SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1996
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______
Commission File No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 043047911
- -------- ---------
(State or other jurisdiction of (I.R.S. Employer
Identification incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue, Lexington, MA 02173
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 861-8444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 twelve (12) months (or for such shorter period that the registrant
was required to file such report(s)), and (2) has been subject to the filing
requirements for the past ninety (90) days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock (excluding preferred stock
convertible into and having voting rights on certain matters equivalent to
622,222 shares of common stock) held by non-affiliates of the registrant was
approximately $477,000,000, based on the last sales price of the Common Stock as
of December 13, 1996.
As of December 13, 1996, 41,017,875 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.
PART II
ITEM 8. Financial Statement and Supplemental Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements Page
- ---------------------------- ----
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets -- September 30, 1996 and 1995.................F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1996, 1995 and 1994........................................F-4
Consolidated Statements of Stockholders' Equity -- For the years
ended September 30, 1996, 1995 and 1994..................................F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1996, 1995 and 1994........................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 8, 1996
F-2
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $145,901 $16,781
Marketable securities 17,068 18,208
Accounts receivable 4,338 237
Inventories 8,376 -
Prepaids and other current assets 1,324 190
--------------- --------------
Total current assets 177,007 35,416
Marketable securities 6,639 -
Property and equipment, net 2,689 1,671
Other assets 103 429
---------------- --------------
$186,438 $37,516
================ ==============
LIABILITIES
Current liabilities:
Accounts payable $ 2,575 $ 1,161
Accrued expenses 11,604 7,994
Deferred revenue 6,921 -
Current portion of capital lease obligations 661 506
---------------- --------------
Total current liabilities 21,761 9,661
Long-term portion of capital lease obligations 526 782
Other long-term liabilities 16 43
Minority interest 19,373 5,638
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, authorized 5,000,000 shares:
Series B, 239,425 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $3,026) 3,000 3,000
Series C, 5,000 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $502) 500 500
Common stock, par value $.001; 60,000,000 shares authorized;
41,015,969 and 33,284,006 shares issued and outstanding at
September 30, 1996 and September 30, 1995, respectively 41 33
Additional paid-in capital 247,999 96,651
Accumulated deficit (106,778) (78,792)
---------------- --------------
Total stockholders' equity 144,762 21,392
---------------- --------------
$186,438 $37,516
================ ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product revenue $14,162 $ - $ -
Contract and license fee revenue 8,335 3,463 101
Investment income 4,465 1,039 505
--------- ------------ -------------
Total revenues 26,962 4,502 606
Costs and expenses:
Cost of product revenue 11,617 - -
Research and development 17,824 15,168 17,737
Selling, general and administrative 17,497 7,878 8,403
Purchase of in-process research and development 8,584 - 1,852
--------- ------------ -------------
Total costs and expenses 55,522 23,046 27,992
Net loss from operations (28,560) (18,544) (27,386)
Minority interest 574 563 -
----------- ---------- -------------
Net loss ($27,986) ($17,981) ($27,386)
=========== ========== =============
Net loss per common share ($0.76) ($0.59) ($0.98)
=========== ========== =============
Weighted average common shares
outstanding 37,004 30,604 27,873
=========== ========== =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------- -------------------- Additional Total
Number of Par Value Number of Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------------------------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993................. 26,851,867 $ 27 244,425 $3,500 $51,125 ($33,426) $21,226
Proceeds from exercise of Class B
Warrants......... .......................... 177,000 841 841
Proceeds from exercise of stock options....... 110,500 465 465
Private placements of common stock,
net of issuance costs of $1,609............. 1,707,000 2 13,752 13,754
Issuance of warrants.......................... 180 180
Issuance of common stock for technology
rights..... ................................ 170,000 759 759
Dividends on preferred stock.................. (63) (63)
Net loss...................................... (27,385) (27,385)
--------------- ------ ---------- ------- -------- -------- --------
Balance at September 30, 1994........... 29,016,367 29 244,425 3,500 67,059 (60,811) 9,777
Proceeds from exercise of Class B Warrants.... 257,107 1,221 1,221
Proceeds from exercise of stock options....... 61,200 151 151
Private placement of common stock, net of
issuance costs of $1,244 ................... 3,009,045 3 24,698 24,701
Dividends on preferred stock.................. (35) (35)
Proceeds from offering of Employee Stock
Purchase Plan........... ................... 10,287 70 70
Proceeds from exercise of unit purchase
options and Class A warrants 930,000 1 2,324 2,325
Proceeds from issuance of Put Protection
Rights and warrants...... .................. 1,163 1,163
Net loss...................................... (17,981) (17,981)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1995........... 33,284,006 33 244,425 3,500 96,651 (78,792) 21,392
Proceeds from exercise of Class B and other
warrants.............. ..................... 3,524,897 4 13,124 13,128
Proceeds from exercise of stock options....... 740,022 1 3,141 3,142
Public offering of common stock, net of
issuance costs of $850.. .................. 3,000,000 3 109,127 109,130
Proceeds from offering of Employee Stock
Purchase Plan............ .................. 16,672 146 146
Dividends on preferred stock.................. (35) (35)
Shares issued in payment of dividends......... 9,935 105 105
Issuance of common stock for technology
rights ..................................... 342,792 8,827 8,827
Shares and payments pursuant to private
placement agreements...... ................. 97,645 (35) (35)
Gain on sale of stock by subsidiary........... 16,348 16,348
Stock-based compensation...................... 600 600
Net loss...................................... (27,986) (27,986)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1996........... 41,015,969 $41 244,425 $3,500 $247,999 ($106,778) $144,762
============= ======= ========== ====== ======== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
For the years ended September 30,
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($27,986) ($17,981) ($27,386)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 889 715 685
(Gain) loss on disposal of fixed assets 38 (34) 46
Amortization of bond premium - - 24
Minority interest in net loss of consolidated
subsidiaries (574) (563) -
Noncash license fee expense - - 180
Purchase of in-process research and
development 8,098 - 759
Noncash compensation 1,422 - 326
Change in assets and liabilities:
Accounts receivable and other assets (4,909) (186) 851
Inventories (8,376) - -
Accounts payable 1,414 44 535
Deferred revenue 6,921 - -
Accrued expenses and other liabilities 3,649 2,129 4,124
----- ----- -----
Net cash (used) by operating activities (19,414) (15,876) (19,856)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (1,850) (504) (1,178)
Purchase of marketable securities (56,641) (22,465) (12,621)
Proceeds from maturities and sales of
marketable securities 51,141 8,614 22,736
Proceeds from sale of fixed assets 63 47 -
----- ------ ------
Net cash provided (used) by investing activities (7,287) (14,308) 8,937
----- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of stock and
other financing activities 125,510 29,630 14,671
Net proceeds from issuance of stock by
subsidiaries 30,569 6,070 -
Proceeds from sale/leaseback 313 324 1,498
Principal payments of capital lease obligations (571) (416) (118)
------- ------ ------
Net cash provided by financing activities 155,821 35,608 16,051
------- ------ ------
Net change in cash and cash equivalents 129,120 5,424 5,132
Cash and cash equivalents at beginning of period 16,781 11,357 6,225
------ ------ -----
Cash and cash equivalents at end of period $145,901 $16,781 $11,357
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
INTERNEURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of the Business:
Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders, including obesity, stroke, anxiety and insomnia. The
Company focuses primarily on developing products that mimic or affect
neurotransmitters, which are chemicals that carry messages between nerve cells
of the central nervous system ("CNS") and the peripheral nervous system. The
Company is also developing products and technologies, generally outside the CNS
field, through four subsidiaries (the "Subsidiaries"): Intercardia, Inc.
("Intercardia"), focuses on cardiovascular disease; Progenitor, Inc.
("Progenitor"), focuses on developmental genomics; Transcell Technologies, Inc.
("Transcell"), focuses on carbohydrate-based drug discovery; and InterNutria,
Inc. ("InterNutria"), focuses on dietary supplement products.
B. Summary of Significant Accounting Policies:
Basis of Presentation: The consolidated financial statements include the
accounts of the Company and its wholly- and majority-owned Subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Marketable Securities: The Company invests available
cash in short-term bank deposits, money market funds, U.S. and foreign
commercial paper and U.S. and foreign government securities. Cash and cash
equivalents includes investments with maturities of three months or less at date
of purchase. Marketable securities consist of investments purchased with
maturities greater than three months and are classified as non-current if they
mature one year or more beyond the balance sheet date. The Company classifies
its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. At September 30, 1995, all investments held were
classified as "held-to-maturity." At September 30, 1996, all investments held
were classified as "available-for-sale."
Property and Equipment: Property and equipment are stated at cost. The Company
provides for depreciation using the straight-line method based upon the
following estimated useful lives:
Estimated Useful Lives:
Office equipment. . . . . . . . . . . . . . . . .. . . . . . . . 2 to 5 years
Laboratory equipment.. . . . . . . . . . . . . . . . . . . . . . . . 5 years
Leasehold improvements. . . . . . Shorter of lease term or estimated useful life
F-7
Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged, respectively, to operations.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market. Drug inventory costs are capitalized commencing from the time
the pertinent drug is recommended for approval by an Advisory Committee of the
U.S. Food and Drug Administration ("FDA") for drugs that are subject to FDA
approval and from the time product is manufactured with the intention of
commercial sale for products not requiring FDA approval.
Revenue Recognition: Product revenue consists of product sales which are
recognized at the later of shipment or acceptance and royalties from licensed
products which are recognized when the amount of and basis for such royalties
are reported to the Company in accordance with the related license agreements.
Cash received in advance of product shipments or acceptance is recorded as
deferred revenue. Contract and license fee revenue consists of contractual
research milestone payments, sales and marketing payments, research and
development grants and contractual research and development funding and is
recognized when services are performed or when contractual obligations are met.
Research and Development: Research and development costs are expensed in the
period incurred.
Income Taxes: Deferred tax liabilities and assets are recognized based on
temporary differences between the financial statement basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation allowance
against net deferred tax assets is established if, based on the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized (see Note I).
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, Accounting for
Stock-Based Compensation, which changes measurement, recognition and disclosure
standards for stock-based compensation. The Company will adopt the disclosure
requirements of SFAS No. 123 in fiscal year 1997 and will continue to measure
stock-based compensation in accordance with present accounting rules. As such,
the adoption of SFAS No. 123 will not impact the financial position or the
results from operations of the Company.
Issuance of Stock by a Subsidiary: Gains on the issuance of common stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the Company
accounts for the change in its proportionate share of the subsidiary's net
assets resulting from the additional equity raised by the subsidiary as an
equity transaction and credits any resulting gain to additional paid-in capital.
Uncertainties: The Company is subject to risks common to companies in the
biotechnology industry, including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
Reclassification: Certain prior year amounts have been reclassified to conform
with fiscal 1996 classifications.
F-8
C. Marketable Securities:
Investments in marketable securities consisted of the following at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
Market Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
U.S. government treasury
and agency obligation ................. $2,005,000 $2,033,000 $4,953,000 $4,950,000
Foreign government and
corporate obligations ................. 3,260,000 3,193,000 - -
U.S. corporate notes ....................... 18,442,000 18,503,000 13,255,000 13,255,000
---------- ---------- ---------- ----------
Total ..................................... $ 23,707,000 $23,729,000 $18,208,000 $18,205,000
============ =========== =========== ===========
</TABLE>
At September 30, 1996, marketable securities representing $6,639,000 of the
total cost mature between September 30, 1997 and 1998 and marketable securities
representing $17,068,000 of the total cost mature within one year from September
30, 1996. At September 30, 1996 and 1995, marketable securities were carried at
cost due to insignificant differences from market value. At September 30, 1996,
gross unrealized gains and loses were $144,000 and $122,000, respectively.
D. Inventories:
Inventories at September 30, 1996 consisted of:
Raw materials $5,420,000
Finished goods 2,956,000
---------
$8,376,000
==========
Raw materials consist primarily of dexfenfluramine drug substance and finished
goods consist primarily of finished Redux(TM).
E. Property and Equipment:
At September 30, 1996 and 1995, property and equipment consisted of the
following:
1996 1995
---- ----
Office equipment ............................ $1,622,000 $ 796,000
Laboratory equipment ........................ 2,612,000 2,036,000
Leasehold improvements ...................... 242,000 337,000
----------- ----------
4,476,000 3,169,000
Less: accumulated depreciation
and amortization ................. (1,787,000) (1,498,000)
--------- ---------
$2,689,000 $1,671,000
========== ==========
Included in the above amounts is property and equipment under capital lease
obligations of $2,169,000 and $1,890,000 at September 30, 1996 and 1995,
respectively, and related accumulated depreciation of $845,000 and $619,000 at
September 30, 1996 and 1995, respectively. Leased assets consist primarily of
laboratory equipment. The Company paid $158,000 and $146,000 in interest expense
during the years ended September 30, 1996 and 1995, respectively, related to
these capital lease obligations.
F-9
F. Accrued Expenses:
At September 30, 1996 and 1995 accrued expenses consisted of the following:
1996 1995
---------------- ---------
Professional fees. . . . . . . . . . $ 947,000 $ 526,000
Clinical and sponsored research. . . 5,490,000 3,737,000
Compensation related . . . . . . . . 3,058,000 1,504,000
Shared manufacturing costs . . . . . - 701,000
Other. . . . . . . . . . . . . . . . 2,109,000 1,526,000
----------- ---------
$11,604,000 $7,994,000
============ ===========
G. Commitments:
The Company leases its facilities, as well as certain laboratory equipment and
furniture, under non-cancelable operating leases. Rent expense under these
leases was approximately $1,195,000, $1,055,000 and $913,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The Company also leases certain
property and equipment under capital leases.
At September 30, 1996, the Company's future minimum payments under lease
arrangements are as follows:
Fiscal Year Operating Leases Capital Leases
----------- ---------------- --------------
1997 $ 1,022,000 $ 777,000
1998 1,078,000 329,000
1999 1,059,000 204,000
2000 1,050,000 47,000
2001 997,000 -
Thereafter 5,093,000 -
------------- --------------
Total lease payments $10,299,000 $1,357,000
===========
Less: amount representing interest (170,000)
-----------
Present value of net minimum lease payments $ 1,187,000
===========
H. Stockholders' Equity:
Preferred Stock: The Certificate of Incorporation of the Company authorizes the
issuance of 5,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including the dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. In fiscal 1993 the Company issued shares of Series
B and Series C Preferred Stock in connection with an agreement with American
Home Products Corp. (see Note K).
Common Stock and Warrants: In March 1990, the Company completed its initial
public offering of securities. The offering consisted of 1,782,500 units at
$6.00 per unit, each unit consisting of three shares of Common Stock, $.001 par
value, and three Class A Warrants. Each Class A Warrant entitled the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $2.20. As of February 1992, all such Class A Warrants had been exercised.
Each Class B Warrant entitled the holder to purchase one share of Common Stock
at $4.75 per share, from the date of issuance through March 15, 1996. During
fiscal 1995, 257,107 Class B Warrants were exercised and proceeds of
approximately $1,221,000 were realized by the Company. In fiscal 1996, Class B
Warrants were exercised (including 165,000 that were exercised on a cashless
basis by an affiliate of the Company resulting in the issuance of 138,432 shares
of Common Stock of the Company) resulting in net proceeds to the Company of
approximately $10,612,000 and the issuance of approximately 2,375,000 shares of
Common Stock.
F-10
In connection with the initial public offering, the Company also provided the
underwriter with Unit Purchase Options to purchase up to 155,000 units for $8.40
per unit. In fiscal 1995, all 155,000 Unit Purchase Options and underlying Class
A Warrants were exercised resulting in proceeds of $2,325,000 and issuance of
930,000 shares of the Company's Common Stock and 465,000 Class B Warrants, which
were exercised in full in fiscal 1996.
In fiscal 1994, the Company completed a private placement of 1,707,000 shares of
its Common Stock resulting in net proceeds of approximately $13,754,000.
In fiscal 1995, the Company completed private placements of 3,009,045 shares of
its Common Stock, at prices ranging from $3.75 to $13.08 per share, which
resulted in net proceeds of approximately $24,701,000. Additionally as part of
the private placements, the Company issued warrants to purchase 500,000 and
62,500 shares of its Common Stock at $10.00 and $12.77 per share, respectively,
which are exercisable through June 1,2002 and August 16, 2000, respectively. In
connection with these private placements, 91,000 additional warrants to purchase
shares of the Company's Common Stock were issued to certain financial
intermediaries at prices ranging from $5.00 to $13.08 per share which expire at
various dates from July 5, 2000 to February 3, 2005. At September 30, 1996,
70,000 of these warrants were outstanding at prices ranging from $5.00 to $7.88
per share and expire from June 1, 2002 to February 3, 2005.
Pursuant to certain placement agreements, an additional 97,645 shares of the
Company's Common Stock were issued during the year ended September 30, 1996.
In January 1996, the Company issued 342,792 shares of Common Stock for the
purchase of the remaining 20% of outstanding capital stock of CPEC, Inc.
("CPEC") not owned by Intercardia (see Note L).
In June 1996, the Company completed a public offering of 3,000,000 shares of
Common Stock at $39.00 per share and received proceeds, net of issuance costs,
of approximately $109,130,000.
During fiscal 1995, certain Subsidiaries issued convertible preferred stock
through private placements which resulted in net proceeds of approximately
$7,233,000 (the "Subsidiaries' Private Placements"). In connection with certain
of the Subsidiaries' Private Placements the Company issued 218,125 warrants to
purchase shares of the Company's Common Stock exercisable at $4.625 per share
until June 30, 1998 (the "Warrants") of which 41,250 Warrants were outstanding
at September 30, 1996. Additionally, investors in the private placements have
the ability on June 30, 1998 to cause the Company to purchase from them certain
amounts of the convertible preferred stock deemed to be illiquid but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights"). The Company received approximately $1,163,000 from the
proceeds of the offerings as consideration for its issuance of the Warrants and
the Put Protection Rights, which was recorded as an equity issuance by the
Company. The Company may pay cash or issue its Common Stock to settle any
obligations arising from the Put Protection Rights and intends to choose
settlement through issuance of its Common Stock. The Company could be required
to issue up to a maximum aggregate of approximately 2,181,250 shares of Common
Stock under certain circumstances if the Put Protection Rights were exercised in
full and the Company's Common Stock is valued at $2.00 per share or less.
Investors also received registration rights relating to the shares underlying
the Warrants and Put Protection Rights. In connection with these private
placements, the Company issued to designees of the Placement Agent which is an
affiliate of the Company (see Note J), warrants to purchase approximately 21,813
shares of Common Stock at $4.625 per share, exercisable through June 30, 1998.
In connection with the Subsidiaries' Private Placements, Interneuron converted
the amounts owed to Interneuron by these Subsidiaries as a result of
Interneuron's funding of the Subsidiaries' operations into convertible preferred
stock of these Subsidiaries. In fiscal 1996, Intercardia completed an initial
public offering of 2,530,000 shares of Intercardia common stock (see Note M).
The Company's percentage of ownership in Progenitor, Transcell and Intercardia
changed from approximately 78%, 79% and 88%, respectively, at September 30, 1995
to approximately 76%, 78% and 60%, respectively, at September 30, 1996.
F-11
Stock Options and Warrants: Under the Company's 1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock may be granted to employees. Under the Company's 1994
Long-Term Incentive Plan (the "1994 Plan"), employees, directors and consultants
to the Company may be granted incentive or non-qualified options to purchase up
to 2,700,000 shares of the Common Stock of the Company and restricted stock
awards of up to 300,000 shares of the Common Stock of the Company. Restricted
stock awards may be made without payment of consideration by the recipient and
may be subject to performance criteria and restriction periods. Under the 1989
and 1994 Plans ("the Plans") the exercise price of incentive options granted
must not be less than the fair market value of the Common Stock as determined on
the date of grant and the term of each grant cannot exceed ten years.
The Company has also granted outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options"). At September 30, 1996, 100,000
Non-Plan Options were outstanding.
The Company has issued warrants to purchase shares of the Company's Common
Stock, certain of which were issued in connection with various financing
arrangments and have been disclosed in this and other Notes to the Consolidated
Financial Statements.
F-12
Presented below under the caption "Stock Options" is all Plan and Non-Plan
option activity and under the caption "Warrants" is all warrant activity,
certain of which may also be disclosed in this and other Notes to the
Consolidated Financial Statements:
<TABLE>
<CAPTION>
Stock Options Warrants
--------------------------- --------------------------------
Option Warrant
------ -------
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
September 30, 1993 2,127,441 $ .83-$12.63 1,020,000 $4.00-$9.00
Granted 916,500 $5.12-$10.00 125,000 $5.12-$14.00
Exercised ( 110,500) $0.00-$ 6.25 -
Canceled (13,600) $4.38-$ 9.63 -
------ ---------------
Outstanding at
September 30, 1994 2,919,841 $ .83-$12.63 1,145,000 $4.00-$14.00
Granted 1,225,200 $4.88-$12.75 893,438 $4.63-$13.08
Exercised (61,200) $.83-$ 7.12 -
Canceled (2,400) $5.12-$ 7.12 -
------------ ---------------
Outstanding at
September 30, 1995 4,081,441 $ .83-$12.63 2,038,438 $4.00-$14.00
Granted 848,300 $14.75-$42.00 75,000 $23.25-$29.75
Exercised (740,021) $2.00-$10.00 (1,309,125) $4.00-$14.00
Canceled (298,000) $6.50-$42.00 -
------- ----------------
Outstanding at
September 30, 1996 3,891,720 $ .83-$32.00 804,313 $4.63-$29.75
========= ================
</TABLE>
At September 30, 1996, outstanding stock options and warrants were exercisable
as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share: Under $5.00 $5.00 to $10.00 Over $10.00 Total
----------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Stock options 127,315 3,066,705 697,700 3,891,720
Warrants 61,813 605,000 137,500 804,313
------- ------------- -------- ----------
189,128 3,671,705 835,200 4,696,033
======= ============= ========= =========
</TABLE>
At September 30, 1996, 2,210,998 stock options and 740,980 warrants were
exercisable and there were no awards of restricted stock. All outstanding
options vest at various rates over periods up to six years and expire at various
dates from August 1, 1999 to September 26, 2006. All outstanding warrants expire
at various dates from June 30, 1998 to February 3, 2005.
F-13
Employee Stock Purchase Plan: On March 22, 1995, the stockholders approved the
Company's 1995 Employee Stock Purchase Plan (the "1995 Plan") covering an
aggregate of 100,000 shares of Common Stock which is offered in one-year
offerings (an "Offering"), the first of which began April 1, 1995. Each Offering
is divided into two six-month Purchase Periods (the "Purchase Periods").
Employees may contribute up to ten percent (10%) of gross wages, with certain
limitations, via payroll deduction, to the 1995 Plan. Stock will be purchased at
the end of each Purchase Period with employee contributions at the lower of 85%
of the last sale price of the Company's Common Stock on the first day of an
Offering or the last day of the related Purchase Period. In fiscal 1995 and
1996, 10,287 and 16,672 shares, respectively, of Common Stock had been purchased
pursuant to the 1995 Plan.
Other: In addition to the 41,016,000 shares of Common Stock outstanding at
September 30, 1996, there were approximately 14,000,000 potentially issuable
shares of Common Stock ("Reserved Common Shares"). Included in the number of
Reserved Common Shares are the following: (i) 4,756,000 shares of Common Stock
reserved for issuance upon conversion of the Company's authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding Preferred Stock; (iii) 2,181,250 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise for the full amount possible; (iv) 4,900,000 shares reserved for
issuance under the Plans and the 1995 Plan (of this amount approximately
3,800,000 has been granted, not all of which was vested); (v) an estimated
250,000 shares issuable in connection with certain acquisitions; and (vi)
approximately 804,000 shares reserved for issuance from exercise of outstanding
warrants.
I. Income Taxes:
At September 30, 1996 and 1995, the significant components of the Company's
deferred tax asset consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal and state net operating loss
carryforwards $38,798,000 $28,315,000
Federal and state tax credit carryforwards 3,721,000 3,527,000
Deferred revenue and accrued expenses 3,723,000 2,555,000
---------- ------------
Total deferred tax asset before
valuation allowance 46,242,000 34,397,000
Valuation allowance against total
deferred tax asset (46,242,000) (34,397,000)
------------ -------------
Net deferred tax asset $ - $ -
============ =============
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $100,000,000 which
expire at various dates from 2004 to 2011. In addition, the Company had
approximately $3,700,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2011. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.
J. Related Party Transactions:
The Company licensed certain patents and technologies from Massachusetts
Institute of Technology ("MIT") relating to research of a principal shareholder
and director and his associates. The Company is obligated to reimburse MIT for
one half of any patent prosecution and maintenance costs to maintain certain of
these licenses.
F-14
During fiscal 1995, Paramount Capital, Inc. ("Paramount") served as placement
agent for the Subsidiaries' Private Placements (see Note H). Lindsay A.
Rosenwald, M.D., the Chairman of the Board and a principal stockholder of the
Company, is the Chairman, Chief Executive Officer and sole stockholder of
Paramount.
Paramount earned $657,000 in commissions related to the Subsidiaries' Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of Paramount warrants to purchase a total of 21,813 shares of the Company's
Common Stock at $4.625 per share, exercisable through June 30, 1998, of which
20,583 were outstanding at September 30, 1996.
D.H. Blair and Co., Inc. ("Blair") was a selected dealer associated with the
Subsidiaries' Private Placements. Blair is substantially owned by relatives of
the sole stockholder of the parent of D.H. Blair Investment Banking Corp., a
principal stockholder of the Company. Blair earned $113,000 in commissions
related to the Subsidiaries' Private Placements. Designees of Paramount
(including Dr. Rosenwald) and Blair also received warrants to purchase an
aggregate of 10% of the preferred stock of the Subsidiaries sold in the
Subsidiaries' Private Placements. These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1996.
Under consulting agreements with two directors and a party related to a director
to provide scientific advice and administrative services, the Company is
obligated to make monthly payments, generally for a one year period subject to
annual renewals. Payments were $180,000, $174,000 and $163,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Also, one of these
directors received additional payments aggregating approximately $103,000
related to certain patent matters and the April 1996 FDA approval of Redux.
Another director has a three year consulting agreement with the Company to
provide services for a total of up to $120,000. Payments under this agreement
were $32,000, $36,000, and $11,000 in fiscal 1996, 1995, and 1994, respectively.
In fiscal 1996, InterNutria acquired certain technology from Walden
Laboratories, Inc. of which the Company's Chairman is a stockholder (see Note
L).
Advances were provided to several employees of the Company and its Subsidiaries
for moving and relocation costs. As of September 30, 1996 and 1995, these loans
totaled approximately $204,000 and $560,000 respectively. Certain amounts will
be repaid and certain amounts will be forgiven upon achievement of specific
milestones; remaining balances will be repaid by the earlier of four years from
the date of the loan or termination of the executive's employment.
The Company made contributions of $182,000, $147,000 and $134,000 in the years
ended September 30, 1996, 1995 and 1994, respectively, to The Center for Brain
Science and Metabolism Charitable Trust of which one of the Company's directors
is the scientific director.
K. Agreements:
Servier: In February 1990, as amended, the Company entered into a series of
agreements with Les Laboratoires Servier ("Licensor") under which the Company
agreed to pursue activities designed to obtain approval to market
dexfenfluramine, a prescription drug developed by the Licensor for the treatment
of obesity associated with carbohydrate craving. Under the terms of the
agreements, the Company obtained U.S. marketing rights to the product in
exchange for future royalty payments based upon net product sales, as defined.
These agreements required non-refundable royalties of $100,000 paid in February
1991, and $300,000 in each subsequent February, until approval of the NDA, which
occurred on April 29, 1996. Additionally, under the terms of these agreements,
the Company is required to purchase the bulk compound from an affiliate of the
Licensor. The Company is obligated to pay to the Licensor 11.5% of net sales by
"AHP" (see below). During fiscal 1996, the Company incurred an expense of and
paid to the Licensor royalties of approximately $3,800,000 which fulfills the
Company's initial annual minimum royalty obligation to the Licensor. Payments
will continue to be made quarterly based upon sales of Redux.
American Home Products: In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by American Home
Products Corp.) ("AHP") for the
F-15
development and marketing in the U.S. of dexfenfluramine for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000 for a patent license and sold to AHP 239,425 shares of its
convertible Series B Preferred Stock for $3,000,000. Holders of Series B
Preferred Stock are entitled to receive mandatory dividends of $.1253 per share
payable at the election of the Company in cash or Common Stock. Such dividends
are payable annually on April 1 of each year, accrue on a daily basis and are
cumulative. Holders of Series B Preferred Stock are also entitled to a
liquidation preference of $12.53 per share, plus accumulated and unpaid
dividends. Holders of Series B Preferred Stock are entitled to convert such
shares into an aggregate of 533,333 shares of Common Stock (a conversion price
of $5.625 per share) subject to adjustment in the event of future dilution. The
agreement provides for additional cash payments for the patent license and
additional purchases of convertible Preferred Stock based upon the Company's
achievement of certain milestones. Additionally, the agreement with AHP provides
for royalty payments to the Company based upon net sales of dexfenfluramine and
for AHP to share equally with the Company certain research and development
expenses.
In June 1993, the Company received payments from AHP in connection
with the submission of a New Drug Application ("NDA") for dexfenfluramine,
consisting of $2,500,000 in a milestone payment and $500,000 through the
purchase of 5,000 shares of convertible Series C Preferred Stock. Holders of
Series C Preferred Stock are entitled to receive mandatory dividends of $1.00
per share payable annually on April 1, of each year, which accrue on a daily
basis and are cumulative. Holders of Series C Preferred Stock are also entitled
to a liquidation preference of $100 per share, plus accumulated and unpaid
dividends. Holders of Series C Preferred Stock are entitled to convert such
shares into an aggregate of 88,888 shares of Common Stock of the Company (a
conversion price of $5.625 per share) subject to anti-dilution adjustment.
Holders of the Series B and C Preferred Stock are entitled to vote on all
matters submitted to a vote of stockholders, other than the election of
directors, generally holding the number of votes equal to the number of shares
of Common Stock into which such shares of Preferred Stock are convertible.
On September 29, 1995 dexfenfluramine was recommended for removal from Schedule
IV of the Controlled Substances Act (the "Descheduling") by a joint committee of
the Endocrinologic and Metabolic Advisory Committee and Drug Abuse Advisory
Committee of the FDA and on April 29, 1996 received clearance for marketing as a
twice-daily prescription drug for the treatment of obesity. If the Descheduling
is effected within one year of NDA approval, the Company would receive
$6,000,000 as a milestone payment and $3,500,000 as an equity investment from
AHP. The Company is uncertain whether the Descheduling will occur within the
time required to receive this payment and investment.
AHP has the right to terminate its sublicense upon twelve months notice to the
Company. The AHP agreements provide that Servier has the right to withdraw its
consent to the sublicense in the event that any entity acquires stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise obtains
control of AHP, provided that no such termination shall occur if AHP or its
successor achieves minimum net sales of $75,000,000 in the first marketing year
or $100,000,000 thereafter or pays Servier amounts to which it would have been
entitled if AHP had achieved such minimum net sales. Servier consented to the
AHP acquisition of American Cyanamid Company.
On April 29, 1996, dexfenfluramine received FDA clearance for marketing under
the name Redux. The Company's License Agreement with AHP provides for base
royalties equal to 11.5% of AHP's net sales and additional royalties ranging
from 5% of the first $50,000,000 of AHP's annual net sales if Redux is a
scheduled drug to 11% of AHP's annual net sales over $200,000,000, providing
Redux is supplied to AHP by the Company and is descheduled. Royalties of
approximately $5,500,000 on net sales through June 30, 1996 were reflected as
product revenue in fiscal 1996. AHP will make quarterly royalty payments to the
Company for net sales of Redux. The Company manufactures Redux through an
arrangement with Boehringer Ingleheim Pharmaceuticals, Inc. (see Boehringer) and
is the exclusive supplier of Redux to AHP.
Boehringer: In November 1995, the Company entered into an exclusive
manufacturing agreement with Boehringer Ingleheim Pharmaceuticals, Inc.
("Boehringer") under which Boehringer agreed to supply, and the Company agreed
to purchase from Boehringer, all of the Company's requirements for
dexfenfluramine capsules. The contract, which expires December 31, 1998,
contains certain minimum purchase and insurance commitments by the Company and
requires conformance by Boehringer to the FDA's Good Manufacturing Practices
F-16
regulations. The agreement provides for the Company to be able to qualify a
second source manufacturer under certain conditions.
Ferrer: The Company has licensed from Ferrer International, S.A. exclusive
rights to citicoline, a drug for potential treatment for memory and motor
impairment due to ischemic stroke, for commercialization in the U.S., Puerto
Rico and Canada. A license fee and future royalties on net sales of citicoline
were consideration provided to Ferrer.
Rhone-Poulenc Rorer: In February 1994, the Company entered into a license
agreement with Rhone-Poulenc Rorer S.A., granting the Company worldwide
exclusive rights to an anti-anxiety compound (pagoclone). The Company paid an
upfront license fee of $250,000 upon execution of the agreement. Additional
payments totaling $1,250,000 relating to the initiation of clinical trials and
submission of an NDA are required based upon achievement of milestones, certain
of which were achieved in fiscal 1996. Payments to be made by the Company upon
approval of an NDA will range from $3,000,000 to $5,000,000, depending on the
number of countries in which approval is achieved. Additional royalties will be
paid based on sales.
Bristol-Myers Squibb: Intercardia acquired CPEC (see Note L), which holds an
exclusive worldwide license to bucindolol, for use in the treatment of
congestive heart failure, which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.
Astra Merck: In December 1995, Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck, Inc. ("Astra Merck") to provide for the development, commercialization
and marketing in the U.S. of a twice-daily formulation of bucindolol for the
treatment of congestive heart failure. Intercardia received $5,000,000 upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license fee revenue in the first quarter of fiscal 1996, and may receive
additional payments based upon achievement of certain milestones and royalties
based on net sales of bucindolol in the U.S. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain product launch costs, up to a total of $11,000,000. In the event
Intercardia elects not to make these payments, future royalties payable by Astra
Merck to Intercardia will be substantially reduced. During the year ended
September 30, 1996, Astra Merck made payments or assumed liabilities of
approximately $4,300,000 on Intercardia' behalf. These amounts did not flow
through the Consolidated Statement of Operations, as they were offset against
related expenses. Astra Merck had paid approximately $2,900,000 of this amount
by September 30, 1996 and approximately $1,400,000 was included as offsetting
accounts receivable and accrued expenses on the Balance Sheet at September 30,
1996.
Chiron: In April 1995, Progenitor entered into an agreement with Chiron
Corporation ("Chiron") to collaborate in the development and commercialization
of Progenitor's proprietary gene therapy technology.
Progenitor received an initial payment of $2,500,000 in April 1995 and paid
$750,000 for certain start-up manufacturing costs to Chiron during fiscal 1995
and 1996. These amounts have been recognized as contract revenue and research
and development expense, respectively, in the year ended September 30,1995.
Progenitor received an additional $500,000 payment in January 1996, which was
recognized as contract revenue in fiscal 1996.
L. Acquisitions:
In May 1994, Intercardia entered into an agreement to acquire 80% of the
outstanding common stock of CPEC, Inc. (formerly Cardiovascular Pharmacology
Engineering and Consultants, Inc.) ("CPEC"), subject to conditions which were
met on September 26, 1994, the effective date of the acquisition. CPEC has an
exclusive worldwide license in North America and Europe to bucindolol, a
non-selective beta-blocker currently under development for congestive heart
failure. Bucindolol began a Phase 3 clinical trial, the Beta-blocker Evaluation
of Survival Trial (the "BEST Study"), for treatment of congestive heart failure
in cooperation with the National Institutes of Health (the "NIH") and The
Department of Veteran Affairs (the "VA") in April 1995. The NIH and VA have
agreed to provide up to $15,750,000 throughout the study and CPEC is obligated
to provide up to an additional
F-17
$2,000,000, of which $1,250,000 has been paid through September 30, 1996, and
fund other costs of the study including drug supply and clinical monitoring.
The purchase price of CPEC was approximately $1,852,000 comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities, and other related expenses. Additionally, future issuances of
Interneuron's Common Stock are required upon achieving the milestones of filing
an NDA and receiving an approval letter from the FDA. The value of these
additional shares is not included in the purchase price because their issuance
is contingent upon achieving these milestones. Substantially all of the purchase
price has been allocated to the bucindolol technology rights. However, because
bucindolol was not a currently commercializable product at the time of
acquisition and future benefits are dependent upon successful completion of
clinical trials and FDA approval, the Company recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.
Intercardia and CPEC also entered into a consulting agreement with a corporation
owned by the minority stockholders of CPEC providing for consulting fees
aggregating $300,000 over a three year period beginning October 1994.
In January 1996, the Company acquired the remaining 20% of the outstanding
capital stock of CPEC not owned by Intercardia by issuing an aggregate of
342,792 shares of Common Stock to the former CPEC minority stockholders. For the
same reasons as stated above, the Company, recorded a charge for the purchase of
in- process research and development of approximately $6,084,000 in fiscal 1996.
In December 1995, InterNutria acquired from Walden Laboratories, Inc.
("Walden"), the technology and know-how to produce a specially formulated
dietary supplement for women's use during their pre-menstrual period called PMS
Escape in exchange for $2,400,000 payable in two installments of Common Stock,
the first in late calendar 1996 and the second in late calendar 1997, at the
then-prevailing market price. Certain affiliates of the Company are or were
stockholders of Walden but will not receive any of the purchase price. The
Company recorded a charge of approximately $2,150,000 in fiscal 1996 in
connection with this transaction for the purchase of in-process research and
development as the future benefits from this technology will depend upon the
successful completion of certain clinical trials.
M. Intercardia:
In February 1996, Intercardia completed an initial public offering of 2,530,000
shares of Intercardia common stock at $15.00 per share resulting in proceeds,
net of offering costs, of approximately $35,000,000 (the "Intercardia IPO"). The
Company purchased 333,333 shares of the Intercardia IPO for approximately
$5,000,000. The Company's ownership of Intercardia's outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia IPO, without giving effect to exercise of options and
warrants. In certain circumstances, the Company has the right to purchase
additional shares of Intercardia common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection Rights that could have caused the
Company to issue in June 1998 up to approximately 1,914,000 shares of Common
Stock expired. As a result of the Intercardia IPO and the Company's purchase of
333,333 shares thereof, the Company recognized a gain on its investment in
Intercardia of approximately $16,350,000 which has been recorded as an increase
to the Company's Additional paid-in capital.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNEURON PHARMACEUTICALS, INC.
Date: December 19, 1996 By: /s/ Glenn L. Cooper
-------------------
Glenn L. Cooper, M.D.,
President and Chief Executive Officer
