================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 8-K/A
---------------
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 23, 1996
INNOVIR LABORATORIES, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-21972 13-3536290
- ---------------------------- ------------ ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
510 EAST 73RD STREET, NEW YORK, NY 10021
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 249-4703
Not Applicable
---------------------------------------------------------------------------
(Former name or former address, if changes since last report
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<PAGE>
On December 23, 1996, Innovir Laboratories, Inc. ("Innovir"), VIMRx
Pharmaceuticals Inc. ("VIMRx") and certain stockholders of Innovir entered into
a series of agreements (the "Transaction") whereby VIMRx acquired 68% of the
issued and outstanding voting stock of Innovir and Innovir acquired all of the
issued and outstanding shares of VIMRx Holdings, Ltd. ("VHL"), a subsidiary of
VIMRx. For financial reporting purposes, the Transaction has been accounted for
as a reverse acquisition whereby VHL is deemed to be the acquirer of Innovir and
the surviving company. In connection therewith, VHL assumed the name of Innovir
Laboratories, Inc. and Subsidiaries, which is referred to herein as the Company
or the Registrant.
This Amendment No. 1 amends the Current Report on Form 8-K of the Registrant
dated December 23, 1996 and filed on January 7, 1997 ("Form 8-K"). As provided
in Item 7 of Form 8-K, the Form 8-K did not include audited financial statements
and pro forma financial information of VHL, which were either not available or
impracticable to provide at the time the Form 8-K was filed. This Amendment No.
1 is filed to provide audited financial statements and the pro forma financial
information of VHL.
The following information amends Item 7 of the Form 8-K and sets forth in its
entirety the information as amended.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired. The following financial
statements of the Company are filed as part of this Current Report:
o Reports of Independent Accountants/Auditors
o Consolidated Balance Sheets at December 31, 1995 and 1996
o Consolidated Statements of Operations for the periods January
6, 1995 (inception) through December 31, 1995 and January 6,
1995 (inception) through December 31, 1996 and the year ended
December 31, 1996
o Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the periods January 6, 1995 (inception) through
December 31, 1996 including the period January 6, 1995
(inception) to December 31, 1995 and the year ended
December 31, 1996
o Consolidated Statements of Cash Flows for the periods January
6, 1995 (inception) through December 31, 1995 and January 6,
1995 (inception) through December 31, 1996 and the year ended
December 31, 1996
o Notes to Financial Statements
(b) Pro Forma Financial Information. The following unaudited pro forma
financial information is filed as part of this Current Report:
o Description of Pro Forma Consolidated Financial Information
o Pro Forma Consolidated Condensed Statement of Operations for
the Year Ended December 31, 1996
o Notes to Pro Forma Consolidated Financial Information
2
<PAGE>
(c) Exhibits.
4.1 Certificate of Designation, Number, Powers, Preferences and
Relative Participating, Optional and Other Special Rights and
the Qualifications, Limitations, Restrictions and Other
Distinguishing Characteristics of Class D Convertible
Preferred Stock of the Registrant, as filed on December 12,
1996.*
10.1 Agreement, dated as of November 21, 1996, among VIMRx
Pharmaceuticals Inc. and the Registrant.**
10.2 Agreement and Waiver, dated December 23, 1996, by and among
VIMRx, the Registrant and The Aries Funds.**
10.3 Services Agreement, dated December 23, 1996, by and between
VIMRx and the Registrant.**
20.1 Press release, dated January 2, 1997.**
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Richard A. Eisner & Company, LLP
27. Financial Data Schedule.
* Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1996.
** Incorporated by reference to the Registrant's Current Report
on Form 8-K filed on January 7, 1997.
All other Items of this report are inapplicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
INNOVIR LABORATORIES, INC.
Date: March 10, 1997 By: /s/ FRANCIS M. O'CONNELL
--------------------------------
Name: Francis M. O'Connell
Title: Chief Financial Officer
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Innovir Laboratories, Inc. and Subsidiaries
(formerly VIMRx Holdings, Ltd. and Subsidiaries):
We have audited the accompanying consolidated balance sheet of Innovir
Laboratories, Inc. and Subsidiaries, (the "Company") (formerly VIMRx Holdings
Ltd. and Subsidiaries) (a development stage enterprise) at December 31, 1996,
and the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the year ended December 31, 1996 and for the
period January 6, 1995 (inception) to December 31, 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 audit. The financial statements of the Company for the period January 6,
1995 (inception) through December 31, 1995 were audited by other auditors, whose
report, dated January 3, 1996, except for Notes 9(b), second paragraph, 2(b), 1,
first paragraph, and 2(a), third paragraph as it relates to the
recapitalization, for which the dates are January 26, 1996, May 22, 1996,
November 21, 1996 and December 23, 1996, respectively, expressed an unqualified
opinion on those statements but included an emphasis of matter paragraph
regarding the Company's dependence on VIMRx Pharmaceuticals Inc. (its parent
company) for financial support.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits 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 audit provides 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 the Company as of
December 31, 1996, and the consolidated results of its operations and its
consolidated cash flows for the year ended December 31, 1996 and for the period
January 6, 1995 (inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 4, 1997
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of
Innovir Laboratories, Inc.
(formerly VIMRx Holdings, Ltd.
Wilmington, Delaware
We have audited the accompanying consolidated balance sheet of VIMRx Holdings,
Ltd. (a development stage company and wholly owned by VIMRx Pharmaceuticals,
Inc.) and subsidiary, VPI (U.K.) Limited (together the "Company") as at December
31, 1995 and the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for the period January 6, 1995 (inception)
through December 31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of the VIMRx Holdings,
Ltd. and subsidiary at December 31, 1995 and the consolidated results of their
operations and their consolidated cash flows for the period from January 6, 1995
(inception) through December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company is dependent on
VIMRx Pharmaceuticals, Inc. for financial support.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
January 3, 1996
With respect to the second paragraph of
Note 9(b),
January 26, 1996
With respect to Note 2(b),
May 22, 1996
With respect to the first paragraph of Note 1,
November 21, 1996
With respect to the retroactive change of the
stockholders' capital accounts,
December 23, 1996
5
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS: 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents $ 6,412,000 $ 68,000
Prepaid expenses and other current assets 203,000 3,000
------------ ------------
Total current assets 6,615,000 71,000
Fixed assets less accumulated depreciation
and amortization 2,439,000 45,000
Note receivable from Ribonetics GmbH 225,000
Amount due from VIMRx Pharmaceuticals Inc. 535,000
Goodwill 1,236,000
Other assets 249,000
------------ ------------
Total assets $ 11,074,000 $ 341,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable and accrued expenses $ 1,319,000 $ 43,000
Note payable to VIMRx Pharmaceuticals Inc. 250,000
Capital lease - current portion 472,000
Term note payable - warrantholder;
current portion includes accrued
interest of $5,000 36,000
------------ ------------
Total current liabilities 1,827,000 293,000
Amount due to VIMRx Pharmaceuticals Inc. 2,002,000
Term note payable - warrantholder; includes
accrued interest of $39,000 227,000
Capital leases 463,000
------------ ------------
Total liabilities 2,517,000 2,295,000
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $.06; 15,000,000
shares authorized:
Class B Convertible Preferred Stock;
2,500,000 shares designated;
297,000 shares issued and outstanding
at December 31, 1996 (liquidation
value, $1,485,000) 18,000
Class D Convertible Preferred Stock;
8,667,000 shares designated, issued
and outstanding at December 31, 1995
and 1996 (liquidation value, $13,000,000) 520,000 520,000
Common stock, par value $.013; 35,000,000
shares authorized; 9,500,000 shares issued
and outstanding at December 31, 1995,
17,946,000 shares issued and outstanding
at December 31, 1996 233,000 124,000
Additional paid-in capital 29,667,000 (572,000)
Cumulative translation adjustment (8,000)
Unearned compensation (181,000)
Deficit accumulated during the
development stage (21,692,000) (2,026,000)
------------ ------------
Total stockholders' equity (deficit) 8,557,000 (1,954,000)
------------ ------------
Total liabilities and stockholders' equity $ 11,074,000 $ 341,000
============ ============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD PERIOD
JANUARY 6, JANUARY 6,
1995 1995
FOR THE (INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
Revenue:
Interest income $ 13,000 $ 13,000
Other 151,000 151,000
------------ ------------
Total revenue 164,000 164,000
------------ ------------
Expenses:
Research and development 1,946,000 $ 1,434,000 3,380,000
General and administrative 506,000 568,000 1,074,000
Interest 4,000 24,000 28,000
Purchased in process research
and development 17,374,000 17,374,000
------------ ------------ ------------
Total expenses 19,830,000 2,026,000 21,856,000
------------ ------------ ------------
Net loss $(19,666,000) $ (2,026,000) $(21,692,000)
============ ============ ============
Loss-per-share data:
Weighted average number of
common shares outstanding 9,685,000 9,500,000
============ ============
Net loss per share $ (2.03) $ (0.21)
============ ============
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the period January 6, 1995 (inception) to December 31, 1996 including the
period January 6, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996
<TABLE>
<CAPTION>
CLASS B CONVERTIBLE CLASS D CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------------- -------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock and Class D
Convertible Preferred Stock in
consideration for cash of $12,000 and
the assignment of certain notes
receivable of $60,000 8,667,000 $ 520,000 9,500,000 $ 124,000
Net loss for the period January 6, 1995
to December 31, 1995
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1995 8,667,000 520,000 9,500,000 124,000
Contributed capital resulting from capital
infusion or forgiveness of intercompany
liabilities
Contributed capital resulting from the
acquisition of Ribonetics GmbH
Recapitalization resulting from the
acquisition of Innovir Laboratories, Inc. 297,000 $ 18,000 8,446,000 109,000
Compensation expense incurred in
connection with the issuance of
stock options
Cumulative translation adjustment
Net loss, for the year ended
December 31, 1996
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1996 297,000 $ 18,000 8,667,000 $ 520,000 17,946,000 $ 233,000
============ ============ ============ ============ ============ ============
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL CUMULATIVE DURING THE
PAID-IN TRANSLATION UNEARNED DEVELOPMENT
CAPITAL ADJUSTMENT COMPENSATION STAGE TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock and Class D
Convertible Preferred Stock in
consideration for cash of $12,000 and
the assignment of certain notes
receivable of $60,000 $ (572,000) $ 72,000
Net loss for the period January 6, 1995
to December 31, 1995 $ (2,026,000) (2,026,000)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1995 (572,000) (2,026,000) (1,954,000)
Contributed capital resulting from capital
infusion or forgiveness of intercompany
liabilities 8,400,000 8,400,000
Contributed capital resulting from the
acquisition of Ribonetics GmbH 3,713,000 3,713,000
Recapitalization resulting from the
acquisition of Innovir Laboratories, Inc. 17,919,000 $ (181,000) 17,865,000
Compensation expense incurred in
connection with the issuance of
stock options 207,000 207,000
Cumulative translation adjustment $ (8,000) (8,000)
Net loss, for the year ended
December 31, 1996 (19,666,000) (19,666,000)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1996 $ 29,667,000 $ (8,000) $ (181,000) $(21,692,000) $ 8,557,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD PERIOD
JANUARY 6, JANUARY 6,
1995 1995
FOR THE YEAR (INCEPTION) (INCEPTION)
ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(19,666,000) $ (2,026,000) $(21,692,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 146,000 4,000 150,000
Purchased in process research and
development 17,374,000 17,374,000
Provision for losses on notes receivable 85,000 85,000
Non-cash compensation 207,000 207,000
Changes in operating assets and liabilities:
(Increase) in other current assets (37,000) (3,000) (40,000)
Increase in accounts payable and
accrued expenses 540,000 43,000 583,000
------------ ------------ ------------
Net cash (used in) operating activities (1,436,000) (1,897,000) (3,333,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment (605,000) (49,000) (654,000)
Cash acquired in acquisitions 3,532,000 3,532,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities 2,927,000 (49,000) 2,878,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sales of common stock 12,000 12,000
Advances and contributed capital from VIMRx
Pharmaceuticals, Inc. 4,864,000 2,002,000 6,866,000
------------ ------------ ------------
Net cash provided by financing activities 4,864,000 2,014,000 6,878,000
------------ ------------ ------------
Effect of exchange rate changes on cash (11,000) (11,000)
------------ ------------
Net increase in cash and cash equivalents 6,344,000 68,000 6,412,000
Cash and cash equivalents at beginning of period 68,000
------------ ------------ ------------
Cash and cash equivalents at
end of period $ 6,412,000 $ 68,000 $ 6,412,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,000 $ 3,000
============ ============
</TABLE>
For non-cash transactions see Notes 2 and 5.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
On November 21, 1996, Innovir Laboratories, Inc. ("Innovir"), VIMRx
Pharmaceuticals Inc. ("VIMRx") and certain stockholders of Innovir
executed agreements (the "Transaction") whereby VIMRx would acquire
68% of Innovir and Innovir would acquire all of the issued and
outstanding shares of VIMRx Holdings, Ltd. ("VHL"), a wholly owned
subsidiary of VIMRx. The Transaction closed on December 23, 1996. As
discussed further in Note 2, for financial reporting purposes, the
Transaction has been accounted for as a reverse acquisition whereby
VHL is deemed to be the acquirer of Innovir and the surviving company.
In connection therewith, VHL's historic capital accounts were
retroactively recapitalized to reflect the capital accounts of
Innovir. For accounting purposes, VHL assumed the name of Innovir
Laboratories, Inc. and Subsidiaries (the "Company").
The Company is a biotechnology company developing a new class of
therapeutic agents based on proprietary technology. As a development stage
enterprise, all of the Company's efforts, to date, have been devoted to
research and development, raising capital, acquiring equipment, setting up
research laboratories, and financial planning. The Company's research
laboratories are located in the United States, the United Kingdom and
Germany.
The Company has no product sales to date, and has limited capital
resources and recurring net operating losses. The Company is dependent
upon receipt of additional capital investment or other financing to fund
its planned research activities. Assuming that the Company can obtain
sufficient financing to complete development of marketable products, the
Company may ultimately need to enter into collaborative agreements with
others (if available) to obtain regulatory approvals, fund early operating
losses and, if deemed appropriate, establish a manufacturing, sales and
marketing capability. In addition to the normal risks associated with a
new business venture, there can be no assurance that the Company's
research and development will be successfully completed, that any products
developed will obtain necessary government regulatory approval or that any
approved product will be commercially viable. In addition, the Company
operates in an environment of rapid change in technology, and is dependent
upon the services of its employees and its consultants.
The Company has sustained operating losses and negative cash flows from
operations since its inception and expects these conditions to continue
for the foreseeable future. Management believes that existing liquid
assets combined with commitments from VIMRx and a warrantholder to
exercise additional outstanding warrants will enable the Company to
continue to operate through March 31, 1998. After March 31, 1998, the
Company will need to raise additional financing through public or private
equity financings or other arrangements to finance operations. In the
event the Company is unable to raise additional capital, operations after
March 31, 1998 will need to be scaled back or discontinued.
CONTINUED
10
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITIONS:
(a) Change in Control/Reverse Acquisition:
As discussed in Note 1, Innovir, VIMRx and certain stockholders of
Innovir (the "Aries Funds") entered into the Transaction whereby
VIMRx acquired 68% of Innovir and Innovir acquired 100% of the
outstanding capital stock of VHL. In consideration for the
acquisition of VHL, Innovir, on December 23, 1996, issued 8,666,666
shares of a newly designated series of preferred stock, Class D
Convertible Preferred Stock and warrants to purchase two million
shares of the Company's common stock. The warrants expire after five
years. The exercise price for one million warrants is $1.00 per
share; the remaining one million warrants have an exercise price of
$2.00 per share.
Simultaneously with Innovir's acquisition of VHL, VIMRx, in exchange
for $3 million and three million shares of VIMRx's common stock,
acquired 9.5 million shares of Innovir's common stock from the Aries
Funds, thereby increasing VIMRx's ownership interest in Innovir to
68%. In addition, VIMRx and the Aries Funds entered into an
agreement whereby VIMRx obtained the right to vote 500,000 shares of
Innovir's common stock held by the Aries Funds, thereby effectively
giving VIMRx voting control of an aggregate of 18,666,666 shares of
Innovir's stock.
The Company's acquisition of VHL and VIMRx's partial acquisition of
Innovir have been accounted for as a purchase in accordance with APB
Opinion No. 16, "Business Combinations" ("APB No. 16") and Emerging
Issues Task Force Issue No. 90-13, "Accounting for Simultaneous
Common Control Mergers" ("EITF No. 90-13"). The application of APB
No. 16 and EITF No. 90-13 requires that the Transaction be accounted
as a reverse acquisition and accordingly, for accounting purposes,
(i) VHL is deemed to be the acquirer and surviving company; (ii)
because Innovir is deemed to be the legal acquirer, VHL's historic
capital accounts have been retroactively restated ("recapitalized")
to reflect Innovir's capital accounts and the equivalent number of
shares received by VIMRx in the Transaction; (iii) Innovir has fair
valued its assets and liabilities to the extent acquired by VIMRx
(68%); and (iv) the assets and liabilities of VHL are carried at
VHL's historic cost.
VIMRx's purchase price of Innovir totaled approximately $17 million.
Of the total purchase price, approximately $3.7 million was
allocated to tangible assets, $1.8 million to liabilities, $13.8
million to purchased in-process research and development and the
balance to goodwill. Technological feasibility of the purchased
in-process research and development had not yet been established and
the technology had no alternative future use.
CONTINUED
11
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(b) Acquisition of Ribonetics GmbH:
During 1996, VHL acquired 100% of the outstanding capital stock of
Ribonetics GmbH ("Ribonetics") in consideration for approximately
$1.6 million of cash and a warrant to purchase 365,000 shares of
VIMRx's common stock at an exercise price $.01 per share (the
"Acquisition"). The Acquisition has been accounted for as a purchase
and the operating results of the Company include those of Ribonetics
for the seven months ended December 31, 1996. The total purchase
price aggregated approximately $3.7 million and has been allocated
to tangible assets, liabilities and purchased in-process research
and development of $475,000, $289,000 and $3,528,000, respectively.
It was determined at the date of acquisition that the purchased
in-process research and development had not reached technological
feasibility and that the technology had no alternative future use.
(c) Pro Forma Results of Operations (Unaudited):
The following pro forma unaudited results of operations have been
prepared as if the Transaction and the Acquisition discussed above
had occurred at the beginning of the respective periods ended
December 31.
PERIOD FROM
JANUARY 6,
1995
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(Unaudited) (Unaudited)
Revenues $ 338,000 $ 1,360,000
Expenses 12,532,000 9,698,000
------------ ------------
Net (loss) $(12,194,000) $ (8,338,000)
============ ============
Net loss per share $ (0.68) $ (0.46)
============ ============
The pro forma results of operations above include adjustments for
the amortization of intangibles and exclude non-recurring charges
related to purchase in-process research and development arising from
the Transaction and the Acquisition.
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the Transaction
and the Acquisition been consummated at the beginning of the
respective periods, nor are they necessarily indicative of future
operating results.
CONTINUED
12
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of all
subsidiaries which are wholly owned. All significant intercompany accounts
and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION:
Financial statements of foreign subsidiaries are translated into U.S.
dollars at the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for
revenues, expenses and gains and losses. Where the local currency is the
functional currency, translation adjustments are recorded as a separate
component of stockholders' equity (deficit). Where the U.S. dollar is the
functional currency, translation adjustments are included in operating
results. Foreign exchange gains and losses included in operations were not
material. As of December 31, 1996, approximately 1% and approximately 8%
of the Company's total assets are located in the United Kingdom and
Germany, respectively.
AMORTIZATION OF GOODWILL:
Goodwill represents the excess of the purchase price paid by VIMRx over
68% of the fair value of the net assets and purchased in-process research
and development of Innovir. Such amount is being amortized on a
straight-line basis over the period of expected benefit of three years.
Total amortization of goodwill for the year ended December 31, 1996 was
not material. The carrying value of goodwill will be reviewed periodically
based on the advancement of Innovir's technology and the continued
employment of Innovir's workforce and consultants. Should this review
indicate that goodwill will not be realized, the Company's carrying value
of the goodwill will be reduced.
FIXED ASSETS:
Fixed assets consist of equipment and leasehold improvements stated at
cost. Equipment is depreciated on a straight-line basis over its estimated
useful life between four to ten years. Leasehold improvements are
amortized over the life of the lease or of the improvement, whichever is
shorter. Expenditures for maintenance and repairs which do not materially
extend the useful lives of the assets are charged to operations as
incurred. The cost and related accumulated depreciation or amortization of
assets retired or sold are removed from the respective accounts, and any
gain or loss is recognized in operations.
DEFERRED FINANCING COSTS:
Direct costs associated with obtaining debt financing have been
capitalized and are being amortized on a basis which approximates the
interest method, over the terms of the respective loans.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments which have
maturities of three months or less when acquired to be cash equivalents.
The carrying amount reported in the
CONTINUED
13
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
balance sheet for cash and cash equivalents approximates its fair value
(also see Note 8). Cash and cash equivalents subject the Company to
concentrations of credit risk. At December 31, 1996, the Company had
invested approximately $4.7 million in money market funds with investment
companies and held approximately $1.7 million of commercial paper issued
by four entities, with maturities not in excess of three months. At
December 31, 1995, the Company had invested approximately $68,000 in money
market funds. The Company holds no collateral for these financial
instruments.
GOVERNMENT GRANTS:
Proceeds from government grants are recognized as income as the related
research is performed. For the year ended December 31, 1996, approximately
$90,000 was recognized as income and is included in other income.
NET LOSS PER SHARE:
Net loss per share is computed on the basis of the net loss for the period
divided by the weighted average number of shares of common stock
outstanding during the period. For all periods presented, the net loss per
share assumes that the recapitalization discussed in Note 2 had occurred
on January 6, 1995. The net loss per share for all periods excludes the
number of shares issuable upon exercise of outstanding options and
warrants and the conversion of preferred stock since such inclusion would
be anti-dilutive.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
See also Note 9(a).
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the basis of
the differences between the tax bases of assets and liabilities and their
respective financial-reporting amounts ("temporary differences") at
enacted tax rates in effect for the year in which the temporary
differences are expected to reverse (see Note 11).
STOCK-BASED EMPLOYEE COMPENSATION:
The accompanying financial position and results of operations of the
Company have been prepared in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"). Under APB No. 25,
generally, no compensation expense is recognized in the accompanying
financial statements in connection with the awarding of stock option
grants to
CONTINUED
14
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
employees provided that, as of the grant date, all terms associated with
the award are fixed and the quoted market price of the Company's stock, as
of the grant date, is not greater than the amount an employee must pay to
acquire the stock as defined; however, to the extent that stock options
are granted to nonemployees for goods or services, the fair value of these
options are included in operating results as an expense.
Disclosures required by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), including
pro forma operating results had the Company prepared its financial
statements in accordance with the fair value based method of accounting
for stock-based compensation, have been included in Note 12.
RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements for
1995 in order to conform with the current year's presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments include notes receivable and accounts payable. The
carrying amount of these instruments approximate fair value due either to
their short-term nature or because the Company believes the instrument
could be exchanged in a current transaction for that carrying amount
(also see Note 8).
4. FIXED ASSETS:
Fixed assets as of December 31, 1996 and 1995 consist of the following:
1996 1995
---------- ----------
Office and laboratory equipment $1,900,000 $ 49,000
Leasehold improvements 689,000
---------- ----------
2,589,000 49,000
Less, Accumulated depreciation and amortization 150,000 4,000
---------- ----------
$2,439,000 $ 45,000
========== ==========
Depreciation and amortization expense on fixed assets for the year ended
December 31, 1996, and for the period January 6, 1995 (inception) to
December 31, 1995 was $146,000 and $4,000, respectively.
CONTINUED
15
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. NOTES RECEIVABLE FROM RIBONETICS GMBH AND NOTE PAYABLE TO VIMRX
PHARMACEUTICALS INC.:
During January 1995, VIMRx assigned certain notes receivable, from
Ribonetics with a discounted value $310,000, to the Company in exchange
for a note payable to VIMRx of $250,000 and a capital contribution of
$60,000.
The notes receivable from Ribonetics had an aggregate face value of
$500,000, accrued interest at a rate of 12.5% and were collateralized by
Ribonetics' equipment and intellectual property rights. Ribonetics
defaulted on the payment terms of the notes and therefore the Company
reduced the carrying value of the notes, during 1995, to their net
realizable value of $225,000. No interest income was recognized regarding
these notes for either 1995 or 1996. The carrying value of these notes was
included in the purchase price when the Company acquired Ribonetics as
discussed in Note 2.
The note payable to VIMRx accrued interest at a rate of 10%. Interest
expense incurred by the Company for the year ended December 31, 1995 was
$24,000. Interest expense for 1996 was not material. During 1996, as part
of the Transaction, the note payable and accrued interest was converted
into equity.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses as of December 31, 1996 and 1995
consist of the following:
1996 1995
---------- ----------
Accounts payable $ 764,000 $ 43,000
Accrued expenses 341,000
Accrued payroll and related costs 42,000
Legal and accounting fees payable 172,000
---------- ----------
$1,319,000 $ 43,000
========== ==========
7. RELATED-PARTY TRANSACTIONS:
(a) Employment Agreement:
The Company has an employment agreement with an officer/stockholder
("officer"), expiring November 30, 1999, whereby the officer has
agreed to devote his full business time to the Company to further
develop certain Company technology. The terms of the agreement
provide for a base salary, adjusted annually, plus a key performance
bonus, as determined by the Company's Board of Directors (the
"Board"). In addition, the
CONTINUED
16
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
agreement provides for the officer to supply certain equipment to
the Company to be used during his term of employment. At the
conclusion of employment, the equipment will be returned to the
officer.
(b) Consulting Agreements:
The Company has several agreements with consultants, two of whom are
stockholders ("stockholders/consultants"). The consultants perform
services for the Company in consideration for certain fees. The
consultants have also agreed to assign to the Company any
inventions, ideas, patents, and copyrights conceived if related to
the Company's business and provide other services as defined in the
agreements. To date, fees paid to the stockholders/consultants have
not been material. Future minimum quarterly payments to the
stockholders/consultants are approximately $46,000 through March 31,
1998 and $24,000 thereafter through March 31, 2000. Under certain
conditions, the Company may have to pay additional amounts ("patent
award"), as defined, in the event the research performed by one of
the consultants leads to the issuance of a patent. Patent awards
paid to date have not been material.
8. TERM NOTE PAYABLE - WARRANTHOLDER:
The term note provides for interest, payable quarterly, at a rate of 8%
per annum. The noteholder holds a lien on all the assets of the Company.
In connection with the issuance of the term note, the Company issued a
warrant which provides the holder with the right to acquire an aggregate
of 40,000 shares of the Company's common stock at $6.25 per share. Any
accrued and unpaid interest ($44,000 as of December 31, 1996) related to
the term note may also be used to acquire additional shares of common
stock at a price of $6.25 per share. The warrant expires on February 10,
1998 and contains anti-dilution provisions and other defined adjustments
in the event of a merger or reorganization, as defined. As of December 31,
1996, the warrant was exercisable and outstanding. The estimated fair
value of the term note at December 31, 1996 was approximately $200,000.
The fair value was estimated on the basis of the current rate of debt with
similar characteristics (also see Note 3).
In addition, during November 1996, the payment terms of the term note were
amended (the "Amended Note") and related accrued and unpaid interest as of
that date was deferred. In consideration for such amendment, the Company
issued a second warrant, which expires on November 21, 2001, to the
noteholder to purchase 20,000 shares of the Company's common stock at
$1.50 per share. The fair value of the warrant, as determined by the
Board, totaled approximately $16,000. Such amount is being accounted for
as deferred financing cost and
CONTINUED
17
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
amortized over the remaining life of the Amended Note. Pursuant to the
Amended Note, future payments of principal and deferred interest are as
follows:
Years Ending Future
December 31, Payments
------------ --------
1997 $ 36,000
1998 130,000
1999 97,000
----------
$ 263,000
==========
Interest expense with regard to the Amended Note was not material for all
periods presented.
9. COMMITMENTS:
(a) Licensing Agreements:
The Company (as licensee) has entered into an exclusive worldwide
licensing agreement with a university whereby the Company has the
exclusive right to use certain technology owned by the university.
According to the terms of the agreement, as amended, the Company is
required to pay royalties which commence one year after the first
sale of a product developed from the licensed technology. Such
royalties are based upon the greater of annual minimum royalties, as
defined, or a percentage of net sales of licensed products and a
portion of sublicensing income, as defined. Annual minimum royalties
are not material. The licensing agreement expires on a country by
country basis as the underlying patents expire in such country. In
addition, the license may be terminated in the event that the
Company fails to implement a plan directed at development and
commercialization of products based on the licensed technology or if
the Company fails to satisfy certain other contractual obligations.
In the event of termination, all licensing rights under the
agreement would revert to the university. The termination of the
license would have a material adverse effect on the business of the
Company. Although the Company intends to use its best efforts to
comply with the terms of the license, there can be no assurance that
the licensing agreement will not be terminated. The Company
believes, based on the opinion of counsel, that the use of this
licensed technology does not infringe on a patent held by a third
party. Nevertheless, there can be no assurance that infringement
proceedings will not be brought against the Company.
In April 1994, the Company (as licensee) entered into another
non-exclusive licensing agreement with a university whereby the
Company has the non-exclusive, non-transferable right to use certain
technology owned by the university. According to the terms of this
agreement, the Company is required to remit royalties on a quarterly
CONTINUED
18
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
basis, at various rates, as defined, beginning after the first
commercial sale of a licensed product, as defined. In addition, the
Company is required to pay a minimum annual advance on earned
royalties ("Advance") of $10,000, which is nonrefundable, but may be
credited, as defined, against future royalties due the university.
Advances paid to date have not been material. Royalties shall
continue to be payable, irrespective of the termination of this
license agreement, until such time as all sales of licensed products
shall have ceased.
During 1996, the Company entered into a research collaboration and
licensing agreement with a pharmaceutical company ("Pharmaceutical
Company"). Under the terms of the agreement, the Pharmaceutical
Company and the Company will jointly develop certain technology and
the Pharmaceutical Company obtained certain rights to the technology
or receive a defined royalty in the event the Company licenses the
technology to a third party. The agreement also provides for the
Pharmaceutical Company to make defined payments to the Company upon
the occurrence of certain events related to the technology's
development and the achievement of defined milestones. The agreement
is for one year unless extended by the parties. During the year
ended December 31, 1996, the Company received $40,000 from the
Pharmaceutical Company in accordance with the agreement. Such amount
has been included in Other Income.
(b) Research Agreements:
The Company has entered into research fellowships and other
agreements with universities and institutions ("Institutions").
Future payments aggregate approximately $300,000 payable at various
dates through June 1998. Under certain conditions the Company or the
Institutions may terminate the respective agreements with 30 or 60
days notice.
On March 7, 1995, VHL entered into a research and development
agreement with Ribonetics. The terms of the agreement provided for
VHL to fund research and development for an initial one-year
term with an option to extend the agreement. During 1995,
approximately $1,050,000 of such funding was made. On January 26,
1996, VHL terminated the agreement.
(c) Lease Commitments:
Operating Leases:
The Company leases various office and laboratory spaces under
noncancelable operating leases and subleases (the "leases") expiring
at periods between May 31, 1999 and June 30, 2001. In addition, the
Company leases certain laboratory space on a month-to-month basis.
The leases provide for escalations of the minimum rent during the
lease terms.
CONTINUED
19
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Company also leases automobiles and office equipment under
noncancelable operating leases. The leases expire at various times
through June 2001.
Future minimum rental payments under all operating leases are as
follows:
Minimum
Years Ending Annual
December 31, Rentals
------------ -----------
1997 $ 424,000
1998 438,000
1999 233,000
2000 80,000
2001 39,000
-----------
$ 1,214,000
===========
Rent expense totaled approximately $170,000 and $27,000 for the year
ended December 31, 1996 and for the period from January 6, 1995
(inception) to December 31, 1995, respectively.
The Company was required by the terms of one of the leases to obtain
the required approval from the lessor prior to the consummation of
the Transaction discussed in Note 2 to the financial statements.
Accordingly, the Company may be considered to be in violation of the
terms of the amended sublease, which would also trigger certain
cross default provisions contained in capital lease obligations. The
present value of the long-term portion of the capital lease
obligations which may be considered to be in technical default total
approximately $40,000. The accompanying financial statements reflect
such amount as a current liability.
Capital Leases:
The Company leases certain equipment under various noncancelable
capital lease agreements. Lease terms range from three to five
years, after which the Company has the option to purchase the
equipment at amounts defined by the respective lease agreements. In
lieu of purchasing the equipment, certain leases may be extended for
specified periods, at defined monthly payments. Upon expiration of
the extended lease terms, the Company may purchase the equipment for
one dollar or must return the equipment to the lessor.
Certain capital leases, as amended (the "Amended Leases") contain
various covenants, which include maintaining a minimum cash level,
as defined, of $250,000 during the term of the leases. This covenant
indirectly restricts the Company's ability to pay dividends.
CONTINUED
20
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
At December 31, 1996, minimum rental payments under all capital
leases, including payments to acquire leased equipment, are as
follows:
Minimum
Years Ending Annual
December 31, Rentals
------------ -----------
1997 $ 536,000
1998 357,000
1999 165,000
2000 46,000
2001 36,000
-----------
1,140,000
Less, Amount representing interest (205,000)
-----------
Present value of net minimum
capital lease payments $ 935,000
===========
Leased equipment included as a component of fixed assets was
approximately $1,387,000 at December 31, 1996; related accumulated
depreciation was approximately $405,000 for the same period. There
was no leased equipment at December 31, 1995.
10. RETIREMENT PLANS:
The Company adopted the provisions of two defined contribution retirement
plans (the "Plans"). The terms of the Plans, among other things, allow
certain eligible employees who have met certain age and service
requirements to participate in the Plans. The Company has agreed to
contribute defined amounts ("Contributions") to the Plans. In addition,
based upon the Company's profitability, the Company may also make
discretionary contributions to the Plans. Contributions to date have not
been material.
11. INCOME TAXES:
There is no provision (benefit) for federal, state or local income taxes
for all periods presented, since the Company has incurred operating losses
since inception and has established a valuation allowance equal to the
total deferred tax asset.
CONTINUED
21
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The tax effect of net operating loss carryforwards, temporary differences
and research and experimental tax credit carryforwards as of December 31,
1996 and 1995 were as follows:
1996 1995
------------ ------------
Deferred tax assets and valuation allowance:
Net operating loss carryforwards $ 13,117,000 $ 125,000
Deferred liabilities 54,000
Deferred costs 93,000
Research and experimental tax credit carryforwards 570,000
Valuation allowance (13,834,000) (125,000)
------------ ------------
$ -- $ --
============ ============
As of December 31, 1996, the Company has available for tax purposes the
following net operating loss carryforwards:
United States (expires various years from 2005 to 2012) $ 25,946,000
United Kingdom (no expiration date) 960,000
Germany (no expiration date) 1,700,000
The Company's research and experimental tax credit carryforward expires in
various years from 2005 through 2012.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes
limitations under certain circumstances on the use of carryforwards upon
the occurrence of an "ownership change" (as defined in Section 382 of the
Code). An ownership change resulted from the Transaction described in Note
2. Such ownership change will limit the use or continued availability of
the Company's carryforwards.
12. STOCK OPTION PLANS:
In connection with the Transaction discussed in Note 2, the Company
adopted Innovir's stock option plans effective December 23, 1996. Prior to
that date, the Company did not have any stock option plan. The information
below, including the pro forma operating results required by SFAS No. 123,
reflects the activity within the plans as of December 31, 1996 and for the
period from December 23, 1996 to December 31, 1996.
(a) Employee Stock Option Plan:
Under the terms of the Company's Employee Stock Option Plan ("Option
Plan"), employees, directors, advisors, and consultants
("participants") may be granted options which entitle holders to
purchase shares of the Company's common stock. Under the Option
Plan, three million shares of the Company's common stock have been
reserved for
CONTINUED
22
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
stock option awards. Such amount is subject to adjustment for stock
splits, stock dividends and other capital adjustments, as defined.
The options will be awarded by the Board or a committee that will
determine the option price and the vesting period, which cannot
exceed ten years. Awards granted to date generally vest on a pro
rata basis over a two to five year period, have a term of ten years
and option exercise prices (except as noted below) equal the market
price of the Company's common stock on the date of grant. The Option
Plan terminates during March 2003.
The following table summarizes the activity in the Option Plan:
WEIGHTED-
AVERAGE
EXERCISE EXERCISE NUMBER OF
PRICE RANGE PRICE SHARES
----------- --------- ---------
Outstanding options as of the date of
the Transaction, December 23, 1996 $2.25 - $12.00 $4.27 1,501,625
Granted (1) $1.30 $1.30 1,860,089
Canceled (1) $2.25 - $12.00 $4.31 (1,451,925)
----------
Balance outstanding,
December 31, 1996 $1.30 - $9.75 $1.35 1,909,789
==========
(1) The Company's Board approved, upon the completion of the
Transaction discussed in Note 2, the cancellation and the
regranting of approximately 1.4 million options. The repriced
options vest over a four year period and have an exercise
price of $1.30 (the fair market value of the Company's common
stock on the date of the repricing was approximately $1.15).
As of December 31, 1996, 278,390 options were exercisable and
986,572 shares of the Company's common stock were reserved for
future awards under the Option Plan.
The following table summarizes stock option information with regards
to the Option Plan as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.30 - $3.50 1,903,189 9.8 years $1.33 271,790 $1.49
$7.75 - $9.75 6,600 7.7 years $8.51 6,600 $8.51
</TABLE>
(b) Non-Employee Director Stock Option Plan:
The Company adopted a Non-Employee Director Stock Option Plan (the
"Director's Plan"). Under the Director's Plan, 270,000 shares of the
Company's common stock have been reserved for stock option awards.
Each new non-employee director is automatically granted an option to
purchase 30,000 shares of common stock on the date on which the
CONTINUED
23
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
non-employee director is initially appointed or elected as a
director ("Initial Option Grant"). Additionally, each non-employee
director who continuously serves on the Board for a two year period
following their initial appointment or election is automatically
granted, on the non-employee director's second anniversary and each
anniversary thereafter, an option to purchase an additional 10,000
shares of common stock ("Anniversary Option Grant"). For each grant,
the exercise price is equal to the fair market value of the
Company's common stock on the date of grant and the term is five
years from the date of the grant. The Initial Option Grant vests
ratably at six month intervals over a three year period. The
Anniversary Option Grant vests 50% on the eighteenth month following
the date of grant and 50% two years following the date of grant.
The following table summarizes the activity in the Director's Plan:
WEIGHTED-
AVERAGE
EXERCISE EXERCISE NUMBER OF
PRICE RANGE PRICE SHARES
----------- --------- ---------
Outstanding options as of the date of
the Transaction, December 23, 1996 $.97 - $7.75 $3.51 145,000
Granted $1.16 $1.16 120,000
Canceled $.97 - $7.75 $3.02 (130,000)
-------
Balance outstanding,
December 31, 1996 $1.16 - $7.75 $1.89 135,000
=======
At December 31, 1996, 15,000 options were exercisable and 135,000
shares of the Company's common stock were reserved for future awards
under the Director's Plan.
The following table summarizes stock option information with regards
to the Director's Plan as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.16 120,000 5.0 Years $1.16 - -
$7.75 15,000 2.4 Years $7.75 15,000 $7.75
</TABLE>
The following table summarizes the pro forma operating results of
the Company had compensation costs for the Option Plan and the
Director's Plan been determined in accordance with the fair value
based method of accounting for stock-based compensation
CONTINUED
24
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
as prescribed in SFAS No. 123. There were no options granted during
1995 and since option grants awarded during 1996 vest over several
years and additional awards are expected to be issued in the future,
the pro forma results noted below are not likely to be
representative of the effects on future years of the application of
the fair value based method.
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
Pro forma net loss $ 20,188,000
============
Pro forma net loss per share $ (2.01)
============
For the purposes of the above pro forma information, the fair value
of each option granted during 1996 was estimated on the date of
grant using the Black-Scholes option pricing model. The
weighted-average fair value of the options granted during 1996 was
$1.29. The following weighted-average assumptions were used in
comprising the fair value of option grants: expected volatility of
83%; risk-free interest rate of approximately 5.7%; expected lives
of four years; and zero dividend yield.
13. STOCKHOLDERS' EQUITY:
The Company, after the recapitalization discussed in Note 2, is authorized
to issue 15 million shares of preferred stock and 35 million shares of
common stock. The Company's Board, at its sole discretion, can issue
shares of preferred stock in series, with each series having rights,
privileges and qualifications determined by the Board. As of December 31,
1996, the Company has outstanding two series of preferred stock whose
rights are as follows:
CLASS B CONVERTIBLE PREFERRED STOCK ("B PREFERRED STOCK"):
Holders of B Preferred Stock have no voting rights and are entitled
to receive dividends equal to those of common stockholders on a
per-share basis as if the B Preferred Stock had been converted into
common stock. B Preferred Stockholders also have a liquidation
preference of $5.00 per share, or such greater amount as determined
by the Board, in the event of a liquidation, dissolution, or winding
up of the Company. The B Preferred Stock's conversion feature
provides for each share of B Preferred Stock, at the option of the
holder, to be converted into shares of common stock at a floating
rate equal to the result of dividing $5.00 by 65% of the average of
the closing bid prices of the common stock for the five days
preceding conversion, as defined. The average closing bid price to
be used in the calculation shall not be less than $5.00.
CONTINUED
25
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
CLASS D CONVERTIBLE PREFERRED STOCK ("D PREFERRED STOCK"):
Each share of D Preferred Stock converts into one share of the
Company's common stock at the option of the holder, or automatically
on June 30, 1997. D Preferred Stockholders have anti-dilution rights
in the event of a stock dividend, stock split or other capital
transaction, as defined. In the event that there are insufficient
shares of common stock authorized, as of June 30, 1997, to allow for
the conversion of all outstanding shares of D Preferred Stock into
shares of common stock, the conversion ratio is increased to one and
one-half shares of common stock for each share of D Preferred Stock.
D Preferred Stock has a liquidation value of $1.50 per share and a
liquidation preference on parity with B Preferred Stockholders. D
Preferred Stockholders vote with common stockholders on an
as-if-converted basis.
The Company has outstanding an aggregate of 10,627,564 warrants, including
warrants discussed in Notes 2 and 8, which were issued by Innovir. The
warrants were issued in connection with debt and equity financings and in
consideration for services and a license. The exercise prices of the
warrants range from $.05 to $9.50 and expire at various dates from 1998 to
2006. As of December 31, 1996, the weighted average exercise price of all
outstanding warrants was $3.46 and 10,627,564 warrants are exercisable. In
connection with warrants issued in consideration for debt financing,
services and a license, the Company records the fair value of these
warrants as an increase to paid-in capital with a corresponding increase
in deferred financing cost, for debt financing, or a charge to operations
for services and licensing fees. In situations where warrants have been
issued in advance of the rendering of services, the Company has classified
such amount as a reduction to stockholders equity ("Unearned
compensation").
14. CONTINGENCIES:
During February 1996, Innovir was named as a defendant in an action filed
by an investor alleging that Innovir wrongfully refused to honor the
investor's request to convert certain shares of Innovir's preferred stock
into Innovir's common stock. During February 1997, the investor and
Innovir settled the action at no material cost to Innovir or the Company.
The Company is aware of patents in the United States and Europe and
related pending patent applications in other countries held by an
unaffiliated third party relating to certain technology which may be
infringed by certain of the Company's synthetic catalytic oligonucleotide
compounds, in which event a license from such third party would be
required. The Company is currently evaluating its patent position.
26
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On December 23, 1996, Innovir Laboratories, Inc. ("Innovir"), VIMRx
Pharmaceuticals Inc. ("VIMRx") and certain stockholders of Innovir entered
into a series of agreements (the "Transaction") whereby VIMRx effectively
acquired 68% of Innovir and Innovir acquired all of the issued and outstanding
shares of VIMRx Holdings, Ltd. ("VHL"), a wholly-owned subsidiary of VIMRx. For
financial reporting purposes, the Transaction has been accounted for as a
purchase in accordance with APB Opinion No. 16, "Business Combinations" ("APB
No. 16") and Emerging Issues Task Force Issue No. 90-13, "Accounting for
Simultaneous Common Control Mergers" ("EITF No. 90-13"). The application of APB
No. 16 and EITF No. 90-13 requires that the Transaction be accounted for as a
reverse acquisition and accordingly, for accounting purposes, (i) VHL is deemed
to be the acquirer and surviving company; (ii) because Innovir is deemed to be
the legal acquirer, VHL's historic capital accounts have been retroactively
restated ("recapitalized") to reflect Innovir's capital accounts and the
equivalent number of shares received by VIMRx in the Transaction; (iii) Innovir
has fair valued its assets and liabilities to the extent acquired by VIMRx
(68%); and (iv) the assets and liabilities of VHL are carried at VHL's historic
cost. VHL also assumed the name of Innovir Laboratories, Inc. and Subsidiaries
(the "Company").
In addition, during 1996, VHL acquired 100% of the outstanding capital stock of
Ribonetics GmbH ("Ribonetics") in consideration for approximately $1.6 million
of cash and a warrant to purchase 365,000 shares of VIMRx's common stock at an
exercise price $.01 per share (the "Acquisition"). The Acquisition has been
accounted for as a purchase and the historic operating results of the Company
include those of Ribonetics for the seven months ended December 31, 1996.
The following unaudited pro forma consolidated condensed statement of operations
for the year ended December 31, 1996 gives effect to the Transaction and the
Acquisition as if they had occurred on January 1, 1996.
The unaudited pro forma consolidated condensed statement of operations for the
year ended December 31, 1996 is based upon the historical operating results of
Innovir, Ribonetics and VHL for the year ended December 31, 1996. The pro forma
consolidated statement of operations excludes material nonrecurring charges
related to purchased in-process research and development. Such amount totaled
$17.4 million and is included in the Company's historic operating results for
the year ended December 31, 1996.
No pro forma consolidated condensed balance sheet as of December 31, 1996 is
presented herein as the consolidated balance sheet of the Company as of December
31, 1996, which reflects the Transaction and the Acquisition, is presented
elsewhere in this Current Report on Form 8-K.
CONTINUED
27
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
DESCRIPTION OF PRO FORMA CONSOLIDATED FINANCIAL INFORMATION,
The pro forma consolidated condensed financial information may not be indicative
of the results that actually would have been attained if the Transaction and
Acquisition had been in effect on the date indicated or which may be attained in
the future.
The pro forma adjustments are described in the accompanying notes to the pro
forma condensed financial information. The pro forma consolidated condensed
information should be read in conjunction with the notes thereto and the
financial statements of Innovir, included in Innovir's Annual Report on Form
10-K for the year ended September 30, 1996, and the consolidated financial
statements of the Company presented elsewhere in the Current Report on Form 8-K.
28
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
INNOVIR
FOR THE RIBONETICS
PERIOD FROM FOR THE
JANUARY 1, THE COMPANY PERIOD FROM
1996 FOR THE YEAR JANUARY 1, PRO FORMA
THROUGH ENDED 1996 YEAR ENDED
DECEMBER 22, DECEMBER 31, THROUGH PRO FORMA DECEMBER 31,
1996 1996 MAY 31, 1996 ADJUSTMENTS 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income $ 89,000 $ 13,000 $ 102,000
Other 151,000 $ 197,000 $ (112,000)(1) 236,000
------------ ------------ ------------ ------------ ------------
Total income 89,000 164,000 197,000 (112,000) 338,000
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development 3,997,000 1,946,000 402,000 (112,000)(1) 6,233,000
General and administrative 5,097,000 506,000 94,000 5,697,000
Interest 183,000 4,000 3,000 190,000
Amortization of goodwill 412,000 (2) 412,000
Purchase in-process research
and development 17,374,000 (17,374,000)(3)
------------ ------------ ------------ ------------ ------------
Total expenses 9,277,000 19,830,000 499,000 (17,074,000) 12,532,000
------------ ------------ ------------ ------------ ------------
Net loss $ (9,188,000) $(19,666,000) $ (302,000) $ 16,962,000 $(12,194,000)
============ ============ ============ ============ ============
Loss-per-share data:
Weighted average number of
common shares outstanding 26,612,666(4)
============
Net loss per share $ (0.46)(4)
============
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
29
<PAGE>
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(FORMERLY VIMRX HOLDINGS, LTD. AND SUBSIDIARIES)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. RELATED PARTY TRANSACTION:
During the period from January 1, 1996 through May 31, 1996, VHL provided
$112,000 of research funding to Ribonetics. The Company's pro forma
consolidated condensed statement of operations has been adjusted to
eliminate this related party transaction.
2. GOODWILL AMORTIZATION:
The excess of the purchase price over the fair market value of the net
assets acquired and purchased in-process research and development was
$1,236,487. Such amount has been recorded as goodwill, and is being
amortized on a straight line basis over the period of expected benefit of
three years. Annual amortization expense totaled $412,162.
3. PURCHASE IN-PROCESS RESEARCH AND DEVELOPMENT:
The historic operating results of the Company include an aggregate charge
for acquired in-process research and development. Such costs have been
deemed to be nonrecurring and directly attributable to the Transaction and
the Acquisition and accordingly have been eliminated from the pro forma
consolidated results of operations.
4. NET LOSS PER SHARE:
The net loss per share is computed on the basis of the pro forma net loss
for the period divided by the pro forma weighted average number of shares
outstanding during the period assuming the Transaction, the Acquisition
and the conversion of 8,666,666 shares of Class D Convertible Preferred
Stock into an equal number of shares of common stock had occurred on
January 1, 1996.
Had the conversion of 8,666,666 shares of Class D Convertible Preferred
Stock into an equal number of shares of common stock not been assumed, the
pro forma net loss per share would have been $(.68).
30
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to Current Report on Form
8-K/A of our report dated March 4, 1997 on our audit of the financial statements
of Innovir Laboratories, Inc. and Subsidiaries (formerly VIMRx Holdings, Ltd.
and Subsidiaries).
Coopers & Lybrand L.L.P.
New York, New York
March 5, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated January 3, 1996 (with respect to
the second paragraph of Note 9(b), January 26, 1996; Note 2(b), May 22, 1996;
the first paragraph of Note 1, November 21, 1996 and December 23, 1996) on the
consolidated financial statements of VIMRx Holdings, Ltd. and subsidiary as at
December 31, 1995 and for the period January 6, 1995 (inception) through
December 31, 1995, included in Form 8-K/A relating to Innovir Laboratories, Inc.
Richard A. Eisner & Company, LLP
New York, New York
March 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,412,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,615,000
<PP&E> 2,589,000
<DEPRECIATION> 150,000
<TOTAL-ASSETS> 11,074,000
<CURRENT-LIABILITIES> 1,827,000
<BONDS> 0
0
538,000
<COMMON> 233,000
<OTHER-SE> 7,786,000
<TOTAL-LIABILITY-AND-EQUITY> 11,074,000
<SALES> 0
<TOTAL-REVENUES> 164,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,826,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> (19,666,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,666,000)
<EPS-PRIMARY> (2.03)
<EPS-DILUTED> (1.00)
</TABLE>
