<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996 Commission file number 0-19855
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SERAGEN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2662345
- - ------------------------------- -----------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
97 South Street, Hopkinton, MA 01748
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(Address of principal executive offices) (Zip Code)
(508) 435-2331
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
16,642,451 shares of Common Stock, par value $.01, were outstanding on May 6,
1996.
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SERAGEN, INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements
Balance Sheets
December 31, 1995 and March 31, 1996 ............................... 3
Statements of Operations
Three Months Ended March 31, 1995 and 1996 ......................... 4
Statements of Cash Flows
Three Months Ended March 31, 1995 and 1996 ......................... 5
Notes to Financial Statements ....................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... 7
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings (None)
Item 2 - Changes in Securities (None)
Item 3 - Defaults upon Senior Securities (None)
Item 4 - Submission of Matters to a Vote of Security Holders (None)
Item 5 - Other Information (None)
Item 6 - Exhibits and Reports on Form 8-K ............................ 9
Signatures ........................................................... 10
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<PAGE> 3
SERAGEN, INC.
<TABLE>
BALANCE SHEETS
(Unaudited)
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1995 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 435,460 $ 521,369
Restricted cash ....................................... 435,318 435,318
Contract receivable ................................... 686,055 1,110,494
Unbilled contract receivable .......................... 496,147 955,657
Prepaid expenses and other current assets ............. 335,238 211,300
------------ ------------
Total current assets ...................... 2,388,218 3,234,138
Property and equipment, net ............................ 5,198,136 5,175,903
Investment in affiliate ................................ 2,599,864 1,429,456
Deferred commission .................................... 2,060,000 2,060,000
Prepaid interest ....................................... 3,528,677 3,268,365
Other assets ........................................... 524,613 541,373
------------ ------------
Total assets .............................. $ 16,299,508 $ 15,709,235
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ...................................... 725,326 671,817
Current maturities of long-term debt .................. 248,494 231,865
Accrued commission payable ............................ 300,000 300,000
Accrued expenses ...................................... 2,413,284 2,455,501
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Total current liabilities ................. 3,687,104 3,659,183
Non-current liabilities:
Long-term debt, less current maturities ............... 12,537,417 18,500,000
Deferred revenue ...................................... 5,000,000 5,000,000
Long-term obligation, less unamortized discount ....... 3,440,482 3,612,386
Affiliate guarantee ................................... 2,076,000 2,076,000
------------ ------------
Total non-current liabilities ............. 23,053,899 29,188,386
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding .............. -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; issued 16,521,212 and 16,623,967 shares
at December 31, 1995 and March 31, 1996,
respectively ........................................ 165,212 166,240
Additional paid-in capital ............................ 141,759,580 141,818,848
Accumulated deficit ................................... (152,273,333) (159,056,391)
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(10,348,541) (17,071,303)
Less treasury stock (14,632 shares and 17,418 shares at
cost at December 31, 1995 and March 31, 1996,
respectively) ....................................... (92,954) (67,031)
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Total stockholders' deficit ............... (10,441,495) (17,138,334)
------------ ------------
Total liabilities and stockholders' deficit $ 16,299,508 $ 15,709,235
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SERAGEN, INC.
<TABLE>
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1995 1996
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<S> <C> <C>
Revenue:
Contract revenue and license fees ......... $ 320,211 $ 1,498,992
Operating expenses:
Cost of contract revenue .................. 320,211 1,398,992
Research and development .................. 3,905,562 3,572,974
General and administrative ................ 1,244,096 1,361,356
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5,469,869 6,333,322
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Loss from operations .................... (5,149,658) (4,834,330)
Equity in loss of affiliate ................ -- 1,170,408
Interest income ............................ 19,647 15,655
Interest expense ........................... 189,135 793,975
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Net loss .......................... $(5,319,146) $(6,783,058)
=========== ===========
Net loss per common share .................. $ (0.33) $ (0.41)
=========== ===========
Weighted average common shares
used in computing net loss per share ...... 16,200,566 16,558,168
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 5
SERAGEN, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $(5,319,146) $(6,783,058)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ....................... 236,403 228,111
Equity in loss of affiliate ......................... -- 1,170,408
Loss on disposal of property and equipment .......... 2,178 --
Amortization of discount on long-term debt obligation 171,903 171,904
Amortization of prepaid interest .................... -- 260,312
Amortization of debt issuance costs ................. -- 46,423
Changes in operating assets and liabilities:
Contract receivable ................................. 88,224 (324,439)
Unbilled contract receivable ........................ 169,101 (459,510)
Prepaid expenses and other current assets ........... 260,149 23,938
Accounts payable .................................... (132,234) (53,509)
Accrued expenses .................................... (257,043) 42,217
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Net cash (used in) operating activities .................. (4,780,465) (5,677,203)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of marketable securities .......... 2,034,948 --
Purchases of property and equipment ................... (18,493) (205,878)
Decrease in other assets .............................. 972 973
----------- -----------
Net cash provided by (used in) investing activities ...... 2,017,427 (204,905)
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Cash flows from financing activities:
Net proceeds from stock issuances ..................... -- 163,094
Purchases of treasury stock ........................... -- (76,875)
Proceeds from issuance of long-term debt .............. -- 6,000,000
Repayments of long-term debt .......................... (46,687) (54,046)
Debt issuance costs ................................... -- (64,156)
----------- -----------
Net cash (used in) provided by financing activities ...... (46,687) 5,968,017
----------- -----------
Net (decrease) increase in cash and cash equivalents ..... (2,809,725) 85,909
Cash and cash equivalents, beginning of period ........... 5,536,782 435,460
----------- -----------
Cash and cash equivalents, end of period ................. $ 2,727,057 $ 521,369
=========== ===========
Supplemental disclosures of cash flows information
Cash payments for interest............................. $ 17,231 $ 361,759
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 6
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
----------
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared by
the Company in accordance with generally accepted accounting principles.
Certain information and footnote disclosure normally included in the
Company's audited annual financial statements has been condensed or omitted in
the Company's interim financial statements. In the opinion of management, the
interim financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair representation of the results for the
interim periods presented.
The results of operations for the interim periods may not necessarily be
indicative of the results of operations expected for the full year, although the
Company expects to incur a significant loss for the year ended December 31,
1996. These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995, which are
contained in the Company's most recent Annual Report on Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date(s) of the financial statements and
the reported amounts of revenues and expenses during the reporting period(s).
Actual results could differ from those estimates.
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<PAGE> 7
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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OVERVIEW
Seragen is engaged in the discovery, research and development of
pharmaceutical products for human therapeutic applications. Since 1985, the
Company has focused substantially all of its efforts and resources on research
and development of its fusion protein technology. The Company's fusion proteins
were developed using proprietary technology and have potential applications in a
wide range of human diseases. To date, the Company has not generated any
revenues from the sale of fusion protein products, and the Company does not
expect to receive any such revenues for several years. The Company has generated
no profit since its inception and expects to incur additional operating losses
over the next several years.
The Company's business is subject to significant risks, including the
uncertainties associated with the regulatory approval process and with obtaining
and enforcing patents important to the Company's business. Seragen expects to
incur substantial operating losses over the next several years due to continuing
expenses associated with its research and development programs, including
pre-clinical testing and clinical trials. Operating losses may also fluctuate
from quarter to quarter as a result of differences in the timing of expenses
incurred.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995. The Company's net loss for the
three month period ending March 31, 1996 was $6.8 million compared to $5.3
million for the same period in the prior year. The most significant cause of
this increase was related to a non-cash charge in 1996 of $1.2 million
reflecting the obligation by the Company to the investors in Seragen
Biopharmaceuticals LTD ("SBL").
The Company's revenues for the three months ending March 31, 1996 and 1995
were $1.5 million and $320,000, respectively, primarily associated with contract
revenue from Lilly for certain development costs of IL-2 Fusion Protein for
cancer therapy.
Total operating expenses increased $800,000 to $6.3 million in 1996 from
$5.5 million in 1995. Fees associated with the cost of contract revenue were
$1.4 million in 1996 as compared to $320,000 in 1995. This increase of $1.1
million reflects the acceleration of clinical development activity under the
Phase III clinical trial for IL-2 Fusion Protein for cancer therapy. For
comparative purposes, the following discussion of research and development
expenses includes the cost of contract revenue. Research and development
expenses increased $800,000 to $5.0 million in the first three months of 1996
from $4.2 million for the same period of 1995. This increase was primarily due
to the costs associated with the Phase III clinical trial for IL-2 Fusion
Protein for cancer therapy and the hiring of additional clinical, scientific and
support staff. This increase was partially offset by reductions in research
grants and outside pre-clinical testing. General and administrative expenses
increased $200,000 to $1.4 million in the first three months of 1996 as compared
to $1.2 million in the first three months of 1995. This increase was primarily
due to recruiting costs associated with hiring research and development staff,
amortization of the fees associated with the lines of credit, and severance
expense related to the resignation of a corporate officer. This increase was
partially offset by a reduction in patent fees, consulting expenses and
corporate communication expenses.
In the first quarter of 1996, a non-cash charge of $1.2 million was
recorded to reflect the obligation by the Company to the investors of SBL.
Interest income decreased by $4,000, to $16,000 in the first quarter of 1996
from $20,000 in the first quarter of 1995 primarily due to lower average
balances of cash equivalents in 1996. Interest expense increased by $605,000 to
$794,000 in the first quarter of 1996 from $189,000 in the first quarter of 1995
due to the borrowings under the lines of credit which commenced in June 1995.
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<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had approximately $521,000 in cash and
cash equivalents and $5.3 million available under its lines of credit. As of
March 31, 1996, the Company had $14.2 million invested in property and
equipment, consisting primarily of leasehold improvements to the Company's
manufacturing facility, laboratory facilities and laboratory equipment.
The Company expects to incur further substantial research and development
expenses as it continues development of its fusion proteins. The Company also
expects to incur substantial administrative and commercialization expenses in
the future. The Company's continuing operating losses and requirements for
working capital will depend on many factors, including the progress and costs
associated with its research, pre-clinical and clinical development efforts, and
the level of resources which the Company must devote to obtaining regulatory
approvals to manufacture and sell its products.
The Company anticipates that existing cash, cash equivalents, and the
interest thereon, the reimbursement for clinical costs for the development of
IL-2 Fusion Protein for cancer therapy, and the remaining balance under the
lines of credit will be sufficient to fund the Company's working capital
requirements through approximately mid-1996. The Report of Independent
Accountants on the Company's Financial Statements for the fiscal year ended
December 31, 1995 includes an explanatory paragraph concerning uncertainties
surrounding the Company's ability to continue as a going concern. This may
adversely affect the Company's ability to raise additional capital. The
Company's ability to finance its operations beyond mid-1996 is dependent upon
its ability to raise additional capital through debt or equity financings,
possible additional payments under the strategic alliance with Lilly, or such
other sources of financing, including partnerships, as may be required.
Any future equity financings could result in dilution to the Company's then
existing stockholders, and there can be no assurance that future arrangements
with collaborative partners or others will be available to the Company, or, if
available, that such arrangements would not require the Company to relinquish
rights to certain products or markets in exchange for funding. No assurance can
be given that additional debt or equity financings will be available on
acceptable terms, if at all, to fund the Company's future working capital
requirements.
UNCERTAINTIES
To the extent that any of the statements contained herein relating to the
Company's products and its operations are forward looking, such statements are
based on current expectations that involve a number of uncertainties and risks.
Such uncertainties and risks include, but are not limited to, the early stage of
the Company's product development and lack of product revenues; the Company's
history of operating losses and accumulated deficit; the Company's limited
financial resources and uncertainty as to the availability of additional capital
to fund its development on acceptable terms, if at all; Boston University's
control of the Company; the Company's reliance on fusion protein technology; the
potential development of competing fusion proteins, products and technologies;
the Company's dependence on its collaborative partner, Eli Lilly and Company,
and the lack of assurance that the Company will receive further funding under
this partnership or develop and maintain other strategic alliances; the lack of
assurance regarding patent and other protection for the Company's proprietary
technology; governmental regulation of the Company's activities, facilities and
products; the Company's limited manufacturing capabilities; the Company's lack
of commercial sales and marketing capabilities; the dependence on key personnel;
the development of competing technologies; uncertainties as to the extent of
reimbursement for the costs of the Company's potential products and related
treatment by government and private health insurers and other organizations; the
potential adverse impact of government-directed health care reform; the risk of
product liability claims; and general economic conditions. As a result, the
Company's future development efforts involve a high degree of risk. For further
information, refer to the risk factors included in the Company's Registration
Statement on Form S-3, Registration No. 33-93792, relating to the resale of
shares of Common Stock, as filed with the Securities and Exchange Commission.
Actual results may differ materially from such expectations.
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<PAGE> 9
SERAGEN, INC.
PART II
OTHER INFORMATION
----------
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibit Index
None
(b) Reports on Form 8-K
None
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<PAGE> 10
SERAGEN, INC.
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.
SERAGEN, INC.
Date: May 13, 1996 By:/S/ George W. Masters
-------------------------------------------
George W. Masters
Vice Chairman of the Board, President
and Chief Executive Officer
Date: May 13, 1996 By:/S/ Thomas N. Konatich
-------------------------------------------
Thomas N. Konatich
Vice President for Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 956,687
<SECURITIES> 0
<RECEIVABLES> 2,066,151
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,234,138
<PP&E> 5,175,903
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,709,235
<CURRENT-LIABILITIES> 3,659,183
<BONDS> 22,112,386
<COMMON> 166,240
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,709,235
<SALES> 0
<TOTAL-REVENUES> 1,498,992
<CGS> 0
<TOTAL-COSTS> 6,333,322
<OTHER-EXPENSES> 1,170,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 793,975
<INCOME-PRETAX> (6,783,058)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,783,058)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> 0
</TABLE>
