UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A#1
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 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
--- ---
16,669,504 shares of Common Stock, par value $.01, were outstanding on
August 9, 1996.
SERAGEN, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
- - ------------------------------
Item 1 - Financial Statements
Balance Sheets -
December 31, 1995, June 30, 1996 and
Pro Forma June 30,1996 (As Restated)................................ 3
Statements of Operations
Three and Six Months Ended June 30, 1995 and 1996 (As Restated)..... 4
Statements of Cash Flows
Six Months Ended June 30, 1995 and 1996 (As Restated)............... 5
Notes to Financial Statements....................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................ 10
PART II - OTHER INFORMATION
- - ---------------------------
Item 1 - Legal Proceedings (None)
Item 3 - Defaults upon Senior Securities (None)
Item 5 - Other Information (None)
Item 6 - Exhibits . . . . . . . . . . . ............................. 14
Signatures ........................................................... 15
<PAGE> 2
<TABLE>
<CAPTION>
SERAGEN,INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS (PROFORMA)
DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996
___________ _______ ________
(As Restated) (As Restated)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 435,460 $ 4,889,252 $ 4,889,252
Restricted cash ........................................................ 435,318 435,318 435,318
Contract receivable .................................................... 686,055 910,214 910,214
Unbilled contract receivable ........................................... 496,147 771,634 771,634
Prepaid expenses and other current assets .............................. 335,238 368,029 288,029
------------- ------------- -------------
Total current assets .................................... 2,388,218 7,374,447 7,294,447
Property and equipment, net .............................................. 5,198,136 5,030,974 5,030,974
Investment in affiliate .................................................. 2,599,864 957,895 957,895
Deferred commission ...................................................... 2,060,000 2,060,000 2,060,000
Prepaid interest ......................................................... 3,528,677 3,008,053 --
Other assets ............................................................. 524,613 504,779 81,592
------------- ------------- -------------
Total assets ............................................ $ 16,299,508 $ 18,936,148 $ 15,424,908
============= ============= =============
LIABILITIES AND STOCKHOLDERS' ( DEFICIT) EQUITY
Current liabilities:
Accounts payable ...................................................... 725,326 595,333 595,333
Current maturities of long-term debt .................................. 248,494 175,806 175,806
Accrued commission payable ............................................ 300,000 -- --
Accrued expenses ...................................................... 2,413,284 2,539,454 2,539,454
------------- ------------- -------------
Total current liabilities ............................... 3,687,104 3,310,593 3,310,593
Non-current liabilities:
Long-term debt, less current maturities ............................... 12,537,417 23,800,000 --
Deferred revenue ...................................................... 5,000,000 5,000,000 5,000,000
Long-term obligation, less unamortized discount........................ 3,440,482 3,784,290 3,784,290
Affiliate guarantee ................................................... 2,076,000 2,076,000 2,076,000
------------- ------------- -------------
Total non-current liabilities ........................... 23,053,899 34,660,290 10,860,290
Stockholders'(deficit) equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued
and outstanding 4,000 shares at June 30, 1996 and Pro Forma
June 30, 1996, respectively ....................................... -- 3,786,667 3,786,667
Convertible preferred stock, Series B, $.01 par value; issued
and outstanding 23,800 shares at June 30, 1996 (Pro Forma) ........... -- -- 23,800,000
Common stock, $.01 par value; 30,000,000 shares authorized;
issued 16,521,212 shares at December 31, 1995, 16,626,737
shares at June 30, 1996 and Pro Forma June 30, 1996, respectively ..... 165,212 166,267 166,267
Additional paid-in capital ............................................... 141,759,580 141,825,370 141,825,370
Accumulated deficit ...................................................... (152,273,333) (164,746,008) (168,257,248)
------------- ------------- -------------
(10,348,541) (18,967,704) 1,321,056
------------- ------------- -------------
Less treasury stock (14,632 shares at cost at December 31, 1995, 17,418
shares at cost at June 30, 1996 and June 30, 1996 Pro Forma,
respectively) ......................................................... (92,954) (67,031) (67,031)
------------- ------------- -------------
Total stockholders' (deficit) equity ....................... (10,441,495) (19,034,735) 1,254,025
------------- ------------- -------------
Total liabilities and stockholders' (deficit) equity ...... $ 16,299,508 $ 18,936,148 $ 15,424,908
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 3
SERAGEN, INC.
<TABLE>
STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1995 1996 1995 1996
_______________________ ______________________
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenue:
Contract revenue and license fees . $ 1,061,936 $ 1,247,250 $ 1,382,147 $ 2,746,242
----------- ----------- ----------- -----------
Operating expenses:
Cost of contract revenue .......... 1,061,936 1,194,253 1,382,147 2,593,245
Research and development .......... 2,938,431 3,302,357 6,843,993 6,875,331
General and administrative ........ 1,257,584 1,149,037 2,501,680 2,510,393
----------- ----------- ----------- -----------
5,257,951 5,645,647 10,727,820 11,978,969
----------- ----------- ----------- -----------
Loss from operations (4,196,015) (4,398,397) (9,345,673) (9,232,727)
Equity in loss of affiliate .......... -- 471,561 -- 1,641,969
Interest income ...................... 17,586 25,454 37,233 41,109
Interest expense ..................... 328,677 818,444 517,812 1,612,419
----------- ----------- ----------- -----------
Net loss ........... (4,507,106) (5,662,948) (9,826,252) (12,446,006)
----------- ----------- ----------- -----------
Dividends ............................ -- 26,667 -- 26,667
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ............... $(4,507,106) $(5,689,615) $(9,826,252) $(12,472,673)
=========== =========== =========== ===========
Net loss per common share ............ $ (0.28) $ (0.34) $ (0.61) $ (0.75)
=========== =========== =========== ===========
Weighted average common shares used in
computing net loss per share ...... 16,265,312 16,607,713 16,244,077 16,582,940
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
SERAGEN, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
1995 1996
----------- ------------
(As Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $(9,826,252) $ (12,446,006)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization .............. 473,224 463,651
Equity in loss of affiliate ................ -- 1,641,969
Loss on disposal of property and equipment . 2,178 --
Amortization of discount of long-term debt . 343,807 343,807
Amortization of prepaid interest ........... 115,694 520,625
Amortization of debt issuance costs ........ 12,606 83,045
Changes in operating assets and liabilities:
Contract receivable ........................ 56,728 (224,159)
Unbilled contract receivable ............... (71,880) (275,487)
Prepaid expenses and other current assets .. 205,829 (32,791)
Accounts payable ........................... 35,089 (129,993)
Accrued commission payable ................. -- (300,000)
Accrued expenses ........................... (52,201) 126,170
--------- ----------
Net cash (used in) operating activities ............ (8,705,178) (10,229,169)
----------- ------------
Cash flows from investing activities:
Proceeds from sales of marketable securities .... 2,034,948 --
Purchases of property and equipment ............. (64,548) (296,489)
Decrease in other assets ........................ 1,944 944
----------- ------------
Net cash provided by (used in) investing activities 1,972,344 (295,545)
----------- ------------
Cash flows from financing activities:
Net proceeds from stock issuances ............... 111,534 3,929,642
Purchases of treasury stock ..................... (39,000) (76,875)
Proceeds from issuance of long-term debt ........ 3,000,000 1 1,300,000
Repayments of long-term debt .................... (95,115) (110,105)
Debt issuance costs ............................. (453,791) (64,156)
----------- ------------
Net cash (used in) provided by financing activities 2,523,628 14,978,506
----------- ------------
Net (decrease) increase in cash and cash equivalents (4,209,206) 4,453,792
Cash and cash equivalents, beginning of period ..... 5,536,782 435,460
----------- ------------
Cash and cash equivalents, end of period ........... $ 1,327,576 $ 4,889,252
=========== ============
Supplemental disclosure of cash flows information:
Cash payments for interest ...................... $ 57,398 $ 367,495
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 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 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.
In September 1997, the Company restated its June 30, 1996 financial
statements to reflect a change in the accounting treatment for the Company's
Amended Sales and Distribution Agreement with Lilly on May 28, 1996. Such
restatement resulted in an increase in the net loss applicable to common
stockholders of $2,940,000 for the three and six months ended June 30, 1996.
(See Note 6)
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the
financial statements and the report amounts of revenues and expenses during
the report period(s). Actual results could differ from those estimates.
3. COLLABORATIVE ARRANGEMENTS:
Eli Lilly
On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gives Lilly exclusive worldwide development,
distribution, and marketing rights, except in certain Asian countries, to the
Company's Interleukin-2 Fusion Protein (IL-2 Fusion Protein) for the treatment
of cancer. Lilly also has the option to obtain worldwide development,
distribution, and marketing rights for additional indications for IL-2 Fusion
Protein and for other Company products under development. The Company retains
exclusive rights to promote IL-2 Fusion Protein and future fusion proteins for
dermatologic applications outside of oncology and will be responsible for bulk
manufacturing for all indications.
<PAGE> 6
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
On August 4, 1994, under the terms of the alliance, Lilly made an initial
payment to the Company of $10 million, $5 million representing payment for
787,092 shares of common stock at approximately $6.35 per share and $5 million
representing an advance against Lilly's purchase of bulk product from the
Company. Lilly is also required to pay the Company an additional $3 million
based on the meeting of certain regulatory milestones in the development of
IL-2 Fusion Protein for CTCL. No regulatory milestone payments have been
achieved to date under this agreement. In addition, Lilly reimburses the
Company for costs incurred in the clinical development of IL-2 Fusion Protein
for cancer therapy, including costs for Phase III clinical trials. The
Company recorded approximately $588,000, $3,337,000 and $2,593,245 of contract
revenue for such reimbursed development costs during the years ended December
31, 1994, 1995 and the six months ended June 30, 1996, respectively.
In connection with this agreement, the Company paid $600,000 in cash and issued
220,000 shares of common stock valued at $1,760,000 to its investment bank for
services provided in connection with the Lilly agreement. In 1995, the Company
charged $300,000 of such payments to additional paid in capital and recorded
the additional payments as prepaid expense to be recognized upon the recognition
of contract revenues and license fees from Lilly in future periods.
On May 28, 1996, Lilly and the Company amended the Sales and Distribution
Agreement relating to the $5.0 million advance paid by Lilly in August 1994
against Lilly's future purchases of bulk product from the Company. Associated
with the original agreement was $2,060,000 of deferred commission expense to
be recognized upon the recognition of product revenue from Lilly. The amended
agreement states that the $5.0 million payment is non-refundable and Seragen
has no obligation to refund the advance should no bulk purchases be made by
Lilly. To the extent Lilly purchases bulk product in the future, the Company
is required to pay Lilly a royalty equal to 75% of the purchase price, up to
$5.0 million of total royalties. The Company will recognize the $5.0 million
non-refundable payment and amortize the related deferred commission upon the
sale of bulk product to Lilly or at such time Lilly acknowledges it will not
purchase any bulk material. The Company previously recognized the $5.0
million non-refundable payment and expensed $2.06 million of deferred
commission in the quarter ended June 30, 1996. (See Note 6)
4. REGULATION S
On May 29, 1996, the Company raised gross proceeds of $4 million
(approximately $3.8 million net of offering fees) through the sale of 4,000
shares of Seragen convertible Series A Preferred Stock to investors outside
the United States. The preferred stock is convertible at the option of the
holders, beginning July 15, 1996, into shares of Seragen's Common Stock at a
conversion price equal to the lesser of $4.125 or 73 percent of the average
closing bid prices for a five day period prior to the conversion date. Terms
of the preferred stock also provide for 8% cumulative dividends payable in
shares of Seragen Common Stock at the time of each conversion. The holders of
the Series A Shares are not entitled to vote separately, as a series or
otherwise, on any matter submitted to a vote of the shareholders of the
Company. Each Series A Share has a liquidation preference equal to the sum of
(a) $1,000, plus (b) an amount equal to any accrued and unpaid dividends from
the date of issuance of the Series A Shares so that such amount must be paid
on each Series A Share in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company before any distribution or payment is
<PAGE> 7
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
made to any holders of any shares of the Common Stock or any other class or
series of the Company's capital stock which is junior to the Series A Shares.
Any shares which remain outstanding on November 29, 1997 will be automatically
converted into shares of Seragen Common Stock. The Company's Series A
Preferred Stock was reflected at $3,786,667 at June 30, 1996 which includes
$26,667 accrued dividends payable from the issuance date through June 30,
1996. As of August 9, 1996, 149 shares of Series A Preferred Stock were
converted into 28,051, 26,739 and 8,395 shares of Common Stock at $2.245,
$2.427 and $2.774, respectively.
5. SUBSEQUENT EVENT
On July 1, 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million loan financing obtained in June 1995
to release the Company from its liability to the banks involved. The new
agreement replaces the lines of credit with convertible Series B Preferred
Stock. Each share of Series B Preferred Stock is convertible at any time at
the investor's option into a number of shares of Seragen Common Stock
determined by dividing $1,000 by the average of the closing sale prices of the
Common Stock as reported on the Nasdaq Stock Market for the ten consecutive
trading days immediately preceding the conversion date. The holders of Series
B Preferred Stock are entitled to receive a cumulative dividend payable in
arrears in cash quarterly on the last day of March, June, September, and
December of each year commencing on September 30, 1996 at an annual rate equal
to the prime rate plus 1 1/2% through June of 1999 and at an increasing
percentage rate thereafter up to a maximum rate of the prime rate plus 5% in
2003. The investors also received warrants to purchase a total of 5,950,000
shares of Seragen Common Stock (250,000 warrants for every $1,000,000 of
preferred stock purchased) at an exercise price of $4.00 per share. The
warrants are exercisable commencing on January 1, 1997 and expire on July 1,
2006. The holders of the Series B Shares are entitled to vote, on any matter
submitted to a vote of the shareholders of the Company, and are entitled to
the number of votes equal to the product of (x) the number of Series B Shares
held on the record date for the determination of the stockholders entitled to
vote on such matters or, if no record date is established, in accordance with
applicable provisions of Delaware law, and (y) $1,000, divided by $4.00. Each
Series B Share has a liquidation preference equal to the sum of (a) $1,000,
plus (b) an amount equal to any accrued and unpaid dividends from the date of
issuance of the Series B shares so that such amount must be paid on each
Series B Share in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company before any distribution or payment is
made to any holders of any shares of the Common Stock or any other class or
series of the Company's capital stock which is junior to the Series B
Shares. At any time, with the approval of the Company's Board of Directors,
Audit Committee or comparable body, the Company may redeem any or all of the
Series B Shares for cash.
The Company has included in this report a June 30, 1996 Pro Forma Balance
Sheet to show the effect of the loan restructuring. The following pro forma
adjustments were incorporated into the pro forma balance sheet: the conversion
of $23.8 million of long-term debt into Series B convertible preferred stock
(an $80,000 dividend relating to estimated issuance costs), and expending of
<PAGE> 8
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
$3.0 Million of prepaid interest and $400,00 of debt issuance costs associated
with the outstanding loans. The valuation of 5,950,000 warrants is currently
being calculated and was not included in the pro forma balance sheet.
6. Restatement of June 30, 1996 Financial Statements
In September of 1997, the Company restated its 1996 financial statements
to reflect a change in the accounting treatment for the Company's amended
Sales and Distribution Agreement with Lilly on May 28, 1996. The restatement
consists of (1)recording the $5.0 million payment by Lilly in 1994 as an
advance against future purchases of bulk product by Lilly (the Company had
previously recorded such amount as revenue in the quarter ended June 30,
1996) and (2)capitalizing as a deferred expense $2,060,000 of commissions paid
by the Company in connection with the $5.0 million payment from Lilly in 1994.
(See Note 3) The following table presents the net loss, net loss applicable to
common stockholders, and net loss per share as originally reported, and as
restated.
<TABLE>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
__________________ ________________
As reported As restated As reported As restated
<CAPTION>
<S> <C> <C> <C> <C>
Net loss $(2,722,948) $(5,662,948) $(9,506,006) $(12,446,006)
Net loss applicable to
common stockholders (2,749,615) (5,689,615) (9,532,673) (12,472,673)
Net loss per share $(0.17) $(0.34) $(0.57) $(0.75)
</TABLE>
<PAGE> 9<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.
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.
Restatement of June 30, 1996 Financial Statements
In September of 1997, the Company restated its 1996 financial statements
to reflect a change in the accounting treatment for the Company's amended
Sales and Distribution Agreement with Lilly on May 28, 1996. The restatement
consists of (1)recording the $5.0 million payment by Lilly in 1994 as an
advance against future purchases of bulk product by Lilly (the Company had
previously recorded such amount as revenue in the quarter ended June 30,
1996), (2)capitalizing as a deferred expense $2,060,000 of commissions paid by
the Company in connection with the $5.0 million payment from Lilly in 1994.
(See Notes 3 and 6)
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995. The Company's net loss for the
three-month period ending June 30, 1996 was $5.7 million compared to $4.5
million for the same period in the prior year. The increase was primarily due
to a $472,000 non-cash charge to reflect a potential obligation by the
Company to the investors of Seragen Biopharmaceuticals LTD (SBL) and an
increase in interest and research and development expense.
The Company's revenues for the three months ending June 30, 1996 and 1995
were $1.2 million and $1.1 million, respectively. The $1.2 million in revenue
in 1996 is associated with contract revenue from Lilly for certain development
costs of IL-2 Fusion Protein for cancer therapy as compared to $1.1 million in
1995.
<PAGE> 10
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------
Total operating expenses increased $0.3 million to $5.6 million in 1996
from $5.3 million in 1995. Fees associated with the cost of contract revenue
were substantially unchanged for the three-month period ending June 30, 1996
as compared to the same period in the prior year. Research and development
expenses increased $400,000 to $3.3 million in the second three months of 1996
from $2.9 million for the same period of 1995. This increase was primarily due
to production and facility validation fees and general support costs
associated with the hiring of clinical and scientific staff earlier in the
year. This increase was partially offset by a reduction in non-reimbursable
research grants. General and administrative expenses decreased $200,000 to
$1.1 million in the second three months of 1996 as compared to $1.3 million in
the second three months of 1995. This decrease was primarily a result of a
reduction in patent fees.
In the second quarter of 1996, a non-cash charge of $472,000 was recorded
to reflect the potential obligation by the Company to the investors in Seragen
Biopharmaceuticals Ltd. ("SBL") in connection with certain put rights.
Interest income increased by $7,000, to $25,000 in the second quarter of 1996
from $18,000 in the second quarter of 1995 primarily due to higher average
balances of cash equivalents in 1996. Interest expense increased by $489,000
to $818,000 in the second quarter of 1996 from $329,000 in the second quarter
of 1995 due to an increase in borrowings under the lines of credit which
commenced in June 1995.
Six Months ended June 30, 1996 and 1995. The Company's net loss for the
six-month period ending June 30, 1996 was $12.4 million compared to $9.8
million for the same period in the prior year.
The Company's revenues for the six-month period ending June 30, 1996 were
$2.7 million compared to $1.4 million for the six months ending June 30, 1995.
The $1.3 million increase in revenue in 1996 primarily consisted of an
increase in payments from Lilly due to the acceleration of clinical
development activity under the Phase III clinical trial for IL-2 Fusion
Protein for cancer therapy.
Total operating expenses increased $1.3 million to $12.0 million in 1996
from $10.7 million in 1995. Fees associated with the cost of contract revenue
were $2.6 million in the six months ending June 30, 1996 compared to $1.4
million for the same period in the prior year. This increase of $1.2 million
reflects the acceleration of clinical development activity under the Phase III
clinical trial for IL-2 Fusion Protein for cancer therapy. Research and
development expenses were substantially unchanged for the six month period
ending June 30, 1996 as compared to the corresponding period in 1995. However,
there were increases in the hiring of additional clinical, scientific and
support staff, which were offset by reductions in external research grants and
pre-clinical testing. General and administrative expenses were substantially
unchanged for the six months period ending June 30, 1996 as compared to the
corresponding period in 1995.
<PAGE> 11
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------
In the six months ending June 30, 1996, a non-cash charge of $1.6 million
was
recorded to reflect the potential obligation by the Company to the
investors in SBL in connection with certain put rights. Interest income was
substantially unchanged in 1996 as compared to 1995. Interest expense
increased $1.1 million to $1.6 million in 1996 from $518,000 in 1995 as a
result of the borrowings under the lines of credit which commenced in June
1995.
Restatement of June 30, 1996 Financial Statements
In September of 1997, the Company restated its 1996 financial statements
to reflect a change in the accounting treatment for the Company's amended
Sales and Distribution Agreement with Lilly on May 28, 1996. The restatement
consists of (1)recording the $5.0 million payment by Lilly in 1994 as an
advance against future purchases of bulk product by Lilly (the Company had
previously recorded such amount as revenue in the quarter ended June 30,
1996) and (2)capitalizing as a deferred expense $2,060,000 of commissions paid
by
the Company in, connection with the $5.0 million payment from Lilly in 1994.
(See Notes 3 and 6) The following table presents the net loss, net loss
applicable to common stockholders, and net loss per share as originally
reported, and as restated.
<TABLE>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
__________________ ________________
As reported As restated As reported As restated
<CAPTION>
<S> <C> <C> <C> <C>
Net loss $(2,722,948) $(5,662,948) $(9,506,006) $(12,446,006)
Net loss applicable to
common stockholders (2,749,615) (5,689,615) (9,532,673) (12,472,673)
Net loss per share $(0.17) $(0.34) $(0.57) $(0.75)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had approximately $4.9 million in cash
and cash equivalents and $14.3 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, and reimbursement for clinical costs for the development of
<PAGE> 12
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------
IL-2 Fusion Protein for cancer therapy will be sufficient to fund the
Company's working capital requirements through approximately September 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 September 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.
<PAGE> 13
SERAGEN, INC.
PART II
OTHER INFORMATION
-----------------------
ITEM 6. Exhibits
(A) Exhibit Index
Exhibit 27 - Restated Financial Data Schedule
<PAGE> 14<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: October 31, 1997 by: /s/ Reed R. Prior
--------------------------
Reed R. Prior
Chairman of the Board
and Chief Executive Officer
<PAGE> 15
<PAGE>
SERAGEN, INC.
EXHIBIT INDEX
-----------------------
Exhibit
Number Description Page
- ------------------------------------------------------------------------------
(27) Restated Financial Data Schedule 17
<PAGE> 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,324,570
<SECURITIES> 0
<RECEIVABLES> 1,681,848
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,374,447
<PP&E> 5,030,974
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,936,148
<CURRENT-LIABILITIES> 3,310,593
<BONDS> 27,584,290
<COMMON> 166,267
0
3,786,667
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,936,148
<SALES> 0
<TOTAL-REVENUES> 2,746,242
<CGS> 0
<TOTAL-COSTS> 11,978,969
<OTHER-EXPENSES> 1,641,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,612,419
<INCOME-PRETAX> (12,472,673)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,472,673)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> 0
</TABLE>
