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, 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
___ ___
20,205,565 shares of Common Stock, par value $.01, were outstanding on
August 11, 1997.
SERAGEN, INC.
INDEX
Page
____
PART I - FINANCIAL INFORMATION
______________________________
Item 1 - Financial Statements
Balance Sheets
December 31, 1996 and June 30,1997 (As restated) . . . . 3
Statements of Operations
Three and Six Months Ended June 30, 1996 (As restated) and 1997 4
Statements of Cash Flows
Six Months Ended June 30, 1996 (As restated) and 1997 . . . . . .5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 12
PART II - OTHER INFORMATION
___________________________
Item 1 - Legal Proceedings (None)
Item 4 - Submission of Matters to a Vote of Security Holders (None)
Item 5 - Other Information (None)
Item 6 - Exhibits . . . . . .. . . . . . . . . . . . . . . . . . . . 21
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE> 2
<PAGE>
<TABLE>
SERAGEN, INC.
BALANCE SHEETS
<CAPTION>
Assets December 31, June 30, 1997
1996 (Unaudited)
____________ _____________
(As Restated) (As Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,548,392 $ 2,078,750
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 610,318 610,318
Contract receivable . . . . . . . . . . . . . . . . . . . . . . . 485,261 512,126
Unbilled contract receivable. . . . . . . . . . . . . . . . . . . 833,983 773,866
Prepaid expenses and other current assets . . . . . . . . . . . . 285,356 97,613
____________ _________
Total current assets . . . . . . . . . . . . . 3,763,310 4,072,673
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . 4,604,115 4,163,141
Deferred Commission. . . . . . . . . . . . . . . . . . . . . . . . . 2,060,000 2,060,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,183 38,239
_________ _________
Total assets . . . . . . . . . . . . . . . . . $ 10,504,608 $ 10,334,053
============ ===========
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 1,111,477 927,444
Current maturities of long-term debt. . . . . . . . . . . . . . 37,418 -
Deposits received from Boston University . . . . . . . . . . . . - 7,899,739
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 3,177,467 4,034,040
Preferred stock redemption liability . . . . . . . . . . . . . 1,236,753 1,122,619
Short-term obligation.. . . . . . . . . . . . . . . . . . . . . 4,128,097 800,000
_________ _________
Total current liabilities. . . . . . . . . . . 9,691,212 14,783,842
________ _________
Non-current liabilities:
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,000,000
Long-term obligation. . . . . . . . . . . . . . . . . . . . . . - 1,450,000
Canadian affiliate put option liability . . . . . . . . . . . . 2,400,000 2,400,000
_________ ________
Total non-current liabilities. . . . . . . . . 7,400,000 8,850,000
________ ________
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 3,105 and 1,500 shares atDecember 31,1996 and
June 30,1997, respectively, at liquidation preference . . . . . . . 2,015,522 508,059
Convertible preferred stock, Series B,$.01 par value; issued and
outstanding 23,800 and 23,800 at December 31, 1996, and June
30,1997, respectively, at liquidation preference . . . . . . . . . . 23,800,000 23,800,000
Convertible preferred stock, Series C,$.01 par value; issued and
outstanding 5,000 and 5,000 at December 31,1996, and June
30,respectively, at liquidation preference . . . . . . . . . . . . . 5,100,000 5,300,000
Common stock, $.01 par value;70,000,000 shares authorized;
issued 17,199,458 and 20,034,050 shares at December
31,1996 and June 30, 1997, respectively . . . . . . . . . . . . . 171,994 200,340
Additional paid in capital. . . . . . . . . . . . . . . . . . . . 151,323,022 154,154,807
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (188,994,811) (197,260,664)
___________ ___________
(6,584,273) (13,297,458)
Less-treasury stock (777 shares at cost at December 31,1996 and
June 30, 1997, respectively) . . . . . . . . . . . . . . . . . . (2,331) (2,331)
___________ ____________
Total stockholders' (deficit) . . . . . . . . (6,586,604) (13,299,789)
Total liabilities and stockholders' (deficit). 10,504,608 10,334,053
============= =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
--
<PAGE> 3
<TABLE>
SERAGEN, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
____________________ ____________________
1996 1997 1996 1997
______________________ _____________________
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenue:
Contract revenue and license fees. . . . . . $ 1,247,250 $ 1,247,822 $ 2,746,242 2,159,447
_________ _________ _________ _________
Operating expenses:
Cost of contract revenue. . . . . . . . . . 1,194,253 1,247,822 2,593,245 2,129,856
Research and development. . . . . . . . . . 3,302,357 3,285,185 6,875,331 5,800,166
General and administrati. . . . . . . . . . 1,149,037 1,408,916 2,510,393 2,600,579
____________ ___________ ___________ ___________
5,645,647 5,941,923 11,978,969 10,530,601
_________ _________ __________ __________
Loss from operations . . . . . . (4,398,397) (4,694,101) (9,232,727) (8,371,154)
Loss incurred in connection with Canadian
affiliate . . . . . . . . . . . . . . . . . (471,561) - (1,641,969) -
Interest income. . . . . . . . . . . . . . . 25,454 14,761 41,109 29,464
Interest expense . . . . . . . . . . . . . (818,444) - (1,612,419) (172,366)
_______ _________ _________ _________
Net loss before extraordinary item. . (5,662,948) (4,679,340) (12,446,006) (8,514,056)
_________ _________ __________ _________
Etraordinary income. . . . . . . . . . . . - 2,050,000 - 2,050,000
_________ _________ _________ _________
Net loss. . . . . . . . . . . (5,662,948) (2,629,340) (12,446,006) (6,464,056)
_________ _________ _________ _________
Preferred stock dividends and accretion. . . 26,667 1,081,094 26,667 1,801,797
Net loss applicable to common
stockholders . . . . . . . . . . . . . . . . . . $ (5,689,615) $ (3,710,434) $ (12,472,673) $ (8,265,853)
============= ============ ============ ==============
Net loss per common share.. . . . . . . . . $ (0.34) $ (0.19) $ (0.75) $ (0.44)
============= ============ =========== ============
Weighted average common shares used in
computing net loss per share. . .. . . . . . . 16,607,713 19,823,618 16,582,940 18,885,360
============= ============ ============ =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 4<PAGE>
<TABLE> SERAGEN, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the six months
ended June 30,
___________________
1996 1997
___________ ___________
(As Reststed)
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,446,006) (6,464,056)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 463,651 464,293
Loss incurred in connection with Canadian affiliate . . . . . . . . 1,641,969 -
Gain/loss on disposal of property and equipment. . . . . . . . . . - 2,491
Amortization of discount on long-term debt . . . . . . . . . . . . 343,807 171,903
Extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . - (2,050,000)
Amortization of prepaid interest . . . . . . . . . . . . . . . . . 520,625 -
Amortization of debt issuance costs. . . . . . . . . . . . . . . . 83,045 -
Non-cash charge for issuance of common shares. . . . . . . . . . . - 800,000
Changes in operating assets and liabilities:
Contract receivable. . . . . . . . . . . . . . . . . . . . . . . . (224,159) (26,865)
Unbilled contract receivable . . . . . . . . . . . . . . . . . . . (275,487) 60,117
Prepaid expenses and other current assets . . . . . . . . . . . . . (32,791) 187,744
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (129,993) (184,032)
Accrued commission payable . . . . . . . . . . . . . . . . . . . . (300,000) -
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 126,170 (306,768)
Net cash (used in) provided by operating activities . . . . . . . . (10,229,169) (7,345,173)
__________ _________
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (296,489) (25,809)
Decrease in other assets. . . . . . . . . . . . . . . . . . . . . . 944 38,944
________ ________
Net cash (used in) provided by investing activities . . . . . . . . . (295,545) 13,135
___________ ________
Cash flows from financing activities:
Net proceeds from common stock issuances. . . . . . . . . . . . . . . 3,929,642 75
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . (76,875) -
Proceeds from issuance of long-term debt. . . . . . . . . . . . . . . 11,300,000 -
Repayments of long-term debt. . . . . . . . . . . . . . . . . . . . . (110,105) (37,418)
Debt and preferred stock issuance costs . . . . . . . . . . . . . . . (64,156) -
Deposits received from Boston University . . . . . . . . . . . . . . - 7,899,739
__________ __________
Net cash (used in) provided by financing activities . . . . . . . . . 14,978,506 7,862,396
__________ _________
Net increase (decrease) in cash and cash equivalents . . . . . . . . 4,453,792 530,358
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 435,460 1,548,392
__________ ________
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 4,889,252 $ 2,078,750
============ =============
Supplemental disclosures of cash flows information:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . $ 367,495 $ 463
============ =============
Supplemental non cash activities:
Conversion of series A preferred stock to common stock . . . . . . . . $ - $ 2,060,056
Preferred stock diidends. . . . . . . . . . . . . . . . . . . . . . . . $ - $ 638,458
Issuance of Common Stock to Lilly . . . . . . . . . . . . . . . . . . . $ - $ 800,000
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 5
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 8)
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 statement 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
("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
<PAGE> 6
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 (See Note 5). 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 and Development 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, and the Company closing the sale of the Operating Division to
Boston University by October 31, 1997.
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. In the
quarter ended June 30, 1997, 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 has recorded it as research and
development expense.
The Company did not obtain $15.0 million of new investment capital by
October 1, 1997, and did not close the sale of the Operating Division by
October 31, 1997. As a result, Lilly has the right currently, with 30 days'
notice, to terminate its agreements with the Company. The Company has
received no indication from Lilly that Lilly intends to exercise that right.
If Lilly were to terminate its agreements with the Company, the Company would
be obligated to pay the $2.15 million payment to Ajinomoto that Lilly has agreed
to make on the Company's behalf and Lilly's obligations under the agreements to
provide financial support to the Company's clinical trial efforts would cease.
5. Amendment to Ajinomoto License Agreement
On June 1, 1997, the Company restructured (the "Restructuring") its
License Agreement with Ajinomoto pursuant to which Ajinomoto had granted the
Company worldwide rights to certain (IL-2) gene patents owned by the Japanese
Foundation for Cancer Research and Ajinomoto for potential use in the
development of the Company's lead product, IL-2 Fusion Protein. Prior to the
Restructuring, the Company was obligated to pay Ajinomoto a license fee of
$4.3 million payable upon the occurrence of certain specified events, but no
later than March 31, 1997 (previously extended by agreement of Ajinomoto to
May 31, 1997); and royalties ranging from 2% to 4% on sales of the licensed
product by the Company or its sublicensees, but with minimum royalties of
$100,000 for the third year of the agreement, $200,000 for the fourth year of
the agreement, and $300,000 for the fifth and following years of the
agreement. In addition, prior to the Restructuring, the rights granted by
Ajinomoto to the Company pursuant to the License Agreement were exclusive.
Under the terms of the Restructuring, the future license fees payable by the
Company to Ajinomoto were reduced to the following amounts: a $2.25 million
fee payable in the amount of $800,000 by June 30, 1998, or approval by the FDA
of a BLA filed by the Company for the licensed product, whichever comes first,
in the amount of $800,000 by June 30, 1999, and in the amount of $650,000 by
<PAGE> 7
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000; and a reduced royalty of 1% on end-user net sales of the
licensed product by the Company or its sublicenses. The Company amended its
agreements with Lilly whereby Lilly will pay license fees to Ajinomoto on
behalf of the Company, subject to certain limitations (See Note 4). The
Restructuring provides that the license granted by Ajinomoto to the Company
will be non-exclusive. Accordingly, in the quarter ended June 30, 1997, the
Company reduced its obligation to Ajinomoto from $4.3 million to $2.25 million
and recorded extraordinary income of $2,050,000 for the reduction of this
liability.
6. 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 June 30, 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
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 June 30, 1997, the net amount due to Boston University from
the Company in respect of the operating facility's operating expenses for the
period from February 14, 1997 to June 30, 1997, was approximately $1,215,160.
<PAGE> 8
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. Subsequent Event
On July 31, 1997, the Company entered into an evaluation license and
option agreement (the "USSC License Agreement") with United States Surgical
Corporation ("USSC") granting USSC an option on worldwide rights to the
Company's DAB389EGF molecule (the "EGF Fusion Protein") for restenosis in
cardiovascular applications. Leon C. Hirsch is the Chairman of USSC and
beneficially owns 7.8% of the common stock of USSC. Turi Josefsen is a
director of USSC and benefically owns 1.8% of the common stock of USSC. John
R. Silber is a director of USSC and benefically owns .02% of the common stock
of USSC. Pursuant to the USSC License Agreement, USSC made an initial payment
to the Company of $5.0 million on July 31, 1997. Under the USSC License
Agreement, USSC is entitled to acquire an exclusive license to the EGF Fusion
Protein technology, at any time during a 15-month evaluation period, upon the
payment to the Company of an additional $5.0 million. In addition, the
Company issued to USSC a warrant for the purchase of 500,000 shares of the
Company's Common Stock at a purchase price of $.5625 per share, the closing
sale price for shares of the Company's Common Stock on the date prior to the
date the warrant was issued. The Company will value this warrant and record
it as a charge to general and administrative expense in the quarter ending
September 30, 1997. USSC has agreed to fund trials associated with the
development of EGF Fusion Protein for restenosis. If USSC's option to
obtain any exclusive license of the EGF Fusion Protein technology is
exercised, milestone payments will be payable by USSC to the Company up to a
maximum amount of $22.5 million. In addition, USSC will be obligated to pay
the Company royalties on commercial sales of the licensed product. In the
event USSC chooses not to exercise the option, the USSC License Agreement will
terminate, and, in exchange, USSC will receive $5.0 million worth of the
Company's Common Stock valued at the average of the closing prices of the
Company's Common Stock (i) for the ten trading days preceding the date of the
USSC License Agreement or (ii) for the ten trading days preceding the date on
which USSC chooses not to exercise the option, whichever is lower. The
Company will record the $5.0 million initial payment from USSC as a liability.
In the event that USSC exercises its option to license the EGF Fusion Protein,
the $5.0 million will be recorded as revenue at that time. In the event that
USSC chooses not to exercise the option, the $5.0 million will be recorded as
stockholders' equity.
8. 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). 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
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
9. Unaudited Pro Forma Information
The following unaudited pro forma financial information reflects the
Company's balance sheet as of June 30, 1997 (As restated), assuming the
transaction with Boston University described in Note 6 was consummated on
February 14, 1997. If the transaction had been consummated on February 14,
1997, the Company's operating loss for the six months ended June 30, 1997,
would have been reduced by approximately $2,184,579. (See Footnote (d) to the
pro forma Balance Sheet.) The unaudited pro forma Balance Sheet does not
purport to be indicative of the results which would actually have been reported
if the transactions had been effected on February 14, 1997, or which may be
reported in the future.
<TABLE> SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
<CAPTION>
Assets June 30, 1997 Adjustments Pro Forma
(As restated)
__________ ___________ _________
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . $ 2,078,750 $ (715,160) a) $ 1,363,590
Restricted cash . . . . . . . . . . . . . . . . . . . . . . 610,318 - 610,318
Contract receivable . . . . . . . . . . . . . . . . . . . 512,126 - 512,126
Unbilled contract receivable. . . . . . . . . . . . . . . . 773,866 - 773,866
Prepaid expenses and other current assets . . . . . . . . . 97,613 - 97,613
__________ ___________ _________
Total current assets . . . . . . . 4,072,673 (715,160) 3,357,513
Property and equipment, net. . . . . . . . . . . . . . . . . . . 4,163,141 (4,148,843) (b) 14,298
Deferred Commission. . . . . . . . . . . . . . . . . . . . . . . 2,060,000 2,060,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 38,239 - 38,239
Total assets . . . . . . . . . . . $ 10,334,053 $ (4,864,003) $ 5,470,050
========== =========== ==========
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 927,444 - 927,444
Deposit received from Boston University . . . . . . . . . . 7,899,739 (7,899,739) (c) -
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . 4,034,040 - 4,034,040
Preferred stock redemption liability. . . . . . . . . . . . 1,122,619 - 1,122,619
Short-term obligation . . . . . . . . . . . . . . . . . . . 800,000 - 800,000
_________ _________ _________
Total current liabilities. . . . . 14,783,842 (7,899,739) 6,884,103
__________ _________ _________
Non-current liabilities:
Deferred Revenue . . . . . . . . . . . . . . . . . . . . . 5,000,000 - 5,000,000
Long-term obligation. . . . . . . . . . . . . . . . . . . . 1,450,000 - 1,450,000
Canadian affiliate put option liability . . . . . . . . . . 2,400,000 - 2,400,000
_________ __________ _________
Total non-current liabilities. . . 8,850,000 - 8,850,000
_________ __________ _________
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 1,500 shares at June 30, 1997, $151,406
liquidation preference. . . . . . . . . . . . 508,059 - 508,059
Convertible preferred stock, Series B, $.01 par value; issued
and outstanding 23,800 shares at June 30, 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 June 30, 1997, $5,300,000
liquidation preference . . . . . . . . . . . . . . . . 5,300,000 - 5,300,000
Common stock, $.01 par value; 70,000,000 shares authorized;
issued 20,034,050 shares at June 30, 1997 . . . . . . . . . . 200,340 - 200,340
Additional paid in capital . . . . . . . . . . . . . . . . . . 154,154,807 (3,035,736) (d) 157,190,543
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (197,260,664) - (197,260,664)
___________ _________ ___________
(13,297,458) 3,035,736 (10,261,722)
Less-treasury stock (777 shares at cost at June 30, 1997). . . ( 2,331) - (2,331)
__________ _________ __________
Total stockholders' (deficit) . . (13,299,789) 3,035,736 (10,264,053)
__________ _________ __________
Total liabilities and stockholders' (deficit). $ 10,334,053 $ (4,864,003) $ 5,470,050
============ ============ =============
</TABLE>
<PAGE> 10
SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
The following pro forma adjustments are required to reflect the sale of the
majority of the Company's property and equipment, the assignment of certain
capital and operating leases to Boston University and the Company's Service
Agreement with Boston University as discussed in Note 6. The net book value
and estimated disposition costs are based on the estimated fair value, as
determined by the management of the Company. Such allocation will be revised
to reflect changes in assets through the date of closing and the determination
of actual disposition costs.
Notes to pro forma Balance Sheet
(a) Reflects (i) $500,000 due to the Company from Boston
University for the remaining purchase price and
(ii) the net amount due to Boston University of $1,215,160. $715,160
(b) Reflects a reduction in property and equipment for the net
book value of assets sold. $4,148,843
(c) Reflects the Boston University deposits of $4.5 million for
the purchase price and the $3,399,739 for the operating costs
as non-refundable payments upon closing. $7,899,739
(d) Reflects (i) the excess of the purchase price over the net
book value of the assets sold of $851,157 and (ii) the
difference between the amount reimbursable from Boston
University and the amounts due to Boston University under
the Service Agreement of $2,184,579. $3,035,736
<PAGE> 11
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION 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 $5.0 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 Agreement 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."
On June 1, 1997, the Company entered into the Amendment to its License
Agreement with Ajinomoto pursuant to which Ajinomoto granted the Company
worldwide rights to certain IL-2 gene patents owned by the Japanese
Foundation for Cancer Research and Ajinomoto for potential use in the
development of the Company's lead product, IL-2 Fusion Protein. The terms of
this transaction are discussed more fully below under "Liquidity and Capital
Resources."
On July 31, 1997, the Company entered into an evaluation license and
option agreement with USSC granting USSC an option on worldwide rights to
the Company's EGF Fusion Protein for restenosis in cardiovascular
applications. USSC has acquired the option in exchange for an initial
payment to the Company of $5.0 million. The terms of this transaction are
discussed more fully below under "Liquidity and Capital Resources."
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). (See Note 8)
<PAGE> 12
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1997 and 1996. The Company's net loss for the
three-month period ended June 30, 1997 was $3.7 million compared to $5.7
million for the period ended June 30, 1996. The decrease in the net loss
during the second three months of 1997 was primarily due to an increase of
$1.1 million in preferred stock dividends in 1997. These increases to the
net loss were partially offset by a decrease in 1997 in operating expenses
of $1.4 million, a reduction in the loss incurred in connection with the
Company's Canadian affiliate of $472,000 in 1997, a decrease of $818,000 in
1997 of interest expense and an extraordinary gain of $2.1 million
reflecting the restructuring of the Ajinomoto agreement in June 1997.
The Company's revenues for the three months ended June 30, 1997 and 1996
was substantially unchanged and consisted primarily of contract revenue from
Lilly for certain development costs of IL-2 Fusion Protein for CTCL.
Total operating expenses for the three months ended June 30, 1997 increased
by $0.3 million to $5.9 million in 1997 from $5.6 million in 1996. The cost
of contract revenue was substantially unchanged for the three-month period
ended June 30, 1997 as compared to the same period in 1996. Research and
development expenses remained constant at $3.3 million in the three months
ended June 30, 1997 in comparison to the three months ended June 30, 1996,
however, there was an $800,000 increase in 1997 associated with the issuance
of 1.0 million shares of Common Stock to Lilly in 1997 valued at $800,000
offset as a result of a reduction in the workforce and related expenses.
General and administrative expenses increased by $0.3 million to $1.4
million in the second three months of 1997 as compared to $1.1 million in
the second three months of 1996. This increase was primarily due to an
increase in legal fees.
The loss incurred in connection with the Company's Canadian affiliate
decreased by $472,000 in the three months ended June 30, 1997 as compared to
the three months ended June 30, 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 decreased in the second
quarter of 1997 as compared to the second quarter of 1996 reflecting lower
cash balances. Interest expense decreased by $818,000 in the second quarter
of 1997 as compared to the second quarter of 1996 due to the elimination of
the lines of credit in exchange for Series B Preferred Stock which occurred
in July 1996. The extraordinary income of $2.1 million in 1997 reflects the
gain recorded in connection with the reduction in the amount payable to
Ajinomoto as a result of the restructuring of the Ajinomoto license
agreement.
Preferred stock dividends and accretion increased by $1.1 million in the
three months ended June 30, 1997 as compared to the three months ended June
30, 1996. This increase in 1997 is due to the accrual of dividends on the
issuances of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock in May 1996, July 1996 and September 1996, respectively. In
addition, in the three months ended June 30, 1997, the Company recorded
$356,653 representing the conversion discount on the Series A Preferred Stock
conversions.
Six Months Ended June 30, 1997 and 1996. The Company's net loss for the
six-month period ended June 30, 1997 was $8.3 million compared to $12.5
million for the period ended June 30, 1996. The decrease in the net loss
during the six months ended June 30, 1997 was primarily due to a reduction in
operating expenses of $1.5 million, a reduction in the loss incurred in
connection with the Company's Canadian affiliate of $1.6 million, a decrease
of $1.4 million in interest expense and an extraordinary gain of $2.1 million
<PAGE> 13
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
reflecting the restructuring of the Ajinomoto license agreement. These
decreases were partially offset by $0.6 million reduction in revenue and
an increase in preferred stock dividends of $1.8 million.
The Company's revenues for the six months ended June 30, 1997 and 1996 were
$2.2 million and $2.7 million, respectively. Contract revenue from Lilly
decreased in the six months ended June 30, 1997 by $500,000 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 six months ended June 30, 1997 decreased by
$1.5 million to $10.5 million in 1997 from $12.0 million in 1996. The cost
of contract revenue was $2.1 million in the six months ended June 30, 1997
as compared to $2.6 million in the six months ended June 30, 1996, a
decrease of $500,000, 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 $5.8 million
in the six months ended June 30, 1997 from $6.9 million for the six months
ended June 30, 1996. This decrease was primarily the result of a reduction
in the workforce and related expenses of approximately $1.9 million. This
decrease was partially offset by an $800,000 charge associated with the
issuance of 1.0 million shares of common stock to Lilly in 1997 in
conjunction with the Amendment. General and administrative expenses
decreased by $0.1 million to $2.6 million in the six months ended June 30,
1997 as compared to $2.5 million in the six months ended June 30, 1996.
The loss incurred in connection with the Company's Canadian affiliate
decreased by $1.6 million in the six months ended June 30, 1997 as compared
to the six months ended June 30, 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 six months ended June 30, 1997 as compared to the six months ended June
30, 1996. Interest expense decreased by $1.4 million to $172,000 in the six
months ended June 30, 1997 from $1.6 million in the six months ended June 30,
1996 due to the elimination of the lines of credit in exchange for Series B
Preferred Stock which occurred in July 1996. The extraordinary gain of $2.1
million in 1997 reflects the gain recorded in connection with the reduction in
the amount payable to Ajinomoto as a result of the restructuring of the
Ajinomoto license agreement.
Preferred stock dividends and accretion increased by $1.8 million in the six
months ended June 30, 1997 as compared to the six months ended June 30, 1996.
This increase in 1997 is due to the accrual of dividends on the issuances of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock in May 1996, July 1996 and September 1996, respectively. In addition,
in the six months ended June 30, 1997, the Company recorded $356,653
representing the conversion discount on the Series A Preferred Stock
conversions.
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
<PAGE> 14
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). The following table presents the net loss, net loss
applicable to common stockholders, and net loss per share as originally
reported, and as restated. (See Note 8)
<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, 1997, the Company had approximately $2.1 million in cash
and cash equivalents, which was comprised of the remainder of the deposit made
by Boston University with respect to the operating facility's operating costs
of $3.4 million in connection with the sale of the Company's manufacturing and
clinical operations to Boston University. Subsequent to June 30, 1997, the
Company received $5.0 million from USSC pursuant to the License Agreement.
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> 15
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
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
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 June
30, 1997, such deposit was recorded as a liability. The net book value of the
assets to be sold to Boston University was $4.2 million as of June 30,
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.
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
development efforts.
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 June 30, 1997, the net amount due to Boston
University from the Company in respect of the operating facility's operating
expenses for the period from February 14, 1997 to June 30, 1997 was
approximately $1,215,160.
<PAGE> 16
On April 7, 1997, the Company entered into the Amendment to its Sales and
Distribution Agreement and Development Agreement with Lilly pursuant to which
Lilly had originally obtained the development and marketing rights to the
Company's lead molecule 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
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
molecules. In addition, Lilly agreed to pay to 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 million
obligation to Ajinomoto under the Company's restructured 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 upon the submission by the Company of a BLA for CTCL to the 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 and Development 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, and the Company closing the sale
of the Operating Division to Boston University by October 31, 1997.
In exchange, the Company issued to Lilly in a private placement, 1.0
million shares of its common stock. In the quarter ended June 30, 1997, 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%
(because the shares are not registered), and has recorded it as research and
development expense.
The Company did not obtain $15.0 million of new investment capital by
October 1, 1997, and did not close the sale of the Operating Division by
October 31, 1997. As a result, Lilly has the right currently, with 30 days'
notice to terminate its agreements with the Company. The Company has received
no indication from Lilly that Lilly intends to exercise that right. If Lilly
were to terminate its agreements with the Company, the Company would be
obligated to pay the $2.15 million payment to Ajinomoto that Lilly has agreed
to make on the Company's behalf and Lilly's obligations under the agreements
to provide financial support to the Company's clinical trial efforts would
cease.
On June 1, 1997, the Company restructured its License Agreement with
Ajinomoto pursuant to which Ajinomoto had granted the Company worldwide rights
to certain IL-2 gene patents owned by the Japanese Foundation for Cancer
Research and Ajinomoto for potential use in the development of the Company's
lead product, IL-2 Fusion Protein. Prior to the restructuring, the Company
was obligated to pay Ajinomoto a license fee of $4.3 million payable upon the
occurrence of certain specified events, but no later than March 31, 1997
(previously extended by agreement of Ajinomoto to May 31, 1997); and royalties
ranging from 2% to 4% on sales of the licensed product by the Company or its
sublicensees, but with minimum royalties of $100,000 for the third year of the
agreement, $200,000 for the fourth year of the agreement, and $300,000 for the
fifth and following years of the agreement. In addition, prior to the
restructuring, the rights granted by Ajinomoto to the Company pursuant to the
License Agreement were exclusive. Under the terms of the restructuring, the
future license fees payable by the Company to Ajinomoto were reduced to
the following amounts: a $2.25 million fee payable in the amount of $800,000
by June 30, 1998, or approval by the FDA of a BLA filed by the Company for the
licensed product, whichever comes first, in the amount of $800,000 by June 30,
1999, and in the amount of $650,000 by March 31, 2000; and a reduced royalty
of 1% on end-user net sales of the licensed product by the Company or its
sublicenses. The Company amended its agreements with Lilly whereby Lilly will
pay license fees to Ajinomoto on behalf of the Company, subject to certain
limitations. The restructuring provides that the license granted by Ajinomoto
to the Company will be non-exclusive. Accordingly, in the quarter ended June
30, 1997, the Company reduced its obligation to Ajinomoto from $4.3 million to
$2.25 million and recorded extraordinary income of $2,050,000 for the
reduction of this liability.
<PAGE> 17
On July 31, 1997, the Company entered into the ("USSC License Agreement")
with ("USSC") granting USSC an option on worldwide rights to ("EGF Fusion
Protein") for restenosis in cardiovascular applications. Leon C. Hirsch is
the Chairman of USSC and beneficially owns 7.8% of the common stock of USSC.
Turi Josefsen is a director of USSC and benefically owns 1.8% of the common
stock of USSC. John R. Silber is a director of USSC and benefically owns
.02% of the common stock of USSC. Pursuant to the USSC License Agreement,
USSC made an initial payment to the Company of $5.0 million on July 31, 1997.
Under the USSC License Agreement, USSC is entitled to acquire an exclusive
license to the EGF Fusion Protein technology, at any time during a 15-month
evaluation period, upon the payment to the Company of an additional $5.0
million. In addition, the Company issued to USSC a warrant for the purchase of
500,000 shares of the Company's Common Stock at a purchase price of $.5625
per share, the closing sale price for shares of the Company's Common Stock on
the date prior to the date the warrant was issued. The Company will value
this warrant and record it as a charge to general and administrative
expense in the quarter ending September 30, 1997. USSC has agreed to fund
trials associated with the development of EGF Fusion Protein for restenosis.
If USSC's option to obtain any exclusive license of the EGF Fusion Protein
technology is exercised, milestone payments will be payable by USSC to the
Company up to a maximum amount of $22.5 million. In addition, USSC will be
obligated to pay the Company royalties on commercial sales of the licensed
product. In the event USSC chooses not to exercise the option, the USSC
License Agreement will terminate, and, in exchange, USSC will receive $5.0
million worth of the Company's Common Stock valued at the average of the
closing prices of the Company's Common Stock (i) for the ten trading days
preceding the date of the USSC License Agreement or (ii) for the ten trading
days preceding the date on which USSC chooses not to exercise the option,
whichever is lower. The Company will record the $5.0 million initial payment
from USSC as a liability. In the event that USSC exercises its option to
license the EGF Fusion Protein, the $5.0 million will be recorded as revenue
at that time. In the event that USSC chooses not to exercise the option,
the $5.0 million will be recorded as stockholders' equity.
On May 29, 1996, the Company issued 4,000 shares of Series A Preferred
Stock ("Series A Shares"), to investors outside the United States in reliance
on Regulation S of the Securities Act, for gross proceeds of $4 million
(approximately $3.8 million net of offering fees). Each Series A Share is
convertible into shares of the Company'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, up to a maximum of
3,321,563 shares of Common Stock. Any share the investor is unable to convert
due to this limitation may be exchanged for $1,150 per share in cash. The
holders of the Series A Shares also are entitled to receive cumulative
dividends at an 8% annual rate upon conversion, payable in shares of Common
Stock. Any Series A Shares remaining outstanding on November 29, 1997, will
be automatically converted into shares of Common Stock. As of August 11,
1997, 2,571 Series A Shares had been converted into 2,573,205 shares of Common
Stock. If the holders of the Series A Shares convert an additional 184 shares
into Common Stock, the Company will be obligated to exchange any remaining
Series A Shares for $1,150 per share in cash, which is currently estimated at
approximately $1.4 million. There can be no assurance that the Company will
have sufficient funds to pay these amounts to the holders of the Series A
Shares.
The Company has not paid the cash dividends due December 31, 1996, March
31, 1997, or June 30, 1997 on its Series B Shares, nor has the Company made
the royalty payments due to STI on January 1, 1997, April 1, 1997, and
July 1, 1997. Correspondingly, STI has not paid the dividends due January 1,
1997, April 1, 1997, and July 1, 1997 on its Class B Shares. The Company does
not expect STI to make the dividend payments due on the Series B Shares
October 1, 1997, and January 1, 1998. As a result the holders of the Class B
Shares have the right under an escrow agreement to seek delivery to them of a
collateral assignment of the Company's Patents although they have not yet
taken steps to exercise this right to foreclose on the Patents. The holders
have agreed in principle to forbear until March 1, 1998 from exercising their
right to foreclose on the Patents.
<PAGE> 18
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, the reimbursement of operating costs by Boston
University and the $5.0 million received by USSC for a license option will be
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
sufficient to fund the Company's working capital requirements through
approximately December 1997. 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 the $3.4 million operating expenses
that have been paid as of June 30, 1997, on such facility will be subject to
refund to Boston University (See Note 8 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.
At December 31, 1996, the Company's net tangible assets (total assets
minus liabilities and goodwill) was a deficit of approximately ($6.6 million
as restated) and at June 30, 1997, the Company's net tangible assets was a
deficit of ($13.3 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. The Company appealed
this decision and submitted to the NASD a plan for the restoration of its net
tangible assets to the minimum level. On July 14, 1997, the appeal panel
granted the Company a temporary exception to the minimum net tangible assets
requirement. In order to qualify for continued listing on the Nasdaq National
Market, the Company was required to make a public filing with the SEC and with
Nasdaq reporting receipt of $5.0 million from USSC pursuant to a license and
option agreement. The Company reported this transaction on July 31, 1997.
The Company also is required to make a public filing with the SEC and Nasdaq
on or before August 31, 1997, to report shareholder approval of the sale of
the operating facility to Boston University and to report an agreement for
financing in an amount at least equal to $15.0 million. On or before
September 30, 1997, the Company must make public filings with the SEC and with
Nasdaq to report closing of the $15.0 million financing and to report a
minimum of $14.0 million in net tangible assets on a pro forma basis. The
Company also must be in compliance with all other criteria for continued
listing on the Nasdaq National Market. If the Company fails to comply with
any of the terms of the exception granted by the appeal panel, the Company's
Common Stock will be delisted from the Nasdaq National Market immediately.
There is no assurance that the Company will be able to satisfy the
conditions imposed by the NASD for continued listing on the Nasdaq National
Market or that, if it fails to satisfy any of these conditions, that the NASD
will grant the Company a further waiver or extension. In the event that the
Company is delisted from the Nasdaq National Market, the Company intends to
re-apply for listing on the Nasdaq National Market or the Nasdaq Small Cap
Market as soon as possible after the Company is able to satisfy the listing
requirements.
The delisting of the Common Stock from the Nasdaq National Market could
have a material adverse effect on the Company's ability to raise additional
equity capital. In addition, as a result of, the delisting of the Common
Stock from the Nasdaq National Market, the investors in Seragen
Biopharmaceuticals Ltd. ("SBL"), a company 49% owned by the Company, may claim
that they are entitled to require the Company to purchase their shares in SBL
for cash. There is no assurance that the Company would have sufficient cash
to purchase the investors' shares in SBL for cash.
<PAGE> 19
SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDTION AND RESULTS OF OPERATIONS
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. Such an offering is
likely to result in a significant dilution to holders of common shares.
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 December 1997.
If adequate additional funds are not available, the Company may be required to
delay, scale back or eliminate some or all of its clinical trials,
manufacturing or development activities or certain other aspects of
its business and may be required to cease operations. The Company also is
exploring other alternatives that could result in a merger or sale of the
Company.
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, or to complete a merger or sale of
the Company. 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> 20<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit Index
Exhibit 27 - Restated Financial Data Schedule
<PAGE> 21
<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> 22<PAGE>
SERAGEN, INC.
EXHIBIT INDEX
Exhibit
Number Description Page
_______________________________________________________________
(27) Restated Financial Data Schedule 24
<PAGE> 23
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<PERIOD-START> JAN-01-1997
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