders'
equity has been restated to give retroactive application to the May 18, 1998
Reverse Stock Split in prior periods by reclassifying from Common Stock to
additional paid-in capital the par value of the eliminated shares arising from
the May 18, 1998 Reverse Stock Split. In addition, all references in the
financial statements to the number of shares, per share amounts and stock option
and warrant data of the Company's Common Stock have been restated.
On September 29, 1997, Procept's shareholders approved a one-for-seven
reverse split of the Company's Common Stock (the September 29, 1997 Reverse
Stock Split). The September 29, 1997
F-13
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. SHAREHOLDERS' EQUITY (CONTINUED)
Reverse Stock Split was effected on October 14, 1997. Shareholders' equity has
been restated to give retroactive application to the September 29, 1997 Reverse
Stock Split in prior periods by reclassifying from Common Stock to additional
paid-in capital the par value of the eliminated shares arising from the
September 29, 1997 Reverse Stock Split. In addition, all references in the
financial statements to number of shares, per share amounts, and stock option
and warrant data of the Company's Common Stock have been restated.
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 hold certain contractual rights requiring contingent additional
issuances of Common Stock to the purchasers, (x) based on the market price on
April 9, 1999 (y) to protect them against future dilutive sales of securities
and (z) as a dividend substitute beginning October 1999. As a result of the
acquisition of Pacific in March 1999, the purchasers in the 1998 Offering and
certain other stockholders were issued an aggregate of 1,036,659 shares of
Procept common stock pursuant to the anti-dilution contractual rights. In the
event of (i) a liquidation, dissolution or winding up of the Company, (ii) the
sale or other disposition of all or substantially all of the assets of the
Company, or (iii) any consolidation, merger, combination, reorganization or
other transaction in which the Company is not the surviving entity, the
purchasers are entitled to receive an amount equal to 140% of such purchaser's
investment as a liquidation "preference." Except in the case of a liquidation,
dissolution or winding up, such payment will be in the form that equity holders
will receive such as in cash, property or securities of the entity surviving the
acquisition transaction. In the event of a liquidation, dissolution or winding
up, such payment is contingent upon the Company having available resources to
make such payment. These contractual rights will terminate on or after April 9,
1999 if the Common Stock trades at more than $11.01 per share.
On June 30, 1997, The Aries Fund and the Aries Domestic Fund, L.P.
(collectively the Aries Funds) made a direct investment of $3.0 million into the
Company. The Company received proceeds of $2.8 million for the issuance of
85,334 shares of Common Stock (the Common Shares). The Common Shares contained
certain contractual obligations including, but not limited to, the right to
convert the Common Shares into preferred stock (the Preferred Stock) upon
Procept shareholder approval of such Preferred Stock. The Company also received
from the Aries Funds an additional $0.2 million for the issuance of two
convertible promissory notes. The notes accrued interest at a rate of 12% per
year and were due on or before September 30, 1997. In addition to the Common
Shares and the notes, the Aries Funds received (i) Class A Warrants exercisable
for an aggregate of 39,182 shares of Procept Common Stock at an initial exercise
price of $0.70 and (ii) Class B Warrants exercisable for an aggregate of 108,603
shares of Procept Common Stock at an initial exercise price of $41.00. The
Company did not separately value the Class A and Class B Warrants from the
Preferred Stock since the resulting accounting treatment for both securities is
to record their value in additional paid-in capital within the equity section of
the balance sheet. Additionally, since the Preferred Stock and the Class A and
Class B
F-14
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. SHAREHOLDERS' EQUITY (CONTINUED)
Warrants are not redeemable, no accretion is required. All of the Class A
Warrants and the Class B Warrants contemplated that such warrants would be
converted on September 30, 1997 into "New Warrants" having the same aggregate
exercise price as the Class A and Class B Warrants converted, but with a per
share exercise price equal to the lesser of (i) $20.30 or (ii) 50% of the
trading price (determined per a formula) at September 30, 1997. The Class A and
Class B Warrants further provided that the exercise price of the New Warrants
would be adjusted at the time of the Company's next equity financing to ensure
that the exercise price of the New Warrants was at least 50% of the pricing in
such future equity financing. The Class A and Class B Warrants were converted to
New Warrants for 328,314 shares of Procept Common Stock having a per share
exercise price of $10.90. In a negotiated transaction with the Aries Funds, the
New Warrants were exchanged in April 1998 for Class C Warrants for an aggregate
of 841,680 shares of Procept 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.
At an adjourned session of the Company's 1997 annual meeting held on
July 15, 1997, its shareholders approved an amendment and restatement of the
Company's Restated Certificate of Incorporation which authorized 1,000,000
shares of preferred stock. On August 1, 1997, the Board of Directors established
a series of 30,061 shares of Series A Convertible Preferred Stock (the Series A
Preferred Stock). Upon the establishment of this Series A Preferred Stock, the
purchasers of the securities issued in the June 1997 direct investment exercised
the right to convert their Common Shares to shares of Series A Preferred. On
August 22, 1997, the Aries Funds converted the 85,334 Common Shares into 28,000
shares of Series A Preferred Stock. On September 30, 1997, the Aries Funds
converted the convertible promissory notes and the corresponding accrued
interest into 2,060 shares of Series A Preferred Stock.
The Series A Preferred Stock was initially convertible into Common Stock at
a conversion price equal to $32.80. The terms of the Series A Preferred Stock
provided that the conversion price would adjust on September 30, 1997 (or
earlier, if certain events occurred) to a new conversion price equal to the
lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a formula)
at September 30, 1997. On September 30, 1997, the conversion price of the
Series A Preferred Stock adjusted to $10.90. In connection with this adjustment,
the Company recorded a preferred stock dividend in the amount of $4,217,388
which reflects the intrinsic value of the beneficial conversion feature based
upon the difference between the $26.25 per share fair market value of the
Company's Common Stock on the date of issuance and the $10.90 per share adjusted
conversion price of the Series A Preferred Stock. Additionally, since the
Series A Preferred Stock is not redeemable, no accretion is required. As of
December 31, 1997, the conversion price of the Series A Preferred Stock was
$10.90, but remains subject to further conversion rate adjustments based on
future events. At December 31, 1997, the Series A Preferred Stock was
convertible into 274,748 shares of Common Stock. After the September 30, 1997
conversion price adjustment, the terms of the Series A Preferred Stock provided
for further reduction of the conversion price of the Series A Preferred Stock
(i) on June 30, 1998 to ensure that the market price at that time was at least
140% of the conversion price, (ii) if equity securities were issued in the
future with a pricing reset feature, on the reset date of such future equity
securities (if such a reset date occurred on or prior to June 30, 1999), so that
the conversion price of the Series A Preferred Stock was reduced proportionately
to the price reduction in the future equity securities, (iii) if no reset date
for future equity securities occurred by June 30, 1999, to ensure that the
market price at that time was at least 200% of the conversion price, and
(iv) on future issuances of equity securities at a price below the then
effective conversion price or the then market price, to a
F-15
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. SHAREHOLDERS' EQUITY (CONTINUED)
price determined by a weighted average formula reflecting such dilutive
issuance. Other significant features of the Series A Preferred Stock include
(i) a per share cumulative annual dividend, payable in cash or in kind, of 10%
of the sum of $140 per share plus accrued but unpaid dividends, (ii) the right
to participate in most subsequent dividend distributions to Common Stock,
(iii) the right to vote the Series A Preferred Stock on an as converted to
Common Stock basis reflecting the then effective conversion price, and (iv) the
right to a liquidation preference of $140 per share plus accrued but unpaid
dividends.
Furthermore, on September 30, 1997 in accordance with the original terms of
the Class A and Class B Warrants issued in the June 1997 private placement, such
warrants were exchanged for 328,314 "New Warrants" at an exercise price of
$10.90 per share. The $10.90 exercise price of the New Warrants was determined
based on a formula set forth in the Class A Warrants and Class B Warrants. The
formula provided that the exercise price of the New Warrants would equal the
lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a formula)
at September 30, 1997. The formula trading price at September 30, 1997 was
$21.80, and the exercise price was fixed at $10.90. The Company incurred costs
in the amount of $0.1 million related to the June 1997 private placement and the
subsequent conversion events which were charged to additional paid-in capital.
In April 1998, all outstanding Series A Preferred Stock was converted into
shares of common stock having certain contractual rights, and in March 1999, the
Company eliminated the authorization of the Series A Preferred Stock by a filing
with the Secretary of the State of Delaware. Also, in April 1998, all new
warrants were converted to Class C Warrants, as discussed above.
On May 17, 1996, the Company completed a self-managed private placement of
units. Each Unit consisted of one share of the Company's Common Stock and one
callable warrant to purchase one share of the Company's Common Stock. The
Warrants are subject to redemption at the sole option of the Company upon
30 days prior notice to the holders of the Warrants beginning May 17, 1998 at a
price of $0.01 per Warrant Share in the event that the average closing price of
the Company's Common Stock for any 20 consecutive trading day period exceeds
$262.50. The initial exercise price of the Warrants per share of common stock is
$175.00. The Company did not separately value the warrants from the common stock
issued in the May 17, 1996 private placement of units 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. The Company
received proceeds of $11.6 million for the issuance of 67,690 Units. The Company
incurred additional costs in the amount of $0.6 million related to this
financing which were charged to additional paid-in capital in 1996.
On February 8, 1996 the Company closed on a second public offering. The
Company received proceeds of $4.9 million (net of underwriting discount and
underwriter's offering expenses) for the issuance of 31,429 shares of Common
Stock. On March 27, 1996, the associated over allotment option was partially
exercised and the Company issued and sold an additional 2,143 shares of the
Company's Common Stock resulting in net proceeds to the Company of
$0.3 million. The Company incurred costs in the amount of $0.2 million related
to this financing at December 31, 1995. The deferred financing costs were
charged to additional paid-in capital in 1996.
The Company has reserved at December 31, 1998, and kept available out of the
authorized but unissued shares of common stock, 4,519,366 shares for issuance
upon the exercise of outstanding options and warrants.
F-16
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998 EQUITY INCENTIVE PLAN
Under the Company's 1998 Equity Incentive Plan, formerly known as the 1989
Stock Plan (the Plan) adopted by the Board of Directors during 1989, and
subsequently amended and restated, 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 16,245 shares. In
March 1996, the Board of Directors approved an amendment to the Plan to increase
the number of shares covered by the Plan by 3,571 which amendment was approved
by the shareholders at the 1996 Annual Meeting of Shareholders. In March 1997,
the Board of Directors approved an amendment to the Plan to increase the number
of shares covered by the Plan by 7,143 shares to 26,959 shares, which amendment
was approved by the shareholders at the 1997 Annual Meeting of Shareholders. In
April 1998, the Board of Directors approved an amendment to the Plan to increase
the number of shares covered by the Plan to 1,500,000 shares, which amendment
was approved at the 1998 Annual Meeting of Shareholders. In November 1998, the
Board of Directors approved an amendment and restatement of the Plan as the 1998
Equity Incentive Plan (the 1998 Plan). In January 1999, the Board of Directors
approved an amendment to the Plan to increase the number of shares covered by
the Plan by 3,300,000 to 4,800,000. At December 31, 1998, there were 4,128,646
shares available for future grants under the 1998 Plan.
The 1998 Plan provides for the granting of incentive stock options (ISOs)
and nonstatutory stock options. In the case of ISOs, the exercise price shall
not be less than 100% of the fair market value per share of the common stock, on
the date of grant. In the case of nonstatutory options, the exercise price shall
be determined by a committee appointed by the Board of Directors. 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.
The options either become exercisable immediately on the date of grant or
shall become exercisable in such installments as the Compensation Committee of
the Board of Directors may specify, generally over a 4 year period. Each option
shall expire on the date specified by the Compensation Committee, but not more
than ten years and one day from the date of grant in the case of nonqualified
options, and generally ten years from the date of grant in the case of ISOs
(five years in certain cases).
DIRECTOR STOCK OPTION PLAN
In June 1994, the shareholders of the Company adopted the 1994 Director
Stock Option Plan (the Director Plan). The Director Plan was established to
attract and retain highly qualified, non-employee directors. The price per share
for each option granted under this plan shall be the current fair market value
at date of grant. The options vest over a period of three years and have a term
of ten years. As originally adopted, the aggregate number of shares of the
Company's common stock which may be optioned under this plan is 2,143 shares. In
March 1997, the Board of Directors approved an amendment to the Director Plan to
increase the number of shares covered by the Director Plan by 2,143 shares,
which amendment was approved by the shareholders at the 1997 Annual Meeting of
Shareholders. In April 1998, the Board of Directors approved an amendment to the
Director Plan to increase the number of shares covered by the Director Plan to
500,000, which amendment was approved at the 1998 Annual Meeting of
Shareholders. In June 1998, the Board of Directors terminated the Director Plan.
F-17
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), issued
in 1995, defined a fair value method of accounting for stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Option 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.
Activity under all stock plans related to all the ISOs and nonqualified
stock options for the three years ended December 31, 1998 is listed below.
<TABLE>
<CAPTION>
ISO NONQUALIFIED WEIGHTED AVG.
SHARES SHARES OPTION PRICE EXERCISE PRICE
-------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995........... 9,073 5,152 $70.00-$892.50 $310.10
Granted.................................... 6,669 740 $87.50-$227.50 $107.10
Exercised.................................. (729) (71) $70.00-$187.60 $ 82.60
Canceled................................... (2,967) (3,405) $70.00-$892.50 $261.80
-------- -------
Outstanding at December 31, 1996........... 12,046 2,416 $70.00-$892.50 $244.30
Granted.................................... 110,943 13,214 $ 10.00-$96.30 $ 22.70
Exercised.................................. (6) -- $70.00 $ 70.00
Canceled................................... (4,038) (91) $70.20-$892.50 $250.70
-------- -------
Outstanding at December 31, 1997........... 118,945 15,539 $10.00-$892.50 $ 39.50
Granted.................................... 428,000 239,000 $ 0.70-$10.00 $ 4.97
Canceled................................... (118,945) (15,486) $10.00-$892.50 $ 37.87
-------- -------
Outstanding at December 31, 1998........... 428,000 239,053 $ 0.70-$70.19 $ 4.98
======== =======
</TABLE>
Summarized information about stock options outstanding at December 31, 1998
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
NUMBER OF WEIGHTED AVERAGE ----------------------------
RANGE OF OPTIONS REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACT LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.70-$3.65 37,110 9.76 $1.03 37,110 $1.03
$ 5.00 598,000 9.65 $5.00 -- $ --
$7.94-$70.19 31,943 2.53 $9.20 26,489 $9.20
</TABLE>
Options for the purchase of 63,599 shares, 23,538 shares and 5,925 shares
are exercisable at December 31, 1998, 1997 and 1996, respectively. The total
exercise proceeds for all options outstanding at December 31, 1998 is
approximately $3.3 million.
F-18
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During September 1998, the Board of Directors cancelled certain individuals'
outstanding stock options under the Plan. The number of stock options cancelled
was 12,510 with exercise prices ranging from $10.00 per share to $735.00 per
share. Concurrent with the canceling of the stock options, the Board of
Directors reissued 248,000 stock options to the same individuals with an
exercise price of $5.00 per share which was greater than the fair market value
at the date of grant.
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend yield................................... None None None
Expected volatility.............................. 104% 75% 75%
Risk free interest rate.......................... 5.25% 6.00% 6.25%
Expected life of option.......................... 5.0 5.0 5.0
</TABLE>
All options granted in 1998, 1997 and 1996 were granted at fair value or at
amounts greater than fair value. Options to consultants are recorded at fair
value and recognized as expense over the vesting period. The weighted average
fair value of options granted was $1.62, $15.90 and $70.70 for 1998, 1997 and
1996, 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 1998, 1997 and 1996
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net loss--as reported................................. $(3,291,357) $(9,052,575) $(11,235,760)
Net loss--pro forma................................... $(3,791,798) $(9,368,531) $(11,455,536)
Basic and diluted net loss per common share--as
reported............................................ $ (1.40) $ (63.68) $ (68.16)
Basic and diluted net loss per common share--pro
forma............................................... $ (1.62) $ (65.20) $ (69.50)
</TABLE>
The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts.
1994 EMPLOYEE STOCK PURCHASE PLAN
In April 1994, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (the 1994 Plan). Under the 1994 Plan, eligible employees of the
Company may purchase shares of Common Stock, through payroll deductions, at the
lower of 85% of fair market value of the stock at the time of grant or 85% of
fair market value at the time of exercise. As originally adopted, a total of
3,572 shares were reserved for issuance under the 1994 Plan. In March 1997, the
Board of Directors approved an amendment to the 1994 Plan to increase the number
of shares covered by the 1994 Plan by 3,572 shares, which amendment was approved
by the shareholders at the 1997 Annual Meeting of Shareholders. In April 1998,
the Board of Directors approved an amendment to the 1994 Plan to increase the
number of shares covered by the 1994 Plan to 200,000, which amendment was
approved at the 1998 Annual Meeting of Shareholders. The Company is not
currently offering shares under the 1994 Plan. The Company issued 763 shares and
857 shares in 1997 and 1996, respectively. The weighted average fair values of
grants at fair value under the 1994 Plan during 1997 and 1996 were $14.10 and
$70.00, respectively. No shares were issued during 1998 under the 1994 Plan.
F-19
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 at any time
on or after April 1, 1995 and on or before April 1, 1999.
On September 11, 1995, the Company issued common stock warrants for a
purchase price of $300.00 to purchase 429 shares of the Company's common stock
to Oppenheimer & Co., Inc. at an exercise price of $490.00 per share, in
connection with the engagement of Oppenheimer & Co., Inc. to provide investment
banking services to the Company. These warrants are exercisable beginning
September 11, 1996 and expire September 10, 2000.
On February 14, 1996, the Company issued common stock warrants for a
purchase price of $220.00 to purchase up to 3,142 shares of the Company's common
stock to Commonwealth Associates at an exercise price of $219.10 per share in
connection with a public financing. These warrants are exercisable beginning
February 14, 1997 and expire on February 14, 2001.
On May 17, 1996, the Company issued a common stock warrant to purchase
11,283 shares of the Company's common stock at an exercise price of $175.00 per
share to David Blech in connection with financial advisory services to the
Company. This warrant is exercisable beginning May 17, 1996 and expires on
May 16, 2001.
On May 17, 1996, the Company completed a self-managed private placement of
units. Each unit consisted of one share of the Company's common stock and one
callable warrant to purchase one share of the Company's common stock. The
Warrants are subject to redemption by the Company upon 30 days prior notice to
the holders of the Warrants beginning May 17, 1998 at a price of $0.10 per
Warrant Share in the event that the average closing price of the Company's
Common Stock for any 20 consecutive trading day period exceeds $262.50. The
initial exercise price of the Warrants per share of common stock is $175.00. The
Company received proceeds of $11.6 million for the issuance of 67,690 units
(i.e., 67,690 shares of Procept Common Stock and warrants to purchase 67,690
shares of Procept Common Stock). The warrants expire on May 17, 2001.
On January 6, 1997, the Company issued a common stock warrant to purchase
1,071 shares of the Company's common stock to Furman Selz LLC at an exercise
price of $105.00 per share in connection with financial advisory services to the
Company. This warrant is exercisable beginning January 6, 1997 and 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.
On April 9, 1998, Procept issued an aggregate of 98.025 units, each unit
consisting of 20,000 shares of common stock, and Class C Warrants to purchase
20,000 shares of the Company's common stock (i.e., 1,960,500 shares of Procept
common stock and warrants to purchase 1,960,500 shares of Procept
F-20
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
common stock) at an exercise price of $5.00 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 Procept common stock for an aggregate of 42.084 Units (i.e.,
841,680 shares of Procept common stock and Class C Warrants to purchase 841,680
shares of Procept common stock at an exercise price of $5.00 per share, which
exercise price was reduced to $3.67 in March 1999 as a result of anti-dilution
provisions).
In connection with the final closing of the Company's 1998 private placement
on April 9, 1998 and certain advisory services, the Company sold to Paramount
Capital, Inc., the Company's placement agent in the 1998 private placement, for
$0.001 per option, options to purchase an aggregate of 24.06875 units (each unit
consisting of 20,000 shares of common stock and Class C Warrants to purchase
20,000 shares of common stock at an exercise price of $5.00 per share, which
exercise price was reduced to $3.67 in March 1999 as a result of anti-dilution
provisions) at an exercise price of $110,000 per unit (i.e., $5.50 per share).
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.
At December 31, 1998 there were 3,852,313 warrants outstanding, all of which
are exercisable.
F. COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. Accumulated other comprehensive income (loss)
currently consists of unrealized gain (loss) on investments as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Accumulated other comprehensive income (loss),
beginning balance............................. $ -- $(4,838) $ 1,088
Unrealized gain (loss) on investments........... 272,588 -- (5,926)
Maturity of investments......................... -- 4,838 --
-------- ------- -------
Accumulated other comprehensive income (loss),
ending balance................................ $272,588 $ -- $(4,838)
======== ======= =======
</TABLE>
G. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
In September 1993, the Company signed a Research and Development Agreement
with Sandoz Pharma Ltd. (the Sandoz Agreement). Effective as of September 1,
1995, the Sandoz Agreement was amended to focus the research program on
compounds targeting CD4 and its ligand and to limit the research program with
respect to compounds that bind to CD2 and its ligand to certain screening
activities being conducted by Sandoz through the end of 1995. In connection with
this amendment, $1.3 million was recorded as revenue in 1996. No further revenue
is expected under the Sandoz Agreement.
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. (VacTex), to provide research services relating to the development
of novel vaccines based on discoveries licensed from the Brigham and Women's
Hospital and Harvard Medical School. These
F-21
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
discoveries shed light on a previously unknown aspect of immunology, the CD1
system of lipid antigen presentation.
Under the Sponsored Research Agreement, Procept conducted specified research
tasks on behalf of VacTex for which Procept received a combination of cash and
equity in VacTex based on the number of full-time equivalent employees of
Procept engaged in the research, but subject to maximum cash and stock limits.
The Sponsored Research Agreement also includes a provision requiring Procept to
issue to VacTex or its shareholders warrants to purchase an aggregate of 1,429
shares of Procept Common Stock at an exercise price of $245.00 per share.
In the year ended December 31, 1998, the Company recorded revenue of
$0.1 million which was paid in cash. In the year ended December 31, 1997, the
Company recorded revenue of $0.5 million which consisted of $0.4 million in cash
and 150,000 shares of VacTex common stock. In the year ended December 31, 1996,
the Company recorded revenue of $0.6 million which consisted of $0.4 million in
cash and 150,000 shares of VacTex common stock. At December 31, 1997, the
Company had an accounts receivable of $21,000, which was subsequently paid in
January 1998, and an investment in VacTex of $0.3 million.
In order to apply available resources to the PRO 2000 Gel development
program, the Company did not seek to renew the Sponsored Research Agreement with
VacTex, which expired on January 8, 1998.
On April 13, 1998, VacTex was acquired by Aquila Biopharmaceuticals, Inc.
(Aquila). The Company's investment in VacTex of 300,000 shares of common stock
was converted to 113,674 shares of Aquila common stock and $128,501 of 7%
debentures. As a result, the Company is accounting for its investment in Aquila
under Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" as an available for sale
security and marked it to market by recording an unrealized gain of
$0.3 million as part of Shareholders' Equity, based on Aquila's common stock
closing price on December 31, 1998. 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 Procept owned
less than 20% of VacTex.
In July 1997, the Company announced that it had been awarded a Phase I Small
Business Innovation Research Grant from the National Institutes of Health to
support the development of novel vaccines for tuberculosis. Under the terms of
the Phase I Grant, Procept received $0.1 million in financial support in 1997.
No further revenue is expected under this grant.
H. INCOME TAXES
No federal or state income taxes have been provided for as the Company has
incurred losses since its inception. At December 31, 1998, the Company had
federal and state tax net operating loss (NOL) carryforwards of approximately
$59.7 million and $46.5 million which will expire beginning in the year 2000
through 2018 for federal and beginning in the year 1998 through 2003 for state,
respectively. Additionally, the Company had federal and state research and
experimentation credit carryforwards of approximately $1.4 million and
$0.9 million, respectively, both of which will expire in the year 2004.
The Internal Revenue Code of 1986 (the Code) contains provisions which limit
the net operating loss carryforwards and tax credits available to be used in any
given year upon the occurrence of certain
F-22
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
H. INCOME TAXES (CONTINUED)
events, including significant changes in ownership interests. In conjunction
with the initial public offering, such a change in ownership as defined in the
Code occurred. Accordingly, certain available NOL carryforwards and tax credits
are subject to these limitations.
The components of Procept's net deferred tax assets were as follows at
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards.... $23,218,000 $22,665,000 $19,021,000
Tax credit carryforwards............ 2,192,000 2,660,000 1,947,000
Depreciation........................ 363,000 1,263,000 1,057,000
Capital leases and other............ (1,171,000) (1,253,000) (935,000)
Valuation allowance................. (24,602,000) (25,335,000) (21,090,000)
----------- ----------- -----------
Total net deferred tax assets......... $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets which are comprised principally of net
operating loss and tax credit carryforwards. Management has considered the
Company's history of losses and concluded, in accordance with the applicable
accounting standards, that it is more likely than not that the Company will not
recognize the benefit of the net deferred tax assets. Accordingly, the deferred
tax assets have been fully reserved. Management re-evaluates the positive and
negative evidence on an annual basis.
I. SAVINGS AND RETIREMENT PLAN
On July 1, 1990, the Company established the Procept, Inc. Savings and
Retirement Plan (the 401(k) Plan), a profit-sharing plan under Section 401 of
the Code. Employees are eligible to participate in the 401(k) Plan by meeting
certain requirements, including length of service and minimum age. The Company
may contribute to the 401(k) Plan, without regard to current or accumulated net
profits, in an amount not to exceed the maximum allowable under applicable
provisions of the Code. The amount is to be allocated to active participants
based on their annual pay as a percentage of the total annual pay of all such
participants. Participants may also contribute to the 401(k) Plan, but no more
than the maximum permissible amount allowed by regulatory definitions. For the
years ended December 31, 1998 and 1996, the Company did not contribute to the
401(k) Plan. For the plan year 1997, the Company contributed 4,324 shares of
Procept common stock to the 401(k) Plan in 1998 with a value of $43,237.
J. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
On February 28, 1989, the Company entered into an operating lease
arrangement for its facility. The Company has made several amendments to its
operating lease arrangement for its facility to include additional leased space
and extension of the lease terms. The commitment under the operating lease
requires the Company to pay monthly base rent and an allocable percentage of
operating costs and property taxes.
F-23
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
J. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The monthly base rent is subject to increases during the course of the lease
term which are unrelated to increases in utilized space. Accordingly, the
Company is providing for rent expense based on an amortization of the lease
payments on a straight-line basis over the life of the lease arrangement.
Pursuant to the aforementioned leasing arrangements, at December 31, 1998
and 1997, the Company has recorded noncurrent liabilities of $0.2 million and
$0.3 million, respectively, for rent expense in excess of cash expenditures for
leased facilities.
Gross rent expense for leased facilities and equipment amounted to
approximately $1.4 million, $1.8 million and $1.6 million, for the years ended
December 31, 1998, 1997 and 1996, respectively. The approximate gross future
minimum annual rental payments for leased facilities for the next two years
under the lease arrangements consist of the following at December 31, 1998:
<TABLE>
<S> <C>
1999............................................ $1,435,000
2000............................................ $ 706,000
</TABLE>
The Company has entered into sublease agreements which offset the future
minimum lease payments by $1.9 million in 1999 and $1.0 million in 2000. The
sublease agreements require that the Company provide certain services including
utilities. The Company expects sublease income to continue to approximate its
related costs.
Pursuant to the facility lease agreement, the Company had provided an open
letter of credit for the term of its leases in the amount of $0.4 million which
would provide for payment to the lessor of its main facility in the event of
default by the Company. The Company held a certificate of deposit, which was
classified as a restricted investment solely for the purpose of collateralizing
this letter of credit in the amount of $0.4 million. During September 1997, in
substitution of the letter of credit and restricted investment arrangement, the
Company increased its rent deposit with the lessor to $0.2 million.
CAPITAL LEASES
In 1992, the Company entered into a leasing agreement which allowed the
Company to lease up to $1.0 million of capital equipment at implicit interest
rates ranging from approximately 11% to 13% for a 42 month term.
In 1994, the Company entered into a $2 million master lease agreement for
the lease and sale/ leaseback of certain equipment and leasehold improvements.
The implicit interest rates for the leases under this agreement range from
approximately 5.5% to 7% for a 36 month term. During fiscal year 1994, the
Company purchased and leased $0.7 million of laboratory equipment, office
equipment and furniture and fixtures pursuant to this leasing arrangement.
During fiscal year 1995, the Company purchased and leased $1.3 million of
laboratory equipment, office equipment and leasehold improvements pursuant to
this leasing arrangement. These equipment leasing agreements have been fully
utilized at December 31, 1996. All obligations under leasing agreements have
been fully satisfied at December 31, 1998.
F-24
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
J. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTRACT RESEARCH
In February 1987, the Company entered into a Research and Licensing
Agreement with Dana-Farber, a Massachusetts not-for-profit corporation. As part
of the Agreement, the Company had agreed to fund certain research and
development projects conducted by Dana-Farber in relation to the development and
eventual commercialization of products related to T-cell activation in exchange
for exclusive rights to technologies developed. The Research and Licensing
Agreement expired on March 31, 1997, as the Company chose not to extend funding.
The amount of contract research costs under the Agreement incurred by the
Company and included in research and development expense amounted to
$0.2 million and $0.8 million in 1997 and 1996, respectively.
LEGAL PROCEEDINGS
On October 23, 1997, Commonwealth Associates (Commonwealth) filed a
Complaint with the United States District Court for the Southern District of New
York naming the Company as a defendant (the Complaint). The Complaint alleges
that the Company breached obligations to Commonwealth under the Underwriting
Agreement between Commonwealth and the Company dated February 8, 1996, giving
Commonwealth a right of first refusal to act as co-lead underwriter or
co-managing agent of a public offering or Private Placement of the Company's
securities during the period ended August 8, 1997. In the Complaint,
Commonwealth seeks aggregate compensatory damages in the amount of $375,000,
incidental and consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as the
court deems proper. The Company served an answer on or about March 16, 1998
denying Commonwealth's allegations and has engaged in substantial discovery. At
a court-sponsored mediation held on February 9, 1999, the Company and
Commonwealth reached an agreement in principle to settle this matter whereby
Commonwealth will agree to dismiss the suit in return for payment of $45,000 in
cash and 36,785 shares of the Company's common stock.
K. SUBSEQUENT EVENT--MERGER (UNAUDITED)
Procept entered into a definitive Agreement and Plan of Merger (the Merger
Agreement) dated December 10, 1998 to acquire Pacific Pharmaceuticals, Inc.
(Pacific), a Delaware corporation engaged in the development of cancer
therapies, based in San Diego, California, through a merger of a wholly owned
subsidiary of Procept with and into Pacific.
The acquisition of Pacific was accounted for under the purchase accounting
method. The aggregate purchase price of $3.8 million, plus estimated acquisition
costs of $1.5 million, assumed liabilities of $6.4 million and $1.0 million for
the value of the stock options and warrants being issued to the Pacific
shareholders were allocated to the acquired tangible and intangible assets based
on their estimated respective fair values. Approximately $8.1 million of the
purchase price has been allocated to in-process research and development and
expensed in the first quarter of 1999. The charge for in-process research and
development represents the value assigned to Pacific's programs which are still
in the development stage and for which there is no alternative future use. The
value assigned to these programs has been determined by selecting the fair value
of these programs, as provided by an independent valuation of the Pacific
business, based on comparable technologies.
F-25
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
K. SUBSEQUENT EVENT--MERGER (UNAUDITED) (CONTINUED)
The valuation methodology was based on estimated discounted cash flows. The
above purchase price accounting is based on the valuation which is being
finalized. Recent Securities and Exchange Commission (SEC) guidelines on
valuation methodologies for in-process research and development are still
evolving. The amount written off may be subject to adjustment as the SEC
continues to focus on accounting for acquired in-process research and
development.
Pursuant to the Merger Agreement, each share of Pacific common stock
(including preferred stock on an as converted basis into common stock) converted
into approximately 0.11 shares of Procept common stock or a total of 2,755,000
Procept shares and an additional 414,584 Procept shares were issued to holders
of Pacific's preferred stock for a total of 3,169,584 Procept shares (of which
1,558,587 shares of Procept common stock issued in the merger to the holders of
Pacific's preferred stock were accompanied by certain contractual rights
identical to contractual rights held by purchasers in Procept's 1998 private
placement). In addition, Procept assumed an approximately $7.3 million
obligation (payable in cash or common stock of Procept) of Pacific's subsidiary,
BG Development Corp., and Procept exchanged all Pacific's outstanding warrant,
unit purchase option and stock option obligations into approximately 1,773,078
like instruments of Procept. As a result of the merger with Pacific, Procept
also issued approximately 1,036,659 shares of its common stock to purchasers in
Procept's 1998 private placement and certain other stockholders pursuant to
certain contractual anti-dilution rights.
F-26
<PAGE>
PROCEPT, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,268,686 $ 2,885,165
Marketable securities..................................... 0 2,003,755
Investment in Aquila...................................... 206,091 568,988
Prepaid expenses and other current assets................. 213,394 182,925
------------ -----------
Total current assets.................................. 5,688,171 5,640,833
------------ -----------
Property and equipment, net................................. 76,624 180,452
Deferred charges............................................ -- 176,025
Deposits.................................................... 7,150 190,615
------------ -----------
Total assets.......................................... $ 5,771,945 $ 6,187,925
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 440,026 $ 268,815
Notes payable to related party............................ 200,000 --
Accrued compensation...................................... 151,912 54,511
Accrued acquisition costs................................. 366,759 --
Other current liabilities................................. 510,138 282,479
Current portion of capital lease obligations.............. 4,714 --
------------ -----------
Total current liabilities............................. 1,673,549 605,805
------------ -----------
Deferred rent............................................... 103,033 185,615
Capital lease obligations................................... 15,637 --
------------ -----------
Total liabilities..................................... 1,792,219 791,420
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000
shares authorized: Series A, 0 and 1 share(s) designated
at
September 30, 1999 and December 31, 1998; 0 shares
issued at September 30, 1999 and December 31, 1998,
respectively............................................ -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 14,089,469 and 3,001,832 shares issued at
September 30, 1999 and December 31, 1998,
respectively............................................ 140,895 30,018
Additional paid-in capital................................ 81,063,143 70,458,992
Deferred compensation..................................... (69,242) (88,716)
Accumulated deficit....................................... (77,177,652) (65,264,520)
Accumulated other comprehensive income.................... 34,439 272,588
Treasury stock, at cost; 1,186 shares at September 30,
1999 and
December 31, 1998, respectively....................... (11,857) (11,857)
------------ -----------
Total shareholders' equity............................ 3,979,726 5,396,505
------------ -----------
Total liabilities and shareholders' equity............ $ 5,771,945 $ 6,187,925
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative agreements from related
party................................... $ -- $ -- $ -- $ 109,375
Interest income........................... 65,845 75,031 221,225 155,530
---------- ---------- ------------ -----------
Total revenues........................ $ 65,845 $ 75,031 221,225 264,905
---------- ---------- ------------ -----------
Costs and expenses:
Research and development.................. 450,209 371,958 1,034,439 1,707,256
General and administrative................ 241,295 269,666 1,219,283 1,411,786
Charge for purchased in-process research
and development......................... -- -- 9,405,671 --
Restructuring............................. -- -- -- 225,000
Other (income) expense, net............... 9,482 (38,444) (26,491) (203,356)
---------- ---------- ------------ -----------
Total costs and expenses.............. 700,986 603,180 11,632,902 3,140,686
---------- ---------- ------------ -----------
Net loss.................................... $ (635,141) $ (528,149) $(11,411,677) $(2,875,781)
---------- ---------- ------------ -----------
Less: Incremental charge associated with the
conversion of the preferred stock
minority interest in a subsidiary,
net................................... -- -- 501,455 --
---------- ---------- ------------ -----------
Net loss available to common shareholders... $ (635,141) $ (528,149) $(11,913,132) $(2,875,781)
========== ========== ============ ===========
Basic and diluted net loss per common
share..................................... $ (0.05) $ (0.18) $ (1.24) $ (1.35)
========== ========== ============ ===========
Weighted average number of common shares
outstanding
--basic and diluted....................... 14,061,206 3,001,832 9,600,025 2,126,651
========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(11,411,677) $(2,875,781)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 99,259 525,951
Gain on sale of equipment............................. (24,550) (208,365)
Charge for purchased in-process research.............. 9,405,671 --
Compensatory stock and stock option expense........... 89,542 --
Savings and Retirement Plan stock contribution........ -- 43,238
Stock options issued for consulting services.......... -- 12,192
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable................................... -- 124,536
Prepaid expense and other current assets.............. (2,398) 60,000
Deposits.............................................. 183,465 --
Accounts payable...................................... (274,323) (768,309)
Accrued compensation.................................. 97,401 (182,261)
Deferred rent......................................... (82,582) (50,203)
Other current liabilities............................. (703,645) 30,353
Other non-current liabilities......................... -- (96,875)
------------ -----------
Net cash used in operating activities............... (2,623,837) (3,385,524)
------------ -----------
Cash flows from investing activities:
Capital expenditures...................................... -- (319,669)
Proceeds from sale of equipment........................... 29,119 647,816
Proceeds for redemption of debentures..................... 128,501 --
Proceeds from maturity of marketable securities........... 2,000,000 (2,000,153)
Cash acquired in the acquisition of Pacific
Pharmaceuticals......................................... 2,750,097 --
------------ -----------
Net cash (used in) provided by investing
activities.......................................... 4,907,717 (1,672,006)
------------ -----------
Cash flows from financing activities:
Payment of note payable................................... (85,000) --
Principal payments on capital lease....................... (2,859) (20,231)
Proceeds for the exercise of common stock warrant......... 187,500 --
Proceeds from private placement of common stock........... -- 9,802,500
Expenses from private placement of common stock........... -- (1,691,091)
------------ -----------
Net cash (used in) provided by financing
activities.......................................... 99,641 8,091,178
------------ -----------
Net change in cash and cash equivalents..................... 2,383,521 3,033,648
Cash and cash equivalents at beginning of period............ 2,885,165 535,242
------------ -----------
Cash and cash equivalents at end of period.................. $ 5,268,686 $ 3,568,890
============ ===========
Supplement disclosures and non-cash transactions:
============ ===========
Cash paid for interest.................................... $ 3,284 $ 5,120
============ ===========
Stock options issued for consulting services.............. $ -- $ 30,192
============ ===========
Savings and Retirement Plan stock contribution............ $ -- $ 43,238
============ ===========
Common stock issued to acquire Pacific Pharmaceuticals.... $ 3,766,913 $ --
============ ===========
Common stock issued to acquire minority interest in
subsidiary.............................................. $ 4,160,363 $ --
============ ===========
Common stock options issued to acquire Pacific
Pharmaceuticals......................................... $ 965,835 $ --
============ ===========
Common stock issued to pay off loans...................... $ 441,870 $ --
============ ===========
Common stock issued for services.......................... $ 35,000 $ --
============ ===========
Common stock issued in settlement of legal action......... $ 135,002 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
NATURE OF BUSINESS
Procept, Inc. ("Procept" or the "Company"), located in Cambridge, MA, is a
biopharmaceutical company currently engaged in the development and
commercialization of novel drugs with a product portfolio focused on infectious
diseases and oncology. As discussed more fully in Note 7, on March 17, 1999,
Procept consummated its merger with Pacific Pharmaceuticals, Inc. ("Pacific") in
which Pacific became a subsidiary of Procept. The combined company has three
compounds in human clinical trials, two of which have substantial government
funding and support. On November 8, 1999, the Company announced a major
strategic change in its business with the signing of an agreement and plan of
merger to acquire Heaven's Door Corporation ("HDC"). HDC, an Internet company,
provides a range of funeral-related products and services for senior citizens.
Procept will focus on growing the Internet business, while maximizing the value
of the biotechnology assets.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with FDA government regulations
and the ability to obtain financing.
PLAN OF OPERATIONS
From its inception in 1985 to 1998, Procept devoted its principal efforts to
drug discovery and research. Since 1998, the Company devoted its principal
efforts to drug development, human clinical trials, and partnership
commercialization, focusing on PRO 2000 Gel and O(6)-Benzylguanine.
Effective with the merger of HDC, the Company will focus its efforts on
creating a central worldwide source, through the website, www.heavenlydoor.com,
to initially provide a comprehensive range of products and services specifically
related to the funeral services industry. The Company and HDC plan to later
expand this concept to other products and services for the elderly and aging
baby boomer population including, but not limited to, the long-term care and
assisted living industry, and financial/estate planning.
Procept has generated no revenue from product sales, has not been profitable
since inception, and has incurred an accumulated deficit of $77.2 million
through September 30, 1999. 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. The
Company expects to incur additional operating losses over the next several years
as it focuses on growing the new Internet business, while maximizing the value
of the biotechnology business through partnerships or the sale of these assets.
The Company expects that its current funds and interest income will be
sufficient to fund Procept's operations through June 2000. Although management
continues to pursue additional funding arrangements and/or strategic partnering,
there can be no assurance that additional funding will be available from any of
these sources or, if available, will be available on acceptable or affordable
terms. If the Company is unable to enter into an additional corporate
collaboration(s) that produce revenue for the Company, or secure additional
financing, the Company's financial condition will be adversely affected.
The accompanying financial statements for the three- and nine-month periods
ended September 30, 1999 and 1998 are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles. These
interim financial statements, in the opinion of
F-30
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods ended September 30, 1999 and 1998. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the fiscal year. These interim financial statements should be
read in conjunction with the audited financial statements for the year ended
December 31, 1998 which are contained in the Company's 1998 Annual Report on
Form 10-K.
2. SHAREHOLDERS' EQUITY
On December 31, 1998, the Company had a total of 3,001,832 shares of common
stock outstanding. During the nine months ending September 30, 1999, the Company
issued 11,087,637 new shares of common stock. These issuances resulted from the
acquisition of Pacific Pharmaceuticals, Inc. ("Pacific") and contractual
obligations associated with the 1998 subscription agreements entered into in
connection with the Company's 1998 private placement (the "1998 Subscription
Agreements") in which the Company raised $8.3 million, net. The following
section summarizes the recent issuances of the Company's common stock.
On March 15, 1999, the Company issued 36,785 shares of its common stock to
Commonwealth Associates in connection with the settlement of the litigation
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. On the same date, the Company issued 2,724 shares of its
common stock to The Harvard School of Dental Medicine as partial satisfaction of
certain contractual obligations of Pacific.
On March 17, 1999, Pacific was merged with, and became a wholly owned
subsidiary of, the Company. In connection with the merger, each share of Pacific
common stock (including preferred stock on an as converted basis) was converted
into approximately 0.11 shares of Procept common stock or a total of 2,753,205
Procept shares; an additional 414,584 Procept shares were issued to holders of
Pacific's preferred stock, for a total of 3,167,789 shares (of which 1,558,587
shares issued in the merger to holders of Pacific preferred stock were
accompanied by certain contractual rights similar to those held by purchasers in
Procept's 1998 private placement). The Company also issued 88,374 shares of its
common stock in exchange for the cancellation of certain indebtedness of
Pacific.
The issuance of common stock in connection with the Pacific merger was a
dilutive issuance under the terms of the 1998 Subscription Agreements. As a
result, on March 17, 1999 pursuant to anti-dilution provisions of the 1998
Subscription Agreements, the Company issued 1,005,058 shares of its common stock
to purchasers in the 1998 private placement and certain other stockholders with
identical contractual rights. In addition, the exercise price of the Company's
Class C Warrants issued in the 1998 private placement was reduced from $5.00 to
$3.67 as a result of the dilutive issuance.
On April 9, 1999, pursuant to the contractual reset provision contained in
the 1998 Subscription Agreements, the Company issued 3,885,851 shares of its
common stock to the purchasers in the 1998 private placement and certain other
stockholders with identical contractual rights.
On May 18, 1999, the Company issued 51,087 shares of its common stock in
connection with the exercise of a common stock warrant.
On June 22, 1999 and July 15, 1999, the Company issued 5,000 and 10,000
shares, respectively, of its common stock as bonuses to certain employees. In
addition, on June 22, 1999, the Company issued 11,765 of its common stock as
partial satisfaction of certain financial obligations.
F-31
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
2. SHAREHOLDERS' EQUITY (CONTINUED)
On June 30, 1999, the Company issued 2,773,575 shares of its common stock
and 924,525 Class D Warrants to purchase common stock to convert the minority
interest in its majority owned subsidiary BG Development Corp. ("BGDC"), thereby
eliminating a $6.5 million obligation pursuant to BGDC's preferred stock while
obtaining all of the outstanding stock of BGDC. The 2,773,575 common shares
issued in the conversion were valued at $2.11 per share. The shares have
contractual rights identical to those held by purchasers in Procept's 1998
private placement. The Class D Warrants are exercisable for an aggregate of
924,525 shares of the Company's common stock at $2.11 per share and expire
June 30, 2004. The total value of the shares plus the warrants (utilizing the
Black-Scholes valuation method), less the book value of the minority interest in
BGDC resulted in an incremental charge against earnings of $501,000 during the
period. This issuance was a dilutive event under the terms of the Class C
Warrants. Accordingly, the exercise price of each Class C Warrant was reduced
from $3.67 to $3.28.
On July 16, 1999 and August 30, 1999, the Company issued 2,680 and 46,949
shares, respectively, of its common stock pursuant to the contractual reset
provisions contained in the 1998 Subscription Agreements.
3. RESEARCH COLLABORATIONS
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"). Under the Sponsored Research Agreement, Procept
conducted specified research tasks on behalf of VacTex for which Procept
received a combination of cash and equity in VacTex based on the number of
full-time equivalent employees of Procept engaged in the research, but subject
to maximum cash and stock limits. At December 31, 1997, the Company's investment
in VacTex was accounted for under the cost method since it was a restricted
security, it did not have a readily determinable fair value and Procept owned
less than twenty percent of VacTex.
On April 13, 1998, Aquila Biopharmaceuticals, Inc. ("Aquila") acquired
VacTex. 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 principal amount
of 7% debentures. On July 15, 1999, the Company redeemed the Aquila 7%
debentures. The Company received $139,758 representing the principal and accrued
interest due at the time of redemption. As a result, the Company is accounting
for its investment in Aquila under Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities"
as an available for sale security and marked it to market by recognizing an
accumulated unrealized net gain of $34,439 as part of Shareholders' Equity,
based on Aquila's common stock closing price on September 30, 1999.
4. RESTRUCTURING
In January 1998, the Company terminated work on all research programs and
underwent a significant downsizing, reducing its staff to 10 people. Due to the
restructuring and focus on the clinical development of PRO 2000 Gel and
O(6)-Benzylguanine, the Company has sold and plans to continue to sell most of
its research equipment. For the nine months ended September 30, 1999, the
Company received approximately $29,000 from the sale of equipment and has
recorded a gain of approximately $25,000 in other expenses.
F-32
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
5. BASIC AND DILUTED NET (LOSS) PER COMMON SHARE
In the quarter ended December 31, 1997, the Company adopted SFAS 128,
"Earnings Per Share," which modifies the way in which earnings per share ("EPS")
is calculated and disclosed. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is based upon the
weighted average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed exercises of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock options using the treasury stock method. For the three- and nine-month
periods ended September 30, 1999, there were no dilutive securities.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements and will provide such information annually in
its Statement of Shareholders' Equity and in a footnote disclosure for interim
periods. Accumulated other comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------------
1999 1998 1999 1998
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss..................................... $(635,141) $(528,149) $(11,411,677) $(2,875,781)
Change in unrealized gain (loss)
on investments............................... 21,371 (146,154) (238,149) 158,414
Comprehensive loss........................... $(613,770) $(674,303) $(11,649,826) $(2,717,367)
========= ========= ============ ===========
Unrealized gain on investments:
Balance at December 31, 1998................. $272,588
Change during the nine months ended September
30, 1999................................... (238,149)
==========================
Balance at June 30, 1999..................... $ 34,439
==========================
</TABLE>
7. ACQUISITION OF PACIFIC PHARMACEUTICALS, INC.
On December 10, 1998, Procept entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") to acquire Pacific Pharmaceuticals, Inc.
("Pacific"), a Delaware corporation engaged in the development of cancer
therapies, based in San Diego, California, through a merger of a wholly owned
subsidiary of Procept with and into Pacific. The acquisition of Pacific
Pharmaceuticals closed on March 17, 1999.
The acquisition of Pacific was accounted for under the purchase accounting
method. The aggregate purchase price of $3.8 million, plus estimated acquisition
costs of $1.5 million, assumed liabilities (including a $200,000 note payable to
a significant shareholder of the Company) of $5.7 million and $1.0 million for
the value of the stock options and warrants being issued to the Pacific
shareholders were allocated to the acquired tangible and intangible assets based
on their estimated respective fair
F-33
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITION OF PACIFIC PHARMACEUTICALS, INC. (CONTINUED)
values. Approximately $9.4 million of the purchase price has been allocated to
in-process research and development and expensed in the quarter ended March 31,
1999. The charge for in-process research and development represents the value
assigned to Pacific's programs that are still in the development stage and for
which there is no alternative future use. The value assigned to these programs
has been developed by determining the fair value of these programs, as provided
by an independent valuation of the Pacific business. The valuation methodology
was based on estimated discounted cash flows.
Pursuant to the Merger Agreement, each share of Pacific common stock
(including preferred stock on an as converted basis into common stock) converted
into approximately 0.11 shares of Procept common stock or a total of 2,753,205
Procept shares and an additional 414,584 Procept shares were issued to holders
of Pacific's preferred stock for a total of 3,167,789 Procept shares (of which
1,558,587 shares of Procept common stock issued in the merger to holders of
Pacific preferred stock were accompanied by certain contractual rights identical
to contractual rights held by purchasers in Procept's 1998 private placements).
In addition, Procept exchanged all Pacific's outstanding warrant, unit purchase
option and stock option obligations into approximately 1,773,078 like
instruments of Procept. Procept also assumed an approximately $6.5 million, net
obligation (payable in cash or common stock of Procept, at the sole option of
the Company) of Pacific's subsidiary, BG Development Corp. ("BGDC"). On
June 30, 1999, the Company issued 2,773,575 shares of its common stock and
924,525 Class D Warrants to convert the obligations to the minority shareholders
of BGDC. The shares have contractual rights identical to those held by
purchasers in Procept's 1998 private placement. The Class D Warrants are
exercisable for an aggregate of 924,525 shares of the Company's common stock at
$2.11 per share and expire on June 30, 2004. As a result of the merger with
Pacific, Procept also issued approximately 1,005,058 shares of its common stock
to purchasers in Procept's 1998 private placement and certain other stockholders
pursuant to certain contractual anti-dilution rights.
PRO FORMA RESULTS OF OPERATION
The following unaudited pro forma results of operations for the nine months
ended September 30, 1999 and 1998 give effect to the Company's acquisition of
Pacific as if the transaction had occurred at the beginning of each period. The
pro forma results of operation exclude the charge for in-process research and
development of $9.4 million that was recorded with the acquisition in 1999, and
do not purport to reflect what the Company's results of operations actually
would have been if the acquisition had occurred as of the beginning of the
periods, or what such results will be for any future period. The financial data
are based upon financial assumptions that the Company believes are reasonable
and should be read in conjunction with the consolidated financial statements and
accompanying notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
PRO FORMA RESULTS FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues........................................... $ 259,103 $ 422,058
Net loss........................................... $(2,815,323) $(5,736,224)
Basic and diluted net loss per common share........ $ (0.31) $ (2.06)
</TABLE>
F-34
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
8. NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
which was issued in June 1998 and was to be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 137 defers the effective date
of SFAS 133 to June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. While management has not determined the impact
of the new standard, it is not expected to be material to the Company.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement has no impact on the Company.
9. SUBSEQUENT EVENT--MERGER WITH HEAVEN'S DOOR CORPORATION
On November 8, 1999, Procept entered into an agreement and plan of merger to
acquire Heaven's Door Corporation, a Delaware corporation engaged in providing a
range of funeral-related products and services through its website,
www.heavenlydoor.com.
The acquisition of HDC will be accounted for utilizing the purchase
accounting method. Under the terms of the agreement, the Company will issue new
shares of Procept common stock in exchange for all of the outstanding HDC
equity. In accordance with the Merger Agreement, the Company will also issue new
shares to holders of the common stock purchased in the 1998 Private Placement,
in exchange for the elimination of certain contractual rights contained in the
1998 Subscription Agreement. In addition, at the time of closing, Procept will
issue new shares to convert the outstanding notes payable and certain other
obligations of the Company. The effect of these issuances of common stock will
result in the current Procept shareholders owning approximately 65% and the
existing HDC shareholders owning approximately 35% of the combined company.
The closing of the merger is contingent upon several conditions, including
the approval of Procept's shareholders. The companies anticipate the transaction
to close early in the first quarter of 2000, subject to satisfaction of all
necessary conditions.
F-35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
Heaven's Door Corporation
New York, New York
We have audited the accompanying balance sheets of Heaven's Door Corporation
(A Development Stage Company) as of June 30, 1999 and 1998, and the related
statements of changes in stockholders' equity, operations and cash flows for
each of the three years in the period ended June 30, 1999 and for the period
from inception (October 27, 1994) through June 30, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heaven's Door Corporation as
of June 30, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1999 and for the period
from the date of inception (October 27, 1994) through June 30, 1999, in
conformity with generally accepted accounting principles.
Rotenberg & Company, LLP
Rochester, New York
August 11, 1999
F-36
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
and Stockholders
Heaven's Door Corporation
New York, New York
We have reviewed the accompanying balance sheet of Heaven's Door Corporation
as of September 30, 1999 and the related statements of operations, changes in
stockholders' equity, and cash flows for the three months ended September 30,
1999 and 1998 and for the period from the date of inception (October 27, 1994)
through September 30, 1999 in accordance with standards established by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Heaven's
Door Corporation.
A review consists principally of inquiries of company personnel and
analytical procedures applied to the financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheets as of June 30, 1999 and 1998, and the related
statements of operations, changes in stockholder's equity and cash flows for
each of the three years in the period ended June 30, 1999 and for the period
from the date of inception (October 27, 1994) through June 30, 1999 (presented
elsewhere herein); and in our report dated August 11, 1999, we expressed an
unqualified opinion on those financial statements.
Rotenberg & Company, LLP
Rochester, New York
November 5, 1999
F-37
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
BALANCE SHEETS AT
JUNE 30, 1999 AND 1998
AND SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30
SEPTEMBER 30, ---------------------
1999 1999 1998
------------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents................................ $ 89,164 $ 525,430 $ --
Accounts Receivable...................................... 23,023 4,082 --
Employee Receivable...................................... 1,835 1,900 --
---------- ---------- -------
Total Current Assets................................. $ 114,022 $ 531,412 $ --
Property and Equipment--Net of Accumulated Depreciation of
$5,026 and $2,306........................................ 85,617 44,091 --
Security Deposit........................................... 8,266 8,266 --
Goodwill--Net of Accumulated Amortization of $7,500 and
$3,750................................................... 67,500 71,250 --
---------- ---------- -------
Total Assets......................................... $ 275,405 $ 655,019 $ --
========== ========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses.................... $ 18,988 $ 19,146 $ --
Advances from Related Parties............................ 5,000 -- --
---------- ---------- -------
Total Liabilities.................................... $ 23,988 $ 19,146 $ --
---------- ---------- -------
Stockholders' Equity
Common Stock: $.001 Par Value; 20,000,000 Shares
Authorized, 12,116,564 Shares Issued and Outstanding at
September 30 and June 30, 1999 and 4,942,564 Shares
Issued and Outstanding at June 30, 1998,
respectively........................................... 12,117 12,117 4,943
Additional Paid-In Capital............................... 1,100,184 1,100,184 1,085
Deficit Accumulated During Development Stage............. (860,884) (476,428) (6,028)
---------- ---------- -------
Total Stockholders' Equity........................... $ 251,417 $ 635,873 $ --
---------- ---------- -------
Total Liabilities and Stockholders' Equity........... $ 275,405 $ 655,019 $ --
========== ========== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-38
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD
FROM INCEPTION (OCTOBER 27, 1994) THROUGH JUNE 30, 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
COMMON ACCUMULATED
STOCK ADDITIONAL DURING TOTAL
NUMBER $.001 PAID IN DEVELOPMENT STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL STAGE EQUITY
----------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Inception--October 27, 1994......... -- $ -- $ -- $ -- $ --
Net Loss............................ -- -- -- (6,028) (6,028)
----------- ------- ---------- --------- ---------
Balance--June 30, 1995.............. -- $ -- $ -- $ (6,028) $ (6,028)
Common Stock Issued--October 24,
1995.............................. 6,027,496 6,028 -- -- 6,028
Stock Split--February 14, 1999...... (1,084,932) (1,085) 1,085 -- --
----------- ------- ---------- --------- ---------
Restated Balance After Stock
Split............................. 4,942,564 4,943 1,085 $ (6,028) $ --
Net Loss............................ -- -- -- -- --
----------- ------- ---------- --------- ---------
Balance--June 30, 1996.............. 4,942,564 4,943 1,085 (6,028) --
Net Loss............................ -- -- -- -- --
----------- ------- ---------- --------- ---------
Balance--June 30, 1997.............. 4,942,564 4,943 1,085 (6,028) --
Net Loss............................ -- -- -- -- --
Balance--June 30, 1998.............. 4,942,564 4,943 1,085 (6,028) --
Additional Paid In Capital.......... -- -- 116,273 -- 116,273
Common Stock Issued:
Compensation--Rule 701--
February 1, 1999................ 5,300,000 5,300 47,700 -- 53,000
Private Placement--Rule 504
Issued at $.50 per Share--May 12,
1999............................ 1,874,000 1,874 935,126 -- 937,000
Net Loss............................ -- -- -- (470,400) (470,400)
----------- ------- ---------- --------- ---------
Balance--June 30, 1999.............. 12,116,564 $12,117 $1,100,184 $(476,428) $ 635,873
Net Loss............................ -- -- -- (384,456) (384,456)
----------- ------- ---------- --------- ---------
Balance--September 30, 1999......... 12,116,564 $12,117 $1,100,184 $(860,884) $ 251,417
=========== ======= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-39
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND FOR THE PERIOD
FROM INCEPTION (OCTOBER 27, 1994) THROUGH JUNE 30, 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
UNAUDITED
---------------------------------------
FOR THE PERIOD
FOR THE PERIOD FROM INCEPTION
FROM INCEPTION (OCTOBER 27, 1994)
(OCTOBER 27, 1994) THROUGH THREE
THROUGH SEPTEMBER 30, MONTHS ENDED
JUNE 30, 1999 1999 1998 1997 1999 SEPTEMBER 30, 1999
------------------ ---------- --------- --------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ -- $ -- $ -- $ -- $ 1,120 $ 1,120
---------- ---------- --------- --------- ---------- ----------
Costs and Expenses
Cost of Product Sales..... -- -- -- -- -- --
Product Development
Costs................... 54,537 54,537 -- -- 138,630 84,093
General and Administrative
Costs................... 193,452 193,452 -- -- 308,748 115,296
Business Development and
Marketing............... 221,284 215,256 -- -- 401,001 179,717
Interest and Other
Expenses................ 7,155 7,155 -- -- 13,625 6,470
---------- ---------- --------- --------- ---------- ----------
Total Costs and
Expenses............ $ 476,428 $ 470,400 $ -- $ -- $ 862,004 $ 385,576
---------- ---------- --------- --------- ---------- ----------
Net Loss for the Period..... $ (476,428) $ (470,400) $ -- $ -- $ (860,884) $ (384,456)
---------- ---------- --------- --------- ---------- ----------
Net Loss Per Share--Basic
and Diluted (1)........... $ (.04) $ (.04) $ -- $ -- $ (.07) $ (.03)
---------- ---------- --------- --------- ---------- ----------
Average Weighted Shares
Outstanding (1)........... 12,116,564 12,116,564 4,942,564 4,942,564 12,116,564 12,116,564
---------- ---------- --------- --------- ---------- ----------
<CAPTION>
UNAUDITED
------------------
THREE
MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenues.................... $ --
---------
Costs and Expenses
Cost of Product Sales..... --
Product Development
Costs................... --
General and Administrative
Costs................... --
Business Development and
Marketing............... --
Interest and Other
Expenses................ --
---------
Total Costs and
Expenses............ $ --
---------
Net Loss for the Period..... $ --
---------
Net Loss Per Share--Basic
and Diluted (1)........... $ --
---------
Average Weighted Shares
Outstanding (1)........... 4,942,564
---------
</TABLE>
(1)SEE NOTE A
The accompanying notes are an integral part of this financial statement.
F-40
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND FOR THE PERIOD
FROM INCEPTION (OCTOBER 27, 1994) THROUGH JUNE 30, 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 27, 1994)
THROUGH
JUNE 30, 1999 1999 1998 1997
------------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss............................................ $(476,428) $(470,400) $ -- $ --
Non-Cash Adjustments:
Depreciation and Amortization..................... 6,056 6,056 -- --
Organizational Costs Paid by Shareholders......... 108,028 102,000 -- --
Franchise Taxes and Filing Fees Paid by
Shareholders.................................... 1,099 1,099 -- --
Stock Issued for Compensation for Services.......... 53,000 53,000 -- --
Changes in Assets and Liabilities:
Other Current Assets.............................. (5,982) (5,982) -- --
Security Deposit.................................. (8,266) (8,266) -- --
Accounts Payable and Accrued Expenses............. 19,146 19,146 -- --
--------- --------- ---------- ----------
Net Cash Flows from Operating Activities........ $(303,347) $(303,347) $ -- $ --
--------- --------- ---------- ----------
Cash Flows from Investing Activities
Cash Purchases of Property and Equipment.......... $ (46,397) $ (46,397) $ -- $ --
Cash Acquisition of Unitel Imaging Corp Cost in
Excess of Fair Value of Net Assets.............. (75,000) (75,000) -- --
--------- --------- ---------- ----------
Net Cash Flows from Investing Activities........ $(121,397) $(121,397) $ -- $ --
--------- --------- ---------- ----------
Cash Flows from Financing Activities
Advances from Related Parties..................... $ -- $ -- $ -- $ --
Additional Paid In Capital in Cash................ 13,174 13,174 -- --
Cash Received--Common Stock Issued................ 937,000 937,000 -- --
--------- --------- ---------- ----------
Net Cash Flows from Financing Activities.......... $ 950,174 $ 950,174 $ -- $ --
--------- --------- ---------- ----------
Net Increase in Cash and Cash Equivalents............. $ 525,430 $ 525,430 $ -- $ --
Cash and Cash Equivalents--
Beginning of Period................................. -- -- -- --
--------- --------- ---------- ----------
Cash and Cash Equivalents--End of Period.............. $ 525,430 $ 525,430 $ -- $ --
--------- --------- ---------- ----------
</TABLE>
F-41
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND FOR THE PERIOD
FROM INCEPTION (OCTOBER 27, 1994) THROUGH JUNE 30, 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED
------------------------------------------------------------
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 27, 1994) THREE THREE
THROUGH MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss................................. $(860,884) $(384,456) $ --
Non-Cash Adjustments:
Depreciation and Amortization.......... 12,526 6,470 --
Organizational Costs Paid by
Shareholders......................... 108,028 -- --
Franchise Taxes and Filing Fees Paid by
Shareholders......................... 1,099 -- --
Stock Issued for Compensation for
Services............................... 53,000 -- --
Changes in Assets and Liabilities:
Other Current Assets................... (24,858) (18,876) --
Security Deposit....................... (8,266) -- --
Accounts Payable and Accrued
Expenses............................. 18,988 (158) --
--------- --------- ---------
Net Cash Flows from Operating
Activities......................... $(700,367) $(397,020) $ --
--------- --------- ---------
Cash Flows from Investing Activities
Cash Purchases of Property and
Equipment............................ $ (90,643) $ (44,246) $ --
Cash Acquisition of Unitel Imaging Corp
Cost in Excess of Fair Value of Net
Assets............................... (75,000) -- --
--------- --------- ---------
Net Cash Flows from Investing
Activities......................... $(165,643) $ (44,246) $ --
--------- --------- ---------
Cash Flows from Financing Activities
Advances from Related Parties.......... $ 5,000 $ 5,000 $ --
Additional Paid In Capital in Cash..... 13,174 -- --
Cash Received--Common Stock Issued..... 937,000 -- --
--------- --------- ---------
Net Cash Flows from Financing
Activities........................... $ 955,174 $ 5,000 $ --
--------- --------- ---------
Net Increase in Cash and Cash
Equivalents.............................. $ 89,164 $(436,266) $ --
Cash and Cash Equivalents--
Beginning of Period...................... -- 525,430 --
--------- --------- ---------
Cash and Cash Equivalents--End of Period... $ 89,164 $ 89,164 $ --
--------- --------- ---------
</TABLE>
F-42
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company maintains its books and prepares its financial statements on the
accrual basis of accounting and complies with the requirements of Statement of
Financial Accounting Standards No. 7, Accounting and Reporting by Development
Stage Enterprises.
The accompanying unaudited interim financial statements reflect all
adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of the Company for the interim periods presented. The
results of operations for these periods are not necessarily comparable to, or
indicative of, results of any other interim period or for the fiscal year as a
whole.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results can differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market funds, time deposits,
certificates of deposit, and all highly liquid debt instruments with original
maturities of three months or less.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and cash equivalents.
Cash and cash equivalents are held with financial institutions with high credit
ratings.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Computer Equipment.......................................... 5 Years
Leasehold Improvements...................................... 3 Years
Office Furniture and Equipment.............................. 7 Years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Upon sale or
retirement of assets, the cost and related accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is recognized.
F-43
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WEBSITE DEVELOPMENT COSTS
Costs incurred to develop the Company's website have been expensed as
incurred.
ORGANIZATION COSTS
Organizational expenses represent management, consulting, legal, accounting,
and filing fees, incurred in the formation of the Company. Organizational costs
are expensed as incurred per Statement of Position 98-5 on Reporting on the
Costs of Start-Up Activities.
GOODWILL
Goodwill recorded on the acquisition of Unitel Imaging Corp. represents the
cost in excess of the fair value of the net assets acquired. Goodwill is being
amortized over its estimated useful life of 5 years.
INCOME TAXES
Deferred taxes are provided in the financial statements for significant
temporary differences arising from assets and liabilities whose bases are
different for financial reporting and income tax purposes. The primary
differences are attributable to depreciation methods. Deferred tax assets
arising from net operating losses incurred during the development stage have
been fully reserved against due to the uncertainty as to when or whether the tax
benefit will be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings per Share." Net loss per share is based upon the
weighted-average number of common shares outstanding. Share and per share
amounts for all periods presented have been adjusted to reflect a stock split in
1999. The weighted average shares outstanding for the year ended June 30, 1999
reflects the common stock issued under Rule 504 and 701 as outstanding for the
entire year since there were no significant operations prior to the stock
offering.
NOTE B--SCOPE OF BUSINESS
Heaven's Door Corporation (formerly named Unitel Imaging Corp.) ("The
Company") was formed in October 1994, under the laws of the State of Delaware.
The Company was dormant until March 1999, when it was determined to commence
development of its business as an Internet service provider to the funeral
services industry. The Company is currently a development stage enterprise and
is in the process of developing a web site to conduct electronic commerce with
funeral homes, cemeteries, florists and others involved in the funeral services
business.
F-44
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1999 and 1998
and September 30, 1999:
<TABLE>
<CAPTION>
JUNE 30
------------------- SEPTEMBER 30
1999 1998 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer Equipment........................... $19,205 $ -- $32,045
Leasehold Improvements....................... 13,857 -- 30,230
Office Furniture and Equipment............... 13,335 -- 28,368
------- -------- -------
46,397 -- $90,643
LESS: Accumulated Depreciation............... 2,306 -- 5,026
------- -------- -------
Net Property and Equipment................. $44,091 $ -- $85,617
======= ======== =======
</TABLE>
NOTE D--LEASE COMMITMENTS
The Company rents approximately 3,000 square feet of office space in New
York City and Coral Springs, Florida under three year leases. The current
monthly rent is approximately $5,100. The minimum annual lease commitments under
these operating leases is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
--------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$61,200 $61,200 $45,900 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
NOTE E--STOCKHOLDERS' EQUITY
COMMON STOCK
The Company's securities are not registered under the Securities Act of 1933
and, therefore, no offering may be made which would constitute a "Public
Offering" within the meaning of the United States Securities Act of 1933, unless
the shares are registered pursuant to an effective registration statement under
the Act.
The stockholders may not sell, transfer, pledge or otherwise dispose of the
common shares of the company in the absence of either an effective registration
statement covering said shares under the 1933 Act and relevant state securities
laws, or an opinion of counsel that registration is not required under the Act
or under the securities laws of any such state.
INITIAL CAPITALIZATION
The Company had all of its organizational costs paid by the shareholders.
The shareholders paid $6,028 for these costs for which they received 6,027,496
shares of the Company's common stock.
F-45
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E--STOCKHOLDERS' EQUITY (CONTINUED)
Certain shareholders paid for additional organization costs of $102,000 and
also contributed additional cash capital of $13,174 during 1999.
STOCK SPLIT
On February 1, 1999 the Board of Directors approved a 1 share for 10 shares
stock split on certain outstanding shares other than protected shares to be
effective as of February 14, 1999 to shareholders of record on that date. The
total number of unprotected shares outstanding on that date was 1,205,500. The
adjusted shares outstanding after the split are as follows:
<TABLE>
<S> <C> <C>
Protected Shares....................................... 4,821,996
Unprotected shares..................................... 1,205,500
Stock Split............................................ 1 for 10 120,550
Adjust Fractional Shares............................... 18
---------
Restated Shares Outstanding............................ 4,942,564
=========
</TABLE>
COMMON STOCK ISSUED
On February 1, 1999 the Board of Directors authorized the Company to sell up
to 2,000,000 shares of common stock to the public at $.50 per share in an
offering pursuant to Regulation D, Rule 504 of the Securities Act of 1933. Stock
subscriptions totaling $937,000 (representing 1,874,000 common shares) were
received in cash and common shares were issued on May 12, 1999.
Also on February 1, 1999 the Board of Directors approved the issuance of
5,300,000 shares of the Company's common shares under Rule 701 to certain
individuals for compensation of services rendered to develop a business and
marketing plan (recorded at the fair value of the services rendered of $53,000).
OTHER
On February 1, 1999 the Board of Directors authorized the establishment of
an employee stock benefit plan. On May 12, 1999, 700,000 shares of common stock
were reserved in treasury for the establishment of an employee stock benefit
plan in the future.
F-46
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Financing Activities:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 27, 1994)
THROUGH
SEPTEMBER 30, 1999 1999 1998 1997
------------------ -------- -------- --------
<S> <C> <C> <C> <C>
Common Stock Issued:
For Compensation for Services........ $ 53,000 $ 53,000 $-- $--
In Exchange for Expenses Paid by
Shareholders......................... $109,127 $103,099 $-- $--
</TABLE>
NOTE G--YEAR 2000 ISSUES
STATE OF READINESS
Heaven's Door recognizes the need to ensure its operations will not be
adversely impacted by the inability of Heaven's Door's systems to process data
having dates on or after January 1, 2000 ("Year 2000").
YEAR 2000 RISKS
Processing errors due to software failure arising from calculations using
the Year 2000 date are recognized as a risk. Heaven's Door is currently
assessing the risk, with respect to the availability and integrity of its
financial systems and the reliability of its operating systems, and is in the
process of communicating with suppliers, customers, financial institutions and
others with whom it conducts business to assess whether they are or will be Year
2000 compliant.
THE COMPANY'S STATE OF READINESS
The Company views contingency planning as broader than the Year 2000 issue
and believes that a comprehensive contingency plan should address any known
circumstance that may cause a disruption of operations or an adverse customer
experience. To that end, the Company is developing business continuity plans to
address each critical process and activity that it believes would cause a
significant disruption to operations if not functional for 24 hours.
Heaven's Door's website hosting service, Interland, has represented to it
that Heaven's Door's hardware and software systems are Year 2000 compliant.
Heaven's Door's information technology systems consist of a series of personal
computers which process data using purchased software programs produced and
maintained by large software vendors. All of the software presently installed on
Heaven's Door's systems is Year 2000 compliant.
F-47
<PAGE>
HEAVEN'S DOOR CORPORATION
(FORMERLY UNITEL IMAGING CORP.)
(A DEVELOPMENT STAGE COMPANY)
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--YEAR 2000 ISSUES (CONTINUED)
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, Heaven's Door has not incurred any significant costs attributable
to Year 2000 compliance. Heaven's Door is not currently aware of any material
operational issues or costs associated with preparing systems for the Year 2000.
Nonetheless, Heaven's Door may experience material unexpected costs caused by
undetected errors or defects in the technology used in its systems or because of
the failure of a material vendor to be Year 2000 compliant.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Pharmaceuticals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Pharmaceuticals, Inc. and Subsidiaries (collectively, the "Company", a
development stage enterprise) as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998 and the period from
September 23, 1983 (date of incorporation of Pacific Pharmaceuticals, Inc.) to
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Pharmaceuticals, Inc.
and Subsidiaries at March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, and for the period from September 23, 1983 (date of incorporation of
Pacific Pharmaceuticals, Inc.) to March 31, 1998 in conformity with generally
accepted accounting principles.
The Company is in the development stage as of March 31, 1998. As discussed
in Note 1 to the consolidated financial statements, the Company's activities
since inception have been directed primarily toward the development and
commercialization of products based on biotechnological research.
As discussed in Note 9, the accompanying fiscal 1997 financial statements
have been restated.
DELOITTE & TOUCHE LLP
July 8, 1998
San Diego, California
F-49
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------
1998 1997
------------ -------------
(AS RESTATED,
SEE NOTE 9)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 3,290,176 $ 1,784,599
Short-term investments...................................... -- 4,981,435
Accounts receivable, net.................................... -- 99,066
Inventory................................................... 38,637 41,677
Prepaid expenses............................................ 85,053 87,311
------------ ------------
Total current assets........................................ 3,413,866 6,994,088
Property and equipment, net................................. 71,840 82,563
Patent costs, net........................................... 104,981 157,597
------------ ------------
TOTAL ASSETS................................................ $ 3,590,687 $ 7,234,248
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 661,371 $ 723,523
Accrued expenses............................................ 201,125 161,574
Current portion of capital leases........................... 4,066 4,670
------------ ------------
Total current liabilities................................... 866,562 889,767
------------ ------------
Capital leases.............................................. 22,584 13,072
------------ ------------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Convertible preferred stock, $25 par value, 2,000,000 shares
authorized;
40,090 and 50,000 issued and outstanding at March 31, 1998
and 1997, respectively (liquidating preference
$10,423,400).............................................. 1,002,288 1,250,038
Common stock, $.02 par value, 100,000,000 shares authorized;
10,777,234 and 8,151,029 shares issued and outstanding at
March 31, 1998 and 1997, respectively..................... 215,545 163,021
Capital in excess of par value.............................. 46,969,197 38,805,489
Deficit accumulated during the development stage............ (45,485,489) (33,887,139)
------------ ------------
Total stockholders' equity.................................. 2,701,541 6,331,409
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 3,590,687 $ 7,234,248
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-50
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, SEPTEMBER 23, 1983
---------------------------------------- (INCEPTION) TO
1998 1997 1996 MARCH 31, 1998
------------ ----------- ----------- ------------------
(AS RESTATED,
SEE NOTE 9)
<S> <C> <C> <C> <C>
REVENUES
Product sales......................... $ 69,510 $ 100,485 $ 13,657 $ 2,019,741
License fees and royalties............ 5,405 1,207 150,000 486,612
Contract research..................... -- 39,172 45,000 268,063
Marketing rights...................... -- 5,000 60,000 1,311,500
Interest and other.................... 273,545 129,316 110,159 1,913,658
------------ ----------- ----------- ------------
Total revenues........................ 348,460 275,180 378,816 5,999,574
------------ ----------- ----------- ------------
COSTS AND EXPENSES
Cost of product sales................. 140,460 95,200 124,530 3,138,395
Product development................... 2,196,433 2,565,664 1,853,899 17,160,961
General and administrative............ 2,086,249 1,155,515 1,257,722 17,851,747
Business development and marketing.... 218,603 290,603 372,316 3,776,889
Interest and other.................... 78,178 65,564 26,252 633,973
------------ ----------- ----------- ------------
Total costs and expenses.............. 4,719,923 4,172,546 3,634,719 42,561,965
------------ ----------- ----------- ------------
Net loss.............................. (4,371,463) (3,897,366) (3,255,903) (36,562,391)
Convertible preferred stock
dividends........................... 7,226,887 1,696,211 -- 8,923,098
------------ ----------- ----------- ------------
Net loss applicable to common
stockholders........................ $(11,598,350) $(5,593,577) $(3,255,903) $(45,485,489)
============ =========== =========== ============
Net loss per share of common
stock-basic and diluted............. $ (1.25) $ (0.69) $ (0.52)
============ =========== ===========
Weighted average common stock
outstanding......................... 9,273,717 8,115,139 6,222,832
============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-51
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK CAPITAL DURING THE
--------------------- ---------------------- IN EXCESS DEVELOPMENT
SHARES PAR VALUE SHARES PAR VALUE OF PAR VALUE STAGE
-------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 23, 1983...................... -- $ -- -- $ -- $ -- $ --
Original issuance of common stock:
October 1983 at $.02 per share..................... 597,500 11,950
October 1983 at $2.00 per share.................... 55,000 1,100 108,900
Issuance for cash, January 1984 at $4.00 per
share............................................ 383,625 7,672 1,325,817
Net loss........................................... (137,937)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1984.......................... -- -- 1,036,125 20,722 1,434,717 (137,937)
Purchase of treasury stock......................... (267)
Adjustment to capital in excess of par value....... 5,600
Net loss........................................... (692,070)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1985.......................... -- -- 1,036,125 20,722 1,440,050 (830,007)
Purchase of treasury stock......................... (83)
Initial public offering, October 1985 at $6.00 per
share............................................ 500,000 10,000 2,392,536
Net loss........................................... (994,767)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1986.......................... -- -- 1,536,125 30,722 3,832,503 (1,824,774)
Purchase of treasury stock......................... (5)
Preferred stock subscribed:
Series A........................................... 6,000 150,000 450,000
Net loss........................................... (1,445,191)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1987.......................... 6,000 150,000 1,536,125 30,722 4,282,498 (3,269,965)
Issuance of 8.5% convertible subordinated notes
warrants......................................... 62,500
Retirement of treasury stock....................... (17,500) (350) 350
Preferred stock subscribed/(returned):
Series A........................................... (3,000) (75,000) (225,000)
Series B........................................... 1,600 40,000 120,000
Net loss........................................... (1,327,934)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1988.......................... 4,600 115,000 1,518,625 30,372 4,240,348 (4,597,899)
Conversion of 8.5% convertible subordinated
notes............................................ 39,999 800 249,193
Consultant's compensation.......................... 1,073 22 6,524
Preferred stock subscribed/(converted):
Series A........................................... (3,000) (75,000) 35,002 700 74,296
Series B........................................... 27,180 679,500 1,556,444
Dividends accrued--Series B........................ (221,955)
Net loss........................................... (1,553,240)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1989.......................... 28,780 719,500 1,594,699 31,894 5,904,850 (6,151,139)
Private placement, November 1989 at $8.00 per
share............................................ 75,000 1,500 538,500
Exercise of common stock options................... 3,500 70 13,930
Preferred stock subscribed/(converted):
Series B........................................... (28,780) (719,500) 719,500 14,390 705,111
Dividends accrued--Series B........................ (141,158)
Reverse accrued dividends--Series B................ 363,113
Exercise of Series B warrants...................... 463,088 9,262 1,611,546
Exercise of other warrants......................... 2,000 40 14,360
Net loss........................................... (1,512,343)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1990.......................... -- -- 2,857,787 57,156 9,010,252 (7,663,482)
Exercise of common stock options................... 7,100 142 28,258
Exercise of other warrants......................... 98,000 1,960 743,640
Consultant's compensation.......................... 338 7 2,894
Private placement, October 1990 at $12.00 per
share............................................ 257,500 5,150 2,765,446
Net loss........................................... (2,111,267)
------- ---------- ---------- -------- ----------- ------------
</TABLE>
F-52
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK CAPITAL DURING THE
--------------------- ---------------------- IN EXCESS DEVELOPMENT
SHARES PAR VALUE SHARES PAR VALUE OF PAR VALUE STAGE
-------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1991.......................... -- -- 3,220,725 64,415 12,550,490 (9,774,749)
Exercise of common stock options................... 10,950 218 40,932
Exercise of other warrants......................... 10,000 200 104,800
Private placement, April 1991 at $17.50 per
share............................................ 214,188 4,284 3,433,816
Net loss........................................... (3,156,803)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1992.......................... -- -- 3,455,863 69,117 16,130,038 (12,931,552)
Exercise of common stock options................... 4,300 86 16,139
Private placement, May 1992 at $11.625 per share... 277,100 5,542 2,889,461
Net loss........................................... (3,738,097)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1993.......................... -- -- 3,737,263 74,745 19,035,638 (16,669,649)
Exercise of common stock options................... 70,227 1,405 292,406
Common stock retired as payment for common stock
options exercised................................ (12,903) (258) (99,740)
Grant of stock option below fair market value...... 468,750
Private placements:
July 1993 at $5.50 per share....................... 317,093 6,342 1,531,879
December 1993 at average of $6.12 per share........ 427,275 8,546 2,386,770
January 1994 at average of $6.24 per share......... 222,100 4,442 1,259,545
March 1994 at $5.30 per share...................... 51,000 1,020 244,088
Common stock issued in payment of offering
expenses......................................... 974 19 8,868
Net loss........................................... (4,613,042)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1994.......................... -- -- 4,813,029 96,261 25,128,204 (21,282,691)
Private placements:
April 1994 at $4.00 per share...................... 100,000 2,000 378,000
August 1994 at $4.485 per share.................... 100,000 2,000 423,575
September 1994 at $3.80 per share.................. 250,000 5,000 886,428
Net loss........................................... (3,754,968)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1995.......................... -- -- 5,263,029 105,261 26,816,207 (25,037,659)
Private placements:
November 1995 at $1.25 per share................... 2,788,000 55,760 2,864,383
Net loss........................................... (3,255,903)
------- ---------- ---------- -------- ----------- ------------
Balance at March 31, 1996.......................... 8,051,029 161,021 29,680,590 (28,293,562)
Private placement of convertible preferred stock... 50,000 $1,250,038 7,291,688
Warrants exercised................................. 100,000 2,000 92,000
Issuance of warrants for services.................. 45,000
Convertible preferred stock dividend (as restated,
see Note 9)...................................... 1,696,211 (1,696,211)
Net loss........................................... (3,897,366)
------------
Balance at March 31, 1997 (as restated)............ 50,000 1,250,038 8,151,029 163,021 38,805,489 (33,887,139)
------- ---------- ---------- -------- ----------- ------------
Warrants exercised................................. 423,437 8,469 389,562
Issuance of common stock for services.............. 13,110 262 11,737
Conversion of preferred stock into common stock.... (9,910) (247,750) 2,189,658 43,793 203,957
Preferred stock unit purchase options as
compensation for financial advisory services..... 331,565
Convertible preferred stock dividend............... 7,226,887 (7,226,887)
Net loss........................................... (4,371,463)
------------
Balance at March 31, 1998.......................... 40,090 $1,002,288 10,777,234 $215,545 $46,969,197 $(45,485,489)
======= ========== ========== ======== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-53
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, SEPTEMBER 23, 1983
--------------------------------------- (INCEPTION) TO
1998 1997 1996 MARCH 31, 1998
----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(4,371,463) $(3,897,366) $(3,255,903) $(36,562,391)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 81,257 109,731 123,427 1,665,001
Non-cash compensation expense upon issuance of common
stock, stock options and warrants..................... 331,565 45,000 -- 851,861
Net book value of asset disposals....................... 76,376 17,064 5,506 241,692
Option income from retirement of stock or amounts
previously advanced by customer....................... -- -- -- (400,000)
Changes in assets and liabilities:
Accounts receivable..................................... 99,066 (96,398) 6,405 --
Inventory............................................... 3,040 (770) 7,060 (38,640)
Prepaid expenses and other assets....................... 2,258 8,634 3,349 (96,028)
Accounts payable........................................ (62,152) 509,214 (2,505) 661,371
Accrued expenses........................................ 39,551 (217,353) 263,486 57,102
Customer advances....................................... -- -- (30,888) 140,863
Other liabilities....................................... -- (7,842) (11,895) (4,866)
----------- ----------- ----------- ------------
Net cash used by operating activities................... (3,800,502) (3,530,086) (2,891,958) (33,484,035)
----------- ----------- ----------- ------------
INVESTING ACTIVITIES
Purchases of short-term investments..................... -- (4,981,435) (1,288,106) (10,461,867)
Maturities of short-term investments.................... 4,981,435 1,288,106 992,326 10,461,867
Capital expenditures.................................... (16,502) (9,764) (51,596) (847,929)
Patent costs............................................ (64,945) (31,799) (61,823) (977,372)
Other................................................... -- 8,825 -- 7,829
----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities..... 4,899,988 (3,726,067) (409,199) (1,817,472)
----------- ----------- ----------- ------------
FINANCING ACTIVITIES
Issuance of notes payable............................... -- 524,467 325,426 2,183,867
Repayment of notes payable.............................. -- (524,467) (325,426) (1,965,124)
Repayment of capital lease obligations.................. (3,940) (4,625) (37,087) (183,547)
Long-term customer advances............................. -- -- -- 100,000
Issuance of common stock, convertible preferred stock
and stock warrants.................................... 410,031 8,635,726 2,920,143 38,456,487
----------- ----------- ----------- ------------
Net cash provided by financing activities............... 406,091 8,631,101 2,883,056 38,591,683
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.... 1,505,577 1,374,948 (418,101) 3,290,176
Cash and cash equivalents at beginning of period........ 1,784,599 409,651 827,752 --
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period.............. $ 3,290,176 $ 1,784,599 $ 409,651 $ 3,290,176
=========== =========== =========== ============
Cash paid for interest.................................. $ 2,682 $ 36,210 $ 18,804 $ 497,742
=========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-54
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The Consolidated Financial Statements include the
accounts of Pacific Pharmaceuticals, Inc. and its wholly owned subsidiaries,
Perio Test, Inc., XYX Acquisition Corp. and BG Development Corp. (collectively,
the "Company"). The Company was incorporated under the laws of the State of
Delaware on September 23, 1983. For the period of inception to date, the
Company's activities have been directed primarily toward the development and
commercialization of products based on biopharmaceutical research. On August 7,
1997, the Company's stockholders approved an amendment to the Certificate of
Incorporation to change the name of the Company to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.
Principles of Consolidation--All significant intercompany balances and
transactions have been eliminated in consolidation.
Development Stage--The Company has not earned significant revenues from
planned principal operations. Accordingly, the Company's activities have been
accounted for as those of a "Development Stage Enterprise" as set forth in
Financial Accounting Standards Board Statement No. 7 ("FAS 7"). Among the
disclosures required by FAS 7 are that the Company's financial statements be
identified as those of a development stage enterprise, and that the consolidated
statements of operations, stockholders' equity and cash flows disclose activity
since the date of the Company's inception.
Since inception, the Company has experienced negative cash flow from
operations, and management considers it prudent to anticipate that negative cash
flow from operations will continue until such time as sales of its products
under development commence. The Company has initiated a private placement equity
financing to raise a maximum of $10 million assuming exercise of over-allotment
provision by the placement agent as described in Note 8. On June 22, 1998, the
Company closed on gross proceeds of $2.9 million ($2.6 net proceeds), for the
aforementioned private placement. The Company has also initiated contingency
plans to defer certain research and development expenditures and other non
essential costs until the Company has closed a more significant portion of the
aforementioned financing. Management believes the Company's financial resources
will be adequate, based on the assumption that no significant revenues are
generated through March 1999.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Cash Equivalents--Cash equivalents consist of money market instruments
purchased with an original maturity of three months or less.
Short-Term Investments--Short term investments represent marketable debt
securities and are carried at fair value in accordance with FAS 115. Unrealized
holding gains or losses have not been material.
Accounts Receivable, net--Accounts receivable consists of sales of products
to customers, net of allowances for doubtful accounts. Inventory--Inventory,
which consists principally of raw materials and work in process, is valued at
the lower of cost (determined by the first-in, first-out method) or market.
F-55
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment--Depreciation and amortization of property and
equipment are provided using the straight-line method over the estimated useful
lives of the related assets, which are principally five and ten years. Property
and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Laboratory equipment.................................... $118,343 $357,139
Office furniture and equipment.......................... 166,860 157,966
Leasehold improvements.................................. 3,799 3,799
-------- --------
Total property and equipment............................ 289,002 518,904
Less accumulated depreciation and amortization.......... (217,162) (436,341)
-------- --------
Total................................................... $ 71,840 $ 82,563
======== ========
</TABLE>
Patent Costs--Legal expenses incurred in connection with applications for
patents on research and development projects are capitalized. The costs are
amortized using the straight-line method over five years. Patent costs which
have no further economic value are written off in the period in which such
impairment in value occurs. As a result of the Company's annual evaluation of
its capitalized patent costs, the Company wrote off patent and trademark costs
during Fiscal 1998 with a net book value of $68,000 which related primarily to
the Kephra technology. Patent costs are net of accumulated amortization of
$335,844 and $360,969 at March 31, 1998 and 1997, respectively.
Accrued Expenses--Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued compensation.................................... $ 67,687 $ 25,185
Accrued clinical trial expense.......................... 133,438 133,438
Other................................................... -- 2,951
-------- --------
Total................................................... $201,125 $161,574
======== ========
</TABLE>
Revenue Recognition--Product sales revenue is generally recognized at the
time of product shipment. License fees and royalties, contract research, and
marketing rights income are all recognized as earned in accordance with their
respective agreements. Payments received in advance of shipments or prior to the
completion of the earnings process are recorded as deferred revenue.
Loss Per Share of Common Stock--Basic loss per share of common stock is
computed by dividing the net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share (EPS) during the current fiscal year. This statement
requires the presentation of earnings per share to reflect both "Basic EPS" as
well as "Diluted EPS" on the face of the statement of operations. In general,
Basic EPS is a function of weighted average number of common shares outstanding
for the periods. Diluted EPS does reflect the potential dilution created by
stock issuable pursuant to
F-56
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
outstanding options, warrants, convertible debt or equity securities and other
contingently issuable shares. The requirements of SFAS 128 have been applied
retroactively to all periods presented. There was no impact on reported net loss
per common share as a result of the adoption of this SFAS.
Concentration of Credit Risk--The Company invests its excess cash in money
market accounts and short-term investments, primarily in U. S. Treasury
securities. The Company has not experienced any significant losses on its cash
accounts or short-term investments.
Fair Value of Financial Instruments--The Company's carrying amounts of its
financial assets and liabilities approximate their fair value due to the
short-term nature of the assets and liabilities.
Major Customers--One customer accounted for 98% and 75% of product sales for
the years ended March 31, 1998 and 1997, respectively. Three customers
individually accounted for 21%, 26% and 46%, respectively, of fiscal year 1996
product sales. Export sales, which accounted for 2% in the current fiscal year,
were to one customer in Japan, and 81% of product sales for the year ended
March 31, 1997 were primarily to one customer in Europe. Export sales, all of
which were to Japan, accounted for 51% of product sales in fiscal year 1996.
Supplemental Cash Flow Information--The Company had the following noncash
financing and investing activities for the period September 23, 1983 (inception)
through March 31, 1998: Common Stock issued upon the conversion of $720,000 of
Series B preferred stock during fiscal year 1990; Common Stock issued upon the
conversion of long-term debt in the amount of $250,000 in fiscal year 1996;
option income of $100,000 recognized from an amount previously classified as a
customer advance during fiscal year 1996; capital lease obligations incurred
totaling $229,000, of which $24,000 was incurred in fiscal year 1996 and $29,000
was incurred in fiscal year 1998, and; non-cash convertible preferred stock
dividends of $6,822,000 and $1,696,000 in fiscal years 1998 and 1997,
respectively.
Reclassifications--Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year's presentation.
2. STOCKHOLDERS' EQUITY
Private Placements of Equity Securities--In fiscal year 1997, the Company
completed a private equity financing ("1997 Private Placement") in two stages
with the initial closing completed on December 19, 1996 (the "Initial Closing")
and the final closing completed on March 7, 1997 (the "Final Closing") in which
it raised $8,542,000, net of offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit
of $100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 Common Stock Purchase
Warrants ("Warrants"), to accredited individuals and institutional investors
pursuant to Regulation D under the Securities Act of 1933, as amended. Each
Warrant entitles the holder to purchase one share of Common Stock at a price of
$1 per share and may be exercised until March 7, 2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of
Common Stock for each share of Preferred Stock. The 1997 Private Placement
contained an adjustment provision to reset the conversion ratio under certain
conditions. For Preferred Stock converted after March 7, 1998, the new
conversion ratio is 290.89 shares of common stock for each share of Preferred
Stock.
F-57
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
The subscribers to the Private Placement purchased the Units at a discount
from the closing prices of the Company's common stock on the Initial Closing
date of 23% and the Final Closing date of 36%. The detachable stock purchase
warrants issued as part of the Units had a fair value at the date of issuance of
$1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been recognized as a
return to the Preferred Stockholders from the date of issuance of the Preferred
Stock to the date in which the Preferred Stock was eligible for conversion into
Common Stock. The reset of the conversion ratio during March 1998 generated an
additional non-cash dividend of $2,576,000. Accordingly, non-cash dividends to
preferred stockholders totaled $9,297,000, of which $7,227,000 and $1,696,000
were recognized during the years ended March 31, 1998 and 1997, respectively.
Holders of the Preferred Stock will be entitled to receive dividends, when
and if declared by the Board of Directors. The Company does not intend to pay
cash dividends on the Preferred Stock or the underlying Common Stock for the
foreseeable future. Liquidating rights for preferred stockholders are $260 per
share plus accrued, but unpaid dividends.
Certain of the subscribers to the Private Placement entered into a Lock-up
Agreement ("Lock-up") with the Company. In the Lock-up, each subscriber agreed
not to sell or exercise any of the securities contained in the Units until the
underlying common stock is registered with the Securities and Exchange
Commission. The Company filed a registration statement with respect to resale of
the securities to be offered and the registration statement was effective on
September 4, 1997. As of March 31, 1998, 25% of the securities remain subject to
the Lock-up.
The placement agent, Paramount Capital Inc. ("Paramount"), who is affiliated
with certain significant shareholders of the Company, received an aggregate
dollar commission of $900,000 and a non-accountable expense allowance of
$410,753. The Company will also pay a commission to Paramount of 6% of the gross
proceeds received upon any exercise of the Warrants. Additionally, in connection
with the 1997 Private Placement and in connection with its provision of
financial advisory services to the Company, Paramount received a Unit Purchase
Option and an Advisory Option (the "Options") which, in the aggregate, entitle
Paramount to purchase 25 Units at $110,000 per unit. Accordingly, the Options
would entitle the holders thereof, upon exercise, to receive (i) 12,500 shares
of Preferred Stock, convertible into 3,636,125 shares of Common Stock, and
(ii) Warrants to purchase 1,250,000 shares of Common Stock.
Under the terms of the Placement Agency agreement the Company signed with
Paramount, Paramount will provide financial advisory services to the Company for
an 18 month period beginning after the final closing. The Company will pay
Paramount $2,500 per month and has agreed to sell 2.5 Units at $110,000 per unit
to Paramount. The convertible Preferred Stock contained in the Units convert
into 363,613 shares of the Company's common stock ("Advisory Stock"). There are
also warrants ("Advisory Warrants") to purchase 125,000 shares of the Company's
common stock at $1 per share attached to the Units, which are exercisable until
March 7, 2007. The Company valued the Advisory Stock at approximately $335,000
and the Advisory Warrants at approximately $162,000 using a valuation program in
accordance with SFAS 123. The Company is amortizing these advisory services over
18 months beginning in April 1997.
F-58
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
During November 1995 the Company completed a private placement of 34.85
units at $100,000 per unit to "accredited" investors as defined by federal
securities regulations. Each unit was comprised of 80,000 shares of the
Company's common stock and 100,000 warrants to purchase one share of common
stock per warrant at an exercise price of $1.00 per share for a period of ten
years. The Company received net proceeds of $2,920,000 after issuance costs of
$565,000 Included among the issuance costs was the payment of $314,000 in
commissions and a non-accountable expense allowance of $139,000 to Paramount.
The Company will also pay a commission to Paramount of 6% of the gross proceeds
received upon any exercise of the warrants. Additionally, Paramount received
4.35625 unit purchase warrants at an exercise price $110,000 per unit, to
purchase up to 784,125 shares of common stock.
Warrants and Placement Agent's Unit Purchase Options--The table below
summarizes the number of the Company's outstanding warrants and unit purchase
options at March 31, 1998:
<TABLE>
<CAPTION>
PLACEMENT
AGENT'S OTHER
CLASS A CLASS B OPTIONS AND COMPENSATION
DESCRIPTION WARRANTS WARRANTS WARRANTS WARRANTS TOTAL
- ----------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997........... 8,385,150 309,734 4,638,408 403,600 13,736,892
Issued.............................. 1,031,880 1,031,880
Exercised........................... 423,437 423,437
Cancelled/Expired................... 153,600 153,600
------- ----------
Balance at March 31, 1998........... 7,961,713 309,734 5,670,288 250,000 14,191,735
========= ========= ========= ======= ==========
Weighted Average Exercise Price..... $1.00 $22.00 $1.06 $1.48 $1.49
========= ========= ========= ======= ==========
</TABLE>
The Company may redeem the warrants if the market price of the Company's
Common Stock for the 20-day period exceeds $4 per share. 3,010,000 of the
Class A Warrants expire in November 2005 and 4,952,000 expire in March 2007.
As described in Note 4, a stipulated settlement agreement was completed in
June 1994 under which the Company issued Class B warrants to purchase 309,734
shares of common stock at an exercise price of $22 per share, exercisable for a
period of five years from date of issuance. The settlement warrants were issued
on August 11, 1996 and expire in August 2001. The Company valued the Class B
warrants using a generally accepted valuation program and determined that the
value was immaterial.
In May 1996, the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), under which the Company acquired an exclusive world-wide
license to a certain Cancer Immunotherapy technology. Under the agreement, the
Company granted WHO a ten-year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.25 per share valued at
$50,000, and must pay a minimum royalty of $50,000 per year. The value of the
warrant was based upon the negotiated terms of the agreement. The first year
royalty is payable in two stages, 1) $25,000 due upon execution of the agreement
and 2) $25,000 due upon submission of an Investigational New Drug ("IND")
application to the U. S. Food and Drug Administration ("FDA"). The initial
$25,000 was recognized as an expense upon execution of the agreement. The
Company will record the balance of the expense related to the issuance of the
warrant and pay the contingent portion of the minimum royalty if and when an IND
is filed with the FDA concerning this technology.
F-59
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
In September 1996, the Company entered into a line of credit agreement with
two of its stockholders under which the Company may borrow up to $500,000. The
agreement called for interest at the rate of 12% per annum. In connection with
the line of credit agreement, the Company granted the stockholders five-year
warrants to purchase a total of 150,000 shares of the Company's common stock at
an exercise price of $0.96. The warrants, which expire in October 2001, are
valued at $20,000, which was recorded as interest during the period the line of
credit facility was outstanding. The fair market value of the warrants was
determined based upon rates for lines of credit with similar terms available to
the Company at the date of grant. The line of credit was subsequently paid back
in March 1997.
Stockholders' Rights Plan--In April 1991, the Company's Board of Directors
adopted a stockholders' rights plan. The plan provides for the distribution of
preferred stock purchase rights to common stockholders which separate from the
common stock ten business days following: (a) an announcement of an acquisition
by a person or group ("Acquiring Party") of 15% or more of the outstanding
common shares of the Company, (b) the commencement of a tender offer or exchange
offer for 15% or more of the common shares, or (c) a merger or asset sale as
defined in the agreement. Under the agreement, certain related parties are not
considered to be an Acquiring Party. In addition, the plan was amended in
November 1995 to allow Paramount (and its affiliates) associated with the
November 1995 private placement to acquire up to 30% of the outstanding common
shares of the Company without being characterized as an Acquiring Party and was
additionally amended on December 17, 1996 to provide that Paramount (and its
affiliates) would not be considered an Acquiring Party under the plan. One right
attached to each share of common stock outstanding as of April 15, 1991 and
attaches to all shares issued thereafter. Each right entitles the holder to
purchase one one-hundredth of one share of Series R junior participating
cumulative preferred stock, par value $25 per share ("unit of preferred stock"),
at an exercise price of $120 per unit of preferred stock. The units of preferred
stock are non redeemable, voting and are entitled to certain preferential
dividend and liquidation rights. The exercise price and the number of units of
preferred stock issuable are subject to adjustment to prevent dilution.
If, after the rights have been distributed, the Company is a party to a
business combination or other specifically defined transaction, each right
(other than those held by the Acquiring Party) will entitle the holder to
receive, upon exercise, units of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of the
right. Alternatively, a majority of the independent Directors of the Company may
direct the Company to exchange all of the then outstanding rights for common
stock at an exchange ratio of one common share per right. The rights expire
April 15, 2001 and are redeemable (at the option of a majority of the
independent Directors of the Company) at $.01 per right at any time until the
tenth day following an announcement of the acquisition of 15% or more of the
Company's Common Stock.
Common Stock Options--The Company is authorized to issue options of up to
6,418,000 common shares to directors, consultants and key employees under
various stock option plans or by direct grant by the Company's Board of
Directors. Incentive and non-qualified stock options are granted at prices not
less than the fair market value at the date of grant. There were no options
granted below fair market value during fiscal years 1998, 1997 and 1996.
However, during fiscal year 1998, two employees were issued 75,000 shares of
restricted stock at a fair market value of $0.875 per share which vest over
F-60
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
a two year period. Options become exercisable in various increments over two
through five years. Options expire if not exercised within 5-10 years from the
date of grant.
The following table summarizes stock option activity for the fiscal years
ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding April 1, 1995................................... 1,051,640 $ 8.87
Granted............................................... 182,000 $ 2.21
Exercised............................................. -- --
Canceled.............................................. (320,340) $11.51
--------- ------
Outstanding March 31, 1996.................................. 913,300 $ 6.59
Granted............................................... 1,054,000 $ 1.15
Exercised............................................. -- --
Canceled.............................................. (257,300) $ 5.10
--------- ------
Outstanding March 31, 1997.................................. 1,710,000 $ 3.08
Granted............................................... 920,000 $ 1.17
Exercised............................................. -- --
Canceled.............................................. (597,500) $ 1.48
--------- ------
Outstanding March 31, 1998.................................. 2,032,500 $ 2.24
--------- ------
</TABLE>
As of March 31, 1998, 4,310,000 shares remained available for grant under
all plans. At March 31, 1998, options for 888,225 shares of common stock were
exercisable at a weighted average exercise price of $3.45 per share and the
remaining 1,144,275 become exercisable through 2002. At March 31, 1997, options
for 489,725 common shares were exercisable at a weighted average exercise price
of $6.78 per share.
The Company has adopted the disclosure only provisions of SFAS 123 and
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
and its related interpretations. Accordingly, no compensation expense has been
recognized during fiscal years 1998, 1997 and 1996 for employee stock option and
purchase plan arrangements. In fiscal year 1998, $5,000 of compensation expense
was recognized related to restricted stock awards.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected life of options. A change
in those assumptions could result in a significant change in the calculated
values. Pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 in fiscal years 1998 and 1997 are presented below.
F-61
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDER'S EQUITY (CONTINUED)
If the computed fair values of the fiscal year 1998, 1997 and 1996 awards
had been amortized to expense over the vesting period of the awards, the program
effect would have been an increase to compensation expense and net loss of
$383,000 or ($.04) per share, $113,000 or ($.01) per share and $40,000 or ($.01)
per share for the years ended March 31, 1998, 1997 and 1996, respectively. The
proforma effect on net loss for fiscal years 1998, 1997 and 1996 is not
representative of the proforma effect on net income or loss in future years
because it does not take into consideration proforma compensation expense
related to grants awarded prior to April 1, 1995.
The following table summarizes significant ranges of outstanding and
exercisable options at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ -----------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES (YRS) PRICE EXERCISABLE PRICE
- ------------------------ --------- ---------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$0.75-$1.13................. 1,525,000 8.9 $1.05 528,125 $1.11
1.75-2.50................... 183,500 7.9 2.04 95,200 2.03
3.50-5.13................... 197,000 6.4 4.91 137,900 4.91
6.25-10.00.................. 67,000 5.1 9.09 67,000 9.09
15.00-16.88................. 60,000 2.7 16.57 60,000 16.57
--------- --- ----- ------- -----
$0.75-16.88................. 2,032,500 8.3 $2.24 888,225 $3.45
========= === ===== ======= =====
</TABLE>
The weighted average fair value of options granted during fiscal years 1998,
1997 and 1996 was estimated at $0.58, $0.57 and $1.42 respectively. The
Company's calculations were made using the Black Scholes option pricing model
recognizing forfeitures as they occur with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Expected Life.............................................. 2.6 2.6 4.0
Interest Rate.............................................. 5.8% 6.0% 6.0%
Volatility................................................. 75% 75% 84%
Dividend Yield............................................. 0% 0% 0%
</TABLE>
3. DISTRIBUTION AND MARKETING AGREEMENTS
In May 1996, the Company entered into a distribution agreement with a
European dental company for it to become the exclusive European distributor for
the Company's Periodontal Tissue Monitor ("the PTM") product. The Company made
an initial shipment to the distributor and recorded revenue of $76,000 during
the year ended March 31, 1997. No revenues were recorded in the current fiscal
year under this agreement and the agreement terminated in November 1997.
On June 23, 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") to begin commercial sales and distribution in
the United States of its PTM product. During the current fiscal year, the
Company signed two agreements with an international dental company for the
exclusive five-year distribution of PTM worldwide, except in Japan. The company
recorded $68,000 in revenues under the agreements during the current fiscal
year.
F-62
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISTRIBUTION AND MARKETING AGREEMENTS (CONTINUED)
During the year ended March 31, 1996 the Company entered into an agreement
under which it granted exclusive rights relating to its Kephra(TM) photochromic
technology. The agreement relates to the exclusive use of Kephra in the U.S. and
Canadian soft-drink markets and expired in June 1997. The Company recorded
$150,000 of revenues during fiscal 1996 under this agreement.
In January 1996 the Company entered into an agreement under which it
licensed its Sun Alert technology for exclusive worldwide use. The Sun Alert
license is renewable each year with a minimum royalty payment of $5,000.
4. COMMITMENTS AND CONTINGENCIES
Technology License Agreements--The Company enters into agreements relating
to certain technologies which obligate the Company to pay royalties based on any
sales of products incorporating such technologies and upon achievement of
certain other milestones.
In March 1998, the Company signed a license agreement for a compound called
O(6) Benzylguanine ("BG") with the owners of the patents: Pennsylvania State
University, the National Institutes of Health (NIH), the University of Chicago,
and Case Western Reserve University, (collectively, the "Co-Owners"). Under the
terms of the agreement, the Company has a six month evaluation period ending on
September 17, 1998. The Company may terminate the agreement during the
evaluation period and pay $75,000 to the Co-Owners. Accordingly, the Company
recorded $75,000 in product development expenses under this agreement during
Fiscal 1998.
The Company may enter into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. If the Company were
to enter into a CRADA with the NIH, it would be obligated to provide funding of
$125,000 each year for five years for research. If the Company elects to
continue to develop the BG technology, it would be obligated to make additional
milestone, royalty and patent reimbursement payments to the Co-Owners during the
term of the License Agreement. The agreement also has a provision in which the
Company may elect to make payments in common stock of the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount. The agreement provides for cash
consideration of $100,000 plus reimbursement of expenses, as well as milestone
payments in the Company's common stock of up to 1,000,000 shares if the BG
compound successfully reaches certain milestones. The Company recorded $225,000
in product development expenses under this agreement during the current fiscal
year. Paramount is affiliated with certain significant shareholders of the
Company and a Paramount employee is a member of the Company's Board of
Directors.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO") under which it acquired an exclusive worldwide license to
Cancer Immunotherapy technology. The agreement requires the Company to pay WHO a
royalty ranging from 8% to 10% on any sales of products using the licensed
technology, or from the sale of marketing rights associated with the technology.
The Company also entered into a research agreement for one year, plus renewal
options, with WHO. During fiscal years 1998 and 1997, the Company incurred
research and development costs of $305,000 and $322,000, on developing this
technology.
The Company has an agreement with the Board of Trustees of the University of
Illinois ("U of I") which grants the Company an exclusive license to certain
technologies used in the PTM product and
F-63
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
requires the Company to pay a royalty, subject to reduction under certain
circumstances, to U of I equal to 5% of any sales of PTM. No royalties were
recorded under the agreement in fiscal year 1998.
Leases--The capitalized cost and accumulated depreciation of property under
capital lease obligations included in property and equipment is as follows:
<TABLE>
<CAPTION>
MARCH 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Office furniture and equipment.............................. $28,393 $23,918
Less accumulated depreciation............................... (3,155) (6,176)
------- -------
Net property under capital lease obligations................ $25,238 $17,742
======= =======
</TABLE>
Future minimum lease commitments and rental payments are summarized as
follows for the year ending March 31:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
-------- ---------
<S> <C> <C>
1999........................................................ $ 6,519 $34,078
=======
2000........................................................ 6,519
2001........................................................ 6,519
2002........................................................ 6,519
2003........................................................ 6,519
Thereafter................................................ 1,630
-------
34,225
Less imputed interest..................................... (7,575)
-------
Present value of minimum future lease payments............ $26,650
=======
</TABLE>
At March 31, 1998, the Company occupied approximately 3,400 square feet of
office and laboratory space in San Diego, California under a lease which expires
in February 1999. The lease has no renewal options. Total rent expense for the
fiscal years ended March 31, 1998, 1997 and 1996, and the period September 23,
1983 to March 31, 1998 was $45,472, $136,831, $132,766 and $1,559,483,
respectively.
Employment Agreement--The Company entered into an employment agreement with
Dr. H. Laurence Shaw, its Chairman, President and Chief Executive Officer for an
initial two year period beginning December 17, 1996, subject to renewal upon
mutual agreement. Pursuant to the agreement, the Company has agreed to pay
Dr. Shaw an initial base salary, subject to certain annual increases. Dr. Shaw
will also be entitled to receive a minimum annual bonus with an additional
annual milestone-based bonus at the discretion of the Board of Directors of up
to an additional 50% of base salary. In connection with the execution of the
agreement, Dr. Shaw was paid a signing bonus. Pursuant to the terms of
agreement, Dr. Shaw was granted qualified incentive stock options to purchase
675,000 shares of the common stock of the Company, exercisable for a period of
ten years, at an exercise price equal to the fair market value on the date of
issuance, with vesting ratably over a three year period from the date of grant.
F-64
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under the terms of Dr. Shaw's employment agreement, the Company is required
to pay all of Dr. Shaw's relocation expenses. The Board of Directors approved an
interest free bridge loan of $300,000 to Dr. Shaw for the purpose of acquiring a
new residence in California prior to the sale of his New Jersey residence. The
loan, which was made on May 1997, was paid back in September 1997. The Company
paid $182,000 in relocation expenses under the employment agreement during
fiscal year 1998.
Consulting Agreements--As compensation for services rendered, the Company
paid annual consulting fees to its former Chairman of $37,500 and $87,500 for
fiscal years 1997 and 1996, respectively.
In December 1996, Dr. Jerry Weisbach was appointed to the Board of Directors
of the Company. The Company also entered into a consulting agreement with
Dr. Weisbach to provide advisory services to the Company. Dr. Weisbach was paid
$30,600 and $9,000 during the fiscal years 1998 and 1997, respectively.
Dr. Weisbach resigned from the Board of Directors in January 1998 and the
consulting agreement was terminated.
Litigation--During 1992, the Company was the target of a consolidated
stockholder class action complaint. Although management believed the claim to be
without merit, the Company concluded that it was in the best interest of the
Company to settle the matter. Such action was ultimately settled during fiscal
1995 with a cash payment of $2,800,000 to the plaintiff class, all of which was
paid by the Company's insurers. Additionally, in fiscal year 1997, the Company
issued to the plaintiff class five year Class B Warrants to purchase 309,734
shares of Common Stock at an exercise price of $22 per share. The Class B
Warrants were issued on August 11, 1997 and expire in August 2001. The Company
valued the Class B warrants using a generally accepted valuation model and
determined that the value was immaterial.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
MARCH 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense.............................. $ 226,000 $ 276,000
Accruals not currently deductible......................... 53,000 41,000
Net operating loss carryforwards.......................... 12,388,000 11,647,000
Capitalized technology.................................... 646,000 --
Research and development and other credits................ 577,000 634,000
----------- -----------
Total deferred tax credits.............................. 13,890,000 12,598,000
Deferred tax liabilities-patent expense..................... (44,000) (65,000)
----------- -----------
Total net deferred tax assets........................... 13,846,000 12,533,000
Valuation allowance for deferred tax assets................. (13,846,000) (12,533,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
A valuation allowance of $13,846,000 and $12,533,000 at March 31, 1998 and
1997, respectively, has been recognized as an offset to the deferred tax assets
as realization of such assets is uncertain. At
F-65
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
March 31, 1998, the Company has federal and California tax net operating loss
carryforwards of approximately $33,077,000 and $9,175,000, respectively. The
Company also has federal and California research and other credit carryforwards
of approximately $442,000 and $135,000, respectively. The difference between the
tax loss and credit carryforwards for federal and California purposes is
attributable to the capitalization of research and development expenses for
California tax purposes and a required 50% limitation in the utilization of
California tax loss carryforwards. The federal and California tax loss
carryforwards and the credit carryforwards expire beginning in Fiscal 1999
through 2013, unless previously utilized.
The Internal Revenue Code ("the Code") includes provisions which
significantly limit potential use of net operating losses in situations where
there is a change in ownership of more than 50% during a three-year period.
Accordingly, if a change in ownership occurs, the ultimate benefit realized from
these carryovers may be significantly reduced in total, and the amount that may
be utilized in any given year may be significantly limited. The State of
California has enacted similar legislation. The common stock issuance of
November 27, 1995 in combination with other stock issuances completed by the
Company during the past three years have resulted in a change in ownership as of
November 27, 1995 as defined in the Code. Accordingly, the Company has federal
and California net operating losses in the amount of $25,175,000 and $6,526,000
respectively that are currently subject to the annual limitation. Approximately
$605,000 of these net operating losses become available for use each year. The
remaining federal and California net operating losses of approximately
$7,902,000 and $2,649,000, respectively, are not subject to the annual
limitation since these losses occurred after the ownership changes.
6. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary
Therapeutics, Inc. ("BTI") under which the Company was granted an option to
acquire BTI, a development stage company with certain technologies in the area
of Photodynamic Therapy ("PDT") for cancer. The agreement, as amended, gives the
Company the right to acquire BTI by a merger of BTI into a wholly-owned
subsidiary of the Company. In February 1997, the Company and BTI agreed to
extend the period during which the Company may exercise its option to acquire
BTI from April 30, 1997 until such time as BTI has completed human clinical
trials of Boronated Porphyrin Compound ("BOPP") at an agreed upon dose level
(the "Option Period"). The Option Period was extended at the Company's request
to enable BTI to complete preclinical studies, to commence clinical trials in
humans and to demonstrate that a given dose level of BOPP in humans would not
cause certain adverse events. Accordingly, the Company has deferred its election
to exercise the option.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued ranges from 1,000,000 to
3,000,000 shares, and is to be determined based upon the market price of the
Company's common stock prior to the date of exercise. The agreement has been
approved by a majority of the stockholders of BTI. The Company's Board of
Directors voted to approve the merger, however the merger is also subject to
shareholder approval for the issuance of additional shares of common stock. One
of the Company directors is also a director of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. The
Company pays substantially all of BTI's
F-66
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC. (CONTINUED)
operating expenses which are comprised primarily of product development costs.
The Company is also required to advance to BTI funds to repay $664,000 of
indebtedness, including accrued interest as part of the acquisition price of
BTI. Certain holders of such indebtedness are shareholders of the Company. In
exchange for such funding, BTI will issue convertible notes to the Company which
may be converted into BTI equity at the Company's option or if the merger is not
consummated. The Company has elected to record all advances to BTI as product
development expense in the period incurred due to uncertainties regarding the
ultimate value to be realized from the convertible notes. During the fiscal
years ended March 31, 1998 and 1997, the Company advanced $1,176,000 and
$1,282,000, respectively to BTI.
7. OTHER RELATED PARTY TRANSACTIONS
For the period September 23, 1983 to March 31, 1995, the Company incurred
expenses, principally for financial consulting services inclusive of finder's
fees on Company financing of $861,928 to related entities.
8. SUBSEQUENT EVENTS
Potential Delisting from the American Stock Exchange
On June 24, 1998, the Company received notice from the American Stock
Exchange ("AMEX") that Amex intends to take action to remove the Company's
Common Stock from the AMEX because the Company no longer satisfies all of the
financial guidelines of the AMEX for continued listing. The Company notified the
Board of Governors of AMEX that intends to appeal the decision to remove the
Company's Common Stock from the AMEX. There can be no assurance that the appeal
by the Company will be successful, and that the listing will be continued. The
Company is taking measures to ensure that in the event of an unsuccessful
appeal, an orderly transition will occur and that its Common Stock will commence
trading on the NASD Electronic Bulletin Board.
Security Private Placement Financing
The Company entered into a Placement Agency agreement with Paramount to do
an additional private placement financing ("Private Placement"). Under the terms
of the agreement, the placement agent will use its best efforts to sell 60 Units
for $100,000 each, which consist of 50,000 shares of Series A Convertible
Preferred Stock ("Units"), valued at $2.00 per share of BG Development Corp.
("BGDC"), a wholly-owned subsidiary of the Company. The Units are redeemable in
cash or common stock of the Company under certain circumstances. The Private
Placement, as presently structured, would raise minimum gross proceeds of
$1,000,000 and maximum gross proceeds of $6,000,000 with a provision for the
placement agent to sell an additional 40 Units as an over-allotment of up to
$4,000,000. Seventy-five percent of the net proceeds of the Private Placement
will be used by BGDC for development costs associated with BG technology
acquired during fiscal 1998 (Note 4). Twenty-five percent of the net proceeds of
the Private Placement will go to the Company to be used for general purposes.
F-67
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
At all times while the Units remain outstanding, the preferred stock shall
accrue dividends as follows:
<TABLE>
<CAPTION>
DIVIDEND DATE DIVIDEND AMOUNT
- ------------- ---------------
<S> <C>
From final closing to 30 months............................. $1.99 per share
30-36 months after closing.................................. $0.82 per share
36-42 months after closing.................................. $0.82 per share
42-48 months after closing.................................. $1.16 per share
42-60 months after closing.................................. $1.16 per share
After 60 months............................................. Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company did an initial closing on 29 Units of the
private placement described above for gross proceeds of $2,900,000 (net proceeds
of $2,600,000).
9. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued in the fiscal year did not reflect the value of the
detachable stock purchase warrants issued in connection with the 1997 Private
Placement described in Note 2. The fair value of such warrants, as calculated by
an independent valuation consulting firm, was $1,967,000, and is being recorded
as a return to the Preferred Stockholders from the date of issue of the
Preferred Stock to the date in which the Preferred Stock was eligible for
conversion into Common Stock. As a result, net loss applicable to Common
Shareholders and net loss per share for Fiscal 1997 have been restated from the
amounts previously reported. Such restatement also resulted in a $530,950
increase in both capital in excess of par value and the deficit accumulated in
development stage.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 23,
1983 (INCEPTION) SEPTEMBER 23,
FISCAL 1997 FISCAL 1997 TO MARCH 31, 1997 1983 (INCEPTION)
AS PREVIOUSLY AS AS PREVIOUSLY TO MARCH 31, 1997
REPORTED RESTATED REPORTED AS RESTATED
------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Convertible preferred stock
dividends.......................... $ 1,165,261 $ 1,696,211 $ 1,165,261 $ 1,696,211
----------- ----------- ------------ ------------
Net loss applicable to common
shareholders....................... $(5,062,627) $(5,593,577) $(33,356,189) $(33,887,139)
----------- ----------- ------------ ------------
Net loss per share of common stock-
basic and diluted.................. $ (0.62) $ (0.69)
=========== ===========
</TABLE>
F-68
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,561,557 $ 3,290,176
Accounts receivable, net.................................. 15,236 --
Inventory................................................. -- 38,637
Prepaid expenses.......................................... 63,261 85,053
----------- -----------
Total current assets.................................. 3,640,054 3,413,866
Property and equipment, net............................... 48,050 71,840
Patent costs, net......................................... 105,322 104,981
----------- -----------
TOTAL ASSETS.......................................... $ 3,793,426 $ 3,590,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 654,271 $ 661,371
Accrued expenses.......................................... 476,864 201,125
Current portion of capital leases......................... 4,381 4,066
----------- -----------
Total current liabilities............................. 1,135,516 866,562
----------- -----------
Capital leases............................................ 19,261 22,584
Minority interest......................................... 4,665,323 --
----------- -----------
Stockholders' Equity/(Deficiency):
Convertible preferred stock, $25 par value, 2,000,000
shares authorized; 36,196 and 40,090 issued and
outstanding at December 31,1998 and March 31, 1998,
respectively............................................ 904,938 1,002,288
(liquidation preference $9,410,960 and $10,423,400,
respectively)
Common stock, $.02 par value, 100,000,000 shares
authorized; 12,513,656 and 10,777,234 shares issued and
outstanding at December 31, 1998 and March 31, 1998,
respectively............................................ 250,269 215,545
Capital in excess of par value............................ 48,384,983 46,969,197
Deficit accumulated during the development stage.......... (51,566,865) (45,485,489)
----------- -----------
Total stockholders' equity/(deficiency)............... (2,026,674) 2,701,541
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY/(DEFICENCY).................................. $ 3,793,426 $ 3,590,687
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-69
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 23, 1983
--------------------------- --------------------------- (INCEPTION) TO
1998 1997 1998 1997 DECEMBER 31, 1998
----------- ------------- ----------- ------------- ------------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales.............. $ 2,120 $ 68,810 $ 6,136 $ 69,510 $ 2,025,877
License fees and
royalties................ -- 145 -- 332 486,612
Contract research.......... -- -- -- -- 268,063
Marketing rights........... -- -- -- -- 1,311,500
Interest and other......... 50,609 59,175 149,963 224,834 2,063,621
----------- ----------- ----------- ----------- ------------
Total revenues............. 52,729 128,130 156,099 294,676 6,155,673
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Cost of product sales...... 13,497 87,471 41,075 122,792 3,179,470
Product development........ 331,856 411,042 1,312,324 1,433,306 18,473,285
General and
administrative........... 812,724 474,538 1,590,292 1,672,782 19,442,039
Business development and
marketing................ 4,345 36,888 26,901 159,128 3,803,790
Interest and other......... 112,963 1,598 131,585 55,725 765,560
----------- ----------- ----------- ----------- ------------
Total costs and expenses... 1,275,385 1,011,537 3,102,177 3,443,733 45,664,144
----------- ----------- ----------- ----------- ------------
Loss applicable to minority
interest................. 73,608 -- 159,083 -- 159,083
Net loss................... (1,149,048) (883,407) (2,786,995) (3,149,057) (39,349,388)
----------- ----------- ----------- ----------- ------------
Convertible preferred stock
dividends................ -- 932,170 3,294,381 4,360,158 12,217,477
Net loss applicable to
common shareholders...... $(1,149,048) $(1,815,577) $(6,081,376) $(7,509,215) $(51,566,865)
=========== =========== =========== =========== ============
Net loss per share of
common stock-basic and
diluted.................. $ (0.09) $ (0.18) $ (0.52) $ (0.84)
----------- ----------- ----------- -----------
Weighted average common
stock outstanding........ 12,356,069 9,986,058 11,681,950 8,906,236
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-70
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK CAPITAL DURING THE
--------------------- ---------------------- IN EXCESS DEVELOPMENT
SHARES PAR VALUE SHARES PAR VALUE OF PAR VALUE STAGE TOTAL
-------- ---------- ---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997
(as restated)...................... 50,000 $1,250,038 8,151,029 $163,021 $38,805,489 $(33,887,139) $ 6,331,409
Exercise of warrants................. 420,312 8,406 386,687 395,093
Issuance of common stock
for services....................... 1,143 20 980 1,000
Conversion of preferred
stock into common stock............ (8,394) (209,850) 1,748,753 34,975 174,875 --
Preferred stock unit purchase
option compensation for
financial advisory services........ 248,666 248,666
Convertible preferred stock
dividends (as restated)............ 4,360,158 (4,360,158) --
Net loss............................. (3,149,057) (3,149,057)
------------ -----------
Balance at December 31, 1997
(as restated)...................... 41,606 $1,040,188 10,321,237 $206,422 $43,976,855 $(41,396,354) $ 3,827,111
------ ---------- ---------- -------- ----------- ------------ -----------
Balance at March 31, 1998............ 40,090 $1,002,288 10,777,234 $215,545 $46,969,197 $(45,485,489) $ 2,701,541
Exercise of warrants................. 1,563 31 1,438 1,469
Common stock issued for services..... 571,172 11,423 251,194 262,617
Preferred stock unit purchase
option as compensation for
financial advisory services........ 138,165 138,165
Conversion of preferred stock
into common stock.................. (3,894) (97,350) 1,163,687 23,270 74,080 --
Convertible preferred
stock dividends.................... 374,056 (3,294,381) (2,920,325)
Proceeds from subsidiary
preferred stock issuance........... 576,853 576,853
Net loss............................. (2,786,995) (2,786,995)
------------ -----------
Balance at December 31, 1998......... 36,196 $ 904,938 12,513,656 $250,269 $48,384,983 $(51,566,865) $(2,026,674)
====== ========== ========== ======== =========== ============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-71
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 23, 1983
------------------------- (INCEPTION) TO
1998 1997 DECEMBER 31, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(2,786,995) $(3,149,057) $(39,349,386)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization...................... 53,357 62,742 1,718,358
Loss allocated to minority interest................ (159,083) -- (159,083)
Non-cash expense upon issuance of common stock
options, common stock and warrants............... 400,782 248,666 1,252,643
Net book value of asset disposals.................. 70,871 58,534 312,563
Option income from retirement of stock or amounts
previously advanced by customer.................. -- -- (400,000)
Changes in assets and liabilities:
Accounts receivable.............................. (15,236) 23,996 (15,236)
Inventory........................................ 38,637 3,040 --
Prepaid expenses and other assets................ 21,792 (20,311) (74,236)
Accounts payable................................. (7,100) (486,751) 654,271
Accrued expenses................................. 275,739 87,647 332,841
Customer advances................................ -- -- 140,863
Other liabilities................................ -- 1,506 (4,869)
----------- ----------- ------------
Net cash used by operating activities.............. (2,107,236) (3,169,988) (35,591,271)
INVESTING ACTIVITIES
Purchases of short-term investments................ -- -- (10,461,867)
Maturities of short-term investments............... -- 1,484,788 10,461,867
Capital expenditures............................... (6,213) (16,637) (854,142)
Patent costs....................................... (94,566) (58,321) (1,071,938)
Other.............................................. 316 -- 8,145
----------- ----------- ------------
Net cash provided (used) by investing activities... (100,463) 1,409,830 (1,917,935)
FINANCING ACTIVITIES
Issuance of notes payable.......................... -- -- 2,183,867
Repayment of notes payable......................... -- -- (1,965,124)
Repayment of capital lease obligations............. (3,324) (3,592) (186,871)
Long-term customer advances........................ -- -- 100,000
Issuance of common and preferred stock............. 578,322 396,093 39,034,809
Minority interest investment in subsidiary......... 1,904,082 -- 1,904,082
----------- ----------- ------------
Net cash provided by financing activities.......... 2,479,080 392,501 41,070,763
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 271,381 (1,367,657) 3,561,557
Cash and cash equivalents at beginning of period... 3,290,176 1,784,599 --
----------- ----------- ------------
Cash and cash equivalents at end of period......... $ 3,561,557 $ 416,942 $ 3,561,557
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-72
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc., XYX
Acquisition Corp. and BG Development Corp., a majority owned subsidiary,
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("FAS 7"). Among the disclosures required by FAS
7 are that the Company's financial statements be identified as those of a
development stage enterprise, and that certain consolidated financial statements
disclose activity since the date of the Company's inception.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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 period.
Actual results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial
statements contain all of the adjustments, consisting only of normal recurring
adjustments and accruals, necessary to present fairly the financial position of
the Company as of December 31, 1998 and March 31, 1998, results of operations
for the nine months ended December 31, 1998 and 1997 (as restated) and from
September 23, 1983 (inception) to December 31, 1998 and cash flows for the nine
months ended December 31, 1998 and 1997 and from September 23, 1983 (inception)
to December 31, 1998. The results of operations for the nine months ended
December 31, 1998 are not necessarily indicative of the results to be expected
in subsequent periods or for the year as a whole. For further information, refer
to the consolidated financial statements and footnotes thereto as set forth in
the Company's Annual Report on Form 10-K and 10-K/A for the year ended
March 31, 1998.
The Company adopted Financial Accounting Standards Board Statement No. 128
("FAS 128"), EARNINGS PER SHARE (EPS). This statement requires the presentation
of earnings per share to reflect both "Basic EPS" as well as "Diluted EPS" on
the face of the statement of operations. In general, Basic EPS is a function of
weighted average number of common shares outstanding for the periods. Diluted
EPS does reflect the potential dilution created by stock issuable pursuant to
outstanding options, warrants, convertible debt or equity securities and other
contingently issuable shares. The requirements of FAS 128 have been applied
retroactively to all periods presented. There was no impact on reported net loss
per common share as a result of the adoption of this FAS.
2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST
During the nine months ended December 31, 1998, the Company entered into a
placement agency agreement with Paramount Capital Inc. ("Paramount). Under the
terms of the agreement, Paramount was to use its best efforts to sell up to 60
Units (with an overallotment option for an additional 40 Units) for $100,000 per
unit, which consist of 50,000 shares of Series A Convertible Preferred Stock
("BGDC Units"), valued at $2.00 per share of BG Development Corp. ("BGDC"). The
BGDC Units are redeemable in cash by BGDC and the BGDC Units may be exchanged
for cash or common stock of the Company under the circumstances described in the
subscription agreement between the
F-73
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST (CONTINUED)
Company and shareholders of BGDC. Pursuant to the subscription agreement,
seventy-five percent of the net proceeds are allocated to BGDC for development
costs associated with O6 Benzylguanine technology. Twenty-five percent of the
net proceeds of the BGDC private placement went to the Company to be used for
general purposes.
The BGDC Units accrue dividends as follows:
<TABLE>
<CAPTION>
DIVIDEND DATE DIVIDEND AMOUNT
------------- ---------------------------------
<S> <C>
Upon final closing............... $1.99 per share
30-36 months after closing....... $0.82 per share
36-42 months after closing....... $0.82 per share
42-48 months after closing....... $1.16 per share
48-60 months after closing....... $1.16 per share
After 60 months.................. Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company completed a closing on 29.35 BGDC Units of the
private placement for gross proceeds of $2,900,000 (net proceeds of $2,455,000).
Paramount, who is affiliated with certain significant shareholders of the
Company, received an aggregate dollar commission of $264,000 and a
non-accountable expense allowance of $117,000 as compensation for the BGDC
private placement. Additionally, Paramount received warrants to purchase 10% of
the number of BGDC Units issued in the private placement at $110,000 per unit.
BGDC and Paramount also entered into a 24 month Financial Advisory Services
Agreement in which BDGC will pay Paramount $3,000 per month for such services
plus warrants ("Advisory Warrants") to purchase 15% of the number of BGDC Units
issued in the private placement at $110,000 per Unit. The Company valued the
Advisory Warrants at $88,000 and is amortizing these advisory services over a
24 month period ending in June 2000.
Subsequent to the closing of the private placement, BGDC Preferred
Stockholders own 16.4% of voting rights in BGDC. This minority interest, as
reflected in the accompanying Consolidated Balance Sheet as of December 31,
1998, includes the initial net proceeds to BGDC of $1,886,000, plus the initial
dividend of $2,920,000, or $1.99 per preferred share outstanding, paid in
capital associated with the amortization of the Advisory Warrants and 16.4% of
BGDC's operating loss through December 31, 1998.
BGDC and the Company have entered into a one-year renewable Corporate
Services and Management Agreement pursuant to which the Company will provide
financial/accounting, administrative, advisory and managerial support to BGDC.
For such services, the Company will receive from BGDC a management fee equal to
$500,000 per year, payable in equal monthly installments. The Company does not
expect any further closings to occur for the private placement.
F-74
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TERMINATION OF PTM PRODUCT
During the quarter ended December 31, 1998, the Company determined that it
would no longer continue to sell its Periodontal Tissue Monitor ("PTM") product.
In that connection, the Company recorded an expense of $113,000, which consists
of the following:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Inventory................................................. $ 55,000
Unamortized patent costs.................................. 58,000
--------
Total................................................. $113,000
========
</TABLE>
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS
In fiscal year 1997, the Company completed a private equity financing ("1997
Private Placement") in two stages with the initial closing completed on
December 19, 1996 (the "Initial Closing") and the final closing completed on
March 7, 1997 (the "Final Closing") in which it raised $8,542,000, net of
offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit
of $100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 detachable Common Stock
Purchase Warrants ("Warrants"), to accredited individuals and institutional
investors pursuant to Regulation D under the Securities Act of 1933, as amended.
Each Warrant entitles the holder to purchase one share of Common Stock at a
price of $1 per share and may be exercised until March 7, 2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of
Common Stock for each share of Preferred Stock. The 1997 Private Placement
contained an adjustment provision to reset the conversion ratio under certain
conditions. For Preferred Stock converted after March 7, 1998, the new
conversion ratio is 290.89 shares of common stock for each share of Preferred
Stock.
The subscribers to the Private Placement purchased the Units at a discount
from the closing prices of the Company's common stock on the Initial Closing
date of 23% and the Final Closing date of 36%. The detachable stock purchase
warrants issued as part of the Units had a fair value at the date of issuance of
$1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been recognized as a
return to the Preferred Stockholders from the date of issuance of the Preferred
Stock to the date in which the Preferred Stock was eligible for conversion into
Common Stock. The reset of the conversion ratio during March 1998 generated an
additional non-cash dividend of $2,576,000.
As discussed in Note 2, the BGDC private placement includes a provision that
the subscribers are entitled to receive $1.99 per share dividends declared by to
Board of Directors of BGDC. The dividends of $2,920,000, which have been
credited to minority interest during the nine months ended December 31, 1998,
accumulate until paid in cash or common stock by BGDC.
F-75
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS (CONTINUED)
Below is a summary of Preferred Stock Dividends recognized during the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 23, 1983
------------------------ ------------------------- (INCEPTION) TO
1998 1997 1998 1997 DECEMBER 31, 1998
DESCRIPTION -------- ------------- --------- ------------- ------------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
Dividend from beneficial
Conversion feature............ -- 665,786 128,036 3,114,179 4,754,075
Dividend from reset of
conversion.................. -- -- 194,752 -- 2,576,077
Dividend from warrant
valuation................... -- 266,384 51,268 1,245,979 1,967,000
BGDC Preferred Stock
dividends................... -- -- 2,920,325 -- 2,920,325
------- ------------- --------- ------------- ----------
Total..................... -- 932,170 3,294,381 4,360,158 12,217,477
======= ============= ========= ============= ==========
</TABLE>
5. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued during the fiscal year did not reflect the value of the
detachable stock purchase warrants issued in connection with the 1997 Private
Placement described in Note 4. The fair value of such warrants, as calculated by
an independent valuation consulting firm, was $1,967,000, and has been recorded
as a return to the Preferred Stockholders from the date of issue of the
Preferred Stock to the date in which the Preferred Stock was eligible for
conversion into Common Stock. As a result, net loss applicable to Common
Shareholders and net loss per share for the quarter ended December 31, 1997 and
nine months ended December 31, 1997 have been restated from the amounts
previously reported. Such restatement resulted in increases of $461,000 and
$980,000 in both capital in excess of par value and the deficit accumulated in
development stage for the quarter and nine months ended December 31, 1997,
respectively.
F-76
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. 1997 RESTATEMENT (CONTINUED)
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED QUARTER ENDED NINE MONTHS
DECEMBER 31, ENDED DECEMBER 31, ENDED
1997 DECEMBER 31, 1997 DECEMBER 31,
AS PREVIOUSLY 1997 AS PREVIOUSLY 1997
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Convertible
Preferred stock
Dividends.................................. $ 665,786 $ 932,170 $ 3,114,179 $ 4,360,158
----------- ----------- ----------- -----------
Net loss applicable
To common
Shareholders............................... $(1,549,193) $(1,815,577) $(6,263,236) $(7,509,215)
----------- ----------- ----------- -----------
Net loss per
Share of
Common stock-
Basic and diluted.......................... $ (0.16) $ (0.18) $ (0.72) $ (0.86)
----------- ----------- ----------- -----------
</TABLE>
6. PROPOSED MERGER
On December 10, 1998, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Procept, Inc. ("Procept"), a biopharmaceutical
company engaged in the development of novel drugs for the prevention of
infectious diseases. The Merger Agreement provides that each of the Company's
shares of common stock (including preferred stock on an as converted basis into
common stock) will convert into 0.11 shares of Procept common stock or a total
of 2,755,000 Procept shares (of which 1,151,048 shares of Procept common stock
to be issued in the merger to the holders of the Company's preferred stock shall
be accompanied by certain contractual rights identical to contractual rights
held by purchasers in Procept's 1998 private placement, and as a result of such
contractual rights, the holders of the Company's preferred stock will also
receive 470,137 additional Procept shares). In addition, Procept has agreed to
assume an approximately $7.3 million obligation of the Company's subsidiary, BG
Development Corp., and Procept has agreed to exchange all of the Company's
outstanding warrant, unit purchase option and stock option obligations into like
instruments of Procept. The merger remains contingent upon the final approval by
both companies' shareholders. Both Companies' have scheduled Special
Shareholders Meetings in mid-March 1999 to vote on the proposed merger.
In conjunction with the Merger Agreement, the Company entered into a
severence agreement with its former Chairman and President and recorded $325,000
liability under such agreement.
7. SUBSEQUENT EVENTS
On February 4, 1999, the Company completed the merger with Binary
Therapeutics, Inc. ("BTI"). The Company issued 2,158,268 shares of its common
stock and assumed notes payable and accrued interest totaling $727,000. The
Company also assumed a common stock warrant obligation and an obligation to
issue shares of its common stock to a licensor in the event certain regulatory
milestones are achieved. The transaction will be accounted for as a purchase.
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Binary Therapeutics, Inc.:
We have audited the accompanying balance sheets of Binary
Therapeutics, Inc. (a development stage enterprise) as of September 30, 1998 and
December 31, 1997, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the nine months ended September 30, 1998 and
for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Binary Therapeutics, Inc. at September 30,
1998 and December 31, 1997, and the results of its operations and its cash flows
for the nine months ended September 30, 1998 and for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
The Company is in the development stage as of September 30, 1998. As
discussed in Note 1 to the financial statements, the Company has not yet
completed clinical trials, or verified the market acceptance or demand for its
research efforts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in research and development of medical products with a
primary focus on cancer treatment. As discussed in Note 1 to the financial
statements, the continued net loss and accumulated deficit at September 30, 1998
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 7. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
DELOITTE & TOUCHE LLP
San Diego, California
December 18, 1998
F-78
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................ $ 1,715 $ 1,214
Prepaid expenses............................................ -- 333
---------- ----------
Total current assets........................................ 1,715 1,547
Property and equipment, net of accumulated depreciation..... 2,754 3,567
Patent costs, net of accumulated amortization............... 49,885 54,607
---------- ----------
TOTAL ASSETS................................................ $ 54,354 $ 59,721
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................................ $ 102,045 $ 125,458
Accrued expenses............................................ 630 30,630
Accrued interest............................................ 457,443 367,330
Notes payable............................................... 3,499,117 2,958,861
---------- ----------
Total current liabilities................................... 4,059,235 3,482,279
Stockholders' Deficit:
Preferred stock, $.001 par value, 5,000,000 shares
authorized................................................ -- --
Common stock, $.001 par value, 20,000,000 shares authorized;
16,854,740 and 14,994,740 shares issued and outstanding
September 30, 1998 and December 31, 1997, respectively.... 16,855 14,995
Capital in excess of par value.............................. 1,192,340 846,200
Deficit accumulated during the development stage............ (5,211,018) (4,280,695)
Subscriptions receivable on sale of common stock............ (3,058) (3,058)
---------- ----------
Total stockholders' deficit................................. (4,004,881) (3,422,558)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 54,354 $ 59,721
========== ==========
</TABLE>
See Notes to Financial Statements.
F-79
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED OCTOBER 23, 1990
SEPTEMBER 30, DECEMBER 31, (INCEPTION) TO
1998 1997 SEPTEMBER 30, 1998
----------------- ------------ ------------------
<S> <C> <C> <C>
COSTS AND EXPENSES
Product development............................ $ 474,234 $ 1,199,603 $ 3,040,030
General and administrative..................... 24,476 79,898 484,528
Interest and other............................. 431,613 792,007 1,686,460
--------- ----------- -----------
Total costs and expenses....................... 930,323 2,071,508 5,211,018
--------- ----------- -----------
Net loss....................................... $(930,323) $(2,071,508) $(5,211,018)
========= =========== ===========
</TABLE>
See Notes to Financial Statements.
F-80
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK CAPITAL IN DURING THE
---------------------- EXCESS OF DEVELOPMENT
SHARES PAR VALUE PAR VALUE STAGE
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at October 23, 1990................................. -- -- --
Original issuance of common stock:
October 1990 at $.001 per share............................. 1,965,000 $ 1,965
---------- -------
* Balance at December 31, 1990.............................. 1,965,000 1,965 --
Issuance of common stock:
September 1991.............................................. 700,000 700
December 1991............................................... 40,000 40
---------- -------
* Balance at December 31, 1991.............................. 2,705,000 2,705 --
Issuance of common stock:
January 1992................................................ 20,000 20
February 1992............................................... 2,024,500 2,025
August 1992................................................. 20,000 20
October 1992................................................ 2,325,000 2,325
---------- -------
* Balance at December 31, 1992.............................. 7,094,500 7,095 --
Issuance of common stock:
January 1993................................................ 1,220,000 1,220
Repurchase of common stock.................................. (20,000) (20)
Net loss.................................................... (351,311)
---------- ------- -----------
* Balance at December 31, 1993.............................. 8,294,500 8,295 (351,311)
Repurchase of common stock.................................. (1,425,000) (1,425)
Receipt of stock subscription...............................
Net loss.................................................... (279,030)
---------- ------- -----------
* Balance at December 31, 1994.............................. 6,869,500 6,870 (630,341)
Issuance of common stock:
May 1995.................................................... 3,638,290 3,639
June 1995................................................... 686,950 686
Stock issued pursuant to Unit Purchase Agreements........... 750,000 750 36,750
Net loss.................................................... (526,576)
---------- ------- ---------- -----------
* Balance at December 31, 1995.............................. 11,944,740 11,945 36,750 (1,156,917)
Collection of subscription receivable.......................
Stock issued pursuant to Unit Purchase Agreements........... 250,000 250 12,250
Stock issued in conjunction with Senior Bridge Notes........ 400,000 400 139,600
Net loss.................................................... (1,052,270)
---------- ------- ---------- -----------
* Balance at December 31, 1996.............................. 12,594,740 12,595 188,600 (2,209,187)
Stock issued in conjunction with Senior Bridge Notes........ 2,400,000 2,400 657,600
Net loss.................................................... (2,071,508)
---------- -----------
Balance at December 31, 1997................................ 14,994,740 14,995 846,200 (4,280,695)
---------- ------- ---------- -----------
Issuance of common stock.................................... 60,000 60 11,940
Stock issued in conjunction with Senior Bridge Notes........ 1,800,000 1,800 334,200
Net loss.................................................... (930,323)
-----------
Balance at September 30, 1998............................... 16,854,740 $16,855 $1,192,340 $(5,211,018)
---------- ------- ---------- -----------
</TABLE>
F-81
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
SUBSCRIPTIONS
RECEIVABLE TOTAL
------------- -----------
<S> <C> <C>
Balance at October 23, 1990................................. -- --
Original issuance of common stock:
October 1990 at $.001 per share............................. $(1,875) $ 90
Net loss....................................................
------- -----------
* Balance at December 31, 1990.............................. (1,875) 90
Issuance of common stock:
September 1991.............................................. 700
December 1991............................................... 40
Net loss....................................................
------- -----------
* Balance at December 31, 1991.............................. (1,875) 830
Issuance of common stock:
January 1992................................................ 20
February 1992............................................... (1,680) 345
August 1992................................................. 20
October 1992................................................ 2,325
Net loss....................................................
------- -----------
* Balance at December 31, 1992.............................. (3,555) 3,540
Issuance of common stock:
January 1993................................................ 1,220
Repurchase of common stock.................................. (20)
Net loss.................................................... (351,311)
------- -----------
* Balance at December 31, 1993.............................. (3,555) (346,571)
Repurchase of common stock.................................. (1,425)
Receipt of stock subscription............................... 1,680 1,680
Net loss.................................................... (279,030)
------- -----------
* Balance at December 31, 1994.............................. (1,875) (625,346)
Issuance of common stock:
May 1995.................................................... (839) 2,800
June 1995................................................... (412) 274
Stock issued pursuant to Unit Purchase Agreements........... 37,500
Net loss.................................................... (526,576)
------- -----------
* Balance at December 31, 1995.............................. (3,126) (1,111,348)
Collection of subscription receivable....................... 68 68
Stock issued pursuant to Unit Purchase Agreements........... 12,500
Stock issued in conjunction with Senior Bridge Notes........ 140,000
Net loss.................................................... (1,052,270)
------- -----------
* Balance at December 31, 1996.............................. (3,058) (2,011,050)
Stock issued in conjunction with Senior Bridge Notes........ 660,000
Net loss.................................................... (2,071,508)
------- -----------
Balance at December 31, 1997................................ (3,058) (3,422,558)
------- -----------
Issuance of common stock.................................... 12,000
Stock issued in conjunction with Senior Bridge Notes........ 336,000
Net loss.................................................... (930,323)
------- -----------
Balance at September 30, 1998............................... $(3,058) $(4,004,881)
------- -----------
</TABLE>
* Balances prior to January 1, 1997 are unaudited
See Notes to Financial Statements.
F-82
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED OCTOBER 23, 1990
SEPTEMBER 30, DECEMBER 31, (INCEPTION) TO
1998 1997 SEPTEMBER 30, 1998
----------------- ------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... ($930,323) ($2,071,508) ($5,211,018)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 12,347 16,426 35,959
Issue of common stock for interest expense..... 336,000 660,000 1,186,000
Issue of common stock for royalty expense...... 12,000 -- 12,000
Changes in assets and liabilities:
Prepaid expenses............................. 333 (333) --
Accounts payable............................. (23,413) (42,427) 102,045
Accrued expenses............................. (30,000) (219,930) 630
Accrued interest............................. 90,113 125,447 457,443
--------- ----------- -----------
Net cash used by operating activities.... (532,943) (1,532,325) (3,416,941)
INVESTING ACTIVITIES
Patent costs................................... (6,812) (5,074) (73,615)
Capital expenditures........................... -- -- (5,421)
--------- ----------- -----------
Net cash used in investing activities.... (6,812) (5,074) (79,036)
FINANCING ACTIVITIES
Issuance of notes payable...................... 540,256 1,536,169 3,499,117
Repurchase of common stock..................... -- -- (1,425)
Net cash provided by financing
activities............................. 540,256 1,536,169 3,497,692
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 501 (1,230) 1,715
Cash at beginning of period.................... 1,214 2,444 --
--------- ----------- -----------
Cash at end of period.......................... $ 1,715 $ 1,214 $ 1,715
--------- ----------- -----------
Cash paid for interest......................... $ 5,499 $ 6,089 $ 18,135
--------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
F-83
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The Company was incorporated under the laws of the
State of Delaware on October 23, 1990. For the period of inception to date, the
Company's activities have been directed toward research and development of
medical products with a primary focus on cancer treatment.
Development Stage--The Company has not earned revenues from operations.
Accordingly, the Company's activities have been accounted for as those of a
"Development Stage Enterprise" as set forth in Financial Accounting Standards
Board Statement No. 7.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the nine months ended September 30, 1998 and year ended
December 31, 1997, the Company incurred net losses of $930,323 and $2,071,508
respectively. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing or
refinancing as may be required, and ultimately to attain successful operations.
In June 1996, as described in Note 7, the Company entered into an agreement
under which it granted Pacific Pharmaceuticals, Inc. ("Pacific"), a development
stage biotechnology company, the right to acquire the Company at any time prior
to April 30, 1997. The agreement was amended in February 1997 and the Company
and Pacific agreed to extend the period during which the Company may exercise
its option to acquire the Company from April 30, 1997 until such time as the
Company has completed human clinical trials of Boronated Porphyrin Compound
("BOPP") at an agreed upon dose level (the "Option Period"). The Company is
currently dependent upon Pacific for funding of all of its operations during the
Option Period. There can be no assurance, however, that Pacific will continue to
provide funding to the Company or that funding provided by Pacific will be
adequate to sustain the Company's operations, or that the Company will be
successful in obtaining alternative financing in the event that Pacific
terminates its funding or if such funding is inadequate to sustain operations.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Research and Development--Research and development costs are expensed as
incurred.
Property and Equipment--Property is recorded at cost and is primarily office
furniture and equipment. Depreciation of property and equipment is provided
using the straight-line method over the
F-84
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated useful lives of the related assets, which are principally five and ten
years. Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Laboratory equipment................................ $ 539 $ 539
Office furniture and equipment...................... 4,882 4,882
Total property and equipment...................... 5,421 5,421
Less: accumulated depreciation.................... (2,667) (1,854)
------- -------
Total............................................... $ 2,754 $ 3,567
======= =======
</TABLE>
Patent Costs--Legal expenses incurred in connection with applications for
patents on research and development projects are capitalized. The costs are
amortized using the straight-line method over five years. Patent costs which
have no further economic value are written off in the period in which such
impairment in value occurs. Patent costs are net of accumulated amortization of
$49,885 and $54,607 at September 30, 1998 and December 31, 1997, respectively.
2. EQUITY
In fiscal year 1995 and fiscal year 1996, the Company completed a private
placement of 2 units at $100,000 per unit to "accredited" investors, (the
"Units"). Each Unit consisted of a Senior Bridge Note with a face value of
$100,000 and 500,000 shares of common stock with par value of $.001 per share.
As a result of this transaction, the Company issued notes payable totaling
$200,000 (see Note 3) and 1,000,000 shares of common stock valued at $0.05 per
share. Notes payable at September 30, 1998 and December 31, 1997 consist of the
following:
In fiscal year 1995, the Company issued Senior Bridge Notes for $200,000
with maturity dates in fiscal year 1996 (see Note 3). In fiscal year 1996, the
Company and the noteholders agreed to an extension of the maturity dates in
exchange for the issuance of 200,000 shares of common stock for each month the
notes remain outstanding. As of December 31, 1997 and September 30, 1998 the
Company issued 2,800,000 and 4,600,000 shares of common stock, respectively,
valued at between $0.35 and $0.17 per share.
In August 1998, the Company issued 60,000 shares of common stock, par value
of $0.001 per share, to the University of California at San Francisco ("UCSF")
in connection with a milestone payment under a license agreement (See
Note 4--License Agreements). The Company valued the common stock at $0.20 per
share and recorded a royalty expense of $12,000 in conjunction with the issuance
of the common stock.
At September 30, 1998 options to purchase 47,500 shares of the Company's
common stock at an exercise price of $.001 per share were outstanding and
exercisable. Also, at September 30, 1998 and December 31, 1997 the Company had
$588,049 and $534,197, respectively, debt and accrued interest convertible into
shares of the Company's common stock at a conversion price of 75% of the market
value of the Company's common stock at the date of conversion (see Note 3). The
convertible debt automatically converts into common stock as described above
upon any of the following events: (i) initial public offering of the Company's
common stock; (ii) completion of a private placement of at
F-85
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. EQUITY (CONTINUED)
least $2 million; (iii) merger, consolidation, recapitalization or sale of
substantially all of the Company's assets.
3. NOTES PAYABLE
Notes Payable at September 30, 1998 and December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Convertible notes payable, no interest, to Pacific
Pharmaceuticals, Inc.............................. $2,671,117 $2,130,861
Notes payable to a stockholder, interest at 10% per
annum, principal and interest due upon demand..... 243,000 243,000
Convertible notes payable to a stockholder, interest
at 24% per annum.................................. 200,000 200,000
Convertible notes payable, interest at 24% per
annum............................................. 100,000 100,000
Senior bridge notes payable, interest at 15% per
annum, principal and interest due upon demand..... 200,000 200,000
Note payable to a bank with interest payable monthly
at the prime rate (bank prime rate at
September 30, 1998 and December 31, 1997 was
8.75 and 8.5%, receptively) loan automatically
renews for 60 days if not paid.................... 85,000 85,000
---------- ----------
$3,499,117 $2,958,861
========== ==========
</TABLE>
$643,000 of the debt outstanding at September 30, 1998 and December 31, 1997 is
payable to stockholders of the Company or their affiliates.
4. COMMITMENTS AND CONTINGENCIES
License Agreements--In July 1992 the Company entered into an exclusive
license agreement with the University of California at San Francisco ("UCSF").
Pursuant to the license agreement, the Company paid an initial license fee of
$15,000 and received an exclusive world-wide license to commercially develop,
manufacture, use and distribute products covered under the license, BOPP. The
license agreement obligates the Company to pay royalties to UCSF equal to 4% of
future sales and/or sublicensing arrangements. The Company made minimum royalty
payments of $10,000 for the year ended December 31, 1997 ("Fiscal 1997") and
$25,000 for the nine months ended September 30, 1998 ("Fiscal Period 1998"). The
license agreement, as amended, requires minimum annual royalty payments of
$25,000 for future years. In addition, the agreement requires the Company to
issue 60,000 shares of its common stock upon the acceptance of the Company's
Investigational New Drug ("IND") application by the FDA and 60,000 shares upon
approval of the Company's New Drug Application. In August 1998, the Company
issued 60,000 shares of common stock as a result of the acceptance of it's IND
application by the FDA. The Company is also obligated to make additional cash
payments upon the achievement of certain FDA approval milestones and all ongoing
patent issue and maintenance costs.
F-86
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1992 the Company entered into a research agreement with UCSF to
conduct research related to the synthesis and biomedical applications of
porphyrins. The research agreement was not funded by the Company and was
replaced by another agreement (the "STAR Agreement") which became effective on
January 1, 1997 and is effective for two years. The Company paid $146,700 under
the STAR Agreement in Fiscal 1997 and $114,000 in Fiscal Period 1998. The
Company is obligated to make an additional payment of $38,000 in the remainder
of 1998. The Company retains any inventions or technology developed by UCSF
under the STAR Agreement.
In October 1993 the Company entered into a five year license and research
agreement with the General Hospital Corporation, doing business as Massachusetts
General Hospital ("Mass General") to develop scientific information relating to
photodynamic diagnosis and therapy. The agreement required the Company to fund
research costs in the amount of $375,000 spread over three years commencing in
1996. In Fiscal 1997, the Company negotiated a termination settlement with Mass
General to pay $85,000 of its costs and the return of the license to Mass
General in exchange for the release of any further obligations under the
agreement. The Company paid $55,000 of the settlement in Fiscal 1997 and the
remaining $30,000 in Fiscal Period 1998.
Employment Agreement--In October 1994, the Company entered into a four-year
employment agreement to engage Dr. Joseph Chang as Chief Executive Officer of
the Company. The agreement provides for a guaranteed annual base salary of
$175,000. Pursuant to an amendment to the agreement dated May 10, 1995, the
Company issued 839,605 shares or 7.5% of the Company's common stock to
Mr. Chang at $.001 per share. The Company and Dr. Chang terminated the
employment agreement in April 1997 and effective in May 1997, entered into a
month-to-month consulting agreement for cash compensation of $3,000 per month.
The Company and Dr. Chang terminated the consulting agreement in November 1997.
Consulting Agreements--On May 23, 1995, the Company entered into a three
year consulting agreement with a researcher at UCSF commencing on September 30,
1995. As compensation for services rendered, the Company agreed to pay an
up-front consulting fee of $30,000 and a monthly retainer in the amount of
$4,000. The Company also issued 47,500 stock options to the consultant
exercisable at $0.001 per share (see Note 2). The consulting agreement was
terminated in September 1998.
In March 1996, the Company entered into a one year consulting agreement with
a consultant to provide assistance with the development of the Company's
technologies. As compensation for services rendered, the Company agreed to pay
an up-front consulting fee of $18,000 and a monthly retainer of $6,000. The
company terminated the consulting agreement in September 1997.
Both consultants are stockholders of the Company.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between items which will have expected future tax consequences and which have
been recognized for financial reporting purposes. Valuation allowances of
$1,645,000 and $1,386,000 have been recognized as an offset to the
F-87
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
deferred tax asset as realization of such assets is uncertain. The significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Deferred Tax Assets
Net Operating Loss Carryforwards.......... $1,550,000 $1,331,000
Research Credit Carryforwards............. 95,000 55,000
Total Deferred Tax Assets................... 1,645,000 1,386,000
Less: Valuation Allowance................... (1,645,000) (1,386,000)
---------- ----------
Net deferred tax assets..................... $ -- $ --
========== ==========
</TABLE>
At September 30, 1998, the Company had federal and Massachusetts tax net
operating carryforwards of approximately $3,875,000 and $3,328,000 respectively.
The federal tax loss will begin expiring in 2006 unless previously utilized. The
Massachusetts tax loss carryforward will begin expiring in 1999. The Company
also has federal research tax credit carryforwards totaling approximately
$95,000. These credits will expire in 2011.
If the merger which is disclosed in Note 7 takes place, then the company
will incur an ownership change, as defined by Internal Revenue Code
Section 382. Such change of ownership would limit the use of the net operating
loss each year to approximately $300,000. Losses incurred by the company after
the ownership change would not be subject to this annual limitation.
6. RELATED PARTY TRANSACTIONS
As described in Note 3, $643,000 of the notes payable outstanding at
September 30, 1998 and December 31, 1997 are payable to stockholders of the
Company or their affiliates. The Company issued 4,600,000 and 2,800,000 shares
of common stock to entities affiliated with stockholders as compensation to
extend the maturity of Senior Bridge Notes as of September 30, 1998 and
December 31, 1997, respectively (see Note 3). Also, $2,671,117 and $2,130,861 in
convertible notes were payable to Pacific at September 30, 1998 and
December 31, 1997, respectively (see Note 7).
Certain stockholders of the Company, or entities affiliated with
stockholders, are stockholders or entities affiliated with stockholders of
Pacific.
7. MERGER AGREEMENT
In June 1996, the Company entered into an agreement under which it granted
Pacific, a development stage biotechnology company, the right to acquire the
Company at any time prior to April 30, 1997. The agreement was amended in
February 1997 and the Company and Pacific agreed to extend the period during
which the Company may exercise its option to acquire the Company from April 30,
1997 until such time as the Company has completed human clinical trials of BOPP
at an agreed upon dose level. The Company is currently dependent upon Pacific
for funding of all of its operations during the Option Period. If Pacific elects
to exercise its option, Pacific would issue approximately 2,150,000 shares
valued at $430,000. The agreement has been approved by a majority of the
stockholders of the Company. Pacific's Board of Directors voted to approve the
merger. One of
F-88
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MERGER AGREEMENT (CONTINUED)
Pacific's directors is also a director and shareholder of the Company. There is
no assurance that Pacific will continue to meet any funding obligations under
the agreement or will elect to exercise the option to acquire the Company.
8. SUBSEQUENT EVENTS
In December 1998, Pacific agreed to merge with Procept, Inc. ("Procept"), a
publicly traded biopharmaceutical company, in which Pacific shareholders will
receive approximately .11 shares of Procept common stock for each share of
Pacific common stock. A condition of the merger with Procept is that Pacific is
required to complete the merger with the Company prior to the completion of
Pacific's merger with Procept.
F-89
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30,1998
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,960 $ 1,715
Prepaid expenses.......................................... -- --
----------- -----------
Total current assets.................................... 1,960 1,715
----------- -----------
Property and equipment, net of accumulated depreciation..... 2,483 2,754
Patent costs, net of accumulated amortization............... 53,307 49,885
----------- -----------
Total assets............................................ $ 57,750 $ 54,354
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 132,959 $ 102,045
Accrued expenses.......................................... 630 630
Accrued interest.......................................... 579,130 457,443
Notes payable............................................. 3,618,329 3,499,117
----------- -----------
Total current liabilities............................... 4,331,048 4,059,235
----------- -----------
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized
Common stock, $.001 par value; 20,000,000 shares
authorized; 16,854,740 shares issued and outstanding at
December 31, 1998, and September 30, 1998............... 16,855 16,855
Capital in excess of par value............................ 1,192,340 1,192,340
Deficit accumulated during the development stage.......... (5,479,435) (5,211,018)
Subscriptions receivable on sale of common stock.......... (3,058) (3,058)
----------- -----------
Total stockholders' deficit............................. (4,273,298) (4,004,881)
----------- -----------
Total liabilities and stockholders' deficit............. $ 57,750 $ 54,354
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-90
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, OCTOBER 23, 1990
--------------------- (INCEPTION) TO DECEMBER 31,
1998 1997 1998
--------- --------- ---------------------------
<S> <C> <C> <C>
Costs and expenses:
Product development........................... $ 69,182 $ 64,480 $ 3,109,212
General and administrative.................... 75,794 12,690 560,322
Interest and other............................ 123,441 187,516 1,809,901
--------- --------- -----------
Total costs and expenses.................. 268,417 264,686 5,479,435
--------- --------- -----------
Net loss........................................ $(268,417) $(264,686) $(5,479,435)
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-91
<PAGE>
BINARY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 23, 1990
DECEMBER 31, (INCEPTION) TO
--------------------- DECEMBER 31,
1998 1997 1998
--------- --------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(268,417) $(264,686) $(5,497,435)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization....................... 4,508 3,854 40,467
Issue of common stock for interest expense.......... -- -- 1,186,000
Issue of common stock for royalty expense........... -- -- 12,000
Changes in assets and liabilities:
Prepaid expenses.................................. -- 250 --
Accounts payable.................................. 30,914 (54,068) 132,959
Accrued expenses.................................. -- (153,182) 630
Accrued interest.................................. 121,687 35,920 579,130
--------- --------- -----------
Net cash used by operating activities......... (111,308) (431,912) (3,528,249)
--------- --------- -----------
INVESTING ACTIVITIES
Patent costs.......................................... (7,659) (2,498) (81,274)
Capital expenditures.................................. -- -- (5,421)
--------- --------- -----------
Net cash used in investing activities......... (7,659) (2,498) (86,695)
--------- --------- -----------
FINANCING ACTIVITIES
Issuance of notes payable............................. 119,212 284,860 3,618,329
Repurchase of common stock............................ -- 150,000 (1,425)
--------- --------- -----------
Net cash provided by financing activities..... 119,212 434,860 3,616,904
--------- --------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 245 450 1,960
Cash at beginning of period........................... 1,715 764 --
--------- --------- -----------
Cash at end of period................................. $ 1,960 $ 1,214 $ 1,960
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-92
<PAGE>
BINARY THERAPEUTICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
NATURE OF OPERATIONS--The Company was incorporated under the laws of the
State of Delaware on October 23, 1990. For the period of inception to date, the
Company's activities have been directed toward research and development of
medical products with a primary focus on cancer treatment.
DEVELOPMENT STATE--The Company has earned revenues from operations.
Accordingly, the Company's activities have accounted for as those of a
"Development Stage Enterprise" as set forth in Financial Accounting Standards
Board Statement No. 7.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements for the
three-month periods ended December 31, 1998 and 1997 are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles. These interim financial statements, in the opinion of management,
reflect all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results for the interim periods ended
December 31, 1999 and 1998. The results of operations for the interim periods
are not necessarily indicative of the results of operations to be expected for
the fiscal year. These interim financial statements should be read in
conjunction with the audited financial statements for the nine months ended
September 30, 1998.
2. NOTES PAYABLE
Notes Payable at December 31, 1998 and September 30, 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
<S> <C> <C>
Convertible notes payable, no interest, to Pacific
Pharmaceuticals, Inc...................................... $2,790,329 $2,671,117
Notes payable to a stockholder, interest at 10% per annum,
principal and interest due upon demand.................... 243,000 243,000
Convertible notes, payable to a stockholder, interest at 24%
per annum................................................. 200,000 200,000
Convertible notes payable, interest at 24% per annum........ 100,000 100,000
Senior bridge notes payable, interest at 15% per annum,
principal and interest due upon demand.................... 200,000 200,000
Note payable to a bank with interest payable monthly at the
prime rate (bank prime rate at December 31, 1998 and
September 30, 1998 was 7.75% and 8.75%, respectively) loan
automatically renews for 60 days if not paid.............. 85,000 85,000
---------- ----------
$3,618,329 $3,499,117
========== ==========
</TABLE>
$643,000 of the debt outstanding at December 30, 1998 and September 30, 1998
is payable to stockholders of the Company and their affiliates.
3. RELATED PARTY TRANSACTIONS
As described in Note 2, $643,000 the notes payable outstanding at
December 31, 1998 and September 30, 1998 are payable to stockholders of the
Company and their affiliates. The Company issued 2,800,000 and 5,200,000 shares
of common stock to entities affiliated with stockholders as compensation to
extend the maturity of Senior Bridge Notes as of December 31, 1998 and 1997,
respectively. Also, $2,790,329 and $2,671,117 in convertible notes were payable
to Pacific at
F-93
<PAGE>
BINARY THERAPEUTICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
December 31, 1998 and September 30, 1998, respectively. Certain stockholders of
the Company, or entities affiliated with stockholders, are stockholders or
entities with stockholders of Pacific.
4. MERGER AGREEMENT
In June 1996, the Company entered into an agreement under which it granted
Pacific, a development stage biotechnology company, the right to acquire the
Company at any time prior to April 30, 1997. The agreement was amended in
February 1997 and the Company and Pacific agreed to extend the period during
which the Company may exercise its option to acquire the Company from April 30,
1997 until such time as the Company has completed human clinical trials of BOPP
at an agreed upon dose level. The Company is currently dependent upon Pacific
for funding of all of its operations during the Option Period. If Pacific elects
to exercise its option, Pacific would issue approximately 2,150,000 shares
valued at $430,000. The agreement has been approved by a majority of the
stockholders of the Company. Pacific's Board of Directors voted to approve the
merger. One of Pacific's directors is also a director and shareholder of the
Company. There is no assurance that Pacific will continue to meet any funding
obligations under the agreement or will elect to exercise the option to acquire
the Company.
5. SUBSEQUENT EVENTS
In December 1998, Pacific agreed to merge with Procept, Inc. ("Procept"), a
publicly traded biopharmaceutical company, in which Pacific shareholders will
receive approximately .11 shares of Procept common stock for reach share of
Pacific common stock. A condition of the merger with Procept is that Pacific is
required to complete the merger with the Company prior to the completion of
Pacific's merger with Procept.
F-94
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
PROCEPT, INC.,
PROCEPT ACQUISITION CORP.,
HEAVEN'S DOOR CORPORATION
AND
THE STOCKHOLDERS NAMED HEREIN
------------------------
Dated as of November 8, 1999
------------------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<C> <S> <C> <C>
SECTION 1 -- THE MERGER.................................................. A-6
1.1 The Merger.................................................. A-6
1.2 Effective Time.............................................. A-6
1.3 Effects of the Merger....................................... A-6
1.4 Certificate of Incorporation and Bylaws..................... A-6
1.5 Directors and Officers...................................... A-6
1.6 Conversion of Stock......................................... A-7
1.7 Closing of HDC Transfer Books............................... A-7
1.8 HDC Dissenting Shares....................................... A-8
1.9 Issuance of Procept Certificates............................ A-8
1.10 No Fractional Shares........................................ A-9
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF HDC....................... A-9
2.1 Organization and Qualification.............................. A-9
2.2 Capitalization.............................................. A-9
2.2.1 Outstanding Capital Stock............................ A-9
2.2.2 Options or Other Rights.............................. A-10
2.3 Authority to Execute and Perform Agreements................. A-10
2.4 Subsidiaries and Other Affiliates........................... A-10
2.5 Certificate of Incorporation and Bylaws; Books and
Records..................................................... A-10
2.6 Financial Statements........................................ A-10
2.7 Absence of Undisclosed Liabilities.......................... A-11
2.8 No Material Adverse Change.................................. A-11
2.9 Tax Matters................................................. A-13
2.10 Compliance with Laws........................................ A-13
2.11 Consents; No Breach......................................... A-14
2.12 Actions and Proceedings..................................... A-14
2.13 Contracts and Other Agreements.............................. A-15
2.14 Real Property; Leases....................................... A-16
2.15 Tangible Property........................................... A-16
2.16 Intellectual Property....................................... A-16
2.17 Title to Assets; Liens...................................... A-16
2.18 Employee Benefit Plans...................................... A-16
2.19 Employee Relations.......................................... A-17
2.20 Relationships with Affiliates............................... A-17
2.21 Insurance................................................... A-17
2.22 Brokerage................................................... A-17
2.23 Hazardous Materials......................................... A-18
2.24 Full Disclosure............................................. A-18
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.......... A-18
3.1 Title....................................................... A-18
3.2 Authority................................................... A-18
3.3 No Conflict................................................. A-18
3.4 Binding Agreement........................................... A-18
3.5 No Broker................................................... A-19
SECTION 4 -- REPRESENTATIONS AND WARRANTIES OF PROCEPT AND PAC........... A-19
4.1 Organization and Qualification.............................. A-19
4.2 Capitalization.............................................. A-19
4.2.1 Outstanding Capital Stock............................ A-19
4.2.2 Options or Other Rights.............................. A-20
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<C> <S> <C> <C>
4.3 Authority to Execute and Perform Agreements................. A-20
4.4 Subsidiaries and Other Affiliates........................... A-21
4.5 Charter and Bylaws; Books and Records....................... A-21
4.6 SEC Reports................................................. A-21
4.7 Financial Statements........................................ A-21
4.8 Absence of Undisclosed Liabilities.......................... A-21
4.9 No Material Adverse Change.................................. A-22
4.10 Compliance with Laws........................................ A-22
4.11 Consents; No Breach......................................... A-23
4.12 Actions and Proceedings..................................... A-24
4.13 Information Supplied........................................ A-24
4.14 Brokerage................................................... A-24
4.15 Tax Matters................................................. A-24
4.16 Environmental Matters....................................... A-25
4.17 Employee Benefit Plans...................................... A-25
4.18 Title to Assets; Liens...................................... A-26
4.19 Intellectual Property....................................... A-26
4.20 Vote Required............................................... A-27
4.21 Full Disclosure............................................. A-27
SECTION 5 -- COVENANTS AND AGREEMENTS.................................... A-27
5.1 Conduct of HDC Business..................................... A-27
5.2 Nasdaq Listing.............................................. A-28
5.3 CEO Search.................................................. A-28
5.4 Agreement not to Entertain other Offers; Termination of
Article VI Rights........................................... A-28
5.5 Corporate Examinations and Investigations................... A-29
5.6 Expenses.................................................... A-30
5.7 Authorization from Others................................... A-30
5.8 Consummation of Agreement................................... A-30
5.9 Further Assurances.......................................... A-30
5.10 Securities Law Matters...................................... A-30
5.11 HDC Stockholder Approval.................................... A-31
5.12 Procept Stockholder Meeting................................. A-31
5.13 Public Announcements and Confidentiality.................... A-31
5.14 Lock-Up Agreements.......................................... A-31
5.15 Procept SEC Filings......................................... A-32
5.16 HDC Interim Financial Statements............................ A-32
5.17 Fairness Opinions........................................... A-32
5.18 Procept Board Membership.................................... A-32
5.19 Termination of Certain Contractual Rights................... A-32
5.20 Funding of HDC.............................................. A-32
5.21 Tax Matters................................................. A-33
5.22 Disclaimer Regarding Tax Status............................. A-35
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY TO
CONSUMMATE THE MERGER....................................... A-35
6.1 Approvals................................................... A-35
6.2 Absence of Order............................................ A-35
6.3 Nasdaq Stock Exchange Listing............................... A-35
6.4 Effectiveness of Registration Statement; State Securities
Laws........................................................ A-35
6.5 Procept Fairness Opinion.................................... A-35
6.6 HDC Fairness Opinion........................................ A-35
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
<C> <S> <C> <C>
6.7 Procept Certificate of Amendment............................ A-35
6.8 Cash Positions.............................................. A-35
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF PROCEPT AND PAC TO
CONSUMMATE THE MERGER....................................... A-35
7.1 Representations, Warranties and Covenants................... A-35
7.2 Certificate of Secretary of HDC............................. A-36
7.3 HDC Lock-Up Agreements...................................... A-36
7.4 SEC Reporting............................................... A-36
7.5 Recision Offers............................................. A-36
7.6 Debt Conversion............................................. A-36
7.7 Cancellation of Contingent Rights........................... A-36
7.8 Opinion of Counsel to HDC................................... A-36
7.9 Merger Certificate.......................................... A-36
7.10 No Encumbrances............................................. A-36
7.11 Dissenting Shares........................................... A-36
7.12 Bank Accounts............................................... A-36
7.13 Certificates................................................ A-36
SECTION 8 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF HDC TO CONSUMMATE
THE MERGER.................................................. A-37
8.1 Representations, Warranties and Covenants................... A-37
8.2 Certificate of Secretary of Procept......................... A-37
8.3 Certificate of Secretary of PAC............................. A-37
8.4 Procept Lock-Up Agreements.................................. A-37
8.5 Opinion of Counsel to Procept and PAC....................... A-37
8.6 Certificates................................................ A-37
8.7 Termination of Certain Contractual Rights................... A-37
8.8 Broker Fees................................................. A-37
SECTION 9 -- INDEMNIFICATION............................................. A-37
9.1 Definitions................................................. A-37
9.2 Indemnification Generally................................... A-37
9.3 Assertion of Claims......................................... A-39
9.4 Notice and Defense of Third Party Claims.................... A-39
9.5 Limitations on Indemnification.............................. A-40
9.6 Survival of Representations and Warranties.................. A-40
SECTION 10 -- TERMINATION, AMENDMENT AND WAIVER........................... A-41
10.1 Termination................................................. A-41
10.2 Effect of Termination....................................... A-41
SECTION 11 -- MISCELLANEOUS............................................... A-42
11.1 Notices..................................................... A-42
11.2 Amendment................................................... A-42
11.3 Waiver...................................................... A-42
11.4 Entire Agreement............................................ A-43
11.5 Governing Law............................................... A-43
11.6 Binding Effect; No Assignment............................... A-43
11.7 Variations in Pronouns...................................... A-43
11.8 Counterparts................................................ A-43
11.9 Exhibits and Disclosure Schedules........................... A-43
</TABLE>
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EXHIBITS
A Article VI Rights Termination and Exchange Agreement
SCHEDULES
Schedule I--List of HDC Stockholders
HDC Disclosure Schedule
Procept Disclosure Schedule
Schedule 5.14--HDC Affiliates and Procept Affiliates
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of November 8, 1999 is among
Procept, Inc. ("Procept"), a Delaware corporation, Procept Acquisition Corp.
("PAC"), a Delaware corporation and a wholly-owned subsidiary of Procept,
Heaven's Door Corporation ("HDC"), a Delaware corporation, and the stockholders
of HDC named on SCHEDULE I hereto (the "Stockholders"). PAC and HDC are herein
sometimes called the "Constituent Corporations." The parties wish to effect the
acquisition of HDC by Procept through a merger of PAC into HDC on the terms and
conditions hereof. This Agreement is intended to be a "plan of reorganization"
within the meaning of Section368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
Accordingly, in consideration of the mutual representations, warranties and
covenants contained herein, the parties hereto agree as follows:
SECTION 1 -- THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions hereof, and
in accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), PAC shall be merged with and into HDC (the "Merger"). The Merger shall
occur at the Effective Time (as defined herein). Following the Merger, HDC shall
continue as the surviving corporation (the "Surviving Corporation") and the
separate corporate existence of PAC shall cease. As a result of the Merger, the
outstanding shares of capital stock of the Constituent Corporations shall be
converted or cancelled in the manner provided in Section 1.6.
1.2 EFFECTIVE TIME. As soon as practicable after satisfaction or waiver of
all conditions to the Merger, the parties shall cause a Certificate of Merger to
be filed in accordance with Section 251 of the DGCL (the "Merger Certificate")
and shall take all such further actions as may be required by law to make the
Merger effective. The Merger shall be effective at such time as the Merger
Certificate is filed with the Secretary of State of the State of Delaware in
accordance with the DGCL or at such later time as is specified in the Merger
Certificate (the "Effective Time"). Immediately prior to the filing of the
Merger Certificate, a closing (the "Closing") will be held at the offices of
Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts (or such other
place as the parties may agree) for the purpose of confirming satisfaction or
waiver of all conditions to the Merger. Subject to satisfaction or waiver of
each of the conditions specified in Sections 6, 7 and 8 hereof, the Closing
shall take place within three business days after the last to occur of:
(a) the day the Merger is approved by the stockholders of HDC pursuant
to Section 5.11; or
(b) the day the issuance of the Merger Consideration (as defined below)
is approved by the stockholders of Procept pursuant to Section 5.12;
or on such other date as the parties may agree, but not later than January 31,
2000 (or March 31, 2000 if the Registration Statement (as defined below) is
reviewed by the SEC). The date on which the Closing occurs is referred to herein
as the "Closing Date".
1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
Sections 259, 260 and 261 of the DGCL.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation of HDC and the Bylaws of PAC, in each case as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and Bylaws of the Surviving Corporation immediately after the
Effective Time, until duly amended in accordance with applicable law.
1.5 DIRECTORS AND OFFICERS. The directors of the Surviving Corporation
immediately after the Effective Time shall be the same as the directors of
Procept after the Effective Time (after giving effect
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to the resignations and additions described in Section 5.18). The officers of
the Surviving Corporation after the Effective Time shall be the officers of HDC
immediately prior to the Effective Time PROVIDED, HOWEVER, that John F. Dee
shall be appointed as interim Chief Executive Officer of HDC. Each such officer
and director shall hold office until his successor shall be duly appointed or
elected, as the case may be, and qualified or until his earlier death,
resignation or removal in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation.
1.6 CONVERSION OF STOCK.
(a) For purposes of this Agreement, "Merger Consideration" means
10,920,000 shares of common stock, $0.01 par value per share, of Procept
("Procept Common Stock") reduced by the number of shares of Procept Common Stock
which would be issued but for the terms of Section 262 of the DGCL in respect of
Dissenting Shares (as defined in Section 1.8).
(b) At the Effective Time, by virtue of the Merger and without any
action on the part of Procept or HDC:
(i) All shares of Common Stock of HDC, $0.001 par value per share (the
"HDC Stock"), outstanding immediately prior to the Effective Time, other than
Dissenting Shares shall be converted into and become the right to receive
(subject to the payment of cash for fractional shares as provided in
Section 1.10) shares of Procept Common Stock in accordance with Section 1.6(c).
(ii) All shares of HDC Stock held at the Effective Time by HDC as
treasury stock shall be canceled and no payment shall be made with respect
thereto.
(iii) All Dissenting Shares shall be dealt with in accordance with
Section 1.8.
(iv) All shares of Common Stock of PAC, $0.01 par value per share,
outstanding immediately prior to the Effective Time, shall be converted into the
right to receive the same number of shares of the Surviving Corporation.
(c) The Merger Consideration shall be allocated among the holders of
shares of HDC Stock outstanding immediately prior to the Effective Time by
allocating to each such holder of HDC Stock outstanding at the Effective Time
(other than the holders of Dissenting Shares) that number of shares of Procept
Common Stock determined by multiplying the number of shares of HDC Common Stock
held by each such holder by the Conversion Factor (as defined below).
(d) "Conversion Factor" means the quotient obtained by dividing
(i) 10,920,000, the maximum possible number of shares of Procept Common Stock
comprising the Merger Consideration, by (ii) the number of shares of HDC Common
Stock outstanding immediately prior to the Effective Time. It is anticipated
that there will be outstanding immediately prior to the Effective Time,
13,029,063 shares of HDC Common Stock, in which case the Conversion Factor will
be 0.8381.
(e) The Merger Consideration shall be adjusted in the event of any
change in Procept Common Stock by reason of a stock split, stock
recapitalization, combination or subdivision of Procept Common Stock, merger or
other exchange of shares by operation of law or the like occurring after the
date of this Agreement and before the Effective Time, such that, after the
record date therefor the Merger Consideration shall be equal to the number and
class of shares or other securities or property that would have been received in
respect of a share of Procept Common Stock, as the case may be, if the Effective
Time had occurred immediately prior to such record date.
1.7 CLOSING OF HDC TRANSFER BOOKS. At the Effective Time, the stock
transfer books of HDC shall be closed and no transfer of HDC Stock shall
thereafter be made. If, after the Effective Time, certificates representing
shares of HDC Stock are presented to the Surviving Corporation, they shall be
canceled and exchanged for certificates representing Procept Common Stock.
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1.8 HDC DISSENTING SHARES.
(a) Shares of HDC Stock held by a stockholder who has properly exercised
appraisal rights with respect thereto in accordance with Section 262 of the DGCL
are referred to herein as "Dissenting Shares". Shares of HDC Stock that
constitute Dissenting Shares shall not be converted into Merger Consideration
and shares of Procept Common Stock shall not be issued pursuant to
Section 1.6(b) in exchange therefor. From and after the Effective Time, a
stockholder who has properly exercised such appraisal rights shall no longer
retain any rights of a stockholder of HDC or the Surviving Corporation, except
those provided under the DGCL.
(b) HDC shall give Procept (i) prompt notice of any written notices and
demands under Section 262 of the DGCL with respect to any shares of capital
stock of HDC, any withdrawal of any such demands and any other instruments
served pursuant to the DGCL and received by HDC and (ii) the right to
participate in all negotiations and proceedings with respect to any demands
under Section 262 of the DGCL with respect to any shares of capital stock of
HDC. HDC shall cooperate with Procept concerning, and shall not, except with the
prior written consent of Procept, voluntarily make any payment with respect to,
or offer to settle or settle, any such demands.
(c) In the event that a holder of HDC Stock makes a demand under
Section 262 of the DGCL the Merger Consideration shall be reduced by the number
of shares of Procept Common Stock which would otherwise have been issued to such
holder.
(d) Cash used to pay holders of HDC Stock exercising demand rights
pursuant to Section 262 of the DGCL shall be funded directly by Procept.
1.9 ISSUANCE OF PROCEPT CERTIFICATES. Prior to the Effective Time, Procept
shall authorize one or more persons to act as Exchange Agent hereunder (the
"Exchange Agent") and shall deposit with or for the account of the Exchange
Agent certificates representing the number of shares of Procept Common Stock
equaling the Merger Consideration and cash in lieu of fractional shares of
Procept Common Stock. As soon as practicable after the Effective Time, (i) HDC
shall deliver to Procept a list of all record holders of HDC Stock immediately
prior to the Effective Time (the "Record Holders"), setting forth each
stockholder's name, address and number of shares of HDC Stock held prior to the
Effective Time and such other information as may be reasonably requested by the
Exchange Agent, certified by the President of HDC (the "Stockholder List") and
(ii) the Exchange Agent shall be instructed to mail to each Record Holder a form
of letter of transmittal which shall specify instructions for use in effecting
the surrender of HDC Stock certificates in exchange for Merger Consideration.
Upon the Exchange Agent's receipt of the letter of transmittal and any
certificate representing outstanding shares of HDC Stock held by a stockholder,
each such stockholder shall be entitled to receive a certificate representing
that number of whole shares of Procept Common Stock into which the shares of HDC
Stock as set forth on the Stockholder List shall have been converted pursuant to
the provisions of this Agreement. The shares of HDC Stock outstanding
immediately prior to the Effective Time (and any certificates representing such
shares) shall be deemed canceled as of the Effective Time. Procept Common Stock
into which HDC Stock shall be converted in the Merger shall be deemed to have
been issued at the Effective Time. If any Procept Common Stock certificates are
to be issued in a name other than that in which the HDC Stock was registered
immediately prior to the Effective Time, it shall be a condition of such
issuance that the person requesting such issuance shall deliver to the Exchange
Agent all documents necessary to evidence and effect such transfer and shall pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of certificates for such shares of Procept Common Stock in a name other
than that of the registered holder of the certificate so surrendered to
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. None of Procept, PAC or HDC shall be liable to any
stockholder of HDC for shares of stock or any cash in lieu of fractional
interests delivered to a public official pursuant to applicable escheat or
abandoned property laws.
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1.10 NO FRACTIONAL SHARES. No certificates representing fractional shares
of Procept Common Stock shall be issued upon the surrender for exchange of HDC
Stock certificates. No fractional interest shall entitle the owner to vote or to
any rights of a security holder. In lieu of fractional shares, each stockholder
who would otherwise have been entitled to receive a fractional share of Procept
Common Stock will receive from Procept at Closing an amount in cash (without
interest) determined by multiplying such fraction by the fair market value of a
share of Procept Common Stock. Such fair market value shall equal the mean of
the daily high and low sales prices of Procept Common Stock on the Nasdaq Small
Cap Market, as reported by Nasdaq, averaged over the period of ten (10) trading
days ending on the fifth trading day prior to the Closing Date.
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF HDC
Except as set forth on the disclosure schedule (the "HDC DISCLOSURE
SCHEDULE") delivered to Procept on the date hereof (regardless of whether the
HDC DISCLOSURE SCHEDULE is referenced in any particular subsection of this
Section 2), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer (provided that
disclosure thereon under any subsection number shall be disclosure for any
section hereof), HDC represents and warrants to Procept as set forth below:
2.1 ORGANIZATION AND QUALIFICATION. HDC is a corporation duly organized,
validly existing and in good standing under the laws of Delaware and has full
corporate power and authority to own, lease and operate its assets, properties
and business and to carry on its business as now being and as heretofore
conducted. HDC does not own any capital stock of any corporation or any interest
in any joint venture, partnership, association, trust or other entity. HDC is
qualified, licensed or is otherwise authorized to transact business as a foreign
corporation and is in good standing in each jurisdiction (in the United States
and outside of the United States) in which the failure to be so qualified,
licensed or otherwise authorized to transact business and in good standing would
have a material adverse effect on the business or financial condition of HDC
(other than changes that are the effect of economic factors affecting the
economy or the funeral related services industry as a whole) (an "HDC Material
Adverse Effect"), all of which jurisdictions are identified in Section 2.1 of
the HDC DISCLOSURE SCHEDULE.
2.2 CAPITALIZATION.
2.2.1 OUTSTANDING CAPITAL STOCK. Immediately prior to Closing, HDC's
authorized capital stock shall consist of 20 million shares of Common Stock,
$.001 par value per share, of which 13,029,063 shares will be issued and
outstanding. Except for the Stockholders and Richard Kurtz, HDC is not aware of
any record or beneficial holder of more than five percent (5%) of the
outstanding shares of HDC Stock. Immediately prior to the Effective Time, all
outstanding shares of HDC Stock will be duly authorized, validly issued, fully
paid, and nonassessable and issued in compliance with all charter documents of
HDC and all applicable federal and state laws. Except as set forth in
Section 2.2.1 of the HDC DISCLOSURE SCHEDULE, no capital stock of HDC is or will
be authorized or outstanding immediately prior to the Effective Time.
Section 2.2.1 of the HDC DISCLOSURE SCHEDULE contains a complete and accurate
list of all record and beneficial holders of HDC Stock as of immediately prior
to the Effective Time, including the number of shares of HDC Stock held by each
such holder.
2.2.2 OPTIONS OR OTHER RIGHTS. Except as set forth in the HDC
Disclosure Schedule, no subscription, warrant, option, preemptive right,
convertible security or other right (contingent or otherwise) to purchase or
acquire any shares of capital stock or other security of HDC issued by HDC is
authorized or outstanding. Except as set forth in the HDC Disclosure Schedule,
there is no commitment or offer by HDC to issue or provide any such
subscription, warrant, option, preemptive right, convertible security or other
right or to issue or distribute to holders of any shares of its capital stock
any evidences of indebtedness or assets of HDC. HDC has no obligation
(contingent or
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otherwise) to purchase, redeem or otherwise acquire any shares of its capital
stock or any interest therein or to pay any dividend or make any other
distribution in respect thereof. There are no restrictions on the transfer of
HDC's capital stock other than those arising from securities laws. There are no
voting trusts, proxies or other agreements, instruments or understandings with
respect to outstanding shares of HDC's capital stock to which HDC is a party.
2.3 AUTHORITY TO EXECUTE AND PERFORM AGREEMENTS. Subject to the
requirement to obtain approval of its stockholders to consummate the Merger
under the DGCL, HDC has the requisite corporate power and authority to execute
and deliver this Agreement and each agreement, document and instrument
contemplated by this Agreement to which it is a party, to consummate the
transactions contemplated hereby and thereby and to perform fully its
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and each such other agreement, document and instrument to which
it is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of HDC. The Board of Directors of HDC has adopted a resolution approving this
Agreement and the transactions contemplated hereby, recommending approval of
this Agreement and the Merger contemplated hereby (the "Procept Merger
Proposal") by the stockholders of HDC and directing that this Agreement be
submitted to the stockholders of HDC for their consideration. This Agreement and
each agreement, document and instrument to which it is a party executed and
delivered pursuant to this Agreement constitute, or when executed and delivered
will constitute, valid and binding obligations of HDC, enforceable in accordance
with their respective terms.
2.4 SUBSIDIARIES AND OTHER AFFILIATES. HDC does not have any subsidiary or
directly or indirectly own or have any investment in any of the capital stock
of, or any other interest in, any other person or entity.
2.5 CERTIFICATE OF INCORPORATION AND BYLAWS; BOOKS AND RECORDS. HDC has
heretofore delivered or made available to Procept true and complete copies of
its Certificate of Incorporation, as amended (certified by the Secretary of
State of Delaware) and Bylaws as in effect on the date hereof and corporate
minute books. HDC is not in default in the performance, observation or
fulfillment of either its Certificate of Incorporation, as amended, or Bylaws.
The minute books of HDC contain true and complete records of all meetings and
consents in lieu of meetings of the Board of Directors and of the stockholders
prior to the date hereof, and accurately reflect all transactions referred to in
such minutes and consents in lieu of meetings.
2.6 FINANCIAL STATEMENTS. The audited financial statements (including any
related notes thereto) representing the financial condition of HDC as of
June 30, 1999 and the unaudited financial statements (including the notes
thereto) representing the financial condition of HDC as of September 30, 1999
(including any related notes thereto) (the "HDC Interim Financials"), (x) were
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes thereto) and (y) fairly present the financial
position of HDC as at the respective dates thereof and the results of its
operations and cash flows for the periods indicated, except that the HDC Interim
Financials were or are subject to normal and recurring year-end adjustments
which were not, or are not expected to be, material in amount. The balance sheet
of HDC as of June 30, 1999 is hereinafter referred to as the "HDC Balance
Sheet," the financial statements as of June 30, 1999 are hereinafter referred to
as the "HDC Financials," and the balance sheet of HDC as of September 30, 1999
is hereinafter referred to as the "HDC Interim Balance Sheet".
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters reflected or
reserved against in the HDC Balance Sheet, at June 30, 1999 HDC had no and has
not since such date incurred any material liabilities (either individually or in
the aggregate) of any nature, whether accrued, absolute, contingent or otherwise
(including without limitation, liabilities as guarantor or otherwise with
respect to
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obligations of others or liabilities for taxes due or then accrued or to become
due), except as and to the extent incurred since June 30, 1999 in the ordinary
course of business.
2.8 NO MATERIAL ADVERSE CHANGE. Since June 30, 1999, there has not been:
(i) any material adverse change in the assets, liabilities, condition
(financial or otherwise), results of operation, business or prospects of HDC or
any occurrence or circumstance which reasonably could be expected to result in
such a material adverse change;
(ii) any material change in the method of operating the business of HDC
or in the manner of keeping the books, accounts or records of HDC or in any
accounting method or practice of HDC;
(iii) except for the execution of this Agreement and the letter of
intent between Procept and HDC, dated September 15, 1999 (the "Letter of
Intent") and the consummation of the transactions contemplated hereby and
thereby, any sale, lease, mortgage, pledge, encumbrance, abandonment or
disposition of, or agreement to sell, lease, mortgage, pledge, encumber, abandon
or dispose of, any material assets or properties of HDC other than in the usual
and ordinary course of business;
(iv) except for the execution of this Agreement and the Letter of Intent
and the consummation of the transactions contemplated hereby and thereby, any
material transaction, commitment, contract or agreement entered into by HDC, or
any relinquishment or abandonment by HDC of any material contract or right, or
any modification, waiver, amendment, release, recision, or termination of any
material term, condition or provision of any contract pertaining to HDC (other
than any satisfaction by performance in accordance with the terms thereof) other
than in the usual and ordinary course of business;
(v) any adverse relationships or conditions with employees, suppliers,
lenders or customers of HDC or any adverse relationships by HDC with
governmental agencies that could reasonably be anticipated to have an HDC
Material Adverse Effect;
(vi) any acquisition by HDC (other than property or interests therein
acquired in the ordinary course of its business) of all or any part of the
assets, properties, capital stock or business of any other person or entity;
(vii) any redemption or other acquisition by HDC of any of its capital
stock or any declaration, setting aside or payment of any dividend or
distribution of any kind with respect to shares of its capital stock;
(viii) any loan or advance by HDC to any of its stockholders, officers,
directors or consultants, or any other loan or advance other than in the
ordinary course of business; or
(ix) except as set forth in the HDC DISCLOSURE SCHEDULE, any new
employment or consulting agreement, any increase in compensation, bonus or other
benefits payable or to become payable by HDC to any of its directors, officers
or employees, other than regularly scheduled increases consistent with past
practice in the ordinary course of business, or any new grant of severance or
termination rights, or increase in rights or benefits payable under existing
severance or termination policies or agreements, to any director, officer or
employee of HDC.
2.9 TAX MATTERS.
(a) Since its inception HDC has not filed any Tax Returns (as defined
below). All Taxes required to be paid by HDC, whether or not shown on any Tax
Return, have been paid or HDC has adequately provided reserves (in accordance
with GAAP). HDC is not currently the beneficiary of any extension of time within
which to file any Tax Return. No claim has ever been made by any taxing
authority in any jurisdiction that HDC is or may be subject to taxation by that
jurisdiction. HDC has never been a member of any group required to file any
affiliated, combined, consolidated, or unitary Tax Return.
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(b) There are no liens or other encumbrances with respect to Taxes upon
any of the assets or properties of HDC, other than with respect to Taxes not yet
due and payable.
(c) No deficiency for any Taxes has been proposed in writing against
HDC, which deficiency has not been paid in full. There are not ongoing or, to
the knowledge of HDC, threatened any audits, examinations, investigations or
other proceedings in respect of Taxes or Tax matters which could result in any
tax deficiency of HDC for any taxable period ending on or before the date
hereof, and HDC knows of no basis for the assertion of such a deficiency. No
issue relating to HDC involving any Tax for which HDC might be liable has been
resolved in favor of any taxing authority in any audit or examination which, by
application of the same principles applied in the resolution of such issue,
could reasonably be expected to result in a deficiency for Taxes of HDC for any
period for which the applicable statute of limitations has not expired.
(d) There are no outstanding agreements, waivers or arrangements
extending the statutory period of limitation applicable to any claim for, or the
period for the collection or assessment of, Taxes due from or with respect to
HDC for any taxable period, and no power of attorney granted by or with respect
to HDC relating to Taxes is currently in force.
(e) The unpaid Taxes of HDC for all taxable periods (or portions
thereof) ending on or prior to the date hereof (A) did not, as of September 30,
1999, exceed the reserve for Tax liability (rather than any reserve for deferred
Taxes established to reflect timing differences between book and Tax income) set
forth on the face of the HDC Interim Balance Sheet (rather than in any notes
thereof).
(f) No consent to the application of section 341(f)(2) of the Code (or
any predecessor provision) has been made or filed by or with respect to HDC or
any of its assets or properties. None of the assets or properties of HDC are or
will be required to be treated as being (i) owned by any other person pursuant
to the provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as
amended, and in effect immediately before the enactment of the Tax Reform Act of
1986, or (ii) tax-exempt use property within the meaning of section 168(h)(1) of
the Code. HDC has not agreed, nor is it required, to make any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise.
(g) HDC has not been and is not currently in violation (or, with or
without notice or lapse of time or both, would be in violation) of any
applicable law or regulation relating to the payment or withholding of Taxes,
and all withholding and payroll Tax requirements required to be complied with by
HDC up to and including the date hereof have been satisfied.
(h) HDC is not and has never been a party to or bound by, nor does it
have or has it ever had any obligation under, any Tax sharing agreement or
similar contract or arrangement.
(i) There is no contract or agreement, plan, or arrangement by HDC
concerning any person that, individually or collectively, would reasonably be
expected to give rise to the payment of any amount that would not be deductible
by HDC by reason of Section 280G of the Code.
(j) HDC is not and has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Procept
shall have received (a) a certification from HDC, dated no more than thirty
(30) days prior to the Effective Time and signed by a responsible corporate
officer of HDC, that HDC is not, and has not been at any time during the five
years preceding the date of such certification, a United States real property
holding company, as defined in Section 897(c)(2) of the Code, and (b) proof
reasonably satisfactory to Procept that HDC has provided notice of such
certification to the IRS in accordance with the provisions of Treasury
Regulations Section 1.897-2(h)(2).
As used in this Agreement, (i) "Tax Return" means any return, declaration,
report, claim for refund, information return, or statement, and any schedule,
attachment, or amendment thereto, including
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without limitation any consolidated, combined or unitary return or other
document (including any related or supporting information), filed or required to
be filed by any taxing authority in connection with the determination,
assessment, collection, imposition, payment, refund or credit of any federal,
state, local or foreign Tax or the administration of the laws relating to any
Tax, and (ii) "Tax" or "Taxes" means any and all taxes, charges, fees, levies,
deficiencies or other assessments of whatever kind or nature including, without
limitation, all net income, gross income, profits, gross receipts, excise, real
or personal property, sales, ad valorem, withholding, social security,
retirement, excise, employment, unemployment, minimum estimated, severance,
stamp, property, occupation, environmental, windfall profits, use, service, net
worth, payroll, franchise, license, gains, customs, transfer, recording and
other taxes, customs, duty, fees, assessments or charges of any kind whatsoever,
imposed by any taxing authority, including any liability therefor as a
transferee under Section 6901 of the Code or any similar provision of applicable
law, as a result of Treasury Regulation Section 1.1502-6 or any similar
provision of applicable law, or as a result of any Tax sharing or similar
agreement, together with any interest, penalties or additions to tax relating
thereto.
2.10 COMPLIANCE WITH LAWS.
2.10.1 Except as set forth on the HDC DISCLOSURE SCHEDULE, HDC is not
in violation of or in default under, in any material respect, any order,
judgment, injunction, award or decree, or any federal, state, local or foreign
law, ordinance or regulation or any other requirement of any governmental or
regulatory body, court or arbitrator, and is in compliance in all material
respects with all of the foregoing that are applicable to it, its business or
its assets. HDC has not received notice of, and there has not been any citation,
fine or penalty imposed or asserted against it for, any such violation or
alleged violation that has not been favorably and fully resolved.
2.10.2 HDC holds all licenses, permits, certificates, exemptions,
variances, franchises, orders or approvals of any federal, state, local or
foreign governmental or regulatory body (collectively, "Permits") that are
material to the conduct of its business and the uses of its assets. The HDC
DISCLOSURE SCHEDULE contains a true and complete list of all such Permits as of
the date hereof (the "HDC Permits"). The HDC Permits are in full force and
effect and the validity and effectiveness of the HDC Permits will not be
affected by the transactions contemplated hereby. No violations are or have been
recorded with any governmental or regulatory body in respect of any HDC Permit,
no proceeding is pending or, to the best knowledge of HDC, threatened to revoke
or limit any HDC Permit, and HDC knows of no grounds for any such revocation or
limitation. HDC is in compliance with the terms of the HDC Permits, except
failures so to comply which individually or in the aggregate, are not having and
could not be reasonably expected to have an HDC Material Adverse Effect.
2.11 CONSENTS; NO BREACH. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by HDC are set forth in Section 2.11 of the HDC
DISCLOSURE SCHEDULE, other than those which the failure to obtain would not
affect the validity of this transaction or materially adversely affect the
business of the Surviving Corporation after the Effective Time. Except as set
forth in Section 2.11 of the HDC DISCLOSURE SCHEDULE, the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby will not (i) violate any provision of the Certificate of
Incorporation, as amended, or Bylaws of HDC; (ii) violate, conflict with or
result in the breach of any of the terms or conditions of, result in a
modification of, or otherwise give any other contracting party the right to
terminate or accelerate, or constitute (or with notice or lapse of time or both
constitute) a default under, any instrument, contract or other agreement to
which HDC is a party or to which HDC or any of its assets or properties is bound
or subject; (iii) violate any statute, law or regulation of any jurisdiction
(which violation would affect the validity of the transaction contemplated
hereby or otherwise would materially adversely affect the business of the
Surviving Corporation after the Effective Time) or any order, judgment,
injunction, award or decree of any court, arbitrator or governmental or
regulatory body applicable to or binding
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upon HDC or any of its securities, properties, assets or business; (iv) violate
any material Permit held by HDC; (v) require any filing with, notice to, or
approval or consent of any foreign, federal, state, local or other governmental
or regulatory body or any other person or entity; (vi) give rise to any
obligation to make any material payment; or (vii) result in the creation of any
Encumbrance (as defined in Section 2.15) on the assets or properties of HDC
excluding from the foregoing clauses (ii), (iii), (iv) and (v) any exceptions to
the foregoing that, in the aggregate, would not have an HDC Material Adverse
Effect on the business of HDC or on the ability of HDC to consummate the
transactions contemplated hereby, and the following: (a) the filing of the
Merger Certificate with the Secretary of State of Delaware, (b) filings with
various state blue sky authorities, (c) the filing with Nasdaq of an application
for listing on the Nasdaq Small-Cap Market of the shares of Procept Common Stock
to be issued in the Merger and (d) the filing with the Securities and Exchange
Commission ("SEC") and the declaration of the effectiveness of a registration
statement on Form S-4 (or such other form required by the SEC) (the
"Registration Statement") to register the shares of Procept Common Stock to be
issued in the Merger, including the proxy statement (the "Procept Proxy
Statement") relating to the meeting of the stockholders of Procept (the "Procept
Stockholders Meeting") to be held for the purpose of voting on the ratification
and approval of the Procept Merger Proposal.
2.12 ACTIONS AND PROCEEDINGS. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal against or involving HDC or any of its securities, assets,
or properties. There are no actions, suits or claims or legal, judicial,
administrative or arbitration proceedings or investigations (whether or not the
defense thereof or liabilities in respect thereof are covered by insurance)
pending or, to the best knowledge of HDC, threatened against or involving HDC,
or any of its securities, assets or properties.
2.13 CONTRACTS AND OTHER AGREEMENTS. Section 2.13 of the HDC Disclosure
Schedule sets forth a correct and complete list of all of the following
currently in effect:
(i) written contracts and other agreements with or for the benefit of
any current or former officer, director, stockholder or employee of HDC
involving more than $10,000, (provided in the case of a loan by HDC to any such
person, the HDC DISCLOSURE SCHEDULE shall list all such loan arrangements,
whether or not in writing, involving at least $10,000) and contracts and other
agreements for the payment of fees or other consideration to any entity in which
HDC has an interest;
(ii) contracts and other agreements with any labor union or association
representing any employee of HDC or otherwise providing for any form of
collective bargaining;
(iii) contracts and other agreements for the purchase or sale of
materials, supplies, equipment, merchandise or services that contain an
escalation, renegotiation or redetermination clause or that obligate HDC to
purchase all or substantially all of its requirements of a particular product
from a supplier, or for periodic minimum purchases of a particular product from
a supplier;
(iv) contracts and other agreements for the sale of any of the assets or
properties of HDC other than in the ordinary course of business or for the grant
to any person of any options, rights of first refusal, or preferential or
similar rights to purchase any of such assets or properties;
(v) partnership or joint venture agreements to which HDC is a party;
(vi) contracts with agents or foreign representatives regarding the
sales or marketing of the services or products of HDC;
(vii) contracts or other agreements under which HDC agrees to act as
surety or guarantor for or to indemnify any party (other than required
indemnification provisions in customer contracts) or to share the tax liability
of any party;
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(viii) contracts, options, outstanding purchase orders and other
agreements for the purchase of any material asset, tangible or intangible;
(ix) contracts and other agreements with customers, suppliers or other
parties for the sharing of fees, the rebating of charges or other similar
arrangements other than such contracts entered into in the ordinary course of
business;
(x) contracts and other agreements containing obligations or liabilities
of any kind to holders of the securities of HDC as such (including, without
limitation, an obligation to register any of such securities under any federal
or state securities laws);
(xi) contracts and other agreements containing covenants of HDC not to
compete in any line of business or with any person or entity or covenants of any
other person or entity not to compete with HDC in any line of business;
(xii) contracts and other agreements relating to the acquisition by HDC
of any operating business or the capital stock of any other person or entity;
(xiii) contracts and other agreements requiring the payment to any party
of a brokerage or sales commission or a finder's or referral fee;
(xiv) contracts, indentures, mortgages, promissory notes, debentures,
loan agreements, guaranties, security agreements, pledge agreements, and other
agreements and instruments relating to the borrowing or lending of money by HDC
or securing any such liability by HDC;
(xv) any agreement or series of related agreements requiring aggregate
payments by or to HDC of more than $10,000;
(xvi) contracts under which HDC will acquire or has acquired ownership
of, or license to, intangible property, including software other than
commercially available end-user licenses; and
(xvii) any other material contract or other agreement to which HDC is a
party or by which any of its assets are bound whether or not made in the
ordinary course of business.
HDC has delivered or made available to Procept true and complete copies of
all of the contracts and other agreements (and all amendments, waivers or other
modifications thereto) set forth in Section 2.13 of the HDC DISCLOSURE SCHEDULE.
All of such contracts and other agreements are valid, subsisting, in full force
and effect, binding upon HDC and to the knowledge of HDC, binding upon the other
parties thereto in accordance with their terms. Other than defaults which would
not, either singly or in the aggregate, have an HDC Material Adverse Effect, HDC
is not in default under any of such contracts and other agreements, nor, to the
knowledge of HDC, is any other party to any such contract or other agreement in
default thereunder, nor does any condition exist that constitutes or with notice
or lapse of time or both would constitute a default by HDC thereunder.
2.14 REAL PROPERTY; LEASES. HDC does not own any real property or any
buildings or other structures and does not have any options or any contractual
obligations to purchase or acquire any interest in real property. Section 2.14
of the HDC DISCLOSURE SCHEDULE sets forth a correct and complete list of all
leases of real property to which HDC is a party (collectively, the "LEASES").
True and complete copies of the Leases and all amendments, modifications and
supplemental agreements thereto have been delivered by HDC to Procept. The
Leases are in full force and effect and to the knowledge of HDC, are binding and
enforceable against each of the other parties thereto in accordance with their
respective terms. To the knowledge of HDC no party to any Lease has given notice
to HDC claiming the existence or occurrence of a breach or default thereunder by
HDC and there has not occurred any event or circumstances which constitute, or
with the passage of time or the giving of notice would constitute, a breach or
default thereunder by HDC other than defaults which would not, either singly or
in the aggregate, have an HDC Material Adverse Effect.
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2.15 TANGIBLE PROPERTY. HDC has good and marketable title to, or valid
leasehold interests or otherwise has the unrestricted right to use, free and
clear of any liens, claims, mortgages, encumbrances, pledges, security
interests, equities and charges of any kind (each an "Encumbrance") each item of
equipment, furniture, leasehold improvements, fixtures, vehicles, structures,
any related capitalized items and other tangible property material to the
business of HDC ("TANGIBLE PROPERTY") other than (i) any statutory Encumbrance
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent and (ii) any minor imperfection of
title or similar Encumbrance which individually or in the aggregate with other
such Encumbrances does not materially impair the value of the property or asset
subject to such Encumbrances or the use of such property or asset in the
ordinary conduct of business. All such Tangible Property is in good and
sufficient operating condition and repair, ordinary wear and tear excepted, and
to the best knowledge of HDC, HDC has not received notice that any of its
Tangible Property is in violation of any existing law or any building, zoning,
health, safety or other ordinance, code or regulation.
2.16 INTELLECTUAL PROPERTY.
(a) To the knowledge of HDC, HDC owns, or is licensed to use, or
otherwise has the right to use all patents, trademarks, service marks, trade
names, trade secrets, logos, franchises, and copyrights, and all applications
for any of the foregoing, and all technology, inventions, trade secrets,
know-how, computer software and processes to the extent material to the conduct
of its business as now conducted (collectively, the "Proprietary Rights"). HDC
has previously delivered to Procept a certified list of all such patents and
registered copyrights and trademarks, and all applications therefor (the "HDC
Registered Rights"). All of the HDC Registered Rights owned by HDC, and to the
knowledge of HDC, all HDC Registered Rights licensed to HDC have been registered
in, filed in or issued by the United States Patent and Trademark Office, the
United States Register of Copyrights, or the corresponding offices of other
jurisdictions as identified in Section 2.16 of the HDC DISCLOSURE SCHEDULE, and
have been properly maintained and renewed in accordance with all applicable
provisions of law and administrative regulations in the United States and in
each such other jurisdiction.
(b) To the knowledge of HDC, the business of HDC as currently conducted
does not infringe upon the proprietary rights of others, nor has HDC received
any notice or claim from any third party of such infringement by HDC. HDC is not
aware of any material unlicensed infringement by any third party on, or any
issued competing claim of right to use or own any of, the Proprietary Rights of
HDC. To the knowledge of HDC, none of the activities of the employees of HDC on
behalf of HDC violates any agreements or arrangements that any such employees
have with former employers.
2.17 TITLE TO ASSETS; LIENS. HDC has good and marketable title to or valid
leasehold interests in or otherwise has the right to use all of its material
assets and properties, including, without limitation, all of the assets and
properties reflected on the HDC Interim Balance Sheet, free and clear of any
Encumbrance, except for (i) assets and properties disposed of in the ordinary
course of business subsequent to the date of the HDC Interim Balance Sheet,
(ii) Encumbrances securing the claims of materialmen, carriers, landlords and
like persons, all of which are not yet due and payable, (iii) liens for Taxes
not yet due and payable or for Taxes being contested in good faith by
appropriate proceedings, or (iv) Encumbrances reflected on the HDC Interim
Balance Sheet.
2.18 EMPLOYEE BENEFIT PLANS. Section 2.18 of the HDC DISCLOSURE SCHEDULE
sets forth a description of the group health plan (the "Plan") that HDC sponsors
for the benefit of its employees. HDC does not sponsor any pension, profit
sharing, retirement, deferred compensation, welfare, insurance, disability,
bonus, vacation pay, severance pay or any similar plan, program or arrangement,
including without limitation any employee benefit plan as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). HDC has never maintained or contributed to any "MULTIEMPLOYER PLAN"
as defined in Section 4001(a)(3) of ERISA, and HDC has not incurred any material
liability under Section 4062, 4063 or 4201 of ERISA. The Plan has been
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administered in all material respects in accordance with the terms of such Plan
and the provisions of any and all applicable statutes, orders or governmental
rules or regulations, including without limitation ERISA and the Code. All
material reports, returns, notices and documents required to be filed with
respect to the Plan, have been timely filed. Except as set forth on the HDC
DISCLOSURE SCHEDULE, all contributions required by law or the terms of the Plan
have been made. Except as set forth on the HDC DISCLOSURE SCHEDULE, all claims
for welfare benefits incurred by employees of HDC on or before the Closing are
or will be fully covered by third-party insurance policies or programs. The Plan
is not a defined benefit pension plan that is subject to Title IV of ERISA, nor
has HDC ever maintained such a plan or any other qualified retirement or savings
plan. Except for continuation of health coverage to the extent required under
Section 4980B of the Code or as otherwise set forth in this Agreement, there are
no obligations under the Plan providing group health expense reimbursement
benefits after termination of employment. Complete copies of the following have
been delivered to Procept: (i) each trust agreement, group annuity contract,
insurance policy or contract; (ii) if applicable, each Form 5500 series annual
report with each required schedule and attachment for each of the three
(3) most recent plan years; and (iii) the most recent summary plan description
and each summary of material modification thereto.
2.19 EMPLOYEE RELATIONS. HDC has approximately 9 full-time equivalent
employees and generally enjoys good employer-employee relations. None of HDC's
employees are represented by any labor union. HDC is not delinquent in payments
to any of its employees or consultants for any wages, salaries, commissions,
bonuses or other direct compensation for any services performed by them to the
date hereof or amounts required to be reimbursed to such employees or
consultants. Neither Procept nor HDC will by reason of the Merger or anything
done prior to the Closing be liable to any HDC employees for severance pay or
any other payments (other than accrued salary, vacation or sick pay in
accordance with HDC's normal policies) in the event any such employees are
terminated. Correct and complete information as to all current directors,
officers, employees or consultants of HDC including, in each case, name, current
job title and annual rate of compensation has been provided by HDC to Procept.
2.20 RELATIONSHIPS WITH AFFILIATES. Except as set forth in Section 2.20 of
the HDC DISCLOSURE SCHEDULE, to the best knowledge of HDC, no officer or
director of HDC has directly or indirectly any interest in, (i) any property or
assets of HDC (except as a stockholder of HDC), (ii) any competitor or customer
of HDC, (iii) any supplier or lender to HDC, or (iv) any party to any material
contract or agreement with HDC.
2.21 INSURANCE. Section 2.21 of the HDC DISCLOSURE SCHEDULE sets forth a
correct and complete list of all policies or binders of fire, liability, product
liability, workmen's compensation, vehicular, directors' and officers' and other
insurance held by or on behalf of HDC specifying in each case the type and scope
of coverage, the amount of coverage, the premium, the insurer, the expiration
date and all claims made thereunder within the past three years. Such policies
and binders are in full force and effect, are reasonably believed to be adequate
for the business engaged in by HDC, are in conformity with the requirements of
all leases or other agreements to which HDC is a party and are valid and
enforceable in accordance with their terms. All premiums due under such policies
and binders have been paid, and HDC is not in default with respect to any
provision contained in any such policy or binder nor has HDC failed to give any
notice or present any claim under any such policy or binder in due and timely
fashion. There are no outstanding unpaid claims under any such policy or binder.
HDC has not received notice of cancellation or non-renewal of, or any material
amendment to, or any material increase in deductibles or premiums under, any
such policy or binder. Correct and complete copies of certificates of insurance
with respect to all such policies and binders have been provided by HDC to
Procept.
2.22 BROKERAGE. No broker, finder, agent or similar intermediary has acted
on behalf of HDC in connection with this Agreement or the transactions
contemplated hereby, and there are no brokerage
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commissions, finders fees or similar fees or commissions payable in connection
therewith based on any agreement, arrangement or understanding with, or any
action taken by, HDC.
2.23 HAZARDOUS MATERIALS. HDC has not generated, used or handled any
Hazardous Materials (as defined below), nor has HDC treated, stored or disposed
of any Hazardous Materials at any site owned or leased at any time by HDC or
shipped any Hazardous Materials for treatment, storage or disposal at any other
site or facility, except in compliance with all applicable laws. To the
knowledge of HDC, no other person has generated, used, handled, stored or
disposed of any Hazardous Materials at any site owned or premises leased by HDC
at any time nor to the knowledge of HDC, has there been or is there threatened
any release of any Hazardous Materials on or at any such site or premises. HDC
does not presently operate or lease nor has it operated or leased in the past
any site on which, underground storage tanks are or were located and which tanks
are the responsibility of HDC to operate. To the knowledge of HDC, without
investigation, no lien has been imposed by any governmental agency in connection
with the presence of any Hazardous Materials on any property, facility,
machinery, or equipment operated or leased by HDC. For purposes of this
Section 2.23, "Hazardous Materials" shall mean and include any "hazardous waste"
as defined in either the United States Resource Conservation and Recovery Act,
42 U.S.C. 6901, or regulations adopted pursuant to said Act, and also any
"hazardous substances" or "hazardous materials" as defined in the United States
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
9601, but excludes ordinary and customary materials in quantities reasonably
required to be used by HDC in the ordinary course of its business.
2.24 FULL DISCLOSURE. All documents and other papers delivered by or on
behalf of HDC in connection with this Agreement and the transactions
contemplated hereby are true, complete and authentic. No representation,
warranty or statement of HDC made in this Agreement or the HDC DISCLOSURE
SCHEDULE or in any document, statement or certificate furnished to Procept
pursuant to this Agreement contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements made, in light of the circumstance under which they were
made, not false or misleading.
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, represents and warrants to
Procept as follows:
3.1 TITLE. Such Stockholder has good and marketable title to the HDC Stock
held by such Stockholder as set forth on SCHEDULE I, free and clear of any and
all covenants, conditions, restrictions, voting trust arrangements, liens,
charges, encumbrances, options and adverse claims or rights whatsoever.
3.2 AUTHORITY. Such Stockholder has the full right, power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby.
3.3 NO CONFLICT. Such Stockholder is not a party to, subject to or bound
by any agreement or any judgment, order, writ, prohibition, injunction, decree
or award of any federal, state, foreign or local court, arbitrational tribunal,
administrative agency or commission or other governmental or regulatory body,
authority or agency (a "Governmental Entity") which would prevent the execution
or delivery of this Agreement by such Stockholder or the consummation of the
transactions contemplated hereby.
3.4 BINDING AGREEMENT. This Agreement has been duly executed by such
Stockholder. This Agreement and all other agreements and obligations entered
into and undertaken in connection with the transactions contemplated hereby to
which such Stockholder is a party constitute the valid and legally binding
obligations of such Stockholder, enforceable against such Stockholder in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights and
remedies of creditors generally. The execution, delivery and
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performance by such Stockholder of this Agreement and the agreements provided
for herein to which such Stockholder is a party, and the consummation by such
Stockholder of the transactions contemplated hereby and thereby, will not, with
or without the giving of notice or the passage of time or both, (a) violate the
provisions of any federal, state, local or foreign laws, regulations, rules,
ordinances or orders applicable to such Stockholder; (b) violate any judgment,
order, writ, prohibition, injunction, decree or award of any Governmental Entity
applicable to such Stockholder; or (c) require on the part of such Stockholder
any filing with, or any permit, authorization, consent or approval of, any
Governmental Entity. No consent or approval of non-governmental third parties is
required to be obtained in connection with the consummation by the Stockholders
of the transactions contemplated by this Agreement.
3.5 NO BROKER. No broker or finder has acted for such Stockholder in
connection with this Agreement or the transactions contemplated hereby, and no
broker or finder is entitled to any brokerage or finder's fee or other
commissions in respect of such transactions based upon agreements, arrangements
or understandings made by or on behalf of such Stockholder.
SECTION 4 -- REPRESENTATIONS AND WARRANTIES OF PROCEPT AND PAC
Except as set forth on the disclosure schedule (the "PROCEPT DISCLOSURE
SCHEDULE") delivered to HDC on the date hereof (regardless of whether the
PROCEPT DISCLOSURE SCHEDULE is referenced in any particular subsection of this
Section 4), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer (provided that
disclosure thereon under any subsection number shall be disclosure for any
section hereof), each of Procept and PAC represents and warrants to HDC as set
forth below:
4.1 ORGANIZATION AND QUALIFICATION. Each of Procept and each direct and
indirect subsidiary of Procept (the "Procept Subsidiaries") is a corporation
duly organized, validly existing and in good standing under the laws of the
state or other jurisdiction of its incorporation and has full corporate power
and authority to own, lease and operate its assets, properties and business and
to carry on its business as now being and as heretofore conducted. PAC was
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement, has engaged in no other business activities and has conducted
its operations only as contemplated hereby. Each of Procept and each Procept
Subsidiary is qualified, licensed or is otherwise authorized to transact
business as a foreign corporation and is in good standing in each jurisdiction
(in the United States and outside of the United States) in which the failure to
be so qualified, licensed or otherwise authorized to transact business and in
good standing would have a material adverse effect on the business or financial
condition of Procept and the Procept Subsidiaries, taken as a whole (other than
changes that are the effect of economic factors affecting the economy or the
pharmaceutical industry as a whole) (a "Procept Material Adverse Effect").
Section 4.1 of the PROCEPT DISCLOSURE SCHEDULE sets forth the name and
jurisdiction of incorporation of each Procept Subsidiary and each jurisdiction
in which Procept and each Procept Subsidiary is licensed, qualified or otherwise
authorized to transact business. Except as disclosed in Section 4.1 of the
PROCEPT DISCLOSURE SCHEDULE, all of the outstanding shares of capital stock of
each Procept Subsidiary are duly authorized, validly issued, fully paid and
nonassessable and are owned, beneficially and of record, by Procept or a Procept
Subsidiary wholly owned, directly or indirectly, by Procept, free and clear of
any Encumbrances.
4.2 CAPITALIZATION.
4.2.1 OUTSTANDING CAPITAL STOCK. Procept's authorized capital stock
consists of (i) 30,000,000 shares of Common Stock, $.01 par value per share, of
which 14,652,161 shares were issued and outstanding as of October 30, 1999, no
shares were held in treasury of Procept and 12,313,506 shares were reserved for
issuance pursuant to instruments described in the PROCEPT DISCLOSURE SCHEDULE
and (ii) 1,000,000 shares of Preferred Stock, $.01 par value per share, none of
which shares are issued and
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outstanding as of the date of this Agreement. Except as disclosed in
Section 4.2 of the PROCEPT DISCLOSURE SCHEDULE, Procept has no obligation to
issue additional shares of Procept Common Stock or any other security of
Procept. Except as disclosed in Procept's proxy statement for its annual meeting
of stockholders held on June 11, 1999, Procept is not aware of any record or
beneficial holder of more than five percent (5%) of the outstanding shares of
Procept Common Stock. The outstanding shares of Procept Common Stock are and all
shares reserved for issuance will be, upon issuance in accordance with the terms
specified in the instruments or agreements pursuant to which they are issuable,
duly authorized, validly issued, fully paid, and nonassessable and have been
issued in compliance with all charter documents of Procept and all applicable
federal and state laws. The shares of Procept Common Stock issuable to the
holders of the HDC Stock pursuant to Article I of this Agreement will be, when
issued in accordance with this Agreement, duly authorized, validly issued, fully
paid and nonassessable. Except as disclosed in Section 4.1 of the PROCEPT
DISCLOSURE SCHEDULE, there are no (x) outstanding subscriptions, warrants,
options, preemptive rights, convertible securities or other rights (any of the
foregoing an "Option") obligating Procept or any of the Procept Subsidiaries to
issue or sell any shares of capital stock of Procept or any Procept Subsidiary
or to grant, extend or enter into any such Option or (y) voting trusts, proxies
or other agreements, instruments or understandings with respect to outstanding
shares of Procept or any Procept Subsidiary or (z) outstanding contractual
obligations of Procept or any Procept Subsidiary to repurchase, redeem or
otherwise acquire any shares of capital stock of any Procept Subsidiary or to
provide funds to or make an investment (in the form of a loan, capital
contribution or otherwise) in any Procept Subsidiary.
4.2.2 OPTIONS OR OTHER RIGHTS. Except as set forth in the PROCEPT
DISCLOSURE SCHEDULE, (i) no Option obligating Procept to purchase or acquire any
shares of capital stock or other security of Procept is authorized or
outstanding, (ii) there is no commitment or offer by Procept to issue or provide
any such Option or to issue or distribute to holders of any shares of its
capital stock any evidences of indebtedness or assets of Procept, (iii) Procept
has no obligation (contingent or otherwise) to purchase, redeem or otherwise
acquire any shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof, (iv) there are no
restrictions on the transfer of Procept's capital stock other than those arising
from securities laws, and (v) there are no voting trusts, proxies or other
agreements, instruments or understandings with respect to outstanding shares of
Procept's capital stock to which Procept is a party.
4.3 AUTHORITY TO EXECUTE AND PERFORM AGREEMENTS. Subject to the
requirement that Procept obtain approval of its stockholders to consummate the
Merger under the DGCL, each of Procept and PAC has the requisite corporate power
and authority to execute and deliver this Agreement and each agreement, document
and instrument contemplated by this Agreement to which it is a party, to
consummate the transactions contemplated hereby and thereby and to perform fully
its respective obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and each such other agreement, document and
instrument to which either of Procept or PAC is a party and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of Procept and PAC. The Board of
Directors of each of Procept and PAC has adopted a resolution approving this
Agreement and the transactions contemplated hereby. The Board of Directors of
PAC has recommended the approval of this Agreement to the sole stockholder of
PAC, and Procept, as the sole stockholder of PAC, has approved this Agreement in
accordance with the DGCL. The Board of Directors of Procept has adopted a
resolution recommending approval of the Procept Merger Proposal by the
stockholders of Procept, declaring the advisability of the issuance of Procept
Common Stock in connection with the Merger, and directing that the Procept
Merger Proposal be submitted for consideration by the stockholders of Procept.
This Agreement and each agreement, document and instrument to which Procept or
PAC is a party executed and delivered pursuant to this Agreement constitutes, or
when executed and delivered by Procept or PAC, as the case may be, will
constitute, valid and binding obligations of each of Procept and PAC,
enforceable against Procept and PAC in accordance with their respective terms.
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4.4 SUBSIDIARIES AND OTHER AFFILIATES. Except as disclosed in Section 4.1
of the PROCEPT DISCLOSURE SCHEDULE, Procept does not have any subsidiary or
directly or indirectly own or have any investment in any of the capital stock
of, or any interest convertible into or exchangeable or exercisable for or any
other interest in, any other person, corporation, partnership, joint venture or
other business association or entity.
4.5 CHARTER AND BYLAWS; BOOKS AND RECORDS. Procept has heretofore
delivered or made available to HDC true and complete copies of the Certificate
of Incorporation (certified by the Secretary of State or comparable authority of
its jurisdiction of incorporation) and Bylaws of each of Procept and PAC as in
effect on the date hereof, and corporate minute books. Neither Procept nor PAC
is in default in the performance, observation or fulfillment of either its
Certificate of Incorporation or Bylaws. The minute books of Procept and PAC
contain true and complete records of all meetings and consents in lieu of
meetings of the Board of Directors and of the stockholders of each of Procept
and PAC prior to the date hereof, and accurately reflect all transactions
referred to in such minutes and consents in lieu of meetings. The stock books of
each of Procept and PAC are true, complete and correct. The general ledgers and
books of account of Procept and PAC to which HDC and its representatives have
been given access are correct and complete in all material respects and have
been maintained in accordance with good business practice.
4.6 SEC REPORTS. Procept has previously delivered to HDC its (i) Annual
Report on Form 10-K for the year ended December 31, 1998 (the "Procept 10-K"),
as filed with the SEC, (ii) the proxy statement relating to Procept's annual
meeting of stockholders held on June 11, 1999 and (iii) all other forms,
schedules, reports and other documents (all of the foregoing documents referred
to in (i), (ii) and (iii), the "Procept SEC Reports") filed by Procept with the
SEC and all similar forms, documents, reports and schedules filed by Procept
with the SEC since January 1, 1994, which are all the documents that Procept and
the Procept Subsidiaries were required to file with the SEC since such date. As
of their respective dates, the Procept SEC Reports and all similar forms,
documents, reports and schedules filed by Procept with the SEC since January 1,
1994 complied in all material respects with applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act") or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Procept has timely filed with the SEC all reports required to be
filed under Section 13, 14 or 15(d) of the Exchange Act since becoming
registered under the Exchange Act.
4.7 FINANCIAL STATEMENTS. The consolidated financial statements contained
in the Procept 10-K and in Procept's quarterly report on Form 10-Q for the
quarter ended June 30, 1999 (the "Procept 10-Q") complied as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto and have been prepared from, and are in accordance with, the
books and records of Procept and fairly present the consolidated financial
condition, results of operations and cash flows of Procept as of the dates and
for the periods presented therein, all in accordance with GAAP applied on a
consistent basis, except as otherwise indicated therein and subject (in the case
of the unaudited financial statements included in the Procept 10-Q) to normal
year-end and audit adjustments and footnote disclosures, which in the aggregate
are not material.
4.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters reflected or
reserved against in the balance sheet for the period ended December 31, 1998 (or
the notes thereto) included in the Procept 10-K (the "Procept Balance Sheet")
neither Procept nor any of the Procept Subsidiaries had at such date or has
incurred since such date liabilities of any nature, whether accrued, absolute,
contingent or otherwise (including without limitation, liabilities as guarantor
or otherwise with respect to obligations of others or liabilities for Taxes due
or then accrued or to become due), except for liabilities (i) adequately
reflected and reserved against in the Procept unaudited balance sheet dated
June 30, 1999 included in the Procept 10-Q (the "Procept Interim Balance
Sheet"), or (iii) incurred
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since December 31, 1998 in the ordinary course of business and not material in
amount, either individually or in the aggregate and which liabilities have not
had, and could not be reasonably expected to have, individually or in the
aggregate, a Procept Material Adverse Effect.
4.9 NO MATERIAL ADVERSE CHANGE. Except as set forth in the Procept
Disclosure Schedule, since December 31, 1998, there has not been:
(i) any material adverse change in the assets, liabilities, condition
(financial or otherwise), results of operation, business or prospects of Procept
and the Procept Subsidiaries, taken as a whole, or any occurrence or
circumstance which reasonably could be expected to result in such a material
adverse change;
(ii) any material change in the method of operating the business of
Procept and the Procept Subsidiaries, in the manner of keeping the books,
accounts or records of Procept and the Procept Subsidiaries or in any accounting
method or practice of Procept and the Procept Subsidiaries;
(iii) except for the execution of this Agreement and the Letter of
Intent and the consummation of the transactions contemplated hereby and thereby,
any sale, lease, mortgage, pledge, encumbrance, abandonment or disposition of,
or agreement to sell, lease, mortgage, pledge, encumber, abandon or dispose of,
any material assets or properties of Procept, other than in the usual and
ordinary course of business;
(iv) except for the execution of this Agreement and the Letter of Intent
and the consummation of the transactions contemplated hereby and thereby, any
material transaction, commitment, contract or agreement entered into by Procept
or any Procept Subsidiary, or any relinquishment or abandonment by Procept or
any Procept Subsidiary of any material contract or right, or any modification,
waiver, amendment, release, recision, or termination of any material term,
condition or provision of any contract pertaining to Procept or any Procept
Subsidiary (other than any satisfaction by performance in accordance with the
terms thereof), other than in the usual and ordinary course of business;
(v) any adverse relationships or conditions with employees, suppliers,
lenders, customers or governmental agencies that could reasonably be anticipated
to have a Procept Material Adverse Effect;
(vi) any acquisition by Procept or any Procept Subsidiary (other than
property or interests therein acquired in the ordinary course of its business)
of all or any part of the assets, properties, capital stock or business of any
other person or entity;
(vii) any redemption or other acquisition by Procept or any Procept
Subsidiary of any of its capital stock or any declaration, setting aside or
payment of any dividend or distribution of any kind with respect to shares of
its capital stock;
(viii) any loan or advance by Procept or any Procept Subsidiary to any
stockholder, officer, director, employee, or consultant, or any other loan or
advance other than in the ordinary course of business; or
(ix) any new employment or consulting agreement, any increase in
compensation, bonus or other benefits payable or to become payable by Procept or
any Procept Subsidiary to any of its directors, officers or employees, other
than regularly scheduled increases consistent with past practice in the ordinary
course of business, or any new grant of severance or termination rights, or
increase in rights or benefits payable under existing severance or termination
policies or agreements, to any director, officer or employee of Procept or any
Procept Subsidiary.
Since December 31, 1998, Procept and the Procept Subsidiaries have conducted
their respective businesses only in the ordinary course consistent with past
practice.
4.10 COMPLIANCE WITH LAWS.
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4.10.1 Each of Procept and the Procept Subsidiaries is not in violation of
or in default under, in any material respect, any order, judgment, injunction,
award or decree, or any federal, state, local or foreign law, ordinance or
regulation or any other requirement of any governmental or regulatory body,
court or arbitrator, and is in compliance in all material respects with all of
the foregoing that are applicable to it, its business or its assets. Neither
Procept nor any of the Procept Subsidiaries has received notice of, and there
has not been any citation, fine or penalty imposed or asserted against any of
them for, any such violation or alleged violation that has not been favorably
and fully resolved.
4.10.2 Procept and the Procept Subsidiaries hold all Permits that are
material to the conduct of their business and the uses of their assets. The
PROCEPT DISCLOSURE SCHEDULE contains a true and complete list of all such
Permits as of the date hereof (the "Procept Permits"). The Procept Permits are
in full force and effect and the validity and effectiveness of the Procept
Permits will not be affected by the transactions contemplated hereby. No
violations are or have been recorded with any governmental or regulatory body in
respect of any Procept Permit, no proceeding is pending or, to the best
knowledge of Procept, threatened to revoke or limit any Procept Permit, and
Procept knows of no grounds for any such revocation or limitation. Procept and
the Procept Subsidiaries are in compliance with the terms of the Procept
Permits, except failures so to comply which, individually or in the aggregate,
are not having and could not be reasonably expected to have a Procept Material
Adverse Effect.
4.11 CONSENTS; NO BREACH. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by Procept and PAC are set forth in Section 4.11
of the PROCEPT DISCLOSURE SCHEDULE, other than those which the failure to obtain
would not affect the validity of this transaction or materially adversely affect
the business of Procept and the Procept Subsidiaries after the Effective Time.
Except as set forth in Section 4.11 of the PROCEPT DISCLOSURE SCHEDULE, the
execution, delivery and performance of this Agreement by Procept and PAC and the
consummation of the transactions contemplated hereby will not (i) violate any
provision of the Certificate of Incorporation or Bylaws of Procept or PAC;
(ii) violate, conflict with or result in the breach of any of the terms or
conditions of, result in a modification of, or otherwise give any other
contracting party the right to payment or terminate or accelerate or constitute
(or with notice or lapse of time or both constitute) a default under, any
instrument, contract or other agreement to which Procept or any Procept
Subsidiary is a party or to which Procept or any Procept Subsidiary or any of
their respective assets or properties is bound or subject; (iii) violate any
statute, law or regulation of any jurisdiction (which violation would affect the
validity of the transaction contemplated hereby or otherwise would materially
adversely affect the business of Procept or the Procept Subsidiaries after the
Effective Time) or any order, judgment, injunction, award or decree of any
court, arbitrator or governmental or regulatory body applicable to or binding
upon Procept or any of the Procept Subsidiaries or their respective securities,
properties, assets or business; (iv) violate any Procept Permit; (v) require any
filing with, notice to, or approval or consent of any foreign, federal, state,
local or other governmental or regulatory body or any other person or entity;
(vi) give rise to any obligation to make any payment; or (vii) result in the
creation of any Encumbrance on the assets or properties of Procept or any of the
Procept Subsidiaries, excluding from the foregoing clauses (ii), (iii), (iv) and
(v) any exceptions to the foregoing that, in the aggregate, would not have a
Procept Material Adverse Effect on the business of Procept or on the ability of
Procept and PAC to consummate the transactions contemplated hereby, and the
following: (a) the filing of the Merger Certificate with the Secretary of State
of Delaware, (b) filings with various state blue sky authorities, (c) the filing
with Nasdaq of an application for listing of the shares of Procept Common Stock
to be issued in the Merger and (d) the filing with the SEC and the declaration
of the effectiveness of the Registration Statement (including the Procept Proxy
Statement).
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4.12 ACTIONS AND PROCEEDINGS. Except as set forth on the PROCEPT
DISCLOSURE SCHEDULE, there are no outstanding orders, judgments, injunctions,
awards or decrees of any court, governmental or regulatory body or arbitration
tribunal against or involving Procept or the Procept Subsidiaries or any of
their securities, assets, or properties. There are no actions, suits or claims
or legal, judicial, administrative or arbitration proceedings or investigations
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending or, to the best knowledge of Procept, threatened
against or involving Procept or the Procept Subsidiaries or any of their
respective securities, assets or properties.
4.13 INFORMATION SUPPLIED. The Procept Proxy Statement, the Registration
Statement and any other documents to be filed by Procept with the SEC or any
other governmental or regulatory authority in connection with the Merger and the
other transactions contemplated hereby will (in the case of the Procept Proxy
Statement, the Registration Statement and any such other documents filed with
the SEC under the Securities Act or the Exchange Act) comply as to form in all
material respects with the requirements of the Exchange Act and the Securities
Act, respectively, and will not, on the date of its filing or, in the case of
the Registration Statement, at the time it becomes effective under the
Securities Act or, in the case of the Procept Proxy Statement, at the time the
Procept Proxy Statement is mailed to stockholders of Procept, at the time of the
Procept Stockholders Meeting, and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4.14 BROKERAGE. Except as set forth on the PROCEPT DISCLOSURE SCHEDULE, no
broker, finder, agent or similar intermediary has acted on behalf of Procept or
PAC in connection with this Agreement or the transactions contemplated hereby,
and there are no brokerage commissions, finders fees or similar fees or
commissions payable in connection therewith based on any agreement, arrangement
or understanding with, or any action taken by Procept.
4.15 TAX MATTERS. For the purposes of this Section 4.15 (including the
defined terms used herein) "Procept" includes each of the Procept Subsidiaries.
(a) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, Procept has
filed all material Tax Returns required to be filed by it under applicable law
prior to the date hereof. All such Tax Returns were true, complete and correct
in all material respects and filed on a timely basis. Procept (i) has paid all
material Taxes due, or claimed or asserted in writing by any taxing authority to
be due, for the periods covered by such Tax Returns or (ii) has duly and fully
provided reserves (in accordance with GAAP) with respect to all such Taxes.
(b) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, the Procept
Balance Sheet includes a reserve for Tax liability which is adequate to pay all
material Taxes of Procept for the taxable periods ending on the date of such
Procept Balance Sheet which were not yet due and payable.
(c) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, there are no Tax
liens upon the assets of Procept which reasonably could be expected to have a
Procept Material Adverse Effect, except liens for Taxes not yet due.
(d) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, (A) Procept has
not waived or extended the statute of limitations for the assessment of any
federal income Taxes applicable to any Tax Returns of Procept; (B) no federal
income Tax Returns have been examined by the appropriate taxing authorities for
any periods; and (C) no deficiency for any material Taxes has been asserted in
writing or assessed by any taxing authority against Procept that has not been
resolved and paid in full.
(e) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, no audits or
other administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of Procept.
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(f) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, Procept has not
received a written ruling of a taxing authority relating to Taxes or entered
into a written and legally binding closing agreement with any taxing authority
relating to Taxes.
(g) To the extent requested by HDC, Procept has made available to HDC
complete and accurate copies of all Tax Returns filed by or on behalf of Procept
for its last three taxable years.
(h) Except as set forth in the PROCEPT DISCLOSURE SCHEDULE, no agreements
relating to allocating or sharing of Taxes have been entered into by Procept.
4.16 ENVIRONMENTAL MATTERS.
(a) As of the date hereof, to the knowledge of Procept, no underground
storage tanks are present under any property that Procept or any of the Procept
Subsidiaries has at any time owned, operated or leased. To the knowledge of
Procept, as of the date hereof no material amount of any Hazardous Materials,
but excluding office and janitorial supplies, are present, as a result of the
actions of Procept or any of the Procept Subsidiaries in, on or under any
property, including the land and the improvements, ground water and surface
water, that Procept or any of the Procept Subsidiaries has at any time owned,
operated, occupied or leased.
(b) At no time has Procept or any of the Procept Subsidiaries transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law or order promulgated by
any governmental or regulatory authority in effect on or before the Effective
Time, which has had or is reasonably likely to have a Procept Material Adverse
Effect, nor has Procept or any of the Procept Subsidiaries disposed of,
transported, sold or manufactured any product containing a Hazardous Material
(collectively "Hazardous Material Activities") in violation of any law or order
to prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity, which has or is reasonably likely to have a Procept Material Adverse
Effect.
(c) Procept and the Procept Subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents ("Environmental Permits")
necessary for the conduct of their Hazardous Material Activities and other
businesses of Procept or any of the Procept Subsidiaries as such activities and
businesses are currently being conducted.
(d) No action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim is pending or, to the knowledge of Procept, as of the date
hereof threatened concerning any Environmental Permit or any Hazardous Material
Activity of Procept or any of the Procept Subsidiaries which reasonably could be
expected to have a Procept Material Adverse Effect. Procept is not aware of any
fact or circumstance which could involve Procept or any of the Procept
Subsidiaries in any environmental litigation or impose upon Procept or any of
the Procept Subsidiaries any environmental liability which in either case would
be reasonably likely to have a Procept Material Adverse Effect.
4.17 EMPLOYEE BENEFIT PLANS. Section 4.17 of the PROCEPT DISCLOSURE
SCHEDULE sets forth a correct and complete list of all pension, profit sharing,
retirement, deferred compensation, welfare, insurance, disability, bonus,
vacation pay, severance pay and similar plans, programs or arrangements,
including without limitation all employee benefit plans as defined in
Section 3(3) of ERISA with respect to which Procept is the "Plan Sponsor" within
the meaning of Section 3(16)(B) of ERISA, or in which Procept or any of the
Procept Subsidiaries participates (the "Procept Plans"). None of Procept or any
of the Procept Subsidiaries has ever maintained or contributed to any
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA or any defined
benefit pension plan or money purchase pension plan that is subject to Title IV
of ERISA, and none of Procept or any of the Procept Subsidiaries has incurred
any material liability under Section 4062, 4063 or 4201 of ERISA. Each Procept
Plan which is intended to be qualified under Section 401(a) or 501(c)(9) of the
Code has received a favorable determination letter from the Internal Revenue
Service ("IRS"). Each Procept Plan has been administered in all
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material respects in accordance with its terms and the provisions of any and all
applicable statutes, orders or governmental rules or regulations, including
without limitation ERISA and the Code. To the knowledge of Procept, nothing has
been done or omitted to be done with respect to any Procept Plan which is
intended to comply with Section 401(a) of the Code that would adversely affect
the qualified status of such Procept Plan or result in any material liability on
the part of Procept or any of the Procept Subsidiaries including, without
limitation, under Title I of ERISA or Section 4975 of the Code (other than an
operational violation that could be corrected through the IRS's Administrative
Policy Regarding Self-Correction). All material reports, returns, notices and
documents required to be filed with respect to all Procept Plans, including
without limitation annual reports on Form 5500, have been timely filed. Except
as set forth on the PROCEPT DISCLOSURE SCHEDULE, all contributions required by
law or the terms of any Procept Plan have been made. Except as set forth on the
PROCEPT DISCLOSURE SCHEDULE, all claims for welfare benefits incurred by
employees of Procept or any of the Procept Subsidiaries on or before the Closing
are or will be fully covered by third-party insurance policies or programs.
Except for continuation of health coverage to the extent required under
Section 4980B of the Code, there are no obligations under any Procept Plan
providing group health expense reimbursement benefits after termination of
employment. Complete copies of the following documents with respect to each
Procept Plan (as applicable) have been delivered to HDC: (i) each relevant
Procept Plan document and subsequent amendment thereto; (ii) each trust
agreement, group annuity contract, insurance policy or contract; (iii) each
Form 5500 series annual report with each required schedule and attachment for
each of the three (3) most recent plan years; (iv) the most recent IRS
determination letter; and (v) the most recent summary plan description and each
summary of material modification thereto. For purposes of this Section 4.17,
references to Procept include Procept and its ERISA Affiliates. An "ERISA
Affiliate" of Procept means any trade or business (whether or not incorporated)
that together with Procept would have been deemed a "single employer" within the
meaning of Section 4001(b) of ERISA or Section 414(m) of the Code at any time
within the five-year period ending on the Closing Date.
4.18 TITLE TO ASSETS; LIENS. Each of Procept and the Procept Subsidiaries
has good and marketable title to or valid leasehold interests in or otherwise
has the right to use all of its material assets and properties, including,
without limitation, all of the assets and properties reflected on the Procept
Interim Balance Sheet, free and clear of any Encumbrance, except for (i) assets
and properties disposed of in the ordinary course of business,
(ii) Encumbrances securing the claims of materialmen, carriers, landlords and
like persons, all of which are not yet due and payable, (iii) liens for Taxes
not yet due and payable or for Taxes being contested in good faith by
appropriate proceedings, or (iv) Encumbrances reflected on the Procept Interim
Balance Sheet.
4.19 INTELLECTUAL PROPERTY.
(a) To the knowledge of Procept, Procept and the Procept Subsidiaries, as
appropriate, own, or are licensed to use, or otherwise have the right to use all
Proprietary Rights to the extent material to the conduct of their business as
now conducted. Procept has previously delivered to HDC a certified list of all
such patents and registered copyrights and trademarks, and all applications
therefor (the "Procept Registered Rights"). All of the Procept Registered Rights
owned by Procept and the Procept Subsidiaries, and to the knowledge of Procept,
all Procept Registered Rights licensed to Procept and the Procept Subsidiaries
have been registered in, filed in or issued by the United States Patent and
Trademark Office, the United States Register of Copyrights, or the corresponding
offices of other jurisdictions as identified in Section 4.19 of the PROCEPT
DISCLOSURE SCHEDULE, and have been properly maintained and renewed in accordance
with all applicable provisions of law and administrative regulations in the
United States and in each such other jurisdiction.
(b) To the knowledge of Procept, the business of Procept and the Procept
Subsidiaries as currently conducted does not infringe upon the proprietary
rights of others, nor has Procept or any of the Procept Subsidiaries received
any notice or claim from any third party of such infringement by Procept
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or any of the Procept Subsidiaries. Procept is not aware of any material
unlicensed infringement by any third party on, or any issued competing claim of
right to use or own any of, the Proprietary Rights of Procept or any of the
Procept Subsidiaries. To the knowledge of Procept, none of the activities of the
employees of Procept or any of the Procept Subsidiaries on behalf of Procept or
any of the Procept Subsidiaries violates any agreements or arrangements that any
such employees have with former employers.
4.20 VOTE REQUIRED. The affirmative vote of the holders of record of at
least a majority of the outstanding shares of Procept Common Stock with respect
to the approval of the Merger and the issuance of Procept Common Stock in
connection with the Merger is the only vote of the holders of any class or
series of capital stock of Procept required to approve the Merger and the other
transactions contemplated hereby.
4.21 FULL DISCLOSURE. All documents and other papers delivered by or on
behalf of Procept and the Procept Subsidiaries in connection with this Agreement
and the transactions contemplated hereby are true, complete and authentic. No
representation, warranty or statement of Procept or PAC made in this Agreement
or in any Exhibit hereto or the PROCEPT DISCLOSURE SCHEDULE or in any document,
statement or certificate furnished by Procept or PAC pursuant to this Agreement
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements made, in
light of the circumstance under which they were made, not false or misleading.
SECTION 5 -- COVENANTS AND AGREEMENTS
The parties covenant and agree as follows:
5.1 CONDUCT OF HDC BUSINESS. Except with the prior written consent of
Procept and except as otherwise contemplated herein, during the period from the
date hereof to the Closing Date, HDC shall observe the following covenants:
(a) AFFIRMATIVE COVENANTS PENDING CLOSING. HDC will:
(i) PRESERVATION OF PERSONNEL. Use all reasonable efforts to preserve
intact its business organization and keep available the services of present
employees, in each case in accordance with past practice, it being understood
that termination of employees with poor performance ratings shall not constitute
a violation of this covenant;
(ii) INSURANCE. Use all reasonable efforts to keep in effect casualty,
public liability, worker's compensation and other insurance policies in coverage
amounts not less than those in effect at the date of this Agreement;
(iii) PRESERVATION OF THE BUSINESS; MAINTENANCE OF PROPERTIES,
CONTRACTS. Use all reasonable efforts to preserve its business, advertise,
promote and market its services, keep its properties intact, preserve its
goodwill, and maintain all physical properties in good operating condition;
(iv) INTELLECTUAL PROPERTY RIGHTS. Use all reasonable efforts to
preserve and protect HDC's Proprietary Rights;
(v) ORDINARY COURSE OF BUSINESS. Operate its business diligently and
solely in the ordinary course; and
(vi) CANCELLATION OF CONTINGENT RIGHTS TO RECEIVE HDC STOCK. Cause HDC
Stock to be issued to each employee, consultant and advisor who currently holds
contingent rights to receive HDC Stock pursuant to the terms of their employment
or engagement arrangements with HDC ("HDC Rightsholders") in exchange for
cancellation of such contingent rights, and withhold or cause to be
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withheld from each HDC Rightsholder funds sufficient to satisfy all applicable
Tax withholding obligations related thereto.
(b) NEGATIVE COVENANTS PENDING CLOSING. HDC will not:
(i) DISPOSITION OF ASSETS. Sell or transfer, or mortgage, pledge or
create or permit to be created any encumbrance on, any of its assets, other than
sales or transfers in the ordinary course of business and liens existing under
arrangements disclosed herein or permitted under Section 2.17;
(ii) LIABILITIES. Without the consent of Procept, (A) incur any
obligation or liability other than in the ordinary course of its business
(provided that HDC may incur expenses in connection with this transaction of up
to $185,000), (B) incur any indebtedness for borrowed money or enter into any
contracts or commitments involving payments by HDC of $10,000 or more, other
than purchase orders or commitments for inventory, materials and supplies in the
ordinary course of business and the additional financing of HDC prior to the
Effective Time contemplated by Section 5.20 hereof or (C) except as contemplated
by Section 5.20 hereof, enter into any transaction with an officer, director or
stockholder holding 5% or more of the equity of HDC;
(iii) COMPENSATION. Without the consent of Procept, (A) change the
compensation or fringe benefits of any officer, director or employee of HDC, or
(B) enter into or modify the Plan or any employment, severance or other
agreement with any officer, director or employee of HDC other than changes in
compensation based on regularly scheduled increases consistent with past
practice in the ordinary course of business or as required by law to maintain
the tax-qualified status of the Plan or as otherwise required by law;
(iv) CAPITAL STOCK. Except as provided in Section 5.1(a)(vi) above and
Section 5.20 below, (A) Grant any option, warrant or other right to purchase, or
to convert any obligation into, shares of its capital stock, (B) declare or pay
any dividend or other distribution with respect to any shares of its capital
stock or (C) issue any shares of its capital stock;
(v) CERTIFICATE OF INCORPORATION AND BYLAWS; TAX ELECTIONS. Except as
contemplated by this Agreement, amend the Certificate of Incorporation, as
amended, or Bylaws of HDC or make any material Tax election;
(vi) ACQUISITIONS. Make any material acquisition of property other than
in the ordinary course of HDC's business; or
(vii) MATERIAL AGREEMENTS. Without the consent of Procept, and except as
contemplated by Section 5.20 hereof, enter into any material agreement with any
other person or entity (other than in the ordinary course of its business
involving payments by HDC of less than $10,000) or modify or cancel any such
agreement.
5.2 NASDAQ LISTING. Procept shall take such actions as may be necessary to
cause the shares of Procept Common Stock to be issued hereunder to be admitted
for trading or approved for quotation on The Nasdaq Small-Cap Market prior to
the Effective Time.
5.3 CEO SEARCH. Procept shall continue its search for an individual to
engage as the Chief Executive Officer of Procept following the Merger. In the
event that a new Chief Executive Officer is not engaged prior to the Merger,
John F. Dee shall continue to serve in that capacity on an interim basis.
5.4 AGREEMENT NOT TO ENTERTAIN OTHER OFFERS; TERMINATION OF ARTICLE VI
RIGHTS.
5.4.1 In consideration of the efforts and expenses undertaken by both
parties in pursuing the Merger and other valuable consideration, the receipt and
adequacy of which are acknowledged, Procept
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and HDC agree that until the Closing Date or until this Agreement is otherwise
terminated pursuant to Section 10, neither Procept nor HDC nor any of their
authorized representatives shall:
(a) (i) directly or indirectly, solicit any proposal relating to the
acquisition by another party of all or any portion of the capital stock of such
company or substantially all of the assets of such company (whether by merger or
otherwise);
(ii) directly or indirectly, engage in any discussions or negotiations
with any other party regarding any such acquisition (whether by merger or
otherwise), or otherwise encourage or facilitate any efforts by any other party
to engage in such an acquisition; or
(iii) except as otherwise contemplated by this Agreement, sell, transfer
or dispose of all or any portion of the capital stock of such company or grant,
issue or sell any option or warrant, right to subscribe to or purchase any such
capital stock or any security convertible into or exchangeable for any such
share or enter into any agreement or commitment to effect any such issuance or
sale or sell, transfer or dispose of substantially all of the assets of such
company (whether by merger or otherwise);
PROVIDED, HOWEVER, that (x) Procept shall have certain rights with respect to
issuance of additional shares of Procept Common Stock to certain of its current
shareholders and/or debtholders pursuant to the terms of the Article VI Rights
Termination and Exchange Agreement dated as of November , 1999 (the
"Article VI Agreement") attached as Exhibit A hereto, (y) nothing in the
foregoing shall restrict either company from engaging in discussions with
potential collaborative partners, subject to such company disclosing to the
other the identity of the party involved in such discussions and the general
nature thereof; and (z) notwithstanding the foregoing, each such company and its
authorized representatives may participate in discussions or negotiations with,
provide information to, and consummate a transaction with, a third party which
would otherwise be prohibited by this section, if (A) such discussions or
negotiations were commenced prior to the date hereof or if commenced after the
date hereof, were not solicited by or on behalf of such company and (B) such
discussions or negotiations were being continued or initiated after consultation
with and based upon written advice of independent legal counsel which determined
in good faith that such action is necessary for the Board of Directors of the
involved company to comply with its fiduciary duties to its stockholders under
applicable law.
(b) In the event that either HDC or Procept breaches its obligations under
Section 5.4(a) or engages in discussions or negotiations with, provides
information to, or consummates a transaction with a third party, which activity
would have been a breach of Section 5.4 but for clause (z) of such section,
then, unless the Merger subsequently occurs prior to January 31, 2000 (or
March 31, 2000 if the Registration Statement is reviewed by the SEC), on the
earlier of (i) the consummation of any such transaction with a third party or
(ii) January 31, 2000 (or March 31, 2000 if the Registration Statement is
reviewed by the SEC), such company shall pay the other a termination fee in the
amount of $250,000, in immediately available funds to an account designated by
the recipient party. The parties acknowledge and agree that the provisions for
payment of such a termination fee are included herein in order to induce each
party to enter into this Agreement and to reimburse the non-terminating party
for incurring the costs and expenses related to the contemplated Merger. No more
than one termination fee shall be paid by any party hereunder. The parties
hereto agree that any termination fee that is paid or due hereunder shall be
deemed to be liquidated damages designed to reasonably compensate the recipient
party for the loss incurred by the breaching party's actions.
5.5 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to the Effective
Time, each of Procept and HDC shall be entitled, through its employees and
representatives, to have such access to the assets, properties, business, books,
records and operations of the other as Procept or HDC, as the case may be, shall
reasonably request in connection with such party's investigation of the other
with respect to the transactions contemplated hereby. Any such investigation and
examination shall be conducted at reasonable times and the party being
investigated shall cooperate fully therein. No investigation by a
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party shall diminish or obviate any of the representations, warranties,
covenants or agreements of any other party contained in this Agreement, provided
that any party having actual knowledge prior to the date hereof of an inaccuracy
in a representation or warranty of another party must have given notice thereof
to such other party prior to the date hereof to be entitled to make any recovery
hereunder for breach of such representation or warranty. For the purposes of
this Agreement, actual knowledge shall mean the conscious knowledge of the
executive officers of a party who have given substantive attention to this
transaction. In order that each of Procept and HDC may have full opportunity to
make such investigation, the party being investigated shall furnish the
representatives of the other during such period with all such information and
copies of such documents concerning the affairs of the party being investigated
as such representatives may reasonably request and cause its officers,
employees, consultants, agents, accountants and attorneys to cooperate fully
with such representatives in connection with such investigation.
5.6 EXPENSES. Subject to Section 5.4, if the Merger is not consummated,
each of HDC and Procept shall bear its respective expenses incurred in
connection with this Agreement and the transactions contemplated hereby. HDC
represents and warrants that its good faith estimate of the fees and expenses of
its legal counsel, financial advisors and accountants to be incurred in
connection with this transaction are as set forth on the HDC DISCLOSURE
SCHEDULE. If the Merger is consummated, the Surviving Corporation, as the
successor to HDC, shall be liable for all unpaid expenses of HDC.
5.7 AUTHORIZATION FROM OTHERS. Prior to the Closing Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits required to permit the consummation of the transactions contemplated by
this Agreement, including without limitation all consents required from third
parties who have contractual relationships with HDC.
5.8 CONSUMMATION OF AGREEMENT. Each party shall use all reasonable efforts
to perform and fulfill all conditions and obligations to be performed and
fulfilled by it under this Agreement and to ensure that to the extent within its
control or capable of influence by it, no breach of any of its representations,
warranties and agreements hereunder occurs or exists on or prior to the
Effective Time, all to the end that the transactions contemplated by this
Agreement shall be fully carried out in a timely fashion.
5.9 FURTHER ASSURANCES. Each of the parties shall execute such documents,
further instruments of transfer and assignment and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby.
5.10 SECURITIES LAW MATTERS. As soon as practicable following the date
hereof, Procept shall prepare and file with the SEC the Registration Statement
covering the shares of Procept Common Stock comprising the Merger Consideration
in which the Procept Proxy Statement/Prospectus will be included as part of the
prospectus. Procept will use best efforts to have the Registration Statement
declared and maintained effective, as soon as practicable following such filing.
HDC will cooperate with Procept in such preparation and, after the Registration
Statement is effective, Procept and HDC (by providing a list of HDC stockholder
names and addresses) shall facilitate the distribution of the Procept Proxy
Statement/Prospectus contained in the Registration Statement to the stockholders
of Procept and the stockholders of HDC. Certificates representing shares issued
to stockholders of HDC who are "affiliates" as defined under the Securities Act
will bear appropriate legends as required under Rule 145 under the Securities
Act. Prior to the Effective Time, Procept shall use best efforts to qualify the
shares of Procept Common Stock to be issued in the Merger under the securities
or "blue sky" laws of every state necessary to offer and issue the Merger
Consideration to the stockholders of HDC at the Closing, except any such state
with respect to which counsel for Procept has determined that such qualification
is not required under the securities or "blue sky" laws of such state, and
except that in no event shall Procept be obligated to qualify as a foreign
corporation or to execute a general consent to service of process in any state
in which it has not previously so qualified or has not previously so consented.
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5.11 HDC STOCKHOLDER APPROVAL. HDC, acting through its Board of Directors,
shall, in accordance with applicable law and its certificate of incorporation
and Bylaws:
(i) as soon as practicable after the declaration of the effectiveness of
the Registration Statement, use best efforts to obtain the approval (the
"Approval") of the HDC stockholders required under the DGCL pursuant to action
by written consent for the consummation of the transactions contemplated hereby;
and
(ii) as soon as practicable after obtaining the Approval, cause notice
of the Approval to be sent to all HDC stockholders.
5.12 PROCEPT STOCKHOLDER MEETING. Procept, acting through its Board of
Directors, shall, in accordance with applicable law and its certificate of
incorporation and Bylaws:
(i) as soon as practicable after the declaration of the effectiveness of
the Registration Statement, duly call, give notice of, convene and hold the
Procept Stockholders Meeting and at any adjournment thereof, submit to the
stockholders of Procept the Procept Merger Proposal to obtain such approval
required pursuant to the Nasdaq Market Rules;
(ii) subject to the duties of the Board of Directors under applicable
law as advised in writing by independent legal counsel, include in the Procept
Proxy Statement to be delivered to the stockholders of Procept soliciting their
approval of this Agreement and the transactions contemplated hereby the
recommendation of its Board of Directors that the stockholders vote in favor of
such transactions; and
(iii) use best efforts (A) to obtain and furnish the information
required to be included by it in the Procept Proxy Statement, (B) to cause the
Procept Proxy Statement to be mailed to its stockholders at the earliest
practicable time after the effectiveness of the Registration Statement, and
(C) to obtain the necessary approvals by its stockholders of this Agreement, the
Merger and the transactions contemplated hereby.
5.13 PUBLIC ANNOUNCEMENTS AND CONFIDENTIALITY. Any press release or other
information to the press or any third party with respect to this Agreement or
the transactions contemplated hereby shall require the prior approval of Procept
and HDC, which approval shall not be unreasonably withheld, provided that a
party shall not be prevented from making such disclosure as it shall be advised
by counsel is required by law. HDC shall also keep confidential and shall not
use in any manner any information or documents obtained from Procept or its
representatives concerning Procept's assets, properties, business and
operations, unless readily ascertainable from public information, already known
or subsequently developed by HDC independently, received from a third party not
under an obligation to keep such information confidential or otherwise required
by law. If this Agreement terminates prior to the Closing, Procept shall also
keep confidential and shall not use in any manner any information or documents
obtained from HDC or its representatives unless readily ascertainable from
public information, already known or subsequently developed by Procept
independently, received from a third party not under an obligation to keep such
information confidential or otherwise required by law. If this Agreement
terminates prior to the Closing all copies of any documents obtained from
another party or its representatives will be returned, except that one copy
thereof may be retained by counsel to the party returning such documents in
order to evidence compliance hereunder. The obligations set forth in the
previous three sentences of this Section 5.13 shall survive termination of this
Agreement.
5.14 LOCK-UP AGREEMENTS. Except as otherwise provided pursuant to
Section 5.20 below, HDC shall use all reasonable efforts prior to the Closing
Date, to cause all directors, executive officers of HDC, holders of 5% or more
of the outstanding voting stock of HDC and certain employees, consultants and
advisors of HDC, each of whom is named on Schedule 5.14 hereto (collectively,
"HDC Affiliates") to execute an agreement in a form reasonably satisfactory to
Procept and its counsel (the "HDC Lock-Up Agreements"), which shall restrict the
sale of shares of Procept Common Stock issued
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to the HDC Affiliates in the Merger for a period of one year from the Closing
Date (the "Holding Period") (provided that individuals who are not officers,
directors or holders of 5% or more of the outstanding voting stock of HDC
("Designated HDC Affiliates") shall have the immediate right to sell up to 5% of
the shares of the Procept Common Stock issued to them in the Merger), after
which (i) 15% of the shares held by Designated HDC Affiliates and (ii) 20% of
such shares held by all other HDC Affiliates shall be available for sale in the
first calendar quarter subsequent to the Holding Period, and an additional 20%
of such shares shall be available for sale each successive calendar quarter
thereafter. Procept shall use all reasonable efforts prior to the Closing Date,
to cause all directors and executive officers of Procept and holders of 5% or
more of the outstanding voting stock of Procept, each of whom is named on
SCHEDULE 5.14 hereto ("Procept Affiliates") to execute an agreement in a form
reasonably satisfactory to HDC and its counsel (the "Procept Lock-Up
Agreements"), which shall restrict the sale of shares of Procept Common Stock
held by such Procept Affiliate during the Holding Period, after which 20% of
such shares shall be available for sale in the calendar quarter subsequent to
the Holding Period, and an additional 20% of such shares shall be available for
sale each successive calendar quarter thereafter.
5.15 PROCEPT SEC FILINGS. Until the Closing Date, Procept shall furnish
HDC with a copy of each periodic or current report filed by Procept under the
Exchange Act promptly after filing the same. All filings made by Procept after
the date hereof pursuant to the Exchange Act will be made in a timely fashion,
will comply as to form in all material respects with the applicable provisions
of the Exchange Act and the rules and regulations thereunder and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading.
5.16 HDC INTERIM FINANCIAL STATEMENTS. Until the Closing Date, HDC shall
furnish Procept with a copy of its unaudited financial statements covering each
calendar quarter ending after June 30, 1999, and prior to the Closing Date,
promptly after the completion thereof. Such interim unaudited financial
statements shall be prepared in a manner consistent with those financial
statements referenced in Section 2.6 above.
5.17 FAIRNESS OPINIONS. Each of Procept and HDC shall use all reasonable
efforts to obtain a fairness opinion from the independent financial advisers
named in Sections 6.5 and 6.6 addressed to such company's Board of Directors
stating that the Merger is fair from a financial point of view to such company
and its stockholders.
5.18 PROCEPT BOARD MEMBERSHIP. Prior to or on the Closing Date, three
persons shall resign as members of the Board of Directors of Procept, and
(ii) the remaining members of the Board of Directors shall vote to (a) enlarge
the number of directors on the Board to nine and (b) effective immediately
following the Effective Time, fill the vacancies on the Procept Board of
Directors with the three individuals to be mutually determined by Procept and
HDC.
5.19 TERMINATION OF CERTAIN CONTRACTUAL RIGHTS. As contemplated by the
Article VI Agreement attached hereto as EXHIBIT C, Procept shall use reasonable
commercial efforts to terminate the rights of certain stockholders and other
persons (the "Article VI Rights") to receive additional shares of Procept Common
Stock pursuant to contractual provisions contained in Subscription Agreements
and in the Agreement and Plan of Merger with Pacific Pharmaceuticals, Inc. dated
as of December 10, 1998.
5.20 FUNDING OF HDC. Richard Kurtz ("Kurtz") shall lend to HDC $275,000
pursuant to an additional financing (the "Financing") of HDC in the form of a
demand note which shall be automatically convertible into 262,499 shares of HDC
Stock immediately prior to the effectiveness of the Merger. Shares of Procept
Common Stock issued as Merger Consideration in respect of HDC Stock issued to
Kurtz in the Financing shall be specifically excluded from the HDC Lock-Up
Agreements.
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5.21 TAX MATTERS. The following provisions shall govern the allocation
between the Surviving Corporation and the Stockholders of responsibility for
certain tax matters following the Effective Time:
(a) The Surviving Corporation shall prepare or cause to be prepared and
file or cause to be filed all Tax Returns for HDC for all periods ending on or
prior to the Effective Time which are due after the Effective Time. Such Tax
Returns shall be provided to the Stockholders for the Stockholders' review and
comment not later than 30 days prior to the due date for filing such Tax Returns
(including extensions), and the Stockholders shall be entitled to suggest to the
Surviving Corporation any reasonable changes to such Tax Returns. The
Stockholders and the Surviving Corporation agree to consult and to resolve in
good faith any issue arising as a result of the review of such Tax Returns and
to mutually consent to the filing of such Tax Returns as promptly as possible.
In the event the parties are unable to resolve any dispute within ten days
following the delivery to the Stockholders of any such Tax Return, the
Stockholders and the Surviving Corporation shall jointly request the Surviving
Corporation's independent accounting firm, or if such firm is not acceptable to
either the Surviving Corporation or the Stockholders, another independent
accounting firm appointed by such firm (the "Independent Accounting Firm") to
resolve any issue at least five days before the due date of such Tax Return, in
order that such Tax Return may be timely filed. The party whose position is
farthest from the resolution reached by the Independent Accounting Firm shall
pay the Independent Accounting Firm's fees and expenses, and the determination
of the Independent Accounting Firm shall be binding on all parties. The
Stockholders shall reimburse the Surviving Corporation for Taxes of HDC with
respect to such periods within fifteen (15) days after payment by the Surviving
Corporation of such Taxes.
(b) The Surviving Corporation shall prepare or cause to be prepared and
file or cause to be filed all Tax Returns of HDC and the Surviving Corporation
for Tax periods which begin before the Effective Time and end after the
Effective Time. The Stockholders shall pay to the Surviving Corporation within
fifteen (15) days after the date on which Taxes are paid with respect to such
periods an amount equal to the portion of such Taxes which relates to the
portion of such taxable period ending on the Effective Time. For purposes of
this section, in the case of any Taxes that are imposed on a periodic basis and
are payable for a taxable period that includes (but does not end on) the
Effective Time, the portion of such Tax which relates to the portion of such
taxable period ending on the Effective Time shall (x) in the case of Taxes other
than Taxes based upon or related to income or receipts, be deemed to be the
amount of such Tax for the entire taxable period multiplied by a fraction the
numerator of which is the number of days in the taxable period from the first
day of such taxable period through the Effective Time and the denominator of
which is the number of days in the entire taxable period, and (y) in the case of
any Tax based upon or related to income or receipts, be deemed equal to the
amount which would be payable if the relevant taxable period ended on the
Effective Time (that is, through a closing of the books of the corporation).
The Surviving Corporation shall deliver to the Stockholders at least
30 days prior to the due date for filing any such Tax Return to which this
Section 5.21(b) relates (including extensions) a statement setting forth the
amount of Tax allocated to the Stockholders pursuant to this section (the "Tax
Statement") for such Tax Returns and copies of such Tax Returns.. The
Stockholders have the right to review such Tax Returns and the Tax Statement
prior to the filing of such Tax Returns and to suggest to the Surviving
Corporation any reasonable changes to such Tax Returns. If the Stockholders
agree with the Tax Statement the Stockholders shall promptly pay the amount
shown thereon to the Surviving Corporation in accordance with the above
provisions of this Section 5.21(b). If the Stockholders disagree with the Tax
Statement, the Stockholders and the Surviving Corporation agree to consult and
to resolve in good faith any issue arising as a result of the review of such Tax
Returns and the Tax Statement and to mutually consent to the filing of such Tax
Returns as promptly as possible. In the event the parties are unable to resolve
any dispute within ten days following the delivery to the Stockholders of such
Tax Returns and the Tax Statement, the Stockholders and the Surviving
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Corporation shall jointly request the Independent Accounting Firm to resolve any
issue in dispute as promptly as possible. If the Independent Accounting Firm is
unable to make a determination with respect to any disputed issue within five
business days prior to the due date (including extensions) for the filing of the
Tax Return in question, then the Surviving Corporation may file such Tax Return
on the due date (including extensions) therefor without such determination
having been made and without the Stockholders' consent. Notwithstanding the
filing of such Tax Return, the Independent Accounting Firm shall make a
determination with respect to any disputed issue, and the amount of Taxes that
are allocated to the Stockholders pursuant to this Section 5.21(b) shall be as
determined by the Independent Accounting Firm. The fees and expenses of the
Independent Accounting Firm shall be paid by the party whose position is
farthest from the determination reached by the Independent Accounting Firm.
Nothing in this section shall excuse the Stockholders from their responsibility
for their share, as determined in accordance with this section, of any such
Taxes if the amount of Taxes as ultimately determined (on audit or otherwise)
for the periods covered by such Tax Returns exceeds the amount determined under
this Section.
(c) Each of the Surviving Corporation and the Stockholders shall
cooperate fully, as and to the extent reasonably requested by any other party,
in connection with the filing of Tax Returns pursuant to this Section and any
audit, litigation, or other proceeding with respect to Taxes of HDC. Such
cooperation shall include the retention (to the extent applicable) and (upon the
other party's request) the provision of records and information which are
reasonably relevant to the preparation of any such Tax Return or to any such
audit, litigation or other proceeding. The Stockholders agree (a) to retain all
books and records, if any, in their possession with respect to Tax matters
pertinent to HDC relating to any taxable period beginning before the Effective
Time until the expiration of the statute of limitations (and, to the extent
notified by the Surviving Corporation, any extension thereof) of the applicable
taxable periods, and to abide by all record retention agreements entered into
with any taxing authority, and (b) to give the Surviving Corporation reasonable
written notice prior to transferring, destroying or discarding any such books
and records and, if the Surviving Corporation so requests, the Stockholders
shall allow the Surviving Corporation to take possession of such books and
records.
(d) All transfer, documentary, sales, use, stamp, registration (but not
including the costs of registration of the Procept Common Stock issued in the
Merger pursuant to the Registration Statement or in connection with quotation of
such shares on the Nasdaq Small-Cap Market) and other such Taxes and fees
(including any penalties and interest) incurred by HDC or the Stockholders in
connection with the consummation of the transactions contemplated by this
Agreement shall be paid by the Stockholders when due, and the Stockholders will,
at their own expense, file all necessary Tax Returns and other documentation
with respect to all such transfer, documentary, sales, use and other Taxes and
fees, and, if, required by applicable law, the Surviving Corporation will, and
will cause its affiliates to, join in the execution of any such Tax Returns and
other documentation.
5.22 DISCLAIMER REGARDING TAX STATUS. HDC and each of the Stockholders
hereby explicitly acknowledge and agree that neither Procept nor Palmer & Dodge
LLP, counsel to Procept, are making or have made any representation or warranty
whatsoever to HDC or any of the Stockholders regarding the tax impact of the
Merger on HDC or the Stockholders or the status of the Merger as a tax free
reorganization under the Code. HDC and the Stockholders are relying on their own
independent legal advice for such purposes.
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SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY TO CONSUMMATE
THE MERGER
The respective obligations of each party to consummate the Merger shall be
subject to the satisfaction or waiver, at or before the Effective Time, of each
of the following conditions:
6.1 APPROVALS. All required approvals of the stockholders of HDC and
Procept and all consents and approvals referred to in Sections 2.11 and 4.11 of
this Agreement, other than those which, the failure to obtain would not affect
the validity of this transaction or materially adversely affect the business of
the Surviving Corporation or Procept and the Procept Subsidiaries after the
Effective Time shall have been obtained.
6.2 ABSENCE OF ORDER. No restraining order or injunction of any court
which prevents consummation of the Merger shall be in effect.
6.3 NASDAQ STOCK EXCHANGE LISTING. The shares of Procept Common Stock to
be issued in the Merger shall have been approved for quotation on the Nasdaq
Small-Cap Market.
6.4 EFFECTIVENESS OF REGISTRATION STATEMENT; STATE SECURITIES LAWS The
Registration Statement shall have been declared effective by the SEC and there
shall not be any stop order in effect with respect to the Registration
Statement. Procept shall have received all state securities or "blue sky"
permits and other authorizations necessary to issue the Procept Common Stock
pursuant to this Agreement.
6.5 PROCEPT FAIRNESS OPINION. The Board of Directors of Procept shall have
received the opinion of Hempstead & Co. Incorporated to the effect that the
Merger is fair from a financial point of view to Procept and its stockholders
and such opinion shall not have been withdrawn as of the Closing Date.
6.6 HDC FAIRNESS OPINION. The Board of Directors of HDC shall have
received the opinion of Capitalink L.C. to the effect that the Merger is fair
from a financial point of view to HDC and its stockholders and such opinion
shall not have been withdrawn as of the Closing Date.
6.7 PROCEPT CERTIFICATE OF AMENDMENT. Immediately prior to the effective
date of the Registration Statement, the Board of Directors of Procept shall have
adopted, and the stockholders of Procept shall have subsequently approved, an
amendment to Procept's Certificate of Incorporation (the "Amendment") pursuant
to Section 242 of the DGCL whereby Procept shall increase its authorized Common
Stock to a number of shares in an amount no less than the sum of all issued and
outstanding shares, plus all shares issuable pursuant to outstanding options,
warrants and other shares issuable pursuant to any of the agreements referenced
herein or on the PROCEPT DISCLOSURE SCHEDULE, and the Amendment shall be duly
filed with the Secretary of State of the State of Delaware pursuant to
Section 103 of the DGCL simultaneously with the Merger Certificate.
6.8 CASH POSITIONS. Immediately prior to the Effective Time, Procept shall
have on hand a minimum of $1,000,000 in net working capital. Immediately prior
to the Effective Time, HDC shall have positive net working capital.
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF PROCEPT AND PAC TO
CONSUMMATE THE MERGER
The obligation of Procept and PAC to consummate the Merger is subject to the
satisfaction or waiver by Procept and PAC, at or before the Effective Time, of
the following conditions:
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of HDC contained in this Agreement shall be true and correct in all
material respects on and as of the Effective Time with the same force and effect
as though made on and as of the Effective Time (with such exceptions as may be
permitted under or contemplated by this Agreement and the HDC DISCLOSURE
SCHEDULE). HDC shall have performed and complied in all material respects with
all covenants and
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agreements required by this Agreement to be performed or complied with by it on
or prior to the Effective Time. HDC shall have delivered to Procept a
certificate, dated the Closing Date, to the foregoing effect.
7.2 CERTIFICATE OF SECRETARY OF HDC. HDC shall have delivered to Procept a
certificate of the Secretary of HDC dated as of the Closing Date, certifying as
to (i) the Certificate of Incorporation, as amended, and the Bylaws of HDC,
(ii) the resolutions of the Board of Directors of HDC authorizing and approving
the execution, delivery and performance by HDC of this Agreement and the
transactions contemplated hereby and (iii) the resolutions of the stockholders
of HDC authorizing and approving this Agreement and the transactions
contemplated hereby.
7.3 HDC LOCK-UP AGREEMENTS. Procept shall have received the HDC Lock-Up
Agreements.
7.4 SEC REPORTING. PricewaterhouseCoopers LLP shall have confirmed, to
Procept's satisfaction, that HDC's historical financial records are adequate to
permit Procept to fulfill its SEC financial reporting obligations in connection
with Procept's future registered financings without unreasonable effort or
expense.
7.5 RECISION OFFERS. HDC shall furnish Procept with reasonably
satisfactory evidence of completion of recision offers wherever required under
applicable state securities laws in connection with its 1999 private placement
of HDC Common Stock pursuant to Rule 504 under Regulation D of the Securities
Act in the jurisdictions of Kentucky, New Hampshire, New Jersey and Virginia.
HDC shall have made all required filings and paid in full all applicable
penalties and fines, if any, resulting from any and all such state securities
law violations.
7.6 DEBT CONVERSION. Procept shall have concluded an agreement with each
of Dr. Lindsay Rosenwald, Aries Trust and Aries Domestic Fund, L.P.
(collectively, the "Debtholders") whereby each of the Debtholders shall have
agreed to cancel certain indebtedness originally owed by Binary
Therapeutics, Inc. in exchange for (i) Procept Common Stock and (ii) certain
reduced cash payments.
7.7 CANCELLATION OF CONTINGENT RIGHTS. All of the contingent rights to
receive HDC Stock referred to in Section 5.1(a)(vi) hereto shall have been
cancelled in exchange for shares of fully paid and nonassessable HDC Stock,
which shares are reflected in Section 2.2.1 of the HDC Disclosure Schedule.
7.8 OPINION OF COUNSEL TO HDC. Procept shall have received an opinion of
Todtman, Nachamie, Spizz & Johns, P.C., counsel to HDC, dated the Closing Date
and in form and substance reasonably acceptable to Procept.
7.9 MERGER CERTIFICATE. HDC shall have executed the Merger Certificate
referred to in Section 1.2.
7.10 NO ENCUMBRANCES. The shares of HDC Stock shall be free and clear of
any Encumbrances.
7.11 DISSENTING SHARES. The Dissenting Shares of HDC Stock shall not
exceed five percent (5%) of the shares of HDC Stock issued and outstanding on
the Closing Date.
7.12 BANK ACCOUNTS. HDC shall have delivered to Procept documentation
necessary to change the authorized signatories for HDC's bank and brokerage
accounts as specified by Procept.
7.13 CERTIFICATES. HDC shall have furnished Procept with such certificates
of public officials as may be reasonably requested by Procept.
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SECTION 8 -- CONDITIONS PRECEDENT TO THE OBLIGATION
OF HDC TO CONSUMMATE THE MERGER
The obligation of HDC to consummate the Merger is subject to the
satisfaction or waiver by it, at or before the Effective Time, of the following
conditions:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Procept and PAC contained in this Agreement shall be true and
correct in all material respects on and as of the Effective Time with the same
force and effect as though made on and as of the Effective Time (with such
exceptions as may be permitted under or contemplated by this Agreement). Procept
and PAC shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by them on or prior to the Effective Time. Each of Procept and PAC shall
have delivered to HDC a certificate, dated the Effective Time, to the foregoing
effect.
8.2 CERTIFICATE OF SECRETARY OF PROCEPT. Procept shall have delivered to
HDC a certificate of the Secretary of Procept dated as of the Closing Date,
certifying as to (i) the Certificate of Incorporation and the Bylaws of Procept,
(ii) the resolutions of the Board of Directors of Procept authorizing and
approving the execution, delivery and performance by Procept of this Agreement
and the transactions contemplated hereby and (iii) the resolutions of the
stockholders of Procept authorizing and approving this Agreement and the
transactions contemplated hereby.
8.3 CERTIFICATE OF SECRETARY OF PAC. PAC shall have delivered to HDC a
certificate of the Secretary of PAC dated as of the Closing Date, certifying as
to (i) the Certificate of Incorporation and the Bylaws of PAC and (ii) the
resolutions of the Board of Directors and stockholder of PAC authorizing and
approving the execution, delivery and performance by PAC of this Agreement and
the transactions contemplated hereby.
8.4 PROCEPT LOCK-UP AGREEMENTS. HDC shall have received the Procept
Lock-Up Agreements.
8.5 OPINION OF COUNSEL TO PROCEPT AND PAC. HDC shall have received an
opinion of Palmer & Dodge LLP, counsel to Procept and PAC, dated the Closing
Date, and in form and substance reasonably acceptable to HDC.
8.6 CERTIFICATES. Procept and PAC shall have furnished HDC with such
certificates of public officials as may be reasonably requested by HDC.
8.7 TERMINATION OF CERTAIN CONTRACTUAL RIGHTS. Procept shall have
furnished HDC with reasonably satisfactory evidence that the Article VI
Agreement has been executed as of or prior to the Closing.
8.8 BROKER FEES. The number of shares of Procept Common Stock payable by
Procept Capital, Inc. as a brokerage fee in connection with the Merger shall not
exceed five percent (5%) of 10,920,000 shares, or 546,000 shares of Procept
Common Stock.
SECTION 9 -- INDEMNIFICATION
9.1 DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
(a) "AFFILIATE" as to any person means any entity, directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with such person.
(b) "EVENT OF INDEMNIFICATION" shall mean either a Stockholder Event of
Indemnification or a Surviving Corporation Event of Indemnification.
(c) "INDEMNIFIED PERSONS" shall mean either Stockholder Indemnified
Persons or Surviving Corporation Indemnified Persons.
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(d) "INDEMNIFYING PERSONS" shall mean either Stockholder Indemnifying
Persons or Surviving Corporation Indemnifying Persons.
(e) "STOCKHOLDER EVENT OF INDEMNIFICATION" shall mean:
(A) any representation or warranty of HDC or the Stockholders set forth herein
having been false or misleading in any material respect as of the time when
made or as of the Effective Time; or
(B) any default by HDC or the Stockholders in the performance or observance of
any of their covenants or agreements hereunder; or
(C) the incidence of any liability for or relating to (w) any Tax of HDC with
respect to any taxable period (or portion thereof, determined in a manner
consistent with Section 5.21(b) hereof) ending on or before the Effective
Time (x) HDC's failure to file any Tax Returns for any period ending on or
before the Effective Time, (y) any transfer, documentary, sales, use, stamp,
registration, (but not including the costs of registration of the Procept
Common Stock issued in the Merger pursuant to the Registration Statement or
in connection with quotation of such shares on the Nasdaq Small-Cap Market)
or other such Tax or fee in connection with the consummation of the
transactions contemplated by this Agreement, or (z) the unpaid Taxes of any
person other than HDC under Treasury Regulations Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise; or
(D) the incidence of any liability, fine, penalty, or other cost relating to or
derived from, directly or indirectly, HDC's violations of state securities
laws in connection with its previous stock issuances ("Blue Sky Claims").
Each claim described in clause (A) or (B) (only to the extent that such claim
relates to the representations and warranties set forth in Section 2.9 or the
covenants and agreements set forth in Section 5.21) or clause (C) of this
paragraph, is referred to herein as a "Tax Claim" and collectively as the "Tax
Claims."
(f) "STOCKHOLDER INDEMNIFIED PERSONS" shall mean and include Procept,
the Surviving Corporation and their respectives Affiliates, successors and
assigns, and the respective officers and directors of each of the foregoing.
(g) "STOCKHOLDER INDEMNIFYING PERSONS" shall mean and include each of
the Stockholders and its, his or her respective successors, assigns, heirs and
legal representatives and estate, except that each of Don Paradiso and GSII
Corporation shall constitute Stockholder Indemnifying Persons only with respect
to liabilities arising from or relating to periods up to and including
September 21, 1999.
(h) "SURVIVING CORPORATION EVENT OF INDEMNIFICATION" shall mean:
(i) any representation or warranty of PAC or Procept set forth
herein or in any certificate delivered in connection herewith having been false
or misleading in any material respect as of the time when made or as of the
Effective Time; or
(ii) any default by PAC or Procept in the performance or observance
of any of their covenants or agreements hereunder.
(i) "SURVIVING CORPORATION INDEMNIFIED PERSONS" shall mean and include
the Stockholders and their respective successors, assigns, heirs and legal
representatives and estate.
(j) "SURVIVING CORPORATION INDEMNIFYING PERSONS" shall mean and include
Procept, the Surviving Corporation and their successors and assigns.
(k) "LOSSES" shall mean any and all losses, claims, shortages, damages,
liabilities, expenses (including reasonable attorneys' and accountants' fees),
assessments, Taxes (including interest or penalties thereon) sustained, suffered
or incurred by any Indemnified Person arising from or in
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<PAGE>
connection with any such matter that is the subject of indemnification under
Section 10.2 hereof, but specifically excluding any consequential or incidental
damages.
9.2 INDEMNIFICATION GENERALLY.
(a) Until the applicable Survival Date (as defined in Section 9.6), the
Stockholder Indemnifying Persons, jointly and severally, shall indemnify the
Stockholder Indemnified Persons from and against any and all Losses arising from
or in connection with any Stockholder Event of Indemnification.
(b) Until the applicable Survival Date (as defined in Section 9.6), the
Surviving Corporation Indemnifying Persons shall indemnify the Surviving
Corporation Indemnified Persons from and against any and all Losses arising from
or in connection with any Surviving Corporation Event of Indemnification.
9.3 ASSERTION OF CLAIMS. No claim shall be brought under Section 9.2
hereof unless the Indemnified Persons, or any of them, at any time prior to the
applicable Survival Date, give the applicable Indemnifying Persons (a) written
notice of the existence of any such claim, specifying the nature and basis of
such claim and the amount thereof, to the extent known or (b) written notice
pursuant to Section 9.4 of any Third Party Claim. The failure so to provide such
notice to the Indemnifying Persons will not relieve the Indemnifying Persons
from any liability which they may have to the Indemnified Persons under this
Agreement or otherwise (unless and only to the extent that such failure results
in the loss or compromise of any rights or defenses of the Indemnifying Persons
and they were not otherwise aware of such action or claim). Upon the giving of
such written notice as aforesaid, the Indemnified Persons, or any of them, shall
have the right to commence legal proceedings prior or subsequent to the Survival
Date for the enforcement of their rights under Section 9.2 hereof.
9.4 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. Losses resulting from the
assertion of liability by third parties (each, a "Third Party Claim") shall be
subject to the following terms and conditions:
(a) The Indemnified Persons shall promptly give written notice to the
applicable Indemnifying Persons of any Third Party Claim that might give rise to
any Loss by the Indemnified Persons, stating the nature and basis of such Third
Party Claim, and the amount thereof to the extent known. Such notice shall be
accompanied by copies of all relevant documentation with respect to such Third
Party Claim, including, without limitation, any summons, complaint or other
pleading that may have been served, any written demand or any other document or
instrument. Notwithstanding the foregoing, the failure to provide notice as
aforesaid to Indemnifying Persons will not relieve the Indemnifying Persons from
any liability which they may have to the Indemnified Persons under this
Agreement or otherwise (unless and only to the extent that such failure directly
results in the loss or compromise of any rights or defenses of the Indemnifying
Person and they were not otherwise aware of such action or claim).
(b) OPPORTUNITY TO DEFEND. The Indemnifying Person may elect to
compromise or defend, and control the defense of, at its own expense and by
counsel of its own choosing, any Third Party Claim, provided that the
Indemnified Person shall have no liability under any compromise or settlement
agreed to by the Indemnifying Person to which it has not consented in writing,
which consent shall not be unreasonably withheld. If the Indemnifying Person
elects to compromise or defend such Third Party Claim, it shall within 30 days
(or sooner, if the nature of the Third Party Claim so requires) notify the
Indemnified Person of its intent to do so (which notification shall contain a
statement acknowledging the Indemnifying Person's obligation to indemnify for
such Third Party Claim as set forth herein), and the Indemnified Person shall
cooperate upon the request and at the expense of the Indemnifying Person, in the
compromise of, or defense against, such Third Party Claim. If the Indemnifying
Person elects not to compromise or defend the Third Party Claim, or fails to
notify the Indemnified Person of its election as herein provided, or fails to
diligently defend or seek to compromise such Third Party Claim after electing to
assume such defense or compromise, the Indemnified Person may pay,
A-39
<PAGE>
compromise or defend such Third Party Claim and receive full indemnification for
its losses, liabilities, damages, deficiencies, costs and expenses as provided
in this Article. In any event, the Indemnified Person and the Indemnifying
Person may participate in (but shall not have the right to control), at their
own expense, the defense of such Third Party Claim by the Indemnifying Person or
the Indemnified Person, respectively. If the Indemnifying Person chooses to
defend any claim, the Indemnified Person shall make available to the
Indemnifying Person any books, records or other documents within its control
that are reasonably requested for such defense and shall otherwise cooperate
with the Indemnifying Person, in which event the Indemnified Person shall be
reimbursed for its out-of-pocket expense. All amounts required to be paid in
connection with any such Third Party Claim pursuant to the determination of any
court, governmental or regulatory body or arbitrator, and all amounts required
to be paid in connection with any such compromise or settlement entered into by
the Indemnifying Person, shall be borne and paid by the Indemnifying Person. The
parties agree to cooperate fully with one another in the defense, compromise or
settlement of any such Third Party Claim.
9.5 LIMITATIONS ON INDEMNIFICATION. Notwithstanding the foregoing, the
right to indemnification under this Section 9 shall be subject to the following
terms:
(a) Except for Tax Claims and Blue Sky Claims, no indemnification shall
be payable pursuant to Section 9.2 unless and until the amount of all claims for
indemnification pursuant to Section 9.2(a) or 9.2(b), as the case may be,
exceeds $100,000 in the aggregate, whereupon indemnification pursuant to such
Event of Indemnification shall be payable for such claims without any deduction.
(b) Except for Tax Claims and Blue Sky Claims, no indemnification shall
be payable pursuant to Section 9.2 if on the date of this Agreement the claiming
party had actual knowledge of the breach of representation, warranty or covenant
giving rise to such claim and such facts could reasonably have been expected to
give rise to the Losses in light of the circumstances known to the claiming
party on the date of this Agreement.
(c) No indemnification shall be payable pursuant to Section 9.2 for
claims asserted other than as set forth in Section 9.3 or 9.4.
(d) In no event shall the aggregate liability of all Stockholder
Indemnifying Persons for any claims other than Tax Claims exceed $6,000,000. The
Surviving Corporation Indemnifying Persons indemnification obligations for
Losses shall in no event be in excess of $6,000,000.
(e) In determining the amount of any indemnity, there shall be taken
into account any tax benefit, insurance proceeds or other similar recovery or
offset realized, directly or indirectly, by the party to be indemnified.
9.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The obligation of the
Indemnifying Persons to indemnify hereunder shall expire with respect to all
Losses of which notice has not been sent under Section 9.3 on or prior to the
date which is two years following the Closing Date; provided that the
Indemnifying Person's obligations hereunder with respect to Tax Claims or Blue
Sky Claims or any Event of Indemnification involving fraud or willful,
intentional or reckless misrepresentation or willful omission of a material fact
shall survive with respect to any action commenced prior to the expiration of
the applicable statute of limitations. The date upon which any claim hereunder
shall terminate is referred to herein as the "Survival Date".
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<PAGE>
SECTION 10 -- TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. This Agreement may be terminated at any time on or prior
to the Closing Date, whether prior to or after approval by HDC's stockholders,
as follows:
(a) by HDC or Procept if, without fault of the terminating party, the
Closing Date shall not have occurred on or before January 31, 2000 (or
March 31, 2000 if the Registration Statement is reviewed by the SEC), which date
may be extended by mutual consent of the parties;
(b) by HDC upon written notice to Procept if any representation or
warranty of Procept made herein was not true and correct in all material
respects when made or Procept has materially breached any covenant contained
herein and has not cured such breach within thirty (30) days of receipt of
written notice from HDC or by the Closing Date, whichever occurs first;
(c) by Procept upon written notice to HDC if any representation or
warranty made herein by HDC was not true and correct in all material respects
when made or HDC has materially breached any covenant contained herein and has
not cured such breach within thirty (30) days of receipt of written notice from
Procept or by the Closing Date, whichever occurs first;
(d) by any party if any court of competent jurisdiction or governmental
body shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree or ruling shall have become final and nonappealable;
(e) by either Procept or HDC if the Procept or HDC stockholders vote and
fail to approve the Merger as required by Delaware law;
(f) by Procept if HDC's Board of Directors (i) fails to recommend that
HDC stockholders vote in favor of the adoption of this Agreement or
(ii) withdraws its recommendation that stockholders vote in favor (other than in
connection with exercising HDC's rights to terminate this Agreement pursuant to
subsection (b) or (d) of this Section 10.1);
(g) by HDC if Procept's Board of Directors (i) fails to include in the
Proxy Statement its recommendation that Procept stockholders vote in favor of
the adoption of this Agreement or (ii) withdraws its recommendation that
stockholders vote in favor (other than in connection with exercising Procept
rights to terminate this Agreement pursuant to Subsection (c) or (d) of this
Section 10.1);
(h) at any time with the written consent of Procept and HDC.
10.2 EFFECT OF TERMINATION. If this Agreement is terminated as provided in
Section 10.1, this Agreement shall forthwith become void and have no effect,
without further obligation on the part of any party, its directors, officers or
stockholders following the date of such termination, other than the provisions
of Section 5.4 relating to a termination fee, Section 5.6 relating to expenses
and Section 5.13 relating to publicity and confidentiality to the extent
provided therein. Nothing contained in this Section shall eliminate or reduce
any party's liability to another party for any breach of this Agreement
occurring before such termination.
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<PAGE>
SECTION 11 -- MISCELLANEOUS
11.1 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
(i) if to Procept, to:
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Attention: John Dee
Tel: (617) 491-1100
Fax: (617) 491-9019
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: Lynnette C. Fallon, Esq.
Tel: (617) 573-0220
Fax: (617) 227-4420
(ii) if to HDC, to:
Heaven's Door Corporation
3300 North University Drive
Coral Springs, FL 33065
Attention: Xavier Metichecchia
Tel: (954) 255-0764
Fax: (954) 255-6041
with a copy to:
Todtman, Nachamie, Spizz & Johns, P.C.
425 Park Avenue, 5th Floor
New York, New York 10022
Attention: Martin Todtman, Esq.
Tel: (212) 754-9400
Fax: (212) 754-6262
(iii) if to a Stockholder, to such Stockholder's respective address as shown on
SCHEDULE I hereto.
Any party may by notice given in accordance with this Section 11.1 to the
other parties designate another address or person for receipt of notices
hereunder.
11.2 AMENDMENT. This Agreement may not be amended except by an instrument
signed by each party hereto.
11.3 WAIVER. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or any conditions to its own obligations, in each case only to
the extent such obligations, agreements and conditions are intended for its
benefit;
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provided that any such extension or waiver shall be binding upon a party only if
such extension or waiver is set forth in a writing executed by such party.
11.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement among
the parties with respect to the Merger and related transactions, and supersedes
all prior agreements, written or oral, with respect thereto, including but not
limited to the Letter of Intent.
11.5 GOVERNING LAW. This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts, without regard to its conflict of law provisions.
11.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. This Agreement is not assignable without the prior written
consent of the other parties hereto.
11.7 VARIATIONS IN PRONOUNS. All pronouns and any variations thereof refer
to the masculine, feminine or neuter, singular or plural, as the context may
require.
11.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts and by facsimile, each of which shall be deemed an original and all
of which together shall constitute one and the same instrument.
11.9 EXHIBITS AND DISCLOSURE SCHEDULES. The Exhibits and Disclosure
Schedules are a part of this Agreement as if fully set forth herein.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date first stated above.
<TABLE>
<S> <C> <C>
PROCEPT, INC.
By: /s/ JOHN F. DEE
-----------------------------------------
Name: John F. Dee
TITLE: PRESIDENT & CEO
HEAVEN'S DOOR CORPORATION
By: /s/ XAVIER J. METICHECCHIA
-----------------------------------------
Name: Xavier J. Metichecchia
TITLE: PRESIDENT
PROCEPT ACQUISITION CORP.
By: /s/ JOHN F. DEE
-----------------------------------------
Name: John F. Dee
TITLE: PRESIDENT & CEO
STOCKHOLDERS:
GSII CORPORATION
By: /s/ DON A. PARADISO
-----------------------------------------
Name: Don Paradiso
TITLE: PRESIDENT / CHAIRMAN
J.E. HOLDINGS
By: /s/ HOWARD WEISER
-----------------------------------------
Name: Howard Weiser
TITLE: PRESIDENT
/s/ MICHAEL MITCHELL, M.D.
-----------------------------------------
Dr. Michael Mitchell
/s/ DON A. PARADISO
-----------------------------------------
Don Paradiso
/s/ CHARLIE SCHEUERMAN
-----------------------------------------
Charlie Scheuerman
/s/ HOWARD WEISER
-----------------------------------------
Howard Weiser
</TABLE>
A-44
<PAGE>
SCHEDULE I -- LIST OF HDC STOCKHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF HDC STOCK
- ---------------- -------------------
<S> <C>
GSII Corporation 1,421,996
2072 S. Military Trail, Suite 7
W. Palm Beach, FL 33415
J.E. Holdings 1,250,000
8632 N.W. 54th Street
Coral Springs, FL 33067
Dr. Michael Mitchell 2,500,000
24 East 12th St., Suite 403
New York, New York 10003
Don Paradiso 200,000
2072 S. Military Trail, Suite 7
W. Palm Beach, FL 33415
Howard Weiser 100,000
8632 N.W. 54th Street
Coral Springs, FL 33067
Charlie Scheuerman 100,000
5741 N.E. 18th Ave., Apt. 1
Ft. Lauderdale, FL 33334
</TABLE>
A-45
<PAGE>
ANNEX B
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PROCEPT, INC.
PROCEPT, INC., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Procept, Inc. (the
"Corporation"), resolutions were duly adopted setting forth a proposed amendment
of the Restated Certificate of Incorporation of the Corporation, and declaring
that such amendment is advisable and that such amendments should be submitted to
the stockholders of the Corporation for approval. The resolutions setting forth
the proposed amendment are as follows:
RESOLVED: That it is advisable that the Restated Certificate of Incorporation of
the Corporation be amended by a Certificate of Amendment to increase
the total number of shares of Common Stock, $.01 par value per share
(the "Common Stock"), that the Corporation shall have authority to
issue by 20,000,000 shares to 50,000,000 shares (the "Authorized Share
Amendment"); that the Authorized Share Amendment be submitted to the
stockholders of the Corporation for approval; that subject to
(i) approval of the Authorized Share Amendment by the stockholders of
the Corporation and (ii) no abandonment of the Authorized Share
Amendment by the Board of Directors of the Corporation in accordance
with Section 242(c) of the Delaware General Corporation Law, the
proper officers of the Corporation at the time in office be and each
of them acting singly is hereby authorized and empowered to execute
the Authorized Share Amendment and, in the name and on behalf of the
Corporation, to file the Authorized Share Amendment with the Secretary
of State of Delaware.
FURTHER
RESOLVED: That in the event the Amendment is submitted to and approved by the
stockholders of the Corporation, the first paragraph of Article FOURTH
of the Restated Certificate of Incorporation of the Corporation be
amended to read in its entirety as follows:
"FOURTH: The total number of shares of stock which the Corporation
has authority to issue is 50,000,000 shares of Common Stock with a
par value of $0.01 per share."
FURTHER
RESOLVED: That it is advisable that the Restated Certificate of Incorporation of
the Corporation be amended by a Certificate of Amendment to change the
name of the Corporation from "Procept, Inc." to "HeavenlyDoor.com,
Inc." (the "Name Change Amendment"); that the Name Change Amendment be
submitted to the stockholders of the Corporation for approval; that
subject to (i) approval of the Name Change Amendment by the
stockholders of the Corporation and (ii) no abandonment of the Name
Change Amendment by the Board of Directors of the Corporation in
accordance with Section 242(c) of the Delaware General Corporation
Law, the proper officers of the Corporation at the time in office be
and each of them acting singly is hereby authorized and empowered to
execute the Name Change Amendment and, in the name and on behalf of
the Corporation, to file the Name Change Amendment with the Secretary
of State of Delaware.
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<PAGE>
FURTHER
RESOLVED: That in the event the Name Change Amendment is submitted to and
approved by the stockholders of the Corporation, Article FIRST of the
Restated Certificate of Incorporation of the Corporation be amended to
read in its entirety as follows:
"FIRST: The name of the Corporation is HeavenlyDoor.com, Inc."
SECOND: Thereafter, pursuant to resolutions of the Corporation's Board of
Directors, the Authorized Share Amendment and the Name Change Amendment were
submitted to the stockholders of the Corporation for approval at a Special
Meeting of Stockholders, and such meeting was called and held upon notice in
accordance with Section 222 of the General Corporation Law of the State of
Delaware. The necessary number of shares as required by statute were voted in
favor of both amendments.
THIRD: The said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said corporation has caused this certificate to be
signed by its duly authorized officers, as of this day of January, 1999.
<TABLE>
<C> <S>
PROCEPT, INC.
By: ----------------------------------------
John F. Dee, PRESIDENT
</TABLE>
B-2
<PAGE>
ANNEX C
HEMPSTEAD & CO. INCORPORATED
807 HADDON AVE., HADDONFIELD, NJ 08033
TEL 856/795-6026
FAX 856/795-4911
November 2, 1999
Independent Committee of Board of Directors
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Gentlemen:
You have asked us to render an opinion regarding the terms of a proposed
transaction (the "Transaction") whereby Procept, Inc. ("Procept") will merge
with Heaven's Door Corporation ("Heaven's Door" or "HDC"), pursuant to the
provisions of a draft of the Agreement and Plan of Merger (the "Agreement")
dated October 27, 1999 between Procept and Heaven's Door.
Specifically, our opinion addresses the fairness of the Transaction, from a
financial point of view, to Procept and to the shareholders of Procept.
The Transaction is among Procept, Inc., a Delaware corporation, Procept
Acquisition Corp. ("PAC"), a Delaware corporation and a wholly-owned subsidiary
of Procept, and Heaven's Door Corporation. PAC and HDC are herein sometimes
called the "Constituent Corporations." The parties plan to effect the
acquisition of HDC by Procept through a merger of PAC into HDC. The merger
consideration shall be 10.92 million shares of Procept's common stock and 13.03
million issued and outstanding shares of HDC common stock (representing 100% of
HDC's equity). Following the merger, HDC shall continue as the surviving
corporation (the "Surviving Corporation") and the separate corporate existence
of PAC shall cease. As a result of the merger, the outstanding shares of capital
stock of the Constituent Corporations shall be converted into the stock of the
Surviving Corporation.
In forming an opinion as to the fairness of the aforementioned Transaction, we
have considered, without limitation, the following:
- A draft dated October 27, 1999, of the Agreement and Plan of Merger
between Procept and Heaven's Door.
- Procept's 10-K reports for the fiscal years ending December 31, 1997 and
1998; and 10-Q reports for the three-month periods ending March 31, 1998,
June 30, 1998, September 30, 1998, March 31, 1999 and June 30, 1999.
- HDC's audited financials for the fiscal years ending June 30, 1998 and
1999 and internal financials for the period from July 1, 1999 through
September 30, 1999.
- Interviews with the senior management of Procept and Heaven's Door.
- A draft dated October 29, 1999 of the Article VI Rights Termination and
Exchange Agreement among Procept, Inc. and certain of its stockholders.
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<PAGE>
- Certain financial projections prepared by Procept and Heaven's Door.
- Press releases, promotional literature and other descriptive materials
provided by Procept and Heaven's Door.
- An October 4, 1999 independent valuation analysis of Procept's
biotechnology assets prepared by Liberty Tree Advisors, LLC.
- Review of Heaven's Door's February 15, 1999 private placement offering and
discussions with Taylor Stewart, HDC's investment bankers.
- We have (i) reviewed the price and trading history of the common stock of
Procept; (ii) reviewed transactions in the common stock of Procept, Inc.;
(iii) reviewed transactions in the common stock of Heaven's Door
Corporation.
In rendering this opinion, we have relied, without independent verification, on
the accuracy and completeness of all financial and other information supplied to
us by Procept. Our opinion is based upon the economic, monetary and market
conditions existing on the date of this letter. We have not been requested to
make, nor have we made, an independent evaluation or appraisal of the individual
assets and liabilities (contingent or otherwise) associated with Procept or
Heaven's Door. Estimates of value in the course of developing this opinion are
not appraisals and should not be misconstrued as appraisals.
We have not been involved in the negotiation of the Transaction. We have assumed
that the Transaction will be consummated on the terms and conditions described
in the draft Transaction documents reviewed by us, and as described to us by the
management of Procept.
It is understood that this letter is directed to inform the Board of Directors
of Procept only and may not be used for any other purpose without the prior
written consent of Hempstead & Co. Inc.
Based on the foregoing and other considerations which we deemed pertinent, it is
our opinion that the terms of the proposed Transaction, as described in the body
of this letter and in the Agreement are fair, from a financial point of view, to
Procept and to the shareholders of Procept.
Very truly yours,
/s/ Hempstead & Co. Inc.
C-2
