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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19171
ICOS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 91-1463450
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22021 - 20th Avenue S.E., Bothell, WA 98021
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(Address of principal executive offices) (Zip code)
(425) 485-1900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former
fiscal year, if changed since last report)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
----- ----------------------------
Common Stock, $0.01 par value 43,919,830
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ICOS CORPORATION
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TABLE OF CONTENTS
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<TABLE>
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PAGE NO.
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PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations for the three months and six
months ended June 30, 1999 and 1998 1
Consolidated Statements of Comprehensive Operations for the three months
and six months ended June 30, 1999 and 1998 2
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
ITEM 1: Legal Proceedings *
ITEM 2: Changes in Securities *
ITEM 3: Defaults Upon Senior Securities *
ITEM 4: Submission of Matters to a Vote of Security Holders 21
ITEM 5: Other Information 22
ITEM 6: Exhibits and Reports on Form 8-K 23
SIGNATURE 24
EXHIBITS 25
</TABLE>
* No information provided due to inapplicability of item.
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative research and development from
related parties $16,020 $ 6,302 $31,665 $12,386
Other - 510 500 1,010
--------------- --------------- --------------- ---------------
Total revenues 16,020 6,812 32,165 13,396
Operating expenses:
Research and development 26,626 15,857 48,889 30,306
General and administrative 1,204 880 2,005 1,671
--------------- --------------- --------------- ---------------
Total operating expenses 27,830 16,737 50,894 31,977
--------------- --------------- --------------- ---------------
Operating loss (11,810) (9,925) (18,729) (18,581)
--------------- --------------- --------------- ---------------
Other income (expense):
Equity in losses of affiliates (3,274) (43) (4,775) (79)
Investment income 908 403 2,049 914
Other, net 216 23 310 22
--------------- --------------- --------------- ---------------
(2,150) 383 (2,416) 857
--------------- --------------- --------------- ---------------
Net loss $ (13,960) $ (9,542) $ (21,145) $ (17,724)
=============== =============== =============== ===============
Net loss per common share basic and diluted $(0.32) $(0.24) $(0.50) $(0.44)
=============== =============== =============== ===============
Weighted average common shares
outstanding basic and diluted 43,274 39,927 42,709 39,913
</TABLE>
See accompanying notes to consolidated financial statements.
1
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(13,960) $(9,542) $(21,145) $(17,724)
Other comprehensive income (loss):
Unrealized gains (losses) on investment
securities:
Unrealized holding losses arising
during the period (210) (29) (214) (8)
Less reclassification adjustments
for losses (gains) included in net loss 13 3 13 (17)
--------------- --------------- --------------- ---------------
Total other comprehensive loss (197) (26) (201) (25)
--------------- --------------- --------------- ---------------
Comprehensive loss $(14,157) $(9,568) $(21,346) $(17,749)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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ICOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
-------------------- -------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,123 $ 69,584
Investment securities available for sale, at market value 42,207 8,090
Interest receivable 627 391
Receivables under collaborative arrangements from related parties 8,933 7,524
Other receivables 276 267
Prepaid expenses 771 501
-------------------- -------------------
Total current assets 77,937 86,357
Property and equipment, at cost:
Land 2,310 2,310
Buildings and improvements 9,461 9,461
Leasehold improvements 9,742 9,805
Furniture and equipment 22,059 18,865
-------------------- -------------------
43,572 40,441
Less accumulated depreciation and amortization 23,197 21,135
-------------------- -------------------
20,375 19,306
-------------------- -------------------
Construction in progress 349 270
-------------------- -------------------
Net property and equipment 20,724 19,576
-------------------- -------------------
Loan receivable from related party 7,341 7,341
Investments in affiliates 5,508 64
Other assets 81 9
-------------------- -------------------
$ 111,591 $113,347
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,792 $ 6,080
Accrued payroll and benefits 1,446 1,005
Federal income taxes payable - 648
Other accrued expenses 3,932 6,881
-------------------- -------------------
Total current liabilities 11,170 14,614
Stockholders' equity:
Preferred stock, $.01 par value. 2,000,000 shares
authorized; none issued - -
Common stock, $.01 par value. 100,000,000 shares
authorized; 43,802,411 issued and outstanding at
June 30, 1999 and 41,482,043 issued and
outstanding at December 31, 1998 438 415
Additional paid-in capital 212,447 189,436
Accumulated other comprehensive loss (204) (3)
Accumulated deficit (112,260) (91,115)
-------------------- -------------------
Total stockholders' equity 100,421 98,733
-------------------- -------------------
$ 111,591 $113,347
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(21,145) $(17,724)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,062 1,591
Amortization of investment premiums/discounts 72 184
Loss (gain) on sale of investment securities 13 (17)
Equity in losses of affiliates 4,775 79
Change in operating assets and liabilities:
Interest receivable (236) 400
Receivables under collaborative arrangements from related parties (1,409) 702
Other receivables (9) (80)
Prepaid expenses (270) 33
Accounts payable (288) 1,213
Accrued payroll, benefits and other expenses (3,156) 1
Deferred research and development revenue - 3,594
------------------- ------------------
Net cash used in operating activities (19,591) (10,024)
Cash flows from investing activities:
Purchases of investment securities (45,357) (12,092)
Maturities of investment securities 8,908 7,980
Sales of investment securities 1,981 22,979
Acquisitions of property and equipment (3,209) (3,074)
Equity investments in affiliates (10,219) (219)
Increase in other assets (8) -
Net cash provided by (used in) investing activities (47,904) 15,574
------------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 21,017 403
Proceeds from issuance of warrants 2,017 2,356
------------------- ------------------
Net cash provided by financing activities 23,034 2,759
------------------- ------------------
Net increase in cash and cash equivalents (44,461) 8,309
Cash and cash equivalents at beginning of period 69,584 1,404
------------------- ------------------
Cash and cash equivalents at end of period $ 25,123 $ 9,713
=================== ==================
Supplemental disclosure of cash paid for income taxes: $ 648 $ -
=================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
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ICOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 (unaudited) and December 31, 1998
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. In the opinion of the management of ICOS Corporation
("ICOS" or the "Company"), the information reflects all adjustments necessary to
make the results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year. For a
presentation including all disclosures required by generally accepted accounting
principles, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998, included in the Company's Annual Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, ICOS Development Corporation. All significant
intercompany transactions and balances have been eliminated.
2. Research and Development Arrangements
-------------------------------------
Suncos
The Company owns a 50% interest in Suncos Corporation ("Suncos"), a
corporation formed for the development and commercialization of Pafase. Pursuant
to the terms of agreements entered into with Suncos, the Company conducts
certain research and development activities on behalf of Suncos and is paid for
such services based upon costs incurred. For the three months and six months
ended June 30, 1999, the Company recognized cost reimbursement revenue under
this arrangement of $6.3 million and $11.1 million, respectively. For the
quarter and six months ended June 30, 1998, the Company recognized cost
reimbursement revenue under this arrangement of $3.0 million and $5.4 million,
respectively.
In March 1999, the Company and Suntory Limited of Japan ("Suntory") each
made an equity investment in Suncos of $10 million. Accordingly, for the second
quarter and six months ended June 30, 1999, the Company recognized $3.2 million
and $4.7 million of expense, respectively, equal to its 50% share of Suncos' net
loss, incurred subsequent to the Company's $10 million equity investment.
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ICOS Clinical Partners, L.P.
In 1997, ICOS Clinical Partners, L.P. (the "Partnership"), an affiliate of
the Company, completed the sale to private investors of interests in the
Partnership. Proceeds from the offering are being used by the Partnership to
fund continued development by the Company of product candidates based on three
compounds: LeukArrest, Pafase and ICM3 pursuant to the terms of a Product
Development Agreement. For the quarter and six months ended June 30, 1999, the
Company recognized cost reimbursement revenue from the Partnership of $3.9
million and $9.1 million, respectively. For the quarter and six months ended
June 30, 1998, the Company recognized cost reimbursement revenue from the
Partnership of $3.3 million and $7.0 million, respectively.
Lilly ICOS, LLC
In October 1998, the Company and Eli Lilly and Company ("Lilly") formed
Lilly ICOS LLC ("Lilly ICOS"), a 50/50 owned limited liability company, to
jointly develop and globally commercialize phosphodiesterase type 5 inhibitors
(PDE 5) as oral therapeutic agents for the treatment of both male and female
sexual dysfunction. For the quarter and six months ended June 30, 1999, the
Company recognized cost reimbursement revenue under this arrangement of $5.8
million and $11.5 million, respectively.
To date, the joint venture has been capitalized by Lilly through cash
infusions and the contribution by the Company of intellectual property
associated with IC351 and its research platform. The technology contributed to
Lilly ICOS by the Company had a zero basis for financial reporting purposes and
accordingly, the Company has recorded its investment in Lilly ICOS as zero. The
Company will not report its proportionate share of Lilly ICOS' results of
operations until such time that the Company makes capital contributions to Lilly
ICOS, if ever.
3. Net Loss Per Common Share
-------------------------
Basic earnings per share ("EPS") is based on the weighted average number of
common shares outstanding during the period. Diluted EPS is based on the
potential dilution that would occur on exercise or conversion of securities into
common stock using the treasury stock method. Securities included in the
Company's calculation of diluted EPS include all dilutive stock options, stock
warrants and contingently issuable stock warrants.
For the quarter and six months ended June 30, 1999, options to acquire 8.6
million shares of common stock with a weighted average exercise price of $17.34
per share and warrants to acquire 11.7 million shares of common stock with a
weighted average exercise price of $37.21 per share have been excluded from the
computation of diluted net loss per common share because they are antidilutive.
For the quarter and six months ended June 30, 1998, options to acquire 6.5
million shares of common stock with a weighted average exercise price of $8.88
per share, warrants to acquire 7.6 million shares of common stock with a
weighted average exercise price of $9.45 per share and contingently issuable
stock warrants to acquire 7.6 million shares of common stock have been excluded
from the computation of diluted net loss per common share because they are
antidilutive.
6
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4. Business Segments
-----------------
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information based
on how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to one business segment,
the discovery and development of proprietary pharmaceuticals for the treatment
of inflammatory diseases and other serious medical conditions.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Risks and Uncertainties
- -----------------------
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes included elsewhere in
this report. This discussion contains forward-looking statements that are
subject to certain risks and uncertainties including, without limitation,
statements of the Company's plans, objectives, expectations and intentions. The
Company's actual results could differ materially from those anticipated or
implied by the forward-looking statements discussed here. Factors that could
cause or contribute to such differences include those discussed below under
"Important Factors Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
Overview
The Company is discovering and developing proprietary pharmaceuticals for
the treatment of inflammatory diseases and other serious medical conditions.
The Company's fundamental strategy is to identify and develop a significant
number of potential product candidates into breakthrough products with high
commercial potential. By understanding the underlying biochemical and
physiological mechanisms and identifying the cellular and molecular entities
involved in the disease process, the Company is developing product candidates
that address important opportunities in the treatment of acute and chronic
diseases that have inflammatory components as well as certain cardiovascular
diseases and cancer. Through this strategy, the Company believes it will be able
to develop novel therapeutics that are more selective than those presently
available.
Financial results for the first half of 1999 reflect planned increases in
operating expenses necessary for advancing multiple therapeutic product
candidates through the development process. Development activities include
product development, process development and the establishment and management of
clinical trials. The Company expects increased clinical, regulatory, process
development and product development activities over the remainder of the year
and in future periods.
8
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The Company has an accumulated deficit at June 30, 1999 of $112.3 million.
The Company's results of operations may vary significantly from quarter to
quarter and will depend on, among other factors, the timing of certain expenses
and payments received from certain collaborations, joint ventures, partnerships
and other business relationships, as well as the progress of the Company's own
research and development efforts, timing of clinical trials and the regulatory
process. The Company expects increased expenditures over the next several
quarters as it begins pre-marketing activities in preparation of the launch of
potential products, continues to expand the size and number of clinical trials
of its product candidates, continues to expand preclinical research and
development activities in support of additional potential product candidates,
and initiates clinical trials of those product candidates deemed most promising.
Revenues
Revenues for the quarter ended June 30, 1999 totaled $16.0 million and
consisted of cost reimbursement of $3.9 million from ICOS Clinical Partners.
L.P. ("the Partnership"), $6.3 million from Suncos Corporation ("Suncos") and
$5.8 million from Lilly ICOS, LLC ("Lilly ICOS"). Revenues for the quarter ended
June 30, 1998 totaled $6.8 million and consisted of cost reimbursement of $3.3
million from the Partnership, $3.0 million from Suncos and $0.5 million received
under the Company's research and development agreement with Abbott Laboratories
("Abbott").
Revenues for the first six months of 1999 were $32.2 million and consisted
of cost reimbursement of $9.1 million from the Partnership, $11.1 million from
Suncos, $11.5 million from Lilly ICOS and $0.5 million received under the
Company's research and development agreement with Abbott. Revenues for the first
six months of 1998 were $13.4 million, and consisted of cost reimbursement of
$7.0 million from the Partnership, $5.4 million from Suncos and $1.0 million
received under the Company's research and development agreement with Abbott.
Operating Expenses
Total operating expenses for the quarter ended June 30, 1999 increased to
$27.8 million from $16.7 million for the quarter ended June 30, 1998. Total
operating expenses for the first half of 1999 increased to $50.9 million from
$32.0 million for the first half of 1998.
Research and development expenses for the second quarter of 1999 increased
to $26.6 million from $15.9 million for the second quarter of 1998. Research and
development expenses for the first half of 1999 increased to $48.9 million from
$30.3 million for the first half of 1998. The increase in research and
development expenses for both the second quarter and first half of 1999 was due
primarily to costs associated with the progression of clinical trials for
LeukArrest(TM), Pafase(TM), ICM3, IC351 and IC14 as well as the expansion of
other product development efforts.
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General and administrative expenses for the second quarter of 1999
increased to $1.2 million from $0.9 million in the second quarter of 1998.
General and administrative expenses for the first half of 1999 increased to $2.0
million from $1.7 million for the first half of 1998. The increase in general
and administrative expenses for both the second quarter and first half of 1999
was due primarily to the addition of administrative personnel to support the
Company's increased product development activities.
Other Income and Expense
Other income primarily represents investment income earned on the Company's
investment securities and interest accrued on the Company's loan to the
Partnership. Investment income for the second quarter of 1999 totaled $0.9
million compared to $0.4 million for the second quarter of 1998. Investment
income for the first half of 1999 totaled $2.0 million compared to $0.9 million
for the first half of 1998. The increase in investment income for both the
second quarter and first half of 1999 was due primarily to higher average cash
and investment balances during the second quarter and first six months of 1999
compared to the same periods of 1998. Interest accrued on the loan to the
Partnership was $0.2 million for both the second quarter of 1999 and 1998 and
$0.3 million for both the first half of 1999 and 1998.
Net Loss
For the quarter ended June 30, 1999, the Company recognized a net loss of
$14.0 million or $0.32 per share compared to a net loss of $9.5 million or $0.24
per share for the quarter ended June 30, 1998. For the first half of 1999, the
Company recognized a net loss of $21.1 million or $0.50 per share compared to a
net loss of $17.7 million or $0.44 per share for the first half of 1998. The
increase in net loss for both the second quarter and first half of 1999 was due
primarily to an increase in costs associated with the progression of clinical
trials for LeukArrest(TM), Pafase(TM), ICM3, IC351 and IC14 and the expansion of
other product development efforts. These increased costs were partially offset
by increased cost reimbursement revenues for both the second quarter and six
months ended June 30, 1999.
Liquidity & Capital Resources
The Company's future cash requirements and expense levels will depend on
many factors, including continued scientific progress in its research and
development programs, the results of research and development, preclinical
studies and clinical trials, acquisitions of products or technology, if any,
relationships with corporate collaborators, competing technological and market
developments, the time and costs involved in filing and prosecuting patents and
enforcing patent claims, the regulatory process, the time and costs of
manufacturing scale-up and commercialization activities, and other factors. The
Company has financed its operations since inception primarily through private
and public sales of the Company's common stock, the exercise of stock options
and warrants, investment income, and revenue from research and development
collaborations, corporate joint ventures, limited partnerships and license
payments.
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At June 30, 1999, the Company had $68.0 million in cash and cash
equivalents, investment securities, and interest receivable, a decrease of $10.1
million from December 31, 1998. This decrease is primarily attributable to
continuing costs associated with clinical trials for LeukArrest(TM), Pafase(TM),
ICM3, IC351 and IC14 and the Company's $10 million equity investment in Suncos,
partially offset by increased cost reimbursement revenues and proceeds from the
exercise of stock options and warrants.
For the six months ended June 30, 1999, the Company spent $3.2 million for
the purchase of capital equipment and leasehold improvements to support research
and development activities. To support its ongoing and future research and
product development efforts over the next several years, the Company will need
to purchase additional capital equipment and lease or purchase additional
laboratory and administrative facilities.
The Company anticipates that its operating expenses will continue to
increase during the remainder of 1999 and in subsequent quarters as it adds the
personnel and facilities associated with advancing potential product candidates
through development and clinical trials and prepares for the commercial launch
of its potential products. Foreseeable incremental costs may include, but are
not limited to, those associated with the Company's own pre-marketing
activities, product development, preclinical studies and clinical trials, patent
filings and administrative activities. The Company may also incur costs and make
capital contributions under its joint venture agreements with Suntory and Lilly
related to the development of Pafase(TM) and IC351, respectively. Under
provisions of these agreements, the Company is to be reimbursed for certain of
its costs. There can be no assurance that all such costs will be reimbursed.
The Company anticipates that its existing cash, including interest income
from investments and anticipated payments from Suncos, Lilly ICOS and the
Partnership, will be adequate to satisfy its cash requirements until mid 2000.
However, the amounts and timing of expenditures will depend on the progress of
ongoing research and development, the rate at which operating losses are
incurred, the execution of development and licensing agreements with potential
corporate partners, the Company's development of products, the Food and Drug
Administration ("FDA") regulatory process, and other factors, many of which are
beyond the Company's control.
The Company has been successful in negotiating collaborations and joint
development agreements with other parties where the work and strategies of the
other parties complement those of the Company. In some instances, these
relationships may involve commitments by the Company to fund some or all of
certain development programs. Although corporate collaborations, partnerships
and joint ventures have provided cost reimbursement revenue to the Company in
the past, there can be no assurance that such funds will be available to the
Company in the future. The Company intends to expand its operations and hire the
additional personnel deemed necessary to continue development of its current
portfolio of product candidates in clinical trials, as well as continuing
discovery and preclinical research to identify additional potential drug
candidates. The Company anticipates that expansion of these activities will
result in an increase in operating expenses in future quarters. Further,
incremental expenditures will be required for additional laboratory, production
and office facilities to accommodate activities and the
11
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personnel associated with this increased development activity. As such, the
Company will need to raise substantial additional funds to conduct its research
and development activities, preclinical studies, clinical trials and pre-
marketing activities necessary to bring its product candidates to market and to
establish marketing capabilities if and when product candidates are ready for
commercialization. There can be no assurance that additional funds will be
available as needed or on terms that are acceptable to the Company. Insufficient
funding will require the Company to delay, scale-back or eliminate some or all
of its research and development activities, planned clinical trials and
administrative programs.
Year 2000
- ---------
Overview
The Year 2000 problem is the result of computer programs being written
using two, rather than four, digits to define the applicable year. Unless
corrected, those systems with time-sensitive software may recognize a date
ending in "00" as the year 1900 rather than the year 2000, potentially resulting
in system failures or miscalculations.
Readiness
Based on an initial review of its computer systems and a survey of its key
outside vendors, the Company presently believes that Year 2000 issues will not
pose significant operational problems. The Company believes that it can correct
the majority of its remaining internal Year 2000 issues with certain
modifications to existing software and selective conversion to new software and
hardware. In addition, most of the Company's software and computer equipment has
been purchased within the last five years and as such, have been manufactured
with Year 2000 considerations in mind. Finally, all of the Company's critical
software applications have been purchased from third-party vendors, the majority
of which have already provided upgrades to bring their products into Year 2000
compliance. The Company estimates that it has already addressed the majority of
expected internal Year 2000 issues through normal upgrades and new purchases of
software and computer equipment. While the Company does not believe its Year
2000 issues will be significant to its operations, it has established a plan to
proactively identify and address remaining Year 2000 issues. The Company has
completed an analysis of its critical software and computer systems and has
assessed the Year 2000 status of its key outside vendors. In addition, the
Company has contacted software and hardware vendors and key outside vendors to
confirm Year 2000 compliance for each item or vendor identified in the analysis.
Based on the information gathered from each vendor, the Company is in the
process of implementing Year 2000 solutions as warranted. Finally, the Company
is in the process of performing tests of relevant systems and correcting any
Year 2000 issues that are identified.
Costs
An extensive review of the Company's computer systems showed that a
majority of the Company's software, hardware, and embedded controllers have been
manufactured with Year 2000 issues in mind. As such, the Company believes that
the cost of identifying and correcting any internal Year 2000 issues will be
minimal.
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Risks
It is possible that after analyzing its systems for Year 2000 issues,
making necessary upgrades and replacements to its systems and testing its
systems, the Company may still encounter Year 2000 problems. Furthermore, it is
possible that some of the Company's key outside vendors will experience Year
2000 problems. Year 2000 problems with the Company's computer systems or its key
outside vendors, might cause delays in development activities or in clinical
trials and ultimately delay the launch of products or have other effects on the
Company's operations. The Company anticipates that its highest Year 2000 risks
are in the Clinical and Manufacturing areas, as failures in these areas may
delay development or increase the time to bring a product to market.
Contingency Plans
The Company is in the process of establishing contingency plans to address
any Year 2000 issues and anticipates having these plans completed by November or
December of 1999.
Important Factors Regarding Forward-Looking Statements
- ------------------------------------------------------
During the quarterly period covered by this report, we revised the factors
included under "Important Factors Regarding Forward-Looking Statements" in our
annual report on Form 10-K for the year ended December 31, 1998, to comply with
the SEC's new "plain English" requirements. So that you do not have to rely on
the factors included in our most recent annual report, which are not in the
"plain English" format, we have included the full text of the factors, as
revised, in this quarterly report. These factors, among others, could cause
actual results to differ materially from those contained in forward-looking
statements made in this report and presented elsewhere by management from time
to time.
We have not generated revenues from the sale of products, and we may not be able
to generate enough product revenues in the future to achieve profitability.
We have not yet completed the development of any products and we do not
expect to have any products commercially available for several years.
Consequently, we have not generated revenues from the sale of products since we
started operations. We anticipate that our operating expenses will increase
significantly in 1999 and subsequent years as we attempt to complete development
of our potential products and introduce our potential products into the market.
Therefore, even if we do successfully develop products that can be marketed, we
will need to generate significant revenues from those products to achieve and
maintain profitability. If we do become profitable, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis.
Our clinical trials may fail to demonstrate the safety and efficacy of our
products, which could prevent or significantly delay the regulatory approval of
our products.
Before obtaining regulatory approvals for the sale of any of our potential
products, we must subject those products to extensive preclinical and clinical
testing to demonstrate their safety and effectiveness for humans. We
13
<PAGE>
may not complete our clinical trials of potential products under development and
the results of the trials may fail to demonstrate the safety or effectiveness of
such products to the extent necessary to obtain regulatory approvals. This could
delay or prevent regulatory approval of our potential products.
At any time during the course of our clinical trials or commercial use of
our products, factors such as delays in patient enrollment in our clinical
trials, the discovery of unacceptable toxicities or side effects, or the
development of disease resistance or other physiological factors could cause us
to interrupt, limit, delay or abort the development or sale of our potential
products.
If we are unable to obtain the additional funding we need to develop and market
our potential products, we may be required to delay, scale back or eliminate
expenditures for some of our programs or contract with third parties to develop
and market our potential products or technologies.
The development of our potential products will require the commitment of
substantial financial resources to conduct the time-consuming research,
preclinical development and clinical trials necessary to bring our products to
market. We may seek additional funding through public or private financings,
including equity financings, and through other arrangements, including
collaborative arrangements. However, financing may be unavailable when we need
it or may be unavailable on acceptable terms. If adequate funds are unavailable,
we may be required to delay, scale back or eliminate expenditures for some of
our programs or contract with third parties to develop and market our potential
products or technologies.
If we fail to negotiate and maintain collaborative arrangements with third
parties, our development and marketing activities may be delayed or reduced.
We have entered into, and we expect to enter into in the future,
collaborative arrangements with experienced third parties who perform, or may in
the future perform, development, regulatory compliance, manufacturing and
marketing activities relating to some of our potential products. If we fail to
secure and maintain successful collaborative arrangements, our development and
marketing activities may be delayed or reduced. Currently, we have collaborative
arrangements with Suntory Limited, Eli Lilly and Company, and other companies
and research laboratories. We may enter into similar arrangements with other
collaborators in the future, but we may be unable to negotiate additional
collaborative arrangements or extensions of our existing arrangements on
acceptable terms. If we do, any extended or additional arrangements may not be
successful.
Our ability to obtain successful collaborative participation will depend on
a number of factors, including the achievement of research objectives by us and
our collaborators and any existing or potential collaborators' financial,
competitive, marketing and strategic considerations, such as the relative
advantages of alternative products being marketed or developed by others.
14
<PAGE>
We could experience price pressure or reduced demand for our products as a
result of inadequate third-party reimbursement of the patient costs of our
products and the trend toward managed healthcare and government insurance
programs.
Our ability to sell products successfully in the future depends in part on
the extent to which various third parties are willing to reimburse the patient
costs of our products and related treatments. These third parties include
government authorities, private health insurers and other organizations, such as
health maintenance organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize or may
limit reimbursement for our products, even if our products are safer or more
effective than the alternatives. In addition, the trend toward managed
healthcare and government insurance programs could result in lower prices and
reduced demand for our products. Cost containment measures instituted by
healthcare providers, including, for example, practice protocols and guidelines
for use of products, and general healthcare reform may also affect our ability
to sell products in sufficient quantities, or at adequate prices, to become
profitable. We cannot predict the effect of future legislation or regulation
concerning the healthcare industry and third-party coverage and reimbursement on
our business.
We may be unable to establish the manufacturing and sales and marketing
capabilities necessary to become profitable.
Currently, we do not have facilities for the manufacture of small molecule
products, such as IC351, and we may not have sufficient manufacturing capacity
to manufacture all of our biological products in quantities necessary for
commercial sale. In addition, our manufacturing capacity may be inadequate to
complete all clinical trials contemplated by us over time. We expect to develop
our manufacturing capacity by expanding our current facilities, building new
facilities or contracting with other parties for manufacturing services. We may
not, however, be able to acquire all the manufacturing resources necessary to
become profitable.
We also do not have direct sales or marketing capabilities. If we decide to
market our potential products through a direct sales force, we would need to
either hire a sales force with expertise in pharmaceutical sales or contract
with a third party to provide a sales force to meet our needs. We may be unable
to develop a direct sales force or establish other distribution channels
necessary for us to generate enough sales to become profitable.
We may be unable to protect our intellectual property rights adequately.
Our success and ability to compete depend on our licensed and internally
developed technology. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy, develop independently or otherwise obtain and use
our products or technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners.
15
<PAGE>
We cannot be sure that our pending patent applications will result in
issued patents. In addition, our issued patents or pending applications may be
challenged or circumvented by our competitors. Policing unauthorized use of our
intellectual property will be difficult, and we cannot be certain that we will
be able to prevent misappropriation of our technology, particularly in countries
where the laws may not protect our proprietary rights as fully as in the United
States.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to stop or delay selling, manufacturing or using products that
incorporate the challenged intellectual property, pay damages or enter into
licensing or royalty agreements which may be unavailable on acceptable terms.
We may be unable to compete successfully in the highly competitive market for
pharmaceutical and biotechnological products.
The market in which we compete is well established and intensely
competitive. We may be unable to compete successfully against our current and
future competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance.
Many entities are engaged in developing pharmaceutical and biotechnological
products for human therapeutic applications, including the applications targeted
by us. Our competitors include pharmaceutical companies, chemical companies,
specialized biotechnology companies, and research and academic institutions.
Many of these organizations have substantially more capital, research and
development, regulatory, manufacturing, marketing, human and other resources and
experience than we do. As a result, they may be able to adapt more quickly to
new technologies, devote greater resources to the promotion or sale of their
products, initiate or withstand substantial price competition, or take advantage
of acquisition or other opportunities more readily.
Rapid changes in technology and industry standards could render our potential
products unmarketable or obsolete.
We are engaged in a field characterized by extensive research efforts and
rapid technological development. New drug discoveries and developments in our
field and other drug discovery technologies are accelerating. Our competitors
may develop technologies and products that are more effective than any we
develop or that render our technology and potential products obsolete or
noncompetitive. In addition, our potential products could become obsolete or
unmarketable if new industry standards emerge. To be successful, we will need to
continually enhance
16
<PAGE>
our products and to design, develop and market new products that keep pace with
new technological and industry developments.
Our stock price has been and is likely to continue to be volatile, which could
cause the market price of our common stock to decline.
The market prices for our common stock and for securities of biotechnology
and pharmaceutical companies generally have been volatile in the past and are
likely to continue to be volatile in the future. If you decide to purchase our
shares, you may not be able to resell them at or above the price you paid due to
a number of factors, including actual or anticipated variations in quarterly
operating results, results and progress of preclinical studies and clinical
trials, changes in earnings estimates by analysts, announcements of
technological innovations or new products by our competitors, changes in the
structure of the healthcare financing and payment systems, general conditions in
the biotechnology and pharmaceutical industry, and significant sales of our
common stock by one or more of our principal stockholders.
Government regulatory authorities may not approve our potential products.
The U.S. Food and Drug Administration and comparable agencies in foreign
countries impose substantial requirements on biotechnology and pharmaceutical
companies during development of potential products. These requirements include
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures surrounding the
development and testing of proposed products. Governmental regulation also
affects the manufacture and marketing of pharmaceutical products. If we do not
receive the necessary governmental approvals to market our products, we will be
unable to sell our products and our business may fail.
Any future FDA or other governmental approval of our potential products may
entail limitations on the indicated uses for which these products may be
marketed. The effect of governmental regulation may be to delay marketing new
products for a considerable period of time, to impose costly requirements on our
activities or to provide a competitive advantage to our competitors. In
addition, compliance with the regulations of these agencies may delay or prevent
us from introducing new or improved products or require us to stop marketing our
products. If we fail to comply with the laws and regulations pertaining to our
business, we may be subject to sanctions, including the temporary or permanent
suspension of operations, product recalls and marketing restrictions.
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our products.
Product liability is a risk in the testing and marketing of biotechnology
and pharmaceutical products. We face an inherent business risk of exposure to
product liability claims in the event that the use of our technology or products
is alleged to have resulted in harm to others. This risk exists in human
clinical trials as well as in
17
<PAGE>
commercial distribution. The biotechnology and pharmaceutical industry in
general has been subject to significant medical malpractice litigation. We may
incur significant liability in the event of such litigation. Although we
maintain product liability insurance, we cannot be sure that this coverage is
adequate or that it will continue to be available on acceptable terms.
We may be exposed to substantial environmental liability arising from our
activities involving the use of hazardous materials.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and radioactive compounds. In the event
of an accident involving these materials, we could be held liable for any
damages that result, and that liability could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and certain
waste products. Although we believe that our operations comply with the
standards prescribed by these laws, the risk of accidental contamination or
injury from these materials cannot be completely eliminated.
We depend on highly qualified management and technical personnel who may not
remain with us.
We are highly dependent on the efforts and abilities of our current key
technical and managerial personnel. Our success will depend in part on retaining
the services of our existing management and key personnel and attracting and
retaining new highly qualified personnel. Failure to retain our existing key
management and technical personnel or to attract additional highly qualified
personnel could, among other things, inhibit our ability to negotiate additional
collaborative arrangements, delay preclinical or clinical testing of our
products, obstruct our ongoing discovery research, or delay the regulatory
approval process.
In our field, competition for qualified management and technical personnel
is intense. This competition is particularly acute at this time due to the low
unemployment rate experienced nationally. In addition, many of the companies
with which we compete for experienced personnel have greater financial and other
resources than we do. As a result of these factors, we may be unsuccessful in
recruiting and retaining sufficient qualified personnel.
If we or our key outside vendors encounter Year 2000 computer problems,
development of our products may be delayed.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries may produce erroneous results, or fail, unless they
are modified or upgraded to process date information correctly. Year 2000
problems with our computer systems or the systems of our key outside vendors
might cause delays in our development activities or in our clinical trials and
ultimately delay the launch of our potential products.
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<PAGE>
As discussed above, we are currently in the process of analyzing our
software and computer systems and the Year 2000 status of our key outside
vendors. We believe that we have already addressed many of our expected internal
Year 2000 issues through normal upgrades and new purchases of software and
computer equipment. However, it is possible that after analyzing our systems for
Year 2000 issues, making necessary upgrades and replacements to our systems and
testing our systems, we may still encounter Year 2000 problems. Furthermore, it
is possible that some of our key outside vendors will fail to correct in a
timely fashion, if at all, their own Year 2000 problems.
19
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts payable and a note receivable from a related
party. The Company does not use derivative financial instruments in its
investment portfolio. The Company's exposure to market risk for changes in
interest rates relates primarily to its short-term investments, thus,
fluctuations in interest rates would not have a material impact on the fair
value of these securities.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 6, 1999. The
proposals voted upon and the results of the voting are as follows:
1. The following nominees for election as Directors, each to hold
office for a term as defined in the Proxy Statement and until
their successors are duly elected and qualified, received not
less than 39,281,086 votes, which represents 98.67% of the shares
of Common Stock voted. Each Director received the number of votes
set opposite his name:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
David V. Milligan 39,332,878 475,504
Alexander B. Trowbridge 39,302,813 505,569
Gary L. Wilcox 39,307,551 500,831
Walter B. Wriston 39,281,086 527,296
</TABLE>
The aforesaid nominees have been elected as Directors for the
term set forth in the Proxy Statement.
The following Directors are currently serving terms that expire
at the 2000 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified:
Frank T. Cary
James L. Ferguson
The following Directors are currently serving terms that expire
at the 2001 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified:
Paul N. Clark
William H. Gates III
Robert W. Pangia
George B. Rathmann
21
<PAGE>
2. The proposal to adopt the 1999 Stock Option Plan as set forth in
the Proxy Statement, received the following votes:
<TABLE>
<S> <C>
For 18,190,231
Against 2,993,584
Abstain 226,757
</TABLE>
The foregoing proposal was approved.
3. The proposal to approve the appointment of KPMG LLP as the
Company's independent public accountants for fiscal year 1999
received the following votes:
<TABLE>
<CAPTION>
Votes
-----
<S> <C>
For 39,652,558
Against 71,987
Withheld 88,837
</TABLE>
The foregoing proposal was approved.
ITEM 5: Other Information
Effective June 16, 1999, the Board of Directors increased the
size of the Board to eleven directors, and elected Paul N. Clark,
the Company's President and Chief Executive Officer, to fill the
vacancy thereby created as a Class 2 Director.
Janice M. LeCocq, Ph.D. resigned as a director of the Company
effective August 3, 1999, citing personal reasons. No replacement
has been named to fill the vacancy created.
Pursuant to Rule 14a-4 under the Securities Exchange Act of 1934,
as amended, the Company intends to retain discretionary authority
to vote proxies with respect to stockholder proposals for which
the proponent does not seek inclusion of the proposed matter in
the Company's proxy statement for the Company's 2000 Annual
Meeting of Stockholders, except in circumstances where (i) the
Company receives notice of the proposed matter no later than
February 14, 2000, and (ii) the proponent complies with the other
requirements set forth in Rule 14a-4.
22
<PAGE>
ITEM 6: Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K
Form 8-K filed June 23, 1999 regarding the appointment
of Paul N. Clark as the Company's Chief Executive
Officer and President.
23
<PAGE>
SIGNATURE
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.
ICOS CORPORATION
Date: August 13, 1999 By: /S/ PAUL N. CLARK
--------------- ------------------
Paul N. Clark
Chief Executive Officer and President
Date: August 13, 1999 By: /S/ HOWARD S. MENDELSOHN
---------------- -------------------------
Howard S. Mendelsohn
Chief Accounting Officer
24
<PAGE>
Index to Exhibits
-----------------
10.1 Employment agreement between ICOS Corporation and Paul N. Clark
dated June 11, 1999
27.1 Financial Data Schedule
25
<PAGE>
EXHIBIT 10.1
[LETTERHEAD OF ICOS CORPORATION]
June 11, 1999
Mr. Paul N. Clark
595 Crabtree Lane
Lake Forest, IL 60045
Dear Paul:
On behalf of ICOS Corporation (the "Company"), I am very pleased to extend
to you an offer to join the Company as President and Chief Executive Officer.
Subject to your agreement, evidenced by countersigning this letter, this letter
agreement (this "Agreement") sets forth the terms and conditions of your
employment by the Company:
1. Position
(a) You ("Executive") shall be the President and Chief Executive Officer
of the Company. In this position, Executive shall have overall charge and
responsibility for the business and affairs of the Company. Executive will
report to the Board of Directors of the Company (the "Board"). Executive will
also be elected a director of the Company.
(b) Executive shall devote his full business time, ability and attention
to the business of the Company and shall not engage in or perform duties for any
other person which interfere with performance of his duties hereunder. Executive
may hold board of director positions for outside civic organizations and may
spend a reasonable amount of time fulfilling the duties of those positions so
long as there is not interference with the performance of Executive's duties
hereunder. Service on a board of directors for a commercial entity will be
subject to prior approval by the Board.
<PAGE>
June 11, 1999
Page 2
2. Term
Executive shall commence employment with the Company on June 16, 1999. The
term of this Agreement shall be five (5) years from commencement of Executive's
employment, with a daily three-year "evergreen" feature effective on the second
anniversary, so that the remaining term will always be at least three (3) years,
subject to either party being able, by written notice, to stop further operation
of this evergreen feature.
3. Annual Salary
Executive's annual salary shall be $500,000 as compensation for services
hereunder (including services as a member of the Board), subject to increase
thereafter at the sole discretion of the Board.
4. Cash Bonuses
When the Company begins paying annual cash bonuses, Executive shall be
eligible to receive cash bonuses consistent with competitive pay practices
generally and with bonuses paid to other senior executives of the Company.
5. Equity-Based Incentive Compensation
(a) Upon commencement of employment, Executive will be granted a ten-year
stock option under the Company's 1999 Stock Option Plan (the "Plan") to purchase
1,500,000 shares of the Company's common stock, which option will vest as to
25,000 shares on each of the first sixty (60) monthly anniversaries of
Executive's date of commencement of employment with the Company (the "Option").
To the extent permitted by applicable law, a portion of the Option will be
treated as an incentive stock option ("ISO") pursuant to Section 422 of the
Internal Revenue Code (the "Code"). The exercise price for the Option will be
equal to the closing price reported by Nasdaq National Market on the date
Executive countersigns this Agreement; provided, however, the exercise price
with respect to the portion of the Option that is treated as an ISO cannot be
less than the closing Nasdaq National Market price on the date of commencement
of employment, and the exercise price of the portion of the Option that is not
an ISO cannot be less than eighty-five (85%) of the closing Nasdaq National
Market price on the date of commencement of employment. In the event of
termination of Executive's employment by the Company without Cause (as defined
in Exhibit A) or by Executive for Good Reason (as defined
<PAGE>
June 11, 1999
Page 3
in Exhibit A), the Option will fully vest and be exercisable over the next two
years, subject to early termination in accordance with Section 11.2(a) of the
Plan. When the Company or its affiliate, Lilly ICOS LLC, receives FDA approval
of an NDA, the last 300,000 shares to vest under the Option will accelerate in
vesting as of the date of approval. If such approval occurs before June 30,
2002, an additional stock option for 300,000 shares will be granted as of such
approval under the Plan or any other Company stock option plan then in effect,
such option to have an exercise price equal to the closing price on the date of
grant and to vest in equal monthly amounts over a forty-eight-month (48) period.
The Plan Administrator of the Plan will permit Executive to pay the exercise
price for the Option by surrendering other common stock of the Company in
accordance with Section 7.5(b) of the Plan and to pay any withholding taxes in
connection with the exercise of the Option by surrendering other common stock of
the Company or having the Company withhold shares issuable upon the exercise, in
accordance with Section 9 of the Plan.
(b) The Option will include a provision that, in the event the exercise
price for the Option or any taxes due on its exercise are paid by the surrender
of other common stock of the Company or, for the payment of withholding taxes,
by withholding of shares, Executive will be granted an option (a "Replacement
Option") under the Plan to purchase a number of shares of common stock of the
Company equal to the number of shares surrendered and/or withheld, provided the
then fair market value of the Company's common stock is at least twenty-five
percent (25%) higher than the exercise price of the Option. The exercise price
of the Replacement Option will be the closing Nasdaq National Market price as of
the grant date of the Replacement Option. The Replacement Option will be a
nonqualified stock option which will first be exercisable six (6) months after
the grant date, will have a term equal to the remainder of the term of the
original Option and will have such other terms as are similar to the terms used
by Abbott Laboratories in its replacement options so long as not inconsistent
with the Company's Plan. An additional Replacement Option will not be granted
upon the exercise of a previously issued Replacement Option if that previously
granted Replacement Option is exercised in the same calendar year that it was
granted.
(c) Executive shall be eligible to receive future grants of stock options
pursuant to the Company's Management Incentive Program or similar stock-based
bonus program consistent with awards granted to other senior executives of the
Company.
<PAGE>
June 11, 1999
Page 4
(d) Executive shall be eligible to receive future periodic (i.e., non-
bonus-related) grants under the Company's stock incentive programs consistent
with competitive pay practices generally and with awards made to other senior
executives of the Company.
6. Group/Fringe/Executive Benefits
Executive and his family may participate in the benefit program provided by
the Company on terms no less favorable to Executive than the terms offered to
other senior executives of the Company. Executive will accrue vacation at the
rate of four (4) weeks per year, the administration thereof (e.g., year-to-year
accumulation and benefits, if any, at termination) to be in accordance with the
policies of the Company.
7. Events Triggering Severance Benefits
Upon the termination of Executive's employment by the Company without Cause
or by the Executive for Good Reason, Executive will be entitled to receive the
severance benefits described in Item 8 below.
8. Severance Benefits
In the event of a termination of employment described in Item 7 above,
Executive will be entitled, in lieu of any other severance benefits (other than
those described elsewhere herein), to:
(a) Continuation of Executive's then current annual salary for a period of
three (3) years and payment at the end of each of such three years an amount
equal to Executive's (i) most recent annual performance cash bonus target or
(ii) if greater, most recent annual cash bonus payment. If requested by
Executive, such salary continuation and bonus payments will be paid in a lump
sum using a six percent (6%) annual discount factor. The foregoing salary
continuation and bonus payments (including lump sum) will not be paid if, at the
time of termination, the aggregate built-in gain of all vested stock options
(including options vesting as a result of termination) granted to Executive is
(or would have been, with respect to exercised options) greater than $6 million.
(b) Payment of a performance cash bonus at target for the year of
termination, prorated for the portion of the year elapsed through the date of
Executive's termination.
<PAGE>
June 11, 1999
Page 5
(c) Payment of any benefits, in accordance with their terms, accrued to
the date of termination, but previously unpaid.
(d) Continuation of health care benefits for Executive and his dependents
for three (3) years after the date of termination or until Executive receives
substantially the same health care benefits from another employer, whichever
occurs first.
(e) Full vesting of all stock options, restricted stock and performance
shares.
9. Gross-Up Payment for Golden Parachute Taxes
(a) If it is determined that any payment by the Company, to or for the
benefit of Executive under this Agreement or otherwise, would be subject to the
federal excise taxes imposed under Section 4999 of the Code, the Company will
make an additional payment to Executive (the "Gross-Up Payment") in an amount
sufficient to cover (1) any golden parachute excise tax payable by Executive,
(2) all taxes on the Gross-Up Payment, and (3) all interest and/or penalties
imposed with respect to such taxes.
(b) As a result of the uncertainty in the application of Section 280G and
Section 4999 of the Code, it is possible that the Company will make a payment
(including a Gross-Up Payment) under Item 9(a) that should not have been made
(an "Overpayment") or that the Company will fail to make a payment (including a
Gross-Up Payment) under Item 9(a) that should have been made (an
"Underpayment"). If it is determined that an Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to the Executive which
he shall repay to the Company, together with interest at the applicable federal
rate provided for in section 7872(f)(2)(A) of the Code. If it is determined that
an Underpayment has occurred, such Underpayment shall promptly be paid by the
Company to Executive, together with interest at the applicable federal rate
provided for in section 7872(f)(2)(A) of the Code. The Company and Executive
agree to give each other prompt written notice of any information or taxing
authority inquiry that could reasonably result in the determination that an
Overpayment or Underpayment has been made.
<PAGE>
June 11, 1999
Page 6
10. No Duty to Mitigate
After a termination of employment, Executive will not be obligated to
mitigate his damages by seeking other comparable employment, and any severance
benefits payable to Executive will not be subject to reduction for any
compensation received from other employment.
11. Termination by Executive or the Company
Executive may, with at least thirty (30) days' prior written notice,
voluntarily terminate this Agreement without liability at any time without Good
Reason. The Company may, with at least thirty (30) days' prior written notice,
terminate this Agreement at any time without Cause, subject to Item 8 above. The
Company may terminate this Agreement without liability at any time for Cause.
12. Death or Disability
This Agreement and Executive's employment relationship with the Company
shall immediately terminate upon Executive's death or, at the election of
Executive or Company, upon disability which precludes Executive from performing
his usual duties for the Company for a period in excess of ninety (90)
consecutive days or for a period in excess of ninety (90) days within any
consecutive 12-month period. The benefits to be provided Executive in connection
with such termination will be con-sistent with the policies of the Company for
other senior Executives of the Company.
13. Fees and Expenses
The Company will pay all reasonable professional fees and related expenses
incurred by Executive in connection with the negotiation and preparation of this
Agreement up to a maximum amount of $50,000. In addition, the Company will pay
all reasonable professional fees and related expenses incurred by Executive each
year in connection with personal financial planning up to a maximum of $15,000
per calendar year.
14. Relocation
The Company will pay all costs of relocation of Executive and his family to
Washington state in accordance with the Company's relocation policy supplemented
as follows:
<PAGE>
June 11, 1999
Page 7
(a) The Company will reimburse Executive for reasonable temporary living
expenses for Executive and his family in the Seattle metropolitan area for a
period not to exceed eighteen (18) months from the date hereof;
(b) The Company will reimburse Executive for reasonable temporary
commuting expenses for Executive and his family between the Chicago metropolitan
area and the Seattle metropolitan area for a period not to exceed eighteen (18)
months from the date hereof;
(c) The Company will make available to Executive the opportunity to sell
his present primary residence through a relocation firm or real estate agent
mutually acceptable to Executive and the Company; and
(d) All relocation payments will be "grossed-up" for applicable taxes.
15. Binding of Successors
The Company will be required to have any successor to all or substantially
all of its business and/or assets expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place.
16. Nonsolicitation
During employment and the period during which Executive is entitled to
salary continuation under Item 8(a), Executive shall not, directly or
indirectly, recruit, solicit or induce any employee, advisor, consultant,
customer or business partner of the Company to terminate such party's
relationship with the Company or to engage in activities competitive with the
Company.
17. Taxes
The Company may deduct and withhold from any payments to be made to
Executive hereunder any amounts required to be deducted and withheld by the
Company under the provisions of any statute, law, regulation or ordinance now or
hereafter enacted. Executive will work reasonably with the Company to structure
any salary, bonus or other compensation in such a fashion to qualify for tax
deductibility under Section 162(m) of the Internal Revenue Code while preserving
the economic benefit intended to be received by Executive.
<PAGE>
June 11, 1999
Page 8
18. Indemnification
Except to the extent inconsistent with the Company's Certification of
Incorporation or Bylaws, the Company will indemnify and hold harmless Executive
to the fullest extent permitted by law with respect to Executive's service as an
officer and director of the Company.
19. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Washington.
20. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
Executive and the Company and supersedes and cancels any prior understandings,
agreements or representations by or between the parties, written or oral. This
Agreement may not be amended, modified, changed or discharged in any respect
except as agreed in writing signed by the parties.
21. No Conflict
Executive represents and warrants that this Agreement and his performance
hereunder does not and will not breach or conflict with any agreement to which
Executive is or becomes a party.
22. Successors and Assigns
The services and duties to be performed by Executive hereunder are personal
and may not be assigned. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors and assigns and Executive, his heirs and
representatives.
23. Waiver
Failure by either party to insist upon strict adherence to any one or more
of the provisions of this Agreement on one or more occasions shall not be
construed as a waiver, nor shall it deprive that party of the right to require
strict compliance thereafter.
<PAGE>
June 11, 1999
Page 9
24. Severability
Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law. If any provision
of this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or the interpretation of
this Agreement in any other jurisdiction.
* * *
We are pleased to have you joining the Company. If the foregoing is
acceptable to you, please sign the enclosed copy of this letter and return it to
me.
Very truly yours,
ICOS CORPORATION
By /s/ George B. Rathmann
-------------------------------------------
George B. Rathmann, Chairman of
the Board, Chief Executive Officer
and President
Agreed and Accepted:
/s/ Paul N. Clark
- -------------------------------
Paul N. Clark
Dated: June 11 , 1999
-------------------
<PAGE>
June 11, 1999
Page 10
Exhibit A
"Cause" means: Executive has (a) been convicted of, or pleaded guilty or
nolo contendere to, a felony involving theft, moral turpitude or fraud against
the Company or under federal or state securities laws, or (b) engaged in conduct
that constitutes willful gross neglect or willful gross misconduct resulting, in
either case, in material adverse effect upon the business or affairs of the
Company.
"Good Reason" means: (i) the assignment to Executive of any duties
inconsistent in any respect with Executive's position, including status,
offices, titles and reporting relationships, authority, duties or
responsibilities as contemplated by this Agreement, or any other action by the
Company which results in a significant diminution in such position, authority,
duties or responsibilities, excluding any isolated, immaterial and inadvertent
action not taken in bad faith and which is remedied by the Company promptly
after receipt of a notice thereof given by Executive; (ii) any failure by the
Company to provide compensation and benefits to Executive as described in this
Agreement, other than an isolated, immaterial and inadvertent failure not taken
in bad faith and which is remedied by the Company promptly after receipt of
notice thereof given by Executive; (iii) failure of the Company to obtain the
assumption in writing of its obligations under this Agreement by any successor
to all or substantially all of the assets of the Company within fifteen (15)
calendar days after a merger, consolidation, sale or similar transaction; and
(iv) any other material breach by the Company of its obligations to Executive
under this Agreement.
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25,123
<SECURITIES> 42,207
<RECEIVABLES> 9,836
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,937
<PP&E> 43,572
<DEPRECIATION> 23,197
<TOTAL-ASSETS> 111,591
<CURRENT-LIABILITIES> 11,170
<BONDS> 0
0
0
<COMMON> 438
<OTHER-SE> 99,983
<TOTAL-LIABILITY-AND-EQUITY> 111,591
<SALES> 0
<TOTAL-REVENUES> 32,165
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,145)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,145)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
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