<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): December 22, 1999
Millennium Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-28494 04-3177038
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
75 Sidney Street, Cambridge, Massachusetts 02139
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(617) 679-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 22, 1999 (the "Effective Time"), Millennium Pharmaceuticals Inc., a
Delaware corporation ("Millennium"), completed its acquisition of LeukoSite,
Inc., a Delaware corporation ("LeukoSite"), pursuant to an Agreement and Plan of
Merger, dated as of October 14, 1999 (the "Merger Agreement"), by and among
Millennium, ANM, Inc., a Delaware corporation and a wholly-owned subsidiary of
Millennium ("Transitory Sub") and LeukoSite. Pursuant to the Merger Agreement,
the Transitory Sub merged with and into LeukoSite (the "Merger") at the
Effective Time, whereupon LeukoSite became a wholly-owned subsidiary of
Millennium. Transitory Sub was formed solely for the purpose of effecting the
Merger.
Millennium issued an aggregate of approximately 6,577,110 shares of
Millennium common stock to the former LeukoSite stockholders in the Merger or
approximately 7,600,178 shares assuming that all presently outstanding
LeukoSite stock options, rights and warrants are exercised. Pursuant to the
Merger Agreement, each outstanding share of LeukoSite common stock was
converted into the right to receive .4296 shares of Millennium common stock.
All options to purchase LeukoSite common stock outstanding immediately prior
to the Merger were assumed by Millennium. The Merger is intended to qualify
as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and is intended to be accounted for using purchase accounting, with
Millennium being deemed to have acquired LeukoSite.
The foregoing description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Merger Agreement which is filed as Exhibit 2 to this Current Report on Form 8-K
and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The required financial statements are attached as Exhibit 99.2.
(b) PRO FORMA FINANCIAL INFORMATION.
The required financial statements are attached as Exhibit 99.3.
(c) EXHIBITS
See Exhibit Index attached hereto.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MILLENNIUM PHARMACEUTICALS, INC.
By: /s/ Kevin P. Starr
-----------------------------
Kevin P. Starr
Chief Financial Officer
Date: January 6, 2000
-3-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2* Agreement and Plan of Merger, dated October 14, 1999,
by and among Millennium, Pharmaceuticals, Inc., a
Delaware corporation ("Millennium"), ANM, Inc., a
Delaware corporation and a wholly-owned subsidiary of
Millennium, and LeukoSite, Inc., a Delaware corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Arthur Andersen LLP
99.1 Press Release issued by Millennium on December 22, 1999
99.2 Financial Statements of LeukoSite
99.3 Unaudited Pro Forma Financial Information of Millennium and
LeukoSite.
</TABLE>
- -----------------
* Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-90403) of Millennium.
-4-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-28239 and 333-90399) and Form S-8 (Nos.
333-15355, 333-15353, 333-29321, 333-15349, 333-15357, 333-29319, 333-84381,
333-84373, 333-84377, 333-93397, and 333-93249) of Millennium
Pharamaceuticals, Inc. of our report dated February 12, 1999 relating to the
financial statements of CytoMed, Inc., which appears in the Current Report on
Form 8-K of Millennium Pharmaceuticals, Inc. dated December 22, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 4, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 29, 1999 for LeukoSite, Inc. financial statements as
of December 31, 1998 and 1999 and for the three years in the period ended
December 31, 1999 included in this Form 8-K, into Millennium Pharmaceuticals,
Inc. previously filed Registration Statement File Nos. 333-15355, 333-15353,
333-29321, 333-15349, 333-15357, 333-29319, 333-28239, 333-84381, 333-84373,
333-90399, 333-93397, 333-84377 and 333-93249.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 4, 2000
<PAGE>
EXHIBIT 99.1
MILLENNIUM ANNOUNCES THE COMPLETION OF LEUKOSITE AND MILLENIUM BIOTHERAPEUTICS
MERGERS
- -- Appoints Christopher Mirabelli, Ph.D., President, Pharmaceutical R&D --
CAMBRIDGE, Mass, December 22, 1999 -- Millennium Pharmaceuticals, Inc. (Nasdaq:
MLNM) today announced the completion of its merger with LukoSite, Inc., in which
Millennium acquired LeukoSite in a stock-for-stock exchange. As a result of the
merger, LeukoSite shareholders will receive 0.4296 shares of Milllenium stock
for each share of LeukoSite stock.
The merger transaction will be recorded as a purchase for accounting purposes
and will result in a charge to Millennium's fourth quarter 1999 financial
results due to the write-off of acquired in process research and development.
In addition to announcing the LeukoSite merger, Millennium today also
announced the completion of its merger with its Millennium BioTherapeutics,
Inc. subsidary, which had previously been a majority owned subsidary. This
merger integrates Millennium BioTherapeutics' research and development with
Millennium's pharmaceutical division to form a unified pipeline in small
molecules, therapeutic proteins and antibodies.
In connection with these mergers, Millennium announced the appointment of
Christopher K. Mirabelli, Ph.D. to the position of president, pharmaceutical
research and development, reporting to Mark Levin, CEO of Millennium
Pharmaceuticals. Dr. Mirabelli, who was president and CEO of LeukoSite prior to
the merger with Millennium, will lead the company's science, technology,
research and development efforts from gene discovery through clinical
evalutaion.
"Our merger with LeukoSite leapfrogs Millennium toward our vision of building
the biopharmaceutical company of the future. LeukoSite's product development
expertise and rich pipeline of potential products add critical capabitities
and expertise to Millennium's platform," said Mark Levin, Chief Executive
Officer of Millennium. "Dr. Mirabelli, who has extensive product development
experience, will lead our newly combined pharmaceutical research and
development organization toward achievement of our therapeutic pipeline and
productivity goals," he added.
<PAGE>
Millennium, a leading drug discovery and development company, employs
large-scale genetics, genomics, high throughput screening and informatics in an
integrated science and technology platform. This innovative drug discovery
platform is applied across the entire healthcare sector, from gene
identification through patient management, to accelerate and transform the
discovery and development of proprietary therapeutic and Diagonomics products
and services. Headquartered in Cambridge, Massachusetts, Millennium and its
affiliate currently employ more than 1,000 people.
THIS PRESS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE A
NUMBER OF RISKS AND UNCERTAINITIES. AMONG THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD
LOOKING STATEMENTS INCLUDE UNCERTAINTIES RELATING TO GENE IDENTIFICATION,
DRUG DISCOVERY AND CLINICAL DEVELOPMENT PROCESSES; MILLENNIUM'S ABILITY TO
SUCCESSFULLY INTEGRATE THE OPERTIONS OF LEUKOSITE, INC.; CHANGES IN
RELATIONSHIPS WITH STRATEGIC PARTNERS AND DEPENDENCE UPON STRATEGIC FOR THE
PERFORMANCE OF CRITICAL ACTIVITIES UNDER COLLABORATIVE AGREEMENTS; THE IMPACT
OF COMPETITIVE PRODUCTS AND TECHNOLOGICAL CHANGES; UNCERTAINTIES RELATING TO
PATENT PROTECTION AND REGULATORY APPROVAL; AND UNCERTAINTIES RELATING TO THE
ABILITY OF MILLENNIUM AND ITS AFFILIATE TO OBTAIN THE SUBSTANTIAL ADDITIONAL
FUNDS REQUIRED FOR PROGRESS IN DRUG DISCOVERY AND DEVELOPMENT. THE FACTORS
THAT COULD AFFECT THE PERFORMANCE OF MILLENNIUM ARE MORE FULLY DESCRIBED IN
FILINGS BY MILLENNIUM WITH THE SECURITIES AND EXCHANGE COMMISSION INCLUDING
BUT NOT LIMITED TO THE FACTORS SET FORTH UNDER THE HEADING "BUSINESS FACTORS
THAT MAY AFFECT RESULTS" IN THE ANNUAL REPORT ON FORM 10-K OF MILLENNIUM FOR
THE YEAR ENDED DECEMBER 31, 1998 AS FILED ON MARCH 24, 1999; AND ALSO, THE
FILINGS BY LEUKOSITE, INC. WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
EXHIBIT 99.2
INDEX TO FINANCIAL STATEMENTS
LEUKOSITE, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1998 and 1999
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
CYTOMED, INC. FINANCIAL STATEMENTS
Report of Independent Accountants PricewaterhouseCoopers LLP
Balance Sheet as of December 31, 1998 and 1997
Statement of Operations for the Years Ended December 31, 1998, 1997 and 1996
Statement of Changes in Stockholders' Deficit for the Years Ended
December 31, 1998, 1997 and 1996
Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,361,339 $ 8,021,059
Marketable securities 15,802,376 14,359,833
Receivable from UCB -- 6,000,000
Other current assets 544,779 899,833
--------------------- ---------------------
Total current assets 21,708,494 29,280,725
--------------------- ---------------------
Property and equipment, net 3,393,873 4,541,370
Marketable securities 2,168,324 4,754,040
Goodwill - 208,050
Other assets 231,930 537,019
--------------------- ---------------------
Total assets $ 27,502,621 $ 39,321,204
--------------------- ---------------------
--------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,387,429 $ 4,856,305
Obligation to fund L&I Joint Venture 203,445 826,702
Deferred revenue 2,172,058 2,539,560
Deferred rent 222,907 40,528
Current portion of capital lease obligations 733,848 958,922
--------------------- ---------------------
Total current liabilities 7,719,687 9,222,017
--------------------- ---------------------
Capital lease obligations, less current portion 1,315,813 975,297
--------------------- ---------------------
Stockholders' equity:
Preferred stock $.01 par value-
Authorized-5,000,000 shares
Issued and outstanding-no shares -- --
Common stock, $.01 par value-
Authorized-25,000,000 shares
Issued and outstanding-11,916,339 shares at
December 31, 1998 and 14,670,121 shares at
September 30, 1999 119,164 146,693
Additional paid-in capital 65,280,443 97,594,072
Accumulated deficit (46,932,486) (68,616,875)
--------------------- ---------------------
Total stockholders' equity 18,467,121 29,123,890
--------------------- ---------------------
Total liabilities and stockholders' equity $ 27,502,621 $ 39,321,204
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1998 1999
---- ----
<S> <C> <C>
REVENUES:
Corporate collaborations $ 5,659,083 $ 7,599,320
Joint venture 820,503 2,661,606
Government grants 590,577 668,144
--------------- --------------
Total revenue 7,070,163 10,929,070
--------------- ---------------
OPERATING EXPENSES:
Research and development 14,997,469 22,806,874
General and administrative 1,872,147 2,567,407
Acquired in-process research and
development -- 4,249,157
--------------- ---------------
Total operating expenses 16,869,616 29,623,438
--------------- ---------------
LOSS FROM OPERATIONS (9,799,453) (18,694,368)
OTHER INCOME (EXPENSE):
Equity in operations of
joint venture (2,922,256) (3,899,863)
Interest income 1,039,935 1,040,391
Interest expense ( 113,749) ( 130,549)
--------------- ---------------
NET LOSS $ (11,795,523) $ (21,684,389)
--------------- ---------------
--------------- ---------------
NET LOSS PER COMMON SHARE
Basic and diluted $(1.12) $(1.69)
--------------- ---------------
--------------- ---------------
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE
Basic and diluted 10,554,312 12,859,521
--------------- ---------------
--------------- ---------------
</TABLE>
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,795,523) $(21,684,389)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 863,304 1,177,605
Stock compensation expense - 152,488
Equity in operations of joint venture 2,922,256 3,899,863
Acquired in-process research and
development - 4,249,157
Change in operating assets and liabilities:
Other current assets (465,912) 199,413
Accounts payable and accrued expenses 1,591,296 (1,549,743)
Deferred revenue 1,439,981 (338,143)
Deferred rent (182,378) (182,379)
------------- -------------
Net cash used in operating activities (5,626,976) (14,076,128)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (17,234,631) (10,247,199)
Proceeds from maturities of marketable securities 12,504,902 16,478,862
Investment in joint venture (3,172,068) (3,276,606)
Purchases of property and equipment (1,109,437) (1,241,782)
Cash acquired in CytoMed acquisition - 564,875
Cash acquired in ProScript acquisition - 104,194
Decrease (increase) in other assets 1,217 244,584
------------- -------------
Net cash provided by (used in) investing activities (9,010,017) 2,626,928
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (752,280) (632,447)
Issuance of common stock 11,731,366 14,382,873
Exercise of stock options 234,283 358,494
------------- -------------
Net cash used in financing activities 11,213,369 14,108,920
------------- -------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,423,624) 2,659,720
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 10,587,873 5,361,339
------------- -------------
CASH AND EQUIVALENTS, END OF PERIOD $ 7,164,249 $ 8,021,059
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 113,749 $ 130,549
------------- -------------
------------- -------------
Property and equipment purchased under capital lease
obligations $ 346,771 $ 320,433
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of CytoMed:
Marketable securities $ - $ 7,374,386
Accounts receivable - 6,355,681
Prepaid expenses - 181,441
Property and equipment - 104,452
Other assets - 5,000
Acquired in-process research and development - 1,588,612
Accounts payable and accrued expenses - (547,178)
Stock issued - (15,627,269)
------------- -------------
$ - $ (564,875)
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Acquisition of ProScript:
Prepaid expenses $ - $ 62,516
Property and equipment - 650,752
Goodwill - 219,000
Other assets - 499,502
Acquired in-process research and development - 2,660,545
Accounts payable and accrued expenses - (959,722)
Deferred revenue - (705,645)
Capital lease obligations - (196,114)
Stock issued - (2,335,028)
------------- -------------
$ - $ (104,194)
------------- -------------
------------- -------------
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Basis of Presentation
LeukoSite, Inc. (the "Company") was incorporated on May 1, 1992. The Company
is a biotechnology company developing proprietary monoclonal antibody and
small molecule drugs to treat patients with cancer and inflammatory,
autoimmune and viral diseases.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of
management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are
adequate to make the information presented not misleading. The results for
the interim periods presented are not necessarily indicative of results to
be expected for the full fiscal year. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes related thereto included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
(a) Cash Equivalents and Marketable Securities
Cash equivalents are highly liquid investments with original maturities of
less than three months. Marketable securities consist of securities with
original maturities of greater than three months. The Company accounts for
cash equivalents and marketable securities in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company has classified its investments as
held-to-maturity. The investments that the Company has the positive intent
and ability to hold to maturity are reported at amortized cost, which
approximates fair market value.
As of September 30, 1999 there were no material unrealized gains or losses
on any investments. Cash and cash equivalents and marketable securities
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
<S> <C> <C>
Cash and cash equivalents:
Cash $ 3,219,315 $ 598,441
Money market funds 1,341,651 5,960,270
Commercial Paper - 1,462,348
Taxable auction securities 800,373 -
----------- -----------
$ 5,361,339 $ 8,021,059
----------- -----------
----------- -----------
Marketable securities, short term:
Corporate bonds and notes (average
maturity of 6 and 5 months $ 15,802,376 $ 14,359,833
respectively)
----------- -----------
----------- -----------
Marketable securities, long term:
Corporate bonds and notes (average
maturity of 16 and 16 months
respectively) $ 2,168,324 $4,754,040
----------- -----------
----------- -----------
</TABLE>
<PAGE>
(b) Net Loss per Common Share
Basic net loss per common share is based on the weighted average number of
common shares outstanding. For the three and six month periods ended
September 30, 1998 and 1999 diluted net loss per common share is the same as
basic net loss per common share as the inclusion of 340,699, 1,010,483,
386,943, and 715,197 weighted average shares of common stock issuable upon
exercise of stock options and warrants would be antidilutive for the three
months ended September 30, 1998 and 1999 and nine months ended September
30, 1998 and 1999 respectively.
3. ILEX Joint Venture
In May 1997 the Company and ILEX Oncology, Inc. (ILEX) entered into a joint
venture agreement that established L&I Partners, LP ("L&I") for the purpose
of developing CAMPATH(R). Under the terms of the partnership, the Company is
required to fund 50% of the partnership's working capital requirements. The
joint venture expires in 2017. Should either party fail to fulfill its
funding obligations, control of the joint venture may change.
The Company accounts for its investment in the joint venture under the
equity method of accounting and records its share of the income or loss in
other income (expense). The Company is reimbursed by the joint venture for
certain costs incurred on behalf of the joint venture and has included such
reimbursements in revenues. The joint venture has sublicensed the rights to
CAMPATH(R) from the Company. For the nine months ended September 30, 1999
the joint venture's recorded loss was $7,799,726. For the nine months ended
September 30, 1999 the Company's share of the joint venture's recorded loss
was $3,899,863 and the Company's obligation to fund the joint venture as of
September 30, 1999 was $826,702. The Company charged the joint venture
$2,661,606 for costs incurred on its behalf for the nine months ended
September 30, 1999.
4. Acquisitions
(a) CytoMed, Inc.
In February 11, 1999 the Company acquired all of the issued and outstanding
capital stock of CytoMed, Inc. ("CytoMed") through the issuance of 935,625
shares of the Company's Series A Convertible Preferred Stock, par value
$.01 per share, to CytoMed shareholders. The Series A Convertible Preferred
Stock automatically converted into common stock on a one-for-one basis upon
the required approval by the Company's shareholders at the annual meeting
held May 25, 1999. The Company may issue another 631,313 common shares to
CytoMed shareholders upon receipt of a $6,000,000 payment to CytoMed from
UCB Pharma. In addition, CytoMed shareholders may receive up to
$23,000,000 in cash and up to an additional 84,000 shares of the Company's
common shares upon the achievement of milestones related to certain
CytoMed product candidates.
The merger was accounted for as a purchase in accordance with the
requirements of Accounting Principles Board (APB) Opinion No.16, Business
Combinations, and accordingly CytoMed's results of operations are included
in those of the Company beginning on the date of the acquisition. The total
purchase price, including transaction costs, was approximately $16,100,000.
The total purchase price was allocated to the fair value of the assets
acquired and liabilities assumed including an allocation to in-process
research and development of $1,588,612. The nature of the efforts to
develop the purchased in-process technologies into commercially viable
products principally relate to the completion of all development, testing,
and high-volume
<PAGE>
manufacturing activities that are necessary to establish that the
products can be produced to meet its design specifications and are
proven to be safe and effective for their respective indications. As of
the acquisition date, technological feasibility of the compounds in
development had not been established and the technologies have no
alternative future uses. If these projects are not successfully
developed, the Company will not realize the value assigned to the
in-process research and development, therefore the value of the
in-process research and development was charged to operations in the
current period.
Total consideration allocated to the fair market value of assets acquired
and liabilities assumed on the purchase date is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents $ 1,044,875
Marketable securities 7,374,386
Accounts receivable 6,355,681
Prepaid expenses 181,441
Property and equipment 104,452
Other assets 5,000
Acquired in-process research and development 1,588,612
Accounts payable and accrued expenses (547,178)
---------------
$ 16,107,269
---------------
---------------
</TABLE>
The following unaudited pro forma condensed consolidated statement of
operations information has been prepared to give effect to the merger as
if such transaction had occurred at the beginning of the periods
presented. In October 1998 CytoMed sold to UCB Pharma assets relating to
certain research programs. CytoMed's historical results of operations
included in the following pro forma information have been adjusted to
reflect the revenues and expenses related to the remaining research
programs acquired by the Company. The historical results of operations
have been adjusted to reflect (i) elimination of the one-time charge to
operations for the purchase of acquired in-process research and
development and (ii) reduction of interest income resulting from use of
$480,000 for transaction costs at an annual interest rate of 5.47%.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- -------------------
<S> <C> <C>
REVENUES $ 13,584,460 $ 10,929,070
NET LOSS $(17,334,735) $ (20,859,815)
NET LOSS PER COMMON SHARE
Basic and diluted $(1.39) $(1.49)
------------- --------------
------------- --------------
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE
Basic and diluted 12,462,349 13,987,778
------------- --------------
------------- --------------
</TABLE>
(b) ProScript, Inc.
On July 19, 1999 the Company acquired all of the issued and outstanding
capital stock of ProScript, Inc. ("ProScript") by payment of $411,719 in
cash to ProScript shareholders and through the issuance of 187,970
shares of the Company's common stock, par value $0.01 per share, to
certain ProScript shareholders. In addition, ProScript shareholders are
entitled to
<PAGE>
additional cash payments upon the achievement of certain milestones and
royalties related to certain ProScript compounds and related to a
ProScript research collaboration with Hoechst Marion Roussel, Inc.
The merger was accounted for as a purchase in accordance with the
requirements of APB Opinion No. 16, Business Combinations, and
accordingly ProScript's results of operations have been included in
those of the Company beginning on the date of the acquisition. The total
purchase price was approximately $2,800,000. The total purchase price
was allocated to the fair value of assets acquired and liabilities
assumed including an allocation to in-process research and development
of $2,660,545. The nature of the efforts to develop the purchased
in-process technologies into commercially viable products principally
relate to the completion of all development, testing, and high-volume
manufacturing activities that are necessary to establish that the
products can be produced to meet its design specifications and are
proven to be safe and effective for their respective indications. As of
the acquisition date, technological feasibility of the compounds in
development had not been established and the technologies have no
alternative future uses. If these projects are not successfully
developed, the Company will not realize the value assigned to the
in-process research and development, therefore the value of the
in-process research and development was charged to operations in the
current period. In addition, the Company has recorded $219,000 of
goodwill which will be amortized over five years.
<TABLE>
<CAPTION>
<S> <C>
Acquisition of ProScript:
Cash and cash equivalents $ 615,914
Prepaid expenses 62,516
Property and equipment 650,752
Goodwill 219,000
Other assets 499,502
Acquired in-process research and development 2,660,545
Accounts payable and accrued expenses (959,722)
Deferred revenue (705,645)
Capital lease obligations (196,114)
-----------
$2,846,748
-----------
-----------
</TABLE>
5. Private Placement
On July 20, 1999 the Company completed a private placement of 1,487,548
shares of its common stock for total net proceeds of $14.2 million after
expenses of the offering. LeukoSite will register these shares and use its
best efforts to keep the registration statement effective for two years, or
until all shares are sold under the registration statement, whichever
comes first.
6. Schering AG Agreement
In August 1999 the Company and ILEX, through L&I, and Schering AG entered
into a distribution and development agreement which grants Schering AG
exclusive marketing and distribution rights to CAMPATH(R) in the U.S.,
Europe and rest of the world except Japan and East Asia, where the Company
and ILEX have retained rights.
In the United States, Berlex Laboratories, Inc., Schering's U.S. affiliate,
the Company and ILEX will share in the profits from the sale of CAMPATH(R).
On sales made in the rest of the territory, Schering AG will pay royalties
equivalent to the rate of profit sharing expected in the U.S. Under
<PAGE>
the terms of the agreement, Schering will make payments of up to $30 million
for rights to CAMPATH(R) upon the achievement of certain regulatory
milestones. The Company and ILEX currently intend to use these funds to pay
for ongoing development activity.
As of September 30, 1999 L&I has received $5 million in funding and this
amount is included in the joint venture's total liabilities.
7. Subsequent Events
On October 14, 1999 Millennium Pharmaceuticals, Inc. ("Millennium") and
the Company announced the signing of a merger agreement pursuant to
which Millennium would acquire the Company in a stock for stock
exchange. If this transaction closes, the Company expects that
Millennium will issue approximately 6,577,110 shares of common
stock to the Company's stockholders, and options, rights and warrants to
purchase approximately 1,023,068 shares of Millennium common
stock to the holders of the Company's options, rights and warrants.
The transaction is subject to, among other things, the approval of the
Company's stockholders as well as antitrust clearance under the
Hart-Scott-Rodino Antitrust Improvements Act.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CytoMed, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of CytoMed, Inc.
(the "Company") at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
<PAGE>
CYTOMED INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 5,394,234 $ 955,643
Marketable securities 4,143,940 7,728,214
Other receivables 6,155,681 --
Other current assets 319,871 130,319
----------- -----------
Total current assets $16,013,726 8,814,176
Fixed assets, net 105,295 541,206
Other assets 5,000 37,600
----------- -----------
$16,124,021 $ 9,392,982
----------- -----------
----------- -----------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations $ -- $ 112,547
Accounts payable 274,406 799,315
Accrued expenses 586,612 551,253
----------- -----------
Total current liabilities 861,018 1,463,115
----------- -----------
Capital lease obligations -- 28,475
----------- -----------
Redeemable preferred stock:
Convertible preferred stock, $.01 par value, 24,335,060 shares authorized:
Series VII redeemable convertible preferred stock, 17,497,594 and 15,662,732
shares issued and outstanding at December 31, 1998 and 1997, respectively,
stated at net issuance price plus accretion (liquidation preference
$20,625,599) 19,689,845 16,162,471
Series I redeemable convertible preferred stock, 184,670 shares issued and
outstanding, stated at redemption value (liquidation preference $609,411) 609,411 609,411
Series II redeemable convertible preferred stock, 400,000 shares issued and
outstanding, stated at net issuance price plus accretion (liquidation
preference $1,320,000) 1,275,145 1,254,649
Series III redeemable convertible preferred stock, 4,967,373 shares issued and
outstanding, stated at net issuance price plus accretion (liquidation
preference $19,396,436) 19,277,444 18,029,915
Series VI redeemable convertible preferred stock, 1,029,392 shares issued and
outstanding, stated at net issuance price plus accretion (liquidation
preference $3,396,994) 3,180,732 3,143,116
----------- -----------
Total redeemable preferred stock 44,032,577 39,199,562
----------- -----------
Stockholders' deficit:
Series V convertible preferred stock, 185,714 shares issued and outstanding, stated
at issuance price (liquidation preference $1,429,998) 1,299,998 1,299,998
Common stock, $0.1 par value; 29,025,945 and 28,966,312 shares authorized, 15,578 and
13,391 shares issued and 15,033 and 12,846 shares outstanding at December 31, 1998
and 1997, respectively 156 134
Additional paid-in capital 18,186,760 17,856,790
Accumulated deficit (48,244,860) (50,443,464)
----------- -----------
(28,757,946) (31,286,452)
Less - Cost of 545 shares of common stock held in treasury (11,628) (11,628)
----------- -----------
Total stockholders' deficit (28,769,574) (31,298,170)
----------- -----------
Commitments (Note 12) -- --
----------- -----------
$16,124,021 $ 9,392,982
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CYTOMED, INC.
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Revenue $ 3,385,205 $ 527,725 $ 1,038,087
------------ ------------ ------------
Costs and expenses:
Research and development 6,987,846 7,108,158 5,616,233
General and administrative 2,457,051 2,336,136 1,980,634
------------ ------------ ------------
9,444,897 9,444,294 7,596,867
------------ ------------ ------------
Loss from operations (6,059,692) (8,916,569) (6,558,780)
------------ ------------ ------------
Other income (expense):
Interest expense (8,350) (866,982) (40,124)
Interest income 447,974 24,756 73,231
Other income - 250,000 -
Gain on sale of assets 10,798,451 - -
------------ ------------ ------------
11,238,075 (592,226) 33,107
------------ ------------ ------------
Net income (loss) 5,178,383 (9,508,795) (6,525,673)
Preferred stock preferences (Note 9)
Accrued dividends on Series III and
Series VII convertible preferred stock (2,685,522) (1,252,040) (1,192,170)
Accretion of stock issuance costs (294,257) (119,130) (92,760)
------------ ------------ ------------
Net income (loss) available to common
stockholders $ 2,198,604 $(10,879,965) $ (7,810,603)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CytoMed, Inc.
Statement of Changes in Stockholders' Deficit
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Series V convertible Additional
preferred stock Common stock paid-in Accumulated Treasury stock
Shares Amount Shares Par value capital deficit Shares Amount Total
------- ---------- ------ --------- ----------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- 2,984 $ 30 $15,904,757 $(31,752,896) 545 $(11,628) $(15,859,737)
Issuance of Series V
convertible preferred stock... 185,714 1,299,998 1,299,998
Issuance of warrants to
purchase Series VI convertible
preferred stock............... 7,546 7,546
Accrued dividend on Series III
convertible preferred stock... (1,192,170) (1,192,170)
Accretion of redeemable
preferred stock to
redemption value.............. (92,760) (92,760)
Issuance of warrants to
purchase common stock......... 137,000 137,000
Net loss....................... (6,525,673) (6,525,673)
------- ---------- ------ --------- ----------- ------------ ------- -------- ------------
Balance at December 31, 1996... 185,714 1,299,998 2,984 30 16,049,303 (39,563,499) 545 (11,628) (22,225,796)
Issuance of warrants to
purchase common stock as
payment of issuance costs
on Series VII convertible
preferred stock............... 172,000 172,000
Issuance of common stock
pursuant to stock option
exercises..................... 10,407 104 4,579 4,683
Acquisition and retirement of
Series IV convertible
preferred stock............... 1,250,012 1,250,012
Accrued dividend on Series III
and Series VII convertible
preferred stock............... (1,252,040) (1,252,040)
Issuance of warrants to
purchase common stock and
Series VII convertible
preferred stock............... 367,590 367,590
Compensation related to the
grant of common stock
options....................... 13,306 13,306
Accretion of redeemable
preferred stock to redemption
value......................... (119,130) (119,130)
Net loss....................... (9,508,795) (9,508,795)
------- ---------- ------ --------- ----------- ------------ ------- -------- ------------
Balance at December 31, 1997... 185,714 1,299,998 13,391 134 17,856,790 (50,443,464) 545 (11,628) (31,298,170)
Issuance of common stock
pursuant to stock option
exercises..................... 2,187 22 970 992
Accrued dividend on Series III
and Series VII convertible
preferred stock............... (2,685,522) (2,685,522)
Value of options transferred
pursuant to the UCB asset
purchase agreement
(Note 3)...................... 329,000 329,000
Accretion of redeemable
preferred stock to redemption
value......................... (294,257) (294,257)
Net income..................... 5,178,383 5,178,383
------- ---------- ------ --------- ----------- ------------ ------- -------- ------------
Balance at December 31, 1998... 185,714 $1,299,998 15,578 $ 156 $18,186,760 $(48,244,860) 545 $(11,628) $(28,769,574)
======= ========== ====== ========= =========== ============ ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CYTOMED, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,178,383 $ (9,508,795) $ (6,525,673)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 235,469 307,038 365,920
Amortization of debt discount - 489,197 4,467
Accrued interest converted to equity - 351,728 -
Compensation related to the grant of common stock options - 13,306 -
Gain on termination of collaboration agreement - (250,000) -
Gain on sale of assets (10,798,451) - -
Changes in assets and liabilities:
Other current assets (189,552) 3,908 (45,533)
Other receivables (155,681) - -
Accounts payable (524,909) 103,642 368,736
Accrued expenses (29,577) 380,787 (76,378)
------------ ------------ -------------
Net cash used in operating activities (6,284,318) (8,109,189) (5,908,461)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (5,657,105) (7,728,214) -
Proceeds from maturities and sales of marketable securities 9,241,379 - -
Decrease in other assets 32,600 - 50,400
Purchases of fixed assets (1,505,681) (329,911) (235,290)
Proceeds from sale of assets 6,898,510 - -
------------ ------------ -------------
Net cash provided by (used in) investing activities 9,009,703 (8,058,125) (184,890)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable from related parties - 5,720,650 1,000,000
Proceeds from sale leaseback transactions - - 127,353
Principal payments on capital lease obligations (141,022) (144,579) (191,269)
Proceeds from issuance of redeemable preferred stock, net 1,853,236 10,540,945 3,042,454
Proceeds from issuance of warrants to purchase preferred
stock and common stock - 13,393 9,546
Proceeds from issuance of common stock 992 4,683 -
------------ ------------ -------------
Net cash provided by financing activities 1,713,206 16,135,092 3,988,084
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents 4,438,591 (32,222) (2,105,267)
Cash and cash equivalents at beginning of year 955,643 987,865 3,093,132
------------ ------------ -------------
Cash and cash equivalents at end of year $ 5,394,234 $ 955,643 $ 987,865
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997. notes payable and accrued interest totaling $7,072,378 were
converted into 6,488,420 shares of Series VII convertible preferred stock.
During 1997 and 1996, the Company recorded debt discounts and additional
paid-in-capital totaling $354,197 and $135,000, respectively, relating to the
issuance of warrants.
During 1997, the Company acquired its Series IV convertible preferred stock
in exchange for the cancellation of a collaboration and license agreement
(Note 4).
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1998, 1997 and 1996, the Company paid approximately $8,000, $26,000
and $29,000, respectively, for interest.
The accompanying notes are an integral part of these financial statements.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
CytoMed, Inc. (the "Company") was incorporated under the laws of the
state of Delaware in May 1986. The Company is engaged in the discovery
and development of innovative anti-inflammatory and analgesic
pharmaceutical products. The Company's principal line of business is
to license its proprietary technology to established pharmaceutical
companies worldwide and to create corporate alliances with these
companies to develop its technology for commercialization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in preparation of the
financial statements are as follows:
REVENUE RECOGNITION
Revenue from collaboration or other contractual agreements is
recognized pursuant to the related agreements as work is performed and
defined milestones are attained. Payments received under these
arrangements for research prior to the completion of the related work
and attainment of milestones are recorded as deferred revenue.
Payments received for license fees or options to license technology
are recognized ratably over the related research period.
PATENT COSTS
The Company has incurred expenditures to register patents and
trademarks for the technology that it sells under various license and
collaboration agreements. Payments made to register these patents and
trademarks have been expensed as incurred because recovery of the
related costs is not sufficiently assured.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company invests excess cash primarily in money market accounts,
government debt securities and corporate bonds which have strong
credit ratings. These investments are subject to minimal credit and
market risks. The Company classifies these investments as
available-for-sale. All available-for-sale investments are recorded at
amortized cost which approximates fair market value.
FIXED ASSETS
Fixed assets are stated at cost and depreciated using the
straight-line method over their estimated useful lives. Leasehold
improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the term of the respective
leases. Maintenance and repair costs are expensed as incurred.
STOCK COMPENSATION
Stock options issued to employees under the Company's stock option
plans are accounted for in accordance with Accounting Principles Board
("APB") Opinion No. 25 and related interpretations. The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123
through disclosure only (Note 10).
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
include cash, cash equivalents, marketable securities, accounts
payable, accrued expenses and notes payable approximates their fair
value at the balance sheet dates.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
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, the 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
could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." The statement
establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to
owners. This standard requires that an enterprise display an amount
representing total comprehensive income for the period. The adoption
of SFAS No. 130 by the Company in 1998 has no impact on the Company as
the Company has no other components of comprehensive income other than
net income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new
standards for the recognition of gains and losses on derivative
instruments and provides guidance as to whether a derivative may be
accounted for as a hedging instrument. Gains or losses from hedging
transactions may be wholly or partially recorded in earnings or
comprehensive income as part of a cumulative translation adjustment,
depending upon the classification of the hedge transaction. Gain or
loss on a derivative instrument not classified as a hedging instrument
is recognized in earnings in the period of change. SFAS No. 133 will
be effective for the Company beginning in 2000. The Company does not
believe adoption of SFAS No. 133 will have a material impact on its
financial position or its results of operations.
3. SALE OF ASSETS
On October 23, 1998, the Company entered into an asset purchase
agreement ("Purchase Agreement") with UCB Research, Inc., UCB Farchim,
S.A., and UCB, S.A. (collectively "UCB"). Under the terms of the
agreement, the Company sold to UCB assets relating to certain research
programs for a total of $12.9 million, of which $6.9 million was
received in 1998 and the remaining $6.0 million is due in October 1999
and is recorded as an other receivable on the accompanying balance
sheet. An additional payment of up to $6.0 million from UCB is
contingently due upon programs sold to UCB reaching certain future
milestones. The Company recognized a gain of $10.8 million on this
sale, which is included in other income for 1998. Under the terms of
the Purchase Agreement, the terms of the outstanding stock options of
employees who were offered employment by UCB were modified to allow
for each individual to retain ownership of, and continue vesting in,
their stock options upon the individual's continued employment with
UCB. The Company determined the aggregate fair value of the affected
options at the date of the modification to be $329,000, which was
recorded as a reduction in the gain recognized on the sale of assets.
In February 1998, the Company had entered into a three year research
and license option agreement with UCB, SA. Under the terms of this
agreement, the Company received $3 million in February 1998, of which
$1.5 million represented an option fee to obtain an exclusive
worldwide license to develop and market a specified compound and $1.5
million represented prepaid research fees. During 1998, the Company
recognized the entire option fee as this agreement was canceled in
October 1998 upon the signing of the asset purchase agreement. The
Company recognized a total of $1,872,617 in research fees under the
research and license option agreement during 1998.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
4. SIGNIFICANT AGREEMENTS
In April 1994, the Company entered into a License and Collaboration
Agreement (the "Chiron Agreement") and an Equity Letter Agreement
(Note 9) with Chiron Corporation ("Chiron"). Under the terms of the
Chiron Agreement, the Company will develop a specific compound and
will complete the preclinical trials, after which the Company will
license the compound to Chiron. In exchange, the Company will receive
milestone payments up to $7.5 million during drug development and
royalty payments based on sales of the product. The Chiron Agreement
will expire eight years from the date of the first commercial sale of
the licensed product. Chiron also made payments to the Company of $1.5
million for certain research and development activities, of which $1.0
million and $0.5 million was received and recognized as revenue in
1995 and 1996, respectively.
In March 1995, the Company entered into a Collaboration Agreement, a
License Agreement (collectively the "Grelan Agreement") and a Stock
Purchase Agreement (Note 9), with Grelan Pharmaceutical Co. Ltd.
("Grelan"). Under the terms of the Grelan Agreement, the Company
participated in the joint development of a specified Company compound
for use in a Grelan product. In exchange, the Company was entitled to
receive milestone payments during drug development and royalty
payments based on sales of the product. The Collaboration Agreement
was set to expire in 1998, and the License Agreement was set to expire
on the later of ten years from the date of the first commercial sale
of the licensed compound or the expiration of the related patent.
Under the Grelan Agreement, Grelan was required to reimburse 50% of
the preclinical expenses incurred by the Company and was required to
make two $500,000 license fee payments on each of the first two
anniversaries of the Grelan Agreement of which $500,000 was received
and recognized as revenue in 1996. Reimbursements of approximately
$205,000 of preclinical expenses were recorded as an offset to
research and development expense in 1996. During 1997, the Company and
Grelan agreed to terminate the Grelan Agreement.
Under the termination agreement, the Company reacquired the 258,400
shares of Series IV convertible preferred stock that was originally
issued for proceeds of $1,500,012 and the license to a certain
compound that had been issued to Grelan under the terms of the Stock
Purchase Agreement and Grelan Agreement, respectively. In addition,
Grelan was released from all future obligations under the Grelan
Agreement, which included the payment of a $53,000 receivable due to
the Company at December 31, 1996, the second $500,000 license fee
payment and reimbursements for 50% of the preclinical expenses
incurred by the Company in 1997. The Company recorded $250,000 as
other income resulting from the termination agreement and wrote off
the $53,000 receivable balance to expense during 1997.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
In May 1996, the Company entered into an Option Agreement and a Stock
Purchase Agreement (Note 9) with Stiefel Laboratories Inc.
("Stiefel"). Under the terms of this Option Agreement, the Company
will deliver a sample of a specified Company compound to Stiefel for
clinical testing. Within sixty days after completion of the clinical
tests or within nine months of the date of delivery, whichever is
earlier, Stiefel may exercise its option to obtain an exclusive
license to develop, market and sell the compound in specific
territories. Upon exercise of the option, Stiefel is required to make
a $1.0 million non-refundable license fee payment. The Option
Agreement also grants Stiefel the right to purchase $5.0 million of
capital stock in lieu of a certain $3.0 million milestone payment that
would be required under the license.
In December 1997, the Company entered into an Option Agreement with
Boehringer Ingelhiem International, GmbH ("BI"). Under the terms of
the Option Agreement, the Company delivered a specified compound to BI
for clinical testing. At any time during the option period, which was
set to expire within 90 days after completion of the clinical tests or
by October 31, 1998, whichever was earlier, BI had the right to
exercise its option to obtain an exclusive worldwide license to
develop, market and sell the compound. BI did not exercise its option
during 1998. Under the terms of this Option Agreement, BI paid to the
Company a $500,000 nonrefundable option fee, which was recognized as
revenue in 1997.
5. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
DECEMBER 31,
MATURITY 1998 1997
<S> <C> <C> <C>
Money market funds -- $3,954,363 $ 955,643
Government securities 3 months 625,081 7,728,214
Corporate Bonds 3-12 months 4,294,577 --
Municipal Bonds 12 months 649,675 --
---------- ----------
$9,523,696 $8,683,857
---------- ----------
---------- ----------
</TABLE>
The Company has not realized any gains or losses on available-for-sale
securities during the three years ended December 31, 1998.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
6. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Research equipment $ -- $1,307,560
Office equipment 111,446 427,319
Furniture and fixtures 51,417 64,528
Leasehold improvements -- 156,286
-------- ----------
162,863 1,955,693
Less-accumulated depreciation and 57,568 1,414,487
amortization -------- ----------
$105,295 $ 541,206
-------- ----------
-------- ----------
</TABLE>
Included in research and office equipment are assets held under capital
leases of $488,683 at December 31, 1997. Accumulated amortization on
these assets totaled $308,406 at December 31, 1997. For the years ended
December 31, 1998, 1997 and 1996, amortization expense on assets held
under capital lease obligations was $70,308, $97,737, and $84,856,
respectively.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Employee compensation and benefits $266,866 $ 280,377
Professional services 202,094 49,893
Other 117,652 220,983
-------- ----------
$586,612 $ 551,253
-------- ----------
-------- ----------
</TABLE>
8. CONVERTIBLE NOTES PAYABLE
In September 1996, the Company entered into a Credit Agreement (the
"Agreement") with certain of its stockholders which provided for
financing up to $3.0 million through the issuance of one year unsecured
promissory notes at a 10.25% interest rate per annum. Pursuant to the
Agreement, the Company was also required to issue warrants to purchase up
to 400,000 shares of the Company's common stock with an exercise price of
$1.95 per share. The Agreement provided that 100,000 warrants will be
issued upon the initial borrowing, one warrant will be issued for each
$10 borrowed and each warrant will be purchased by the investors for
$0.01 per warrant. In December 1996, the
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
Company borrowed $1.0 million under the Agreement and issued warrants to
purchase 200,000 shares of the Company's common stock. The warrants were
exercisable and expire at various times through December 11, 2006. The
proceeds of this financing were allocated to the notes and to the
warrants based on management's estimate of their fair values. This
resulted in $137,000 being ascribed to warrants which was recorded as
additional paid-in-capital. Of this amount, $135,000 was recorded as a
discount to the face value of the notes and was amortized over the term
of the notes. In 1997, the Company borrowed the remaining $2.0 million
under the Agreement and issued warrants to purchase 200,000 shares of the
Company's common stock. In addition, during 1997 the Company borrowed
$3,720,650 under separate agreements from existing stockholders in the
form of unsecured promissory notes at an interest rate of 10.50% per
annum. In connection with these notes, the Company issued warrants to
purchase up to 493,050 and 18,397 shares of the Company's common stock
with an exercise price of $1.95 and $7 per share of common stock,
respectively. The proceeds from the 1997 financings were allocated to the
notes and to the warrants based on management's estimate of their fair
values. This resulted in $363,312 being ascribed to warrants which was
recorded as additional paid-in-capital. Of this amount, $354,197 was
recorded as a discount to the face value of the notes. The discount was
amortized over the period from issuance of the notes to the conversion
into Series VII convertible preferred stock (see Note 9) and is included
in interest expense for the year ended December 31, 1997.
<PAGE>
9. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The following table summarizes redeemable preferred stock activity during
each of the three years in the period ended December 31, 1998.
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
----------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Balance at December 31, 1995 5,810,443 $18,859,695
Issuance of Series VI preferred stock 248,922 1,742,456
Accrued dividend on Series III preferred stock -- 1,192,170
Accretion to redemption value -- 92,760
---------- -----------
Balance at December 31, 1996 6,059,365 $21,887,081
Issuance of Series VI preferred stock 192,246 1,345,722
Issuance of Series VII preferred stock,
net issuance cost of $976,777 9,174,312 9,195,223
Issuance of warrants to purchase common stock
as payment of issuance costs on Series VII
preferred stock -- (172,000)
Issuance of Series VII preferred stock upon
conversion of convertible notes payable 6,488,420 7,072,378
Issuance of Series VI preferred stock 588,224 --
Acquisition and retirement of Series IV
preferred stock (258,400) (1,500,012)
Accrued dividend on Series III and VII
preferred stock -- 1,252,040
Accretion to redemption value -- 119,130
---------- -----------
Balance at December 31, 1997 22,244,167 39,199,562
Issuance of Series VII preferred stock, net
of issuance costs of $146,764 1,834,862 1,853,236
Accrued dividend on Series III and Series VII
preferred stock -- 2,685,522
Accretion to redemption value -- 294,257
---------- -----------
Balance at December 31, 1998 24,079,029 $44,032,577
---------- -----------
---------- -----------
</TABLE>
In December 1997, the Company sold 9,174,312 shares of newly designated
Series VII convertible preferred stock for net proceeds of $9,195,223. As
payment of certain offering costs associated with the issuance of the
Series VII convertible preferred stock, the Company issued a warrant,
which expires in ten years, to purchase 500,000 shares of the Company's
common stock with an exercise price of $1.09 per share of common stock.
Management ascribed a value to the warrant of $172,000 which was recorded
as issuance costs for the Series VII convertible preferred stock. The
Company issued an additional 1,834,862 shares of Series VII preferred
stock for net proceeds of $1,853,236 in March 1998.
Also in December 1997, the Company converted notes payable plus accrued
interest in the amount of $7,072,378 into 6,488,420 shares of Series VII
convertible preferred stock.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
In May 1996 and pursuant to the Stiefel Stock Purchase Agreement (Note
4), the Company sold 185,714 shares of newly designated Series V
convertible preferred stock to Stiefel for net proceeds of $1,299,998.
This agreement also granted to Stiefel the right to purchase an
additional $5.0 million in Series V convertible stock at the then-current
fair value on or before October 1, 1999.
In May 1995 and pursuant to the Grelan Stock Purchase Agreement (Note 4),
the Company sold 258,400 of newly designated Series IV convertible
preferred stock to Grelan for net proceeds of $1,500,012. This stock was
reacquired by the Company in 1997 (Note 4).
In July 1994 and pursuant to the amended Chiron Equity Letter Agreement
(Note 4), the Company sold 400,000 shares of newly designated Series II
convertible preferred stock to Chiron for net proceeds of $1,200,000. The
Company also sold to Chiron for $100,000 a warrant to purchase an
additional 25,000 shares of Series II preferred stock with an exercise
price of $3.90 per share. In October 1996 and pursuant to the Equity
Letter Agreement, the Company sold 248,922 shares of newly designated
Series VI convertible preferred stock to Chiron for net proceeds of
$1,742,456. Also during 1996, the Company sold to Chiron for $7,546 a
warrant to purchase an additional 5,390 shares of the Series VI
convertible preferred stock with an exercise price of $9.10 per share. In
May 1997 and pursuant to the Equity Letter Agreement, the Company sold an
additional 192,246 shares of Series VI convertible preferred stock to
Chiron for net proceeds of $1,345,722. The Company also sold to Chiron
for $4,278 a warrant to purchase an additional 3,054 shares of the Series
VI convertible preferred stock with an exercise price of $9.10 per share.
In December 1997 and in connection with the issuance of the Series VII
convertible preferred stock, the Company issued 588,224 shares of Series
VI convertible preferred stock to Chiron in settlement of the
anti-dilutions provisions of the Series VI convertible preferred stock.
During 1998, the Company increased the number of authorized shares of
common stock to 29,025,945 shares.
PREFERRED STOCK
Preferred stock has the following characteristics:
DIVIDEND PROVISIONS
The holders of the Series III and Series VII convertible preferred
stock are entitled to a cumulative dividend of 8% of the initial
issuance price of the shares per annum which accrues daily whether or
not such dividend is declared or paid. This cumulative dividend is
being recorded by a charge to accumulated deficit and by an increase in
the carrying value of the Series III and the Series VII convertible
preferred stock. When and if declared by the Board of Directors and
prior to the payment of dividends to common stockholders, the Company
will first pay the cumulative dividend on the Series VII convertible
preferred stock, then pay the cumulative dividend on the Series III
convertible preferred stock and lastly pay the declared dividend to all
preferred stockholders.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding-up of the
Company, the Series VII convertible preferred stock shall rank senior
to any other class of stock. The Series I, II, III and VI convertible
preferred stock (the "Senior Preferred Stock") shall rank equally with
each other and senior to the Series V convertible preferred stock and
common stock. The Series V convertible preferred stock ranks senior to
the common stock of the Company. The holders of the Series VII
convertible preferred stock will be entitled to receive, before
payments to any other class of stock are made, and amount equal to
$1.09 per share plus any cumulative and declared but unpaid dividends.
After all payments have been made to the Series VII preferred
stockholders, the holders of the Senior Preferred Stock will be
entitled to receive, before payments to the Series V preferred
stockholders and the common stockholders are made, an amount equal to
$3.30 for the Series I and II preferred stock, $3.00 for the Series III
preferred stock and $7.70 for the Series VI preferred stock per share,
subject to adjustment, plus any declared but unpaid dividends and, in
the case of the Series III preferred stockholders, any unpaid
cumulative dividends. After all payments described above have been made
to the holders of the Senior Preferred Stock, the holders of the Series
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
V convertible preferred stock and Senior Preferred Stock will be
entitled to receive, before payments to the common stockholders are
made, the following amounts: Series V preferred stockholders will
receive an amount equal to $7.70 per share, plus any declared but
unpaid dividends; and the holders of Senior Preferred Stock will
receive an amount equal to the aggregate amount distributable to the
Series V preferred stockholders, distributed in an equal amount per
share of the Senior Preferred Stock then outstanding.
VOTING RIGHTS
Holders of the preferred stock are entitled to vote upon any matter
submitted to the stockholders for a vote. Each share of preferred stock
will have one vote for each share of common stock into which the
respective share of preferred stock is convertible on the record date
for the vote.
CONVERSION RIGHTS
The preferred stock is convertible, at the option of the holder, into
common stock of the Company based on a formula which currently would
result in a 1-for-1 exchange for the Series I, II, III, VI and VII
stockholders and a 1-for-1.47 exchange for the Series V stockholder.
The preferred stock will automatically convert into common stock upon
the closing of a public offering of the Company's common stock in which
net proceeds equal or exceed $15 million and the price per share equals
or exceeds $3.00.
REDEMPTION
Upon the written request from the holders of at least the majority of
the Series VII preferred stock, on December 15, 2002 and the first and
second anniversaries thereof, the Company will redeem the Series VII
preferred stock at a price equal to the amount to which the holder
would be entitled to receive in the event of a liquidation (the
"Redemption Price"). Upon the written request from the holders of at
least the majority of the Senior Preferred Stock at any time after
March 22, 2000, the Company will redeem the Senior Preferred Stock at a
price equal to the amount to which the holder would be entitled to
receive in the event of a liquidation (the "Redemption Price") in three
annual payments. The difference between the net issuance price and the
Redemption Price for the Series II, III, VI and VII convertible
preferred stock is being accreted by a charge to accumulated deficit.
The Series V preferred stock is not redeemable.
RESERVED STOCK
At December 31, 1998, the Company has 1,512 shares, 25,000 shares, 24,102
shares and 19,703 shares of Series I, II, III and VI convertible
preferred stock, respectively, reserved for issuance upon the exercise of
warrants. At December 31, 1998, the Company also has 29,009,754 shares of
common stock reserved for issuance upon the conversion of the preferred
stock outstanding and upon the exercise of warrants and options.
WARRANTS
The Company has issued warrants to purchase common and preferred stock in
connection with the issuance of notes payable (Note 8), the establishment
of capital lease facilities (Note 12) and the issuance of the Series VII
preferred stock (Note 9). Warrants outstanding at December 31, 1998 are
as follows:
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
SECURITY OF SHARES PER SHARE EXPIRATION DATE
<S> <C> <C> <C>
Series I convertible preferred stock 614 $3.00 July 31, 2001
Series I convertible preferred stock 898 3.00 April 30, 2003
Series II convertible preferred stock 25,000 3.90 July 11, 1999
Series III convertible preferred stock 24,102 3.00 See Note 12
Series VI convertible preferred stock 19,703 3.90 October 3, 2001
Common stock 47,080 0.28 June 18, 2001 - February 25, 2006
Common stock 898,009 1.95 December 11, 2006 - December 15, 2007
Common stock 559,633 1.09 April 13, 2003 - December 15, 2007
Common stock 18,397 7.00 August 22, 2007
</TABLE>
Certain of the warrant agreements contain antidilution provisions related
to future issuances of stock. In 1997, in connection with the issuance of
the Series VII convertible preferred stock, the Company issued additional
warrants to purchase 11,259 shares of the Series VI convertible preferred
stock at an exercise price of $3.90 per share and reduced the exercise
price on outstanding warrants to purchase 8,444 shares of Series VI
convertible preferred stock from $9.10 to $3.90 per share to satisfy
antidilution provisions.
10. STOCK OPTION PLANS
The 1991 Stock Option Plan (the "Plan") provides for the grant of
incentive and nonqualified stock options for the purchase of shares of
the Company's common stock by employees, directors and consultants of the
Company. In 1998, the Plan was amended to provide for the purchase of up
to an aggregate of 2,969,453 shares of the Company's common stock. The
Board of Directors is responsible for the administration of the Plan. The
Board of Directors determines the term of each option, number of shares
for which each option is granted and the price at which each option is
exercisable. The Company may not grant an employee incentive stock
options with a fair market value in excess of $100,000 that is
exercisable during any one calendar year. The term of incentive stock
options granted cannot exceed ten years (five years for options granted
to holders of more than 10% of the voting stock of the Company). The
exercise price for incentive stock options granted may not be less than
100% of the fair market value per share of the underlying common stock
(110% for options granted to holders of more than 10% of the voting stock
of the Company). Stock appreciation rights may be granted in tandem with
option grants and would be exercisable to the same extent and under the
same conditions as the underlying option.
In September 1996, the Company established the 1996 Director Stock Option
Plan (the "Director Plan") which provides for the grant of non-qualified
stock options for the purchase of up to 110,000 shares of the Company's
common stock to the members of the Board of Directors of the Company. The
Director Plan also provides for the automatic grant of options (the
"Automatic Options") to purchase 6,000 shares to each eligible member of
the Board of Directors on the date the Director Plan becomes effective
and, subsequently, on the date that the Director is elected to the Board
of Directors. Each Automatic Option vests ratably over a five year period
beginning on the first
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
anniversary of the date of the grant. Options granted under the Director
Plan that are not Automatic Options vest in accordance with the terms of
each option agreement as established by the Board of Directors. The
exercise price for all options under the Director Plan may not be less
than the fair market value of the underlying common stock on the date of
grant.
No compensation expense was recorded related to stock-based employee
compensation awards. Had compensation cost been determined based on the
fair value of the options granted to employees at the grant date, as
prescribed by SFAS No. 123, the Company's net income (loss) for the years
ended December 31, 1998, 1997 and 1996 would have been approximately
$5,100,000, $(9,595,000) and $(6,576,000), respectively.
For purposes of the pro forma disclosure, the fair value of each option
grant was estimated on the date of grant based upon the following
assumptions: no dividend yield; no volatility; risk-free interest rate of
5.1%, 6.2% and 6.8% for 1998, 1997 and 1996, respectively; and expected
option term of 7 years.
During 1997, the Company granted options in the amount of 17,693 to
nonemployees under the Plan. The estimated fair value of these options
totaled $13,306 which was recorded as compensation expense during 1997.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years then ended
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year $1,055,679 $1.01 970,142 $0.96 558,518 $0.45
Granted 2,077,638 0.50 130,693 1.40 434,864 1.58
Exercised (2,187) 0.45 (10,407) 0.45 -- --
Cancelled (251,258) 1.66 (34,749) 1.12 (23,240) 0.46
---------- ----- ------- ----- -------- -----
Outstanding at end of year 2,809,872 0.60 1,055,679 1.01 970,142 0.96
---------- --------- --------
---------- --------- --------
Options exercisable at end of year 805,173 0.64 488,768 0.66 362,616 0.45
---------- --------- --------
---------- --------- --------
Weighted-average fair value of
options granted during the year $ 0.15 $ 0.68 0.60
---------- --------- --------
---------- --------- --------
Options available for future grant 254,993
----------
----------
</TABLE>
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$0.30 - $0.50 2,449,166 $0.49 8.7 649,367 $0.46
0.53 - 0.70 116,513 0.68 7.2 68,113 0.68
1.40 - 1.95 194,193 1.93 8.0 87,693 1.93
--------- -------
2,809,872 0.60 8.6 805,173 0.64
--------- -------
--------- -------
</TABLE>
11. INCOME TAXES
The Company's deferred tax assets and (liabilities) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Net operating loss carryforwards $ 17,317,000 $ 18,067,000
Tax credit carryforwards 2,522,000 2,086,000
Other 84,000 229,000
------------ ------------
Gross deferred tax assets 19,923,000 20,382,000
Deferred gain on sale of assets (4,381,000) --
------------ ------------
Net deferred tax assets 15,542,000 20,382,000
Valuation allowance (15,542,000) (20,382,000)
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
Under SFAS No. 109, the benefit associated with future deductible
temporary differences is recognized if it is more likely than not that
a benefit will be realized. Based on historical evidence, the Company
has recorded a valuation allowance that offsets all net deferred tax
assets.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
At December 31, 1998, the Company has U.S. Federal net operating loss
carryforwards and tax credit carryforwards available to reduce future
tax liabilities which expire as follows:
<TABLE>
<CAPTION>
NET OPERATING
YEAR OF LOSS TAX CREDIT
EXPIRATION CARRYFORWARDS CARRYFORWARDS
<S> <C> <C>
2005 $ 429,000 $ 32,000
2006 2,969,000 142,000
2007 5,192,000 100,000
2008 6,418,000 314,000
2009 8,287,000 373,000
2010 5,045,000 101,000
2011 6,459,000 108,000
2012 9,544,000 322,000
2018 -- 423,000
----------- ----------
$44,343,000 $1,915,000
----------- ----------
----------- ----------
</TABLE>
The Company has $29,107,000 of state net operating loss carryforwards
which expire at various dates in 1999 to 2002 in approximately the
same proportion as the federal net operating loss carryforwards
expiring in 2005 to 2008 described above. The Company also has
$1,163,000 of state tax credit carryforwards which expire at various
dates in 2006 to 2013 in approximately the same proportion as the
federal tax credit carryforwards expiring in the same years described
above. Under the Internal Revenue Code, certain substantial changes in
the Company's ownership could result in an annual limitation on the
amount of net operating loss and tax credit carryforwards which can be
utilized in future years.
12. COMMITMENTS
LEASES
The Company leases facilities under a noncancellable operating lease,
which expires in March 1999. The minimum lease commitments under this
lease total approximately $25,000.
Rent expense was approximately $682,000, $782,000 and $514,000 in
1998, 1997 and 1996, respectively.
In connection with the facilities lease, the Company had a standby
letter of credit outstanding in favor of the lessor for $25,000 at
December 31, 1997. This letter of credit was collateralized by a
certificate of deposit, which was included in other assets, totaling
$25,000 at December 31, 1997. In October 1998, in conjunction with the
UCB asset purchase agreement (Note 3), the letter of credit and
related certificate of deposit were transferred to UCB.
The Company had entered into an agreement which allowed the Company to
lease up to $750,000 of laboratory and office equipment. At December
31, 1997, the Company had acquired approximately $665,000 of equipment
under the agreement. In October 1998, in conjunction with the UCB
asset purchase agreement (Note 3), the Company purchased all assets
held under this lease agreement. In connection with this lease, the
Company issued warrants to the lessor in 1995 for the purchase of
24,102 shares of Series III convertible preferred stock in 1995 at an
exercise price of $3.00 per share. This warrant expires on August 2,
2005 or five years from the effective date of an initial public
offering of common stock by the Company, whichever is sooner. The
value ascribed to the warrant totaled $19,300 and was accounted for as
discount on the related capital lease obligation. The discount was
amortized as interest expense during the term of the lease.
<PAGE>
CYTOMED, INC.
NOTES TO FINANCIAL STATEMENTS
In April 1998, the Company entered into an agreement to lease
up to $2.5 million of equipment and tenant improvements. At
December 31, 1998, no amounts were outstanding under the
agreement. In connection with this agreement, the Company
issued a warrant to the lessor for the purchase of 59,633
shares of common stock at an exercise price of $1.09 per share.
The warrant expires in April 2003. The value ascribed to the
warrant was not significant.
RESEARCH, LICENSE AND CONSULTING AGREEMENTS The Company has entered
into research, license and consulting agreements to support its
research and development activities which expire at various dates
through June 1999. Amounts charged to operations in connection with
these agreements for the years ended December 31, 1998, 1997 and 1996
totaled approximately $321,000, $470,000 and $540,000, respectively.
Certain of the agreements contain provisions for future royalties to
be paid on sales of products developed under the agreements.
13. SUBSEQUENT EVENTS
On February 11, 1999, LeukoSite, Inc. ("LeukoSite") acquired all of
the outstanding common and preferred stock of the Company in exchange
for approximately 935,000 shares of LeukoSite Series A preferred
stock. All outstanding options and warrants of the Company became
immediately exercisable and were either exercised or terminated. Upon
the receipt of the $6 million payment from UCB due in October 1999
pursuant to the UCB asset purchase agreement (Note 3), the
stockholders of the Company will receive approximately 631,000
additional shares of LeukoSite Series A preferred stock. In the event
that LeukoSite receives milestone payments pursuant to the UCB asset
purchase agreement or receives the $1 million license fee payment upon
the execution of the Stiefel license agreement (Note 4) , LeukoSite
will make additional payments of up to $7.0 million to the
stockholders of the Company. In addition, in the event that the
Company's remaining research programs achieve certain milestones,
LeukoSite will make additional cash payments of up to $16.5 million
and issue up to approximately 84,000 additional shares of LeukoSite
Series A preferred stock to the stockholders of the Company.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
LEUKOSITE, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1997 and 1998......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
L & I PARTNERS, L.P.
Report of Independent Public Accountants................................................................... F-22
Balance Sheets as of December 31, 1997 and 1998............................................................ F-23
Statements of Operations for the Period from Inception (May 2, 1997) through
December 31, 1997 and the Year Ended December 31, 1998 and for the Period from Inception (May 2, 1997)
through December 31, 1998................................................................................ F-24
Statements of Partners' Capital for the Period from Inception (May 2, 1997) through
December 31, 1998........................................................................................ F-25
Statement of Cash Flows for the Period from Inception (May 2, 1997) through December 31, 1997 and the Year
Ended December 31, 1998, and for the Period from Inception (May 2, 1997) through December 31, 1998....... F-26
Notes to Financial Statements.............................................................................. F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LeukoSite, Inc.:
We have audited the accompanying consolidated balance sheets of LeukoSite,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LeukoSite,
Inc. and subsidiary as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 29, 1999
F-2
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 10,587,873 $ 5,361,339
Marketable securities............................................................ 14,569,100 15,802,376
Other current assets............................................................. 408,811 544,779
------------- -------------
Total current assets........................................................... 25,565,784 21,708,494
------------- -------------
Property and equipment, at cost:
Laboratory furniture, fixtures and equipment..................................... 2,703,706 3,761,263
Leasehold improvements........................................................... 2,409,753 3,561,757
Office furniture, fixtures and equipment......................................... 298,925 454,427
------------- -------------
5,412,384 7,777,447
Less--Accumulated depreciation and amortization.................................. (2,973,095) (4,383,574)
------------- -------------
2,439,289 3,393,873
Marketable securities.............................................................. -- 2,168,324
Other assets....................................................................... 27,090 231,930
------------- -------------
Total assets................................................................... $ 28,032,163 $ 27,502,621
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 196,987 $ 272,128
Accrued expenses................................................................. 1,866,423 4,115,301
Obligation to fund joint venture................................................. 1,770,310 203,445
Deferred revenue................................................................. 1,161,250 2,172,058
Deferred rent.................................................................... 243,171 222,907
Current portion of capital lease obligations..................................... 866,835 733,848
------------- -------------
Total current liabilities...................................................... 6,104,976 7,719,687
------------- -------------
Deferred rent, net of current portion.............................................. 222,907 --
------------- -------------
Capital lease obligations, net of current portion.................................. 896,578 1,315,813
------------- -------------
Commitments and contingencies (Notes 7, 13, 14 and 15)
Stockholders' equity:
Preferred stock $.01 par value--Authorized--5,000,000 shares Issued and
outstanding--no shares......................................................... -- --
Common stock, $.01 par value--Authorized--25,000,000 shares Issued and
outstanding--9,875,741 shares at December 31, 1997 and 11,916,339 shares at
December 31, 1998.............................................................. 98,758 119,164
Additional paid-in capital....................................................... 53,294,367 65,280,443
Deficit accumulated during the development stage................................. (32,585,423) (46,932,486)
------------- -------------
Total stockholders' equity....................................................... 20,807,702 18,467,121
------------- -------------
Total liabilities and stockholders' equity....................................... $ 28,032,163 $ 27,502,621
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Revenues:
Corporate collaborations........................................ $ 3,591,000 $ 5,098,345 $ 10,020,468
Joint venture (Note 7).......................................... -- 250,106 1,260,185
Government grants............................................... 82,770 377,459 791,218
------------- -------------- --------------
Total revenues................................................ 3,673,770 5,725,910 12,071,871
------------- -------------- --------------
Operating expenses:
Research and development........................................ 8,502,187 11,980,233 21,141,587
General and administrative...................................... 1,370,538 1,757,802 2,624,773
------------- -------------- --------------
Total operating expenses...................................... 9,872,725 13,738,035 23,766,360
------------- -------------- --------------
Loss from operations.......................................... (6,198,955) (8,012,125) (11,694,489)
Other income (expense):
Equity in operations of joint venture........................... -- (3,357,916) (3,857,640)
Interest income................................................. 378,924 865,840 1,367,936
Interest expense................................................ (201,659) (146,900) (162,870)
------------- -------------- --------------
Net loss...................................................... $ (6,021,690) $ (10,651,101) $ (14,347,063)
------------- -------------- --------------
------------- -------------- --------------
Net loss per common share:
Basic and diluted............................................. $ (5.65) $ (2.62) $ (1.32)
------------- -------------- --------------
------------- -------------- --------------
Shares used in computing net loss per common share:
Basic and diluted............................................. 1,065,522 4,298,828 10,895,411
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- ADDITIONAL
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- ----------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995......... 1,000,000 $ 10,000 1,041,099 $ 10,411 $3,121,267 ($15,302,632) $(12,160,954)
Issuance of Series E convertible
preferred stock, net of issuance
costs of $40,434................. 1,250,000 12,500 -- -- 4,947,066 -- 4,959,566
Exercise of stock options.......... -- -- 45,491 455 31,816 -- 32,271
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock...... -- -- -- -- 610,000 -- 610,000
Net loss........................... -- -- -- -- -- (6,021,690) (6,021,690)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1996......... 2,250,000 22,500 1,086,590 10,866 8,710,149 (21,324,322) (12,580,807)
Accretion of redeemable convertible
preferred stock dividends........ -- -- -- -- -- (610,000) (610,000)
Proceeds from initial public
offering of common stock, net of
$745,480 of issuance costs....... -- -- 2,875,000 28,750 15,268,270 -- 15,297,020
Conversion of convertible preferred
stock............................ (2,250,000) (22,500) 548,780 5,488 17,012 -- --
Conversion of redeemable
convertible preferred stock...... -- -- 4,986,827 49,869 25,293,042 -- 25,342,911
Issuance of common stock, net of
$30,000 of issuance costs........ -- -- 336,135 3,361 3,966,639 -- 3,970,000
Exercise of stock options.......... -- -- 42,409 424 39,255 -- 39,679
Net loss........................... -- -- -- -- -- (10,651,101) (10,651,101)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1997......... -- -- 9,875,741 98,758 53,294,367 (32,585,423) 20,807,702
Issuance of common stock, net of
$68,651 of issuance costs........ -- -- 1, 967,169 19,672 11,714,691 -- 11,734,363
Issuance of common stock under
Employee Stock Purchase Plan..... -- -- 13,713 137 95,815 -- 95,952
Exercise of stock options.......... -- -- 59,716 597 175,570 -- 176,167
Net loss........................... -- -- -- -- -- (14,347,063) (14,347,063)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1998......... -- $ -- 11,916,339 $ 119,164 $65,280,443 ($46,932,486) $18,467,121
---------- ----------- ---------- ----------- ---------- ------------ -----------
---------- ----------- ---------- ----------- ---------- ------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss................................................................ $(6,021,690) $(10,651,101) $(14,347,063)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization......................................... 908,860 1,019,531 1,466,420
Gain on sale of equipment............................................. -- -- (11,746)
Equity in operations of joint venture................................. -- 3,357,916 3,857,640
Changes in operating assets and Liabilities--
Other current assets................................................ (66,270) (255,032) (135,968)
Accounts payable and accrued expenses............................... 431,198 901,312 2,324,019
Deferred revenue.................................................... 261,250 900,000 1,010,808
Deferred rent....................................................... 234,204 (104,357) (243,171)
----------- ----------- -----------
Net cash used in operating activities............................. (4,252,448) (4,831,731) (6,079,061)
----------- ----------- -----------
Cash flows used in investing activities:
Investment in marketable securities..................................... (11,741,504) (21,066,603) (21,951,502)
Proceeds from maturities of marketable securities....................... 6,787,602 11,442,960 18,549,902
Investment in joint venture............................................. -- (1,587,606) (5,424,505)
Purchases of property and equipment..................................... (184,549) (48,228) (1,164,445)
Proceeds from sale of equipment......................................... -- -- 12,800
Decrease (increase) in other assets..................................... -- 436 (204,840)
----------- ----------- -----------
Net cash used in investing activities............................. (5,138,451) (11,259,041) (10,182,590)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital Leases.................................... (695,226) (878,067) (971,365)
Proceeds from redeemable convertible preferred stock, net of issuance
costs................................................................. 7,790,607 3,819,506 --
Proceeds from initial public offering, net of issuance costs............ -- 15,297,020 --
Issuance of common stock, net of issuance costs......................... -- 3,970,000 11,734,363
Issuance of common stock under the Employee Stock Purchase Plan......... -- -- 95,952
Exercise of stock options............................................... 32,271 39,679 176,167
Issuance of convertible preferred stock, net of issuance costs.......... 4,959,566 -- --
----------- ----------- -----------
Net cash provided by financing activities........................... 12,087,218 22,248,138 11,035,117
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...................... 2,696,319 6,157,366 (5,226,534)
Cash and cash equivalents, beginning of period............................ 1,734,188 4,430,507 10,587,873
----------- ----------- -----------
Cash and cash equivalents, end of period.................................. $ 4,430,507 $10,587,873 $ 5,361,339
----------- ----------- -----------
----------- ----------- -----------
Supplemental cash flow information:
Cash paid during the period for interest................................ $ 201,659 $ 146,900 $ 162,870
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of noncash investing and financing activities:
Property and equipment acquired under capital lease obligations......... $ 343,927 $ 1,093,691 $ 1,257,613
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
LeukoSite, Inc. (the Company) was incorporated on May 1, 1992. The Company
is engaged in the development of small molecule and monoclonal antibody
therapeutics with potential applications in inflammatory, autoimmune, and viral
diseases and cancer.
The Company was considered to be in the development stage for financial
reporting purposes until December 1998. During 1998, the Company experienced
significant revenue growth, including revenue from its joint venture with Ilex
(as discussed in Note 7), entered into several new collaboration agreements (see
Note 4 and Note 9) and subsequent to year-end acquired all of the issued and
outstanding capital stock of CytoMed, Inc. (see Note 21). As such, the Company
no longer reports cumulative results from inception as required for development
stage enterprises.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All material intercompany accounts
and transactions have been eliminated in consolidation.
(B) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts estimated to allocate
the cost of property and equipment over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIVES
- ------------------------------------------------------------------------------ --------------
<S> <C>
Laboratory furniture, fixtures and equipment.................................. 4-5 years
Laboratory and office computer equipment...................................... 3 years
Leasehold improvements........................................................ Life of lease
Office furniture, fixtures and equipment...................................... 4-5 years
</TABLE>
(C) REVENUE RECOGNITION
All of the Company's revenues are non-refundable and are substantially
derived from corporate collaborative research arrangements, government grants
and amounts billed to the Company's joint venture with Ilex, as discussed in
Note 7. Corporate collaboration revenues and government grants, which are not
subject to achieving development milestones, are recognized on a straight-line
basis over the period of the contract, which approximates when work is performed
and costs are incurred. Revenues that are earned upon the achievement of
development milestones are recognized when the milestones are achieved and
payment is due. License fee revenue represents technology transfer fees received
for rights to certain technology of the Company. License fees are recognized as
revenue when all obligations as defined in the
F-7
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
individual agreements are fulfilled by the Company and there is no risk of
refund. Deferred revenue represents payments received in advance of revenue
recognition.
(D) RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Funding
commitments are recorded as a liability when they become contractually due.
Research and development expenses in the accompanying consolidated statements of
operations include funded and unfunded expenses.
(E) DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, marketable securities and accounts payable. The carrying amounts of
these financial instruments approximate fair value due to the short-term nature
of these instruments.
(F) NET LOSS PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE.
The Company adopted SFAS No. 128 effective December 15, 1997. Basic net loss is
based on the weighted average number of common shares outstanding. The 1997 net
loss available to common stockholders has been adjusted to include $610,000 of
dividends attributable to redeemable convertible preferred stock. Diluted net
loss per share is the same as basic net loss per share as the inclusion of stock
options and warrants would be antidilutive.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net loss...................................... $ (6,021,690) $ (10,651,101) $ (14,347,063)
Accretion of preferred stock dividends........ -- (610,000) --
------------- -------------- --------------
Net loss applicable to common stockholders.... $ (6,021,690) $ (11,261,101) $ (14,347,063)
------------- -------------- --------------
------------- -------------- --------------
Net loss per common share--basic and
diluted..................................... $ (5.65) $ (2.62) $ (1.32)
------------- -------------- --------------
------------- -------------- --------------
Weighted average common shares
outstanding--basic and diluted.............. 1,065,522 4,298,828 10,895,411
------------- -------------- --------------
------------- -------------- --------------
Antidilutive securities that were not
included--common stock options and
warrants.................................... 429,087 467,698 560,004
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are highly liquid investments with original maturities of
less than three months. Marketable securities consist of securities with
original maturities of greater than three months. The Company accounts for cash
equivalents and marketable securities in accordance SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In accordance with SFAS No.
115, the Company has classified its investments as held-to-maturity. The
investments that the Company has the positive intent
F-8
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
and ability to hold to maturity are reported at amortized cost, which
approximates fair market value. As of December 31, 1998, there were no material
unrealized gains or losses on investments. Cash and cash equivalents and
marketable securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents:
Cash................................................. $ 1,373,786 $ 3,219,315
Money market funds................................... 6,609,783 1,341,651
Taxable auction securities........................... 2,604,304 800,373
----------------- -----------------
$ 10,587,873 $ 5,361,339
----------------- -----------------
----------------- -----------------
Marketable securities, short-term:
U.S. government agency obligations (average maturity
of 5 months)....................................... $ 6,094,401 $ --
Corporate bonds and notes (average Maturity of 5 and
6 months respectively)............................. 8,474,699 15,802,376
----------------- -----------------
$ 14,569,100 $ 15,802,376
----------------- -----------------
----------------- -----------------
Marketable securities, long-term:
Corporate bonds and notes (average Maturity of 15.5
months)............................................ $ -- $ 2,168,324
----------------- -----------------
----------------- -----------------
</TABLE>
Taxable auction securities have maturities of either seven, twenty-eight, or
thirty-five days and the yields on these instruments are reset upon maturity by
utilizing the Dutch Auction or remarketing mechanisms. New and existing
investors reset the rates through a competitive bidding process that reflects
factors such as the current interest rate environment, comparable yields
available in alternative short-term cash instruments and the credit quality of
the issuer.
(4) WARNER-LAMBERT AGREEMENTS
The Company and Warner-Lambert Company (Warner) have entered into research,
development and marketing agreements to share expertise in the discovery and
development of compounds that antagonize the MCP-1, IL-8, CCR5 and CXCR4
receptors and A4B7 and AEB7 integrins and to market therapeutic drugs that
result from the collaboration.
The Company and Warner signed an agreement related to MCP-1 in September
1994 that was amended in July 1995 and October 1997 (the MCP-1 Agreement). Under
the MCP-1 Agreement, the Company and Warner are working to screen and select
compounds for further development. In conjunction with the MCP-1 Agreement,
Warner agreed to purchase preferred stock at a predetermined share price and to
fund a portion of the Company's research expenses. Warner purchased $3,000,000
of Series C convertible preferred stock in 1995 and $5,000,000 of Series E
convertible preferred stock in 1996.
The Company and Warner signed an agreement related to IL-8 in July 1995 that
was amended in October 1997 (the IL-8 Agreement). Under the IL-8 Agreement, the
Company and Warner are working to screen and select compounds for further
development. In connection with the IL-8 Agreement, Warner paid the Company
$250,000 for the grant of a license to the technology and made a $1,000,000
equity investment in the Series G preferred stock in March 1997.
F-9
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) WARNER-LAMBERT AGREEMENTS (CONTINUED)
The Company and Warner signed an agreement related to CCR5 and CXCR4 in
October 1996 (the CCR5 and CXCR4 Agreement). Under the CCR5 and CXCR4 Agreement,
the Company and Warner are working to discover and develop small molecule
antagonists to AIDS chemokine co-receptors CCR5 and CXCR4 for the treatment of
HIV infection. This agreement was extended in January 1998, at which time Warner
made a nonrefundable $1,000,000 payment related to the achievement of certain
milestones.
Under the terms of the October 1997 amendment to the MCP-1 and IL-8
agreements, the Company, Warner and Kyowa Hakko Kogyo (Kyowa) have agreed to
jointly pursue research and development of antagonists that target MCP-1, IL-8,
CCR1 and CXCR3.
The Company and Warner signed an agreement related to A4B7 and AEB7 in
December 1998 (the A4B7 and AEB7 Agreement). Under the A4B7 and AEB7 Agreement,
the Company and Warner are working to discover and develop small molecule
atagonists to the A4B7 and AEB7 integrin targets implicated in asthma and
inflammatory bowel disease. In connection with the A4B7 and AEB7 Agreement,
Warner made a nonrefundable $2,500,000 payment for the grant of a license to the
technology and agreed to provide research funding.
The Company received quarterly research funding under the MCP-1 and IL-8
Agreements and the A4B7 and AEB7 Agreement. Through December 31, 1998, the
Company had received $3,831,250 in research support. Revenue recognized for
research support during the years ended December 31, 1996, 1997 and 1998 was
$690,000, $1,035,000 and $1,021,667, respectively, and as of December 31, 1998,
the Company has deferred recognizing $834,583 as revenue. The MCP-1, IL-8, CCR5
and CXCR4, and A4B7 and AEB7 Agreements (the Warner Agreements) also contain
milestone payments payable to the Company beginning upon the designation of a
product candidate for development. In addition, under the Warner Agreements,
Warner will pay royalties as a percentage of sales, as defined, for certain
products developed under the agreements. Warner waived its antidilution rights
relating to the Series C, E and G preferred stock, which was converted into
common stock in August 1997, in exchange for a credit against future royalties,
if any become payable, under the MCP-1 and IL-8 Agreements and the Kyowa
Agreement discussed in Note 6. The approximate amount of such credit is
$3,900,000. The Warner Agreements can be terminated by either party with six
months' written notice or for cause, as defined.
(5) ROCHE BIOSCIENCE AGREEMENT
The Company signed an agreement with Roche Bioscience (Roche) for the
development of a drug to block the binding of eotoxin in July 1996. Under the
terms of this agreement, Roche will make payments to the Company in the form of
licensing fees, research support and milestone payments and royalties on
worldwide sales of products resulting from the collaboration. Through December
31, 1998, the Company had received $7,062,500 in licensing and research support
payments from Roche. Revenue recognized for the years ended December 31, 1996,
1997 and 1998 was $2,900,000, $2,100,000 and $1,925,000, respectively, and as of
December 31, 1998, the Company has deferred recognizing $137,500 as revenue.
Roche is responsible for preclinical and clinical development of products and
has worldwide exclusive rights to market products.
(6) KYOWA HAKKO KOGYO AGREEMENT
The Company signed an agreement with Kyowa to discover and develop small
molecule antagonists and monoclonal antibody drugs to CXCR3 and CCR1 in April
1997. The agreement was amended in October 1997. Under the terms of the amended
agreement, Kyowa has primary rights to market products
F-10
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) KYOWA HAKKO KOGYO AGREEMENT (CONTINUED)
in Japan and Asia resulting from the collaboration. Furthermore, the amended
agreement calls for the Company, together with Warner and Kyowa to jointly
develop antagonists that target MCP-1, IL-8, CXCR3 and CCR1. The Company is
entitled to receive research support and milestone payments, as well as
royalties based on net sales, as defined. Through December 31, 1998, the Company
had received $7,000,000 of research funding from Kyowa. Revenue recognized for
the years ended December 31, 1997 and 1998 was $2,100,000 and $3,300,000,
respectively, and as of December 31, 1998, the Company has deferred recognizing
$1,200,000 as revenue.
(7) ILEX AGREEMENT
In May 1997, the Company and Ilex Oncology, Inc. (Ilex) entered into a joint
venture agreement that established a limited partnership for the purpose of
developing CAMPATH-Registered Trademark-. Under the terms of the partnership,
the Company is required to fund 50% of the partnership's working capital
requirements. The joint venture expires in 2017, but provides for either partner
under certain circumstances to purchase the other partner's ownership position
of the joint venture after October 2000. Should either party fail to fulfill its
funding obligations, control of the joint venture may change.
The Company accounts for its investment in the joint venture under the
equity method of accounting and records its share of the income of loss in other
income (expense). The Company is reimbursed by the joint venture for certain
costs incurred on behalf of the joint venture. The joint venture has sublicensed
the rights to CAMPATH-Registered Trademark- from the Company. For the years
ended December 31, 1997 and 1998, the Company's share of the joint venture's
recorded loss was $3,357,916 and $3,857,640, respectively, and the Company had a
funding liability of $203,445 to the joint venture as of December 31, 1998. The
Company charged the joint venture $1,235,185 and $250,106 for costs incurred by
the Company on behalf of the joint venture for the year ended December 31, 1998
and December 31, 1997, respectively, which has been recorded as revenue by the
Company. During 1998, the joint venture made a nonrefundable $25,000 payment to
the Company for the license to the rights of CAMPATH-Registered Trademark-,
which has been recorded as revenue by the Company.
(8) GENENTECH
The Company entered into an agreement with Genentech, Inc. (Genentech) in
December 1997 to develop and commercialize LDP-02, a humanized monoclonal
antibody for the treatment of inflammatory bowel disease (IBD). Under the terms
of the agreement Genentech will have exclusive worldwide rights to market
LDP-02. In connection with the agreement, Genentech made a $4,000,000 equity
investment in the Company and was issued warrants to purchase 250,000 shares of
common stock at an exercise price of $16.22 per share. The agreement calls for
payments to be made to the Company for the achievement of certain milestones as
well as future royalty payments based upon the sale of products developed under
the collaboration. In addition, Genentech will provide two credit facilities.
The first facility will be for approximately $15 million and will fund
development of products through completion of Phase II clinical trials. The
second facility will be available to the Company if it agrees to fund 25% of the
Phase III clinical trial development costs in return for a specified share of
profits on U.S. sales of any products developed under the agreement, as defined.
If the Company elects this option, it will also receive royalties on products
sold outside of the U.S. The two credit facilities can be repaid by the Company
or converted into shares of common stock under certain circumstances, at the
option of the Company or Genentech, at the market value of the common stock at
the date of conversion. No funds have been drawn against the credit facilities
for the years ended December 31, 1997 and 1998.
F-11
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) MORPHOSYS
The Company entered into a two-year collaboration agreement with MorphoSys
AG (MorphoSys) in August 1998 to discover and develop therapeutic monoclonal
antibodies for inflammatory and autoimmune disorders. Under the terms of the
agreement, the Company received exclusive worldwide rights to develop and
commercialize antibody therapeutics resulting from the collaboration. The
Company made a technology access fee payment in August 1998 of $750,000, which
has been included in research and development expense. The agreement calls for
payments to be made to MorphoSys for funded research, the achievement of certain
milestones as well as future royalties, based upon commercial sales of products
developed under the collaboration.
(10) CAPITAL LEASE
In 1993, the Company entered into a master lease agreement for the sale and
leaseback or lease of up to $2,250,000 of laboratory and office equipment and
leasehold improvements. At December 31, 1998, the Company had acquired
approximately $2,130,000 of laboratory and office equipment and leasehold
improvements under the lease agreement. The Company also has an obligation to
purchase $750,000 of leasehold improvements at the expiration of the lease term
for 15% of its original cost. The Company issued warrants for the purchase of
210,000 shares of Series A redeemable convertible preferred stock at an exercise
price of $1.00 per share to the lessors under the master lease agreement (see
Note 13(b)).
In 1994, the Company entered into a second master equipment lease agreement
for the lease of up to $750,000 of laboratory and office equipment. At December
31, 1998, the Company had acquired approximately $730,000 of equipment under the
lease. The leased equipment reverts back to the lessor at the end of the lease
term or the Company may purchase all of the equipment for fair market value,
which will not be less than 10% or more than 20% of the cost of the equipment.
On January 18, 1996, this agreement was amended to provide an additional
$300,000 of lease availability.
On March 14, 1997, the Company entered into another lease agreement for the
lease of up to $1,200,000 of laboratory and office equipment, of which $450,000
may be utilized for leasehold improvements. The leased equipment reverts back to
the lessor at the end of the lease term or the Company may purchase all of the
equipment for fair market value, which will not be less than 10% or more than
20% of the cost of the equipment. On May 7, 1998, this agreement was amended to
provide an additional $1,200,000 of lease availability. As of December 31, 1998,
$1,010,000 is available under this lease commitment.
On March 26, 1998, the Company entered into another lease agreement for the
lease of up to $500,000 of laboratory and office equipment. The leased equipment
reverts back to the lessor at the end of the lease term or the Company may
purchase all of the equipment for fair market value, which will not be less than
10% or more than 15% of the cost of the equipment. As of December 31, 1998,
$500,000 is available under this lease commitment.
On June 12, 1998, the Company entered into another lease agreement for the
lease of up to $1,300,000 of laboratory and office equipment, of which $455,000
may be utilized for leasehold improvements. The leased equipment reverts back to
the lessor at the end of the lease term or the Company may purchase all of the
equipment for fair market value, which will not be less than 10% or more than
20% of the cost of the equipment. As of December 31, 1998, $620,000 is available
under this lease commitment.
F-12
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CAPITAL LEASE (CONTINUED)
Future minimum lease payments under these lease agreements at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Year Ending December 31,
1999.......................................................................... $ 883,933
2000.......................................................................... 790,774
2001.......................................................................... 427,161
2002.......................................................................... 227,413
------------
Total....................................................................... 2,329,281
Less--Amount representing interest............................................ 279,620
------------
Present value of future lease payments...................................... 2,049,661
Less--Amounts due within one year............................................. 733,848
------------
Amounts due after one year.................................................. $ 1,315,813
------------
------------
</TABLE>
(11) CAPITAL STOCK
(A) STOCK SPLIT AND AMENDMENT TO CHARTER
On August 8, 1997, the Company amended its Restated Certificate of
Incorporation, which included a 1-for-4.10 reverse stock split of the Company's
common stock and a change in the par value of the Company's common stock to $.01
per share. Accordingly, all share and per share amounts of common stock for all
periods presented have been retroactively adjusted to reflect the reverse stock
split and change in par value. The Company is authorized to issue 25,000,000
shares of common stock, $.01 par value, and 5,000,000 shares of preferred stock,
$.01 par value.
(B) INITIAL PUBLIC OFFERING
On August 15, 1997, the Company completed the initial public offering of
2,875,000 shares of its common stock at $6 per share, for total net proceeds of
$15.3 million after underwriting discounts and expenses of the offering. In
connection with the public offering, all outstanding shares of redeemable
convertible preferred stock and convertible preferred stock were automatically
converted into 5,535,607 shares of common stock.
F-13
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) PREFERRED STOCK
(A) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock activity for the two years in the
period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES D SERIES F
---------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ---------- --------- ---------- --------- ---------- --------- ----------
Balance, December 31, 1995... 10,000,000 $9,855,261 1,666,667 $1,926,629 1,481,482 $1,950,908 -- $ --
Issuance of Series F
preferred stock, net of
issuance costs of
$34,838.................... -- -- -- -- -- -- 1,638,335 4,880,607
Issuance of Series G
preferred stock, net of
issuance costs of
$90,000.................... -- -- -- -- -- -- -- --
Value ascribed to guaranteed
rate of return on
redeemable convertible
preferred stock............ -- -- -- -- -- -- -- --
---------- ---------- --------- ---------- --------- ---------- --------- ----------
Balance, December 31, 1996... 10,000,000 9,855,261 1,666,667 1,926,629 1,481,482 1,950,908 1,638,335 4,880,607
Issuance of Series G
preferred stock, net of
issuance costs of
$40,000.................... -- -- -- -- -- -- -- --
Accretion of redeemable
convertible Preferred stock
dividend................... -- -- -- -- -- -- -- --
Conversion of redeemable
convertible preferred
stock...................... (10,000,000) (9,855,261) (1,666,667) (1,926,629) (1,481,482) (1,950,908) (1,638,335) (4,880,607)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997... -- $ -- -- $ -- -- $ -- -- $ --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
SERIES G
---------------------
<S> <C> <C>
NUMBER CARRYING
OF SHARES VALUE
--------- ----------
Balance, December 31, 1995... -- $ --
Issuance of Series F
preferred stock, net of
issuance costs of
$34,838.................... -- --
Issuance of Series G
preferred stock, net of
issuance costs of
$90,000.................... 857,143 2,910,000
Value ascribed to guaranteed
rate of return on
redeemable convertible
preferred stock............ -- (610,000)
--------- ----------
Balance, December 31, 1996... 857,143 2,300,000
Issuance of Series G
preferred stock, net of
issuance costs of
$40,000.................... 1,102,719 3,819,506
Accretion of redeemable
convertible Preferred stock
dividend................... -- 610,000
Conversion of redeemable
convertible preferred
stock...................... (1,959,862) (6,729,506)
---------- ----------
Balance, December 31, 1997... -- $ --
--------- ----------
--------- ----------
</TABLE>
As discussed in Note 11(b), upon completion of the Company's initial public
offering, all outstanding shares of redeemable convertible preferred stock were
automatically converted into 4,986,827 shares of common stock.
The Company also had a separate agreement with certain Series G shareholders
whereby their shares were converted into common stock based upon a specific rate
of return on their original investment, as defined. The Company recorded the
value attributed to the guaranteed rate of return (based on an original
investments of $3,000,000, an annual rate of return of 33% and an estimated
period of approximately 7.5 months before conversion into common stock) as
additional paid-in capital and accreted it as a preferred stock dividend over
the estimated period that the stock was outstanding. The Company recorded
$610,000 of such accretion through December 31, 1997.
(13) STOCK OPTIONS AND WARRANTS
(A) STOCK OPTIONS
The Company has adopted the 1993 Stock Option Plan (the Plan) under which it
may grant both incentive stock options and nonstatutory stock options. The Plan
provides for the granting of options to purchase up to 2,125,000 shares of
common stock. As of December 31, 1998, 352,720 shares are available for future
grant under the Plan. To date, all options granted have been issued with an
exercise price equal to the fair market value at the time of issuance.
F-14
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company's 1997 Employee Stock Purchase Plan authorizes a total of up to
150,000 shares of the Company's common stock to be sold to participating
employees. Participating employees may purchase shares of common stock at 85% of
its fair market value at the beginning or end of an offering period, whichever
is lower, through payroll deductions in an amount not to exceed 8% of an
employee's base compensation.
During 1993, the Company granted a stock option to purchase 135,000 shares
of Series A redeemable convertible preferred stock at $1.00 per share pursuant
to a stock restriction agreement with a consultant. Upon conversion of the
Series A redeemable convertible preferred stock into common stock as discussed
in Note 11(b), the option holder is now entitled to purchase 32,927 shares of
common stock at an exercise price of $4.10 per share. This option expires on
August 15, 2002.
The Company had the following common stock option activity for the three
years end December 31, 1998:
<TABLE>
<CAPTION>
OPTION
NUMBER PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
---------- ------------- -------------------
<S> <C> <C> <C>
Balance, December 31, 1995...................... 468,776 $ .04-1.19 $ .74
Granted....................................... 324,356 1.19-6.15 5.37
Exercised..................................... (45,491) .04-1.19 .70
Canceled...................................... (15,212) .82-5.13 2.30
---------- ------------- ---
Balance, December 31, 1996...................... 732,429 $ .04-6.15 $ 2.75
Granted....................................... 633,008 6.12-11.13 8.46
Exercised..................................... (42,409) .04-6.15 .93
Canceled...................................... (48,509) .69-7.17 4.45
---------- ------------- ---
Balance, December 31, 1997...................... 1,274,519 $ .04-11.13 $ 5.50
Granted....................................... 469,403 6.56-13.00 9.29
Exercised..................................... (59,716) .04-7.17 2.98
Canceled...................................... (84,908) .94-11.13 7.98
---------- ------------- ---
Balance, December 31, 1998...................... 1,599,298 $ .04-13.00 $ 6.66
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1996................... 197,767 $ .04-2.62 $ .66
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1997................... 336,805 $ .04-7.17 $ 1.70
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1998................... 585,644 $ .04-11.13 $ 3.71
---------- ------------- ---
---------- ------------- ---
</TABLE>
F-15
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER OF SHARES CONTRACT LIFE EXERCISE PRICE NUMBER OF SHARES EXERCISE PRICE
- -------------- ----------------- ----------------- ---------------- ----------------- -----------------
$.04-.94 279,460 5.03 $ .65 279,460 $ .65
1.00-2.62 60,240 6.68 1.17 42,552 1.18
5.12-6.75 410,555 7.99 5.85 145,667 5.69
7.13-8.88 294,073 8.85 7.59 70,592 7.72
9.00-10.75 383,820 9.74 10.04 12,379 10.36
11.13-13.00 171,150 9.91 11.17 34,994 11.13
----------------- ----- ------- ------- -----
1,599,298 8.21 $ 6.66 585,644 $ 3.71
----------------- ----- ------- ------- -----
----------------- ----- ------- ------- -----
</TABLE>
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants granted to employees to be included in the statement of
operations or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company has computed the pro
forma disclosures required under SFAS No. 123 for options granted in 1996, 1997
and 1998 using the Black-Scholes option pricing model prescribed by SFAS No.
123. The assumptions used for the years ended December 31, 1996, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------------- ---------------- ----------------
Risk-free interest rate............... 5.54%-6.83% 5.83%-6.86% 4.46%-5.57%
Expected dividend yield............... 0% 0% 0%
Expected life......................... 7 years 7 years 7 years
Expected volatility................... 33% 60% 46%
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The total value of the options granted during the years ended 1996, 1997 and
1998 was computed as approximately $867,000, $3,561,000 and $2,338,000,
respectively. Of these amounts, approximately $99,000, $458,000 and $1,179,000
would be charged to operations for the years ended December 31, 1996, 1997 and
1998, respectively. The remaining amount would be amortized over the related
vesting periods. The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years, as pro forma
compensation expense may vary based upon the number of options granted and the
assumptions used in valuing these options.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial
F-16
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS AND WARRANTS (CONTINUED)
portion of the stock options granted are incentive stock options and the Company
does not anticipate a future deduction associated with the exercise of these
stock options. The pro forma effect of SFAS No. 123 for the years ended December
31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- -------------------------- --------------------------
PRO AS AS PRO
AS REPORTED FORMA REPORTED PRO FORMA REPORTED FORMA
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss......................... ($6,021,690) $(6,121,057) $(10,651,101) $(11,109,101) $(14,347,063) $(15,525,781)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
Basic and diluted net loss per
common share................... $ (5.65) $ (5.74) $ (2.62) $ (2.73) $ (1.32) $ (1.42)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
</TABLE>
(B) WARRANTS
In connection with the issuance of the Company's Series G redeemable
convertible preferred stock, the Company granted warrants to purchase shares of
common stock. The total number of shares issuable upon exercise of the warrants
and the exercise price will be determined once the Company completes its first
firm commitment underwritten public offering in which the net proceeds to the
Company are at least $17,500,000 (the Designated Public Offering). The warrants
shall become exercisable only if the Designated Public Offering occurs after
December 20, 2000. If the Designated Public Offering occurs on or prior to
December 20, 2000, the warrants shall become null and void. The warrants are
exercisable beginning on the later of (i) the date of the closing of the
Designated Public Offering after December 20, 2000 or (ii) the date of closing
in connection with, or expiration of, the underwriters' overallotment option in
connection with the Designated Public Offering. The warrants expire on the
earlier of (i) the date of closing of the Designated Public Offering provided
the closing occurs on or prior to December 20, 2000 or (ii) December 20, 2003.
In conjunction with the Company's master lease agreement (see Note 10), the
Company issued warrants for the purchase of 210,000 shares of Series A
redeemable convertible preferred stock at an exercise price of $1.00 per share.
Upon conversion of the Series A redeemable convertible preferred stock into
common stock as discussed in Note 11(b), the warrantholder became entitled to
purchase 51,220 shares of common stock at an exercise price of $4.10 per share.
The warrants are fully exercisable and expire on August 15, 2002. The value
assigned to the warrants, $90,500, is being accounted for as debt discount and
is being amortized over the lease period.
In conjunction with the Company's agreement with Genentech (see Note 8), the
Company issued warrants to purchase 250,000 shares of common stock at an
exercise price of $16.22 per share. The warrants are exercisable on December 18,
1999 and expire on December 18, 2007.
F-17
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) OPERATING LEASE
In December 1994, the Company entered into an operating lease for its office
and research facilities. The lease expires in December 1999 with an option to
renew for two additional five-year terms. On September 1, 1998, the term of the
lease was extended for an additional period commencing as of December 1, 1999
and expiring as of November 30, 2004. The Company has received certain rent
concessions during the initial term of the lease. Rent expense is being
recognized ratably over the term of the lease. Deferred rent included in the
accompanying consolidated balance sheet represents the difference between cash
paid to date and rent expense recognized to date. Rent expense for 1996, 1997
and 1998 amounted to approximately $459,000, $459,000 and $741,000 respectively.
Future minimum rental payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Year Ending December 31,
1999............................................................................ $ 1,724,281
2000............................................................................ 1,294,243
2001............................................................................ 1,294,243
2002............................................................................ 1,294,243
2003............................................................................ 1,294,243
2004............................................................................ 1,186,389
------------
$ 8,087,642
------------
------------
</TABLE>
(15) INCOME TAXES
The Company follows the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES, whereby a deferred tax asset or liability is measured by the enacted tax
rates that would be in effect when any differences between the financial
statement and tax bases of assets or liabilities reverse. The Company has
elected to defer the deduction of certain research and development costs, as
defined in the Internal Revenue Code. As of December 31, 1998, the Company has
available deferred research and development costs of approximately $29,105,000,
net operating loss carryforwards of approximately $13,800,000 and research and
development credit carryforwards of approximately $1,300,000 to reduce future
federal income taxes, if any. The net operating loss and credit carryforwards
expire beginning in the year 2007 and are subject to review and possible
adjustment by the Internal Revenue Service. Because of the uncertainty
F-18
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) INCOME TAXES (CONTINUED)
of the realization of future tax return benefits of the deferred tax assets, a
full valuation allowance has been provided.
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Operating loss carryforwards.................................. $ 1,902,000 $ 5,502,000
Tax credit carryforwards...................................... 900,000 1,300,000
Start-up costs................................................ 160,000 180,000
Development costs............................................. 9,905,000 12,374,000
Nondeductible accruals........................................ 84,000 102,000
Depreciation.................................................. 189,000 375,000
-------------- --------------
13,140,000 19,833,000
Less--Valuation allowance..................................... (13,140,000) (19,833,000)
-------------- --------------
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The United States Tax Reform Act of 1986 contains provisions that may limit
the Company's net operating loss and credit carryforwards available to be used
in any given year in the event of significant changes in the ownership interests
of significant stockholders. The Company has completed numerous financings since
its inception and has incurred ownership changes, as defined in the Tax Reform
Act of 1986. The Company believes that the ownership changes will not
significantly impact its ability to utilize its net operating loss and tax
credit carryforwards.
(16) COMMITMENTS
(A) RESEARCH, LICENSE AND CONSULTING AGREEMENTS
The Company has entered into various research, license and consulting
agreements to support its research and development activities. These agreements
generally expire over several years. Certain of such agreements contain
provisions for future royalties to be paid on sales of products developed under
the agreements. The Company also has commitments to fund research and
development under arrangements discussed in Notes 7 and 16(b).
Future minimum commitments under research, license and consulting
agreements, excluding any funding related to the Ilex joint venture discussed in
Note 7, at December 31, 1998 are approximately as follows:
<TABLE>
<S> <C>
1999............................................................ $1,805,000
2000............................................................ 288,000
2001............................................................ 25,000
----------
Total........................................................... $2,118,000
----------
----------
</TABLE>
(B) LEUKOSITE (U.K.) LIMITED
The Company has a wholly owned subsidiary, LeukoSite (UK) Limited (LeukoSite
UK). LeukoSite UK was incorporated for the purpose of entering into a research
agreement to fund research activity in the United Kingdom. An agreement has been
established whereby LeukoSite UK will contribute $3,000,000
F-19
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) COMMITMENTS (CONTINUED)
toward funding the construction, equipping and the operations of a research
center in the UK. The Company has paid and charged to operations $2,500,000 of
such commitment as of December 31, 1998, and the balance will be paid in
six-month intervals of $250,000 each. It is expected that the Company will fund
most of the cash requirements of LeukoSite UK.
(17) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
Payroll and payroll-related....................................... $ 608,724 $ 711,678
Consulting and contract research.................................. 263,300 249,010
Preclinical research and development.............................. 330,237 1,776,605
Clinical research and development................................. 174,592 559,672
Legal fees........................................................ 145,018 124,882
Other............................................................. 344,552 693,454
------------ ------------
$ 1,866,423 $ 4,115,301
------------ ------------
------------ ------------
</TABLE>
(18) PROFIT SHARING PLAN
The Company maintains a profit sharing plan (the Plan) that provides for tax
deferred employee benefits under Section 401(k) of the Internal Revenue Code.
The Plan allows employees to make contributions, a portion of which will be
matched by the Company, up to 25% of the lesser of 6% of an employee's salary or
an employee's contributions. The Company's contributions are 100% vested. There
were no Company matching contributions during the years ended December 31, 1996
and 1997. The Company has made matching contributions to the Plan of
approximately $52,000 for the year ended December 31, 1998. The Company pays the
administrative costs of the Plan.
(19) COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The statement established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. The Company has adopted this statement
for the year ended December 31, 1998 with no material impact on the Company's
financial statements as there are no material differences between comprehensive
income and reported.
(20) SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and require that enterprises report selected
information about operating segments in interim financial reports issued to
stockholders.
F-20
<PAGE>
LEUKOSITE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) SEGMENT REPORTING (CONTINUED)
The Company has adopted this statement for the fiscal year ending December
31, 1998. In accordance with SFAS No. 131, the Company has one operating
segment. Additional disclosure of revenue information about products and
services is, therefore, not required.
(21) SUBSEQUENT EVENT
On February 11, 1999, the Company acquired all of the issued and outstanding
capital stock of CytoMed Inc. (CytoMed) through the issuance of 935,625 shares
of the Company's Series A Convertible Preferred Stock, par value $.01 per share,
to CytoMed shareholders. The Series A Convertible Preferred Stock is convertible
into common stock on a one-to-one basis upon required approval by Company
shareholders. The Company will issue another 631,313 common shares to CytoMed
shareholders upon receipt of a $6,000,000 payment to CytoMed from UCB Pharma
which is required to be paid in October 1999. In addition, CytoMed shareholders
may receive up to $23,000,000 in cash and 84,000 shares of the Company's common
stock which is required upon the achievement of clinical development and
regulatory milestones related to CytoMed's product candidates. The total
purchase price, including shares issued, shares to be issued and transaction
costs, was approximately $16,100,000 and the net assets acquired were
approximately $14,500,000. The transaction will be accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16, BUSINESS
COMBINATIONS.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the General Partners of
L&I Partners, L.P.:
We have audited the accompanying balance sheets of L&I Partners, L.P. (a
Delaware Limited Partnership in the development stage), as of December 31, 1998
and 1997, and the related statements of operations, partners' capital and cash
flows for the year ended December 31, 1998, and for the period from inception
(May 2, 1997) through December 31, 1997, and cumulative from inception (May 2,
1997) through December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of L&I Partners, L.P., as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998, and for the period from inception through
December 31, 1997, and cumulative from inception through December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Antonio, Texas
January 29, 1999
F-22
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
ASSETS
CASH AND CASH EQUIVALENTS...................................................................... $ 60 $ 353
PREPAID EXPENSES............................................................................... 4 --
--------- ---------
Total assets............................................................................... $ 64 $ 353
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable to related parties.......................................................... $ 737 $ 1,202
Accrued subcontractor costs.................................................................. -- 3,210
--------- ---------
Total liabilities.......................................................................... 737 4,412
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Limited partners' capital.................................................................... (666) (4,006)
General partner's capital.................................................................... (7) (40)
Receivable from general partner.............................................................. -- (13)
--------- ---------
Total partners' capital.................................................................... (673) (4,059)
--------- ---------
Total liabilities and partners' capital.................................................... $ 64 $ 353
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
INCEPTION INCEPTION
YEAR ENDED THROUGH THROUGH
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE................................................................ $ -- $ -- $ --
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative........................................... 153 -- 153
------------ ------------ ------------
Costs of contract research services performed by related parties..... 4,876 1,202 6,078
Subcontractor costs.................................................. 2,755 5,520 8,275
------------ ------------ ------------
Total operating expenses......................................... 7,784 6,722 14,506
------------ ------------ ------------
OPERATING LOSS......................................................... (7,784) (6,722) (14,506)
------------ ------------ ------------
INTEREST INCOME........................................................ 68 6 74
------------ ------------ ------------
NET LOSS............................................................... $ (7,716) $ (6,716) $ (14,432)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS' PARTNER'S
CAPITAL CAPITAL TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
BALANCE, inception, May 2, 1997.................................................. $ -- $ -- $ --
Contributions.................................................................. 2,643 27 2,670
Receivable from general partner................................................ -- (13) (13)
Net loss....................................................................... (6,649) (67) (6,716)
----------- ----- ---------
BALANCE, December 31, 1997....................................................... (4,006) (53) (4,059)
Contributions.................................................................. 10,979 123 11,102
Net loss....................................................................... (7,639) (77) (7,716)
----------- ----- ---------
BALANCE, December 31, 1998....................................................... $ (666) $ (7) $ (673)
----------- ----- ---------
----------- ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
INCEPTION INCEPTION
YEAR ENDED THROUGH THROUGH
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (7,716) $ (6,716) $ (14,432)
Adjustments to reconcile net loss to net cash used in operating
activities-........................................................
Increase in assets-
Prepaid expenses................................................. (4) -- (4)
Increase (decrease) in liabilities-
Accounts payable to related parties.............................. 3,925 1,202 5,127
Accrued subcontractor costs...................................... (3,210) 3,210 --
------------ ------------ ------------
Net cash used in operating activities........................ (7,005) (2,304) (9,309)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................................ 6,712 2,657 9,369
------------ ------------ ------------
Net cash provided by financing activities.................... 6,712 2,657 9,369
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (293) 353 60
CASH AND CASH EQUIVALENTS, beginning of period......................... 353 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 60 $ 353 $ 60
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital contributions made through settlement of accounts payable
to related parties............................................... $ 4,390 $ -- $ 4,390
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONTROL
L&I Partners, L.P. (L&I), was founded in May 1997 as a joint venture between
Ilex Oncology, Inc. (Ilex), and Leukosite, Inc. (Leukosite). L&I was formed to
develop and commercialize a monoclonal antibody (CAMPATH-Registered Trademark-)
initially for the treatment of chronic lymphocytic leukemia, pursuant to an
agreement of limited partnership and a license agreement between Leukosite, Ilex
and L&I. The development and commercialization activities of L&I are jointly
managed by Leukosite and Ilex who will generally share equally in profits and
losses. The joint venture expires in 2017, but provides for either partner to
purchase the other partner's ownership interest in the joint venture in the
event of an unresolved deadlock (relating to the activities of the partnership)
after the earlier of a change in control (as defined therein) of the other party
or October 31, 2000. In addition, in the event that one party is unable or
unwilling to fulfill its funding obligations to the joint venture, then in
certain circumstances, the party that funds the joint venture shall gain control
of the management of the joint venture, subject to certain catch-up rights of
the other party.
L&I is in the development stage and has not yet generated operating revenues
nor is there any assurance of future revenues. Since inception, L&I has received
significant support from Leukosite and Ilex. Although its affiliation with
Leukosite and Ilex puts it in a preferred position to develop and commercialize
a product, L&I continues to be subject to the risks and challenges associated
with other companies in a comparable stage of development including the ability
to obtain adequate financing to fund operations and development, dependence on
key individuals and entities, competition from larger companies and successful
marketing of its products. Accordingly, L&I's future success is uncertain.
During the period from inception (May 2, 1997) through December 31, 1998,
L&I incurred a net loss of approximately $14.5 million and, at December 31,
1998, had a negative working capital of approximately $.7 million and negative
partners' capital of approximately $.7 million. The ability of L&I to continue
as a going concern is dependent upon the ongoing support of its partners. The
general and limited partners have committed to making additional capital
contributions in order to fund the obligations and operations of L&I through
fiscal 1999.
Under the partnership structure, Ilex and Leukosite each hold a 49.5 percent
limited partner interest and L&I LLC holds a 1 percent general partner interest
in L&I. Ilex and Leukosite each hold a 50 percent interest in L&I LLC.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and are not the basis for reporting
taxable income to the partners. The financial statements include the accounts of
L&I only.
ESTIMATES IN FINANCIAL STATEMENTS
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
F-27
<PAGE>
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
liabilities and disclosure of contingent 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.
STATEMENT OF CASH FLOWS
L&I considers all highly liquid investments with maturities of three months
or less at the date of purchase to be cash equivalents.
INCOME TAXES
Income and deductions of L&I for federal income tax purposes are includable
in the tax returns of the individual partners. Accordingly, no recognition has
been given to federal income taxes in the accompanying financial statements of
L&I.
PRICE RISK MANAGEMENT ACTIVITIES
L&I may enter into exchange traded futures and options contracts, forward
contracts, swaps and other financial instruments with third parties to hedge
foreign currency commitments.
ALLOCATION OF NET INCOME (LOSS) AND CASH DISTRIBUTIONS
Net income (loss) is allocated to partners based on their effective
ownership interest in the operating results of L&I. L&I is not required to and
has not made any cash distributions.
2. RELATED-PARTY TRANSACTIONS:
L&I utilizes services extensively from both its limited partners. These
services include contract research, development, scientific expertise, business
development services and general management. The limited partners also provide
certain general management services free of charge to L&I, however, the fair
value of such services is immaterial to the results of operations of L&I for the
period from inception (May 2, 1997) through December 31, 1998. During the year
ended December 31, 1998 and for the period from May 2, 1997, through December
31, 1997, L&I incurred the following related party expenses for contract
research services (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ILEX....................................................................... $ 3,616 $ 952
Leukosite.................................................................. 1,260 250
--------- ---------
$ 4,876 $ 1,202
--------- ---------
--------- ---------
</TABLE>
3. LICENSING AGREEMENTS:
L&I has sublicensed the rights to CAMPATH-Registered Trademark- from
Leukosite. The licensing agreement grants L&I the right to develop and market
the product and to license the rights to the compound to other third parties.
Under terms of the agreement, L&I is required to pay certain fees and royalties
to Leukosite as defined in the agreement. No such payments were required for the
period from inception through December 31, 1998.
F-28
<PAGE>
EXHIBIT 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements have been
prepared to give effect to the merger using the purchase method of accounting.
The unaudited pro forma combined balance sheet as of September 30, 1999
gives effect to the merger as if it had occurred on such date, and reflects the
allocation of the purchase price to the LeukoSite assets acquired, including
in-process research and development, and liabilities assumed. The unaudited pro
forma combined statements of operations combine the historical statements of
operations of Millennium and LeukoSite as if the merger had occurred at
January 1, 1998. The historical financial statements of LeukoSite included
herein have been adjusted on a pro forma basis to reflect the February 1999
acquisition of CytoMed, Inc. by LeukoSite as if such acquisition had occurred on
January 1, 1998 ("Historical LeukoSite Financial Statements Assuming the CytoMed
Acquisition"). Information with respect to the 1998 Historical LeukoSite
Financial Statements Assuming the CytoMed Acquisition is derived from and can be
found in the LeukoSite Form 8-K filed on April 27, 1999 in conjunction with the
CytoMed acquisition and incorporated by reference herein. The unaudited pro
forma combined statement of operations for the nine-month period ended
September 30, 1999 combines the historical unaudited statements of operations of
Millennium and LeukoSite, as adjusted, for such period. It is expected that
following the merger, Millennium will incur additional costs, which are not
expected to be significant to the combined results of operations, in connection
with integrating the operations of the two companies. Integration-related costs
are not included in the accompanying unaudited pro forma combined financial
statements.
The Millennium statement of operations for the period in which the merger
occurs will include a significant charge for acquired in-process research and
development, currently estimated to be approximately $327.6 million, or 59.2% of
the purchase price. This amount represents the values determined by management,
using a discounted cash flow methodology, to be attributable to the in-process
research and development programs of LeukoSite based on a preliminary valuation
of such programs. Such amount is subject to significant change pending
completion of the final independent valuation analysis. The charge relates to
specific on-going research and development programs and preclinical projects.
Assuming each of these research programs continues through all stages of
clinical development, the projected future research and development expenditures
related to these programs, excluding the cost of research and development which
may be performed by corporate collaborators, is approximately $139.3 million.
The programs are forecasted to be completed at various times between 2000 and
2006. If Millennium would have allocated less of the purchase price to these
programs, the value would have been recorded as goodwill on the balance sheet
and amortized over the expected benefit period, resulting in increased
amortization expense during that period. Millennium believes that the allocation
of the purchase price to these programs is appropriate given the future
potential of these programs to contribute to the operations of Millennium.
Unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
merger occurred at the beginning of the periods presented, nor is it necessarily
indicative of future financial position or results of operations. These
unaudited pro forma combined financial statements are based upon the respective
historical financial statements of Millennium and LeukoSite, as adjusted, and do
not incorporate, nor do they assume, any benefits from cost savings or synergies
of operations of the combined company.
<PAGE>
MILLENNIUM PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL LEUKOSITE
HISTORICAL FINANCIAL STATEMENTS PRO FORMA
MILLENNIUM ASSUMING THE PRO FORMA MILLENNIUM
PHARMACEUTICALS, INC. CYTOMED ACQUISITION ADJUSTMENTS PHARMACEUTICALS, INC.
--------------------- -------------------- ----------- ---------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.. $ 81,960 $ 8,021 $ 89,981
Marketable securities...... 143,220 14,360 157,580
Due from strategic
partners................. 9,547 9,547
Prepaid expenses and other
current assets........... 6,746 6,900 13,646
-------- -------- -------- --------
Total current assets......... 241,473 29,281 270,754
-------- -------- -------- --------
Property and equipment, net.. 51,152 4,541 55,693
Restricted cash and other
assets..................... 12,564 5,291 17,855
Intangible assets, net....... 3,684 208 $ 43,072 (B) 200,758
2,920 (C)
151,082 (D)
(208)(F)
-------- -------- -------- --------
Total assets................. $308,873 $ 39,321 $196,866 $545,060
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........... $ 13,450 $ 464 $ 13,914
Accrued expenses........... 8,466 5,259 $ 7,000 (E) 20,725
Deferred revenue........... 7,371 2,540 9,911
Current portion of capital
lease obligations........ 8,836 959 9,795
-------- -------- -------- --------
Total current liabilities.... 38,123 9,222 7,000 54,345
-------- -------- -------- --------
Capital lease obligations,
net of current portion..... 25,984 975 26,959
Minority interest............ 15,564 15,564
Commitments and contingencies
Stockholders' equity:
Preferred stock............
Common stock............... 36 147 (147)(G) 43
7 (H)
Additional paid-in 321,525 97,594 (97,594)(G) 868,126
capital.................. 546,601 (H)
Deferred compensation...... (1,370) (1,370)
Notes receivable from
officers................. (29) (29)
Other comprehensive loss... (539) (539)
Accumulated deficit........ (90,421) (68,617) (327,618)(A) (418,039)
68,617 (G)
-------- -------- -------- --------
Total stockholders' equity... 229,202 29,124 189,866 448,192
-------- -------- -------- --------
Total liabilities and
stockholders' equity....... $308,873 $ 39,321 $196,866 $545,060
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE>
MILLENIUM PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
LEUKOSITE
FINANCIAL
STATEMENTS PRO
HISTORICAL ASSUMING THE FORMA
MILLENNIUM CYTOMED PRO FORMA MILLENNIUM
PHARMACEUTICALS, INC. ACQUISITION ADJUSTMENTS PHARMACEUTICALS, INC.
--------------------- ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Strategic alliances............. $128,581 $ 128,581
Corporate collaborations and
grants........................ $ 8,267 8,267
Joint venture revenue........... 2,662 2,662
-------- -------- --------- ---------
128,581 10,929 139,510
-------- -------- --------- ---------
Costs and expenses:
Research and development........ 113,276 23,551 136,827
General and administrative...... 23,907 2,567 26,474
Acquired in-process research and
development................... 2,661 2,661
Amortization of intangible
assets........................ 2,027 $ 36,951 (I) 38,978
-------- -------- --------- ---------
139,210 28,779 36,951 204,940
-------- -------- --------- ---------
Loss from operations.............. (10,629) (17,850) (36,951) (65,430)
Interest income................... 9,209 1,021 10,230
Interest expense.................. (2,177) (131) (2,308)
Minority interest................. 2,204 2,204
Equity in operations of joint
venture......................... (3,900) (3,900)
-------- -------- --------- ---------
Net loss.......................... $ (1,393) $(20,860) $ (36,951) $ (59,204)
======== ======== ========= =========
Basic and diluted net loss per
share........................... $ (0.04) $ (1.49) ($ 1.40)
======== ======== =========
Shares Used In Calculating:
Basic and diluted net loss per
share........................... 35,817 13,988 (13,988)(J) 42,394
6,577 (K)
======== ======== =========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE>
MILLENNIUM PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
LEUKOSITE
FINANCIAL
STATEMENTS PRO
HISTORICAL ASSUMING THE FORMA
MILLENNIUM CYTOMED PRO FORMA MILLENNIUM
PHARMACEUTICALS, INC. ACQUISITION ADJUSTMENTS PHARMACEUTICALS, INC.
--------------------- ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Strategic alliances............. $133,682 $ 133,682
Corporate collaborations and
grants........................ $ 12,324 12,324
Joint venture revenue........... 1,260 1,260
-------- -------- --------- ---------
133,682 13,584 147,266
-------- -------- --------- ---------
Costs and expenses:
Research and development........ 114,190 24,535 138,725
General and administrative...... 24,419 4,144 28,563
Amortization of intangible
assets........................ 2,702 $ 49,269 (I) 51,971
-------- -------- --------- ---------
141,311 28,679 49,269 219,259
-------- -------- --------- ---------
Loss from operations.............. (7,629) (15,095) (49,269) (71,993)
Interest income................... 6,198 1,789 7,987
Interest expense.................. (2,410) (171) (2,581)
Minority interest................. 14,179 14,179
Equity in operations of joint
venture......................... (3,858) (3,858)
-------- -------- --------- ---------
Net income (loss)................. $ 10,338 $(17,335) $ (49,269) $ (56,266)
======== ======== ========= =========
Basic net income (loss) per
share........................... $ 0.34 $ (1.39) $ (1.52)
======== ======== =========
Diluted net income (loss) per
share........................... $ 0.33 $ (1.39) $ (1.52)
======== ======== =========
Shares Used In Calculating:
Basic net income (loss) per (12,462)(J)
share........................... 30,319 12,462 6,577 (K) 36,896
======== ======== =========
Diluted net income (loss) per
share........................... 31,508 12,462 36,896
======== ======== =========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE>
MILLENNIUM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1
The unaudited pro forma combined financial statements reflect the conversion
of all of the outstanding shares of LeukoSite common stock into approximately
6,577,110 shares of Millennium common stock pursuant to the merger. This
calculation is based on LeukoSite's outstanding capitalization at September 30,
1999 using the conversion ratio of 0.4296 of a share of Millennium common stock
for each share of outstanding LeukoSite common stock. Options and warrants to
purchase approximately 2,297,246 shares of LeukoSite common stock with a
weighted average exercise price of $9.17 will be assumed by Millennium pursuant
to the merger and converted into options and warrants to purchase 986,911 shares
of Millennium common stock. The total cost of the proposed merger is estimated
to be approximately $553.6 million, determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of Millennium shares (calculated using $74.52 per
share fair value at the date of the merger agreement)..... $490,100
Value of LeukoSite options and warrants assumed............. 56,508
Millennium transaction costs, consisting primarily of
financial advisory, legal and accounting fees............. 7,000
--------
$553,608
========
</TABLE>
Based upon a preliminary valuation of tangible and intangible assets
acquired and liabilities assumed, Millennium has allocated the total cost of the
merger to the net assets of LeukoSite as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired.................................... $ 39,113
In-process research and development......................... 327,618
Intangible assets (assembled workforce, core technology and
goodwill)................................................. 197,074
Liabilities assumed......................................... (10,197)
--------
$553,608
========
</TABLE>
LeukoSite is engaged in the discovery and development of a new class of
pharmaceutical products for the treatment or prevention of serious diseases.
LeukoSite's business focus is in the development of medicines for treating
cancer and inflammatory, autoimmune and viral diseases. LeukoSite's research and
development programs in these areas are in various stages from pre-clinical
development to late stage clinical trials. LeukoSite's strategy has been to
develop and commercialize its products through alliances with major
pharmaceutical and biotechnology companies. No products utilizing LeukoSite's
proprietary technologies have been approved for marketing to date. The LeukoSite
research and development programs currently in process were valued as follows:
<TABLE>
<S> <C>
CAMPATH-Registered Trademark-............................... $ 38,922
LDP-01...................................................... 20,155
LDP-02...................................................... 24,482
LDP-341..................................................... 139,149
LDP-977..................................................... 17,334
Preclinical projects........................................ 87,576
--------
$327,618
========
</TABLE>
<PAGE>
MILLENNIUM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
The in-process research and development has been written off against the
combined retained earnings. Because the charge is nonrecurring, it has not been
reflected in the pro forma combined statements of operations. Such charge will
be included in the Millennium statement of operations in the quarter in which
the merger is completed. The intangible assets will be amortized over their
estimated useful lives of 4 years.
NOTE 2
The pro forma combined balance sheet includes the adjustments necessary to
give effect to the merger as if it had occurred on September 30, 1999 and to
reflect the allocation of the acquisition cost to the fair value of tangible and
intangible assets acquired and liabilities assumed as noted above, including a
charge to retained earnings for acquired in-process research and development and
the elimination of LeukoSite's equity accounts. Adjustments included in the pro
forma combined balance sheet are summarized as follows (in thousands except per
share amounts):
(A) The charge to operations for in-process research and development of
$327,618.
(B) The valuation of $43,072 for LeukoSite core technology.
(C) The valuation of $2,920 for the LeukoSite workforce.
(D) The valuation of $151,082 for the LeukoSite goodwill.
(E) The accrual of the estimated acquisition costs of $7,000.
(F) To eliminate LeukoSite historical goodwill of $208.
(G) To eliminate LeukoSite historical stockholders' equity amounts:
<TABLE>
<S> <C>
Common stock................................................ $ 147
Additional paid-in capital.................................. 97,594
Accumulated deficit......................................... 68,617
</TABLE>
(H) Issuance of 6,577,110 shares of Millennium $.001 par value common stock
to acquire all of the outstanding common stock of LeukoSite and
assumption of options and warrants to purchase common stock, as discussed
in Note 1. Common stock credited for $7 and additional paid-in capital
credited for $546,601, including an adjustment of $56,508 to reflect the
fair value of stock options and warrants issued by Millennium
Pharmaceuticals in exchange for the LeukoSite stock options and warrants.
NOTE 3
The Historical LeukoSite Financial Statements Assuming the CytoMed
Acquisition, for the nine months ended September 30, 1999, have been adjusted on
a pro forma basis to reflect the February 1999 acquisition of CytoMed, Inc. by
LeukoSite as if such acquisition had occurred on January 1, 1998. Such pro forma
adjustments include the addition of $744 of Research and Development Costs,
incurred by CytoMed in 1999 prior to the acquisition, and the reversal of the
$1,588 Acquired In-Process Research and Development charge, associated with the
CytoMed acquisition, due to its non-recurring nature.
<PAGE>
MILLENNIUM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 (CONTINUED)
The Historical LeukoSite Financial Statements Assuming the CytoMed
Acquisition for the year ended December 31, 1998 are derived from and can be
found in the LeukoSite Form 8-K filed on April 27, 1999 in conjunction with the
CytoMed acquisition.
NOTE 4
The pro forma combined statements of operations include the adjustments
necessary to give effect to the merger as if it had occurred on January 1, 1998.
(I) Adjustments consist of the amortization of acquired intangible assets
using the following estimated useful lives:
<TABLE>
<S> <C>
Assembled workforce......................................... 4 years
Core technology............................................. 4 years
Goodwill.................................................... 4 years
</TABLE>
NOTE 5
(J) To eliminate LeukoSite weighted average shares outstanding.
(K) Pro forma basic and diluted net loss per share amounts for the year
ended December 31, 1998 and the nine-month period ended September 30,
1999, are based upon the historical weighted-average number of Millennium
common stock outstanding adjusted to reflect the issuance, as of
January 1, 1998, of approximately 6,577,110 shares of Millennium common
stock.
(L) The impact of outstanding options and warrants, including LeukoSite
options and warrants assumed, has been excluded from the calculation of
diluted net loss per share as the effect would be antidilutive.
