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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20459
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-20713
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ENTREMED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-1959440
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Delaware 58-1959440
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 200
9610 Medical Center Drive
Rockville, Maryland
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(Address of principal executive offices)
20850
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(Zip code)
(301) 217-9858
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(Registrant's telephone number, including area code)
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 NO X
NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most recent practicable date.
Class Outstanding at May 7, 1997
- --------------------------- --------------------------
Common Stock $.01 Par Value 12,086,200
Class Outstanding at July 31, 1997
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Common Stock $.01 Par Value 12,229,768
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ENTREMED, INC.
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
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Item 1 -- Financial Statements
Consolidated Balance Sheets
as of March 31,June 30, 1997 and December 31, 1996...................................................31996 3
Consolidated Statements of
Operations for the Three Months Ended
March 31,June 30, 1997 and 1996.......................................................................41996, and the Six Months
Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash
Flows for the ThreeSix Months Ended March 31,June 30, 1997
and 1996......................................................................................51996 5
Notes to Consolidated Financial
Statements....................................................................................6Statements 6
Item 2 -- Management's Discussion and Analysis
of Financial Condition and Results of
Operations.........................................................................8Operations 8
Part II. OTHER INFORMATION
Item 1 -- Legal Proceedings.................................................................10Proceedings 10
Item 2 -- Changes in Securities.............................................................10Securities 10
Item 3 -- Defaults upon Senior Securities...................................................10Securities 10
Item 4 -- Submission of Matters to Vote of
Security Holders..................................................................10Holders 10
Item 5 -- Other Information.................................................................10Information 11
Item 6 -- Exhibits and Reports on Form 8-K..................................................10
SIGNATURES...................................................................................118-K 11
SIGNATURES 12
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ENTREMED, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
-------------------- ------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 30,374,92229,385,427 $ 33,051,206
Short-termShort term investments 19,718,51719,924,500 19,669,623
Interest receivable 364,725466,039 401,673
Prepaid expenses 39,245185,855 97,962
-------------------- ------------------------------- ------------
Total current assets 50,497,40949,961,821 53,220,464
-------------------- ------------------------------- ------------
Furniture and equipment, net 875,9381,109,199 824,559
-------------------- ------------------------------- ------------
Other assets 403,307403,319 101,316
-------------------- ------------------------------- ------------
Total assets $ 51,776,65451,474,339 $ 54,146,339
==================== =============================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 496,968756,550 $ 600,303
Accrued liabilities 1,136,831520,461 957,718
Capital lease obligations - 104,152
Deferred revenues 1,591,667revenue 2,509,167 -------------------- ------------------2,509,167
------------- ------------
Total current liabilities 3,225,4663,786,178 4,171,340
-------------------- ------------------
Capital lease obligations,------------- ------------
Deferred revenue, less current portion - -
-------------------- ------------------
Deferred revenues, less current portion 2,061,6661,886,667 2,236,666
-------------------- ------------------------------- ------------
Minority interest 41,188Interest 36,997 44,142
==================== =============================== ============
Stockholders' equity:
Preferred stock, $1.00 par value
5,000,000 shares authorized, no shares issued and
outstanding as of March 31,June 30, 1997 (unaudited)
and December 31, 1996 - -
Common stock, $.01 par value: 27,000,00020,000,000 shares
authorized, 12,062,20012,182,632 (unaudited) and 12,009,598
shares issued and outstanding as of March 31,June 30, 1997
and December 31, 1996, respectively 120,622121,826 120,096
Additional paid-in capital 73,008,02273,503,474 72,830,898
Accumulated deficit (26,680,310)(27,860,803) (25,256,803)
-------------------- ------------------------------- ------------
Total stockholders' equity 46,448,33445,764,497 47,694,191
-------------------- ------------------------------- ------------
Total liabilities and stockholders' equity $ 51,776,65451,474,339 $ 54,146,339
==================== =============================== ============
The accompanying notes are an integral part of the financial statements.
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ENTREMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,Six months ended
June 30, June 30,
1997 1996 ---------------------------------------
Revenues:1997 1996
------------------------ -------------------------
Revenues:
Collaborative research &and development $ 1,042,500 $ 1,042,500 License fee$ 2,085,000 $ 2,085,000
Licensing 50,000 50,000 --------------- -----------------100,000 100,000
----------- ----------- ----------- ------------
Total revenues 1,092,500 1,092,500 --------------- -----------------2,185,000 2,185,000
----------- ----------- ----------- ------------
Expenses:
Research & development 2,418,835 2,063,2701,743,560 1,246,045 4,162,395 3,309,315
General & administrative 749,660 771,411
--------------- -----------------
Total operating expenses 3,168,495 2,834,6811,219,501 472,224 1,969,161 1,243,635
----------- ----------- ----------- ------------
2,963,061 1,718,269 6,131,556 4,552,950
Interest expense - (8,643) (1,418) (9,547)(18,190)
Interest income 650,952 76,321
--------------- -----------------685,877 169,474 1,336,829 245,795
----------- ---------- ----------- ------------
Net loss before minority interest (1,426,461) (1,675,407)(1,184,684) (464,938) (2,611,145) (2,140,345)
Minority interest 2,9544,191 - --------------- -----------------7,145 -
----------- ---------- ----------- ------------
Net loss $( 1,423,507) $ ( 1,675,407)
=============== ==================(1,180,493) $ (464,938) $(2,604,000) $(2,140,345)
------------ ---------- ----------- -----------
Net loss per share $ (0.12)(0.10) $ (0.23)
--------------- -----------------(0.06) $ (0.22) $ (0.29)
============ ========== =========== ===========
Weighted average number of shares
outstanding 12,044,203 7,312,035
--------------- -----------------12,134,490 7,676,696 12,089,347 7,494,366
---------- --------- ---------- ---------
Pro forma net loss per share $ (0.18)
=================(0.05) $ (0.23)
========== ==========
Pro forma weighted average number
of shares outstanding 9,312,035
=================9,237,136 9,274,585
========= =========
The accompanying notes are an integral part of the financial statements.
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ENTREMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
ThreeSix Months Ended
March 31,June 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,423,507) $ (2,046,460)(2,604,000) $(2,140,345)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 61,709 48,457129,101 98,136
Warrants issued for consulting services 291,000 -
Minority interest (7,145) -
Changes in assets and liabilities:
Accounts receivable - 2,500,000
Prepaid expenses 58,717 -
Other assets (1,991) 13,120Expenses (87,893) (212,438)
Accounts payable (103,335) 78,553156,247 440,016
Accrued liabilities 179,113 -(437,257) 144,500
Deferred revenue (1,092,500) -(349,999) (350,000)
Deposits (2,003) (422)
Interest receivable 36,948 -
---------------- ----------------(64,366) (26,709)
------------ -----------
Net cash usedprovided (used) by operating activities (2,284,846) (1,906,330)
---------------- ----------------(2,976,315) 452,738
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CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments 9,874,723 -
Purchases of short-term investments net (48,894)(10,129,600) -
Investments (300,000) -(200,000)
Purchases of furniture & equipment (116,042) (34,386)
----------------- ----------------(413,741) (113,104)
------------ -----------
Net cash used by investing activities (464,936) (34,386)
----------------- ----------------(968,618) (313,104)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital lease obligations (104,152) -(194,033)
Proceeds from sales of common stock 177,650 1,783,227
--------------- ---------------383,306 48,666,755
------------ -----------
Net cash provided by financing activities 73,498 1,783,227
--------------- ---------------279,154 48,472,722
------------ -----------
Net decreaseincrease in cash and cash equivalents (2,676,284) (157,489)(3,665,779) 48,612,356
Cash and cash equivalents at beginning of period 33,051,206 218,619
--------------- ---------------6,885,099
------------ -----------
Cash and cash equivalents at end of period $ 30,374,922 $ 61,130
=============== ===============29,385,427 $55,497,455
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH INVESTMENT AND FINANCING ACTIVITIES
Interest paid $ 1,418 $ -
=============== ===============18,190
============ ===========
The accompanying notes are an integral part of the financial statements.
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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,JUNE 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial information of
EntreMed, Inc. (the "Company") includes the accounts of its 85% owned
subsidiary, Cytokine Sciences, Inc. Cytokine Sciences was formed in June
1996 and was capitalized with $250,000 by EntreMed for the purpose of
acquiring the assets of Innovative Therapeutics, Inc., which acquisition
was completed in July 1996 in exchange for 15% of the common stock of
Cytokine Sciences, Inc.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, such
consolidated financial statements do not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the threesix month period ended March 31,June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the Company's
audited financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1996.
2. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
shares outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common and convertible preferred stock issued
for consideration below the initial public offering (the "IPO") price of
$15.00 and stock options and warrants issued with exercise prices below
the IPO price during the twelve-month period preceding the initial filing
of the registration statement (commonly referred to as "Cheap Stock"),
have been included in the calculation of common shares using the treasury
stock method forthrough April 12, 1996 in the threesix month period ended March 31,June
30, 1996, as if they were outstanding prior to the effective date of the
IPO.
The net loss per share amounts for the three and six months ended March 31,June
30, 1996 as required by generally accepted accounting principles, which
do not give effect to the pro forma conversion of preferred stock and
Cheap Stock described above, or any stock option or warrant common share
equivalents considered antidilutive, is as follows:
Net loss per share $ (0.26)
Weighted average common shares
outstanding 6,460,717
Three months ended Six months ended
June 30, 1996 June 30, 1996
Net loss per share $(0.10) $(0.30)
Weighted average common shares outstanding 12,134,490 7,068,703
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2. NET LOSS PER SHARE (cont.)
Pro forma net loss per common share for the threesix month period ended March 31, 1996June
30, 1997 is calculated using the weighted average number of common shares
outstanding, Cheap Stock as described above and assumes the conversion of
the convertible preferred stock at the beginning of the period.
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2. NET LOSS PER SHARE (continued)
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), effective December 1997. SFAS 128 will require the Company
to present both "basic" and "diluted" loss per share amounts on the face
of the statement of operations, replacing the existing net loss per
share. Under SFAS 128, basic loss per share would not have changed from
the reported loss per share of $(0.12)$(0.10) and $(0.23)$(0.06) for the three month
periods ended March 31,June 30, 1997 and 1996, respectively.respectively, and $(0.22) for the
six month period ended June 30 1996. Basic loss per share for the six
month period ended June 30, 1997 would have been $(0.30). Diluted loss
per share would not have differed from basic loss per share as stock
option or warrant common share equivalents are antidilutive.
3. INITIAL PUBLIC OFFERING
On June 17, 1996, the Company completed an initial public offering of
3,200,000 shares of the Company's common stock at a price of $15.00 per
share. Bristol-Myers Squibb Company, a party to a collaboration with the
Company, also purchased from the Company in a private placement on the
closing of the offering 333,333 shares of the Company's common stock at
$15.00 per share. The initial public offering resulted in net proceeds
to the Company of approximately $43,500,000 and the private placement
with Bristol-Myers Squibb Company ("BMS") resulted in net proceeds to the
Company of an additional $5,000,000.
4. CONTINGENCIES
The Company is a party to certain litigation filed in August 1995 in the
United States District Court for the Eastern District of Tennessee by
Bolling McCool & Twist, a consulting firm. The suit relates to a claim
for services rendered in the approximate amount of $50,000 and seeks a
finder's fee in an unspecified amount in connection with the
Bristol-Myers collaboration. The Company is unable to predict with
certainty the eventual outcome of the lawsuit. The Company is contesting
the action vigorously and believes that this proceeding will not have a
material adverse effect on the Company or its financial statements,
although there can no assurance that this will be the case.
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ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Since its inception in September 1991, the Company has devoted
substantially all of its efforts and resources to sponsoring and conducting
research and development on its own behalf and through collaborations with
corporate partners and academic research and clinical institutions, and
establishing its facilities and hiring personnel. In December 1995, the
Company entered into a collaboration agreement with Bristol-Myers Squibb
Company ("BMS") in which BMS made an equity investment in the Company and
agreed to pay certain research and development fees and expenses, license fees,
milestone payments, and royalties on net sales, if any. Through March 31,June 30, 1997,
with the exception of license fees and research and development funding from
BMS and certain research grants, the Company had not generated any revenue from
operations. The Company anticipates its revenue sources for the next several
years will be limited to research grants and future collaboration payments from
BMS and from other collaborators under arrangements that may be entered into in
the future. The timing and amounts of such revenues, if any, will likely
fluctuate and depend upon the achievement of specified milestones.
RESULTS OF OPERATIONS
Three and Six Months Ended March 31,June 30, 1997 and June 30, 1996
Revenues were $1,092,500 duringfor the three monthsmonth periods ended March 31,June 30, 1997
("1997 Three Months") and during the three months ended March 31,June 30, 1996 ("1996 Three Months") and $2,185,000
for the six month periods ended June 30, 1997 ("1997 Six Months") and June 30,
1996 ("1996 Six Months"). This reflects revenue received under the BMS
collaboration agreement which was executed in December 1995. The collaborative
research and development fees relate to the amortization over five years of a
one-time payment of $2,500,000 received in December 1995 and the amortization
of semi-annual payments of $1,835,000 under the BMS collaboration agreement.
The license fee represents the amortization over five years of a one-time
$1,000,000 license fee received in December 1995 under the BMS collaboration
agreement.
Research and development expenses increased by 17%40% from approximately
$2,063,000$1,246,000 in the 1996 Three Months to $2,419,000approximately $1,744,000 in the 1997
Three Months and by approximately 26% from approximately $3,309,000 in the 1996
Six Months to approximately $4,162,000 in the 1997 Six Months. Research and
developmentDevelopment expenditures include sponsored research payments to academic
collaborators including a $1,000,000 payment to Children's Hospital in
both the 1997 and 1996 Three Months; and expenses related to the Company's internal research programs.
The increase in research and development costs reflects increased efforts in
the Company's sponsored research and product development programs related to
its angiogenesis and cell permeation technologies. Overall, research personnel
increased from 18 as of January 1, 1996 to 32 as of June 30, 1997. Research
and development expenses are expected to continue to increase as the Company
continues to expand its research and development efforts.
General and administrative expenses decreased by 3%increased from approximately
$472,000 in the 1996 Three Months to approximately $749,000$1,220,000 in the 1997 Three
Months, a 158% increase. For the 1997 Six Months general and administrative
expenses were approximately $1,969,000 as compared to $1,244,000 for the 1996
Six Months, a 58% increase. The overall increase in general and administrative
expenses during the 1997 period compared to the comparable periods of 1996 is a
result of the Company incurring additional expenses associated with being a
public company, investigating potential strategic relationships, and increasing
the administrative staff to support the research scientists and collaborative
efforts the
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Company is conducting. The 1997 Three Months and 1997 Six Months include a one
time expense charge of approximately $400,000 related to certain consulting
work. The total number of administrative personnel the Company had increased
from 8 as of January 1, 1996 to 12 as of June 30, 1997.
Interest income increased to approximately $686,000 in the 1997 Three
Months as compared to approximately $771,000 in
the 1996 Three Months. General and administrative expenses remained relatively
constant, reflecting a one-time charge$169,000 in the 1996 Three Months of $233,000
relatedand to future payments under a termination agreement with a former director
of the Company, offset in part by higher general and administrative expenses
incurred$1,337,000 in
the 1997 Three Months as a result of being a public company.
Interest income increased to $651,000 for the 1997 ThreeSix Months from $76,000 for$246,000 in the 1996 ThreeSix Months. This increase is a
result of the investment of the proceeds received from the BMS collaboration
agreement and the Company's initial public offering.
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The minority interest relates to the portion of the loss recognized by
Cytokine Sciences that is attributable to the minority shareholders of Cytokine
Sciences.
Liquidity and Capital Resources
At March 31,June 30, 1997, the Company had cash and cash equivalents of
approximately $30,375,000$29,385,000 and short-term investments of $19,925,000 with
working capital of approximately $47,272,000,$46,176,000, primarily representing the net
proceeds of the Company's initial public offering and concurrent private
placement with BMS in June 1996 together with funds received under the BMS
agreement entered into in December 1995. Cash and cash
equivalents includes approximately $500,000 received from a principal
stockholder upon exercise of stock options by such stockholder, which exercise
was rescinded and which cash was returned in May 1997. As a result, at March
31, 1997, the Company recorded a corresponding accrued liability.
The Company's cash resources have been used to finance research and
development, including sponsored research, capital expenditures, including
leasehold improvements to the Company's laboratory facility, and general and
administrative expenses. Over the next several years, the Company expects to
incur substantial additional research and development costs, including costs
related to early-stage research in areas not reimbursed by BMS, preclinical and
clinical trials, increased administrative expenses to support its research and
development operations and increased capital expenditures for pilot
manufacturing capacity, various equipment needs and facility improvements.
As of May 1,July 31, 1997, the Company was a party to sponsored research
agreements and clinical trials requiring the Company to fund an aggregate of
approximately $5,084,000 through 1999 (including $4,000,000 to Children's
Hospital) and license agreements requiring milestone payments of up to
$4,360,000 and additional payments upon attainment of regulatory milestones.
BMS is obligated to make additional semi-annual payments to the Company
of $1,835,000 in each of June and December through June 2000 as well as
additional payments in the event certain mostly late-stage regulatory milestones
are achieved. BMS may terminate the collaboration agreement and return the
licensed technology to the Company at any time upon six months notice, in which
event it would have no further funding obligation to the Company.
- ------------------------------------
Statements herein that are not descriptions of historical facts are
forward-looking and subject to risk and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those set forth in the Company's Securities and Exchange Commission
filings under "Risk Factors", including risks relating to the early stage of
products under development; uncertainties relating to clinical trials'
dependence on third parties' future capital needs; and risks relating to the
commercialization, if any, of the Company's proposed products (such as
marketing, safety, regulatory, patent, product liability, supply, competition
and other risks).
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
This information as set forth in Note 4 of "Notes to Condensed
Consolidated Financial Statements" appearing in Item 1 of Part I of
this report is incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of stockholders was held on June 30, 1997
("Annual Meeting").
(b) Not applicable.
(c) At the Annual Meeting, the stockholders considered and approved the
following proposals:
(i) Election of Directors. The following sets forth the nominees who
were elected directors of the Company for the term expiring in the year
indicated as well as the number of votes cast for, against or withheld:
Term
(Year Votes
Expires) Name For Against Withheld
-------- ----------------------- ---------- ------- --------
2000 John W. Holaday, Ph. D. 10,645,392 23,223 -
2000 Wendell M. Starke 10,659,390 9,225 -
1999 Bart Chernow, M.D. 10,659,390 9,225 -
1999 Samuel R. Dunlap, Jr. 10,584,974 83,641 -
1999 Mark C. M. Randall 10,659,390 9,225 -
1998 Donald S. Brooks 10,659,390 9,225 -
1998 Leon E. Rosenberg, M.D. 10,659,278 9,337 -
1998 Lee F. Meier 10,659,390 9,225 -
(ii) Amendments to Stock Option Plan. At the Annual Meeting the
stockholders approved and ratified an amendment to the 1996 Stock Option Plan
("Plan") to increase the number of shares of Common Stock available for option
grants from 516,667 to 1,266,667. This proposal received 7,319,526 votes in
favor, 505,414 votes against and 419,896 abstentions. In addition, 2,423,779
shares were not voted.
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(iii) Amendment to Certificate of Incorporation. At the Annual
Meeting, the stockholders approved a proposal to amend the Company's
Certificate of Incorporation to provide for a classified board. This proposal
received 7,566,539 votes in favor, 685,508 votes against and 27,889 abstentions.
In addition, 2,388,680 shares were not voted.
(iv) Ratification of Appointment of Ernst & Young LLP. At the Annual
Meeting, stockholders ratified the selection of Ernst & Young LLP as the
independent auditors. The proposal received 10,574,620 votes in favor, 78,334
votes against, and 15,662 abstentions.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
11 Computation of Earnings Per Share
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by Registrant during the
quarter ended March 31,June 30, 1997.
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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.
ENTREMED, INC.
(Registrant)
Date: MayAugust 12, 1997 /s/ John W. Holaday
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John W. Holaday, Ph.D.
President and Chief Executive Officer
Date: MayAugust 12, 1997 /s/ R. Nelson Campbell
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R. Nelson Campbell
Chief Financial Officer
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