UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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
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(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
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16,963,975 shares of Common Stock, par value $.01, were outstanding on
November 4, 1996.
Total Number of Pages: 16
Exhibit Index at Page: 15
<PAGE>
SERAGEN, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets -
December 31, 1995 and September 30, 1996 (As Restated) 3
Statements of Operations
Three and Nine Months Ended September 30, 1995 and 1996
(As Restated) 4
Statements of Cash Flows
Nine Months Ended September 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 9
PART II - OTHER INFORMATION
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. 13
Signatures 14
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<PAGE>
<TABLE>
SERAGEN,INC.
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
(As Restated)
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<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 435,460 $ 6,321,560
Restricted cash........................................................ 435,318 435,318
Contract receivable.................................................... 686,055 404,796
Unbilled contract receivable........................................... 496,147 595,631
Prepaid expenses and other current assets.............................. 335,238 207,213
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Total current assets.................................... 2,388,218 7,964,518
Property and equipment, net.............................................. 5,198,136 4,860,076
Investment in affiliate.................................................. 2,599,864 747,596
Deferred commission...................................................... 2,060,000 --
Prepaid interest......................................................... 3,528,677 --
Other assets............................................................. 524,613 80,620
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Total assets............................................ $ 16,299,508 $ 13,652,810
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LIABILITIES AND STOCKHOLDERS' ( DEFICIT) EQUITY
Current liabilities:
Accounts payable....................................................... 725,326 998,905
Current maturities of long-term debt................................... 248,494 117,657
Accrued commission payable............................................. 300,000 --
Accrued expenses....................................................... 2,413,284 1,815,504
Short-term obligation, less unamortized discount....................... -- 3,956,193
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Total current liabilities............................... 3,687,104 6,888,259
Non-current liabilities:
Long-term debt, less current maturities................................ 12,537,417 --
Deferred revenue....................................................... 5,000,000 --
Long-term obligation, less unamortized discount........................ 3,440,482 --
Affiliate guarantee.................................................... 2,076,000 2,076,000
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Total non-current liabilities........................... 23,053,899 2,076,000
Stockholders'(deficit) equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued and
outstanding 3,566 shares at September 30, 1996, $3,663,432
liquidation preference................................................. -- 3,663,432
Convertible preferred stock, Series B, $.01 par value; issued and
outstanding 23,800 shares at September 30, 1996, $23,800,000
liquidation preference.................................................. -- 23,800,000
Convertible preferred stock, Series C, $.01 par value; issued and
outstanding 5,000 shares at September 30, 1996, $5,000,000
liquidation preference ................................................ -- 5,000,000
Common stock, $.01 par value; 30,000,000 shares authorized; issued
16,521,212 shares at December 31, 1995 and 16,823,557 shares at
September 30, 1996, respectively........................................ 165,212 168,235
Additional paid-in capital............................................... 141,759,580 150,849,168
Accumulated deficit ..................................................... (152,273,333) (178,792,284)
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(10,348,541) 4,688,551
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Less treasury stock 14,632 shares at cost at December 31, 1995 .......... (92,954) --
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Total stockholders' (deficit) equity.................... (10,441,495) 4,688,551
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Total liabilities and stockholders' (deficit) .......... $ 16,299,508 $ 13,652,810
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
<TABLE>.
SERAGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- --------------------------
1995 1996 1995 1996
(As Restated) (As Restated)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue and license fees ....... $ 721,137 $ 1,613,833 $ 2,103,284 $ 9,360,075
------------ ------------ ------------ ------------
Operating expenses:
Cost of contract revenue and license fees 721,137 693,762 2,103,284 3,322,003
Research and development ................ 3,827,738 3,477,591 10,671,731 10,352,922
General and administrative .............. 1,242,866 941,812 3,744,546 5,477,209
------------ ------------ ------------ ------------
5,791,741 5,113,165 16,519,561 19,152,134
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Loss from operations .... (5,070,604) (3,499,332) (14,416,277) (9,792,059)
Loss incurred in connection with Canadian
affiliate ................................. -- 210,299 -- 1,852,268
Interest income ........................... 16,969 25,665 54,202 66,774
Interest expense .......................... 591,230 3,666,103 1,109,042 5,278,522
------------ ------------ ------------ ------------
Net loss ................ (5,644,865) (7,350,069) (15,471,117) (16,856,075)
Preferred stock dividends and accretion.... -- 9,636,209 -- 9,662,876
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders ....................... $ (5,644,865) $(16,986,278) $(15,471,117) $(26,518,951)
============= ============= ============= =============
Net loss per common share ................. $ (0.34) $ (1.02) $ (0.95) $ (1.60)
============= ============= ============= =============
Weighted average common shares used in
computing net loss per share ............ 16,461,616 16,691,874 16,310,144 16,619,514
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
<TABLE>
SERAGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1995 1996
(As Restated)
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<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $(15,471,117) $(16,856,075)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization .................... 719,226 700,409
Compensation associated with stock issuance ...... -- 20,501
Equity in loss of affiliate ...................... -- 1,852,268
Loss on disposal of property and equipment ....... 2,237 519
Amortization of discount of long-term debt ....... 515,711 515,711
Amortization of prepaid interest ................. 376,007 3,528,677
Amortization of debt issuance costs .............. 43,858 558,411
Changes in operating assets and liabilities:
Contract receivable .............................. (327,694) 281,259
Unbilled contract receivable ..................... 40,686 (99,484)
Prepaid expenses and other current assets ........ 258,889 128,025
Accounts payable ................................. 94,394 273,579
Deferred commission .............................. -- 2,060,000
Accrued commission payable ....................... (300,000) (300,000)
Accrued expenses ................................. (18,590) (597,780)
Deferred revenue ................................. -- (5,000,000)
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Net cash used in operating activities .................. (14,066,393) (12,933,980)
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Cash flows from investing activities:
Proceeds from sales of marketable securities ......... 2,034,948 --
Purchases of property and equipment .................. (172,622) (362,868)
Decrease in other assets ............................. 4,050 1,915
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Net cash provided by (used in) investing activities .... 1,866,376 (360,953)
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Cash flows from financing activities:
Proceeds from preferred stock issuances............... 9,000,000
Net proceeds from common stock issuances.............. 192,547 194,604
Purchases of treasury stock .......................... (157,562) (89,625)
Proceeds from issuance of long-term debt ............. 9,000,000 11,300,000
Repayments of long term debt ......................... (145,348) (168,255)
Debt and preferred stock issuance costs .............. (486,945) (356,062)
Dividends paid ....................................... -- (583,295)
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Net cash (used in) provided by financing activities .... 8,402,692 19,297,367
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Net (decrease) increase in cash and cash equivalents ... (3,797,325) 6,002,434
Cash and cash equivalents, beginning of period ......... 5,536,782 435,460
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Cash and cash equivalents, end of period ............... $ 1,739,457 $ 6,321,560
============= =============
Supplemental disclosure of cash flows information
Cash payments for interest ........................... $ 218,206 $ 758,771
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Seragen, Inc. (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 presentation 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 March 1997, the Company restated its September 30, 1996 financial
statements to reflect the Series A, B and C Preferred Stock at their
liquidation value. Such restatement resulted in an increase in net loss
attributable to common stockholders of $9.6 million which includes an $8.6
million dividend representing the value ascribed to the warrants issued in
connection with the Series B Preferred Stock. ( See Notes 4, 5, 6, and 7).
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 reported period(s). Actual results could differ from those estimates.
3. Amendment to Lilly Sales and Distribution Agreement
On May 28, 1996, Eli Lilly and Company ("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. 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. Accordingly, the Company
recorded $5.0 million in revenue and $2,060,000 in commission expense in the
second quarter of 1996.
4. Regulation S Financing
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 ("Series A Shares") to
Investors outside the United States. The Series A Shares are convertible at
the option of the holders, beginning July 15, 1996, into a maximum of
3,321,563 shares of Seragen Common Stock at a conversion price equal to
the lesser of $4.125 or 73 percent of the average closing bid prices for a
<PAGE>
five day period prior to the conversion date. Any shares the investor is
unable to convert may be exchanged for $1,150 per share in cash. Terms of the
Series A Shares provide for 8% cumulative dividends payable at the time of
each conversion in shares of Seragen Common Stock. 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, except as
required by law. 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 made to any holders of any shares of Seragen Common Stock or any
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<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
other class or series of the Company's capital stock that is junior to the
Series A Shares. Any shares that remain outstanding on November 29, 1997 will
be automatically converted into shares of Seragen Common Stock. The Series A
Shares were reflected at $3,663,432 at September 30, 1996 representing their
liquidation value, which includes accrued dividends payable from the issuance
date through September 30, 1996. The Company also recorded preferred stock
issuance costs of $240,000. As of October 31, 1996, 644 Series A Shares were
converted into 337,715 shares of Common Stock at conversion prices ranging
from $2.774 to $1.296 per share.
5. Loan Restructuring
On July 1, 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million bank financing obtained in June 1995
under which the guarantors directly assumed the liability with the banks and
the Company was released from its liability to the banks. In exchange for the
guarantors satisfying the Company's liability to the banks, the guarantors
were issued 23,800 shares of convertible Series B Preferred Stock ("Series B
Shares"). Each of the Series B Shares is convertible at any time at the
option of the holder into a number of shares of Seragen Common Stock
determined by dividing $1,000 by the average of the closing sales 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 Shares 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 holders of Series B shares also received warrants to
purchase a total of 5,950,000 shares of Seragen Common Stock 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 Company has estimated the value of
these warrants to be $1.45 per warrant or $8.6 million. The value ascribed
to the warrants and the issuance costs have been recorded as a preferred stock
dividend and an offset to paid in capital. 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 the 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 $1,000, plus 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 Seragen 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.
In connection with restructuring the bank debt into Series B Shares, the
Company expensed approximately $3.0 million of prepaid interest and $558,000
of debt issuance costs associated with the outstanding loans. In the period
ended September 30, 1996, preferred stock dividends related to Series B Shares
were approximately $9.3 million, which consists of $8.6 million representing
the value ascribed to the warrants, $600,000 in cash dividends and $80,000 of
issuance costs.
6. Regulation D Financing
On September 30, 1996, the Company raised net proceeds of approximately $5
million through the sale of 5,000 shares of the Company's non-voting
convertible Series C Preferred Stock ("Series C Shares") in a private
placement to an institutional investor under Regulation D of the Securities
Act of 1933. The Series C Shares are convertible at the option of the holder
-7-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
into shares of Seragen Common Stock at a conversion price equal to the lesser
of $2.75 or 73 percent of the average closing bid prices for a five day period
prior to the conversion date. Terms of the Series C Shares also provide for
8% cumulative dividends payable in shares of Seragen Common Stock at the time
of each conversion. Each Series C Share has a liquidation preference equal to
$1,000 plus an amount equal to any accrued and unpaid dividends from the date
of issuance of the Series C Shares in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the Company. Series C Shares which
remain outstanding on March 30, 1998 will be automatically converted into
shares of Seragen Common Stock. The Series C Shares were reflected at
$5,000,000 at September 30, 1996 representing their liquidation value.
Preferred stock dividend issuance costs related to the Series C Shares were
estimated at $33,000.
7. Restatement of September 30, 1996 Financial Statements
In March 1997, the Company restated its September 30, 1996 financial
statements to reflect the Series A, B and C Preferred Stock at their
liquidation value. Such restatement resulted in an increase in net loss
attributable to common stockholders of $9.6 million which includes an $8.6
million dividend representing the value ascribed to the warrants issued in
connection with the Series B Preferred Stock. (See Notes 4, 5 and 6). The
following table presents the net loss, the net loss applicable to common
stockholders, and net loss per share, as originally reported and restated.
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss................ $ (7,350,069) $ (7,350,069) $ (16,856,075) $ (16,856,075)
Net loss applicable to
common stockholders.... (8,012,216) (16,986,278) (17,544,889) (26,518,951)
Net loss per share...... $ (0.48) $ (1.02) $ (1.06) $ (1.60)
</TABLE>
-8-
<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 September 30, 1996 Financial Statements
In March 1997, the Company restated its September 30, 1996 financial
statements to reflect the Series A, B and C Preferred Stock at their
liquidation value. Such restatement resulted in an increase in net loss
attributable to common stockholders of $9.6 million which includes an $8.6
million dividend representing the value ascribed to the warrants issued in
connection with the Series B Preferred Stock. (See Notes 4, 5, 6 and 7).
Results of Operations
Three Months Ended September 30, 1996 and 1995. The Company's net loss
applicable to common stockholders for the three-month period ended September
30, 1996 was $17.0 million compared to $5.6 million for the three-month period
ended September 30, 1995. This increase of $11.4 million in 1996 was
primarily due to a total of $9.6 million in dividends associated with the
Series A, B and C Preferred Stock. Included in the $9.6 million of dividends
is (i) $8.6 million for the value ascribed to the warrants issued to the
Series B shareholders, (ii) $353,000 for dividend issuance costs for Series A,
B and C Preferred Stock and (iii) $689,000 for cash and common stock
dividends. In addition to the $9.6 million in preferred stock dividends in
1996, this increase was also due to the expensing of $3.0 million of prepaid
interest associated with the restructuring of the June 1995 loan guarantees.
This increase in interest and dividend expense was partially offset by an
increase in revenue and a decrease in total operating expenses.
The Company's revenues for the three months ended September 30, 1996 and
1995 were $1.6 million and $721,000, respectively. In the third quarter of
1996, revenue consisted of a one-time $1.4 million fee relating to the
exercise by a third party of an option to license certain patents in the
field of transplantation. The remaining $200,000 in revenue in 1996 is
associated primarily with contract revenue from Eli Lilly and Company
("Lilly") for certain development costs of IL-2 Fusion Protein for cancer
therapy as compared to $721,000 in 1995. The decrease in contract revenue in
1996 is a result of a restructuring of the terms of a third party clinical
trial management contract which is primarily funded by Lilly.
Total operating expenses decreased by $700,000 to $5.1 million in 1996
from $5.8 million in 1995. Expenses associated with the cost of contract
revenue and license fees were substantially unchanged for the three-month
period ended September 30, 1996 as compared to the same period in 1995.
However, there was a decrease of approximately $500,000 in the cost of
contract revenue from Lilly because of the change in terms of the third party
clinical trial management contract mentioned above.This decrease was offset by
-9-
<PAGE>
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a $500,000 increase related to a sub-license fee payable on the patent license
revenue mentioned above. Research and development expenses decreased by
$300,000 to $3.5 million in the third quarter of 1996 from $3.8 million for
the same period of 1995. This decrease was partially due to the decision by
the Company in 1996 to focus it's financial resources on IL-2 Fusion Protein
for cancer and psoriasis therapies thereby reducing clinical development
activity in other indications. An additional decrease was realized through a
reduction in non-reimbursable research grants and outside pre-clinical
testing. General and administrative expenses decreased by $300,000 to
$942,000 in the third quarter of 1996 as compared to $1.2 million in 1995.
This decrease is primarily due to a reduction in payroll expense.
In the third quarter of 1996, a non-cash charge of $210,000 was recorded
to reflect the potential obligation by the Company to the Canadian investors
in Seragen Biopharmaceuticals Ltd. ("SBL") in connection with certain put
rights. Interest income increased by $9,000 to $26,000 in the third quarter of
1996 from $17,000 in the third quarter of 1995 primarily due to higher average
balances of cash equivalents in 1996. Interest expense increased by $3.1
million to $3.7 million in the third quarter of 1996 from $591,000 in the
third quarter of 1995 primarily because of the expending of $3.0 million of
prepaid interest and $475,000 of debt issuance costs associated with the
repayment of the June 1995 loans. In the third quarter of 1996, preferred
stock dividends were $9.6 million associated with the Series A, B and C
Preferred Stock and primarily consisted of an $8.6 million value ascribed to
the warrants issued in connection with the issuance of the Series B Preferred
Stock.
Nine Months ended September 30, 1996 and 1995. The Company's net loss
applicable to common stockholders for the nine-month period ended September
30, 1996 was $26.5 million compared to $15.5 million for the nine-month period
ended September 30, 1995. This increase of $11.0 million in 1996 was
primarily due to $9.6 million in dividends associated with the Series A, B and
C Preferred Stock, as described above. In addition to the $9.6 million in
dividends, the Company expensed $3.0 million of prepaid interest associated
with the restructuring of the June 1995 guaranteed loans and a non-cash charge
of $1.9 million for the potential obligation by the Company to the investors
in SBL in connection with certain put rights. These increases in interest and
dividend expense were partially offset by a net increase in revenue of $2.9
million due to an amendment to the Sales and Distribution Agreement between
the Company and Lilly in the second quarter of 1996.
The Company's revenues for the nine-month period ended September 30, 1996
were $9.4 million compared to $2.1 million for the nine months ended September
30, 1995. The increase of $7.3 million in revenue in 1996 was the result of a
one-time $1.5 million fee relating to the exercise by a third party of an
option to license certain patents in the field of transplantation, the
recognition of $5.0 million of revenue in the second quarter of 1996 for which
cash had been previously paid by Lilly in August 1994 and an increase of
$700,000 primarily in contract revenue from Lilly associated with the Phase
III clinical trial for IL-2 Fusion Protein for cancer therapy.
Total operating expenses increased by $2.7 million to $19.2 million in
1996 from $16.5 million in 1995. Fees associated with the cost of contract
revenue and license fees increased by $1.2 million to $3.3 million in 1996
compared to $2.1 million for the same period in the prior year. This increase
is due to an increase of $700,000 for the acceleration of clinical development
activity under the Phase III clinical trial for IL-2 Fusion Protein for cancer
therapy and approximately an increase of $500,000 related to a sub-license fee
payable on the patent license revenue mentioned above. Research and
development expenses decreased by $300,000 to $10.4 million in 1996 from $10.7
million in 1995. This decrease was partially due to the decision by the
Company in 1996 to focus it's financial resources on IL-2 Fusion Protein for
cancer and psoriasis therapies thereby reducing clinical development activity
in other indications. An additional decrease was realized through a reduction
in non-reimbursable research grants and outside pre-clinical testing. General
and administrative expenses increased by $1.8 million to $5.5 million in 1996
from $3.7 million in 1995. The increase was primarily the result of a
non-cash charge of $2.1 million in the second quarter of 1996 for commission
expense associated with an amendment to the Sales and Distribution Agreement
between the Company and Lilly. This increase is partially offset by a
decrease in patent legal fees and payroll expense.
-10-
<PAGE>
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the nine months ended September 30, 1996, a non-cash charge of $1.9
million was recorded to reflect the potential obligation by the Company to the
Canadian investors in SBL in connection with certain put rights. Interest
income increased $13,000 to $67,000 in 1996 from $54,000 in 1995 due to higher
average balances of cash equivalents in 1996. Interest expense increased $4.2
million to $5.3 million in 1996 from $1.1 million in 1995 primarily because of
the expending of $3.0 million of prepaid interest and $475,000 of debt
issuance costs associated with the repayment of the June 1995 loans and due to
higher loan balances in the first and second quarters of 1996.
In 1996 preferred stock dividends were $9.6 million associated with the
Series A, B and C Preferred Stock and primarily consisted of the $8.6 million
value ascribed to the warrants issued in connection with the issuance of the
Series B Preferred Stock.
Restatement of September 30, 1996 Financial Statements
In March 1997, the Company restated its September 30, 1996 financial
statements to reflect the Series A, B and C Preferred Stock at their
liquidation value. Such restatement resulted in an increase in net loss
attributable to common stockholders of $9.6 million which includes an $8.6
million dividend representing the value ascribed to the warrants issued in
connection with the Series B Preferred Stock. (See Notes 4, 5, 6 and 7).
The following table presents the net loss, the net loss applicable to common
stockholders, and net loss per share, as originally reported and restated.
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss................ $ (7,350,069) $ (7,350,069) $ (16,856,075) $ (16,856,075)
Net loss applicable to
common stockholders.... (8,012,216) (16,986,278) (17,544,889) (26,518,951)
Net loss per share...... $ (0.48) $ (1.02) $ (1.06) $ (1.60)
</TABLE>
Liquidity and Capital Resources
As of September 30, 1996, the Company had approximately $6.3 million in
cash and cash equivalents and $14.0 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.
-11-
<PAGE>
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company anticipates that existing cash, cash equivalents, and the
interest thereon, and reimbursement for clinical costs for the development of
IL-2 Fusion Protein for cancer therapy will be sufficient to fund the
Company's working capital requirements through approximately December 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 December 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
arrangementsmwith collaborative partners or others will be available to the
Company, or, ifmavailable, 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 or risk. For further
information, refer to the risk factors included in the Company's Registration
Statement on Form S-3, Registration No. 333-12613, 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.
-12-
<PAGE>
SERAGEN, INC.
PART II
OTHER INFORMATION
Item 6. Exhibits, financial statements schedules and reports on Form 8-K
(a) Exhibit Index
Exhibit 3.4 Restated By-Laws of the Registrant, as amended
(previously filed)
Exhibit 10.64 Employment Agreement, dated November 6, 1996, by and
between the Registrant and Mr. Reed Prior (previously filed)
Exhibit 10.65 Employment Agreement, dated November 6, 1996, by and
between the Registrant and Jean C. Nichols, Ph.D., (previously
filed)
Exhibit 10.66 Stockholders Agreement, dated November 6, 1996, by
and between the Registrant and Boston University, Leon C. Hirsch,
Turi Josefsen, Gerald S.J. Cassidy, LorettaP. Cassidy and Reed R.
Prior (previously filed)
Exhibit 10.67 Retirement and Consulting Agreement, dated
November 6, 1996, by and between the Registrant and Mr. George W.
Masters (previously filed)
Exhibit 27 Financial Data Schedule (Edgar) (filed herewith)
-13-
<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: April 8, 1997 by: /s/ Reed R. Prior
----------------------------------
Reed R. Prior
Chairman of the Board
and Chief Executive Officer
Date: April 8, 1997 by: /s/ Jean C. Nichols
-----------------------------------
Jean C. Nichols, Ph.D.
President and
Chief Technology Officer
(Principal Financial and Accounting Officer)
-14-
<PAGE>
SERAGEN, INC.
EXHIBIT INDEX
Exhibit
Number Description Page
_______ ___________ ____
(3.4) Restated By-Laws of the Registrant, as amended
(previously filed)
(10.64) Employment Agreement, dated November 6, 1996, by
and between the Registrant and Reed Prior
(previously filed)
(10.65) Employment Agreement, dated November 6, 1996, by
and between the Registrant and Jean C. Nichols,Ph.D.,
(previously filed)
(10.66) Stockholders Agreement, dated November 6, 1996,
by and between the Registrant and Boston
University, Leon Hirsch, Turi Josefsen,
Gerald S.J. Cassidy, Loretta P. Cassidy and
Reed R.Prior (previously filed)
(10.67) Retirement and Consulting Agreement, dated
November 6, 1996, by and between the Registrant
and Mr. George W. Masters (previously filed)
(27) Financial Data Schedule (Edgar) (filed herewith) 16
-15-
<PAGE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,756,878
<SECURITIES> 0
<RECEIVABLES> 1,000,427
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,964,518
<PP&E> 4,860,076
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,652,810
<CURRENT-LIABILITIES> 6,888,259
<BONDS> 0
<COMMON> 168,235
0
32,463,432
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,652,810
<SALES> 0
<TOTAL-REVENUES> 9,360,075
<CGS> 0
<TOTAL-COSTS> 19,152,134
<OTHER-EXPENSES> 1,852,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,278,522
<INCOME-PRETAX> (26,518,951)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,518,951)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> 0
</TABLE>
