<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
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 0-22147
ILEX ONCOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2699185
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11550 I.H. 10 WEST, SUITE 100
SAN ANTONIO, TEXAS 78230
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 949-8200
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
- -------------------- -------------------------------------
COMMON STOCK, NATIONAL ASSOCIATION OF SECURITIES
$.01 PAR VALUE DEALERS AUTOMATED QUOTATION SYSTEM
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
----
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 .
--- ---
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 TO THIS
FORM 10-K. X .
---
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
MARCH 6, 2000 IS 21,793,682.
THE AGGREGATE MARKET VALUE OF THE STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 6, 2000 WAS APPROXIMATELY $832 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE
REGISTRANT'S 2000 ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION NOT LATER THAN APRIL 30, 2000
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE> 2
1999 ANNUAL REPORT ON FORM 10-K
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PART II.
--------
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The reports of the Company's Independent Public Accountants, Financial
Statements and Notes to Financial Statements appear herein commencing on page
F-1.
PART IV.
--------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Index to Financial Statements appears on Page
F-1.
2. Financial Statement Schedules The Financial Statement Schedules of
fifty percent or less owned persons required to be filed by Regulation
S-X are attached hereto as Exhibit 99.1.
(b) Reports on Form 8-K None
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------- -------------------------
<S> <C>
2.1 Plan of Merger and Acquisition Agreement dated July 16, 1999, by and
among ILEX Oncology, Inc., Convergence Pharmaceuticals, Inc., Vikas
Sukhatme, Raghurom Kalluri, Ralph Weichselbaum, Donald Kufe, Glenn C.
Rice, and Tsuyneya Ohno (incorporated herein by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed July 30, 1999)
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December
12, 1996, as amended)
3.2 Bylaws of the Company, as amended (Incorporated herein by
reference to Exhibit 3.2 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
4.1 Specimen of certificate representing Common Stock, $.01 par value,
of the Company (Incorporated herein by reference to Exhibit 4.1 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.1 Services Agreement dated November 18, 1994 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.6 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
10.2 Covenant Not To Sue dated September 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.7 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
10.3 Lease Agreement dated September 1, 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.10 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
</TABLE>
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1999 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S> <C>
10.4 Commercial Industrial Sublease Agreement between TRTF/CTRCRF
Building Corporation and the Company (Incorporated herein by reference
to Exhibit 10.11 of the Company's Registration Statement No. 333-17769
on Form S-1 filed December 12, 1996, as amended)
10.5+ License Agreement [Oxypurinol] dated March 31, 1995 by and among
BW Wellcome Co., The Welcome Foundation Limited and the Company
(Incorporated herein by reference to Exhibit 10.14 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.6+ License Agreement [Eflornithine] between ILEX Oncology, Inc. and
Marion Merrell Dow Inc. and its subsidiaries Merrell Dow
Pharmaceuticals Inc. and Marion Merrell Dow France Et Cie
(Incorporated herein by reference to Exhibit 10.17 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.7+ License Agreement [RP 60475] dated November 18, 1994 between
Rhone-Poulenc Rorer S.A. and the Company (Incorporated herein by
reference to Exhibit 10.20 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.8+ Agreement dated November 25, 1996 between Hoffmann-La Roche,
Inc. and the Company [RO23-7553] (Incorporated herein by reference to
Exhibit 10.21 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
10.9 Subordinated Option Agreement dated March 27, 1995 between CTRC
Research Foundation and the Company (Incorporated herein by reference
to Exhibit 10.35 of the Company's Registration Statement No. 333-17769
on Form S-1 filed December 12, 1996, as amended)
10.10 Employment Agreement dated November 2, 1994 between Richard L.
Love and the Company (Incorporated herein by reference to Exhibit
10.36 of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.11 Amendment to Employment Agreement dated April 4, 1995 between
Richard L. Love and the Company (Incorporated herein by reference to
Exhibit 10.37 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
10.12 Amendment to Employment Agreement dated September 27, 1995
between Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.38 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.13 Employment Agreement dated August 27, 1996 between Pedro
Santabarbara, M.D., Ph.D. and the Company (Incorporated herein by
reference to Exhibit 10.43 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.14 Consulting Services Agreement dated March 16, 1995 between the
Company and Charles A. Coltman, Jr., M.D. (Incorporated herein by
reference to Exhibit 10.45 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.15 1995 Stock Option Plan for the Company (Incorporated herein by
reference to Exhibit 10.47 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
</TABLE>
<PAGE> 4
1999 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S> <C>
10.16 1996 Non-Employee Director Stock Option Plan for the Company
(Incorporated herein by reference to Exhibit 10.48 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.17 Form of Non-Employee Director Stock Option Agreement
(Incorporated herein by reference to Exhibit 10.49 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.18 Fourth Amended and Restated Registration Rights Agreement
between the Company, CTRC and the holders of the Series B, C, D and E
Preferred Stock (Incorporated herein by reference to Exhibit 10.50 of
the Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.19 Form of Pledge Agreement between Cancer Therapy and Research
Center Endowment and each of Gary V. Woods, and Ruskin C. Norman, M.D.
(Incorporated herein by reference to Exhibit 10.55 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.20+ Exclusive License Agreement [Oxypurinol] dated November 27,
1996 between MGI Pharma, Inc. and the Company (Incorporated herein by
reference to Exhibit 10.56 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.21 Stock Purchase Agreement dated April 11, 1995 between Daniel Von
Hoff and the Company (Incorporated herein by reference to Exhibit
10.58 of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.22 Stock Purchase Agreement dated April 11, 1995 between Richard L.
Love and the Company (Incorporated herein by reference to Exhibit
10.60 of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.23 Promissory Note dated April 12, 1995 between Daniel Von Hoff and
the Company (Incorporated herein by reference to Exhibit 10.62 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.24 Promissory Note dated April 12, 1995 between Richard L. Love and
the Company (Incorporated herein by reference to Exhibit 10.63 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.25 Ownership Restriction Agreement dated December 11, 1996 between
MPILEX Management, L.L.C., MPILEX Partners, L.P. and holders of units
thereof (Incorporated herein by reference to Exhibit 10.66 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.26 Agreement of Limited Partnership of MPILEX Partners, L.P.
(Incorporated herein by reference to Exhibit 10.67 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
10.27 Regulations of MPILEX Management, L.L.C. dated December 1996
(Incorporated herein by reference to Exhibit 10.68 of the Company's
Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)
</TABLE>
<PAGE> 5
1999 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S> <C>
10.28 License Agreement dated December 11, 1996 between MPILEX
Partners, L.P. and the Company (Incorporated herein by reference to
Exhibit 10.69 of the Company's Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)
10.29 Registration Rights Agreement dated July 9, 1997, between the
Company and PRN Research, Inc. (Incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed
August 14, 1997)
10.30 Service Agreement dated June 30, 1997, between the Company and
PRN Research, Inc. (Incorporated herein by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q filed August 14, 1997)
10.31 Drug Development and Commercialization Agreement dated March 27,
1998, between the Company and The Burnham Institute, Inc.
(Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed May 15, 1998)
10.32 Office Building Lease Agreement dated April 8, 1998, between the
Company and N.W.A. Limited Partnership (Incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed August 14, 1998)
10.33 Consulting Services Agreement dated July 1, 1997, between the
Company and Dr. Daniel D. Von Hoff, M.D.
10.34 Stock Purchase Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed May
17, 1999)
10.35 Registration Rights Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed May
17, 1999)
10.36 Letter of Credit Agreement dated April 5, 1999 between the
Company and PFK (incorporated herein by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q filed May 17, 1999)
10.37 Employment Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and Glenn C. Rice (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated July
16, 1999 and filed July 30, 1999)
10.38 Registration Rights Agreement dated July 16, 1999 among ILEX
Oncology, Inc., Vikas Sukhatme, Raghuram Kalluri, Ralph Weichselbaum,
Donald Kufe, Glenn C. Rice, Tsuneya Ohno, Stephen Dolezalek, Beth
Israel Deaconess Medical Center and Arch Development Corporation
(incorporated herein by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated July 16, 1999 and filed July 30,
1999)
10.39 Stock Purchase Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and each of the Investors (as defined therein)
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q filed August 16, 1999)
10.40+ Distribution and Development Agreement between L&I Partners, L.P. and
Schering AG dated August 24, 1999 (incorporated herein by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K/A filed
September 21, 1999)
10.41** Letter agreement dated September 9, 1999, between the Company
and Al J. Jecminek.
11.1** Computation of Earnings Per Share
</TABLE>
<PAGE> 6
1999 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S> <C>
21.1 Subsidiaries of the Company State of Names Under Name
Incorporation Which Doing Business
</TABLE>
<TABLE>
<CAPTION>
State of Names Under
Name Incorporation Which Doing Business
---- ------------- --------------------
<S> <C> <C>
ILEX Oncology Services, Inc. Delaware ILEX Services, Inc.
ILEX Products, Inc. Delaware ILEX Products, Inc.
Convergence Pharmaceuticals, Inc. Delaware ILEX Products Research Division
ILEX Services Limited United Kingdom ILEX Services Limited
</TABLE>
<TABLE>
<S> <C>
23* Consent of Arthur Andersen LLP
24.1* Power of Attorney (included on signature page)
27** Financial Data Schedule
99.1** Financial Statements of L&I Partners, L.P.
</TABLE>
* Filed herewith.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
<PAGE> 7
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of San Antonio, Texas,
on April 6, 2000.
<TABLE>
<S> <C>
ILEX ONCOLOGY, INC.
By: /s/ RICHARD L. LOVE
-----------------------
Richard L. Love
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ GREGORY L. WEAVER
-------------------------
Gregory L. Weaver
Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)
</TABLE>
Pursuant to the requirements of Section 13 of 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated on April 6, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ GARY V. WOODS
----------------------------
Gary V. Woods Director, Chairman of the Board
/s/ RICHARD L. LOVE
----------------------------
Richard L. Love President, Chief Executive Officer
Director
/s/ DANIEL D. VON HOFF, M.D.
----------------------------
Daniel D. Von Hoff, M.D Director
/s/ JOHN L. CASSIS
----------------------------
John L. Cassis Director
/s/ A. DANA CALLOW, JR.
----------------------------
A. Dana Callow, Jr. Director
/s/ RUSKIN C. NORMAN, M.D.
----------------------------
Ruskin C. Norman, M.D Director
/s/ JASON S. FISHERMAN, M.D.
----------------------------
Jason S. Fisherman, M.D. Director
/s/ JOSEPH S. BAILES, M.D.
--------------------------
Joseph S. Bailes, M.D. Director
/s/ GLENN C. RICE, PH.D.
------------------------
Glenn C. Rice, Ph.D Director
</TABLE>
<PAGE> 8
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1999, 1998 and
1997
F-5
Consolidated Statements of Stockholders' Equity - For the Years Ended December 31, 1999, 1998 and
1997
F-6
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and
1997
F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 9
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ILEX Oncology, Inc.:
We have audited the accompanying consolidated balance sheets of ILEX Oncology,
Inc. (a Delaware corporation), and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1999, 1998 and 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 auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of ILEX Oncology, Inc., and
subsidiaries as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999, 1998 and 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 19, 2000
F-2
<PAGE> 10
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
December 31
----------------------
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 43,477 $ 5,331
Investments in marketable securities 33,758 18,849
Restricted investments 1,400 1,400
Accounts receivable, net of allowance for doubtful accounts of
$164 and $150 in 1999 and 1998, respectively
Billed 4,414 2,477
Unbilled 2,484 863
Employee 245 --
Related party -- 208
Prepaid expenses and other 1,914 1,194
--------- ---------
Total current assets 87,692 30,322
--------- ---------
NONCURRENT ASSETS:
Investments in marketable securities 10,216 --
Restricted investments 275 445
Investments in and advances to-
Research and development partnerships (2,534) 228
Contract research affiliate -- 473
Intangible asset, net -- 6,704
Other -- 75
--------- ---------
7,957 7,925
--------- ---------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $3,242 and $1,374 in 1999 and 1998, respectively 4,705 4,441
--------- ---------
Total assets $ 100,354 $ 42,688
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
December 31
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Related parties $ 165 $ 306
Other 2,462 2,000
Accrued subcontractor costs-
Related parties 739 95
Other 1,913 1,038
Accrued liabilities 2,488 908
Deferred revenue 2,557 2,033
--------- ---------
Total current liabilities 10,324 6,380
--------- ---------
LONG-TERM LIABILITIES 369 404
--------- ---------
10,693 6,784
--------- ---------
COMMITMENTS AND CONTINGENCIES (see Note 16)
MINORITY INTEREST 5,082 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.01 par value; 20,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value; 40,000,000 shares authorized;
21,590,425 and 12,652,593 shares issued; 21,551,425 and
12,613,593 shares outstanding in 1999 and 1998, respectively 216 127
Additional paid-in capital 163,821 67,623
Receivables on sale of common stock -- (46)
Accumulated deficit (77,338) (31,283)
Deferred compensation (1,603) --
Less - Treasury stock at cost; 39,000 shares in 1999 and 1998 (517) (517)
--------- ---------
Total stockholders' equity 84,579 35,904
--------- ---------
Total liabilities and stockholders' equity $ 100,354 $ 42,688
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 12
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
--------- -------- --------
REVENUE:
<S> <C> <C> <C>
Product development $ 4,407 $ 4,622 $ 5,027
Contract research services 13,457 9,650 5,903
Licensing fees -- -- 300
-------- -------- --------
Total revenue 17,864 14,272 11,230
-------- -------- --------
OPERATING EXPENSES:
Research and development costs 15,990 16,127 6,740
Direct cost of research services 13,227 10,875 4,587
General and administrative 4,063 4,354 6,691
In-process research and development 11,124 -- --
Special charges 13,882 -- --
-------- -------- --------
Total operating expenses 58,286 31,356 18,018
-------- -------- --------
OPERATING LOSS (40,422) (17,084) (6,788)
OTHER INCOME (EXPENSE):
Equity in losses of-
Research and development partnerships (3,824) (4,453) (4,295)
Contract research affiliate (3,310) (1,541) (182)
Interest income, net 1,700 1,850 2,583
Minority interest in consolidated subsidiary (82) -- --
-------- -------- --------
LOSS BEFORE INCOME TAXES (45,938) (21,228) (8,682)
Provision for foreign income taxes 117 -- --
-------- -------- --------
NET LOSS $(46,055) $(21,228) $ (8,682)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (3.04) $ (1.71) $ (.72)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 15,144 12,450 12,118
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 13
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, except Shares Issued and Outstanding
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
-------------------- -------------------- --------------------
Shares $0.01 Shares $0.01 Shares $0.01
Issued and Par Issued and Par Issued and Par
Outstanding Value Outstanding Value Outstanding Value
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 2,991,477 $ 30 3,101,448 $ 31 1,309,424 $ 13
Issuance of common shares in public offering,
net of issuance costs -- -- -- -- -- --
Conversion of Series A, B, C, D and E preferred
stock to common shares (2,991,477) (30) (3,101,448) (31) (1,309,424) (13)
Exercise of stock options and warrants -- -- -- -- -- --
Issuance of common shares for collaborative
agreement -- -- -- -- -- --
Issuance of common shares for investment in
European affiliate -- -- -- -- -- --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1997 -- -- -- -- -- --
Issuance of common shares for collaborative
agreement -- -- -- -- -- --
Stock received as a reduction in advances
to partners -- -- -- -- -- --
Exercise of stock options and warrants -- -- -- -- -- --
Warrants issued in payment of licensing fee -- -- -- -- -- --
Collections on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1998 -- -- -- -- -- --
Issuance of common shares in connection
with termination of a collaborative agreement -- -- -- -- -- --
Issuance of common shares for acquisition
of company -- -- -- -- -- --
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound -- -- -- -- -- --
Exercise of stock options and warrants -- -- -- -- -- --
Options issued for consulting agreements -- -- -- -- -- --
Issuance of common shares in private
placement, net of issuance costs -- -- -- -- -- --
Issuance of common shares in secondary
offering, net of issuance costs -- -- -- -- -- --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1999 -- $ -- -- $ -- -- $ --
=========== ===== ========== ===== ========== =====
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, except Shares Issued and Outstanding
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common Stock
-------------------- -------------------- --------------------
Shares $0.01 Shares $0.01 Shares $0.01
Issued and Par Issued and Par Issued and Par
Outstanding Value Outstanding Value Outstanding Value
----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 113,953 $ 1 475,753 $ 5 1,187,539 $ 12
Issuance of common shares in public offering,
net of issuance costs -- -- -- -- 2,700,000 27
Conversion of Series A, B, C, D and E preferred
stock to common shares (113,953) (1) (475,753) (5) 7,992,055 80
Exercise of stock options and warrants -- -- -- -- 70,387 1
Issuance of common shares for collaborative
agreement -- -- -- -- 312,188 3
Issuance of common shares for investment in
European affiliate -- -- -- -- 17,361 --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1997 -- -- -- -- 12,279,530 123
Issuance of common shares for collaborative
agreement -- -- -- -- 314,600 3
Stock received as a reduction in advances
to partners -- -- -- -- (39,000) --
Exercise of stock options and warrants -- -- -- -- 58,463 1
Warrants issued in payment of licensing fee -- -- -- -- -- --
Collections on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1998 -- -- -- -- 12,613,593 127
Issuance of common shares in connection
with termination of a collaborative agreement -- -- -- -- 629,200 6
Issuance of common shares for acquisition
of company -- -- -- -- 1,000,000 10
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound -- -- -- -- 218,858 2
Exercise of stock options and warrants -- -- -- -- 500,574 5
Options issued for consulting agreements -- -- -- -- -- --
Issuance of common shares in private
placement, net of issuance costs -- -- -- -- 2,389,200 24
Issuance of common shares in secondary
offering, net of issuance costs -- -- -- -- 4,200,000 42
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1999 -- $ -- -- $ -- 21,551,425 $ 216
======== ===== =========== ====== ============ =====
<CAPTION>
Receivables
Additional on Sale
Paid-In of Common Accumulated Deferred Treasury
Capital Stock Deficit Compensation Stock Total
---------- ----------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 $ 26,218 $ (111) $ (1,373) $ -- $ -- $ 24,826
Issuance of common shares in public offering,
net of issuance costs 29,135 -- -- -- -- 29,162
Conversion of Series A, B, C, D and E preferred
stock to common shares -- -- -- -- -- --
Exercise of stock options and warrants 163 -- -- -- -- 164
Issuance of common shares for collaborative
agreement 5,296 -- -- -- -- 5,299
Issuance of common shares for investment in
European affiliate 278 -- -- -- -- 278
Payments received on receivables on sale of
common stock -- 29 -- -- 29
Net loss -- -- (8,682) -- -- (8,682)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1997 61,090 (82) (10,055) -- -- 51,076
Issuance of common shares for collaborative
agreement 3,104 -- -- -- -- 3,107
Stock received as a reduction in advances
to partners -- -- -- -- (517) (517)
Exercise of stock options and warrants 286 -- -- -- -- 287
Warrants issued in payment of licensing fee 3,143 -- -- -- -- 3,143
Collections on receivables on sale of
common stock -- 36 -- -- -- 36
Net loss -- -- (21,228) -- -- (21,228)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1998 67,623 (46) (31,283) -- (517) 35,904
Issuance of common shares in connection
with termination of a collaborative agreement 6,286 -- -- -- -- 6,292
Issuance of common shares for acquisition
of company 9,928 -- -- -- -- 9,938
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound 2,498 -- -- -- -- 2,500
Exercise of stock options and warrants 874 -- -- -- -- 879
Options issued for consulting agreements 2,167 -- -- (1,603) -- 564
Issuance of common shares in private
placement, net of issuance costs 19,976 -- -- -- -- 20,000
Issuance of common shares in secondary
offering, net of issuance costs 54,469 -- -- -- -- 54,511
Payments received on receivables on sale of
common stock -- 46 -- -- -- 46
Net loss -- -- (46,055) -- -- (46,055)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1999 $163,821 $ -- $(77,338) $ (1,603) $(517) $ 84,579
======== ====== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 14
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
--------- --------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,055) $(21,228) $ (8,682)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,226 2,076 967
Special charges 13,882 -- --
In-process research and development 11,124 -- --
Net activity of research and development partnerships and
contract research affiliate 4,426 435 4,477
Minority interest 82 -- --
Deferred compensation expense for consultants options 564 -- --
Valuation of warrant issued in payment of licensing fees -- 3,143 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (3,622) (143) (3,589)
(Increase) decrease in prepaid expenses and other (443) (474) 327
Increase in other noncurrent assets 75 (75) --
Increase in accounts payable and accrued liabilities 1,468 1,473 1,071
Increase in deferred revenue 524 1,105 398
Increase (decrease) in other long-term liabilities (35) (29) 207
-------- -------- --------
Net cash used in operating activities (15,784) (13,717) (4,824)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net activity of marketable securities' transactions (25,125) 417 (2,144)
Net activity in restricted investments 170 (1,120) 100
Purchase of property and equipment (1,723) (2,708) (2,047)
Advances to research and development partnerships and contract research
affiliate (1,000) (519) (2,736)
Acquisitions, net of cash acquired (328) -- --
-------- -------- --------
Net cash used in investing activities (28,006) (3,930) (6,827)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for cash, net of issuance costs 77,011 -- 29,076
Proceeds from sale of subsidiary's preferred stock 5,000 -- --
Exercise of options and warrants 879 287 164
Collections of receivables on sale of common stock 46 36 29
Payment of note payable assumed in acquisition (1,000) -- --
-------- -------- --------
Net cash provided by financing activities 81,936 323 29,269
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 38,146 $(17,324) $ 17,618
CASH AND CASH EQUIVALENTS, beginning of year 5,331 22,655 5,037
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 43,477 $ 5,331 $ 22,655
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ -- $ -- $ --
Income taxes -- -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 15
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share Information, Per Share Information or As
Otherwise Indicated)
1. ORGANIZATION AND OPERATIONS
ILEX Oncology, Inc. (the Company), was incorporated in December 1993 under the
laws of the State of Delaware. The Company is a drug development company that is
focused on oncology through its subsidiaries: ILEX Products, Inc. (ILEX
Products) and ILEX Oncology Services, Inc. (ILEX Services). ILEX Products is
focused in the areas of identification, development, manufacturing and
regulatory approval of oncology compounds to develop cancer therapeutics and
build a chemoprevention product platform. ILEX Services manages the preclinical
research and clinical trials for our own product candidates, as well as oncology
products being developed by other companies.
In December 1996, the Company entered into an agreement with MPI Enterprises,
L.L.C. (MPI) in order to form a drug development joint venture, which has been
fully consolidated (see Note 4). In June 1999, ILEX Services acquired certain
assets and liabilities of Pharma Forschung Kaufbeuren GmbH (PFK), a European
contract research affiliate, through its new wholly owned subsidiary ILEX
Services Limited (Services Ltd.), which now provides the Company with two
locations from which European clinical trials will be managed and supported:
Edinburgh, Scotland and Guildford, England (see Note 4). In July 1999, the
Company acquired Convergence Pharmaceutical, Inc. (Convergence), a Boston,
Massachusetts company, and its portfolio of angiogenesis inhibitors (see Note
6).
The accompanying consolidated financial statements include the accounts of ILEX
Oncology, Inc., and its subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform to the 1999 presentation.
Currently, the Company has no products available for sale. The Company does have
seven drugs in clinical development and several product candidates in late
preclinical research. All of the product rights are either acquired or
in-licensed. The Company has not generated any revenues from product sales to
date, and there can be no assurance that revenues from product sales will be
achieved. Accordingly, the Company has incurred net losses to date.
The Company's ability to achieve a profitable level of operations in the future
will depend in large part on the ability to complete development of its
compounds, obtaining regulatory approvals for such compounds, commercializing
these potential products through marketing agreements with other companies or,
if the Company chooses, marketing such compounds independently, successfully
manufacturing such compounds, achieving market acceptance of such compounds and
expanding its contract research services business. There can be no assurance
that the Company will be successful in developing such compounds, obtaining such
approvals, bringing such compounds to market, developing sales, marketing or
distribution capabilities, manufacturing such products, generating market
acceptance or expanding its contract research services business.
During 1999, the Company received $77,011 in net proceeds from common stock
offerings including common stock sold in connection with a collaborative
agreement for a drug compound. Additionally, the Company received $5,000 from
the sale of preferred stock of a subsidiary. These transactions provide
additional funding to expand preclinical research and clinical trials, potential
acquisitions of complementary technologies, products or companies, and for
general corporate purposes (see Note 8). However, the Company may require
substantial additional funds to conduct research and development, to further
develop its potential pharmaceutical products, to manufacture and market any
pharmaceutical products that may be developed and to expand its contract
research service business (see Note 18). The Company expects its capital and
operating expenditures to increase substantially over the next several years.
The Company's current sources of funding are derived from its collaborative
agreements with its strategic partners, its contract research services, existing
cash and cash equivalents and investments in marketable securities. The Company
believes that its collaborative agreements with strategic partners, its contract
research services, existing cash and cash equivalents and investments in
marketable securities will satisfy its cash requirements for the foreseeable
future. There can be no assurance, however, that additional funds will be
available on acceptable terms, if at all.
F-8
<PAGE> 16
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition.
Product Development - Revenues from drug development studies are based on the
time incurred on such studies. The Company is reimbursed for investigator
costs based on actual costs incurred or predetermined rates together with
out-of-pocket costs incurred during the performance of the study. Revenues
related to milestone payments of the drug development studies are recognized
based on the completion of the milestone measurement.
Contract Research Services - Revenues from contract research services are
related to both fixed price and hourly based customer contracts and are
recognized on a percentage-of-completion basis or as such services are
performed.
Licensing Fees - Revenues from the signing of licensing agreements are
recognized upon the execution of the agreements as the Company has no future
obligations related to the signing of the license agreement and such fees are
nonrefundable.
Current Assets and Current Liabilities. The carrying value of current assets and
current liabilities, excluding investments in marketable securities,
approximates fair value due to the short maturity of these items.
Property and Equipment. Property and equipment are reported at cost and
depreciated over the estimated useful lives of the individual assets using the
straight-line method (see Note 5). Leasehold improvements represent capitalized
employee salaries related to construction and other miscellaneous costs incurred
to bring the leased current Good Manufacturing Practices (cGMP) facility (see
Note 14) into use, as well as improvements made to leased facilities. Leasehold
improvements are amortized over the lesser of the life of the lease or the
useful life of the related property. Expenditures for maintenance and repairs
are charged to expense as incurred. The estimated lives used in computing
depreciation and amortization are as follows:
Office equipment 3 - 10 years
Lab equipment 5 - 10 years
Leasehold improvements 2 - 15 years
Deferred Revenue. Deferred revenue represents advances for services not yet
rendered under fixed fee contract services and billings in excess of revenue
recognized, and should be realized within six months to one year.
Investments in Marketable Securities. At December 31, 1999 and 1998, marketable
debt securities have been categorized as held to maturity and are stated at
amortized cost, as these securities have staggered maturity dates, and
management of the Company does not intend to liquidate these securities before
maturity. Marketable debt securities with an original maturity of less than one
year are classified in the balance sheet as current assets, while securities
with a maturity of greater than one year are classified as noncurrent assets.
The fair value of marketable securities is based on currently published market
quotations (see Note 3).
Credit Risk and Major Customer. The Company places its excess temporary cash and
cash equivalents in a money market account with a high quality financial
institution. At times, such amounts may be in excess of the FDIC insurance
limit. The Company's accounts receivable are primarily from pharmaceutical and
biotechnology companies. Based on the Company's evaluation of the collectibility
of these accounts receivable, an allowance for doubtful accounts of $164 and
$150 was necessary at December 31, 1999 and 1998, respectively. The Company
believes the exposure to credit risk related to the remaining accounts
receivable is minimal.
For the years ended December 31, 1999, 1998 and 1997, the Company's top five
customers accounted for 65 percent, 78 percent and 51 percent of total revenue,
respectively. The following table represents total revenue in excess of ten
percent from significant customers:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$4,330 24% $3,615 25% $ 2,143 19%
3,006 17% 2,714 19% 1,700 15%
1,868 10% 2,149 15%
1,901 13%
</TABLE>
F-9
<PAGE> 17
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
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 may differ from those estimates.
Income Taxes. The Company has incurred losses since inception for both book and
tax purposes. The tax provision recorded in 1999 relates to amounts accrued for
the Company's wholly owned subsidiary acquired during 1999 which operates in the
United Kingdom.
Statements of Cash Flows. The Company considers all highly liquid investments
with maturities of three months or less at the date of purchase to be cash
equivalents.
Noncash financing and investing activities for the years ended December 31,
1999, 1998 and 1997, include the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Conversion of preferred stock into common stock $ -- $ -- $ 80
Contribution payable to MPILEX Partners, L.P. (MPILEX) -- -- 11
Contribution made to MPILEX as a reduction in accounts receivable -- -- 1,089
Issuance of common stock for investment in PFK GmbH (PFK) -- -- 278
Issuance of common stock to Physician Reliance Network, Inc. (PRN) 6,292 3,107 5,299
Treasury shares received from MPILEX as a reduction in advances
to research and development partnerships -- 517 --
Issuance of common stock for acquisition 9,938 -- --
Assets acquired in acquisition 774 -- --
Liabilities assumed in acquisition 2,199 -- --
Settlement of accounts payable through acquisition 566 -- --
</TABLE>
Foreign Currency Translation. Services Ltd. is a wholly owned subsidiary of ILEX
Services based in the United Kingdom. The financial statements of Services Ltd.
were prepared in British pounds and translated to United States (U.S.) dollars
based on the current exchange rate at the end of the period for the balance
sheet and a weighted-average rate for the period on the statement of operations.
Translation adjustments were insignificant for the year ended December 31, 1999.
Net Loss Per Share. Basic net loss per share was computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
year. Diluted net loss per share is equal to basic net loss per share, as the
effect of all common stock equivalents is antidilutive.
3. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 1999 and 1998, the following marketable securities due within
one year were classified as current assets:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Cost Fair Value Cost Fair Value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Government agency securities $ -- $ -- $ 2,885 $ 2,885
======== ======== ========= ========
Corporate securities $ 33,050 $ 32,991 $ 15,964 $ 15,955
========= ======== ========= ========
U.S. Treasury securities $ 150 $ 150 $ 150 $ 150
========= ======== ========= ========
Foreign government securities $ 708 $ 706 $ -- $ --
========= ======== ======== ========
</TABLE>
F-10
<PAGE> 18
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the following marketable securities with a
maturity greater than one year were classified as noncurrent assets:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 275 $ 279 $ 445 $ 446
============ ============ ============ ============
Corporate securities $ 10,216 $ 10,164 $ - $ -
============ ============ ============ ============
</TABLE>
Gross unrealized holding gains and losses at December 31, 1999, were
approximately $18 and $127, respectively. Gross unrealized holding gains and
losses at December 31, 1998, were approximately $7 and $15, respectively.
Amounts related to U.S. Treasury securities which are classified as restricted
investments and are attributable to collateral for a lease commitment, are
included in their respective investment categories (see Note 10 and 14).
4. INVESTMENTS IN AND ADVANCES TO RESEARCH AND DEVELOPMENT PARTNERSHIPS AND
CONTRACT RESEARCH AFFILIATE
In December 1996, the Company entered into an agreement with MPI, for an equally
owned joint venture, MPILEX, for research collaboration endeavors. At December
31, 1998, as a result of making contributions to MPILEX in excess of MPI's
contributions, the Company had a majority ownership interest in and controlling
interest of MPILEX. The activity for the venture has been fully consolidated in
the Company's 1999 and 1998 operating results with all significant intercompany
transactions and accounts being eliminated.
In May 1997, the Company entered into an agreement with LeukoSite, Inc.
(LeukoSite), now Millennium Pharmaceutical, Inc. (Millennium), for an equally
owned joint venture, L&I Partners, L.P. (L&I), for research collaboration
endeavors. The Company accounts for its investment in L&I using the equity
method of accounting. The following is summarized financial information for L&I
as of and for the period ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Summarized Income Statement Information
1999 1998 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Revenue $ 3,750 $ - $ -
Operating expenses 11,339 7,784 6,722
Operating loss (7,589) (7,784) (6,722)
Net loss (7,686) (7,716) (6,716)
Summarized Balance Sheet Information
1999 1998
---- ----
(Unaudited)
Assets $ 2,899 $ 64
Liabilities 9,279 737
-------- --------
Partners' equity $ (6,380) $ (673)
======== ========
</TABLE>
In August 1999, L&I entered into an agreement which grants Schering AG exclusive
marketing and distribution rights to CAMPATH(R) in the U.S., Europe, and the
rest of the world except Japan and East Asia, where ILEX and Millennium have
retained rights. The agreement provides that Schering will advance to the
partnership up to $30 million to L&I for the rights to CAMPATH(R) and for the
achievement of certain regulatory milestones. Profits from the sale of CAMPATH
in the U.S. will be shared equally between ILEX, Millennium, and Schering's U.S.
affiliate, Berlex Laboratories, Inc. For sales made in the rest of the
territory, Schering AG will make royalty payments equivalent to the rate of
profit sharing expected in the U.S.
F-11
<PAGE> 19
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
In September 1997, the Company entered into an agreement with PFK, a German
contract research organization, to purchase a 30 percent equity interest in PFK.
In 1998, the Company purchased an additional 10 percent equity interest in PFK
for a cash payment of $519, bringing the Company's total ownership interest in
PFK to 40 percent. In June 1999, ILEX Services acquired certain assets and
liabilities of the former PFK offices in the United Kingdom through its wholly
owned subsidiary, Services Ltd. The acquisition, for $541, was accounted for as
a purchase and provides ILEX Services with two locations from which European
clinical trials will be managed and supported: Edinburgh, Scotland, and
Guildford, England. Also on June 1, 1999, ILEX Services incurred one-time exit
costs of approximately $2.9 million in letter of credit guarantee funding costs
and a write-off of its remaining investment in PFK. While the Company continues
to hold a 40 percent interest in PFK, management believes the funding provided
to PFK under the letter of credit is uncollectible and, accordingly, has
expensed such amount as additional losses attributable to its contract research
affiliate.
5. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Office equipment $ 5,188 $ 4,208
Lab equipment 2,147 1,252
Leasehold improvements 612 355
------- -------
7,947 5,815
Accumulated depreciation and amortization (3,242) (1,374)
------- -------
Net property and equipment $ 4,705 $ 4,441
======= =======
</TABLE>
6. ACQUISITION OF CONVERGENCE
On July 16, 1999, the Company acquired Convergence, of Boston, Massachusetts, a
privately held research-based pharmaceutical company with an emerging portfolio
of angiogenesis and DNA repair inhibitors. The acquisition has been accounted
for using the purchase method of accounting. Under the terms of the agreement,
ILEX acquired Convergence in exchange for 1 million shares of the Company's
common stock, and an additional earn-out of up to 1 million shares to be issued
to Convergence's founders if certain development milestones are met. The Company
also assumed $1.0 million in Convergence debt as part of the purchase.
Accordingly, the Company has included the results of operations for Convergence
from the date of acquisition. Subsequent to the purchase of Convergence by the
Company, the note was called and the Company paid the principal sum of this note
together with the accrued interest.
Concurrent with the acquisition, the Company entered into four consulting
agreements with the founders of Convergence. The agreements specify compensation
levels and grant the four founders of Convergence the option to purchase a total
of 100,000 shares of the Company's common stock at an exercise price of $9.94.
The options vest at the rate of 25 percent per year beginning in July 2000. The
fair value of the options is recorded as deferred compensation as a separate
component of stockholders' equity and adjusted to current market value on a
quarterly basis. Deferred compensation is being amortized to expense over the
vesting period of the options. At December 31, 1999, using an option-pricing
model, the fair value of the options was calculated as approximately $2.2
million, and the Company had recognized approximately $564 in consulting
expense.
In connection with the acquisition of Convergence, the Company acquired certain
intangible assets including intellectual property in the area of angiogenesis
inhibitors. In connection with the purchase price allocation, $11.1 million was
expensed as a charge for the purchase of in-process research and development.
In performing this allocation, the Company considered, among other factors,
Convergence's research and development projects that were in process at the date
of acquisition. With regard to the in-process research and development projects,
the Company considered factors such as the stage of development of the
technology at the time of acquisition, the importance of each project to the
overall development plan, alternative future use of the technology and the
projected incremental cash flows from the projects when completed and any
associated risks. Due to their specialized nature, the in-process research and
development projects had no alternative future use, either for re-deployment
elsewhere in the business or in liquidation, in the event the projects failed.
F-12
<PAGE> 20
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
The Income Approach was the primary technique utilized in valuing the purchased
research and development projects. The value assigned to these projects was
limited because technological feasibility had not been established; including
development, testing and regulatory activities associated with the introduction
of projected product launches. The value assigned to purchased in-process
technology was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The independent appraisal also considered the fact that the
existing know-how diminishes in value over time as new technologies are
developed and changes in market conditions render current products and
methodologies obsolete. The assumptions underlying the cash flow projections
used were derived primarily from investment banking reports, historical results,
company records and discussions with management.
Revenue estimates for each in-process project were developed by management based
on estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors. Due to the technological and economic risks
associated with the developmental projects, a discount rate of 100 percent was
used to discount cash flows from the in-process products. The Company believes
that the foregoing assumptions used in the purchase price allocation were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate revenue, development costs or
profitability or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion and revenues attributable
to each project.
The following table reflects unaudited pro forma combined results of operations
of ILEX, Convergence and Services Ltd. as if the acquisitions had occurred on
January 1, 1999 and 1998 (see Note 4). Such pro forma information is presented
for informational purposes only and is not necessarily indicative of the
consolidated results that would have been achieved had the acquisition actually
been consummated at January 1, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Total revenue $ 18,662 $ 15,822
Net loss $ (46,686) $ (21,864)
Basic loss per share $ (3.08) $ (1.76)
</TABLE>
7. MINORITY INTEREST
On September 23, 1999, ILEX Services issued 290,867 shares of Series A
convertible preferred stock for $5 million to Impath, Inc. The preferred stock
is convertible to the Company's common stock based upon a computation set forth
in the certificate of designation for the preferred stock. The preferred stock
is entitled to liquidation preferences over the ILEX Services' common stock.
The preferred stock is eligible for dividends at an annual rate of $1.031 per
share. Dividends are accrued monthly and will be paid to the stockholders
annually in arrears beginning in September 2000, when and as declared by ILEX
Services' board of directors. A member of the Company's board of directors also
serves as a member of the board of directors of Impath, Inc.
At December 31, 1999, the convertible preferred stock is reflected as minority
interest on the Company's consolidated balance sheet. The corresponding
dividends are reflected as minority interest in consolidated subsidiary on the
Company's consolidated statements of operations.
8. STOCKHOLDERS' EQUITY
In April 1995, certain consultants and employees of the Company exercised rights
to purchase, in aggregate, 1,187,481 shares of common stock pursuant to their
respective consulting or employment agreements for $208. A portion of this
amount was paid in cash and the Company financed the remaining balance. The
remaining notes receivable were repaid in 1999.
In February 1997, the Company completed the issuance of an additional 2.7
million common shares through a public offering, resulting in net proceeds
(after deducting issuance costs) of $29.2 million. In connection with the public
offering, the board of directors approved an approximate 1.75 for 1 reverse
stock split of the Company's common stock effective upon the effective date of
the public offering. All common stock, convertible preferred stock, options,
warrants
F-13
<PAGE> 21
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
and per share information included in the accompanying consolidated financial
statements were adjusted to give retroactive effect to the split. All of the
outstanding Series A, Series B, Series C, Series D and Series E convertible
preferred stock were converted into 7,992,055 shares of common stock at the date
of the public offering. In September 1997, the Company acquired a 30 percent
equity interest in PFK, a German contract research organization, followed by an
additional investment of 10 percent in 1998. This purchase was effected through
the issuance of 17,361 common shares and cash payments of $1.4 million and $519
in 1997 and 1998, respectively.
In December 1998, the Company received 39,000 shares of its own stock from
MPILEX as payment for contract research services rendered by the Company. The
cost of the stock at the date of payment was $517 and was recorded as treasury
stock in the accompanying consolidated financial statements.
In January 1999, the Company entered into a development and licensing agreement
for an oncology compound with a pharmaceutical company. In March 1999, the
pharmaceutical company purchased $2.5 million of common stock of the Company
(see Note 12).
In July 1999, the Company completed a $20 million private placement of 2,389,200
shares of common stock. The shares were sold at a 15 percent discount from the
average 30-day trading price prior to closing.
In November 1999, the Company completed an underwritten public offering of its
common stock pursuant to which 4.2 million shares were sold by the Company. The
number of shares sold by the Company includes the underwriters' exercise of
their overallotment option. Proceeds, net of offering costs, to the Company from
this offering were approximately $54.5 million.
9. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, FAS 123 also
allows entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25). The Company has adopted FAS 123 and has elected to
remain with the accounting prescribed by APB 25. The Company has made the
required disclosures prescribed by FAS 123.
During 1995, the Company adopted a stock option plan (the Plan). Under the Plan,
stock options may be granted to key employees and consultants of the Company as
approved by a committee of the Company's board of directors. Originally, the
Company had reserved 570,904 shares of common stock for issuance in accordance
with the Plan. In May 1998, the Company increased the number of authorized
shares of common stock reserved for issuance under the Plan to 1.8 million.
Stock options vest pursuant to the individual stock option agreements, usually
25 percent per year beginning one year from the date of grant, with unexercised
options expiring ten years from the date of grant. As of December 31, 1999,
options covering 311,619 shares have been exercised under this plan and options
covering 301,139 shares have expired.
In October 1996, the Company adopted a nonemployee directors' stock option plan
(the Directors' Plan). Under the Directors' Plan, each nonemployee director is
granted a one-time option equaling 17,128 shares of common stock. In October
1996, December 1996, August 1997, and February 1998 the nonemployee directors
were granted 102,768, 17,128, 17,128, and 30,000 options, respectively,
exercisable at $7.01, $7.01, $16.50, and $8.63 per share, respectively. These
options vest at 1/48 per month, with unexercised options expiring ten years from
the date of grant. During both 1997 and 1998, 17,128 of these options were
forfeited when nonemployee directors resigned their positions with the Company.
As of December 31, 1999, no options covering shares under this plan have been
exercised.
F-14
<PAGE> 22
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
A summary of the status of the Company's fixed stock option plans for the years
ended December 31, 1999, 1998 and 1997, and changes during these years on those
dates is presented below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,178,736 $ 8.56 972,258 $ 7.74 688,680 $ 4.21
Granted 492,530 11.02 396,514 10.37 380,730 12.96
Exercised (184,181) 4.77 (58,463) 5.12 (68,975) 2.20
Forfeited (175,644) 10.25 (131,573) 10.09 (28,177) 5.79
-------- ------- ---------- ------- ------- -------
Outstanding, end of year 1,311,441 $ 9.71 1,178,736 $ 8.56 972,258 $ 7.74
========== ======= ========== ======= ======= =======
Options exercisable at end of year 458,050 $ 7.67 401,144 $ 5.65 232,256 $ 3.77
========== ======= =========== ======= ======= =======
Weighted average fair value of options
granted during the year $ 6.31 $ 7.07 $ 10.39
======= ======= =======
</TABLE>
The following table summarizes the information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted Number Weighted
Average Weighted Exercisable at Average
Number Remaining Average December 31, Exercise
Exercise Prices Outstanding Contractual Life Exercise Price 1999 Price
--------------- ----------- ---------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$0.18 - $3.86 184,797 1.9 years $ 3.50 168,194 $ 3.50
$3.87 - $7.73 201,875 4.5 years $ 7.06 132,184 $ 7.05
$7.74 - $11.60 556,107 7.7 years $ 9.69 57,261 $ 8.90
$11.61 - $15.47 228,791 6.2 years $ 12.97 47,315 $ 13.01
$15.48 - $19.34 139,871 4.8 years $ 16.51 53,096 $ 16.34
------------ ------------
1,311,441 5.8 years $ 9.71 458,050 $ 7.67
============ ============
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined on the fair value of the grant dates for awards under those plans
consistent with the method of FAS 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net loss As reported $(46,055) $(21,228) $(8,682)
Pro forma $(48,362) $(22,900) $(9,468)
Loss per share As reported $ (3.04) $ (1.71) $ (0.72)
Pro forma $ (3.20) $ (1.84) $ (0.78)
</TABLE>
For options granted in 1999, 1998 and 1997, the fair value of each option grant
was estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions: dividend yield of 0
percent for all years; expected volatility of 72.57 percent, 81.89 percent and
62.18 percent in 1999, 1998 and 1997, respectively; risk free interest rate of
5.875 percent, 4.5 percent and 6.3 percent in 1999, 1998 and 1997, respectively.
The expected life of the options granted for 1999 is 3.78 years, and the
expected life of the options granted for 1998 and 1997 was the term to
expiration.
F-15
<PAGE> 23
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
In connection with the private placement of Series B convertible preferred
stock, the Company issued a warrant for the purchase of 97,044 shares of common
stock at approximately $3.50 per share. The Company's management determined the
value of the warrant issued was immaterial to the financial position and results
of operations of the Company. The value of the warrants was based on the
exercise price of the warrant and the fair value of the Company's common stock
at the date of issuance as well as the terms of the warrant issued. The warrant
may be exercised in whole at any time or in part from time to time, prior to its
expiration in September 2000. In December 1999, a cashless exercise of these
warrants was executed for shares totaling 80,918. As of December 31, 1999, all
outstanding warrants were exercised.
In connection with the private placement of Series C convertible preferred
stock, the Company issued 355,913 warrants for the purchase of common stock at
approximately $8.76 per share to the Series C convertible preferred
stockholders. The value of the warrants issued were immaterial based on the
exercise price of the warrants and the fair value of the Company's common stock
on the date the warrants were issued. As such, no amount was attributed to the
warrants. The warrants may be exercised in whole at any time or in part from
time to time, prior to their expiration in July 2001. The exercise price of
these warrants is subject to an adjustment if the Company issues common stock
subsequent to the date of the warrants at a price per share less than the
exercise price of the warrants. As a result of the Company's private placement
in July 1999 (see Note 8), the exercise price of the warrants was adjusted to
$8.71. During 1999, two warrant holders completed a cashless exercise of
warrants for shares totaling 6,259. As of December 31, 1999, 344,672 of these
warrants remain unexercised.
In March 1998, the Company entered into an agreement with a drug development
institute to license a compound for development by the Company. The agreement
called for an initial payment of $250 and a warrant to purchase 590,113 shares
of the Company's common stock. Using the Black-Scholes pricing model, the value
of the warrant was determined to be $3,143. In 1999, all outstanding warrants
were exchanged for shares totaling 229,216 via a cashless exercise.
10. SPECIAL CHARGES
The Company recorded special charges totaling $13.9 million in the second
quarter of 1999. As discussed below, these charges include the recognition of
$12.3 million of costs associated with the termination of the Company's
agreements with PRN and $1.6 million of charges related to other items.
In July 1997, the Company entered into an assignment agreement and a services
agreement with PRN under which the Company and PRN agreed to jointly market
their clinical trial service capabilities. In accordance with these agreements,
the Company issued 312,188 and 314,600 common shares to PRN in July 1997 and
1998, respectively. The value of the shares issued was recorded as an intangible
asset and was being amortized over the term of the agreements. The Company also
agreed to issue up to an additional 629,200 shares to PRN over a two-year period
if PRN remained in compliance with various provisions of the agreements.
Additionally, 1,255,988 common shares could have been issued over a four-year
period if certain milestones were achieved. Effective June 30, 1999, the Company
and PRN terminated the agreements and the Company recorded an approximate $12.3
million special charge associated with the value of the remaining 629,200 shares
issued and the write-off, in accordance with Financial Accounting Standard 121,
of the net intangible asset associated with the PRN agreements. The Company has
no further obligation with respect to the assignment agreement or with respect
to the contingent shares under the services agreement.
The remaining $1.6 million in special charges is comprised of a $750 accrual for
a debt guarantee of an unaffiliated site management organization which
management determined to be uncollectible, a $350 write-down of computer
equipment, and an approximate $500 write-off of an operating lease commitment
for manufacturing equipment which management has determined will not be
utilized.
11. RELATED-PARTY TRANSACTIONS
CTRC Research Foundation (CTRC Research), a stockholder of the Company, performs
certain administrative and technical support services for the Company. For the
years ended December 31, 1999, 1998 and 1997, the Company paid CTRC Research
approximately $190, $672, and $832, respectively, for these services and
reimbursement of salaries and benefits. As described in Note 14, the Company has
lease agreements with CTRC Research for labs and the cGMP
F-16
<PAGE> 24
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
facility. For the years ended December 31, 1999, 1998 and 1997, the Company paid
CTRC Research approximately $439, $280, and $94, respectively, related to these
lease agreements. At December 31, 1999 and 1998, the Company had payables to
CTRC Research amounting to $92, related to the aforementioned services and lease
agreements.
In March 1995, the Company entered into a subordinated option agreement with
CTRC Research. The agreement gives the Company the subordinated option to
acquire licenses or certain marketable rights, as defined in the agreement,
owned by CTRC Research. The subordinated option for any particular marketable
right is exercisable only after a third party, with which CTRC Research has
contracted, elects not to exercise its primary option on the same marketable
right. The subordinated option agreement expires in fiscal year 2000.
During 1999, the Company had outstanding receivables from employees related to
the exercise of stock options, which are repaid prior to the transfer of stock.
Additionally, during the year the Company made an interest free loan to an
officer of the Company, which was repaid prior to year-end.
Subcontractors provide the Company with consulting services and preclinical and
clinical testing related to certain of its contracts. Such costs may be included
in either research and development costs or subcontractor costs in the
accompanying consolidated financial statements. For the years ended December 31,
1999, 1998 and 1997, the Company incurred the following related-party expenses
for subcontracting costs:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CTRC Research $ 1,037 $ 699 $ 486
Director of the Company 312 323 388
Stockholders 350 63 305
Company owned by officer/director of the Company - - 1,654
PRN 223 649 540
US Oncology 28 - -
MPI - - 21
PFK 175 1,084 404
-------- -------- --------
$ 2,125 $ 2,818 $ 3,798
======== ======== ========
</TABLE>
At December 31, 1999 and 1998, the following subcontractor costs were payable to
related parties:
<TABLE>
<CAPTION>
December 31
----------------
1999 1998
------- ------
<S> <C> <C>
CTRC Research $ 428 $ -
PRN 225 95
US Oncology 86 -
------- ------
$ 739 $ 95
======= ======
</TABLE>
During 1999 and 1998, the Company performed contract research services on behalf
of L&I and MPILEX, the Company's research and development partnerships. For the
years ended December 31, 1999, 1998 and 1997, the Company recorded the following
revenues related to these services:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
L&I $ 4,330 $ 3,615 $ 952
MPILEX - 851 1,421
</TABLE>
F-17
<PAGE> 25
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
12. LICENSING AGREEMENTS
In 1994, the Company obtained two licensing agreements for oncology compounds
from CTRC Research. During 1995 and 1996, the Company entered into six
additional licensing agreements. All of the licensing agreements grant the
Company the right to develop and market the oncology compounds covered by such
agreements and to license the rights to such compounds to other third parties.
Under the terms of the agreements, the Company is required to pay upfront fees
and/or annual fees, as defined in the agreements. In addition, the Company must
also pay royalties upon commercialization of the compounds. Under certain
agreements, the Company is required to make milestone payments, as defined in
the agreements. At December 31, 1999, the Company had not attained any of the
events that require a milestone payment.
During 1998, the Company entered into an agreement with a drug development
institute to license a compound for development by the Company. The agreement
called for an initial payment and a warrant to purchase shares of the Company's
common stock. (See Note 9.) The agreement also requires subsequent payments to
the drug development institute at the attainment of various milestones. At
December 31, 1999, the Company had not attained any of the events that require a
milestone payment.
During 1998, the Company entered into an agreement with a customer for the
development of an oncology compound. The agreement requires the Company to
perform clinical research services valued at $3 million in exchange for a 30
percent ownership interest in the compound. The Company also has certain rights
to negotiate for additional ownership interest.
In January 1999, the Company entered into a development and licensing agreement
for an oncology compound with a pharmaceutical company. Under the terms of the
development and licensing agreement, the pharmaceutical company has the option
to further develop and commercialize the compound after completion of specified
clinical trials and, if exercised, the Company is eligible to receive royalties.
Should the pharmaceutical company decide not to exercise its option, the Company
will have to pay the pharmaceutical company milestone payments and royalties on
sales in addition to a license fee to continue development and commercialization
of the compound.
13. EMPLOYEE BENEFITS:
The Company has an employee benefit plan and trust for certain employees who
meet specified length of service requirements. The plan qualifies under Section
401(k) of the Internal Revenue Code as a salary reduction plan. Employees may
elect to contribute a certain percentage of their salary on a before-tax basis.
Employees are immediately fully vested in their contributions and begin vesting
in employer contributions after one year of service, as defined in the plan
document. The plan is a defined contribution plan with employer contributions
made solely at the discretion of the board of directors. Since adoption of the
plan, the Company has made no employer contributions. For the years ended
December 31, 1999, 1998 and 1997, administrative expenses incurred by the
Company related to this plan were not significant. The Company does not provide
postretirement benefits or postemployment benefits to its employees.
14. OPERATING LEASES
The Company has several noncancelable operating leases for office space,
equipment and the cGMP facility. Rent expense associated with these leases was
approximately $1,421, $904, and $885 for the years ended December 31, 1999, 1998
and 1997, respectively. As described in Note 11, one of the leases is with CTRC
Research, a related party.
During 1995, the Company entered into a lease agreement with a non-profit
corporation controlled by CTRC Research and the Texas Research Park Foundation
for the use of the cGMP facility. The cGMP facility will be utilized for the
manufacturing of oncology drugs. Under the terms of the lease agreement, which
expires in 2010, the Company is required to make monthly payments, which
commenced in 1998. The payments are based on a fixed monthly rate plus a
percentage of gross sales, as defined in the agreement.
In February 1996, the Company entered into a noncancelable lease agreement for
equipment to be used in the cGMP facility. The lease required the Company to
make monthly payments of approximately $16 and was to expire in 2001. Under the
terms of the agreement, the Company maintained $425 in the form of securities as
collateral for the equipment. During 1999, the Company expensed the remaining
balance of the lease commitment (see Note 10). Additionally, in
F-18
<PAGE> 26
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
January 2000, the Company paid the balance of the lease commitment, and the
securities held as collateral were released to the Company.
At December 31, 1999, future minimum lease payments under all operating leases
are as follows:
<TABLE>
<CAPTION>
Related
Party Other Total
------- -------- -------
Year ending December 31-
<S> <C> <C> <C>
2000 $ 159 $ 1,507 $ 1,666
2001 159 1,551 1,710
2002 159 1,345 1,504
2003 159 1,372 1,531
2004 159 403 562
Thereafter 891 1,169 2,060
</TABLE>
15. INCOME TAXES
As of December 31, 1999, the Company had net operating loss (NOL) carryforwards
of approximately $60 million for U.S. federal income tax purposes which are
available to reduce future taxable income will expire in 2010 through 2019. The
tax effects of significant temporary differences representing deferred income
tax assets and liabilities are as follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward $ 20,342 $ 9,584
Expense provisions 341 182
Other tax differences, net 1,686 (4)
Valuation allowance (22,369) (9,762)
-------- --------
Total deferred income tax assets $ - $ -
======== ========
</TABLE>
The valuation allowance as of December 31, 1999 and 1998, represents tax
benefits, primarily NOL carryforwards, which were not realizable at that date.
For December 31, 1999, the Company's tax provision of $117 relates solely to
foreign (UK) operations. Otherwise, the Company has not provided any U.S.
deferred income taxes or UK withholding taxes on the undistributed earnings of
its UK subsidiary based on the determination that such earnings will be
indefinitely reinvested. At December 31, 1999, the cumulative undistributed
earnings of this subsidiary were approximately $240. If such earnings were not
considered indefinitely reinvested, deferred U.S. and UK withholding taxes would
have been provided after consideration of foreign tax credits.
The availability of the NOL and credit carryforwards to reduce U.S. federal
taxable income is subject to various limitations under the Internal Revenue Code
of 1986 (the Code), as amended, in the event of a greater than 50 percent
ownership change as defined in Section 382 of the Code during the applicable
three-year period. As of December 31, 1999, the Company had incurred such an
ownership change. However, the Company does not believe that this change in
ownership significantly impacts the Company's ability to utilize its NOL and tax
credit carryforwards as of December 31, 1999, because the amount of the
cumulative limitation (based upon the Company's current market capitalization)
during the carryforward period exceeds the total amount of NOL and tax credit
carryforwards.
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to which the
Company is a party will have a material adverse effect on the Company's
financial position or results of operations. However, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular
F-19
<PAGE> 27
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
claim or proceeding would not have a material adverse effect on the Company's
results of operations for the period in which such resolution occurred.
During 1998, the Company guaranteed a $1.0 million line of credit for Clinical
Research Group, Inc. (CRG). The guarantee gave the Company access to a network
of clinical sites managed by CRG. The guarantee is limited for a period of three
years beginning in May 1998 and ending in May 2001. If the guarantee comes to
redemption, the Company will obtain an ownership interest in CRG in accordance
with the guarantee agreement. Under the terms of the agreement, the Company
maintained $1.25 million in the form of securities as collateral for the
guarantee. During 1999, the Company expensed $750 related to this guarantee as
part of a special charge (see Note 10). At December 31, 1999, the Company had
yet to fund the guarantee, however management believes that it will be funded
during 2000 and is considered uncollectible.
17. SEGMENT REPORTING
The Company has two reportable segments: ILEX Products and ILEX Services. ILEX
Products is involved in the development of proprietary compounds for the
treatment and prevention of cancer. ILEX Services provides contract research
services for the development, manufacturing, and regulatory approval of oncology
compounds. The Company's reportable segments are strategic business units that
are managed separately because each business requires different technology and
marketing strategies.
The Company has reclassified certain prior year income statement amounts between
its two operating segments for purposes of comparability with current year
presentation. The effect of these reclassifications for the year ended December
31, 1998 is to increase research & development costs by $618, increase the cost
of contract research services by $1,562, and to reduce corporate general &
administrative costs by $2,180.
The accounting policies of the segments are the same as those of the Company.
The Company evaluates performance based on the profit or loss from operations
before income taxes.
Selected Segment Information
<TABLE>
<CAPTION>
Services Products Total
-------- -------- --------
For the Year Ended December 31, 1999
<S> <C> <C> <C>
Revenue from external customers $ 13,457 $ 4,407 $ 17,864
Intersegment revenue 11,322 -- 11,322
-------- -------- --------
Total revenue 24,779 4,407 29,186
Direct costs 20,165 20,374 40,539
In-process research and development -- 11,124 11,124
Special charges 12,847 8 12,855
-------- -------- --------
Segment operating loss (8,233) (27,099) (35,332)
Equity in losses of partnerships (3,310) (3,824) (7,134)
-------- -------- --------
Segment net loss $(11,543) $(30,923) $(42,466)
======== ======== ========
For the Year Ended December 31, 1998
Revenue from external customers $ 9,650 $ 4,622 $ 14,272
Intersegment revenue 7,513 -- 7,513
-------- -------- --------
Total revenue 17,163 4,622 21,785
Direct costs 17,015 17,500 34,515
-------- -------- --------
Segment operating income (loss) 148 (12,878) (12,730)
Equity in losses of partnerships (1,541) (4,453) (5,994)
-------- -------- --------
Segment net income (loss) $ (1,393) $(17,331) $(18,724)
======== ======== ========
</TABLE>
F-20
<PAGE> 28
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Services Products Total
-------- -------- --------
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Revenue $ 5,903 $ 5,327 $ 11,230
Direct costs 4,587 6,740 11,327
-------- -------- --------
Segment operating income (loss) 1,316 (1,413) (97)
Equity in losses of partnerships (182) (4,295) (4,477)
-------- -------- --------
Segment net income (loss) $ 1,134 $ (5,708) $ (4,574)
======== ======== ========
</TABLE>
Reconciliation of Segment Information to Consolidated Totals
<TABLE>
<CAPTION>
For the Years Ended
December 31
---------------------------------
1999 1998 1997
-------- -------- --------
Research and Development Costs:
<S> <C> <C> <C>
Reportable products segment direct costs $ 20,374 $ 17,500 $ 6,740
Elimination of intersegment gross profit (4,384) (1,373) --
-------- -------- --------
Consolidated research and development costs $ 15,990 $ 16,127 $ 6,740
======== ======== ========
CRO Costs:
Reportable services segment direct costs $ 20,165 $ 17,015 $ 4,587
Elimination of intersegment expenses (6,938) (6,140) --
-------- -------- --------
Consolidated direct costs of research services $ 13,227 $ 10,875 $ 4,587
======== ======== ========
Operating net loss:
Reportable segment operating loss $(35,332) $(12,730) $ (97)
Corporate general and administrative expenses (4,063) (4,354) (6,691)
Special charges (1,027) -- --
-------- -------- --------
Consolidated operating loss $(40,422) $(17,084) $ (6,788)
======== ======== ========
Net income (loss)-
Reportable segment net loss $(42,466) $(18,724) $ (4,574)
Corporate general and administrative expenses (4,063) (4,354) (6,691)
Special charges (1,027) -- --
Interest income, net 1,700 1,850 2,583
Minority interest (82) -- --
Foreign income taxes (117) -- --
-------- -------- --------
Consolidated net loss $(46,055) $(21,228) $ (8,682)
======== ======== ========
</TABLE>
18. SUBSEQUENT EVENT (UNAUDITED)
In March 2000, the Company entered into definitive agreements to sell 3.0
million shares of its common stock at $45 per share to selected institutional
and other accredited investors. Gross proceeds to the Company are expected to be
approximately $135 million. Net proceeds to the Company are expected to be
approximately $127 million. The transaction is expected to close during the
first quarter of 2000. ILEX intends to use its share of the proceeds from the
private placement to accelerate its clinical trials and preclinical research,
with a particular focus on its late-stage clinical product candidates and
preclinical angiogenesis inhibitors, as well as for potential acquisitions of
complementary technologies, products, companies and for general corporate
purposes.
F-21
<PAGE> 29
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
- ------ ------------
<S> <C>
2.1 Plan of Merger and Acquisition Agreement dated July 16, 1999, by
and among ILEX Oncology, Inc., Convergence Pharmaceuticals,
Inc., Vikas Sukhatme, Raghurom Kalluri, Ralph Weichselbaum,
Donald Kufe, Glenn C. Rice, and Tsuyneya Ohno (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed July 30, 1999)
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
3.2 Bylaws of the Company, as amended (Incorporated herein by
reference to Exhibit 3.2 of the Company's Registration Statement
No. 333-17769 on Form S-1 filed December 12, 1996, as amended)
4.1 Specimen of certificate representing Common Stock, $.01 par
value, of the Company (Incorporated herein by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.1 Services Agreement dated November 18, 1994 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.6 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.2 Covenant Not To Sue dated September 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.7 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.3 Lease Agreement dated September 1, 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.10 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.4 Commercial Industrial Sublease Agreement between TRTF/CTRCRF
Building Corporation and the Company (Incorporated herein by
reference to Exhibit 10.11 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
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1999 ANNUAL REPORT ON FORM 10-K
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10.5+ License Agreement [Oxypurinol] dated March 31, 1995 by and among
BW Welcome Co., The Welcome Foundation Limited and the Company
(Incorporated herein by reference to Exhibit 10.14 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.6+ License Agreement [Eflornithine] between ILEX Oncology, Inc. and
Marion Merrell Dow Inc. and its subsidiaries Merrell Dow
Pharmaceuticals Inc. and Marion Merrell Dow France Et Cie
(Incorporated herein by reference to Exhibit 10.17 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.7+ License Agreement [RP 60475] dated November 18, 1994 between
Rhone-Poulenc Rorer S.A. and the Company (Incorporated herein by
reference to Exhibit 10.20 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.8+ Agreement dated November 25, 1996 between Hoffmann-La Roche,
Inc. and the Company [RO23-7553] (Incorporated herein by
reference to Exhibit 10.21 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.9 Subordinated Option Agreement dated March 27, 1995 between CTRC
Research Foundation and the Company (Incorporated herein by
reference to Exhibit 10.35 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.10 Employment Agreement dated November 2, 1994 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.36 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.11 Amendment to Employment Agreement dated April 4, 1995 between
Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.37 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.12 Amendment to Employment Agreement dated September 27, 1995
between Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.38 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.13 Employment Agreement dated August 27, 1996 between Pedro
Santabarbara, M.D., Ph.D. and the Company (Incorporated herein
by reference to Exhibit 10.43 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.14 Consulting Services Agreement dated March 16, 1995 between the
Company and Charles A. Coltman, Jr., M.D. (Incorporated herein
by reference to Exhibit 10.45 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.15 1995 Stock Option Plan for the Company (Incorporated herein by
reference to Exhibit 10.47 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.16 1996 Non-Employee Director Stock Option Plan for the Company
(Incorporated herein by reference to Exhibit 10.48 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
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1999 ANNUAL REPORT ON FORM 10-K
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10.17 Form of Non-Employee Director Stock Option Agreement
(Incorporated herein by reference to Exhibit 10.49 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.18 Fourth Amended and Restated Registration Rights Agreement
between the Company, CTRC and the holders of the Series B, C, D
and E Preferred Stock (Incorporated herein by reference to
Exhibit 10.50 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.19 Form of Pledge Agreement between Cancer Therapy and Research
Center Endowment and each of Gary V. Woods, and Ruskin C.
Norman, M.D. (Incorporated herein by reference to Exhibit 10.55
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.20+ Exclusive License Agreement [Oxypurinol] dated November 27, 1996
between MGI Pharma, Inc. and the Company (Incorporated herein by
reference to Exhibit 10.56 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.21 Stock Purchase Agreement dated April 11, 1995 between Daniel Von
Hoff and the Company (Incorporated herein by reference to
Exhibit 10.58 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.22 Stock Purchase Agreement dated April 11, 1995 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.60 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.23 Promissory Note dated April 12, 1995 between Daniel Von Hoff and
the Company (Incorporated herein by reference to Exhibit 10.62
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.24 Promissory Note dated April 12, 1995 between Richard L. Love and
the Company (Incorporated herein by reference to Exhibit 10.63
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.25 Ownership Restriction Agreement dated December 11, 1996 between
MPILEX Management, L.L.C., MPILEX Partners, L.P. and holders of
units thereof (Incorporated herein by reference to Exhibit 10.66
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.26 Agreement of Limited Partnership of MPILEX Partners, L.P. among
MPILEX Management, L.L.C. (Incorporated herein by reference to
Exhibit 10.67 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.27 Regulations of MPILEX Management, L.L.C. dated December 1996
(Incorporated herein by reference to Exhibit 10.68 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
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10.28 License Agreement dated December 11, 1996 between MPILEX
Partners, L.P. and the Company (Incorporated herein by reference
to Exhibit 10.69 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.29 Registration Rights Agreement dated July 9, 1997, between the
Company and PRN Research, Inc. (Incorporated herein by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
filed August 14, 1997)
10.30 Service Agreement dated June 30, 1997, between the Company and
PRN Research, Inc. (Incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q filed August
14, 1997)
10.31 Drug Development and Commercialization Agreement dated March 27,
1998, between the Company and The Burnham Institute, Inc.
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed May 15, 1998)
10.32 Office Building Lease Agreement dated April 8, 1998, between the
Company and N.W.A. Limited Partnership (Incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed August 14, 1998)
10.33 Consulting Services Agreement dated July 1, 1997, between the
Company and Dr. Daniel D. Von Hoff, M.D. (Incorporated herein by
reference to Exhibit 10.61 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998)
10.34 Stock Purchase Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.35 Registration Rights Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.36 Letter of Credit Agreement dated April 5, 1999 between the
Company and PFK (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q filed May
17, 1999)
10.37 Employment Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and Glenn C. Rice (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated July 16, 1999 and filed July 30, 1999)
10.38 Registration Rights Agreement dated July 16, 1999 among ILEX
Oncology, Inc., Vikas Sukhatme, Raghuram Kalluri, Ralph
Weichselbaum, Donald Kufe, Glenn C. Rice, Tsuneya Ohno, Stephen
Dolezalek, Beth Israel Deaconess Medical Center and Arch
Development Corporation (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
July 16, 1999 and filed July 30, 1999)
10.39 Stock Purchase Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and each of the Investors (as defined therein)
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed August 16, 1999)
10.40+ Distribution and Development Agreement between L&I Partners,
L.P. and Schering AG dated August 24, 1999 (incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K/A filed September 21, 1999)
10.41** Letter agreement dated September 9, 1999, between the Company
and Al J. Jecminek.
11.1** Computation of Earnings Per Share
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1999 ANNUAL REPORT ON FORM 10-K
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21.1 Subsidiaries of the Company
State of Names Under
Name Incorporation Which Doing Business
---- ------------- --------------------
ILEX Oncology Services, Inc. Delaware ILEX Services, Inc.
ILEX Products, Inc. Delaware ILEX Products, Inc.
Convergence Pharmaceuticals, Inc. Delaware ILEX Products Research Division
ILEX Services Limited United Kingdom ILEX Services Limited
23* Consent of Arthur Andersen LLP
24.1* Power of Attorney (included on signature page)
27** Financial Data Schedule
99.1** Financial Statements of L&I Partners, L.P.
* Filed herewith.
** Filed previously
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
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<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K/A, into the Company's previously filed
Registration Statements (File No. 333-25537 and file No. 333-32000).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 5, 2000
