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 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 (As Restated) . . 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. . . . . . 9
PART II - OTHER INFORMATION
___________________________
Item 1 - Legal Proceedings (None)
Item 2 - Submission of Matters to a Vote of Security Holders (None)
Item 3 - Other Information (None)
Item 6 - Exhibits . . . . . . . . . . . .. . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE> 2 <PAGE>
<TABLE>
SERAGEN, INC.
BALANCE SHEETS
<CAPTION>
Assets December 31, March 31, 1997
1996 (Unaudited)
______________ ______________
(As Restated) (As Restated)
<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
Deferred Commission. . . . . . . . . . . . . . . . . . . . . . 2,060,000 2,060,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 77,183 39,211
____________ ______________
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 10,504,608 10,682,921
============ ==============
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:
Deferred Revenue. . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,000,000
Canadian affiliate put option liability . . . . . . . . . . . 2,400,000 2,400,000
___________ ____________
Total non-current liabilities . . . . . . . . . . . . . . 7,400,000 7,400,000
___________ ____________
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 . . . . . . . . . . . . . . . . . . . . (188,994,811) (193,550,229)
_____________ ____________
(6,584,273) (11,123,824)
Less-treasury stock (777 shares at cost at December 31, 1996
and March 31, 1997, respectively). . . . . . . . . . . . . . (2,331) (2,331)
____________ ____________
Total stockholders' (deficit) . . . . . . . . . . . . . (6,586,604) (11,126,155)
____________ ___________
Total liabilities and stockholders' (deficit) . . . . . $ 10,504,608 $ 10,682,921
============= ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 3
<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>
<PAGE> 4
<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>
<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 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.
In September 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. (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 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 Agreement and Development Agreement with Eli
Lilly and Company ("Lilly") pursuant to which Lilly had originally obtained
the development and marketing rights to the Company's lead molecule DAB389IL-2
<PAGE> 6
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
("IL-2 Fusion Protein") for all cancer and certain non-cancer indications.
Under the terms of the Amendment, subject to certain limitations, Lilly
relinquished all other development and marketing rights to IL-2 Fusion Protein
for non-cancer indications, as well as rights to other molecules. In
addition, Lilly agreed to pay to Ajinomoto Company, Inc. ("Ajinomoto") on
behalf of the Company $4.3 million: Lilly paid $2.15 million to Ajinomoto for
a license granted by Ajinomoto directly to Lilly; and Lilly has agreed to pay,
subject to certain conditions, up to $2.15 million of the Company's $2.25
obligation to Ajinomoto under the Company's restructed agreement with
Ajinomoto. Pursuant to the Amendment, Lilly is permitted to
credit $1.5 million of the amount paid by Lilly to Ajinomoto on behalf of the
Company against the next $1.5 million milestone payment that falls due from
Lilly to the Company under the Sales and Distribution Agreement between the
Company and Lilly on the submission by the Company of a U.S. Biologics License
Application ("BLA") for cutaneous T-cell lymphoma ("CTCL") to the Food and
Drug Administration ("FDA"). Lilly is not obligated to make any further
payments in respect of the Company's obligations to Ajinomoto if Lilly
terminates the Sales and Distribution Agreement between it and the Company as
a result of a failure by the Company to meet specified clinical, regulatory
and financial milestones and other requirements. Among the relevant
milestones and requirements referenced in the preceding sentence are the
Company's obtaining commitments for $5.0 million of new investment capital by
July 1, 1997, and closing on the same by August 1, 1997, and the Company
obtaining $15.0 million of new investment capital by October 1, 1997. On
July 31, 1997, the Company reported that it had obtained $5.0 million through
an agreement with U.S. Surgical Corporation.
In exchange, the Company issued to Lilly in a private placement 1.0
million shares of its common stock. The shares of common stock issued to
Lilly are valued at the closing price of the Company's Common Stock as
reported on Nasdaq on the date of issuance of the shares to Lilly, less a
discount of 20% to reflect a discount from the Nasdaq closing price because
the shares are not registered under the Securities Act of 1933. The Company
has valued the 1.0 million shares of common stock issued to Lilly at $800,000
based on the April 7, 1997 Nasdaq closing price of $1.00, less 20%, and will
record it as research and development expense in the quarter ended June 30,
1997.
5. Sale of Manufacturing and Clinical Operations to Boston University
On February 14, 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 $5.0 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 the
purchase price and operating cost deposits to fund its current operations,
although as of March 31, 1997, such deposit was recorded as a liability.
Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into a service agreement ("the Service Agreement") with Boston
<PAGE> 7
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
At the closing, most of the Company's employees involved in the
manufacturing and clinical operations will become employees of Boston
University. Both the purchase price and operating cost deposits are subject
to refund to Boston University in the event that conditions for closing are
not met. Upon the closing of this transaction, the Company will account for
the gain and the sale of the operating facility and the excess of the
reimbursed operating costs over the amount due to Boston University, pursuant
to the Service Agreement dated as of February 14, 1997 for the period from
February 14, 1997, until the closing of the transaction, as a contribution of
capital. As of March 31, 1997, the net amount due from Boston University to
the Company in respect of the operating facility's operating expenses for the
period from February 14, 1997 to March 31, 1997, was approximately $779,678.
6. Restatement of 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,
and (3) reversing a $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). As a result of the restatement discussed above, the
accumulated deficit increased by $1,740,000, deferred commissions increased by
$2,060,000, deferred revenue increased by $5.0 million and the Lilly contract
obligation decreased by $1.2 million.
<PAGE> 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.
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.
Restatement of 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,
and (3) reversing a $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). As a result of the restatement discussed above, the
accumulated deficit increased by $1,740,000, deferred commissions increased by
$2,060,000, deferred revenue increased by $5.0 million and the Lilly contract
obligation decreased by $1.2 million.(See Note 6)
<PAGE> 9
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
$1.4 million in 1996, a decrease of $518,000, 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
<PAGE> 10
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the lines of credit which occurred in July 1996.
Restatement of 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,
and (3) reversing a $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). As a result of the restatement discussed above, the
accumulated deficit increased by $1,740,000, deferred commissions increased by
$2,060,000, deferred revenue increased by $5.0 million and the Lilly contract
obligation decreased by $1.2 million.(See Note 6).
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.
The Company began assembling the components of its operating division (the
"Operating Division") over five years ago. The Company developed the
Operating Division with excess capacity in order to meet anticipated
commercial demand for the Company's products. In addition, the Company
maintained a relatively high level of staffing in the Operating Division in
order to comply with regulatory requirements. Historically, the Company has
not utilized its Operating Division to full capacity principally because the
Company has not yet begun manufacturing product for commercial purposes and
due to the limited financial resources that the Company has available to
develop other products. The Company maintained the Operating Division,
despite its high costs, because of the delays and disruptions in its clinical
trial efforts that would have resulted from discontinuing the Operating
Division and obtaining the services from third parties. The Company
did not provide services to third parties using the services of the Operating
Division due to regulatory guidelines that prevented it from doing so. In
recent years, the FDA has relaxed these guidelines. However, the Company
chose not to contract out excess capacity because this would not have led to
a substantial and rapid reduction in expenditures and because of the potential
resulting distraction to key management.
<PAGE> 11
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of February 14, 1997, the Company entered into the Asset Purchase
Agreement to sell its manufacturing and clinical operations facilities to
Boston University or a designated affiliate for $5.0 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 the purchase price and
operating costs deposits to fund its current operations although, as of March
31, 1997, such deposit was recorded as a liability. The net book value of the
assets to be sold to Boston University was $4.4 million as of March 31,
1997. These assets represent substantially all of the Company's property and
equipment and consist primarily of leasehold improvements to the Company's
manufacturing facility, laboratory facilities and laboratory equipment.
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
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.
At the closing, most of the Company's employees involved in the
manufacturing and clinical operations will become employees of Boston
University. Both the purchase price and the operating costs deposits are
subject to refund to Boston University in the event that conditions for
closing are not met. Upon the closing of this transaction, the Company will
account for the gain and the sale of the operating facility and the excess of
the reimbursed operating costs over the amount due to Boston University,
pursuant to the Service Agreement dated as of February 14, 1997 for the
period from February 14, 1997, until the closing of the transaction, as a
contribution of capital. As of March 31, 1997, the net amount due from Boston
University from the Company in respect of the operating facility's operating
expenses for the period from February 14, 1997 to March 31, 1997 was
approximately $779,678.
The Company expects that the transactions with Boston University
discussed above will effectively out-source the Company's research and
development activities, and reduce the Company's cash needs, both for capital
expenditures and operating expenses. The Company is subject to certain
additional risks and expenditures, including termination of its contract
service agreement if the Company does not reimburse Boston University for the
losses in excess of $9.0 million in a contract year, provided that, after
notice, the Company does not pay Boston University the difference between its
actual losses for that year and $9.0 million. If the Company is unable to or
chooses not to make the additional payments, it will be forced to change to a
new service provider. This could adversely affect the Company's research and
<PAGE> 12
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
development efforts.
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.
At December 31, 1996, the Company's net tangible assets (total assets
minus liabilities and goodwill) was approximately ($6.6 million as restated).
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
<PAGE> 13
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
<PAGE> 14
<PAGE>
SERAGEN, INC.
PART II
OTHER INFORMATION
Item 4. Exhibits
(a) Exhibit Index
Exhibit 27 - Restated Financial Data Schedule
<PAGE> 15<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> 16
SERAGEN, INC.
EXHIBIT INDEX
Exhibit
Number Description Page
______________________________________________________________________________
(27) Restated Financial Data Schedule 18
<PAGE> 17
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