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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______________ to _______________
Commission File Number 0-11094
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RIBI IMMUNOCHEM RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 81-0394349
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
553 Old Corvallis Road, Hamilton, MT 59840-3131
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (406) 363-6214
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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___.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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The aggregate market value of Registrant's voting and non-voting common equity
held by non-affiliates of the Registrant was $81,102,000 based upon the last
sale price of such stock on March 4, 1998, as reported by The Nasdaq Stock
Market.
As of March 4, 1998, Registrant had 20,312,273 shares of common stock, $.001 par
value, outstanding.
Page 1 of 2 Cover Pages
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DOCUMENTS INCORPORATED BY REFERENCE
Portions entitled "Election of Directors," "Committees and Meetings," "Principal
Stockholders and Management's Stockholdings," "Executive Compensation" and
"Directors Compensation" from the Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held April 24, 1998 . . . . . . . . . . . Part III
Such Definitive Proxy Statement for Annual Meeting of Stockholders to be held
April 24, 1998, except for portions thereof which have been specifically
incorporated by reference, shall not be deemed "filed" as part of this Annual
Report on Form 10-K.
Page 2 of 2 Cover Pages
TABLE OF CONTENTS
Part I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 18
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 18
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 19
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 43
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 43
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 43
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 43
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 43
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
PART I
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Item 1. BUSINESS
GENERAL
The Company was incorporated on January 9, 1981, under the laws of Delaware and
is engaged in the development of biopharmaceutical products that stimulate the
immune system to generate a cascade of natural agents and signals to prevent and
treat human disease. Ribi immunostimulants can be combined with disease-specific
antigens which may direct the immune system to respond to a particular cancer or
infectious disease or can be used to modulate the immune response which may
prevent or ameliorate conditions such as ischemia-reperfusion injury. The
Company is engaged in the research, development, production and marketing of
these products, some of which are under investigation by other companies for use
as adjuvants. In addition, the Company engages in related activities such as the
custom formulation and sale of research products.
The Company has an active research and development program for new products and
the improvement of its existing products. The Company manufactures all of its
clinical products and has developed and continues to develop processes for the
commercial-scale production of its compounds. The Company protects its
proprietary products and processes through the filing of patent applications and
the use of confidentiality agreements. The Company has 21 issued United
States patents covering its compounds, processes and certain uses of its
products. The expiration dates for United States patents held by the Company
range from 2001 to 2011. Patents have also been applied for or issued on a
selected basis in foreign countries.
The Company is headquartered near Hamilton, Montana, in a modern facility
housing approximately 60,000 square feet of laboratory, administrative,
marketing, pilot plant and commercial-scale production functions. In addition to
the plant and equipment, the Company owns approximately 35 acres allowing for
potential future expansion. To date most of the Company's revenues have been
from investment income earned on cash balances and investments, product license
and contract research fees, and sales of research and animal health products.
Products for use as human biopharmaceuticals have not yet been approved for
sale.
THE COMPANY'S TECHNOLOGY
The technology of the Company is based on the potent capacities of certain
microbial products to modulate the cascade of cytokines (regulatory substances
produced by cells) in man and other animals. Slight modifications of these
products and/or their physical and biological delivery to the immune system
profoundly influence the qualitative and quantitative natures of the subsequent
cytokine modulation and the physiological responses. The Company believes that
appropriate delivery of products of this core technology can be used to enhance
a protective response or to suppress an unwanted immunological or inflammatory
response.
The Company believes it has developed a distinct approach to immune modulation.
The Company's materials activate macrophages, lymphocytes and other cells
relating to the immune system. This activation stimulates an immunological
cascade of cytokine production which complements the normal, protective
responses that are initiated during infection or injury. Furthermore, this type
of stimulation results in an individually tailored response, similar to the
manner in which the body would respond to natural stimuli.
1
The concept of using microbial products to provide a general immune modulation
as a therapeutic approach dates back to the late 1800s. However, little progress
was made in exploiting the therapeutic potentials of these products until the
1980s. First of all, much reliance had been placed on chemotherapeutics,
antibiotics and radiation as panaceas for infectious and neoplastic (abnormal
tissue growth) diseases. Secondly, there appeared to be unsolvable toxicity
problems associated with the microbial immunotherapeutic products. In 1981 the
late Dr. Edgar Ribi, a co-founder of the Company, and his colleagues discovered
a reproducible process which led to the detoxification of endotoxin, a bacterial
cell-wall component and one of the most potent known stimulators of the immune
system. By separating and isolating selected portions of bacterial cell walls,
Dr. Ribi and his colleagues were able to define chemically the precise structure
of the endotoxin molecule which possessed immunomodulatory activities and to
attenuate the toxicity of this molecule without destroying its beneficial
biological properties. The result was a chemical entity referred to as
monophosphoryl lipid A, trademarked by the Company as MPL immunomodulator. In
addition to attenuating toxicity of the endotoxin molecule, the Company's
scientists have extracted biologically active components from the cell walls of
MYCOBACTERIUM BOVIS or PHLEI and have formulated combinations of these
components as potential immunomodulatory agents.
Knowledge of the structures of MPL and other immunomodulators now makes it
possible to prepare these compounds and related small molecules by synthetic
methods. Comparison of the biological activities of these synthetic compounds
with their structures is allowing the development of a detailed picture of the
relationships between structures and activities. This has led to the
identification of molecules that may have unique uses as new immunomodulatory
products.
The core of the Company's product development is the use of MPL immunomodulator
by itself or in combination with other immunomodulators and appropriate delivery
vehicles to modify selectively the immunological status of an individual. This
is accomplished primarily through precise enhancement or suppression of cellular
hormones called cytokines.
Modulation of the cascade of cytokines, both enhancement and suppression, is an
extremely complicated process. The particular roles played by the cytokines,
alone and in combination with others, have not yet been defined completely.
Furthermore, it is unlikely that it will ever be possible to assess the immune
status of a patient to such an extent that treatment with exogenous cytokines
can be tailored to the patient's exact needs. Poor distribution of cytokines
from the bloodstream to desired target tissues also limits their utility as drug
products. By studying the structure-function relationships of natural and
synthetic immunomodulators, Company scientists hope to discover ways to
selectively stimulate or suppress cytokine responses in various tissues
naturally. Information from these studies may provide new insights about how the
beneficial effects of cytokine modulation can be exploited in the treatment of
disease.
The Company's products are in various stages of development. Other than
supplying clinical materials to corporate partners, selling certain veterinary
vaccine adjuvants and certain laboratory research products which presently
generate limited sales revenue, the Company has no commercial products. There is
no assurance that the products under development, including MELACINE melanoma
theraccine, a synthetic cardioprotectant, or any adjuvants, vaccines or other
immunological agents, will be commercially successful. While there is evidence
that the biological response modifiers produced by the Company and others may
2
provide treatment for certain cancers, infectious or other diseases, the
workings of the immune system, particularly in conjunction with biological
response modifiers, are not yet fully understood. As a result, the Company's
research and development activities, as well as those of its competitors, are
based on theories and concepts which may not have been completely proven or
defined. The Company has been testing certain of its compounds on humans in the
United States pursuant to Investigational New Drug ("IND") applications filed
with the United States Food and Drug Administration ("FDA"). To date,
preclinical and clinical data indicate product activity, and there have been no
significant unexpected, untoward effects associated with the administration of
the Company's products. However, considerable additional testing in human
subjects is required to demonstrate efficacy and confirm product safety for most
of the Company's products. If results are successful, there is no assurance that
the Company will receive the necessary governmental approvals for its products,
that additional satisfactory collaborative or licensing arrangements will be
available to the Company, or that any of the Company's products will be accepted
by the medical community.
THE COMPANY'S PRODUCTS
In the United States, human biopharmaceutical products are regulated by the FDA.
The FDA requires every new drug intended for human use to be tested under
strictly regulated treatment protocols, all of which require substantial time
and cost. (See below, "Government Regulation - FDA Approvals.")
The table on the following page summarizes the current status of the Company's
product development programs, which are discussed in more detail beginning on
page 5. Results which have been reported in Phase 1 and Phase 2 trials involving
the Company's products do not establish product efficacy, and there can be no
assurance that any of the listed products will progress beyond their current
state of development or ultimately receive necessary regulatory approval from
the FDA or comparable agencies in foreign countries or be accepted by the
medical community.
3
Product Proposed Application Status Collaborator/Licensee
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Adjuvants Enhancement of Phase 1, 2, SmithKline Beecham
infectious disease & 3 (herpes ("SB") - exclusive rights
vaccines simplex, for herpes; hepatitis A
hepatitis B, B and C; influenza A and
influenza, B; Lyme disease; malaria;
malaria, human papillomavirus;
strepto- among others -
coccal co-exclusive rights for
infections, DPT; HAEMOPHILUS
Epstein - INFLUENZA b; otitis
Barr, AIDS) media; polio;
tuberculosis; among
others - nonexclusive
rights for AIDS and
others
Wyeth-Lederle Vaccines
and Pediatrics -
co-exclusive rights for
DPT; HAEMOPHILUS IN-
FLUENZA b; otitis media;
polio; among others
Adjuvants Enhancement of Preclinical SB - exclusive rights in
allergy vaccines the European Community,
Eastern Europe and Canada
- co-exclusive for the
rest of the world
Adjuvants Enhancement of Phase 1 SB - nonexclusive rights
cancer vaccines for cancer vaccines
MELACINE Stage IV (advanced) Product Schering-Plough
melanoma malignant melanoma license Corporation - exclusive
theraccine applications worldwide rights, except
filed in Canada
Canada and
Europe. Biomira, Inc. - exclusive
Application rights for Canada only
being
prepared for
the U.S.
Stage II (early Phase 3 Schering-Plough
stage) malignant Corporation - exclusive
melanoma (prevention worldwide rights, except
of recurrence after Canada
surgery)
4
Product Proposed Application Status Collaborator/Licensee
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MELACINE Stage IV (advanced) Phase 3 Schering-Plough
melanoma malignant melanoma Corporation -
theraccine exclusive worldwide
+ inter- rights
feron-alfa
2b
Synthetic Prevention of Preclinical None (1)
Cardio- ischemia-reperfusion Planning
protectant injury in coronary Phase 3
artery bypass graft
patients
DETOX Enhancement of Phase 1 & 2 Biomira (exclusive to
adjuvant therapeutic vaccines and pre- specific antigens)
(theraccines) for clinical
breast, lung, National Cancer Institute
gastrointestinal - collaboration
ovarian, uterine,
colon and prostate
cancers
<FN>
- ------------------------
(1) See "Marketing" on page 12
</FN>
Cancer Theraccines
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A. MELACINE Melanoma Theraccine
Melanoma is a cancer of the skin cells that produce the dark pigment melanin.
While early stage melanoma is limited to the skin, it spreads to the liver,
lungs and other organs in later stages. Prognosis is dire for patients with
advanced disease. Median survival for advanced-disease patients is approximately
8 months using currently available forms of treatment. It is estimated that in
1998, melanoma will be diagnosed in approximately 41,600 people in the
United States, with an estimated 7,300 deaths due to the disease. Over the past
15 years the incidence of malignant melanoma in the United States has risen
steadily. It is currently the most common cancer in women ages 25-29; second
most common cancer in women ages 30-34; and third most common cancer in men ages
35-44. Increased exposure to ultraviolet rays may be an important factor
contributing to the increase in new cases of melanoma.
The Company is developing MELACINE, a therapeutic vaccine to treat melanoma.
MELACINE uses melanoma tumor-associated antigens and DETOX immunostimulant to
help the melanoma patient slow or stop the natural progression of the disease.
In 1996 the Company completed a meta-analysis of published survival data for
patients with disseminated melanoma who received various available therapies.
The meta-analysis, a recognized statistical method for combining results of
several independent studies of a particular subject, among other things,
reviewed the survival characteristics of 5,392 patients with disseminated
melanoma from 74 clinical studies published between 1974 and 1995 by leading
melanoma researchers of various available therapies, including chemotherapy,
interferon, interleukin-2, lymphokine-activated killer cells and other melanoma
vaccines. The results of this meta-analysis were then compared with the median
survival for a similar cohort of patients treated with MELACINE melanoma
theraccine. A significant difference in median survival was observed with 11
months for
5
evaluable MELACINE patients compared to 7.9 months for evaluable patients
receiving other therapies included in the meta-analysis. Survival data for late-
stage patients treated with MELACINE was determined in 1996 in an analysis of
final data collected from the Company's first MELACINE Phase 3 study, which
compared MELACINE therapy with an aggressive, experimental four-drug
chemotherapy regimen. The study found that during the treatment period, patients
receiving MELACINE experienced highly superior quality of life compared to
patients receiving chemotherapy and that there was no statistically significant
difference in median survival results between the two modalities (11 months for
evaluable patients receiving MELACINE vs. 12.4 months for evaluable chemotherapy
patients). Additionally, a significantly longer median survival of 18.2 months
was observed in patients who experienced clinical responses to therapy with
MELACINE ("responders") as compared to the entire group receiving MELACINE
(p=0.016). In contrast, the data suggest that while chemotherapy does cause
tumor shrinkage in some patients, this shrinkage is not associated with a
survival advantage. Patients who experienced a clinical response to chemotherapy
only had a median survival of 15.2 months, which is not statistically
significant when compared to the evaluable patients as a group who were treated
with chemotherapy (p=0.53). Responders to MELACINE can be identified after one
course (14 weeks) of therapy, giving physicians the opportunity to switch non-
responders to alternative therapeutic modalities relatively early in the disease
management process. The only drugs currently approved by the FDA for melanoma
are dacarbazine ("DTIC"), Hydroxyurea, interferon alfa-2b ("INTRON A", Schering-
Plough Corporation), which was approved in 1995 for post-operative therapy in
patients whose tumors can be surgically removed and are at high risk of
recurrence, and interleukin-2, which was approved in early 1998 in the United
States for Stage IV (late stage) melanoma. All of these drugs are quite toxic
and have limited efficacy. Based on this information plus the fact that the cost
of treatment with MELACINE is expected to be less than most other forms of
treatment, the Company filed a New Drug Submission ("NDS") with the Canadian
Health Protection Branch ("HPB")in 1997. The HPB accepted the NDS for MELACINE
for a detailed review on a six-month "fast-track" basis, and a decision
regarding MELACINE melanoma theraccine as therapy for Stage IV melanoma is
expected in the first half of 1998. The Company filed a license application with
the European Agency for the Evaluation of Medicinal Products ("EMEA") in the
first quarter of 1998. The EMEA has granted expedited review status for the
submission and a decision is possible by the end of 1998. The Company plans to
submit a commercial license application for MELACINE in the United States in the
third quarter of 1998.
A second Phase 3 clinical trial, which is sponsored by the National Cancer
Institute ("NCI") and being conducted by the Southwest Oncology Group ("SWOG"),
is designed to determine the ability of MELACINE to prevent recurrence of
melanoma in Stage II (early stage) patients. These patients had their melanoma
lesions surgically removed. In this study, MELACINE was given to half of the
patients, and they are being compared to the other half of the patients in the
study who did not receive treatment but were only observed. Patient accrual in
this study was completed in 1996. The patient groups will be followed for two
years, with final data analysis to begin in late 1998.
In 1995, the FDA allowed the Company to begin a third Phase 3 clinical trial.
This study compares patients with Stage IV melanoma receiving the combined
therapy of MELACINE and INTRON A interferon alfa-2b with a control arm of
patients receiving only INTRON A. Malcolm S. Mitchell, M.D., at the University
of California-San Diego, has been a principal investigator in the development of
MELACINE. Dr. Mitchell published results from a pilot study of treatment with
MELACINE followed by INTRON A in the first quarter of 1994. He reported that
seven patients in the trial who responded to INTRON A had previously had an
6
increase in a certain type of white blood cells as a result of previous
immunotherapy with MELACINE. White blood cell response data was not available
for the eighth responding patient. Dr. Mitchell suggested there may be synergy
between the two drugs as indicated by a 44% overall clinical response rate
(tumor regression) and extended survival in the responding melanoma patients in
comparison to non-responders. The 44% response rate (8 of 18 patients) was
higher than that obtained previously with either agent alone.
In 1992, the Company licensed to Biomira, Inc. ("Biomira") of Edmonton, Alberta,
Canada, exclusive Canadian marketing rights to MELACINE. In the first quarter of
1998, the Company licensed to Schering-Plough Corporation exclusive worldwide
rights, except for Canada, to distribute, market and sell MELACINE. In addition
to license fees, the Company will receive transfer payments for supplies of
MELACINE and will be entitled to royalties upon commercial sale of MELACINE.
MELACINE was given Orphan Drug status by the FDA in 1989, which provides seven
years of marketing exclusivity from the date of marketing approval.
The Company has exclusive marketing rights for MELACINE through an agreement
with the University of Southern California where the melanoma tumor associated
antigens were developed through the work of Dr. Mitchell. The University is
entitled to royalty payments from the Company upon commercial sale of MELACINE
melanoma theraccine.
B. Other Theraccines
In addition to MELACINE, the Company has participated in research programs and
has established relationships to evaluate therapies that incorporate the
Company's immunostimulants with tumor-associated antigens for the treatment of
other types of cancers. In 1990, the Company entered into a collaboration with
Biomira. Biomira produces synthetic carbohydrate antigens which can be combined
with the Company's adjuvants to produce theraccines with potential application
against breast, lung, gastrointestinal, ovarian and uterine cancers. Human
clinical data have been published which demonstrate that the Company's DETOX B-
SE adjuvant plays a key role in generating a significant immune response with
Biomira's line of THERATOPE cancer theraccines. Biomira has licensed DETOX B-SE
adjuvant from the Company for the clinical development and potential
commercialization of THERATOPE theraccines. In 1996 Biomira announced final
Phase 2 clinical data showing that its THERATOPE vaccine for breast cancer
provides a median survival benefit of more than 26 months as compared to less
than 10 months achieved historically with chemotherapy. Biomira and Chiron
announced in 1997 that they are planning to jointly develop THERATOPE for breast
cancer and plan to begin a Phase 3 trial in 1998.
During 1995 the Company completed a license and supply agreement with SB
covering the use of the Company's adjuvants in cancer theraccines under
development by SB. Under the license/supply agreement, the Company granted SB a
non-exclusive, worldwide license to use its adjuvants commercially upon
regulatory approval of SB's cancer vaccines. The Company will receive an annual
license fee and milestone payments for each SB vaccine incorporating the
Company's adjuvants that is submitted for regulatory review and subsequent
milestone payments upon regulatory approval of each vaccine incorporating a
Company adjuvant. In addition to transfer payments for commercial quantities of
adjuvant, the Company will also receive royalties on any commercial sales of
approved vaccines incorporating its adjuvants. In late 1997, SB began a Phase 1
trial with a cancer vaccine that utilized the Company's adjuvants.
7
Infectious Disease Vaccines
- ---------------------------
The Company's immunostimulant technology appears to have beneficial application
in the creation of vaccines for the prevention of viral and bacterial
infections. The Company believes that current emphasis on preventive health
care, the recent resurgence of certain previously controlled infectious diseases
and the continued emergence of new diseases, such as AIDS and Lyme disease, will
lead to greater use of prophylactic vaccines. The immunostimulating
characteristics of MPL make it well suited for use as an adjuvant with various
specific antigens for the creation of vaccines. Alum, the adjuvant historically
used in approved vaccines, is proving to be inadequate for many new vaccine
antigens, particularly those created with advanced DNA and subunit technology.
The Company has licensed its adjuvants to SmithKline Beecham ("SB") in three
separate agreements for use in vaccines for infectious diseases that SB is
developing. The first agreement, signed in 1991, provides exclusive, worldwide
use in defined SB vaccines for a number of primarily adult viral vaccines. The
Company receives transfer payments for supplies of adjuvant and will receive
royalties upon commercialization. SB is conducting human clinical testing with
the Company's adjuvants for vaccines against herpes, hepatitis B, malaria,
influenza and Epstein-Barr virus. During 1997, SB continued to advance the
development of several vaccines covered by this agreement including a clinical
trial designed to test the efficacy of a novel herpes vaccine in an 800-couple
study using a selected consort design. In the trial one partner in a couple has
herpes and the other does not. The vaccine is being tested for its ability to
prevent the spread of herpes between partners. Data from this Phase 3 study may
be available in 1998. The Company expects that SB will prepare regulatory
filings for this vaccine as soon as possible if the results demonstrate
efficacy.
Early in 1997, THE NEW ENGLAND JOURNAL OF MEDICINE published data from SB and
Walter Reed Army Institute of Research concerning a challenge study with an
experimental malaria vaccine. The vaccine, which incorporated MPL
immunomodulator and another adjuvant, achieved an efficacy rate of 86% against
challenge infection by malaria-infected mosquitoes. A series of further clinical
studies, including a limited field trial in West Africa, using the formulation
incorporating MPL were initiated in 1997 to determine the duration of immunity
and other aspects of the immune mechanisms involved. Malaria, for which no
effective vaccine currently exists, causes more than 2 million deaths annually
worldwide.
The second license agreement with SB was signed in 1992 for a group of bacterial
infectious disease vaccines, including some pediatric vaccines. Under this
agreement SB is actively evaluating a new generation of combination vaccines
containing diphtheria, pertussis, tetanus, HAEMOPHILUS INFLUENZA b (meningitis)
and polio antigens and is in early research with several other bacterial
vaccines that include the Company's adjuvants. Pursuant to this agreement, the
Company granted SB a co-exclusive, worldwide license to use the Company's
adjuvants commercially upon regulatory approval. In addition to an annual
license fee, the Company receives transfer payments for supplies of the
adjuvants and will be entitled to royalties from SB upon commercial sale of the
vaccines.
Effective December 31, 1996, the Company entered into a third infectious disease
vaccine license agreement granting SB an exclusive license to use the Company's
adjuvants in a human papillomavirus ("HPV") (genital warts) vaccine, a co-
exclusive license for a tuberculosis vaccine, and a non-exclusive license to use
the Company's adjuvants in the development of additional infectious disease as
well as other vaccines. In addition to annual license fees, the Company will
8
receive transfer payments for clinical and commercial quantities of adjuvant and
royalties on any commercial sales of vaccines incorporating the Company's
adjuvants. Vaccines under this agreement are in early stages of development.
Effective in 1993, the Company entered into license and supply agreements with
Wyeth-Lederle Vaccines and Pediatrics ("WLV&P"), a business unit of Wyeth-Ayerst
Laboratories, which is a division of American Home Products Corporation, for the
co-exclusive use of the Company's adjuvants in the development of prophylactic
vaccines, including pertussis, HAEMOPHILUS INFLUENZA b and STREPTOCOCCUS
PNEUMONIAE and for supply by the Company of commercial quantities of adjuvants.
The agreements with WLV&P provide for an annual license fee, transfer payments
for supplies of adjuvants and for royalty payments upon commercial sale of
vaccines. In 1997, WLV&P continued Phase 1 human clinical testing of a bacterial
vaccine incorporating MPL immunomodulator as an adjuvant.
In the course of product development, the Company has extensively studied the
structure/function relationships of its complex immunostimulant molecules
derived from natural, bacterial sources. With this information, Company
scientists designed synthetic small molecules with a broad spectrum of
properties. Some of the molecules appear to be powerful immunostimulants that
enhance mucosal immunity. Mucosal immunity may be critical in the development of
vaccines for respiratory infections and sexually transmitted diseases. Most
intestinal, respiratory and genital infections enter through mucosal surfaces,
suggesting that mucosal immunity may be the best system to employ in combating
these diseases.
The Company has generated preclinical data indicating that certain investigative
vaccines incorporating its new synthetic adjuvants enhance mucosal immunity when
delivered intranasally. It is known that mucosal vaccine delivery systems can
induce protective immune responses both on mucosal surfaces and systemically
throughout the bloodstream. This is because certain types of antigen-presenting
cells reside in tissue just below the mucosal surface. These cells capture
invading organisms and migrate to lymphoid tissues to "present" the infectious
threat to white blood cells, leading to a systemic response. These antigen-
presenting cells also migrate back to the mucosal areas, where the production of
antibodies in mucosal tissue provides the first line of defense against the
infection. Preclinical data generated by the Company indicate that its
investigational intranasal vaccines stimulate production of the appropriate
antibodies in the mucosal tissues. The investigational vaccines further resulted
in the development of a systemic response, which is important in achieving
protection against certain diseases. By comparison, injected vaccines can induce
strong systemic responses but sometimes inadequate mucosal responses.
In addition to the effectiveness of intranasal vaccine delivery, advantages
include ease of use and patient acceptance. An intranasal vaccine would be
administered by delivering a drop or spray of vaccine inside the nose, which
most recipients would prefer over injections with needles and syringes. Such a
delivery system could also improve compliance where multiple doses of a vaccine
are required. The Company is combining its synthetic adjuvants with unique
antigens to see if this new technology can provide solutions to diseases,
particularly sexually transmitted diseases, for which there are few or no
current options.
Other Vaccines
- --------------
The Company added a significant opportunity in 1996 to its vaccine adjuvant
franchise with the signing of a license/supply agreement covering the use of its
9
adjuvants in allergy vaccines under development by SmithKline Beecham Pharma, a
subsidiary of SB. This agreement provides SB Pharma with the right to use the
Company's adjuvants commercially upon regulatory approval of SB Pharma's allergy
vaccines. The Company will receive an annual license fee prior to, and minimum
annual royalties subsequent to, regulatory approval of any SB Pharma allergy
vaccines incorporating a Company adjuvant. The Company will also receive supply
payments for clinical and commercial quantities of its adjuvants and royalties
on any commercial sales of approved allergy vaccines incorporating the Company's
adjuvants. These potential vaccines are presently in the early stages of
development.
Cardioprotectant
- ----------------
Ischemia-reperfusion injury is damage that can occur in tissue during the oxygen
deprivation of ischemia and when blood flow is restored after such events as
cardiovascular surgery, angioplasty or organ transplantation. Paradoxically,
restoring blood flow to ischemic tissue may induce a complex series of events
leading to both reversible and irreversible cardiac tissue damage beyond any
damage that may have occurred during the ischemic period. It is believed that a
significant factor in reperfusion injury is the generation of "free radical"
molecules, which attack and damage cardiac tissue. Such damage may reduce
cardiac function, and/or cause cardiac cell death.
It is well established in animal models that a phenomenon termed "ischemic
preconditioning" can protect heart tissue from ischemia-reperfusion injury.
Short periods of ischemia followed by reperfusion can protect a heart which is
subsequently subjected to prolonged ischemia (as in surgical procedures). This
activity elicits both a window of immediate protection that lasts for up to two
hours as well as a second window of protection that begins approximately 12
hours later. Most physicians do not consider it desirable to mechanically induce
short periods of ischemia in patients prior to a surgical procedure to
precondition and protect the heart. The Company had previously pursued
development of a natural compound, MPL-C cardioprotectant, that was found to
pharmaceutically mimic certain aspects of ischemic preconditioning. The drug was
administered the day before cardiac surgery in order to take advantage of the
second window of protection described above. During 1997, however, the Company
chose to change from the natural cardioprotectant, MPL-C, to a novel synthetic
cardioprotectant. This occurred after the Company obtained preclinical data
indicating that the synthetic exhibited an improved therapeutic index (safety
profile) against ischemia-reperfusion injury during a delayed second window of
protection and also provided a first window of almost immediate protection. This
is a considerable advance in the Company's cardioprotection program, since the
synthetic compound can be administered almost immediately prior to the surgical
procedure. A clinical plan is being prepared to test this synthetic
cardioprotectant for its ability to prevent or mitigate ischemia-reperfusion
injury in a surgical setting, as measured by a specified reduction in certain
complications. Based on preliminary discussions with the FDA , the Company is
developing a Phase 3 human clinical study with this novel synthetic compound in
order to establish efficacy.
The new synthetic cardioprotectant has potential to be used prophylactically to
address ischemia-reperfusion injury that can result from a number of
cardiovascular surgical procedures. Each year in the United States more than
500,000 cardiovascular surgeries require stopping the heart, which can result in
cardiac injury. More than 350,000 angioplasty procedures, which first reduce and
then restore blood flow to the heart, are performed each year in the United
States. Surgical procedures requiring cardiopulmonary bypass have been
implicated to result in complications such as myocardial stunning and
infarction,
10
with clinically significant morbidity and mortality in the acute perioperative
and postoperative period. A significant number of these patients are potentially
at elevated risk for experiencing adverse long-term effects, including
congestive heart failure.
Research Products
- -----------------
The Company currently produces approximately 20 research products. These
products, which include adjuvants, are used in various research projects by
industrial, academic and government research laboratories and clinics, as well
as by physicians and veterinarians in the development of treatments for a
variety of diseases and to study the body's immune responses. The Company also
uses some of the research products it produces in its efforts to develop
immunotherapeutic agents capable of treating infectious diseases, malignant
tumors and other diseases.
Contract Services
- -----------------
The Company, from time to time, engages in contract services, whereby it
conducts specialized projects on behalf of others utilizing the expertise of its
research and production teams.
Sources and Availability of Raw Materials
- -----------------------------------------
Materials for producing the Company's pharmaceutical products come from a number
of sources. Most of its products are derived from biological organisms, which
are grown and maintained within the Company's facilities. Critical organisms,
not readily available from other sources, are stored in secure locations outside
of the Company's facilities. Chemicals and agents used in the manufacturing
process are fairly common and are readily available from several different
vendors.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. The Company's products under
development are expected to address a broad range of markets. The Company's
competition will be determined in part by the potential indications for which
the Company's products are developed and ultimately approved by regulatory
authorities. The first pharmaceutical product to reach the market in a
therapeutic or preventive area is often at a significant competitive advantage
relative to later entrants to the market. Accordingly, the relative speed with
which the Company or its corporate partners can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company's competitive position will also depend on, among other things, its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, develop and implement production and marketing
plans, obtain and maintain patent protection and secure adequate capital
resources. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, value and patent position. In addition to potential competition
from other biopharmaceutical products, the products presently under development
by the Company may compete with nonbiologic drugs and other therapies. The
Company's competitors include major pharmaceutical, chemical and specialized
biotechnology companies, many of which have financial, technical and marketing
resources significantly greater than those of the Company.
11
The Company is aware that research is being conducted by others in areas in
which the Company is seeking to establish commercial products. The Company's
competitors might offer products which, by reason of price or efficacy, may be
superior to any products that may be developed by the Company. There can be no
assurance that the discovery and introduction of products by others will not
render the Company's current or future products obsolete, or that the Company
will otherwise be able to effectively compete with such competitors.
MARKETING
The Company's revenues were derived from the following sources:
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Sales:
Research products $ 484 502 543
Custom adjuvants and research
products 2,259 1,046 347
Veterinary products - - 56
Other - 11 7
------ ------ ------
Total sales 2,743 1,559 953
Investment income, net 942 1,017 1,216
Fees from licenses and
contracts 2,834 2,042 1,848
Other 11 5 6
------ ------ ------
Total revenues $ 6,530 4,623 4,023
====== ====== ======
Export sales $ 2,262 1,205 294
====== ====== ======
The Company plans to license its products to marketing partners for all
applications. It filed for marketing approval of MELACINE in Canada in 1997 and
in Europe in early 1998. The Company plans to file in the United States later in
1998. The Company has granted worldwide, except for Canada, marketing rights for
MELACINE to Schering-Plough Corporation and marketing rights in Canada to
Biomira in exchange for license fees, milestone payments, transfer payments and
royalties. The Company will manufacture MELACINE to supply worldwide demand and
transfer finished product to its partners. In the area of vaccine adjuvants the
Company has license agreements in place. In the areas of synthetic adjuvants and
cardioprotection, if preclinical and clinical trial data are favorable, the
Company intends to grant additional licenses to marketing partners in exchange
for license fees, transfer payments and royalties on commercial sales, or a
combination thereof. For vaccine adjuvant applications, the Company would
manufacture its products as bulk intermediates for transfer to marketing
partners for finishing and distribution. The Company is currently preparing to
conduct a Phase 3 human clinical trial with a synthetic cardioprotectant in the
prevention of heart damage associated with open-heart surgery. The Company will
seek corporate partners to assist in the Phase 3 trial and share the substantial
financial risk of final development of the cardioprotectant.
In the United States the Company markets its research products through direct
mail, scientific journal and trade show advertising and markets them worldwide,
generally to nonexclusive distributors. Export sales, consisting mainly of
custom adjuvants for the Company's corporate partners' pre-marketing needs and
research products, were shipped primarily to Europe, Japan and Canada.
12
While the Company has made a decision to manufacture only health care products
for humans in its manufacturing facility, it continues to produce a limited
amount of veterinary adjuvant in appropriate conditions within its research
facility for split manufacturing agreements. Under USDA regulations it is
possible for a company that does not have a USDA license to manufacture certain
components of veterinary products and ship them to a USDA-licensed animal health
company for completion and distribution. Sales from split manufacturing
agreements have not been significant for the last three years.
RESEARCH AND DEVELOPMENT
The primary source of new product candidates is internal research, except for
the cell lines for the MELACINE melanoma theraccine antigens, which have been
licensed from the University of Southern California for a royalty fee from
commercial sales of MELACINE. Costs and expenses for research and development
activities were $5,530,000 in 1995, $6,203,000 in 1996 and $8,184,000 in 1997.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the research, preclinical development, clinical
trials, production and marketing of the Company's human biopharmaceutical
products.
FDA Approvals
- -------------
In order to produce and market human biopharmaceuticals, the Company must
satisfy mandatory procedures and meet safety and efficacy standards established
by the FDA and equivalent foreign regulatory authorities. The process of seeking
and obtaining FDA approval for the manufacturing and marketing of a new human
biopharmaceutical product may require a number of years and substantial funding.
The steps required before a human biopharmaceutical can be produced and marketed
include preclinical studies, the filing of an Investigational New Drug ("IND")
application, human clinical trials and approval of a Biologic License
Application ("BLA") or a Product License Application ("PLA") and an
Establishment License Application ("ELA"). (The BLA and PLA are both referred to
as BLA in the following paragraphs.) For synthetic drugs that might be
developed, the Company would request approval of a New Drug Application ("NDA")
rather than a BLA.
Preclinical studies are conducted in the laboratory and in animal model systems
to gain preliminary information on a product's activity and to identify major
safety problems. The results of these studies are submitted to the FDA as part
of the IND application before allowance can be obtained to begin testing in
humans. Protocols for the human trials, outlines for production of the materials
and statements describing the testing facilities are also included in the IND.
The clinical testing program required for a new biopharmaceutical product
principally involves three phases. However, in conducting actual clinical
trials, the demarcation between phases at times becomes indistinct. Phase 1
studies are conducted with human volunteers or healthy patients to determine the
maximum tolerated dose and to discover the possible side effects of the
substance. Phase 2 studies are conducted with groups of patients having a
specific disease in order to determine the most effective doses and schedules of
administration. Phase 3 involves wide-scale studies that are adequately
controlled in order to provide statistically valid data on response rates which
can be compared with current therapies, including drugs or biologics.
13
In the United States, data from Phase 1, 2 and 3 trials are submitted in a BLA
to the FDA. The BLA involves considerable data collection, verification and
analysis. It also includes the preparation of summaries of the manufacturing and
testing processes, preclinical studies and clinical trials. BLA approval by the
FDA is necessary before the product may be marketed in the United States.
During the BLA review period, in addition to consideration of the safety and
efficacy data, the FDA also determines what labeling it will require and permit
for marketing of the product. The agency may also require post-marketing testing
and surveillance for possible adverse reactions as a condition of its approval.
The Company obtained Orphan Drug designation for MELACINE in 1989 and, if
appropriate, may request Orphan Drug designation for other products. Under the
Orphan Drug Act, the FDA may grant Orphan Drug status to drugs intended to treat
a "rare disease or condition," which is a disease or condition that affects less
than 200,000 individuals in the United States or more than 200,000 persons in
the United States if there is no reasonable expectation that sales will be
sufficient to recover the costs of developing and making available the drug. If
a product is designated an Orphan Drug, then the sponsor is entitled to receive
certain incentives to undertake the development and marketing of the product,
including limited tax credits, where applicable. In addition, the sponsor that
obtains the first marketing approval for a designated Orphan Drug for a given
indication is eligible to receive marketing exclusivity for a period of seven
years. There may be multiple designations of Orphan Drug status for a given
biologic (or drug) and indication; however, only the sponsor of the first
approved BLA (or NDA) for a given biologic (or drug) for its use in treating a
given rare disease may receive marketing exclusivity. There is no assurance that
any additional products of the Company will receive Orphan Drug status. While it
may be advantageous to obtain Orphan Drug status of eligible products, there can
be no assurance that the precise scope of protection that is currently afforded
by Orphan Drug status or the current level of economic benefits and incentives
will remain in effect in the future.
Governmental Reforms
- --------------------
In the past few years health care reform has received considerable attention.
While it appears that federal governmental intervention is not imminent at this
time, certain reform measures currently being considered by various state
governments and certain related market restructuring could adversely affect the
pricing of therapeutic or prophylactic products or the amount of reimbursement
available. Such events could have an adverse impact on the profitability of
companies developing, manufacturing or marketing pharmaceutical products. The
Company cannot predict the extent of possible future governmental reforms or the
effect such reforms or other measures may have on its business.
Other Governmental Regulations
- ------------------------------
In addition to the foregoing, the Company is and will be subject to various
regulations relating to the maintenance of safe working conditions, good
laboratory and manufacturing practices and the use and disposal of harmful or
potentially harmful substances.
There can be no assurance that any required approvals will be granted on a
timely basis, if at all, or that such approvals, once granted, will not be
withdrawn. Furthermore, there is no assurance that additional regulation will
not be imposed on the Company's activities or products in the future.
14
PATENTS AND PROPRIETARY PROTECTION
The Company has obtained and applied for patents in the United States and
several foreign countries. The Company has 21 issued United States patents with
expiration dates ranging from 2001 to 2011. There is no assurance that patents
applied for by the Company will be obtained, and there can be no assurance that
the claims embodied in existing patents to which the Company has rights will not
be challenged. The issuance of a patent to the Company or to a licensor of the
Company is not conclusive as to validity or as to the enforceable scope of
claims therein. The validity and enforceability of a patent can be challenged by
a request for re-examination or litigation after its issuance and, if the
outcome of such litigation is adverse to the owner of the patent, other parties
may be free to use the subject matter covered by the patent.
There can be no assurance that additional patents will be obtained by the
Company in the United States or in other jurisdictions, or that any patents will
provide substantial protection, or be of commercial benefit to the Company. The
cost of enforcing the Company's patent rights in lawsuits which the Company may
bring against infringers or which may be brought challenging the Company's
patents may be high and could interfere with the Company's operations. The
patent laws of other countries may differ from those of the United States as to
the patentability of the Company's products and processes. Moreover, the degree
of protection afforded by foreign patents may be different from that in the
United States. On an ongoing basis, the Company reviews its patent portfolio and
has abandoned and may in the future abandon patents or patent applications for
reasons including limited protection, lack of commercial importance and limited
enforceability, among other considerations.
Although the Company attempts to protect its products and processes by seeking
patent protection when deemed appropriate, it also relies upon trade secrets,
proprietary know-how and continuing technological innovation to develop and
maintain its competitive position. Product development contracts and
relationships between the Company, its consultants and other pharmaceutical
companies may provide access to the Company's know-how. The Company requires
such parties to execute confidentiality agreements. Insofar as the Company
relies on confidentiality arrangements, there can be no assurance that others
may not independently develop similar technology or that secrecy will not be
breached.
All employees are required to sign a confidential information agreement that
contains terms assigning patent rights to the Company as well as obligations not
to use or disclose any such information during and for a period of two years
following termination of their employment.
The Company maintains an active trademark protection program in the United
States and in those foreign countries where it expects to market its products.
MELACINE melanoma theraccine, MPL immunomodulator and the Company's logo are
registered trademarks in the United States. INTRON-A is a registered trademark
of Schering-Plough Corporation and THERATOPE is a registered trademark of
Biomira, Inc. DETOX adjuvant is a trademark of the Company. In this document,
trademarks are designated with capital letters.
EMPLOYEES, CONSULTANTS AND COLLABORATORS
As of December 31, 1997, the Company had 97 full-time and 6 part-time employees.
The Company also uses outside consultants and collaborators to support and
complement the activities of its scientific staff. The Company utilizes such
15
persons to aid in specific research and development projects, rather than to act
as a general scientific advisory board.
Item 2. PROPERTIES
The Company's facilities are located near Hamilton, Montana, on a 35-acre
complex owned by the Company. Its buildings contain approximately 60,000 square
feet of laboratory, commercial-scale manufacturing, animal production, marketing
and administrative facilities. The manufacturing facility has been built to FDA
standards for Good Manufacturing Practices. The Company believes that its
present facility will meet its manufacturing and other requirements for the
foreseeable future, except that additional capacity to produce synthetic
products may be added in 1998 at a cost of approximately $200,000.
Item 3. LEGAL PROCEEDINGS
The Company, the National Institutes of Health ("NIH") and the Bitterroot Valley
Sanitary Landfill ("Landfill") were notified by the Montana Department of Health
and Environmental Sciences (now known as the Department of Environmental Quality
{"DEQ"}) in March 1991 that they had been identified as potentially responsible
parties ("PRPs") and as such are jointly and severally liable for groundwater
contamination located at and near the site of the Landfill in Ravalli County,
Montana. The Company's involvement arises out of waste materials which it
deposited at the Landfill from 1982 to 1985 which the Landfill had permits to
receive. The NIH unilaterally and voluntarily initiated and completed work
pursuant to an interim remediation plan approved by the DEQ to remove and
decontaminate the believed source of contamination and treat the aquifers which
tests have shown contain contaminants. Although decontamination of the soil at
and around the Landfill has been completed, it is believed treatment of the
groundwater in the proximity of the disposal site continues utilizing carbon
filtering and air sparging, and it is anticipated such treatment will continue
through 1998 and possibly longer. The DEQ conducted a "Risk Assessment" and
issued a "Draft Final Feasibility Study" in October 1994 that discussed possible
final remediation alternatives. In August 1995, the DEQ announced that it had
approved a second interim action in the vicinity of the Landfill being
unilaterally and voluntarily conducted by the NIH and which involves installing
individual replacement and new wells to provide both an alternate water supply
for the affected residents and to develop additional information on the site
hydrogeology. Information collected from these wells through a multi-year
monitoring program will be used by the DEQ to evaluate the effectiveness of the
remediation efforts to date. The current plan calls for the wells to be
installed in three phases: Phase I includes occupied properties with the
highest remaining contamination levels; Phase II includes occupied properties
with lesser degrees of contamination; and Phase III consists largely of vacant
properties. Preliminary studies completed in 1994 estimated the cost of the
wells to be approximately $1,400,000. The first Phase was completed in the
spring of 1996. The DEQ has not informed the Company of the status of completion
of Phases II and III. The DEQ could require the PRPs to implement further
remediation should these wells not provide sufficient quality or quantity of
water. The NIH, which has taken the lead and incurred substantially all of the
remediation costs, has represented publicly that it would continue to work with
the DEQ toward an acceptable final remediation plan. In 1993, the NIH stated
that as of that time, it had incurred costs and anticipated future interim
remediation costs which could total $2 million or more. In 1996, the DEQ filed
an action against the Company, the Landfill and the owner of the Landfill
seeking reimbursement of costs in the amount of $199,000 associated with its
oversight activities. For procedural reasons, the DEQ dismissed this action but
later reinitiated the
16
action against the Company, the Landfill and the owner of the Landfill seeking
recovery of past alleged costs associated with its oversight activities in the
amount of $238,000, as well as a declaratory judgment finding the parties liable
for future oversight costs, plus civil penalties in the event the parties fail
to comply. The Company believes that it has meritorious defenses to the claim,
including the amount thereof, and that there are other responsible parties. The
Company has filed a response to the action, including a motion to dismiss. There
can be no assurance that the Company's defenses and motion will be successful.
On March 8, 1998, the Company received a letter from the U.S. Department of
Justice indicating that, on behalf of the NIH, it intends to seek from the
Company a share of remediation costs incurred by the NIH to date as well as
anticipated future costs. The letter indicates that to date, the NIH has spent
approximately $3.4 million and expects future costs of approximately an
additional $1.0 million or more and that the NIH is entitled to contribution of
two-thirds of the total amount from the Company. Although the Company believes
it has meritorious defenses to the claim, including the amount thereof, and that
there are other responsible parties, there can be no assurance that the Company
will be successful in its defenses to claims arising out of the Landfill,
including the claims made by the NIH. While an adverse outcome could involve the
payment of significant amounts by the Company, management does not believe that
the eventual outcome will have a material adverse effect on the financial
condition of the Company. However, the Company is unable to determine its
overall potential liability with respect to the Landfill at this time. As of
December 31, 1997, the Company has accrued a reserve of approximately $190,000,
primarily to cover billed and potential legal, consulting, remediation and DEQ
reimbursement costs associated with the Company as a PRP.
In June 1997, a complaint was filed in District Court in Ravalli County against
the Company by a former employee who was discharged for cause in June 1996. The
plaintiff alleges discharge in violation of the Montana Wrongful Discharge from
Employment Act ("Act") and further, that discharge was for refusal to violate
public policy. The Court has granted dismissal with respect to that portion of
the complaint which alleges termination for refusal to violate public policy.
Plaintiff has recently filed a motion for reconsideration asking the Court to
reverse its decision with respect to the issue of termination for refusal to
violate public policy and requested the Court for permission to amend the
complaint to include additional allegations relative to the public policy issue.
If the Court refuses plaintiff's motions on the issue of violation of public
policy but if plaintiff should ultimately prevail on the issue of discharge in
violation of the Act, the potential liability of the Company would be
approximately $240,000, exclusive of attorneys' fees and related costs. If the
Court reverses its decision of dismissal with respect to the violation of public
policy issue, the Company could be subject to punitive damages in addition to
the potential liability for violation of the Act. It is not possible to estimate
what amount of punitive damages, if any, might be awarded if plaintiff were to
prevail on the violation of public policy issue. The Company believes that it
has a meritorious defense and plans to vigorously defend the suit. Because the
action is in early stages, it is not possible to reliably assess the outcome.
The plaintiff has also filed a petition for Judicial Review in District Court in
Missoula County naming the Company and the State of Montana Department of Labor
and Industry respondents and asking the Court to review and overturn the
Department of Labor's decision finding plaintiff was terminated for misconduct
as defined in MCA Section 39-51-2303 and, therefore, not allowing plaintiff to
collect unemployment benefits. The Company has filed a response arguing the
correctness of the Department of Labor's decision. It is not possible to
determine the outcome of this action at this time. However, in the event
17
plaintiff is successful, it would not have a material adverse effect on the
financial condition of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of all executive
officers of the Company. All executive officers are serving a current term of
office which continues until the next Annual Meeting of Directors, which is
expected to be held on or about April 24, 1998.
Name Age Position and Period Served
- ---- --- --------------------------
Robert E. Ivy 64 President, Chief Executive Officer
and director of the Company since
1987; Chairman of the Board of
Directors since 1989; director of
The International Heart Institute
of Montana Foundation since 1995.
John L. Cantrell, Ph.D. 59 Executive Vice President and
director of the Company since 1981.
Vern D. Child, C.P.A. 53 Vice President-Finance of the
Company since 1988; Treasurer
since 1986; Assistant
Secretary since 1989.
Gary T. Elliott, Pharm.D., 41 Vice President-Pharmaceutical
Ph.D. Development of the Company since
1994; Director of Pharmaceutical
Sciences from 1992 to 1994; Head
Immunochemist from 1988 to 1992.
Ronald H. Kullick, R.Ph., J.D. 55 Vice President-Legal Counsel and
Secretary of the Company since
1989.
Charles E. Richardson, Ph.D. 46 Vice President-Pharmaceutical
Discovery of the Company since
1994; Director of Production,
Engineering and Technical Services
from 1989 to 1994.
Kenneth B. Von Eschen, Ph.D. 49 Vice President-Clinical and
Regulatory Affairs of the Company
since 1994; Director of Clinical
and Regulatory Affairs from 1992 to
1994; Manager or Clinical and
Regulatory Affairs from 1988 to
1992.
18
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the Symbol:
RIBI. The high and low sales prices shown below were compiled from the monthly
Summary of Activity reports provided by The Nasdaq Stock Market. The prices
represent interdealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions. As of March 4, 1998, the Company had
approximately 1,527 stockholders of record.
1997 1996
---- ----
High Low High Low
---- --- ---- ---
First quarter $ 5.63 3.75 6.88 4.75
Second quarter 4.88 3.38 6.25 4.13
Third quarter 4.69 3.44 4.88 3.50
Fourth quarter 4.75 3.50 4.38 3.13
The Company has not declared any cash dividends with respect to its common
stock. The Company does not intend to declare or pay any cash dividends on its
common stock, and there can be no assurance that the Company will ever declare
or pay cash dividends on its common stock.
Item 6. SELECTED FINANCIAL DATA
The selected financial information below should be read in conjunction with the
Company's historical financial statements and notes. Such information may not be
indicative of the Company's future financial condition or results of operations.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except per Share Data)
Year Ended December 31,
- ----------------------
Sales & other revenues $ 2,754 1,564 959 1,019 871
Licenses and contracts 2,834 2,042 1,848 2,075 1,307
Investment income, net 942 1,017 1,216 1,460 984
Net loss (6,417) (5,589) (5,317) (3,790) (3,684)
Net loss per common
share (.32) (.30) (.28) (.20) (.25)
Dividends per common
share - - - - -
Research & development
expenses 8,184 6,203 5,530 4,993 3,730
Average number of
shares outstanding 20,072 18,890 18,877 18,657 14,658
December 31,
Cash, cash equivalents
& investments $ 13,370 14,512 19,824 25,967 29,140
Total assets 27,770 28,298 33,911 38,824 35,468
Long-term debt - - - - -
Stockholders' equity 25,415 26,847 32,427 37,338 34,557
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its inception in 1981, the Company has been engaged primarily in the
research and development of immunostimulants for use in preventing and treating
human diseases. To date, the Company has received limited revenues from
commercial sales and sales of clinical supplies. The Company has incurred net
operating losses in each year since its inception and expects to incur
additional losses for the next year, and probably longer. At December 31, 1997,
the Company's accumulated deficit was approximately $42,053,000.
The Company's results of operations can vary significantly from quarter to
quarter and depend, among other factors, on costs related to the progress of its
research and development, including the preparation of commercial license
applications and, to a lesser extent, on revenues and costs associated with
manufacturing. To date, research and development expenses, together with
manufacturing costs, have exceeded product and other revenues in all periods.
The Company is not able to estimate with certainty the amount of cash and
working capital that may be needed for operations. Such requirements typically
vary depending upon the results of basic research and clinical trials, the time
and expense required for governmental approval of products, and competitive and
technical developments, most of which are beyond management's control. There is
no assurance that the Company will be able to obtain the necessary funding in
sufficient amounts or at the appropriate time for its planned activities. In the
event the Company may require additional funding and is not successful in
obtaining additional funding, it might not be able to proceed as rapidly as it
would like, if at all, with the development and commercialization of its
products, which would have a material adverse effect on its future financial
condition and results of operations.
In computer systems and applications developed in the 1970s and 1980s, years
were often stored in a 2-digit rather than 4-digit format to save expensive
computer storage and processing space. These systems correctly assumed the 2-
digit year in data storage was preceded by the digits "19". At year 2000, a 2-
digit date of "00" may not be interpreted correctly by these systems, which
could lead to incorrect or inadequate results. The Company has established a
committee which has made a preliminary assessment of the Company's exposure to
the "Year 2000" problem. The Company expects to incur both internal staffing
costs, as well as consulting and other expenses related to these issues. These
costs will be expensed as incurred. Preliminary assessment indicates that
resulting solutions will involve a mix of purchasing new systems and modifying
existing systems. The Company is working to solve these issues in a timely
manner, but there can be no assurance that all of the Year 2000 problems will be
resolved before the end of 1999 or that all of the Company's vendors and
customers will be year 2000 compliant. The Company is not able to estimate at
this time the potential costs associated with the Year 2000 problem.
Pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, several forward-looking statements that involve a number of
risks and uncertainties are included within this Management's Discussion and
Analysis of Financial Condition and Results of Operations. In addition to the
risks and uncertainties discussed with the forward-looking statements, there are
a number of other factors that could cause actual results to differ materially
from projected results, including but not limited to the following: levels of
20
expenditure on and results of the Company's research and the impact of those
results on milestone and transfer payments from partners, research results of
other companies using the Company's products, competition from other companies,
changes in government regulation, including price controls for newly developed
drugs, and risk factors listed from time-to-time in the Company's SEC reports.
Forward-looking statements herein are followed by an asterisk ("*").
RESULTS OF OPERATIONS
Revenues
- --------
The Company has received limited revenues from commercial sales and sales of
clinical supplies. The balance of its revenues has been from contracts and
licenses and investment income earned on cash balances and investments. The
Company anticipates that its revenues from operations, which increased from
approximately $4,023,000 in 1995 to approximately $4,623,000 in 1996 and to
approximately $6,530,000 in 1997, will continue to be limited for the next year,
and possibly longer.*
Fees from licenses and contracts increased from $1,848,000 in 1995 to $2,042,000
in 1996 and to $2,834,000 in 1997. In 1996 increased revenues from the
agreements with SmithKline Beecham ("SB") signed in late 1995 more than offset
revenue from a research contract with SB, which expired at the end of 1995. In
1996 the Company signed a fourth license agreement with SB for use of its
adjuvants in allergy vaccines, and in January 1997 a fifth agreement was signed
granting SB use of the Company's adjuvants in various vaccines being developed
by SB. This most recent agreement, which was effective as of December 31, 1996,
grants SB an exclusive license to use the Company's adjuvants in a human
papillomavirus vaccine, a co-exclusive license for a tuberculosis vaccine and a
non-exclusive license to use the Company's adjuvants in the development of
additional infectious disease as well as other vaccines. In addition to annual
license fees, the Company will receive transfer payments for clinical and
commercial quantities of adjuvant and royalties on any commercial sales of
vaccines incorporating the Company's adjuvant.* To date there have been no sales
of adjuvants pursuant to licensing agreements. Of the five agreements with SB,
three are in the area of infectious diseases, one is in the area of cancer and
one is in the area of allergies.
Investment income decreased from $1,216,000 in 1995 to $1,017,000 in 1996 and
$942,000 in 1997. The year-to-year reduction in investment income has been due
substantially to reductions in the amount of funds available for investment
during the periods. The average interest rate in the investment portfolio
increased from approximately 5.59% at December 31, 1995 to 6.03% at December 31,
1996 and 6.14% at December 31, 1997. Additionally, losses, net of gains,
realized from sales of investments were approximately $71,000 in 1995 and
$11,000 in 1997.
Purchases and Production
- ------------------------
Purchases and production costs increased from $775,000 in 1995 to $988,000 in
1996 and to $1,337,000 in 1997. Such costs, as a percentage of sales, have been
declining during this three year period as the volume of products manufactured
in the manufacturing facility has increased. As throughput increases, the cost
per unit should decrease until plant capacity is reached, if ever.* It is
possible that material, labor and other costs will be higher than expected or
that throughput will not reach the levels planned.
21
Research and Development
- ------------------------
The Company incurred research and development expenses of approximately
$5,530,000, $6,203,000, and $8,184,000 in 1995, 1996 and 1997, respectively. The
year-to-year increase principally reflects the increasing costs of expanding
preclinical and clinical programs for the Company's products under development,
and in 1997, additional costs of preparing and filing commercial license
applications. These expenses consisted primarily of salaries, contract
consulting costs and laboratory supplies. Labor costs decreased from
approximately 47% of total research and development costs in 1995 to 43% in 1996
and 36% in 1997. Supply costs have ranged from 21% to 22% of total research and
development expenses throughout the three-year period. Contract consulting costs
increased from approximately 22% of total research and development expenses in
1995 to 27% in 1996 and 36% in 1997. The year-to-year increase in expense can be
attributed to increased clinical, preclinical and commercial licensing
activities. The Company expects research and development expenses to be fairly
level between 1997 and 1998, as it plans to continue its preclinical development
programs, file commercial license applications for MELACINE in Europe and the
United States and complete patient accrual in its Phase 3 clinical trial testing
MELACINE administered in conjunction with interferon alfa-2b to treat patients
with late-stage melanoma.* Level research and development expenses are
dependent, among other things, on the Company's ability to attract patients to
its clinical trials, the results experienced in trials and the acceptance of
regulatory filings by various regulatory agencies.
Selling, General and Administrative
- -----------------------------------
Selling, General and Administrative expenses remained relatively flat at
approximately $3,035,000 and $3,021,000 in 1995 and 1996, respectively, and
increased to $3,426,000 in 1997. During this three-year period, labor costs
decreased from $1,636,000 in 1995 to $1,591,000 in 1996 and increased to
$1,692,000 in 1997. In 1997 the increase in costs is mainly attributable to
greater investor relations efforts, higher maintenance costs and added
depreciation. The Company allocates part of its administrative and depreciation
costs, which are directly related to manufacturing, to the cost of producing
products for sale and for use in clinical trials. Such costs allocated in each
year 1995, 1996 and 1997 were $638,000, $808,000 and $837,000, respectively.
Net Loss
- --------
The Company's net loss increased from $5,317,000 in 1995 to $5,589,000 in 1996
and to $6,417,000 in 1997. Its net loss per share over the same period was $.28
per share in 1995, $.30 per share in 1996 and $.32 per share in 1997. The
weighted average number of shares outstanding increased approximately 6% from
1996 to 1997. The increase reflects shares issued in a sale of stock and
warrants to SB in January 1997 and the exercise of unrelated warrants in July
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from the issuance and sale of
equity securities, limited sales of products, interest earned on investments and
payments under contract research and license agreements. The financing sources
have, to date, enabled the Company to maintain adequate liquidity. Cash, cash
equivalents and investments totaled approximately $13,370,000 at December 31,
1997, as compared to approximately $14,512,000 at December 31, 1996.
22
The principal uses of cash during 1997 were approximately $5,203,000 for
operations and approximately $796,000 for plant and equipment. The Company used
approximately 11% more cash in operations in 1997 than in 1996, reflecting on a
cash basis increased revenues, which were more than offset by higher research
and product development expenses. Increased cash basis revenues represent cash
collected in January and December 1997 under a license and option agreement,
which was signed in 1997 and effective in December 1996. Cash requirements for
operating activities in 1998 are expected to increase only slightly over 1997
levels.* While revenues are expected to increase in 1998, expenses are expected
to continue to outpace revenue as the Company expands its efforts to discover
new products and continue its work in clinical and regulatory areas.* Projected
cash requirements are dependent upon the Company receiving the revenues that are
anticipated and conducting the research, particularly the clinical trials and
commercial regulatory filings, that are projected. It is possible that sales
could be lower, because customers may not order as much material as expected. It
is also possible that patient accrual within planned clinical trials will be
slower than anticipated or the results of the trials or other research will not
be as expected.
The Company did not raise significant amounts of cash outside of operations
during 1995 or 1996. In 1997 the Company's primary sources of cash were
approximately $3,963,000 from the sale of approximately 1,103,000 shares of
common stock to SB and $963,000 from the exercise of outstanding warrants and
stock options. At December 31, 1996, the Company had warrants and options
outstanding to acquire shares and warrants which were issued in private
placements in 1991 and 1992 at exercise prices ranging from $3.00 to $8.25 per
share. All such warrants were scheduled to expire in 1997 if not exercised. In
January 1997 the Company decided to extend the expiration date of the warrants
and options, which were to expire in April 1997, to July 31, 1997, and reduce
the exercise price of the options from $8.25 to $6.00 per share. The change was
made to preserve for the Company the opportunity to raise additional capital at
a very economical cost if the warrants were exercised. In July 1997, all of the
$3.00 warrants were exercised and all of the $6.00 warrants and options expired
without exercise. The Company still has outstanding warrants to purchase 500,000
shares at $5.00 per share that were issued to SB in 1997 as part of its stock
purchase agreement. These warrants expire if not exercised by January 1, 2000.
Additionally, SB has the right to make an additional equity investment of up to
$2,000,000 at any time through January 1, 1999, at the market price of the stock
at the time of the investment.
The Company will require substantial additional funds to continue its research
and development programs and to commercialize its products under development.
Future capital requirements will depend upon a number of factors, including the
rate of expenditure on and the progress of the Company's research and
development programs, the time and cost to obtain regulatory approvals, and
demand for products based on the Company's technology. The Company believes that
its available cash, cash equivalents and investments together with funds from
licensing agreements and product sales should be sufficient to meet its capital
requirements through 1999.*
Item 3 "Legal Proceedings" on page 16 of this report on Form 10-K contains a
discussion of contingencies related to the Company's identification as a
Potentially Responsible Party for groundwater contamination at and near the
Bitterroot Valley Sanitary Landfill, the Company being a named defendant in a
suit brought by the Montana Department of Environmental Quality seeking to
recover alleged costs associated with its oversight activities of the Landfill,
23
and a request for contribution of remediation costs incurred by the NIH. Item 3
also contains information regarding a suit filed by a former employee.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . 25
Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . 26
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 27
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . 28
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 30
24
RIBI IMMUNOCHEM RESEARCH, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ribi ImmunoChem Research, Inc.:
We have audited the accompanying balance sheets of Ribi ImmunoChem Research,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ribi ImmunoChem Research, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Billings, Montana
January 17, 1998
25
RIBI IMMUNOCHEM RESEARCH, INC.
BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
----------------------
1997 1996
-------- --------
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,224 432
Available-for-sale investment securities
and accrued interest 12,146 14,080
Accounts receivable 870 52
Inventories 1,250 1,268
Other current assets 234 273
-------- --------
Total current assets 15,724 16,105
Property, plant and equipment, net 11,453 11,601
Other assets, net 593 592
-------- --------
Total assets $ 27,770 28,298
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 611 318
Accrued liabilities 614 570
Deferred revenue 1,130 563
-------- --------
Total current liabilities 2,355 1,451
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.10 par, 10,000,000
authorized shares; none issued and
outstanding - -
Common stock, $.001 par; 30,000,000 authorized
shares; 20,311,623 and 18,891,443 issued and
outstanding in 1997 and 1996, respectively 20 19
Additional paid-in capital 67,485 62,492
Unrealized investment holding losses (37) (28)
Accumulated deficit (42,053) (35,636)
-------- --------
Total stockholders' equity 25,415 26,847
-------- --------
Total liabilities and stockholders'
equity $ 27,770 28,298
======== ========
See accompanying notes to financial statements.
26
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Data)
Years Ended December 31,
1997 1996 1995
-------- -------- --------
Revenues:
Sales $ 2,743 1,559 953
Contracts and licenses 2,834 2,042 1 848
Investment income, net 942 1,017 1,216
Other, net 11 5 6
-------- -------- --------
6,530 4,623 4,023
Costs and expenses:
Purchases and production 1,337 988 775
Research and development 8,184 6,203 5,530
Selling, general and administrative 3,426 3,021 3,035
-------- -------- --------
12,947 10,212 9,340
-------- -------- --------
Net loss $ (6,417) (5,589) (5,317)
======== ======== ========
Net loss per common share $ (.32) (.30) (.28)
======== ======== ========
Average number of shares outstanding 20,072 18,890 18,877
======== ======== ========
See accompanying notes to financial statements.
27
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
Unreal-
Addi- ized Total
tional Holding Accumu- Stock-
Common Paid-in Gains lated holders'
Stock Capital (Losses) Deficit Equity
----- ------- ------ ------- ------
Balance at December 31, 1994 $ 19 62,377 (328) (24,730) 37,338
Issuance of 3,000 shares
under stock grant program - 12 - - 12
Issuance of 14,050 shares
upon exercise of options - 40 - - 40
Compensation relating to
stock options - 31 - - 31
Unrealized gain on investment
securities, net - - 323 - 323
Net loss - - - (5,317) (5,317)
----- ------ ----- ------ ------
Balance at December 31, 1995 19 62,460 (5) (30,047) 32,427
Issuance of 1,400 shares
under stock grant program - 6 - - 6
Issuance of 1,800 shares
upon exercise of options - 6 - - 6
Compensation relating to
stock options - 20 - - 20
Unrealized loss on investment
securities, net - - (23) - (23)
Net loss - - - (5,589) (5,589)
----- ------ ----- ------ ------
Balance at December 31, 1996 19 62,492 (28) (35,636) 26,847
Issuance of 3,000 shares
under stock grant program - 13 - - 13
Issuance of 22,400 shares
upon exercise of options - 89 - - 89
Sale of 1,103,448 shares in
a private placement, net 1 3,962 - - 3,963
Issuance of 291,332 shares
upon exercise of warrants - 874 - - 874
Compensation relating to
stock options - 55 - - 55
Unrealized loss on investment
securities, net - - (9) - (9)
Net loss - - - (6,417) (6,417)
----- ------ ----- ------ ------
Balance at December 31, 1997 $ 20 67,485 (37) (42,053) 25,415
===== ====== ===== ====== ======
See accompanying notes to financial statements.
28
RIBI IMMUNOCHEM RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net loss $ (6,417) (5,589) (5,317)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 1,002 935 817
Common stock grants 13 6 12
Compensation relating to stock
options 55 20 31
Discount accretion (17) (415) (460)
Abandoned patents and asset sales 18 18 8
Changes in operating assets and
liabilities:
Accounts receivable (818) 673 (584)
Inventories 18 (285) (305)
Other current assets 39 (23) 40
Accounts payable 293 65 (122)
Accrued liabilities 44 (31) 22
Deferred revenue 567 (67) 442
-------- -------- --------
Net cash used by operating
activities (5,203) (4,693) (5,416)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (796) (924) (1,475)
Payments for other assets (78) (93) (78)
Proceeds from sale of assets 1 - 3
Proceeds from maturities of
held-to-maturity securities - 3,121 7,239
Proceeds from maturities and
sales of available-for-sale securities 8,214 4,784 3,663
Purchases of available-for-sale
securities (6,272) (1,956) (327)
Purchases of held-to-maturity
securities - (97) (4,079)
-------- -------- --------
Net cash provided by
investing activities 1,069 4,835 4,946
-------- -------- --------
Cash flows from financing activities:
Sale of common shares, net 3,963 - -
Proceeds from exercise of warrants 874 - -
Proceeds from exercise of options 89 6 40
-------- -------- --------
Net cash provided by financing
activities 4,926 6 40
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 792 148 (430)
Cash and cash equivalents at beginning
of year 432 284 714
-------- -------- --------
Cash and cash equivalents at end of year $ 1,224 432 284
======== ======== ========
See accompanying notes to financial statements.
29
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
OPERATIONS. Ribi ImmunoChem Research, Inc. (the "Company") was incorporated
on January 9, 1981, and is principally engaged in the development of
biopharmaceutical products that stimulate the immune system to generate a
cascade of natural agents and signals to prevent and treat human disease.
The Company also engages in related activities such as the custom formula-
tion and sale of research products and contract research.
REVENUE RECOGNITION. Revenues from the sale of research products are
recognized when products are shipped to customers. Revenues from contract
research are recognized as related expenses are incurred. Nonrefundable
license fees received in connection with product license agreements are
deferred and recognized over the term of the contract.
CASH EQUIVALENTS. In the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity on the date of acquisition
of three months or less to be cash equivalents.
INVESTMENT SECURITIES. Investment securities consist of marketable debt
securities and mutual funds that have invested in marketable debt
securities. All investment securities are available to support current
operations and are, therefore, classified as "available-for-sale." These
available-for-sale securities are recorded at fair value, which is based on
quoted market prices.
Any gains and losses from the sale of investment securities are computed
under the specific identification method. Unrealized holding gains and
losses, net of related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stock-
holders' equity until realized. Unrealized losses, if any, for all
investment securities that are other than temporary are charged against
earnings.
INVENTORIES. Inventories are stated at the lower of cost or market on a
specific identification basis. Cost is based on the actual costs associated
with producing the inventories, which include direct labor and materials,
quality control and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost and depreciated on a straight-line basis over estimated useful lives
of 25 to 40 years for buildings and 3 to 12 years for equipment, furniture
and fixtures. Maintenance and repairs are charged to expense as incurred.
Significant betterments are capitalized.
NET LOSS PER COMMON SHARE. During 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 (Earnings
per Share) which deals with the computation and presentation of earnings
per share. The Company was not required to make any changes in the
computation of earnings per share resulting from the adoption of the new
standard for the year 1997 or for any previously reported year. Net loss
per common share is based on the weighted average number of shares
outstanding. Diluted net loss per common share is not presented, as the
effect is antidilutive.
30
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
The Company has certain warrants and stock options outstanding that are
described in Notes 5 and 6 of the Notes to Financial Statements that could
potentially dilute earnings per share in the future.
PATENTS AND OTHER ASSETS. Other assets consist principally of the costs of
patents filed, deferred patent application costs and patent maintenance
costs. Such costs are amortized on a straight-line basis over the estimated
remaining useful lives of the patented technology ranging from 3 to 20
years. Unsuccessful patent application costs are expensed when the patent
is denied or abandoned.
INCOME TAXES. The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes. Deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities and are
measured by applying enacted tax rates to taxable years in which such
differences are expected to reverse. The current and noncurrent portions of
these deferred tax assets and liabilities are classified in the balance
sheet based on the respective classification of the assets and liabilities
which give rise to such deferred income taxes. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in tax
expense in the period that includes the enactment date.
STOCK-BASED EMPLOYEE COMPENSATION. From time-to-time the Company grants to
its employees stock and/or options to purchase stock. In the case of stock
grants, compensation expense is recognized by the Company at the time of
the grant in the amount of the market value of the stock on the grant date.
Compensation expense for the grant of stock options is recognized only when
the market value of the underlying stock exceeds the exercise price of the
stock option on the grant date. Any such compensation expense is charged to
expense over the term that the options vest to the optionee.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS. The carrying amounts for cash,
cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short duration of those
instruments.
ESTIMATES. Management of the Company has made certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
RECLASSIFICATION. Certain reclassifications have been made to the prior
year financial statements to conform to the 1997 presentation of accrued
interest receivable.
31
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(2) Investment Securities
The following is a summary of the Company's investment securities as of
December 31, 1997 and 1996:
Fair
Amortized Market Unrealized Unrealized
December 31, 1997 Cost Value Gains Losses
----------------- --------- --------- ---------- ----------
(In Thousands)
Mutual funds investing primarily
in short to intermediate term
securities of the U.S.
Government and its agencies $ 4,717 4,661 - 56
Securities of the U.S. Government
and its agencies 3,453 3,470 17 -
Corporate mid-term notes 3,367 3,369 3 1
Insured certificates of deposit 508 508 - -
--------- --------- --------- ---------
12,045 12,008 20 57
Accrued interest 138 138 - -
--------- --------- --------- ---------
$ 12,183 12,146 20 57
========= ========= ========= =========
December 31, 1996
-----------------
Mutual funds investing primarily
in short to intermediate term
securities of the U.S.
Government and its agencies $ 4,945 4,849 - 96
Securities of the U.S. Government
and its agencies 5,596 5,634 38 -
Corporate mid-term notes 2,894 2,925 33 2
Insured certificates of deposit 561 560 - 1
--------- --------- --------- ---------
13,996 13,968 71 99
Accrued interest 112 112 - -
--------- --------- --------- ---------
$ 14,108 14,080 71 99
========= ========= ========= =========
Substantially all debt securities at December 31, 1997 mature within one year.
During 1997 the Company sold shares of debt mutual funds for $500,000 and
realized a book loss of approximately $11,000. During 1996 the Company sold
shares of debt mutual funds for $425,000. Book gains realized on the sales
totaled approximately $3,000 and book losses realized totaled approximately
$3,000.
32
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(3) Inventories
Inventories are as follows:
December 31,
---------------------------
1997 1996
---------- ----------
(In Thousands)
Raw materials $ 132 96
Work in process 1,053 1,092
Finished goods 65 80
---------- ----------
$ 1,250 1,268
---------- ----------
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
---------------------------
1997 1996
---------- ----------
(In Thousands)
Buildings $ 9,629 9,604
Equipment, furniture and fixtures 7,149 6,519
---------- ----------
16,778 16,123
Less accumulated depreciation 5,598 4,711
---------- ----------
11,180 11,412
Construction in progress 84 -
Land 189 189
---------- ----------
$ 11,453 11,601
========== ==========
(5) Stockholders' Equity
In early 1997, effective December 31, 1996, SmithKline Beecham ("SB") purchased
1,103,448 shares of common stock for $4,000,000. SB has the right to make an
additional equity investment of up to $2,000,000 at any time through January 1,
1999, at the then market price. Additionally, with the stock purchase SB
acquired warrants to purchase 500,000 shares of stock at $5.00 per share. The
warrants expire if not exercised by January 1, 2000.
At December 31, 1996, the Company had warrants and options outstanding to
purchase 1,092,402 shares at prices ranging from $3.00 to $8.25 per share. These
warrants and options were issued in connection with sales of stock in 1991 and
1992. In January 1997 the Company extended the expiration date of warrants and
options to purchase 801,070 shares, which were to expire in April 1997, to July
31, 1997. At the same time the exercise price of all $8.25 options was reduced
to $6.00 per share. On July 31, 1997, these warrants and options all expired
without exercise. Warrants to purchase 291,332 shares of common stock at $3.00
per share were exercised for $874,000.
33
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(6) Stock Compensation Plans
The Company has a stock grant program under which common stock may be issued to
key employees, consultants and other persons providing services deemed important
to the Company. The program requires the employee to assign to the Company all
know-how, patents and proprietary information developed while employed by, or
developed as a result of employment with the Company and to agree not to engage
in any activity which could be considered to be in competition with the
Company's proposed business while employed by the Company. If the employee
violates any one of these conditions, the shares issued pursuant to the program
shall revert to the Company. Non-employees receiving grants are not subject to
the conditions imposed on employees receiving grants. Additionally, the Company
grants 100 shares of stock to each employee who is not an officer of the Company
after completion of one year of employment. Such 100 share grants are not
subject to the forfeiture conditions described above.
The following table sets forth the activity in the stock grant program for the
years ended December 31, 1997, 1996 and 1995
Years Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Shares available at beginning
of year 27,968 29,368 32,368
Shares granted 3,000 1,400 3,000
------ ------ ------
Shares available at end
of year 24,968 27,968 29,368
====== ====== ======
Weighted average grant date
fair value $ 4.13 4.57 4.03
====== ====== ======
The Company has a stock option plan called the 1996 Stock Option Plan ("Plan").
Under the Plan all full- or part-time employees are eligible to receive
incentive stock options and nonqualified stock options, and certain directors
and consultants are eligible to receive nonqualified stock options. Any option
granted under the Plan may include a stock appreciation right (SAR) to surrender
to the Company all, or a portion, of the option in exchange for cash or stock,
the sum of which is equal to the value of the excess of fair market value of the
common stock over the option price. The Plan provides for awarding options for a
maximum of 900,000 shares with an exercise price not less than fair market value
at the date of grant, except for options awarded to certain directors. Options
are nontransferable and expire if not exercised within ten years from the date
of the grant. Options can be exercised in cumulative installments over a vesting
schedule set by the Company's Board of Directors. Through December 31, 1997, all
options granted from the Plan to employees can be exercised in cumulative
installments of 20% per year beginning on the date of the grant. Vesting of
discounted stock options issued to certain directors is discussed below.
The Company also has a stock option plan that was approved by stockholders in
1986. The 1986 plan expired in 1996 and no new options can be granted under it.
However, options already granted (1,283,000 shares, net of forfeited options)
can be exercised for a period of ten years from the date of grant. The terms of
the 1986 plan were very similar to the ones described for the 1996 Plan. All
options
34
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
granted under the 1986 plan, except for discounted stock options issued to
certain directors as discussed below, can be exercised in cumulative
installments of 20% per year beginning on the date of the grant.
Both stock option plans provide for the issuance of nonqualified stock options
with an exercise price which is 20% below the market price of the Company's
common stock on the grant date. The discounted stock options may be awarded to
directors who are not employees of the Company who elect to receive the
discounted stock options rather than cash for all or a portion of their director
fees. The directors are required to make the voluntary election at least six
months prior to the beginning of each calendar year. The number of options to be
granted is determined by dividing the amount of the foregone cash compensation
by the amount of the per share price discount on the grant date. Such options
are granted at the end of each calendar quarter and are fully vested on the
grant date. The options, which expire if not exercised within ten years from the
grant date, are exercisable after a six month period following the grant date.
During 1996 the Company's Board of Directors adopted the 1996 Directors Stock
Option Plan ("Directors Plan") for directors who are not employees of the
Company. The Directors Plan was approved by stockholders in 1997. The plan
provides for the grant of nonqualified options to purchase a maximum of 210,000
shares of common stock. Each director who is not an employee was granted options
to purchase 30,000 shares on the later of the date the plan was adopted or on
the date he first became a director. In addition, immediately following each
annual meeting of the Company's stockholders, each director who is not an
employee who continues as a director after the meeting will be granted options
to purchase 500 shares. The exercise price of the options is the market price on
the date of the grant. The options vest and can be exercised at the rate of 50%
on the date of grant and 25% on each anniversary of the grant date. The options
expire if not exercised within ten years of the grant date. During 1996 and
1997, options to purchase 150,000 shares at $4.00 per share and 2,500 shares at
$3.63 per share, respectively, were granted under the plan. None of the options
have been exercised.
The following table sets forth the activity in the 1986 and 1996 stock option
plans and the 1996 directors stock option plan for the years ended December 31,
1995, 1996 and 1997. There were no SARs outstanding under the plans during the
three year period ended December 31, 1997.
35
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
Options for Employees Discounted Options
and Directors for Directors
-------------------- --------------------
Average Average Total
Common Exercise Common Exercise Common
Shares Price Shares Price Shares
------ ----------- ------ ----------- ------
Shares under option:
Outstanding at
December 31, 1994 979,575 $ 6.08 38,676 $ 4.71 1,018,251
Granted 96,000 3.92 19,720 3.65 115,720
Exercised (14,050) 2.81 - - (14,050)
Canceled (115,475) 6.20 - - (115,475)
--------- ------- ---------
Outstanding at
December 31, 1995 946,050 5.90 58,396 4.35 1,004,446
Granted 432,779 5.26 9,568 3.34 442,347
Exercised (1,800) 3.19 - - (1,800)
Canceled (33,100) 6.24 (7,694) 4.42 (40,794)
--------- ------- ---------
Outstanding at
December 31, 1996 1,343,929 5.44 60,270 4.18 1,404,199
Granted 128,500 3.65 13,864 3.32 142,364
Exercised (22,400) 3.96 - - (22,400)
Canceled (80,400) 7.16 - - (80,400)
--------- ------- ---------
Outstanding at
December 31, 1997 1,369,629 $ 5.20 74,134 $ 4.02 1,443,763
========= ======= =========
Options exercisable at:
December 31, 1995 591,700 $ 5.90 51,378 $ 4.32 643,078
December 31, 1996 864,506 5.71 53,369 4.31 917,875
December 31, 1997 1,032,372 5.49 65,181 4.14 1,097,553
Ranges of exercise
prices and average months
(mo) to expiration of:
Options outstanding at
December 31, 1997
$1.50 (34 mo) 2,000 $ 1.50 - $ - 2,000
$2.95-$4.90 (91 mo) 619,950 3.89 65,500 3.69 685,450
$5.75-$7.50 (65 mo) 719,429 6.21 8,634 6.49 728,063
$8.00-$8.63 (62 mo) 28,250 8.32 - - 28,250
--------- ------- ---------
1,369,629 74,134 1,443,763
========= ======= =========
Options exercisable at
December 31, 1997
$1.50 (34 mo) 2,000 $ 1.50 - $ - 2,000
$2.95-$4.90 (82 mo) 341,300 3.86 56,547 3.78 397,847
$5.75-$7.50 (63 mo) 660,822 6.23 8,634 6.49 669,456
$8.00-$8.63 (62 mo) 28,250 8.32 - - 28,250
--------- ------- ---------
1,032,372 65,181 1,097,553
========= ======= =========
36
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
The Company has entered into a Stock Option Agreement with its Chief Executive
Officer, President and Chairman ("CEO"). Pursuant to the 1987 agreement, and
later agreements, the CEO was granted options to purchase 228,000 shares of
common stock at prices ranging from $2.63 to $3.00 per share. All of the CEO's
options under this agreement were to expire if not exercised by June 30, 1997.
In April 1997 the Company's Board of Directors extended the expiration date of
the options to June 30, 2000. The CEO did not exercise any options in 1995, 1996
or 1997. At December 31, 1997, there are options outstanding to purchase 50,000
shares at $3.00 per share, all of which are exercisable. Additionally, the CEO
has been granted options to purchase stock under the Company's stock option
plans described above.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("Standard"). The Standard recommends a
fair value method of accounting for stock based compensation plans. The Standard
also allows companies the option to continue accounting for plans based on
Accounting Principles Board Opinion No. 25 and related interpretations provided
that they make certain additional disclosures. The additional disclosures
include pro forma net income and earnings per share based upon the provisions of
the Standard. Accordingly, the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25 in accounting for its employee stock
based compensation plans. As a result, no compensation expense has been
recognized relative to its employees where the exercise price of the option
equaled or exceeded the stock's market value on the grant date. Compensation
expense recognized relative to directors who receive discounted stock options
rather than cash for directors' fees totaled $12,000, $8,000 and $18,000 in
1997, 1996 and 1995, respectively. Compensation expense recognized from grants
of stock totaled $12,000, $6,000 and $12,000 in 1997, 1996 and 1995,
respectively. Compensation expense recognized from the extension of the
expiration date of the CEO's stock options totaled $31,000 in 1997. If
compensation cost for the stock option plans would have been determined for
employees and directors, other than directors receiving discounted options,
consistent with the Standard, the Company's net loss and basic loss per common
share would have been increased to the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net loss (In Thousands)
As reported $ 6,417 5,589 5,317
Pro forma 6,818 6,018 5,365
Basic loss per common share
As reported $ .32 .30 .28
Pro forma .34 .32 .28
Weighted average fair value of options
granted during the year $ 2.13 2.93 2.49
The pro forma amounts in the preceding table only include the vested portion of
the fair value of stock options granted after December 31, 1994, as required by
the Standard. Because some of the options granted prior to December 31, 1994,
vest during this phase-in period and the value is not included, the pro forma
amounts are not likely to be representative of the effects on future reported
net loss and net loss per share. The fair value has been determined using the
Black-Scholes
37
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
formula, which requires the Company to make several assumptions, some of which
are listed below.
Options Granted In
------------------
1997 1996 1995
---- ---- ----
Average risk-free interest rate 6.6% 6.2% 7.1%
Average expected life (years) 5.6 6.5 6.5
Average annualized expected volatility .556 .573 .573
Expected dividends None None None
(7) Commitments and Contingencies
The Company has an employment agreement with its Chief Executive Officer,
President and Chairman, which currently provides for an annual salary of
$258,000. The agreement requires the payment of the salary, adjustable annually,
through June 30, 1998, unless there is termination for "cause," or until
extended.
The Company carries $10 million in product liability insurance for its products
which are being used in clinical trials and for commercial sales, when approved,
of MELACINE melanoma theraccine. The Company is self-insured for product
liability for research products and veterinary products being marketed. In
addition, the Company has agreed to indemnify its directors and officers for
liabilities incurred as a result of their positions with the Company.
The Company, the National Institutes of Health ("NIH") and the Bitterroot Valley
Sanitary Landfill ("Landfill") were notified by the Montana Department of Health
and Environmental Sciences (now known as the Department of Environmental Quality
{"DEQ"}) in March 1991 that they had been identified as potentially responsible
parties ("PRPs") and as such are jointly and severally liable for groundwater
contamination located at and near the site of the Landfill in Ravalli County,
Montana. The Company's involvement arises out of waste materials which it
deposited at the Landfill from 1982 to 1985 which the Landfill had permits to
receive. The NIH voluntarily initiated and completed work pursuant to an interim
remediation plan approved by the DEQ to remove and decontaminate the believed
source of contamination and treat the aquifers, which tests have shown contain
contaminants. Although decontamination of the soil at and around the Landfill
has been completed, it is believed treatment of the groundwater in the proximity
of the disposal site continues utilizing carbon filtering and air sparging, and
it is anticipated such treatment will continue through 1998 and possibly longer.
The DEQ conducted a "Risk Assessment" and issued a "Draft Final Feasibility
Study" in October 1994 that discussed possible final remediation alternatives.
In August 1995, the DEQ announced that it had approved a second interim action
in the vicinity of the Landfill being voluntarily conducted by the NIH and which
involves installing individual replacement and new wells to provide both an
alternate water supply for the affected residents and to develop additional
information on the site hydrogeology. Information collected from these wells
through a multi-year monitoring program will be used by the DEQ to evaluate the
effectiveness of the remediation efforts to date. The current plan calls for the
wells to be installed in three phases: Phase I includes occupied properties
with the highest remaining contamination levels; Phase II includes occupied
properties with lesser degrees of
38
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
contamination; and Phase III consists largely of vacant properties. Preliminary
studies completed in 1994 estimated the cost of the wells to be approximately
$1,400,000. The first Phase was completed in the spring of 1996. The DEQ has not
informed the Company of the status of completion of Phases II and III. The DEQ
could require the PRPs to implement further remediation should these wells not
provide sufficient quality or quantity of water. The NIH, which has taken the
lead and incurred substantially all of the remediation costs, has represented
publicly that it would continue to work with the DEQ toward an acceptable final
remediation plan. In 1993, the NIH stated that as of that time, it had incurred
costs and anticipated future interim remediation costs which could total $2
million or more. In 1996, the DEQ filed an action against the Company, the
Landfill and the owner of the Landfill seeking reimbursement of costs in the
amount of $199,000 associated with its oversight activities. For procedural
reasons, the DEQ dismissed this action but later reinitiated the action against
the Company, the Landfill and the owner of the Landfill seeking recovery of past
alleged costs associated with its oversight activities in the amount of
$238,000, as well as a declaratory judgment finding the parties liable for
future oversight costs, plus civil penalties in the event the parties fail to
comply. The Company has filed a response to the action. Because of the
uncertainties, including the uncertainty of the cost of further remediation and
whether the NIH will seek and obtain partial reimbursement from the other PRPs,
it is not possible at this time to determine the potential liability of the
Company as a PRP or in the DEQ action.
Two landowners in the vicinity of the Landfill filed civil suits against the
PRPs and the DEQ seeking unspecified damages for alleged diminished value of
land, possible health hazards and loss of domestic water source. Settlement was
reached in June 1997. As part of the settlement, the suits were dismissed with
prejudice, and plaintiffs will be barred from making any future claims arising
out of the alleged contamination.
Some of the costs incurred in the defense of the civil suits, including the
action by the DEQ seeking reimbursement of costs, have been paid by insurance.
During each of the years 1997, 1996 and 1995, the Company charged earnings with
net costs pertaining to the Landfill of $42,000, $13,000 and $64,000,
respectively, including those costs associated with the civil suit settled in
June 1997. As of December 31, 1997, the Company has accrued a reserve of
approximately $190,000, primarily to cover billed and potential legal,
consulting and DEQ reimbursement costs associated with the Company as a PRP.
In June 1997, a complaint was filed in District Court in Ravalli County against
the Company by a former employee who was discharged for cause in June 1996. The
plaintiff alleges discharge in violation of the Montana Wrongful Discharge from
Employment Act ("Act") and further, that discharge was for refusal to violate
public policy. The Court has granted dismissal with respect to that portion of
the complaint which alleges termination for refusal to violate public policy.
Plaintiff has recently filed a motion for reconsideration asking the Court to
reverse its decision with respect to the issue of termination for refusal to
violate public policy and requested the Court for permission to amend the
complaint to include additional allegations relative to the public policy issue.
If the Court refuses plaintiff's motions on the issue of violation of public
policy but if plaintiff should ultimately prevail on the issue of discharge in
violation of the Act, the potential liability of the Company would be
approximately $240,000, exclusive of attorneys' fees and related costs. If the
Court reverses its decision of dismissal with respect to the violation of public
policy issue, the Company
39
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
could be subject to punitive damages in addition to the potential liability for
violation of the Act. It is not possible to estimate what amount of punitive
damages, if any, might be awarded if plaintiff were to prevail on the violation
of public policy issue. The Company believes that it has a meritorious defense
and plans to vigorously defend the suit. Because the action is in early stages,
it is not possible to reliably assess the outcome.
In computer systems and applications developed in the 1970s and 1980s, years
were often stored in a 2-digit rather than 4-digit format to save expensive
computer storage and processing space. These systems correctly assumed the 2-
digit year in data storage was preceded by the digits "19". At year 2000, a 2-
digit date of "00" may not be interpreted correctly by these systems, which
could lead to incorrect or inadequate results. The Company has established a
committee which is in the process of evaluating the Company's exposure to the
"Year 2000" problem. Preliminary assessment indicates that resulting solutions
will involve a mix of purchasing new systems and modifying existing systems. The
Company is not able to estimate at this time the potential costs associated with
the Year 2000 problem.
(8) Income Taxes
The net operating loss carryforwards and tax credits available to reduce future
Federal taxable income or related taxes and the year of expiration are approxi-
mately as follows:
Net Orphan Research and
Operating Investment Drug Development
Expires December 31, Loss Credit Credit Credit
- -------------------- ---------- ---------- ------ ----------
(In Thousands)
1997 $ 314 4 - 14
1998 254 7 - 31
1999 328 3 - 50
2000 529 9 - 58
2001 251 - - 76
2002 821 - - 82
2003 2,272 - - 128
2004 2,751 - - 106
2005 2,606 - - 115
2006 3,595 - - 154
2007 4,488 - - 198
2008 4,238 - - 243
2009 4,574 - - 343
2010 5,445 - - 163
2011 5,390 - 241 173
2012 5,813 - 622 407
------ ------ ------ ------
$ 43,669 23 863 2,341
====== ====== ====== ======
40
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
The tax effects of temporary differences that give rise to federal and state
deferred tax assets and liabilities consist of the following:
December 31,
--------------------------------
1997 1996
----------- ------------
(In Thousands)
Gross deferred tax assets:
Net operating loss
carryforwards $ 17,929 15,540
General business credit
carryforwards 3,235 2,004
Loss contingency reserve 79 79
Employee benefits 109 89
Other 28 29
----------- -----------
21,380 17,741
Valuation allowance (20,873) (17,280)
----------- -----------
507 461
----------- -----------
Gross deferred tax
liabilities:
Depreciation 422 355
Inventories 85 106
----------- -----------
507 461
----------- -----------
Net $ - -
=========== ===========
The Company has provided a valuation allowance for deferred tax assets which
management believes are not currently assured of being realized. The ultimate
realization of deferred tax assets is dependent upon the existence of, or
generation of, taxable income in the periods in which those temporary
differences are deductible.
The net increase in the valuation allowance for the years ended December 31,
1997, 1996, and 1995 was $3,593,000, $2,108,000 and $2,380,000, respectively.
Additionally, when subsequently recognized, approximately $855,000 of the
valuation allowance will be credited to additional paid-in capital.
(9) International Sales and Major Customers
The Company markets its research products worldwide, generally to nonexclusive
distributors. During 1997, 1996 and 1995, export sales were 82%, 77% and 31% of
total sales, respectively. Export sales were primarily to Europe, Japan and
Canada.
The Company has a total of five license agreements with SmithKline Beecham
("SB") for use of the Company's adjuvants in various vaccines being developed by
SB. SB is developing vaccines, which include the Company's adjuvants, for
indications in infectious diseases, cancer and allergies. The agreements
generally provide for payment to the Company of license fees and supply
payments, as well as royalties upon commercialization of SB's vaccines. The
agreements grant SB exclusive rights to the Company's adjuvants for use in
vaccines for some diseases and co-exclusive or non-exclusive rights for others.
The Company also sells adjuvants and research products to SB. Revenues from all
transactions with SB were 63% of total revenue
41
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - continued
in 1997, 48% in 1996 and 31% in 1995. At December 31, 1997, SB owed the Company
approximately $786,000 in trade accounts receivable, none of which are
delinquent.
As of December 31, 1997, SB and S.R. One Limited, a subsidiary of SB, held
1,797,056 shares, or 8.8% of the Company's outstanding common stock. Pursuant to
a 1997 agreement, SB has the right to make an additional equity investment of up
to $2,000,000 at any time through January 1, 1999, at the market price of the
stock at the time of the investment. Additionally, SB has warrants to purchase
500,000 shares of common stock at $5.00 per share. The warrants expire if not
exercised by January 1, 2000.
The Company has granted Wyeth-Lederle Vaccines and Pediatrics ("WLV&P") (a
business unit of Wyeth-Ayerst Laboratories, which is a division of American Home
Products Corporation) a worldwide co-exclusive license to use the Company's
adjuvants commercially upon regulatory approval of certain vaccines being
developed by WLV&P. In addition to an annual license fee, the Company will
receive transfer payments for supplies of adjuvant and will be entitled to
royalties upon commercial sale of vaccines. Revenues received from WLV&P were
12% of the Company's total revenue in 1997, 17% in 1996 and 19% in 1995.
(10) Employee Benefits
The Company provides an employee savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all full-time employees.
The Company matches 30% of employee contributions of up to 6% of compensation.
The amount charged against income in 1997, 1996 and 1995 was $69,000, $58,000
and $52,000, respectively.
Additionally, the Company provides other employee benefits, including health
insurance for employees who are actively employed. Charges against income for
health insurance were approximately $207,000, $168,000 and $198,000 in 1997,
1996 and 1995, respectively.
(11) Future Accounting Changes
During 1997, the Financial Accounting Standards Board released two Statements of
Financial Accounting Standards ("FAS") that the Company will be required to
adopt in 1998. FAS 130 requires companies to report comprehensive income in a
new financial statement. Comprehensive income will include net income, as well
as other changes in stockholders' equity that result from transactions and
economic events other than those with stockholders. FAS 131 requires companies
to provide information about the different types of business activities in which
an enterprise engages and the different economic environments in which it
operates. Information will be provided along lines or segments that are based on
the way management organizes the lines or segments within the enterprise for
making operating decisions and assessing performance. Neither of these standards
will have a material impact on the Company's financial position or results of
operations.
42
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed independent auditors and has not had any
disagreements with its independent auditors.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has filed with the Securities and Exchange Commission a Definitive
Proxy Statement for the Company's Annual Meeting of Stockholders to be held on
April 24, 1998. The information required by Items 10, 11, 12 and 13 of this
Annual Report on Form 10-K is set forth in such Definitive Proxy Statement in
the sections entitled "Election of Directors," "Committees and Meetings,"
"Principal Stockholders and Management's Stockholdings," "Executive Compensa-
tion" and "Directors Compensation" on pages 1 through 11. Those portions of such
Definitive Proxy Statement containing such information are incorporated herein
by this reference. Information regarding the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K under the heading "Executive
Officers of the Registrant."
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Ribi ImmunoChem Research, Inc., are filed
with this Report on Form 10-K under Item 8 of Part II on pages 24 through 42:
Independent Auditors' Report
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997, 1996
and 1995
Statements of Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.
43
3. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description and Incorporation by Reference
- ---------- ------------------------------------------
3.1 Restated Certificate of Incorporation. This certificate was filed
June 22, 1992, as Exhibit 4.1 to Registrant's registration
statement on Form S-3, Registration No. 33-48713. Said Exhibit
4.1 is incorporated herein by this reference.
3.2 Amended Bylaws of the Company. These Bylaws were filed on
March 13, 1989, as Exhibit 3.2 to Registrant's annual report on
Form 10-K dated December 31, 1988, File No. 0-11094. Said Exhibit
3.2 is incorporated herein by this reference.
*10.1 Employment Agreement with Mr. Robert E. Ivy dated July 1, 1987.
This agreement was filed on July 10, 1987, as Exhibit 10.1 to
Registrant's report on Form 8-K dated June 30, 1987, File No. 0-
11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.2 Stock Option Agreement with Mr. Robert E. Ivy dated July 1, 1987.
This agreement was filed on July 10, 1987, as Exhibit 10.2 to
Registrant's report on Form 8-K dated June 30, 1987, File No. 0-
11094. Said Exhibit 10.2 is incorporated herein by this
reference.
*10.3 Amendment dated November 1, 1988, to the Stock Option Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.3 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.3 is incorporated herein by this reference.
*10.4 Amendment dated January 30, 1989, to the Employment Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.4 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.4 is incorporated herein by this reference.
*10.5 Second amendment dated March 5, 1990, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on May 4, 1990, as Exhibit 10.1 to
Registrant's report on Form 10-Q dated March 31, 1990, File No.
0-11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.6 Third amendment dated April 25, 1991, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on August 9, 1991, as Exhibit 10.3 to
Registrant's report on Form 10-Q dated June 30, 1991, File No. 0-
11094. Said Exhibit 10.3 is incorporated herein by this
reference.
44
Exhibit No. Description and Incorporation by Reference - continued
- ---------- ------------------------------------------
*10.7 1986 Stock Option Plan (as amended and restated effective
April 29, 1992). This plan was filed on August 5, 1992, as
Exhibit 10.2 to Registrant's report on Form 10-Q dated June 30,
1992, File No. 0-11094. Said Exhibit 10.2 is incorporated herein
by this reference.
*10.8 1996 Stock Option Plan adopted by stockholders on April 24, 1996.
This plan was filed on March 18, 1996, as Appendix A to
Registrant's definitive proxy statement for the Annual
Stockholders' Meeting held on April 24, 1996, File No. 0-11094.
Said Appendix A is incorporated herein by this reference.
*10.9 1996 Directors' Stock Option Plan adopted by stockholders on
April 30, 1997. This plan was filed on March 19, 1997, as
Appendix A to Registrant's definitive proxy statement for the
Annual Stockholders meeting held on April 30, 1997, File No. 0-
11094. Said Appendix A is incorporated herein by this reference.
*
**10.10 Fourth amendment dated April 30, 1997, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987.
**24 Consent of independent auditors.
***27 Financial Data Schedule.
<FN>
- ----------------
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
</FN>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Registrant during the fourth quarter
of the fiscal year ended December 31, 1997.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RIBI IMMUNOCHEM RESEARCH, INC.
Date: March 25, 1998 By: /s/ Robert E. Ivy
------------------ ---------------------------------------------
Robert E. Ivy, Chief Executive Officer,
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 25, 1998 By: /s/ Robert E. Ivy
------------------ ---------------------------------------------
Robert E. Ivy, Chief Executive Officer,
President and Chairman of the Board (principal
executive officer)
Date: March 25, 1998 By: /s/ Vern D. Child
------------------ ---------------------------------------------
Vern D. Child, Vice President Finance and
Treasurer (principal financial and accounting
officer)
Date: March 25, 1998 By: /s/ John L. Cantrell
------------------ ---------------------------------------------
John L. Cantrell, Executive Vice President and
Director
Date: March 25, 1998 By: /s/ Philipp Gerhardt
------------------ ---------------------------------------------
Philipp Gerhardt, Director
Date: March 25, 1998 By: /s/ Paul Goddard
------------------ ---------------------------------------------
Paul Goddard, Director
Date: March 25, 1998 By: /s/ Mark I. Greene
------------------ ---------------------------------------------
Mark I. Greene, Director
Date: March 25, 1998 By: /s/ Thomas N. McGowen, Jr.
------------------ ---------------------------------------------
Thomas N. McGowen, Jr., Director
Date: March 25, 1998 By: /s/ Frederick B. Tossberg
------------------ ---------------------------------------------
Frederick B. Tossberg, Director
46
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDEX
Exhibit No Description and Incorporation by Reference Page
- ---------- ------------------------------------------ ----
3.1 Restated Certificate of Incorporation. This certificate was
filed June 22, 1992, as Exhibit 4.1 to Registrant's registration
statement on Form S-3, Registration No. 33-48713. Said Exhibit
4.1 is incorporated herein by this reference.
3.2 Amended Bylaws of the Company. These Bylaws were filed on
March 13, 1989, as Exhibit 3.2 to Registrant's annual report on
Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 3.2 is incorporated herein by this reference.
*10.1 Employment Agreement with Mr. Robert E. Ivy dated July 1, 1987.
This agreement was filed on July 10, 1987, as Exhibit 10.1 to
Registrant's report on Form 8-K dated June 30, 1987, File No. 0-
11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.2 Stock Option Agreement with Mr. Robert E. Ivy dated July 1,
1987. This agreement was filed on July 10, 1987, as Exhibit
10.2 to Registrant's report on Form 8-K dated June 30, 1987,
File No. 0-11094. Said Exhibit 10.2 is incorporated herein by
this reference.
*10.3 Amendment dated November 1, 1988, to the Stock Option Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.3 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.3 is incorporated herein by this reference.
*10.4 Amendment dated January 30, 1989, to the Employment Agreement
with Mr. Robert E. Ivy dated July 1, 1987. This agreement was
filed on March 13, 1989, as Exhibit 10.4 to Registrant's report
on Form 10-K dated December 31, 1988, File No. 0-11094. Said
Exhibit 10.4 is incorporated herein by this reference.
*10.5 Second amendment dated March 5, 1990, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on May 4, 1990, as Exhibit 10.1 to Regis-
trant's report on Form 10-Q dated March 31, 1990, File No. 0-
11094. Said Exhibit 10.1 is incorporated herein by this
reference.
*10.6 Third amendment dated April 25, 1991, to the Stock Option
Agreement with Mr. Robert E. Ivy dated July 1, 1987. This
agreement was filed on August 9, 1991, as Exhibit 10.3 to Regis-
trant's report on Form 10-Q dated June 30, 1991, File No. 0-
11094. Said Exhibit 10.3 is incorporated herein by this
reference.
47
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDEX
Exhibit No Description and Incorporation by Reference - continued Page
- ---------- ------------------------------------------ ----
*10.7 1986 Stock Option Plan (as amended and restated effective
April 29, 1992). This plan was filed on August 5, 1992, as
Exhibit 10.2 to Registrant's report on Form 10-Q dated June 30,
1992, File No. 0-11094. Said Exhibit 10.2 is incorporated
herein by this reference.
*10.8 1996 Stock Option Plan adopted by stockholders on April 24,
1996. This plan was filed on March 18, 1996, as Appendix A to
Registrant's definitive proxy statement for the Annual
Stockholders' Meeting held on April 24, 1996, File No. 0-11094.
Said Appendix A is incorporated herein by this reference.
*10.9 1996 Directors' Stock Option Plan adopted by the Stockholders on
April 30, 1997. This plan was filed on March 19, 1997, as
Appendix A to Registrant's definitive proxy statement for the
Annual Stockholders Meeting held on April 30, 1997, File
No. 0-11094. Said Appendix A is incorporated herein by this
reference.
*
**10.10 Fourth amendment dated April 30, 1997, to the Stock Option 49
Agreement with Mr. Robert E. Ivy dated July 1, 1987.
**24 Consent of independent auditors. 50
***27 Financial Data Schedule.
<FN>
- ----------------
*Management contract or compensatory plan or arrangement
**Filed herewith
***Filed only electronically
</FN>
48
Exhibit 10.10
FOURTH AMENDMENT TO OPTION AGREEMENT
This Fourth Amendment ("Amendment") to Option Agreement dated as of April 30,
1997 ("Effective Date") is between RIBI IMMUNOCHEM RESEARCH, INC., a Delaware
corporation located at 553 Old Corvallis Road, Hamilton, MT 59840 (the
"Corporation") and ROBERT E. IVY, whose mailing address is P.O. Box 1648,
Hamilton, MT 59840 (the "Optionee").
WHEREAS, the Corporation has previously granted to Optionee an option to
purchase shares of common stock, par value $.001 per share, of the Corporation
pursuant to that certain "Option Agreement" dated as of July l, 1987 (the
"Option Agreement") and which option, pursuant to the terms of said Option
Agreement, is set to expire as of 5 P.M. Mountain Time on June 30, 1997
("Expiration Date"); and
WHEREAS, as of the date of this Amendment, Optionee holds an option to purchase
50,000 shares of common stock at an exercise price of $3.00 per share
("Remaining Option") and which Remaining Option to purchase said shares is fully
vested; and
WHEREAS, the Corporation and the Optionee wish to further amend the Option
Agreement effective as of the Effective Date to extend the expiration date of
said Option Agreement.
NOW THEREFORE, in consideration of Optionee's continued employment with the
Corporation and the covenants and agreements contained herein, the parties agree
as follows:
1. Section 2 of the Option Agreement is hereby amended to provide that
with respect to all or any portion of said Remaining Option which is
not exercised on or before the Expiration Date, that said Expiration
Date shall be extended until June 30, 2000, subject to earlier
termination as provided for elsewhere in said Option Agreement.
2. Except as expressly modified herein, all provisions of the Option
Agreement and amendments thereto are hereby ratified, confirmed and
approved and shall remain in force and effect. This Amendment shall be
governed by and construed in accordance with the laws of the State of
Delaware without giving effect to rules governing conflicts of law.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the Effective
Date.
RIBI IMMUNOCHEM RESEARCH, INC. OPTIONEE
By:
--------------------------- ----------------------------------
Title: Date:
------------------------ -----------------------------
Date:
-------------------------
49
Exhibit 24
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Accountants' Consent
The Board of Directors
Ribi ImmunoChem Research, Inc.:
We consent to incorporation by reference in the registration statements No. 33-
6513, No. 333-18341 and No. 33-73478 filed on Form S-8 and registration
statements No. 333-32943, No. 33-44391, No. 33-48713 and No. 33-69984 filed on
Form S-3 of Ribi ImmunoChem Research, Inc. of our report dated January 17, 1998,
relating to the balance sheets of Ribi ImmunoChem Research, Inc. as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of Ribi ImmunoChem Research, Inc.
KPMG Peat Marwick LLP
Billings, Montana
March 23, 1998
50