<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
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, 1998
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
- ------------------------------ ---------------------------------------------
(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
--------------
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
- --------------------------------------------------------------------------------
(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___.
---
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. ___
The aggregate market value of Registrant's voting and non-voting common equity
held by nonaffiliates of the Registrant was $43,106,000 based upon the last sale
price of such stock on March 4, 1999, as reported by The Nasdaq Stock Market.
As of March 4, 1999, Registrant had 20,323,373 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," "Compliance with Section 16(a) of the
Exchange Act," "Committees and Meetings," "Principal Shareholders and
Management's Shareholdings," "Executive Compensation" and "Directors
Compensation" from the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 26, 1999. . . . . . . . . . . . . . . . . Part III
Such Definitive Proxy Statement for Annual Meeting of Shareholders to be held
April 26, 1999, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 18
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . 19
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 20
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 47
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 47
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 47
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 47
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
<PAGE>
PART I
------
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 or ameliorate 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. 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 22 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 2015. 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 cascade of cytokines (regulatory substances
produced by cells) 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
appropriate delivery of products of this core technology can be used to enhance
a protective response or to suppress an unwanted immunological or inflammatory
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 which 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 cofounder 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 M. 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 related small molecules by synthetic
methods. Comparison of the biological activities of these synthetic compounds
with their structures is allowing the development of a detailed picture of the
relationships between structures and activities. This has led to the
identification of molecules 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 enhancement and suppression, 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 bloodstream 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 or 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
supplying clinical materials to corporate partners and selling 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, the synthetic
cardioprotectant, or any adjuvants, vaccines or other immunological agents, will
be commercially successful. While there is evidence that the immunomodulators
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 immunomodulators, are not yet fully understood. As a result,
the Company's research and development activities, as well
2
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as those of its competitors, are based on theories and concepts that 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 "Government Regulation - FDA Approvals" on page 13 of this
report on Form 10-K).
The table below summarizes the current status of the Company's product
development programs, which are discussed in more detail beginning on page 5.
Results that have been reported in Phase 1 and Phase 2 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.
<TABLE>
<CAPTION>
Product Proposed Application Status Collaborator/Licensee
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<S> <C> <C> <C>
Adjuvants - Enhancement of Phase 1, 2, SmithKline Beecham
Natural infectious disease & 3 (herpes ("SB") - exclusive rights
vaccines simplex, for herpes; hepatitis A,
hepatitis B, B and C; influenza A and
human B; Lyme disease; malaria;
papilloma- human papillomavirus;
virus, among others -
influenza, co-exclusive rights for
malaria, DPT; HAEMOPHILUS
strepto- INFLUENZA b; otitis
coccal media; polio;
infections, tuberculosis; among
Epstein- others - nonexclusive
Barr rights for AIDS and
respiratory others
syncytial
virus and Wyeth-Lederle Vaccines
AIDS) and Pediatrics -
co-exclusive rights for
DPT; HAEMOPHILUS IN-
FLUENZA b; otitis media;
polio; among others
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Adjuvants - Enhancement of Preclinical None (1)
Synthetic infectious disease
vaccines
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3
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Product Proposed Application Status Collaborator/Licensee
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Adjuvants - Enhancement of Phase 2 Allergy Therapeutics Ltd
Natural allergy vaccines - exclusive rights in the
European Community,
Eastern Europe and Canada
- co-exclusive for the
rest of the world
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Adjuvants - Enhancement of Phase 1 SB - nonexclusive rights
Natural cancer vaccines for cancer vaccines
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MELACINE Stage IV (advanced) Product Schering-Plough
melanoma malignant melanoma license Corporation - exclusive
theraccine application worldwide rights
filed in
Canada.
Application
being
prepared for
the U.S.
Stage II (early) Phase 3 Schering-Plough
stage) malignant Corporation - exclusive
melanoma (prevention worldwide rights
of recurrence after
surgery)
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MELACINE Stage IV (advanced) Phase 3 Schering-Plough
melanoma malignant melanoma Corporation - exclusive
theraccine worldwide rights
+ inter-
feron-alfa
2b
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RC-552 Prevention of Preclinical, None (1)
cardio- ischemia-reperfusion Planning
protectant injury in coronary Phase 2
artery bypass graft and/or 3
patients
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DETOX Enhancement of Phase 1, 2 & Biomira (exclusive to
adjuvant therapeutic vaccines 3 and pre- specific antigens)
(theraccines) for clinical
breast, lung, National Cancer Institute
gastrointestinal and - collaboration
colon cancers
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</TABLE>
(1) See "Marketing" on page 12
4
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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
eight months using currently available forms of treatment. In 1998 there were
41,600 new cases of melanoma diagnosed in the United States and 7,300 deaths.
Over the past 15 years the incidence of malignant melanoma in the United States
has risen steadily. The rate of increase in incidence is second only to that of
lung cancer in women. 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.
In 1996 the Company completed 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, among other things,
reviewed the survival characteristics of 5,392 patients with disseminated
melanoma from 74 clinical studies published between 1974 and 1995 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 significant difference in median survival was observed with 11
months for evaluable MELACINE patients compared to 7.9 months for evaluable
patients receiving other therapies included in the meta-analysis.
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 3 study, which compared MELACINE therapy with an aggressive, experimental
four-drug chemotherapy regimen. The study found that during the treatment
period, patients receiving MELACINE experienced significantly better quality of
life compared to patients receiving chemotherapy and that there was no
statistically significant difference in median survival results between the two
modalities (11 months for evaluable patients receiving MELACINE vs. 12.4 months
for evaluable chemotherapy patients). Additionally, a significantly longer
median survival of 18.2 months was observed in patients who experienced clinical
responses to therapy with MELACINE ("responders") as compared to the entire
group receiving MELACINE (p=0.016). In contrast, the data suggested that while
chemotherapy caused tumor shrinkage in some patients, this shrinkage was not
associated with a significant survival advantage. Patients who experienced a
clinical response to chemotherapy only had a median survival of 15.2 months,
which was not statistically different when compared to the evaluable patients as
a group who were treated with chemotherapy (p=0.53). Responders to MELACINE can
be identified after one course (14 weeks) of therapy, giving physicians the
opportunity to switch nonresponders to alternative therapeutic modalities
relatively early in the disease management process. The only drugs currently
approved by the FDA for melanoma are dacarbazine ("DTIC"), hydroxyurea,
interferon alfa-2b ("INTRON A," Schering-Plough Corporation), which was approved
in 1995 for post-operative therapy in patients whose tumors can be surgically
removed and are at high risk of recurrence, and interleukin-2 ("PROLEUKIN,"
Chiron Corporation), which was approved in early 1998 in the United States for
Stage IV (late stage) melanoma. All of these drugs are quite toxic and have
limited efficacy.
5
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Based on the comparative information, the lack of good treatment alternatives,
plus the fact that the cost of treatment with MELACINE is expected to be less
than most other forms of treatment, the Company filed a New Drug Submission
("NDS") with the Canadian Health Protection Branch ("HPB") in 1997. The NDS is
presently in regulatory review. The Company has answered all questions submitted
to date by the HPB and addressed all issues identified during a manufacturing
facility inspection by the HPB last summer. The Company continues to work with
the HPB to expedite successful conclusion of the necessary regulatory approval
process for MELACINE.
The Company filed a license application for MELACINE with the European Agency
for the Evaluation of Medicinal Products ("EMEA") in the first quarter of 1998.
However, the application was withdrawn in November 1998 after the EMEA requested
the submission of additional clinical and product data by January 1999. As these
data would not be available within that time period and following the advice of
the EMEA, the Company withdrew the application, preserving the right to submit
the requested clinical data at a later date. The Company has been working
closely with the FDA to define the data package required for submission of a
license application in the United States.
A second Phase 3 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 did not receive vaccine treatment but were only observed. This study
of 689 patients reached full accrual in late 1996 with final analysis of disease
recurrence expected between late 1999 and late 2000, depending on the actual
number of recurrences.
In 1995 the FDA allowed the Company to begin a third Phase 3 clinical trial.
This study compares patients with Stage IV melanoma receiving the combined
therapy of MELACINE and a low-dose regimen of Schering-Plough Corporation's
INTRON A (interferon alfa-2b) with a control arm of patients receiving only
INTRON A. Results of this study are expected in late 1999. In a pilot study of
treatment with MELACINE followed by INTRON A, seven patients 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. The data 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 nonresponders. The 44% response
rate (8 of 18 patients) was higher than that obtained previously with either
agent alone.
In 1998 the Company granted worldwide marketing rights for MELACINE to Schering-
Plough Corporation. 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. The Company had in 1992 licensed the rights to
market MELACINE in Canada to Biomira, Inc. ("Biomira") of Edmonton, Alberta,
Canada. During 1998 the Company reacquired those rights from Biomira and granted
them to Schering-Plough Corporation.
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. Malcolm S. Mitchell. The
University is entitled to royalty payments from the Company upon commercial sale
of MELACINE melanoma theraccine.
6
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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 and gastrointestinal 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 2 clinical data
showing that its THERATOPE theraccine for metastatic breast cancer provides a
median survival of more than 26 months as compared to less than 10 months
achieved historically with chemotherapy. Biomira, in collaboration with Chiron
Corporation, announced in November 1998 the start of a pivotal Phase 3 trial to
evaluate the effectiveness of THERATOPE theraccine in treating metastatic breast
cancer. The study, believed to be the largest of its kind in this patient
cohort, will include 75 to 80 centers worldwide studying approximately 900
evaluable patients. Primary endpoints for the study are time to disease
progression and survival. The study is expected to reach full accrual after 18
months, with submission for regulatory approval to follow, assuming favorable
study results.
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. Under the license/supply agreement, the Company granted SB a
nonexclusive, 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. In late 1997, SB began a Phase 1
trial with a cancer vaccine that utilized the Company's adjuvants and is
continuing development in 1998.
Infectious Disease Vaccines
- ---------------------------
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 certain of its adjuvants to SmithKline Beecham ("SB")
in three separate agreements for use in vaccines for infectious diseases that SB
is developing. The first agreement, signed in 1991, provides for 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
7
<PAGE>
adjuvants for vaccines against herpes, hepatitis B, malaria, human papilloma
virus and respiratory syncytial virus. During 1998 SB continued to advance the
development of several vaccines covered by this agreement. In December 1998 SB
announced Phase 3 safety and efficacy results of a new, more powerful hepatitis
B vaccine containing the Company's MPL immunomodulator. This new vaccine was
developed to address low or nonresponding patients to SB's current hepatitis B
vaccine, ENGERIX-B. ENGERIX-B is the world's leading hepatitis B vaccine with
over 450 million doses distributed worldwide. While the three-dose ENGERIX-B
regimen is effective in most people, certain segments of the population,
including the elderly with decreased immune function and hemodialysis patients,
do not receive adequate protection. In addition, some healthy young individuals
require additional doses to achieve sufficient buildup of antibody levels. The
new vaccine combines the antigen in ENGERIX-B with SB's novel adjuvant, SBAS4,
which contains the Company's MPL. In the clinical trial in nonresponders
comparing ENGERIX-B with the new vaccine, seroconversion rates (protective
antibody levels) were measured one month after each of three vaccine doses; at
zero, one and six months. After the first dose, 78% of the group given the new
vaccine seroconverted versus 59% of the ENGERIX-B group. After two doses, 96%
versus 76% seroconverted. After the third and final treatment, 98% of patients
receiving the vaccine containing MPL seroconverted compared to only 81% of the
patients given ENGERIX-B. SB has indicated that it plans to file for
registration of the new hepatitis B vaccine for use in low and nonresponders by
the end of 2000.
SB is also conducting a clinical trial using MPL, which is designed to test the
efficacy of a novel herpes vaccine in a study using a selected consort design.
In the trial one partner in a couple has herpes and the other does not. The
vaccine is being tested for its ability to prevent the spread of herpes between
partners.
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 has rights to develop 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 that include the Company's adjuvants. Pursuant to this agreement, the
Company granted SB a co-exclusive, worldwide license to use certain of 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 certain of the
Company's adjuvants in a human papillomavirus ("HPV") (genital warts) vaccine, a
co-exclusive license for a tuberculosis vaccine, and a nonexclusive 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. Vaccines under this agreement are in early stages of development.
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 certain 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. During 1998 WLV&P
8
<PAGE>
continued clinical development of a pediatric combination vaccine containing MPL
immunomodulator as an adjuvant.
Additionally, Merck & Co., Inc. and CEL-SCI Corporation have both entered into
option agreements with the Company to use MPL in AIDS vaccines each is
developing.
In the course of product development, the Company has extensively studied the
structure/function relationships of its complex immunostimulant molecules
derived from bacterial sources. With this information, Company scientists
designed synthetic small molecules with a broad spectrum of properties. These
compounds should result in an expanding product pipeline that will include the
next generation of novel adjuvants for broad use in therapeutic and prophylactic
vaccine applications. The Company's second-generation adjuvant technology
platform is based on novel AGP (aminoalkyl glucosamine phosphate) adjuvants. In
animal models these new synthetic compounds display potent bioactivity, possess
an excellent safety profile and are amenable to alternative methods for vaccine
delivery, such as intranasal delivery. Synthetic AGP compounds may also provide
advantages in ease of formulation, manufacturing scale-up and simplified quality
assurance. It has been shown in animal models that mucosal immunity is
stimulated using intranasal delivery of vaccines containing the Company's
synthetic adjuvants. The ability to stimulate mucosal immunity, considered an
important early defense mechanism against respiratory, gastrointestinal and
sexually transmitted diseases, presents the opportunity to develop a new line of
prophylactic and therapeutic vaccines. Company scientists have successfully used
AGPs in preclinical testing of tetanus, hepatitis B and influenza vaccines.
Plans are underway to initiate human clinical trials of AGPs to generate safety
data which will be important in attracting future collaborators.
In 1998 the Company announced it acquired exclusive worldwide rights to a novel
molecular adjuvant technology developed at the Eppley Institute for Cancer
Research at the University of Nebraska. This molecular adjuvant technology
includes a class of synthetic molecules that have the unique, dual ability to
both target and stimulate specific immune system cells. The broad-based
technology has potential application in vaccines against certain cancers and
chronic infectious diseases, including hepatitis B and CHLAMYDIA TRACHOMATIS, a
highly prevalent sexually transmitted disease which can lead to pelvic
inflammatory disease, sterility and blindness. Company scientists are evaluating
the molecular adjuvant technology in cancer vaccine models as well.
Additional business opportunities are represented by the AGP and molecular
adjuvant technologies. Since both are unencumbered by licensing arrangements,
the Company has the potential to realize new revenue streams by establishing
corporate collaborations.
Other Vaccines
- --------------
Another significant opportunity was added in 1996 to the Company's 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 provided SB Pharma with the right to
use certain of the Company's adjuvants commercially upon regulatory approval of
SB Pharma's allergy vaccines. In 1998 development of SB Pharma's allergy
vaccines was assumed by Allergy Therapeutics Ltd. ("ATL"). Under the agreement
between ATL and the Company, ATL has rights to MPL immunomodulator for use in a
generation of allergy desensitization products. Current allergy desensitization
involves a series of injections of allergen extracts administered by a health
care professional initially weekly, later monthly, for up to three years. Early
Phase 2 clinical studies have shown that with the addition of MPL, ATL's new
generation of allergy vaccines may provide desensitization
9
<PAGE>
with fewer immunizations. In addition a new sublingual delivery system under
development at ATL may increase patient compliance by allowing self-
administration of these novel vaccines. ATL has a very aggressive clinical trial
program underway. Should trials go as planned, MPL may be included in a new
allergy desensitization product, initially on a named-patient basis in the
second half of 1999.
Under the agreement with ATL, the Company will receive an annual license fee
prior to, and minimum annual royalties subsequent to, regulatory approval of any
ATL 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.
Cardioprotectant
- ----------------
Ischemia-reperfusion injury is damage that can occur in tissue during the oxygen
deprivation of ischemia and when blood flow is restored after such events as a
heart attack or a planned event such 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. The injury can result in a number of complications:
infarction (tissue death), myocardial stunning (depression of heart function),
arrhythmias (irregular heart beats) and in some cases, death.
It is well established in animal models that a phenomenon termed "ischemic
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). This
activity elicits both a window of immediate protection that lasts for up to two
hours as well as a second window of protection that begins approximately 12
hours later. 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 the heart. The Company had previously pursued
development of a natural compound, MPL-C cardioprotectant, that was found to
pharmaceutically mimic certain aspects of ischemic preconditioning.
Subsequently, the Company's synthetic chemistry program discovered a novel
cardioprotectant that is fast acting, with high potency and an improved
therapeutic index, as compared to MPL-C.
In 1997 the Company prioritized its cardiology program on development of the new
synthetic compound, RC-552 cardioprotectant. Since then, preclinical studies of
RC-552 have been conducted in several animal heart models (including dog,
rabbit, mouse and pig) by Company and collaborating scientists in leading
research institutions. Results indicate the drug possesses a unique profile in
that it reduces infarct size, reduces stunning and lowers the incidence of
arrhythmias caused by ischemia-reperfusion injury. Dr. Dipak Das of the
University of Connecticut College of Medicine studied RC-552 in a canine
cardiopulmonary bypass model. In this model RC-552 was administered in a single
dose prior to surgery, followed by continuous infusion of a smaller dose
throughout a one-hour and forty-minute ischemic period and a subsequent three-
hour reperfusion period. The results showed that RC-552 reduced damage to the
heart by 65 to 70 percent.
The findings of Dr. Das and other investigators that RC-552 provides protection
in a model of severe cardiac ischemia during cardiopulmonary bypass, and that it
provides rapid and continuous protection with drug infusion, have important
implications for
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<PAGE>
its clinical use. It may now be possible to protect surgery patients immediately
after giving drug, during the entire operation and through the post-surgical
periods, when they are still at risk for complications of ischemia-reperfusion
injury. There currently is no drug approved to prevent this condition, which
occurs in approximately 25% of coronary artery bypass graft ("CABG") surgeries
based upon a composite endpoint of infarction, severe stunning and death.
Because of the Company's experience with MPL-C, the FDA has determined that RC-
552 can proceed directly into advanced clinical studies in open heart bypass and
aortic valve replacement surgery patients following filing of an IND.
Potential clinical applications for RC-552 cardioprotectant may include CABG
surgery, aortic valve replacement, angioplasty, non-cardiac surgery in high risk
patients, unstable angina, acute MI thrombolytic therapy and organ
transplantation.
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.
Additionally, physicians and veterinarians use the products 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 infectious
diseases, 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.
Sources and Availability of Raw Materials
- -----------------------------------------
Materials for producing the Company's pharmaceutical products come from a number
of sources. Most of its products are derived from biological organisms, which
are grown and maintained within the Company's facilities. Critical organisms,
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 generally 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
11
<PAGE>
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>
1998 1997 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Sales:
Research products $ 481 484 502
Custom adjuvants and research
products 2,057 2,259 1,046
Other - - 11
------ ------ ------
Total sales 2,538 2,743 1,559
Investment income, net 746 942 1,017
Fees from licenses and
contracts 2,841 2,834 2,042
Other (2) 11 5
------ ------ ------
Total revenues $ 6,123 6,530 4,623
====== ====== ======
Export sales $ 2,099 2,262 1,205
====== ====== ======
</TABLE>
The Company plans to license its products to marketing partners for all
applications. It filed for marketing approval of MELACINE in Canada in 1997 and
plans to file in the United States later. The Company has granted worldwide
marketing rights for MELACINE to Schering-Plough Corporation in exchange for
license fees, milestone payments, transfer payments and royalties. The Company
will manufacture MELACINE to supply potential worldwide demand and transfer
finished product to its partner. In the area of vaccine adjuvants the Company
has several license agreements in place. In the areas of synthetic adjuvants and
cardioprotection, if preclinical and clinical trial data are favorable, the
Company intends to grant additional 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 preparing to
conduct a Phase 2 or 3 human clinical trial with its synthetic cardioprotectant,
RC-552, in the prevention of heart damage associated with heart surgery. The
Company will seek a corporate partner to assist in the clinical trial and share
the substantial financial risk of final development of the cardioprotectant.
12
<PAGE>
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 for the Company's corporate partners' premarketing needs and
research products, were shipped primarily to Europe, Japan and Canada. Note 10
of the Notes to Financial Statements on page 45 of this report on Form 10-K
contains information about the Company's major customers.
RESEARCH AND DEVELOPMENT
The primary source of new product candidates is internal research. Additionally,
cell lines for the MELACINE melanoma theraccine antigens have been licensed from
the University of Southern California for a royalty fee from commercial sales of
MELACINE, and certain molecular adjuvant technology has been licensed from the
University of Nebraska in consideration for the payment of royalties upon
commercialization. Costs and expenses for research and development activities
were $7,872,000 in 1998, $8,184,000 in 1997 and $6,203,000 in 1996.
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 Biologic License
Application ("BLA") or a Product License Application ("PLA") and an
Establishment License Application ("ELA"). (The BLA and PLA are both referred to
as BLA in the following paragraphs.) For synthetic drugs that might be
developed, the Company would request approval of a New Drug Application ("NDA")
rather than a BLA.
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 1
studies are conducted with human volunteer patients to determine the maximum
tolerated dose and to discover the possible side effects of the substance. Phase
2 studies are conducted with groups of patients having a specific disease in
order to determine the most effective doses and schedules of administration.
Phase 3 involves wide-scale studies that are adequately controlled in order to
provide statistically valid data on response rates which can be compared with
current therapies, including drugs or biologics.
13
<PAGE>
In the United States data from Phase 1, 2 and 3 trials are submitted in a BLA to
the FDA. The BLA 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. BLA approval by the
FDA is necessary before the product may be marketed in the United States.
During the BLA 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 of seven
years. There may be multiple designations of Orphan Drug status for a given
biologic (or drug) and indication; however, only the sponsor of the first
approved BLA (or NDA) for a given biologic (or drug) 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.
14
<PAGE>
PATENTS AND PROPRIETARY PROTECTION
The Company has obtained and applied for patents in the United States and
several foreign countries. The Company has 22 issued United States patents with
expiration dates ranging from 2001 to 2015. 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 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.
MELACINE melanoma theraccine, MPL immunomodulator and the Company's logo are
registered trademarks in the United States. INTRON-A is a registered trademark
of Schering-Plough Corporation and THERATOPE is a registered trademark of
Biomira, Inc. DETOX adjuvant is a trademark of the Company. In this document
trademarks are designated with capital letters.
EMPLOYEES, CONSULTANTS AND COLLABORATORS
As of December 31, 1998 the Company had 107 full-time and 5 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.
15
<PAGE>
Item 2. PROPERTIES
The Company's facilities are located near Hamilton, Montana, on a 35-acre
complex owned by the Company. Its buildings contain approximately 60,000 square
feet of laboratory, pilot plant, commercial-scale manufacturing, 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 ("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
generated and were subsequently deposited at the Landfill from 1982 to 1985
which the Landfill had permits to receive. The NIH unilaterally and voluntarily
initiated and completed work pursuant to an interim remediation plan approved by
the DEQ to remove and decontaminate the believed source of 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 1999 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 unilaterally and voluntarily conducted by the NIH and which
involved 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 are being used by the DEQ to evaluate
the effectiveness of the remediation efforts to date. The second interim action
plan calls for the wells to be installed in three phases: Phase I included
occupied properties with the highest remaining contamination levels; Phase II
included occupied properties with lesser degrees of contamination; and Phase III
consisted largely of vacant properties. Preliminary studies completed in 1994
estimated the cost of the wells to be approximately $1,400,000. Information
indicates that a total of 19 alternate water supply wells have been installed at
a cost of approximately $1,000,000. The DEQ could require the PRPs to implement
further remediation should these wells not provide sufficient quality or
quantity of water. Additionally, the NIH has indicated it is undertaking Phase
II groundwater remediation to intercept and treat contaminated groundwater near
the eastern Landfill boundary. The NIH has projected costs for this Phase II
groundwater remediation to be in excess of $1,000,000 through 1999. 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.
The DEQ initiated an action in 1997 against the Company, the Landfill and the
owners of the Landfill seeking recovery of past alleged costs associated with
its oversight activities in the amount of $238,000, as well as a declaratory
judgment finding the parties liable for future oversight costs, plus civil
penalties in the event the parties fail to comply. Since the action was
initiated, the Company and the NIH jointly have received statements requesting
payment of an additional $27,000. In May 1998 the Company was informed that the
DEQ had entered into a settlement agreement
16
<PAGE>
with the Landfill and its owners, whereby the Landfill and its owners agreed to
collectively pay the DEQ approximately $35,000. The Company believes that it has
meritorious defenses to the claim, including the amount thereof, and that there
are other responsible parties. The Company has filed a response to the action,
including a counterclaim and motions for a change in venue and to dismiss.
Recently, the Court granted the Company's motion for a change of venue to
Ravalli County where the Company is located. The Court did not rule on the
motion to dismiss, which motion will now be acted upon by the Court in Ravalli
County. Recently the DEQ filed a Motion for Stay of Proceedings pending the
outcome of the action in Federal District Court discussed below in which the DEQ
is a plaintiff. The Court granted the motion which the Company did not oppose.
On April 21, 1998, the Company received notice that the United States of America
(U.S.), acting on behalf of the Department of Health and Human Services, which
oversees the NIH, filed suit in United States District Court seeking
contribution from the Company of an "equitable share" of past and future
response costs incurred by the NIH in connection with the remediation at and
near the Landfill. The complaint alleges that as of September 30, 1997, the U.S.
had incurred response costs in excess of $3,400,000 and that it expects to incur
more than $1,000,000 in additional response costs. The Company filed a response
to the action. On or about June 4, 1998 the Company received notice that the
U.S. had entered into a settlement agreement with the Landfill and the Landfill
owners pursuant to which the settling parties agreed to make payment in the
amount of $440,000. In view of the settlement, the U.S. filed with the Court a
Joint Motion for Stay of Proceedings between the U.S., the Landfill and Landfill
owners. Assuming the settlement is completed, the action against the Landfill
and the Landfill owners would be dismissed. Although the Company believes it has
meritorious defenses to the cost recovery claim, including the amount thereof,
and that there are other responsible parties, there can be no assurance that the
Company will be successful in its defenses to claims arising out of the
Landfill, including the claims made by the U.S.
On or about June 6, 1998 the DEQ filed a complaint in the United States District
Court against the Company, the Landfill and the owners of the Landfill seeking
recovery of past alleged costs associated with its oversight activities in the
amount of $258,000, of which it indicated not more than $154,000 had been
reimbursed, plus interest and attorneys' fees and costs as well as a declaratory
judgment finding the parties liable for future response costs. This action is
similar to that filed in the State District Court where further action has been
deferred pending the outcome of the Federal action. The Company has filed a
response to the action, including a counterclaim against the DEQ. The DEQ has
initiated discovery. The Company responded to a discovery request. The Company
believes that is has meritorious defenses to the claim, including the amount
thereof, and that there are other responsible parties. There can be no assurance
that the Company's defenses and counterclaim will be successful.
Depending upon the eventual outcome of the above discussed litigation and when
in time the litigation is concluded and the success of the Company in pursuing
defense and indemnity with insurance carriers, the outcome may or may not have a
material adverse effect on the Company's financial condition. Accordingly, it is
not possible at present to accurately predict whether an adverse outcome will
have a material adverse effect on the Company's financial condition. The Company
is unable to determine its overall potential liability with respect to the
Landfill at this time. As of December 31, 1998, the Company has accrued a
reserve of approximately $290,000 to cover legal, consulting and DEQ
reimbursement costs associated with the Company as a PRP. Net costs charged
against operations in 1998, 1997 and 1996 were $104,000, $42,000 and $13,000,
respectively.
17
<PAGE>
In June 1997 a complaint was filed in District Court in Ravalli County against
the Company by a former employee who was discharged for cause in June 1996. The
plaintiff alleges discharge in violation of the Montana Wrongful Discharge from
Employment Act ("Act") and further, that discharge was for refusal to violate
public policy. The Court granted dismissal with respect to that portion of the
complaint which alleges termination for refusal to violate public policy.
Plaintiff filed a motion for reconsideration asking the Court to reverse its
decision with respect to the issue of termination for refusal to violate public
policy and requested the Court for permission to amend the complaint to include
additional allegations relative to the public policy issue. On April 6, 1998 the
Court allowed plaintiff to amend the complaint as requested. If plaintiff should
ultimately prevail on the issue of discharge in violation of the Act, the
potential liability of the Company would be approximately $320,000, exclusive of
the Company's attorneys' fees and related costs. If the plaintiff prevails on
the public policy issue, the Company could be subject to punitive damages of an
unknown amount in addition to the potential liability for violation of the Act.
The Company believes that it has a meritorious defense and plans to vigorously
defend the suit. However, it is not possible to reliably assess the outcome.
Depending upon the eventual outcome of this litigation and when in time the
litigation is concluded, the outcome may or may not have a material adverse
effect on the Company's financial condition. It is possible the case may go to
trial during 1999.
The plaintiff also filed a petition for Judicial Review in District Court in
Missoula County naming the Company and the State of Montana Department of Labor
and Industry respondents and asking the Court to review and overturn the
Department of Labor's decision finding plaintiff was terminated for misconduct
as defined in MCA Section 39-51-2303 and, therefore, not allowing plaintiff to
collect unemployment benefits. The Company filed a response arguing the
correctness of the Department of Labor's decision. The Court remanded the matter
to the Department of Labor for further testimony, which was taken. The
Department of Labor recently issued a Findings of Fact; Conclusions of Law; and
Order in which it confirmed its previous findings that the plaintiff willfully
and purposefully failed to follow the reasonable instructions of the Company
and, therefore, was discharged for misconduct connected with his work and
directly affecting his employment. Accordingly, the Department confirmed its
previous findings that the plaintiff is not eligible to receive unemployment
insurance benefits. It is not known at this time what further action, if any,
the plaintiff may take with respect to his claim for unemployment insurance
benefits.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 1998.
18
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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 26, 1999.
<TABLE>
<CAPTION>
Name Age Position and Period Served
- ---- --- --------------------------
<S> <C> <C>
Robert E. Ivy 65 President, Chief Executive Officer
and director of the Company since
1987; Chairman of the Board of
Directors since 1989; member of the
Board of Directors of The
International Heart Institute of
Montana Foundation since 1995 and
Sonus Pharmaceuticals, Inc., since
February 1999.
John L. Cantrell, Ph.D. 60 Executive Vice President and
director of the Company since 1981.
Vern D. Child, C.P.A. 54 Vice President-Finance of the
Company since 1988; Treasurer since
1986; Assistant Secretary since
1989.
Gary T. Elliott, Pharm.D., 42 Vice President-Pharmaceutical
Development of the Company since
1994; Director of Pharmaceutical
Sciences from 1992 to 1994.
Ronald H. Kullick, R.Ph., J.D. 56 Vice President-Legal Counsel and
Secretary of the Company since
1989.
Charles E. Richardson, Ph.D. 47 Vice President-Pharmaceutical
Discovery of the Company since
1994; Director of Production,
Engineering and Technical Services
from 1989 to 1994.
Kenneth B. Von Eschen, Ph.D. 50 Vice President-Clinical and
Regulatory Affairs of the Company
since 1994; Director of Clinical
and Regulatory Affairs from 1992 to
1994.
</TABLE>
19
<PAGE>
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the Symbol:
RIBI. The high and low sales prices shown below were compiled from information
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 4, 1999 the Company had approximately 1,499
shareholders of record.
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low
---- -- ---- ---
<S> <C> <C> <C> <C>
First quarter $ 6.25 3.50 5.63 3.75
Second quarter 6.19 4.75 4.88 3.38
Third quarter 5.31 2.25 4.69 3.44
Fourth quarter 3.19 1.81 4.75 3.50
</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.
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>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
- ----------------------
Sales & other revenues $ 2,536 2,754 1,564 959 1,019
Licenses and contracts 2,841 2,834 2,042 1,848 2,075
Investment income, net 746 942 1,017 1,216 1,460
Net loss (7,633) (6,417) (5,589) (5,317) (3,790)
Net loss per common
share (.38) (.32) (.30) (.28) (.20)
Dividends per common
share - - - - -
Research & development
expenses 7,872 8,184 6,203 5,530 4,993
Average number of
shares outstanding 20,318 20,072 18,890 18,877 18,657
December 31,
- -----------
Cash, cash equivalents
& investments $ 13,225 13,370 14,512 19,824 25,967
Total assets 29,828 27,770 28,298 33,911 38,824
Long-term debt - - - - -
Shareholders' equity 25,600 25,415 26,847 32,427 37,338
</TABLE>
20
<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, 1998
the Company's accumulated deficit was approximately $49,874,000.
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 its
research and development, including the preparation of commercial license
applications 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 that 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.
In computer systems and applications developed in the 1970s and 1980s, years
were often stored in a 2-digit rather than 4-digit format to save expensive
computer storage and processing space. These systems correctly assumed the 2-
digit year in data storage was preceded by the digits "19." At Year 2000, a 2-
digit date of "00" may not be interpreted correctly by these systems, which
could lead to incorrect or inadequate results, or equipment failure in cases
where computer chips regulate equipment operation. The Company established a
committee, which made a preliminary assessment, and hired an outside firm which
determined in reasonable detail the Company's exposure to the "Year 2000"
problem. Systems that may require remediation have been identified and
prioritized. Remediation of identified systems, including contingency planning,
is approximately 90% complete with completion targeted for May 1, 1999.* The
Company has identified what it considers to be critical vendors. A survey to
determine the level of vendor compliance is in progress with a targeted
completion date of July 1, 1999.* Depending upon the results of the vendor
survey, appropriate contingency plans will be developed prior to January 1,
2000.* The Company expects to continue to incur both internal staffing costs, as
well as consulting and other expenses related to these issues. These costs will
be expensed as incurred. The Company expects that solutions will involve a mix
of purchasing new systems and modifying existing systems. The Company is not yet
able to estimate the potential costs associated with the Year 2000 problem. At
December 31, 1998 approximately $67,000 has been spent for assessment and
remediation. Additionally, approximately $170,000 has been spent for the
acquisition and implementation of software for tracking and managing
manufacturing and for new accounting systems that, under other circumstances,
would have been purchased at a later time. The Company has allocated additional
funds of approximately
21
<PAGE>
$200,000 to complete its identification, necessary remediation and contingency
planning. Although the Company is working to solve these issues in a timely
manner, there can be no assurance that all of the Year 2000 problems will be
resolved before the end of 1999 or that all of the Company's vendors and
customers will be Year 2000 compliant. At the present time the Company does not
expect Year 2000 issues to have a major impact on its operation. Most of its raw
materials are fairly common and are available from several different suppliers.
The Company is developing some contingency plans to control the impact of an
unforeseen failure. Depending upon the nature and length of a possible Year 2000
compliance failure by the Company and/or its vendors, the result could be a
minor delay in the production of one or more of the Company's products with
little, if any, financial impact; or, in a worst case scenario, for example, in
the event of a long-term disruption of electrical and/or natural gas service,
the result could be partial or complete cessation of operations of the Company
pending restoration of service. Depending upon the event, it could impact the
ability of the Company to produce product in response to potential orders from
its customers and otherwise effect the normal day-to-day operations of the
Company, which could have a material adverse financial effect upon the Company.
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. 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 reports to the
Securities and Exchange Commission. Forward-looking statements herein are
followed by an asterisk ("*").
RESULTS OF OPERATIONS
Revenues
- --------
The Company has received limited revenues from commercial sales and sales of
clinical supplies. The balance of its revenues has been from contracts and
licenses and investment income earned on cash balances and investments. The
Company anticipates that its revenues from operations, which increased from
approximately $4,623,000 in 1996 to approximately $6,530,000 in 1997 and
decreased slightly to approximately $6,123,000 in 1998, will continue to be
limited for the next year, and probably longer.*
Fees from licenses and contracts increased from $2,042,000 in 1996 to $2,834,000
in 1997 and remained level at $2,841,000 in 1998. In January 1997 a fifth
agreement was signed with SmithKline Beecham ("SB") granting them use of the
Company's adjuvants in various vaccines being developed by SB. This most recent
agreement, 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 nonexclusive license to use the
Company's adjuvants in the development of additional infectious disease vaccines
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.* To date there have been no commercial sales of adjuvants pursuant to
licensing agreements.
22
<PAGE>
Investment income decreased from $1,017,000 in 1996 to $942,000 in 1997 and
$746,000 in 1998. The year-to-year reduction in investment income has been due
substantially to reductions in the amount of funds available for investment
during those periods. The average interest rate in the investment portfolio
increased from approximately 6.03% at December 31, 1996, to 6.14% at December
31, 1997, and decreased to 5.35% at December 31, 1998. Additionally, losses, net
of gains, realized from sales of investments were approximately $11,000 in 1997
and $20,000 in 1998.
Purchases and Production
- ------------------------
Purchases and production costs increased from $988,000 in 1996 to $1,337,000 in
1997 and to $1,836,000 in 1998. Such costs, as a percentage of sales, declined
from 1996 to 1997 as the volume of products manufactured in the manufacturing
facility increased. The costs increased, as a percentage of sales, from 1997 to
1998. In 1998 the manufacturing plant underwent additional validation testing
necessary as part of the MELACINE commercial licensing activities, resulting in
a decrease in plant throughput for the year.
Research and Development
- ------------------------
The Company incurred research and development expenses of approximately
$6,203,000, $8,184,000 and $7,872,000 in 1996, 1997 and 1998, respectively. The
increase in 1997 principally reflects, in addition to ongoing preclinical and
clinical programs for the Company's products under development, costs of
preparing and filing commercial license applications. Research and development
expenses consisted primarily of salaries, contract consulting costs and
laboratory supplies. Labor costs decreased from approximately 43% of total
research and development costs in 1996 to 36% in 1997 and increased to 41% in
1998. Supply costs have ranged from 21% to 23% of total research and development
expenses throughout the three-year period. Contract consulting costs increased
from approximately 27% of total research and development expenses in 1996 to 36%
in 1997 and decreased to 29% in 1998. The year-to-year variance in expense can
be attributed to the level of activity in clinical, preclinical and commercial
licensing projects. The Company expects research and development expenses to be
lower from 1998 to 1999.* While the Company plans to continue its preclinical
development programs and complete patient accrual in its Phase 3 clinical trial
testing MELACINE administered in conjunction with interferon alfa-2b to treat
patients with late-stage melanoma, much of the work for the preparation of a
commercial licensing application for MELACINE in the United States has been
completed.* Lower research and development expenses are dependent, among other
things, on the rate at which patients are attracted to the Company's clinical
trials, the results experienced in trials and other research activities, and the
acceptance of regulatory filings by various regulatory agencies.
Selling, General and Administrative
- -----------------------------------
Selling, General and Administrative expenses increased from $3,021,000 in 1996
to $3,426,000 in 1997 to $4,048,000 in 1998. During this three-year period,
labor costs increased from $1,591,000 in 1996 to $1,692,000 in 1997 and to
$1,754,000 in 1998. In addition to labor costs, the increase in costs in 1997 is
mainly attributable to greater investor relations efforts, higher maintenance
costs and added depreciation. In 1998 the increase in costs, other than labor
costs, is primarily attributable to costs associated with litigation and the
landfill located in Ravalli County, Montana (see Item 3, "Legal Proceedings,"
page 16 of this report on Form 10-K). Additionally, other increases pertain to
Year 2000 assessment and remediation expenses, depreciation expense and
maintenance costs. The Company allocates part of its administrative and
depreciation costs, which are directly related to manufacturing, to the cost of
23
<PAGE>
producing products for sale and for use in clinical trials. Such costs allocated
in each year 1996, 1997 and 1998 were $808,000, $837,000 and $907,000,
respectively.
Net Loss
- --------
The Company's net loss increased from $5,589,000 in 1996 to $6,417,000 in 1997
and to $7,633,000 in 1998. Its net loss per share over the same period was $.30
per share in 1996, $.32 per share in 1997 and $.38 per share in 1998. The
weighted average number of shares outstanding increased approximately 6% from
1996 to 1997. The increase reflects shares issued in a sale of stock and
warrants to SB in January 1997 and the exercise of unrelated warrants in July
1997.
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 equivalents and investments totaled approximately $13,225,000 at December
31, 1998, as compared to approximately $13,370,000 at December 31, 1997.
The principal uses of cash during 1998 were approximately $4,966,000 for
operations, approximately $1,660,000 for deposits and other assets and
approximately $1,280,000 for plant and equipment. The Company used approximately
5% less cash in operations in 1998 than in 1997, reflecting on a cash basis
increased revenues. Increased cash basis revenues include cash collected under a
marketing license agreement, which may have to be returned if certain product
approval goals are not met (see Note 10 of the Notes to Financial Statements).
Cash requirements for operating activities in 1999 are expected to decrease
below 1998 levels as work is completed for clinical trials and commercial
licensing applications.* Additionally, revenues are expected to increase
slightly in 1999.* Projected cash requirements are dependent upon the Company
receiving the revenues that are anticipated and conducting the research,
particularly the clinical trials and commercial regulatory filings, that are
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.
In 1998 the Company obtained additional working capital from the sale of
convertible preferred stock for net proceeds of $7,714,000. Note 6 of the Notes
to Financial Statements contains more information about the sale. In 1997 the
Company's primary sources of cash were approximately $3,963,000 from the sale of
approximately 1,103,000 shares of common stock to SB and $963,000 from the
exercise of outstanding warrants and stock options. The Company has outstanding
warrants to purchase 500,000 shares at $5.00 per share that were issued to SB in
1997 as part of its stock purchase agreement. These warrants expire if not
exercised by January 1, 2000.
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. The Company believes that
presently 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 2002.*
24
<PAGE>
Item 3, "Legal Proceedings," on page 16 of this report on Form 10-K contains a
discussion of contingencies related to the Company's identification as a
Potentially Responsible Party for groundwater contamination at and near the
Bitterroot Valley Sanitary Landfill, the Company being a named defendant in
suits brought by the Montana Department of Environmental Quality seeking to
recover alleged costs associated with its oversight activities of the Landfill,
and a request for contribution of remediation costs incurred by the NIH. Item 3
also contains information regarding a suit filed by a former employee.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest earned on the Company's investment portfolio is affected by changes in
the general level of interest rates in the United States. The following table
provides information about the Company's investment portfolio including
principle cash flows and related weighted average interest rates by anticipated
maturity dates. At December 31, 1998 the Company's available-for-sale investment
securities, comprising primarily of debt instruments of major corporations and
the United States Government and its agencies, are substantially similar in
nature and have been combined for this presentation.
<TABLE>
<CAPTION>
Year Ended Principal Average
December 31, Maturing Interest Rate
------------ -------- -------------
(In Thousands)
<S> <C> <C>
1999 $ 6,849 5.34%
2000 5,640 5.37%
2005 5 5.42%
------
$12,494
======
Fair Value at
December 31, 1998 $12,501
======
</TABLE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . 26
Balance Sheets as of December 31, 1998 and 1997 . . . . . . . . . . . . . . . 27
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . 28
Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . 29
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . 31
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 32
25
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
INDEPENDENT AUDITORS' REPORT
KPMG
P.O. Box 7108
Billings, MT 59103
The Board of Directors and Shareholders
Ribi ImmunoChem Research, Inc.:
We have audited the accompanying balance sheets of Ribi ImmunoChem Research,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Billings, Montana
January 22, 1999
26
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
Assets
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 458 1,224
Available-for-sale investment securities
and accrued interest 12,767 12,146
Accounts receivable 1,302 870
Inventories 1,185 1,250
Other current assets 213 234
-------- --------
Total current assets 15,925 15,724
Property, plant and equipment, net 11,738 11,453
Deposits 1,568 -
Other assets, net 597 593
-------- --------
Total assets $ 29,828 27,770
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 275 611
Accrued liabilities 793 614
Deferred revenue 3,160 1,130
-------- --------
Total current liabilities 4,228 2,355
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par, 10,000,000
authorized shares; Series A convertible;
stated value $8,240,000; 8,240 shares issued
and outstanding in 1998 (aggregate liquidation
preference $8,429,000) 1 -
Common stock, $.001 par; 30,000,000 authorized
shares; 20,322,873 and 20,311,623 issued and
outstanding in 1998 and 1997, respectively 20 20
Additional paid-in capital 75,446 67,485
Accumulated other comprehensive income (loss) 7 (37)
Accumulated deficit (49,874) (42,053)
-------- --------
Total shareholders' equity 25,600 25,415
-------- --------
Total liabilities and shareholders'
equity $ 29,828 27,770
======== ========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Sales $ 2,538 2,743 1,559
Contracts and licenses 2,841 2,834 2,042
Investment income, net 746 942 1,017
Other, net (2) 11 5
-------- -------- --------
6,123 6,530 4,623
Costs and expenses:
Purchases and production 1,836 1,337 988
Research and development 7,872 8,184 6,203
Selling, general and administrative 4,048 3,426 3,021
-------- -------- --------
13,756 12,947 10,212
-------- -------- --------
Net loss $ (7,633) (6,417) (5,589)
======== ======== ========
Net loss per common share $ (.38) (.32) (.30)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Accumu-
lated
Other
Addi- Compre- Total
Pre- tional hensive Accumu- Share-
ferred Common Paid-in Income lated holders'
Stock Stock Capital (Loss) Deficit Equity
----- ----- ------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - 19 62,460 (5) (30,047) 32,427
Comprehensive loss:
Net loss - - - - (5,589) (5,589)
Other comprehensive loss:
Unrealized investment
losses - - - (23) - (23)
----- ------
Total - - - - - (5,612)
Issuance of 1,400 common shares
under stock grant program - - 6 - - 6
Issuance of 1,800 common shares
upon exercise of options - - 6 - - 6
Compensation relating to
stock options - - 20 - - 20
----- ----- ------ ----- ------ ------
Balance at December 31, 1996 - 19 62,492 (28) (35,636) 26,847
Comprehensive loss:
Net loss - - - - (6,417) (6,417)
Other comprehensive loss:
Realized and unrealized
investment losses - - - (20) - (20)
Investment losses
included in net loss - - - 11 - 11
----- ------
- - - (9) - (9)
----- ------
Total - - - - - (6,426)
Issuance of 3,000 common shares
under stock grant program - - 13 - - 13
Issuance of 22,400 common shares
upon exercise of options - - 89 - - 89
Sale of 1,103,448 common shares
in a private placement, net - 1 3,962 - - 3,963
Issuance of 291,332 common shares
upon exercise of warrants - - 874 - - 874
Compensation relating to
stock options - - 55 - - 55
----- ----- ------ ----- ------ ------
Balance at December 31, 1997 - 20 67,485 (37) (42,053) 25,415
</TABLE>
29
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (continued)
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Accumu-
lated
Other
Addi- Compre- Total
Pre- tional hensive Accumu- Share-
ferred Common Paid-in Income lated holders'
Stock Stock Capital (Loss) Deficit Equity
----- ----- ------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive loss:
Net loss - - - - (7,633) (7,633)
Other comprehensive income:
Realized and unrealized
investment gains - - - 24 - 24
Investment losses
included in net loss - - - 20 - 20
----- ------
- - - 44 - 44
----- ------
Total - - - - - (7,589)
Issuance of 1,400 common shares
under stock grant program - - 5 - - 5
Issuance of 9,850 common shares
upon exercise of options - - 36 - - 36
Sale of 8,240 preferred shares
in a private placement, net 1 - 7,713 - - 7,714
Accretion of liquidation
preference on preferred stock - - 188 - (188) -
Compensation relating to
stock options - - 19 - - 19
----- ----- ------ ----- ------ ------
Balance at December 31, 1998 $ 1 20 75,446 7 (49,874) 25,600
===== ===== ====== ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,633) (6,417) (5,589)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 1,054 1,002 935
Common stock grants 5 13 6
Compensation relating to stock options 19 55 20
Discount accretion and investment losses 39 (17) (415)
Abandoned patents and asset sales 23 18 18
Changes in operating assets and
liabilities:
Accounts receivable (432) (818) 673
Inventories 65 18 (285)
Other current assets 21 39 (23)
Accounts payable (336) 293 65
Accrued liabilities 179 44 (31)
Deferred revenue 2,030 567 (67)
-------- -------- --------
Net cash used by operating
activities (4,966) (5,203) (4,693)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,280) (796) (924)
Payments for other assets and deposits (1,660) (78) (93)
Proceeds from sale of assets 5 1 -
Proceeds from maturities of
held-to-maturity securities - - 3,121
Proceeds from maturities and
sales of available-for-sale securities 15,694 8,214 4,784
Purchases of available-for-sale
securities (16,309) (6,272) (1,956)
Purchases of held-to-maturity
securities - - (97)
-------- -------- --------
Net cash provided (used) by
investing activities (3,550) 1,069 4,835
-------- -------- --------
Cash flows from financing activities:
Sale of common stock, net - 3,963 -
Sale of preferred stock, net 7,714 - -
Proceeds from exercise of warrants - 874 -
Proceeds from exercise of options 36 89 6
-------- -------- --------
Net cash provided by financing
activities 7,750 4,926 6
-------- -------- --------
Increase (decrease) in cash and cash
equivalents (766) 792 148
Cash and cash equivalents at beginning
of year 1,224 432 284
-------- -------- --------
Cash and cash equivalents at end of year $ 458 1,224 432
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
31
<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 recognized over the term of
the contract.
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, in 1997, mutual funds that have invested in marketable debt
securities. All investment securities are available to support current
operations and are, therefore, classified as "available-for-sale." These
available-for-sale securities are recorded at fair value, which is based on
quoted market prices.
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 other comprehensive income 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.
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
40 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 and takes into consideration the
liquidation preference of the preferred stock. Diluted net loss per common share
is not presented, as the effect is antidilutive.
COMPREHENSIVE INCOME. Statement of Financial Accounting Standard No. 130
entitled "Reporting Comprehensive Income" ("FAS 130") was issued in 1997 and
adopted by the Company in 1998 on a retroactive basis as permitted by the
32
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
standard. FAS 130 requires that changes in shareholders' equity that result from
transactions and economic events other than those with shareholders be included
with net income or loss to arrive at "comprehensive income or loss." The Company
has reported comprehensive loss, net of income taxes, in the Statements of
Shareholders' Equity and Comprehensive Income.
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 less than one year to
nearly 17 years. Unsuccessful patent application costs are expensed when the
patent is denied or abandoned.
INCOME TAXES. The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities and are measured by applying
enacted tax rates to taxable years in which such differences are expected to
reverse. 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 vest to the optionee.
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.
33
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(2) Investment Securities
The following is a summary of the Company's investment securities:
<TABLE>
<CAPTION>
Fair
Amortized Market Unrealized Unrealized
December 31, 1998 Cost Value Gains Losses
----------------- --------- --------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Securities of the U.S. Government
and its agencies $ 4,644 4,653 13 4
Corporate mid-term notes 7,373 7,372 8 9
Insured certificates of deposit 477 476 - 1
--------- --------- --------- ---------
12,494 12,501 21 14
Accrued interest 266 266 - -
--------- --------- --------- ---------
$ 12,760 12,767 21 14
========= ========= ========= =========
December 31, 1997
-----------------
Mutual funds investing primarily
in short to intermediate term
securities of the U.S.
Government and its agencies $ 4,717 4,661 - 56
Securities of the U.S. Government
and its agencies 3,453 3,470 17 -
Corporate mid-term notes 3,367 3,369 3 1
Insured certificates of deposit 508 508 - -
--------- --------- --------- ---------
12,045 12,008 20 57
Accrued interest 138 138 - -
--------- --------- --------- ---------
$ 12,183 12,146 20 57
========= ========= ========= =========
</TABLE>
Substantially all debt securities at December 31, 1998 mature within two years.
During 1998 the Company sold shares of two debt mutual funds and one corporate
mid-term note for $5,793,000. Book gains realized on the sales totaled
approximately $17,000, and book losses realized totaled approximately $37,000.
During 1997 the Company sold shares of a debt mutual fund for $500,000 and
realized a book loss of approximately $11,000. During 1996 the Company sold
shares of debt mutual funds for $425,000. Book gains realized on the sales
totaled approximately $3,000, and book losses realized totaled approximately
$3,000.
34
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(3) Inventories
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- ----------
(In Thousands)
S> <C> <C>
Raw materials $ 112 132
Work in process 1,024 1,053
Finished goods 49 65
---------- ----------
$ 1,185 1,250
========== ==========
</TABLE>
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- ----------
(In Thousands)
S> <C> <C>
Buildings $ 9,737 9,629
Equipment, furniture and fixtures 8,008 7,149
---------- ----------
17,745 16,778
Less accumulated depreciation 6,545 5,598
---------- ----------
11,200 11,180
Construction in progress 349 84
Land 189 189
---------- ----------
$ 11,738 11,453
========== ==========
</TABLE>
(5) Net Loss per Common Share
Net loss per common share is computed as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Net loss $ (7,633) (6,417) (5,589)
Accretion of liquidation preference
on preferred stock 188 - -
------ ------ ------
Net loss applicable to common stock $ (7,821) (6,417) (5,589)
====== ====== ======
Weighted average number of common shares
outstanding 20,318 20,072 18,890
====== ====== ======
Net loss per common share $ (.38) (.32) (.30)
====== ====== ======
</TABLE>
35
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
The Company has convertible preferred stock, warrants and stock options
outstanding that are described in Notes 6 and 7 of the Notes to Financial
Statements that could potentially dilute earnings per share in the future.
(6) Shareholders' Equity
In July 1998 RGC International Investors, LDC, ("Holder") purchased 8,240 shares
of convertible preferred stock of the Company for gross proceeds of $8,240,000
("stated value"). The preferred stock's liquidation preference equals its stated
value plus an amount equal to 5% per annum. Beginning the 91st day after the
July 17 closing, the preferred stock is convertible into shares of common stock
of the Company. From the 91st day until 120 days after the closing, the
conversion price was fixed at $6.04. After 120 days the conversion price floats
at the lesser of the fixed conversion price or a market price based on average
market bid prices for a defined period prior to the conversion date. The actual
number of shares of common stock that will be issued will depend upon the
preferred stock's liquidation preference and the actual conversion price when
the preferred stock is converted. Beginning with the 91st day from the closing
date, each thirty days thereafter, on a cumulative basis, a maximum amount of
15% of the preferred stock may be converted into shares of common stock if the
conversion price is less than $4.00. The Holder may not control more than 4.9%
of the Company's outstanding common stock at any given time. In addition, except
for block trades of not less than 15,000 shares of converted common stock, there
are restrictions on the number of converted common shares that may be traded on
any given trading day. Subject to certain conditions, the Company has the right
to redeem all or a portion of the preferred stock at a premium over the purchase
price paid by the Holder. In the event the Company fails to meet certain
obligations under the agreement with the Holder, the Holder can require the
Company to redeem the preferred stock at a premium over the purchase price paid
by the Holder. The Company's obligations under this provision generally include
maintaining an adequate number of authorized but not issued common shares for
conversion purposes, maintaining a current registration statement for the
converted common stock, and maintaining a listing for the Company's common stock
on the stock market. Certain liquidation or bankruptcy procedures would also
trigger the mandatory redemption provisions. Any shares not converted or
redeemed will automatically be converted into common stock in July 2001.
In early 1997, effective December 31, 1996, SmithKline Beecham ("SB") purchased
1,103,448 shares of common stock for $4,000,000. 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.
During 1997 warrants to purchase 291,332 shares of common stock at $3.00 per
share were exercised for $874,000. These warrants were issued in connection with
a sale of common stock in 1991.
(7) 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
36
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
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.
Nonemployees 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 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Shares available at beginning
of year 24,968 27,968 29,368
Shares granted 1,400 3,000 1,400
------ ------ ------
Shares available at end
of year 23,568 24,968 27,968
====== ====== ======
Weighted average grant date
fair value $ 3.57 4.13 4.57
====== ====== ======
</TABLE>
The Company has a stock option plan called 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 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, 1998 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 shareholders in
1986. The 1986 Plan expired in 1996, and no new options can be granted under it.
However, options already granted (908,000 shares, net of options that have been
exercised or forfeited) 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
37
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
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 ("Directors' Plan") for directors who are not employees of the
Company. The Directors' Plan was approved by shareholders in 1997. The
Directors' Plan provides for the grant of nonqualified options to purchase a
maximum of 210,000 shares of common stock. Each director who is not an employee
was granted options to purchase 30,000 shares on the later of the date the
Directors' Plan was adopted or on the date he first became a director. In
addition, immediately following each annual meeting of the Company's
shareholders, each director who is not an employee who continues as a director
after the meeting will be granted options to purchase 500 shares. The exercise
price of the options is the market price on the date of the grant. The options
vest and can be exercised at the rate of 50% on the date of grant and 25% on
each anniversary of the grant date. The options expire if not exercised within
ten years of the grant date. During 1996 options to purchase 150,000 shares at
$4.00 per share were granted under the Directors' Plan. During each year 1997
and 1998 options were granted to purchase 2,500 shares at prices of $3.63 and
$5.75 per share, respectively.
The following table sets forth the activity in the 1986 and 1996 stock option
plans and the 1996 Directors' Plan for the years ended December 31, 1996, 1997
and 1998. There were no SARs outstanding under the plans during the three year
period ended December 31, 1998.
38
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Options for Employees Discounted Options
and Directors for Directors
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
Average Average Total
Common Exercise Common Exercise Common
Shares Price Shares Price Shares
------ ----------- ------ ----------- ------
Shares under option:
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
Granted 128,500 3.65 13,864 3.32 142,364
Exercised (22,400) 3.96 - - (22,400)
Canceled (80,400) 7.16 - - (80,400)
--------- ------- ---------
Outstanding at
December 31, 1997 1,369,629 5.20 74,134 4.02 1,443,763
Granted 192,750 5.04 26,250 3.22 219,000
Exercised (9,850) 3.61 - - (9,850)
Canceled (50,650) 5.38 - - (50,650)
--------- ------- ---------
Outstanding at
December 31, 1998 1,501,879 $ 5.18 100,384 $ 3.81 1,602,263
========= ======= =========
Options exercisable at:
December 31, 1996 864,506 $ 5.71 53,369 $ 4.31 917,875
December 31, 1997 1,032,372 5.49 65,181 4.14 1,097,553
December 31, 1998 1,159,472 5.35 83,044 4.05 1,242,516
Ranges of exercise
prices and average months
(mo) to expiration of:
Options outstanding at
December 31, 1998
$1.50-$1.85 (105 mo) 2,000 $ 1.50 10,810 $ 1.85 12,810
$2.95-$4.90 (41 mo) 675,850 3.93 80,940 3.78 756,790
$5.75-$7.50 (61 mo) 795,779 6.15 8,634 6.49 804,413
$8.00-$8.63 (50 mo) 28,250 8.32 - - 28,250
--------- ------- ---------
1,501,879 100,384 1,602,263
========= ======= =========
Options exercisable at
December 31, 1998
$1.50 (22 mo) 2,000 $ 1.50 - $ - 2,000
$2.95-$4.90 (78 mo) 453,555 3.91 74,410 3.76 527,965
$5.75-$7.50 (53 mo) 675,667 6.21 8,634 6.49 684,301
$8.00-$8.63 (50 mo) 28,250 8.32 - - 28,250
--------- ------- ---------
1,159,472 83,044 1,242,516
========= ======= =========
</TABLE>
39
<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, which are currently outstanding
and exercisable, to purchase 50,000 shares of common stock at $3.00 per share.
All of the CEO's options under this agreement expire if not exercised by
June 30, 2000. The CEO did not exercise any options in 1996, 1997 or 1998.
Additionally, the CEO has been granted options to purchase stock under the
Company's stock option plans described above.
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 in accounting for stock options. 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 expense recognized relative to directors
who receive discounted stock options rather than cash for directors' fees
totaled $19,000, $12,000 and $8,000 in 1998, 1997 and 1996, respectively.
Compensation expense recognized from grants of stock totaled $5,000, $13,000 and
$6,000 in 1998, 1997 and 1996, respectively. Compensation expense recognized
from the extension of the expiration date of the CEO's stock options in 1997
totaled $31,000. 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 fair value method, the Company's net
loss and basic loss per common share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss (In Thousands)
As reported $ 7,633 6,417 5,589
Pro forma 8,116 6,818 6,018
Basic loss per common share
As reported $ .38 .32 .30
Pro forma .41 .34 .32
Weighted average fair value of options
granted during the year $ 3.17 2.13 2.93
</TABLE>
The pro forma amounts in the preceding table only include the vested portion of
the fair value of stock options granted after December 31, 1994. Because some of
the options granted prior to December 31, 1994 vest during this phase-in period
and the value is not included, the pro forma amounts are not likely to be
representative of the effects on future reported net loss and net loss per
share. 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.
40
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Options Granted In
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average risk-free interest rate 5.5% 6.6% 6.2%
Average expected life (years) 7.0 5.6 6.5
Average annualized expected volatility .557 .556 .573
Expected dividends None None None
</TABLE>
(8) Commitments and Contingencies
The Company has an employment agreement with its CEO, which currently provides
for an annual salary of $275,000. The agreement may be terminated by the Company
by giving notice one year prior to expiration of the contract, which otherwise
automatically extends for one-year periods, unless there is termination for
"cause." The CEO will be paid his salary until the agreement expires.
The Company carries $10 million in product liability insurance for its products
which are being used in clinical trials and for commercial sales, when approved,
of MELACINE melanoma theraccine. The Company is self-insured for product
liability for research 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
generated and were subsequently deposited at the Landfill from 1982 to 1985
which the Landfill had permits to receive. The NIH unilaterally and voluntarily
initiated and completed work pursuant to an interim remediation plan approved by
the DEQ to remove and decontaminate the believed source of 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 1999 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 unilaterally and voluntarily conducted by the NIH and which
involved 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 are being used by the DEQ to evaluate
the effectiveness of the remediation efforts to date. The second interim action
plan calls for the wells to be installed in three phases: Phase I included
occupied properties with the highest remaining contamination levels; Phase II
included occupied properties with lesser degrees of contamination;
41
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
and Phase III consisted largely of vacant properties. Preliminary studies
completed in 1994 estimated the cost of the wells to be approximately
$1,400,000. Information indicates that a total of 19 alternate water supply
wells have been installed at a cost of approximately $1,000,000. The DEQ could
require the PRPs to implement further remediation should these wells not provide
sufficient quality or quantity of water. Additionally, the NIH has indicated it
is undertaking Phase II groundwater remediation to intercept and treat
contaminated groundwater near the eastern Landfill boundary. The NIH has
projected costs for this Phase II groundwater remediation to be in excess of
$1,000,000 through 1999. 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.
The DEQ initiated an action in 1997 against the Company, the Landfill and the
owners of the Landfill seeking recovery of past alleged costs associated with
its oversight activities in the amount of $238,000, as well as a declaratory
judgment finding the parties liable for future oversight costs, plus civil
penalties in the event the parties fail to comply. Since the action was
initiated, the Company and the NIH jointly have received statements requesting
payment of an additional $27,000. In May 1998 the Company was informed that the
DEQ had entered into a settlement agreement with the Landfill and its owners,
whereby the Landfill and its owners agreed to collectively pay the DEQ
approximately $35,000. The Company believes that it has meritorious defenses to
the claim, including the amount thereof, and that there are other responsible
parties. The Company has filed a response to the action, including a
counterclaim and motions for a change in venue and to dismiss. Recently, the
Court granted the Company's motion for a change of venue to Ravalli County where
the Company is located. The Court did not rule on the motion to dismiss, which
motion will now be acted upon by the Court in Ravalli County. Recently the DEQ
filed a Motion for Stay of Proceedings pending the outcome of the action in
Federal District Court discussed below in which the DEQ is a plaintiff. The
Court granted the motion which the Company did not oppose.
On April 21, 1998, the Company received notice that the United States of America
(U.S.), acting on behalf of the Department of Health and Human Services, which
oversees the NIH, filed suit in United States District Court seeking
contribution from the Company of an "equitable share" of past and future
response costs incurred by the NIH in connection with the remediation at and
near the Landfill. The complaint alleges that as of September 30, 1997, the U.S.
had incurred response costs in excess of $3,400,000 and that it expects to incur
more than $1,000,000 in additional response costs. The Company filed a response
to the action. On or about June 4, 1998 the Company received notice that the
U.S. had entered into a settlement agreement with the Landfill and the Landfill
owners pursuant to which the settling parties agreed to make payment in the
amount of $440,000. In view of the settlement, the U.S. filed with the Court a
Joint Motion for Stay of Proceedings between the U.S., the Landfill and Landfill
owners. Assuming the settlement is completed, the action against the Landfill
and the Landfill owners would be dismissed. Although the Company believes it has
meritorious defenses to the cost recovery claim, including the amount thereof,
and that there are other responsible parties, there can be no assurance that the
Company will be successful in its defenses to claims arising out of the
Landfill, including the claims made by the U.S.
On or about June 6, 1998 the DEQ filed a complaint in the United States District
Court against the Company, the Landfill and the owners of the Landfill seeking
recovery of
42
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
past alleged costs associated with its oversight activities in the amount of
$258,000, of which it indicated not more than $154,000 had been reimbursed, plus
interest and attorneys' fees and costs as well as a declaratory judgment finding
the parties liable for future response costs. This action is similar to that
filed in the State District Court where further action has been deferred pending
the outcome of the Federal action. The Company has filed a response to the
action, including a counterclaim against the DEQ. The DEQ has initiated
discovery. The Company responded to a discovery request. The Company believes
that is has meritorious defenses to the claim, including the amount thereof, and
that there are other responsible parties. There can be no assurance that the
Company's defenses and counterclaim will be successful.
Depending upon the eventual outcome of the above discussed litigation and when
in time the litigation is concluded and the success of the Company in pursuing
defense and indemnity with insurance carriers, the outcome may or may not have a
material adverse effect on the Company's financial condition. Accordingly, it is
not possible at present to accurately predict whether an adverse outcome will
have a material adverse effect on the Company's financial condition. The Company
is unable to determine its overall potential liability with respect to the
Landfill at this time. As of December 31, 1998, the Company has accrued a
reserve of approximately $290,000 to cover legal, consulting and DEQ
reimbursement costs associated with the Company as a PRP. Net costs charged
against operations in 1998, 1997 and 1996 were $104,000, $42,000 and $13,000,
respectively.
In June 1997 a complaint was filed in District Court in Ravalli County against
the Company by a former employee who was discharged for cause in June 1996. The
plaintiff alleges discharge in violation of the Montana Wrongful Discharge from
Employment Act ("Act") and further, that discharge was for refusal to violate
public policy. The Court granted dismissal with respect to that portion of the
complaint which alleges termination for refusal to violate public policy.
Plaintiff filed a motion for reconsideration asking the Court to reverse its
decision with respect to the issue of termination for refusal to violate public
policy and requested the Court for permission to amend the complaint to include
additional allegations relative to the public policy issue. On April 6, 1998 the
Court allowed plaintiff to amend the complaint as requested. If plaintiff should
ultimately prevail on the issue of discharge in violation of the Act, the
potential liability of the Company would be approximately $320,000, exclusive of
the Company's attorneys' fees and related costs. If the plaintiff prevails on
the public policy issue, the Company could be subject to punitive damages of an
unknown amount in addition to the potential liability for violation of the Act.
The Company believes that it has a meritorious defense and plans to vigorously
defend the suit. However, it is not possible to reliably assess the outcome.
Depending upon the eventual outcome of this litigation and when in time the
litigation is concluded, the outcome may or may not have a material adverse
effect on the Company's financial condition. It is possible the case may go to
trial during 1999.
The plaintiff has also filed a petition for Judicial Review in District Court in
Missoula County naming the Company and the State of Montana Department of Labor
and Industry respondents and asking the Court to review and overturn the
Department of Labor's decision finding plaintiff was terminated for misconduct
as defined in MCA Section 39-51-2303 and, therefore, not allowing plaintiff to
collect unemployment benefits. The Company filed a response arguing the
correctness of the Department of Labor's decision. Recently, the Court rendered
a decision remanding the matter to the
43
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
Department of Labor for further testimony. Pursuant to the order of the Court,
additional testimony was recently completed. A decision by the Department is
expected by the end of March 1999. However, in the event plaintiff is
successful, it would not have a material adverse effect on the financial
condition of the Company.
(9) 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
approximately as follows:
<TABLE>
<CAPTION>
Net Orphan Research and
Operating Investment Drug Development
Expires December 31, Loss Credit Credit Credit
- -------------------- ---------- ---------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
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 5,445 - - 163
2011 5,391 - 242 173
2012 5,813 - 622 406
2018 7,240 - 315 423
------ ------ ------ ------
$ 50,596 19 1,179 2,749
====== ====== ====== ======
</TABLE>
44
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
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,
--------------------------------
1998 1997
----------- ------------
(In Thousands)
<S> <C> <C>
Gross deferred tax assets:
Net operating loss
carryforwards $ 20,698 17,929
General business credit
carryforwards 3,955 3,235
Loss contingency reserve 121 79
Employee benefits 123 109
Other 35 28
----------- -----------
24,932 21,380
Valuation allowance (24,381) (20,873)
----------- -----------
551 507
----------- -----------
Gross deferred tax
liabilities:
Depreciation 487 422
Inventories 64 85
----------- -----------
551 507
----------- -----------
Net $ - -
=========== ===========
</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,
1998, 1997 and 1996 was $3,508,000, $3,593,000 and $2,108,000, respectively.
Additionally, when subsequently recognized, approximately $861,000 of the
valuation allowance will be credited to additional paid-in capital.
(10) International Sales and Major Customers
The Company markets its research products worldwide, generally to nonexclusive
distributors. During 1998, 1997 and 1996, export sales were 83%, 82% and 77% of
total sales, respectively. Export sales were primarily to Europe, Japan and
Canada.
The Company has a total of four license agreements with SmithKline Beecham
("SB") for use of defined adjuvants in various vaccines being developed by SB.
SB is developing vaccines, which include these adjuvants, for indications in
infectious diseases and cancer. 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
these adjuvants for use in vaccines for some diseases and co-exclusive or
nonexclusive rights for others. The Company also sells adjuvants and research
products to SB. Revenues from all transactions with SB were 59% of total revenue
in 1998, 63% in 1997 and 48% in 1996. At December 31, 1998
45
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
SB owed the Company approximately $1,039,000 in trade accounts receivable, none
of which are delinquent.
As of December 31, 1998, SB and S.R. One Limited, a subsidiary of SB, held
1,254,056 shares, or 6.2% of the Company's outstanding common stock.
Additionally, SB has warrants to purchase 500,000 shares of common 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
15% of the Company's total revenue in 1998, 12% in 1997 and 17% in 1996.
During 1998 the Company entered into a marketing agreement with Schering-Plough
("SP"), which provides SP with worldwide marketing rights for the Company's
MELACINE melanoma theraccine. At December 31, 1998, the Company has $2,068,000
in deferred license revenues, the proceeds of which would be returned to SP if
certain product goals are not achieved by December 31, 1999. SP has the option
to extend the goal deadline. Of the total potential refund, $500,000 would
require the use of current investments and the balance would come from
noncurrent deposits, which are restricted from use in the Company's operations.
(11) Employee Benefits
The Company provides an employee savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all regular employees. The
Company matches 30% of employee contributions of up to 6% of compensation. The
amount charged against income in 1998, 1997 and 1996 was $73,000, $69,000 and
$58,000, respectively.
Additionally, the Company provides other employee benefits, including health
insurance for employees who are actively employed. The Company is self-insured
for health insurance up to a predetermined amount above which third party
insurance applies. For 1998 the maximum exposure to health claims totaled
$278,000. Charges against income for health insurance, including claims and
insurance, were approximately $274,000, $207,000 and $168,000 in 1998, 1997 and
1996, respectively.
(12) Future Accounting Changes
During 1998 the Financial Accounting Standards Board released Statement of
Financial Accounting Standards ("FAS") No. 133, which the Company will be
required to adopt in 1999. FAS No. 133 requires uniform accounting for
derivative instruments and hedging activities. While the Company is still
evaluating FAS No. 133, it does not expect the Standard to have a material
impact on the Company's financial position or results of its operations.
46
<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 Shareholders to be held on
April 26, 1999. 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," "Compliance with Section 16(a) of
the Exchange Act," "Committees and Meetings," "Principal Shareholders and
Management's Shareholdings," "Executive Compensation" 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 26 through 46:
Independent Auditors' Report
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998, 1997
and 1996
Statements of Shareholders' Equity and Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996
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.
47
<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.
*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.
48
<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 stockholders on
April 30, 1997. This plan was filed on March 19, 1997, as
Appendix A to Registrant's definitive proxy statement for the
Annual Stockholders meeting held on April 30, 1997, File
No. 0-11094. Said Appendix A is incorporated herein by this
reference.
*10.10 Fourth amendment dated April 30, 1997, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on March 25, 1998, as Exhibit 10.10 to
Registrant's report on Form 10-K dated December 31, 1997,
File No. 0-11094. Said Exhibit 10.10 is incorporated herein by
this reference.
**24 Consent of independent accountants.
***27 Financial Data Schedule.
</TABLE>
- ----------------
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
(b) Reports on Form 8-K
On November 5, 1998 Registrant filed a report on Form 8-K reporting under Item 5
the withdrawal of the Marketing Authorization Application for MELACINE melanoma
theraccine for the treatment of Stage IV melanoma in Europe.
49
<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, 1999 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, 1999 By: /s/ Robert E. Ivy
------------------ ---------------------------------------------
Robert E. Ivy, Chief Executive Officer,
President and Chairman of the Board
(principal executive officer)
Date: March 26, 1999 By: /s/ Vern D. Child
------------------ ---------------------------------------------
Vern D. Child, Vice President Finance and
Treasurer (principal financial and accounting
officer)
Date: March 26, 1999 By: /s/ John L. Cantrell
------------------ ---------------------------------------------
John L. Cantrell, Executive Vice President
and Director
Date: March 26, 1999 By: /s/ Philipp Gerhardt
------------------ ---------------------------------------------
Philipp Gerhardt, Director
Date: March 26, 1999 By: /s/ Paul Goddard
------------------ ---------------------------------------------
Paul Goddard, Director
Date: March 26, 1999 By: /s/ Mark I. Greene
------------------ ---------------------------------------------
Mark I. Greene, Director
Date: March 26, 1999 By: /s/ Thomas N. McGowen, Jr.
------------------ ---------------------------------------------
Thomas N. McGowen, Jr., Director
Date: March 26, 1999 By: /s/ Frederick B. Tossberg
------------------ ---------------------------------------------
Frederick B. Tossberg, Director
50
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDIX
<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. 53
*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.
51
<PAGE>
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDIX
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 stockholders
on April 30, 1997. This plan was filed on March 19, 1997,
as Appendix A to Registrant's definitive proxy statement
for the Annual Stockholders meeting held on April 30, 1997,
File No. 0-11094. Said Appendix A is incorporated herein
by this reference.
*10.10 Fourth amendment dated April 30, 1997, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on March 25, 1998, as Exhibit 10.10 to
Registrant's report on Form 10-K dated December 31, 1997,
File No. 0-11094. Said Exhibit 10.10 is incorporated herein
by this reference.
**24 Consent of independent accountants.
***27 Financial Data Schedule. 63
</TABLE>
- ----------------
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
52
<PAGE>
Exhibit No. 3.2
RIBI IMMUNOCHEM RESEARCH, INC.
AMENDED BYLAWS
AS OF JANUARY 25, 1999
ARTICLE I
OFFICES
SECTION 1. The registered office shall be in the City of Wilmington, County
of New Castle, State of Delaware.
SECTION 2. The corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may, from
time to time, determine, or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. All meetings of the stockholders for the election of directors
shall be held in the Town of Hamilton, State of Montana, at such place as may be
fixed from time to time by the Board of Directors, or at such other place either
within or without the State of Delaware as shall be designated from time to time
by the Board of Directors and stated in the Notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place within or
without the State of Delaware, as shall be stated in the Notice of the meeting,
or in a duly executed Waiver of Notice thereof.
SECTION 2. Annual Meetings of stockholders, commencing with the year 1982,
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the Notice of the meeting, at which
the stockholders shall elect by a plurality vote a Board of Directors, and
transact such other business as may properly be brought before the meeting.
To be properly brought before an annual meeting, business must be specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, otherwise properly brought before the
meeting by or at the direction of the Board of Directors or otherwise properly
brought before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation, not less than 60 days nor more than 90 days prior to the date on
which the corporation first mailed its proxy materials for the previous year's
annual meeting of stockholders (or the date on which the corporation mails its
proxy materials for the current year if during the prior year the corporation
did not hold an annual meeting or if the date of the annual meeting was changed
more than 30 days from the prior year). A stockholder's notice to the secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of the stockholder proposing
such business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
53
<PAGE>
Notwithstanding anything in the bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this SECTION 2, provided, however, that nothing in this SECTION 2 shall
be deemed the annual meeting in accordance with said procedure.
The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this SECTION 2, and if he should so
determine he shall so declare to the meeting, and any such business not properly
brought before the meeting shall not be transacted.
Nothing in this SECTION 2 shall affect the right of a stockholder to
request inclusion of a proposal in the corporation's proxy statement to the
extent that such right is provided by an applicable rule of the Securities and
Exchange Commission.
SECTION 3. Written Notice of the Annual Meeting stating the place, date and
hour of the meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting.
SECTION 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the Notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
SECTION 5. Special Meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
SECTION 6. Written Notice of a Special Meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
SECTION 7. Business transacted at any Special Meeting of stockholders shall
be limited to the purposes stated in the Notice.
SECTION 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business, except as otherwise provided by statute, or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without Notice other than announcement at the
meeting, until a quorum shall be present or represented. At such
54
<PAGE>
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
Notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 9. When a quorum is present at any meeting, the vote of the holders
of a majority of the stock having voting power present in person, or represented
by proxy, shall decide any question brought before such meeting, unless the
question is one upon which by express provision of the statutes or of the
Certificate of Incorporation, a different vote is required in which case such
express provision shall govern and control the decision of such question.
ARTICLE III
DIRECTORS
SECTION 1. The number of Directors which shall constitute the whole board
shall be not less than one (1) or more than nine (9). The first board shall
consist of five (5) directors. Thereafter, within the limits above specified,
the number of directors shall be determined by resolution of the Board of
Directors, or by the stockholders at the Annual Meeting. The directors shall be
elected at the Annual Meeting of the stockholders, except as provided in SECTION
2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
The directors will, by majority vote, at each Annual Meeting of the Board,
where a quorum exists, elect the Chairman of the Board who will serve as
Chairman until the next Annual Meeting of the Board or until his successor is
elected and qualified. The Chairman of the Board shall preside at all meetings
of the stockholders and the Board of Directors. The remuneration of the Chairman
of the Board shall be fixed by the Board of Directors, if it so determines.
SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next Annual
Election and their successors are duly elected and shall qualify, unless sooner
displaced. If there are no directors in office, then an election of directors
may be held in the manner provided by statute. If, at the time of filling any
vacancy or any newly created directorship, the directors then in office shall
constitute less than a majority of the whole board (as constituted immediately
prior to any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office.
SECTION 3. The business of the corporation shall be managed by or under the
direction of its Board of Directors which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation, or by these bylaws directed or required to be
exercised or done by the stockholders.
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MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4. The Board of Directors of the corporation may hold meetings,
both Regular and Special, either within or without the State of Delaware.
SECTION 5. The Board of Directors shall meet for the purpose of
organization, the election of officers, the election of a chairman and the
transaction of other business, as soon as practicable after each Annual Meeting
of Stockholders, on the same day and at the same place where such Annual Meeting
shall be held. Notice of such meeting need not be given. In the event such
Annual Meeting is not so held, the Annual Meeting of the Board of Directors may
be held at such place, either within or without the State of Delaware, on such
date and at such time as shall be specified in a notice thereof given as
hereinafter provided in Section 1, Article IV or in a waiver of notice thereof.
SECTION 6. Regular Meetings of the Board of Directors may be held with
Notice at such time and at such place as shall from time to time be determined
by the board.
SECTION 7. Special Meetings of the board may be called by the president on
two (2) days Notice to each director, either personally or by mail or by
telegram; Special Meetings shall be called by the president or secretary in like
manner and on like Notice on the written request of two (2) directors unless the
board consists of only one (1) director; in which case, Special Meetings shall
be called by the president or secretary in like manner and on like Notice on the
written request of the sole director.
SECTION 8. At all meetings of the board, a majority of the board members
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
Notice other than announcement at the meeting, until a quorum shall be present.
SECTION 9. Unless otherwise restricted by the Certificate of Incorporation
or these bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors, or of any committee thereof, may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
SECTION 10. Unless otherwise prohibited by the Certificate of Incorporation
or these bylaws, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in a meeting of the Board of
Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
SECTION 11. The Board of Directors may, by resolution passed by a majority
of the whole board, designate one (1) or more committees, each committee to
consist of one (1) or more of the directors of the corporation. The board may
designate one (1) or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
56
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In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he, or they, constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the Seal of the corporation to be affixed to all
papers which may require it; but, no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all, or substantially all, of the corporation's property
and assets, recommending to the stockholders a dissolution of the corporation,
or a revocation of a dissolution, or amending the bylaws of the corporation;
and, unless the resolution or the Certificate of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
SECTION 12. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
SECTION 13. Unless otherwise restricted by the Certificate of Incorporation
or these bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors, and may be paid a fixed
sum for attendance at each meeting of the Board of Directors, or a stated salary
as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefore. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
SECTION 14. Unless otherwise restricted by the Certificate of Incorporation
or by statute, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of shares entitled to vote
at an election of directors.
ARTICLE IV
NOTICES
SECTION 1. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation, or of these bylaws, Notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
Notice, but such Notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such Notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
SECTION 2. Whenever any Notice is required to be given under the provisions
of the statutes or of the Certificate of Incorporation, or of these bylaws, a
waiver
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thereof, in writing, signed by the proper person or persons entitled to said
Notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. The officers of the corporation shall be a president, a
treasurer, a secretary, and one or more vice presidents. No officer need be a
member of the Board. Two or more offices, except those of president and vice
president and those of president and secretary, may be held by the same person.
but no officer shall execute, acknowledge or verify any instrument in more than
one capacity. The officers of the corporation shall be elected annually by the
Board of Directors at its Annual Meeting.
OTHER OFFICERS AND AGENTS
SECTION 2. The Board of Directors may also elect such other officers and
agents, designating the authority and prescribing the duties thereof, as the
Board may, from time to time, determine to be advisable.
TENURE, REMOVAL AND VACANCIES
SECTION 3. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
COMPENSATION
SECTION 4. The compensation of all officers of the corporation shall be
fixed by the Board of Directors.
AUTHORITY AND DUTIES
SECTION 5. All officers as between themselves and the corporation shall
have such authority and perform such duties in the management of the corporation
as may be provided in these bylaws, or, to the extent not provided, as may be
prescribed by the Board of Directors.
THE PRESIDENT
SECTION 6. The president shall be the chief executive officer of the
corporation. He shall have general and active management of the business of the
corporation and shall see to it that all resolutions and orders of the Board of
Directors are carried into effect, and, in connection therewith, shall be
authorized to delegate to the other officers such of his powers and duties as
president at such time and in such manner as he may deem to be advisable. The
president and chief executive officer will prepare an annual business plan
including operating budget, capital budget, headcount and compensation plan for
presentation to and approval by the Board of Directors. This plan will be
reviewed and as necessary renewed at each regular Board Meeting. The president
and chief executive officer shall, from time to time, inform the Board of new
opportunities and strategies which could further the mission of the corporation
and, as appropriate, seek their approval to pursue such opportunities and
strategies. In the absence or disability of the chairman, he shall
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preside at all meetings of the stockholders and directors, and he shall have
such other powers and duties as the Board of Directors may from time to time
prescribe.
THE VICE PRESIDENTS
SECTION 7. In the absence of the president, or in the event of his
inability or refusal to act, the vice president (or in the event there be more
than one (1) vice president, the vice presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of, and be subject to, all the restrictions upon the
president. The vice president shall perform such other duties and have such
other powers as the Board of Directors may, from time to time, prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 8. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the Standing Committees
when required. He shall give, or cause to be given, Notice of all meetings of
the stockholders and Special Meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
Corporate Seal of the Corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the Seal of the corporation and to attest the affixing by his
signature.
SECTION 9. The assistant secretary, or if there be more than one (1), the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the secretary, or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the Board of Directors
may, from time to time, prescribe.
THE TREASURER AND ASSISTANT TREASURERS
SECTION 10. The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
SECTION 11. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
SECTION 12. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six [6] years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the restoration
to the corporation,
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<PAGE>
in case of his death, resignation retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
SECTION 13. The assistant treasurer, or if there shall be more than one
(1), the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may, from time to time, prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
SECTION 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by the chairman
or vice chairman of the Board of Directors, or the president or vice president
and the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by him in
the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefore, and the
amount paid thereon shall be specified.
SECTION 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
SECTION 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
SECTION 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
60
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FIXING RECORD DATE
SECTION 5. In order that the corporation may determine the stockholders
entitled to Notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to Notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
SECTION 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other Notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
SECTION 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
SECTION 3. The Board of Directors shall present at each Annual Meeting, and
at any Special Meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
SECTION 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
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FISCAL YEAR
SECTION 5. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
SECTION 6. The corporate Seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware." The Seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise used.
INDEMNIFICATION
SECTION 7. The Corporation shall:
(a) Indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit, or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that he is or was
a director, officer or employee of the Corporation, is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgements, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with any such
action, suit, or proceeding, in each such case to the fullest extent permissible
under subsections (a) through (e) of Section 145 of General Corporation Law of
the State of Delaware or the indemnification provisions of any successor
statute.
(b) Indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgement in its favor by reason of the
fact that he is or was a director, officer or employee of the Corporation, or is
or was serving at the request of the corporation as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit.
The foregoing right of indemnification shall in no way be exclusive of any
other rights of indemnification to which any such person may be entitled under
any bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, and shall inure to the benefit of the heirs, personal
representatives, executors and administrators of such a person.
ARTICLE VIII
AMENDMENTS
SECTION 1. These bylaws may be altered, amended or repealed by a majority
vote of either the shareholders or a majority of the Board of Directors. Any
bylaw adopted, amended or repealed by the shareholders may be amended or
repealed by the Board.
62
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Exhibit 24
KPMG
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. 333-32943, No. 33-44391, No. 33-48713, No. 33-69984 and No. 333-
61435 filed on Form S-3 of Ribi ImmunoChem Research, Inc. of our report dated
January 22, 1999, relating to the balance sheets of Ribi ImmunoChem Research,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of Ribi ImmunoChem Research,
Inc.
/s/ KPMG LLP
Billings, Montana
March 24, 1999
63
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE THREE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> RIBI IMMUNOCHEM RESEARCH, INC.
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