<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21134
HEAVENLYDOOR.COM, INC.
----------------------
(FORMERLY PROCEPT, INC.)
(Exact Name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of
incorporation or organization)
04-2893483
----------
(I.R.S. Employer
Identification No.)
369 Lexington Avenue, New York, New York
-------------------------------------------
(Address of principal executive offices)
10017
-----
(zip code)
Registrant's telephone number, including area code: (212) 453-3111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of latest practicable date.
Class
-----
Common Stock, $.01 par value
Outstanding as of November 10, 2000
-----------------------------------
32,491,172
Exhibit Index Appears on Page 22
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
<TABLE>
<CAPTION>
INDEX
-----
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
September 30, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations (Unaudited) 4
Three and nine months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (Unaudited) 5-6
Nine months ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial 14-18
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
</TABLE>
2
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000
(UNAUDITED) DECEMBER 31, 1999
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,944,719 $ 4,074,525
Investment in Aquila -- 269,976
Prepaid expenses and other current assets 126,587 223,065
---------------- --------------------
Total current assets 4,071,306 4,567,566
Property and equipment, net of accumulated depreciation of
$1,009,544 and $1,901,797 at September 30, 2000 and
December 31, 1999, respectively 283,203 50,553
Goodwill, net of accumulated amortization of
$3,284,860 at September 30, 2000 21,257,819 --
Deferred charges -- 321,544
Other assets 77,582 7,150
--------------- --------------------
Total assets $ 25,689,910 $ 4,946,813
=============== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 331,015 $ 119,826
Accrued compensation 125,805 84,961
Accrued professional services 188,500 243,962
Other current liabilities 56,549 200,870
Deferred rent -- 67,317
Current portion of capital lease obligations 46,958 4,832
--------------- --------------------
Total current liabilities 748,827 721,768
---------------- --------------------
Capital lease obligations 101,252 14,384
--------------- --------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized;
Series A, no shares designated, issued and outstanding -- --
Common stock, $.01 par value; 75,000,000 shares authorized;
32,491,172 and 14,970,818 shares issued at September 30, 2000
and December 31, 1999, respectively 324,912 149,709
Additional paid-in capital 154,634,972 87,194,700
Deferred compensation (43,276) (2,187,710)
Accumulated deficit (130,076,777) (81,044,361)
Accumulated other comprehensive income -- 98,323
--------------- --------------------
Total shareholders' equity 24,839,831 4,210,661
--------------- --------------------
Total liabilities and shareholders' equity $ 25,689,910 $ 4,946,813
=============== ====================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- -----------------------------------
2000 1999 2000 1999
------------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
Interest income $ 69,540 $ 65,845 $ 201,941 $ 221,225
------------------- ------------------- ---------------- --------------------
Total revenue 69,540 65,845 201,941 221,225
------------------- ------------------- ---------------- -------------------
Costs and operating expenses:
Research and development (excludes $3,746,836 of
non-cash stock based compensation charges in
2000) 130,003 450,209 905,273 1,034,439
Sales and marketing 379,090 - 757,146 -
General and administrative (excludes $15,435,688
of non-cash stock based compensation charges in
2000) 915,372 241,295 2,895,016 1,219,283
Non-cash stock based compensation charges - - 19,182,524 -
Amortization of goodwill and other intangibles 1,223,805 - 3,273,610 -
Charge for purchased in-process research and
development - - - 9,405,671
Other operating (income) expense, net (10,725) 9,482 (405,167) (26,491)
-------------------------------------- ---------------- -------------------
Total costs and operating expenses 2,637,545 700,986 26,608,402 11,632,902
------------------- ------------------- ---------------- -------------------
Loss from operations (2,568,005) (635,141) (26,406,461) (11,411,677)
Other income 50,000 - 550,000 -
------------------- ------------------- ---------------- -------------------
Net loss (2,518,005) (635,141) (25,856,461) (11,411,677)
Less: Incremental charge associated with the
conversion of the minority interest in a
subsidiary, net - - - 501,455
-------------------------------------- ---------------- -------------------
Net loss available to common shareholders $ (2,518,005) $ (635,141) $ (25,856,461) $ (11,913,132)
=================== ================== ================ ===================
Basic and diluted net loss per common share $ (.08) $ (.05) $ (.85) $ (1.24)
=================== ================== ================ ===================
Weighted-average number of common
shares outstanding - basic and diluted 32,491,172 14,061,206 30,388,614 9,600,025
=================== ================== ================ ===================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(25,856,461) $ (11,411,677)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,348,702 99,259
Gain on sale of assets (273,394) (24,550)
Charge for purchased in-process research - 9,405,671
Compensation charge associated with stock options 14,729,024 -
Compensatory stock and stock option expense 4,472,975 89,542
Deferred rent (67,317) (82,582)
Changes in operating assets and liabilities, net of acquisition:
Prepaid expenses and other current assets 150,828 (2,398)
Other assets (62,166) 183,465
Accounts payable 192,586 (274,323)
Accrued compensation 40,844 97,401
Other current liabilities (338,278) (703,645)
-------------- --------------
Net cash used in operating activities (3,662,657) (2,623,837)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (176,179) -
Proceeds from sale of equipment 144,866 29,119
Proceeds from redemption of debentures - 128,501
Proceeds from sale of investment 405,753 -
Proceeds from maturity of marketable securities - 2,000,000
Cash acquired in acquisitions 17,831 2,750,097
------------- -------------
Net cash provided by investing activities 392,271 4,907,717
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of common stock options 153,888 -
Proceeds from the exercise of common stock warrants 3,292,790 187,500
Principal payments on notes payable (290,019) (85,000)
Principal payments on capital leases (16,079) (2,859)
-------------- --------------
Net cash provided by financing activities 3,140,580 99,641
------------- -------------
Net change in cash and cash equivalents (129,806) 2,383,521
Cash and cash equivalents at beginning of period 4,074,525 2,885,165
------------- -------------
Cash and cash equivalents at end of period $ 3,944,719 $ 5,268,686
============= =============
</TABLE>
(Continued on Page 6)
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from Page 5)
(Unaudited)
-----------
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
-------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Supplement disclosure of cash flow information:
Cash paid for interest $ 17,390 $ 3,284
============= =============
Supplemental disclosure of non-cash transactions:
Fair value of common stock issued to acquire
Heaven's Door Corporation $ 23,935,275 $ --
============= =============
Debt assumed from the acquisition of Heaven's Door Corporation $ 330,000 $ --
============= =============
Fair value of common stock issued to acquire
minority interest in subsidiary $ -- $ 4,160,363
============= =============
Fair value of common stock issued to acquire
Pacific Pharmaceuticals $ -- $ 3,766,913
============= =============
Fair value of common stock issued in exchange
for certain contractual obligations $ 23,020,955 $ --
============= =============
Fair value of common stock issued to consultants $ 4,453,500 $ --
============= =============
Fair value of common stock options assumed in the
Pacific Acquisition $ -- $ 965,835
============= =============
Fair value of common stock issued to pay off loans $ -- $ 441,870
============= =============
Fair value of common stock issued in settlement of legal action $ -- $ 135,002
============= =============
Fair value of common stock issued for services $ -- $ 35,000
============= =============
Capital lease obligation incurred for the
acquisition of equipment $ 145,072 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-----------
1. BASIS OF PRESENTATION
---------------------
NATURE OF BUSINESS
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a product
portfolio focused on infectious diseases and oncology. In March 1999, the
Company acquired Pacific Pharmaceuticals, Inc. ("Pacific"), which became a
subsidiary of the Company. In January 2000, the Company consummated a major
strategic change in its business by acquiring Heaven's Door Corporation ("HDC"),
a company that provides business-to-business and business-to-consumer products
and services for the funeral service industry over the Internet. Effective with
the acquisition of HDC, the Company's name was changed from Procept, Inc. to
HeavenlyDoor.com, Inc. and the name of the Company's subsidiary, Pacific, was
changed to Procept, Inc. The Company expects to expand its business operations,
through internal development as well as through strategic alignments and/or
potential acquisitions, with a focus on providing a comprehensive package of
elder life services for persons 50 years of age or older. The Company has now
out-licensed or disposed of all of its biotechnology assets.
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which generally can be identified by the use of such terms as "anticipate,"
"believe," "continue," "expect," "may," "should," or similar variations or the
negative thereof. These forward looking statements involve risks and
uncertainties, many of which are out of the Company's control and which may
affect its future business plans. Factors that may affect the Company's future
business plans include: (i) the viability of the Company's business strategy and
its ability to implement such strategy, (ii) its ability to secure financing for
its operations, (iii) its ability to maintain and expand its current base of
funeral home and other service and product customers, (iv) its ability to
generate revenues sufficient to meet its operating costs and, (v) its ability to
identify, complete and integrate acquisitions. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. In addition, the Company's
business, operations and financial condition are subject to the risks,
uncertainties and assumptions which are described in the Company's reports and
statements filed from time to time with the Securities and Exchange Commission.
Should one or more of those risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those discussed therein and certain assets of the Company may not be
recoverable.
PLAN OF OPERATIONS
Since its inception in 1985 through 1999, the Company devoted its principal
efforts to drug discovery and research. Since 1998, the Company has devoted its
principal efforts to drug development, human clinical trials and partnership
commercialization of PRO 2000 Gel and O6-Benzylguanine.
The Company, through its web site www.HeavenlyDoor.com, provides a range of
products and services specifically related to the funeral service industry. The
Company's current web site provides consumers access to information concerning
the arrangement and handling of funeral related services from the privacy of
their own homes. In addition, the Company's web site offers funeral homes and
other service providers the ability to have an Internet presence through a
customized, linked web site designed by the Company for the funeral home or
other service provider.
7
<PAGE>
From inception through September 30, 2000, the Company has generated no revenue
from product sales or services, has not been profitable, and has incurred an
accumulated deficit of $130.1 million. Losses have resulted primarily from costs
incurred in research and development activities related to the Company's efforts
to develop drug candidates and from the associated administrative costs. The
Company expects to continue to incur significant operating losses in connection
with its ongoing efforts to develop its current business.
In January 2000, the Company received proceeds of $400,000 from the sale of
113,674 common shares of Aquila Biopharmaceuticals, Inc. ("Aquila"). In
connection with the sale, the Company recorded a gain of $200,000, representing
the difference between the proceeds of the sale of $400,000 less the carrying
cost of the investment of $200,000. As of September 30, 2000, the Company had
liquidated all securities it held in Aquila.
On March 28, 2000, the Company received proceeds of $3.1 million from the
exercise of Class C Warrants to purchase approximately 1.3 million shares of
common stock. These warrants were exercised at a price of $2.40 per warrant
representing a discount of $0.88 to the contractual exercise price of $3.28 per
warrant. Accordingly, in the first quarter of 2000, a charge of $200,000 was
recorded directly to equity which represents the fair market value of the
discount given to holders of certain exercised Class C warrants. The Company
expects that its current funds along with the proceeds generated through the
exercise of these warrants and interest income will be sufficient to fund the
Company's current operations over the next twelve months.
For the nine months ended September 30, 2000, the Company recorded a gain of
$400,000 in other operating (income) expense, primarily from the gain of
$300,000 on sales of biotechnology research and development equipment and fixed
assets in connection with the shut down of its biopharmaceutical operations. The
Company also reported non-operating other income of $550,000 for the nine months
ended September 30, 2000, which is comprised of proceeds of $500,000 received in
the second quarter 2000 from its agreement with Interneuron Pharmaceuticals,
Inc. for the out-licensing of PRO 2000 Gel (see Note 7) and proceeds of $50,000
received in the third quarter 2000 relating to Pacific's assignment of its
licensing rights to Periodontal Tissue Monitor ("PTM") as well as all of
Pacific's intellectual property rights and assets related to dental technology,
including PTM. Under the assignment agreement for PTM, Pacific transferred all
of its remaining licensing obligations. In addition, Pacific may further receive
a milestone payment, subject to the approval of a PTM product for a
particular market.
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements as of and for the three and nine months
ended September 30, 2000 are unaudited and 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 period ended September 30,
2000. The consolidated balances as of December 31, 1999 were derived from
audited financial statements but do not include all disclosures required by
generally accepted accounting principles. The accompanying condensed
consolidated financial statements have been prepared in accordance with
accounting standards for interim financial statements and should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, which are contained in the Company's 1999 Annual Report on Form 10-K.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year.
8
<PAGE>
2. SHAREHOLDERS' EQUITY
--------------------
On December 31, 1999, the Company had a total of 14,970,818 shares of common
stock outstanding. During the quarter ended March 31, 2000, the Company issued
17,520,354 new shares of common stock. These issuances resulted from the
acquisition of HDC, termination of certain contractual obligations, the issuance
of common stock to consultants, and the exercise of warrants and options for
common stock. There were no issuances of common stock for the second and third
quarters of fiscal 2000.
In connection with the acquisition of HDC in January 2000, each share of HDC
stock was converted into approximately 0.81 shares of the Company's common stock
or a total of 10,920,000 shares of the Company. In accordance with the merger
agreement, the Company also issued 3,876,887 shares of common stock with a fair
value of $23,020,955 to investors in the Company's 1998 private placement,
former preferred stockholders of Pacific, and certain other common stockholders,
in exchange for the elimination of the certain contractual obligations incurred
in connection with the 1998 private placement, the Pacific acquisition and other
transactions. This transaction was accounted for by recording a charge of
$23,020,955 directly to equity, which represents the fair market value of the
shares issued to those shareholders who relinquished their contractual rights.
In addition, the Company issued 546,000 common shares as consideration for the
fee due to the placement agent involved in the HDC transaction and the fair
value of these securities were included in the purchase price.
In February 2000, the Company issued a total of 76,560 shares of its common
stock for proceeds of $153,888 in connection with the exercise of common stock
options.
In February and March 2000, the Company issued a total of 59,241 shares of its
common stock for proceeds of $192,790 in connection with the exercise of
warrants for common stock.
On February 28, 2000, the Company issued a total of 750,000 shares of its common
stock with a fair value of $4,453,500 to consultants and, accordingly, a charge
of $4,453,500 was recorded during the quarter ended March 31, 2000.
On March 28, 2000, the Company issued 1,291,666 shares of its common stock for
proceeds of $3,100,000 in connection with the exercise of Class C Warrants.
These warrants were exercised at a discount to the contractual exercise price
and, accordingly, a charge of $155,000 was recorded directly to equity during
the quarter ended March 31, 2000.
3. BASIC AND DILUTED NET LOSS PER COMMON SHARE
-------------------------------------------
Basic net loss per common share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per common share 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
9
<PAGE>
used to repurchase outstanding stock options using the treasury stock method.
For the three and nine month periods ended September 30, 2000 and 1999, there
were no dilutive securities.
4. COMPREHENSIVE INCOME (LOSS)
---------------------------
Comprehensive income (loss) includes the net loss and accumulated other
comprehensive income (loss), which consists of the change in unrealized gain on
investments. Comprehensive income (loss) is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net loss $ (2,579,620) $ (635,141) $ (23,338,456) $ (11,411,677)
Change in unrealized gain
on investments - 21,371 (98,323) (238,149)
------------------ ----------------- ------------------ ------------------
Comprehensive loss $ (2,579,620) $ (613,770) $ (23,436,779) $ (11,649,826)
================== ================= ================= ====================
Unrealized gain on investments:
Balance, beginning of period $ - $ 13,068 $ 98,923 $ 272,588
Change during the period - 21,371 (98,923) (238,149)
------------------ ----------------- ------------------ ------------------
Balance, end of period $ - $ 34,439 $ - $ 34,439
================== ================= --================ ==================
</TABLE>
5. ACQUISITION OF HEAVEN'S DOOR CORPORATION.
-----------------------------------------
Heaven's Door Corporation, a Delaware corporation engaged in providing a range
of funeral-related products and services through its web site
www.HeavenlyDoor.com, was acquired by the Company in January 2000.
The acquisition of HDC was accounted for utilizing the purchase method of
accounting. The aggregate purchase price of $22.8 million (10,920,000 shares
with a fair value of $2.09 per share) plus the estimated acquisition costs of
$1.6 million and assumed net liabilities of $100,000, were allocated to the
acquired tangible and intangible assets. As a result of this acquisition, the
Company has recorded goodwill of $24.5 million, which represents the excess cost
over the fair value of net liabilities acquired, which will be amortized over a
period of five years. Pursuant to the Merger Agreement with HDC, each share of
HDC was converted into approximately .81 shares of the Company's common stock,
or a total of 10,920,000 shares. In addition, the Company assumed all of the HDC
notes payable obligations that were outstanding on the date of the acquisition.
The notes are payable by the Company on demand of the note holder, and bear a
10% annual interest rate.
In accordance with the Merger Agreement, the Company also issued 3,876,887
shares to investors in the 1998 private placement, former holders of Pacific
preferred stock and certain other common stockholders in exchange for the
elimination of certain contractual rights held by such investors. This
transaction was accounted for by recording a charge of $23,020,955 directly to
equity during the first quarter of 2000.
On January 28, 2000, concurrent with the merger with HDC, in accordance with the
original terms of certain outstanding stock options (1) the number of shares
subject to such options increased by 1,004,224 shares and (2) the
10
<PAGE>
exercise price on the existing variable stock options was reduced from $2.11 per
share to $1.56 per share. In addition, the Board of Directors accelerated the
vesting of the variable stock options. Effective with the Merger, the number and
the associated exercise price of the variable stock options became fixed and
accounted for accordingly. Therefore, a compensation charge $14,729,024 was
recorded in the quarter ended March 31, 2000, resulting from the revaluation
under variable plan accounting and the acceleration of the vesting of the
variable stock options.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma results of operations for the nine months
ended September 30, 2000 and 1999 give effect to the Company's acquisition of
HDC and Pacific as if the transactions had occurred at the beginning of each
fiscal year. The following pro forma results of operations do not reflect the
$19,182,524 non-cash stock based compensation charge, or the $9,405,671
charge for purchased in-process research and development recorded in the nine
months ended September 30, 2000 and 1999, respectively. The pro forma results
of operations do not purport to reflect what the Company's actual results of
operations would have been if the acquisition had occurred at the beginning
of the periods. 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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues $ 201,942 $ 258,303
================== ==================
Net loss $ (7,144,838) $ (6,711,463)
================== ==================
Basic and diluted net loss
per common share $ (.24) $ (.25)
================== ==================
</TABLE>
6. CONTINGENCIES
-------------
On February 22, 1999, Christopher R. Richied ("Richied") filed a complaint with
the United States District Court for the Southern District of New York naming
Pacific and Binary Therapeutics Inc. ("Binary"), both subsidiaries of the
Company, as defendants (the "Complaint"). The Complaint alleged that Pacific and
Binary breached obligations to Richied under certain consulting agreements. On
August 7, 2000, Pacific and Binary settled the Complaint. In connection with the
settlement, the Company received a release from all claims and was not required
to pay any remuneration.
7. RELATED PARTY TRANSACTIONS
--------------------------
As part of the acquisition of HDC, the Company assumed notes payable in the
amount of $330,000, including notes payable to Richard J. Kurtz, a director of
the Company and a former shareholder of HDC. On May 31, 2000, the Company paid
$243,068 to Mr. Kurtz, consisting of $235,019 of principal plus $8,049 of
accrued interest. On September 22, 2000 and October 20, 2000, the Company made
final principal and interest payments, respectively, of $55,000 and $3,841,
which in the aggregate satisfied the Company's remaining obligation to Mr.
Kurtz. During the third quarter, the Company recorded a reduction of $39,741 to
goodwill, representing the adjustment of notes payable recorded at acquisition
to the aggregate amounts of principal paid.
11
<PAGE>
On June 14, 2000, the Company entered into an agreement with Interneuron
Pharmaceuticals, Inc. ("Interneuron") for the out-licensing of PRO 2000 Gel.
Glenn L. Cooper, M.D., a director of the Company at the time of the agreement,
is the President and Chief Executive Officer of Interneuron. In addition, the
principal shareholder of the Company is a shareholder of Interneuron. Pursuant
to this agreement, the Company received a payment of $500,000 in June 2000,
which is included in other income for the nine months ended September 30, 2000.
The Company retains ownership and certain future rights to PRO 2000 Gel under
the licensing agreement, including i) provisions for the receipt of additional
payments based upon the achievement of certain milestones and ii) royalties from
future commercial sales of PRO 2000 Gel, if any. Interneuron has a limited
option to purchase the ownership of PRO 2000 Gel. The Company, however, has no
further obligation to fund research and development for PRO 2000 Gel.
On October 13, 2000, Pacific entered into an agreement with AOI Pharmaceuticals
Inc. ("AOI") to sublicense Pacific's exclusive worldwide patent rights and
know-how relating to O6-benzylguanine ("O6"). Michael S. Weiss, Chairman of the
Board of Directors of the Company, is the Chairman and Chief Executive Officer
of AOI. In addition, the principal shareholder of the Company is a shareholder
of an affiliate of AOI. Pursuant to this agreement, Pacific sublicensed all
development and licensing rights to AOI in exchange for future royalties on net
sales of O6. The agreement also provides for cash payments to Pacific based upon
the achievement of certain developmental milestones. In addition, AOI assumed
all financial obligations of Pacific relating to its licensing of worldwide
patent rights as of the effective date of the agreement.
On October 17, 2000, the Company entered into a non-binding letter of intent to
acquire WWH Insurance Services, Inc. ("WWH"). WWH is a privately held national
independent distributor of life and health insurance products. WWH conducts
business under the trade names SeniorQuote(TM), BancQuote(TM) and Senior Family
Care(TM). Philip C. Pauze, a director of the Company, is a director and
stockholder of WWH. The acquisition of WWH would broaden the Company's reach
into products and services for seniors, beyond that originally anticipated with
the acquisition of HDC, whose operations are primarily Web-centric. WWH targets
consumers through direct marketing channels; primarily, via cable television
programs whose audience meets the demographic profile of WWH's target market.
The Company expects to execute a definitive letter of agreement by the end of
November 2000, provided that the results of the mutual due diligence reviews
presently underway meet with the approval of the Company and WWH. The
acquisition will be subject to customary closing conditions as well as the
approval of the Company's stockholders.
8. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either
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December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a product
portfolio focused on infectious diseases and oncology. In March 1999, Procept
acquired Pacific Pharmaceuticals, Inc. ("Pacific"), which became a subsidiary of
the Company. In January 2000, the Company consummated a major strategic change
in its business by acquiring Heaven's Door Corporation ("HDC"), a company that
provides business-to-business and business-to-consumer products and services for
the funeral service industry over the Internet. Effective with the acquisition
of HDC, the Company's name was changed from Procept, Inc. to HeavenlyDoor.com,
Inc. The Company expects to expand its business operations, through internal
development as well as through strategic alignments and/or potential
acquisitions, with a focus on providing a comprehensive package of elder life
services for persons 50 years of age or older. The Company has now out-licensed
or disposed of all of its biotechnology assets.
RESULTS OF OPERATIONS
From inception through September 30, 2000, the Company has generated no revenues
from product sales or services, has not been profitable since inception, and has
an accumulated deficit of $130.1 million. During that period, the Company was
dependent upon corporate collaborations, equity financing and interest on
invested funds to provide the working capital necessary for its research and
development activities. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to develop
drug candidates and from the associated administrative costs required to support
these efforts. In addition, since the acquisition of HDC, the Company has
incurred losses in connection with the development of the Company's Internet
business and related marketing activities. The Company expects to continue to
incur significant operating losses in connection with its ongoing efforts to
develop its current business.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Company's total revenue, which is derived from interest income, was $70,000
for the three month periods ended September 30, 2000 and 1999. For the
comparative nine month periods ended September 30, 2000 and 1999, interest
income was $200,000.
The Company's total operating expenses increased by $1.9 million, to $2.6
million, for the third quarter of 2000 from $700,000 for the comparable period
of 1999. Total operating expenses increased to $26.6 million from $11.6 million
during the comparative nine month periods ended September 30, 2000 and 1999,
respectively, an increase of $15.0 million. During the first quarter ended March
31, 2000, the Company recorded non-cash charges of $19.2 million. These non-cash
items included a charge of $14.7 million relating to compensation expense
associated with variable stock options, and a $4.5 million charge for the fair
value of common stock issued to consultants. In the first quarter of 1999, the
Company recorded a non-cash charge of $9.4 million relating to the acquisition
of Pacific. These non-cash charges excluded, total operating expenses increased
to $7.4 million for the nine months ended September 30, 2000 from $2.2 million
during the same period in 1999, an increase of $5.2 million. Components of the
changes in total operating expenses are as follows:
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Research and development expenses decreased by $300,000 and $100,000 for the
three and nine month periods ended September 30, 2000 and 1999, respectively.
These decreases in research and development costs were primarily due to the
curtailment of expenditures committed to biotechnology activities as the Company
divested itself of this business. Such decreases were offset, in part, by costs
associated with developing the Company's Internet website in 2000.
Sales and marketing expenses were $400,000 and $800,000 for the three and
nine month periods ended September 30, 2000. Sales and marketing expenditures
reflect the Company's pursuit of an Internet business strategy and the
escalation of sales and marketing activities associated with promoting the
Internet web site.
General and administrative expenses increased by $700,000 and $1.7 million for
the three and nine month periods ended September 30, 2000, respectively, over
comparable periods in 1999. During the third quarter of 2000, the Company
concentrated its Internet activities in its New York City location and closed
down the former operations of HDC in Florida. Included in third quarter 2000
general and administrative expenses of $900,000 were $200,000 of non-recurring
shuttering costs relating to the discontinuance of its Florida operations. For
the nine months ended September 30, 2000, general and administrative expenses
were $2.9 million, as compared to $1.2 million for the similar period in 1999,
an increase of $1.7 million. The year-to-date increase reflects expenditures,
which in some cases were redundant, of exiting the Company's bio-pharmaceutical
operations in Cambridge, Massachusetts, relocating and consolidating its
Internet activities in New York City and shuttering its Florida operations. For
the nine months ended September 30, 2000, general and administrative
expenditures relating to the bio-pharmaceutical operations were $1.2 million,
which reflect the amount expended during the similar period in 1999. The balance
of year-to-date 2000 general and administrative expenditures of $1.7 million
pertain to the Company's Internet business activities.
Amortization of goodwill resulting from the acquisition of HDC was $1.2 million
and $3.3 million for the three and nine month periods ended September 30, 2000,
respectively.
The Company recorded a gain of $400,000 in other operating (income) expense for
the nine months ended September 30, 2000, primarily from the gain of $300,000 on
sales of biotechnology research and development equipment and fixed assets in
connection with the shutdown of its biopharmaceutical operations. The Company
also reported non-operating other income of $550,000 for the nine months ended
September 30, 2000, which is comprised of proceeds of $500,000 received in the
second quarter 2000 from its agreement with Interneuron Pharmaceuticals, Inc.
for the out-licensing of PRO 2000 Gel and proceeds of $50,000 received in the
third quarter 2000 relating to Pacific's assignment of its licensing rights to
Periodontal Tissue Monitor ("PTM") as well as all of Pacific's intellectual
property rights and assets related to dental technology, including PTM. Under
the assignment agreement for PTM, Pacific transferred all of its remaining
licensing obligations. In addition, Pacific may further receive a milestone
payment, subject to the approval of a PTM product for a particular market.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter and nine months ended September 30, 2000, the Company
incurred net losses of $2.5 million and $25.9 million, respectively. The net
loss for the nine month period ended September 30, 2000 includes non-cash
charges of $14.7 million associated with variable stock options, and $4.5
million for the fair value of common stock issued to consultants. Since the
beginning of this year, the Company has used $3.7 million to fund
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operating activities, as compared to $2.6 million for the same period of 1999.
The $1.1 million increase is primarily the result of the Company's increased
operating activities associated with developing its new Internet business.
At September 30, 2000, the Company's aggregate cash and cash equivalents were
$3.9 million, a net decrease of $100,000 from December 31, 1999. This decrease
is primarily attributable to $3.7 million of cash used to fund operations, which
was offset by the receipt of $3.1 million in proceeds from the exercise of
approximately 1.3 million Class C common stock warrants at a negotiated discount
to the contractual exercise price, plus proceeds of $400,000 received from the
sale of its investment in Aquila Biopharmaceuticals, Inc. and $100,000 in
proceeds from the sale of property and equipment. The $3.7 million of cash used
to fund operations is net of $500,000 in proceeds received in connection with
the Company's out-licensing of PRO 2000 Gel and $50,000 relating to the
assignment of its licensing rights to PTM, respectively.
In connection with the acquisition of HDC in January 2000, each share of HDC
stock was converted into approximately 0.81 shares of the Company's common stock
or a total of 10,920,000 HeavenlyDoor.com shares. In accordance with the merger
agreement, the Company also issued 3,876,887 shares of common stock with a fair
value of $23,020,955 to investors in the Company's 1998 private placement,
former preferred stockholders of Pacific Pharmaceuticals, Inc., and certain
other common stockholders in exchange for the elimination of the certain
contractual obligations incurred in connection with the 1998 private placement,
the Pacific acquisition and other transactions. In addition, the Company issued
546,000 common shares as consideration for the fee due the placement agent
involved in the HDC transaction. The Company also issued a total of 750,000
shares with a fair value of $4,453,500 to consultants in exchange for consulting
services.
The Company expects that its current funds and interest income will be
sufficient to fund the Company's current operations over the next twelve months.
Although management continues to pursue additional funding arrangements, no
assurance can be given that such financing will be available to the Company. If
the Company is unable to generate significant revenue from future operations, or
obtain additional revenue in connection with the existing licenses of the
Company's biotechnology assets, or secure additional financing, the Company's
financial condition will be adversely affected. Further, any potential strategic
alignment and/or potential acquisition could affect the Company's liquidity and
financing requirements. If additional funds are raised by issuing equity
securities, further dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the timing of payments received under the licenses of the biotechnology
assets. Other important factors that may affect achieving the Company's
strategic goals and other forward-looking statements are set forth in Exhibit
99.1 of the Company's 1999 Annual Report on Form 10-K.
The Company's working capital and other cash needs will depend heavily on the
amount and timing of the Company's investment in the development and promotion
of its Internet business and the timing and structure of payments related to the
biotechnology assets.
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RELATED PARTY TRANSACTIONS
As part of the acquisition of Heaven's Door Corporation, the Company assumed
notes payable in the amount of $330,000, payable to Richard J. Kurtz, a director
of the Company and a former shareholder of HDC. On May 31, 2000, the Company
paid $243,068 to Mr. Kurtz, consisting of $235,019 of principal plus $8,049 of
accrued interest. On September 22, 2000, the Company made a principal payment of
$55,000 to Mr. Kurtz in satisfaction of its remaining obligation. Accordingly,
the Company recorded a reduction of $39,741 to goodwill, representing the
adjustment of notes payable recorded at acquisition to the aggregate amounts of
principal paid.
On June 14, 2000, the Company entered into an agreement with Interneuron
Pharmaceuticals, Inc. ("Interneuron") for the out-licensing of PRO 2000 Gel.
Glenn L. Cooper, M.D., a director of the Company at the time of the agreement,
is the President and Chief Executive Officer of Interneuron. In addition, the
principal shareholder of the Company is a shareholder of Interneuron. Pursuant
to this agreement, the Company received a payment of $500,000 in June 2000,
which is included in other income for the nine months ended September 30, 2000.
The Company retains ownership and certain future rights to PRO 2000 Gel under
the licensing agreement, including i) provisions for the receipt of additional
payments based upon the achievement of certain milestones and ii) royalties from
future commercial sales of PRO 2000 Gel, if any. Interneuron has a limited
option to purchase the ownership of PRO 2000 Gel. The Company, however, has no
further obligation to fund research and development for PRO 2000 Gel.
On October 13, 2000, Pacific entered into an agreement with AOI Pharmaceuticals
Inc. ("AOI") to sublicense its exclusive worldwide patent rights and know-how
relating to O6-benzylguanine ("O6"). Michael S. Weiss, Chairman of the Board of
Directors of the Company, is the Chairman and Chief Executive Officer of AOI. In
addition, the principal shareholder of the Company is a shareholder of an
affiliate of AOI. Pursuant to this agreement, Pacific sublicensed all
development and licensing rights to AOI in exchange for future royalties on net
sales of O6. The agreement also provides for cash payments to Pacific based upon
the achievement of certain developmental milestones. In addition, AOI assumed
all financial obligations of Pacific relating to its licensing of worldwide
patent rights as of the effective date of the agreement.
On October 17, 2000, the Company entered into a non-binding letter of intent to
acquire WWH Insurance Services, Inc. ("WWH"). WWH is a privately held national
independent distributor of life and health insurance products. WWH conducts
business under the trade names SeniorQuote(TM), BancQuote(TM) and Senior Family
Care(TM). Philip C. Pauze, a director of the Company, is a director and
stockholder of WWH. The acquisition of WWH would broaden the Company's reach
into products and services for seniors, beyond that originally anticipated with
the acquisition of HDC, whose operations are primarily Web-centric. WWH targets
consumers through direct marketing channels; primarily, via cable television
programs whose audience meets the demographic profile of WWH's target market.
The Company expects to execute a definitive letter of agreement by the end of
November 2000, provided that the results of the mutual due diligence reviews
presently underway meet with the approval of the Company and WWH. The
acquisition will be subject to customary closing conditions as well as the
approval of the Company's stockholders.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
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clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
NASDAQ LISTING
By letter dated August 25, 2000, The Nasdaq Stock Market, Inc. ("Nasdaq")
notified the Company that, based upon the Company's failure to maintain a
minimum bid price of $1.00 for thirty consecutive trading days, the Company's
common stock is subject to delisting. In accordance with its bid price rule,
Nasdaq provided the Company 90 calendar days, or until November 27, 2000, to
regain compliance, or the common stock of the Company will be delisted at the
opening of business on November 29, 2000. The Company is entitled to an oral or
written hearing to appeal Nasdaq's determination. The Company intends to file a
request for a hearing by November 27, 2000, the deadline prescribed by Nasdaq in
its notice.
YEAR 2000
During 1998, the Company completed its assessment of the potential impact of the
year 2000 on its information technology and non-information technology systems.
The year 2000 problem as defined is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs or systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in a miscalculation or system failures. Based on the Company's
assessment, there is no year 2000 impact on the Company's information technology
systems. Operating systems and applications used by the Company are year 2000
compliant. At this time, the Company is not aware of any year 2000 issues
relating to its third party vendors. The Company replaced several
non-information technology systems. The cost of year 2000 compliant
non-technology information systems was approximately $8,000. The Company's most
critical uncertainty relates to its third parties' information technology
systems not being year 2000 compliant. This may result in inaccurate information
from banks, government agencies, contracted research organization, vendors, etc.
As of September 30, 2000, the Company had not experienced any adverse effects as
a result of the year 2000 problem.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 ("FRR 48"), "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments." FRR 48 required disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those already required under generally accepted accounting principles.
The Company is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
27.1 Financial Data Schedule. Filed herewith.
(b) Reports On Form 8-K.
-------------------
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEAVENLYDOOR.COM, INC.
(Registrant)
Date: November 13, 2000 by: /s/ SALVATORE A. BUCCI
---------------------------------------
Salvatore A. Bucci
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule. Filed herewith.
22
