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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____________ to ____________________________
Commission File Number 0-11094
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RIBI IMMUNOCHEM RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 81-0394349
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
553 Old Corvallis Road, Hamilton, MT 59840-3131
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (406) 363-6214
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x . No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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The aggregate market value of Registrant's voting stock held by non-affiliates
of the Registrant was $99,807,710, based upon the last sale price of such stock
on March 3, 1997, as reported by the Nasdaq National Market tier of The Nasdaq
Stock Market.
As of March 3, 1997, Registrant had 20,001,291 shares of common stock, $.001 par
value, outstanding.
Page 1 of 2 Cover Pages
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DOCUMENTS INCORPORATED BY REFERENCE
Portions entitled "Election of Directors," "Committees and Meetings," "Principal
Stockholders and Management's Stockholdings," "Executive Compensation" and
"Directors Compensation" from the Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held April 30, 1997 . . . . . . . . . . . Part III
Such Definitive Proxy Statement for Annual Meeting of Stockholders to be held
April 30, 1997, except for portions thereof which have been specifically
incorporated by reference, shall not be deemed "filed" as part of this Annual
Report on Form 10-K.
Page 2 of 2 Cover Pages
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TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . 16
Executive Officers of the Registrant. . . . . . . . . . . . . . . . 16
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 17
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 19
Item 8. Financial Statements and Supplementary Data . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 42
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 10. Directors and Executive Officers of the Registrant. . . . 42
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . 42
Item 13. Certain Relationships and Related Transactions. . . . . . 42
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 42
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PART I
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Item 1. BUSINESS
GENERAL
The Company was incorporated on January 9, 1981, under the laws of Delaware and
is engaged in the development of biopharmaceutical products that stimulate the
immune system to generate a cascade of natural agents and signals to prevent and
treat human disease. Ribi immunostimulants can be combined with disease-
specific antigens which may direct the immune system to respond to a particular
cancer or infectious disease or can be used to modulate the immune response
which may prevent conditions such as ischemia-reperfusion injury. The Company
is engaged in the research, development, production and marketing of these
products, some of which are under investigation by other companies for use as
adjuvants. In addition, the Company engages in related activities such as the
custom formulation and sale of research products.
The Company has an active research and development program for new products and
the improvement of its existing products. Also, the Company manufactures all of
its clinical products and has developed and continues to develop processes for
the commercial-scale production of its compounds. The Company protects its
proprietary products and processes through the filing of patent applications and
the use of confidentiality agreements. The Company has 21 issued United
States patents covering its compounds, processes and certain uses of its
products. The expiration dates for United States patents held by the Company
range from 2001 to 2011. Patents have also been applied for or issued on a
selected basis in foreign countries.
The Company is headquartered near Hamilton, Montana, in a modern facility
housing approximately 60,000 square feet of laboratory, administrative,
marketing, pilot plant and commercial-scale production functions. In addition
to the plant and equipment, the Company owns approximately 35 acres allowing for
potential future expansion. To date most of the Company's revenues have been
from investment income earned on cash balances and investments, product license
and contract research fees, and sales of research and animal health products.
Products for use as human biopharmaceuticals have not yet been approved for
sale.
THE COMPANY'S TECHNOLOGY
The technology of the Company is based on the potent capacities of certain
microbial products to modulate the cytokine (regulatory substances produced by
cells) cascade in man and other animals. Slight modifications of these products
and/or their physical and biological delivery to the immune system profoundly
influence the qualitative and quantitative natures of the subsequent cytokine
modulation and the physiological responses. The Company believes that appro-
priate delivery of products of this core technology can be used to suppress an
unwanted immunological or inflammatory response or to enhance a protective
response.
The Company believes it has developed a distinct approach to immune modulation.
The Company's materials activate macrophages, lymphocytes and other cells
relating to the immune system. This activation stimulates an immunological
cascade of cytokine production that complements the normal, protective responses
that are initiated during infection or injury. Furthermore, this type of
stimulation results in an individually tailored response, similar to the manner
in which the body would respond to natural stimuli.
1
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The concept of using microbial products to provide a general immune modulation
as a therapeutic approach dates back to the late 1800s. However, little
progress was made in exploiting the therapeutic potentials of these products
until the 1980s. First of all, much reliance had been placed on
chemotherapeutics, antibiotics and radiation as panaceas for infectious and
neoplastic (abnormal tissue growth) diseases. Secondly, there appeared to be
unsolvable toxicity problems associated with the microbial immunotherapeutic
products. In 1981 the late Dr. Edgar Ribi, a co-founder of the Company, and his
colleagues discovered a reproducible process which led to the detoxification of
endotoxin, a bacterial cell-wall component and one of the most potent known
stimulators of the immune system. By separating and isolating selected portions
of bacterial cell walls, Dr. Ribi and his colleagues were able to define
chemically the precise structure of the endotoxin molecule which possessed
immunomodulatory activities and to attenuate the toxicity of this molecule
without destroying its beneficial biological properties. The result was a
chemical entity referred to as monophosphoryl lipid A, trademarked by the
Company as MPL immunomodulator. In addition to attenuating toxicity of the
endotoxin molecule, the Company's scientists have extracted biologically active
components from the cell walls of MYCOBACTERIUM BOVIS or PHLEI and have
formulated combinations of these components as potential immunomodulatory
agents.
Knowledge of the structures of MPL and other immunomodulators now makes it
possible to prepare these compounds and closely related derivatives by synthetic
methods. Comparison of the biological activities of these synthetic derivatives
with their structures is allowing a detailed picture of the relationships of
structures to activities to be developed. This may lead to the identification
of derivatives that may have unique uses as new immunomodulatory products.
The core of the Company's product development is the use of MPL immunomodulator
by itself or in combination with other immunomodulators and appropriate delivery
vehicles to modify selectively the immunological status of an individual. This
is accomplished primarily through precise enhancement or suppression of cellular
hormones called cytokines.
Modulation of the cascade of cytokines, both suppression and enhancement, is an
extremely complicated process. The particular roles played by the cytokines,
alone and in combination with others, have not yet been defined completely.
Furthermore, it is unlikely that it will ever be possible to assess the immune
status of a patient to such an extent that treatment with exogenous cytokines
can be tailored to the patient's exact needs. Poor distribution of cytokines
from the blood stream to desired target tissues also limits their utility as
drug products. By studying the structure-function relationships of natural and
synthetic immunomodulators, Company scientists hope to discover ways to
selectively stimulate and suppress cytokine responses in various tissues
naturally. Information from these studies may provide new insights about how
the beneficial effects of cytokine modulation can be exploited in the treatment
of disease.
The Company's products are in various stages of development. Other than certain
veterinary vaccine adjuvants and certain laboratory research products which
presently generate limited sales revenue, the Company has no commercial
products. There is no assurance that the products under development, including
MELACINE melanoma theraccine, MPL-C cardioprotectant, or any adjuvants, vaccines
or other immunological agents will be commercially successful. While there is
evidence that the biological response modifiers produced by the Company and
others may provide treatment for certain cancers, infectious or other diseases,
the workings of the immune system, particularly in conjunction with biological
response
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modifiers, are not yet fully understood. As a result, the Company's research
and development activities, as well as those of its competitors, are based on
theories and concepts which may not have been completely proven or defined. The
Company has been testing certain of its compounds on humans in the United States
pursuant to Investigational New Drug ("IND") applications filed with the United
States Food and Drug Administration ("FDA"). To date, preclinical and clinical
data indicate product activity, and there have been no significant unexpected,
untoward effects associated with the administration of the Company's products.
However, considerable additional testing in human subjects is required to
demonstrate efficacy and confirm product safety for most of the Company's
products. If results are successful, there is no assurance that the Company
will receive the necessary governmental approvals for its products, that
additional satisfactory collaborative or licensing arrangements will be
available to the Company, or that any of the Company's products will be accepted
by the medical community.
THE COMPANY'S PRODUCTS
In the United States, human biopharmaceutical products are regulated by the FDA.
The FDA requires every new drug intended for human use to be tested under
strictly regulated treatment protocols, all of which require substantial time
and cost. (See below, "Government Regulation - FDA Approvals.")
The table on the following page summarizes the current status of the Company's
product development programs, which are discussed in more detail beginning on
page 5. Results which have been reported in Phase I and Phase II trials
involving the Company's products do not establish product efficacy, and there
can be no assurance that any of the listed products will progress beyond their
current state of development or ultimately receive necessary regulatory approval
from the FDA or comparable agencies in foreign countries or be accepted by the
medical community.
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<TABLE>
<S> <C> <C> <C>
Product Proposed Application Status Collaborator/Licensee
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Adjuvants Enhancement of Phase SmithKline Beecham -
infectious disease I/II/III exclusive rights for
vaccines (herpes herpes; hepatitis A, B
simplex and C; influenza A and B;
I/II, Lyme disease; malaria;
hepatitis B, human papillomavirus;
influenza, among others -
malaria, co-exclusive rights for
strepto- DPT; Haemophilus
coccal influenza b; otitis
infections, media; polio;
AIDS) tuberculosis; among
others - nonexclusive
rights for AIDS and
others
Wyeth-Lederle Vaccines
and Pediatrics -
co-exclusive rights for
DPT; Haemophilus in-
fluenza b; otitis media;
polio; among others
Adjuvants Enhancement of Preclinical SmithKline Beecham -
allergy vaccines exclusive rights in the
European Community,
Eastern Europe and Canada
- co-exclusive for the
rest of the world
Adjuvants Enhancement of Preclinical SmithKline Beecham -
cancer vaccines nonexclusive rights for
cancer vaccines
MELACINE Stage IV (advanced) Product Biomira, Inc. (exclusive
melanoma malignant melanoma license rights for Canada only)
theraccine applications (1)
being
prepared for
North
America,
Europe and
Australia
Stage II (early Phase III
stage) malignant
melanoma (prevention
of recurrence after
surgery)
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Product Proposed Application Status Collaborator/Licensee
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MELACINE Stage IV (advanced) Phase III Schering-Plough
melanoma malignant melanoma Corporation
theraccine collaboration
+ inter-
feron-alfa
2b
MPL-C Prevention of Phase II None (1)
ischemia-reperfusion
injury in coronary
artery bypass graft
patients
DETOX Enhancement of Phase I/II Biomira (exclusive to
therapeutic vaccines and pre- specific antigens)
(theraccine) for clinical
breast, lung, National Cancer Institute
gastrointestinal, - collaboration
ovarian, uterine,
colon and prostrate
cancers
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<FN>
(1) See "Marketing" on page 11
</FN>
</TABLE>
Infectious Disease Vaccines
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The Company's immunostimulant technology appears to have beneficial application
in the creation of vaccines for the prevention of viral and bacterial
infections. The Company believes that current emphasis on preventive health
care, the recent resurgence of certain previously controlled infectious diseases
and the continued emergence of new diseases, such as AIDS and Lyme disease, will
lead to greater use of prophylactic vaccines. The immunostimulating
characteristics of MPL make it well suited for use as an adjuvant with various
specific antigens for the creation of vaccines. Alum, the adjuvant historically
used in approved vaccines, is proving to be inadequate for many new vaccine
antigens, particularly those created with advanced DNA and subunit technology.
The Company has licensed its adjuvants to SmithKline Beecham ("SB") in three
separate agreements for use in vaccines for infectious diseases SB is
developing. The first agreement, signed in 1991, provides exclusive, worldwide
use in defined SB vaccines for a number of primarily adult viral vaccines. The
Company receives transfer payments for supplies of adjuvant and will receive
royalties upon commercialization. SB is conducting human clinical testing with
the Company's adjuvants for vaccines against herpes, hepatitis B, malaria and
influenza. During 1996 SB continued to advance the development of several
vaccines covered by this agreement including a clinical trial designed to test
the efficacy of a novel herpes vaccine in an 800-couple study using a selected
consort design. In the trial one partner in a couple has herpes and other does
not. Data from this Phase III study may be available in 1997. If the data are
favorable, SB could file a license application in 1998.
Early in 1997, THE NEW ENGLAND JOURNAL OF MEDICINE published data from SB and
Walter Reed Army Institute of Research about a challenge study with an
experimental malaria vaccine. The vaccine, which incorporated MPL
immunomodulator and another adjuvant, achieved an efficacy rate of 86% against
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challenge infection by malaria-infected mosquitoes. SB said that a series of
further clinical studies, including a limited field trial in West Africa, using
the formulation incorporating MPL will be initiated in 1997 to determine
duration of immunity and other aspects of the immune mechanisms involved.
Malaria, for which no effective vaccine currently exists, causes more than 2
million deaths annually worldwide.
The second license agreement with SB was signed in 1992 for a group of bacterial
infectious disease vaccines, including some pediatric vaccines. Under this
agreement SB is actively evaluating a new generation of combination vaccines
containing diphtheria, pertussis, tetanus, HAEMOPHILUS INFLUENZA b (meningitis)
and polio antigens and is in early research with several other bacterial
vaccines which use the Company's adjuvants. Pursuant to this agreement, the
Company granted to SB a co-exclusive, worldwide license to use the Company's
adjuvants commercially upon regulatory approval. In addition to an annual
license fee, the Company receives transfer payments for supplies of the
adjuvants and will be entitled to royalties from SB upon commercial sale of the
vaccines.
Effective December 31, 1996, the Company entered into a third infectious disease
vaccine license agreement granting SB an exclusive license to use the Company's
adjuvants in a human papillomavirus ("HPV") (genital warts) vaccine, a co-
exclusive license for a tuberculosis vaccine and non-exclusive license to use
the Company's adjuvants in the development of additional infectious disease as
well as other vaccines. In addition to annual license fees, the Company will
receive transfer payments for clinical and commercial quantities of adjuvant and
royalties on any commercial sales of vaccines incorporating the Company's
adjuvants.
In 1995 the Company signed an option agreement with Cantab Pharmaceuticals
Research, Lt. covering the use of MPL immumodulator as an adjuvant for inclusion
in a therapeutic vaccine against HPV. SB has licensed Cantab's HPV antigen
technology and is now developing a vaccine using the Company's adjuvants.
Effective in 1993, the Company entered into license and supply agreements with
Wyeth-Lederle Vaccines and Pediatrics ("WLV&P"), a business unit of Wyeth-Ayerst
Laboratories, which is a division of American Home Products Corporation, for the
co-exclusive use of the Company's adjuvants in the development of prophylactic
vaccines, including pertussis, HAEMOPHILUS INFLUENZA b and STREPTOCOCCUS
PNEUMONIAE and for supply by the Company of commercial quantities of adjuvants.
The agreements with WLV&P provide for an annual license fee, transfer payments
for supplies of adjuvants and for royalty payments upon commercial sale of
vaccines. In 1996 WLV&P informed the Company that the FDA had allowed it to
proceed with a Phase I human clinical study of a bacterial vaccine incorporating
MPL immunomodulator as an adjuvant, which it initiated in late 1996.
The Company's strategy in the area of AIDS vaccines is to grant licenses on a
nonexclusive basis. Additional preclinical and clinical data indicating the
ability of the Company's adjuvants to stimulate important cellular immune
responses to infectious disease vaccines were presented in late 1995.
Researchers from the Walter Reed Army Institute of Research presented favorable
animal data from an experimental AIDS vaccine incorporating a Company adjuvant.
The AIDS vaccine has been formulated and is being tested in primates, which
could lead to human clinical testing.
6
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Cancer Theraccines
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A. MELACINE Melanoma Theraccine
Melanoma is a cancer of the skin cells that produce the dark pigment melanin.
While early stage melanoma is limited to the skin, it spreads to the liver,
lungs and other organs in later stages. Prognosis is dire for patients with
advanced disease. Median survival for advanced-disease patients is
approximately 8 months using currently available chemotherapy. It was estimated
that in 1996, melanoma was diagnosed in approximately 38,300 people in the
United States, with an estimated 7,300 deaths due to the disease. Over the past
13 years the incidence of malignant melanoma in the United States has risen by
60% and is currently rising at a faster rate than any other cancer. Increased
exposure to ultraviolet rays may be an important factor contributing to the
increase in new cases of melanoma.
The Company is developing MELACINE, a therapeutic vaccine to treat melanoma.
MELACINE uses melanoma tumor-associated antigens and DETOX immunostimulant to
help the melanoma patient slow or stop the natural progression of the disease.
During 1995 the Company began a meta-analysis of published survival data for
patients with disseminated melanoma who received various available therapies.
The meta-analysis, a recognized statistical method for combining results of
several independent studies of a particular subject, reviewed the survival
characteristics of nearly 5,400 patients with disseminated melanoma from more
than 70 published clinical studies by leading melanoma researchers of various
available therapies, including chemotherapy, interferon, interleukin-2,
lymphokine-activated killer cells and other melanoma vaccines. The results of
this meta-analysis were then compared with the median survival for a similar
cohort of patients treated with MELACINE melanoma theraccine. A highly
significant difference in median survival was observed with 11 months for
evaluable MELACINE patients compared to 7.9 months for the other evaluable
therapies included in the meta-analysis. MELACINE seems to also provide an
advantage when compared to only those therapies available since 1985, which
achieved a composite median survival of 8.5 months. Survival data for late-
stage patients treated with MELACINE was determined in 1996 in an analysis of
final data collected from the Company's first MELACINE Phase III study, which
compared MELACINE therapy with an aggressive, experimental four-drug
chemotherapy regimen. This analysis found no statistically significant
survival advantage between MELACINE and the four-drug chemotherapy regimen,
known also as the Dartmouth Protocol. However, the study found that during the
treatment period, patients receiving MELACINE experienced significantly better
quality of life compared to patients receiving chemotherapy. The only drugs
approved by the FDA for melanoma are dacarbazine ("DTIC"), which has only
limited effectiveness, and interferon alfa-2b ("INTRON A", Schering-Plough
Corporation), which was only recently approved for post-operative therapy in
patients whose tumors can be surgically removed. Based on the information it
now has plus the fact that the cost of treatment with MELACINE is expected to be
less than most other forms of treatment, the Company intends to submit product
license applications for using MELACINE to treat late stage melanoma in North
America, Europe and Australia.
A second clinical trial, which is sponsored by the National Cancer Institute
("NCI") and being conducted by the Southwest Oncology Group ("SWOG"), is
designed to determine the ability of MELACINE to prevent recurrence of melanoma
in Stage II (early stage) patients. These patients had their melanoma lesions
surgically removed. In this study, MELACINE was given to half of the patients,
and they are being compared to the other half of the patients in the study who
do not receive treatment but are only observed. Patient accrual in this study
7
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was completed in 1996. The patient groups will be followed for two years, with
final data analysis to begin in late 1998.
In 1995 the FDA allowed the Company to begin a third Phase III clinical trial.
This study compares patients with Stage IV (disseminated) melanoma receiving the
combined therapy of MELACINE and INTRON A interferon alfa-2B with a control arm
of patients receiving only INTRON A. Malcolm S. Mitchell, M.D., at the
University of California-San Diego, has been a principal investigator in the
development of MELACINE. Dr. Mitchell published results from a pilot study of
treatment with MELACINE followed by INTRON A in the first quarter of 1994. He
reported that seven patients in the trial who responded to INTRON A had
previously had an increase in a certain type of white blood cells as a result of
previous immunotherapy with MELACINE. White blood cell response data was not
available for the eighth responding patient. Dr. Mitchell suggested there may be
synergy between the two drugs as indicated by a 44% overall clinical response
rate (tumor regression) and extended survival in the responding melanoma
patients in comparison to non-responders. The 44% response rate (8 of 18
patients) was higher than that obtained with either agent alone.
In 1992, the Company licensed to Biomira, Inc. ("Biomira") of Edmonton, Alberta,
Canada, exclusive Canadian marketing rights to MELACINE. Biomira is responsible
for conducting any necessary clinical trials and obtaining regulatory approval
in Canada. In addition to license fees, the Company will receive transfer
payments for supplies of MELACINE and will be entitled to royalties upon
commercial sale of MELACINE in Canada.
MELACINE was given Orphan Drug status by the FDA in 1989, which provides seven
years of marketing exclusivity from the date of marketing approval.
The Company has exclusive marketing rights for MELACINE through an agreement
with the University of Southern California where the melanoma tumor associated
antigens were developed through the work of Dr. Mitchell. The University is
entitled to royalty payments from the Company upon commercial sale of MELACINE
theraccine.
B. Other Theraccines
In addition to MELACINE, the Company has participated in research programs and
has established relationships to evaluate therapies that incorporate the
Company's immunostimulants with tumor-associated antigens for the treatment of
other types of cancers. In 1990, the Company entered into a collaboration with
Biomira. Biomira produces synthetic carbohydrate antigens which can be combined
with the Company's adjuvants to produce theraccines with potential application
against breast, lung, gastrointestinal, ovarian and uterine cancers. Human
clinical data have been published which demonstrate that the Company's DETOX B-
SE adjuvant plays a key role in generating a significant immune response with
Biomira's line of THERATOPE cancer theraccines. Biomira has licensed DETOX B-SE
adjuvant from the Company for the clinical development and potential
commercialization of THERATOPE theraccines. In 1996 Biomira announced final
Phase II clinical data showing that its THERATOPE vaccine for breast cancer
provides a median survival benefit of more than 26 months as compared to less
than 10 months achieved historically with chemotherapy. Biomira has indicated
that it is planning a Phase III study and that it may seek regulatory approval
in 1997 based on the Phase II data.
During 1995 the Company completed a license and supply agreement with SB
covering the use of the Company's adjuvants in cancer theraccines under
development by SB.
8
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Under the license/supply agreement, the Company has granted SB a non-exclusive,
worldwide license to use its adjuvants commercially upon regulatory approval of
SB's cancer vaccines. The Company will receive an annual license fee and
milestone payments for each SB vaccine incorporating the Company's adjuvants
that is submitted for regulatory review and subsequent milestone payments upon
regulatory approval of each vaccine incorporating a Company adjuvant. In
addition to transfer payments for commercial quantities of adjuvant, the Company
will also receive royalties on any commercial sales of approved vaccines
incorporating its adjuvants. These cancer vaccines are presently in the early
stages of development and testing.
Other Vaccines
- --------------
The Company added a significant opportunity in 1996 to its vaccine adjuvant
franchise with the signing of a license/supply agreement covering the use of its
adjuvants in allergy vaccines under development by SmithKline Beecham Pharma, a
subsidiary of SB. This agreement provides SB Pharma with the right to use the
Company's adjuvants commercially upon regulatory approval of SB Pharma's allergy
vaccines. The Company will receive an annual license fee prior to, and minimum
annual royalties subsequent to, regulatory approval of any SB Pharma allergy
vaccines incorporating a Company adjuvant. The Company will also receive supply
payments for clinical and commercial quantities of its adjuvants and royalties
on any commercial sales of approved allergy vaccines incorporating the Company's
adjuvants. These potential vaccines are presently in the early stages of
development.
MPL-C Cardioprotectant
- ----------------------
Ischemia-reperfusion injury is the damage that can occur in tissue during the
oxygen deprivation of ischemia and when blood flow is restored after such events
as cardiovascular surgery, angioplasty or organ transplantation. Paradoxically,
restoring blood flow to ischemic tissue may induce a complex series of events
leading to both reversible and irreversible cardiac tissue damage beyond any
damage that may have occurred during the ischemic period. It is believed that a
significant factor in reperfusion injury is the generation of "free radical"
molecules, which attack and damage cardiac tissue. Such damage may reduce
cardiac function, and/or cause cardiac cell death.
MPL-C cardioprotectant has potential to be used prophylactically to address
ischemia-reperfusion injury which can result from a number of cardiovascular
surgical procedures. Each year in the United States more than 400,000
cardiovascular surgeries require stopping the heart, which can result in cardiac
injury. More than 350,000 angioplasty procedures, which first reduce and then
restore blood flow to the heart, are performed each year in the United States.
Surgical procedures requiring cardiopulmonary bypass have been implicated to
result in complications such as myocardial stunning and infarction, with
clinically significant morbidity and mortality in the acute perioperative and
postoperative period. A significant number of these patients are potentially at
elevated risk for experiencing adverse long-term effects, including congestive
heart failure.
It is well established in animal models that a phenomenon termed
"preconditioning" can protect heart tissue from ischemia-reperfusion injury.
Short periods of ischemia followed by reperfusion can protect a heart which is
subsequently subjected to prolonged ischemia (as in surgical procedures). Most
physicians do not consider it desirable to mechanically induce short periods of
ischemia in patients prior to a surgical procedure to precondition and protect
9
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the heart. The Company has experimental evidence that MPL-C can preserve or
enhance concentration of an important energy source in ischemic rabbit heart
tissue and reduce degradation of adenosine (an endogenous protective molecule)
to various metabolites in a fashion similar to that reported for ischemic
preconditioning. Two distinct forms of preconditioning are now recognized: a
short-lived form, which occurs within minutes of transient ischemia and lasts
one to two hours, and a long-lived form, which reappears a number of hours
following dissipation of the initial transient preconditioned state. The
Company believes that a longer-lived preconditioning may be induced by the pre-
surgical administration of MPL-C and that this form of preconditioning may
offer substantial clinical benefit to patients at risk of ischemia-reperfusion
injury. Preclinical data suggests that MPL-C may reduce all three
manifestations of ischemia-reperfusion injury in open-heart surgery patients:
infarction (irreversible damage), myocardial stunning (reversible damage) and
arrhythmias (irregular, unstable heartbeats). At the 69th annual American Heart
Association Scientific Meeting in November 1996, preclinical data was presented
that demonstrated how MPL-C cardioprotectant significantly reduces heart muscle
death caused by ischemia and reperfusion injury. The data showed that
preventive use of MPL-C reduced cardiac infarct size nearly 75% as compared to
controls and helped to establish further the mode of action of MPL-C. The
research was done at the Medical College of Wisconsin, Good Samaritan Hospital
Heart Institute and the University of Southern California, in collaboration with
the Company, and within the Company's laboratories.
During 1996 a Phase II(a) safety/activity clinical trial of MPL-C, which was
started in 1993, continued in patients undergoing coronary artery bypass graft
(CABG) surgery who are at risk of ischemia-reperfusion injury. This study,
which is randomized, placebo-controlled and double-blinded, is designed to
determine the safety profile and activity of a single dose of MPL-C administered
prior to CABG surgery. Various dose levels are being studied to determine a
safe, active dose for possible further clinical testing. Based on the results
of the Phase II(a) trial, the Company plans to initiate a 225 patient controlled
Phase II(b) trial in the first half of 1997 in conjunction with the Cleveland
Clinic. This study is designed to determine dose-response relationships and
endpoints for MPL-C in a human clinical setting. This study may provide the
Company with the data required to design a pivotal study as well as attract a
corporate marketing partner to continue the clinical development of MPL-C.
Research Products
- -----------------
The Company currently produces approximately 20 research products. These
products, which include adjuvants, are used in various research projects by
industrial, academic and government research laboratories and clinics, as well
as by physicians and veterinarians in the development of treatments for a
variety of diseases and to study the body's immune responses.
The Company also uses some of the research products it produces in its efforts
to develop immunotherapeutic agents capable of treating malignant tumors and
other diseases.
Contract Services
- -----------------
The Company, from time to time, engages in contract services, whereby it
conducts specialized projects on behalf of others utilizing the expertise of its
research and production teams.
10
<PAGE>
Sources and Availability of Raw Materials
- -----------------------------------------
Materials for producing the Company's pharmaceutical products come from a number
of sources. The pharmaceutical products are derived from biological organisms,
which are grown and maintained within the Company's facilities. Backup supplies
of critical organisms, which are not readily available from other sources, are
stored in secure locations outside of the Company's facilities. Chemicals and
agents used in the manufacturing process are fairly common and are readily
available from several different vendors.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. The Company's products under
development are expected to address a broad range of markets. The Company's
competition will be determined in part by the potential indications for which
the Company's products are developed and ultimately approved by regulatory
authorities. The first pharmaceutical product to reach the market in a
therapeutic or preventive area is often at a significant competitive advantage
relative to later entrants to the market. Accordingly, the relative speed with
which the Company or its corporate partners can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company's competitive position will also depend on, among other things, its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, develop and implement production and marketing
plans, obtain and maintain patent protection and secure adequate capital
resources. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, value and patent position. In addition to potential competition
from other biopharmaceutical products, the products presently under development
by the Company may compete with nonbiologic drugs and other therapies. The
Company's competitors include major pharmaceutical, chemical and specialized
biotechnology companies, many of which have financial, technical and marketing
resources significantly greater than those of the Company.
The Company is aware that research is being conducted by others in areas in
which the Company is seeking to establish commercial products. The Company's
competitors might offer products which, by reason of price or efficacy, may be
superior to any products that may be developed by the Company. There can be no
assurance that the discovery and introduction of products by others will not
render the Company's current or future products obsolete, or that the Company
will otherwise be able to effectively compete with such competitors.
MARKETING
The Company's revenues were derived from the following sources:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Sales:
Research products $ 502 543 514
Custom adjuvants and research
products 1,046 347 396
Veterinary products - 56 88
Other 11 7 10
------ ------ ------
Total sales 1,559 953 1,008
11
<PAGE>
1996 1995 1994
---------- ---------- ----------
(In Thousands)
Investment income, net 1,017 1,216 1,460
Fees from licenses and
contracts 2,042 1,848 2,075
Other 5 6 11
------ ------ ------
Total revenues $ 4,623 4,023 4,554
====== ====== ======
Export sales $ 1,205 294 351
====== ====== ======
</TABLE>
The Company plans to license its products to marketing partners for all
applications. It plans to file for marketing approval for MELACINE in North
America, Europe and Australia in 1997 and grant marketing rights to a partner or
partners within the United States and certain foreign countries in exchange for
license fees, transfer payments, royalties and financial contributions toward
the cost of obtaining marketing approval. The Company intends to manufacture
MELACINE to supply worldwide demand and transfer finished product to its partner
or partners. In the areas of vaccine adjuvants and ischemia-reperfusion injury,
if clinical trial data are favorable, the Company intends to grant licenses to
marketing partners in exchange for license fees, transfer payments and royalties
on commercial sales, or a combination thereof. For vaccine adjuvant
applications, the Company would manufacture its products as bulk intermediates
for transfer to marketing partners for finishing and distribution. The Company
is currently conducting a Phase II(a) dose escalation human clinical trial and
plans to begin a Phase II(b) trial with MPL-C in the prevention of heart damage
associated with open-heart surgery. These studies are intended to demonstrate
safety and provide indications of efficacy. The Company will seek corporate
partners to assist in the final stages of development and share the substantial
financial risk of final development of MPL-C.
In the United States the Company markets its research products through direct
mail, scientific journal and trade show advertising and markets them worldwide,
generally to nonexclusive distributors. Export sales, consisting mainly of
custom adjuvants and research products, were shipped primarily to Europe, Japan
and Canada.
While the Company has made a decision to manufacture only health care products
for humans in its manufacturing facility, it continues to produce a limited
amount of veterinary adjuvant in appropriate conditions within its research
facility for split manufacturing agreements. Under USDA regulations it is
possible for a company that does not have a USDA license to manufacture certain
components of veterinary products and ship them to a USDA-licensed animal health
company for completion and distribution. Sales from split manufacturing
agreements have not been significant for the last three years.
There can be no assurance that the Company will be successful in any of its
proposed marketing efforts.
RESEARCH AND DEVELOPMENT
The primary source of new product candidates is internal research, except for
the cell lines for the MELACINE melanoma theraccine antigens, which have been
licensed from the University of Southern California for a royalty fee from
commercial sales of MELACINE. Costs and expenses for research and development
activities were $4,993,000 in 1994, $5,530,000 in 1995 and $6,203,000 in 1996.
12
<PAGE>
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the research, preclinical development, clinical
trials, production and marketing of the Company's human biopharmaceutical
products.
FDA Approvals
- -------------
In order to produce and market human biopharmaceuticals, the Company must
satisfy mandatory procedures and meet safety and efficacy standards established
by the FDA and equivalent foreign regulatory authorities. The process of
seeking and obtaining FDA approval for the manufacturing and marketing of a new
human biopharmaceutical product may require a number of years and substantial
funding. The steps required before a human biopharmaceutical can be produced
and marketed include preclinical studies, the filing of an Investigational New
Drug ("IND") application, human clinical trials and approval of a Product
License Application ("PLA"), and in some cases, approval of an Establishment
License Application ("ELA").
Preclinical studies are conducted in the laboratory and in animal model systems
to gain preliminary information on a product's activity and to identify major
safety problems. The results of these studies are submitted to the FDA as part
of the IND application before allowance can be obtained to begin testing in
humans. Protocols for the human trials, outlines for production of the
materials and statements describing the testing facilities are also included in
the IND.
The clinical testing program required for a new biopharmaceutical product
principally involves three phases. However, in conducting actual clinical
trials, the demarcation between phases at times becomes indistinct. Phase I
studies are conducted on human volunteers or in healthy patients to determine
the maximum tolerated dose and to discover the possible side effects of the
substance. Phase II studies are conducted on groups of patients having a
specific disease in order to determine the most effective doses and schedules of
administration. Phase III involves wide-scale studies that are adequately
controlled in order to provide statistically valid data on response rates which
can be compared with current therapy, including drugs or biologics.
In the United States, data from Phase I, II and III trials are submitted in a
PLA to the FDA. The PLA involves considerable data collection, verification and
analysis. It also includes the preparation of summaries of the manufacturing
and testing processes, preclinical studies and clinical trials. PLA approval by
the FDA is necessary before the product may be marketed in the United States.
During the PLA review period, in addition to consideration of the safety and
efficacy data, the FDA also determines what labeling it will require and permit
for marketing of the product. The agency may also require post-marketing
testing and surveillance for possible adverse reactions as a condition of its
approval.
The Company obtained Orphan Drug designation for MELACINE in 1989, and if
appropriate may request Orphan Drug designation for other products. Under the
Orphan Drug Act, the FDA may grant Orphan Drug status to drugs intended to treat
a "rare disease or condition," which is a disease or condition that affects less
than 200,000 individuals in the United States or more than 200,000 persons in
the United States if there is no reasonable expectation that sales will be
sufficient to recover the costs of developing and making available the drug. If
a product is designated an Orphan Drug, then the sponsor is entitled to receive
certain incentives to undertake the development and marketing of the product,
including limited tax credits, where applicable. In addition, the sponsor that
obtains the first marketing approval for a designated Orphan Drug for a given
indication is eligible to receive marketing exclusivity for a period
13
<PAGE>
of seven years. There may be multiple designations of Orphan Drug status for a
given drug (or biologic) and indication; however, only the sponsor of the first
approved New Drug Application ("NDA") or PLA for a given drug (or biologic) for
its use in treating a given rare disease may receive marketing exclusivity.
There is no assurance that any additional products of the Company will receive
Orphan Drug status. While it may be advantageous to obtain Orphan Drug status
of eligible products, there can be no assurance that the precise scope of
protection that is currently afforded by Orphan Drug status or the current level
of economic benefits and incentives will remain in effect in the future.
Governmental Reforms
- --------------------
In the past few years health care reform has received considerable attention.
While it appears that federal governmental intervention is not imminent at this
time, certain reform measures currently being considered by various state
governments and certain related market restructuring could adversely affect the
pricing of therapeutic or prophylactic products or the amount of reimbursement
available. Such events could have an adverse impact on the profitability of
companies developing, manufacturing or marketing pharmaceutical products. The
Company cannot predict the extent of possible future governmental reforms or the
effect such reforms or other measures may have on its business.
Other Governmental Regulations
- ------------------------------
In addition to the foregoing, the Company is and will be subject to various
regulations relating to the maintenance of safe working conditions, good
laboratory and manufacturing practices and the use and disposal of harmful or
potentially harmful substances.
There can be no assurance that any required approvals will be granted on a
timely basis, if at all, or that such approvals, once granted, will not be
withdrawn. Furthermore, there is no assurance that additional regulation will
not be imposed on the Company's activities or products in the future.
PATENTS AND PROPRIETARY PROTECTION
The Company has obtained and applied for patents in the United States and
several foreign countries. The Company has 21 issued United States patents with
expiration dates ranging from 2001 to 2011. There is no assurance that patents
applied for by the Company will be obtained, and there can be no assurance that
the claims embodied in existing patents to which the Company has rights will not
be challenged. The issuance of a patent to the Company or to a licensor of the
Company is not conclusive as to validity or as to the enforceable scope of
claims therein. The validity and enforceability of a patent can be challenged
by a request for re-examination or litigation after its issuance and, if the
outcome of such litigation is adverse to the owner of the patent, other parties
may be free to use the subject matter covered by the patent.
There can be no assurance that additional patents will be obtained by the
Company in the United States or in other jurisdictions, or that any patents will
provide substantial protection, or be of commercial benefit to the Company. The
cost of enforcing the Company's patent rights in lawsuits which the Company may
bring against infringers or which may be brought challenging the Company's
patents may be high and could interfere with the Company's operations. The
patent laws of other countries may differ from those of the United States as to
the patentability of the Company's products and processes. Moreover, the degree
of protection afforded by foreign patents may be different from that in the
United States. On an ongoing basis, the Company
14
<PAGE>
reviews its patent portfolio and has abandoned and may in the future abandon
patents or patent applications for reasons including limited protection, lack of
commercial importance and limited enforceability, among other considerations.
Although the Company attempts to protect its products and processes by seeking
patent protection when deemed appropriate, it also relies upon trade secrets,
proprietary know-how and continuing technological innovation to develop and
maintain its competitive position. Product development contracts and
relationships between the Company, its consultants and other pharmaceutical
companies may provide access to the Company's know-how. The Company requires
such parties to execute confidentiality agreements. Insofar as the Company
relies on confidentiality arrangements, there can be no assurance that others
may not independently develop similar technology or that secrecy will not be
breached.
All employees are required to sign a confidential information agreement that
contains terms assigning patent rights to the Company as well as obligations not
to use or disclose any such information during and for a period of two years
following termination of their employment.
The Company maintains an active trademark protection program in the United
States and in those foreign countries where it expects to market its products.
RIBIGEN veterinary anticancer agent, MELACINE melanoma theraccine, MPL
immunomodulator and the Company's logo are registered trademarks in the United
States. RIBIGEN is a registered trademark in several foreign countries.
INTRON-A is a registered trademark of Schering-Plough Corporation and THERATOPE
is a registered trademark of Biomira, Inc. In this document, registered
trademarks are designated with capital letters.
EMPLOYEES
As of December 31, 1996, the Company had 94 full-time and 4 part-time employees.
The Company also uses outside consultants and collaborators to support and
complement the activities of its scientific staff. The Company utilizes such
persons to aid in specific research and development projects, rather than to act
as a general scientific advisory board.
Item 2. PROPERTIES
The Company's facilities are located near Hamilton, Montana, on a 35-acre
complex owned by the Company. The Company's buildings contain approximately
60,000 square feet of laboratory, commercial scale manufacturing, animal
production, marketing and administrative facilities. The manufacturing facility
has been built to FDA standards for Good Manufacturing Practices. The Company
believes that its present facility will meet its manufacturing and other
requirements for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
The Company, the National Institutes of Health and the Bitterroot Valley
Sanitary Landfill ("Landfill") were notified by the Montana Department of Health
and Environmental Sciences (now the Department of Environmental Quality ["DEQ"])
in March 1991 that they had been identified as potentially responsible parties
("PRPs") for groundwater contamination located at and near the site of the
Landfill in Ravalli County, Montana. The DEQ has filed an action against the
Landfill, the operator of the Landfill and the Company, seeking reimbursement of
costs associated with its oversight activities. The DEQ recently dismissed this
action reserving the right to refile. Additionally, in 1993 two landowners in
the vicinity of the Landfill filed civil suits seeking unspecified damages for
alleged diminished value of land, possible health hazards and loss of domestic
water source. In 1996 the court granted a motion for
15
<PAGE>
summary judgment dismissing the civil suits. Counsel for one of the plaintiffs
filed a motion for reconsideration, which was denied. Counsel has appealed the
District Court decision to the State Supreme Court on behalf of both plaintiffs.
The Company is preparing a response to the appeal. In addition, Supreme Court
rules require the parties to submit to non-binding mediation prior to the matter
being heard by the Court. The Company is preparing for the mediation
proceeding. As of December 31, 1996, the Company has a reserve of $190,000
primarily to cover billed and potential legal, consulting and DEQ reimbursement
costs associated with the Company as a PRP and the civil suits. At least some
costs related to the civil suits have been and are expected to continue to be
covered by insurance. However, the Company is unable to determine its potential
liability with respect to the Landfill at this time. (See Note 7 of Notes to
Financial Statements for a more complete discussion of these proceedings.
However, the preceding discussion includes information with respect to the
dismissal by the DEQ of their action seeking reimbursement and the appeal to the
State Supreme Court by the plaintiffs in the civil suits. Both developments
occurred subsequent to the date the financial statements, including Note 7, were
issued.)
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of all executive
officers of the Company. All executive officers are serving a current term of
office which continues until the next Annual Meeting of Directors, which is
expected to be held on or about April 30, 1997.
<TABLE>
<S> <C> <C>
Name Age Position and Period Served
- ---- --- --------------------------
Robert E. Ivy 63 President, Chief Executive Officer and
director of the Company since 1987;
Chairman of the Board of Directors
since 1989; director and Chairman of
the Finance Committee of St. Patrick
Hospital, Missoula, Montana, since
1991; director of The International
Heart Institute of Montana Foundation
since 1995.
John L. Cantrell, Ph.D. 58 Executive Vice President and director
of the Company since 1981.
Lonnie L. Bookbinder, Ph.D., 50 Vice President-Director of Corporate
M.B.A. Development of the Company since 1994;
Vice President, Corporate Development
of Nycomed-Salutar, Inc., a multi-
national medical company, from 1992 to
1994; Director, IN VIVO Products and
Corporate Development of Immunomedics,
Inc., an antibody based diagnostic
imaging and therapeutic company, from
1990 to 1992.
Vern D. Child, C.P.A. 52 Vice President-Finance of the Company
since 1988; Treasurer since 1986;
Assistant Secretary since 1989.
16
<PAGE>
Name Age Position and Period Served
- ---- --- --------------------------
Gary T. Elliott, Pharm.D., 40 Vice President-Pharmaceutical
Ph.D. Development of the Company since 1994;
Director of Pharmaceutical Sciences
from 1992 to 1994; Head Immunochemist
from 1988 to 1992.
Ronald H. Kullick, R.Ph., J.D. 54 Vice President-Legal Counsel and
Secretary of the Company since 1989.
Charles E. Richardson, Ph.D. 45 Vice President-Pharmaceutical
Discovery of the Company since 1994;
Director of Production, Engineering
and Technical Services from 1989 to
1994.
Kenneth B. Von Eschen 48 Vice President-Clinical Regulatory
Ph.D. Affairs of the Company since 1994;
Director of Clinical and Regulatory
Affairs from 1992 to 1994; Manager of
Clinical and Regulatory Affairs from
1988 to 1992.
</TABLE>
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the Symbol: RIBI. The high and low sales prices shown
below were compiled from the monthly Summary of Activity reports provided by The
Nasdaq Stock Market. The prices represent interdealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions. As
of March 3, 1997, the Company had approximately 1,617 stockholders of record.
<TABLE>
<CAPTION>
1996 1995
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $ 6.88 4.75 4.63 3.38
Second quarter 6.25 4.13 4.75 3.38
Third quarter 4.88 3.50 6.25 3.75
Fourth quarter 4.38 3.13 6.50 3.88
</TABLE>
The Company has not declared any cash dividends with respect to its common
stock. The Company does not intend to declare or pay any cash dividends on its
common stock, and there can be no assurance that the Company will ever declare
or pay cash dividends on its common stock.
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected financial information below should be read in conjunction with the
Company's historical financial statements and notes. Such information may not
be indicative of the Company's future financial condition or results of
operations.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands Except per Share Data)
Year Ended December 31,
- ----------------------
<S> <C> <C> <C> <C> <C>
Sales & other revenues $ 1,564 959 1,019 871 1,118
Licenses and contracts 2,042 1,848 2,075 1,307 135
Investment income, net 1,017 1,216 1,460 984 863
Net loss (5,589) (5,317) (3,790) (3,684) (3,603)
Net loss per common
share (.30) (.28) (.20) (.25) (.27)
Dividends per common
share - - - - -
Average number of
shares outstanding 18,890 18,877 18,657 14,658 13,250
Research & development
expenses $ 6,203 5,530 4,993 3,730 2,993
December 31,
- -----------
Cash, cash equivalents
& investments $14,512 19,824 25,967 29,140 17,806
Total assets 28,298 33,911 38,824 35,468 23,368
Long-term debt - - - - -
Stockholders' equity 26,847 32,427 37,338 34,557 22,790
</TABLE>
18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its inception in 1981, the Company has been engaged primarily in the
research and development of immunostimulants for use in preventing and treating
human diseases. To date, the Company has received limited revenues from
commercial sales and sales of clinical supplies. The Company has incurred net
operating losses in each year since its inception and expects to incur
additional losses for the next year, and probably longer. At December 31, 1996,
the Company's accumulated deficit was approximately $35,636,000.
The Company's results of operations can vary significantly from quarter to
quarter and depend, among other factors, on costs related to the progress of
clinical trials conducted by the Company and, to a lesser extent, on revenues
and costs associated with manufacturing. To date, research and development
expenses, together with manufacturing costs, have exceeded product and other
revenues in all periods.
The Company is not able to estimate with certainty the amount of cash and
working capital which may be needed for operations. Such requirements typically
vary depending upon the results of basic research and clinical trials, the time
and expense required for governmental approval of products, and competitive and
technical developments, most of which are beyond management's control. There is
no assurance that the Company will be able to obtain the necessary funding in
sufficient amounts or at the appropriate time for its planned activities. In
the event the Company may require additional funding and is not successful in
obtaining additional funding, it might not be able to proceed as rapidly as it
would like, if at all, with the development and commercialization of its
products, which would have a material adverse effect on its future financial
condition and results of operations.
Pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, several forward-looking statements that involve a number of
risks and uncertainties are included within this Management's Discussion and
Analysis of Financial Condition and Results of Operations including (i)
anticipated limited revenues from operations, (ii) anticipated receipt of
milestone and transfer payments from research partners, (iii) expected levels of
research and development spending, and (iv) the Company's cash requirements. In
addition to the risks and uncertainties discussed with the forward-looking
statements, there are a number of other factors that could cause actual results
to differ materially from projected results, including but not limited to the
following: levels of expenditure on and results of the Company's research and
the impact of those results on milestone and transfer payments from partners,
research results of other companies using the Company's products, competition
from other companies, changes in government regulation, including price controls
for newly developed drugs, and risk factors listed from time-to-time in the
Company's SEC reports. Forward-looking statements herein are followed by an
asterisk ("*").
RESULTS OF OPERATIONS
Revenues
- --------
To date, the Company has received only limited revenues from commercial sales
and sales of clinical supplies. The balance of the Company's revenues has been
from
19
<PAGE>
contracts and licenses and investment income earned on cash balances and
investments. The Company anticipates that its revenues from operations, which
decreased from approximately $4,554,000 in 1994 to approximately $4,023,000 in
1995 and increased to approximately $4,623,000 in 1996, will continue to be
limited for the next year, and probably longer.*
Fees from licenses and contracts decreased from $2,075,000 in 1994 to $1,848,000
in 1995 and increased to $2,042,000 in 1996. In 1994 the Company signed a
license agreement with Wyeth-Lederle Vaccines and Pediatrics ("WLV&P"), a
business unit of Wyeth-Ayerst Laboratories, which is a division of American Home
Products Corporation, for use of the Company's adjuvants in vaccines WLV&P is
developing. The agreement was retroactive to 1993 resulting in the recognition
of retroactive license fees in 1994. Late in 1995, the Company signed a third
license and supply agreement with SmithKline Beecham ("SB"). This agreement is
for the nonexclusive use of the Company's adjuvants in cancer vaccines under
development by SB. The Company will receive an annual license fee and certain
milestone payments, as well as transfer payments for supplies of adjuvant and
royalties on commercial sales of approved cancer vaccines incorporating its
adjuvants.* Additionally, late in 1995 Cantab Pharmaceuticals Research, Ltd.
signed a one-year option agreement for a co-exclusive worldwide license to use
MPL immunostimulant commercially upon regulatory approval of Cantab's vaccine
being developed for treating and preventing genital warts. In 1996 increased
revenues from the agreements signed in late 1995 more than offset revenue from a
research contract with SB, which expired at the end of 1995. In 1996 the
Company signed a fourth license agreement with SB for use of its adjuvants in
allergy vaccines, and in January 1997 a fifth agreement was signed granting SB
use of the Company's adjuvants in various vaccines being developed by SB. This
most recent agreement, which is effective as of December 31, 1996, grants SB an
exclusive license to use the Company's adjuvants in a human papillomavirus
vaccine, a co-exclusive license for a tuberculosis vaccine and a non-exclusive
license to use the Company's adjuvants in the development of additional
infectious disease as well as other vaccines. In addition to annual license
fees, the Company will receive transfer payments for clinical and commercial
quantities of adjuvant and royalties on any commercial sales of vaccines
incorporating the Company's adjuvant.*
Investment income decreased from $1,460,000 in 1994 to $1,216,000 in 1995 and
decreased to $1,017,000 in 1996. The year-to-year reduction in investment
income has been due substantially to reductions in the amount of invested funds
during the periods. The average interest rate in the investment portfolio
increased from approximately 5.35% at December 31, 1994 to 5.59% at December 31,
1995 and 6.03% at December 31, 1996. Additionally, in 1995 the Company sold
investments in certain debt mutual funds for proceeds of $3,592,000, on which it
realized an investment loss of $71,000. Approximately $3,033,000 of the
proceeds were reinvested in debt securities with the intention of increasing
future yield and reducing interest rate risk.
Purchases and Production
- ------------------------
Purchases and production costs increased from $751,000 in 1994 to $775,000 in
1995 and to $988,000 in 1996. Such costs were proportionately lower in 1996
than in 1994 and 1995 compared to sales. The Company completed an expansion of
its manufacturing plant in 1994 and has been involved in the scale-up and
refinement of some of its manufacturing processes, which resulted in additional
costs in 1994 and 1995. Certain plant testing and validation efforts were
incurred in 1996 and have continued into early 1997, as the Company prepares to
file applications to market its MELACINE therapeutic melanoma vaccine.
20
<PAGE>
Research and Development
- ------------------------
The Company incurred research and development expenses of approximately
$4,993,000, $5,530,000, and $6,203,000 in 1994, 1995 and 1996, respectively.
The year-to-year increase principally reflects the increasing costs of expanding
preclinical and clinical programs for the Company's products under development.
These expenses consisted primarily of salaries, contract consulting costs and
laboratory supplies. Labor costs decreased from approximately 49% of total
research and development costs in 1994 to 47% in 1995 and 43% in 1996. Supply
costs have ranged from 21% to 23% of total research and development expenses
throughout three-year period. Contract consulting costs increased from
approximately 17% of total research and development expenses in 1994 to 22% in
1995 and 27% in 1996. The year-to-year increase in expense can be attributed to
increased clinical, preclinical and, in 1996, product licensing activities. The
Company expects research and development expenses to be significantly higher in
1997 as it plans to open a controlled trial testing the efficacy of MPL-C
cardioprotectant in preventing reperfusion injury in high-risk cardiac
patients.* It also plans to file product license applications in North America,
Australia and Europe for MELACINE melanoma theraccine and to accelerate patient
accrual in its Phase III clinical trial testing MELACINE administered in
conjunction with interferon alfa-2b to treat patients with late-stage melanoma.*
Increased research and development expenses are dependent, among other things,
on the Company's ability to attract study centers and patients to its clinical
trials, the results experienced in the trials and the acceptance of regulatory
filings by various regulatory agencies.
Selling, General and Administrative
- -----------------------------------
This category of expense remained relatively flat at approximately $3,035,000
and $3,021,000 in 1995 and 1996, respectively, after increasing from $2,600,000
in 1994. During this three-year period, labor costs increased from $1,300,000
in 1994 to $1,636,000 in 1995 and decreased to $1,591,000 in 1996. In 1995
depreciation and amortization increased by $347,000 when compared to the
previous year, and expenses related to the Bitterroot Valley Sanitary Landfill
("Landfill") increased by $99,000, net of insurance reimbursements. Offsetting
these increases were decreases in advertising of research products and an
increase in administrative and depreciation costs allocated to manufacturing,
reflecting the start-up of the new plant in 1995. The Company allocates part of
its administrative and depreciation costs to the cost of manufacturing products
for sale and for use in clinical trials. Such costs allocated in each year
1994, 1995 and 1996 were $286,000, $638,000 and $808,000, respectively.
Net Loss
- --------
The Company's net loss increased from $3,790,000 in 1994 to $5,317,000 in 1995
and to $5,589,000 in 1996. Its net loss per share over the same period was $.20
per share in 1994, $.28 per share in 1995 and $.30 per share in 1996.
Inflation has not had a material impact on the results of operations of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from the issuance and sale of
equity securities, limited sales of products, interest earned on investments and
payments under contract research and license agreements. The financing sources
have, to date, enabled the Company to maintain adequate liquidity. Cash, cash
21
<PAGE>
equivalents and investments totaled approximately $14,512,000 at December 31,
1996, as compared to approximately $19,824,000 at December 31, 1995.
The principal uses of cash during 1996 were approximately $4,693,000 for
operations and approximately $924,000 for plant and equipment. The Company used
approximately 13% less cash in operations in 1996 than in 1995, reflecting on a
cash basis increased revenues, which more than offset higher research and
product development expenses. Increased cash basis revenues represent cash
collected in January 1996 under license and option agreements, which were signed
and effective in December 1995. Cash requirements for operating activities in
1997 are expected to increase significantly over 1996 levels.* While revenues
are expected to increase in 1997, expenses are expected to continue to outpace
revenue as the Company expands its work in clinical and regulatory areas.
Projected cash requirements are dependent upon the Company receiving the
revenues that are anticipated and conducting the research, particularly the
clinical trials, that is projected. It is possible that sales could be lower,
because customers may not order as much material as expected. It is also
possible that patient accrual within planned clinical trials will be slower than
anticipated or the results of the trials or other research will not be as
expected.
The Company did not raise significant amounts of cash outside of operations
during 1995 or 1996. In 1994 the Company's primary sources of cash were
approximately $6,302,000 from the exercise of outstanding warrants and stock
options and $578,000 from collections on notes receivable accepted in a 1992
private placement of common stock and warrants. At December 31, 1996, the
Company had warrants and options outstanding to acquire shares and warrants
which were issued in private placements in 1991 and 1992 at exercise prices
ranging from $3.00 to $8.25 per share. All such warrants expire in 1997 if not
exercised. In January 1997 the Company decided to extend the expiration date of
the warrants and options, which expire in April 1997, to July 31, 1997 and
reduce the exercise price of the options from $8.25 to $6.00 per share. The
change was made to preserve for the Company the opportunity to raise additional
capital at a very economical cost if the warrants are exercised. If exercised,
the warrants and options in total could provide up to an additional $5,679,000
to the Company.* See Note 5 of Notes to Financial Statements.
During 1994 the Company constructed and equipped an expansion of its
manufacturing plant with a total cost of approximately $6,652,000, of which
approximately $715,000 was paid in 1995. The Company believes that this
expansion enables it to meet anticipated manufacturing and other facility
requirements for the foreseeable future.*
The Company will require substantial additional funds to continue its research
and development programs and to commercialize its products under development.
Future capital requirements will depend upon a number of factors, including the
rate of expenditure on and the progress of the Company's research and
development programs, the time and cost to obtain regulatory approvals, and
demand for products based on the Company's technology. In January 1997,
effective December 31, 1996, the Company issued approximately 1,103,000 common
shares to SB for $4,000,000 pursuant to a private placement agreement. With
this additional cash, the Company believes that its available cash, cash
equivalents and investments together with funds from licensing agreements and
product sales should be sufficient to meet its capital requirements through
1999.*
See Note 7 of Notes to Financial Statements and Item 3, Legal Proceedings, on
page 15 of this Annual Report on Form 10-K for discussions of contingencies
related to the Company's identification as a PRP for groundwater contamination
22
<PAGE>
at and near the Bitterroot Valley Sanitary Landfill and the Company being a
named defendant in two civil suits brought by landowners in the vicinity of the
Landfill.
23
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . 25
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . . . . 26
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . 27
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . 28
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . 29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 30
24
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ribi ImmunoChem Research, Inc.:
We have audited the accompanying balance sheets of Ribi ImmunoChem Research,
Inc. as of December 31, 1996 and 1995 and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ribi ImmunoChem Research, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Billings, Montana
January 20, 1997
25
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
Assets
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 432 284
Available-for-sale investment securities
and accrued interest 14,080 5,079
Held-to-maturity investment securities
and accrued interest - 6,574
Accounts receivable 52 725
Inventories 1,268 983
Other current assets 273 250
-------- --------
Total current assets 16,105 13,895
Held-to-maturity investment securities - 7,887
Property, plant and equipment, net 11,601 11,580
Other assets, net 592 549
-------- --------
Total assets $ 28,298 33,911
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 318 253
Accrued liabilities 570 601
Deferred revenue 563 630
-------- --------
Total current liabilities 1,451 1,484
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par; 10,000,000
authorized shares; none issued and
outstanding - -
Common stock, $.001 par; 30,000,000 authorized
shares; 18,891,443 and 18,888,243 issued and
outstanding in 1996 and 1995, respectively 19 19
Additional paid-in capital 62,492 62,460
Unrealized investment holding losses (28) (5)
Accumulated deficit (35,636) (30,047)
-------- --------
Total stockholders' equity 26,847 32,427
-------- --------
Total liabilities and stockholders'
equity $ 28,298 33,911
======== ========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF OPERATIONS
(In Thousands Except per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Sales $ 1,559 953 1,008
Contracts and licenses 2,042 1,848 2,075
Investment income, net 1,017 1,216 1,460
Other, net 5 6 11
-------- -------- --------
4,623 4,023 4,554
Cost and expenses:
Purchases and production 988 775 751
Research and development 6,203 5,530 4,993
Selling, general and administrative 3,021 3,035 2,600
-------- -------- --------
10,212 9,340 8,344
-------- -------- --------
Net loss $ (5,589) (5,317) (3,790)
======== ======== ========
Net loss per common share $ (.30) (.28) (.20)
======== ======== ========
Average number of shares outstanding 18,890 18,877 18,657
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)<PAGE>
<TABLE>
<CAPTION>
Notes
Receiv- Unreal-
Common Addi- able - ized Total
Stock tional Common Holding Accumu- Stock-
(Par Paid-in Stock, Gains lated holders'
(Value) Capital Net (Losses) Deficit Equity
----- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 17 56,053 (578) 5 (20,940) 34,557
Issuance of 1,200 shares
under stock grant program - 9 - - - 9
Issuance of 139,700 shares
upon exercise of options - 483 - - - 483
Issuance of 1,899,668 shares
upon exercise of warrants 2 5,817 - - - 5,819
Compensation relating to
stock options - 14 - - - 14
Collections and interest on
notes receivable - common
stock, net - - 578 - - 578
Unrealized loss on investment
securities, net and other - 1 - (333) - (332)
Net loss - - - - (3,790) (3,790)
----- ------ ----- ----- ------ ------
Balance at December 31, 1994 19 62,377 - (328) (24,730) 37,338
Issuance of 3,000 shares
under stock grant program - 12 - - - 12
Issuance of 14,050 shares
upon exercise of options - 40 - - - 40
Compensation relating to
stock options - 31 - - - 31
Unrealized gain on investment
securities, net - - - 323 - 323
Net loss - - - - (5,317) (5,317)
----- ------ ----- ----- ------ ------
Balance at December 31, 1995 19 62,460 - (5) (30,047) 32,427
Issuance of 1,400 shares
under stock grant program - 6 - - - 6
Issuance of 1,800 shares
upon exercise of options - 6 - - - 6
Compensation relating to
stock options - 20 - - - 20
Unrealized loss on investment
securities, net - - - (23) - (23)
Net loss - - - - (5,589) (5,589)
----- ------ ----- ----- ------ ------
Balance at December 31, 1996 $ 19 62,492 - (28) (35,636) 26,847
===== ====== ===== ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,589) (5,317) (3,790)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 935 817 470
Common stock grants 6 12 9
Compensation relating to stock
options 20 31 14
Discount accretion (426) (485) (449)
Abandoned patents and asset sales 18 8 (2)
Changes in operating assets and
liabilities:
Accounts receivable 673 (584) (73)
Accrued interest 11 25 21
Inventories (285) (305) 193
Other current assets (23) 40 (51)
Accounts payable 65 (122) 174
Accrued liabilities (31) 22 103
Deferred revenue (67) 442 (45)
-------- -------- --------
Net cash used by operating
activities (4,693) (5,416) (3,426)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (924) (1,475) (6,626)
Payments for other assets (93) (78) (100)
Proceeds from sale of assets - 3 3
Proceeds from maturities of
held-to-maturity securities 3,121 7,239 12,977
Proceeds from maturities and
sales of available-for-sale securities 4,784 3,663 -
Purchases of available-for-sale
securities (1,956) (327) (408)
Purchases of held-to-maturity
securities (97) (4,079) (10,308)
-------- -------- --------
Net cash provided (used) by
investing activities 4,835 4,946 (4,462)
-------- -------- --------
Cash flows from financing activities:
Collections and interest on notes
receivable - common stock, net - - 578
Proceeds from exercise of warrants - - 5,819
Proceeds from exercise of options 6 40 483
Other - - 1
-------- -------- --------
Net cash provided by financing
activities 6 40 6,881
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 148 (430) (1,007)
Cash and cash equivalents at beginning
of year 284 714 1,721
-------- -------- --------
Cash and cash equivalents at end of year $ 432 284 714
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
OPERATIONS. Ribi ImmunoChem Research, Inc. (the "Company") was
incorporated on January 9, 1981, and is principally engaged in the
development of biopharmaceutical products that stimulate the immune system
to generate a cascade of natural agents and signals to prevent and treat
human disease. The Company also engages in related activities such as the
custom formulation and sale of research products and contract research.
REVENUE RECOGNITION. Revenues from the sale of research products are
recognized when products are shipped to customers. Revenues from contract
research are recognized as related expenses are incurred. Nonrefundable
license fees received in connection with product license agreements are
deferred and recognized over the term of the contract.
CASH AND CASH EQUIVALENTS. In the statement of cash flows, the Company
considers all highly liquid debt instruments with a maturity on the date
of acquisition of three months or less to be cash equivalents.
INVESTMENT SECURITIES. Investment securities consist of marketable debt
securities and mutual funds that have invested in marketable debt
securities. Securities, which the Company expects to hold to maturity
("held-to-maturity"), are stated at cost and adjusted for amortization of
premium and accretion of discount to the earlier of the call date or
maturity using the interest method. All other securities ("available-for-
sale") are recorded at fair value. Fair values of investment securities
are based on quoted market prices.
On June 30, 1996, the Company reclassified all of its held-to-maturity
investment securities as available-for-sale and reported them as current
assets. The change resulted in a reduction of $49,000 to the unrealized
investment losses reported in the stockholders' equity section of the
balance sheet on June 30, 1996. Previously, the Company's investment
securities, which it had both the intent and ability to hold until
maturity, were classified as held-to-maturity. Additionally, both held-
to-maturity investment securities maturing after twelve months and
available-for-sale investment securities were previously classified as
noncurrent assets. The change was made to reflect the Company's belief
that all investments are available to support current operations and to
report on a more consistent basis with other companies in the industry.
Any gains and losses from the sale of investment securities are computed
under the specific identification method. Unrealized holding gains and
losses, net of related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stock-
holders' equity until realized. Unrealized losses, if any, for all
investment securities that are other than temporary are charged against
earnings.
INVENTORIES. Inventories are stated at the lower of cost or market on a
specific identification basis. Cost is based on the actual costs
associated with producing the inventories, which include direct labor and
materials, quality control and manufacturing overhead.
30
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost and depreciated on a straight-line basis over estimated useful
lives of 25 to 30 years for buildings and 3 to 12 years for equipment,
furniture and fixtures. Maintenance and repairs are charged to expense as
incurred. Significant betterments are capitalized.
NET LOSS PER COMMON SHARE. Net loss per common share is based on the
weighted average number of shares outstanding. Common share equivalents
are not included in loss per share calculations as the effect is anti-
dilutive.
PATENTS AND OTHER ASSETS. Other assets consist principally of the costs
of patents filed, deferred patent application costs and patent maintenance
costs. Such costs are amortized on a straight-line basis over the
estimated remaining useful lives of the patented technology ranging from 3
to 20 years. Unsuccessful patent application costs are expensed when the
patent is denied or abandoned.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. The current and noncurrent portions of these
deferred tax assets and liabilities are classified in the balance sheet
based on the respective classification of the assets and liabilities which
give rise to such deferred income taxes. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in tax
expense in the period that includes the enactment date.
STOCK-BASED EMPLOYEE COMPENSATION. From time-to-time the Company grants
to its employees stock and/or options to purchase stock. In the case of
stock grants, compensation expense is recognized by the Company at the
time of the grant in the amount of the market value of the stock on the
grant date. Compensation expense for the grant of stock options is
recognized only when the market value of the underlying stock exceeds the
exercise price of the stock option on the grant date. Any such
compensation expense is charged to expense over the term that the options
become exercisable.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS. The carrying amounts for
cash, cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short duration of those
instruments.
ESTIMATES. Management of the Company has made certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
RECLASSIFICATION. Certain reclassifications have been made to the prior
year financial statements to conform to the 1996 presentation of
investments.
31
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(2) Investment Securities
The following is a summary of the Company's investment securities as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
Fair
Amortized Market Unrealized Unrealized
December 31, 1996 Cost Value Gains Losses
----------------- --------- --------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Mutual funds investing primarily
in short to intermediate term
securities of the U.S.
Government and its agencies $ 4,945 4,849 - 96
Securities of the U.S. Government
and its agencies 5,596 5,634 38 -
Corporate mid-term notes 2,894 2,925 33 2
Insured certificates of deposit 561 560 - 1
--------- --------- ---------- ----------
13,996 13,968 71 99
Accrued interest 112 112 - -
--------- --------- ---------- ----------
$ 14,108 14,080 71 99
========= ========= ========== ==========
December 31, 1995
-----------------
Available-for-sale:
Mutual funds investing primarily
in short to intermediate term
securities of the U.S.
Government and its agencies $ 5,084 5,079 30 35
--------- --------- ---------- ----------
Held-to-maturity:
Securities of the U.S. Government
and its agencies 8,150 8,140 13 23
Corporate mid-term notes 5,898 6,037 152 13
Insured certificates of deposit 290 289 - 1
--------- --------- ---------- ----------
14,338 14,466 165 37
Accrued interest 123 123 - -
--------- --------- ---------- ----------
19,545 19,668 195 72
Recorded unrealized losses (5) ========= ========== ==========
---------
$ 19,540
=========
</TABLE>
Substantially all debt securities at December 31, 1996 mature within two years.
During 1996 the Company received $425,000 from sales of available-for-sale
securities. Gains and offsetting losses realized on the sales each totaled
approximately $3,000. During 1995 the Company received $3,592,000 from sales of
available-for-sale securities. Losses totaling $71,000 were realized on the
sales. Approximately $3,033,000 of the proceeds in 1995 were reinvested in debt
securities with the intention of increasing future yield and reducing interest
rate risk.
32
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(3) Inventories
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Raw materials $ 96 99
Work in process 1,092 780
Finished goods 80 104
---------- ----------
$ 1,268 983
========== ==========
</TABLE>
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Buildings $ 9,604 9,427
Equipment, furniture and fixtures 6,519 5,779
---------- ----------
16,123 15,206
Less accumulated depreciation 4,711 3,835
---------- ----------
11,412 11,371
Construction in progress - 20
Land 189 189
---------- ----------
$ 11,601 11,580
========== ==========
</TABLE>
(5) Stockholders' Equity
The following table sets forth activity relative to warrants and options to
acquire shares of common stock which were issued in common stock offerings in
1991 and 1992. All such warrants and options expire in 1997.
<TABLE>
<CAPTION>
Year issued 1991 1992 Total
---------------------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Exercise price $ 3.00 3.60 4.00 6.00 8.25
====== ====== ====== ====== ======
(In Thousands)
Total common shares 2,300 200 467 708 93 3,768
Exercised:
1991 (100) - (200) - - (300)
1992 (209) - (267) - - (476)
1993 - - - - - -
1994 (1,700) (200) - - - (1,900)
1995 - - - - - -
1996 - - - - - -
------ ------ ------ ------- ------- -------
Unexercised 291 - - 708 93 1,092
====== ====== ====== ======= ======= =======
</TABLE>
33
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
In January 1995 the Company reduced the exercise price from $11.55 to $6.00 per
share and extended the expiration date from 1995 to 1997 on the warrants to
purchase 708,000 common shares. In January 1997 the Company extended the
expiration date on the warrants to purchase 708,000 common shares from April 1,
1997, to July 31, 1997. Additionally, the exercise price was reduced from $8.25
to $6.00 per share and the expiration date extended from April 1, 1997, to July
31, 1997, on options to purchase 93,000 common shares. The Company may call
the warrants if its common stock trades at a price of $8.00 or more per share
for a period of 20 consecutive trading days. The changes were made to preserve
for the Company the opportunity to raise additional capital at a very economical
cost if the warrants are exercised.
(6) Stock Compensation Plans
The Company has a stock grant program under which common stock may be issued to
key employees, consultants and other persons providing services deemed important
to the Company. The program requires the employee to assign to the Company all
know-how, patents and proprietary information developed while employed by, or
developed as a result of employment with the Company and to agree not to engage
in any activity which could be considered to be in competition with the
Company's proposed business while employed by the Company. If the employee
violates any one of these conditions, the shares issued pursuant to the program
shall revert to the Company. Non-employees receiving grants are not subject to
the conditions imposed on employees receiving grants. Additionally, the Company
grants 100 shares of stock to each employee who is not an officer of the Company
after their completion of one year of employment. Such 100 share grants are not
subject to the forfeiture conditions described above.
The following table sets forth the activity in the stock grant program for the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Shares available at beginning
of year 29,368 32,368 33,568
Shares granted 1,400 3,000 1,200
------ ------ ------
Shares available at end
of year 27,968 29,368 32,368
====== ====== ======
Weighted average grant date
fair value $ 4.57 4.03 6.94
====== ====== ======
</TABLE>
In 1996 the Company's stockholders approved the 1996 Stock Option Plan ("Plan").
Under the Plan all full- or part-time employees are eligible to receive
incentive stock options and nonqualified stock options and certain directors and
consultants are eligible to receive nonqualified stock options. Any option
granted under the Plan may include a stock appreciation right (SAR) to surrender
to the Company all, or a portion, of the option in exchange for cash or stock,
the sum of which is equal to the value of the excess of fair market value of the
common stock over the option price. The Plan provides for awarding options for
a maximum of 900,000 shares with an exercise price not less than fair market
value at the date of grant, except for options awarded to certain directors.
Options are nontransferable and expire if not
34
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
exercised within ten years from the date of the grant. Options can be exercised
in cumulative installments over a vesting schedule set by the Company's Board of
Directors. Through December 31, 1996, all options granted from the Plan to
employees can be exercised in cumulative installments of 20% per year beginning
on the date of the grant. Vesting of discounted stock options issued to certain
directors is discussed below.
The Company also has a stock option plan that was approved by stockholders in
1986 (the "1986 Plan"). The 1986 Plan expired in 1996 and no new options can be
granted under it. However, options already granted (1,359,000 shares, net of
forfeited options) can be exercised for a period of ten years from the date of
grant. The terms of the 1986 Plan were very similar to the ones described for
the 1996 Plan. All options granted under the 1986 Plan, except for discounted
stock options issued to certain directors, as discussed below, can be exercised
in cumulative installments of 20% per year beginning on the date of the grant.
Both stock option plans provide for the issuance of nonqualified stock options
with an exercise price which is 20% below the market price of the Company's
common stock on the grant date. The discounted stock options may be awarded to
directors who are not employees of the Company who elect to receive the
discounted stock options rather than cash for all or a portion of their director
fees. The directors are required to make the voluntary election at least six
months prior to the beginning of each calendar year. The number of options to
be granted is determined by dividing the amount of the foregone cash
compensation by the amount of the per share price discount on the grant date.
Such options are granted at the end of each calendar quarter and are fully
vested on the grant date. The options, which expire if not exercised within ten
years from the grant date, are exercisable after a six month period following
the grant date.
During 1996 the Company's Board of Directors adopted the 1996 Directors' Stock
Option Plan (the "Directors' Plan") for directors who are not employees of the
Company, subject to stockholder approval. Stockholder approval will be
requested at the 1997 Annual Stockholders' Meeting. The Directors' Plan
provides for the award of nonqualified options to purchase a maximum of 210,000
shares of common stock. Each director who is not an employee was awarded
options to purchase 30,000 shares on the later of the date the Directors' Plan
was adopted or on the date they first became a director. In addition,
immediately following each annual meeting of the Company's stockholders, each
director who is not an employee who continues as an outside director after the
meeting will be awarded options to purchase 500 common shares. The exercise
price of the options is the market price on the date of the award. The options
vest and can be exercised at the rate of 50% on the date of award and 25% on
each anniversary of the award date. The options expire if not exercised within
ten years of the award date. During 1996, options to purchase 150,000 shares
were awarded under the Directors' Plan with an exercise price of $4.00 per
share. None of the options have been exercised.
The following table sets forth the activity in the 1986 and 1996 Stock Option
Plans and the 1996 Directors' Stock Option Plan for the years ended December 31,
1994, 1995 and 1996. There were no SAR's outstanding under the plans during the
three-year period ended December 31, 1996.
35
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Options for Employees Discounted Options
and Directors for Directors
-------------------- --------------------
Average Average Total
Common Exercise Common Exercise Common
Shares Price Shares Price Shares
------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at
December 31, 1993 1,023,675 $ 5.66 14,928 $ 5.09 1,038,603
Granted 104,500 7.49 23,748 4.46 128,248
Exercised (119,700) 3.54 - - (119,700)
Canceled (28,900) 6.69 - - (28,900)
--------- ------- ---------
Outstanding at
December 31, 1994 979,575 6.08 38,676 4.71 1,018,251
Granted 96,000 3.92 19,720 3.65 115,720
Exercised (14,050) 2.81 - - (14,050)
Canceled (115,475) 6.20 - - (115,475)
--------- ------- ---------
Outstanding at
December 31, 1995 946,050 5.90 58,396 4.35 1,004,446
Granted 432,779 5.26 9,568 3.34 442,347
Exercised (1,800) 3.19 - - (1,800)
Canceled (33,100) 6.24 (7,694) 4.42 (40,794)
--------- ------- ---------
Outstanding at
December 31, 1996 1,343,929 5.44 60,270 4.18 1,404,199
========= ======= =========
Options exercisable at:
December 31, 1994 484,475 $ 5.80 24,345 $ 5.50 508,820
December 31, 1995 591,700 5.90 51,378 4.32 643,078
December 31, 1996 864,506 5.71 53,369 4.31 917,875
Ranges of exercise
prices and average months
(mo) to expiration of:
Options outstanding at
December 31, 1996
$1.50 (46 mo) 2,000 $ 1.50 - $ - 2,000
$3.00-$4.90 (97 mo) 527,650 3.96 51,636 3.80 579,286
$5.75-$7.50 (78 mo) 731,029 6.22 8,634 6.49 739,663
$8.00-$8.63 (82 mo) 83,250 8.11 - - 83,250
--------- ------- ---------
1,343,929 60,270 1,404,199
========= ======= =========
Options exercisable at
December 31, 1996
$1.50 (46 mo) 2,000 $ 1.50 - $ - 2,000
$3.00-$4.90 (82 mo) 244,050 3.80 44,735 3.89 288,785
$5.75-$7.50 (73 mo) 559,406 6.30 8,634 6.49 568,040
$8.00-$8.63 (81 mo) 59,050 8.12 - - 59,050
--------- ------- ---------
864,506 53,369 917,875
========= ======= =========
</TABLE>
36
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
The Company has entered into a Stock Option Agreement with its Chief Executive
Officer, President and Chairman ("CEO"). Pursuant to the 1987 agreement, and
later agreements, the CEO was granted options to purchase 228,000 shares of
common stock at prices ranging from $2.63 to $3.00 per share. All of the CEO's
options under this agreement expire if not exercised by June 30, 1997. During
1994, the CEO exercised options to purchase 20,000 shares at a price of $3.00
per share. The CEO did not exercise any options in 1995 or 1996. At December
31, 1996, there are options outstanding to purchase 50,000 shares at $3.00 per
share, all of which are exercisable. Additionally, the CEO has been granted
options to purchase stock under the Company's stock option plans described
above.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("Standard"). The Standard, which is
effective for reporting periods beginning after December 15, 1995, recommends
procedures to account for stock based compensation plans. The Standard also
allows companies the option to continue accounting for plans based on Accounting
Principles Board Opinion No. 25 and related interpretations provided that they
make certain additional disclosures. The additional disclosures include pro
forma net income and earnings per share based upon the provisions of the
Standard. Accordingly, the Company has elected to continue to apply Accounting
Principles Board Opinion No. 25 in accounting for its employee stock based
compensation plans. As a result, no compensation expense has been recognized
relative to its employees where the exercise price of the option equaled or
exceeded the stock's market value on the grant date. Compensation relative to
directors who receive discounted stock options rather than cash for directors'
fees totaled $8,000, $18,000 and $27,000 in 1996, 1995 and 1994, respectively.
Compensation recognized from the grant of stock totaled $6,000, $12,000 and
$8,000 in 1996, 1995 and 1994, respectively. If compensation cost for the stock
option plans would have been determined for employees and directors, other than
directors receiving discounted options, consistent with the Standard, the
Company's net loss and net loss per common share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss (In Thousands)
As reported $ 5,589 5,317
Pro forma 6,018 5,365
Net loss per common share
As reported $ (.30) (.28)
Pro forma (.32) (.28)
</TABLE>
The pro forma amounts include the fair value of stock options first vesting in
the reporting year from options granted after December 15, 1994, as required by
the Standard. During this phase-in period, the pro forma amounts are not likely
to be representative of the effects on reported net loss and net loss per share
for future years because options vest over several years and additional awards
generally are made each year. The fair value has been determined using the
Black-Scholes formula, which requires the Company to make several assumptions,
some of which are listed below:
37
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Options Granted In
------------------
1996 1995
---- ----
<S> <C> <C>
Average risk-free interest rate (%) 6.2 7.1
Average expected life (years) 6.5 6.5
Average annualized expected volatility .573 .573
Expected dividends None None
</TABLE>
(7) Commitments and Contingencies
The Company has an employment agreement with its Chief Executive Officer,
President and Chairman, which currently provides for an annual salary of
$258,000. The agreement requires the payment of the salary, adjustable
annually, through June 30, 1998, unless there is termination for "cause."
The Company carries $10 million in product liability insurance for its products
which are being used in clinical trials and is self-insured for product
liability coverage for research products and veterinary products being marketed.
In addition, the Company has agreed to indemnify its directors and officers for
liabilities incurred as a result of their positions with the Company.
The Company, the National Institutes of Health ("NIH") and the Bitterroot Valley
Sanitary Landfill ("Landfill") were notified by the Montana Department of Health
and Environmental Sciences (now known as the Department of Environmental Quality
["DEQ"]) in March 1991 that they had been identified as potentially responsible
parties ("PRPs") and as such are jointly and severally liable for groundwater
contamination located at and near the site of the Landfill in Ravalli County,
Montana. The Company's involvement arises out of waste materials which it
deposited at the Landfill from 1982 to 1985 which the Landfill had permits to
receive. The NIH voluntarily initiated and completed work pursuant to an
interim remediation plan approved by the DEQ to remove and decontaminate the
believed source of the contamination and treat the aquifers which tests have
shown contain contaminants. Although decontamination of the soil at and around
the Landfill has been completed, treatment of the groundwater in the proximity
of the disposal site continues utilizing carbon filtering and air sparging, and
it is anticipated such treatment will continue through 1997 and possibly longer.
The DEQ conducted a "Risk Assessment" and issued a "Draft Final Feasibility
Study" in October 1994 that discussed possible final remediation alternatives.
In August 1995, the DEQ announced that it had approved a second interim action
in the vicinity of the Landfill being voluntarily conducted by the NIH and which
involves installing individual replacement and new wells to provide both an
alternate water supply for the affected residents and to develop additional
information on the site hydrogeology. Information collected from these wells
through a multi-year monitoring program will be used by the DEQ to evaluate the
effectiveness of the remediation efforts to date. The current plan calls for the
wells to be installed in three phases: Phase I includes occupied properties
with the highest remaining contamination levels; Phase II includes occupied
properties with lesser degrees of contamination; and Phase III consists largely
of vacant properties. Preliminary studies completed in 1994 estimated the cost
of the wells to be approximately $1,400,000. The first Phase was completed in
the spring of 1996. The DEQ could require the PRPs to implement further
remediation should these wells not provide
38
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
sufficient quality or quantity of water. The NIH, which has taken the lead and
incurred substantially all of the remediation costs, has represented publicly
that it would continue to work with the DEQ toward an acceptable final
remediation plan. In 1993, the NIH stated that as of that time, it had incurred
costs and anticipated future interim remediation costs which could total $2
million or more. The DEQ has filed an action against the Landfill, the operator
of the Landfill and the Company seeking reimbursement of costs in the amount of
$199,000 associated with its oversight activities. The Company has filed a
response to the action. Because of these uncertainties, including the
uncertainty of the cost of further remediation and whether the NIH will seek and
obtain partial reimbursement from the other PRPs, it is not possible at this
time to determine the potential liability of the Company as a PRP.
Two landowners in the vicinity of the Landfill have filed civil suits seeking
unspecified damages for alleged diminished value of land, possible health
hazards and loss of domestic water source. The suits name the PRPs and the DEQ,
as well as unknown individuals and corporations which may be discovered to have
contributed to the injuries alleged. The Company filed answers to these suits
denying any liability and in a motion for summary judgment, denied the injuries
alleged. On October 11, 1996, the court granted the summary judgment and
dismissed the plaintiffs' claims. A motion was filed on behalf of one of the
plaintiffs to vacate the order or alternatively, to direct the entry of a final
judgment as to all claims against the defendants. The court denied the
plaintiffs' motion to vacate the order. Counsel for the plaintiff has indicated
the intent to appeal the summary judgment order. This plaintiff has extended an
offer to settle the matter for which the motion for reconsideration was filed.
The Company and the other defendants are evaluating the offer. It is not
possible at this time, to predict whether additional civil suits will be filed,
the outcome of the pending suits or the potential financial impact on the
Company or the probability of adverse decisions.
As of December 31, 1996, the Company has a reserve of approximately $190,000
primarily to cover billed and potential legal, consulting, settlement and DEQ
reimbursement costs associated with the Company as a PRP and the civil suits.
Some of the costs incurred in the defense of the civil suits, including the
action by the DEQ seeking reimbursement of costs, have been paid by insurance
and at least some of the future costs are expected to be paid by insurance.
None of the expected future insurance reimbursements have been included in the
reserve. During 1994 the Company received $125,000 in insurance proceeds from
one insurance company, which was in rehabilitation, in a one-time settlement of
any claims associated with the Landfill issues. Net costs charged (credited) to
operations during 1996, 1995 and 1994 were $13,000, $64,000 and $(35,000),
respectively.
(8) Income Taxes
The net operating loss carryforwards and tax credits available to reduce future
Federal taxable income or related taxes and the year of expiration are approxi-
mately as follows:
39
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Net Research and
Operating Investment Development
Expires December 31, Loss Credit Credit
- -------------------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
1996 $ 181 26 5
1997 314 4 14
1998 254 7 31
1999 328 3 50
2000 529 9 58
2001 251 - 76
2002 821 - 82
2003 2,272 - 128
2004 2,751 - 106
2005 2,606 - 115
2006 3,595 - 154
2007 4,488 - 198
2008 4,238 - 243
2009 4,574 - 343
2010 5,469 - 163
2011 5,631 - 188
------ ------ ------
$ 38,302 49 1,954
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to federal and state
deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---------- ------------
(In Thousands)
<S> <C> <C>
Gross deferred tax assets:
Net operating loss
carryforwards $ 15,781 13,579
General business credit
carryforwards 2,004 1,815
Loss contingency reserve 79 79
Employee benefits 89 79
Other 29 21
----------- -----------
17,982 15,573
Valuation allowance (17,521) (15,172)
----------- -----------
461 401
----------- -----------
Gross deferred tax liabilities:
Depreciation 355 262
Inventories 106 139
----------- -----------
461 401
----------- -----------
$ - -
=========== ===========
</TABLE>
The Company has provided a valuation allowance for deferred tax assets which
management believes are not currently assured of being realized. The ultimate
realization of deferred tax assets is dependent upon the existence of, or
generation of, taxable income in the periods in which those temporary
differences are deductible.
The net increase in the valuation allowance for the years ended December 31,
1996, 1995, and 1994 was $2,349,000, $2,380,000 and $2,178,000, respectively.
Additionally,
40
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
when subsequently recognized, approximately $849,000 of the valuation allowance
will be credited to additional paid-in capital.
(9) International Sales and Major Customers
The Company markets its research products worldwide, generally to nonexclusive
distributors. During 1996, 1995 and 1994, export sales were 77%, 31% and 35% of
total sales, respectively. Export sales were primarily to Europe, Japan and
Canada.
In early January 1997, effective December 31, 1996, the Company entered into
another license agreement with SmithKline Beecham ("SB"). The Company now has a
total of five license agreements with SB for use of the Company's adjuvants in
various vaccines being developed by SB. SB is developing vaccines, which
include the Company's adjuvants, for indications in infectious diseases, cancer
and allergies. The agreements generally provide for payment to the Company of
license fees and supply payments, as well as royalties upon commercialization of
SB's vaccines. The agreements grant SB exclusive rights to the Company's
adjuvants for use in vaccines for some diseases and co-exclusive or non-
exclusive rights for others. In 1992 the Company entered into a one-year
research and collaboration agreement with SB pursuant to which the Company
performed research for SB related to certain adjuvants and vaccines. The
research was funded by SB and the agreement was renewed for the years 1994 and
1995. The Company also sells adjuvants and research products to SB. Revenues
from all transactions with SB were 48% of total revenue in 1996, 31% in 1995 and
26% in 1994.
As of December 31, 1996, S.R. One Limited, a subsidiary of SB, held 750,608
shares, or 4% of the Company's common stock. Early in 1997, effective December
31, 1996, SB purchased 1,103,448 additional shares from the Company for
$4,000,000 bringing its total ownership to 9.3% of the Company's outstanding
common stock. SB has the right to make an additional equity investment of up to
$2,000,000 at any time through January 1, 1999. Also, with the stock purchase
SB acquired warrants to purchase 500,000 shares of stock at $5.00 per share.
The warrants expire if not exercised by January 1, 2000.
The Company has granted Wyeth-Lederle Vaccines and Pediatrics ("WLV&P") (a
business unit of Wyeth-Ayerst Laboratories, which is a division of American Home
Products Corporation) a worldwide co-exclusive license to use the Company's
adjuvants commercially upon regulatory approval of certain vaccines being
developed by WLV&P. In addition to an annual license fee, the Company will
receive transfer payments for supplies of adjuvant and will be entitled to
royalties upon commercial sale of vaccines. Revenues received from WLV&P were
17% of the Company's total revenue in 1996, 19% in 1995 and 25% in 1994.
(10) Employee Benefits
The Company provides an employee savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all full-time employees.
The Company matches 30% of employee contributions of up to 6% of compensation.
The amount charged against income in 1996, 1995 and 1994 was $58,000, $52,000
and $44,000, respectively.
Additionally, the Company provides other employee benefits including health
insurance for employees who are actively employed. Charges against income for
health insurance were approximately $168,000, $198,000 and $147,000 in 1996,
1995 and 1994, respectively.
41
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed independent auditors and has not had any
disagreements with its independent auditors.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has filed with the Securities and Exchange Commission a Definitive
Proxy Statement for the Company's Annual Meeting of Stockholders to be held on
April 30, 1997. The information required by Items 10, 11, 12 and 13 of this
Annual Report on Form 10-K is set forth in such Definitive Proxy Statement in
the sections entitled "Election of Directors," "Committees and Meetings,"
"Principal Stockholders and Management's Stockholdings," "Executive Compensa-
tion" and "Directors Compensation" on pages 1 through 11. Those portions of
such Definitive Proxy Statement containing such information are incorporated
herein by this reference. Information regarding the Company's executive
officers is set forth in Part I of this Annual Report on Form 10-K under the
heading "Executive Officers of the Registrant."
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Ribi ImmunoChem Research, Inc., are filed
with this Report on Form 10-K under Item 8 of Part II on pages 24 through 41:
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995
and 1994
Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994
Notes to Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.
42
<PAGE>
3. Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Description and Incorporation by Reference
- ----------- ------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation. This certificate was
filed June 22, 1992, as Exhibit 4.1 to Registrant's registration
statement on Form S-3, Registration No. 33-48713. Said Exhibit
4.1 is incorporated herein by this reference.
3.2 Amended Bylaws of the Company. These Bylaws were filed on March
13, 1989, as Exhibit 3.2 to Registrant's annual report on Form
10-K dated December 31, 1988, File No. 0-11094. Said Exhibit
3.2 is incorporated herein by this reference.
*10.1 Employment Agreement with Mr. Robert E. Ivy dated July 1, 1987.
This agreement was filed on July 10, 1987, as Exhibit 10.1 to
Registrant's report on Form 8-K dated June 30, 1987, File No. 0-
11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.2 Stock Option Agreement with Mr. Robert E. Ivy dated July 1,
1987. This agreement was filed on July 10, 1987, as Exhibit
10.2 to Registrant's report on Form 8-K dated June 30, 1987,
File No. 0-11094. Said Exhibit 10.2 is incorporated herein by
this reference.
*10.3 Amendment dated November 1, 1988, to the Stock Option Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.3 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.3 is incorporated herein by this reference.
*10.4 Amendment dated January 30, 1989, to the Employment Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.4 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.4 is incorporated herein by this reference.
*10.5 Second amendment dated March 5, 1990, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on May 4, 1990, as Exhibit 10.1 to
Registrant's report on Form 10-Q dated March 31, 1990, File No.
0-11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.6 Third amendment dated April 25, 1991, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on August 9, 1991, as Exhibit 10.3 to
Registrant's report on Form 10-Q dated June 30, 1991, File
No. 0-11094. Said Exhibit 10.3 is incorporated herein by this
reference.
*10.7 1986 Stock Option Plan (as amended and restated effective April
29, 1992). This plan was filed on August 5, 1992, as Exhibit
10.2 to Registrant's report on Form 10-Q dated June 30, 1992,
File No. 0-11094. Said Exhibit 10.2 is incorporated herein by
this reference.
43
<PAGE>
Exhibit No. Description and Incorporation by Reference - Continued
- ----------- ------------------------------------------
*10.8 1996 Stock Option Plan adopted by stockholders on April 24,
1996. This plan was filed on March 18, 1996, as Appendix A to
Registrant's definitive proxy statement for the Annual
Stockholders' Meeting held on April 24, 1996, File No. 0-11094.
Said Appendix A is incorporated herein by this reference.
*10.9 1996 Directors' Stock Option Plan adopted by the Board of
Directors on July 24, 1996. Stockholder approval will be
requested at the Annual Meeting of Stockholders which will be
held on April 30, 1997. This plan was filed on March 19, 1997,
as Appendix A to Registrant's definitive proxy statement for
such Annual Meeting of Stockholders, File No. 0-11094. Said
Appendix A is incorporated herein by this reference.
**24 Consent of independent auditors.
***27 Financial Data Schedule.
<FN>
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
</FN>
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Registrant during the fourth quarter
of the fiscal year ended December 31, 1996.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RIBI IMMUNOCHEM RESEARCH, INC.
Date: March 26, 1997 By: /s/ Robert E. Ivy
---------------------- -----------------------------------------
Robert E. Ivy, Chief Executive Officer,
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 26, 1997 By: /s/ Robert E. Ivy
---------------------- -----------------------------------------
Robert E. Ivy, Chief Executive Officer,
President and Chairman of the Board (principal
executive officer)
Date: March 26, 1997 By: /s/ Vern D. Child
---------------------- -----------------------------------------
Vern D. Child, Vice President Finance and
Treasurer (principal financial and accounting
officer)
Date: March 26, 1997 By: /s/ John L. Cantrell
---------------------- -----------------------------------------
John L. Cantrell, Executive Vice President and
Director
Date: March 26, 1997 By: /s/ Philipp Gerhardt
---------------------- -----------------------------------------
Philipp Gerhardt, Director
Date: March 26, 1997 By: /s/ Paul Goddard
---------------------- -----------------------------------------
Paul Goddard, Director
Date: March 26, 1997 By: /s/ Mark I. Greene
---------------------- -----------------------------------------
Mark I. Greene, Director
Date: March 26, 1997 By: /s/ Thomas N. McGowen, Jr.
---------------------- -----------------------------------------
Thomas N. McGowen, Jr., Director
Date: March 26, 1997 By: /s/ Frederick B. Tossberg
---------------------- -----------------------------------------
Frederick B. Tossberg, Director
45
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description and Incorporation by Reference Page
- ---------- ------------------------------------------ ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation. This certificate
was filed June 22, 1992, as Exhibit 4.1 to Registrant's
registration statement on Form S-3, Registration No. 33-
48713. Said Exhibit 4.1 is incorporated herein by this
reference.
3.2 Amended Bylaws of the Company. These Bylaws were filed
on March 13, 1989, as Exhibit 3.2 to Registrant's annual
report on Form 10-K dated December 31, 1988, File No. 0-
11094. Said Exhibit 3.2 is incorporated herein by this
reference.
*10.1 Employment Agreement with Mr. Robert E. Ivy dated July 1,
1987. This agreement was filed on July 10, 1987, as Exhibit
10.1 to Registrant's report on Form 8-K dated June 30, 1987,
File No. 0-11094. Said Exhibit 10.1 is incorporated herein
by this reference.
*10.2 Stock Option Agreement with Mr. Robert E. Ivy dated July 1,
1987. This agreement was filed on July 10, 1987, as Exhibit
10.2 to Registrant's report on Form 8-K dated June 30, 1987,
File No. 0-11094. Said Exhibit 10.2 is incorporated herein
by this reference.
*10.3 Amendment dated November 1, 1988, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on March 13, 1989, as Exhibit 10.3 to
Registrant's report on Form 10-K dated December 31, 1988,
File No. 0-11094. Said Exhibit 10.3 is incorporated herein
by this reference.
*10.4 Amendment dated January 30, 1989, to the Employment Agree-
ment with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on March 13, 1989, as Exhibit 10.4 to
Registrant's report on Form 10-K dated December 31, 1988,
File No. 0-11094. Said Exhibit 10.4 is incorporated herein
by this reference.
*10.5 Second amendment dated March 5, 1990, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on May 4, 1990, as Exhibit 10.1 to Regis-
trant's report on Form 10-Q dated March 31, 1990, File No. 0-
11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.6 Third amendment dated April 25, 1991, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on August 9, 1991, as Exhibit 10.3 to
Registrant's report on Form 10-Q dated June 30, 1991, File
No. 0-11094. Said Exhibit 10.3 is incorporated herein by
this reference.
46
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDEX
Exhibit No. Description and Incorporation by Reference - Continued Page
- ---------- ------------------------------------------ ----
*10.7 1986 Stock Option Plan (as amended and restated effective
April 29, 1992). This plan was filed on August 5, 1992, as
Exhibit 10.2 to Registrant's report on Form 10-Q dated
June 30, 1992, File No. 0-11094. Said Exhibit 10.2 is
incorporated herein by this reference.
*10.8 1996 Stock Option Plan adopted by stockholders on April 24,
1996. This plan was filed on March 18, 1996, as Appendix A
to Registrant's definitive proxy statement for the Annual
Stockholders' Meeting held on April 24, 1996, File No.
0-11094. Said Appendix A is incorporated herein by this
reference.
*10.9 1996 Directors' Stock Option Plan adopted by the Board of
Directors on July 24, 1996. Stockholder approval will be
requested at the Annual Meeting of Stockholders which will
be held on April 30, 1997. This plan was filed on March 19,
1997, as Appendix A to Registrant's definitive proxy
statement for such Annual Meeting of Stockholders, File No.
0-11094. Said Appendix A is incorporated herein by this
reference.
**24 Consent of independent auditors. 48
***27 Financial Data Schedule.
<FN>
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
</FN>
</TABLE>
47
<PAGE>
Exhibit 24
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Accountants' Consent
The Board of Directors
Ribi ImmunoChem Research, Inc.:
We consent to incorporation by reference in the registration statements No. 33-
6513, No. 333-18341 and No. 33-73478 filed on Form S-8 and registration
statements No. 33-44391, No. 33-48713 and No. 33-69984 filed on Form S-3 of Ribi
ImmunoChem Research, Inc. of our report dated January 20, 1997, relating to the
balance sheets of Ribi ImmunoChem Research, Inc. as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of Ribi
ImmunoChem Research, Inc.
KPMG Peat Marwick LLP
Billings, Montana
March 24, 1997
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCED SHEETS AT DECEMBER 31, 1996 AND 1995, AND STATEMENTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000352331
<NAME> RIBI IMMUNOCHEM RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 432
<SECURITIES> 14,080
<RECEIVABLES> 52
<ALLOWANCES> 0
<INVENTORY> 1,268
<CURRENT-ASSETS> 16,105
<PP&E> 16,312
<DEPRECIATION> 4,711
<TOTAL-ASSETS> 28,298
<CURRENT-LIABILITIES> 1,451
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 26,828
<TOTAL-LIABILITY-AND-EQUITY> 28,298
<SALES> 1,559
<TOTAL-REVENUES> 4,623
<CGS> 988
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<INCOME-PRETAX> (5,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,589)
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<CHANGES> 0
<NET-INCOME> (5,589)
<EPS-PRIMARY> (0.30)
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</TABLE>
