<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-K/A
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to___________________
Commission File Number 0-21972
INNOVIR LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3536290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 EAST 73RD STREET, NEW YORK, NEW YORK 10021
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 249-1100
--------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $.013 par value
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of the Common Stock of the registrant outstanding as of
March 16, 1998 was 34,830,925. The number of shares of Common Stock held by
nonaffiliates on such date was 8,083,823 with an aggregate market value of
$3,540,714 based on the closing price on such date of $0.438 per share, as
reported by the Nasdaq SmallCap Market.
<PAGE>
INDEX
PART I FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------------
<S> <C>
Independent Auditors' Report F-2
Report of Independent Accountants F-3
Independent Auditors' Report F-4
Consolidated Balance Sheets at December 31, 1997 and 1996 F-5
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996, and for the period
from January 6, 1995 (inception) through December 31, 1995 and the period from January 6, 1995
(inception) through December 31, 1997. F-6
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997 and
1996, and for the period from January 6, 1995 (inception) through December 31, 1995. F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996, and for the period
from January 6, 1995 (inception) through December 31, 1995 and the period from January 6, 1995
(inception) through December 31, 1997. F-8
Notes to Financial Statements F-9 to F-27
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Innovir Laboratories, Inc.:
We have audited the accompanying consolidated balance sheet of Innovir
Laboratories, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended, and for the period
from January 6, 1995 (inception) to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The accompanying financial statements of Innovir
Laboratories, Inc. as of December 31, 1996, were audited by other auditors whose
report thereon dated March 4, 1997, expressed an unqualified opinion on those
statements. The accompanying financial statements of Innovir Laboratories, Inc.
as of December 31, 1995, were audited by other auditors whose reported dated
January 3, 1996, except for note 3(b), and the first paragraph of note 1(b) and
to the retroactive change of the stockholders' capital accounts, for which the
dates are May 22, 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. Our opinion on the consolidated
statements of operations, stockholders' equity and cash flows, insofar as it
relates to the amounts included for the period from January 6, 1995 (inception)
to December 31, 1996 is based solely on the reports of other auditors which have
been furnished to us.
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 and the reports of the other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors, the
1997 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Innovir Laboratories, Inc. and
subsidiaries (a development stage enterprise) as of December 31, 1997 and the
results of their operations and their cash flows for the year then ended and for
the period from January 6, 1995 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Wilmington, Delaware
March 23, 1998
F-2
<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 then ended. 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 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 then ended in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 4, 1997
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Innovir Laboratories, Inc.
(formerly VIMRx Holdings, Ltd.)
Wilmington, Delaware
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Innovir Laboratories, Inc. and
subsidiary (a development stage company) 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 consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated results of operations
and consolidated cash flows of Innovir Laboratories, Inc. and subsidiary for the
period from January 6, 1995 (inception) through December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1(a) 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 acquisition of Ribonetics in Note 3(b),
May 22, 1996
With respect to the first paragraph of Note 1(b) and to the
retroactive change of the stockholders' capital accounts,
December 23, 1996
F-4
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
ASSETS: 1997 1996
---------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,159,000 $ 6,412,000
Prepaid expenses and other current assets 184,000 203,000
---------------------------------------------
Total current assets 2,343,000 6,615,000
Fixed assets less accumulated depreciation and amortization 2,345,000 2,439,000
Amount due from VIMRX Pharmaceuticals Inc. -- 535,000
Goodwill, less accumulated amortization of $412,000 at December 31, 1997 826,000 1,236,000
Other assets 220,000 249,000
---------------------------------------------
Total assets $ 5,734,000 $ 11,074,000
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 1,274,000 $ 1,319,000
Capital leases 382,000 472,000
Term note payable 130,000 36,000
---------------------------------------------
Total current liabilities 1,786,000 1,827,000
Amount due to VIMRX Pharmaceuticals Inc. 838,000 --
Term note payable 96,000 227,000
Capital leases 289,000 463,000
---------------------------------------------
Total liabilities 3,009,000 2,517,000
---------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.06; 15,000,000 shares authorized:
Class B Convertible Preferred Stock; 2,500,000 shares designated;
280,000 shares issued and outstanding at December 31, 1997,
(liquidation value $1,400,000); 297,000 shares issued and
outstanding at December 31, 1996, (liquidation value $1,485,000) 17,000 18,000
Class D Convertible Preferred Stock; 8,667,000 shares
designated, issued and outstanding at December 31, 1996 -- 520,000
(liquidation value of $13,000,000); none at 1997
Common stock, par value $.013; 70,000,000 shares authorized;
34,831,000 shares issued and outstanding at December 31, 1997,
17,946,000 shares issued and outstanding at December 31, 1996 453,000 233,000
Additional paid-in capital 34,036,000 29,667,000
Cumulative translation adjustment (40,000) (8,000)
Unearned compensation -- (181,000)
Deficit accumulated during the development stage (31,741,000) (21,692,000)
---------------------------------------------
Total stockholders' equity 2,725,000 8,557,000
---------------------------------------------
Total liabilities and stockholders' equity $ 5,734,000 $ 11,074,000
=============================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD PERIOD
JANUARY 6, 1995 JANUARY 6, 1995
FOR THE YEAR ENDED FOR THE YEAR ENDED (INCEPTION) THROUGH (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
--------------------- ------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
Operating Expenses:
Research and development $ 6,399,000 $ 1,946,000 $ 1,434,000 $ 9,779,000
Purchased in process
research -- 17,374,000 -- 17,374,000
and development
General and administrative 3,375,000 506,000 568,000 4,449,000
Amortization of Goodwill 412,000 -- 412,000
--------------------- ------------------- -------------------------- -----------------------
10,186,000 19,826,000 2,002,000 32,014,000
--------------------- ------------------- -------------------------- -----------------------
Other (income) expenses:
Interest income (136,000) (13,000) -- (149,000)
Interest expense 126,000 4,000 24,000 154,000
Other-net (127,000) (151,000) -- (278,000)
--------------------- ------------------- -------------------------- -----------------------
(137,000) (160,000) 24,000 (273,000)
--------------------- ------------------- -------------------------- -----------------------
Net (loss) $ (10,049,000) $ (19,666,000) $ (2,026,000) $ (31,741,000)
===================== =================== ========================== =======================
Loss per share data:
Basic loss per share $ (0.43) $ (2.03) $ (0.21)
===================== =================== ==========================
Weighted average number of
shares of Common
Stock outstanding 23,509,000 9,685,000 9,500,000
===================== =================== ==========================
Diluted loss per share $ (0.43) $ (2.03) $ (0.21)
===================== =================== ==========================
Weighted average number of
shares of Common
Stock and dilutive
equivalent shares
outstanding 23,509,000 9,685,000 9,500,000
===================== =================== ===========================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
For the period from January 6, 1995 (inception) to December 31, 1997
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Class B Convertible Class D Convertible
Preferred Stock Preferred Stock Common Stock Additional
------------------- ------------------- ------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- ------- --------- ------- --------- ------- ----------
<S> <C> <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 $(572,000)
Net loss for the period from January 6,
1995 to December 31, 1995 -- -- -- -- -- -- --
-------- ------- --------- ------- ---------- ------- ----------
Balance at December 31, 1995 -- -- 8,667,000 520,000 9,500,000 124,000 (572,000)
Contributed capital resulting from capital
infusion or forgiveness of inter-company
liabilities -- -- -- -- -- -- 8,400,000
Contributed capital resulting from the
acquisition of Ribonetics GmbH -- -- -- -- -- -- 3,713,000
Contributed capital resulting from the
acquisition of Innovir
Laboratories, Inc. 297,000 $18,000 -- -- 8,446,000 109,000 17,919,000
Compensation expense incurred in
connection with the issuance of stock -- -- -- -- -- -- --
options
Cumulative translation adjustment -- -- -- -- -- -- 207,000
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 29,667,000
Exercise of options and warrants -- -- -- -- 3,131,000 41,000 1,973,000
Costs incurred in connection with issuance
of equity securities -- -- -- -- -- -- (24,000)
Conversion of Class B Convertible Stock (17,000) (1,000) -- -- 26,000 -- 1,000
Conversion of Class D Convertible Stock -- -- (8,667,000) $(520,000) 8,667,000 113,000 407,000
Issuance of common stock -- -- -- -- 5,080,000 66,000 1,934,000
Adjustment for shares held in escrow in
connection with stockholder's
litigation -- -- -- -- (19,000) -- --
Compensation expense incurred in
connection with the issuance of
stock options -- -- -- -- -- -- 78,000
Amortization of unearned compensation -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Net loss for the year ended December 31,
1997 -- -- -- -- -- -- --
-------- ------- --------- ------- ---------- ------- ----------
Balance at December 31, 1997 280,000 $17,000 -- -- 34,831,000 $453,000 $34,036,000
======== ======= ========= ======= ========== ======= ==========
<CAPTION>
Cumulative
Unearned Translation Deficit
Compensation Adjustment Retained Total
------------ ----------- ----------- ------------
<S> <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 -- -- -- $ 72,000
Net loss for the period from January 6,
1995 to December 31, 1995 -- -- (2,026,000) (2,026,000)
----------- -----------
Balance at December 31, 1995 -- (2,026,000) (1,954,000)
Contributed capital resulting from capital
infusion or forgiveness of inter-company
liabilities -- -- 8,400,000
Contributed capital resulting from the
acquisition of Ribonetics GmbH -- -- -- 3,713,000
Contributed capital resulting from the
acquisition of Innovir
Laboratories, Inc. (181,000) -- -- 17,865,000
Compensation expense incurred in
connection with the issuance of stock --
options -- -- 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 (181,000) (8,000) (21,692,000) 8,557,000
Exercise of options and warrants -- -- -- 2,014,000
Costs incurred in connection with issuance
of equity securities -- -- -- (24,000)
Conversion of Class B Convertible Stock -- -- -- --
Conversion of Class D Convertible Stock -- -- -- --
Issuance of common stock -- -- -- 2,000,000
Adjustment for shares held in escrow in
connection with stockholder's litigation -- -- -- --
Compensation expense incurred in
connection with the issuance of
stock options -- -- -- 78,000
Amortization of unearned compensation 181,000 -- -- 181,000
Translation adjustment -- (32,000) -- (32,000)
Net loss for the year ended December 31,
1997 -- -- (10,049,000) (10,049,000)
------------ ------------ ----------- -----------
Balance at December 31, 1997 -- $ (40,000) $(31,741,000) $ 2,725,000
============ ============ =========== ===========
</TABLE>
F-7
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
January 6, January 6,
1995 1995
For the year For the year (Inception) (Inception)
ended ended through through
December 31, December 31, December 31, December 31,
1997 1996 1995 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(10,049,000) $(19,666,000) $(2,026,000) $(31,741,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 795,000 146,000 4,000 945,000
Amortization of goodwill 412,000 -- -- 412,000
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 259,000 207,000 -- 466,000
Changes in operating assets and liabilities:
(Increase) in other current assets (7,000) (37,000) (3,000) (47,000)
(Increase) in other assets (1,000) -- -- (1,000)
(Decrease) increase in accounts payable and
accrued expenses (40,000) 540,000 43,000 543,000
------------- ------------- ------------ -------------
Net cash (used in) operating activities (8,631,000) (1,436,000) (1,897,000) (11,964,000)
------------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (664,000) (605,000) (49,000) (1,318,000)
Cash acquired in acquisitions -- 3,532,000 3,532,000
------------- ------------- ------------ -------------
Net cash (used in) provided by investing
activities (664,000) 2,927,000 (49,000) 2,214,000
------------- ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 3,990,000 -- 12,000 4,002,000
Advances and contributed capital from VIMRX
Pharmaceuticals Inc. 1,372,000 4,864,000 2,002,000 8,238,000
Repayment of capital leases (390,000) -- -- (390,000)
------------- ------------- ------------ -------------
Net cash provided by financing activities 4,972,000 4,864,000 2,014,000 11,850,000
------------- ------------- ------------ -------------
Effect of exchange rate changes on cash 70,000 (11,000) -- 59,000
------------- ------------- ------------ -------------
Net (decrease) increase in cash and cash
equivalents (4,253,000) 6,344,000 68,000 2,159,000
Cash and cash equivalents at beginning or period 6,412,000 68,000 -- --
------------- ------------- ------------ -------------
Cash and cash equivalents at end of period $ 2,159,000 $ 6,412,000 $ 68,000 $ 2,159,000
============= ============= ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 126,000 $ 3,000 -- $ 129,000
============= ============= ============ =============
For non-cash transactions, see Notes 3 & 5.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
NOTE 1 THE BUSINESS
(a) Operations
Innovir Laboratories, Inc. ("Innovir") is a biotechnology company
developing a new class of biopharmaceutical agents based on proprietary
technology for the treatment and prevention of diseases and also for
genomic and pharmaceutical research. 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 to obtain regulatory approvals, fund early operating losses, and
if deemed appropriate, establish manufacturing, marketing and sales
capabilities.
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 Pharmaceuticals, Inc.,
("VIMRX") will enable the Company to continue to operate through the
first quarter of 1999. After that date, 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 that date will need to be
scaled back or discontinued.
(b) Ownership
The Company's shares are publicly traded on NASDAQ under the symbol
"INVR". On November 21, 1996, Innovir, VIMRX, and certain stockholders of
Innovir executed agreements (the "Transaction") whereby VIMRX acquired
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 was consummated on December 23,
1996. As further discussed in Note 3, for financial reporting purposes,
the Transaction has been accounted for as a reverse acquisition in which
VHL is deemed to be the acquirer of Innovir and the surviving company. In
connection therewith, VHL's capital accounts were retroactively
recapitalized to reflect the capital accounts of Innovir. VHL then
assumed the name of Innovir Laboratories, Inc. and Subsidiaries (the
"Company").
In December 1997, through an additional investment of approximately
$2,000 for 5,080,000 shares of Common Stock, VIMRX increased its
ownership in the Company to approximately 70%.
F-9
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
(c) Risks
The Company is subject to those risks associated with development stage
enterprises. 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 technological change, and is
dependent upon the services of its employees and consultants.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company expects to
incur substantial expenditures in the foreseeable future related to
research, development and commercialization of its proposed products.
Based on current projections, which are subject to change (such change
may be significant), the Company's management believes that the cash and
cash equivalents on hand at December 31, 1997 and commitments for
additional financing by VIMRX will be sufficient to fund its operations
into the first quarter of the year ending December 31, 1999. Thereafter,
the Company will require additional funds, which it may seek to raise
through public or private equity or debt financings, collaborative or
other arrangements with corporate sources, or through other sources of
financing, which may include the sale, licensing or spinning off of
certain of the Company's technologies. There can be no assurance that
such additional financing will be obtained on terms reasonable to the
Company, if at all. In the event that the Company is unable to raise
additional capital, planned operations would need to be scaled back or
discontinued during 1999.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its three wholly-owned subsidiaries, VHL, Innovir Ltd.,
Ribonetics GmbH and Innovir GmbH. All significant intercompany balances
and transactions have been eliminated in consolidation.
(c) Foreign currency translation
Financial statements of foreign subsidiaries are translated into US
dollars using the year-end rate for net assets, and average exchange
rates for revenue and expense accounts. Adjustments resulting from these
translations are reflected directly in stockholders' equity.
F-10
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
(d) Cash and Cash Equivalents
Cash and cash equivalents of $2,159 and $6,412 at December 31, 1997 and
1996, respectively, consist of money market deposits, bank deposits, and
a mutual fund which invests in short duration bonds. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. The Company holds no collateral for these financial
instruments.
(e) Fixed assets
Fixed assets, which consist principally of office equipment, laboratory
equipment, and leasehold improvements, are stated at cost. Fixed assets
under capital lease are stated unless it is under a capital lease,
at the present value of minimum lease payments.
Depreciation of equipment is calculated on the straight-line method over
the estimated useful lives of the assets which range from 4 to 15 years.
Equipment held under capital leases and leasehold improvements are
amortized on a straight line basis over the shorter of the lease term
or estimated useful life of the asset.
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 the statement of operations.
(f) Goodwill
Goodwill of $1,236 arose on the Transaction. This goodwill represents
the excess of purchase price paid by VIMRX over 68% of the fair value of
net assets acquired and purchased in-process research and development,
which is amortized on a straight-line basis over the period of expected
benefit which is 3 years.
The carrying value of goodwill is reviewed periodically by assessing the
advancement of Innovir's technology and the continued employment of
Innovir's workforce and consultants. Should such a review indicate that
the value of goodwill will not be realized, the Company's carrying value
of the goodwill will be reduced.
(g) Other assets
Other assets consist principally of security deposits and deferred
financing costs. Deferred financing costs associated with obtaining
debt financing have been capitalized and are being amortized on a basis
which approximates the interest method, over the term of the loan.
(h) Research and Development
Research and development costs are expensed as incurred. In the event of
a business combination, purchased research and development is valued and
included in the allocation of the purchase price. If technological
feasibility of the acquired technology can not be
F-11
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
established at the date of acquisition and the technology has no future
alternative uses, the amount is immediately charged to expense.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method in
accordance with the Statement of Financial Accounting Standards No. 109
("SFAS 109"). Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets
may be reduced, if necessary, by a valuation allowance for any tax
benefits which are not expected to be realized. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS No. 123), Accounting
for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(k) Net loss per share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss
per share is computed using the weighted average number of shares of
common and potentially dilutive shares outstanding during the period.
Potentially dilutive common shares consist of stock options and warrants
and convertible preferred stock using the treasury stock method and are
excluded if their effect is antidilutive.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") Earnings Per Share ("EPS").
SFAS 128 establishes and simplifies the standards for computing earnings
per share previously found in Accounting principles Board Opinion No. 15,
Earnings Per Share ("APB 15") and makes them comparable to international
EPS standards. The adoption of SFAS 128 did not have a material impact on
prior year financial statements.
F-12
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
For all periods presented, the net loss per share is computed assuming
that the recapitalization discussed in Note 3 had occurred on January 6,
1995.
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it
is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
(m) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of a long-
lived asset may not be recoverable. Such asset is deemed impaired and
written down to its fair value if expected future cash flows are less
that its carrying amount.
(n) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities as well as
the disclosure of contingencies. Actual results could differ from those
estimates.
(o) Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
(p) New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires that all
items are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt this accounting standard as required. The
adoption of SFAS 130 will have no impact on the Company's earnings,
financial condition or liquidity, but will require the Company to
classify items of other comprehensive income in a financial statement and
display the accumulated balance of other comprehensive income in a
financial statement and display the accumulated balance of other
comprehensive income separately in the equity section of the balance
sheet.
F-13
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
In June 1997, the FASB also issued Statement of Financial Standard No.
131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 supersedes Statement of Financial Standards No.
14, Financial Reporting for Segments of a Business Enterprise, and
establishes new standards for reporting information about operation
segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS 131 is effective for periods beginning
after December 15, 1997. SFAS 131 affects reporting in financial
statements only and will have no impact on the Company's results of
operations, financial condition or liquidity.
In February, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS 132)
which amends the disclosure requirements of Statements No. 87, Employers'
Accounting for Pensions (SFAS 87). The Company does not believe that
adoption of SFAS 132 will have a material impact on its financial
position.
NOTE 3 ACQUISITIONS
(a) Change in Control / Reverse Acquisition
As discussed in Note 1, Innovir, VIMRX and certain stockholders of
Innovir (the "Aries Fund") entered into the Transaction whereby VIMRX
acquired 68% of Innovir, and Innovir acquired 100% of the outstanding
capital stock of VHL. On December 23, 1996, in consideration for the
acquisition of VHL, Innovir 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 the first
million warrants is $1 per share. The remaining warrants have an
exercise price of $2 per share.
Simultaneous with Innovir's acquisition of VHL, VIMRX, in exchange for
$3,000 and three million shares of VIMRX's common stock, acquired 9.5
million shares of Innovir's common stock from the Aries Fund, 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 2,500,000 shares of Innovir's common stock
held by the Aries Fund, 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 16"), and Emerging Issues
Task Force Issue No. 90-13, Accounting for Simultaneous Common Control
Mergers, ("EITF 90-13"). The application of APB 16 and EITF 90-13
requires that the Transaction be accounted for as a reverse acquisition,
and accordingly, for accounting purposes:
(a) VHL is deemed to be the acquirer and the surviving company;
(b) since 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;
(c) to the extent VIMRX has acquired Innovir (68%), Innovir has
revalued its assets and liabilities to fair value; and
(d) the assets and liabilities of VHL are carried at VHL's historic
cost.
VIMRX's purchase price for 68% of Innovir totaled approximately $17,000
which was allocated as follows:
F-14
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
Tangible assets $ 3,700
Liabilities (1,800)
In-process research and development 13,800
Goodwill 1,300
-------
$17,000
======
In-process research and development was immediately expensed since
technological feasibility had not yet been established, and there was no
alternative future use.
(b) Acquisition of Ribonetics GmbH
During 1996, VHL acquired 100% of the capital stock of Ribonetics GmbH
("Ribonetics") in consideration for approximately $1,600 cash and a
warrant to purchase 365,000 shares of VIMRX's common stock at an exercise
price of $.01 per share (the "Acquisition"). The Acquisition was
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 $3,714 and was allocated as follows:
Tangible assets $475
Liabilities (289)
In-process research and development 3,528
------
$3,714
=====
In-process research and development was immediately expensed since
technological feasibility had not yet been established, and there was 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 ending December 31.
Period from
January 6, 1995
Year ended (Inception) through
December 31, 1996 December 31, 1995
(unaudited) (unaudited)
Other income $ 338 $1,360
Expenses 12,532 9,698
------- ------
Net loss $12,194 $8,338
======= ======
Basic and diluted
loss per share $ 0.68 $ 0.46
======= ======
The pro forma results of operations above includes adjustment 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.
F-15
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
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 period,
nor are they necessarily indicative of future operating results.
NOTE 4 FIXED ASSETS
Fixed assets as of December 31, 1997 and 1996 are comprised of the
following:
1997 1996
------ ------
Office and laboratory equipment $2,666 $1,900
Leasehold improvements 561 689
------ ------
3,227 2,589
Less accumulated depreciation and amortization 882 150
------ ------
Net fixed assets $2,345 $2,439
====== ======
Depreciation and amortization expense on fixed assets was $795 and $146
for the years ended December 31, 1997 and 1996, respectively, and $4 for
the period from January 6, 1995 (Inception) through December 31, 1995.
NOTE 5 LEASES
The Company is obligated under various capital leases, some of which are
with VIMRX, that expire at various dates during the next five years. At
December 31, 1997 and 1996, the gross amount of equipment and related
accumulated amortization recorded under capital leases were as follows:
1997 1996
Equipment $1,513 $1,387
Less accumulated amortization 842 405
------ ------
$ 671 $ 982
====== ======
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has several noncancelable operating leases, primarily
office space, that expire over the next three years. These leases
generally contain renewal options and require the Company to pay all
executory costs such as maintenance and insurance. Rental expense totaled
approximately $493, $170, and $27 for the years ended December 31, 1997
and 1996, and the period from January 5, 1995 through December 31, 1995,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1997 are:
F-16
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31,
1998 $422 $493
1999 232 302
2000 80 63
2001 51 30
2002 - -
---- ----
Total minimum lease payments 785 $888
====
Less amount representing interest 114
----
Present value of net minimum capital lease payments 671
Less current installments of obligations under capital leases 382
----
Obligations under capital leases,
excluding current installments $289
====
</TABLE>
During 1997, the Company began leasing certain equipment from VIMRX, its
principal shareholder. The leases, which range in duration from 36 to 48
months, have been classified as capital leases since Innovir is entitled
to purchase the related assets at a bargain price, upon expiration of the
lease. The implicit interest rate in the lease is 12.5% which
approximates what a third party would have charged the Company. For the
year ended December 31, 1997, payments to VIMRX under these leases
totaled $19, which was comprised of principal repayments of $14, and
interest of $5.
Certain capital leases contain various covenants including a requirement
that the Company must maintain a minimum cash balance (as defined in the
lease agreement) during the term of the lease. This covenant indirectly
restricts the Company's ability to pay dividends.
NOTE 6 SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts payable and accrued expenses are comprised of the following at
December 31:
1997 1996
------- -------
Accounts payable 490 764
Accrued expenses 402 341
Accrued payroll related costs 8 42
Severance payable 233 -
Legal and accounting fees payable 141 172
------ ------
$1,274 $1,319
====== ======
NOTE 7 TERM NOTES PAYABLE
At December 31, term notes payable is comprised of:
F-17
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
1997 1996
---- ----
Term notes payable, including accrued interest
of $39 and $44 at December 31, 1997 and
1996, respectively 226 263
--- ---
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 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 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 expired on February 10, 1998.
In November 1996, the note was amended ("Amended Note"), and related
accrued and unpaid interest as of that date was deferred. In
consideration for the amendment, the Company issued a second warrant,
which entitles the holder to purchase 20,000 shares of the Company's
common stock at a price of $1.50 per share. This warrant expires in
November, 2001. Upon issuance of the warrant, the Board determined the
fair value to be $16. Such amount is being amortized as deferred
financing costs over the remaining life of the Amended Note.
Pursuant to the Amended Note, future payments of principal and deferred
interest are as follows:
For the years ended December 31,
1998 $130
1999 96
--
$226
===
Interest expense related to the term note payable was not material to any
of the periods presented.
NOTE 8 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.
The tax effect of net operating loss carryforwards, temporary differences
and research and experimental tax credit carryforwards as of December 31,
1997 and 1996 were as follows:
F-18
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards 15,765 13,117
Research and experimental tax credit carryforwards 820 570
Others 33 147
------ ------
Total deferred tax assets 16,618 13,834
Valuation allowance (16,618) (13,834)
------ ------
Net deferred taxes - -
====== ======
As of December 31, 1997, the Company has available for tax purposes the
following net operating loss carryforwards:
United States (expires in various years from 2005 to 2012) 32,092
Germany (no expiration date) 2,300
United Kingdom (no expiration date) 1,786
The Company's research and experimental tax credit carryforward expires
in various years from 2005 through 2012.
The ownership change described in Note 3 will limit the use or continued
availability of the Company's carryforwards.
NOTE 9 STOCK OPTION PLANS
The Company maintains two stock incentive plans: the Employee Stock
Option Plan, and the Non-Employee Director Stock Option Plan (the
"Plans"). In aggregate, the Plans authorize grants of options to
purchase up to 3,270,000 shares of authorized but unissued common stock.
Employee Stock Option Plan
In connection with the Transaction described in Note 3, the Company
adopted Innovir's stock option plan (the "Employee's Plan") effective
December 23, 1996. Pursuant to the Employee's Plan the Company's Board
of Directors may grant stock options to employees, directors, advisors,
and consultants ("participants"). The Employee's Plan authorizes grants
of options to purchase up to 3,000,000 shares of authorized but unissued
common stock. Such amount is subject to adjustment for stock splits,
stock dividends and other capital adjustments as defined in the
Employee's Plan. The options will be awarded by the Board or a committee
that will determine the option price and vesting period, which may not
exceed 10 years. Generally, awards vest on a pro rata basis over two to
five years, have a term of ten years, and except as noted below, have
exercise prices equal to the market value on the date of grant. The
Employee's Plan terminates during March 2003.
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
F-19
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
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 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 of the option is five years from the date of 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.
At December 31, 1997, there were 958,873 additional shares available for
grant under the Plans. The per share weighted-average fair value of
stock options granted during 1997 and 1996 was $0.30 and $1.29 on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - zero dividend yield,
expected volatility of 109%, risk-free interest rate of 6.2%, and an
expected life of 4 years; 1996 - zero dividend yield, expected
volatility of 83%, risk-free interest rate of 5.7%, and an expected life
of 4 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
1997 1996
-------- --------
Net loss:
As reported $10,049 $19,666
Pro forma 10,286 20,188
Loss per share:
As reported - basic and diluted (.43) (2.03)
Pro forma - basic and diluted (.44) (2.08)
Since all options were issued effective December 23, 1996, the pro
forma net loss includes the full impact of calculating compensation cost
for stock options under SFAS No. 123.
F-20
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
Stock option activity for the Employee's Plan during the periods
indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
Exercise Average Number of
Price Range Exercise Price Shares
------------ -------------- -----------
<S> <C> <C> <C>
Outstanding options as of date
of the Transaction, $2.25-$12.00 $4.27 1,501,625
Granted(a) $ 1.30 $1.30 1,860,089
Canceled(a) $2.25-$12.00 $4.31 (1,451,925)
----- ----------
Balance outstanding,
December 31, 1996 $ 1.30-$9.75 $1.35 1,909,789
Granted $.6875-$1.30 $1.18 1,135,300
Canceled (b) $ 1.30 $1.30 (922,601)
----- ----------
Balance outstanding,
December 31, 1997 $ .84-$9.75 $1.16 2,122,488
===== ==========
</TABLE>
(a) Upon completion of the Transaction discussed in Note 3, the Company's Board
approved the cancellation and 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 repricing was approximately $1.15.
(b) In connection with severance of certain employees, options which had been
granted to the employee, but were not yet vested, were canceled. The
exercise term for options in which the employee was vested was extended.
All other features of the options were unchanged.
F-21
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
Stock option activity for the Director's Plan during the periods
indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Exercise Average Number of
Price Range Exercise Price Shares
----------- -------------- ----------
<S> <C> <C> <C>
Outstanding options as of date
of the Transaction, $0.97-$7.75 $3.51 145,000
Granted $ 1.16 $1.16 120,000
Canceled $0.97-$7.75 $3.02 (130,000)
----- --------
Balance outstanding,
December 31, 1996 $1.16-$7.75 $1.89 135,000
Granted $0.88-$0.94 $0.92 40,000
Canceled $ 1.16 $1.16 (90,000)
-------
Balance outstanding
December 31, 1997 $0.88-$7.75 $2.21 85,000
========
</TABLE>
At December 31, 1997, weighted-average remaining contractual life of
outstanding options was 9 years.
At December 31, 1997 and 1996, the number of options exercisable under
the Plans was 723,697 and 293,390, respectively. 958,873 and 1,121,572
shares of the Company's common stock were reserved for future awards
under the Plans at December 31, 1997 and 1996, respectively.
NOTE 10 COMMITMENTS
In addition to the leases described in Note 5, the Company has made
several commitments which are described below:
Severance Agreement
The Company had an employment contract with an officer/stockholder which
was to expire in November, 1999. Effective October 1, 1997 (the
"Separation Date"), the Company and officer entered into a separation
agreement. In connection with the separation agreement, the Company
agreed to pay the officer $200 in twelve equal monthly installments. The
full amount was charged to expense at the separation date. Payments of
$33 have been made through December 31, 1997; the remaining $167 is
included in accrued expenses on the balance sheet.
The Company entered into Separation Agreements with two other employees.
In connection with these agreements, severance payments totaling $85
were charged to expense. At December 31, 1997 $66 is included in accrued
expenses, and will be paid during the first half of 1998.
F-22
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
Consulting Agreements
On November 1, 1997 the Company entered into has an agreement with a
consultant under which the Company pays the Consultant a fee of $2.5 per
month for a minimum commitment of four days per month. The Consultant is
paid an additional $0.5 for each additional day over the minimum. The
term of the Agreement continues until October 31, 2001, although either
party may terminate the agreement at any time provided they give 60 days
notice of their intent. In addition to the remuneration, the Consultant
received options to purchase 40,000 shares of the Company's common stock
at $.6875 per share, which was the market value at the date of grant. The
options vest in four equal installments at the end of each year through
October 31, 2001.
The Company has several agreements with consultants, two of whom are
stockholders ("stockholder/consultants"). The consultants perform
services for the Company in consideration for certain fees. The
consultants have also agreed to assign the Company any inventions, ideas,
patents, and copyrights conceived, related to the Company's business and
provide other services as defined in the agreement. To date, payments
under these agreements has not been material. Future minimum quarterly
payments to the stockholders/consultants are approximately $46 through
March, 1998 and $24, hereafter until March 31, 2000. Under certain
conditions, the Company may have to pay additional amounts ("Patent
Awards") in the event the research performed by one of the consultants
leads to the issuance of a patent. Patent Awards to date have not been
material.
The Company had various other consulting agreements, all of which either
expired during 1997, or have no significant payments due.
Collaborative Research Agreement
In conjunction with the New York State Science and Technology Foundation
(the "Foundation"), the Company has agreed to support collaborative
research at a University. Under the terms of this agreement, which is a
renewal of a previous one-year contract, the Company and the Foundation
have agreed to reimburse the University for $125 of direct costs, split
60%/40% between the Company and the Foundation, plus certain indirect
costs. The agreement covers the period from July 1, 1997 through June
30, 1998. As of December 31, 1997, the Company had made payments
totaling approximately $45, and expects to make two additional payments,
which should aggregate $45. The Company expects that the agreement will
be extended for an additional one-year period.
Licensing Agreements
The Company (as licensee) has entered into an exclusive worldwide
licensing agreement with Yale 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
F-23
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
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 the agreement, the
Company is required to remit royalties on a quarterly basis, at various
rates, as defined. In addition, the Company is required to pay a minimum
annual advance on earned royalties ("Advance") of $10 which is non-
refundable, but may be credited, as defined, against future royalties
due to 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 will
receive a defined royalty in the event the Company licenses the
technology to the 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 both parties. During the years ended December 31,
1997 and 1996, the Company received $108 and $40 respectively, from the
Pharmaceutical Company in accordance with the agreement. Such amounts
have been included in Other Income.
NOTE 11 CONTINGENCIES
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 compounds, in which event a
license from such third party would be required. The Company is
currently evaluating its patent position.
The Company may be considered to be in violation of the terms of its
office and laboratory sublease by not obtaining the required approval
from the owner of the property prior to the consummation of the
Transaction described in Note 3. In addition, the owner of the property
has alleged, and the Company's sublandlord disputes, that the
sublandlord may also be in breach of its lease with the owner of the
property. If the sublandlord is evicted, the Company would lose its
right to occupy its current space. While the Company believes these
matters may be resolved without a materially adverse effect on the
Company's business or financial position, the ultimate outcome can not
be predicted.
NOTE 12 STOCKHOLDERS' EQUITY
After the recapitalization described in Note 3 and subsequent Board
resolutions, the Company is authorized to issue 15 million shares of
preferred stock and 70 million shares of common stock. The Company's
Board, at its sole discretion, can issue series of preferred stock with
each series having
F-24
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
rights, privileges, and qualifications determined by the Board. As of
December 31, 1997, the Company has outstanding Class B Convertible
Preferred Stock whose rights are as follows:
Holders of Class 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 Class B Preferred Stock had been converted
to common stock. Class 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 Class B Preferred Stock's
conversion feature provides for each share of Class B Preferred Stock
to be converted into shares of common stock, at the option of the
holder, 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.
The Company also has outstanding an aggregate of 7,957,306 warrants. 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 $0.05 to $9.50 and expire at various dates from 1998
to 2006. As of December 31, 1997, the weighted average exercise price of
the warrants was $4.72, and all 7,957,306 of the warrants are
exercisable. In connection with warrants issued in 1996 in consideration
for the debt financing, services and a license, the Company recorded the
fair value of the 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 classified such amount ("Unearned Compensation") as a
reduction to stockholders equity. On December 31, 1997, the Company
issued to VIMRX a warrant to purchase 1,000,000 shares of common stock at
a price of $0.394/share. Additionally, all services related to warrants
issued in 1996 were rendered in 1997, so at December 31, 1997 there is no
longer any Unearned Compensation included in stockholders' equity.
In August 1997, warrants to purchase 1,000,000 shares of Common Stock at
$1.00 per share were exercised by VIMRX. In addition, at December 31,
1997, VIMRX owns warrants to purchase an additional 1,000,000 shares of
Common Stock at an exercise price of $2.00 per share and another
1,000,000 shares of common stock at an exercise price of $0.394/share.
In August 1997, warrants to purchase 2,000,000 shares of Common Stock at
$0.50 per share were exercised by certain other shareholders. On
December 30, 1997, VIMRX purchased an additional 5,080,436 shares of
previously unissued Common Stock at $0.39 per share, which was the market
price for the Company's publicly traded shares on that date. At December
31, 1997, VIMRX owns approximately 70% of the Company's common stock.
At December 31, 1996, the Company also had 8,666,667 shares of Class D
Preferred Stock outstanding. As described in Note 16, the shares were
automatically converted to 8,666,667 shares of common stock on July 1,
1997. There were no Class D Preferred Shares outstanding at December 31,
1997.
F-25
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
NOTE 13 EMPLOYEE BENEFIT PLANS
The Company operates 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 contributes defined amounts,
generally equal to 50 cents on the dollar for the first 6% of the
employees salary. In addition, the Company may make discretionary
contributions to the Plans. Contributions to date have not been
material.
NOTE 14 RELATED PARTY TRANSACTIONS
At of December 31, 1997, the Company owed VIMRX $838 which represents
cash advances from VIMRX and expenses paid by VIMRX on behalf of the
Company. The amount due bears no interest and has no set payment dates.
At December 31, 1996, the balance was related to obligations which arose
from the Transaction discussed in Note 3. In addition, an agreement (the
"Agreement") with VIMRX permits the Company to issue a put notice to
VIMRX on a monthly basis to cover cash needs. Under the terms of the
Agreement, within 15 trading days of the put notice, VIMRX will purchase
up to $5,000 of Innovir common stock at a price equal to the average
closing bid price for the 15 days prior to the date the put notice was
issued or $1.30/share, whichever is lower. Other related party
transactions are described in Notes 1, 3, 5, 6 and 12.
NOTE 15 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values of cash and cash equivalents, employee loan receivables,
accounts payable and accrued interest approximate fair value because of
the short term maturity of these instruments.
The carrying amount of the term note payable and debt related to capital
leases approximates fair value because the Company believes the
instruments could be exchanged in a current transaction for the carrying
amount.
NOTE 16 NONCASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of $126, $545 and $0 were incurred in 1997,
1996 and 1995, respectively, when the Company entered into leases for
new equipment.
During 1997, the Company converted 17,000 shares of Class B Convertible
Preferred Stock into 26,000 shares of Common Stock. All of the
outstanding shares of Class D Convertible Preferred Stock ("D Preferred
Stock") were automatically converted to 8,666,667 shares of Common Stock
on July 1, 1997.
NOTE 17 GEOGRAPHIC INFORMATION
Information on the Company's geographic operations is set forth below:
F-26
<PAGE>
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data
1997 1996 1995
------- ------ -----
Operating loss:
United States $ 7,294 18,131 --
Europe 2,755 1,535 2,026
------- ------ -----
Total operating loss $10,049 19,666 2,026
======= ====== =====
Identifiable assets:
United States $ 4,283 10,021 --
Europe 1,451 1,053 341
------- ------ -----
Total identifiable assets $ 5,734 11,074 341
======= ====== =====
F-27
<PAGE>
<PAGE>
Exhibit 23
Independent Auditors' Consent
The Board of Directors and Stockholders of
Innovir Laboratories Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33- 74016, 33-86022 and 33-86024) on Form S-8 and registration statements (Nos.
333-01078, 333-12865 and 33-93608) on Form S-3 of our report dated March 23,
1998, relating to the consolidated balance sheet of Innovir Laboratories Inc.
and Subsidiaries as of December 31, 1997, and the related consolidated statement
of operations, stockholders' equity and cash flows for the year then ended,
which report appears in the December 31, 1997 annual report on Form 10-K/A of
Innovir Laboratories Inc.
KPMG Peat Marwick LLP
Wilmington, Delaware
May 11, 1998
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Innovir Laboratories, Inc. and Subsidiaries on Form S-3 (File Nos. 333-12865,
333-01078 and 33-93608), and Form S-8 (File Nos. 33-86022, 33-74016 and
33-86024) of our report dated March 4, 1997, on our audit of the financial
statements of Innovir Laboratories, Inc. and Subsidiaries as of and for the year
ended December 31, 1996, which report is included in this Annual Report on Form
10-K/A.
COOPERS & LYBRAND L.L.P.
New York, New York
May 7, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-86024, 33-74016 and 33-86022), Form S-3 (File Nos.
333-1078 and 333-12865) and Amendment No.1 to Registration Statement No.
33-93608 on Form S-3, of our report dated January 3, 1996 (with respect to the
acquisition of Ribonetics in Note 3[b], May 22 1996 and to the first paragraph
of Note 1[b] and to the retroactive change of the stockholders' capital
accounts, December 23, 1996) on the consolidated financial statements of Innovir
Laboratories Inc. and subsidiary (the "Company") as of December 31, 1995 and for
the period January 6, 1995 (inception) through December 31, 1995 included in the
Company's 1997 Annual Report on Form 10-K/A.
Richard A. Eisner & Company, LLP
New York, New York
May 8, 1998
