<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-12406
IMMUNEX CORPORATION
(exact name of registrant as specified in its charter)
Washington 51-0346580
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
51 University Street, Seattle, WA 98101
(Address of principal executive offices)
Registrant's telephone number, including area code (206) 587-0430
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 81,812,042
- --------------------------------- ----------------------------------
Class Outstanding at August 6, 1999
<PAGE>
IMMUNEX CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
a) Consolidated Condensed Balance Sheets - 4
June 30, 1999 and December 31, 1998
b) Consolidated Condensed Statements of Operations - 5
for the three-month periods ended June 30, 1999
and June 30, 1998
c) Consolidated Condensed Statements of Operations - 6
for the six-month periods ended June 30, 1999
and June 30, 1998
d) Consolidated Condensed Statements of Cash Flows - 7
for the six-month periods ended June 30, 1999
and June 30, 1999
e) Notes to Consolidated Condensed Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial 12 - 17
Condition and Results of Operations
Item 3. Market Risks 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
The consolidated condensed financial statements included herein have been
prepared by Immunex Corporation without audit, according to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The financial statements reflect, in
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations as of and for the periods indicated. The statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The results of operations for the six-month period ended June 30, 1999, are
not necessarily indicative of results to be expected for the entire year
ending December 31, 1999.
<PAGE>
Item 1. FINANCIAL STATEMENTS
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 249,757 $ 43,600
Marketable securities 391,054 101,245
Accounts receivable, net 55,669 28,939
Inventories 17,969 23,475
Other current assets 3,404 4,726
--------------- ----------------
Total current assets 717,853 201,985
Property, plant and equipment, net 96,760 90,092
Other assets 46,103 33,248
--------------- ----------------
$ 860,716 $ 325,325
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,835 $ 39,256
Accounts payable - AHP 30,395 13,950
Accrued compensation and related items 9,169 13,756
Current portion of long-term obligations 3,478 3,477
Interest payable - AHP 1,538 -
Other current liabilities 6,580 5,074
--------------- ----------------
Total current liabilities 102,995 75,513
Convertible note - AHP 450,000 -
Other long-term obligations 2,442 2,349
Shareholders' equity:
Common stock, $.01 par value 778,605 725,597
Unrealized gain (loss) on investment, net (1,076) 1,228
Accumulated deficit (472,250) (479,362)
--------------- ----------------
Total shareholders' equity 305,279 247,463
--------------- ----------------
$ 860,716 $ 325,325
=============== ================
</TABLE>
See accompanying notes.
4
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
Ended ended
June 30, June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues:
Product sales $ 125,854 $ 39,961
Royalty and contract revenue 2,620 24,194
---------------- ----------------
128,474 64,155
Operating expenses:
Cost of product sales 39,678 7,691
Research and development 30,264 36,910
Selling, general and administrative 52,937 20,780
---------------- ----------------
122,879 65,381
---------------- ----------------
Operating income (loss) 5,595 (1,226)
Other income (expense):
Interest income 5,075 1,550
Interest expense (1,628) (111)
Other income, net 69 70
---------------- ----------------
3,516 1,509
---------------- ----------------
Income before income taxes 9,111 283
Provision for income taxes 2,250 88
---------------- ----------------
Net income $ 6,861 $ 195
================ ================
Net income per common share:
Basic $ 0.08 $ 0.00
================ ================
Diluted $ 0.08 $ 0.00
================ ================
------------------------------------------
Number of shares used for per share amounts:
Basic 81,423 79,630
================ ================
Diluted 88,531 83,630
================ ================
</TABLE>
See accompanying notes.
5
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six months Six months
Ended ended
June 30, June 30,
1999 1998
------------------- -------------------
<S> <C> <C>
Revenues:
Product sales $ 221,091 $ 78,777
Royalty and contract revenue 5,560 27,244
------------------- -------------------
226,651 106,021
Operating expenses:
Cost of product sales 66,887 14,782
Research and development 58,473 63,816
Selling, general and administrative 97,210 39,217
------------------- -------------------
222,570 117,815
------------------- -------------------
Operating income (loss) 4,081 (11,794)
Other income (expense):
Interest income 6,949 3,090
Interest expense (1,697) (221)
Other income, net 149 241
------------------- -------------------
5,401 3,110
------------------- -------------------
Income (loss) before income taxes 9,482 (8,684)
Provision for income taxes 2,370 146
------------------- -------------------
Net income (loss) $ 7,112 $ (8,830)
=================== ====================
Net income (loss) per common share:
Basic $ 0.09 $ (0.11)
=================== ===================
Diluted $ 0.08 $ (0.11)
=================== ===================
Number of shares used for per share amounts:
Basic 81,080 79,680
=================== ===================
Diluted 87,615 79,680
=================== ===================
</TABLE>
See accompanying notes.
6
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1999 1998
------------------- -------------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 7,112 $ (8,830)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,728 9,293
Deferred income tax provision 2,075 -
License fee received as common stock (990) -
Cash flow impact of changes to:
Accounts receivable (26,730) (17,958)
Inventories 5,561 2,317
Accounts payable, accrued liabilities and
other current liabilities 27,424 (355)
Other current assets 1,323 436
------------------- -------------------
Net cash provided by (used in) operating activities 25,503 (15,097)
------------------- -------------------
Investing Activities:
Purchases of property, plant and equipment (13,562) (22,453)
Purchases of marketable securities (317,166) (85,822)
Proceeds from sales and maturities of marketable
securities 25,150 44,397
Acquisition of product rights, net (15,500) (5,000)
Other (370) (20)
------------------- -------------------
Net cash used in investing activities (321,448) (68,898)
------------------- -------------------
Financing Activities:
Proceeds from the issuance of common stock to AHP 40,777 2,330
Proceeds from exercise of stock options 12,232 1,921
Proceeds from AHP convertible note, net 449,000 -
Guaranty payment received from AHP - 60,032
Other 93 14
------------------- -------------------
Net cash provided by financing activities 502,102 64,297
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 206,157 (19,698)
Cash and cash equivalents, beginning of period 43,600 66,176
------------------- -------------------
Cash and cash equivalents, end of period $ 249,757 $ 46,478
================== ==================
</TABLE>
See accompanying notes.
7
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
- -----------------------------------------------
Immunex Corporation (which may be referred to as IMMUNEX, WE, US or OUR) is a
biopharmaceutical company that discovers, develops, manufactures and markets
innovative therapeutic products for the treatment of human diseases,
including cancer, infectious diseases and immunological disorders such as
rheumatoid arthritis.
We operate in a highly regulated and competitive environment. Our business is
regulated primarily by the United States (U.S.) Food and Drug Administration
(FDA). The FDA regulates the products we sell, our manufacturing processes
and our promotional activities. Obtaining approval for a new therapeutic
product is never certain, may take several years and is very costly.
Competition in researching, developing and marketing pharmaceutical products
is intense. Any of the technologies covering our existing products or
products under development could become obsolete or diminished in value by
discoveries and developments of other organizations.
Our market for pharmaceutical products is primarily the U.S. Our sales are
primarily through wholesalers and specialty distributors.
The condensed consolidated financial statements are prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management must make some estimates and assumptions that affect
reported amounts and disclosures.
American Home Products Corporation (AHP), holds a majority interest in
Immunex, totaling approximately 54%. All references to AHP include AHP and
its various affiliates, divisions and subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
INVENTORIES
Inventories are stated at the lower of cost, using a weighted-average method,
or market. The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Raw materials $ 1,198 $ 807
Work in process 12,724 17,953
Finished goods 4,047 4,715
--------------------- ---------------------
Totals $ 17,969 $ 23,475
===================== =====================
</TABLE>
Work in process may include product that is essentially complete but is
awaiting packaging.
8
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
DEPRECIATION AND AMORTIZATION
The cost of buildings and equipment is depreciated evenly over the estimated
useful lives of the assets, which range from three to 31.5 years. Leasehold
improvements are amortized evenly over either their estimated useful lives,
or the term of the lease, whichever is lower. Goodwill is being amortized
evenly over a 10 year period. Intangible product rights and other intangible
assets are amortized evenly over their estimated useful lives, ranging from
five to 15 years.
REVENUES
Product sales are recognized when product is shipped. We perform ongoing
credit evaluations of our customers and we do not require collateral. Product
sales are recorded net of reserves for estimated chargebacks, returns,
discounts, Medicaid rebates and administrative fees. We maintain reserves at
a level that we believe is sufficient to cover estimated future requirements.
Revenues received under royalty, licensing and collaborative agreements are
recognized based on the terms of the underlying contractual agreements.
NOTE 3. REPORTING COMPREHENSIVE INCOME
- --------------------------------------
Our investments are considered available-for-sale and are stated at fair
value on the balance sheet with the unrealized gains and losses included as a
component of shareholders' equity. During the second quarter of 1999 and
1998, there were no material realized gains or losses. Immunex's investment
guidelines state that the maximum average life of any one security shall be
five years with the maximum weighted average life of the investment portfolio
being three years. The following table sets forth the components of
comprehensive income (loss), (in thousands):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,861 $ 195 $ 7,112 $ (8,830)
Unrealized loss on investments (2,199) (934) (2,304) (3,029)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 4,662 $ (739) $ 4,808 $ (11,859)
============= ============= ============= =============
</TABLE>
9
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
NOTE 4. EARNINGS PER COMMON SHARE
- ----------------------------------
Basic earnings per share is calculated by dividing net income or net loss by
the weighted average number of common shares outstanding. Diluted earnings
per share is calculated by dividing net income by the weighted average common
shares outstanding plus the dilutive effect of outstanding stock options. If
we report a net loss, diluted earnings per share will be the same as basic
earnings per share because the effect of outstanding stock options being
added to weighted average shares outstanding would reduce the loss per share.
Accordingly, outstanding stock options are not included in the calculation
during net loss periods.
The components of calculating net income (loss) per share is set forth in the
following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,861 $ 195 $ 7,112 $ (8,830)
============= ============= ============= =============
Weighted average common shares
outstanding, basic 81,423 79,630 81,080 79,680
Net effect of dilutive stock options 7,108 4,000 6,535 -
------------- ------------- ------------- -------------
Weighted average common shares
outstanding, diluted 88,531 83,630 87,615 79,680
============= ============= ============= =============
Earnings (loss) per common share,
basic $ 0.08 $ 0.00 $ 0.09 $ (0.11)
============= ============= ============= =============
Earnings (loss) per common share,
diluted $ 0.08 $ 0.00 $ 0.08 $ (0.11)
============= ============= ============= =============
</TABLE>
NOTE 5. STOCK SPLIT
On February 23, 1999, the Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend. The record date of the stock
split was March 11, 1999, and stockholders were entitled to receive the
additional shares on March 25, 1999. All references to retained earnings, common
stock, average number of common shares outstanding and per share amounts in the
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations prior to the record date of the stock split
have been restated to reflect the two-for-one stock split on a retroactive
basis.
On July 27, 1999, the Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend. The record date of the stock
split is August 12, 1999, and stockholders are entitled to receive the
additional shares on August 26, 1999. The stock split approved on July 27, 1999
has not been reflected within the financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
10
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
NOTE 6. AHP CONVERTIBLE NOTE
In May 1999, Immunex issued a seven-year, 3% coupon, convertible subordinated
note to AHP. The principal amount of the note, purchased in private placement,
totaled $450 million, resulting in related debt issuance costs of $1.0 million.
The note is convertible into Immunex common stock at a price of $173.68 per
share. After three years, Immunex can redeem, or call the note, provided that
its closing price for 20 consecutive days exceeds or equals $208.42 per share.
After four years, Immunex can call the note at any time if its closing price for
20 days exceeds or equals the conversion price. AHP may convert the note into
common stock of Immunex at any time.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
INTRODUCTION
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements provide our current expectations or
forecasts of future events. In particular, these include statements relating to
future actions, prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial results. From
time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public. Any or all of our forward-looking
statements in this report and in any other public statements we make may turn
out to be wrong. Inaccurate assumptions we might make and known or unknown risks
and uncertainties can affect our forward-looking statements. Consequently, no
forward-looking statement can be guaranteed and our actual results may differ
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
Annual Reports on Form 10-K. Factors that we think could cause our actual
results to differ materially from expected and historical results include, but
are not limited to, those discussed in the "Risk Factors" section described in
our latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
OVERVIEW
For the three months ended June 30, 1999, we generated net income of
$6.9 million, compared to net income of $0.2 million for the comparable 1998
period. For the six-month periods ended June 30, 1999 and 1998, the Company had
net income of $7.1 million and a net loss of $8.8 million, repectively. The
improvement in operating results is due primarily to U.S. sales of ENBREL-R-
(etanercept), which we began selling in November 1998 following U.S. FDA
approval of ENBREL for treatment of advanced rheumatoid arthritis. ENBREL is
being promoted by AHP in the U.S. through its Wyeth-Ayerst sales and marketing
organization. AHP shares in the gross profits from U.S. sales of ENBREL and both
companies share the selling, marketing, distribution and other costs to support
sales of ENBREL.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
REVENUES
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
ENBREL $ 86.9 $ - $146.5 $ -
LEUKINE-R- (sargramostim, GM-CSF) 16.6 16.2 32.6 31.3
NOVANTRONE-R- (mitoxantrone) 11.1 13.1 21.9 26.5
Other product sales 11.3 10.7 20.1 21.0
------ ------ ------ ------
Total product sales 125.9 40.0 221.1 78.8
Royalty and contract revenue 2.6 24.2 5.6 27.2
------ ------ ------ ------
Total revenue $128.5 $ 64.2 $226.7 $106.0
====== ====== ====== ======
</TABLE>
Product sales increased to $125.9 million from $40.0 million and to
$221.1 million from $78.8 million for the three and six months ended June 30,
1999 and 1998, respectively. The improvement during both 1999 periods is due to
sales of ENBREL.
Royalty and contract revenue totaled $2.6 million and $5.6 million for
the three and six months ended June 30, 1999, compared to $24.2 million and
$27.2 million for the comparable 1998 periods. Revenue recognized during the
1999 three and six-month periods reflects recurring amounts recognized under
existing royalty and license agreements. In June 1998, we earned $20.0 million
from AHP under the terms of the ENBREL Promotion Agreement, when our Biologics
License Application for ENBREL for treatment of advanced rheumatoid arthritis
was accepted for review by the FDA. Royalty and contract revenue is expected to
fluctuate significantly depending on the achievement of milestones under
existing agreements and new business opportunities that may be identified. Under
the ENBREL Promotion Agreement, we will earn a one-time payment of $10.0 million
if net sales of ENBREL in North America exceed $200.0 million in any 12
consecutive months. We expect to earn this payment during the third quarter of
1999.
OPERATING EXPENSES
Cost of product sales was 31.5% and 19.2% of product sales for the
quarters ended June 30, 1999 and 1998, respectively. For the six months ended
June 30, 1999 and 1998, cost of product sales was 30.3% and 18.8% of product
sales, respectively. The increase in the cost of product sales percentage during
the current year period is due to the following:
- Launch of ENBREL in November 1998 (ENBREL, like LEUKINE, is a
biologic. Biologics generally have a higher manufacturing cost
than traditional pharmaceutical products and, in the case of
our biologic products, are subject to multiple royalty
obligations), and
- Unfavorable change in the mix of other products.
Cost of product sales as a percentage of product sales is expected to
increase in the future if sales of ENBREL continue to grow.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Research and development expense was $30.3 million and $36.9 million for
the quarters ended June 30, 1999 and 1998, respectively, and $58.5 million
and $63.8 million for the six months ended June 30, 1999 and 1998. Research
and development expense in 1998 included the acquisition of the rights
outside North America to NUVANCE-TM- (IL-4 receptor) and other receptor
product candidates for $10.0 million. Furthermore, in July 1998, we ended our
oncology collaboration with AHP. Expenses related to this agreement totaled
$4.1 million and $8.3 million during the three and six-month periods ended
June 30, 1998, respectively. Exclusive of these expenditures, research and
development expense increased $7.5 million and $13.0 million during the three
and six-months ended June 30, 1999 versus the comparable 1998 periods. The
increase is due primarily to the following:
- Spending on development of ENBREL reflecting clinical studies
for the treatment of chronic heart failure and European trials
for treatment of rheumatoid arthritis,
- Spending on NUVANCE-TM- (IL-4R) including a Phase II trial of
NUVANCE-TM- to treat ASTHMA,
- Increased costs for other market opportunities and product
candidates, including NOVANTRONE-R- (mitoxantrone for
injection concentrate) for treatment of progressive multiple
sclerosis and CD40 Ligand to treat renal cell cancer, and
- Increased spending on discovery research.
Selling, general and administrative expense increased to $52.9 million
from $20.8 million and to $97.2 million from $39.2 million for the three and
six-months periods ended June 30, 1999 and 1998, respectively. The increase
is due primarily to expenses associated with selling and marketing of ENBREL.
Under the terms of the ENBREL Promotion Agreement, AHP assumed a majority of
these expenses and will share in the gross profits from U.S. sales of ENBREL.
Selling, general and administrative expenses include our share of these
expenses and the amount of the gross profits shared with AHP from sales of
ENBREL. In addition to expenses incurred under the ENBREL Promotion
Agreement, selling, general and administrative expense increased due to the
following:
- Higher product liability insurance premiums due to higher
average limits,
- Expenses associated with information systems,
- Spending on selling activities related to our oncology
products, and
- Estimated charges to cover the costs associated with a recall
of AMICAR-R- (aminocaproic acid) totaling $0.9 million.
OTHER INCOME (EXPENSE)
Interest income increased to $5.1 million and $6.9 million for the three
and six months ended June 30, 1999 compared to $1.6 million and $3.1 million
for the same periods in 1998. The issuance of $450.0 million of convertible
debt to AHP, additional equity purchases and improved cash flow from
operations resulted in a significant increase in funds available for
investment purposes and the interest earned on these funds. The increase in
interest income was partially offset by an increase in interest expense,
incurred on the convertible notes. Interest expense increased by $1.5 million
for both the three and six-months ended June 30, 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes was $2.3 million and $0.1 million for the
quarters ended June 30, 1999 and 1998, and $2.4 million and $0.1 million for
the six months ended June 30, 1999 and 1998, respectively. The provision for
income taxes during 1999 is primarily for federal income taxes. This tax
provision is a non-cash transaction because we will utilize our net operating
tax loss carryforwards to satisfy the federal tax liability.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
For 1999 approximately $32 million of income before taxes will result in the
reporting of a normal tax provision on our financial statements with a
corresponding reduction of goodwill and intangible product rights. To the
extent that income before taxes exceeds $32 million in the current year, our
net operating tax loss carryforwards, for purposes of financial reporting,
will offset the corresponding tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $640.8 million
and $144.8 million at June 30, 1999 and December 31, 1998, respectively. In
May, we received $450.0 million in proceeds from the issuance of a
convertible note to AHP (see below). The Company's cash reserves are held in
a variety of interest-bearing instruments including government and corporate
obligations and money market accounts.
Operating activities provided cash of $25.5 million during the first six
months of 1999. Cash provided by operating activities reflects the
improvement in our operating results and, to a lesser extent, favorable
changes in our working capital requirements. The increase in accounts
receivable from sales of Enbrel was more than offset by increased payables to
AHP under the ENBREL Promotion Agreement and decreased inventory levels.
Cash used in investing activities totaled $321.4 million for the first
six months of 1999. The majority of the cash used for investing activities is
due to $317.2 million in purchases of marketable securities, offset by $25.2
million in proceeds from the sales and maturities of marketable securities.
In addition, expenditures for capital equipment totaled $13.6 million,
primarily for purchases of computer hardware and software and purchases of
lab equipment during the first six months of 1999. An additional $15.5
million represents our share of payments to Ares-Serono International S.A.
and Genentech, Inc. under TNFR license agreements.
Financing activities provided cash of $502.1 million for the six-month
period ended June 30, 1999. A majority of this increase can be attributed to
the $450.0 million in proceeds from the 3%, seven-year convertible note
issued to AHP. The proceeds from this note are expected to be used for the
following:
- New product development,
- Financing strategic acquisitions of products, product
candidates, technologies or other businesses,
- Increasing working capital required to support sales of
ENBREL,
- Financing expansion for constructing new manufacturing,
research and office facilities, and,
- Funding other general working capital requirements.
In addition, under the terms of a Governance Agreement with AHP, AHP can
purchase additional shares of our common stock in order to maintain its
percentage ownership. The purchase price is equal to the fair market value of
the shares, as determined in accordance with the Governance Agreement, on the
date of AHP's purchase. Under the terms of the Governance Agreement, we
received $40.8 million from the issuance of 855,838 additional shares of our
common stock to AHP during the first half of 1999. An additional $12.2
million was received from the exercise of employee stock options during the
same period.
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
YEAR 2000
The "Year 2000" issue is the result of computer programs being unable to
differentiate between the year 1900 and the year 2000 because they were
written using two digits rather than four to define the applicable year. This
could result in a system failure or miscalculations with respect to current
programs. We have established a Year 2000 Committee with representatives from
all of the functional areas at Immunex. The Year 2000 Committee has been
engaged in a comprehensive review of our computer systems and software
applications (INFORMATION TECHNOLOGY) and equipment that utilize date
sensitive computer chips (EMBEDDED CHIPS). Embedded Chips are utilized in our
security systems and certain manufacturing, laboratory and office equipment.
Based on this review, we have determined that certain software, hardware and
equipment will have to be modified or replaced so that they will properly
utilize dates beyond December 31, 1999. Furthermore, we have contacted key
third-party suppliers, service providers, distributors, wholesalers and other
entities with which we have a business relationship (BUSINESS PARTNERS) to
determine their compliance with Year 2000 requirements.
We anticipate that required modifications and replacements of our
critical systems and applications will be completed prior to the year 2000.
However, if such modifications are not completed in a timely manner, or if
there were a similar such failure on the part of our Business Partners, there
could be a material adverse impact on our operations.
Our plan to resolve the Year 2000 issues is organized into three
functional areas: Information Technology, Embedded Chips and Business
Partners. For each functional area, there are three phases:
- Phase I: Assessment
- Phase II: Testing and Remediation
- Phase III: Implementation and Contingency Planning
Assessment activities for each functional area are complete. Testing
and remediation has been completed for most systems and is expected to be
completed during the third quarter of 1999. As a result of this process, certain
software applications have been identified that are not Year 2000 compliant and
replacement of those software applications is in process or has been completed.
We have initiated the process of developing contingency plans for certain
critical business processes. These contingency plans involve, among other
actions, adjusting production schedules, increasing inventories, and developing
manual workarounds. The Company is continuing to monitor the progress of key
Business Partners which have not completed their Year 2000 compliance programs.
Contingency planning for key Business Partners has been completed and we are in
the process of implementing those plans.
The estimated completion dates of each phase of the three functional areas
are as follows:
<TABLE>
<CAPTION>
Information Technology Embedded Chips Business Partners
---------------------- -------------------------- --------------------
<S> <C> <C> <C>
Phase I Complete Complete Complete
Phase II 1999 Third Quarter Complete 1999 Third Quarter
Phase III 1999 Third Quarter 1999 Third Quarter 1999 Third Quarter
</TABLE>
We are utilizing both internal and external resources to identify, correct
and test our computer systems, equipment and other applications for Year 2000
compliance. Our total cost for the Year 2000 project is estimated at
approximately $6.3 million ($1.6 million of expense and $4.7 million
capital). Through June 30, 1999, we have incurred approximately $4.3 million
($0.9 million of expense and $3.4 million capital). These amounts do not
include any internal costs. We plan on utilizing our existing cash reserves
to fund our Year 2000 compliance program.
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
We have not identified our most reasonably likely worst case scenario with
respect to possible losses in connection with Year 2000 related problems. We
plan on completing this analysis prior to year-end.
The Year 2000 disclosures discussed above are based on numerous
expectations which are subject to uncertainties. Certain risk factors which
could have a material adverse effect on the Company's results of operations
and financial condition include but are not limited to: failure to identify
critical systems which will experience failures, errors in the remediation
efforts, unexpected failures by key Business Partners, inability to obtain
new replacements for non-compliant systems or equipment, failures by
governmental agencies causing delays in approval of new products or sales of
approved products, general economic downturn relating to Year 2000 failures
in the U.S. and in other countries, failures in global banking systems and
capital markets, or extended failures by public and private utility companies
or common carriers supplying services to the Company.
17
<PAGE>
Item 3. MARKET RISKS
We invest our cash reserves in marketable securities consisting
primarily of U.S. government and corporate obligations. Our marketable
securities are subject to interest rate risk. If market interest rates increased
relatively by 10%, the effect on our operating results would not be material. In
addition, we own common stock in two biotechnology companies with a cost of $4.0
million.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The description of legal proceedings is incorporated by reference to
Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the Company's Shareholders ("Shareholders") was
held on Thursday, April 29, 1999 ("Annual Meeting"). Of the 40,418,354 shares
outstanding as of the record date, March 9, 1999, there were 38,909,338 shares
or 96.27% of the total shares eligible to vote represented in person or proxy.
The following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual
meeting of shareholders and until their successors are elected and
qualified.
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Edward V. Fritzky 38,591,902 139,235
Joseph J. Carr 38,766,720 142,618
Kirby L. Cramer 38,587,209 141,755
Robert I. Levy 36,405,926 2,503,412
John E. Lyons 38,594,174 139,126
Joseph M. Mahady 38,730,713 178,625
Edith W. Martin 36,018,875 1,275,790
Peggy V. Phillips 38,586,649 142,315
Douglas E. Williams 38,602,639 135,017
</TABLE>
2. To approve the adoption of the 1999 Employee Stock Purchase Plan,
including the reservation of 500,000 shares of common stock for
issuance thereunder.
<TABLE>
<S> <C>
For 34,247,107
Against 349,814
Abstain 41,784
Not Voted 5,779,649
</TABLE>
3. To approve the adoption of the 1999 Employee Stock Option Plan,
including the reservation of 6,000,000 shares of common stock for
issuance thereunder.
<TABLE>
<S> <C>
For 26,488,865
Against 8,096,628
Abstain 53,212
Not Voted 5,779,649
</TABLE>
4. To approve an amendment to the Company's Articles of Incorporation that
increases the number of authorized shares of common stock by
100,000,000, from 100,000,000 to 200,000,000.
<TABLE>
<S> <C>
For 38,717,730
Against 145,637
Abstain 45,971
Not Voted 1,509,016
</TABLE>
19
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 3.1 Restated Articles of Incorporation of
Immunex Corporation, as filed with the
Secretary of State of Washington on
May 19, 1999.
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
On May 28, 1999, the Company filed a Form 8-K under Item 5
announcing the issuance and sale of a $450.0 million, 3%
Convertible Subordinated Note to American Home Products, due
2006.
20
<PAGE>
SIGNATURES
Pursuant to requirements 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.
IMMUNEX CORPORATION
Date: 8/10/99 /s/ Edward V. Fritzky
------------------ -------------------------------------------
Edward V. Fritzky
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: 8/9/99 /s/ David A. Mann
------------------ -------------------------------------------
David A. Mann
Vice President, Finance and Interim Chief
Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
IMMUNEX CORPORATION
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles
of Incorporation of the undersigned, a Washington corporation.
ARTICLE 1. NAME
The name of this corporation is Immunex Corporation.
ARTICLE 2. SHARES
2.1 AUTHORIZED CAPITAL
The total number of shares which the corporation is authorized to issue
is 205,000,000, consisting of 200,000,000 shares of Common Stock having a par
value of $.01 per share and 5,000,000 shares of Preferred Stock having a par
value of $.01 per share. The Common Stock is subject to the rights and
preferences of the Preferred Stock as hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more
series in any manner permitted by law and the provisions of these Articles of
Incorporation of the corporation, as determined from time to time by the Board
of Directors and stated in the resolution or resolutions providing for the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the designation, preferences, limitations and relative
rights of the shares of any series that is wholly unissued or to be established.
Unless otherwise specifically provided in the resolution establishing any
series, the Board of Directors shall further have the authority, after the
issuance of shares of a series whose number it has designated, to amend the
resolution establishing such series to decrease the number of shares of that
series, but not below the number of shares of such series then outstanding.
2.3 DIVIDENDS
The holders of shares of the Preferred Stock shall be entitled to
receive dividends, out of the funds of the corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. If such dividends on the Preferred Stock
shall be cumulative, then if dividends shall not have been paid, the deficiency
shall be fully paid or the dividends declared and set apart for payment at such
rate, but without interest on cumulative dividends, before any dividends on the
Common Stock shall be paid or declared and set apart for payment. The holders of
the Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
<PAGE>
2.4 REDEMPTION
The Preferred Stock may be redeemable at such price, in such amount,
and at such time or times as may be provided by the Board of Directors in
designating a particular series of Preferred Stock. In any event, such Preferred
Stock may be repurchased by the corporation to the extent legally permissible.
2.5 LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the
affairs of the corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of the Preferred Stock
shall not be entitled to receive any distributive amounts upon the liquidation,
dissolution, or winding up of the affairs of the corporation other than the
distributive amounts referred to in this section, unless otherwise provided by
the Board of Directors in designating a particular series of Preferred Stock.
2.6 CONVERSION
Shares of Preferred Stock may be convertible into Common Stock of the
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
2.7 VOTING RIGHTS
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
ARTICLE 3. REGISTERED OFFICE AND AGENT
The name of the initial registered agent of this corporation and the
address of its initial registered office are as follows:
Scott G. Hallquist
51 University Street
Seattle, WA 98101
ARTICLE 4. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 5. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not
exist with respect to shares of stock of this corporation.
2
<PAGE>
ARTICLE 6. DIRECTORS
6.1 NUMBER AND TERM OF DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein, PROVIDED, HOWEVER, that the number of
directors shall not be reduced so as to shorten the term of any director at the
time in office. Directors need not be shareholders. Unless a director dies,
resigns, or is removed, he shall hold office until the later of the next annual
meeting of shareholders or until his successor is elected and qualified,
whichever is later.
6.2 REMOVAL OF DIRECTORS
Subject to the terms of the Amended and Restated Governance Agreement,
dated as of December 15, 1992, among Immunex Corporation, Lederle Oncology
Corporation and American Cyanamid Company ("Cyanamid"), as it may be amended or
restated from time to time (the "Governance Agreement"), one or more members of
the Board of Directors (including the entire Board) may be removed, with or
without cause, by the written consent of the holders of record of a majority of
the outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class (the "Voting Stock").
6.3 VACANCIES
Any vacancy occurring on the Board of Directors may be filled, subject
to the terms of the Governance Agreement, by the affirmative vote of a majority
of the remaining directors, though less than a quorum. A director elected to
fill a vacancy shall be elected for the unexpired term of his or her predecessor
in office. Any directorship to be filled by reason of an increase in the number
of directors may be filled by the Board, subject to the Governance Agreement,
for a term of office continuing only until the next election of directors by the
shareholders.
ARTICLE 7. BYLAWS
All of the powers of this corporation, insofar as the same may be
lawfully vested by these Articles of Incorporation in the Board of Directors,
are hereby conferred upon the Board of Directors of this corporation. In
furtherance and not in limitation of that power, the Board of Directors, subject
to the Governance Agreement, shall have the power to adopt, amend or repeal the
Bylaws of this corporation, subject to the power of the shareholders to amend or
repeal such Bylaws. The shareholders shall also have the power to amend or
repeal the Bylaws of this corporation and to adopt new Bylaws. No action may be
taken or effected by written consent of shareholders in lieu of a meeting.
ARTICLE 8. SPECIAL SHAREHOLDER MEETINGS
Special meetings of the shareholders of the Corporation for any purpose
or purposes may be called at any time by the Board of Directors, the Chairman of
the Board of Directors, or the President of the Corporation. Further, a special
meeting of the shareholders shall be held if the holders of not less than 40% of
all the votes entitled to be cast on any issue proposed to be considered at such
special meeting have dated, signed and delivered to the Secretary one or more
written demands for such meeting, describing the purpose or purposes for which
it is to be held.
3
<PAGE>
ARTICLE 9. MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS
Subject to the Governance Agreement, a merger, share exchange, sale of
substantially all of the Corporation's assets, or dissolution must be approved
by the affirmative vote of a majority of the Corporation's outstanding shares
entitled to vote, or if separate voting by voting groups is required then by not
less than a majority of all the votes entitled to be cast by that voting group.
ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION
Subject to the Governance Agreement and except as otherwise provided
herein, this corporation reserves the right to amend or repeal by the
affirmative vote of the holders of a majority of the outstanding Voting Stock,
any of the provisions contained in these Articles of Incorporation in any manner
now or hereafter permitted by law, and the rights of the shareholders of this
corporation are granted subject to this reservation.
ARTICLE 11. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act (the
"Act"), as it exists on the date hereof or may hereafter be amended, permits the
limitation or elimination of the liability of Directors, a Director of this
corporation shall not be liable to this corporation or its shareholders for
monetary damages for conduct as a Director. Any amendments to or repeal of this
Article 11 shall not adversely affect any right or protection of a Director of
this corporation for or with respect to any acts or omissions of such Director
occurring prior to such amendment or repeal. Notwithstanding any other
provisions of law, these Articles of Incorporation (except as hereinafter
provided) or the Bylaws of this corporation, the affirmative vote of the holders
of not less than 80% of the Voting Stock shall be required to alter, amend or
repeal, or to adopt any provisions inconsistent with, this Article 11 or any
provision hereof.
ARTICLE 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
This corporation shall indemnify its Directors and Officers to the full
extent not prohibited by applicable law now or hereafter in force against
liability arising out of a proceeding to which such individual was made a party
because the individual is or was a Director or an Officer. However, such
indemnity shall not apply on account of:
(a) acts or omissions of a Director or Officer finally adjudged to
be intentional misconduct or a knowing violation of law;
(b) conduct of a Director or Officer finally adjudged to be in
violation of Section 23B.08.310 of the Act relating to
distributions by this corporation; or
(c) any transaction with respect to which it was finally adjudged
that such Director or Officer personally received a benefit in
money, property, or services to which the Director or Officer
was not legally entitled.
Subject to the foregoing, it is specifically intended that proceedings covered
by indemnification shall include proceedings brought by this corporation
(including derivative actions), proceedings by government entities and
governmental officials or other third party actions.
4
<PAGE>
ARTICLE 13. RESOLUTION OF CONFLICTING TERMS
Notwithstanding any other provision of these Articles of Incorporation,
any conflict between (a) any action taken by this corporation or the Board of
Directors, or any provision of these Articles of Incorporation or the Bylaws of
this corporation, as each may be amended and/or restated from time to time, on
the one hand, and (b) the terms of the Governance Agreement on the other, shall
be resolved in favor of the terms of the Governance Agreement unless otherwise
agreed to in writing by Cyanamid. Any amendment or repeal of this Article 13
shall require the affirmative vote of the holders of more than 70% of the common
stock on a fully diluted basis.
ARTICLE 14. ELECTION TO NOT BE COVERED BY STATUTE
This corporation elects not to be covered by the provisions of Section
23B.17.020 of the Act.
ARTICLE 15. INCORPORATOR
The name and address of the incorporator are as follows:
Stephen M. Graham
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Dated: May 18, 1999.
IMMUNEX CORPORATION
/s/ Scott G. Hallquist
--------------------------------
Name: Scott G Hallquist
---------------------------
Its: Senior Vice President
----------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 249,757
<SECURITIES> 391,054
<RECEIVABLES> 43,325
<ALLOWANCES> 1,067
<INVENTORY> 17,969
<CURRENT-ASSETS> 717,853
<PP&E> 169,328
<DEPRECIATION> 72,568
<TOTAL-ASSETS> 860,716
<CURRENT-LIABILITIES> 102,995
<BONDS> 450,000
0
0
<COMMON> 778,605
<OTHER-SE> 473,326
<TOTAL-LIABILITY-AND-EQUITY> 860,716
<SALES> 221,091
<TOTAL-REVENUES> 226,651
<CGS> 66,887
<TOTAL-COSTS> 222,570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 318
<INTEREST-EXPENSE> 1,697
<INCOME-PRETAX> 9,482
<INCOME-TAX> 2,370
<INCOME-CONTINUING> 7,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,112
<EPS-BASIC> .09
<EPS-DILUTED> .08
</TABLE>
