UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998 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
28,062,143 shares of Common Stock, par value $.01, were outstanding on May
14, 1998.
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SERAGEN, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets
December 31, 1997 and March 31,1998 . . . . . . . . . . . . . 3
Statements of Operations
Three Months Ended March 31, 1997 and 1998 . . . . . . . . . 4
Statements of Cash Flows
Three Months Ended March 31, 1997 and 1998. . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings (None)
Item 2 - Changes in Securities and Use of Proceeds. . . . . . . . . . 25
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . 25
Item 4 - Submission of Matters to a Vote of Security Holders (None)
Item 5 - Other Information (None)
Item 6 - Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 26
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.
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<TABLE>
<CAPTION>
SERAGEN, INC.
BALANCE SHEET
ASSETS December 31, March 31, 1998
1997 (Unaudited)
_______________ ________________
<S> <C> <C>
Current assets
Cash and cash equivalents . . . . . . . . . . . . . $5,328,535 $4,588,786
Restricted cash . . . . . . . . . . . . . . . . . . 175,000 200,000
Contract receivable . . . . . . . . . . . . . . . . 208,190 634,233
Unbilled contract receivable. . . . . . . . . . . . 944,063 1,014,994
Prepaid expenses and other current assets . . . . . 72,065 71,442
________________ _______________
Total current assets . . . . . 6,727,853 6,509,455
Property and equipment, net. . . . . . . . . . . . . . . 15,064 13,054
Deferred commission. . . . . . . . . . . . . . . . . . . 2,060,000 2,060,000
Other assets . . . . . . . . . . . . . . . . . . . . . . 8,648 9,324
Total assets . . . . . . . . . 8,811,565 8,591,833
================ ===============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . 447,008 264,206
Related Party Payable. . . . . . . . . . . . . . .. 3,422,833 5,887,835
Dividend Payable - Series B Preferred Stock. . . .. 2,943,136 3,528,383
Accrued expenses. . . . . . . . . . . . . . . . . . 2,240,435 1,678,640
Preferred stock redemption liability . . . . . . . - 4,530,461
Short-term obligation.. . . . . . . . . . . . . . . 800,000 800,000
_______________ ________________
Total current liabilities. . . 9,853,412 16,689,525
_______________ ________________
Non-current liabilities:
Deferred revenue. . . . . . . . . . . . . . . . . . 10,000,000 10,000,000
Long-term obligation. . . . . . . . . . . . . . . . 1,450,000 1,450,000
Canadian affiliate put option liability . . . . . . 2,400,000 2,400,000
_______________ ______________
Total non-current liabilities. 13,850,000 13,850,000
_______________ _____________
Commitments and contingencies
Stockholders' (deficit);
Convertible preferred stock, Series B, $.01 par
value; issued and outstanding 23,800 shares at
December 31, 1997 and March 31, 1998, respectively
$23,800,000 at liquidation preference . . . . . . . 23,800,000 23,800,000
Convertible preferred stock, Series C, $.01 par
value; issued and outstanding 5,000 and 0 shares
at December 31, 1997, and March 31,1998,
respectively at $5,500,000 liquidation preference. . 5,500,000 -
Convertible preferred stock, Series D, $.01 par
value; issued and outstanding 908 and 310 shares at
December 31, 1997, and March 31,1998, respectively
at liquidation preference. . . . . . . . . . . . . 1,023,231 354,926
Common stock, $.01 par value; 70,000,000 shares
authorized; issued 21,444,894 and 27,273,857 shares
at December 31,1997 and March 31, 1998, respectively 214,448 272,731
Additional paid in capital . . . . . . . . . . . . 160,957,800 163,571,997
Accumulated deficit. . . . . . . . . . . . . . . . (209,384,995) (209,945,015)
______________ ______________
(14,889,516) (21,945,361)
Less-treasury stock (777 shares at cost at December
31,1997 and March 31, 1998, respectively) . . . . . (2,331) (2,331)
______________ _____________
Total stockholders' (deficit). (14,891,847) (21,947,692)
Total liabilities and ______________ _____________
stockholders' (deficit). . . . 8,811,565 8,591,833
============== =============
</TABLE>
3.
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The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
SERAGEN, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three months
ended March 31,
___________________________________
1997 1998
_______________ ______________
<S> <C> <C>
Revenue:
Contract revenue and license fees. . . . $911,625 $747,174
Operating expenses:
Cost of contract revenue . . . . . . . . 882,034 747,098
Research and development . . . . . . . . 2,516,840 1,494,661
General and administrative . . . . . . . 1,189,803 606,281
______________ _____________
4,588,677 2,848,040
______________ _____________
Loss from operations . . . . . . (3,677,052) (2,100,866)
______________ _____________
Interest income. . . . . . . . . . . . . . 14,703 44,145
Interest expense . . . . . . . . . . . . . 172,366 -
______________ _____________
Net loss . . . . . . . . . . . . (3,834,715) (2,056,721)
Preferred stock dividends and accretion. . 720,703 1,503,299
______________ _____________
Net loss applicable to common
stockholders . . . . . . . . . . . . . . . ($4,555,418) ($3,560,020)
============== =============
Net loss per common share. . . . . . . . . $ (O.25) $ (0.15)
============== ============
Weighted average common shares used in
computing net loss per share. . . . . . . 17,936,675 23,243,684
============== ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
4.
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<TABLE>
<CAPTION>
SERAGEN, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended March 31,
________________________________________
1997 1998
________________ __________________
<S> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . ($3,834,715) ($2,056,721)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . 232,351 2,010
Compensation associated with stock issuance. .. . . - -
Equity in loss of affiliate . . . . . . . . . . . . - -
Loss on disposal of property and equipment. . . . . - -
Amortization of discount on long-term debt. . . . . 171,903 -
Non-cash charge for issuance of common shares.. . . - -
Compensation expense. . . . . . . . . . . . . . . . 116,567
Changes in operating assets and liabilities:
Contract receivable . . . . . . . . . . . . . . . . 111,298 (426,043)
Unbilled contract receivable. . . . . . . . . . . . (67,806) (70,931)
Prepaid expenses and other current assets . . . . . 87,171 623
Accounts payable. . . . . . . . . . . . . . . . . . (502,156) (182,802)
Related Party Payable . . . . . . . . . . . . . . . - 2,465,002
Deposits received from Boston University. . . . . . 4,500,000
Accrued expenses. . . . . . . . . . . . . . . . . . (148,779) (561,794)
Deferred revenue. . . . . . . . . . . . . . . . . . -
_______________ _______________
Net cash (used in) provided by operating activities 549,267 (714,089)
_______________ _______________
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . (4,800) -
Decrease in other assets . . . . . . . . . . . . . 37,972 (676)
(Increase) decrease restricted cash account. . . . - (25,000)
______________ _______________
Net cash (used in) provided by investing activities 33,172 (25,676)
______________ _______________
Cash flows from financing activities:
Net proceeds from common stock issuances. . . . . . 75 16
Repayments of long-term debt. . . . . . . . . . . . (8,017) -
______________ _______________
Net cash (used in) provided by financing activities. . (7,942) 16
_______________ _______________
Net increase (decrease) in cash and cash equivalents 574,497 (739,749)
Cash and cash equivalents, beginning of period . . . . 1,548,392 5,328,535
______________ ________________
Cash and cash equivalents, end of period . . . . . . . $2,122,889 $4,588,786
=============== ================
Supplemental disclosures of cash flows information:
Cash paid for interest . . . . . . . . . . . . . . . $463 -
=============== ================
Supplemental non cash activities:
Conversion of Series A preferred stock to common stock $738,205 -
Conversion of series C preferred stock to common stock
and redemption liability . . . . . . . . . . . . . . - 6,274,833
Conversion of Series D preferred stock to common stock - 929,357
Series C and D preferred dividends - 109,718
Accrued but unpaid Series B dividends 149,113 3,379,270
</TABLE>
The accompanying notes are an integral part of the financial statements.
5.
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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 period presented.
The results of operations for the interim period 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, 1998. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 1997,
which are contained in the Company's most recent Annual Report on Form 10-K.
2. Ligand Merger Agreement
On May 11, 1998, the Company executed an Agreement and Plan of
Reorganization (the "Ligand Merger Agreement") with Ligand Pharmaceuticals,
Inc. ("Ligand") and Knight Acquisition Corporation ("Knight"), a wholly-owned
subsidiary of Ligand. Subject to approval by a majority of the outstanding
voting shares of capital stock of the Company and certain other conditions,
Knight will merge with and into the Company, with the result that the Company
will become a wholly-owned subsidiary of Ligand (the "Ligand Merger"). This
transaction is expected to close in the third or fourth quarter of 1998.
Simultaneously with the execution of the Ligand Merger Agreement, the Company
and its subsidiary Seragen Technology, Inc. ("STI") entered into an Accord and
Satisfaction Agreement (the "Accord") with the Trustees of Boston University
("B.U."), Seragen LLC, Marathon Biopharmaceuticals, LLC ("Marathon"), USSC,
Leon C. Hirsch, Turi Josefsen, Gerald S.J. and Loretta P. Cassidy, Reed R.
Prior, Jean C. Nichols, Ph.D., Elizabeth C. Chen, Robert W. Crane, Shoreline
Pacific Institutional Finance, Lehman Brothers Inc., 520 Commonwealth Avenue
Real Estate Corp., and 660 Corporation, pursuant to which those parties agreed
to forbear from exercising all specified rights against the Company and STI
for so long as the Ligand Merger Agreement continues in effect and to release
the Company from specified liabilities, including the liabilities to BU,
Marathon and USSC discussed above, in the event that the Ligand merger is
consummated. The terms of the Ligand Merger Agreement and the Accord are
described in the Company's Form 8-K dated as of May 11, 1998. There can be no
assurance that the Ligand merger will be consummated.
3. 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.
4. Loss Per Share
Effective December 31, 1997, the Company adopted 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
6
<PAGE>
publicly held common stock or potential common stock. The adoption of this
statement did not require restatement of prior years' earnings per share.
5. Eli Lilly and Company
On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gave Lilly exclusive worldwide development,
distribution, and marketing rights, except in certain Asian countries, to the
Company's Interleukin-2 Fusion Protein ("IL-2 Fusion Protein") for the
treatment of cancer. Lilly also had the option to obtain worldwide
development, distribution, and marketing rights for additional indications for
IL-2 Fusion Protein and for other Company products under development. The
Company retained exclusive rights to promote IL-2 Fusion Protein and future
fusion proteins for dermatologic applications outside of oncology and was to
be responsible for bulk manufacturing for all indications.
On August 4, 1994, under the terms of the alliance, Lilly made an initial
payment to the Company of $10 million, $5 million representing payment for
787,092 shares of common stock at approximately $6.35 per share and $5 million
representing an advance against Lilly's purchase of bulk product from the
Company. Lilly also agreed to pay the Company an additional $3 million based
on meeting certain regulatory milestones in the development of IL-2 Fusion
Protein for cutaneous T-cell lymphoma ("CTCL"). In addition, Lilly reimburses
the Company for costs incurred in the clinical development of IL-2 Fusion
Protein for CTCL, including costs for Phase III clinical trials. The Company
recorded approximately $3,337,000, $3,979,000, and $4,281,000 of contract
revenue for such reimbursed development costs during the years ended December
31, 1995, 1996 and 1997, and $912,000 and $747,000 for the three months ended
March 31, 1997 and 1998, respectively. In connection with this agreement, the
Company paid $600,000 in cash and issued 220,000 shares of common stock valued
at $1,760,000 to its investment bank for services provided in connection with
the Lilly agreement. In 1995, the Company charged $300,000 of such payments
to additional paid in capital and recorded the additional payments as prepaid
expense to be recognized upon the recognition of product revenues and license
fees from Lilly in future periods.
On May 28, 1996, Lilly and the Company amended the Sales and Distribution
Agreement relating to the $5.0 million advance paid by Lilly in August 1994
against Lilly's future purchases of bulk product from the Company. Associated
with the original agreement was $2,060,000 of deferred commission expense to
be recognized upon the recognition of product revenue from Lilly. The amended
agreement states that the $5.0 million payment is non-refundable and Seragen
has no obligation to refund the advance should no bulk purchases be made by
Lilly. To the extent Lilly purchases bulk product in the future, the Company
is required to pay Lilly a royalty equal to 75% of the purchase price, up to
$5.0 million of total royalties. The Company will recognize the $5.0 million
non-refundable payment and amortize the related deferred commission upon the
sale of bulk product to Lilly or at such time as Lilly acknowledges it will
not purchase any bulk material.
On April 7, 1997, the Company entered into an amendment to its Sales and
Distribution Agreement and Development Agreement with Lilly. Pursuant to the
amendment, Lilly relinquished, subject to certain limitations, all development
and promotion rights to IL-2 Fusion Protein non-cancer indications, as well as
rights to the Company's other molecules. Lilly did, however, retain rights to
distribute all intravenous and intramuscular formulations of IL-2 Fusion
Protein, for both cancer and non-cancer indications, except, in the case of
cancer indications, in certain Asian countries and, in the case of non-cancer
indications, certain Asian countries and member countries of the European
Union. Pursuant to the amendment, Lilly agreed to pay to Ajinomoto Co., 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 million obligation to Ajinomoto under the Company's
restructured agreement with Ajinomoto (see Note 6). Pursuant to the
amendment, Lilly credited $1.5 million of the amount paid by Lilly to
Ajinomoto on behalf of the Company against the $1.5 million milestone payment
from Lilly to the Company under the Sales and Distribution Agreement between
the Company and Lilly for the submission by the Company of a U.S. Biologics
License Application ("BLA") for CTCL to the Food and Drug Administration
("FDA") which was completed on December 9, 1997.
7
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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. Such milestones have not been met by the Company and,
as a result, Lilly has the right at any time to terminate its arrangements
with the Company with 30 days notice. 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.
In exchange for the amendment of the Sales and Distribution Agreement in
April 1997, 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 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.
Pursuant to a letter agreement dated May 11, 1998, Lilly has agreed to
assign to Ligand its rights and obligations under its existing agreements with
the Company upon FDA approval of the Company's BLA for CTCL. In the event
that the FDA approves the BLA, this assignment will occur regardless of
whether the Ligand merger has been consummated so long as Ligand is exercising
its best efforts to seek consummation of the merger at the time of regulatory
approval.
6. Amendment to Ajinomoto License Agreement
In December 1994, the Company entered into a license agreement with
Ajinomoto which provides the Company with exclusive worldwide rights under
Ajinomoto's IL-2 gene patents for the Company's fusion proteins. On June 1,
1997, the Company restructured its license agreement with Ajinomoto. 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 (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 sublicensee.
The Company amended its agreements with Lilly whereby Lilly will pay
certain license fees to Ajinomoto on behalf of the Company, subject to certain
limitations (see Note 5) and Lilly assumed $2.15 million of the obligation at
April 7, 1997. 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 $2.05 million
for the forgiveness of indebtedness. On May 11, 1998, Ajinomoto agreed to
assign the license to Ligand in the event that the Ligand Merger is
consummated.
8
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7. 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 B.U. or a designated affiliate for $5.0
million. After receiving shareholder approval and ratification, the Company
closed the sale of its operating division on December 31, 1997. B.U.'s
designee, Marathon assumed responsibility for the facility's operations as of
December 31, 1997. The net book value of the assets to be sold to B.U. was
approximately $4.5 million as of February 14, 1997. The net book value of the
assets sold to B.U. was approximately $3.9 million as of December 31, 1997.
At the closing, B.U. paid the remaining $500,000 of the purchase price, and a
majority of the Company's employees involved in its manufacturing and clinical
operations became employees of the contract service organization created by
B.U. under the name Marathon.
At March 31, 1997, B.U. had paid the Company $4.5 million as a deposit
and, from the time of execution of the agreement, had assumed responsibility
for the facility's operations, including responsibility for operating costs.
Both the deposit and the operating costs incurred by B.U. were subject to
refund in the event that conditions for closing were not met. The statement
of operation for the period ended March 31, 1997 does not reflect any
reimbursements by B.U. The Company recorded a gain of $1,089,328 on the sale
of the operating facility and $4,585,987 for the excess of the reimbursed
operating costs over the amount due to B.U. pursuant to the Service Agreement
for the period from February 14, 1997, until the closing of the transaction on
December 31, 1997 as a contribution of capital.
Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into a service agreement (the "Service Agreement") with B.U.
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 B.U. to terminate the agreement if losses during a contract year
exceed $9.0 million and the Company does not reimburse B.U. 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 originally agreed to pay B.U.
approximately $5.5 million and $6.6 million in years 1 and 2 of this contract,
respectively. Under the agreement, the fees could be mutually increased or
decreased, but not to less than $4.3 million per contract year. As of May 11,
1998, the Company and B.U. agreed to reduce the fees payable in the contract
year ending January 31, 1999 to $4.3 million. This reduction in fees applies
retroactively to February 1, 1998, the beginning of the current contract year.
The Service Agreement has reduced substantially the Company's operating costs
in research and development, as the Company is contracting solely for the
services that the Company requires for clinical and manufacturing purposes.
8. License and Option Agreement with United States Surgical Corporation
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 beneficially owns 1.8% of the common stock of USSC. John
R. Silber is a director of USSC and beneficially 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 $0.5625 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 charged $175,000 for such warrant to
general and administrative expense in the year ended December 31, 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
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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 has recorded the $5.0 million initial
payment from USSC as deferred revenue, 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. Pursuant to the Accord, USSC has agreed to exercise the option and
release the Company from all claims in the event the Ligand Merger is
consummated, in exchange for merger consideration of $5,000,000 (see Note 2).
9. Seragen Biopharmaceuticals, Ltd.
Effective as of May 1, 1998, the Company entered into a settlement
agreement (the "Seragen Canada Settlement Agreement") with its Canadian
affiliate, Seragen Biopharmaceuticals Ltd./Seragen Biopharmaceutique Ltee
("Seragen Canada"), and Sofinov Societe Financiere d'Innovation Inc., Societe
Inovatech du Grand Montreal, MDS Health Ventures Inc., Canadian Medical
Discoveries Fund Inc., Royal Bank Capital Corporation, and Health Care and
Biotechnology Venture Fund (collectively, the "Investor Shareholders"). The
Seragen Canada Settlement Agreement provides for the purchase by Seragen
Canada of all shares of Seragen Canada capital stock currently held by the
Investor Shareholders for an aggregate amount equal to Seragen Canada's cash
and liquid investments on hand after the payment of specified expenses. As of
February 28, 1998, Seragen Canada held approximately $9,378,770 in cash and
liquid investments. Such purchase transaction is expected to occur on or
prior to June 15, 1998. Upon the consummation of Seragen Canada's purchase of
the Investor Shareholders' Seragen Canada shares, mutual releases among the
Company, Seragen Canada, and the Investor Shareholders will become effective
and a November 22, 1995 Shareholders Agreement and other specified agreements
executed in connection with the original organization of Seragen Canada in
November 1995 will be terminated. The Seragen Canada Settlement Agreement
also provides for issuance by the Company of an aggregate of $2.4 million
worth of its Common Stock upon the later to occur of (a) the closing date for
Seragen Canada's purchase of the Investor Shareholders' Seragen Canada shares
and (b) the earlier to occur of (i) a qualified offering by the Company of
additional shares of its capital stock with net proceeds to the Company of $10
million and (ii) the consummation of a disposition of the Company, whether by
way of a merger (as contemplated under the Ligand Merger Agreement) or
otherwise, or substantially all of the Company's assets.
10. Conversion of Series C Preferred Stock
On September 30, 1996, the Company raised $5 million through the sale of
5,000 shares of the Company's non-voting convertible Series C Preferred Stock
("Series C Shares") in a private placement to B.U. under Regulation D of the
Securities Act of 1933. The Series C Shares were convertible at the option of
the holder into shares of Seragen Common Stock at a per share conversion price
equal to the lesser of $2.75 or 73 percent of the average closing bid prices
for a five day period prior to the conversion date, up to a maximum of
3,360,625 shares of Seragen Common Stock. Any shares the investor was unable
to convert due to this limitation could be exchanged for $1,150 per share in
cash. Terms of the Series C Shares also provided for 8% cumulative dividends
payable in shares of Seragen Common Stock at the time of each conversion.
Each Series C Share had a liquidation preference equal to $1,000 plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series C Shares in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company. Series C Shares which remained
outstanding on March 30, 1998 were to be automatically converted into shares
of the Company's Common Stock. The Company's Series C Shares were reflected
at $5,100,00 and $5,500,000 at December 31, 1996, and 1997. The Company
recorded common stock dividends of $100,000 and $400,000 in the years ended
December 31, 1996 and 1997, respectively.
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Effective March 30, 1998, 1,060 Series C Shares automatically converted,
in accordance with the terms of the Series C preferred stock, into 3,360,625
shares of the Company's common stock and 3,940 Series C Shares were, as
required by the terms of the Series C preferred stock, purchased by the
Company for an aggregate purchase price of $4,530,461. Following these
transactions, no Series C Shares remained outstanding. The purchase price for
the Series C Shares purchased by the Company has not yet been paid by the
Company, nor has B.U., the holder of the Series C Shares, demanded payment of
the said purchase price. As a result, the Company currently is indebted to
B.U. for this amount. Pursuant to the Accord and Satisfaction Agreement dated
as of May 11, 1998, B.U. has agreed, with respect to the securities received
in exchange for the Series C Shares, to release the Company from all claims in
the event the Ligand Merger is consummated in exchange for merger
consideration of $5,000,000 (see Note 2).
11. New Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement. It also
requires that an entity classify items of other comprehensive earnings (e.g.,
foreign currency translation adjustments and unrealized gains and losses on
certain marketable securities) by their nature in an annual financial
statement. The Company's total comprehensive earnings for the three month
periods ended March 31, 1998 and 1997 were the same as reported net loss for
those periods.
In April 1998, the AICPA issued Statement of Position 98-5 "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1,
1999. Adoption of this Statement will not have a material impact on the
Company's consolidated financial position or results of operations.
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SERAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company 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 in 1998. 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 agreement to sell its
manufacturing and clinical operations facilities to B.U. or a designated
affiliate for $5 million and in connection therewith entered into a service
agreement with B.U. pursuant to which B.U. will provide the Company with
certain services related to product research, development, manufacturing,
clinical trials, quality control and quality assurance. After receiving
shareholder approval and ratification, the Company completed the sale of the
Operating Division on December 31, 1997. B.U.'s designee, Marathon assumed
responsibility for the facility's operations as of December 31, 1997. The
terms of this transaction are discussed more fully below under "Liquidity and
Capital Resources".
On May 11, 1998, the Company executed the Ligand Merger Agreement with
Ligand and Knight, a wholly-owned subsidiary of Ligand. Subject to approval
by a majority of the outstanding voting shares of capital stock of the Company
and certain other conditions, Knight will merge with and into the Company,
with the result that the Company will become a wholly-owned subsidiary of
Ligand. This transaction is expected to close in the third or fourth quarter
of 1998. Simultaneously with the execution of the Ligand Merger Agreement,
the Company and its subsidiary STI entered into the Accord with the Trustees
of Boston University, Seragen LLC, Marathon, USSC, Leon C. Hirsch, Turi
Josefsen, Gerald S.J. and Loretta P. Cassidy, Reed R. Prior, Jean C. Nichols,
Ph.D., Elizabeth C. Chen, Robert W. Crane, Shoreline Pacific Institutional
Finance, Lehman Brothers Inc., 520 Commonwealth Avenue Real Estate Corp., and
660 Corporation, pursuant to which those parties agreed to forbear from
exercising all specified rights against the Company and STI for so long as the
Ligand Merger Agreement continues in effect and to release the Company from
specified liabilities, in the event that the Ligand merger is consummated.
The terms of the Ligand Merger Agreement and the Accord are described in the
Company's Form 8-K dated as of May 11, 1998. There can be no assurance that
the Ligand merger will be consummated.
The Company's business is subject to significant risks, including the
ability to obtain shareholder approval of the Ligand Merger Agreement or to
raise additional capital, the uncertainties associated with the regulatory
approval process and with obtaining and enforcing patents important to the
Company's business. If the Ligand Merger is not consummated, the Company
expects to incur substantial operating losses over the next several years due
to continuing expenses associated with its research and development programs,
including pre-clinical testing and clinical trials. Operating losses may also
fluctuate from quarter to quarter as a result of differences in the timing of
expenses incurred.
Results of Operations
Three Months Ended March 31, 1998 and 1997. The Company's net loss
applicable to common shareholders for the three-month period ended March 31,
1998 was $3.6 million compared to $4.6 million for the period ended March 31,
1997. The decrease in the net loss of $1.0 million during the first quarter
of 1998 was primarily due to a reduction in operating expenses of $1.7 million
and a reduction of interest expense of $172,000. This decrease was partially
offset by a reduction in contract revenue with Lilly of $135,000 and an
increase in preferred stock dividends of $783,000.
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The Company's revenues for the three months ended March 31, 1998 and
1997 were $747,000 and $912,000, respectively, primarily contract revenue from
Lilly for certain development costs of IL-2 Fusion Protein for cancer therapy.
Contract revenue from Lilly decreased in 1998 by $135,000 reflecting the
completion in 1998 of certain clinical data management milestones and patient
enrollment for a Phase III clinical trial for IL-2 Fusion Protein for CTCL.
Total operating expenses for the quarter ended March 31, 1998
decreased by $1.7 million to $2.8 million in 1998 from $4.6 million in 1997.
This decrease of $1.7 million was primarily due to savings resulting from the
Company's Service Agreement with B.U. and the sale of the Company's Operating
Division to BU. The cost of contract revenue was $747,000 in 1998 as compared
to $882,000 in 1997, a decrease of $135,000, reflecting the completion in 1998
of certain clinical data management milestones and patient enrollment for a
Phase III clinical trial for IL-2 Fusion Protein for CTCL. Research and
development expenses decreased by $1.0 million to $1.5 million in the first
three months of 1998 from $2.5 million for the first three months of 1997.
The reductions in research and development are a result of the sale of the
Operating Division to B.U. which resulted in substantial reductions in nearly
all expenses including salaries, (as the result of the transfer of a majority
of the Company's employees), rent and depreciation. General and
administrative expenses decreased by $584,000 to $606,000 in the first three
months of 1998 as compared to $1.2 million in the first three months of 1997.
This decrease was primarily the result of the transfer of certain employees in
connection with the sale of the Company's Operating Division to B.U. and
reductions in legal fees, outside services and business insurance.
The Company believes the current maximum obligation to the Company's
Canadian affiliate is $2.4 million, which was accrued as of December 31, 1997.
Interest income increased by $30,000 reflecting interest earned on higher cash
balances versus the first quarter of 1997. Interest expense decreased by
$172,000 to $0 in the first quarter of 1998 from $172,000 in the first quarter
of 1997 as a result of elimination of interest expense associated with a note
payable. Preferred stock dividends and accretion increased by $783,000 to
$1.5 million in the first three months on 1998 as compared to $721,000 in the
first three months in 1997. This increase was the dividend expense related to
the conversion of 598 shares of Series D and 1060 Series C Shares into common
stock.
Liquidity and Capital Resources
As of March 31, 1998, the Company had approximately $4.6 million in cash
and cash equivalents, which was comprised of (i) the final payment of $0.5
million made by B.U. with respect to the sale of the Operating Division to
B.U., and (ii) the remainder of $5.0 million from USSC pursuant to the USSC
License Agreement. The Company currently has negative working capital of
$10.2 million and is dependent upon the continued forbearance of B.U. pursuant
to the Accord (see Note 2) If B.U. were to require payment from the Company,
the Company would be unable to make such payment and might be forced to cease
operations.
The Company expects to incur substantial additional research and
development expenses as it continues development of its fusion proteins and
pursues regulatory approval of DAB389IL-2 for CTCL through its pending BLA.
The Company also expects that substantial investment will be required to
commercialize its products. 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.
Even if the BLA is approved by the FDA, a number of considerations affect
the Company's business prospects. These include: the currently-projected
sales levels for DAB389IL-2 in CTCL; the prices that the Company will receive
for the product from Lilly, its marketing partner for cancer; the royalties
the Company must pay to other parties for its technology licenses; the
Company's obligation to repay a $5 million advance against future sales; and
the Company's costs for having the product manufactured. Given these
considerations, the Company does not expect revenues from DAB389IL-2 to cover
its operating costs for the foreseeable future.
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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 certain 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 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 has credited $1.5 million of the
amount paid by Lilly to Ajinomoto on behalf of the Company against the $1.5
million milestone payment that was due from Lilly to the Company under the
Sales and Distribution Agreement between the Company and Lilly upon the
submission in December 1997 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. The Company has not met the
milestones and as a result, Lilly has the right, 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.
In exchange for the amendments to the agreement, the Company issued to
Lilly in a private placement 1.0 million shares of its common stock, which
were valued at $800,000 and recorded as research and development expense.
Pursuant to a letter agreement dated May 11, 1998, Lilly has agreed to
assign to Ligand its rights and obligations under its existing agreements with
the Company upon FDA approval of the Company's BLA for CTCL. In the event
that the FDA approves the BLA, this assignment will occur regardless of
whether the Ligand Merger has been consummated so long as Ligand is exercising
its best efforts to seek consummation of the merger at time of regulatory
approval.
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 license fees and royalties as follows: $4.3
million payable upon the occurrence of certain specified events, but no later
than March 31, 1997 (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 and
royalties 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 1997, the Company
14
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reduced its obligation to Ajinomoto from $4.3 million to $2.25 million and
recorded extraordinary income of $2,050,000 for the forgiveness of
indebtedness. On May 11, 1998, Ajinomoto agreed to assign the license to
Ligand in the event that the Ligand Merger is consummated.
In 1997, the Company sold its Operating Division to B.U. The Company
began assembling the components of the Company's operating division, which
includes substantially all of the Company's personnel and tangible assets and
related contract rights other than (i) certain management personnel, and (ii)
assets utilized by retained management personnel in the performance of their
duties (collectively, the "Operating Division"), over five years ago. The
Company developed the Operating Division in a manner that provided excess
capacity in order to meet anticipated commercial demand for the Company's
products. Historically, the Operating Division has never operated at full
capacity 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, however,
maintained a relatively high level of staffing in order to comply with
regulatory requirements. The Company maintained the Operating Division,
despite its high costs, because of the delays and disruptions in the Company's
product development and clinical trial efforts that the board of directors and
management believed would have resulted had the Company discontinued the
operations of the Operating Division and sought to obtain the services
provided by the Operating Division from third parties. In late 1996, the
Company determined that it did not have adequate financial resources to
maintain the Operating Division in accordance with its initial plans or to
develop additional products utilizing the Operating Division. 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.
As of February 14, 1997, the Company entered into the Asset Purchase
Agreement to sell the Operating Division to B.U. or a designated affiliate for
$5.0 million. The net book value of the assets to be sold to B.U. was
approximately $4.5 million as of February 14, 1997. The Company closed this
transaction as of December 31, 1997. The net book value of the assets sold to
B.U. was approximately $3.9 million as of December 31, 1997. At the closing,
B.U. paid the remaining $500,000 of the purchase price, and a majority of the
Company's employees involved in its manufacturing and clinical operations
became employees of the contract service organization created by B.U. under
the name Marathon. Upon the closing of this transaction, the Company
accounted for the gain on the sale of the Operating Division and the excess of
the reimbursed operating costs over the amount due to B.U., pursuant to the
Service Agreement for the period from February 14, 1997 until the closing of
the transaction, as a contribution of capital.
Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into the Service Agreement with B.U. 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 B.U. to
terminate the agreement if losses during a contract year exceed $9.0 million
and, after notice, the Company does not reimburse B.U. for the losses in
excess of $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. 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 Operating Division. The Company originally agreed
to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of
this contract, respectively. Under the agreement, the fees could be mutually
increased or decreased, but not to less than $4.3 million per contract year.
As of May 11, 1998, the Company and B.U. agreed to reduce the fees payable in
the contract year ending January 31, 1999 to $4.3 million. This reduction in
fees applies retroactively to February 1, 1998, the beginning of the current
contract year. As of April 30, 1998, the Company has not paid any portion of
these fees, and B.U. has not taken any action to compel payment. As a result,
the Company currently is indebted to B.U. in this respect in the amount of
$6.0 million as of that date. Pursuant to the Accord, Marathon has agreed to
release the Company from all claims in the event the Ligand Merger is
consummated, in exchange for the merger consideration (see Note 2).
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As a result of the Service Agreement, the Company's research and
development operating costs in the year ended December 31, 1997 were reduced
substantially, even after taking into consideration the accrued amount owed to
B.U. under the Service Agreement. The Service Agreement is expected to
continue to result in reduced 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.
On July 31, 1997, the Company entered into the USSC License Agreement
with USSC, granting USSC an option on worldwide rights to the EGF Fusion
Protein for restenosis in cardiovascular applications. Leon C. Hirsch, who
beneficially owns more than 5% of the Company's Common Stock, is the Chairman
of USSC and beneficially owns 7.8% of the common stock of USSC. Turi
Josefsen, who beneficially owns more than 5% of the Company's Common Stock, is
a director of USSC and beneficially owns 1.8% of the common stock of USSC.
John R. Silber, a director of the Company, is a director of USSC and
beneficially 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 charged $175,000 for such warrant to general and administrative
expense. USSC has agreed to fund trials associated with the development of
EGF Fusion Protein for restenosis. If USSC's option to obtain an 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. Pursuant to the Accord, USSC has agreed to exercise the option and
release the Company from all claims in the event the Ligand Merger is
consummated, in exchange for merger consideration of $5,000,000 (see Note 2).
On August 6, 1997, the Company and Harvard College amended their license
agreement dated November 29, 1983. Pursuant to the amended license agreement,
the royalties payable by the Company on net sales of product covered by such
license agreement were reduced from 5% to 2%. Further, the royalties payable
to Harvard from sub-licenses were reduced from 50% to 10%.
On October 1, 1997, the Company and the Boston Medical Center (formerly
University Hospital) amended their license and royalty agreement dated
November 18, 1991. Pursuant to the amended license and royalty agreement, the
royalties payable by the Company on net sales of product covered by such
license agreement following the expiration of the Harvard license, above, were
reduced from 1.5% to 1.0%. Further, the royalties payable to Boston Medical
Center from sub-licenses were reduced from 15% to 2% provided that such
products require other patents or licenses in addition to the license from
Boston Medical Center.
In January 1998, the Company subleased approximately 7,000 square feet of
office space in two buildings in Hopkinton, Massachusetts from Marathon. The
subleases on each of the buildings expires in January 1999 and the Company can
exercise, at its option, two one-year extensions on each sublease.
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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 was
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, subject to a
contractually-imposed maximum of 3,321,563 shares of Common Stock. Any share
the investor was unable to convert due to the conversion cap could be
exchanged for $1,150 per share in cash. On November 11, 1997, the holder of
the Series A Shares and the Company agreed to eliminate the conversion
limitation and the ability to exchange such shares for cash when subject to
such limitation. The holders of the Series A Shares also were entitled to
receive cumulative dividends from May 29, 1996, at an 8% annual rate upon
conversion, payable in shares of Common Stock. Any Series A Shares remaining
outstanding on November 29, 1997, were to be automatically converted into
shares of Common Stock.
On November 26, 1997, the Company issued 923 shares of Series D Preferred
stock ("Series D Shares") in exchange for all remaining outstanding shares of
its Series A Shares. The Series D Shares feature terms identical to the
Series A Shares, except that (1) the Series D Shares do not convert
automatically into Common Stock until November 29, 1998, and (2) the Series D
Shares are redeemable for cash. At March 31, 1998, 310 shares of Series D
Shares were outstanding, representing a liquidation value of $354,966.
The Company has not paid the cash dividends due December 31, 1996, March
31, 1997, June 30, 1997, September 30, 1997, December 31, 1997, and March 31,
1998 on shares of its Series B Preferred stock ("Series B Shares"), nor has
the Company made the royalty payments due to its subsidiary, Seragen
Technology, Inc. ("STI"), on January 1, 1997, April 1, 1997, July 1, 1997,
October 1, 1997, January 1, 1998, and April 1, 1998. Correspondingly, STI has
not paid the dividends due January 1, 1997, April 1, 1997, July 1, 1997,
October 1, 1997, January 1, 1998, and April 1, 1998 on shares of its Class B
common stock ("Class B Shares"). The Company does not expect STI to make any
dividend payments advisors due on the Class B Shares in 1998. 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.
Dividends payable of approximately $3.5 million with respect of the
Series B Shares were outstanding at March 31, 1998, and are included in
accrued expenses.
On September 30, 1996, the Company raised $5 million through the sale of
5,000 shares of the Company's non-voting convertible Series C Preferred Stock
("Series C Shares") in a private placement to B.U. under Regulation D of the
Securities Act of 1933. The Series C Shares were convertible at the option of
the holder into shares of Seragen Common Stock at a per share conversion price
equal to the lesser of $2.75 or 73 percent of the average closing bid prices
for a five day period prior to the conversion date, up to a maximum of
3,360,625 shares of Seragen Common Stock. Any shares the investor was unable
to convert due to this limitation could be exchanged for $1,150 per share in
cash. Terms of the Series C Shares also provided for 8% cumulative dividends
payable in shares of Seragen Common Stock at the time of each conversion.
Each Series C Share had a liquidation preference equal to $1,000 plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series C Shares in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company. Series C Shares which remained
outstanding on March 30, 1998 were to be automatically converted into shares
of the Company's Common Stock.
Effective March 30, 1998, 1,060 Series C Shares automatically converted,
in accordance with the terms of the Series C preferred stock, into 3,360,625
shares of the Company's common stock and 3,940 Series C Shares were, as
required by the terms of the Series C preferred stock, purchased by the
Company for an aggregate purchase price of $4,530,461. Following these
transactions, no Series C Shares remained outstanding. The purchase price for
the Series C Shares purchased by the Company has not yet been paid by the
Company, nor has B.U., the holder of the Series C Shares, demanded payment of
the said purchase price. As a result, the Company currently is indebted to
B.U. for this amount. Pursuant to the Accord, B.U. has agreed, with respect
to the securities received in exchange for the Series C Shares, to release the
Company from all claims in the event the Ligand Merger is consummated, in
exchange for merger consideration of $5,000,000 (see Note 2).
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The Company's Common Stock was delisted from trading on the Nasdaq
National Market on September 9, 1997, due to failure to comply with Nasdaq's
minimum net tangible assets requirement. The delisting of the Common Stock
from the Nasdaq National Market could have a material adverse effect on the
Company's efforts to raise additional equity capital.
Effective as of May 1, 1998, the Company entered into a settlement
agreement (the "Seragen Canada Settlement Agreement") with its Canadian
affiliate, Seragen Biopharmaceuticals Ltd./Seragen Biopharmaceutique Ltee
("Seragen Canada"), and Sofinov Societe Financiere d'Innovation Inc., Societe
Inovatech du Grand Montreal, MDS Health Ventures Inc., Canadian Medical
Discoveries Fund Inc., Royal Bank Capital Corporation, and Health Care and
Biotechnology Venture Fund (collectively, the "Investor Shareholders"). The
Seragen Canada Settlement Agreement provides for the purchase by Seragen
Canada of all shares of Seragen Canada capital stock currently held by the
Investor Shareholders for an aggregate amount equal to Seragen Canada's cash
and liquid investments on hand after the payment of specified expenses. As of
February 28, 1998, Seragen Canada held approximately $9,378,770 in cash and
liquid investments. Such purchase transaction is expected to occur on or
prior to June 15, 1998. Upon the consummation of Seragen Canada's purchase of
the Investor Shareholders' Seragen Canada shares, mutual releases among the
Company, Seragen Canada, and the Investor Shareholders will become effective
and a November 22, 1995 Shareholders Agreement and other specified agreements
executed in connection with the original organization of Seragen Canada in
November 1995 will be terminated. The Seragen Canada Settlement Agreement
also provides for issuance by the Company of an aggregate of $2.4 million
worth of its Common Stock upon the later to occur of (a) the closing date for
Seragen Canada's purchase of the Investor Shareholders' Seragen Canada shares
and (b) the earlier to occur of (i) a qualified offering by the Company of
additional shares of its capital stock with net proceeds to the Company of $10
million and (ii) the consummation of a disposition of the Company, whether by
way of a merger (as contemplated under the Ligand Merger Agreement) or
otherwise, or substantially all of the Company's assets.
The Company anticipates that existing cash and cash equivalents and
reimbursement of clinical costs for the development of IL-2 Fusion Protein for
cancer therapy from Lilly will be sufficient, under the forbearance provision
of the Accord (see Note 2), to fund the Company's working capital requirements
through approximately October 1998. The Report of Independent Accountants on
the Company's Financial Statements for the fiscal year ended December 31, 1997
includes an explanatory paragraph concerning uncertainties surrounding the
Company's ability to continue as a going concern. This uncertainty may
adversely affect the Company's ability to raise additional capital. The
Company's ability to finance its operations is dependent upon its ability to
raise additional capital.
The Company has explored possible opportunities for equity and debt
offerings. On the basis of discussions with its financial advisors and with
multiple prospective investors, Company management concluded that it is
unlikely that the Company will be able to obtain such financing on terms that
Company management believes would be attractive to the Company's existing
shareholders.
On May 11, 1998, the Company executed the Ligand Merger Agreement with
Ligand and Knight, a wholly-owned subsidiary of Ligand. Subject to approval
by a majority of the outstanding voting shares of capital stock of the Company
and certain other conditions, Knight will merge with and into the Company,
with the result that the Company will become a wholly-owned subsidiary of
Ligand. This transaction is expected to close in the third or fourth quarter
of 1998. Simultaneously with the execution of the Ligand Merger Agreement,
the Company and its subsidiary STI entered into the Accord with the Trustees
of BU, Seragen LLC, Marathon Biopharmaceuticals, LLC, USSC, Leon C. Hirsch,
Turi Josefsen, Gerald S.J. and Loretta P. Cassidy, Reed R. Prior, Jean C.
Nichols, Ph.D., Elizabeth C. Chen, Robert W. Crane, Shoreline Pacific
Institutional Finance, Lehman Brothers Inc., 520 Commonwealth Avenue Real
Estate Corp., and 660 Corporation, pursuant to which those parties agreed to
forbear from exercising all specified rights against the Company and STI for
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so long as the Ligand Merger Agreement continues in effect and to release the
Company from specified liabilities, including the liabilities to BU, Marathon
and USSC discussed above, in the event that the Ligand merger is consummated.
The terms of the Ligand Merger Agreement and the Accord are described in the
Company's Form 8-K dated as of May 11, 1998. There can be no assurance that
the Ligand merger will be consummated.
In the event that the Ligand merger is not consummated, the Company may
continue to seek additional funds through collaborative or other arrangements
with corporate partners and others. The Company entered into one such
arrangement in 1997 with USSC, as described above, with respect to its EGF
Fusion Protein. However, the Company's prospects for such arrangements with
respect to IL-2 Fusion Protein appear to be limited. The Company's management
has found that clinical issues associated with the side-effect profile of the
product and with its intravenous administration, along with the fact that the
same molecule has already been partnered for cancer indications, make it
difficult to attract a partner to develop the product for non-cancer
indications. Management of the Company accordingly believes that it will
continue to be difficult for the Company to establish, on advantageous terms,
additional collaborative partnerships for further trials of IL-2 Fusion
Protein.
If the Merger Agreement with Ligand is terminated and as a result the
Accord is also terminated, 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 1998 unless the Company is able to secure a
financing or other means of funding operations. 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.
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, to modify certain existing arrangements, to enter
into additional strategic partnerships and other collaborative arrangements,
to raise additional capital on satisfactory terms, or to consummate the merger
of the Company pursuant to the Ligand Merger Agreement. For further
information, refer to the "Business Outlook" section in the Company's Form
10-K as filed with the Securities and Exchange Commission. Actual results may
differ materially from such expectations.
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SERAGEN, INC.
PART II
OTHER INFORMATION
_______________________
Item 2. Changes in Securities
Effective March 30, 1998, 1,060 Series C Shares automatically converted
in accordance with the terms of the Series C Shares, into 3,360,625 shares of
the Company's Common Stock and 3,940 Series C Shares were as required by the
terms of the Series C Shares, purchased by the Company for an aggregate
purchase price of $4,530,461. Following these transactions no Series C Shares
remained outstanding.
Item 3. Defaults upon Senior Securities
Under the terms of the Series B Preferred Stock (the "Series B Shares"),
the Company is obligated to pay quarterly dividends to the holders of the
Series B Shares. The Company did not make its dividends payments due December
31, 1996, March 31, 1997, June 30, 1997, September 30, 1997, December 31, 1997
and March 31, 1998, and does not anticipate making payment due June 30, 1998.
As of March 31, 1998, the amount of dividends in arrears was approximately
$3.5 million.
In connection with the issuance of the Series B Shares, the Company
transferred all of its existing and future United States patents and patent
applications (the "Patents") to Seragen Technology, Inc. ("STI") in exchange
for 214,200 shares of STI Class A Common Stock and 23,800 shares of STI Class
B Common Stock. STI provided the Company with an irrevocable worldwide
exclusive license (the "Irrevocable License Agreement") with respect to the
Patents. Under the Irrevocable License Agreement, the Company is obligated to
pay quarterly royalties in an amount equal to the amount of any dividend that
the holders of the Series B Shares are entitled to receive but have not
received by the royalty due date (which is one day after each quarterly
dividend payment date for the Series B Shares). The Company delivered the
23,800 shares of STI Class B Common Stock pro rata to the holders of the
Series B Shares. STI's Class B Common Stock provides for cumulative dividends
payable in the same amount as any royalties payable by the Company under the
Irrevocable License Agreement. STI also executed a collateral assignment of
the Patents in favor of the holders of the Series B Shares. Pursuant to an
escrow arrangement, the collateral assignment of the Patents is required to be
delivered to the holders of the Series B Shares in the event that, after
notice, STI fails for 60 days to pay any dividend due in respect of its Class
B Common Stock. The Company did not make its royalty payments due January 1,
1997, April 1, 1997, July 1, 1997, October 1, 1997, January 1, 1998 and April
1, 1998 and does not anticipate making any payments due in 1998. STI did not
pay Class B Common Stock dividends due January 1, 1997, April 1, July 1,
1997, October 1, 1997, January 1, 1998, and April 1, 1998 and does not
anticipate making any payments due in 1998. STI did not pay Class B Common
Stock dividends due January 1, 1997, April 1, 1997, July 1, 1997, October 1,
1997, January 1, 1998 and April 1, 1998 and does not anticipate making the
payments due in 1998. To the Company's knowledge, the holders of the Series B
Shares have not provided notice of the STI dividend payment failure to the
escrow agent. In the event that STI redeems its Class B Common Stock, the
escrow agent is required to deliver a reassignment of the Patents, executed by
the holders of the STI Class B Common Stock, to the Company.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit Index
Exhibit 10.105 - Settlement Agreement, dated as of May 1, 1998,
between the Registrant, Seragen Biopharmaceuticals Ltd./Seragen
Biopharmaceutique Ltee, and the Investor Shareholders named
therein (1)
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Exhibit 10.106 - Agreement and Plan of Reorganization, dated May 11,
1998, between the Registrant, Ligand Pharmaceuticals Incorporated,
and Knight Acquisition Corporation (1) (2)
Exhibit 10.107 - Accord and Satisfaction Agreement, dated May 11,
1998, between the Registrant, Seragen Technology, Inc., the Third
Parties named therein, 520 Commonwealth Avenue Real Estate
Corporation, and 660 Corporation (1)
Exhibit 10.108 - Extension Option Agreement, dated May 11, 1998,
between the Registrant, Ligand Pharmaceuticals Incorporated, Marathon
Biopharmaceuticals LLC, 520 Commonwealth Real Estate Corporation, and
660 Corporation (1)
Exhibit 10.109 - Letter agreement, dated May 11, 1998, between the
Registrant, Ligand Pharmaceuticals Incorporated, and Eli Lilly and
Company (1)
Exhibit 10.110 - Employment Agreement, dated as of April 30, 1998, by
and between the Registrant and Mr. Robert W. Crane (filed herewith)
Exhibit 10.111 - Amendment No.1 to Service Agreement dated May 11,
1998 by and between Registrant and Marathon Biopharmaceuticals, LLC
(2) (filed herewith)
(1) All exhibit descriptions followed by (1) were previously
filed as Exhibits to, and incorporated by reference from, the
Registrant's Form 8-K for May 11, 1998 event.
(2) Confidential treatment has been requested for portions of
this exhibit, which portions have been omitted from the
exhibit as filed with the Commission.
(b) Reports on Form 8-K
A Current Report on Form 8-K for May 11, 1998 event, relating to the
Company's signing a merger agreement with Ligand Pharmaceuticals
Incorporated
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SERAGEN, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Seragen, Inc.
Date: May 15, 1998 /s/ Reed R. Prior
------------------------
Reed R. Prior
Chairman of the Board
and Chief Executive Officer
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EMPLOYMENT AGREEMENT
Employment Agreement dated as of April 30, 1998 between Seragen, Inc.
(the "Company"), having an office at 97 South Street, Hopkinton, Massachusetts
01748, and Robert Crane ("Crane"), residing at 423 Scotch Road, Titusville, NJ
08560.
WHEREAS, Crane is currently employed by the Company as acting Chief
Financial Officer; and
WHEREAS, the Company agreed to employ Crane in the aforesaid capacity on
and after November 11, 1996;
WHEREAS, Crane has provided services to the Company substantially on the
terms set forth herein since November 11, 1996
WHEREAS, the Company and Crane now desire to reduce to writing their
agreement in respect to Crane's employment;
Unless otherwise specifically provided, all capitalized terms are defined
in Section 5.
1. Term of Employment.
Subject to the terms and conditions of this Agreement, the Company hereby
employs Crane, and Crane hereby accepts employment by the Company, commencing
on April 30, 1998 (the "Effective Date") and continuing until the date Crane
is terminated or otherwise resigns pursuant to Section 4 of this Agreement,
except that any rights or obligations arising before such date (including the
right to future severance payments) shall remain in full force and effect
after such date.
2. Duties.
(a) General. Crane is hereby engaged to serve as Vice President of
Finance and Chief Financial Officer of the Company. Crane shall report solely
to the Chief Executive Officer of the Company, shall perform such executive
duties as may be assigned to him from time to time by the Company's Chief
Executive Officer and shall possess such other titles, without additional
compensation, as may be assigned or granted to him from time to time by the
Company's Chief Executive Officer or Board of Directors. If such additional
titles involve significant additional responsibilities, Crane and the Company
shall negotiate in good faith to determine any additional compensation that
shall be paid to Crane. Except as provided in Section 2(b) hereof, Crane
agrees to devote his full business time, energy and skill to the Company's
affairs and shall at all times act with due regard to the best interests of
the Company.
(b) Outside Commitments. Crane represents and agrees that he shall not
accept employment by or serve as a consultant to, any person other than the
Company except to the extent that such activities do not exceed 10% of his
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business time, do not materially interfere with his ability to perform his
duties for the Company, and are not competitive with the business of the
Company.
3. Compensation and Other Benefits. For all services to be rendered by
Crane and all covenants undertaken by him pursuant to this Agreement, the
Company shall pay and Crane shall accept the compensation set forth in this
Section 3.
(a) Salary. The Company shall pay Crane a salary at the rate of One
Hundred Ninety-Five Thousand Dollars ($195,000) per annum during the term of
his employment hereunder, payable in accordance with the Company's normal
payroll practices for its senior management. The Company may, at any time, in
the discretion of its Board of Directors increase, but not decrease, Crane's
base salary based upon merit as a result of positive reviews of Crane's
performance by the Chief Executive Officer.
(b) Stock Options. The Company shall grant Crane stock options (the
"Options") under the Seragen, Inc. 1992 Long Term Incentive Plan (the "Plan")
to purchase sufficient shares of the Company's common stock, par value $.01
per share ("Common Stock"), to equal two point seven five percent (2.75%) of
the then outstanding Common Stock, measured on a Fully Diluted Basis (as the
term is defined in Section 5), at the Fair Market Value (as defined in the
Plan) per share of Common Stock on the date of grant. To the extent permitted
by federal income tax law, options issued to Crane under the Plan shall be
"incentive stock options" (as defined in Section 422 of the Internal Revenue
Code (the "Code")). The Options shall be evidenced by a Stock Option Agreement
(the "Option Agreement") setting forth the terms and conditions applicable to
the Options.
(i) Vesting. The Option Agreement shall provide that:
(1) the Options shall vest, i.e., become exercisable as
follows: (A) 1/48 of the Options, multiplied by the number of calendar months
or partial calendar months that have elapsed from November 11, 1996 until the
date of grant of the Options, shall vest immediately upon the grant of the
Options and (B) 1/48 of the Options shall vest on the first day of each
calendar month thereafter, so that Crane shall be fully (100%) vested on
October 1, 2000;
(2) upon the termination by the Company of Crane's employment
without Just Cause or Crane's termination for Good Reason (as the terms are
defined in Section 5), in place of the vesting schedule provided in Section
3(b)(i)(1) above, the number of Options that shall vest as of the date of such
termination shall be equal to the sum of (A) 25% of the Options and (B) 3.125%
of the Options, multiplied by the number of calendar months or partial
calendar months that have elapsed from November 11, 1996 until the date of
such termination; and
(3) upon a Change in Ownership (as the term is defined in
Section 5), in place of the vesting schedule provided in Section 3(b)(i)(1)
above, the Options shall become fully (100%) vested.
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(ii) General Provisions.
(1) The Options shall, to the extent vested, be fully
exercisable until the tenth (10th) anniversary of the date of grant, except
that the Options will expire 15 days after a termination of employment with
Just Cause. To the extent that any Options that are "incentive stock options"
are not exercised before the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Options will remain outstanding for
the remainder of their term but will thereafter be treated as non-qualified
stock options.
(2) The Options shall be exercisable in accordance with the
terms of the Plan, including the right to pay the option exercise price in
whole or in part by surrendering shares of Common Stock or Restricted Stock
(as such term is defined in the Plan) held by Crane for at least six months
prior to the exercise date with an aggregate Fair Market Value equal to the
option exercise price or in accordance with a cashless exercise program
established with a securities brokerage firm and approved by the Company, and
shall provide that stock certificates to be issued upon exercise of vested
Options shall be issued outright and free of escrow no later than three (3)
days after the date of exercise.
(3) Stock certificates issued pursuant to the exercise of an
Option shall include only such legends as are required to comply with federal
or state securities law or regulations.
(4) The Options shall include all rights and benefits under
the Plan, including Section 11 (relating to accelerated vesting on a Change in
Control), and the Company shall not terminate any Option issued to Crane upon
a Change in Control (as defined in the Plan) without Crane's written approval.
(5) In the event that the Company grants options or other
equity interests to management, employees, directors or consultants, or the
Company sells shares of its Common Stock or any equity securities or
securities convertible or exchangeable into any equity securities of the
Company, as part of a plan or series of plans of financing, or the number of
shares of Common Stock outstanding on a Fully Diluted Basis increases as a
result of a change in the conversion ratio of any class of securities
convertible or exchangeable into any equity securities of the Company, the
Company shall grant Crane additional stock options under the Plan covering
that number of shares of Common Stock necessary to cause Crane's proportionate
holdings of the outstanding Common Stock on a Fully Diluted Basis, immediately
after the grant or sale of such options, shares or other equity interests to
equal his proportionate holdings of the outstanding Common Stock, on a Fully
Diluted Basis, immediately prior to the grant or sale of such options, shares
or other equity interests (the "Dilution Options"), but not to exceed two
point seven five percent (2.75%) of the Common Stock on a Fully Diluted Basis.
Dilution Options will be granted on the last day of the calendar quarter
during which such grant or sale of options, shares or other equity interests
is completed, based on the number of shares of Common Stock outstanding on a
Fully Diluted Basis on the last day of such calendar quarter, except that, in
the case of any target Equity Financing (as the term is defined in Section 5)
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from which the Company receives proceeds of at least Ten Million ($10,000,000)
Dollars, the Dilution Options will be granted immediately upon the
consummation of such Target Equity Financing. Dilution Options will have an
exercise price equal to the fair market value per share of Common Stock on the
date of grant of such Dilution Options, and will otherwise be subject to the
same terms and conditions, and will vest and remain exercisable on the same
terms, as are set forth in Section 3(b) for all other Options granted to
Crane.
Crane's right to receive Dilution Options pursuant to this subsection
3(b)(ii)(5) will terminate after the Company has received cumulative proceeds
(since November 11, 1996) of at least Twenty Million ($20,000,000) Dollars
from one or more Target Equity Financings.
(6) The Company shall, on or before December 31, 1998, at its
own expense register under the Securities Act of 1933 the maximum aggregate
number of shares issuable under the Plan on a Registration Statement on Form
S-8 and use its best efforts to maintain the effectiveness of such
Registration Statement for as long as any of the Options or Dilution Options
remain outstanding.
(c) Commuting and Living Expense Reimbursement. The Company shall,
within ten (10) days of receipt of reasonable substantiation, reimburse Crane
for (i) all reasonable costs incurred by him in connection with obtaining
lodging accommodations in the vicinity of the Company's principal office in
order to carry out his duties and responsibilities under this Agreement and
weekly travel between such location and his family residence located in
Titusville, New Jersey, plus (ii) any federal, state or local income or
payroll taxes incurred by Crane with respect to payments made under this
Section 3(c), including this subsection 3(c)(ii), so that Crane shall be made
whole on an after tax basis.
(d) Vacation and Employee Benefits. Crane shall be entitled to paid
vacations in accordance with the policies of the Company from time to time in
effect, subject to a minimum of four (4) weeks per year, accruing and earned
pro-rata over each 12 month period following the execution hereof, and shall
be eligible to participate in any pension, profit sharing or similar plan and
any health, hospitalization, medical, accident, disability, sick leave,
supplementary income benefit, life insurance or other similar benefit plan or
program of the Company now existing or hereafter established and available to
the Company's employees generally or to key employees as a group to the extent
his age, health, and other qualifications make him eligible to participate.
Furthermore, Crane shall be entitled to such additional benefits as may be
granted to him from time to time by the Chief Executive Officer or the Board
of Directors of the Company.
(e) Severance. Upon the termination of Crane's employment for any
reason, the Company shall pay Crane for up to four (4) weeks of any unused
accrued vacation time, together with all salary and other benefits accrued
through the date of termination. If either Crane shall voluntarily terminate
his employment for Good Reason (as defined in Section 5) or Crane's employment
hereunder is terminated by the Company without Just Cause (as defined in
Section 5), the Company shall provide Crane with the following severance
benefits:
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(i) upon the date of such termination the Company shall pay Crane,
as termination and severance pay, in a lump sum, an amount equal to twelve
(12) months' salary based on his then salary rate; and
(ii) upon the date of such termination the Company shall pay Crane,
in a lump sum, the amount of any remaining obligations under any lease for
local lodging, up to a maximum of one year; and
(iii) the Company will continue to provide Crane and his family
with the same group health plan benefits coverage provided to them prior to
Crane's termination for the maximum period set forth in the continuation
coverage requirements under "COBRA", and the Company will provide such
coverage without cost or charge of any nature to Crane or any member of his
family, other than any applicable deductible or co-payment, for such maximum
period, but in no event for a period longer than twelve (12) months following
the date of Crane's termination.
(iv) the Company shall transfer to Crane full ownership of the
Gateway 2000 portable computer (including all accessories) which he is
currently using and in which he has already invested his own personal funds,
provided, however that Crane shall provide to the Company a copy, in machine
readable format, of all computer files relating to his employment with the
Company.
(f) Death or Disability. If Crane's employment is terminated by death
or disability, the Company shall pay to Crane's estate or to Crane, as the
case may be, the balance of his accrued and unpaid salary through the date of
such termination and unreimbursed expenses and his unused accrued vacation
time (up to four (4) weeks). For the purposes of this section, the word
"disability" shall have the same meaning as in the Company's then-applicable
long-term disability policy that would qualify Crane for full benefits under
the policy.
(g) Employment. All compensation payable and other benefits provided
under this Section 3 shall be subject to customary withholding for income,
F.I.C.A. and other employment taxes. The value of stock issued pursuant to the
exercise of an Option or Dilution Option shall be measured solely in
accordance with IRS rules and regulations.
(h) Asset Value Realization Bonus. As of the date hereof, it is
understood that a major goal of Crane's employment hereunder shall be to
assist the Company in obtaining a satisfactory sale or merger of the Company.
Therefore, in the event a Change in Ownership of the Company (as the term is
defined in Section 5) is Effected (as hereinafter defined) during the term of
Crane's employment with the Company or at any time before the first
anniversary of Crane's termination of employment, then the Company shall pay
Crane as an addition to his other compensation a fee (the "Asset Value
Realization Bonus") equal to two point seven-five percent (2.75%) of the Net
Proceeds (as hereinafter defined) for any acquisition that is part of the
Change in Ownership, which amount shall be reduced (but not below zero) by the
Option Stock Gain (as hereinafter defined) recognized by Crane as a result of
the sale by him of Common Stock acquired upon the exercise of Options or
Dilution Options granted to him under Section 3(b) above. The Company shall
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<PAGE>
pay the Asset Value Realization Bonus, or any increase in the Asset Value
Realization Bonus, on or before the closing of any acquisition that is part of
a Change in Ownership. If any part of the Net Proceeds is payable after
closing (the "Deferred Payments"), however, then the Company may defer the
payment of the part of the Asset Value Realization Bonus allocable to the
Deferred Payments until receipt of the Deferred Payments, provided the payor
of the Deferred Payments has agreed in writing to pay directly to Crane the
Asset Value Realization Bonus allocable to the Deferred Payments as and when
such Deferred Payments are made to the Company or its shareholders. "Net
Proceeds" shall mean the total cash plus any property received directly or
indirectly by the Company or its shareholders in kind with respect to all
acquisitions constituting the Change in Ownership, reduced by all investment
banking fees, brokerage fees, appraisal fees, and other professional expenses
directly attributable to the acquisitions. A transaction shall be "Effected"
by a certain date if it is consummated by that date or is the subject matter
of an agreement or memorandum of intent executed by that date and subsequently
consummated. "Option Stock Gain" shall mean the difference between the net
proceeds from Crane's sale of Common Stock and the net cost to Crane to
exercise the Options and Dilution Options for such stock on the assumption
that Crane has, in fact, exercised all vested options and sold all Common
Stock received on such exercise as of the date of the Change in Ownership;
Crane shall for this purpose be deemed to have sold all Common Stock that (i)
he owns at the time of the Change of Ownership or could then own if he
exercised all vested options, (ii) he is permitted to sell, and (iii) in the
event of a merger or sale of securities, he has received an offer to purchase,
and is permitted to sell, on the same terms and conditions as those of the
transactions that constitute the Change in Ownership.
4. Termination of Employment.
(a) Termination by Company. The Company may terminate Crane's employment
hereunder at any time without Just Cause, effective upon not less than thirty
(30) days' prior written notice. The Company may terminate Crane's employment
hereunder with Just Cause immediately without notice. If the termination is
for Just Cause, the Company shall provide Crane as soon as practicable with a
written explanation of the facts on which the termination is based. For the
purposes of this Agreement, the Company shall be deemed to have terminated
Crane without Just Cause if (i) Crane shall have notified the Company in
writing that he has Good Reason (as defined in Section 5) to terminate
employment with the Company, (ii) the Company shall not have eliminated such
Good Reason within thirty (30) days of such notice, and (iii) Crane shall have
given notice of termination of his employment more than thirty (30) days after
delivery of such notice of Good Reason and less than sixty (60) days after
delivery of such notice of Good Reason.
(b) Termination by Crane. Crane may terminate his employment hereunder
at any time upon not less than thirty (30) days' prior written notice. Upon
Crane's voluntary termination of employment without Good Reason pursuant to
this Section 4(b), Crane shall not be entitled to the severance benefits
described in Section 3(e) above.
(c) Disability. If Crane shall incur a disability, the Company may
terminate Crane's employment upon not less than thirty (30) days' prior
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written notice. Upon such termination, Crane shall be entitled to receive
from the Company only those payments set forth in Section 3(f) hereof. For
the purposes of this section, the word "disability" shall have the same
meaning as in the Company's then-applicable long-term disability policy that
would qualify Crane for full benefits under the policy.
5. Definitions.
(a) Just Cause. For the purposes of this Agreement, "Just Cause" shall
mean:
(i) the commission by Crane of an act of, or omission of an act
that would constitute, willful and material malfeasance or gross negligence in
the performance of his duties on behalf of the Company;
(ii) the commission by Crane of a willful act of material fraud in
the performance of his duties on behalf of the Company;
(iii) the conviction of Crane for commission of a felony; or
(iv) the breach by Crane of any material term of this Agreement or
the continuing willful failure of Crane to perform his material duties to the
Company (other than any such failure resulting from Crane's incapacity due to
physical or mental illness) after written notice thereof (specifying the
particulars thereof in reasonable detail) and a reasonable opportunity to be
heard and cure such breach or failure are given to Crane by the Chief
Executive Officer of the Company or the Board of Directors of the Company. No
notice, however, shall be due for a breach or failure to perform that cannot
be cured or for any act described in clauses (i), (ii) or (iii) above.
For purposes of this Section 5(a), no act, or failure to act, on Crane's
part shall be considered "willful" unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action or omission
was in the best interests of the Company.
(b) Good Reason. For the purposes of this Agreement, "Good Reason"
shall mean:
(i) the Company shall have materially breached its obligations
under this Agreement (including any substantial change in Crane's duties or
responsibilities), and such breach is not cured within twenty (20) days of
Crane's sending a written notice of such breach;
(ii) the Company shall have incurred a Change in Ownership;
(iii) the Company shall have incurred a Change in Control;
(iv) the Company shall be Insolvent;
(v) the Company shall have acted in bad faith to cause Crane to
resign from the Company;
7
<PAGE>
(vi) the Options shall not have been granted within six (6) months
of the date of execution of this Agreement; or
(vii) the Dilution Options shall not have been granted within the
time period set forth in Section 3(b).
Good Reason shall not arise in any situation in which Crane shall have
given written consent to the act or failure to act of the Company.
(c) Insolvency. For the purposes of this Agreement, the Company shall be
"Insolvent" if
(i) it commences any case, proceeding or other action (A) under the
Federal Bankruptcy Code seeking to have an order for relief entered with
respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution, composition
or other relief with respect to it or its debts, or (B) seeking appointment of
a receiver, trustee, custodian or other similar official for it or for all or
any substantial part of its property, or the Company shall make a general
assignment for the benefit of its creditors, or
(ii) there shall be commenced against the Company any case,
proceeding or other action of a nature referred to in Section 5(c)(i) above,
which case, proceeding or other action
results in the entry of an order for relief from which no stay has been
granted within sixty (60) days, or
(iii) for a period in excess of sixty (60) days, the Company shall
generally not, or shall be unable to, pay its debts as they become due or
shall admit in writing its inability to pay its debts.
(d) Change in Ownership. For purposes of this Agreement, a "Change in
Ownership" of the Company shall mean (i) the acquisition by any "person" or
group of "persons" (as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934 ("Exchange Act")), whether by way of merger, sale of assets, stock
purchase, tender offer or otherwise, of (A) all or substantially all of the
equity securities of the Company or (B) all or substantially all of the
operating assets of the Company and its subsidiaries taken as a whole,
provided that the sale of the Company's manufacturing and clinical operations
facilities to Boston University or Boston University's designated affiliate,
shall not constitute a change in ownership, or (ii) the sale or out-licensing
after the date hereof of the majority (in value) of the technology assets of
the Company and its subsidiaries taken as a whole.
(e) Change in Control. For purposes of this Agreement, a "Change in
Control" of the Company shall have the same meaning as provided in Section
11(b) of the Plan as in effect on the date hereof.
(f) Fully Diluted Basis. For purposes of this Agreement, "Fully Diluted
Basis" shall mean that all shares of Common Stock issuable upon exercise of
8
<PAGE>
options outstanding under the Plan or any other stock option plan (including
the Options and Dilution Options granted to Crane pursuant to this Agreement)
and all shares of Common Stock issuable on exercise of all other outstanding
options, warrants, conversion rights or other rights issued by the Company to
acquire equity securities shall be deemed to be outstanding.
(g) Target Equity Financing. Target Equity Financing shall mean the
sale or issuance of stock of the Company or of debt securities of the Company
with conversion rights, other than
(i) stock or debt securities sold or issued to a shareholder and/or affiliated
investment entities who as of the Effective Date collectively own at least 1%
of the Common Stock as measured on a Fully Diluted Basis or (ii) stock issued
as a result of the exercise of options presently outstanding or issued
pursuant to the Plan.
6. Confidentiality.
(a) Crane acknowledges that during the course of his employment with the
Company he has had access to, will have access to and may obtain, develop or
learn of Confidential Information (as defined below).
(b) Crane agrees that while employed by the Company and thereafter he
shall hold such Confidential Information in strictest confidence and that,
except pursuant to his employment with the Company, he shall not at any time,
during or after the conclusion of his employment with the Company, or in any
manner, either directly or indirectly, use (for his own benefit or otherwise),
divulge, disclose or communicate to any unauthorized person, firm or
corporation in any manner whatsoever any Confidential Information.
(c) Under this Agreement, the term "Confidential Information" shall
include but not be limited to any of the following information relating to the
Company learned by Crane during or as a result of his employment or prior
consulting engagement with the Company:
(i) information relating to the products, product development
activities, research, technical and/or scientific know-how, plans, projects,
processes or manner of operations;
(ii) computer databases, software programs and information relating
to the nature of the hardware or software and how said hardware and software
are used in combination or alone;
(iii) methods of selling, pricing and business operations in
general as well as specific;
(iv) the identity of customers, market research information and any
other information in any form relating to such customers and their
relationships or dealings with the Company or any subsidiary or affiliate
thereof;
(v) any trade secret or confidential information of or concerning
any customers, affiliates or business relations; and
9
<PAGE>
(vi) any other trade secret or information of a confidential or
proprietary nature.
(d) While an employee of the Company, Crane shall use, divulge, disclose
or communicate Confidential Information only in the scope of his employment
with the Company. Crane shall not at any time after the termination of his
employment with the Company, for whatever reason, use, divulge, disclose, or
communicate for any purpose any Confidential Information.
(e) Crane will not make or use any notes or memoranda relating to any
Confidential Information except for the benefit of the Company, and will, at
the Company's request, return each original and every copy of any and all
notes, memoranda, correspondence, diagrams or other records, in written or
other form, that he may at any time have within his possession or control that
contain any Confidential Information.
(f) Notwithstanding the above, this Section 6 shall not apply to any
matter which is now or becomes part of the public domain, other than through
Crane's improper act or omission, was known to Crane prior to the commencement
of his employment or any prior consulting arrangements with the Company or is
disclosed to Crane by a third party which did not obtain the information,
directly or indirectly, under an obligation of confidence to the Company.
Further, this agreement shall not apply to information which Crane is required
to disclose by enforceable legal process.
7. Non-Competition.
Crane acknowledges and recognizes the highly competitive nature of the
business conducted by the Company. Accordingly, Crane agrees that, in
consideration of the premises
contained herein, he shall not, for his own benefit or for the benefit of any
other person or entity, while employed by the Company and for a one-year
period thereafter:
(a) become an employer, officer, director, owner, employee, partner,
consultant or other participant in any entity, or assist any person, which
competes with or which is about to compete with the Company in the business of
developing, manufacturing, marketing or selling pharmaceutical products based
upon diphtheria fusion toxins or any other technology owned by the Company
before Crane's termination (a "Competitive Business"); or
(b) own any interest in any entity which engages, or is about to engage
in a Competitive Business; provided, however, that Crane shall have the right
to acquire as a passive investor an equity interest of not more than one
percent (1%) of the issued and outstanding shares of any publicly traded
corporation's stock.
8. Company Right to Inventions.
Crane shall promptly disclose, grant and assign to the Company for its
sole use and benefit any and all inventions, improvements, technical
information and suggestions relating in any way to diphtheria fusion toxins or
10
<PAGE>
other technology created by the Company, which he may develop or acquire while
employed by the Company (whether or not during usual working hours), together
with all patent applications, letters patent, copyrights and reissues thereof
that may at any time be granted for or upon any such invention, improvement or
technical information. In connection therewith:
(a) Crane shall without charge, but at the expense of the Company,
promptly at all times hereafter execute and deliver such applications,
assignments, descriptions and other instruments as may be reasonably necessary
or proper in the reasonable opinion of the Company to vest title to any such
inventions, improvements, technical information, patent applications, patents,
copyrights or reissues thereof in the Company and to enable it to obtain and
maintain the entire right and title thereto throughout the world; and
(b) Crane shall render to the Company at its expense (including a
reasonable payment for the time involved in case he is not then in its employ)
all such assistance as it may reasonably require in the prosecution of
applications for said patents, copyrights or reissues thereof, in the
prosecution or defense of interferences which may be declared involving any of
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, inventions, improvements
or technical information.
9. Breach. In the event of breach by Crane of any provision of Sections
6, 7 and 8 hereof, the remedy at law will be deemed inadequate, and the
Company will be entitled, in addition to any other remedies available by law,
to appropriate injunctive and other relief. Should any provision hereof be
adjudged to any extent invalid by any competent tribunal, such provision will
be deemed modified to the extent necessary to make it enforceable.
10. Indemnity. To the extent permitted by law, the Company shall
indemnify Crane and hold him harmless for all acts or decisions made by him in
good faith while performing services for the Company or any designee of the
Company and shall pay or reimburse Crane for all expenses as and when
incurred, including attorneys' fees, actually and necessarily incurred by
Crane in connection with the defense of any action, suit or proceeding to
which Crane may be made a party by reason of his performing services hereunder
and in connection with any related appeal including the cost of court
settlements. The Company shall also use its best efforts to obtain coverage
for him under any insurance policy obtained during the term of this Agreement
covering the other officers and directors of the Company against lawsuits.
11. Notices. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be deemed to have
been given when sent by facsimile or when mailed at any general or branch
United States Post Office enclosed in a certified postpaid envelope and
addressed to the address of the respective party stated below or to such
changed address as the party may have fixed by notice:
To the Company: Seragen, Inc.
97 South Street
Hopkinton, MA 01748
Attention: Chief Executive Officer
Fax No.: (508) 485-9805
11
<PAGE>
To Crane: Mr. Robert Crane
423 Scotch Road
Titusville, NJ 08560
Fax No.: (609) 730-9717
12. Legal Fees. The Company shall pay Crane's reasonable legal fees
incurred with respect to the preparation of this Agreement and other documents
related to his employment by the Company.
13. Miscellaneous.
(a) Construction. This Agreement shall be construed, interpreted and
governed by the laws of the State of Delaware without regard to the principles
of conflicts of laws.
(b) Binding Agreement; Assignability. This Agreement shall be binding
upon and inure to the benefit of Crane, his legal representatives, heirs and
distributees, and the Company, its successors and assigns; provided, however,
that because this Agreement is a personal service contract, Crane shall not
assign any of his employment duties or obligations hereunder and any purported
assignment shall be null and void ab initio.
(c) Previous Agreements. This Agreement supersedes all other agreements
between the Company and Crane relating to Crane's employment by the Company.
(d) Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to its subject matter, and no waiver, modification
or change of any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed waiver, modification or change is
sought to be enforced.
(e) Waiver. The waiver of any breach of any duty, term or condition of
this Agreement shall not be deemed to constitute a waiver of any preceding or
succeeding breach of the same or of any other duty, term or condition of this
Agreement.
(f) Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof or to affect the meaning thereof.
(g) Survival. The provisions of Sections 6, 7, 8 and 10 shall survive
termination of this Agreement.
(h) Representations and Warranties of Crane. Crane represents and
warrants that his performance of all of the terms of this Agreement and as an
employee of the Company does not and will not breach any consulting,
12
<PAGE>
employment, non-compete or other agreement to keep in confidence proprietary
information, knowledge, or data acquired by him in confidence or in trust from
a third party prior to his employment with the Company.
(i) Representations and Warranties of Company.
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is duly
qualified to do business in the Commonwealth of Massachusetts and has full
power and authority to operate its businesses as now operated and to perform
this Employment Agreement in accordance with its terms.
(ii) The execution and delivery of this Employment Agreement to
Crane and the carrying out of the provisions hereof have been duly authorized
by the Board of Directors of the Company based upon the unanimous
recommendation of the Compensation Committee of the Board of Directors.
(iii) This Employment Agreement shall be, when duly executed and
delivered, a legal and binding obligation of the Company, enforceable in
accordance with its terms.
(iv) Neither the execution nor delivery of this Employment
Agreement, nor the compliance with its terms, shall constitute a violation or
breach of the Certificate of Incorporation, as amended to date, or of the
by-laws, as currently in effect, of the Company or of any agreement between
the Company and any other party.
(j) Capitalized Terms. All capitalized terms shall have the meanings
provided in Section 5 unless provided elsewhere.
(k) Arbitration. Except as provided in Paragraph 9 above, any claim or
controversy arising out of or relating to this Agreement or the breach thereof
shall be settled by arbitration in accordance with the laws of the
Commonwealth of Massachusetts. Such arbitration shall be conducted in the City
of Boston in accordance with the rules then-existing of the American
Arbitration Association for commercial disputes. In any such arbitration each
party shall have the right to demand (i) a written statement setting forth,
for each cause of action, a detailed statement of the facts on which it is
based and a description of how the amount demanded was calculated; and (ii) to
demand inspection and copying of relevant documents and things in the
possession or control of any of the other parties, prior to the arbitration
hearing. The arbitrator shall have authority to order compliance with, and
shall otherwise supervise, such demands for written statements and/or for
pre-hearing inspection and copying. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year first above written.
SERAGEN, INC.
By: /s/ Reed R. Prior
-----------------------
ROBERT CRANE
/s/ Robert W. Crane
---------------------------
14
<PAGE>
CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR PORTIONS OF THIS
EXHIBIT, WHICH PORTIONS HAVE BEEN
OMITTED FROM THE ATTACHED DOCUMENT
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
THE OMITTED PORTIONS HAVE BEEN
REPLACED BY AN ASTERISK ENCLOSED BY
BRACKETS ("[ * ]")
AMENDMENT NO. 1 TO SERVICE AGREEMENT
This Amendment No. 1 to Service Agreement (the "Amendment") is made
between Seragen, Inc., a Delaware corporation having a usual place of business
at 97 South Street, Hopkinton, Massachusetts ("Seragen"), and Marathon
Biopharmaceuticals, LLC, a Massachusetts limited liability company having a
usual place of business at 97 South Street, Hopkinton, Massachusetts (the
"Service Provider"), as successor by assignment of Trustees of Boston
University ("BU"), as of May 11, 1998, for the purpose of amending that
certain Service Agreement, dated as of February 14, 1997 (the "Service
Agreement"), between Seragen and BU.
This Amendment is made with reference to the following facts:
A. Seragen entered into the Service Agreement to
purchase
certain services relating to product research, development, manufacturing,
clinical trial, quality control, and quality assurance.
B. Service Provider is the successor by assignment to BU, one of
the original parties to the Service Agreement.
C. Seragen has made certain business decisions that will result
in a reduction of the amount of product research, development, manufacturing,
clinical trial, quality control, and quality assurance services that will be
required in the second Contract Year (as defined in the Service Agreement).
D. Seragen is willing, on the terms set forth in this Amendment,
to perform for itself certain clinical trial services originally subject to
the Service Agreement and Service Provider desires to make available to
Seragen the assets necessary for Seragen to perform those services.
E. Section 2.01 of the Service Agreement provides that, in the
event that Seragen's research and development requirements change, the parties
to the Service Agreement shall negotiate amendments (including appropriate
price reductions) to the services required to be performed
<PAGE>
- 2 -
under the Service Agreement. Section 4.01 of the Service Agreement provides
that, in such an event, the parties shall agree on appropriate adjustments to
the Technology Service Fees (as defined in the Service Agreement) payable
under the Service Agreement; provided, however, that in no event shall the
Technology Service Fees payable with respect to any Contract Year be reduced
to less than $4,300,000.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Amendment, the parties to this Amendment,
intending to be legally bound, agree as follows:
1. In lieu of the services required to be provided pursuant to
Schedule 1 to the Service Agreement by Service Provider in the second Contract
Year, Service Provider shall provide the services specified in Schedule 1
attached to this Amendment.
2. In light of the reduced services to be provided to Seragen in
the second Contract Year, the Technology Service Fees for the second Contract
Year shall be $4,300,000.
3. Service Provider shall make available without any additional
compensation to Seragen all assets necessary for Seragen to perform such
clinical trial services at the facility located at 99 South Street, Hopkinton,
Massachusetts, as Seragen may from time to time reasonably specify, which
services are not required to be performed by Service Provider under this
Amendment.
4. Capitalized terms used in this Amendment and not otherwise
defined shall have the meaning given those terms in the Service Agreement.
5. Except as expressly modified by this Amendment, the Service
Agreement shall remain in full force and effect.
<PAGE>
- 3 -
Seragen and Service Provider have executed this Amendment effective
as of the date first set forth above.
SERAGEN, INC.
/s/ Reed R. Prior
---------------------------
By: Reed R. Prior
Chairman, Chief Executive
Officer & Treasurer
MARATHON BIOPHARMACEUTICALS, LLC
Service Provider
/s/ Kenneth G. Condon
---------------------------
By: Kenneth G. Condon
Manager
<PAGE>
Schedule 1 - Service Agreement
Services to be performed by Service Provider for Seragen in 1998:
Manufacturing of Batches - 1998:
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Includes raw materials, labor and utilities
Manufacturing Fill of Batches - 1998:
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Quality Control and Release Testing of Batches - 1998:
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Includes raw materials, labor and utilities
Quality Assurance - 1998:
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Includes raw materials, labor and utilities
Product Development - 1998
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Includes labor and direct materials
Clinical/ Pre Clinical/ Regulatory Studies - 1998
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
Includes clinical trial site fees, labs, pathology fees, supplies and
overhead, clinical assays
Clinical/ Pre Clinical/ Regulatory Studies and Other- 1998
Service Specifications [ * ] [ * ] Comments
- ------- -------------- --------- --------- --------
[ * ]
[ * ]
Price for services rendered in 1998 - $6,605,651 (Original estimate)
Price for services rendered in 1998 - $4,300,000 (Revised estimate)
[ * ] - Confidential treatment requested
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
RESTATED FINANCIAL DATA SCHEDULE EXHIBIT 27
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,788,786
<SECURITIES> 0
<RECEIVABLES> 1,649,227
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,509,455
<PP&E> 13,054
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,591,833
<CURRENT-LIABILITIES> 16,689,525
<BONDS> 0
<COMMON> 272,731
0
24,154,926
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,591,833
<SALES> 0
<TOTAL-REVENUES> 747,174
<CGS> 0
<TOTAL-COSTS> 2,848,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,560,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,560,020)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
