SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-K

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the year ended December 31, 2004
		Commission File Number: 0-21134

 

Paligent Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		04-2893483
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10 East 53rd Street, New York, New York		10022
(Address of principal executive offices)		(zip code)

 

Registrant’s telephone number, including area code:  (212) 755-5461

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock $0.01 par value per share

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ý  NO  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

YES  o  NO  ý

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was $3,729,000.

 

The number of shares of the registrant’s Common Stock outstanding as of March 22, 2005 was 32,490,948.

 

Documents incorporated by reference:

 

None.

 

 

PART I

 

Item 1.  Business.

 

Corporate Summary

 

Since 2001, Paligent Inc. together with its subsidiaries (collectively, “Paligent” or the “Company”) has been engaged in seeking business opportunities to maximize value for its shareholders.  The Company has evaluated various strategic alternatives, including acquisitions of new operating businesses and technologies as well as potential merger opportunities.

 

From its inception in 1985 through 1999, the Company operated, under the name Procept, Inc., as a biotechnology company engaged in the development and commercialization of novel drugs with a product portfolio focused on infectious diseases and oncology.  During 1999, the Company’s principal efforts were devoted to drug development and human clinical trials focusing on two biotechnology compounds, PRO 2000 Gel and O6-Benzylguanine (“O6-BG”).  During fiscal 2000, the Company closed its research facilities and out-licensed PRO 2000 Gel and O6-BG, which had been under development by the Company for several years.  In September 2004, the Company transferred all of its rights, title and interest in PRO 2000 Gel pursuant to an option duly exercised by its sublicensee and in March 2005, the Company assigned all of its rights, interests and obligations in O6-BG.

 

In January 2000, the Company acquired Heaven’s Door Corporation (“HDC”), a company that provided products and services over the Internet.  Effective with the acquisition of HDC, the Company’s name was changed from Procept, Inc. to HeavenlyDoor.com, Inc.  At the same time, Procept, Inc. became the new name of the Company’s subsidiary, Pacific Pharmaceuticals, Inc. (hereinafter referred to as “Procept”), a company engaged in the development of cancer therapies, which the Company acquired in March 1999.  After a sustained period of deterioration in the Internet and technology sectors and related capital markets, the Company decided, in the fourth quarter of 2000, to discontinue the pursuit of its Internet strategy.  Shortly thereafter, the Company entered into an agreement to sell all of its Web-based assets and Internet operations and ceased its Internet activities. In connection with this agreement, the Company’s name was again changed, on December 31, 2000, from HeavenlyDoor.com, Inc. to Paligent Inc.

 

On July 1, 2003, the Company executed a non-binding letter of intent to acquire privately held Digital Products of Delaware, Inc. (“Digital”), a company engaged in providing electronic monitoring products and services to the criminal justice and corrections industry.  The Company proposed to acquire all of the issued and outstanding stock of Digital in consideration of the issuance of shares of common stock of the Company such that the shareholders of Digital would own 80% of the outstanding stock of the post-acquisition company.  Richard J. Kurtz, a director and the principal stockholder of the Company, is the principal stockholder of Digital.  On January 16, 2004, the Company announced that the contemplated Digital acquisition was being indefinitely postponed due to Digital’s need to focus on meeting certain business demands which would hinder its ability to conclude the business combination with the Company.  Although the Company remains interested in a potential acquisition of Digital, upon the postponement of the Digital transaction, the Company resumed its efforts to identify an alternative business combination.

 

2

 

On July 28, 2004, the Company executed a letter of intent to acquire privately held SoyToy LLC (“SoyToy”), a company engaged in the retail sale and distribution of soymilk machines.  Mr. Kurtz holds a 50% membership interest in SoyToy.  The letter of intent contemplated the acquisition by the Company of all of the issued and outstanding membership interests of SoyToy in consideration of the issuance of shares of common stock of the Company such that the present stockholders of Paligent and equity holders of SoyToy would each own 50% of the outstanding stock of the post-acquisition company, subject to adjustment for future issuances.  In addition, the letter of intent contemplated that approximately one-half of the existing related party debt of SoyToy would be converted at the closing into convertible preferred stock of the Company, the terms of which were to be mutually acceptable to the Company and Mr. Kurtz, the holder of the related party debt.  The letter of intent provided that the proposed acquisition would be subject, among other things, to the execution of definitive acquisition documentation and the approval by the holders of a majority of shares of Paligent common stock that are not owned by Mr. Kurtz or his affiliates. The Company estimated that approximately $1.5 million would be needed to fund the initial phase of SoyToy’s business plan, which the Company and SoyToy anticipated financing, at least in part, prior to the completion of the business combination.  SoyToy’s progress in developing its business plan has been proceeding at a slower pace than initially envisioned.  While the letter of intent expired on September 26, 2004, the Company has continued discussing the potential transaction with SoyToy.  However, due to the lack of progress, the Company has been considering alternative transactions.

 

Former Biotechnology Programs

 

PRO 2000 Gel

 

On June 14, 2000, the Company licensed to Indevus Pharmaceuticals, Inc., formerly Interneuron Pharmaceuticals, Inc. (“Indevus”), the exclusive, worldwide rights to develop and market PRO 2000 Gel (the “PRO 2000 License”) (see Item 13 - Certain Relationships and Related Transactions).  PRO 2000 Gel is a vaginal, topical microbicide designed to provide protection against human immunodeficiency virus (“HIV”) infection, as well as other sexually transmitted pathogens (e.g., herpes, chlamydia and gonorrhea infection). Under the terms of the PRO 2000 License, the Company (i) received an up-front payment of $500,000 and retained certain future rights to PRO 2000 Gel; (ii) transferred responsibility for all remaining development and commercialization activities for PRO 2000 Gel to Indevus; and (iii) granted Indevus an option, for a limited period of time following the completion of the Phase III efficacy trial, to purchase the future royalty rights relating to PRO 2000 Gel.

 

On April 11, 2003, the Company and Indevus executed an amendment to the PRO 2000 License (the “PRO 2000 Amendment”).  Upon execution of the PRO 2000 Amendment, the Company received $500,000 from Indevus in exchange for (i) the elimination of the $500,000 milestone payment that was to be paid under the PRO 2000 License upon the initiation of a Phase II safety trial (planned to begin later in 2003); and (ii) a second option, upon which exercise the Company would receive an additional payment of $500,000, to acquire all of the Company’s rights, title and interest to PRO 2000 Gel as set forth in the PRO 2000 License, provided that such second option is exercised prior to September 30, 2004.

 

On September 27, 2004, Indevus exercised the second option under the PRO 2000 Amendment, at which time Indevus acquired all of the Company’s rights, title and interest in PRO 2000 Gel as set forth in the PRO 2000 License.  In connection with the exercise of the second option under the PRO 2000 Amendment, Indevus paid $500,000 to the Company.

 

3

 

O6-Benzylguanine

 

On October 13, 2000, Procept and AOI Pharmaceuticals Inc. (“AOI”) entered into a sublicense agreement (the “Sublicense Agreement”) pursuant to which AOI sublicensed Procept’s exclusive, worldwide patent rights and know-how relating to O6-BG in exchange for future royalties on net sales of O6-BG (see Item 13 - Certain Relationships and Related Transactions).  O6-BG is a chemosensitizer that is designed to overcome resistance to a significant class of commonly used chemotherapeutic agents known as O6-alkylating agents.  A Phase II development program began in 1999, which was conducted in accordance with a Cooperative Research and Development Agreement (“CRADA”) executed with the National Cancer Institute (“NCI”), a unit of the National Institutes of Health (“NIH”), in August 1998.  The Sublicense Agreement also provides for cash payments to Procept based upon the achievement of certain developmental milestones.  In addition, AOI assumed all financial obligations of Procept relating to its licensing of worldwide patent rights and CRADA costs that are incurred subsequent to the effective date of the Sublicense Agreement.  On February 28, 2002, Procept and the United States Public Health Service (“PHS”), represented by NIH, a constituent agency of PHS, executed an exclusive Patent License Agreement (the “New License Agreement”), which superseded the license agreement dated February 6, 1998 between Procept and The Penn State Research Foundation (“PSRF”) (the “Original License Agreement”).  The New License Agreement affirms Procept’s worldwide patent rights to O6-BG and related compounds, and acknowledges the Sublicense Agreement, as of the date executed by Procept and AOI.

 

In connection with the execution of the New License Agreement, Procept, together with the NCI and AOI, also executed an amendment to the CRADA (the “Amended CRADA”), pursuant to which AOI replaced Procept as Collaborator (i.e., the research and development partner).  Under terms of the Amended CRADA, AOI assumed direct responsibility for all remaining research and payment obligations, effective as of February 28, 2002.

 

In May 2002, Procept and PHS executed an amendment to the New License Agreement (the “First Amendment”).  The First Amendment clarified language in the New License Agreement pertaining to future sublicensing agreements, in the event that such agreements were to be executed.  In addition, the Company, together with PHS, PSRF, AOI and the University of Chicago (“UC”), also executed, in May 2002, a Comprehensive Release Agreement (the “Release Agreement”).  The Release Agreement provides for the irrevocable and absolute release of the Company by PHS, PSRF and UC from any and all claims or obligations arising out of, or related to the Original License Agreement.  The Release Agreement was made part of the New License Agreement.  In October 2002, Procept and PHS executed a second amendment to the New License Agreement revising certain provisions pertaining to benchmark payments and royalties as set forth in the New License Agreement and First Amendment.

 

In August 2003, AOI and the NCI executed a further amendment to the CRADA, extending the term of the CRADA to August 7, 2005.

 

In February 2005, Procept and PHS executed a third amendment to the New License Agreement revising the provision for payment of an additional royalty to PHS upon the occurrence of an assignment by Procept of the New License Agreement.  Such additional royalty was revised from a payment amount of $20,000 to $17,500.

 

Subsequently, in March 2005, pursuant to an agreement by and between Procept, Keryx Biopharmaceuticals, Inc., the parent of AOI (“Keryx”) and PHS (the “Assignment Agreement”), Procept assigned all of its rights, interests and obligations under the New License Agreement to Keryx; in exchange, Keryx agreed to pay Procept a total of $158,750, in two installments.  The first installment of $83,750 was paid on March 30, 2005.  The second installment of $75,000 is payable on December 31,

 

4

 

2005 and is evidenced by a promissory note from Keryx payable to Procept, which bears no interest until after the maturity date.  In connection with the Assignment Agreement, Procept paid to PHS the additional royalty of $17,500, as provided for under the New License Agreement, as revised in February 2005.

 

Employees

 

As of March 1, 2005, the Company has one full-time employee. The Company also utilizes independent contractors to perform various functions for the Company. The Company’s employee is not represented by a labor union.

 

Item 2.       Properties.

 

On January 16, 2004, the Company relocated its principal executive offices to 10 East 53^rd Street, 33^rd Floor, New York, New York 10022 under a month-to-month arrangement for approximately 300 square feet.

 

Item 3.       Legal Proceedings.

 

The Company had been maintaining its principal executive offices at 369 Lexington Avenue, 10^th Floor, New York, New York 10017 (the “Lexington Office”).  In July 2001, the Company sublet substantially all of the Lexington Office (the “Sublease”).

 

On December 31, 2003, the Sublease was terminated pursuant to a Surrender Agreement under which the Company and the subtenant under the Sublease (the “Subtenant”) agreed to release one another with respect to any and all claims under the Sublease and the Company received from the Subtenant cash and a promissory note approximately equivalent to the aggregate amount due as of December 31, 2003 in exchange for the termination of the Sublease and a furniture and equipment rental agreement.  The Promissory Note, in the original amount of $75,000, bore interest at the rate of 6% per annum and was to be payable in three installments of $25,000, plus accrued interest, on June 30, 2004, December 31, 2004 and June 30, 2005.  The Company did not receive from the Subtenant the installment payment that was due on June 30, 2004.  On September 14, 2004, the Company filed an action in the Supreme Court of the State of New York, New York County, alleging that the Subtenant had defaulted on its obligations under the Promissory Note dated December 31, 2003.  In February 2005, the Company and the Subtenant reached a settlement of the Company’s claim pursuant to which the Company received a one-time payment of $30,000 in exchange for withdrawing its action.

 

Item 4.       Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

 

5

 

PART II

 

Item 5.          Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s common stock trades on the OTC Bulletin Board under the symbol PGNT.  The following table sets forth the range of high and low closing sale prices for the Common Stock as reported by the OTC Bulletin Board for the periods indicated below.

 

 

As of March 22, 2005, there were 1,500 holders of record.

 

Dividend Policy

 

The Company has never paid cash dividends on its common stock and does not anticipate paying such dividends in the foreseeable future.  The Company intends to retain any future earnings for use in its business.

 

6

 

Item 6.  Selected Financial Data.

 

The selected financial data set forth below as of December 31, 2004 and 2003 and for each of the three years ended December 31, 2004, 2003 and 2002 are derived from the Company’s consolidated financial statements included elsewhere in this Report, which have been audited by independent accountants Rothstein, Kass & Company, P.C., for the years ended December 31, 2004 and 2003, and by PricewaterhouseCoopers LLP for the year ended December 31, 2002.  The selected financial data set forth below as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 are derived from audited consolidated financial statements not included in this Report.  This data should be read in conjunction with the Company’s financial statements and related notes thereto (contained in Item 15 of this Report) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

 

SELECTED FINANCIAL DATA

 

		YEARS ENDED DECEMBER 31,
		2004			2003			2002			2001			2000
		(in thousands, except share data)
Statement of operations data:
Revenues		$	2		$	1		$	8		$	73		$	254
Costs and expenses:
Research and development(1)		—			—			—			286			4,696
Sales and marketing		—			—			—			—			1,135
General and administrative(1)(2)		608			686			1,004			1,460			23,409
Impairment of goodwill(2)		—			—			—			—			20,031
Total costs and expenses		608			686			1,004			1,746			49,271
Loss from operations		(606		)	(685		)	(996		)	(1,673		)	(49,017		)
Other income (expense)		500			497			—