<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): FEBRUARY 21, 2000
AXYS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
0-22788 22-2969941
(Commission File Number) (IRS Employer
Identification No.)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CA 94080
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 829-1000
<PAGE> 2
ITEM 5: OTHER EVENTS:
This Current Report on Form 8-K supplements the Current Report on Form 8-K filed
by Axys Pharmaceuticals, Inc. (the "Company") on January 23, 1998 (the "Initial
Form 8-K") in connection with the closing of the merger of the Company's
wholly-owned subsidiary, Beagle Acquisition Sub, Inc. (the "Merger Sub"), and
Sequana Therapeutics, Inc. ("Sequana") pursuant to the terms of that certain
Agreement and Plan of Merger and Reorganization by and between the Company, the
Merger Sub and Sequana dated November 2, 1997.
In compliance with the reporting requirements of Items 2 and 7 of Form 8-K, the
Initial Form 8-K described the relevant aspects of the transaction required by
Item 2 and filed financial statements of the business acquired required by Item
7 by incorporating by reference such financial statements as filed with the
Securities and Exchange Commission (the "SEC") in Sequana's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 1997, June 30, 1997 and
September 30, 1997. The Initial Form 8-K filed pro forma financial information
by incorporating by reference such pro forma financial information as filed with
the SEC in the Registration Statement on Form S-4 (Registration No. 333-41205)
on November 26, 1997.
Included herein are the financial statements of Sequana for the fiscal year
ended December 31, 1997 filed to supplement the disclosure of the required
financial statements with respect to the acquired business referred to above and
in Item 2 of the Initial Form 8-K.
<PAGE> 3
CONSOLIDATED FINANCIAL STATEMENTS
SEQUANA THERAPEUTICS, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 4
Sequana Therapeutics, Inc.
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ 5
Audited Consolidated Financial Statements
Consolidated Balance Sheets........................................................... 6
Consolidated Statements of Operations................................................. 7
Consolidated Statements of Shareholders' Equity....................................... 8
Consolidated Statements of Cash Flows................................................. 9
Notes to Consolidated Financial Statements............................................11
</TABLE>
<PAGE> 5
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Sequana Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Sequana
Therapeutics, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sequana
Therapeutics, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 6, 1998
<PAGE> 6
Sequana Therapeutics, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,683,306 $ 9,402,958
Investment securities, available-for-sale 43,280,639 43,316,733
Other current assets 2,129,413 2,820,355
------------ ------------
Total current assets 58,093,358 55,540,046
Furniture and equipment, net 8,089,157 8,285,305
Investment in joint venture 2,301,140 --
Notes receivable from officers and employees 433,247 530,844
Other assets 1,176,376 1,737,075
------------ ------------
$ 70,093,278 $ 66,093,270
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,983,297 $ 3,965,475
Deferred revenue 5,943,730 3,357,936
Current portion of loans and capital
lease obligations 3,669,697 2,396,523
------------ ------------
Total current liabilities 15,596,724 9,719,934
Loans and capital lease obligations, less current portion 6,480,926 4,524,311
Commitments
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares
authorized, 10,499,919 and 10,133,243 shares
issued and outstanding at December 31, 1997
and 1996, respectively 10,499 10,113
Additional paid-in capital 95,050,268 90,611,609
Notes receivable from shareholders (261,892) (237,040)
Deferred compensation (747,762) (1,220,650)
Unrealized gain on available-for-sale securities 6,420,833 --
Accumulated deficit (52,456,318) (37,315,007)
------------ ------------
Total shareholders' equity 48,015,628 51,849,025
------------ ------------
Total liabilities and shareholders' equity $ 70,093,278 $ 66,093,270
============ ============
</TABLE>
See accompanying notes.
<PAGE> 7
Sequana Therapeutics, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues under strategic alliances $ 19,585,206 $ 9,705,048
Operating expenses:
Research and development 29,910,548 26,396,844
Charge for acquisition of in-process
research and development -- 3,366,168
General and administrative 5,392,843 5,004,604
------------ ------------
Total operating expenses 35,303,391 34,767,616
------------ ------------
Loss from operations (15,718,185) (25,062,568)
Other income (expense):
Interest income 2,680,771 3,276,968
Interest expense (662,787) (433,809)
Equity interest in loss of joint venture (1,441,110) --
------------ ------------
Net loss $(15,141,311) $(22,219,409)
============ ============
Basic and diluted net loss per share $ (1.48) $ (2.31)
============ ============
Shares used in computing basic and
diluted net loss per share 10,247,830 9,625,286
========== =========
</TABLE>
See accompanying notes.
<PAGE> 8
Sequana Therapeutics, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------------------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - 8,125,632 $ 8,126 $55,484,707
Issuance of common stock in follow-on
public offering - - 1,700,000 1,700 30,035,106
Issuance of common stock in acquisition - - 158,451 158 3,197,907
Issuance of common stock - - 74,445 74 1,268,234
Issuance of common stock upon exercise
of options - - 47,901 48 147,683
Issuance of common stock on exercise of
warrants - - 6,814 7 (7)
Deferred compensation for issuance of
stock and options - - - - 477,979
Amortization of deferred compensation - - - - -
Repayment of notes receivable - - - - -
Net loss - - - - -
----------------------------------------------------------------------------------
Balance at December 31, 1996 - - 10,113,243 10,113 90,611,609
Issuance of common stock - - 219,636 220 3,036,612
Issuance of common stock upon exercise
of options, net of repurchases - - 90,245 90 204,022
Issuance of common stock related to
Employee Stock Purchase Plan - - 76,795 76 717,025
Issuance of warrants related to funding
of joint venture - - - - 481,000
Amortization of deferred compensation - - - - -
Collection on notes receivable - - - - -
Accrued interest on notes receivable - - - - -
Unrealized gain on available-for-sale
securities - - - - -
Net loss - - - - -
----------------------------------------------------------------------------------
Balance at December 31, 1997 - $ - 10,499,919 $ 10,499 $ 95,050,268
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
NOTES GAIN ON
RECEIVABLE AVAILABLE-FOR- TOTAL
FROM DEFERRED SALE ACCUMULATED SHAREHOLDERS'
SHAREHOLDERS COMPENSATION SECURITIES DEFICIT EQUITY
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ (254,144) $ (1,368,802) $ - $ (15,095,598) $ 38,774,289
Issuance of common stock in follow-on
public offering - - - - 30,036,806
Issuance of common stock in acquisition - - - - 3,198,065
Issuance of common stock - - - - 1,268,308
Issuance of common stock upon exercise
of options - - - - 147,731
Issuance of common stock on exercise of
warrants - - - - -
Deferred compensation for issuance of
stock and options - (477,979) - - -
Amortization of deferred compensation - 626,131 - - 626,131
Repayment of notes receivable 17,104 - - - 17,104
Net loss - - - (22,219,409) (22,219,409)
-------------------------------------------------------------------------------------
Balance at December 31, 1996 (237,040) (1,220,650) - (37,315,007) 51,849,025
Issuance of common stock - - - - 3,036,832
Issuance of common stock upon exercise
of options, net of repurchases - - - - 204,112
Issuance of common stock related to
Employee Stock Purchase Plan - - - - 717,101
Issuance of warrants related to funding
of joint venture - - - - 481,000
Amortization of deferred compensation - 472,888 - - 472,888
Collection on notes receivable 8,503 - - - 8,503
Accrued interest on notes receivable (33,355) - - - (33,355)
Unrealized gain on available-for-sale
securities - - 6,420,833 - 6,420,833
Net loss - - - (15,141,311) (15,141,311)
-------------------------------------------------------------------------------------
Balance at December 31, 1997 $ (261,892) $ (747,762) $ 6,420,833 $ (52,456,318) $ 48,015,628
=====================================================================================
</TABLE>
See accompanying notes.
<PAGE> 9
Sequana Therapeutics, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(15,141,311) $(22,219,409)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,250,808 2,380,897
Amortization of deferred compensation 472,888 626,131
Charge for acquisition of in-process
research and development and other -- 3,274,266
Accrued interest on shareholder notes receivable (33,355) --
Common stock issued in connection with a
collaboration agreement 38,519 --
Equity interest in loss of joint venture 1,441,110 --
Change in operating assets and liabilities,
net of acquisition:
Other current assets 690,942 (1,212,022)
Accounts payable and accrued expenses 2,017,822 1,108,020
Deferred revenue 2,585,794 1,046,080
------------ ------------
Net cash used in operating activities (4,676,783) (14,996,037)
INVESTING ACTIVITIES
Purchases of investment securities (45,523,152) (52,737,763)
Sales and maturities of investment securities 51,980,079 37,246,053
Investment in joint venture (3,261,250) --
Purchases of furniture and equipment (3,054,660) (2,402,076)
Other assets 560,699 (1,522,468)
Notes receivable from employees 97,597 (67,844)
------------ ------------
Net cash provided by (used in) investing activities 799,313 (19,484,098)
FINANCING ACTIVITIES
Issuance of common stock, net 3,919,526 31,452,845
Proceeds from notes payable 6,000,000 1,000,000
Repayments of loans and capital lease obligations (2,770,211) (2,099,544)
Other financing activities 8,503 17,104
------------ ------------
Net cash provided by financing activities 7,157,818 30,370,405
------------ ------------
Increase (decrease) in cash and cash equivalents 3,280,348 (4,109,730)
Cash and cash equivalents at beginning of year 9,402,958 13,512,688
------------ ------------
Cash and cash equivalents at end of year $ 12,683,306 $ 9,402,958
============ ============
</TABLE>
See accompanying notes.
<PAGE> 10
Sequana Therapeutics, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
-------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $624,050 $ 421,830
======== ==========
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Equipment acquired under capital leases and loans $ -- $3,751,046
====== ==========
Warrants issued in connection with formation
of joint venture $481,000 $ --
======== ========
</TABLE>
See accompanying notes.
<PAGE> 11
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Sequana Therapeutics, Inc. (Sequana or the Company) is a genomics company that
uses industrial-scale gene discovery technology and functional genomics to
discover and characterize genes that cause certain common diseases. The
Company's gene discovery methodology is based on positional cloning, a method
that uses statistical analysis of disease inheritance patterns to isolate
disease genes. The Company has ongoing discovery programs in asthma, diabetes,
obesity, osteoporosis, schizophrenia, manic depression, and other disease areas.
The Company believes that identification of disease genes and determination of
their biological function will provide insights into the causes of common
diseases and may facilitate the development of novel prognostic, diagnostic, and
therapeutic products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, NemaPharm, Inc. (NemaPharm), since the date of
acquisition (see Note 3). All significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with maturities of three
months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company generally invests its excess cash in U.S. government securities,
high-credit quality commercial paper, certificates of deposit, and money market
accounts. Such investments are made in accordance with the Company's investment
policy which establishes guidelines relative to diversification and maturities
designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
<PAGE> 12
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
The Company classifies its investment securities as available-for-sale. Such
securities are carried at estimated fair value with unrealized gains and losses,
if any, reported as a separate component of shareholders' equity. The cost of
investment securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion are included in interest income. Realized gains and
losses are also included in interest income. The cost of securities sold is
based on the specific identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (generally four to seven years) on a straight-line
basis. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the assets. Amortization of equipment under
capital leases is reported with depreciation of furniture and equipment.
RESEARCH AND DEVELOPMENT REVENUE AND EXPENSES
Revenue under strategic alliances is recognized as research activities are
performed over the term of the agreements and upon the achievement of certain
milestones. Revenues for cost reimbursement are recognized as the related costs
are incurred. Advance payments received in excess of amounts earned are
classified as deferred revenue. Research and development costs are expensed as
incurred.
STOCK-BASED COMPENSATION
In 1996, the Company implemented the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Under FAS 123, the Company will continue to account for
stock-based compensation under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and will provide pro forma disclosures of net income and earnings
per share as if the fair value basis method prescribed in FAS 123 had been
applied in measuring compensation expense.
<PAGE> 13
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which
requires the Company to simplify the calculation of earnings per share and
achieve comparability with the recently issued International Accounting Standard
No. 33, "Earnings Per Share." FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods presented
have been restated, where appropriate, to conform to FAS 128.
Basic earnings per share is computed based on the weighted average number of the
Company's common stock outstanding. In addition, there were other dilutive
securities outstanding in the form of options and warrants to purchase 1,323,672
and 888,888 shares of common stock at December 31, 1997 and 1996, respectively.
These shares, which would normally be included in the computation of dilutive
earnings per share, were not included in that computation because the effect
would be antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
<PAGE> 14
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of FAS 130 will not have a material
impact on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 changes the way companies
report selected segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. FAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not yet reached a conclusion
as to the appropriate segments, if any, it will be required to report to comply
with FAS 131.
2. AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
On November 2, 1997, the Company and Arris Pharmaceutical Corporation (Arris)
entered into an Agreement and Plan of Merger and Reorganization (the Merger
Agreement) providing for the acquisition of the Company by Arris. Under the
terms of the Merger Agreement, a wholly owned subsidiary of Arris will be merged
with and into Sequana, with Sequana to be the surviving corporation. Upon the
completion of the merger, Sequana will become a wholly owned subsidiary of
Arris.
On January 8, 1998, the shareholders of the respective companies approved the
issuance of Arris common stock under the Merger Agreement. In accordance with
the agreement, Arris issued approximately 14,620,000 shares of Arris common
stock in exchange for all the outstanding common stock of the Company on the
basis of 1.35 shares of Arris common stock for one share of Sequana common
stock.
<PAGE> 15
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION
On October 15, 1996, the Company acquired all of the outstanding capital stock
of NemaPharm, a drug discovery company, through the issuance of approximately
158,000 shares of the Company's common stock and options to acquire 38,000
shares of the Company's common stock. The acquisition was accounted for under
the purchase method, and accordingly, the consolidated financial statements
include the operations of NemaPharm from the date of its acquisition. The
aggregate cost of NemaPharm of approximately $3.4 million was charged to
acquired in-process research and development during 1996. The operations of
NemaPharm had no material effect on the pro forma combined results of operations
of the Company and NemaPharm for the periods preceding the Company's
acquisition.
4. CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES
The Company holds an equity investment in Aurora Biosciences Corporation
(Aurora), which is included in the investment securities balance at December 31,
1997 and 1996 and is classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Aurora completed its initial public offering in June 1997, and as of December
31, 1997, the Company reported an unrealized gain of $6.4 million on its
investment in Aurora. The unrealized gain represents the excess of the fair
value of Sequana's investment over the original cost ($1.5 million) and is
reported as a separate component of shareholders' equity.
<PAGE> 16
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES (CONTINUED)
For the remaining portion of the Company's portfolio (certificates of deposit,
corporate notes, and U.S. government securities), the estimated fair value
recorded approximates amortized cost. The estimated fair value of the Company's
available-for-sale securities by type is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 1,891,856 $ 121,704
Money market funds 5,119,111 7,203,632
Corporate notes 4,672,339 2,077,622
U.S. government securities 1,000,000 --
----------- -----------
$12,683,306 $ 9,402,958
=========== ===========
Investment securities:
Certificates of deposit $ 2,797,918 $ 8,995,975
Corporate notes 14,110,663 12,441,960
U.S. government securities 18,497,058 20,424,631
Equity securities of Aurora 7,875,000 1,454,167
----------- -----------
$43,280,639 $43,316,733
=========== ===========
</TABLE>
The estimated fair value of cash equivalents and investment securities,
excluding cash and equity securities, classified by date of maturity is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Due within one year $33,095,480 $36,568,934
Due after one year 13,101,609 16,029,053
----------- -----------
$46,197,089 $52,597,987
=========== ===========
</TABLE>
<PAGE> 17
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FURNITURE AND EQUIPMENT
Furniture and equipment comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Office furniture and equipment $ 891,507 $ 559,336
Computer and scientific equipment 13,693,980 11,318,393
Leasehold improvements 926,878 579,976
----------- -----------
15,512,365 12,457,705
Less accumulated depreciation and
amortization 7,423,208 4,172,400
----------- -----------
Furniture and equipment, net $ 8,089,157 $ 8,285,305
=========== ===========
</TABLE>
Included in furniture and equipment at December 31, 1997 and 1996 is equipment
under capital leases and loans aggregating $9.3 million, all of which is pledged
as security pursuant to the Company's equipment financing agreements.
Accumulated amortization with respect to such equipment totaled $6.0 million and
$3.7 million at December 31, 1997 and 1996, respectively.
6. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
Notes receivable consist primarily of loans made to certain officers and
employees to facilitate their relocation. Such notes accrue interest at the
applicable federal rate, as adjusted yearly, and are due upon demand. The notes
are secured by approximately 88,000 shares of common stock and options to
purchase 219,000 shares of common stock at December 31, 1997.
7. LOAN AND LEASE OBLIGATIONS
The Company leases its facilities under operating leases that generally provide
for annual cost-of-living related increases. Certain equipment is leased under
operating and capital leases. Total rent expense under operating leases was $2.8
million and $2.1 million for the years ended December 31, 1997 and 1996,
respectively.
<PAGE> 18
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOAN AND LEASE OBLIGATIONS (CONTINUED)
In October 1996, the Company entered into a credit agreement with a bank which,
subject to compliance with certain financial covenants and conditions, may be
used by the Company to finance up to $7 million of capital expenditures or other
working capital requirements through September 1997. Included in loans and
capital lease obligations at December 31, 1997 and 1996 were $6.6 million and $1
million, respectively, of loans obtained pursuant to this agreement. The
agreement provides for equal principal installments over a four-year period,
commencing in September 1997, along with interest based on Eurodollar rates.
Minimum future obligations due under the Company's operating and capital leases
and loans as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES AND OPERATING
YEARS ENDED DECEMBER 31, LOANS LEASES
-------------------------------------- ----------- ----------
<S> <C> <C>
1998 $ 3,840,286 $1,419,408
1999 3,202,652 1,381,354
2000 2,031,628 1,330,669
2001 1,312,500 1,370,589
2002 -- --
----------- ----------
Total minimum lease payments 10,387,066 $5,502,020
==========
Less amount representing interest 236,443
-----------
Present value of capital lease and
loan payments 10,150,623
Less current portion 3,669,697
-----------
Long-term obligations under capital
leases and loans $ 6,480,926
===========
</TABLE>
COMMON STOCK
In connection with a strategic alliance entered into during October 1997,
Warner-Lambert Company made a $2 million private equity investment in the
Company, purchasing 151,297 shares of common stock at a price of $13.22 per
share.
<PAGE> 19
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOAN AND LEASE OBLIGATIONS (CONTINUED)
COMMON STOCK (CONTINUED)
In February 1997, pursuant to terms of the strategic alliance agreement with the
Company, Corange International, Ltd. made a $1.25 million private equity
investment in the Company, purchasing 56,849 shares of common sock at a price of
$21.99 per share.
In March 1996, the Company raised net proceeds of $30 million through a
follow-on public offering of its common stock.
8. SHAREHOLDERS' EQUITY
DEFERRED COMPENSATION
The Company has recorded deferred compensation for the difference between the
price per share of certain stock sold and stock options granted and deemed fair
value of such shares for accounting purposes. Deferred compensation is amortized
to expense over the vesting period of the related stock and options. The Company
recorded deferred compensation of approximately $1.3 million in connection with
the issuance of 208,333 shares of common stock to the Company's President and
Chief Executive Officer (in exchange for a $187,500 promissory note) and the
sale of 86,805 shares of common stock to two affiliated shareholders for $78,125
in March 1995. The promissory note bears interest at 7.2%, is secured by the
208,333 shares of common stock, and becomes due and payable upon the occurrence
of certain events. Such shares vest over a four-year period, with the unvested
shares subject to repurchase by the Company at the original issue price in the
event of this employee's termination.
STOCK WARRANTS
At December 31, 1997, the Company had outstanding warrants to purchase an
aggregate of 461,471 shares of the Company's common stock. The warrants are
exercisable at prices ranging from $3.00 to $24.00 per share and expire at
various dates through 2007.
<PAGE> 20
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
In April 1994, the Company adopted the 1994 Incentive Stock Plan (the Plan),
under which, as amended, 1,563,125 shares of the Company's common stock were
reserved for issuance. The Plan provides for the grant of incentive stock
options to employees and nonstatutory stock options to employees and
consultants. Options under the Plan have a ten-year term and generally vest over
four years. The exercise price of incentive stock options must equal at least
the fair market value on the date of grant, and the exercise price of
nonstatutory stock options is as determined by the Board of Directors.
During 1995, the Company adopted the 1995 Director Option Plan (the Director
Plan), under which, as amended, 225,000 shares of the Company's common stock
were reserved for issuance to all nonemployee members of the Board of Directors.
The Director Plan provides for the automatic grant of an option to purchase
shares of the Company's common stock at the time the nonemployee joins the Board
of Directors. The options have a ten-year term, an exercise price equal to the
fair market value of the common stock on the date of grant, and vest over four
years.
At December 31, 1997, options to purchase 118,000 shares of the Company's common
stock were granted and outstanding under the Director Plan with a weighted
average exercise price of $13.87 per share.
Pro forma information regarding net loss and net loss per share is required by
FAS 123 and has been determined as if the Company had accounted for its employee
stock options under the alternative fair value method provided for in FAS 123.
The fair value for these options was estimated as of the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996: risk-free interest rates of 6.13% and 6.39%,
volatility factors of the expected market price of the Company's common stock of
0.62% and 0.61%, and a weighted average expected life of the options of 4.62 and
5 years. The weighted average fair value of options granted during the years
ended December 31, 1997 and 1996 was $9.01 and $10.06, respectively.
<PAGE> 21
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in
highly subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
net loss and pro forma net loss per share totaled approximately $16.0 million
and $1.56 per share and $23.4 million and $2.43 per share, respectively, for the
years ended December 31, 1997 and 1996. The pro forma results are not likely to
be representative of the effects of applying FAS 123 on the reported net income
or loss for future years as these amounts reflect the expense associated with
only one or two years of vesting.
The following table summarizes stock option activity under the Plan and related
information through December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
<S> <C> <C>
Outstanding at December 31, 1995 322,809 $ 4.87
Granted 571,099 $ 15.95
Exercised (47,901) $ 3.08
Canceled (68,590) $ 9.02
--------
Outstanding at December 31, 1996 777,417 $ 12.75
Granted 377,364 $ 12.77
Exercised (79,763) $ 2.58
Canceled (143,727) $ 8.01
--------
Outstanding at December 31, 1997 931,291 $ 13.30
========
</TABLE>
At December 31, 1997, options to purchase an aggregate of 554,377 shares of
common stock were exercisable under the Plan at a weighted average exercise
price of $13.02 per share, and options to purchase 576,002 shares of common
stock were available for future grant.
<PAGE> 22
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding under
the Company's plans at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED
RANGE AVERAGE WEIGHTED WEIGHTED
OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 3.00 93,218 7.67 $ 1.68 80,209 $ 1.81
$ 9.00 - $13.00 335,749 9.20 $11.65 178,878 $11.61
$15.25 - $16.75 418,241 9.13 $15.72 224,012 $15.69
$18.50 - $24.12 84,083 9.20 $20.77 71,278 $20.79
------- -------
$ 0.01 - $24.12 931,291 9.02 $13.30 554,377 $13.02
======= =======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
During 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the
Purchase Plan) under which 200,000 shares of the Company's common stock were
reserved for issuance. The Purchase Plan provides for all eligible employees to
purchase the Company's common stock through payroll deductions at a price equal
to 85% of the lesser of the fair market value per share on the start date of
each overlapping two-year offering period or on the date on which each
semiannual purchase period ends. The Purchase Plan will terminate in May 2005.
As of December 31, 1997, 76,795 shares of common stock have been issued pursuant
to the Purchase Plan.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance is as follows at December 31, 1997:
<TABLE>
<S> <C>
Outstanding warrants 461,471
1994 Incentive Stock Plan 637,201
1995 Director Option Plan 225,000
1995 Employee Stock Purchase Plan 81,592
---------
1,405,264
=========
</TABLE>
<PAGE> 23
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STRATEGIC ALLIANCES
BOEHRINGER INGELHEIM
In June 1997, the Company expanded its strategic alliance with Boehringer
Ingelheim in the area of asthma. Under terms of the expanded alliance,
Boehringer Ingelheim doubled its level of research funding to the Company to
support additional research into asthma-related genes. The increased funding
support was effective retroactively to January 1, 1997 and continues through the
term of the original five-year agreement, subject to certain rights of early
termination. The Company recognized revenue of $8.1 and $4.1 million in the
years ended December 31, 1997 and 1996, respectively, under this alliance.
Boehringer Ingelheim has the right to terminate the agreement (subject to
certain notification requirements) beginning in June 1998 or earlier in the
event the Company is acquired by another pharmaceutical company.
CORANGE
In June 1995, the Company and Corange International, Ltd. (Corange), the parent
company of Boehringer Mannheim GmbH, entered into a five-year strategic alliance
in the area of osteoporosis. Corange made a nonrefundable payment of $1 million
to the Company, and an investment fund affiliated with Corange made an equity
investment of $1 million in the Company. The Company receives ongoing payments
for research support and may receive additional milestone payments and royalties
on sales of diagnostic and therapeutic products resulting from the alliance.
Corange is also obligated to purchase $1.25 million in shares of the Company's
common stock for each of the next three years at a purchase price equal to 135%
of an average per share market price. In accordance with the agreement, Corange
purchased 56,849 and 37,538 shares of the Company's common stock during 1997 and
1996, respectively. The Company recognized revenue totaling $2.1 million and
$2.5 million in the years ended December 31, 1997 and 1996, respectively, under
this alliance. Corange has the right to terminate the agreement (subject to
certain notification requirements) beginning in February 1998 or earlier in the
event the Company is acquired by another pharmaceutical company.
<PAGE> 24
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STRATEGIC ALLIANCES (CONTINUED)
WARNER-LAMBERT COMPANY
On October 31, 1997, the Company entered into a five-year strategic alliance
with the Warner-Lambert Company (Warner-Lambert) aimed at developing novel
therapeutic products for the treatment of schizophrenia and bipolar disorder.
The alliance will combine the Company's research capabilities in the areas of
gene discovery, functional genomics, bioinformatics, and screening with
Warner-Lambert's research, development, and clinical expertise. Under the terms
of the alliance, Warner-Lambert paid the Company a nonrefundable up-front fee of
$2 million and made a $2 million equity investment in the Company. The Company
will also receive ongoing payments for research support and may receive
additional payments upon achievement of certain milestones and royalties on the
sale of small molecule therapeutic products that may result from the alliance.
Under the agreement, Warner-Lambert was granted exclusive worldwide rights to
develop and commercialize small molecule therapeutic products, while the Company
retains certain rights to develop and commercialize diagnostic, pharmacogenetic,
and nonsmall molecule therapeutic products. The strategic alliance may be
extended by Warner-Lambert for up to three additional one-year periods.
Warner-Lambert has certain rights of early termination, including a right, in
the event certain conditions are not met, to terminate the research program
during the thirty-day period commencing on the first anniversary of the proposed
change in control transactions discussed further in Note 2 of Notes to
Consolidated Financial Statements.
10. INVESTMENT IN JOINT VENTURE
In January 1997, the Company and Memorial Sloan-Kettering Cancer Center (MSKCC)
formed Genos Biosciences, Inc. (Genos), a joint venture focused on the research
and identification of genes and related genetic information of value in the
prognosis, diagnosis, and possible treatment of certain common cancers. The
Company and MSKCC each own 50% of Genos and have committed to make capital
contributions of approximately $5 million each to fund its initial operations.
The Company invested approximately $3.5 million in Genos during 1997, and
Sequana's remaining capital contribution is expected to be funded in early 1998.
The investment in Genos is accounted for under the equity method. Terms of the
joint venture agreement provide MSKCC a right of termination, under certain
conditions, in the event of a change in control of the Company.
<PAGE> 25
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STRATEGIC ALLIANCES (CONTINUED)
Under terms of the agreement, the Company licensed certain of its technology to
Genos and has contracted with Genos to conduct research and provide certain
other services to the joint venture. Payments to date for such research and
services have not been material.
In connection with the formation of Genos, the Company sold a warrant to MSKCC
to purchase 350,000 shares of the Company's common stock, exercisable at a price
of $17.38 per share. The Company's Chairman of the Board, Chief Executive
Officer, and Chief Financial Officer are members of the Board of Directors of
Genos.
11. INCOME TAXES
At December 31, 1997, the Company had federal and California income tax net
operating loss carryforwards of approximately $43,500,000 and $2,200,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the fifty percent
limitation on California loss carryforwards.
The federal and California tax loss carryforwards will begin to expire in 2008
and 1998, respectively, unless previously utilized. The Company also has federal
and California research tax credit carryforwards of approximately $1,600,000 and
$600,000, respectively, which will begin to expire in 2008 unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% that have occurred. However,
the Company does not believe such limitation will have a material impact upon
the utilization of these carryforwards.
<PAGE> 26
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
shown below. A valuation allowance of $21,800,000 has been recognized to offset
the deferred tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liability - tax over book $ 300,000 $ 298,000
depreciation
Deferred tax assets:
Net operating loss carryforwards 14,900,000 11,313,000
Research and development credits 2,000,000 1,199,000
Capitalized research and development 3,700,000 1,822,000
Other 1,500,000 197,000
------------ ------------
Total deferred tax assets 22,100,000 14,531,000
Valuation allowance for deferred tax assets (21,800,000) (14,233,000)
------------ ------------
Net deferred tax assets 300,000 298,000
------------ ------------
Net deferred tax liabilities (assets) $ -- $ --
============ ============
</TABLE>
12. 401(k) PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan that allows substantially all
employees to contribute up to 15% of their salary, subject to annual
limitations. The Board of Directors may, at its sole discretion, approve company
contributions. To date, there have been no company contributions under the plan.
<PAGE> 27
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 hereunto duly authorized.
AXYS PHARMACEUTICALS, INC.
--------------------------
(Registrant)
Date: February 21, 2000
By: /s/ Kathleen Stafford
--------------------------
Kathleen Stafford
Sr. VP and CFO
(Chief Accounting Officer)
