UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 25, 1997
IMCLONE SYSTEMS INCORPORATED
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19612 04-2834797
State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
180 Varick Street, New York, New York 10014
(Address of principal executive offices) (Zip Code)
(212) 645-1405
Registrant's telephone number, including area code
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Item 5. Other Events
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RELATING TO THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
The following discussion and analysis by management is provided to identify
certain significant factors which affected the financial position and operating
results of ImClone Systems Incorporated (the "Company" or "ImClone") during the
periods included in the accompanying financial statements.
OVERVIEW AND RISK FACTORS
The Company is a biopharmaceutical company engaged primarily in the
research and development of therapeutic products for the treatment of selected
cancers and cancer-related disorders. The products under development include
cancer therapeutics and cancer vaccines. Since its inception in April 1984, the
Company has devoted substantially all of its efforts and resources to research
and development conducted on its own behalf and through collaborations with
corporate partners and academic research and clinical institutions. The Company
has generated a cumulative net loss of approximately $101,973,000 for the period
from its inception to December 31, 1996. The Company expects to incur
significant additional operating losses over each of the next several years. The
major sources of the Company's working capital have been the proceeds of its
initial public offering in November 1991, a second public offering in May 1993,
overseas offerings in 1994, the sale of its Cadus Pharmaceutical Corporation
("Cadus") stock holdings in December 1994 and April 1995, the debt and equity
transaction with a group of investors (the "Oracle Group") in August 1995,
public offerings completed in November 1995 and February 1996, private equity
financings, license fees and research and development fees from corporate
partners, and income earned on the investment of these funds. See "Liquidity and
Capital Resources". Since its inception through December 31, 1996, the Company
also has incurred indebtedness of $6,313,000 ($2,000,000 of which was repaid
March 31, 1992) under Industrial Development Revenue Bonds, the proceeds of
which have been used for the acquisition, construction and installation of the
Company's research and development faciltiy in New York City. The Company also
has a remaining obligation to Pharmacia and UpJohn, Inc. ("Pharmacia") at
December 31, 1996 in the amount of $1.9 million. See Note 6(a) to the Financial
Statements.
Substantially all of the Company's products are in the early stages of
development, clinical studies or research. Substantially all the Company's
revenues were generated from license and research arrangements with corporate
sponsors. The Company's revenues under its research and license agreements with
corporate sponsors have fluctuated and are expected to fluctuate significantly
from period to period. Similarly, the Company's results of operations have
fluctuated and are expected to fluctuate significantly from period to period.
These variations have been, and are expected to be, based primarily on the
timing of entering into supported research and license agreements, the status of
the Company's various products, the timing and level of revenues from sales by
its partner in diagnostics, Abbott Laboratories ("Abbott"), of products bearing
the Company's technology, the addition or termination of research programs or
funding support, performance by the Company's corporate collaborators of their
funding and marketing obligations, the achievement of specified research or
commercialization milestones and variations in the level of expenditures for the
Company's proprietary products during any given period. The Company's products
will require substantial additional development and clinical testing and
investment prior to commercialization. To achieve profitable operations, the
Company, alone or with others, must successfully develop, introduce and market
its products. No assurance can be given that any of the Company's product
development efforts will be successfully completed, that required regulatory
approvals can be obtained or that any products, if developed, will be
successfully manufactured or marketed or achieve customer acceptance.
1
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RESULTS OF OPERATIONS
Years Ended December 31, 1996 and December 31, 1995
Revenues for the years ended December 31, 1996 and December 31, 1995 were
$600,000 and $800,000, respectively. Revenues for both years included $300,000
from its corporate partnership with the Wyeth-Lederle Vaccine Division of
American Home Products Corporation ("American Home") in infectious disease
vaccines. In addition, revenues for the years ended December 31, 1996 and
December 31, 1995 included royalty fees of $225,000 and contract research fees
of $500,000, respectively, from the Company's strategic alliance with Abbott in
diagnostics. Finally, the year ended December 31, 1996 included $75,000 in
license fees from the Company's cross-licensing agreement with Immunex for novel
hematopoietic growth factors.
Total operating expenses for the years ended December 31, 1996 and December
31, 1995 were $15,443,000 and $12,507,000, respectively. Research and
development expenses for the years ended December 31, 1996 and December 31, 1995
were $11,482,000 and $8,768,000, respectively. Such amounts for the years ended
December 31, 1996 and December 31, 1995 represented 74% and 70%, respectively,
of total operating expenses. The $2,714,000 increase in research and development
expenses is primarily attributable to costs incurred for C225, the Company's
lead therapeutic product candidate. This includes additional staffing and
expenditures in the functional areas of product development, manufacturing and
clinical and regulatory affairs to support the manufacture of C225 for human
clinical trials and travel-related expenses to pursue strategic partnerships for
C225 (and other product candidates). The remaining increase reflects growth in
the area of discovery research for future product candidates.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with corporate partners
and technology licensors, and expenses associated with applying for patent
protection for the Company's technology and products. Such expenses for the year
ended December 31, 1996 were $3,961,000 compared to $3,739,000 for the year
ended December 31, 1995. The $222,000 increase primarily reflects additional
staffing to support the expanding research, clinical, development and
manufacturing efforts of the Company, particularly with its lead therapeutic
product candidate, C225. The Company expects general and administrative expenses
to increase in future years to support planned increases in research and
development.
2
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Interest and other income was $918,000 for the year ended December 31, 1996
as compared to $3,120,000 for the year ended December 31, 1995. Other income for
the year ended December 31, 1995 included the sale of the remaining one-half of
its shares of capital stock of Cadus for $3,000,000 to High River Limited
Partnership ("High River"). See "Liquidity and Capital Resources". The greater
interest income earned during the year ended December 31, 1996 reflects the
Company's improved cash position from the November 1995 and February 1996 public
sales of shares of its Common Stock. See "Liquidity and Capital Resources".
Interest and other expense was $823,000 and $1,054,000 for the years ended
December 31, 1996 and December 31, 1995, respectively. Such expense for both
years primarily includes interest on two outstanding Industrial Development
Revenue Bonds with an aggregate principal amount of $4,313,000, interest
recorded on the liability to Pharmacia for the reacquisition of the worldwide
rights to Interleukin-6 Mutein ("IL-6m") and the contract manufacture of
clinical material, and interest accrued and the amortization of the non-cash
debt discount recorded in connection with the Company's August 1995 financing
with the Oracle Group. See "Liquidity and Capital Resources" and Notes 6(a) and
6(b) to the Financial Statements.
The Company had net losses of $16,015,000 or $0.83 per share, and
$9,641,000 or $0.72 per share, for the years ended December 31, 1996 and
December 31, 1995, respectively. The net loss for the year ended December 31,
1996 included a $1,267,000 or $0.07 per share extraordinary loss on early
extinguishment of debt through the May issuance of Common Stock in lieu of cash
repayment of a $2,500,000 loan due the Oracle Group and a $180,000 long-term
note owed to a Company Director. See "Liquidity and Capital Resources".
Years Ended December 31, 1995 and December 31, 1994
Revenues for the years ended December 31, 1995 and December 31, 1994 were
$800,000 and $950,000, respectively. Revenues for the years ended December 31,
1995 and December 31, 1994 consisted of $300,000 from the Company's corporate
partnership with American Home in vaccines. In addition, revenues for the years
ended December 31, 1995 and December 31, 1994 included contract research fees of
$500,000 and $400,000, respectively, from the Company's strategic alliance with
Abbott in diagnostics. Finally, license fees of $250,000 were recognized from
the Abbott alliance during the year ended December 31, 1994.
Total operating expenses for the years ended December 31, 1995 and December
31, 1994 were $12,507,000 and $15,164,000, respectively. Research and
development expenses for the years ended December 31, 1995 and December 31, 1994
were $8,768,000 and $11,816,000, respectively. Such amounts for the years ended
December 31, 1995 and December 31, 1994 represented 70% and 78%, respectively,
of total operating expenses. The decrease in research and development expenses
is attributable to the reduction in selected personnel, laboratory and third
party costs. Also, the Company incurred a one-time charge of $800,000 during the
year ended December 31, 1994 for the contract manufacture of IL-6m clinical
material from Pharmacia.
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General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with corporate partners
and technology licensors, and expenses associated with applying for patent
protection for the Company's technology and products. Such expenses for the year
ended December 31, 1995 were $3,739,000 compared to $3,348,000 for the year
ended December 31, 1994. The increase is related primarily to fees incurred in
connection with the April 1995 Cadus stock sale, a loan agreement and related
financing with the Oracle Group completed in August 1995, a contemplated
product-related financing of C225 which the Company did not continue to pursue,
and transfer of the Company's patent representation to outside counsel.
Interest and other income was $3,120,000 for the year ended December 31,
1995 as compared to $3,186,000 for the year ended December 31, 1994. Each year
included a gain from the sale of 50% of the Company's common and preferred Cadus
stock to an unrelated party for $3,000,000. Interest and other expense was
$1,054,000 and $821,000 for the years ended December 31, 1995 and December 31,
1994, respectively. Such expense for both years primarily reflect interest on
two outstanding Industrial Development Revenue Bonds with an aggregate principal
amount of $4,313,000. In addition, interest and other expense also included
interest recorded on the liability to Pharmacia for the reacquisition of the
worldwide rights to IL-6m and the contract manufacture of clinical material for
the Company's trials of IL-6m. See "Liquidity and Capital Resources" and Note
6(a) to the Financial Statements. Interest for the period ended December 31,
1995 also includes accrued interest and the amortization of discounted interest
incurred in connection with the August 1995 financing with the Oracle Group. See
Note 6(b) to the Financial Statements.
The equity in the loss of affiliate of $342,000 for the year ended December
31, 1994 was attributable to the Company's share in the losses of Cadus, which
was accounted for under the equity method during the year. During 1994, the
Company owned 28% of the common and preferred stock of Cadus. The terms of its
sale of 50% of its holdings in Cadus to High River for $3,000,000 were finalized
in December 1994; the cash consideration was received by the Company on January
4, 1995. On April 27, 1995, sale of the Company's remaining Cadus stock was
completed for $3,000,000 to High River. See "Liquidity and Capital Resources"
and Note 2(e) to the Financial Statements.
The Company had net losses of $9,641,000 or $0.72 per share, and
$12,191,000 or $1.12 per share, for the years ended December 31, 1995 and
December 31, 1994, respectively, due to the factors discussed above. The lower
loss per share for the year ended December 31, 1995 was primarily attributable
to a lower net loss and an increase in the number of outstanding shares.
4
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had a cash and cash equivalents and
securities available for sale balance of approximately $13.5 million, virtually
all of which represents the remaining balance of the proceeds of public
offerings of 3,000,000 shares of Common Stock in November 1995 and 2,200,000
shares of Common Stock in February 1996. Such balances totaled approximately
$10.9 million on February 13, 1997.
The Company has financed its operations primarily through the proceeds of
an initial public offering in November 1991, which raised approximately $31.7
million, net of expenses, supported research funding and license agreements,
interest income, the issuance of industrial development bonds and the following
described additional financings. In May 1993, the Company completed a second
public Common Stock offering which raised approximately $10.4 million, net of
expenses. In 1994, the Company completed several private offerings of its Common
Stock, including offerings pursuant to Regulation S under the Securities Act of
1933, as amended (the "1933 Act"). The 1933 Act places restrictions on the
resale in the United States of shares issued in a Regulation S offering. These
various private offerings raised an aggregate of approximately $5.7 million.
In December 1994 the Company completed the sale of one-half of its shares
of capital stock of Cadus to High River for $3.0 million. During April 1995, the
Company completed the sale of the remaining one-half of its shares of capital
stock of Cadus for $3.0 million, also to High River. In exchange for receiving a
now-expired right to repurchase all the outstanding shares of capital stock of
Cadus, the Company granted to High River two options to purchase shares of
Common Stock. One option is for 150,000 shares at an exercise price per share
equal to $2.00, subject to adjustment under certain circumstances, and the other
option is for 300,000 shares at an exercise price per share equal to $0.69,
subject to adjustment under certain circumstances. Both options will expire on
April 26, 2000.
In August 1995, the Oracle Group purchased 1,000,000 shares of Common Stock
for a purchase price of $1.5 million and made a loan to the Company in the
aggregate amount of $2.5 million with a two-year maturity, but subject to
mandatory prepayment, in whole or in part, upon the occurrence of certain
events, including the raising of certain additional funds. The loan carried an
annual interest rate of 8%. The Oracle Group includes Oracle Partners, L.P.,
Quasar International Partners C.V., Oracle Institutional Partners L.P., Sam
Oracle Fund, Inc. and Warren B. Kanders. The Oracle Group also received warrants
exercisable at any time until August 10, 2000 entitling the holders thereof to
purchase 500,000 shares of Common Stock at a price of $1.50 per share and
500,000 shares of Common Stock at a price of $3.00 per share. As a result of the
Company's offerings of shares of its Common Stock in November 1995 and February
1996, the Oracle Group was entitled to require the Company to apply 20 percent
of the gross proceeds of the sale of the shares of Common Stock from the
offerings to repay the loan.
5
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In May 1996, the Company and the Oracle Group exchanged the notes
evidencing the 1995 loan in the aggregate outstanding principal amount of $2.5
million for 333,333 shares of Common Stock and the Company paid the accrued and
unpaid interest on the notes in the amount of $143,000 in cash. The Company
recorded an extraordinary loss of $1,228,000 on the extinguishment of the debt.
The Company has registered such shares of Common Stock with the Securities and
Exchange Commission (the "Commission") under a registration statement in
accordance with the provisions of the 1933 Act.
In July 1995, a director loaned the Company $180,000 in exchange for a
long-term note due two years from issuance at an annual interest rate of 8%. As
part of the transaction, the director was granted 36,000 warrants to purchase
Company Common Stock at $1.50 per share and an additional 36,000 warrants to
purchase Company Common Stock at $3.00 per share. In May 1996, the Company and
the director exchanged the note for 24,000 shares of Common Stock and the
Company paid the accrued and unpaid interest on the note in the amount of
$10,000 in cash. The Company recorded an extraordinary loss of $39,000 on the
extinguishment of the debt. The Company has registered such shares of Common
Stock with the Commission under a registration statement in accordance with the
provisions of the 1933 Act.
In November 1995, the Company completed a public sale of 3,000,000 shares
of Common Stock at a per share price to the public of $3.75. Net proceeds to the
Company from this sale totaled approximately $10.6 million after deducting
expenses payable by the Company in connection with the offering and the
commission paid by the Company.
In February 1996, the Company completed a public sale of 2,200,000 shares
of Common Stock at a per share price to the public of $6.63. Net proceeds to the
Company from this sale totaled approximately $13.6 million after deducting
expenses payable by the Company in connection with the offering and the
commission paid by the Company.
In May 1996, the Company extended its collaboration with Merck KGaA
(formerly E. Merck) ("Merck") for the development of a therapeutic cancer
vaccine, BEC-2, for use in small-cell lung carcinoma and in malignant melanoma.
The collaboration continues a research and license agreement between the two
companies signed in December 1990. Under the terms of the modified agreement,
the Company may receive up to $11.7 million in license fees, research and
development support and milestone payments in addition to the monies previously
received under the original agreement. In return, Merck will receive marketing
rights to BEC-2 for all therapeutic indications outside North America. Formerly,
the rights of Merck were confined to Europe, Australia and New Zealand. Merck
will also share in the development costs for the United States and Europe and
will pay all development costs in other territories. The Company will be
entitled to royalties based upon product sales outside North America.
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In June 1996, the Company and the New York City Industrial Development
Agency (the "NYIDA") extended the maturity of the Company's $2.1 million
repayment obligation to the NYIDA for the 1986 Industrial Revenue Bond, which
was due on June 15, 1996, to December 15, 1997.
In December 1996, the Company entered into a technology cross-licensing
agreement with Immunex Corporation ("Immunex") relating to FLT3/FLK-2 ligand and
its receptor. FLT3 ligand is a hematopoietic growth factor. Under the terms of
the agreement, the Company has exclusively licensed the receptor to Immunex for
use in the manufacture of the ligand. In return, the Company will receive an
initial payment of $150,000 and a royalty based on the sales of the ligand by
Immunex and its sub-licensees. Of the initial $150,000 payment, $75,000 was
recorded as license fee revenue for the year ended December 31, 1996. In
addition, Immunex has granted the Company a non-exclusive license in the United
States and Canada to use its patented FLT3/FLK-2 ligand, manufactured by
Immunex, for ex-vivo stem cell expansion together with an exclusive license to
distribute the ligand with its own proprietary products for ex-vivo expansion.
Immunex has agreed to seek to obtain the consent of its parent company, American
Home, to expand the territory of this license to include the world outside North
America.
In December 1996, the Company and Abbott modified their 1992 diagnostic
strategic alliance to provide for an exclusive sublicensing agreement with
Chiron Diagnostics ("Chiron") for the Company's patented DNA signal
amplification technology, Ampliprobe. Under the terms of the agreement, all
sales of Chiron branched DNA diagnostic probe technology in countries covered by
Company patents will be subject to a royalty to Abbott to be passed through to
the Company. The initial royalty payment of approximately $225,000, which
covered Ampliprobe sales from January 1992 through September 1996, was included
under the revenue caption "research and development funding from third parties
and other" for the year ended December 31, 1996. The Company received the
initial royalty payment from Abbott in late January 1997.
In December 1996, the Company signed an agreement with Finova Technology
Finance, Inc. ("Finova") to finance the lease of laboratory and computer-related
equipment and make certain building and leasehold improvements to existing
facilities involving payments aggregating approximately $2,500,000. The first of
multiple intended leases has been signed at a cost of $421,000. Each lease has a
fair market value purchase option at the expiration of a 42-month term. Pursuant
to the agreement, the Company issued to Finova a warrant expiring December 31,
1999 to purchase 23,220 shares of Common Stock at an exercise price of $9.69 per
share. The Company has registered such shares of Common Stock underlying the
warrant with the Commission under a registration statement in accordance with
the provisions of the 1933 Act. See Notes 6(a), 10 and 11 to the Financial
Statements.
The Company has expended and will continue to expend in the future
substantial funds to continue the research and development of its products,
conduct pre-clinical and clinical trials, establish clinical-scale and
commercial-scale manufacturing in its own facilities or in the facilities of
others, and market its products. In addition, $2.1 and $2.2 million,
respectively, in Industrial Development Revenue Bonds issued on behalf of the
Company in 1986 and 1990 become due in December 1997 and May 2004, respectively.
See Note 5 to the Financial Statements.
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In July 1993, the Company entered into an agreement with Erbamont, Inc.,
now a subsidiary of Pharmacia, to acquire the worldwide rights to IL-6m, a blood
cell growth factor, which had been licensed to Pharmacia pursuant to a
development and licensing agreement. In consideration of the return of rights
and the transfer of certain material and information, the Company has paid $1.4
million and has further obligations to Pharmacia. Such obligations, including
those to pay for IL-6 mutein material manufactured and supplied by Pharmacia,
totaled $2.4 million at March 31, 1996. In addition, the Company is required to
pay Pharmacia $2.7 million in royalties on eventual sales of IL-6m, if any. In
March, 1996, the Company entered into a Repayment Agreement with Pharmacia (the
"Repayment Agreement") pursuant to which it agreed to pay the $2.4 million over
24 months commencing in March 1996, with interest only payable during the first
six months. At December 31, 1996 the remaining obligation to Pharmacia totaled
$1.9 million. In connection with the Repayment Agreement, the Company signed a
Confession of Judgment, which can be filed by Pharmacia with an appropriate
court in the case of default by the Company. Pursuant to a Security Agreement
entered into with Pharmacia, the Company pledged its interests in patents
related to IL-6m and to heparanase to secure its obligations under the Repayment
Agreement.
The Company's future working capital and capital requirements will depend
upon numerous factors, including the progress of the Company's research and
development programs, pre-clinical testing and clinical trials, the Company's
corporate partners fulfilling their obligations to the Company, the timing and
cost of seeking regulatory approvals, the level of resources that the Company
devotes to the development of manufacturing, marketing and sales capabilities,
technological advances, the status of competitors and the ability of the Company
to maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company to support these activities.
The Company's budgeted cash expenditures for the twelve month period ending
December 31, 1997 total approximately $20.5 million. Included in this budget
figure are $1.7 million of the remaining $1.9 million obligation to Pharmacia
and the $2.1 million Industrial Revenue Development Bond debt payable to the
NYIDA in December 1997. In addition, the budget reflects the expansion of
operations to include numerous new outside research agreements, the proposed
hire of several new employees during 1997 and related costs to support the
expansion of the Company's research and development programs, including the
expanded clinical trials. The Company expects that its capital resources,
including the ongoing research support of its corporate partners but excluding
the anticipated proceeds from a proposed public offering of 3,000,000 shares of
Common Stock by the Company for which a registration statement has been filed
with the Commission pursuant to the 1933 Act but which has not as of the date
hereof been declared effective by the Commission (the "Proposed Offering"), will
be sufficient to fund its operations through 1997. However, the receipt of
certain of such ongoing research support is subject to attaining research and
development milestones, certain of which have not yet been achieved. These
milestones include the successful completion of a pilot manufacturing run
relating to the BEC-2 cancer vaccine and the nonoccurence of third party
opposition filings against a currently allowed patent of the Company in Europe
relating to the Abbott strategic alliance. There can be no assurance that the
Company will achieve these milestones in 1997, if at all. If difficulty is
encountered in attaining these milestones, the Company may postpone the budgeted
expansion of operations to allow for funding of its operations beyond 1997.
Accordingly, in order to fund its capital needs after 1997, the Company will
require significant levels of additional capital and intends to raise the
necessary capital through the Proposed Offering and additional equity or debt
financings, arrangements with corporate partners or from other sources.
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The Company has entered into preliminary discussions with several major
pharmaceutical companies regarding various alternatives concerning the funding
of research and development for certain of its products. No assurance can be
given that the Company will be successful in pursuing any such alternatives. In
addition, the Company may seek to enter into a significant strategic partnership
with a pharmaceutical company for the development of its lead product candidate,
C225. Such a strategic alliance could include an up-front equity investment and
license fees plus milestone fees and revenue sharing. There can be no assurance
that the Company will be successful in achieving such an alliance, nor can the
Company predict the amount of funds which might be available to it if it entered
into such an alliance or the time at which such funds would be made available.
The Company has granted a security interest in substantially all facility
equipment located in its New York City facility to secure the obligations of the
Company to the NYIDA relating to the 1986 Industrial Development Revenue Bond
and the 1990 Industrial Development Revenue Bond, which were issued to finance a
portion of the cost of this facility.
The Company has outfitted and purchased equipment for a certain property to
create a clinical-scale production facility that complies with current Good
Manufacturing Practices regulations. To be successful, the Company's products
must be manufactured in commercial quantities in compliance with regulatory
requirements and at acceptable costs. Although the Company has developed
products in the laboratory and in some cases has produced sufficient quantities
of materials for pre-clinical animal trials and early stage clinical trials,
production in late stage clinical or commercial quantities may create technical
challenges for the Company. If it commercializes its products, the Company plans
to adapt this facility for use as its commercial-scale manufacturing facility.
However, the Company has limited experience in clinical-scale manufacturing and
no experience in commercial-scale manufacturing, and no assurance can be given
that the Company will be able to make the transition to late stage clinical or
commercial production. The timing and any additional costs of adapting the
facility for commercial manufacturing will depend on several factors, including
the progress of products through clinical trials, and are not yet determinable.
Total capital expenditures made during the year ended December 31, 1996
were $693,000. Of the total capital expenditures made during the year ended
December 31, 1996, $421,000 has been reimbursed in accordance with the terms of
the Finova agreement mentioned above which provides for improvements and
equipping of the Company's manufacturing facility in New Jersey. The balance of
capital additions was for equipment and computer-related purchases for both the
New Jersey facility and the corporate office and research laboratories in New
York.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $97,350,000 which expire at various
dates from 2000 through 2011. At December 31, 1996 the Company had research
credit carryforwards of approximately $1,883,000 which expire at various dates
between the years 2001 and 2011. Pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, the annual utilization of the Company's net operating
loss and research credit carryforwards may be limited if the Company experiences
a change in ownership of more than 50% within a three-year period. The Company
believes that one or more of such ownership changes may have occured since 1986.
Therefore, the Company may be significantly limited in utilizing its tax net
operating loss carryforwards arising before such ownership change(s) to offset
future taxable income. Similarly, the Company may be restricted in using its
research credit carryforwards arising before such ownership change(s) to offset
future federal income tax expense.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not expect
that adoption of SFAS No. 125 will have a near-term material impact on the
Company's financial position, results of operations, or liquidity.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual operations, performance and results could
differ materially from those reflected in, or anticipated by, these
forward-looking statements. In evaluating the Company and its operations,
performance and results, certain factors should be considered, including, among
other things, the factors discussed above under "Overview and Risk Factors", and
the risks and uncertainties discussed in the Company's most recent Annual Report
on Form 10-K under the captions "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in the Company's
Quarterly Reports on Form 10-Q and in the Company's other reports filed under
the Exchange Act.
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FINANCIAL STATEMENTS
Index to Financial Statements
Financial Statements
Independent Auditors' Report.................................. ........... F-2
Balance Sheets at December 31, 1996 and 1995.............................. F-3
Statements of Operations for the
Years Ended December 31, 1996, 1995, and 1994........................... F-4
Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995, and 1994........................... F-5
Statements of Cash Flows for the
Years Ended December 31, 1996, 1995, and 1994........................... F-6
Notes to Financial Statements............................................. F-7
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
ImClone Systems Incorporated:
We have audited the financial statements of ImClone Systems Incorporated as
listed in the accompanying index. 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 ImClone Systems Incorporated
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 2(h) to the financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, in 1996.
/s/ KMPG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
February 18, 1997
F-2
<PAGE>
IMCLONE SYSTEMS INCORPORATED
Balance Sheets
(in thousands, except share data)
December 31, December 31,
Assets 1996 1995
------------ -------------
Current assets:
Cash and cash equivalents ..................... $ 2,734 $ 10,207
Securities available for sale ................. 10,780 --
Prepaid expenses .............................. 122 115
Amount due from officer and stockholder ....... 101 132
Other current assets .......................... 479 26
--------- ---------
Total current assets ..................... 14,216 10,480
--------- ---------
Property and equipment:
Land ......................................... 340 340
Building and building improvements ........... 8,969 8,969
Leasehold improvements ....................... 4,832 4,832
Machinery and equipment ...................... 5,159 4,796
Furniture and fixtures ....................... 536 526
Construction in progress ..................... 320 --
--------- ---------
Total cost ............................... 20,156 19,463
Less accumulated depreciation
and amortization ....................... (9,606) (7,984)
--------- ---------
Property and equipment, net .............. 10,550 11,479
--------- ---------
Patent costs, net .............................. 977 707
Deferred financing costs, net .................. 65 74
Other assets ................................... 77 63
--------- ---------
$ 25,885 $ 22,803
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................. $ 1,059 $ 992
Accrued expenses and other .................... 1,366 826
Interest payable .............................. 238 343
Current portion of long-term liabilities ...... 3,858 4,584
--------- ---------
Total current liabilities ................ 6,521 6,745
--------- ---------
Long-term debt ................................. 2,200 2,200
Long-term notes payable, net ................... -- 1,928
Other long-term liabilities,
less current portion.......................... 575 107
--------- ---------
Total liabilities ........................ 9,296 10,980
--------- ---------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $1.00 par value;
authorized 4,000,000 shares;
none issued and outstanding ................ -- --
Common stock, $.001 par value;
authorized 30,000,000 shares;
issued 20,248,122 and 16,819,622
at December 31, 1996 and
December 31, 1995, respectively;
outstanding 20,233,699 and
16,806,919 at December 31, 1996 and
December 31, 1995, respectively ............ 20 17
Additional paid-in capital ................... 118,760 97,914
Accumulated deficit .......................... (101,973) (85,958)
Treasury stock, at cost; 14,423
and 12,703 shares at December 31, 1996
and December 31, 1995, respectively ........ (169) (150)
Unrealized loss on securities
available for sale ......................... (49) --
--------- ---------
Total stockholders' equity ............... 16,589 11,823
--------- ---------
$ 25,885 $ 22,803
========= =========
See accompanying notes to financial statements.
F-3
<PAGE>
IMCLONE SYSTEMS INCORPORATED
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Revenues:
License fees from third parties ................ $ 75 $ -- $ 250
Research and development funding from third
parties and other ........................... 525 800 700
-------- -------- --------
Total revenues ................... 600 800 950
-------- -------- --------
Operating expenses:
Research and development ....................... 11,482 8,768 11,816
General and administrative ..................... 3,961 3,739 3,348
-------- -------- --------
Total operating expenses .......... 15,443 12,507 15,164
-------- -------- --------
Operating loss ...................................... (14,843) (11,707) (14,214)
-------- -------- --------
Other (income) expense:
Interest and other income ...................... (918) (3,120) (3,186)
Interest and other expense ..................... 823 1,054 821
Equity in loss of affiliate .................... -- -- 342
-------- -------- --------
Net interest and other income ...... (95) (2,066) (2,023)
-------- -------- --------
Loss before extraordinary item ...................... (14,748) (9,641) (12,191)
Extraordinary loss on extinguishment of debt......... 1,267 -- --
-------- -------- --------
Net loss ............................................ $(16,015) $ (9,641) $(12,191)
======== ======== ========
Net loss per common share:
Loss before extraordinary item .............. $ (0.76) $ (0.72) $ (1.12)
Extraordinary loss on extinguishment of debt. 0.07 -- --
-------- -------- --------
Net loss per common share ................... $ (0.83) $ (0.72) $ (1.12)
======== ======== ========
Weighted average shares outstanding ................. 19,371 13,311 10,903
======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
IMCLONE SYSTEMS INCORPORATED
Statements of Stockholders' Equity
Years Ended December 31, 1994, 1995, and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury
--------------------------
Shares Amount Capital Deficit Stock
-------------- --------- -------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ....... 9,510,183 $ 10 $ 79,497 $ (64,126) $ (150)
-------------- --------- -------------- ---------------- -----------
Issuance of common stock ........... 3,067,502 3 5,133
Advances to officer and
stockholder ....................
Amortization of deferred
compensation ...................
Net loss ........................... (12,191)
-------------- --------- -------------- ---------------- -----------
Balance at December 31, 1994 ....... 12,577,685 $ 13 $ 84,630 $ (76,317) $ (150)
-------------- --------- -------------- ---------------- -----------
Issuance of common stock ........... 4,000,000 4 11,998
Options exercised .................. 156,750 162
Warrants exercised ................. 15,300 23
Payment of promissory notes ........ 57,184 36
Proceeds from promissory notes ..... 2
Debt discount ...................... 1,063
Net loss ........................... (9,641)
-------------- --------- -------------- ---------------- -----------
Balance at December 31, 1995 ....... 16,806,919 $ 17 $ 97,914 $ (85,958) $ (150)
-------------- --------- -------------- ---------------- -----------
Issuance of common stock ........... 2,200,000 2 13,560
Options exercised .................. 266,275 846
Warrants exercised ................. 604,892 1 2,960
Options granted to non-employees.... 95
Extinguishment of debt ............. 357,333 3,260
Debt discount ...................... 125
Treasury shares .................... (1,720) (19)
Changes in unrealized loss on
securities available for sale ...
Net loss ............................ (16,015)
-------------- --------- -------------- ---------------- -----------
Balance at December 31, 1996 ........ 20,233,699 $ 20 $ 118,760 $ (101,973) $ (169)
============== ========= ============== ================ ===========
<CAPTION>
Unrealized
Amount Loss on
Due from Securities
Officer and Deferred Available
Stockholder Compensation for Sale Total
-------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ........ $ (398) $ (21) $ - $ 14,812
-------------- ----------------- ------------- ----------------
Issuance of common stock ............ 5,136
Advances to officer and
stockholder ..................... 398 398
Amortization of deferred
compensation .................... 21 21
Net loss ............................ (12,191)
-------------- ----------------- ------------- ----------------
Balance at December 31, 1994 ........ $ - $ - $ - $ 8,176
-------------- ----------------- ------------- ----------------
Issuance of common stock ............ 12,002
Options exercised ................... 162
Warrants exercised .................. 23
Payment of promissory notes ......... 36
Proceeds from promissory notes ...... 2
Debt discount ....................... 1,063
Net loss ............................ (9,641)
-------------- ----------------- ------------- ----------------
Balance at December 31, 1995 ........ $ - $ - $ - $ 11,823
-------------- ----------------- ------------- ----------------
Issuance of common stock ............ 13,562
Options exercised ................... 846
Warrants exercised .................. 2,961
Options granted to non-employees.... 95
Extinguishment of debt .............. 3,260
Debt discount ....................... 125
Treasury shares ..................... (19)
Changes in unrealized loss on
securities available for sale ... (49) (49)
Net loss ............................ (16,015)
-------------- ----------------- ------------- ----------------
Balance at December 31, 1996 ........ $ - $ - $ (49) $ 16,589
============== ================= ============= ================
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
IMCLONE SYSTEMS INCORPORATED
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net loss .............................................. $(16,015) $ (9,641) $(12,191)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........................ 1,704 1,789 1,844
Expense associated with issuance
of options ....................................... 95 -- 21
Equity in loss of affiliate .......................... -- -- 342
Loss on sale of investments .......................... -- -- 23
Fees associated with commercialization
and license agreement rights ...................... -- -- 117
Extraordinary loss on early
extinguishment of debt ............................ 1,267
Discounted interest amortization ..................... 156 222 --
Write-off of fixed assets ............................ -- 2 --
Write-off of patent costs ............................ -- 126 29
Changes in:
Prepaid expenses .................................... (7) (37) 19
Other current assets ................................ (453) 42 (4)
Due from officer .................................... 31 24 (111)
Other assets ........................................ (14) 115 (110)
Interest payable .................................... (105) 328 (1)
Accounts payable .................................... 67 (624) 780
Accrued expenses and other .......................... 540 421 434
-------- -------- --------
Net cash used in operating activities ............. (12,734) (7,233) (8,808)
-------- -------- --------
Cash flows from investing activities:
Acquisitions of property and equipment ............... (693) (36) (434)
Proceeds from sale of equipment ...................... 421 -- --
Purchases of securities available for sale ........... (32,665) -- --
Sales of securities available for sale ............... 21,836 -- 5,350
Additions to patents ................................. (343) (186) (176)
Investment in and advances to affiliate .............. -- -- 405
-------- -------- --------
Net cash (used in) provided by investing activities (11,444) (222) 5,145
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock ............................. 13,562 12,002 5,534
Proceeds from exercise of stock options and warrants . 3,807 185 --
Purchase of treasury stock ........................... (19) -- --
Proceeds from long-term notes payable ................ -- 2,680 --
Proceeds from short-term notes payable ............... -- 100 220
Repayment of short-term notes payable ................ -- (284) --
Repayment of long-term debt .......................... -- -- (400)
Payments of other liabilities ........................ (645) (53) (55)
-------- -------- --------
Net cash provided by financing activities ......... 16,705 14,630 5,299
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ... (7,473) 7,175 1,636
Cash and cash equivalents at beginning of period ....... 10,207 3,032 1,396
-------- -------- --------
Cash and cash equivalents at end of period ............. $ 2,734 $ 10,207 $ 3,032
======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
ImClone Systems Incorporated
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Basis of Preparation
ImClone Systems Incorporated (the "Company") is a biopharmaceutical company
engaged primarily in the research and development of therapeutic products for
the treatment of cancer and cancer related disorders. The Company employs
accounting policies that are in accordance with generally accepted accounting
principles in the United States.
The Company expects that its capital resources, including the ongoing
research support of its corporate partners, will be sufficient to fund its
operations through 1997. If, however, difficulty is encountered in attaining the
milestones necessary for continued research support, the Company would postpone
the budgeted expansion of operations to allow for funding of its operations
beyond 1997. Accordingly, in order to fund its capital needs after that time,
the Company will require significant levels of additional capital and intends to
raise the necessary capital through additional equity or debt financings,
arrangements with corporate partners or from other sources. The Company has
entered into preliminary discussions with several major pharmaceutical companies
regarding various alternatives concerning the funding of research and
development for certain of its products. No assurance can be given that the
Company will be successful in pursuing any such alternatives. In addition, the
Company may seek to enter into a significant strategic partnership with a
pharmaceutical company for the development of its lead product candidate, C225.
Such a strategic alliance could include an up-front equity investment and
license fees plus milestone fees and revenue sharing. There can be no assurance
that the Company will be successful in achieving such an alliance, nor can the
Company predict the amount of funds which might be available to it if it entered
into such an alliance or the time at which such funds would be made available.
The biopharmaceutical industry is subject to rapid and significant
technological change. The Company has numerous competitors, including major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. These competitors may succeed in
developing technologies and products that are more effective than any which are
being developed by the Company or which would render the Company's technology
and products obsolete and non-competitive. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company. In addition, many of the Company's
competitors have significantly greater experience than the Company in
pre-clinical testing and human clinical trials of new or improved pharmaceutical
products and in obtaining Food and Drug Administration ("FDA") and other
regulatory approvals on products for use in health care. The Company is aware of
various products under development or manufactured by competitors that are used
for the prevention, diagnosis or treatment of certain diseases the Company has
targeted for product development, some of which use therapeutic approaches that
compete directly with certain of the Company's product candidates. The Company
has limited experience in conducting and managing pre-clinical testing necessary
to enter clinical trials required to obtain government approvals and has limited
experience in conducting clinical trials. Accordingly, the Company's competitors
may succeed in obtaining FDA approval for products more rapidly than the
Company, which could adversely affect the Company's ability to further develop
and market its products. If the Company commences significant commercial sales
of its products, it will also be competing with respect to manufacturing
efficiency and marketing capabilities, areas in which the Company has limited or
no experience.
F-7
<PAGE>
(2) Summary of Significant Accounting Policies
(a) Cash Equivalents
Cash equivalents consist primarily of U.S. government instruments,
commercial paper, master notes and other readily marketable debt instruments.
The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents.
(b) Investments in Securities
The Company classifies its investment in debt and equity securities in one
of three categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
At December 31, 1996, all investments in securities were classified as
available-for-sale.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
equipment is provided by straight-line methods over estimated useful lives of
three to twelve years, and leasehold improvements are being amortized over the
related lease term (including optional renewal periods (Note 10)) or the service
lives of the improvements, whichever is shorter.
(d) Patent Costs
Patent and patent application costs are amortized on a straight-line basis
over their respective expected useful lives, up to a 15-year period.
(e) Deferred Financing Costs
Costs incurred in obtaining the Industrial Development Revenue Bonds (Note
5) are amortized using the straight-line method over the terms of the related
bonds.
F-8
<PAGE>
(f) Investment in and Advances to Affiliate
Cadus Pharmaceutical Corporation ("Cadus") was incorporated in January 1992
to develop novel classes of therapeutics that target signal transduction
pathways. The Company held a 50% investment in the capital stock of Cadus
through November 1994. In December 1994, an agreement was reached for the
Company to sell one-half of its shares of capital stock of Cadus to High River
Limited Partnership ("High River") for total consideration of $3.0 million. The
gain in 1994 on sale of the Cadus shares was recorded in the Statement of
Operations as other income for the year ended December 31, 1994. The cash
consideration was received by the Company on January 4, 1995.
During April 1995, the Company completed the sale of the remaining one-half
of its shares of capital stock of Cadus for $3.0 million, also to High River. In
exchange for receiving a now-expired right to repurchase all the outstanding
shares of capital stock of Cadus, the Company granted to High River two options
to purchase shares of Common Stock. One option is for 150,000 shares at an
exercise price per share equal to $2.00, subject to adjustment under certain
circumstances, and the other option is for 300,000 shares at an exercise price
per share equal to $0.69, subject to adjustment under certain circumstances.
Both options will expire on April 26, 2000.
(g) Revenue Recognition
License fees are recognized if the Company enters into license agreements
with third parties that provide for the payment of non-refundable fees when the
agreement is signed or when all parties concur that specified goals are
achieved. These fees are recognized as license fee revenues in accordance with
the terms of the particular agreement.
Research and development funding revenue is derived from collaborative
agreements with third parties and is recognized in accordance with the terms of
the respective contracts. Revenue from certain agreements is recognized using
the percentage of completion method based on contract costs incurred to date
compared with total estimated contract costs.
Revenue recognized in the accompanying statements of operations is not
subject to repayment. Revenue received that is related to future performance
under such contracts is deferred and recognized as revenue when earned.
(h) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(i) Research and Development
Research and development expenditures made pursuant to certain research and
development contracts with academic institutions, and other research and
development costs, are expensed as incurred.
F-9
<PAGE>
(j) Income Taxes
Effective January 1, 1993 the Company adopted SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires a change from the deferred method of
accounting for income taxes to the asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been recognized in the Company's financial statements or tax
returns.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the 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.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Adoption of this
Statement did not have a material impact on the Company's financial position,
results of operations, or liquidity.
(m) Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares outstanding. Common stock equivalents are not included in the computation
of average shares outstanding because they are anti-dilutive.
(n) Reclassification
Certain amounts previously reported have been reclassified to conform to
current year's presentation.
F-10
<PAGE>
(3) Securities Available-For-Sale
Securities available-for-sale of $10,780,000 at December 31, 1996 consisted
of mortgage-backed debt securities. The amortized cost of such securities was
$10,829,000 and the net unrealized holding losses were $49,000 at December 31,
1996. These securities available-for-sale have maturities ranging from 1997 to
1999.
(4) Accrued Expenses and Other
The following items are included in accrued expenses and other:
December 31, December 31,
1996 1995
------------ ------------
Salaries and other
payroll related expenses ................. $ 782,000 $206,000
Legal and accounting fees .................. 217,000 145,000
Other ...................................... 367,000 475,000
---------- --------
$1,366,000 $826,000
========== ========
(5) Long-term Debt
Long-term debt is comprised of the following:
December 31, December 31,
1996 1995
------------ ------------
10.75% Bond due 1997 ................. $ 2,113,000 $ 2,113,000
11.25% Bond due 2004 ................. 2,200,000 2,200,000
Less current portion ................. (2,113,000) (2,113,000)
----------- -----------
$ 2,200,000 $ 2,200,000
=========== ===========
On December 31, 1986, the New York City Industrial Development Agency (the
"NYIDA") issued an Industrial Development Revenue Bond (the "1986 Bond") on
behalf of the Company in the amount of $2,113,000. During December 1994, the
Bond's original maturity date of December 15, 1994 was extended to June 15,
1996. During June 1996, the Company and the NYIDA extended the maturity date an
additional eighteen months to December 15, 1997. The proceeds from the sale of
this Bond were used by the Company for the acquisition, construction and
installation of the Company's research and development facility in New York
City.
In August 1990, the NYIDA issued another Industrial Development Revenue
Bond (the "1990 Bond") in the amount of $2,200,000. The Bond is due May 1, 2004.
The proceeds from the sale of the Bond were used by the Company for the
acquisition, construction and installation of the Company's research and
development facility in New York City.
The Company has granted a security interest in substantially all equipment
located in its New York City facility to secure the obligations of the Company
to the NYIDA relating to the 1986 Bond and the 1990 Bond.
F-11
<PAGE>
(6) Long-term Liabilities and Notes Payable
(a) Other Long-term Liabilities
Other long-term liabilities is comprised of the following:
December 31, December 31,
1996 1995
------------ ------------
Liability to reacquire IL-6m rights ............ $ 1,917,000 $ 2,400,000
Liability under capital lease obligations ..... 354,000 125,000
Liability under license agreement .............. 49,000 53,000
Less current portion ........................... (1,745,000) (2,471,000)
----------- -----------
$ 575,000 $ 107,000
=========== ===========
In July 1993, the Company entered into an agreement with Erbamont, Inc.,
now a subsidiary of Pharmacia and Upjohn, Inc. ("Pharmacia"), to acquire the
worldwide rights to IL-6m, a blood cell growth factor, which had been licensed
to Pharmacia pursuant to a development and licensing agreement. In consideration
of the return of rights and the transfer of certain material and information,
the Company has paid $1.4 million and has further obligations to Pharmacia. Such
obligations, including those to pay for IL-6 mutein material manufactured and
supplied by Pharmacia, totaled $2.4 million at March 31, 1996. In addition, the
Company is required to pay Pharmacia $2.7 million in royalties on eventual sales
of IL-6m, if any. In March, 1996, the Company entered into a Repayment Agreement
with Pharmacia (the "Repayment Agreement") pursuant to which it agreed to pay
the $2.4 million over 24 months commencing in March 1996, with interest only
payable during the first six months. At December 31, 1996 the remaining
obligation to Pharmacia totaled $1.9 million. In connection with the Repayment
Agreement, the Company signed a Confession of Judgment, which can be filed by
Pharmacia with an appropriate court in the case of default by the Company.
Pursuant to a Security Agreement entered into with Pharmacia, the Company
pledged its interests in patents related to IL-6m and to heparanase to secure
its obligations under the Repayment Agreement.
During fiscal 1992, the Company entered into a capital lease agreement for
laboratory equipment which was recorded as an asset in the amount of $262,000.
The lease extends over a five-year period and has a bargain purchase option at
the end of the lease term. At December 31, 1996, the accumulated depreciation on
this equipment totaled $180,000. See also Note 10.
In December 1996, the Company signed an agreement with Finova Technology
Finance, Inc. ("Finova") to finance the lease of laboratory and computer-related
equipment and make certain building and leasehold improvements to existing
facilities involving payments aggregating approximately $2,500,000. The first of
multiple intended leases was signed in December 1996 at a cost of $421,000 and
related to equipment previously purchased by the Company during 1996. This
capital lease has been treated as a sale-leaseback transaction and no gain or
loss was recognized on the sale. Each lease has a fair market value purchase
option at the expiration of a 42-month term. At December 31, 1996, accumulated
depreciation on these assets totaled $6,000. Pursuant to the agreement, the
Company issued to Finova a warrant expiring December 31, 1999 to purchase 23,220
shares of Common Stock at an exercise price of $9.69 per share. The Company
recorded a non-cash debt discount of approximately $125,000 in connection with
this financing, which discount is being amortized over the 42-month term of the
first lease. See also Notes 10 and 11.
In connection with the Company's production and eventual marketing of
certain products, the Company entered into a license agreement which requires
minimum annual royalty payments throughout the term of the agreement. The
agreement expires in 2004 and calls for minimum annual payments of $10,000,
which are creditable against royalties that may be due from sales. To the extent
the minimum annual royalties are not expected to be offset by sales, the Company
has charged the net present value of these payments to operations. An interest
rate of 10% was used to discount the cash flows.
F-12
<PAGE>
(b) Long-term Notes Payable, net
Long-term notes payable is comprised of the following:
December 31, December 31,
1996 1995
------------ ------------
Liability for director
promissory note, including interest ........ $ -- $ 186,000
Liability for long-term loan,
including interest ......................... -- 2,583,000
Less loan discount ........................... -- (841,000)
---------- -----------
$ -- $ 1,928,000
========== ===========
In July 1995, a director loaned the Company $180,000 in exchange for a
long-term note due two years from issuance at an annual interest rate of 8%. As
part of the transaction, the director was granted 36,000 warrants to purchase
Company common stock at $1.50 per share and an additional 36,000 warrants to
purchase Company common stock at $3.00 per share. In May 1996, the Company and
the director exchanged the note for 24,000 shares of Common Stock and the
Company paid the accrued and unpaid interest on the note in the amount of
$10,000 in cash. The Company recorded an extraordinary loss of $39,000 on the
extinguishment of the debt. The Company has registered such shares of Common
Stock with the Commission under a registration statement in accordance with the
provisions of the Securities Act of 1933 (the "1933 Act").
On August 11, 1995, the Oracle Group purchased 1,000,000 shares of Common
Stock for a purchase price of $1.5 million and made a loan to the Company in the
aggregate amount of $2.5 million with a two-year maturity, but subject to
mandatory prepayment, in whole or in part, upon the occurrence of certain
events, including the raising of certain additional funds. The loan carried an
annual interest rate of 8%. The Oracle Group includes Oracle Partners, L.P.,
Quasar International Partners C.V., Oracle Institutional Partners L.P., Sam
Oracle Fund, Inc. and Warren B. Kanders. The Oracle Group also received warrants
exercisable at any time until August 10, 2000 entitling the holders thereof to
purchase 500,000 shares of Common Stock at a price of $1.50 per share and
500,000 shares of Common Stock at a price of $3.00 per share. As a result of the
Company's offerings of shares of its Common Stock in November 1995 and February
1996, the Oracle Group was entitled to require the Company to apply 20 percent
of the gross proceeds of the sale of the shares of Common Stock from the
offerings to repay the loan.
In May 1996, the Company and the Oracle Group exchanged the notes in the
aggregate outstanding principal amount of $2.5 million for 333,333 shares of
Common Stock and the Company paid the accrued and unpaid interest on the notes
in the amount of $143,000 in cash. The Company recorded an extraordinary loss of
$1,228,000 on the extinguishment of the debt. The Company has registered such
shares of Common Stock with the Commission under a registration statement in
accordance with the provisions of the 1933 Act.
F-13
<PAGE>
(7) Research Agreements
The Company has entered into several research and development agreements
with third parties. Generally, the agreements provide for the Company to receive
research and development funding, milestone payments, royalties, or license fees
or a combination thereof. In return, the Company has granted licenses to these
third parties to market or manufacture and market certain of its products in
specified fields of use and in specified geographic areas.
Revenues for the years ended December 31, 1996, December 31, 1995, and
December 31, 1994 were $600,000, $800,000, and $950,000 respectively. Revenues
for each year consisted of $300,000 from its corporate partnership with the
Wyeth-Lederle Vaccine Division of American Home Products Corporation ("American
Home") in infectious disease vaccines. In addition, revenues for the year ended
December 31, 1996 included royalty fees of $225,000 from the Company's strategic
alliance with Abbott Laboratories ("Abbott") in diagnostics. Revenues for the
years ended December 31, 1995, and December 31, 1994 included contract research
fees of $500,000 and $400,000, respectively, also from the Abbott alliance. The
year ended December 31, 1996 also included $75,000 in license fees from the
Company's cross-licensing agreement with Immunex Corporation ("Immunex") for
novel hematopoietic growth factors. Finally, license fees of $250,000 were
recognized from the Abbott alliance during the year ended December 31, 1994.
Revenues for all three years were derived from United States sources.
(8) Capital Stock
(a) Stock Option Plans:
In February 1986, the Company adopted an Incentive Stock Option Plan and a
Nonqualified Stock Option Plan (the "86 Plans"). On February 25, 1996, the
Company adopted an additional Stock Option Plan and Nonqualified Stock Option
Plan (the "96 Plans") which were approved by shareholders at its Annual Meeting
held June 3, 1996. Combined, the 86 and 96 Plans provide for the granting of
options to purchase up to 3,000,000 shares of Common Stock to key employees and
advisors. Incentive stock options may not be granted at a price less than the
fair market value of the stock at the date of grant. Options under both the 86
and 96 Plans expire ten years from the date of grant. Certain options granted
under these plans vest over three- to five-year periods. At December 31, 1996,
options to purchase 2,103,577 shares of Common Stock were outstanding and
525,625 shares were available for grant.
A summary of stock option activity follows:
Weighted average
Number of exercise price
shares per share
---------- ----------
Balance at December 31, 1993 ................ 969,321 $8.75
1994 activity
Granted ................................ 254,500 3.94
Exercised .............................. --
Canceled ............................... (331,742) 10.21
----------
Balance at December 31, 1994 ................ 892,079 $6.83
1995 activity
Granted ................................ 752,000 1.91
Exercised .............................. (156,750) 1.04
Canceled ............................... (120,375) 1.45
----------
Balance at December 31, 1995 ................ 1,366,954 $2.34
1996 activity
Granted ................................ 1,077,875 9.85
Exercised .............................. (266,275) 3.18
Canceled ............................... (74,977) 2.58
----------
Balance at December 31, 1996 ................ 2,103,577 $6.08
----------
F-14
<PAGE>
In June 1996, the Company granted options to purchase 116,000 shares of its
Common Stock to certain Scientific Advisory Board members in consideration for
future services. The fair value of the grant was approximately $756,000 as
calculated using the Black-Scholes option pricing model. Compensation expense is
being recognized ratably over the four year vesting period of the options. See
Note 8(c) for weighted average assumptions used. During the year ended December
31, 1996, the Company recognized approximately $95,000 in compensation expense
relating to the above grants.
During April 1995, the Company completed the sale of the remaining one-half
of its shares of capital stock of Cadus for $3.0 million to High River. In
exchange for receiving a now-expired right to repurchase all the outstanding
shares of capital stock of Cadus, the Company granted to High River two options
to purchase shares of Common Stock. One option is for 150,000 shares at an
exercise price per share equal to $2.00, subject to adjustment under certain
circumstances, and the other option is for 300,000 shares at an exercise price
per share equal to $0.69, subject to adjustment under certain circumstances.
Both options will expire on April 26, 2000. The 450,000 options have a weighted
average exercise price of $1.13.
On February 2, 1995, exercise prices for certain granted and outstanding
Incentive and Nonqualified Stock Options with original exercise prices in excess
of $1.25 per share were offered to be repriced to $1.25 per share, by vote of a
Special Subcommittee of the Compensation Committee of the Board of Directors.
Benefit of repricing was confined to individuals who continued to serve the
Company as employees or consultants, and 645,000 options were repriced. In
connection with the offer of repricing, the vesting schedule of those choosing
to accept repriced options was extended to June 30, 1995 for options already
vested or to vest prior to June 30, 1995. The closing trading price of the
Company's common stock on February 2, 1995 was $0.69.
(b) Warrants
As of December 31, 1996, a total of 3,275,645 common shares were issuable
under outstanding warrants. Such warrants have been issued to certain officers,
directors and other employees of the Company, certain Scientific Advisory Board
members, certain investors and certain credit providers and investors.
A summary of warrant activity follows:
Weighted
Number of Average Exercise
Shares Price Per Share
--------- ----------------
Balance at December 31, 1993 ........ 2,983,970 9.47
1994 Activity
Granted ........................ 24,600 0.69
Exercised ...................... -- --
Cancelled ...................... (536,003) 6.61
---------
Balance at December 31, 1994 ........ 2,472,567 10.01
1995 Activity
Granted ........................ 1,434,300 3.03
Exercised ...................... (15,300) 1.50
Cancelled ...................... -- --
---------
Balance at December 31, 1995 ........ 3,891,567 3.15
1996 Activity
Granted ....................... 23,220 9.69
Exercised ..................... (604,892) 4.89
Cancelled ..................... (34,250) 12.92
---------
Balance at December 31, 1996 ....... 3,275,645 2.41
=========
During September 1996, the Company repriced certain warrants held by
investors to purchase 80,700 shares of Common Stock in order to promote their
exercise prior to pending expiration. The warrants were repriced to an amount
which was ten percent less than the average closing price for the Common Stock
for the thirty days leading up to and including the day prior to the date of
exercise. The fair market value of the warrant was reflected as a cost of
capital.
During November 1996, the Company repriced certain warrants held by
investors to purchase 130,000 shares of Common Stock in order to promote their
exercise prior to pending expiration. The warrants were repriced to an amount
which was ten percent less than the average closing price for the Common Stock
for the thirty days leading up to and including the day prior to the date of
exercise. The fair market value of the warrant was reflected as a cost of
capital.
In December 1995, the Company granted its President a ten-year warrant to
purchase 350,000 common shares at an exercise price determined by the $5.50
trading price of the stock on the date of grant. The grant of the warrant was
approved by shareholders at its Annual Meeting held June 3, 1996.
On February 2, 1995 exercise prices for certain granted and outstanding
warrants were offered to be repriced to $1.50 per share. The benefit of the
repricing was confined to individuals who continued to serve the Company as
employees or consultants, and 2,048,217 warrants were repriced. In consideration
for the offer of repricing, those choosing to accept the repriced warrants are
to pay the Company the difference in value before and after repricing as
calculated by use of the Black-Scholes model, which payment can be made through
promissory notes to the Company. The closing trading price of the Company's
common stock on February 2, 1995 was $.69.
F-15
<PAGE>
The outstanding warrants expire and are exercisable for the number of
shares of Common Stock as shown below:
March 1997.................................................... 728,500
December 1999................................................. 47,820
March 2000.................................................... 12,300
July 2000..................................................... 72,000
August 2000................................................... 925,000
November 2000................................................. 12,720
March 2001.................................................... 2,500
May 2001...................................................... 1,112,805
June 2003..................................................... 12,000
December 2005................................................. 350,000
----------
Total............................................. 3,275,645
==========
(c) SFAS No. 123:
Options and Warrants
In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting
for Stock Based Compensation". The following table summarizes the weighted
average fair value of stock options and warrants granted during years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Option Plans Warrant Plans
----------------------------------- ----------------------------------
1996 1995 1996 1995
------------------ -------------- ------------- -----------------
Shares $ Shares $ Shares $ Shares $
---------- ------ -------- ----- ------ ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price equals market value at date
of grant ..................................... 1,077,875 $5.56 602,000 $1.07 23,220 $5.39 1,434,300 $0.64
Exercise price exceeds market value at date of
grant ........................................ -- $ -- 795,000 $0.32 -- $ -- 2,048,217 $0.29
</TABLE>
The above table share amounts for 1995 reflect the impact of the re-pricing
as discussed in Notes 8(a) and (b).
The fair value of stock options and warrants was estimated using the
Black-Scholes option pricing model. The Black-Scholes model considers a number
of variables including the exercise price and the expected life of the option,
the current price, the expected volatility and the dividend yield of the
underlying stock, and the risk-free interest rate during the expected term of
the option. The following summarizes the weighted average assumptions used:
<TABLE>
<CAPTION>
Option Plans Warrant Plans
--------------------------------- --------------------------------
1996 1995 1996 1995
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Expected life (years)............... 3.5 2.5 2.0 (1) 2.0
Interest rate....................... 5.00% 5.00% 5.00% 5.00%
Volatility.......................... 85.13% 85.13% 85.13% 85.13%
</TABLE>
(1) The weighted average expected life does not include the warrants repriced
in 1996 as they were exercised simultaneously.
The estimated volatility reflects the performance of the Company's Common
Stock over the twelve-month period ended December 31, 1996. The expected life of
the options and warrants reflects the anticipated holding period prior to
exercise. The estimated risk-free interest rate used is based on risk-free
investment products with similar terms.
The following table summarizes information concerning stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/96 Term Price at 12/31/96 Price
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.33 - 0.69........ 337,500 3.3 0.66 335,250 0.66
1.03 - 1.91........ 387,800 5.7 1.21 275,825 1.24
2.00............... 150,000 3.3 2.00 150,000 2.00
3.19 - 3.88........ 47,250 8.8 3.80 11,813 3.77
4.00 - 5.69........ 136,750 7.9 5.22 71,688 5.09
6.38 - 7.88........ 107,652 9.4 7.20 3,126 6.38
8.33 - 9.75........ 72,000 9.1 9.10 43,000 9.14
10.88 - 12.88...... 844,625 9.4 10.90 165,250 10.89
13.33 - 16.00...... 20,000 2.9 13.40 19,500 13.33
--------- ---------
2,103,577 7.1 6.08 1,075,452 3.49
========= =========
</TABLE>
F-16
<PAGE>
As of December 31, 1996, the outstanding warrants to purchase 3,275,645
common shares were all exercisable. The weighted average remaining contractual
term at December 31, 1996 for the 12,300 outstanding warrants exercisable at
$.63 per share is 3.2 years, the 24,600 exercisable at $.69 per share is 3.0
years, the 2,285,525 exercisable at $1.50 per share is 3.6 years, the 498,500
exercisable at $3.00 per share is 5.8 years, the 21,500 exercisable at $4.00 per
share is 0.2 years, the 350,000 exercisable at $5.50 per share is 9.0 years, the
12,000 exercisable at $7.00 per share is 6.5 years, the 23,220 exercisable at
$9.69 per share is 3.0 years, the 6,000 exercisable at $10.00 per share is 3.9
years, and the 42,000 exercisable at $13.33 per share is 4.3 years.
Pro forma net loss and loss per share reflect compensation cost of $3.6
million and $2.1 million, respectively, for the years ended December 31, 1996
and 1995. The fair value of combined stock options and stock warrants awarded in
1996 and 1995 were as follows:
(Thousands of dollars,
except per share amounts) 1996 1995
- ------------------------- ---- ----
Net loss As reported $(16,015) $ (9,641)
Pro forma $(19,653) $(11,728)
Loss per share As reported $ (0.83) $ (0.72)
Pro forma $ (1.01) $ (0.88)
The amounts disclosed may not be representative of the effects on reported
net loss for future years.
(9) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and December 31, 1995 are presented below.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -------------
Deferred tax assets:
<S> <C> <C>
Liability to reacquire IL-6m rights and materials............. $863,000 $ 1,147,000
Gain on sale of Cadus shares ................................. -- 1,367,000
Equity in loss of affiliate .................................. -- 917,000
Research and development credit carryforward ................. 1,883,000 1,757,000
Compensation relating to the issuance of
stock options and warrants .................................. 2,740,000 3,038,000
Net operating loss carryforwards ............................. 44,374,000 31,870,000
Other ........................................................ 958,000 540,000
------------ ------------
Total gross deferred tax assets ..................... 50,818,000 40,636,000
Less valuation allowance ............................ (50,818,000) (40,636,000)
------------ ------------
Net deferred tax assets ............................. $ -- $ --
------------ ------------
Deferred tax liabilities:
Property and equipment, principally due to
depreciation and amortization............................... $ -- $ --
------------ ------------
Total gross deferred tax liabilities ................ $ -- $ --
============ ============
Net deferred tax asset .............................. $ -- $ --
============ ============
</TABLE>
For the years ended December 31, 1996 and December 31, 1995, the Company
established an aggregate valuation allowance of $50,818,000 and $40,636,000
respectively, to reflect management's belief that significant uncertainty exists
regarding the ultimate realization of its deferred tax assets.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $97,350,000 which expire at various
dates from 2000 through 2011. At December 31, 1996 the Company had research
credit carryforwards of approximately $1,883,000 which expire at various dates
between years 2001 and 2011. Pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, the annual utilization of the Company's net operating
loss and research credit carryforwards may be limited if the Company experiences
a change in ownership of more than 50% within a three-year period. The Company
believes that one or more of such ownership changes may have occurred since
1986. Therefore, the Company may be significantly limited in utilizing its tax
net operating loss carryforwards arising before such ownership change(s) to
offset future taxable income. Similarly, the Company may be restricted in using
its research credit carryforwards arising before such ownership change(s) to
offset future federal income tax expense.
F-17
<PAGE>
(10) Commitments
Leases
The Company leases premises under an operating lease, a portion of which
expired in 1993 and a portion of which expires in 1999. The Company has extended
the 1993 expired portion of the lease through 1997 at 85% of each year's fair
market rental value and from 1997 to 1999 at 100% of each year's fair market
rental value, for a portion of the premises. The rate for the remaining portion
of the premises is $264,000 annually through March 31, 1997 and $285,000
annually through March 31, 1999. The estimated future lease payment schedule
below is based on the exercise of the renewal options described above, using a
fair market rental value of $10.00 per square foot. Rent expense for leased
premises was approximately $508,000, $493,000, and $467,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Future minimum lease payments under the capital and operating leases are as
follows:
Capital Operating
Leases Leases
------------ ------------
Years ending December 31,
- -------------------------
1997 ................................... $ 203,000 $ 516,000
1998 ................................... 142,000 513,000
1999 ................................... 141,000 291,000
2000 ................................... 71,000 8,000
2001 ................................... -- 1,000
Thereafter ............................. -- --
----------- ----------
$ 557,000 $1,329,000
Less interest expense .................. (203,000) --
----------- ----------
$ 354,000 $1,329,000
=========== ==========
Supported Research
The Company has entered into various research and license agreements with
certain universities to supplement the Company's research activities and to
obtain for the Company rights to certain technology. The agreements generally
require the Company to fund the research and to pay royalties based upon
percentages of revenues, if any, on sales of products developed from technology
arising under these agreements.
Consulting Agreements
The Company has consulting agreements with several of its Scientific
Advisory Board members and other consultants. These agreements generally are for
a term of one year or are terminable at the Company's option.
F-18
<PAGE>
(11) Supplemental Cash Flow Information and Non-cash Investing and Financing
Activities are as Follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental Cash Flow Information
Cash paid during the period for:
Interest............................................. $ 817.0 $ 504.0 $ 504.0
------- ------- -------
Supplemental Non-cash Investing and Financing Activities
Finova capital asset and lease obligation additions.... 421.0 -- --
Fair value of Finova warrant........................... 125.0 -- --
Extinguishment of Oracle Group debt for stock.......... 2,500.0 -- --
Extinguishment of director debt for stock.............. 180.0 -- --
Unrealized loss on securities available for sale....... 49.0 -- --
</TABLE>
(12) Related Party Transactions
The outstanding balance of total miscellaneous noninterest-bearing cash
advances to the President and CEO of the Company on December 31, 1994 totaled
approximately $156,000. The officer has provided the Company with a demand
promissory note pursuant to which the officer is obligated to repay the debt
over a twenty four month period ending April 30, 1997.
During the year ended December 31, 1995, the Company made additional
miscellaneous non-interest-bearing cash advances to the officer totaling $7,000.
In addition, the officer repaid $31,000 of the demand promissory note during the
year ended December 31, 1995. This brought the outstanding balance of total
miscellaneous non-interest-bearing cash advances to the officer of $132,000 at
December 31, 1995.
During the year ended December 31, 1996, the Company made additional
miscellaneous non-interest-bearing cash advances to the officer totaling $8,000.
In addition, the officer repaid $39,000 of the demand promissory note during the
year ended December 31, 1996. This brought the outstanding balance of total
miscellaneous non-interest-bearing cash advances to the officer of $101,000 at
December 31, 1996.
In March 1995, two directors (one of whom is an officer) each loaned the
Company $20,000 in exchange for short-term notes due sixty days from issuance.
As part of the transaction, the directors were each granted 2,460 five-year
warrants to purchase Company common stock at $.625 per share, the stock closing
price on the date of the promissory note. Each lender could accept payment of
principal and interest at 15% in Company shares in lieu of cash, also at $.625
per share. In May 1995, one director accepted payment of $20,493 which included
principal and interest at 15%. The second lender accepted principal and interest
totaling $15,493 and 8,000 shares of Company common stock at $.625 per share.
F-19
<PAGE>
Also in March 1995, a director and a shareholder each loaned the Company
$30,000 in exchange for short-term notes due sixty days from issuance. As a part
of the transaction, the director and shareholder were each granted 3,690
five-year warrants to purchase Company common stock at $.625 per share, the
stock closing price on the date of the promissory note. Each lender could accept
payment of principal and interest at 15% in Company shares in lieu of cash, also
at $.625 per share. During May 1995, the director accepted payment of 49,184
shares of Company common stock at $.625 per share, while the shareholder
accepted $30,740 which included principal and interest at 15%.
In May 1995, the Company loaned an officer $20,000 in exchange for a demand
promissory note. The officer was obligated to repay the debt over a sixteen
month period ended September 17, 1996. The loan was paid in full in December
1995.
In January 1996, the Company paid Concord International Investment Group,
LP, approximately $163,000 for services rendered by it to the Company in
connection with structuring a contemplated product related financing for C225.
Mr. Robert F. Goldhammer, Chairman of the Board of Directors, is a limited
partner of Concord International Investment Group, LP.
In August 1995 and January 1996, the Company paid Delano & Kopperl
Financial Advisors, Inc. a total of approximately $69,000 for services rendered
by it to the Company in connection with structuring a contemplated product
related financing for C225. Paul B. Kopperl, a director of the Company, is
President, director, and 25% shareholder of Delano & Kopperl Financial Advisors,
Inc.
F-20
<PAGE>
(13) Fair Value of Financial Instruments
For the years ended December 31, 1996 and 1995, the following methods and
assumptions were used to estimate the fair value of each class of financial
instrument:
Cash and cash equivalents, accounts payable, accrued and other current
liabilities
The carrying amounts approximate fair value because of the short maturity
of those instruments.
Long-term debt and notes payable
Discounted cash flow analyses were used to determine the fair value of
long-term debt and notes payable because quoted market prices on these
instruments were unavailable. The fair value of these instruments approximated
the carrying amount.
(14) Summary of Quarterly Results of Operations (Unaudited)
The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments necessary to fairly
present the Company's results of operations and related information for the
periods presented. Net loss per share has been computed using the weighted
average shares outstanding during each quarter. Common stock equivalent shares
are excluded where the effect of their inclusion would result in decreasing the
net loss per share.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
(In thousands, except per share data) 3/31 6/30 9/30 12/31
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Revenues ................................. $ 75 $ 75 $ 75 $ 375
Operating expenses ....................... 3,066 3,438 3,714 5,225
------- ------- ------- -------
Operating loss ........................... (2,991) (3,363) (3,639) (4,850)
Net interest and other expense(income) ... 154 (61) (97) (91)
------- ------- ------- -------
Loss before extraordinary item ........... (3,145) (3,302) (3,542) (4,759)
Extraordinary loss on extinguishment
of debt................................ -- 1,267 -- --
------- ------- ------- -------
Net loss ................................. $(3,145) $(4,569) $(3,542) $(4,759)
======= ======= ======= =======
Net loss per common share:
Loss before extraordinary item ........... $ (0.18) $ (0.17) $ (0.18) $ (0.25)
Extraordinary loss on extinguishment
of debt ............................... -- 0.06 -- --
------- ------- ------- -------
Net loss per common share ................ $ (0.18) $ (0.23) $ (0.18) $ (0.25)
======= ======= ======= =======
Year ended December 31, 1995
Revenues ................................. $ 75 $ 75 $ 575 $ 75
Operating expenses ....................... 2,871 2,745 2,823 4,068
------- ------- ------- -------
Operating loss ........................... (2,796) (2,670) (2,248) (3,993)
Net interest and other expense(income) ... 218 (2,837) 267 286
------- ------- ------- -------
Net income (loss) ........................ (3,014) 167 (2,515) (4,279)
------- ------- ------- -------
Net income (loss) per share .............. $ (0.24) $ 0.01 $ (0.19) $ (0.29)
======= ======= ======= =======
</TABLE>
F-21
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits (numbered in accordance with S-K Item 601)
23 Consent of KPMG Peat Marwick LLP
<PAGE>
SIGNATURES
Pursuant to the 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.
IMCLONE SYSTEMS INCORPORATED
Date: February 27, 1997 By /s/ JOHN B. LANDES
--------------
John B. Landes
Vice President
Business Development
and General Counsel
The Board of Directors
ImClone Systems Incorporated:
We consent to the incorporation by reference in the registration statements
Nos. 33-95860, 333-07339 and 333-21417 on Form S-3 and Nos. 333-10275 and
33-95894 on Form S-8 of ImClone Systems Incorporated of our report dated
February 18, 1997, with respect to the balance sheets of ImClone Systems
Incorporated as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the Form 8-K
of ImClone Systems Incorporated dated February 25, 1997.
/s/ KPMG PEAT MARWICK LLP
-----------------------------
KPMG PEAT MARWICK LLP
New York, New York
February 27, 1997
