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, 1997 Commission file number 0-19855
_______________ ________
SERAGEN, INC.
_________________________________________________________
(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
_______________________________ ______
(Address of principal executive offices) (Zip Code)
(508) 435-2331
_________________________________________________________________
(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
____ ____
20,033,273 shares of Common Stock, par value $.01, were outstanding on May 14,
1997.
<PAGE>
SERAGEN, INC.
INDEX
Page
____
PART I - FINANCIAL INFORMATION
______________________________
Item 1 - Financial Statements
Balance Sheets
December 31, 1996 and March 31, 1997. . . . . . . . . . 3
Statements of Operations
Three Months Ended March 31, 1996 and 1997. . . . . . . 4
Statements of Cash Flows
Three Months Ended March 31, 1996 and 1997. . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . 11
PART II - OTHER INFORMATION
___________________________
Item 1 - Legal Proceedings (None)
Item 2 - Changes in Securities . . . . . . . . . . . . . 15
Item 3 - Defaults upon Senior Securities . . . . . . . . 15
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. . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . 17
- 2-
<PAGE>
<TABLE>
SERAGEN, INC.
BALANCE SHEETS
<CAPTION>
Assets December 31,
March 31, 1997
1996 (Unaudited)
______________ ______________
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 1,548,392 $ 2,122,889
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . 610,318 610,318
Contract receivable . . . . . . . . . . . . . . . . . . . . . 485,261 373,963
Unbilled contract receivable. . . . . . . . . . . . . . . . . 833,983 901,789
Prepaid expenses and other current assets . . . . . . . . . . 285,356 198,185
____________ ______________
Total current assets . . . . . . . . . . . . . . . . . . 3,763,310 4,207,144
Property and equipment, net. . . . . . . . . . . . . . . . . . 4,604,115 4,376,566
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 77,183 39,211
____________ ______________
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 8,444,608 $ 8,622,921
============ ==============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 1,111,477 609,321
Current maturities of long-term debt. . . . . . . . . . . . . 37,418 29,401
Deposit received from Boston University . . . . . . . . . . . - 4,500,000
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . 3,177,467 3,600,279
Preferred stock redemption liability. . . . . . . . . . . . . 1,236,753 1,370,075
Short-term obligation, less unamortized discount . . . . . . 4,128,097 4,300,000
___________ ____________
Total current liabilities . . . . . . . . . . . . . . . . 9,691,212 14,409,076
___________ ____________
Non-current liabilities:
Lilly contract obligation . . . . . . . . . . . . . . . . . . 1,200,000 1,200,000
Canadian affiliate put option liability . . . . . . . . . . . 2,400,000 2,400,000
___________ ____________
Total non-current liabilities . . . . . . . . . . . . . . 3,600,000 3,600,000
___________ ____________
Commitments and contingencies
Stockholders' (deficit);
Preferred stock, $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued
and outstanding 2,402 shares at March 31, 1997, $1,193,108
liquidation preference . . . . . . . . . . . . . . . . . . 2,015,522 1,193,108
Convertible preferred stock, Series B, $.01 par value; issued
and outstanding 23,800 shares at March 31, 1997, $23,800,000
liquidation preference . . . . . . . . . . . . . . . . . . . 23,800,000 23,800,000
Convertible preferred stock, Series C, $.01 par value; issued
and outstanding 5,000 shares at March 31, 1997, $5,200,000
liquidation preference . . . . . . . . . . . . . . . . . . . 5,100,000 5,200,000
Common stock, $.01 par value; 70,000,000 shares authorized;
issued 17,199,458 and 18,049,658 shares at December 31, 1996
and March 31, 1997, respectively . . . . . . . . . . . . . . 171,994 180,497
Additional paid in capital . . . . . . . . . . . . . . . . . 151,323,022 152,052,800
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (187,254,811) (191,810,229)
_____________ ____________
(4,844,273) (9,383,824)
Less-treasury stock (777 shares at cost at December 31, 1996
and March 31, 1997, respectively). . . . . . . . . . . . . . (2,331) (2,331)
____________ ____________
Total stockholders' (deficit) . . . . . . . . . . . . . (4,846,604) (9,386,155)
____________ ___________
Total liabilities and stockholders' (deficit) . . . . . $ 8,444,608 $8,622,921
============= ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
SERAGEN, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the three months
ended March 31,
_____________________________________________
1996 1997
________________ _________________
<S> <C> <C>
Revenue:
Contract revenue and license fees . . . . . . . . . . . . $1,498,992 $ 911,625
Operating expenses:
Cost of contract revenue. . . . . . . . . . . . . . . . . 1,398,992 882,034
Research and development. . . . . . . . . . . . . . . . . 3,572,974 2,516,840
General and administrative. . . . . . . . . . . . . . . . 1,361,356 1,189,803
____________ _____________
6,333,322 4,588,677
____________ _____________
Loss from operations . . . . . . . . . . . . . . . . . . . (4,834,330) (3,677,052)
Loss incurred in connection with Canadian
affiliate . . . . . . . . . . . . . . . . . . . . . . . . 1,170,408 -
Interest income . . . . . . . . . . . . . . . . . . . . . . 15,655 14,703
Interest expense . . . . . . . . . . . . . . . . . . . . . 793,975 172,366
_____________ _____________
_
Net loss . . . . . . . . . . . . . . . . . . . . . . (6,783,058) (3,834,715)
============= ==============
Preferred stock dividends and accretion . . . . . . . . . . - 720,703
============= ==============
Net loss applicable to common stockholders. . . . . . . . . (6,783,058) (4,555,418)
============= ==============
Net loss per common share . . . . . . . . . . . . . . . . . $ (0.41) $ (0.25)
============= ==============
Weighted average common shares
used in computing net loss per share. . . . . . . . . . . 16,558,168 17,936,675
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
SERAGEN, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the three months
ended March 31,
______________________________________
1996 1997
_______________ _______________
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,783,058) $(3,834,715)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 228,111 232,351
Loss incurred in connection with Canadian affiliate. . . . 1,170,408 -
Amortization of discount on long-term debt . . . . . . . . 171,904 171,903
Amortization of prepaid interest . . . . . . . . . . . . . 260,312 -
Amortization of debt issuance costs. . . . . . . . . . . . 46,423 -
Changes in operating assets and liabilities:
Contract receivable. . . . . . . . . . . . . . . . . . . . (324,439) 111,298
Unbilled contract receivable . . . . . . . . . . . . . . . (459,510) (67,806)
Prepaid expenses and other current assets. . . . . . . . . 23,938 87,171
Accounts payable . . . . . . . . . . . . . . . . . . . . . (53,509) (502,156)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 42,217 (148,779)
Deposit received from Boston University. . . . . . . . . . - 4,500,000
___________ __________
Net cash (used in) provided by operating activities . . . . (5,677,203) 549,267
___________ __________
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . (205,878) (4,800)
Decrease in other assets . . . . . . . . . . . . . . . . . 973 37,972
__________ _________
Net cash (used in) provided by investing activities . . . . . (204,905) 33,172
__________ _________
Cash flows from financing activities:
Net proceeds from common stock issuances . . . . . . . . . 163,094 75
Purchases of treasury stock . . . . . . . . . . . . . . . (76,875) -
Proceeds from issuance of long-term debt . . . . . . . . . 6,000,000 -
Repayments of long-term debt . . . . . . . . . . . . . . . (54,046) (8,017)
Debt and preferred stock issuance costs . . . . . . . . . (64,156) -
__________ _________
Net cash (used in) provided by financing activities . . . . . 5,968,017 (7,942)
__________ _________
Net increase (decrease) in cash and cash equivalents . . . . 85,909 574,497
Cash and cash equivalents, beginning of period . . . . . . . 435,460 1,548,392
___________ ____________
Cash and cash equivalents, end of period . . . . . . . . . . $ 521,369 $ 2,122,889
=========== ============
Supplemental disclosures of cash flows information:
Cash paid for interest . . . . . . . . . . . . . . . . . . $ 361,759 $ 463
=========== ============
Supplemental non cash activities:
Conversion of series A preferred stock to common stock . . $ - 738,205
Preferred stock dividends . . . . . . . . . . . . . . . . $ - 149,113
The accompanying notes are an integral part of the financial statements.
</TABLE>
-5-
<PAGE>
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 ending
December 31, 1997. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1996, 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.
3. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
No. 128"). SFAS No. 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. This statement is effective for fiscal years ending
after December 15, 1997 and early adoption is not permitted. When adopted,
the statements will require restatement of prior years' earnings per share.
The Company will adopt this statement for its fiscal year ending December 31,
1997.
4. Amendment to Lilly Agreements
On April 7, 1997, the Company entered into an amendment (the "Amendment")
to its Sales and Distribution and Development Agreement with Eli Lilly and
Company ("Lilly") pursuant to which Lilly had the development and marketing
rights to the Company's lead molecule DAB389IL-2 ("IL-2 Fusion Protein") for
all cancer and certain non-cancer indications. The Amendment confirms Lilly's
commitment to develop, promote and distribute IL-2 Fusion Protein for the
treatment of cutaneous T-cell lymphoma ("CTCL") as long as the Company
continues to meet agreed clinical, financial and manufacturing objectives, as
defined. Under the Amendment, Lilly has, subject to certain conditions,
relinquished development and marketing rights to IL-2 Fusion Protein for all
non-cancer indications, as well as rights to other molecules. This will allow
the Company to seek additional strategic partners for those indications and
molecules, subject only to Lilly's retained rights to distribute intravenous
and intramuscular formulations of IL-2 Fusion Protein in the territory covered
by the Company's agreements with Lilly. Lilly also has agreed to assist the
Company in meeting its obligations to Ajinomoto. In exchange, the Company has
agreed to issue to Lilly in a private placement 1,000,000 shares of its common
stock and to release Lilly from a certain future milestone payment.
-6-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. Sale of Manufacturing and Clinical Operations to Boston University
On February 18, 1997, the Company entered into an asset purchase agreement
(the "Asset Purchase Agreement") to sell its manufacturing and clinical
operations facilities to Boston University or a designated affiliate for $5
million. The closing of the transaction is subject to, among other things,
approval by the Company's stockholders. Boston University has paid the
Company $4.5 million as a deposit and, from the time of execution of the
agreement, has assumed responsibility for the facility's operations, including
responsibility for operating costs. The Company is permitted to use this
deposit to fund its current operations. At the closing, most of the Company's
employees involved in the manufacturing and clinical operations will become
employees of Boston University. Both the deposit and the operating costs
incurred by Boston University are subject to refund in the event that
conditions for closing are not met. Upon the closing of this transaction, the
Company will record a gain in its statement of operations for the operating
expenses reimbursed by Boston University, net of amounts due to Boston
University under a service agreement dated as of February 18, 1997 (the
"Service Agreement") for the period from February 14, 1997 until the closing
of the transaction. As of March 31, 1997, the net amount due to the Company
from Boston University in respect of the facility's operating expenses for the
period from February 14, 1997 to March 31, 1997 was approximately $779,000.
Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into the Service Agreement with Boston University providing
for the purchase by the Company of certain services related to product
research, development, manufacturing, clinical trials, quality control, and
quality assurance. The Service Agreement expires in January 1999, and is
subject to certain early termination provisions, including the option of
Boston University to terminate the agreement if losses during a contract year
exceed $9.0 million and the Company does not reimburse Boston University for
the losses in excess of $9.0 million. The Service Agreement may be renewed
for two successive one-year terms at the option of the Company. The Company
has the option to repurchase the assets comprising the manufacturing and
clinical operations facilities. The Company has agreed to pay Boston
University fees of approximately $5.5 million and $6.6 million in years 1 and
2 of the Service Agreement, respectively. The fees can be increased or
decreased by agreement of the parties, but may not be reduced to less than
$4.3 million per contract year. The Service Agreement is expected to reduce
substantially the Company's operating costs in research and development, as
the Company will be contracting solely for the services that the Company
requires for clinical and manufacturing purposes. The Company will give
effect to this transaction in its financial statements after closing.
6. Pro Forma Financial Statements
The following unaudited pro forma financial information reflects the
Company's balance sheet, as of March 31, 1997, and the Company's historical
statement of operations for the quarter ended March 31, 1997, assuming the
transactions described above were consummated on January 1, 1997. The
unaudited pro forma financial statements do not purport to be indicative of
the results which would actually have been reported if the transactions had
been effected on that date or which may be reported in the future.
-7-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
<CAPTION>
Assets Historical Adjustments Pro Forma
____________ _____________ ____________
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 2,122,889 $ 1,279,678 (a) $ 3,402,567
Restricted cash . . . . . . . . . . . . . . . . . 610,318 - 610,318
Contract receivable . . . . . . . . . . . . . . . 373,963 - 373,963
Unbilled contract receivable. . . . . . . . . . . 901,789 - 901,789
Prepaid expenses and other current assets . . . . 198,185 - 198,185
____________ ____________ ____________
Total current assets . . . . . . 4,207,144 1,279,678 5,486,822
Property and equipment, net. . . . . . . . . . . . 4,376,566 (4,364,840)(b) 11,726
Other assets . . . . . . . . . . . . . . . . . . . 39,211 - 39,211
____________ ____________ ____________
Total assets. . . . . . . . . . $ 8,622,921 $(3,085,162) $ 5,537,759
============ ============ ============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . 609,321 - 609,321
Current maturities of long-term debt. . . . . . . 29,401 - 29,401
Deposit received from Boston University . . . . . 4,500,000 4,500,000)(c) -
Accrued expenses. . . . . . . . . . . . . . . . . 3,600,279 - 3,600,279
Preferred stock redemption liability. . . . . . . 1,370,075 - 1,370,075
Short-term obligation, less unamortized discount. 4,300,000 - 4,300,000
____________ ____________ ____________
Total current liabilities . . . 14,409,076 (4,500,000) 9,909,076
Non-current liabilities:
Lilly contract obligation . . . . . . . . . . . . 1,200,000 - 1,200,000
Canadian affiliate put option liability . . . . . 2,400,000 - 2,400,000
____________ ____________ ____________
Total non-current liabilities . 3,600,000 - 3,600,000
____________ ____________ ____________
Commitments and contingencies
Stockholders' (deficit);
Preferred stock, $.01 par value; 5,000,000 shares
authorized
Convertible preferred stock, Series A, $.01
par value; issued and outstanding 2,402
shares at March 31, 1997, $1,193,108
liquidation preference . . . . . . . . . . . . . 1,193,108 - 1,193,108
Convertible preferred stock. Series B, $.01
par value; issued and outstanding 23,800
shares at March 31, 1997, $23,800,000
liquidation preference . . . . . . . . . . . . . 23,800,000 - 23,800,000
Convertible preferred stock, Series C, $.01
par value; issued and outstanding 5,000
shares at March 31, 1997, $5,200,000
liquidation preference . . . . . . . . . . . . . 5,200,000 - 5,200,000
Common stock, $.01 par value; 70,000,000 shares
authorized; issued 18,049,658 shares at
March 31, 1997 . . . . . . . . . . . . . . . . . 180,497 - 180,497
Additional paid in capital . . . . . . . . . . . . . 152,052,800 635,160(d) 152,687,960
Accumulated deficit. . . . . . . . . . . . . . . . . (191,810,229) 779,678(e) (191,030,551)
_____________ ___________ ____________
(9,383,824) 1,414,838 (7,968,986)
Less-treasury stock (777 shares at cost at
March 31, 1997). . . . . . . . . . . . . . . . . ( 2,331) - (2,331)
_____________ ___________ ____________
Total stockholders' (deficit) . . . . . . . . . (9,386,155) 1,414,838 (7,971,317)
_____________ ___________ ____________
Total liabilities and stockholders' (deficit) . $ 8,622,921 $ (3,085,162) $ 5,537,759
============= ============ ============
</TABLE>
-8-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
The following pro forma adjustments are required to reflect the sale of the
majority of the Company's property and equipment, the assignment of certain
capital and operating leases to Boston University and the Company's Service
Agreement with Boston University as discussed in Note 5. The net book value
and estimated disposition costs are based on the estimated fair value, as
determined by the management of the Company. Such allocation will be revised
to reflect changes in assets through the date of closing and the determination
of actual disposition costs.
Notes to Pro Forma Balance Sheet
(a) Reflects an increase in cash for the remaining $500,000
of the purchase price and $779,678 representing the net
amount received from Boston University. $1,279,678
(b) Reflects a reduction in property and equipment for the
net book value of assets sold. $4,364,840
(c) Reflects the Boston University deposits as non-refundable
payments upon closing. $4,500,000
(d) Reflects the excess of the purchase price over the net
book value of the assets sold as additional paid in capital. $ 635,160
(e) Reflects the difference between the amount reimbursable
from Boston University and the amounts due to Boston
University under the Service Agreement. $ 779,678
-9-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
_________________
<TABLE>
SERAGEN, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997
<CAPTION>
Historical Adjustments Pro Forma
____________ ____________ ____________
<S> <C> <C> <C>
Revenue:
Contract revenue and license fees . . . . . . . . . $ 911,625 $ - $ 911,625
Operating expenses:
Cost of contract revenue and license fees . . . . . 882,034 - 882,034
Research and development. . . . . . . . . . . . . . 2,516,840 (2,219,447)(a) 297,393
Contract R&D with affiliate . . . . . . . . . . . . - 1,361,427 (b) 1,361,427
General and administrative. . . . . . . . . . . . . 1,189,803 (635,426)(a) 554,377
___________ ____________ ___________
4,588,677 (1,493,446) 3,095,231
___________ ____________ ___________
Loss from operations. . . . . . . . . . . . . . (3,677,052) 1,493,446 (2,183,606)
Interest income. . . . . . . . . . . . . . . . . . . . 14,703 - 14,703
Interest expense . . . . . . . . . . . . . . . . . . . 172,366 - 172,366
___________ ____________ ___________
Net loss. . . . . . . . . . . . . . . . . . . . (3,834,715) 1,493,446 (2,341,269)
============ ============ ===========
Preferred stock dividends. . . . . . . . . . . . . . . 720,703 - 720,703
____________ ____________ ____________
Net loss applicable to common stockholders . . . . . . $ 4,555,418) $ 1,493,446 $(3,061,972)
============ ============ ============
Net loss per common share. . . . . . . . . . . . . . . $ (.25) $ - $ (.17)
============ ============ ============
Weighted average common shares used
in computing net loss per share . . . . . . . . . . 17,936,675 - 17,936,675
============ ============ ============
</TABLE>
The following pro forma adjustments are required to reflect the sale of the
majority of the Company's property and equipment, the assignment of certain
capital and operating leases to Boston University, the Company's service
contract with Boston University and the transfer of the majority of the
Company's employees to Boston University as discussed in Note 5. The pro
forma adjustments will be revised to reflect changes in assets through the
date of closing and the determination of actual disposition costs.
Notes to Pro Forma Statement of Operations
(a) Reflects the actual reduction of operating expenses
due to the sale of property and equipment, the transfer
of employees to Boston University and reductions in the
related research and development and general and
administrative activities. $2,854,873
(b) Reflects the contracted cost for the three months ended
March 31, 1997 of research and development activities
to be received through the service contract with Boston
University. $1,361,427
-10-
<PAGE>
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
In February 1997, the Company entered into an Asset Purchase
Agreement to sell its manufacturing and clinical operations facilities to
Boston University or a designated affiliate for $5 million and in connection
therewith entered into a Service Agreement with Boston University pursuant to
which Boston University will provide the Company with certain services related
to product research, development, manufacturing, clinical trials, quality
control and quality assurance. The terms of this transaction are discussed
more fully below under "Liquidity and Capital Resources".
On April 7, 1997, the Company entered into the Amendment to its Sales and
Distribution and Development Agreement with Lilly pursuant to which Lilly had
the development and marketing rights to the Company's lead molecule IL-2
Fusion Protein for all cancer and certain non-cancer indications. The terms
of this transaction are discussed more fully below under "Liquidity and
Capital Resources".
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, 1997 and 1996. The Company's net loss for
the three-month period ended March 31, 1997 was $4.6 million compared to $6.8
million for the period ended March 31, 1996. The decrease in the net loss
during the first quarter of 1997 was primarily due to a reduction in operating
expenses of $1.7 million and a reduction in the loss incurred in connection
with the Company's Canadian affiliate of $1.2 million. These decreases were
partially offset by a reduction in contract revenue with Lilly of $517,000 and
an increase in preferred stock dividends of $721,000.
The Company's revenues for the three months ended March 31, 1997 and 1996
were $912,000 and $1.5 million, respectively, primarily contract revenue from
Lilly for certain development costs of IL-2 Fusion Protein for cancer therapy.
Contract revenue from Lilly decreased in 1997 by $517,000 primarily due to
the completion of certain clinical data management milestones in 1996 and the
winding down of patient enrollment in 1997 for a Phase III clinical trial for
IL-2 Fusion Protein for CTCL.
Total operating expenses for the quarter ended March 31, 1997 decreased by
$1.7 million to $4.6 million in 1997 from $6.3 million in 1996. This decrease
of $1.7 million was primarily due to management's decision in December 1996 to
reduce operating expenses and streamline the Company's organization. The
Company eliminated approximately 17% of its workforce. In addition, the
Company decided to put non-essential purchases on hold until the Company
completed the sale of its facilities operation to Boston University. There
also was a decrease due to a reduction in validation fees of approximately
$200,000. The cost of contract revenue was $882,000 in 1997 as compared to
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SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$1.4 million in 1996, a decrease of $517,000, reflecting the completion of
certain clinical data management milestones in 1996 and the winding down of
patient enrollment in 1997 for a Phase III clinical trial for IL-2 Fusion
Protein for CTCL. Research and development expenses decreased by $1.1 million
to $2.5 million in the first three months of 1997 from $3.6 million for the
first three months of 1996. This decrease was primarily the result of a
reduction in the workforce and the hold on non-essential purchases mentioned
above. This decrease was partially offset by an increase in expenses related
to the initiation in the fourth quarter of 1996 of a Phase I/II clinical trial
of IL-2 Fusion Protein for psoriasis therapy and a Phase I/II clinical trial
of DAB389EGF ("EGF Fusion Protein") for non-small cell lung cancer. General
and administrative expenses decreased by $200,000 to $1.2 million in the first
three months of 1997 as compared to $1.4 million in the first three months of
1996. This decrease was primarily due to the reduction in workforce mentioned
above and a reduction in recruiting costs. This decrease was partially offset
by an increase in legal fees.
The loss incurred in connection with the Company's Canadian affiliate
decreased by $1.2 million in the three months ended March 31, 1997 as compared
to the three months ended March 31, 1996. The Company believes the current
maximum obligation to the Canadian affiliate is $2.4 million, which was
accrued as of December 31, 1996. Interest income was substantially unchanged
in the first quarter of 1997 as compared to the first quarter of 1996.
Interest expense decreased by $622,000 to $172,000 in the first quarter of
1997 from $794,000 in the first quarter of 1996 due to the restructuring of
the lines of credit which occurred in July 1996.
Liquidity and Capital Resources
As of March 31, 1997, the Company had approximately $2.1 million in cash
and cash equivalents, which was comprised of the remainder of a deposit of
$4.5 million made by Boston University in connection with the sale of the
Company's manufacturing and clinical operations. The net book value of the
assets to be sold to Boston University was $4.4 million. These assets
represent substantially all of the Company's property and equipment as of
March 31, 1997, and consist primarily of leasehold improvements to the
Company's manufacturing facility, laboratory facilities and laboratory
equipment.
The Company expects to incur substantial additional 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
progress in 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.
On February 18, 1997, the Company entered into an agreement to sell its
manufacturing and clinical operations facilities to Boston University or a
designated affiliate for $5 million. The closing of the transaction is
subject to, among other things, approval by the Company's stockholders.
Boston University has paid the Company $4.5 million as a deposit and, from the
time of execution of the agreement, has assumed responsibility for the
facility's operations, including responsibility for operating costs. The
Company is permitted to use this deposit to fund its current operations. At
the closing, most of the Company's employees involved in the manufacturing and
clinical operations will become employees of Boston University. Both the
deposit and the operating costs incurred by Boston University are subject to
refund in the event that conditions for closing are not met. Upon the closing
of this transaction, the Company will record a gain in its statement of
operations for the operating expenses reimbursed by Boston University, net of
amounts due to Boston University under the Service Agreement for the period
from February 14, 1997 until the closing of the transaction. As of March 31,
1997, the net amount due to the Company from Boston University in respect of
the facility's operating expenses for the period from February 14, 1997 to
March 31, 1997 was approximately $779,000.
Simultaneously, the Company entered into the Service Agreement with Boston
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SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
University providing for the purchase by the Company of certain services
related to product research, development, manufacturing, clinical trials,
quality control, and quality assurance. The Service Agreement expires in
January 1999 and is subject to certain early termination provisions,
including the option of Boston University to terminate the agreement if losses
during a contract year exceed $9.0 million and the Company does not reimburse
Boston University for the losses in excess of $9.0 million. The Service
Agreement may be renewed for two successive one-year terms at the option of
the Company. The Company has the option to repurchase the assets comprising
the manufacturing and clinical operations facilities. The Company has agreed
to pay Boston University fees of approximately $5.5 million and $6.6 million
in years 1 and 2 of the Service Agreement, respectively. The fees can be
increased or decreased by agreement of the parties, but may not be reduced to
less than $4.3 million per contract year. The Service Agreement is expected
to substantially reduce operating costs in research and development, as the
Company will be contracting solely for the services that the Company requires
for clinical and manufacturing purposes. The Company will give effect to this
transaction in its financial statements after closing.
On April 7, 1997, the Company entered into the Amendment to its Sales and
Distribution and Development Agreement with Lilly pursuant to which Lilly had
the development and marketing rights to the Company's lead molecule IL-2
Fusion Protein for all cancer and certain non-cancer indications. The
Amendment confirms Lilly's commitment to develop, promote and distribute IL-2
Fusion Protein for the treatment of CTCL as long as the Company continues to
meet agreed clinical, financial and manufacturing objectives, as defined.
Under the Amendment, Lilly, subject to certain conditions, has relinquished
development and marketing rights to IL-2 Fusion Protein for all non-cancer
indications, as well as rights to other molecules. This will allow the
Company to seek additional strategic partners for those indications and
molecules, subject only to Lilly's retained rights to distribute intravenous
and intramuscular formulations of IL-2 Fusion Protein in the territory covered
by the Company's agreements with Lilly. Lilly also has agreed to assist the
Company in meeting its obligations to Ajinomoto. In exchange, the Company has
agreed to issue to Lilly in a private placement 1,000,000 shares of its common
stock and to release Lilly from a certain future milestone payment.
The Company anticipates that existing cash and cash equivalents, the
reimbursement of clinical costs for the development of IL-2 Fusion Protein for
cancer therapy from Lilly and the reimbursement of operating costs by Boston
University will be sufficient to fund the Company's working capital
requirements through approximately June 1997 provided that the Company is able
to amend its current agreement with Ajinomoto to reduce the amount of its
payment obligation to Ajinomoto to an amount commensurate with the amount that
Lilly has agreed to pay. In addition, the Company must complete the sale of
its manufacturing and clinical operation facilities to Boston University or
the $4.5 million deposit and operating expenses that have been paid to date on
such facility will be subject to refund to Boston University (See Note 5 in
the "Notes to the Financial Statements" regarding significant future
obligations). The Report of Independent Accountants on the Company's
Financial Statements for the fiscal year ended December 31, 1996 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. See Note A in the Annual
Report on Form 10-K for the year ended December 31, 1996 in the "Notes to the
Financial Statements." The Company's ability to finance its operations 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 strategic partnerships,
as may be available.
The Company is exploring a possible equity offering, although the terms of
such offering have not been finalized. There can be no assurance that the
Company will be successful in an equity offering or that the amount raised
will be sufficient to fund the Company's operating expenses until other
sources of funds can be secured. Management of the Company believes that to
be able to complete a new equity financing successfully, the holders of the
Company's Series A, Series B and Series C preferred stock will be required to
convert such securities in connection with the offering. Management is in
discussions with such holders, but there is no assurance that such agreements
can be reached on terms satisfactory to the Company.
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<PAGE>
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 1996, the Company's net tangible assets (total assets
minus liabilities and goodwill) was approximately ($4.8 million). On May 13,
1997, the Company received a letter for the National Association of Securities
Dealers, Inc. (the "NASD") advising it that because the Company is not in
compliance with the minimum net tangible assets level of $4.0 million, the
Company's common stock will be delisted from trading on the Nasdaq National
Market System (the "Nasdaq NMS"). The Company intends to appeal this decision
and will submit to the NASD a plan for the restoration of its net tangible
assets to the minimum level. The appeal will stay the delisting pending a
ruling by the appeal panel. However, there is no assurance that the NASD will
find the plan to be acceptable or that the NASD would delay the delisting to
allow the Company sufficient time to implement the plan. If the Common Stock
is delisted from the Nasdaq NMS, the Company intends to make application for
listing on the Nasdaq SmallCap Market if the Company meets the requirements
for listing on the Nasdaq SmallCap at that time. The delisting of the Common
Stock from the Nasdaq NMS could have a material adverse effect on the
Company's efforts to raise additional equity capital.
The Company is seeking to obtain additional funds through collaborative or
other arrangements with corporate partners and others. There can be no
assurance that the Company will be successful in securing collaborative or
other arrangements with corporate partners or others on acceptable terms, if
at all. If the Company does not consummate an equity financing or additional
collaborative or other arrangements with corporate partners, then the
Company's current cash position may not be sufficient to meet its financial
obligations or to fund operations at the current level beyond June 1997. If
adequate additional funds are not available, the Company may be required to
delay, scale back or eliminate certain of its clinical trials, manufacturing
or development activities or certain other aspects of its business and may be
required to cease operations.
Safe Harbor Information
Some of the statements contained in this document are forward-looking,
including statements relating directly or by implication to the Company's
products, operations, strategic partnerships, and ability to fund its
operations. These statements are based on current expectations and involve a
number of uncertainties and risks, including (but not limited to) the
Company's ability to proceed with successful development, testing, and
licensing of its products and the Company's ability to enter into additional
strategic partnerships and other collaborative arrangements or to raise
additional capital on satisfactory terms. For further information, refer to
the "Business Outlook" section in the Company's Form 10-K as filed with the
Securities and Exchange Commission. Actual results may differ materially from
such expectations.
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<PAGE>
SERAGEN, INC.
PART II
OTHER INFORMATION
Item 2. Changes in Securities
On April 7, 1997, in a private offering, the Company sold
1,000,000 shares of Common Stock to Eli Lilly and Company ("Lilly").
No cash consideration was received by the Company. The shares were
delivered in consideration for Lilly amending its prior agreements
with the Company and relinquishing certain rights to the Company.
These securities were sold pursuant to an exemption from registration
under the Securities Act of 1933 ("Securities Act") in reliance on
the exemption provided in Section 4 (2) to the Securities Act and
Regulation D under the Securities Act.
Item 3. Defaults upon Senior Securities
In connection with the Series B Preferred Stock (the "Series B
Shares"), the Company is obligated to pay quarterly dividends to the
holders of the Series B Shares. The Company did not make its
dividends payments due December 31, 1996 and March 31, 1997, and does
not anticipate making the payment due June 30, 1997. As of March 31,
1997, the amount of dividends in arrears was approximately $1.2
million.
In connection with the issuance of the Series B Shares, the Company
transferred all of its patents (the "Patents") to Seragen Technology,
Inc. ("STI") in exchange for 214,200 shares of STI Class A Common
Stock and 23,800 shares of STI Class B Common Stock. STI provided
the Company with an irrevocable worldwide exclusive license with
respect to the Patents (the "Irrevocable License Agreement"). Under
the Irrevocable License Agreement, the Company is obligated to pay
quarterly royalties in an amount equal to the amount of any dividend
that the holders of the Series B Shares are entitled to receive but
have not received by the royalty due date (which is one day after
each quarterly dividend payment date for the Series B Shares). The
Company delivered the 23,800 shares of STI Class B Common Stock pro
rata to the holders of the Series B Shares. STI's Class B common
Stock provides for cumulative dividends payable in the same amount as
any royalties payable by the Company under the Irrevocable License
Agreement. STI also provided the Company with a collateral
assignment of the Patents made by STI in favor of the holders of the
Series B Shares. Pursuant to an escrow arrangement, the collateral
assignment of the Patents is required to be delivered to the holders
of the Series B Shares in the event that, after notice, STI fails for
60 days to pay any dividend due in respect of its STI Class B Common
Stock. The Company did not make its royalty payments due January 1,
1997, or April 1, 1997, and does not anticipate making the payment
due July 1, 1997. STI did not pay STI Class B Common Stock dividends
due January 1, 1997, or April 1, 1997, and does not anticipate making
the payment due July 1, 1997. To the Company's knowledge, the
holders of the Series B Shares have not provided notice of the STI
dividend payment failure to the escrow agent. In the event that STI
redeems its STI Class B Common Stock, the escrow agent is required to
deliver a reassignment of the Patents to the Company.
Item 6. Exhibits, financial statements schedules and reports on Form 8-K
(a) Exhibit Index
Exhibit 10.79 - Second Amendment to Sublease dated February 21,
1997, by and between the Registrant and Sierracom (filed
herewith)
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<PAGE>
SERAGEN, INC.
PART II
OTHER INFORMATION
(b) Reports on Form 8-K
A Current Report on Form 8-K for February 18, 1997 event,
relating to an agreement to sell the Company's manufacturing and
clinical operations facilities to Boston University.
A Current Report on Form 8-K/A for February 18, 1997 event,
relating to the Company's inclusion of its proforma information.
A Current Report on Form 8-K for March 16, 1997 event, relating
to a change in the Company's independent accountants.
A Current Report on Form 8-K for April 7, 1997 event, relating
to the Company's announcement that it had amended its prior
agreements with Eli Lilly and Company.
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PAGE
<PAGE>
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 9, 1997 By:/s/ Reed R. Prior
_________________
Reed R. Prior
Chairman of the Board
and Chief Executive Officer
Date: May 9, 1997 By:/s/ Jean C. Nichols,Ph.D.
________________________
Jean C. Nichols, Ph.D.
President, Chief Technology
Officer and Director
(Principal Financial and Accounting
Officer)
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<PAGE>
<PAGE>
SERAGEN, INC.
EXHIBIT INDEX
Exhibit
Number Description Page
______________________________________________________________________________
(10.79) Second Amendment to Sublease, dated
February 21, 1997, by and between the
Registrant and Sierracom (filed herewith) 19
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<PAGE>
Exhibit 10.79
SECOND AMENDMENT TO SUBLEASE
____________________________
THIS SECOND AMENDMENT TO SUBLEASE ("Amendment") is made as of the
21st day of February, 1997, by and between SIERRACOM, a division of Sierra
Networks, Inc. ("Sublessor") and SERAGEN, INC. ("Sublessee").
W I T N E S S E T H:
WHEREAS, Sublessor and Sublessee entered into a Sublease dated
October 12, 1995, for certain premises (the "Subleased Premises") constituting
an 8,000 square foot portion of a building (the "Building") designated as
Section A on a photocopy of a plan entitled "As-Built Plan of Land in
Hopkinton, Mass." dated July 31, 1984, Scale 1" = 51' approximately, drawn by
Schofield Brothiss, Inc. (the "Plan"), together with appurtenances granted in
the Sublease;
WHEREAS, the Sublease provided for Sublessee to sublease an
additional 8,000 square foot portion of the building designated as Section B
on the Plan, including certain appurtenances, as of July 1, 1996;
WHEREAS, the Sublease was modified June 25, 1996 (styled "Addendum
to Sublease Agreement"), to reduce the amount of square footage in Section B
subleased by Sublessee as of July 1, 1996, to 5,600 square foot (for a then
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<PAGE>
total square footage of 13,600 square feet), and to delay to a date then
uncertain Sublessee's sublease of the balance of Section B constituting an
additional 2,400 square feet; and
WHEREAS, Sublessor and Sublessee desire to amend the Sublease to
reduce the amount of square footage constituting the Subleased Premises and to
modify certain other terms as provided herein.
NOW THEREFORE, in consideration of the mutual covenants set forth
herein and of other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree to amend
the Sublease in the following manner:
1. Effective as of the date hereof (the "Effective Date"), the
Sublease shall be amended to reduce the Subleased Premises by 5,600 square
feet (constituting the space designated as Section B) and to eliminate any
further obligation or right of Sublessee to sublease any portion of the 8,000
square feet constituting Section B. The Section B space previously subleased
by Sublessee shall be delivered to Sublessor by Sublessee in its current "AS
IS" condition, broom clean. For all purposes of the Sublease from and after
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<PAGE>
the Effective Date, the term Subleased Premises shall mean the 8,000 square
feet designated as Section A on the Plan.
2. As of the Effective Date, the Base Rent for the Subleased
Premises as set forth in Table I of Section 3.1 of the Sublease shall be
deleted and replaced with the following:
Table I
Monthly Annual
Period Base Rent Base Rent
____________________ ____________________ ___________________
Effective Date - 9/30/98 $5,000.00 $60,000.00
10/1/98 - 9/30/02 $6,000.00 $72,000.00
10/1/02 - 9/30/05 $7,000.00 $84,000.00
3. Without limitation of any other provision in the Sublease
referencing Section B (all of which shall be construed commencing on the
Effective Date to delete references, rights and obligations with respect to
Section B), as of the Effective Date
(a) The third (3rd) sentence of the second paragraph of
Section 5.3 shall be deleted.
(b) The tenth (10th) sentence of Section 6.3 shall be
deleted in its entirety and replaced with the following sentence: "The
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<PAGE>
Sublessee's apportioned share will be determined by the percentage
relationship (12.5%) between the square footage of the Subleased Premises
(8,000 sq. ft.) and the square footage of the total building (64,000 sq.
ft.)."
4. All capitalized terms not defined in this Amendment shall
have the same meaning as in the Sublease.
5. Except as expressly modified and amended by the provisions
of this Amendment, all terms covenants and conditions of the Sublease shall
remain in full force and effect in accordance with their terms.
6. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same Amendment.
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<PAGE>
IN WITNESS WHEREOF, Sublessor has hereunto set its hand and seal,
and Sublessee has caused this Amendment to be executed as a sealed instrument,
all as of the day and year first above written.
Sublessor:
SIERRACOM, a division of Sierra
Networks, Inc.
By:/s/ Peter Sullivan [SEAL]
___________________
Sublessee:
SERAGEN, INC.
By:/s/ Reed R. Prior [SEAL]
__________________
