1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999March 31, 2000
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file number 0-19612
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IMCLONE SYSTEMS INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2834797
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization) Identification No.)
180 VARICK STREET, NEW YORK, NY 10014
- ----------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 645-1405
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 12, 1999May 11, 2000
- ------------------------------------------- ---------------------------------
Common Stock, par value $.001 25,632,55131,263,291 Shares
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IMCLONE SYSTEMS INCORPORATED
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999March 31, 2000 (unaudited)
and December 31, 19981999 1
Unaudited Consolidated Statements of Operations - Three
and nine months ended September 30,March 31, 2000 and 1999 and 1998 2
Unaudited Consolidated Statements of Cash Flows - NineThree
months ended September 30,March 31, 2000 and 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 1412
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 1512
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
SEPTEMBER 30,MARCH 31, DECEMBER 31,
ASSETS 2000 1999
1998--------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents . $1,211 $3,888........................................ $ 20,512 $ 12,016
Securities available for sale 33,052 42,851..................................... 322,037 107,352
Prepaid expenses 239 470.................................................. 3,498 158
Other current assets 1,528 1,196
------------- ------------.............................................. 10,458 7,599
--------- ---------
Total current assets 36,030 48,405
------------- ------------....................... 356,505 127,125
--------- ---------
Property and equipment:
Land 340 340.............................................................. 1,087 1,087
Building and building improvements 10,708 10,519................................ 10,913 10,810
Leasehold improvements 4,878 4,846............................................ 4,891 4,891
Machinery and equipment 8,619 7,834........................................... 9,177 9,049
Furniture and fixtures 653 640............................................ 1,003 898
Construction in progress 3,724 115
------------- ------------.......................................... 9,912 5,209
--------- ---------
Total cost 28,922 24,294................................. 36,983 31,944
Less accumulated depreciation and amortization (14,162) (12,877)
------------- ------------.................. (15,198) (14,729)
--------- ---------
Property and equipment, net 14,760 11,417
------------- ------------................ 21,785 17,215
--------- ---------
Patent costs, net 897 860...................................................... 983 1,013
Deferred financing costs, net 39 46.......................................... 8,008 37
Other assets 1,868 1,524
------------- ------------
$53,594 $62,252
============= ============........................................................... 309 304
--------- ---------
$ 387,590 $ 145,694
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,948 $1,109................................................... $ 4,921 $ 3,987
Accrued expenses and other 2,695 4,847................................................... 5,032 5,123
Interest payable 106................................................... 1,225 45
Deferred revenue -- 75
Fees potentially refundable from corporate partner 14,000 4,000................. 24,000 20,000
Current portion of long-term liabilities 913 744........................... 880 906
Preferred stock dividends payable 4,307 2,512
------------- ------------.................................. 448 -
--------- ---------
Total current liabilities 23,969 13,332
------------- ------------.................. 36,506 30,061
--------- ---------
Long-term debt 2,200......................................................... 242,200 2,200
Other long-term liabilities, less current portion 1,363 1,546
------------- ------------...................... 918 1,135
--------- ---------
Total liabilities 27,532 17,078
------------- ------------.......................... 279,624 33,396
--------- ---------
Commitments and contingencies
Stockholders' equity :equity:
Preferred stock, $1.00 par value; authorized 4,000,000 shares;
issued and outstanding Series A Convertible: 400,000300,000
at September 30, 1999March 31, 2000 and December 31, 19981999 (preference in
liquidation $44,307$30,448 and $42,512,$30,000, respectively) 400 400................ 300 300
Common stock, $.001 par value; authorized 60,000,000 shares;
issued 25,671,32431,230,183 and 24,567,31229,703,090 at September 30, 1999March 31, 2000 and
December 31, 1998,1999, respectively; outstanding 25,620,507,31,179,366, and
24,516,49529,652,273 at September 30, 1999March 31, 2000 and December 31, 1998,1999,
respectively 26 25.................................................. 31 30
Additional paid-in capital 191,094 184,853......................................... 292,968 286,038
Accumulated deficit (165,211) (138,846)................................................ (185,514) (173,457)
Treasury stock, at cost; 50,817 shares at September 30, 1999March 31, 2000
and December 31, 19981999 ......................................... (492) (492)
Note receivable - officer and stockholder (139).......................... - (142)
Accumulated other comprehensive income (loss):income:
Unrealized gain (loss) on securities available for sale net 384 (624)
------------- ------------.............. 673 21
--------- ---------
Total stockholders' equity 26,062 45,174
------------- ------------
$53,594 $62,252
============= ============................. 107,966 112,298
--------- ---------
$ 387,590 $ 145,694
========= =========
See accompanying notes to consolidated financial statements.
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IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
------------------------
2000 1999
1998 1999 1998-------- --------
Revenues:
Product development milestone revenuesLicense fees from third parties ........................ $ --40 $ -- $ -- $1,000-
Research and development funding from third
parties and other 138 819 1,021 2,434
-------- --------................................... 166 629
-------- --------
Total revenues 138 819 1,021 3,434
-------- --------........................... 206 629
-------- --------
Operating expenses:
Research and development 8,626 6,423 22,131 15,269............................... 11,101 6,354
General and administrative 2,107 1,215 5,784 4,174
-------- --------............................. 3,126 2,002
-------- --------
Total operating expenses 10,733 7,638 27,915 19,443
-------- --------.................. 14,227 8,356
-------- --------
Operating loss (10,595) (6,819) (26,894) (16,009)
-------- --------.............................................. (14,021) (7,727)
-------- --------
Other:
Interest income (589) (741) (1,757) (2,348)........................................ (3,187) (604)
Interest expense 129 120 375 320....................................... 1,221 123
Loss (gain) on securities available for sale 21 (32) 853 (34)
-------- --------.................. 2 832
-------- --------
Net interest and other income (439) (653) (529) (2,062)
-------- --------.............. (1,964) 351
-------- --------
Net loss (10,156) (6,166) (26,365) (13,947).................................................... (12,057) (8,078)
Preferred dividends (including assumed incremental yield
attributableattributible to beneficial conversion feature of $333$254
and $317$336 for the three months ended September 30,March 31, 2000
and 1999, and 1998, respectively and $1,005 and $952 for the
nine months ended September 30, 1999 and 1998,
respectively) 938 922 2,800 2,747................................ 702 928
-------- -------- -------- ------
Net loss to common stockholders $(11,094) $(7,088) $(29,165) $(16,694)
======== ========............................. $(12,759) $ (9,006)
======== ========
Basic and diluted net loss per common share $(0.44) $(0.29)................. $ (1.17)(0.43) $ (0.69)
======== ========(0.37)
======== ========
Weighted average common shares outstanding 25,398 24,328 24,947 24,277
======== ========.................. 29,968 24,447
======== ========
See accompanying notes to consolidated financial statements.
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IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NineThree Months Ended
September 30,March 31,
--------------------------
2000 1999
1998--------- ---------
Cash flows from operating activities:
Net loss $(26,365) $(13,947).......................................................................... $ (12,057) $ (8,078)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,374 1,341.................................................. 499 462
Amortization of deferred financing costs ....................................... 140 2
Expense associated with issuance
of options and warrants 1,979 416.................................................... 1,114 417
Loss (gain) on securities available for sale 853 (34).......................................... 2 832
Changes in:
Prepaid expenses 231 382............................................................ (3,340) 11
Other current assets (332) (320)........................................................ (2,859) (204)
Other assets (130) (47)................................................................ (5) (119)
Interest payable 61 38............................................................ 1,180 63
Accounts payable 839 (429)............................................................ 934 257
Accrued expenses and other (2,152) 1,023............................................................ (91) (2,377)
Deferred revenue ............................................................ - (75) 150
Fees potentially refundable from corporate partner 10,000 --
-------- --------.......................... 4,000 -
--------- ---------
Net cash used in operating activities (13,717) (11,427)
-------- --------........................ (10,483) (8,809)
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (4,096) (812)......................................... (5,039) (910)
Purchases of securities available for sale (19,378) (38,322)..................................... (291,740) (7,199)
Sales and maturities of securities available for sale 29,117 50,503.......................... 77,705 13,814
Additions to patents (118) (248)
-------- --------........................................................... - (67)
--------- ---------
Net cash (used in) provided by investing activities 5,525 11,121
-------- --------.......... (219,074) 5,638
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 5,936 404........................... 6,194 311
Proceeds from issuance of common stock under the employee stock purchase plan 114 12.. 68 13
Proceeds from equipment and building improvement financings 94 593issuance of 5 1/2% convertible subordinated notes ................ 240,000 -
Deferred financing costs ....................................................... (8,111) -
Proceeds from repayment of note receivable by officer - stockholder,
including interest ........................................................ 145 -
Payments of other liabilities (640) (662)
Interest received on note receivable - officer and stockholder 11 --
-------- --------.................................................. (243) (199)
--------- ---------
Net cash provided by financing activities 5,515 347
-------- --------.................... 238,053 125
--------- ---------
Net increase (decrease) increase in cash and cash equivalents (2,677) 41................................. 8,496 (3,046)
Cash and cash equivalents at beginning of period ..................................... 12,016 3,888
2,558
-------- ----------------- ---------
Cash and cash equivalents at end of period $1,211 $2,599
======== ========........................................... $ 20,512 $ 842
--------- ---------
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized................................. $ 47,000 $ 51,000
See accompanying notes to consolidated financial statements.
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IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements of ImClone Systems Incorporated ("ImClone"
or the "Company") as of September 30, 1999March 31, 2000 and for the three and nine months ended September 30,March 31,
2000 and 1999 and 1998 are unaudited. In the opinion of management, these unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998,1999, as filed with the Securities and Exchange
Commission.
Results for the interim periods are not necessarily indicative of results for
the full years.
(2) SEGMENT INFORMATION
The Company is a biopharmaceutical company engaged in the research and
development of novel cancer treatments. The Company is currently pursuing three
research and development programs that it believes show promisepotential for treating
cancer: growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. A
substantial portion of the Company's efforts and resources are devoted to
research and development conducted on its own behalf and through collaborations
with corporate partners and academic research and clinical institutions. The
Company has not derived any commercial revenue from product sales. The Company
is managed and operated as one business. The entire business is comprehensively
managed by a single management team that reports to the Chief Operating Officer.
The Company does not operate separate lines of business or separate business
entities with respect to any of its product candidates. In addition,Except for contract
services (see Note 4) and clinical trials conducted by independent investigators
on behalf of the Company, the Company does not directly conduct any of its operations
outside of the United States. Accordingly, the Company does not prepare discrete
financial information with respect to separate product areas or by location and
does not have separately reportable segments as defined by SFAS No. 131.
(3) FOREIGN CURRENCY TRANSACTIONS
Gains and losses from foreign currency transactions, such as those resulting
from the translation and settlement of receivables and payables denominated in
foreign currencies, are included in the consolidated statement of operations.
The Company does not currently use derivative financial instruments to manage
the risks associated with foreign currency fluctuations. The Company recorded no
gains or losses on foreign currency transactions of approximately $9,000 for the ninethree months ended
September 30, 1999March 31, 2000 and recorded losses on foreign currency transactions of
approximately $131,000$21,000 for the nine months ended September 30, 1998. For the three months ended September 30, 1999 and September 30, 1998, the Company
recorded foreign currency transaction losses of approximately $132,000 and
$20,000, respectively.March 31, 1999.
(4) COMMITMENTSCONTRACT SERVICES
The Company signed a definitive agreement in April 1999 with Boehringer
Ingelheim PharmaceuticalsPharma KG ("BI Pharmaceuticals"Pharma") for the further development, production
scale-up and manufacture of the Company's lead therapeutic product candidate,
C225,IMC-C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. The
Company estimates that the total cost under the agreement
includingwas DM11,440,000 or $6,283,000 based on the costforeign currency rate on the date
of additional amountspayment. All of the material manufactured under this agreement has been
provided to Merck KGaA for use in clinical trials in Europe and Merck KGaA has
reimbursed the Company an aggregate amount of $4,442,000 during March and April
2000. This reimbursable amount has been accounted for as a reduction of
research and development expense in the fourth quarter of 1999.
In December 1999, the Company entered into a development and manufacturing
services agreement with Lonza Biologics PLC ("Lonza"). Under the agreement,
Lonza is engaging in process development and scale-up for the manufacture of
IMC-C225. These steps are being taken to assure that its process will produce
bulk material that conforms with the Company's reference material. Under our
arrangements with Lonza, Lonza will manufacture six 5,000 liter production runs
under cGMP conditions of material that may be used for clinical and/or
commercial supply. The Company also has agreed in principle with Lonza to the
Company hadmaterial terms of a three-year commercial supply agreement for which the
right to request, will be
DM12,100,000 or $6,636,000 as of September 30, 1999.definitive agreement is being completed. As of September 30, 1999,March 31, 2000, the Company has
incurred approximately DM3,940,000, of which DM3,720,000 has
been paid,$159,000 for services provided under this
Page 4
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agreement.
The Company is building a new manufacturing facility adjacent to its current
manufacturing facility in New Jersey. This new facility will contain three
10,000 liter fermentors and will be dedicated to the commercial production of
IMC-C225. The 80,000 square foot fully equipped facility will cost approximately
$45 million and will be built on land purchased in December 1999 for $700,000.
The Company has incurred approximately $7,607,000 in engineering,
pre-construction and construction costs associated with the new manufacturing
facility through March 31, 2000. The costs incurred to date associated with the
construction of the facility have been paid from the Company's cash reserves.
(5) RELATED PARTY TRANSACTIONS
In January 1998, the Company accepted a promissory note totaling approximately
$131,000 from its President and CEO in connection with the exercise of a warrant
to purchase 87,305 shares of the Company's common stock, $.001 par value (the
"Common Stock").stock. The note iswas due no
later than two years from issuance and iswas full recourse. Interest was paidpayable
on the first anniversary date of the promissory Page 4
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note at an annual rate of 8.5% and is payable on the stated maturity
or any accelerated maturity at the annual rate of 8.5%8 1/2%. At September 30, 1999,In March 2000, the
total amountnote, including all interest, was paid in full.
(6) LONG-TERM DEBT
Long term debt consists of the following:
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
5 1/2% Convertible Subordinated Notes due March 1, 2005 .. $240,000,000 $ -
Industrial Development Revenue Bond with an annual interest
rate of 11 1/4%, due May 1, 2004 ....................... 2,200,000 2,200,000
------------ ------------
$242,200,000 $ 2,200,000
============ ============
In February 2000, the Company includingcompleted a private placement of $240,000,000 in
convertible subordinated notes due March 1, 2005. The Company received net
proceeds from this offering of approximately $231,900,000, after deducting costs
associated with the offering. The notes bear interest was approximately $139,000at an annual rate of 5
1/2% payable semi-annually on September 1 and March 1 of each year, beginning
September 1, 2000. The holders may convert all or a portion of the notes into
common stock at any time on or before March 1, 2005 at a conversion price of
$110.18 per share, subject to adjustment if certain events affecting the common
stock of the Company occur. The notes are subordinated to all existing and
future senior indebtedness. The Company may redeem some or all of the notes at
any time prior to March 6, 2003, at a redemption price of 100% of the principal
amount plus accrued and unpaid interest to the redemption date if (1) the
closing price of the common stock has exceeded 150% of the conversion price for
at least 20 trading days in any consecutive 30-trading day period and (2) if
the redemption occurs before March 1, 2002, the shelf registration statement
covering resales of the notes and the common stock is classifiedeffective and expected to
remain effective and available for use for the 30 days following the redemption
date. If the notes are redeemed under these circumstances, the Company will
make an additional payment of $152.54 per $1,000 aggregate principal amount of
notes, minus the amount of all interest paid on such principal amount since
February 29, 2000 to the date the redemption notice is mailed. On or after
March 6, 2003, the Company may redeem some or all of the notes at specified
redemption prices, plus accrued and unpaid interest to the day preceding the
redemption date. Noteholders may require the Company to redeem all notes at
100% of the principal amount plus accrued interest in the stockholders' equity sectionevent of a
"fundamental change" as defined in the note indenture. The Company is required
to file with the Securities and Exchange Commission a shelf registration
statement covering resales of the balance sheet asnotes and the common stock.
In January and February 2000, the Company entered into financing arrangements
with Finova Technology Finance, Inc. ("Finova") and Transamerica Business Credit
Corporation ("Transamerica") under which it may obtain at its option up to an
aggregate of $25,000,000 for its utilization primarily in connection with the
build-out of its new commercial manufacturing facility. The funds may be
obtained through multiple leases of equipment and building improvements for not
less than specified minimum amounts. Each lease contains a note
receivable from officerballoon purchase
option at the end of a 48-month term. During the first quarter of 2000 the
Company paid $100,000 in application fees associated with these agreements,
which may be applied against future principal and stockholder.
(6) EARNINGSinterest payments.
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(7) NET LOSS PER COMMON SHARE
Basic and diluted Earnings Per Share ("EPS") areloss per common share is computed based on the net loss for
the relevant period, adjusted for cumulative Series A Convertible Preferred
Stock (the "Series A Preferred Stock" or "Series A Preferred Shares") dividends and the assumed incremental yield attributable to the
beneficial conversion feature in the preferred stock, divided by the weighted
average number of shares outstanding during the period. Potentially dilutive
securities, including convertible preferred stock, convertible debt, options
and warrants, have not been included in the diluted EPSloss per common share
computation because they are anti-dilutive.
(7)(8) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive loss:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
........................ ........................MARCH 31,
--------------------------------
2000 1999
1998 1999 1998
..... ..... ..... ....------------ ------------
Net loss $(10,156,000) $(6,166,000) $(26,365,000) $(13,947 ,000)................................................. $(12,057,000) $ (8,078,000)
Other comprehensive income:income (loss):
Unrealized holding gain arising during the period 86,000 (910,000) 155,000 (704,000).... 650,000 13,000
Less: Reclassification adjustment for realized gain (loss)loss
included in net loss (21,000) 32,000 (853,000) 34,000
------------ -----------........................... (2,000) (832,000)
------------ ------------
Total other comprehensive income 107,000 (942,000) 1,008,000 (738,000)
------------ -----------................ 652,000 845,000
------------ ------------
Total comprehensive loss $(10,049,000) $(7,108,000) $(25,357,000) $(14,685,000)
============ ===========................................. $(11,405,000) $ (7,233,000)
============ ============
(8) LOSS ON SECURITIES AVAILABLE FOR SALE
In October 1997, the Company entered into a Collaborative Research and License
Agreement with CombiChem Inc. ("CombiChem"). Concurrent with this agreement, the
Company entered into a Stock Purchase Agreement pursuant to which the Company
purchased 312,500 shares of common stock of CombiChem, as adjusted, for a total
purchase price of $2,000,000. The investment has been classified as available
for sale and a long-term asset. The market value of the investment in CombiChem
has declined substantially from the date of original investment and the Company
has deemed this decline in market value to be other than temporary. Accordingly,
the cost basis in the investment in CombiChem has been adjusted and a loss on
securities available for sale of $828,000 was recorded in March 1999. These
securities have not been sold by the Company. In October 1999, CombiChem
announced that it is being acquired and holders of its shares will receive cash
consideration of approximately $6.75 per share, subject to completion of the
acquisition, which would represent a financial reporting gain with respect to
the CombiChem shares of approximately $937,000, after considering the
aforementioned write-down.
(9) COMMON STOCK
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved the amendment of the Company's certificate of incorporation to increase
the total number of shares of Common Stock the Company is authorized to issue
from 45,000,000 shares to 60,000,000 shares.
In September 1999, the Company filed with the Securities and Exchange Commission
a Registration Statement on Form S-3 relating to the public offering and sale of
up to 2,875,000 shares of its common
Page 5
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stock. There can be no assurance that the Company will consummate the sale of
any of these shares of common stock.
(10) STOCK OPTIONS AND WARRANTS
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved an amendment to the Company's 1996 Incentive Stock Option Plan (the
"1996 ISO Plan") to increase the total number of shares of Common Stock that may
be issued pursuant to options that may be granted under the 1996 ISO Plan from
3,000,000 to 4,000,000, which number shall be reduced by the number of shares of
Common Stock that have been or may be issued pursuant to options granted under
the Company's 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified
Plan").
The stockholders also approved amendments to the Company's 1996 Non-Qualified
Plan to (i) increase the total number of shares of Common Stock that may be
issued pursuant to options that may be granted under the 1996 Non-Qualified Plan
from 3,000,000 to 4,000,000, which number shall be reduced by the number of
shares of common stock that have been or may be issued pursuant to options
granted under the Company's 1996 ISO Plan, and (ii) increase the annual option
grant made to members of the Board of Directors and the Chairman who are not
full-time employees of the Company under the 1996 Non-Qualified Plan. The annual
option grant to non-employee members of the Board of Directors increased from
2,500 to 15,000 and the annual option grant to the Chairman increased from 2,500
to 30,000.
The stockholders approved the grant of an option to the Company's President and
Chief Executive Officer to purchase 1,000,000 shares of Common Stock at a per
share exercise price equal to $18.25, the last reported sale price of the Common
Stock on the date shareholder approval was obtained at the annual shareholders
meeting. The options will vest no later than six years from the grant date and
specified amounts are subject to earlier vesting if specified Company Common
Stock price thresholds are met.
The stockholders approved the grant of an option to the Company's Executive Vice
President and Chief Operating Officer to purchase 650,000 shares of Common Stock
at a per share exercise price equal to $18.25, the last reported sale price of
the Common Stock on the date shareholder approval was obtained at the annual
shareholders meeting. The options will vest no later than six years from the
grant date and specified amounts are subject to earlier vesting if specified
Company Common Stock price thresholds are met.
(11) RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform to the
current year's presentation.
(12) COLLABORATIVE AGREEMENTS
The Company has a development and license agreement with Merck KGaA with respect
to C225,IMC-C225, its lead interventional therapeutic product for the treatment of
cancer. In exchange for certain marketing and development rights, the Company
can receive up to $60,000,000 in milestone payments ($30,000,000 of which areis
equity based) assuming the achievement of certain milestones and a $30,000,000
secured line of credit or guaranty for the build-out of a manufacturing facility
for the commercial production of C225.IMC-C225. This agreement may be terminated by
Merck KGaA in various instances, including (i) at its discretion on any date on
which a milestone is achieved (in which case no milestone payment will be made),
(ii) for a one-year period after first commercial sale of C225IMC-C225 in Merck
KGaA's territory, upon Merck KGaA's reasonable determination that the product is
economically unfeasible (in which case Merck KGaA is entitled to receive back
50% of the cash-based milestone payments then paid to date, but only out of
revenues received, if any, based upon a royalty rate applied to the gross profit
from C225IMC-C225 sales or C225IMC-C225 license fees in the United States and Canada),
or (iii) in the event the Company does not obtain certain collateral license
agreements in which case Merck KGaA also is entitled to a return of all cash
amounts with respect to milestone payments to date, plus liquidated damages of
$500,000. In April 1999, the parties agreed on the production concept for the
manufacturing facility and are currently working toward securing Merck KGaA's
guaranty of the Company's obligations under a $30,000,000 credit facility
relating to the construction of the manufacturing facility. In the event of
termination of the agreement, the Page 6
9
Company will be required to use its best
reasonable efforts to cause the release of Merck KGaA as guarantor. As of September 30, 1999,March
31, 2000, the Company has received $14,000,000$24,000,000 in milestone payments. And, as of October 27, 1999, Merck
KGaA has confirmed the Company has achieved milestones, with respect to which
the Company is entitled to receive an additional $6,000,000 in payments. These
payments have been recorded as fees potentially refundable from corporate
partner and revenue recognition of such amounts will be recognized as revenuecommence upon Merck's providing the credit
facility or guaranty and the Company'sCompany
obtaining the defined collateral license agreements.
Page 6
9
(10) REVENUE RECOGNITION
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements, including the recognition of non-refundable fees received upon
entering into arrangements. The Company is in the process of evaluating this
SAB and the effect it may have on its financial statements and current revenue
recognition policies. The Company must adopt SAB 101, as amended, in the
second quarter of 2000 with an effective date of January 1, 2000 and the
recognition of the cumulative effect adjustment, if any, calculated as of
January 1, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis by our management is provided to identify
certain significant factors which affected our financial position and operating
results during the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
NineThree Months Ended September 30,March 31, 2000 and 1999 and 1998
REVENUES.
Revenues for the ninethree months ended September 30,March 31, 2000 and 1999 were $206,000 and
1998 were $1,021,000
and $3,434,000,$629,000, respectively, a decrease of $2,413,000,$423,000, or 70%67%. Revenues for the ninethree
months ended September 30,March 31, 2000 included $166,000 in royalty revenue from our
strategic alliance with Abbott Laboratories ("Abbott") in diagnostics. Revenues
for the three months ended March 31, 1999 primarily consisted of (i) $225,000$75,000 in
research support from our partnership with American Home Products Corporation
("American Home") in infectious disease vaccines, (ii) $533,000$425,000 in research and
support payments from our research and license agreement with Merck KGaA for our
principal cancer vaccine product candidate, BEC2, and (iii) $258,000 in royalty
revenue from our strategic alliance with Abbott Laboratories ("Abbott") in
diagnostics. Revenues for the nine months ended September 30, 1998 consisted of
(i) $225,000 in research support from our partnership with American Home in
infectious disease vaccines, (ii) $1,000,000 in milestone revenue and $1,875,000
in research and support payments from our research and license agreement with
Merck for BEC2 (iii) $236,000$124,000 in royalty
revenue from our strategic alliance with Abbott in diagnostics and (iv) $98,000 from a Phase I Small Business
Innovation Research grant from the National Cancer Institute for a program in
cancer-related angiogenesis.diagnostics. The decrease in
revenues for the ninethree months ended September 30, 1999March 31, 2000 was primarily attributable to (i)
the decrease in research and support revenue as a result of the completion of
all research and support payments due from our research and license agreement
with Merck KGaA for BEC2
and (ii) a decrease in milestone revenue which can vary widely from period to
period depending upon the timing of the achievement of various research and
development milestones for products under development.
OPERATING;BEC2.
OPERATING EXPENSES; RESEARCH AND DEVELOPMENT EXPENSES.DEVELOPMENT.
Total operating expenses for the ninethree months ended September 30,March 31, 2000 and 1999 were
$14,227,000 and 1998
were $27,915,000 and $19,443,000,$8,356,000, respectively, an increase of $8,472,000,$5,871,000, or 44%70%.
Research and development expenses for the ninethree months ended September 30,March 31, 2000 and
1999 were $11,101,000 and 1998 were $22,131,000 and $15,269,000,$6,354,000, respectively, an increase of $6,862,000$4,747,000 or
45%75%. Such amounts for the ninethree months ended September 30,March 31, 2000 and 1999 represented
78% and 1998 represented 79%76%, respectively, of total operating expenses. Research and development
expenses in both years.for the three months ended March 31, 2000 and 1999 have been offset by
$824,000 and $516,000, respectively, for clinical trial costs that are
reimbursable by Merck KGaA. The increase in research and development expenses
for the ninethree months ended September 30, 1999March 31, 2000 was primarily attributable to (i) the
costs associated with the initiation of atwo pivotal Phase III clinical trialtrials of C225IMC-C225 in
treating head and neck cancer, one in combination with radiation and one in
combination with cisplatin, (ii) the costs associated with the initiation of two additional Phase
II clinical trials of C225,IMC-C225, one in refractory head and neck cancer in
combination with cisplatin and one in refractory colorectal cancer in
combination with irinotecan, (iii) expenditures in the functional areas of
product development, manufacturing, clinical and regulatory affairs associated
with C225,IMC-C225, (iv) non-cash expenses recognized in connection with the issuance
of options granted to scientific consultants and collaborators and (v)
expenditures associated with additional staffing in the area of discovery
research. We expect research and development costs to increase in future periods
as we continue to expand our efforts in product development and clinical trials.
Page 7
10
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses include administrative personnel costs,
costs to develop our internal marketing and sales capabilities, costs incurred
in connection with pursuing arrangements with corporate partners and technology
licensors, and expenses associated with applying for patent protection for our
technology and products. Such expenses for the ninethree months ended September 30,March 31, 2000
and 1999 were $3,126,000 and 1998 were $5,784,000 and $4,174,000,$2,002,000, respectively, an increase of $1,610,000,1,124,000,
or 39%56%. The increase in general and administrative expenses primarily reflected
(i) costs associated with the marketing efforts of the Company and (ii)
additional support staffing for the expanding research, development, clinical
manufacturing and marketingmanufacturing efforts of the Company, particularly with respect to C225 and (ii) expenses associated with the
pursuit of strategic corporate alliances and other corporate development
expenses.IMC-C225.
We expect general and administrative expenses to increase in future periods to
support our planned increases in research, development, clinical and
manufacturing efforts.
INTEREST AND OTHER INCOME OR LOSS AND INTEREST EXPENSE.
Interest income was $1,757,000$3,187,000 for the ninethree months ended September 30, 1999March 31, 2000
compared with $2,348,000$604,000 for the ninethree months ended September 30, 1998, a
decreaseMarch 31, 1999, an increase of
$591,000, or 25%.$2,583,000. The decreaseincrease was primarily attributable to the decreaseincrease in our
investment portfolio as a result of funding our operations.November 1999 public stock offering and
our February 2000 private placement of 5 1/2% convertible subordinated notes.
Interest expense was $375,000$1,221,000 and $320,000$123,000 for the ninethree months ended September
30,March
31, 2000 and 1999, and 1998, respectively, an increase of $55,000 or 17%.$1,098,000. Interest expense for
both periods primarily included (i) interest on anthe outstanding Industrial
Development Revenue1990 IDA Bond issued in 1990 (the "1990 IDA Bond")
with a principal amount of $2,200,000 and (ii) interest recorded on various
capital lease obligations under a December 1996 Financing Agreement (the "1996
Financing Agreement") and an April 1998 Financing Agreement (the "1998 Financing
Agreement") with Finova Technology Finance, Inc. ("Finova").Finova. Interest expense for the three months ended March 31,
2000 was offset by capitalizing interest costs during the construction period of
the Company's new manufacturing facility in the amount of $154,000. The
increase was
primarilyin interest expense is attributable to entering into additional capital leases. We recorded
lossesinterest on the outstanding
convertible subordinated notes. Losses on securities available for sale for the
ninethree months ended September 30,March 31, 2000 and 1999 in the amount of $853,000 as compared to gains of $34,000 for the nine
months ended September 30, 1998.were $2,000 and $832,000,
respectively. The loss for the ninethree months ended September
30,March 31, 1999 is primarily
attributable to the $828,000 write-down of our investment in CombiChem Inc. ("CombiChem") as
a result of an other than temporary decline.
See "Liquidity and Capital Resources". In October 1999, CombiChem announced that
it is being acquired and holders of its shares will receive cash consideration
of approximately $6.75 per share, subject to completion of the acquisition,
which would represent a financial reporting gain with respect to the CombiChem
shares of approximately $937,000, after considering the aforementioned
write-down. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."impairment.
NET LOSSES.
We had net losses to common stockholders of $29,165,000$12,759,000 or $1.17$0.43 per share for
the ninethree months ended September 30, 1999March 31, 2000 compared with $16,694,000$9,006,000 or $0.69$0.37 per
share for the ninethree months ended September 30, 1998.March 31, 1999. The increase in the net losses
and per share net loss to common stockholders was due primarily to the factors
noted above.
Three Months Ended September 30, 1999 and 1998
REVENUES.
Revenues for the three months ended September 30, 1999 and 1998 were $138,000
and $819,000, respectively, a decrease of $681,000, or 83%. Revenues for the
three months ended September 30, 1999 consisted of (i) $75,000 in research
support from our partnership with American Home in infectious disease vaccines,
and (ii) $63,000 in royalty revenue from our strategic alliance with Abbott in
diagnostics. Revenues for the three months ended September 30, 1998 consisted of
(i) $75,000 in research support from our partnership with American Home in
infectious disease vaccines, (ii) $625,000 in research and support payments from
our research and license agreement with Merck KGaA for BEC2 (iii) $119,000 in
royalty revenue from our strategic alliance with Abbott in diagnostics. The
decrease in revenues for the three months ended September 30, 1999 was primarily
attributable to the decrease in research and support revenue as a result of the
completion of all research and support payments due from our research and
license agreement with Merck for BEC2.
Page 8
11
OPERATING; RESEARCH AND DEVELOPMENT EXPENSES.
Total operating expenses for the three months ended September 30, 1999 and 1998
were $10,733,000 and $7,638,000, respectively, an increase of $3,095,000, or
41%. Research and development expenses for the three months ended September 30,
1999 and 1998 were $8,626,000 and $6,423,000, respectively, an increase of
$2,203,000 or 34%. Such amounts for the three months ended September 30, 1999
and 1998 represented 80% and 84%, respectively, of total operating expenses. The
increase in research and development expenses for the nine months ended
September 30, 1999 was primarily attributable to (i) the costs associated with
the initiation of a pivotal Phase III clinical trial of C225 in treating head
and neck cancer in combination with radiation, (ii) the costs associated with
the initiation of two additional Phase II clinical trials of C225, one in
refractory head and neck cancer in combination with cisplatin and one in
refractory colorectal cancer in combination with irinotecan, (iii) expenditures
in the functional areas of product development, manufacturing, clinical and
regulatory affairs associated with C225, (iv) expenses recognized in connection
with the issuance of options granted to scientific consultants and collaborators
and (v) expenditures associated with additional staffing in the area of
discovery research. We expect research and development costs to increase in
future periods as we continue to expand our efforts in product development and
clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with corporate partners
and technology licensors, and expenses associated with applying for patent
protection for our technology and products. Such expenses for the three months
ended September 30, 1999 and 1998 were $2,107,000 and $1,215,000, respectively,
an increase of $892,000, or 73%. The increase in general and administrative
expenses primarily reflected (i) additional support staffing for the expanding
research, development, clinical, manufacturing and marketing efforts of the
Company, particularly with respect to C225 and (ii) expenses associated with the
pursuit of strategic corporate alliances and other corporate development
expenses. We expect general and administrative expenses to increase in future
periods to support our planned increases in research, development, clinical and
manufacturing efforts.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE.
Interest income was $589,000 for the three months ended September 30, 1999
compared with $741,000 for the three months ended September 30, 1998, a decrease
of $152,000, or 21%. The decrease was primarily attributable to the decrease in
our investment portfolio as a result of funding our operations. Interest expense
was $129,000 and $120,000 for the three months ended September 30, 1999 and
1998, respectively, an increase of $9,000 or 8%. Interest expense for both
periods primarily included (i) interest on the outstanding 1990 IDA Bond with a
principal amount of $2,200,000 and (ii) interest recorded on various capital
lease obligations under the 1996 Financing Agreement and the 1998 Financing
Agreement with Finova.
NET LOSSES.
We had net losses to common stockholders of $11,094,000 or $0.44 per share for
the three months ended September 30, 1999 compared with $7,088,000 or $0.29 per
share for the three months ended September 30, 1998. The increase in the net
losses and per share net loss to common stockholders was due primarily to the
factors noted above.
Page 9
12
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999,March 31, 2000, our principal sources of liquidity consisted of cash
and cash equivalents and short-term securities available for sale of
approximately $34,263,000. Since$342.5 million. From inception through March 31, 2000 we have
financed our operations through the following means:
- - Public and private sales of equity securities and convertible
notes in financing transactions have raised approximately
$163,799,000$489.8 million in net proceeds.
-proceeds
- We have earned approximately $33,876,000$35.2 million from license fees,
contract research and development fees and royalties from
collaborative partners,
including approximately $1,021,000 earned during the nine months ended
September 30, 1999.partners. Additionally, we have received $14,000,000$24.0
million in potentially refundable fees from our C225IMC-C225
development and license agreement with Merck KGaA. And, as of
October 27, 1999,March 31, 2000, Merck KGaA has confirmed that we have achieved
milestones, with respect to which we are entitled to receive
an additional $6,000,000$2.0 million in payments. The amounts from Merck
KGaA with respect to C225IMC-C225 have yet to be recognized as
revenue. See Footnote 12,
"Collaborative Agreements", of the Notes to Consolidated Financial
Statements.
-revenue because they are refundable under certain
circumstances
Page 8
11
- We have earned approximately $10,220,000$14.5 million in interest income including
approximately $1,757,000 earned during the nine months ended September
30,1999.
-
- The sale of the Industrial Development RevenueIDA Bonds ( the "IDA Bonds") in each of 1985, 1986 and 1990
through the New York Industrial Development
Agency (the "NYIDA") raised an aggregate of $6,313,000,$6.3 million, the proceeds of which
have been used for the acquisition, construction and
installation of our research and development facility in New
York City, and of which $2,200,000$2.2 million is currently outstanding.outstanding
We may from time to time consider a number of strategic alternatives
designed to increase shareholder value, including joint ventures, acquisitions
and other forms of alliances as well as the sale of all or part of the company.
The 1990 IDA Bond in the outstanding principal amount of $2,200,000
becomes due in 2004. We will incur annual interest on the 1990 IDA Bond
aggregating approximately $250,000. In order to secure our obligations to the
NYIDA under the 1990 IDA Bond, we have granted the NYIDA a security interest in
facility equipment purchased with the bond proceeds.
In February 2000, we completed a private placement of $240,000,000 in
convertible subordinated notes due March 1, 2005. We signedreceived net proceeds from
this offering of approximately $231,900,000, after deducting expenses associated
with the offering. The notes bear interest at 5.5% payable semi-annually on
September 1 and March 1 of each year, beginning September 1, 2000. A holder may
convert all or a portion of a note into common stock at any time on or before
March 1, 2005 at a conversion price of $110.18 per share, subject to adjustment
if certain events affecting our common stock occur. We may redeem some or all of
the notes prior to March 6, 2003 if specified common stock price thresholds are
met. On or after March 6, 2003, we may redeem some or all of the notes at
specified redemption prices.
In December 1999, we entered into a development and manufacturing
services agreement with Lonza. Under the agreement, Lonza is engaging in process
development and scale-up for the manufacture of IMC-C225. These steps are being
taken to assure that its process will produce bulk material that conforms with
the Company's reference material. Under our arrangements with Lonza, Lonza will
manufacture six 5,000 liter production runs under cGMP conditions of material
that may be used for clinical and/or commercial supply. The Company also has
agreed in principle with Lonza to the material terms of a three-year commercial
supply agreement for which the definitive agreement in April 1999 with Boehringer Ingelheim
Pharmaceuticals KG ("BI Pharmaceuticals") for the further development,
production scale-up and manufacture of the Company's lead therapeutic product
candidate, C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. We
estimate that the total cost under the agreement, including the cost of
additional amounts of material we had the right to request, will be
DM12,100,000 or $6,636,000 as of September 30, 1999.is being completed. As of
September 30, 1999,
we hadMarch 31, 2000, the Company has incurred approximately DM3,940,000, of which DM3,720,000 has been paid,$159,000 for services
provided under this agreement. We do not currently hedge our
exposure to the foreign currency risk associated with this agreement. We may
pursue an agreement with another third party relating to the manufacture of C225
for both clinical trials and commercial sale. Any such agreement would likely
require us to expend substantial funds over the next several years for process
development and for supply of C225.
We have obligations under various capital leases for certain
laboratory, office and computer equipment and also certain building improvements
primarily under the 1996 Financing Agreement and the 1998 Financing Agreement
with Finova. The 1996 Financing Agreement allowed us to finance the lease of
equipment and make certain building and leasehold improvements to existing
facilities involving amounts totaling approximately $2,500,000. Each lease has a
fair market value purchase option at the expiration of a 42-month term. Pursuant
to the 1996 Financing Agreement, we issued to Finova a warrant expiring December
31, 1999 to purchase 23,220 shares of our common stock at an exercise price of
$9.69 per share. We recorded a non-cash debt discount of approximately $125,000
in connection with this financing, which discount is being amortized over the
42-month term of the first lease. The 1996 Financing Agreement with Finova
expired in December 1997 and we1997. We utilized only $1,745,000 of the full $2,500,000
under the agreement. In April 1998, we entered into the 1998 Financing Agreement
with Finova totaling approximately $2,000,000. The terms of the 1998 Financing
Agreement are substantially similar to the now expired 1996 Financing Agreement
except that each lease has a 48-month term. As of September 30, 1999, we hadWe have entered into twelve
individual leases under both the 1996 Financing Agreement and the 1998 Financing
Agreement aggregating a total cost of $3,695,000. The 1998 Financing Agreement
expired in May 1999. Page 10
13In January and February 2000, we entered into financing
arrangements with Finova and Transamerica under which we may obtain at our
option up to an aggregate of $25,000,000 for our utilization primarily in
connection with the build-out of our new commercial manufacturing facility. The
funds may be obtained through multiple leases of equipment and building
improvements for not less than specified minimum amounts. Each lease contains a
balloon purchase option at the end of a 48-month term. The Company has paid
$100,000 in application fees associated with these agreements, which may be
applied against future principal and interest payments.
We rent our New York City facility under aan operating lease that was scheduled to expireexpires in
March 1999.December 2004. We renewedare in the entire lease for a term commencing asprocess of January 1,
1999 through December 2004 and have begun to retrofitrenovating the facility to better suit
our needs at anneeds. The renovation is expected to cost of approximately $2,000,000.$2,000,000 and is
substantially complete.
Page 9
12
Under our agreement with Merck KGaA for C225,IMC-C225, we developed, in
consultation with Merck KGaA, a production concept for a new manufacturing
facility for the commercial production of C225.IMC-C225. Merck KGaA is to provide us,
if we so choose, subject to certain conditions, with a guaranty under a $30,000,000$30
million credit facility for the build-out of this facility. We have determined
to erect this facility adjacent to our current manufacturing facility in New
Jersey, which supplies C225IMC-C225 to support our clinical trials. We plan to begin constructionbroke ground
on thisthe facility in the first half ofJanuary 2000 and estimate that the total cost will be
approximately $45,000,000.$45 million. We are currently in the process of finalizingnegotiating the
terms of the loan agreement and guaranty. We expect to fund the remaining cost
of this facility through a combination of cash on hand, proceeds from our
February 2000 private placement of convertible notes and equipment financing
transactions.
Total capital expenditures made during the ninethree months ended September 30, 1999March 31,
2000 were $4,628,000, of which $532,000 have been reimbursed in accordance with the
terms of the 1998 Financing Agreement with Finova.$5,039,000. Of the total capital expenditures made during the ninethree
months ended September 30, 1999, $1,788,000March 31, 2000, $591,000 related to the purchase of equipment for
and costs associated with the retrofit of our corporate office and research
laboratories in New York. The balance of
capital additions include $1,821,000 in engineeringYork and other capital expenditures relating to the New York
facility. We incurred $4,290,000 related to engineering, pre-construction and
construction costs associated with the build-out of the commercial manufacturing
facility to be erected adjacent to our current manufacturing facility in New
Jersey. The remaining $1,019,000$158,000 is related to improving and equipping our
existing manufacturing facility.
In 1998, we hired a Vice President of Marketing and Sales and have
recently hired directors of marketing, field sales and sales operations, each
with experience in the commercial launch of a monoclonal antibody cancer
therapeutic, to develop our internal marketing and sales capabilities. We are
preparing for the marketing and sale of IMC-C225 in the U.S. and Canada, and in
that regard, we plan to hire regional sales managers and approximately 40
sales people prior to the commencement of IMC-C225 sales.
The holders of the 400,000 shares of Series A Convertible Preferred Stock (the "series A
preferred stock") are entitled to receive cumulative dividends at an annual rate
of $6.00 per share. Dividends accrue as of the issuance date of the Seriesseries A
Preferred Stockpreferred stock and are payable on the outstanding Seriesseries A Preferred Stockpreferred stock in
cash on December 31 of each year beginning December 31, 1999 or at the time of
conversion or redemption of the Seriesseries A Preferred Stockpreferred stock on which the dividend
is to be paid, whichever is sooner. Accrued dividends were $4,307,000approximately
$448,000 at September 30, 1999.
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 relating to the public offering and sale of up to
2,875,000 shares of our common stock. There can be no assurance that we will
consummate the sale of any of these shares of common stock.March 31, 2000.
We believe that our existing cash on handand cash equivalents and securities
available for sale and amounts expected to be available under our credit
facilities together with the net proceeds from the anticipated
offering of our common stock, should enable us to maintain our current and planned operations
through at least 2001.2002. We are also entitled to reimbursement for certain
research and development expenditures and to certain milestone payments,
including $16,000,000$6 million in cash-based milestone payments and $30,000,000$30 million in
equity-based milestone payments from our C225IMC-C225 development and license
agreement with Merck KGaA, which are to be paid subject to our attaining
research and development milestones, certain of which have recently been
attained, and certain other conditions. There can be no assurance that we will
achieve the unachieved milestones. Additionally, the termination of the
agreement due to our failure to obtain the necessary collateral license
agreements would require us to return all milestone payments made to date, plus
$500,000 in liquidated damages. Our future working capital and capital
requirements will depend upon numerous factors, including, but not limited to:
- - progress of our research and development programs,
pre-clinical testing and clinical trials
- - our corporate partnerspartners' fulfilling their obligations to us
-
- timing and cost of seeking and obtaining regulatory approvals
-
- timing and cost of manufacturing scale-up and effective
commercialization activities and arrangements
-
- level of resources that we devote to the development of
marketing and sales capabilities
- - costs involved in filing, prosecuting and enforcing patent
claims
- - technological advances
-Page 10
13
- status of competitors
-
- our ability to maintain existing and establish new
collaborative arrangements with other companies to provide
funding to support these activities
Page 11
14
-
- costs of establishing both clinical scale and commercial scale
manufacturing capacity in our facility and those of others
In order to fund our capital needs after 2001,2002, we will require
significant levels of additional capital and we intend to raise the capital
through additional arrangements with corporate partners, equity or debt
financings, or from other sources including the proceeds of product sales, if
any. There is no assurance that we will be successful in consummating any such
arrangements. If adequate funds are not available, we may be required to
significantly curtail our planned operations.
At December 31, 1998,1999, we had net operating loss carryforwards for
United States federal income tax purposes of approximately $130,954,000$151 million, which
expire at various dates from 2000 through 2018.2019. At December 31, 19981999 we had
research credit carryforwards of approximately $4,725,000$7.7 million, which expire at
various dates between yearsfrom 2009 and 2018.through 2019. Under Section 382 of the Internal Revenue
Code of 1986, as amended, a corporation's ability to use net operating loss and
research credit carryforwards may be limited if the corporation experiences a
change in ownership of more than 50 percentage points within a three-year
period. Since 1986, we have experienced at least two such ownership changes. As
a result, we are only permitted to use in any one year approximately $5,159,000$5.2
million of our available net operating loss carryforwards that relate to periods
before these ownership changes. Similarly, we are limited in using our research
credit carryforwards. It has not been determined whether the pendingNovember 1999
public stock offering and the February 2000 private placement of our common
stockconvertible
subordinated notes will result in additional ownership changes that would
further limit the use of our net operating losses and research credit
carryforwards.
YEAR 2000
The "Year 2000 problem" involves mainlyRECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the inabilitystaff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 summarizes certain computer
programs and microprocessing devicesof the staff's views in
applying generally accepted accounting principles to differentiate between the year 1900 and
the year 2000 because two-digit rather than four-digit fields were used to
identify the year. There are a variety of related "date" problems,revenue recognition in
financial statements, including the use by older programs and devicesrecognition of algorithms that will fail to correctly
identify the year 2000 and certain other years in the twenty-first century as
leap years. A Year 2000 problem could cause a computer system or microprocessor
that is date sensitive to malfunction, resulting in system failures. Such
failures could cause disruptions of our operations, including, without
limitation, the systems in place at our Somerville, New Jersey clinical-scale
manufacturing facility, computers, communication devices and laboratory
instrumentation and systems which use date-based information in our research and
development and scientific testing or, possibly, in our pre-clinical or clinical
trials.
To deal with the Year 2000 problem we have developed a Year 2000 program that
has three main phases: (1) review of information technology and
non-information-technology systems for the purposes of assessing the potential
impact of Year 2000 on our business and identifying non-Year 2000 compliant
systems; (2) remediation and development of contingency plans; and (3) testing.
These phases are not necessarily sequential. We have a Year 2000 team to
coordinate and carry out the various phases and Reporting Responsible Persons in
each critical area, including computer hardware, software, other hardware,
laboratory equipment, collaborators and process/clinical development. While we
believe that our program is and will be adequate to address Year 2000 problems,
there can be no assurance that our operations will not be adversely affected.
While we have devoted significant resources to dealing with the Year 2000
problem, our efforts to date have not caused the deferral of any other
significant information technology projects.
We have reviewed the potential impact of the "Y2K" bug on our research and
development, product development, manufacturing, financial, communication and
administrative operations. We determined which systems are critical to our
business. We also determined which systems were non-Year 2000 compliant.non-refundable fees received
upon entering into arrangements. We are in the process of remediating through corrective programming
modifications or system replacement all mission critical systems that we
identified as non-compliant. We believe thatevaluating this process is substantially
completed. In addition, for systems that weSAB
and the effect it may have identified as non-mission
critical, we also intend to either correct them through programming changes or
replace them with compliant software and any necessary hardware or, possibly,
simply discontinue using the system.
Page 12
15
We have incurred approximately $350,000 on our Yearfinancial statements and current revenue
recognition policies. We must adopt SAB 101, as amended, in the second quarter
of 2000 program through
September 30, 1999. This includeswith an effective date of January 1, 2000 and the purchaserecognition of third-party software and
required hardware to run such softwarethe
cumulative effect adjustment, if any, calculated as well as the cost of modifying
software. We estimate that any additional costs incurred to complete our
remediation plan will not be material.
In addition to the review of internal systems, we are making inquiries of our
critical suppliers, corporate partners, manufacturers, clinical study sites,
service suppliers, communications providers, lessors, utilities, and banks whose
system failures or non-compliant products could have an adverse impact on our
operations. While we are not currently aware of any material Year 2000 problems
involving such entities that are likely to adversely affect us, there can be no
assurance that there will not be such problems or that, if discovered, they will
be timely remediated.
We have developed contingency plans to deal with possible disruptions of
important operations such as discovery research, product development,
manufacturing and ongoing clinical trials. Such disruptions could affect the
development and ultimate marketing of potential products as well as put us at a
competitive disadvantage relative to companies that have corrected such
problems. These contingency plans may need to be refined as more information
becomes available.January 1, 2000.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT
Those statements contained herein that do not relate to historical
information are forward-looking statements. There can be no assurance that the
future results covered by such forward-looking statements will be achieved.
Actual results may differ materially due to the risks and uncertainties inherent
in the Company's business, including without limitation, the risks and
uncertainties associated with completing pre-clinical and clinical trials of the
Company's compounds that demonstrate such compounds' safety and effectiveness;
obtaining additional financing to support the Company's operations; obtaining
and maintaining regulatory approval for such compounds;compounds and complying with other
governmental regulations applicable to the Company's business; obtaining the raw
materials necessary in the development of such compounds; consummating
collaborative arrangements with corporate partners for product development;
achieving milestones under collaborative arrangements with corporate partners;
developing the capacity and ability to manufacture, as well as to market and sell
the Company's products, either directly or with collaborative partners;
developing market demand for and acceptance of such products; competing
effectively with other pharmaceutical and biotechnological products; obtaining
adequate reimbursement from third party payors; attracting and retaining key
personnel; obtaining patents to protect the Company's own products, licenses to
use certain technologies of third parties and operating without infringing the
intellectual property rights of others; successfully remedying Year 2000
problems by the Company and those entities associated with the Company;protecting proprietary rights; and those other factors
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview and Risk Factors," in the Company's most recent
Registration Statement on Form S-3.10-K.
Page 1311
1614
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our holdings of financial instruments are comprised ofcomprise a mix of any ofsecurities which may
include U.S. corporate debt, foreign corporate debt, U.S. government debt,
foreign government/agency guaranteed debt and commercial paper. All such
instruments are classified as securities available for sale. Generally, we do
not invest in portfolio equity securities or commodities or use financial
derivatives for trading purposes. Our debt security portfolio represents funds
held temporarily pending use in our business and operations. We manage these
funds accordingly. We seek reasonable assuredness of the safety of principal and
market liquidity by investing in investment grade fixed income securities while
at the same time seeking to achieve a favorable rate of return. Our market risk
exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically
invest in the shorter-endsecurities which have a range of the maturity spectrum or if longer, indates.
Typically, those with a short-term maturity are fixed-rate, highly liquid debt
instruments and those with longer-term maturities are highly liquid debt
instruments with periodic interest rate adjustments. We also have certain
foreign exchange currency risk. See footnote 4.3 of the financial statements. The
table below presents the principal amounts and related weighted average interest
rates by year of maturity for our investment portfolio as of September
30, 1999:March 31, 2000:
20042005 AND
1999
2000 2001 2002 2003 2004 THEREAFTER TOTAL
FAIR VALUE
---- ---- ---- ---- ---------------- ------------ ---------- ----- ---------- ------------ ------------ ------------
Fixed Rate $ 15,913,000 $ 6,889,000 $1,448,000 - $2,844,000 - - - - $2,844,000 $2,843,000$ 40,022,000 $131,583,000 $195,855,000
Average
Interest Rate 5.05% 6.41% 8.00% - 5.10% - - - - 5.10% -6.60% 6.64% 6.50%
Variable Rate - - - - - $30,214,000(1) $30,214,000 $30,209,000$ 15,315,000(1) $110,194,000(1) $125,509,000
Average
Interest Rate - - - - 6.27% 6.35% 6.34%
------------ ------------ ---------- ---------- ------------ ------------ ------------
$ 15,913,000 $ 6,889,000 $1,448,000 - 5.59% 5.59%$ 55,337,000 $241,777,000 $321,364,000
============ ============ ========== ========== ============ ============ ============
FAIR VALUE
------------
Fixed Rate $190,418,000
Average
Interest Rate -
------ ---------- ------ ------- ------ ---------- ----------- -----------Variable Rate $131,619,000
Average
Interest Rate -
$2,844,000 - - - $30,214,000(1) $33,058,000 $33,052,000
====== =========== ====== ======= ====== ========== =========== ===========------------
$322,037,000
============
(1) These holdings consist of U.S. corporate and foreign corporate floating rate
notes. Interest on the securities are adjusted at fixed dates using prevailing
interest rates. These holdings are highly liquid and weliquid. We consider the potential for
loss of principal to be minimal.
Page 14
17Our 5 1/2% convertible subordinated notes in the principal amount of
$240,000,000 due March 1, 2005 and other long-term debt have fixed interest
rates and the fair value of these instruments is affected by changes in market
interest rates. The subordinate notes are convertible into the Company's
common stock at a conversion price of $110.18 per share. The fair value of this
instrument is subject to changes in interest rates and the price of the
Company's common stock.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2000, we issued an aggregate of
600,850 shares of unregistered common stock to holders of warrants upon exercise
of such warrants for a total purchase price of $1,389,219, which were
consummated as private sales under Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act").
On February 29, 2000, we completed a private placement of $240,000,000
aggregate principal amount of 5 1/2% convertible subordinated notes due March 1,
2005. We received net proceeds from this offering of approximately $231,900,000,
after deducting costs associated with the offering. The notes bear interest at
an annual rate of 5 1/2% payable semi-annually on September 1 and March 1 of
each year, beginning September 1, 2000. The holders may convert all or any
portion of a note, in multiples of $1,000, into common stock at any time on or
before March 1, 2005 at a conversion price of $110.18 per share, subject to
adjustment if certain events affecting the common stock occur. In lieu of
fractional shares, we will pay a cash adjustment based on the closing price of
the common stock on the last business day prior to the conversion. The notes
are subordinated to all existing and future senior indebtedness. We may redeem
some or all of the notes at any time prior to March 6, 2003, at a redemption
price of 100% of the principal amount plus accrued and unpaid interest to the
redemption date if (1) the closing price of the common stock has exceeded 150%
of the conversion price for at least 20 trading days in any consecutive
30-trading day period and (2) if the redemption occurs before March 1, 2002,
the shelf registration statement, to be filed, covering resales of the notes
and the common stock is effective and expected to remain effective and
available for use for the 30 days following the redemption date. We shall mail
the notice for redemption within five trading days of the consecutive 30-trading
day period. If the notes are redeemed under these circumstances, we will make an
additional payment of $152.54 per $1,000 aggregate principal amount of notes,
minus the amount of all interest paid on such principal amount since February
29, 2000 to the date the notice was mailed. On or after March 6, 2003, we may
redeem some or all of the notes at specified redemption prices, plus accrued
and unpaid interest to the day preceding the redemption date. The holders have
the right, upon the occurrence of certain specified events constituting a
fundamental change, to require us to redeem all or any part of such holder's
notes at a price equal to 100% of the principal amount of the notes being
redeemed, together with accrued interest to, but excluding, the date of
redemption. We are required to file with the Securities and Exchange Commission
a shelf registration statement covering resales of the notes and the common
stock.
Morgan Stanley & Co. Incorporated and Merrill Lynch & Co., who acted as
the initial purchasers for the convertible notes, received an aggregate fee of
$7,800,000. The notes were issued pursuant to safe-harbor exemptions
from the registration requirements of the Securities Act, solely to qualified
institutional buyers and to a limited number of institutional "accredited
investors" pursuant to Rule 144A and Regulation D of the Securities Act.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On October 7, 1999, the Company filed with the Commission a
Current Report on Form 8-K, attaching a press release issued by
the Company.None.
Page 1512
1815
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 thereunto duly authorized.
IMCLONE SYSTEMS INCORPORATED
(Registrant)
Date: November 15, 1999May 12, 2000 By /s/ Samuel D. Waksal
------------------------------------------------------------------------------
Samuel D. Waksal
President and Chief Executive Officer
Date: November 15, 1999May 12, 2000 By /s/ Carl S. Goldfischer
------------------------------------------------------------------------------
Carl S. Goldfischer
Vice President, Finance and Chief
Financial Officer
Page 1613