1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1998
REGISTRATION NO. 333- .
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTRACEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 293 04-2980325
(I.R.S. EMPLOYER IDENTIFICATION
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL NUMBER)
CLASSIFICATION CODE NUMBER)
2005 NW SAMMAMISH ROAD, SUITE 107
ISSAQUAH, WASHINGTON 98027
(425) 392-2992
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SIMON R. MCKENZIE
CHIEF EXECUTIVE OFFICER
INTRACEL CORPORATION
2005 NW SAMMAMISH ROAD, SUITE 107
ISSAQUAH, WASHINGTON 98027
(425) 392-2992
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
JOSEPH W. BARTLETT, ESQ. ALAN L. JAKIMO, ESQ.
ALLEN L. WEINGARTEN, ESQ. BROWN & WOOD LLP
MORRISON & FOERSTER LLP ONE WORLD TRADE CENTER
1290 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10048
NEW YORK, NEW YORK 10104 (212) 839-5300
(212) 468-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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Common Stock, $.0001 par value.............. $57,500,000 $16,963
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(1) Estimated pursuant to Rule 457(o) under the Securities Act solely for the
purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 9, 1998
PROSPECTUS
, 1998
SHARES
INTRACEL CORPORATION
COMMON STOCK
All of the shares of common stock offered hereby are being sold by Intracel
Corporation ("Intracel" or the "Company"). Prior to this offering, there has
been no public market for the common stock of the Company. It is currently
estimated that the initial public offering price will be between $ and
$ per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
Application has been made to have the common stock approved for quotation
on the Nasdaq National Market under the symbol "ICEL."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share...................... $ $ $
Total(3)....................... $ $ $
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(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $ , which will be paid by
the Company.
(3) The Company and one of the Company's stockholders (the "Selling
Stockholder") have granted to the Underwriters a 30-day option to purchase
up to and additional shares, respectively, at the Price to the
Public less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, Proceeds to the
Company, and proceeds to the Selling Stockholder will be $ , $ ,
$ , and $ , respectively. See "Underwriting."
The shares of common stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York on or about
, 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
3
[PICTURE OF COMPANY FACILITIES]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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ZYMMUNE(R) is a registered United States trademark of the Company.
ASI(BCL), HumaRAD(16.88), HumaRAD(88BV59), Apo-Tek Lp(a) and Accu-D(x) are
trademarks of the Company. Other trademarks used herein belong to various other
parties. As used herein, "OncoVAX(CL)" means OncoVAX(CL)(R), "HumaSPECT" means
HumaSPECT(R), and "ZYMMUNE" means ZYMMUNE(R).
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All references to Stage I, Stage II, Stage III and Stage IV colon cancer
set forth herein refer to different stages of the disease based upon the status
of a patient's tumor nodes and metastases.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus, including "Risk Factors" and
the consolidated financial statements and notes thereto. Unless otherwise
indicated, all information in this Prospectus assumes (i) no exercise of the
Underwriters' over-allotment option, or currently outstanding stock options,
granted by the Company and (ii) the conversion of all shares of the Company's
Series A, A-1, A-3, B-1 and B-2 preferred stock into shares of common stock
effective upon the closing of the Offering (the "Preferred Stock Conversion").
All references to the "Company" or "Intracel" herein include Intracel
Corporation, its predecessor Massachusetts corporation and their respective
subsidiaries. Unless otherwise indicated, all references to years refer to the
fiscal years of the Company ending December 31.
THE COMPANY
Intracel is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and immunotherapeutic and
diagnostic products for cancers and infectious diseases. Based upon the results
of Phase III clinical trials, the Company is preparing a Biologics License
Application ("BLA") for its OncoVAX(CL) cancer vaccine for the post-surgical
treatment of Stage II colon cancer, the most common form of colon cancer. The
Company is also planning to initiate Phase III clinical trials for OncoVAX(CL)
in combination with chemotherapy for Stage III colon cancer, has initiated Phase
III clinical trials for its proprietary formulation of keyhole limpet hemocyanin
("KLH") for the treatment of refractory bladder cancer, and is planning to
initiate a Phase II/III clinical trial for its ASI(BCL) vaccine for the
treatment of low-grade B-cell lymphoma. In addition, the Company markets a
portfolio of in vitro diagnostic products and is introducing a number of new
diagnostic products for detecting and monitoring various cancers, AIDS and heart
disease.
The Company believes that OncoVAX(CL) is the first vaccine to demonstrate
efficacy for the post-surgical treatment of Stage II colon cancer, and has
recently announced the results of a ten-year Phase III clinical trial for
OncoVAX(CL) conducted at University Hospital, Vrije Universiteit, Amsterdam (the
"Amsterdam" trial). This randomized multi-centered 254-patient clinical trial
was the third in a series of clinical trials of OncoVAX(CL) conducted in the
United States and Europe. The series included a Phase III clinical trial
conducted by the Eastern Cooperative Oncology Group (the "ECOG" trial) and a
Phase II/III clinical trial conducted by Dr. Herbert C. Hoover, Jr. (the
"Hoover" trial). In the Amsterdam trial, the Company believes that OncoVAX(CL)
demonstrated a 61% reduction in the rate of recurrences and a 50% improvement in
the survival rate for patients with Stage II colon cancer when compared to
surgery alone. The Company believes that the results of the Amsterdam trial are
supported by positive trends shown in the ECOG and Hoover trials. Stage II colon
cancer accounts for approximately 120,000 of the more than 200,000 new cases of
colon cancer diagnosed in the United States and Europe each year. There is
currently no product approved by the United States Food and Drug Administration
(the "FDA") for patients with Stage II colon cancer, and surgery is the
principal means of treatment. The Company plans to file a BLA for OncoVAX(CL)
with the FDA in late 1998 and is presently seeking the necessary regulatory and
reimbursement approvals in certain countries in Europe.
OncoVAX(CL) is a multivalent vaccine produced from a patient's own
surgically removed tumor. The tumor is collected immediately after surgery and
delivered to one of the Company's OncoVAX treatment centers ("OncoVAX Centers")
for manufacture and subsequent administration of the vaccine. Each OncoVAX
Center has been designed to treat up to 2,000 patients per year. The Company
plans to establish OncoVAX Centers at or near hospitals with established surgery
practices, serving areas characterized by high population density and high
incidence of colon cancer. Each OncoVAX Center will require less than 3,000
square feet and will employ a staff of production technicians and a supervising
physician. The first OncoVAX Center in the United States has been established at
Lehigh Valley Hospital in Allentown, Pennsylvania and the first OncoVAX Center
in Europe is being established at University Hospital, Vrije Universiteit,
Amsterdam. The Company plans to establish more than 25 OncoVAX Centers in the
United States and more than 15 in Europe.
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5
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent
HumaSPECT and its B-cell lymphoma vaccine ASI(BCL). The Company has filed an
amendment to the Investigational New Drug application ("IND") for OncoVAX(CL)
with the FDA to commence a Phase III clinical trial for the use of OncoVAX(CL)
in combination with chemotherapy for the treatment of Stage III colon cancer.
The Company believes that this combination therapy will be more effective in the
treatment of Stage III colon cancer than either OncoVAX(CL) or chemotherapy
administered alone. The Company is currently in discussions with the FDA
regarding the commencement of the Phase III clinical trial for this combination
therapy. No assurance can be given that the Company will be given clearance to
commence this Phase III clinical trial in a timely manner, if at all.
As a complementary product for OncoVAX(CL), the Company has developed
HumaSPECT, a totally human antibody labeled with a radioisotope, to monitor
recurrence and metastatic spread of colon cancer. In a Phase III clinical trial
completed in 1996, the Company believes that HumaSPECT demonstrated significant
advantages over CT scans, the current standard for detecting recurrence and
metastatic spread of colon cancer. Based on these results the Company has filed
a BLA in the United States and a Marketing Authorization Application ("MAA") in
Europe. The FDA has completed its initial review of the Company's BLA submitted
for HumaSPECT, and is now reviewing the Company's responses to the FDA's initial
round of questions. There can be no assurance that the Company will obtain FDA
approval to market HumaSPECT in the United States in a timely manner, if at all.
With respect to the MAA, the Company has recently been advised by the European
Medicines Evaluation Agency ("EMEA") that HumaSPECT has been recommended for
marketing authorization. While no assurance can be given, the Company expects
the European Union to approve this MAA.
The Company has initiated a Phase III clinical trial for KLH for the
treatment of refractory bladder cancer. In Phase II clinical trials, the Company
believes that KLH demonstrated significantly less toxicity than the leading
FDA-approved product for the treatment of bladder cancer. The Company has
entered into a strategic partnership with Mentor Corporation ("Mentor"), a
leading urology company, under which Mentor has been funding research and
development, is required to make milestone payments to the Company and will
market KLH worldwide. Mentor also markets Accu-D(x), the Company's rapid bladder
cancer test.
The Company plans to file an amendment to the IND for its ASI(BCL)vaccine
with the FDA to commence a Phase II/III clinical trial for such vaccine in the
first half of 1999. ASI(BCL) is designed to prevent recurrence of low-grade
non-Hodgkin's B-cell lymphoma, the most common type of B-cell lymphoma, in
patients who have achieved remission through chemotherapy and/or immunotherapy.
ASI(BCL), like OncoVAX(CL), is an autologous vaccine and is produced using a
unique antigen derived from a patient's own cancerous cells. The Company
believes that a Phase I clinical trial has demonstrated that ASI(BCL) can
stimulate a specific immune response and is associated with improved clinical
outcomes.
The Company has substantial expertise in the development and manufacturing
of totally human antibodies. In April 1998, the Company commenced enrollment in
its Phase I clinical trial for its totally human antibody HumaRAD(16.88) for the
treatment of head and neck cancer and plans to submit an IND with the FDA to
commence a Phase I clinical trial of a related product, HumaRAD(88BV59), for the
treatment of ovarian cancer, in the first half of 1999. In addition, the Company
is developing several antibody products to treat life-threatening infectious
diseases.
Through its wholly owned subsidiary, Bartels, Inc. ("Bartels"), the Company
also markets a portfolio of innovative in vitro diagnostic products for the
confirmation of viral and bacterial diseases. The Company markets these
diagnostic products domestically to approximately 1,500 hospitals and clinical
laboratories through its internal sales force. Internationally, the Company
relies upon third-party distributors to market its diagnostic products. In 16
countries the Company is marketing a one-minute test for HIV/AIDS based on its
proprietary INSTI technology. In addition, the Company is introducing a number
of new diagnostic products, including its Apo-Tek Lp(a) test kit to monitor an
important indicator of heart disease, its Accu-D(x) test to monitor the
recurrence of bladder cancer, and its ZYMMUNE test to monitor CD4/CD8 levels in
patients with AIDS.
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6
The Company's technology foundation in cancer vaccines and human antibodies
is supported by a clinical trial group with expertise in designing and
implementing complex clinical trials and by state-of-the-art manufacturing
facilities capable of producing commercial quantities of its therapeutic,
diagnostic and prognostic products. To conduct research, development,
manufacturing and marketing of its products, the Company employs over 240 people
in multiple facilities, including its corporate headquarters in Issaquah,
Washington, a therapeutic product facility located in Rockville, Maryland and
diagnostic product facilities in Issaquah, Washington and Richmond, British
Columbia, Canada.
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THE OFFERING
Common Stock Offered by the Company.......... shares
Common Stock to be Outstanding After the
Offering................................... shares(1)
Use of Proceeds.............................. To support the establishment and early
operation of OncoVAX Centers, to repay
existing indebtedness, and the balance for
the Company's other research and development
programs, to conduct clinical trials for the
Company's cancer and infectious disease
products and for working capital and other
general corporate purposes. The Company may
also use a portion of the net proceeds to
acquire technologies or products com-
plementary to its business. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... ICEL
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(1) The foregoing computations exclude: (i) 3,211,240 shares of common stock
issuable upon exercise of stock options outstanding as of March 31, 1998, at
a weighted-average exercise price of $1.35 per share; (ii) 679,341 shares of
common stock issuable upon exercise of warrants expected to remain
outstanding after the Offering, at a weighted-average exercise price of
$4.50 per share; and (iii) 1,720,132 shares of common stock issuable upon
exercise of warrants granted in conjunction with the refinancing of various
short-term and long-term debt which will occur subsequent to March 31, 1998,
but before the date of this Prospectus, of which 98,132 are exercisable at
$7.64 per share and 1,622,000 are exercisable at an exercise price per share
equal to the price to the public per share set forth on the cover page of
this Prospectus, unless a registered public offering of the Company's common
stock is not consummated on or prior to December 31, 1998, in which case
1,622,000 are exercisable at $10.00 per share.
RISK FACTORS
The Offering involves a high degree of risk. See "Risk Factors."
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SUMMARY FINANCIAL DATA
The following Summary Consolidated Financial and Operating Data of the
Company is qualified by reference to and should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto which
are included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED PRO FORMA THREE MONTHS ENDED
YEAR ENDED JUNE 30 ENDED DECEMBER 31 YEAR ENDED MARCH 31
------------------------- DECEMBER 31 ----------------- DECEMBER 31 -------------------------
1993 1994 1995 1995 1996 1997 1997(1) 1997 1998(2)
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(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Revenue................. $1,776 $1,618 $ 1,566 $ 2,426 $14,718 $13,452 $ 21,341 $ 3,785 $ 5,463
Cost of revenue......... 533 449 824 1,779 7,433 9,493 16,109 2,780 3,841
Selling, general and
administrative........ 962 801 1,580 2,593 5,740 8,478 12,922 1,720 4,235
Research and
development........... 785 1,078 1,174 1,118 1,043 556 8,633 151 2,026
Acquired research and
development........... 2,100 37,718
Amortization of cost in
excess of net assets
acquired.............. 151 908 908 993 227 248
Reorganization
expense............... 917
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Total operating
expense............. 2,280 2,328 3,578 7,741 16,041 19,435 38,657 4,878 48,068
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Loss from operations.... (504) (710) (2,012) (5,315) (1,323) (5,983) (17,316) (1,093) (42,605)
Interest income
(expense), net........ 47 22 68 (135) (2,179) (2,496) (3,334) (640) (788)
Gain on pension
curtailment........... 800
Loss on sale-leaseback
transaction........... (335)
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Loss before
extraordinary item.... (457) (688) (1,944) (5,450) (3,502) (8,479) (20,985) (1,733) (42,593)
Extraordinary gain on
early extinguishment
of debt............... 1,367
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Net loss.............. $ (457) $ (688) $(1,944) $(4,083) $(3,502) $(8,479) $(20,985) $(1,733) $(42,593)
====== ====== ======= ======= ======= ======= ======== ======= ========
MARCH 31, 1998
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PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED(3)(4)
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(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 733 $ 11,213 $ 56,993
Working capital (deficit)................................. (4,176) 6,304 52,084
Total assets.............................................. 45,646 56,126 101,906
Long-term debt, non-convertible, including current
portion................................................. 30,229 36,998 31,998
Long-term debt, convertible, including current portion.... 233 10,382
Redeemable, convertible preferred stock................... 20,463 20,463
Accumulated deficit....................................... (63,301) (63,301) (63,301)
Total stockholders' equity (deficit)...................... (16,391) (20,939) 60,686
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(1) Gives effect to the acquisition of PerImmune Holdings, Inc. and Subsidiary
("PerImmune Holdings") as if it had occurred on January 1, 1997. See "Pro
Forma Consolidated Financial Information."
(2) Represents the Company as consolidated with PerImmune Holdings.
(3) Gives effect to the refinancing of various short-term and long-term debt
which will occur subsequent to March 31, 1998, but before the date of this
Prospectus but excludes the effect of 1,622,000 shares of common stock
issuable upon exercise of warrants granted in connection with this
refinancing, at an exercise price per share equal to the price to the public
per share set forth on the cover page of this Prospectus, unless a
registered public offering of the Company's Common Stock is not consummated
on or prior to December 31, 1998, in which case 1,622,000 are exercisable at
$10.00 per share. See Note 14 to the Company's consolidated financial
statements contained elsewhere in this Prospectus.
(4) Adjusted to reflect (i) the Preferred Stock Conversion, (ii) the exercise of
warrants for the purchase of 928,696 shares of common stock at a
weighted-average price of $6.22 per share upon consummation of the Offering,
(iii) the automatic conversion of certain notes payable into shares of
common stock, upon consummation of the Offering and (iv) the sale of common
stock offered hereby with an assumed total net proceeds of $45,000,000 and
the repayment of $5,000,000 of indebtedness.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of common stock offered hereby.
DEPENDENCE ON ONCOVAX(CL)
The Company's future growth and profitability will depend on its ability to
introduce and market OncoVAX(CL) and establish OncoVAX Centers. There can be no
assurance that the Company will be able to obtain and maintain necessary
regulatory approvals for OncoVAX(CL) on a timely basis, if at all. The failure
of the Company to introduce and market OncoVAX(CL) and establish OncoVAX Centers
on a timely basis would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the results of the Amsterdam, ECOG and Hoover
trials of OncoVAX(CL) will provide sufficient evidence to support the approval
by the FDA of the Company's BLA for OncoVAX(CL) being prepared for submission.
If the FDA does not consider the ECOG and Hoover trials as relevant or
supporting to the efficacy of OncoVAX(CL), there can be no assurance that the
FDA will consider the Amsterdam trial alone as a sufficient basis for approval.
Given the May 1998 FDA Guidance Document entitled "Providing Clinical Evidence
of Effectiveness of Human Drug and Biological Products," which discusses the use
and limitations of a single clinical trial to form the basis for approval of a
BLA, and the views the FDA has expressed on this subject with respect to
OncoVAX(CL) combined with chemotherapy for the treatment of Stage III colon
cancer discussed below, there can be no assurance that the FDA will not require
additional clinical trials of OncoVAX(CL) prior to FDA acceptance of the
Company's BLA for filing, or ultimately, for approval.
The Company may elect to seek approval of OncoVAX(CL) under the accelerated
approval provisions of the Food and Drug Administration Modernization Act of
1997 (the "FDA Modernization Act"). The accelerated approval regulations apply
to products used in the treatment of serious or life-threatening illnesses that
appear to provide meaningful therapeutic benefits over existing treatments.
These regulations permit approval of such products before clinical research is
completed based on the product's effect on a clinical endpoint or surrogate
endpoint. When a product is approved under the accelerated approval regulations,
the sponsor may be required to conduct additional adequate and well-controlled
studies to verify that the effect on the surrogate endpoint correlates with
improved clinical outcome or to otherwise verify the clinical benefit. In the
event such postmarketing studies do not verify the drug's anticipated clinical
benefit, or if there is other evidence that the drug product is not shown to be
safe and effective, expedited withdrawal procedures permit the FDA, after a
hearing, to remove a product from the market. Significant uncertainty exists as
to the extent to which these accelerated approval regulations will result in
accelerated review and approval. Further, the FDA has not made available
comprehensive guidelines with respect to these regulations and retains
considerable discretion to determine eligibility for accelerated review and
approval. Accordingly, the FDA could employ such discretion to deny eligibility
of OncoVAX(CL) as a candidate for accelerated review or to require additional
clinical trials or other information before approving OncoVAX(CL). A
determination that OncoVAX(CL) is not eligible for accelerated review and delays
and additional expenses associated with generating a response to any such
request for additional trials could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Government Regulation; No Assurance of Regulatory Approvals" and
"Business -- Government Regulation."
Even if OncoVAX(CL) is approved for marketing by the FDA and other
regulatory authorities, there can be no assurance that it will be commercially
successful or that the Company will be successful in establishing and operating
OncoVAX Centers and manufacturing OncoVAX(CL) on a commercial scale at a cost
that will enable the Company to realize a profit. If OncoVAX(CL) is approved,
its commercialization through the Company's OncoVAX Centers would be
substantially different from the manner in which most anti-cancer treatments,
including chemotherapeutics, are now manufactured and distributed. Despite the
results of the clinical trials of
8
10
OncoVAX(CL) and the absence of any therapeutic products currently approved by
the FDA for post-surgical treatment of Stage II colon cancer, there can be no
assurance that oncologists and other physicians will refer patients for
treatment with OncoVAX(CL). Market acceptance also could be affected by the
availability of third party reimbursement. Failure of OncoVAX(CL) to achieve
significant market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Uncertainty Related to Health Care Reform and Third Party Reimbursement" and
"Business -- Competition."
On May 26, 1998, the FDA's Center for Biologics Evaluation and Research
("CBER") advised the Company in writing that its proposed Phase III clinical
trial relating to the use of OncoVAX(CL) in combination with chemotherapy for
the treatment of Stage III colon cancer had been placed on clinical hold and,
therefore, may not begin until certain manufacturing information is provided to
CBER. The Company has responded to CBER's requests. The Company believes that
upon evaluation of this information CBER will remove the clinical hold and allow
the clinical trial to begin by the third quarter of 1998. CBER also asked
questions regarding the study to determine whether it would constitute a
"pivotal" Phase III trial sufficient to support approval. In addition, the FDA
questioned whether a single pivotal study would be sufficient to approve a
product for this indication and requested further information on this issue. The
Company intends to provide all requested information. There can be no assurance
at this time that the FDA will allow the study to commence or will consider this
clinical trial to be sufficient to support approval.
DEVELOPMENT, INTRODUCTION AND MARKETING OF NEW PRODUCTS
The Company's future growth and profitability will depend, in part, on its
ability to develop, introduce and market new products based on its proprietary
technologies. Many of the Company's products are currently under development,
either in preclinical testing or clinical trials. Other products are planned for
future development. The time period required for such development is extensive
and highly uncertain and such development requires substantial expense. The new
products developed by the Company may prove to be ineffective or unreliable.
They may be difficult to manufacture in a cost-effective manner, may fail to
receive necessary regulatory clearances, may not achieve market acceptance or
may encounter other unanticipated difficulties. The failure of the Company to
develop, introduce and market new products on a timely basis or at all could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business."
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
The Company has conducted and plans to continue to undertake extensive and
costly clinical trials to assess the safety and efficacy of its product
candidates. Such trials are often subject to setbacks and delays. The rate of
completion of the Company's clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of the patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased expenses and delays, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company cannot assure that patients enrolled in the
Company's clinical trials will respond to the Company's product candidates.
Failure to comply with FDA regulations applicable to clinical trials could
result in delay, suspension or cancellation of such trials (e.g., clinical
hold), and/or refusal by the FDA to accept the results of such trials. In
addition, the FDA may suspend clinical trials at any time if it concludes that
the participants in such trials are being exposed to unacceptable risks. Thus,
there can be no assurance that any clinical trials will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's product candidates. Furthermore, there can be no assurance that
human clinical trials will show any current or future product candidate to be
safe and effective or that data derived therefrom will be suitable for
submission to the FDA or will support the Company's submission of a BLA, Product
License Application ("PLA") or New Drug Application ("NDA"). See "-- Dependence
on OncoVAX(CL)" for a description of certain issues relating to the clinical
trials of OncoVAX(CL), "Business -- Therapeutic Products -- OncoVAX(CL) for the
treatment of colon cancer" for a description of certain issues relating to the
Company's BLA for HumaSPECT and "Business -- Government Regulation."
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GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
All new drugs, biologics and diagnostic products, including the Company's
products under development, are subject to extensive and rigorous government
regulation in the United States and elsewhere. The requirements imposed by
regulators of pharmaceuticals and medical devices vary from country to country.
In the United States, regulation is administered by the federal government,
principally the FDA under the Federal Food, Drug and Cosmetic Act (the "FDC
Act") and other laws including, in the case of biologics, the Public Health
Service Act (the "PHS Act"), and by state and local governments. Such
regulations govern, among other things, the development, testing, manufacture,
labeling, storage, premarket approval, advertising, promotion, sales and
distribution of such products and post-approval monitoring of safety and
efficacy.
In the European Union, the EMEA is responsible for administering a
centralized assessment procedure for European Union-wide authorizations valid in
Britain, France, Germany, Italy, Spain and Greece ("Member States") for
medicinal products of significant therapeutic interest or comprising a
significant innovation.
In addition, regulatory approval of prices is required in most countries
other than the United States. For example, regulators in certain European
countries condition their approval of a pharmaceutical product on the agreement
of the seller not to sell the product for more than a certain price in their
respective countries. In some cases, the price established in any of these
countries may serve as a benchmark in the other countries. As such, the price
approved in connection with the first approval obtained in any of these European
countries may serve as the maximum price that may be approved in the other
European countries. Also, a price approved in one of these European countries
that is lower than the price previously approved in the other European countries
may require a reduction in the prices in those other European countries. In such
an event, there can be no assurance that the resulting prices would be
sufficient to generate an acceptable return on the Company's investment in its
products.
The regulatory process, which includes preclinical studies and clinical
trials of each potential product, is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most new drugs, biologics and diagnostic
products, including the Company's products under development, must be approved
by the FDA. Securing FDA marketing approvals often requires the submission of
extensive preclinical and clinical data and supporting information to the FDA.
No assurances can be given that the Company will make such submissions in a
timely fashion. Product approvals, if granted, can be withdrawn for failure to
comply with regulatory requirements or upon the occurrence of unforeseen
problems following initial marketing. Moreover, regulatory approvals for
products such as new drugs, biologics and diagnostic products, even if granted,
may require that the labeling for such products include significant limitations
on the uses for which such products may be marketed. There can be no assurance
that the Company will be able to obtain necessary regulatory approvals on a
timely basis, if at all, for any of its product candidates, and delays in
receipt or failures to receive such approvals or failures to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
Failure to comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls or seizures,
injunctions, refusals to permit products to be imported into or exported out of
the United States, refusals of the FDA to grant premarket approval of drugs,
biologics or devices, refusals of the FDA to allow the Company to enter into
government supply contracts, withdrawals of previously approved marketing
applications and criminal prosecutions.
The pharmaceutical legislation of the European Union requires any person
seeking to market a medicinal product for human use to obtain approval of an
MAA. While procedures for approval of MAAs have been harmonized within the
European Union through directives for implementation into the domestic law of
each Member State and by regulations having direct effect, the specific
approvals and the time required for approval varies from country to country and
may, in some instances, involve additional testing. Drugs designated by the EMEA
as "high-tech" products are evaluated by the EMEA on an expedited basis,
generally within 210 days.
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Manufacturers of drugs, biologics and devices also are required to comply
with the FDA current Good Manufacturing Practice ("cGMP") regulations or similar
foreign regulations, which include requirements relating to quality control and
quality assurance as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to inspection by the FDA and
other government regulators, including unannounced inspection in their own and
other jurisdictions. Certain material manufacturing changes to approved drugs,
biologics and diagnostic products also are subject to FDA and foreign regulatory
review and approval. There can be no assurance that the Company or its suppliers
will be able to comply with the applicable cGMP regulations and other FDA or
other post-approval regulatory requirements such as adverse event reporting.
Failure to comply with the post-approval regulatory requirements can lead to
product withdrawal and/or other regulatory action by the FDA. Such failure could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Governmental Regulation."
In addition to regulation by the FDA, the Nuclear Regulatory Commission
(the "NRC") and some individual states (referred to as "Agreement States") also
regulate companies that possess radioactive material and those that manufacture,
prepare or transfer radioactive drugs for commercial distribution. Agreement
States typically regulate in a manner similar to the NRC. The Company's
incorporation of radioactive materials in its labeled products HumaSPECT,
HumaRAD(16.88) and HumaRAD(88BV59) will subject it to these NRC requirements. To
comply, the Company must apply for and maintain appropriate licenses and comply
with reporting, recordkeeping, and other regulatory requirements. The Company's
failure to comply with the regulatory requirements could subject it to
enforcement actions including civil penalties and orders to modify, suspend, or
revoke its licenses. With a suspended or revoked license, the Company would need
to cease and desist from possessing the radioactive material necessary for
producing its products and from distributing its products.
FRAUD AND ABUSE, FACILITY LICENSURE AND OTHER HEALTHCARE REGULATION
In marketing its current products, the Company is subject to federal and
state anti-kickback laws that regulate the financial relationships between
manufacturers of products, such as the Company's diagnostic products, and the
hospitals, physicians and other potential purchasers of medical products or
sources of referral related to the purchase of such products. The statutory
prohibitions are broad and are enforceable with considerable discretion by
federal and state authorities. Federal regulations provide very specific "safe
harbors" for only some business practices; other practices may not be in
violation of the law but are not provided a safe harbor. Because of the breadth
of the statutory provisions, there can be no assurance that the Company's
activities in selling and marketing medical products would not come under
scrutiny and challenge under one or more of these laws. Such a challenge could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's OncoVAX Centers will be subject to state laws regulating the
licensure and operation of health care facilities and clinics where patients
receive treatment. The structure and operation of the OncoVAX Centers and each
OncoVAX Center's relationship to supervising physicians and other health care
professionals also must comply with laws existing in some states that prohibit
the corporate practice of medicine. These laws vary from state to state and are
enforced by the courts and regulatory authorities with broad discretion. The
Company intends to structure and operate its OncoVAX Centers in compliance with
these laws, but a failure to meet these requirements could have a material
adverse effect on the Company's ability to market OncoVAX(CL) and this, in turn,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The relationships between the Company's OncoVAX Centers and their
supervising physicians also will be subject to state and federal anti-kickback
laws, as well as the federal law governing physicians' financial relationships
with health care entities (also known as the "Stark Law") and similar laws.
These laws are enforced by imposition of civil and criminal penalties as well as
possible exclusion from reimbursement by any state or federal health care
program. The Company intends to structure and operate its OncoVAX Centers in
compliance with these laws, but a failure to meet these requirements that
results in an investigation, penalties or exclusion from participation in
government payor programs could have a material adverse effect on
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availability and extent of reimbursement for OncoVAX(CL) and this, in turn,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES
The Company has experienced significant losses since inception. As of March
31, 1998, the Company's accumulated deficit was approximately $63.3 million. The
Company expects to incur significant additional operating losses primarily in
connection with the establishment and operation of its OncoVAX Centers, ongoing
and expanded research and development and expanded and later stage clinical
trials. The Company expects that losses will fluctuate from quarter to quarter
and that such fluctuations may be substantial. Most of the Company's product
candidates are in development in preclinical studies and clinical trials and
have not generated product revenues. To achieve and sustain profitable
operations, the Company, alone or with others, must develop successfully, obtain
regulatory approval for, manufacture, introduce, market and sell its products.
The time frame necessary to achieve market success is long and uncertain. There
can be no assurance that the Company will ever generate sufficient product
revenues to become profitable or to sustain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Pro Forma Consolidated Financial Information."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's operations to date have consumed substantial and increasing
amounts of cash. The Company's negative cash flow from operations is expected to
continue and to accelerate in the foreseeable future. The development of the
Company's technology and potential products, including the establishment of
OncoVAX Centers in the United States and Europe, will continue to require a
commitment of substantial funds. The Company expects that its existing capital
resources, including the net proceeds of the Offering and interest thereon, will
be adequate to satisfy the requirements of its current and planned operations
until the end of 1999. However, the rate at which the Company expends its
resources is variable, may be accelerated and will depend on many factors,
including the scope and results of preclinical studies and clinical trials,
continued progress of the Company's research and development of product
candidates, the cost, timing and outcome of regulatory approvals, the expenses
of establishing a sales and marketing force, the cost of establishing and
operating OncoVAX Centers, the cost of manufacturing, the cost involved in
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims, the acquisition of technology licenses, the status of competitive
products and the availability of other financing.
The Company may need to raise substantial additional capital to fund its
operations and may seek such additional funding through public or private equity
or debt financings, as well as through collaborative arrangements. There can be
no assurance that such additional funding will be available on acceptable terms,
if at all. If additional funds are raised by issuing equity securities,
substantial equity dilution to stockholders may result. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research and development programs, curtail its
operations or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own. See "Pro Forma Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; UNCERTAINTY OF INTELLECTUAL PROPERTY
RIGHTS
Extensive research has been conducted in the cancer vaccine and monoclonal
antibody fields by pharmaceutical and biotechnology companies and other
organizations and a substantial number of patents in these fields have been
issued to other pharmaceutical and biotechnology companies. In addition,
competitors may have applications for additional patents pending and may obtain
additional patents and proprietary rights related to products or processes
competitive with or similar to those of the Company. Patent applications are
maintained in secrecy for a period after filing and, in the United States,
patent applications are confidential until the patent is issued. Publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries and the filing of related patent applications. The Company may not
be aware of all of the
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patents potentially adverse to the Company's interests that may have been issued
to other companies, research or academic institutions, or others. No assurance
can be given that such patents do not exist, have not been filed, or could not
be filed or issued, which contain claims relating to the Company's technology,
products or processes. To date, no consistent policy has emerged regarding the
breadth of claims allowable in pharmaceutical and biotechnology patents.
The Company is aware of various patents that have been issued to others
that pertain to a portion of the Company's prospective business. There can be no
assurance that patents do not exist in the United States or in other countries
or that patents will not be issued to third parties that contain preclusive or
conflicting claims with respect to OncoVAX(CL) or any of the Company's other
product candidates or programs. Commercialization of cancer vaccines and
monoclonal antibody-based products may require licensing and/or cross-licensing
of one or more patents with other organizations in the field. There can be no
assurance that the licenses that might be required for the Company's processes
or products would be available on commercially acceptable terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, which could result in substantial costs to
the Company, may also be necessary to enforce any patents issued to the Company
or to determine the scope and validity of third party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or to cease using such technology.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Many non-United States
jurisdictions allow oppositions by third parties to granted patents and/or
issued patents. The Company may have to participate in opposition proceedings in
non-United States jurisdictions to prevent a third party from obtaining a patent
that may be adverse to the Company's interests. Also, the Company may have to
defend against a third party's opposition to a patent granted and/or issued to
the Company. There can be no assurance that the Company will be successful in an
opposition proceeding, and participation in such a proceeding could result in
substantial cost to the Company whether or not the eventual outcome is favorable
to the Company. Moreover, there is certain subject matter which is patentable in
the United States and not generally patentable outside of the United States and
this may limit the protection the Company can obtain on some of its inventions
outside of the United States. For example, methods of treating humans are not
patentable in many countries outside of the United States. These and/or other
issues may prevent the Company from obtaining patent protection outside of the
United States, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents and Other Intellectual Property."
The Company also relies on trade secrets and trademarks to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its key employees, consultants, medical
advisory board members, collaborators and contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and trademarks or
those of its collaborators or contractors will not otherwise become known or be
discovered independently by competitors.
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HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biotechnology industries are intensely competitive.
Many of the product candidates being developed by the Company would compete with
existing drugs, therapies and diagnostic products, and new drugs, therapies and
diagnostic products under development, including, in the case of cancer
treatments, angiogenesis inhibitors, gene therapy, advanced hormonal replacement
therapy and new chemotherapeutics. There are many pharmaceutical companies,
diagnostic companies, biotechnology companies, public and private universities
and research organizations actively engaged in research and development of
products for the treatment of people with cancer. Many of these organizations
have financial, technical, manufacturing and marketing resources greater than
those of the Company. Several of them may have developed or are developing
therapies or diagnostic products that could be used for treatment or diagnosis
of the same diseases targeted by the Company. If a competing company were to
develop or acquire rights to a safer or more efficacious treatment of or
diagnostic products for the same diseases targeted by the Company, or one which
offers significantly lower costs of treatment or diagnosis, the Company's
business, financial condition and results of operations could be materially
adversely affected.
The Company believes that its product development programs will be subject
to significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that develop and apply
technologies similar to the Company's technologies. Other companies may succeed
in developing products earlier than the Company, obtaining approvals for such
products from the FDA more rapidly than the Company or developing products that
are safer or more effective than those under development or proposed to be
developed by the Company. There can be no assurance that research and
development by others will not render the Company's technology or product
candidates obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies. See
"Business -- Competition."
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company is dependent upon a limited number of key management and
technical personnel. The loss of the services of one or more of such key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
success will be dependent upon its ability to attract and retain additional
highly qualified personnel. The Company faces intense competition in its
recruiting activities, and there can be no assurance that the Company will be
able to attract and/or retain qualified personnel. See "Management."
EXPOSURE TO PRODUCT LIABILITY
The manufacture and sale of human therapeutic and diagnostic products
involve an inherent risk of product liability claims and associated adverse
publicity. The Company has only limited commercial product liability insurance.
There can be no assurance that the Company will be able to maintain existing
insurance or obtain additional product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. An inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims brought against the Company in excess of its insurance
coverage, if any, or a product recall could have a material adverse effect upon
the Company's business, financial condition and results of operations.
UNCERTAINTY RELATED TO THIRD PARTY REIMBURSEMENT
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives to reform
health care financing continue to be dominated by cost-containment efforts. The
Company anticipates that Congress, state legislatures and the private sector
will continue to review and assess controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, the increased use of capitated managed
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care contractors by government payors, price controls on pharmaceuticals and
other fundamental changes to the health care delivery system. Any such proposed
or actual changes could affect the Company's ultimate profitability or could
cause the Company to limit or eliminate spending on development projects. In
anticipation of the impending demographic shifts brought about by the "baby
boom" generation, legislative debate concerning potential reform to Medicare,
the government's health financing program for persons over age 65, is expected
to continue, and market forces are expected to drive reductions in health care
costs. The Company cannot predict what impact the adoption of any federal or
state health care reform measures or future private sector reforms may have on
its business.
In the United States and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from third
party payors, such as government health administration authorities, managed care
providers, private health insurers and other organizations. The Company has very
limited experience obtaining coverage and reimbursement for its products in the
United States. Third party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
OncoVAX(CL), as potentially the first vaccine to treat colon cancer approved for
marketing by government regulators, faces particular uncertainties due to the
absence of a comparable, approved therapy to serve as a model for pricing and
reimbursement decisions.
As an autologous product that will not generally be sold through
traditional commercial channels, OncoVAX(CL) may present unique coverage and
payment issues for Medicare. Because the Company's plans concerning the
production, distribution and administration of OncoVAX(CL) do not precisely fit
the models established for drug coverage and payment by Medicare, the Company
cannot predict whether Medicare will cover and pay for the biologic under its
established rules for drugs and biologics. Failure to obtain coverage and
adequate reimbursement could have a material adverse effect on the Company's
ability to market OncoVAX(CL). With respect to private payors, there can be no
assurance that the Company's product candidates will be considered cost
effective or that adequate third party reimbursement will be available to enable
the Company to maintain price levels sufficient to realize an appropriate return
on its investment in product development. If adequate coverage and reimbursement
rates are not provided by the government and third party payors for the
Company's products, the market acceptance of these products could be adversely
affected, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Reimbursement."
RADIOACTIVE AND OTHER HAZARDOUS MATERIALS
The manufacturing and administration of the Company's HumaRAD products and
HumaSPECT require the handling, use and disposal of (90)Yttrium and Technetium
Tc 99m, respectively, each a radioactive isotope. These activities must comply
with various state and federal regulations. Violations of these regulations
could delay significantly completion of clinical trials and commercialization of
these products.
The Company expects to continue using hazardous chemicals and radioactive
compounds in its ongoing research activities. Although the Company believes that
safety procedures for handling and disposing of such materials will comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company could be held liable for any damages that result from
such an accident, contamination or injury from the handling and disposal of
these materials, as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations. See "Business -- Radioactive and Other
Hazardous Materials."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS
The Company's international operations are anticipated to comprise a
substantial percentage of the Company's net revenue in the future and,
accordingly, the Company will be subject to risks associated with international
operations. Such risks include managing a multinational organization,
fluctuations in currency
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exchange rates, the burden of complying with international laws and other
regulatory and product certification requirements and changes in such laws and
requirements, tariffs and other trade barriers, import and export controls,
restrictions on the repatriation of funds, inflationary conditions, staffing,
employment and severance issues, political and economic instability and longer
payment cycles in certain countries. The inability to effectively manage these
and other risks could adversely affect the Company's business, financial
condition and results of operations.
TAX LOSS CARRYFORWARDS
The Company's net operating loss carryforwards ("NOLs") expire through the
year 2012. Under Section 382 of the Internal Revenue Code of 1986, as amended,
utilization of prior NOLs is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the federal long-term exempt tax rate. Each of the Company and PerImmune
Holdings has experienced an ownership change, and is limited in its use of its
prior NOLs. In the event the Company or PerImmune Holdings achieves profitable
operations, these limitations would have the effect of increasing the Company's
consolidated tax liability and reducing net income and available cash reserves.
See Note 8 to the consolidated financial statements of the Company and Note 13
to the consolidated financial statements of PerImmune Holdings.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Following consummation of the Offering, directors, executive officers and
principal stockholders of the Company will beneficially own approximately %
of the outstanding shares of the Company's common stock. Accordingly, these
stockholders, individually and as a group, may be able to control the Company
and direct its affairs and business, including any determination with respect to
a change in control of the Company, future issuances of common stock or other
securities by the Company, declaration of dividends on the common stock and the
election of directors. See "Principal and Selling Stockholders."
FUTURE MERGERS AND ACQUISITIONS
The Company may acquire complementary businesses, products or technologies
in the future although the Company has no pending agreements or commitments. No
assurance can be given that the Company will not incur problems in integrating
any future acquisition and there can be no assurance that any future acquisition
will result in the Company's becoming profitable or, if the Company achieves
profitability, that such profitability will be sustainable. Furthermore, there
can be no assurance that the Company will realize value from any such
acquisition which equals or exceeds the consideration paid. Any such problem
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, future acquisitions by the
Company may result in dilutive issuances of equity securities, the incurrence of
additional debt, large one-time write-offs and the creation of goodwill or other
intangible assets that could result in amortization expense. These factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the common stock
and there is no assurance that an active market will develop or be sustained
after the Offering. The initial public offering price will be determined through
negotiations among the Company and the Underwriters and may bear no relationship
to the price at which the common stock will trade upon consummation of the
Offering. The securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. The market prices of the common stock of many publicly
held biotechnology and pharmaceutical companies have in the past been, and can
in the future be expected to be, especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
release of reports by securities analysts, developments or disputes concerning
patents or proprietary rights, regulatory developments, changes in regulatory or
medical reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial
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results, may have a significant and adverse impact on the market price of the
common stock. See "Underwriting."
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of common stock to be sold in the Offering will be freely
tradable. The remaining shares of common stock, representing approximately
% of the outstanding common stock upon consummation of the Offering, will
be deemed "restricted securities" under the Securities Act, and, as such, will
be subject to restrictions on the timing, manner and volume of sales of such
shares. Certain holders of those shares will have the right to request the
registration of their shares under the Securities Act following the completion
of a period of one year, in the case of directors and executive officers, and a
period of 180 days, in the case of certain other stockholders, after the date of
this Prospectus, which, upon the effectiveness of such registration, would
permit the free transferability of such shares. See "Shares Eligible for Future
Sale."
The Company, its executive officers and directors and certain of its
current stockholders have agreed that, subject to certain limited exceptions,
for a period of one year, in the case of directors and executive officers, and a
period of 180 days, in the case of such other stockholders, after the date of
this Prospectus, without the prior written consent of the Underwriters, they
will not, directly or indirectly, offer to sell, sell or otherwise dispose of
any shares of common stock. See "Underwriting."
No predictions can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale, will have on the market
price for common stock prevailing from time to time. The sale of a substantial
number of shares held by existing stockholders, whether pursuant to a subsequent
public offering or otherwise, or the perception that such sales could occur,
could adversely affect the market price of the common stock and could materially
impair the Company's future ability to raise capital through an offering of
equity securities.
DILUTION
Purchasers of the shares of common stock offered hereby will experience
immediate dilution of $ per share in net tangible book value (deficit) per
share after deducting the underwriting discounts and estimated offering
expenses. Such investors will experience additional dilution upon the exercise
of outstanding options. See "Dilution."
ADVERSE IMPACT OF POSSIBLE ISSUANCES OF PREFERRED STOCK;
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could affect adversely the voting power of the holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation. Additionally, the issuance of preferred stock and certain
provisions in the Company's Amended and Restated Certificate of Incorporation,
as amended (the "Certificate of Incorporation"), and Bylaws may have the effect
of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the common stock at a premium over the market price of the
common stock and may affect adversely the market price of and the voting and
other rights of the holders of the common stock.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements.
17
19
Management has initiated a program to prepare the Company's computer
systems and other electronic applications for the year 2000 (the "Year 2000
Program"). Through the Year 2000 Program, management is currently reviewing the
Company's computer systems and other electronic applications in order to
identify potential Year 2000 problems. Based upon preliminary results of the
Year 2000 Program, management anticipates that the Company's Year 2000
compliance expenses will not be material and that the Company's Year 2000
Program will be completed before January 1, 2000. The Company's failure to
successfully complete its Year 2000 Program could have a material adverse effect
on the Company's business, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, which may be deemed to
include the Company's plans to commercialize OncoVAX(CL) and other product
candidates, conduct clinical trials with respect to OncoVAX(CL) and other
product candidates, seek regulatory approvals, open OncoVAX Centers, expand its
sales and marketing capability, use OncoVAX Centers to conduct clinical trials,
evaluate additional product candidates for subsequent clinical and commercial
development and apply the proceeds of the Offering. In addition, this Prospectus
states the Company's belief that the net proceeds of the Offering and interest
thereon will be adequate to satisfy the requirements of its current and planned
operations through the end of 1999. Actual results could differ materially from
those projected in any forward-looking statements for a variety of reasons,
including those detailed above in this "Risk Factors" section or elsewhere in
this Prospectus.
18
20
THE COMPANY
The Company is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and of immunotherapeutic
and diagnostic products for cancers and infectious diseases. Since its formation
in 1987, the Company has grown in part as a result of various strategic mergers
and acquisitions.
On January 2, 1998, the Company acquired in a tax-free merger (the
"Merger") all of the capital stock of PerImmune Holdings, which conducts
operations through PerImmune, Inc., its wholly owned subsidiary ("PerImmune").
PerImmune's core research and development expertise in cancer and infectious
diseases complement those previously developed by the Company. The Company's
expanded resources and greater management depth resulting from the Merger have
increased the Company's ability to offer a broader spectrum of diagnostic,
prognostic and immunotherapeutic products targeted at cancer and infectious
diseases. In particular, the addition of PerImmune's large clinical development
group has augmented development of the Company's therapeutic products and the
Company's sales and marketing organization has enabled the direct launch of many
of PerImmune's diagnostic products. PerImmune Holdings was incorporated in 1996
by the management of PerImmune to acquire all of the common stock of PerImmune
from Organon Teknika Corporation, an indirect wholly-owned subsidiary of Akzo
Nobel, NV ("Organon Teknika").
In November 1995, the Company entered into a Stock Purchase Agreement with
Dade International, Inc. ("Dade") by which the Company acquired all of the
common stock of Bartels held by Dade. This acquisition provided the Company with
entry into the diagnostic products retail market.
The Company was incorporated under the laws of Massachusetts in 1987 and
reincorporated under the laws of Delaware in 1997. The Company's principal
executive offices are located at 2005 NW Sammamish Road, Suite 107, Issaquah,
Washington 98027 and its telephone number is (425) 392-2992.
19
21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of common stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$45 million ($ million if the over-allotment option granted by the Company
to the Underwriters is exercised in full) based upon an assumed initial public
offering price of $ per share.
The Company anticipates that such net proceeds, together with its other
available cash and cash equivalents, will be used as follows: (i) approximately
$25 million to support the establishment and early operation of OncoVAX Centers;
(ii) $5 million to repay existing indebtedness bearing interest at a rate of
11 1/2% per annum due when the Company receives the proceeds of the Offering;
and (iii) the balance for the Company's other research and development programs,
to conduct clinical trials for the Company's cancer and infectious disease
products and for working capital and other general corporate purposes. The
Company may also use a portion of the net proceeds to acquire technologies or
products complementary to its business, although no material expenditures in
connection with any such acquisitions are anticipated as of the date of this
Prospectus. Pending application as described above, the Company intends to
invest the net proceeds from the Offering in short-term investment-grade,
interest-bearing instruments.
The amounts and timing of the Company's actual expenditures for the
purposes described above will depend upon a number of factors, including: the
scope and results of preclinical studies and clinical trials; continued progress
of the Company's research and development of product candidates; the cost,
timing and outcome of regulatory approvals; the adequacy of manufacturing and
other facilities; the expenses of expanding the Company's sales and marketing
force; the cost involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; the acquisition of technology licenses;
the status of competitive products and the availability of other financing. The
Company will require substantial additional funds to conduct its operations in
the future, and there can be no assurance that such funding will be available on
acceptable terms, if at all. The Company expects that its existing capital
resources, including the net proceeds of the Offering and interest thereon, will
be adequate to satisfy the requirements of its current and planned operations
until the end of 1999. The occurrence of certain unforeseen events or changed
business conditions, however, could result in the application of the proceeds of
the Offering in a manner other than as described in this Prospectus.
DIVIDEND POLICY
The Company has never paid a cash dividend on its common stock and does not
anticipate paying any cash dividends in the foreseeable future.
20
22
CAPITALIZATION
The following table sets forth at March 31, 1998 (a) the actual
capitalization of the Company; (b) the pro forma capitalization of the Company,
giving effect to the refinancing of various short-term and long-term debt which
will occur subsequent to March 31, 1998, but before the date of this Prospectus
and (c) the pro forma capitalization as adjusted to reflect: (i) the Preferred
Stock Conversion, the probable exercise of certain warrants and the automatic
conversion of certain outstanding notes payable into common stock, each upon the
consummation of the Offering and (ii) the receipt of the estimated net proceeds
from the sale of the shares of common stock offered hereby at an
assumed initial public offering price of $ per share and after deducting the
underwriting discounts and commissions and offering expenses payable by the
Company. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and notes thereto appearing
elsewhere in this Prospectus.
MARCH 31, 1998
---------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(1)(2)
-------- ---------- --------------
(DOLLAR IN THOUSANDS)
Cash and cash equivalents............................... $ 733 $ 11,213 $ 56,993
======== ========== ============
Long-term debt, non-convertible, including current
portion............................................... $ 30,229 $ 36,998 $ 31,998
Long-term debt, convertible, including current
portion(3)............................................ 233 10,382
Redeemable and convertible preferred stock, $0.0001 par
value; 5,000,000 shares authorized; of which 1,780,220
shares have been authorized for issue in five series
subject to mandatory redemption, of which 1,430,994
shares are issued and outstanding, actual and pro
forma; none pro forma as adjusted(4).................. 20,463 20,463
Stockholder's equity (deficit):
Series A-2 preferred stock, $0.0001 par value; 155,000
shares authorized; 45,482 shares issued and
outstanding, actual; none pro forma and pro forma
as adjusted........................................
Common stock, $0.0001 par value; 25,000,000 shares
authorized; 10,917,256 shares issued and
outstanding, actual and pro forma; shares
issued and outstanding, pro forma as adjusted(5)... 1 1 2
Additional paid-in capital............................ 46,909 42,361 123,985
Accumulated deficit................................... (63,301) (63,301) (63,301)
-------- ---------- ------------
Total stockholders' equity (deficit).......... (16,391) (20,939) 60,686
-------- ---------- ------------
Total capitalization.......................... $ 34,534 $ 46,904 $ 92,684
======== ========== ============
- ---------------
(1) Gives effect to the refinancing of various short-term and long-term debt
which will occur subsequent to March 31, 1998, but before the date of this
Prospectus. See Note 14 to the Company's consolidated financial statements
contained elsewhere in this Prospectus.
(2) Adjusted to reflect the Preferred Stock Conversion, the exercise of certain
warrants and the automatic conversion of certain outstanding notes payable
into common stock, each upon the consummation of the Offering, and the sale
of common stock offered hereby and the repayment of $5,000,000 of
indebtedness. The par value of common stock issued in the Offering has been
excluded from the pro forma as adjusted column.
(3) Actual includes $232,500 in short-term notes payable which will
automatically be converted into 54,648 shares of common stock upon
consummation of the Offering and pro forma also includes $10,149,807 in
notes payable which will automatically be converted into shares of
common stock upon consummation of the Offering.
(4) On an actual and pro forma basis, includes Series A, 730,000 shares
authorized, 615,697 shares issued and outstanding; Series A-1, 850,000
shares authorized, 664,196 shares issued and outstanding; Series A-3,
200,000 shares authorized, 150,881 shares issued and outstanding; Series
B-1, 100 shares authorized, issued and outstanding; and Series B-2, 120
shares authorized, issued and outstanding. None of such shares will be
outstanding on a pro forma as adjusted basis.
(5) The foregoing computations exclude: (i) 3,211,240 shares of common stock
issuable upon exercise of stock options outstanding as of March 31, 1998, at
a weighted-average exercise price of $1.35 per share; (ii) 679,341 shares of
common stock issuable upon exercise of warrants expected to remain
outstanding after the Offering, at a weighted-average exercise price of
$4.50 per share; and (iii) 1,720,132 shares of common stock issuable upon
exercise of warrants granted in conjunction with the refinancing of various
short-term and long-term debt which will occur subsequent to March 31, 1998,
but before the date of this Prospectus, of which 98,132 of these warrants
are exercisable at $7.64 per share and 1,622,000 are exercisable at an
exercise price per share equal to the price to the public per share set
forth on the cover page of this Prospectus, unless a registered public
offering of the Company's common stock is not consummated on or prior to
December 31, 1998, in which case 1,622,000 are exercisable at $10.00 per
share.
21
23
DILUTION
The pro forma net tangible book value (deficit) of the Company as of March
31, 1998, was $ , or $ per share of common stock. Net tangible book
(deficit) per share represents the Company's total tangible assets less total
liabilities, divided by shares of common stock outstanding (after
reflecting the Preferred Stock Conversion, the conversion of notes into 54,648
shares of common stock, which notes automatically convert upon consummation of
the Offering, and the exercise of warrants to purchase 928,696 shares of common
stock, which warrants automatically expire ten days after consummation of the
Offering and the sale of shares of common stock by the Company in the
Offering). Without taking into account any other changes in the net tangible
book value after March 31, 1998, other than to give effect to the sale of
shares of common stock by the Company in the Offering (at the
initial price and after deducting the underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated proceeds
thereof, the net tangible book value (deficit) of the Company as of March 31,
1998, would have been $ , or $ per share. This amount represents an
immediate improvement in net tangible book value (deficit) of $ per share to
existing stockholders and immediate dilution in pro forma net tangible book
value (deficit) of $ attributable to new investors purchasing common
stock in the Offering. Dilution per share to new investors represents the
difference between the pro forma net tangible book deficit per share of common
stock immediately upon consummation of the Offering and the amount per share
paid by purchasers of common stock of the Company in the Offering. The following
table illustrates this per share dilution as of March 31, 1998:
Initial public offering price per share..................... $
---------
Pro forma net tangible book value (deficit) per share at
March 31, 1998.........................................
Improvement per share attributable to new investors.......
------
Pro forma net tangible book value (deficit) per share after
the Offering..............................................
---------
Dilution per share to new investors......................... $
=========
22
24
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited consolidated pro forma statement of operations (the
"Pro Forma Consolidated Financial Information") gives pro forma effect to the
completion of the Merger of PerImmune Holdings on January 2, 1998, after giving
effect to the pro forma adjustments described in the accompanying notes as if
the Merger had occurred on January 1, 1997. The Pro Forma Consolidated Financial
Information has been prepared from, and should be read in conjunction with, the
historical consolidated financial statements and notes thereto of each of the
Company and PerImmune Holdings.
The Pro Forma Consolidated Financial Information is provided for
illustrative purposes only and does not purport to represent what the actual
results of operations of the Company would have been had the Merger occurred on
the date assumed, nor is it necessarily indicative of the Company's future
operating results. The following table enumerates the unaudited pro forma
consolidated statement of operations.
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
ACQUIRED PRO FORMA PRO FORMA
COMPANY BUSINESS ADJUSTMENTS CONSOLIDATED
---------- -------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue
Product................................. $ 13,452 $ 2,111 $ 15,563
Contract................................ 5,778 5,778
---------- -------- ------- ----------
Total revenue........................ 13,452 7,889 21,341
Cost of revenue
Product................................. 9,493 1,600 11,093
Contract................................ 5,016 5,016
---------- -------- ------- ----------
Total cost of revenue................ 9,493 6,616 16,109
Selling, general and administrative....... 8,478 2,849 $ 1,595(1) 12,922
Research and development.................. 556 8,077 8,633
Amortization of cost in excess of net
assets acquired......................... 908 85(1) 993
---------- -------- ------- ----------
Total operating expense.............. 19,435 17,542 1,680 38,657
---------- -------- ------- ----------
Loss from operations................. (5,983) (9,653) (1,680) (17,316)
Interest income (expense), net............ (2,496) (838) (3,334)
Loss on sale-leaseback transaction........ (335) (335)
---------- -------- ------- ----------
Net loss............................. (8,479) (10,826) (1,680) (20,985)
Preferred stock dividends/accretion....... (1,261) (32) 32(2) (1,261)
---------- -------- ------- ----------
Net loss used in calculating loss per
share.............................. $ (9,740) $(10,858) $(1,648) $ (22,246)
========== ======== ======= ==========
Historical net loss per share............. $ (2.39)
==========
Pro forma net loss per share.............. $ (2.33)
==========
Shares used in calculating per share
data.................................... 4,073,398 9,552,052
========== ==========
- ---------------
(1) Represents the pro forma effects of purchase price allocation amortization.
(2) Represents the pro forma effect of the Merger.
23
25
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR INTRACEL CORPORATION
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," the consolidated financial statements of the Company and the notes
thereto included elsewhere in this Prospectus. The statement of operations data
for the years ended June 30, 1993 and June 30, 1994 and the balance sheet data
at June 30, 1993, June 30, 1994, June 30, 1995 and December 31, 1995 are derived
from the financial statements of the Company not included in this Prospectus.
The statement of operations data for the year ended June 30, 1995, the six
months ended December 31, 1995 and the year ended December 31, 1996 and the
balance sheet data as of December 31, 1996 are derived from the consolidated
financial statements of the Company included elsewhere in this Prospectus and
have been audited by Ernst & Young LLP, independent auditors. The financial
statement data as of and for the year ended December 31, 1997 is derived from
the financial statements of the Company included elsewhere in this Prospectus
and has been audited by PricewaterhouseCoopers LLP, independent accountants. The
pro forma financial data for the year ended December 31, 1997 and the financial
data as of and for the periods ended March 31, 1997 and 1998 are unaudited but
have been prepared on a basis consistent with the audited consolidated financial
statements of the Company and the notes thereto and included all adjustments
(constituting only normal recurring adjustments), which the Company considered
necessary for a fair presentation of the information. The results of operation
for the three months ended March 31, 1998 are not necessarily indicative of
results to be expected for the year or for any future periods.
SIX MONTHS YEAR ENDED
YEAR ENDED JUNE 30 ENDED DECEMBER 31
-------------------------- DECEMBER 31 -------------------
1993 1994 1995 1995 1996 1997
------ ------- ------- ----------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue
Product................................ $1,776 $ 1,618 $ 1,566 $ 2,426 $ 14,718 $ 13,452
Contract...............................
------ ------- ------- ------- -------- --------
Total revenue........................ 1,776 1,618 1,566 2,426 14,718 13,452
------ ------- ------- ------- -------- --------
Cost of revenue
Product................................ 533 449 824 1,779 7,433 9,493
Contract...............................
------ ------- ------- ------- -------- --------
Total cost of revenue................ 533 449 824 1,779 7,433 9,493
Selling, general and administrative...... 962 801 1,580 2,593 5,740 8,478
Research and development................. 785 1,078 1,174 1,118 1,043 556
Acquired research and development........ 2,100
Amortization of costs in excess of net
assets acquired........................ 151 908 908
Reorganization expense................... 917
------ ------- ------- ------- -------- --------
Total operating expense.............. 2,280 2,328 3,578 7,741 16,041 19,435
------ ------- ------- ------- -------- --------
Loss from operations................... (504) (710) (2,012) (5,315) (1,323) (5,983)
Interest income (expense), net........... 47 22 68 (135) (2,179) (2,496)
Gain on pension curtailment..............
Loss on sale-leaseback transaction.......
------ ------- ------- ------- -------- --------
Loss before extraordinary item......... (457) (688) (1,944) (5,450) (3,502) (8,479)
Extraordinary gain on early
extinguishment of debt................. 1,367
------ ------- ------- ------- -------- --------
Net loss............................... (457) (688) (1,944) (4,083) (3,502) (8,479)
Preferred stock dividends................ (211) (266) (790) (1,261)
------ ------- ------- ------- -------- --------
Net loss used in calculating loss per
share................................ $ (457) $ (688) (2,155) (4,349) (4,292) (9,740)
====== ======= ======= ======= ======== ========
Net loss basic and diluted per
share(3)............................. $(0.12) $ (0.17) $ (0.54) $ (1.12) $ (1.10) $ (2.39)
====== ======= ======= ======= ======== ========
Shares used in computing net loss per
share.................................. 3,915 3,947 3,963 3,886 3,895 4,073
====== ======= ======= ======= ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 648 $ 421 $ 2,370 $ 4,072 $ 3,145 $ 1,975
Working capital (deficit)................ 1,072 569 2,273 1,986 2,226 (401)
Total assets............................. 1,912 1,632 3,728 25,646 27,355 28,042
Long-term debt, including current
portion................................ 102 281 193 18,047 22,557 19,672
Redeemable, convertible preferred
stock.................................. 3,961 9,578 10,367 11,222
Accumulated deficit...................... (537) (1,226) (3,381) (7,730) (12,021) (20,708)
Total stockholders' equity (deficit)..... 1,422 834 (1,314) (5,624) (9,717) (9,306)
PRO FORMA THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 -------------------------
1997(1) 1997 1998(2)
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue
Product................................ $ 15,563 $ 3,785 $ 4,184
Contract............................... 5,778 1,279
-------- -------- --------
Total revenue........................ 21,341 3,785 5,463
-------- -------- --------
Cost of revenue
Product................................ 11,093 2,780 2,847
Contract............................... 5,016 994
-------- -------- --------
Total cost of revenue................ 16,109 2,780 3,841
Selling, general and administrative...... 12,922 1,720 4,235
Research and development................. 8,633 151 2,026
Acquired research and development........ 37,718
Amortization of costs in excess of net
assets acquired........................ 993 227 248
Reorganization expense...................
-------- -------- --------
Total operating expense.............. 38,657 4,878 48,068
-------- -------- --------
Loss from operations................... (17,316) (1,093) (42,605)
Interest income (expense), net........... (3,334) (640) (788)
Gain on pension curtailment.............. 800
Loss on sale-leaseback transaction....... (335)
-------- -------- --------
Loss before extraordinary item......... (20,985) (1,733) (42,593)
Extraordinary gain on early
extinguishment of debt.................
-------- -------- --------
Net loss............................... (20,985) (1,733) (42,593)
Preferred stock dividends................ (1,261) (207) (366)
-------- -------- --------
Net loss used in calculating loss per
share................................ (22,246) (1,940) (42,959)
======== ======== ========
Net loss basic and diluted per
share(3)............................. $ (2.33) $ (0.50) $ (3.97)
======== ======== ========
Shares used in computing net loss per
share.................................. 9,552 3,908 10,809
======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,832 $ 733
Working capital (deficit)................ 3,386 (4,176)
Total assets............................. 26,149 45,646
Long-term debt, including current
portion................................ 20,488 30,462
Redeemable, convertible preferred
stock.................................. 10,574 20,463
Accumulated deficit...................... (13,961) (63,301)
Total stockholders' equity (deficit)..... (7,567) (16,391)
- ---------------
(1) Gives effect to the acquisition of PerImmune Holdings as if it had occurred
on January 1, 1997. See "Pro Forma Consolidated Financial Information."
(2) The quarter ended March 31, 1998 is presented as consolidated with PerImmune
Holdings.
(3) See Note 2 to the Company's consolidated financial statements contained
elsewhere in this Prospectus for explanation of earnings per share
calculations.
24
26
SELECTED FINANCIAL DATA FOR PERIMMUNE HOLDINGS
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of PerImmune Holdings and the
notes thereto included elsewhere in this Prospectus. The balance sheet data as
of December 31, 1993 and the statement of operations data for the year then
ended and for the year ended December 31, 1994 are derived from the financial
statements of Biotechnology Research Institute ("BRI"), a predecessor company to
PerImmune which operated as a division of Organon Teknika, an indirect wholly
owned subsidiary of Akzo Nobel, NV. Such financial statements are not included
in this Prospectus but have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The balance sheet data as of December 31, 1994 and
1995 are derived from the financial statements of PerImmune, which was
incorporated as a wholly-owned subsidiary of Organon Teknika in December 1994
(BRI and PerImmune, collectively the "Predecessor Companies"). Such financial
statements are not included in this Prospectus but have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The statement of
operations data for the year ended December 31, 1995 is derived from the
statement of operations of PerImmune, which is included elsewhere in this
Prospectus and which was audited by KPMG Peat Marwick LLP, independent certified
public accountants. The balance sheet data as of August 2, 1996 have been
derived from the unaudited financial statements of PerImmune and have been
prepared on a basis consistent with the audited financial statements of
PerImmune and the notes thereto and include all adjustments (constituting only
normal recurring adjustments), for a fair presentation of the information. The
statement of operations data for the period ended August 2, 1996 is derived from
the financial statements of PerImmune included elsewhere in this Prospectus and
has been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The balance sheet data as of December 31, 1996 and the statement of
operations data for the period then ended were derived from the consolidated
financial statements of PerImmune Holdings included elsewhere in this Prospectus
and have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The balance sheet data as of December 31, 1997 and the statement of
operations data for the year then ended are derived from the consolidated
financial statements of PerImmune Holdings included elsewhere in this
Prospectus, and have been audited by PricewaterhouseCoopers LLP, independent
accountants.
PREDECESSOR COMPANIES (1) PERIMMUNE HOLDINGS
--------------------------------------- -------------------------
JANUARY 1 AUGUST 3
YEAR ENDED DECEMBER 31 THROUGH THROUGH YEAR ENDED
--------------------------- AUGUST 2 DECEMBER 31 DECEMBER 31
1993 1994 1995 1996 1996 1997
------- ------- ------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
Government contracts.................................... $ 3,947 $ 6,005 $ 6,578 $ 3,420 $ 2,751 $ 1,869
Commercial and affiliate contracts...................... 11,099 10,483 11,313 7,176 1,106 3,909
Product sales........................................... 821 1,247 1,407 1,632 594 2,111
------- ------- ------- ------- ------- --------
Total revenue....................................... 15,867 17,735 19,298 12,228 4,451 7,889
------- ------- ------- ------- ------- --------
Operating expenses:
Cost of contracts and sales:
Government contracts.................................... 3,469 5,173 5,779 3,375 1,968 1,585
Commercial and affiliate contracts...................... 9,996 9,796 10,189 6,299 886 3,431
Product sales........................................... 609 822 1,124 1,102 325 1,600
------- ------- ------- ------- ------- --------
Total cost of contracts and sales................... 14,074 15,791 17,092 10,776 3,179 6,616
Selling, general and administrative....................... 1,034 1,264 1,283 740 708 2,241
Research and development.................................. 467 239 360 189 4,683 8,077
Other..................................................... 50 29 14 10 608
------- ------- ------- ------- ------- --------
Total operating expenses............................ 15,575 17,344 18,764 11,719 8,580 17,542
------- ------- ------- ------- ------- --------
Income (loss) from operations....................... 292 391 534 509 (4,129) (9,653)
Interest (expense), net..................................... (446) (837)
Loss on sale-leaseback transaction.......................... (335)
------- ------- ------- ------- ------- --------
Income (loss) before income taxes................... 292 391 534 509 (4,575) (10,825)
Provision for income taxes.................................. (111) (285) (356) (68)
------- ------- ------- ------- ------- --------
Net income (loss)................................... $ 181 $ 106 $ 178 $ 441 $(4,575) $(10,825)
======= ======= ======= ======= ======= ========
BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents................................... $ 2 $ 2 $ 2 $ 193 $ 2,424 $ 2,504
Working capital (deficit)................................... 3,123 3,244 3,014 (18) (3,835) (8,871)
Total assets................................................ 7,506 12,694 12,829 12,650 13,624 8,030
Long-term debt, including current portion................... 14,835 10,393
Redeemable, convertible preferred stock..................... 9,786
Retained earnings (accumulated deficit)..................... 178 619 (5,485) (16,310)
Total stockholders' equity (deficit)........................ 5,844 10,242 10,521 9,161 (5,485) (16,027)
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(1) Effective August 3, 1996, 100% of PerImmunes' common stock was acquired by
PerImmune Holdings from Organon Teknika in exchange for a $9,234,935 note
payable.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus. This discussion and analysis should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company is an integrated biopharmaceutical company operating in one
business segment, focused on the development and commercialization of cancer
vaccines and of immunotherapeutic and diagnostic products for cancers and
infectious diseases. The Company is applying its extensive expertise in
immunology and its clinical, regulatory, manufacturing and marketing experience
to develop a portfolio of innovative therapeutic, prognostic and diagnostic
products.
On January 2, 1998, the Company acquired all of the capital stock of
PerImmune Holdings. With the consummation of the Merger, PerImmune Holdings
became a subsidiary of Intracel. Management's Discussion and Analysis of
Financial Condition and Results of Operations for each of Intracel and PerImmune
Holdings for 1997, 1996 and 1995 will be presented, as appropriate, on a
separate basis. The results of operations for the three month period ended March
31, 1998 and forward-looking liquidity and capital resources will be discussed
on a consolidated basis.
INTRACEL -- RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1997
Revenues were $5.5 million for the three months ended March 31, 1998 as
compared to $3.8 million for the comparable 1997 period. Product revenues
increased by $.4 million to $4.2 million as a result of $.7 million of revenues
from the acquisition of PerImmune Holdings offset by a decline of $.3 million in
diagnostics revenues. This decline was due to the Company's decision at the end
of 1997 to move its manufacturing for the INSTI product to Canada. The new
facility came on line in March with revenues beginning at that time. Contract
revenues were $1.3 million, all as a result of the Merger.
Cost of revenues increased by $1.1 million to $3.8 million for the three
months ended March 31, 1998 as compared to the same period in 1997. The increase
was primarily due to the Merger and was related to the cost of contract
revenues.
Selling, general and administrative expenses increased period to period by
$2.5 million. Expenses relating to the Merger represented $.8 million of such
increase. Salaries and other related costs rose by $.6 million as a result of
the Company's establishment of an infrastructure for the purpose of managing the
merged companies and preparing for the launch of OncoVAX(CL). Accounting and
legal costs have increased by $.4 million due to a change in timing of the
completion of the Company's audited financial statements as compared to 1997 and
the completion of a comprehensive review of all patents. In addition, as a
result of the Merger, the Company had to prepare additional audited financial
statements for its newly acquired subsidiary, PerImmune Holdings.
Research and development expense in 1998 increased by $1.9 million as
compared to the comparable 1997 period. This increase is almost entirely due to
the Merger.
Interest expense was about the same for both periods.
A gain of $.8 million was recognized in association with the curtailment of
the PerImmune Holdings pension plan.
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1997 COMPARED WITH 1996
Diagnostic revenues were $13.5 million compared to $14.7 million in 1996.
This $1.2 million decline was primarily attributable to the Company's decision
to establish its own marketing and sales organization to replace the Company's
exclusive third-party distributor. During 1997 the Company's INSTI product for
AIDS testing was introduced to the overseas markets at a price to facilitate
market penetration which resulted in revenues for the INSTI product to increase
by $.4 million to $.5 million for the year.
Cost of product sales increased by $2.1 million to $9.5 million. The
increase was due primarily to a $1.1 million charge for excess and obsolete
inventory used for research-related sales. In addition, costs for the INSTI
product exceeded revenues by $.8 million. Ramp-up costs for the higher volume
were high as an automated filling line was not completed until near year end.
Other automated production enhancements are planned to reduce costs further as
volume expands.
Selling, general and administrative expenses increased by $2.7 million to
$8.5 million. This increase was due to several factors. As indicated above, the
Company developed its own sales and marketing organization during 1997. Also,
during 1997, the Company established a regulatory department. This department
provides quality control in compliance with regulatory requirements to support
Bartel's lines of production and newly emerging products such as INSTI and
ZYMMUNE. Costs increased in 1997 in connection with the Company's merger and
acquisition program, which included the Merger on January 2, 1998. A lease for a
fully developed diagnostic manufacturing facility was acquired in September 1996
with associated costs included for all of 1997.
Research and development expenses decreased by $.5 million due to the
reduced payments under a specific contract. Reorganization expense of $.9
million was incurred in 1996, in connection with the Company's relocation from
Cambridge, Massachusetts to Issaquah, Washington.
Interest expense increased by $.3 million to $2.5 million as a result
primarily of increases in interest rates for certain debt instruments.
SIX MONTHS ENDED DECEMBER 31, 1995
Due to a change in the Company's fiscal year end from June 30 to December
31 during 1995, all information in the following paragraphs under this section
applies to the six months ended December 31, 1995.
Product sales for the six months ended December 31, 1995 were $2.4 million,
primarily comprised of $1.8 million from diagnostic product sales generated by
Bartels from the date of its acquisition.
For the six month period ended December 31, 1995, cost of product sales was
$1.8 million, primarily comprised of $1.2 million pertaining to Bartels cost of
product sales. Selling, general and administrative expenses for the six months
ended December 31, 1995 totaled $2.6 million.
Research and development expenses of $1.1 million for the six month period
ended December 31, 1995 were associated with a specific contract. An additional
$2.1 million was expensed in the six months ended December 31, 1995 for acquired
in-process research and development associated with the acquisition of Bartels.
The Company recognized an extraordinary gain for the six months ended
December 31, 1995 of $1.4 million, pertaining to the Company's early retirement
of debt.
TWELVE MONTHS ENDED JUNE 30, 1995
Net revenues of $1.6 million for the year ended June 30, 1995 were
comprised of sales of proteins and antibodies for use in diagnostic and research
applications.
Cost of sales of $.8 million consisted of the cost to manufacture the
various proteins and antibodies for the year ended June 30, 1995. Selling,
general and administrative expenses were $1.6 million for the year ended June
30, 1995.
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Research and development expenses of $1.2 million for the year ended June
30, 1995 were associated with a specific contract.
INTRACEL -- LIQUIDITY
The Company's operating activities used $2.5 million in 1997 resulting from
the net loss of $2.9 million (adjusted for non-cash items) offset by a $.4
million reduction in investment in working capital. Investing activities used
$4.2 million of which $2.0 million represented the deposit in escrow of
restricted cash associated with a debt issue. Additionally, $1.4 million was
invested in the purchase of property and equipment and $.8 million was invested
or advanced to Bartels Prognostics, Inc., an unconsolidated subsidiary in which
the Company has a minority interest ("Bartels Prognostics"). Net cash from
financing activities of $5.5 million was primarily comprised of $1.7 million
from the sale of preferred stock and $6.0 million net from the sale of common
stock and the exercise of warrants and options, offset by $2.3 million of
payments on long-term debt net of proceeds of new issuances and associated
costs.
PERIMMUNE HOLDINGS -- RESULTS OF OPERATIONS
PerImmune Holdings' operations are conducted in one business segment which
applies biotechnology and other life sciences technologies to develop and
provide products and services. PerImmune Holdings groups these activities into
three operating activities: Government Contracts, Commercial Contracts and
Product Sales.
PerImmune Holdings' operations began on August 3, 1996 with its acquisition
of PerImmune from Organon Teknika, an indirect wholly owned subsidiary of Akzo
Nobel, NV, in a leveraged buyout. Therefore, all comparisons are for the full
year of 1997 as compared to approximately five months of 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE FIVE MONTHS ENDED
DECEMBER 31, 1996
Revenues were $7.9 million compared to $4.5 million in 1996. Government
contracts revenues decreased by $.9 million to $1.9 million. This decrease was
the result of several contracts which ended during the government fiscal year,
October 1996 to September 1997, with only one of those contracts being renewed,
at a much lower dollar value than in prior years. Management decided to
de-emphasize the government contract business and instead focus on future
products and services. Commercial contract revenues increased by $2.8 million to
$3.9 million. This increase was due to the start of a research and development
contract with Baxter Healthcare Corporation and the difference in the length of
the two reporting periods. Product sales increased by $1.5 million to $2.1
million due entirely to the difference in the length of the two reporting
periods. There was also a decrease of $.3 million in 1997 sales due to the
completion of research and development for PerImmune's previous parent in 1996.
Gross profit was approximately the same for both years. Government contract
gross profits declined from 28.5% of sales to 15.2% of sales due to the start-up
of new contracts and additional costs not expected on contracts completed.
Commercial contract additional profits declined from 19.9% of sales to 12.2% of
sales due to non-billable overruns on various fixed price research and
development contracts. Product sales gross profits decreased from 45.3% to 24.2%
of sales due to start-up and validation expenses related to products that
received marketing clearance from the FDA in late 1997.
Selling, general administrative expense increased by $1.5 million due to
the change in reporting periods and the initial payment of over $.3 million in
connection with marketing studies prior to the launch of the HumaSPECT product
line. PerImmune's former parent paid marketing costs in the past.
Research and development costs were $3.4 million higher in 1997 due to the
change in reporting periods, introduction of several clinical trials and filing
of applications for approval with the FDA, offset by lower research and
development activity as PerImmune Holdings placed more emphasis on its largest
projects while eliminating others. Other expense increased by $.6 million due in
part to facility costs that in the past had been allocated to government
contracts which were completed in 1996.
Interest expense increased by $.6 million due to the change in reporting
periods. Interest income of $.2 million was due to the earnings on excess cash
received from the sale-leaseback of PerImmune's corporate headquarters building
in January 1997, which also resulted in a $.3 million loss.
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PERIMMUNE HOLDINGS -- LIQUIDITY
PerImmune Holdings' operating activities used $8.5 million in 1997
resulting from the net loss of $9.9 (adjusted for non-cash items) offset by a
$1.4 million in reduction in investment in working capital. Investing activities
generated $3.6 million of which $5.1 million related to the purchase and
sale-leaseback transaction referred to above and leaseback improvements offset
by capital expenditures of $.3 million and $1.2 million paid to an investor
advisor. Net cash from financing activities of $5.0 million included $9.8
million from issuance of convertible preferred stock, $.3 million from issuance
of common stock and $.9 million from issuance of notes payable offset by $5.6
million in payment of notes payable and $.4 million of increase in restricted
cash.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
As stated earlier, the future liquidity and capital resources of the
Company will be discussed on a post-Merger consolidated basis.
The Company recently announced the results of a ten-year Phase III clinical
trial for OncoVAX(CL), which the Company believes is the first vaccine to
demonstrate efficacy for the post-surgical treatment of Stage II colon cancer.
The Company plans to begin treatment of patients using the OncoVAX(CL) vaccine
by establishing OncoVAX Centers in Europe and the United States. Over 40 OncoVAX
Centers are expected to be established in the next several years. Some capital
expenditures will be needed for each facility but the principal need will be
that of working capital and in particular the build-up of patient receivables.
At January 2, 1998 the Company's principal source of liquidity was
approximately $2.5 million in cash and cash equivalents. The Company has made
some changes to its existing debt and is in the process of completing additional
modifications and refinancings (extending maturities) which will provide
additional funding.
During 1997, the Company received certain amendments and waivers to a debt
agreement and its covenants. These amendments and waivers were retroactive to
January 1, 1997 and remain in effect until June 30, 1998. The amendments and
waivers became effective upon consummation of the Merger. On April 1, 1998 the
Company repaid all amounts outstanding under the debt agreement.
On June 8, 1998, the Company received a firm commitment letter from a
current debt and equity holder for $35.0 million of financing which will provide
approximately $8.0 million of additional funding after the proceeds are applied
to repay existing debt obligations and redeem the Series A-2 preferred stock.
This borrowing arrangement includes warrants to purchase up to approximately
1,622,000 shares of the Company's common stock, expiring on July 1, 2003, and
allows for certain registration rights for these warrant shares. The warrants
are exercisable at an exercise price per share equal to the price to the public
per share set forth on the cover page of this prospectus, unless a registered
public offering of the Company's common stock is not consummated on or prior to
December 31, 1998, in which case the warrants will be exercisable at $10 per
share. In addition, on June 8, 1998, another lender agreed to delay the maturity
of approximately $10,100,000 of the debt assumed from Holdings until January,
2000.
YEAR 2000 COMPLIANCE
Management has initiated the Year 2000 Program to prepare the Company's
computer systems and other electronic applications for the year 2000. Through
the Year 2000 Program, management is currently reviewing the Company's computer
systems and other electronic applications in order to identify potential Year
2000 problems. Based upon preliminary results of the Year 2000 Program,
management anticipates that the Company's Year 2000 compliance expenses will not
be material and that the Company's Year 2000 Program will be completed before
January 1, 2000. The Company's failure to successfully complete its Year 2000
Program could have a material adverse effect on the Company's business,
financial condition and results of operations.
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BUSINESS
GENERAL
Intracel is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and immunotherapeutic and
diagnostic products for cancers and infectious diseases. Based upon the results
of Phase III clinical trials, the Company is preparing a BLA for its OncoVAX(CL)
cancer vaccine for the post-surgical treatment of Stage II colon cancer, the
most common form of colon cancer. The Company is also planning to initiate Phase
III clinical trials for OncoVAX(CL) in combination with chemotherapy for Stage
III colon cancer, has initiated Phase III clinical trials for KLH for the
treatment of refractory bladder cancer, and is planning to initiate a Phase
II/III clinical trial for its ASI(BCL) vaccine for the treatment of low-grade
B-cell lymphoma. In addition, the Company markets a portfolio in vitro
diagnostic products and is introducing a number of new diagnostic products for
detecting and monitoring various cancers, AIDS and heart disease.
The Company believes that OncoVAX(CL) is the first vaccine to demonstrate
efficacy for the post-surgical treatment of Stage II colon cancer, and has
recently announced the results of the ten year Phase III Amsterdam trial. This
randomized multi-centered 254-patient clinical trial was the third in a series
of clinical trials of OncoVAX(CL) conducted in the United States and Europe. The
series included the Phase III ECOG trial and the Phase II/III Hoover trial. In
the Amsterdam trial, the Company believes that OncoVAX(CL) demonstrated a 61%
reduction in the rate of recurrences and a 50% improvement in the survival rate
for patients with Stage II colon cancer when compared to surgery alone. The
Company believes that the results of the Amsterdam trial are supported by
positive trends shown in the ECOG and Hoover trials. Stage II colon cancer
accounts for approximately 120,000 of the more than 200,000 new cases of colon
cancer diagnosed in the United States and Europe each year. There is currently
no product approved by the FDA for patients with Stage II colon cancer, and
surgery is the principal means of treatment. The Company plans to file a BLA for
OncoVAX(CL) with the FDA in late 1998 and is presently seeking the necessary
regulatory and reimbursement approvals in certain countries in Europe.
OncoVAX(CL) is a multivalent vaccine produced from a patient's own
surgically removed tumor. The tumor is collected immediately after surgery and
delivered to one of the Company's OncoVAX Centers for manufacture and subsequent
administration of the vaccine. Each OncoVAX Center has been designed to treat up
to 2,000 patients per year. The Company plans to establish OncoVAX Centers at or
near hospitals with established surgery practices, serving areas characterized
by high population density and high incidence of colon cancer. Each OncoVAX
Center will require less than 3,000 square feet and will employ a staff of
production technicians and a supervising physician. The first OncoVAX Center in
the United States has been established at Lehigh Valley Hospital in Allentown,
Pennsylvania and the first OncoVAX Center in Europe is being established at
University Hospital, Vrije Universiteit, Amsterdam. The Company plans to
establish more than 25 OncoVAX Centers in the United States and more than 15 in
Europe.
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent
HumaSPECT and its B-cell lymphoma vaccine ASI(BCL). The Company has filed an
amendment to the IND for OncoVAX(CL) with the FDA to commence a Phase III
clinical trial for the use of OncoVAX(CL) in combination with chemotherapy for
the treatment of Stage III colon cancer. The Company believes that this
combination therapy will be more effective in the treatment of Stage III colon
cancer than either OncoVAX(CL) or chemotherapy administered alone. The Company
is currently in discussions with the FDA regarding the commencement of the Phase
III clinical trial for this combination therapy. No assurance can be given that
the Company will be given clearance to commence this Phase III clinical trial in
a timely manner, if at all.
As a complementary product for OncoVAX(CL), the Company has developed
HumaSPECT, a totally human antibody labeled with a radioisotope, to monitor
recurrence and metastatic spread of colon cancer. In a Phase III clinical trial
completed in 1996, the Company believes that HumaSPECT demonstrated significant
advantages over CT scans, the current standard for detecting recurrence and
metastatic spread of colon cancer. Based on these results the Company has filed
a BLA in the United States and an MAA in Europe.
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The FDA has completed its initial review of the Company's BLA submitted for
HumaSPECT, and is now reviewing the Company's responses to the FDA's initial
round of questions. There can be no assurance that the Company will obtain FDA
approval to market HumaSPECT in the United States in a timely manner, if at all.
With respect to the MAA, the Company has recently been advised by the EMEA that
HumaSPECT has been recommended for marketing authorization. While no assurance
can be given, the Company expects the European Union to approve this MAA.
The Company has initiated a Phase III clinical trial for KLH for the
treatment of refractory bladder cancer. In Phase II clinical trials, the Company
believes that KLH demonstrated significantly less toxicity than the leading
FDA-approved product for the treatment of bladder cancer. The Company has
entered into a strategic partnership with Mentor, a leading urology company,
under which Mentor has been funding research and development, is required to
make milestone payments to the Company and will market KLH worldwide. Mentor
also markets Accu-D(x), the Company's rapid bladder cancer test.
The Company plans to file an amendment to the IND for its ASI(BCL)vaccine
with the FDA to commence a Phase II/III clinical trial for such vaccine in the
first half of 1999. ASI(BCL) is designed to prevent recurrence of low-grade
non-Hodgkin's B-cell lymphoma, the most common type of B-cell lymphoma, in
patients who have achieved remission through chemotherapy and/or immunotherapy.
ASI(BCL), like OncoVAX(CL), is an autologous vaccine and is produced using a
unique antigen derived from a patient's own cancerous cells. The Company
believes that a Phase I clinical trial has demonstrated that ASI(BCL) can
stimulate a specific immune response and is associated with improved clinical
outcomes.
The Company has substantial expertise in the development and manufacturing
of totally human antibodies. In April 1998, the Company commenced enrollment in
its Phase I clinical trial for its totally human antibody HumaRAD(16.88) for the
treatment of head and neck cancer and plans to submit an IND with the FDA to
commence a Phase I clinical trial of a related product, HumaRAD(88BV59), for the
treatment of ovarian cancer, in the first half of 1999. In addition, the Company
is developing several antibody products to treat life-threatening infectious
diseases.
Through Bartels, the Company also markets a portfolio of innovative in
vitro diagnostic products for the confirmation of viral and bacterial diseases.
The Company markets these diagnostic products domestically to approximately
1,500 hospitals and clinical laboratories through its internal sales force.
Internationally, the Company relies upon third-party distributors to market its
diagnostic products. In 16 countries, the Company is marketing a one-minute test
for HIV/AIDS based on its proprietary INSTI technology. In addition, the Company
is introducing a number of new diagnostic products, including its Apo-Tek Lp(a)
test kit to monitor an important indicator of heart disease, its Accu-D(x) test
to monitor the recurrence of bladder cancer, and its ZYMMUNE test to monitor
CD4/CD8 levels in patients with AIDS.
The Company's technology foundation in cancer vaccines and human antibodies
is supported by a clinical trial group with expertise in designing and
implementing complex clinical trials and by state-of-the-art manufacturing
facilities capable of producing commercial quantities of its therapeutic,
diagnostic and prognostic products. To conduct research, development,
manufacturing and marketing of its products, the Company employs over 240 people
in multiple facilities, including its corporate headquarters in Issaquah,
Washington, a therapeutic product facility located in Rockville, Maryland and
diagnostic product facilities in Issaquah, Washington and Richmond, British
Columbia, Canada.
BACKGROUND INFORMATION
Overview
Cancer is a family of more than one hundred different diseases which can be
categorized into two broad groups: (i) solid tumors, like colon, breast,
prostate and lung cancer and (ii) hematologic, or blood-borne, cancers like
B-cell lymphoma and leukemia. Both groups are generally characterized by a
breakdown of the cellular mechanisms that ordinarily regulate cell growth and
cell death in healthy tissues.
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Cancers develop from normal cells in the body. When a cell ceases to act
according to its pre-programmed function, it may become malignant and grow
uncontrollably. In solid tumors, malignant cells disrupt the normal function of
the tissues in which they are growing and can also spread to other tissues in
the body or "metastasize." This disruption in vital organs, such as the lungs or
the liver, frequently leads to death. Blood-borne cancers primarily affect blood
cells and the immune system. Death from blood-borne cancers is usually caused by
infection and/or vital organ failure.
Despite a substantial investment in cancer research and development during
the past several decades, the overall incidence of cancer is now higher than it
was 30 years ago. According to the World Health Organization, cancer kills six
million people per annum worldwide. The American Cancer Society estimates that,
in the United States, the incidence of new cancer cases in 1998 will be
approximately 1.2 million and that over 560,000 people will die from cancer. In
addition, according to the American Cancer Society, over 35% of all Americans,
or 85 million people, now living will eventually contract some form of cancer.
According to statistics published by the American Cancer Society which are
based on estimates from the National Cancer Institute, approximately 35% of all
new cancer cases and approximately 24% of cancer deaths in the United States in
1998 will be attributable to colorectal, breast, ovarian, bladder and head and
neck cancer. The diagnosis and treatment of these cancers and B-cell lymphoma
are the subject of current development efforts by the Company. The following
table details the new cases, deaths and direct treatment expenditures for
selected cancers in the United States:
NEW CASES, DEATHS AND ANNUAL EXPENDITURES FOR SELECTED CANCERS IN THE UNITED
STATES
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ANNUAL
EXPENDITURES(2)
TYPE NEW CASES(1) DEATHS(1) (IN MILLIONS)
- ---------------------------------------------------------------------------------
Lung 171,500 160,100 $5,060
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Colorectal 131,600 56,500 6,465
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Breast 180,300 43,900 6,599
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Prostate 184,500 39,200 4,610
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Ovarian 25,400 14,500 906
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Bladder 54,400 12,500 2,172
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Head and neck 30,300 8,000 N/A
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Non-Hodgkin's lymphoma(3) 55,400 24,900 N/A
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(1) Source: American Cancer Society's Cancer Facts and Figures, 1998.
(2) Includes all direct treatment expenses but excludes all indirect and actual
morbidity costs. Source: Brown M.L., Fintor L.; "The Economic Burden of
Cancer," Cancer Prevention and Control, New York, Marcel Dekker, 1995.
(3) Includes B-cell lymphoma which accounts for a vast majority of new cases and
deaths.
Current Cancer Treatments
The three most common methods of treating patients with cancer are surgery,
chemotherapy and radiation. Surgery is primarily performed to remove solid
tumors that are accessible to the surgeon and can be effective if the cancer has
not yet metastasized. Frequently, however, the surgeon cannot remove all of the
cancerous cells associated with the solid tumor. This results in the need for
post-surgical "adjuvant" treatment methods, such as chemotherapy or radiation,
to kill or limit growth of remaining cancerous cells and to prevent recurrence
of the cancer.
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Chemotherapy, which typically involves the intravenous administration of
cytotoxic drugs designed to destroy cancerous cells, is used for the treatment
of both solid tumors and blood-borne malignancies. Chemotherapeutic drugs
generally interfere with cell division and are therefore more toxic to rapidly
dividing cancer cells. Since cancer cells can often survive the effect of a
single drug, several different drugs are usually given in a combination therapy
designed to target overlapping mechanisms of cellular metabolism and to
overwhelm the ability of cancer cells to develop drug resistance. Nevertheless,
partial and even complete remissions achieved by chemotherapy are often not
permanent, because the treatment does not kill all the cancer cells, and the
cancer resumes its progression within a few months or years of treatment.
Chemotherapy is often re-administered to relapsed patients whose response
typically becomes shorter with each successive treatment as resistance
increases. Eventually, most patients become "refractory" to chemotherapy,
meaning that the length of their response, if any, to treatment is so brief as
to conclude that further chemotherapy regimes would be of little or no benefit.
Chemotherapeutic drugs are not sufficiently specific to cancer cells to
avoid affecting normal cells, especially those that are growing rapidly. As a
result, patients often experience debilitating side effects such as nausea,
vomiting, hair loss, anemia and fatigue, as well as life-threatening side
effects such as immune system suppression. These side effects can limit the
effectiveness of therapy because the clinician must avoid exceeding the maximum
dose of drug that the patient can tolerate. Since dosages must be limited to
avoid unacceptable side effects, it may not be possible to administer
sufficiently high doses of chemotherapeutic drugs to overcome the natural
ability of cancer cells to become resistant.
Radiation is employed to irradiate a solid tumor and surrounding tissues
and is a first-line therapy for inoperable tumors, but side effects are a
limiting factor in treatment. Radiation accomplishes its purpose by killing
cancers cells through a process called ionization. Some cells die immediately
after radiation because of the direct effect, though most die because the
radiation damages the chromosomes and DNA thereby limiting cell division.
Radiation is used frequently in conjunction with surgery either to reduce the
tumor mass prior to surgery or to destroy any tumor cells that may remain at the
tumor site after surgery. However, radiation therapy cannot assure that all
tumor cells will be destroyed and has very limited utility for treating
widespread metastatic disease.
Mechanisms of Immunity
The immune system is composed of specialized cells that recognize, destroy
and eliminate disease causing foreign substances or cancer cells. There are two
generally recognized components of immunity, cellular immunity and humoral
immunity. Cellular immunity is effected by T lymphocytes ("T-cells"), natural
killer cells, macrophages, and polymorphonuclear leukocytes. T-cells recognize
and can be directly toxic to viruses, bacteria, parasites and cancer cells.
T-cells also secrete cytokines which recruit and activate other immune cells,
such as macrophages, natural killer cells and polymorphonuclear leukocytes, to
the site of infection or tumor, where these cells engulf, or secrete cytotoxic
substances that kill, the foreign substances, infectious agents or cancer cells.
T-cells also direct the development of humoral immunity. Humoral immunity is
effected by antibodies produced by B lymphocytes ("B-cells"). Antibodies are
proteins produced in response to foreign substances called "antigens."
Antibodies have a region that binds specifically to the antigen and a region
that binds other immune cells such as macrophages and natural killer cells. The
region that binds other immune cells is only recognized by these cells when the
antibody is bound to the antigen. Thus, the antibody specifically directs the
elimination of the antigen from the body. In persons with healthy immune
systems, cancerous cells are recognized as antigens and eliminated through a
process called immune surveillance. In patients with cancer, the immune
surveillance process often fails, thus allowing cancerous cells to evade
elimination by the immune system and develop into tumors and lymphomas. It is
believed, however, that the immune system's ability to fight cancer can be
enhanced through various immunotherapeutic approaches.
Emerging Immunotherapeutic Cancer Treatments
Scientific progress in defining key aspects of the molecular biology and
immunology of cancer in recent years has yielded a number of promising new
treatment approaches, which potentially overcome some of the
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major drawbacks of current treatment modalities. The Company believes that one
of the most promising approaches for the development of cancer treatments is
immunotherapy. The four principal immunotherapeutic or cancer vaccine approaches
are described in the following table and include: (i) Active Specific
Immunotherapy, (ii) Active Non-Specific Immunotherapy, (iii) Antibody-Based
Immunotherapy and (iv) Adoptive Immunotherapy. The Company is developing
products which utilize one or more of the first three of these approaches.
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IMMUNOTHERAPEUTIC APPROACHES
- -------------------------------------------------------------------------------------
TYPE OF IMMUNOTHERAPY DESCRIPTION
- -------------------------------------------------------------------------------------
Active Specific Activation of anti-tumor immunity using antigenic tumor
cells, cell lysates, or extracted/synthetic tumor antigens.
- -------------------------------------------------------------------------------------
Active Non-Specific Activation of anti-tumor immunity and other nonspecific
effector cells using microbial or chemical immunomodulators.
- -------------------------------------------------------------------------------------
Antibody-Based Transfer of antibodies or antisera, providing indirect
enhancement to immunity.
- -------------------------------------------------------------------------------------
Adoptive Transfer of immunological cells from one patient to another.
Active Specific Immunotherapy involves the stimulation of a patient's
immune system by using a patient's own cancer cells or extracted or synthetic
tumor associated antigens. Cancer vaccines based upon active specific
immunotherapy are typically mixed with a non-specific adjuvant whose role is to
stimulate the immune system's response to the vaccine. By isolating cells or
antigenic components from the tumor, mixing them with an adjuvant, and
reintroducing this mixture back into the individual, the immune system may be
induced to develop a response capable of destroying tumor cells. Active specific
immunotherapy treatments are generally being developed as an adjuvant to
surgery. Adjuvant therapy is necessary because surgery often fails to remove all
primary or metastatic cancer cells. Active specific immunotherapy may offer the
means by which an individual's immune system can be activated throughout the
body to search out and destroy these residual cancer cells. The Company's active
specific immunotherapeutic products include OncoVAX(CL) for the treatment of
colon cancer and ASI(BCL) for the treatment of B-cell lymphoma.
Active Non-Specific Immunotherapy involves the stimulation of a patient's
immune system by using non-specific microbial or chemical immunomodulators, such
as Bacillus Calmette-Guerin ("BCG"), the only FDA-approved immunomodulator for
the treatment of bladder cancer. The mechanisms by which these non-specific
immunomodulators enhance the immune response to antigens are poorly understood
but are thought to involve the inducement of a local inflammatory reaction. This
reaction results in the recruitment and activation of antigen presenting cells,
the production of cytokines and the recruitment of effector T-cells and B-cells
to the site of the antigen. Some of these non-specific agents have also been
shown to be effective as immunogenic carriers and adjuvants. The Company's
active non-specific immunotherapeutic products include KLH for the treatment of
refractory bladder cancer.
Antibody-Based Immunotherapy involves the use of anti-cancer monoclonal
antibodies as stand-alone therapeutics to augment a patient's immune system or
as targeting mechanisms for the administration of radiation or chemotherapy.
While monoclonal antibodies have been shown to be effective in binding to cancer
cells, problems associated with their specificity, immunogenicity and variable
binding properties have to date resulted in a limited number of useful
applications for even the most effective monoclonal antibodies when used alone.
Research has increasingly moved towards using monoclonal antibodies as vehicles
for targeting the administration of radiation or chemotherapy to the immediate
vicinity of malignant cells. The Company's antibody-based immunotherapeutic
products include HumaRAD(16.88) and HumaRAD(88BV59), totally human antibodies
labeled with (90)Yttrium for the intratumoral treatment of head and neck cancer
and of ovarian cancer, respectively.
Adoptive Immunotherapy involves the transfer of immunological cells with
anti-cancer properties from one patient into another in the hope that these
cells either directly or indirectly produce anti-cancer effects on
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growing tumors. Although significant advances have been made, the available data
remains inconclusive. At present, the Company is not active in this field.
THERAPEUTIC PRODUCTS
The Company has accumulated and developed proprietary technology and
expertise in several different approaches to the development of cancer vaccines
and immunotherapeutics. The diversity of the Company's product and technology
portfolio reflects the Company's belief that different approaches are required
for different cancers. The following table sets forth the Company's leading
therapeutic and in vivo monitoring products, classifies each according to its
immunotherapeutic approach, specifies the cancer indication treated or monitored
by each and summarizes the regulatory status of each:
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THERAPEUTIC PRODUCTS
- -------------------------------------------------------------------------------------------------------
IMMUNOTHERAPEUTIC/ CLINICAL TRIAL STATUS/
PRODUCT DIAGNOSTIC APPROACH INDICATION EXPECTED MILESTONES(1)
- -------------------------------------------------------------------------------------------------------
OncoVAX(CL) Active Specific Stage II colon cancer Phase III complete, BLA
Immunotherapy filing expected in late
1998. Launch in Europe
expected in first half
of 1999.(2)
- -------------------------------------------------------------------------------------------------------
OncoVAX(CL) plus Active Specific plus Stage III colon cancer Amendment to IND filed
chemotherapy chemotherapy for Phase III.(3)
- -------------------------------------------------------------------------------------------------------
HumaSPECT Antibody-Based Diagnosis Monitoring of colon BLA submitted in the
cancer United States. MAA
submitted in Europe,
where EMEA has
recommended approval.(4)
- -------------------------------------------------------------------------------------------------------
KLH Active Non-Specific Refractory bladder cancer Phase III initiated.
Immunotherapy
- -------------------------------------------------------------------------------------------------------
ASI(BCL) Active Specific B-cell lymphoma Phase II/III amendment
Immunotherapy to IND planned for
submission in 1999.
- -------------------------------------------------------------------------------------------------------
HumaRAD(16.88) Antibody-Based Diagnosis Head and neck cancer Phase I enrollment
commenced.
- -------------------------------------------------------------------------------------------------------
HumaRAD(88BV59) Antibody-Based Diagnosis Ovarian cancer Phase I IND planned for
submission in 1999.
- -------------------------------------------------------------------------------------------------------
HumaSPECT Antibody-Based Diagnosis Ovarian cancer Phase II completed.
- -------------------------------------------------------------------------------------------------------
MONOGENE(INT) Antibody-Based gene HIV Phase I IND planned for
therapy submission in 1999.
- -------------------------------------------------------------------------------------------------------
- ---------------
(1) See "Risk Factors -- Government Regulation" and "-- Government Regulation."
(2) See "Risk Factors -- Dependence on OncoVAX(CL)" for a description of certain
issues relating to the proposed BLA filing.
(3) See "Risk Factors -- Dependence on OncoVAX(CL)" for a description of certain
issues relating to the status of this IND amendment.
(4) See "Business -- Therapeutic Products -- OncoVAX(CL) for the treatment of
colon cancer" for a description of certain issues relating to the Company's
BLA for HumaSPECT.
OncoVAX(CL) for the treatment of colon cancer
The American Cancer Society estimates that approximately 95,600 Americans
will be diagnosed with colon cancer in 1998 and approximately 47,700 will die
from colon cancer in 1998, ranking second only to lung cancer as a cause of
death from cancer. According to Facts and Figures in the European Community
(1993), colon cancer afflicts over 120,000 people annually in Europe, with
deaths from colon cancer estimated at over
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79,000 per year. Colon cancer is generally classified into four categories or
stages according to the status of the tumor nodes and metastasis. In Stage I
colon cancer, the tumor has not penetrated the bowel wall and surgery is
curative in more than 90% of the cases. In Stage II colon cancer, penetration of
the bowel wall has occurred but regional lymph nodes are negative and surgery is
curative for approximately 70% of these patients. Approximately two-thirds of
patients with colon cancer present with Stage II disease. In Stage III colon
cancer, the tumor has spread to the lymph nodes and the cure rate is moderate to
poor depending on the extent of lymph node involvement. In Stage IV colon
cancer, the cancer has spread to other vital organs in the body and is fatal in
the vast majority of cases. Generally, patients that recur present with advanced
colon cancer and the prognosis for these patients is very poor.
Except for surgery, there is no medically accepted treatment for either
Stage I or Stage II colon cancer and trials using adjuvant chemotherapy have not
clearly demonstrated any patient benefit. For Stage III colon cancer, a
combination of the chemotherapeutic drugs 5-fluorouracil ("5-FU") and levamisole
or leucovorin is the treatment of choice in the United States and in Europe. The
Company estimates that between 20% and 30% of patients fail to complete their
course of chemotherapy because of adverse reactions.
OncoVAX(CL) is an active specific immunotherapeutic for the post-surgical
treatment of patients diagnosed with Stage II colon cancer. OncoVAX(CL) is
prepared for each patient using the patient's own surgically removed tumor.
After receipt at an OncoVAX Center, the tumor is enzymatically treated to
separate the tumor cells and these cells are frozen awaiting preparation of the
vaccine. The vaccine consists of a regimen of four inoculations administered
over a period of six months. When a patient presents approximately four to five
weeks after surgery for the first inoculation and one week later for the second
inoculation, a portion of the tumor cells is thawed, irradiated to neutralize
tumorigenic potential and combined with a proprietary formulation of BCG that
serves as an immunogenic enhancer. The third inoculation (given one week after
the second inoculation) and the final booster inoculation (given six months
after the initial inoculation) are prepared the same way but without the
addition of BCG.
In the Amsterdam trial, OncoVAX(CL) was tested in the prospectively
randomized multi-center Phase III clinical trial. A total of 254 patients were
randomized postoperatively to receive either OncoVAX(CL) or no further treatment
after eligibility was established. Eligible patients included patients with
confirmed Stage II or Stage III disease whose primary tumors had an adequate
number of cells to allow for the production of OncoVAX(CL). Twelve hospitals
within a four hour radius of University Hospital screened potential candidates
for the protocol. The potential candidate's colon resection was performed at one
of the twelve sites, and the tumor specimen was transported to University
Hospital's vaccine production laboratory for processing.
The Company believes that the Amsterdam trial demonstrated that, at a
median follow-up period of 5.4 years after treatment, OncoVAX(CL) significantly
reduces the rate of tumor recurrences by 44% in patients with Stage II and III
colon cancer. In Stage II patients, OncoVAX(CL) had the greatest impact with a
statistically significant 61% reduction in the rate of recurrences along with
proportional increases in overall survival.
The Company believes that, in addition to its efficacy, OncoVAX(CL) has
demonstrated an extremely favorable safety profile. Over a 15-year period, more
than 700 people have received either a three- or four-shot regimen of
OncoVAX(CL) with no significant side effects reported. The Company believes that
the results of the Amsterdam trial confirmed positive trends seen in the ECOG
and Hoover trials that tested OncoVAX(CL) administered in regimens of three
inoculations without a six-month booster inoculation.
The Company is now preparing a BLA for OncoVAX(CL) for submission to the
FDA in late 1998. The Company is also seeking the necessary registrations and
reimbursement approvals in certain countries in Europe.
To commercialize OncoVAX(CL), the Company is planning to establish OncoVAX
Centers at or near hospitals with established surgery practices. OncoVAX Centers
have been designed to treat up to 2,000 patients per year. Each OncoVAX Center
will require less than 3,000 square feet and contain all the equipment,
facilities and personnel necessary to manufacture, store and administer
OncoVAX(CL). The first centers in the United States are planned for areas
characterized by high population density and high incidence
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of colon cancer. In each OncoVAX Center, the Company will employ a staff of
production technicians and a supervising physician. Each center will be
responsible for collecting tumors from regional colorectal surgeons. The Company
estimates that most OncoVAX Centers can be established and put into operation
for an investment of less that $1.5 million per site. The first OncoVAX Center
in the United States has been established at Lehigh Valley Hospital in
Allentown, Pennsylvania and the first OncoVAX Center in Europe is being
established at University Hospital, Vrije Universiteit, Amsterdam. The Company
plans to establish more than 25 OncoVAX Centers in the United States and more
than 15 in Europe.
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent
HumaSPECT for monitoring recurrence of colon cancer and ASI(BCL) for prevention
of recurrence of disease in B-cell lymphoma. In the immediate term, the Company
plans to use the OncoVAX Centers to conduct a Phase III clinical trial for
OncoVAX(CL) in combination with chemotherapy to treat Stage III colon cancer
patients. See "Risk Factors -- Dependence on OncoVAX(CL)" for the status of the
Company's clinical trial for such product.
The Company plans to market OncoVAX(CL) in conjunction with HumaSPECT,
which has been designed to detect recurrence of colorectal cancer. HumaSPECT is
a totally human antibody that is labeled with a radioisotope and then injected
into a patient to detect recurrent or metastatic spread of colon cancer. Because
HumaSPECT utilizes a human antibody (rather than a non-human antibody that can
elicit an adverse reaction by the patient's own immune system), it can be
repeatedly infused. A multi-center, Phase III clinical trial was completed for
HumaSPECT in 1996. In this trial, HumaSPECT demonstrated to be as accurate as CT
scans in detecting recurrence of colorectal cancer and significantly superior to
CT scans in determining whether a recurrence is inoperable. The Company has
since submitted a BLA to the FDA and an MAA to the EMEA which has now
recommended HumaSPECT for European approval. The Company believes, with the EMEA
recommendation for European approval, that HumaSPECT is the first totally human
antibody approved for use in humans. HumaSPECT is also being evaluated in
clinical trials for its efficacy in detecting recurrent lung, ovarian and
prostate cancer. The Company plans to recommend HumaSPECT to patients vaccinated
with OncoVAX(CL) to monitor recurrence and metastatic spread during the
three-year period following vaccination. HumaSPECT can be administered and the
results interpreted at an OncoVAX Center, with the results sent to a patient's
oncologist or physician for further action, if required.
On November 5, 1997, the FDA advised the Company in writing that its BLA
for HumaSPECT was not approvable at that time. The letter raised questions
regarding clinical and manufacturing issues. The Company submitted responses to
the issues raised in the FDA letter via letters dated April 10 and May 19, 1998.
The Company believes it has fully responded to all issues raised by the FDA.
Once a company fully responds to the FDA, the agency has six months to either
approve the BLA or issue a "complete action" letter setting forth specific
deficiencies, if any, and the actions necessary to receive approval. There can
be no assurance, however, that upon review of these submissions that the FDA
ultimately will approve the BLA for HumaSPECT.
KLH for the treatment of bladder cancer
The American Cancer Society estimates that there will be 54,400 new cases
of bladder cancer in the United States in 1998. Bladder cancer is the fourth
most prevalent malignant disease among male patients and the eighth among female
patients. The Company estimates that approximately 350,000 people in the United
States currently have had or are living with bladder cancer. Patients diagnosed
with bladder cancer present with superficial tumors of which approximately 80%
are papillary and the remaining 20% are carcinoma in situ ("CIS"). Superficial
papillary tumors respond well to endoscopic surgery and post-surgical adjuvant
therapy, but recurrence at the same or another site in the bladder is relatively
common. CIS has particularly invasive and lethal potential and is not amenable
to surgical resection. Intravesicular therapy, using chemotherapy and/or BCG, is
used to treat endoscopically unresectable bladder cancer lesions. It is also
used after surgery as adjuvant therapy designed to prevent recurrences.
The Company is developing an active, non-specific immunotherapeutic
approach for the treatment of bladder cancer using a proprietary formulation of
keyhole limpet hemocyanin. Keyhole limpet hemocyanin is a potent immune
stimulator that induces a non-specific inflammatory response in the bladder.
However, a
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tumor-specific phenomenon may be involved as it has been recognized that keyhole
limpet hemocyanin shares an antigen in common with bladder cancer cells. The
Company believes that keyhole limpet hemocyanin has a significantly more
favorable toxicity profile than BCG therapy and chemotherapy. Keyhole limpet
hemocyanin is also being used by the Company and others as an immunogenic
enhancer for products based upon active specific immunotherapy.
The Company has completed a Phase I/II dose escalation study on KLH for
superficial bladder cancer and CIS of the bladder. KLH was administered as a
treatment for those bladder cancer patients that did not respond to treatment
with BCG or chemotherapy. Data from the Phase I/II study indicates that, of the
25% of all bladder cancer patients who fail to respond to BCG or other forms of
treatment, KLH has a greater than 50% complete response rate. Based upon these
results, the Company has commenced a Phase III clinical trial to evaluate the
efficacy of KLH for the treatment of refractory bladder cancer.
The Company has entered into a strategic partnership agreement for the
marketing and distribution of KLH with Mentor. Under the terms of the agreement,
the Company will receive additional funding for research and development,
milestone payments and 30% of the net sales of the product.
ASI(BCL) for the treatment of B-cell Lymphoma
The American Cancer Society estimates that approximately 55,400 cases of
non-Hodgkin's lymphoma will be diagnosed in the United States in 1998. As with
other cell types in the body, the B-cells and T-cells of the immune system may
become malignant and grow as systemic tumors such as lymphomas. B-cell non-
Hodgkin's lymphomas are one such group of cancers of the immune system and
currently afflict approximately 250,000 people in the United States alone.
B-cell non-Hodgkin's lymphomas are diverse with respect to both diagnosis and
treatment and are generally classified as low-grade, intermediate or high grade.
The Company estimates that approximately half of the 250,000 patients afflicted
with non-Hodgkin's lymphoma in the United States have low-grade or follicular
lymphoma and approximately 18,000 of these have been diagnosed within the
previous 12 months. Treatment alternatives for lymphoma patients include
chemotherapy, radiation and Rituxan(R), which is currently indicated for use in
refractory, low grade, CD20 positive B-cell non-Hodgkin's lymphoma.
In conjunction with researchers at Stanford University, the Company has
been developing ASI(BCL), an active specific immunotherapeutic product for the
treatment of B-cell lymphoma, as an adjuvant therapy to chemotherapy and
antibody-based immunotherapy. The approach is based upon the observation that
each clone of B-cells expresses on the cell surface an antibody unique to that
clone. Each patient's B-cell lymphoma may be characterized by the unique portion
of the antibody molecule, the idiotype, expressed on the surface of that
patient's tumor cells and this idiotype constitutes a patient-specific,
tumor-specific antigen. By stimulating an immune response against this idiotype,
the Company believes that ASI(BCL) may be able to prevent the continuous pattern
of tumor relapse in B-cell lymphoma patients completing remission therapy.
Results from a Phase I study indicated that when B-cell lymphoma patients
were immunized during remission, 71% (15 out of 21) developed an immune response
to ASI(BCL). Of these responding patients, 87% (13 out of 15) remained in a
state of remission for a median duration of 7.9 years. An additional Phase I
activity study has been ongoing since 1995 for which the Company has prepared 31
vaccines of which 27 have now been administered. Based upon results obtained to
date, the Company is preparing to file an amendment to its existing IND to
commence a Phase II/III clinical trial of ASI(BCL) in the United States in the
first half of 1999.
HumaRAD
The Company is developing HumaRAD(16.88) and HumaRAD(88BV59), radiolabeled
human monoclonal antibodies for the treatment of head and neck cancer and of
ovarian cancer, respectively. Focal head and neck cancer grows locally and
usually metastasizes to the regional lymph nodes rather than to distant sites.
This compartmentalization provides an opportunity for intratumoral injection of
a radiolabeled monoclonal antibody. The American Cancer Society estimates that
30,300 people in the United States will develop head and neck cancer in 1998 and
that approximately 8,000 people will die in 1998 from the disease. Surgery and
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40
radiation are the only currently available treatments for head and neck cancer
and are often disfiguring. Like head and neck cancer, ovarian cancer is a
relatively localized disease. The American Cancer Society estimates that, in
1998, there will be 25,400 cases of newly diagnosed ovarian cancer in the United
States and that approximately 14,500 people will die in 1998 from the disease.
Approximately 70% of patients with ovarian cancer are diagnosed with advanced
disease. The introduction of platinum combination chemotherapy and taxol has
greatly improved medium-term survival, but long-term survival rates remain low.
The prognosis is particularly poor for patients with recurrent or progressive
disease.
The Company's HumaRAD products utilize radioimmunotherapy ("RIT"), a form
of targeted radiation therapy, by having a human monoclonal antibody carry a
therapeutic dose of radiation, in this case (90)Yttrium, to tumor cells. By
targeting "compartmentalized" tumors with intratumoral injections of a human
monoclonal antibody, the Company believes its HumaRAD products may overcome
systemic toxicity and the antigenicity of non-human antibodies, two of the major
problems previously encountered with RIT in the treatment of solid tumors.
The Company has developed extensive expertise in the RIT field. The
Company's HumaRAD human monoclonal antibodies bind with a variety of tumor types
in vivo and have been shown to be specific for tumor localization in patients
with colorectal, breast, ovarian and head and neck cancer. One of the most
important advantages seen with these HumaRAD products is their lack of
immunogenicity in patients. This is in contrast to a single administration of a
mouse monoclonal antibody from which the majority of patients develop a human
anti-mouse response precluding further or frequent treatment with the mouse
antibody. The administration of HumaRAD, even following multiple infusions, does
not elicit a human anti-human response. This is important because multiple
infusions are necessary to deliver a therapeutic dose of radiation.
The Company, by using intratumoral injections of HumaRAD(16.88) in patients
with head and neck cancer, has been able to demonstrate that it can deliver
therapeutic doses of radiation to the primary tumor and metastatic lymph nodes.
In ovarian cancer, where the whole peritoneal cavity is at risk and the majority
of patients present with advanced disease, the Company is evaluating the
intraperitioneal administration of HumaRAD(88BV59) in patients who have minimal
residual disease following surgery and chemotherapy. The Company has commenced
enrollment of its Phase I clinical trial of HumaRAD(16.88) for the treatment of
head and neck cancer and plans to submit an IND with the FDA to commence a Phase
I clinical trial of HumaRAD(88BV59) for the treatment of ovarian cancer in the
first half of 1999.
Other products
The successful development of HumaSPECT and the Company's HumaRAD products
has enabled the Company to extend its human antibody program to the development
of products to treat several serious infectious diseases in North America and
Europe. The principal targets of this program are life-threatening infectious
diseases, including nosocomial, or hospital-borne infections, and HIV/AIDS.
The Company is developing human monoclonal antibodies for three different
types of bacteria: staphylococcus epidermidis, enterococcus faecalis and
enterococcus faecium. Some of this work was initiated pursuant to an agreement
with Baxter Healthcare Corporation ("Baxter") which terminated March 1998.
Baxter may have some residual licensing rights to products developed during the
course of this contract. Staphylococcus epidermis is a major cause of infections
of premature infants in hospitals. Enterococcus faecalis and enterococcus
faecium are major causes of serious infections in immunocompromised patients.
The seriousness of enterococcus infection, particularly faecium, is exacerbated
by the increasing prevalence of resistance to antibiotics, including vancomycin.
The Company plans to file an IND to commence Phase I clinical trials of one or
more of these antibodies in the first half of 1999.
The Company has also been developing its MONOGENE(INT) antibody-based gene
therapy product for the treatment of patients with HIV/AIDS. MONOGENE(INT)
involves the introduction of an antibody gene into key immune cells of the body.
The antibody gene allows the immune cells to produce an antibody fragment which
binds to the critical integrase protein and which, in extensive preclinical
testing, has been shown to strongly inhibit HIV infection. The Company believes
that this gene therapy approach is less toxic and less likely to result in viral
resistance than certain other therapies. The Company is currently focused on
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manufacturing clinical grade quantities of MONOGENE(INT) necessary for use in
conducting a Phase I clinical trial.
DIAGNOSTIC PRODUCTS
In addition to its therapeutic products portfolio, the Company also
develops, manufactures and markets a portfolio of in vitro diagnostic products.
The Company's diagnostic business unit has been expanded through acquisition and
internal development to include the following products:
- -------------------------------------------------------------------------------------------------
DIAGNOSTIC PRODUCTS
- -------------------------------------------------------------------------------------------------
PRODUCT DIAGNOSTIC USES STATUS(1)
- -------------------------------------------------------------------------------------------------
Confirmatory diagnostic Viruses and bacteria Being marketed.
products
- -------------------------------------------------------------------------------------------------
INSTI HIV-1/2 HIV Registered or approved in 16
countries.
- -------------------------------------------------------------------------------------------------
Chemotrax(BR) Breast cancer Pre-market approval ("PMA")
application approved. Being marketed.
- -------------------------------------------------------------------------------------------------
ZYMMUNE CD4/CD8 HIV 501(k) cleared. Being marketed.
- -------------------------------------------------------------------------------------------------
Accu-D(x) Bladder cancer 501(k) cleared. Being marketed by
Mentor.
- -------------------------------------------------------------------------------------------------
Apo-Tek Lp(a) Cardiovascular disease 501(k) cleared. Being marketed by
Sigma Diagnostics, Inc. ("Sigma").
- -------------------------------------------------------------------------------------------------
(1) See "-- Government Regulation -- Device Regulation."
Confirmatory diagnostic products
With the exception of pathogens which have a major effect on the blood
supply, such as HIV and hepatitis, a significant volume of virology and
bacteriology testing in the United States and elsewhere continues to employ
standard cell culture techniques. Depending on the pathogen suspected and the
organs involved, a fecal, sputum or blood sample is taken from the patient and
sent to a hospital or clinical laboratory in a plastic transport containing a
liquid preservative. The laboratory incubates the patient sample with a cell-
line selected for its ability to produce the suspected pathogen. After a
standard incubation period, the cells are then exposed to antibodies that
recognize the virus or bacterium for which the test has been designed. These
antibodies are coupled with dyes or enzymes so laboratory technicians can
observe whether the virus or bacterium is present.
Through Bartels, the Company manufactures and/or markets a comprehensive
family of products required for every step of this process and is widely
regarded as one of the leading suppliers in the field. The product portfolio
includes 31 transports, 50 cell-lines, more than 60 antibodies and 66
enzyme-linked immuno-assay ("ELISA") tests. The Company also supplies
instrumentation required to read the results of its ELISA tests. In accordance
with standard industry practice, these instruments are generally placed with
customers under the terms of an agreement that require the customer to make
minimum purchases of the Company's products.
INSTI HIV-1/2
After several international clinical trials, the Company is currently
launching a rapid test for detection of HIV-1 and HIV-2. The INSTI HIV-1/2 test
takes approximately one minute to run, is easy to perform and interpret and is
as sensitive and specific as most instrument-based tests which take more than an
hour or more and many steps to perform. The product has been registered/approved
in India, Thailand, Chile, Russia,
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Pakistan, South Africa, Venezuela, Costa Rica, Panama, Colombia, Jordan, Belize,
Haiti, Dominican Republic, Surinam and Turkey. INSTI HIV-1/2 is the first
product utilizing the Company's INSTI platform technology that provides a fast
and accurate antibody detection system for serum, plasma and whole blood
samples. In addition to speed and accuracy, the INSTI format has been designed
for high-volume, low-cost production. The product is being manufactured at the
Company's facility in Richmond, British Columbia, Canada.
Chemotrax(BR)
Until recently, there has been no FDA-approved test to determine the
sensitivity of solid tumors to the range of chemotherapeutic agents available to
treat these tumors. In 1996, after a four-year PMA application process, Bartels
Prognostics received FDA approval to market Chemotrax(BR), a chemotherapeutic
sensitivity test to be used in conjunction with the treatment of breast cancer.
Clinical trials demonstrated that Chemotrax(BR) accurately measured breast tumor
cell sensitivity to 5-FU, a type of chemotherapy widely used to treat breast and
other cancers, and that assay results correlated closely to patient clinical
responses to 5-FU. Bartels Prognostics has now submitted an investigational
device exemption to the FDA for the testing of six other chemotherapeutic agents
in breast cancer so that a panel of standard chemotherapies can be evaluated for
each breast cancer patient. The Company has exclusive rights to market
Chemotrax(BR).
ZYMMUNE CD4/CD8
The Company is launching ZYMMUNE CD4/CD8, a product to determine the number
of CD4 and CD8 immune cells in the body. CD4/CD8 counts are an important marker
for staging and treating HIV-infected individuals and implementing therapeutic
intervention. The demand for CD4/CD8 testing is expected to grow as patients on
the new triple therapy regimes live longer and require extended monitoring. The
standard methodology used to determine the level of these immune cells has been
a combination of flow cytometry and hematology. ZYMMUNE CD4/CD8 is a simpler,
less costly alternative to the flow cytometer and provides results in less than
35 minutes. The ZYMMUNE CD4/CD8 testing system received final FDA clearance in
August 1996 and is now in expanded field trials.
Accu-D(x)
The Company has developed Accu-D(x), a point-of-care in vitro diagnostic
test for the detection of recurrent bladder cancer. Accu-D(x) is a urine-based
test which can be performed in a physician's office in about seven minutes. The
Company estimates that the market potential for Accu-D(x) in the United States
includes approximately 350,000 persons previously diagnosed with bladder cancer.
Accu-D(x) was cleared for marketing by the FDA in May 1997. The Company has also
entered into an agreement with Mentor for the marketing and distribution of
Accu-D(x), pursuant to which product sales began in early 1998. Under the terms
of the agreement, the Company receives 50% of the net sales of the product.
Apo-Tek Lp(a)
In November 1997, the Company received FDA clearance to market its Apo-Tek
Lp(a) test kit which detects Lipoprotein(a) ("Lp(a)"), a single independent risk
factor for astherosclerotic cardiovascular disease. The Company estimates that
over 57 million Americans have one or more types of cardiovascular disease. The
Company's Apo-Tek Lp(a) test can be used with human serum or plasma to detect
and accurately quantify Lp(a) levels and shows no cross reactivity with
plasminogen or other plasma components. The Company currently has a distribution
agreement with Sigma in connection with Apo-Tek Lp(a), pursuant to which product
sales began in early 1998.
MANUFACTURING
The Company manufactures its therapeutic products in Rockville, Maryland in
a facility of approximately 120,000 square feet. The Rockville, Maryland
facility contains cGMP facilities for production of human monoclonal antibodies,
gene therapy and production of vaccines from antisera as well as extensive
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research and development facilities. The Company manufactures all of its
FDA-cleared diagnostic products in two registered facilities totaling
approximately 54,000 square feet in Issaquah, Washington. The Company's INSTI
HIV-1/2 product is manufactured in a facility of approximately 7,000 square feet
in Richmond, British Columbia, Canada. The Company has established its first
OncoVAX Center in Allentown, Pennsylvania, is establishing its second OncoVAX
Center in Amsterdam, The Netherlands and is planning to establish more than 40
OncoVAX Centers in the United States and Europe to manufacture and administer
OncoVAX(CL). All of the Company's facilities are leased. Upon establishment of
the OncoVAX Centers, the Company believes that its facilities will be adequate
for the foreseeable future.
MARKETING AND SALES
The Company markets and sells its diagnostic products in the United States
through its own direct sales force. Outside the United States, the Company
utilizes local distributors for the sale of its diagnostic products. The Company
has appointed Sigma and Mentor as exclusive world-wide distributors for Apo-Tek
Lp(a) and of Accu-D(x), respectively.
The Company plans to market and sell OncoVAX(CL) and HumaSPECT through
OncoVAX Centers to be established in the United States and Europe. The Company
anticipates that OncoVAX Centers will be supported by account representatives
with both sales and service responsibilities with centralized marketing support
located in Rockville, Maryland. The Company has appointed Mentor as exclusive
world-wide distributor for KLH, but has not appointed distributors for any of
its other therapeutic products.
REIMBURSEMENT
In the United States, almost all people over age 65 have primary health
care coverage through the federal Medicare program administered by the Health
Care Financing Administration ("HCFA"). The strong correlation between the
incidence of cancer and age means that HCFA's decisions concerning coverage and
payment for OncoVAX(CL) by Medicare will be financially significant to the
Company. As an autologous product that will not generally be sold through
traditional commercial channels, OncoVAX(CL) may present unique coverage and
payment issues for Medicare. Currently, once approved by the FDA, Medicare
covers medically necessary biologics administered as part of or incident to a
physician's service when furnished to beneficiaries in settings such as
physicians' offices or clinics. Under federal law, HCFA establishes a separate
payment amount for each FDA-approved drug based on the commercially published
price of the drug. The Company plans to work to ensure that HCFA addresses and
resolves any unique OncoVAX(CL) issues under its existing policies that
generally provide Medicare coverage and payment for FDA-approved drugs. The
Company plans to operate its OncoVAX Centers in compliance with applicable state
licensure requirements and with applicable Medicare regulations.
Medicare's decision concerning coverage of OncoVAX(CL) also may be useful
in assuring private coverage and payment. Adults under age 65 who have insurance
coverage are likely to have employer sponsored or work-related health plans,
which are increasingly likely to involve some element of managed care with
policies similar to those of Medicare. Because coverage and payment issues for
private insurance coverage are heavily dependent on the provisions in the
insurance contract, the Company is planning to work closely with payors and
patients to obtain coverage and payment for OncoVAX(CL).
GOVERNMENT REGULATION
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's therapeutic and diagnostic
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Therapeutic and diagnostic products that are
administered to patients are regulated as drugs or biologic drugs, while
diagnostic products that are used on blood and tissue samples taken from
patients are regulated as devices.
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Drug Regulation
Non-biological drugs and biological drugs are generally subject to some of
the same laws and regulations. Ultimately, however, they are approved under
different regulatory frameworks, with non-biological drugs being approved under
the FDC Act through an NDA and biological drugs being approved under the PHS Act
by a BLA. Among other things, the FDA Modernization Act clarifies that
biological products are subject to the same requirements as non-biological
products under the FDC Act, except that a biological product licensed under the
PHS Act is not required to have an NDA. Thus, as a biologic, OncoVAX(CL) is
subject to IND regulations prior to approval and will be regulated as both a
biologic and a drug once it has an approved BLA. Traditionally, a company
seeking FDA approval to market a biological drug (in contrast to a non-
biological drug) was required to file and obtain approval of a PLA and an
Establishment License Application ("ELA") with the FDA pursuant to the PHS Act
before commercial marketing of the product could begin. The FDA Modernization
Act repealed the statutory requirement for an ELA for a biological product.
Instead, a single BLA covering both the product and the facility in which the
product is manufactured is now required. As of February 19, 1998, the effective
date of the FDA Modernization Act, approval of applications filed under the old
system will result in the issuance of a BLA for the product. No refiling or
other action on the part of the applicant will be required to implement this
conversion to a single license. At the present time, the Company believes that
OncoVAX(CL) and other immunotherapeutics that it may develop will be regulated
by the FDA as biologics.
The steps required before a drug or biologic may be approved for marketing
in the United States generally include (i) preclinical laboratory tests and
animal tests, (ii) the submission to the FDA of an IND application for human
clinical testing, which must become effective before human clinical trials may
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product, (iv) in the case of a biologic, the
submission to the FDA of a BLA, or in the case of a drug, an NDA, (v) FDA review
of the BLA or NDA and (vi) satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is made to assess compliance with
cGMPs. The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approval will be
granted on a timely basis, if at all.
Preclinical studies include laboratory evaluation of the product, as well
as animal studies to assess the safety and potential efficacy of the product.
The results of the preclinical studies, together with manufacturing information
and analytical data, are submitted to the FDA as part of the IND. The IND
automatically will become effective thirty days after receipt by the FDA unless
the FDA, before that time, raises concerns or questions about the conduct of the
trials as outlined in the IND and places the trial on clinical hold. In such
case, the IND sponsor and the FDA must resolve any outstanding concerns before
clinical trials can proceed. There can be no assurance that submission of an IND
will result in FDA authorization to commence clinical trials. Moreover, once
trials have commenced, the FDA may stop the trials, or particular types of
trials, by placing a "clinical hold" on such trials because of concerns about,
for example, the safety of the product being tested or the adequacy of the trial
design. Such holds can cause substantial delay and in some cases may require
abandonment of a product or a particular trial.
Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator consistent with an informed consent. Further, each clinical trial
must be reviewed and approved by an independent Institutional Review Board
("IRB") at each institution at which the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II clinical trials usually involve studies in a limited patient population
to (i) evaluate the efficacy of the drug for specific, targeted indications,
(ii) determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. Phase III clinical trials generally further
evaluate clinical efficacy and test further for safety within an expanded
patient population and at multiple clinical sites. Phase IV clinical trials are
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conducted after approval to gain additional experience from the treatment of
patients in the intended therapeutic indication and to document a clinical
benefit in the case of drugs approved under accelerated approval regulations. If
the FDA approves a product while a company has ongoing clinical trials that were
not necessary for approval, a company may be able to use the data from these
clinical trials to meet all or part of any Phase IV clinical trial requirement.
These clinical trials are often referred to as "Phase III/IV post-approval
clinical trials." Failure to promptly conduct Phase IV clinical trials could
result in withdrawal of approval for products approved under accelerated
approval regulations.
In the case of products for severe or life-threatening diseases, the
initial clinical trials are sometimes done in patients rather than in healthy
volunteers. Since these patients are afflicted already with the target disease,
it is possible that such clinical trials may provide evidence of efficacy
traditionally obtained in Phase II clinical trials. These trials are referred to
frequently as Phase I/II trials. There can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the preclinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA or NDA requesting approval to market
the product. Before approving a BLA or NDA, the FDA will inspect the facilities
at which the product is manufactured and will not approve the product unless the
manufacturing facility is in cGMP compliance. The FDA may delay approval of a
BLA or NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, and/or require postmarketing testing and
surveillance to monitor safety or efficacy of a product. There can be no
assurance that FDA approval of any BLA or NDA submitted by the Company will be
granted on a timely basis, if at all. Also, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
such product may be marketed. Any FDA approvals that may be granted will be
subject to continual review, and newly discovered or developed safety or
efficacy data may result in withdrawal of products from marketing. Moreover, if
and when such approval is obtained, the marketing and manufacture of the
Company's products would remain subject to extensive regulatory requirements
administered by the FDA and other regulatory bodies, including compliance with
cGMPs and adverse event reporting requirements. Failure to comply with these
regulatory requirements could, among other things, result in product seizures,
recalls, fines, injunctions, suspensions, or withdrawals of regulatory
approvals, operating restrictions and criminal prosecutions.
The FDA Modernization Act establishes a new statutory program for the
approval of fast track drugs, including biological products. The fast track
program is designed to facilitate the development and expedite the approval of
therapies that are intended to treat serious or life-threatening conditions,
such as cancer and AIDS, and that demonstrate the potential to address unmet
medical needs for such conditions. Under the new fast track program, a request
for designation may be submitted concurrently with, or any time after, the
submission of an application for an IND. If a product meets the statutory
criteria, the Secretary is required to designate it as a fast track drug within
60 days of the request for designation. An application for a fast track drug may
be approved upon determination that the drug has an effect on a clinical
endpoint or a surrogate endpoint that is reasonably likely to predict clinical
benefit. While precise time frames for approval of fast track products have not
been established, the Prescription Drug User Fee Act established performance
goals correspondence between the FDA Commissioner and Congress committing the
agency to a six-month review period for priority drugs.
The Company may elect to seek approval of OncoVAX(CL) under this
accelerated approval process. If a product is approved under the accelerated
approval regulations, the sponsor may be required to conduct additional adequate
and well-controlled studies to verify that the effect on the surrogate marker
represents improved clinical outcome or otherwise confirm the effect on a
clinical endpoint. In the event such postmarketing studies do not verify the
drug's anticipated clinical benefit, or if there is other evidence that the drug
product is not shown to be safe and effective, expedited withdrawal procedures
permit the FDA, after a hearing, to remove a product from the market. For
products approved under the accelerated approval provisions, promotional
materials must be submitted to the FDA for review 30 days prior to
dissemination.
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Significant uncertainty exists as to the extent to which such initiative will
result in accelerated review and approval. Further, the FDA has not made
available comprehensive guidelines with respect to this initiative, and it
retains considerable discretion in determining eligibility for accelerated
review and approval and is not bound by discussions that an applicant may have
with FDA staff. Accordingly, the FDA could employ such discretion to deny
eligibility of OncoVAX(CL) as a candidate for accelerated review or require
additional clinical trials or other information before approving OncoVAX(CL).
The Company cannot predict the ultimate impact, if any, of the new approval
process on the timing or likelihood of FDA approval of OncoVAX(CL) or any of its
other potential products.
Treatment of patients with an experimental therapy may be allowed under a
treatment IND before general marketing begins and pending FDA approval. Charging
for an investigation product also may be allowed under a treatment IND to
recover certain costs of development, if various requirements are met. The
Company may elect to file a treatment IND pending approval of its BLA for
OncoVAX(CL).
The Company also will be subject to a variety of regulations governing
clinical trials and sales of its products outside the United States. Whether or
not FDA approval has been obtained, approval of a product by the comparable
non-U.S. regulatory authorities must be obtained prior to the commencement of
marketing of the product in their respective countries. The approval process
varies from country to country and the time needed to secure approval may be
longer or shorter than that required for FDA approval.
The pharmaceutical legislation of the European Union requires any person
seeking to market a medicinal product for human use to obtain approval of an
MAA. Procedures for granting such authorizations have been harmonized within the
European Union through the issue of directives for implementation into the
domestic law of each Member State and by Regulations having direct effect. There
are two authorization procedures by which approvals can be sought to market
pharmaceutical products in more than one Member State. The first is a
centralized assessment procedure administered by the EMEA. The second is a
decentralized, or "mutual recognition" procedure available only to
non-biologics. Pursuant to this procedure, an applicant may apply for a national
authorization in one Member State. Upon obtaining that authorization, an
applicant may make further national applications in such other Member States as
are relevant to the applicant, requesting the relevant national authorities in
those Member States to recognize, by reference to the assessment report of the
relevant national authority in the first Member State, the marketing
authorization already granted. In the event of objection, European Union
authorities require that binding arbitration determine whether authorizations
should be granted and, if so, on what terms. The Company's policy is to design
its clinical trials in order to meet the eligibility requirements for
multi-country European Union approval. Drugs designated by the EMEA as
"high-tech" products are evaluated by the EMEA on an expedited basis, generally
within 210 days.
In addition, prices are regulated in most countries other than the United
States. For example, regulators in certain European countries condition their
approval of a pharmaceutical product on the agreement of the seller not to sell
the product for more than a certain price in their respective countries. In some
cases, the price established in any of these countries may serve as a benchmark
in the other countries. As such, the price approved in connection with the first
approval obtained in any of these European countries may serve as the maximum
price that may be approved in the other European countries. Also, a price
approved in one of these European countries that is lower than the price
previously approved in the other European countries may require a reduction in
the prices in such other European countries. In such event, there can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return on the Company's investment in its products.
Device Regulation
Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacturing, labeling,
distribution and promotion of medical devices. In the United States, medical
devices are classified into one of three classes (i.e., Class I, II, or III) on
the basis of the controls deemed necessary by the FDA to reasonably ensure their
safety and effectiveness. Class I devices are subject to general controls (e.g.,
labeling, premarket notification and adherence to cGMPs) and Class II devices
are subject to general and special controls (such as performance standards,
postmarket surveillance,
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patient registries, and FDA guidelines). Generally, Class III devices are those
which must receive premarket approval by the FDA to ensure their safety and
effectiveness (life-sustaining, life-supporting and implantable devices, or new
devices which have been found not to be substantially equivalent to legally
marketed devices). Before a new device can be introduced in the market, the
manufacturer must generally obtain FDA clearance or approval through either
clearance of a 510(k) notification or approval of a PMA application. However,
most Class I devices are now exempt from the FDA's market clearance
requirements.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMA applications.
A PMA application must be supported by valid scientific evidence to demonstrate
the safety and effectiveness of the device, typically including the results of
clinical trials, bench tests and laboratory and animal studies. The PMA
application must also contain a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and any training materials.
Once the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing
and begin its review. Although the FDA has 180 days to review a PMA application,
such reviews generally take one to three years, and may take significantly
longer, from the date the PMA application is accepted for filing.
During the review of a PMA application, an advisory committee likely will
be convened to review and evaluate the application and provide recommendations
to the FDA as to whether the device should be approved. The FDA is not bound by
the recommendation of the advisory panel. In addition, prior to approval, the
FDA generally will inspect the manufacturing facility to ensure compliance with
applicable cGMP requirements. If granted approval, the PMA application may
include significant limitations on the indicated uses for which the product may
be marketed, and the agency may require post-marketing studies of the device.
If the FDA's evaluation of the PMA application or manufacturing facilities
is not favorable, the FDA will deny approval of the PMA application or issue a
"non-approval" letter. The FDA may determine that additional clinical trials are
necessary, in which case approval may be delayed for one or more years while
additional clinical trials are conducted and submitted. The PMA application
process can be expensive, uncertain, and lengthy, and a number of devices for
which FDA clearance has been sought by other companies have never been approved
for marketing. Modifications to a device that is the subject of an approved PMA
application, its labeling, or manufacturing process may require approval by the
FDA of PMA application supplements or new PMA applications. Supplements to a PMA
application often require the submission of the same type of information
required for an initial PMA application, except they are generally limited to
that information needed to support the proposed change.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a preamendment Class III medical device
for which the FDA has not called for PMA applications. In some cases, 510(k)
submissions require clinical data. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, but it may take longer.
The FDA may determine that a proposed device is not substantially equivalent to
a legally marketed device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information could prevent
or delay the market introduction of new products that fall into this category.
For any devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions.
If human clinical trials of a device are required, whether for a 510(k) or
a PMA application, and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) will have
to file an investigational device exemption ("IDE") application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate IRBs, human
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clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs without
the need for FDA approval. Submission of an IDE does not give assurance that the
FDA will approve the IDE and, if it is approved, there can be no assurance that
the FDA will determine that the data derived from these studies supports the
safety and efficacy of the device or warrants the continuation of clinical
studies. Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
Although clinical investigations of most devices are subject to the IDE
requirements, clinical investigations of in vitro diagnostic ("IVDs") tests are
exempt from the IDE requirements, including FDA approval of investigations,
provided the testing meets certain exemption criteria. IVD manufacturers must
also establish distribution controls to assure that IVDs distributed for the
purpose of conducting clinical investigations are used only for that purpose.
Pursuant to current FDA policy, manufacturers of IVDs labeled for
investigational use only ("IUO") or research use only ("RUO") are encouraged by
the FDA to establish a certification program under which investigational IVDs
are distributed to or utilized only by individuals, laboratories, or health care
facilities that have provided the manufacturer with a written certification of
compliance indicating that the IUO or RUO product will be restricted in use and
will, among other things, meet institutional review board and informed consent
requirements.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation,
including routine inspections of facilities by the FDA and certain state
agencies. Manufacturers of medical devices for marketing in the United States
are required to adhere to applicable regulations setting forth detailed cGMP
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product may
have caused or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to cause
or contribute to a death or serious injury. Labeling and promotional activities
are subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with cGMP requirements, MDR requirements, and other
applicable regulations. With respect to devices, the FDA Modernization Act will
affect the IDE, 510(k) and PMA application processes, and also will affect
device standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and postmarket surveillance, accredited third
party review, and the dissemination of off-label information. The Company cannot
predict how or when these changes will be implemented or what effect the changes
will have on the regulation of the Company's products. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, and results of
operations. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.
Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals,
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and criminal prosecution. The FDA also has authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Some states may require licensure of the Company's OncoVAX Centers, and may
have specific requirements concerning the staffing of the OncoVAX Centers. The
structure, staffing, and administration of the patient-care side of the OncoVAX
Centers may differ from state-to-state based on these legal requirements.
The Company's activities in operating its OncoVAX Centers will be subject
to various federal and state laws pertaining to health care fraud and abuse,
including anti-kickback laws, false claims laws, and physician self-referral
laws. Violations of these laws are punishable by criminal and/or civil
sanctions, including, in some instances, imprisonment and exclusion from
participation in federal health care programs, including Medicare, Medicaid,
veteran health programs, and TRICARE. The Company plans to structure and staff
its OncoVAX Centers so as to comply with these laws.
In marketing its current products, the Company also is subject to federal
and state anti-kickback laws that regulate the financial relationships between
manufacturers of products and the hospitals, physicians and other potential
purchasers of medical products or sources of referral related to the purchase of
such products. The statutory prohibitions are broad and are enforceable with
considerable discretion by federal and state authorities. Federal regulations
provide very specific "safe harbors" for only some business practices; other
practices may not be in violation of the law but are not provided a safe harbor.
The Company intends its marketing and sales activities to be in compliance with
these laws, but because of the breadth of the statutory provisions, the Company
cannot provide assurances that its activities in selling and marketing medical
products will not come under scrutiny and challenge under one or more of these
laws.
RADIOACTIVE AND OTHER HAZARDOUS MATERIALS
The NRC and the Agreement States regulate companies that possess
radioactive material and those that manufacture, prepare, or transfer
radioactive drugs for commercial distribution to assure the public's safety
through proper use of radioactive materials. Agreement States typically regulate
in a manner similar to the NRC. The Company's incorporation of radioactive
materials into its HumaRAD products and HumaSPECT subjects it to these NRC
requirements. To comply, the Company must apply for and maintain appropriate
licenses and comply with reporting, recordkeeping, and other regulatory
requirements. Obtaining and maintaining a license includes demonstrating that:
the Company's equipment and facilities are adequate to protect health and
minimize danger to life and property; the personnel are adequately qualified to
operate the equipment; and environmental concerns are adequately addressed.
Other regulatory requirements include specific packaging and labeling
compliance, measuring radiation emitted from products before distribution,
conducting daily inspections and maintaining instruments used to measure the
product's radiation. The regulatory authorities periodically conduct routine
inspections, the frequency of which varies depending on the Company's history
and changes in volume or character of manufacturing operations.
The NRC takes enforcement actions against those companies failing to
achieve compliance with NRC regulations. The Company's failure to comply with
the regulatory requirements could subject it to enforcement actions including
civil penalties up to $5,500 per violation per day and orders to modify,
suspend, or revoke its licenses. With a suspended or revoked license, the
Company would be required to cease possessing the radioactive material necessary
for producing its products and distributing its products. The nature of a
particular penalty will depend on who discovered the violation and upon its
severity, repetitiveness, and the willfulness involved. The manufacturing and
administration of the Company's HumaRAD products and HumaSPECT require the
handling, use and disposal of (90)Yttrium and Technetium Tc 99m, respectively,
each a radioactive isotope. These activities must comply with various state and
NRC regulations regarding the handling and use of radioactive materials.
Violations of these regulations could significantly delay completion of clinical
trials and commercialization of the Company's HumaRAD products and HumaSPECT.
The administration of the Company's HumaRAD products and HumaSPECT entails
the introduction of radioactive materials into patients. These patients emit
radioactivity at levels that pose a safety concern to others around them,
especially healthcare workers for whom the cumulative effect of repeated
exposure to
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radioactivity is of particular concern. These concerns are addressed in
regulations promulgated by the NRC, as well as by various state and local
governments and individual hospitals. Generally, patients who emit radioactivity
above specified levels are required to be hospitalized, where they can be
isolated from others until radiation falls to acceptable levels. The NRC
recently enacted regulations that have made it easier for hospitals to treat
patients with radioactive materials on an outpatient basis. Under these
regulations, the Company's HumaRAD products and HumaSPECT may be administered on
an outpatient basis in most cases. Although state and local governments often
follow the lead of the NRC, many currently do not, and there can be no assurance
that they will do so or that patients receiving the Company's HumaRAD products
and HumaSPECT will not have to remain hospitalized for one to three days
following administration, adding to the overall cost.
The Company expects to continue using hazardous chemicals and radioactive
compounds in its ongoing research activities. Although the Company believes that
safety procedures for handling and disposing of such materials will comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company could be held liable for any damages that result from
such an accident, contamination or injury from the handling and disposal of
these materials as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company believes that patent and trade secret protection is important
to its business and that its future will depend in part on its ability to
maintain its technology licenses, protect its trade secrets, secure additional
patents and operate without infringing the proprietary rights of others.
Currently, the Company has an extensive portfolio of patents and additional
pending patent applications in connection with most of the Company's therapeutic
products. This includes United States Patent No. 5,484,596, which covers the
OncoVAX(CL) method of treatment and will expire in January 2013.
Extensive research has been conducted in the cancer vaccine and monoclonal
antibody fields and by pharmaceutical and biotechnology companies and other
organizations and a substantial number of patents in these fields have been
issued to other pharmaceutical and biotechnology companies. In addition,
competitors may have applications for additional patents pending and may obtain
additional patents and proprietary rights related to products or processes
competitive with or similar to those of the Company. Patent applications are
maintained in secrecy for a period after filing and, in the United States,
patent applications are confidential until the patent is issued. Publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries and the filing of related patent applications. The Company may not
be aware of all of the patents potentially adverse to the Company's interests
that may have been issued to other companies, research or academic institutions,
or others. No assurance can be given that such patents do not exist, have not
been filed, or could not be filed or issued, which contain claims relating to
the Company's technology, products or processes. To date, no consistent policy
has emerged regarding the breadth of claims allowable in pharmaceutical and
biotechnology patents.
The Company is aware of various patents that have been issued to others
that pertain to a portion of the Company's prospective business. There can be no
assurance that patents do not exist in the United States or in other countries
or that patents will not be issued to third parties that contain preclusive or
conflicting claims with respect to OncoVAX(CL) or any of the Company's other
product candidates or programs. Commercialization of cancer vaccines and
monoclonal antibody-based products may require licensing and/or cross-licensing
of one or more patents with other organizations in the field. There can be no
assurance that the licenses that might be required for the Company's processes
or products would be available on commercially acceptable terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial
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condition and results of operations. Litigation, which could result in
substantial costs to the Company, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine priority
of invention, which could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. An adverse outcome could subject
the Company to significant liabilities to third parties and require the Company
to license disputed rights from third parties or to cease using such technology.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Many non-United States
jurisdictions allow oppositions by third parties to granted patents and/or
issued patents. The Company may have to participate in opposition proceedings in
non-United States jurisdictions to prevent a third party from obtaining a patent
that may be adverse to the Company's interests. Also, the Company may have to
defend against a third party's opposition to a patent granted and/or issued to
the Company. There can be no assurance that the Company will be successful in an
opposition proceeding, and participation in such a proceeding could result in
substantial cost to the Company whether or not the eventual outcome is favorable
to the Company. Moreover, there is certain subject matter which is patentable in
the United States and not generally patentable outside of the United States and
may limit the protection the Company can obtain on some of its inventions
outside of the United States. For example, methods of treating humans are not
patentable in many countries outside of the United States. These and/or other
issues may prevent the Company from obtaining patent protection outside of the
United States which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies on trade secrets and trademarks to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its key employees, consultants, medical
advisory board members, collaborators and contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and trademarks or
those of its collaborators or contractors will not otherwise become known or be
discovered independently by competitors.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
Many of the product candidates being developed by the Company, if approved,
would compete with existing drugs, therapies and diagnostic products. There are
many pharmaceutical companies, biotechnology companies, public and private
universities and research organizations actively engaged in research and
development of products for the treatment of people with cancer. Many of these
organizations have financial, technical, manufacturing and marketing resources
greater than those of the Company. Several of them may have developed or are
developing therapies or diagnostic products that could be used for treatment or
diagnosis of the same diseases targeted by the Company. If a competing company
were to develop or acquire rights to a more efficacious therapeutic or
diagnostic product for the same diseases targeted by the Company, or one which
offers significantly lower costs of treatment or diagnosis, the Company's
business, financial condition and results of operations could be materially
adversely affected.
The Company believes that competition in the development and marketing of
new cancer therapies will be based primarily on product efficacy and safety,
time to market and price. To the extent the Company's product programs are
successful, it also intends to rely to some degree on patents and other
intellectual property and orphan drug designations to protect its products from
competition.
The Company believes that its product development programs will be subject
to significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that
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develop and apply technologies similar to the Company's technologies. Other
companies may succeed in developing products earlier than the Company, obtaining
approvals for such products from the FDA more rapidly than the Company or
developing products that are more effective than those under development or
proposed to be developed by the Company. There can be no assurance that research
and development by others will not render the Company's technology or product
candidates obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of human therapeutic and diagnostic products
involve an inherent risk of product liability claims and associated adverse
publicity. The Company has only limited commercial product liability insurance.
There can be no assurance that the Company will be able to maintain existing
insurance or obtain additional product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. An inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims brought against the Company in excess of its insurance
coverage, if any, or a product recall could have a material adverse effect upon
the Company's business, financial condition and results of operations.
HUMAN RESOURCES
As of June 30, 1998, the Company had over 240 employees. The Company's
employees are not represented by a collective bargaining agreement. The Company
believes its relations with its employees are good.
MEDICAL ADVISORY BOARD
The Company's Medical Advisory Board is comprised of internationally
recognized clinical researchers in the fields of oncology and cancer surgery.
The Medical Advisory Board advises the Company's management on strategic issues
related to the Company's clinical development programs and consists of the
following individuals:
Herbert C. Hoover, Jr., M.D., co-chairman of the Medical Advisory Board, is
the Chairman of the Department of Surgery at Lehigh Valley Hospital in
Allentown, Pennsylvania and the Vice Chairman of the Department of Surgery and
Professor of Surgery at Pennsylvania State University/Milton S. Hershey Medical
Center, Hershey, Pennsylvania. Dr. Hoover is the holder of the Anne C. and Carl
R. Anderson Chair of Surgery at Lehigh Valley Hospital. Dr. Hoover obtained a
B.A. from the Kansas State College of Pittsburgh in 1966 and his M.D. in 1970
from the University of Kansas School of Medicine. Dr. Hoover is a member of
numerous professional societies and national, regional, medical school and
hospital committees and boards, as well as being on the editorial board of
various medical and scientific journals.
Herbert Michael Pinedo, M.D., Ph.D., co-chairman of the Medical Advisory
Board, is Professor of Medical Oncology and Chief of the Department of Medical
Oncology at the Vrije Universiteit in Amsterdam, the Netherlands. Dr. Pinedo
obtained his M.S. and his M.D. degree in 1967 and his Ph.D. in Medical Science
in 1972, from the Medical School of the University of Leiden in Amsterdam, the
Netherlands. Dr. Pinedo belongs to numerous professional societies, university
and hospital committees and boards, and is on the editorial boards of numerous
medical journals.
Michael Andrew Choti, M.D. is Director, Johns Hopkins Colon Cancer Center,
and Medical Director, Outpatient Center at The Johns Hopkins Hospital and has
been Assistant Professor in the Department of Surgery at The Johns Hopkins
School of Medicine since 1992, Assistant Professor in the Department of Oncology
at The Johns Hopkins School of Medicine since 1995, and a full-time staff member
in the Department of Surgery at The Johns Hopkins Hospital. Dr. Choti obtained
his B.S. in 1979 from the University of California at Irvine and his M.D. in
1983 from Yale University School of Medicine. Dr. Choti is a member in various
professional societies as well as being involved in various professional
activities.
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Ronald Levy, M.D. has been Chief of the Division of Oncology at Stanford
University School of Medicine since 1993. From 1987, Dr. Levy has been Professor
of Medicine, Division of Oncology, at Stanford University School of Medicine,
Summy Chair at Stanford University School of Medicine, and an American Cancer
Society Clinical Research Professor. Dr. Levy obtained his A.B. from Harvard
University in 1963 and obtained his M.D. from Stanford University in 1968. Dr.
Levy is a member of numerous medical societies and an active member of various
professional review organizations, including the Margaret Early Trust Research
Grant Committee and the Scientific Advisory Board of CellPro, Bothell,
Washington.
H. Kim Lyerly, M.D., Ph.D. is Professor of Surgery, Immunology, and
Pathology and Clinical Director of the Duke Center for Genetic and Cellular
Therapies at Duke University Medical Center. Dr. Lyerly obtained his B.S. in
1980 from the University of California at Riverside and his M.D. from the
University of California at Los Angeles in 1983. Dr. Lyerly is on the Editorial
Board of Annals of Surgery and International Journal of Surgical Science. Dr.
Lyerly has been awarded numerous honors and belongs to numerous professional
societies. Since 1990, Dr. Lyerly has been a research sponsor working with
various M.D.s and Ph.D.s, as well as an investigator since 1988 working on
protocols for the treatment of diseases such as AIDS and leukemia, and on
molecular therapeutics programs.
Bruce G. Wolff, M.D. is Professor of Surgery at the Mayo Medical School and
a consultant in colon, rectal, and general surgery, at the Mayo Clinic. Dr.
Wolff obtained a B.S. from Davidson College and his M.D. from Duke University
School of Medicine. Dr. Wolff belongs to numerous in-house Mayo Clinic
organizations as well as national and regional organizations including being
vice-chairman of the American Cancer Society Executive Committee on Allied
Health Personnel.
LEGAL PROCEEDINGS
The Company is party to claims and litigation that arise in the normal
course of business. Management believes that the ultimate outcome of these
claims and litigation will not have a material impact on the financial position
or results of operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
current directors and executive officers.
NAME AGE POSITION
- -------------------------- --- ----------------------------------------------------------
Michael G. Hanna, 62 Chairman of the Board and Chief Scientific Officer
Ph.D. ..................
Simon R. McKenzie......... 41 President, Chief Executive Officer and Director
Daniel S. Reale........... 43 Senior Vice President and President, OncoVAX(CL) Division
Persis M. Strong.......... 44 Senior Vice President and President, Bartels Diagnostics
Division
Lawrence A. Bloom......... 42 Senior Vice President, Corporate Development
Diana Goroff, Ph.D........ 44 Vice President, Operations
Peggy McGaw............... 40 Vice President, Finance
Carl T. Foster............ 33 Vice President, Business Development
Raymond J. Schuyler....... 62 Director
Joseph Caligiuri.......... 69 Director
Steven Gerber, M.D. ...... 44 Director
Alexander Klibanov, 48 Director
Ph.D. ..................
- ---------------
Michael G. Hanna, Ph.D. is currently Chairman of the Board and Chief
Scientific Officer of the Company. Dr. Hanna had been Chairman of the Board,
Chief Executive Officer and President of PerImmune since 1994. Dr. Hanna founded
the Litton Institute of Applied Biotechnology ("LIAB") in 1982. In 1985, Organon
Teknika assumed operations of LIAB and Dr. Hanna served as Senior Vice President
of Organon Teknika. Prior to his position at LIAB in 1982, Dr. Hanna served as
the Director of the National Cancer Institute, Frederick Cancer Research Center.
Simon R. McKenzie founded Intracel in 1987 and serves as President, Chief
Executive Officer and a director of the Company. From 1987 to the present, Mr.
McKenzie has served as President of Intracel and, from 1995 to 1997, Mr.
McKenzie was also Chairman of the Board. Prior to forming Intracel, Mr. McKenzie
co-founded and managed Baltech, Inc., an early stage pharmaceutical company
developing a new class of antiviral drugs including candidates for treating
Herpes Simplex. Since 1997, Mr. McKenzie has served on the Board of Directors of
New Century Pharmaceuticals, an early stage company working in x-ray
crystallography.
Daniel S. Reale is currently Senior Vice President of the Company and
President of the Company's OncoVAX(CL) Division. From 1994 to 1997, Mr. Reale
served as President and Chief Operating Officer of Coral Therapeutics, a
provider of in-hospital apheresis-based technologies, where he was responsible
for the establishment of 10 hospital-based state-of-the-art blood service units
in cGMP environments. From 1989 to 1994, Mr. Reale served as Senior Vice
President, Operations for Chartwell Home Therapies, L.P., where Mr. Reale
oversaw 14 infusion pharmacies with hospital based supporting clinics.
Persis M. Strong presently serves as Senior Vice President of the Company
and President of the Company's Bartels Diagnostics Division. She joined the
Company in 1995 as Vice President of Marketing. Ms. Strong has over 17 years of
management and business development experience in the medical diagnostics
industry. Prior to joining the Company, Ms. Strong spent 7 years with Binax,
Inc., a point-of-care diagnostics company, where she served as Vice President of
Marketing. From 1981 to 1988, Ms. Strong was employed by Ventrex Laboratories,
Inc., a biotechnology company, in various marketing and management positions.
Ms. Strong has extensive international business experience and has successfully
organized and negotiated manufacturing and distribution arrangements in over 35
international markets.
Lawrence A. Bloom is Senior Vice President of Corporate Development for the
Company. From 1996 to 1997, Mr. Bloom was a consultant to emerging biotechnology
companies. From 1991 to 1995, Mr. Bloom
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served as Senior Vice President for Dillon Read Inc., an investment banking
firm. From 1985 to 1990, Mr. Bloom served as Vice President and Associate
Portfolio Manager for Lehman Management Co., a $15 billion money management
division of Shearson/Lehman American Express.
Diana Goroff, Ph.D. is Vice President of Operations. From 1991 to 1998, Dr.
Goroff served as Director of Parenteral Drug Manufacturing for PerImmune. Dr.
Goroff has extensive experience with production of monoclonal antibodies and has
recently managed the clinical production of the Company's first totally human
antibody.
Peggy McGaw is Vice President, Finance and joined the Company in January
1998. From 1995 to 1997, Ms. McGaw served as the Financial Reporting Manager of
Western Wireless Corp., a telecommunication service provider. From 1991 to 1995,
Ms. McGaw was employed by PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.), most recently as a Business Assurance Manager affiliated with the
firm's National High Tech Group. Ms. McGaw is a certified public accountant and
has extensive experience working with emerging technology base companies and in
obtaining public financing.
Carl T. Foster joined the Company as Vice President of Business Development
in June 1998. From 1997 to June 1998, Mr. Foster served as Managing Director of
Ferghana Partners, Inc., an investment banking firm. From 1989 to 1997, Mr.
Foster was employed by Merck and Co., Inc. and Astra Merck, Inc., which are
affiliated pharmaceutical companies, most recently as Director of Licensing and
Business Development of Astra Merck, Inc..
Raymond J. Schuyler has been a director of Intracel since August 1995. Mr.
Schuyler is a Senior Vice President and Chief Investment Officer of Orion
Capital and Security Insurance Co. of Hartford, one of Intracel's principal
institutional stockholders. Mr. Schuyler has been involved in investment banking
and portfolio management for more than 38 years.
Joseph Caligiuri became a director of Intracel immediately following the
Merger. Mr. Caligiuri retired as a Corporate Executive Vice President of Litton
Industries, Inc. in April 1993, where he had worked since 1969. Mr. Caligiuri
also serves as a member of the Board of Directors of Titan Corporation, a
commercial and military electronic and information systems company and Avnet,
Inc., an electronics components and distribution company.
Steven Gerber, M.D. became a director of Intracel immediately following the
Merger. Dr. Gerber is a senior pharmaceutical industry analyst and Head of
Healthcare Research for CIBC Oppenheimer, an investment banking firm. Dr. Gerber
holds a medical staff appointment at Cedars-Sinai Medical Center in Los Angeles.
He is also a member of the Board of Overseers of Tufts University School of
Medicine, and a member of the Board of Directors of Syncor International
Corporation.
Alexander Klibanov, Ph.D. has been a director of Intracel since July 1992.
For more than five years, Dr. Klibanov has been a Professor of Chemistry in the
Department of Chemistry at the Massachusetts Institute of Technology. He serves
on the editorial and review board of numerous scientific publications in the
fields of chemistry and biochemistry. He is a leader in the fields of
enzymology, having published numerous related articles in leading publications.
There are no family relationships among any of the persons who are
directors or executive officers of Intracel.
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SUMMARY OF EXECUTIVE COMPENSATION
The table below sets forth certain information concerning the compensation
earned by the Company's Chief Executive Officer and each of the other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") whose aggregate cash compensation exceeded $100,000 for
services rendered in all capacities to the Company during the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------- ----------------------------
SHARES OF
COMMON STOCK
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUSES OPTIONS COMPENSATION
- ------------------------------------------ -------- ------- ------------ ------------
Simon R. McKenzie
President and Chief Executive Officer... $186,434
Persis M. Strong
Senior Vice President, Marketing........ 118,550 20,000
Matthew L. Root
Chief Financial Officer(1).............. 94,003 $20,000
Cheryl Cataldo
Corporate Secretary(1).................. 111,374
- ---------------
(1) Mr. Root served as chief financial officer for a portion of 1997, and Ms.
Cataldo served as an executive officer for a portion of 1997. They were not
officers of the Company as of the last day of fiscal year 1997.
The following table sets forth information regarding stock options granted
pursuant to the Company Stock Option Plan (as defined) during the fiscal year
ended December 31, 1997 to each of the Named Executive Officers. The Company has
never granted any stock appreciation rights.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF
GRANTED TO STOCK PRICE
NUMBER OF EMPLOYEES APPRECIATION FOR
SECURITIES IN FISCAL YEAR OPTION TERM
UNDERLYING OPTIONS ENDED EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED DECEMBER 31, 1997 PER SHARE(1) DATE 5% 10%
- ---------------------- ------------------ ----------------- -------------- ---------- --------- ---------
Simon R.
McKenzie(2).........
Persis M. Strong(2)... 20,000 15.4% $4.50 12/31/02 $24,865 $54,946
Matthew L. Root.......
Cheryl Cataldo........
- ---------------
(1) All share numbers and prices adjusted to reflect a two-for-one stock split
on December 31, 1997. The Company granted options totaling 130,000 shares
(as adjusted) during the year ended December 31, 1997.
(2) As of April 30, 1998, the Company granted Mr. McKenzie warrants to purchase
679,341 shares of common stock at an exercise price of $4.50 and options to
Ms. Strong to purchase 15,000 shares of common stock at an exercise price of
$7.50 per share.
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No options were exercised by the Named Executive Officers in 1997. The
following table sets forth the specified information concerning unexercised
options held by the Named Executive Officers as of December 31, 1997.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES SUBJECT VALUE OF UNEXERCISED
TO UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------- ------------- ----------- -------------
Simon R. McKenzie...................... 200,000(2) $475,480
Persis M. Strong....................... 51,666(2) 28,334 90,000 $ 30,000
Matthew L. Root........................
Cheryl Cataldo......................... 7,467 13,333 4,933 6,667
- ---------------
(1) Calculated based upon the difference between the exercise price and the
estimated fair market value of the underlying securities as of December 31,
1997.
(2) As of April 30, 1998, the Company granted Mr. McKenzie warrants to purchase
679,341 shares of common stock at an exercise price of $4.50 per share and
options to Ms. Strong to purchase 15,000 shares of common stock at an
exercise price of $7.50 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its key
employees. The following is a summary of the material terms and conditions of
such agreements and is subject to the detailed provisions of the respective
agreements attached as exhibits to the Registration Statement.
Dr. Hanna entered into an employment agreement with the Company as of
January 2, 1998, providing for his employment as Chairman of the Board and Chief
Scientific Officer of the Company with a base salary of $200,000, which may be
increased by discretionary bonus payments. In addition, the agreement provides
for a $50,000 bonus if the Company's initial OncoVAX Center commences treatment
of its first cancer patient prior to December 31, 1998 and a bonus of $50,000 if
HumaSPECT receives FDA or MAA final approval prior to September 30, 1998. The
Company may terminate employment for cause (as defined) or either party may
terminate upon 30 days prior notice. Pursuant to the employment agreement, the
Company has provided to Dr. Hanna a $2,000,000 life insurance policy which will
be fully-funded within five years. Dr. Hanna's compensation also includes
customary perquisites and other personal benefits. If Dr. Hanna's employment is
terminated without cause, or Dr. Hanna terminates the agreement by reason of
constructive discharge (as defined), the Company is obligated to pay him a lump
sum amount equal to the monthly portion of his base salary multiplied by 36,
certain benefits for a three-year period following termination and, to the
extent he is not fully vested with the Company retirement plans, the difference
between any amounts payable to him under such plans and amounts which would have
been payable had he been vested. If employment is terminated on account of
medical disability (as defined), the Company is obligated to pay Dr. Hanna an
amount equal to two-thirds of his base salary (less any amounts paid as workers
compensation, social security disability or other federal, state or local
disability benefits) for the period ending the earlier of (i) the date that Dr.
Hanna becomes employed in a full-time manner or substantially full-time basis,
in which case he shall receive his base salary without adjustment or (ii) the
date that Dr. Hanna attains normal retirement age. The agreement has an initial
three-year term and shall be negotiated on an annual basis upon expiration of
the initial term. The agreement also provides that Dr. Hanna may not engage in
certain competitive activities with the Company for a period of one year
following termination of the agreement.
Mr. McKenzie entered into an employment agreement with the Company as of
January 2, 1998, providing for his employment as President and Chief Executive
Officer of the Company with a base salary of $200,000, which may be increased by
discretionary bonus payments. In addition, the agreement provides for a $50,000
bonus if a private placement of the Company's equity securities aggregating not
less than $3,000,000 is consummated by December 31, 1998 and a bonus of $50,000
if a public offering of the Company's equity securities registered under the
Securities Act aggregating not less than $20,000,000 is consummated by December
31, 1998. In addition, pursuant to the agreement the Company granted to Mr.
McKenzie warrants,
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exercisable at $4.50 per share, to acquire shares of common stock in an amount
which will result in ownership of six percent of the Company's capital stock on
a fully-diluted basis. Mr. McKenzie's compensation also includes customary
perquisites and other personal benefits. The Company may terminate employment
for cause (as defined) or either party may terminate the agreement upon 30 days
prior notice. If such agreement is terminated without cause, or Mr. McKenzie
terminates the agreement by reason of constructive discharge (as defined), the
Company is obligated to pay him a lump sum amount equal to the monthly portion
of his base salary multiplied by 36, certain benefits for a three-year period
following termination and, to the extent he is not fully vested with the Company
retirement plans, the difference between any amounts payable to him under such
plans and amounts which would have been payable had he been vested. If
employment is terminated on account of medical disability (as defined), the
Company is obligated to pay Mr. McKenzie an amount equal to two-thirds of his
base salary (less any amounts paid as workers compensation, social security
disability or other federal, state or local disability benefits) for the period
ending the earlier of (i) the date that Mr. McKenzie becomes employed in a
full-time manner or substantially full-time basis, in which case he shall
receive his base salary without adjustment or (ii) the date that Mr. McKenzie
attains normal retirement age. The agreement has an initial four-year term and
shall be negotiated on an annual basis upon expiration of the initial term. Mr.
McKenzie has agreed not to compete with the Company for a period of one year
following termination of the agreement.
Mr. Reale entered into an employment agreement with the Company effective
March 8, 1998, providing for his employment as President of the OncoVAX Division
with a base salary of $200,000, which may be increased by discretionary bonus
payments. Pursuant to the agreement, the Company has granted Mr. Reale options
to purchase 100,000 shares of its common stock at an exercise price of $7.50 per
share vesting at a rate of 25% on the commencement of his employment and 25% on
each of the first, second and third anniversaries thereof. If Mr. Reale achieves
the first and second year performance objectives set forth therein, his options
will vest at an accelerated rate. Additionally, Mr. Reale may receive additional
performance bonuses totaling up to 100% of his salary. Mr. Reale's compensation
includes customary perquisites and other personal benefits.
Ms. Strong entered into an employment agreement with the Company effective
June 1, 1998, providing for her employment as Senior Vice President and
President of the Bartels Diagnostic Division with a base salary of $160,000,
which may be increased by discretionary bonus payments. During her employment
with the Company, Ms. Strong has purchased 10,000 shares of common stock and
been granted options to purchase 95,000 shares of common stock with exercise
prices ranging from $2.50 per share to $7.50 per share. Ms. Strong's
compensation includes customary perquisites and customary benefits.
Mr. Bloom entered into an employment agreement with the Company effective
February 1, 1998, providing for his employment as Senior Vice President of
Corporate Development with a base salary of $160,000, which may be increased by
discretionary bonus payments and option grants. Prior to his entering this
employment agreement, Mr. Bloom had a consulting agreement with the Company from
August 1997 to February 1998, pursuant to which he was paid $51,000. Mr. Bloom
has purchased 20,000 shares of common stock in the Company and has been granted
options to purchase 35,000 shares of common stock with the exercise prices
ranging from $4.50 per share to $7.50 per share. Mr. Bloom's compensation
includes customary perquisites and customary benefits.
Mr. Foster entered into an employment agreement with the Company effective
May 19, 1998, providing for his employment as Vice President of Business
Development with a base salary of $200,000, which may be increased by
discretionary bonus payments. Pursuant to the agreement, the Company has granted
Mr. Foster options to purchase 100,000 shares of its common stock at an exercise
price of $10.00 per share vesting at a rate of 25% on the commencement of his
employment and 25% on each of the first, second and third anniversaries thereof.
If Mr. Foster achieves the first and second year performance objectives set
forth therein, his options will vest at an accelerated rate. Additionally, Mr.
Foster may receive additional performance bonuses totaling up to 100% of his
salary. Mr. Foster's compensation includes customary perquisites and customary
benefits.
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STOCK OPTION PLANS
Intracel Stock Option Plans
The Company has reserved 800,000 shares of common stock for issuance under
its 1989 Stock Option Plan and 1990-91 Stock Option Plan (the "Company Stock
Option Plan") which provides for the granting of options to key employees and
consultants of the Company and its subsidiaries. The option price per share, the
amount of shares underlying each option, the vesting period and the expiration
date are determined by the Board of Directors at the date of the grant, except
that the option price may not be less than the fair market value (as defined) of
stock on the date of the grant and the option period may not exceed ten years.
For stockholders possessing more than a 10% ownership interest, the option price
shall not be less than 110% of the fair market value at the date of grant. The
vesting period for options issued in 1997 ranged from 24 months to 48 months and
all had expiration dates five years from the date of issue. At March 31, 1998,
options to purchase 1,007,034 shares of common stock at $1.00 to $4.50 per share
were outstanding, of which 687,533 were vested and exercisable. See Note 10 to
the Company's consolidated financial statements contained elsewhere in this
Prospectus.
PerImmune Holdings, Inc. Stock Option Plan
Pursuant to the Amended and Restated 1996 Stock Option Plan of PerImmune
Holdings (the "PerImmune Stock Option Plan") for independent directors,
executive officers and key employees and consultants (all as defined) of
PerImmune Holdings, PerImmune and the Company, PerImmune Holdings reserved 500
shares of its common stock, par value $.01 per share, for issuance. At the time
of the Merger, options to purchase 257 shares of PerImmune Holdings were
outstanding, of which options to purchase 86 shares of PerImmune Holdings were
vested and exercisable. In connection with the Merger, the Company assumed
PerImmune Holdings' obligations under the PerImmune Stock Option Plan.
Consequently, each option outstanding under the PerImmune Stock Option Plan
converted into an option to purchase 9,108.32 shares of common stock upon
exercise. Of the options to purchase 257 shares of PerImmune Holdings, options
to purchase 255 shares of PerImmune Holdings were granted to employees of
PerImmune Holdings at an exercise price of $2,725 per share and options to
purchase two shares of PerImmune Holdings were granted to directors of PerImmune
Holdings at an exercise price of $45,000 per share.
401(k) RETIREMENT SAVINGS PLAN
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute amounts through payroll deductions.
The Company matches employees' contributions at the discretion of the Company's
Board of Directors. The Company did not match employee contributions to the
401(k) savings plan in the 1997, 1996 and 1995 periods. The Company does not
provide other post-retirement benefits.
In connection with the Merger, the Company assumed PerImmune Holdings'
employee pension plan, a noncontributory defined benefit pension plan (the
PerImmune Holdings Plan) retroactive to August 2, 1996. The Company froze the
benefits under the PerImmune Holdings Plan in February 1998, and determined that
the remaining PerImmune Holdings Plan assets and recorded pension liability
exceeded the obligation relating to the participants. As a result of the
curtailment of the plan benefits, the Company recorded income of $800,000 and
reduced the related pension liability in accordance with Statement of Financial
Accounting Standards No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans."
In addition, PerImmune Holdings maintains a defined-contribution savings
plan under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all full-time employees. Participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. PerImmune Holdings matches employee contributions according
to a specified formula. PerImmune Holdings' matching contributions totalled
$176,098 and $72,779 for the year ended December 31, 1997, and period from
August 3, 1996 through December 31, 1996, respectively.
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COMMITTEES OF THE BOARD OF DIRECTORS
In March 1998, the Board of Directors designated a Compensation Committee,
which consists of Joseph Caligiuri, Steven Gerber and Alexander Klibanov. The
Compensation Committee reviews executive salaries and administers any bonuses,
incentive compensation and stock options of the Company issuable to management
employees and directors of the Company. In addition, the Compensation Committee
consults with management of the Company regarding compensation policies and
practices of the Company. Also in March 1998, the Board of Directors established
an Audit Committee consisting of Joseph Caligiuri, Simon R. McKenzie and Raymond
J. Schuyler, an Executive Committee consisting of Michael J. Hanna, Simon R.
McKenzie and Raymond J. Schuyler and a Finance Committee consisting of Steven
Gerber, Simon R. McKenzie and Raymond J. Schuyler. The Audit Committee will
review the professional services provided by the Company's independent auditors,
the annual financial statements of the Company and the Company's internal
financial controls.
DIRECTOR COMPENSATION
Fees. None of the Company's directors who are also employees of the Company
receive cash compensation for attendance at meetings of the Board of Directors
or at meetings of committees of the Board of Directors of which they are
members. Independent, non-employee directors shall be entitled to cash
compensation of $1,500 for attendance at meetings of the Board of Directors or
at meetings of committees of the Board of Directors of which they are members.
All directors receive reimbursement for reasonable travel expenses incurred in
connection with attendance at each Board of Directors and committee meeting.
Stock Options. To attract and retain independent, non-employee directors
for the Company, the Company has issued, and intends to continue to issue, to
its independent directors, a one time grant of 15,000 options to purchase the
Company's common stock pursuant to the Company Stock Option Plan, in amounts
determined at the discretion of the Board of Directors or the Compensation
Committee and exercisable at a price equal to the fair market value of the
common stock on the date of grant. These options vest over a three year period.
Independent directors will generally be granted stock options upon their initial
appointment, and independent directors and stockholder representative directors
may be granted stock options during their term of service as an incentive for
continued service. Employee directors are not granted stock options for their
services as directors.
CONFIDENTIALITY AND NON-COMPETE AGREEMENTS
The Company has entered into employment agreements containing
confidentiality and non-compete provisions with each of its key employees. The
agreements provide that, among other things, all inventions, discoveries and
ideas which are, directly or indirectly, related to or suggested by the
employee's employment or is pertinent to any field of business or research in
which the Company is engaged or is considering engaging during the employee's
employment shall be the sole and exclusive property of the Company. The
agreements also provide that, for a period of two years from the date of his
termination of employment with the Company for any reason, the employee will
not, directly or indirectly, engage, participate or invest in any business
activity anywhere in the world that is competitive with or similar to the
products and services of the Company or make use of any of the Company's
confidential information.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of April 30, 1998, and as adjusted to
reflect the sale of the shares of common stock offered hereby (assuming no
exercise of the Underwriters' over-allotment option), by: (i) each person (or
group of affiliated persons) known by the Company to own beneficially more than
five percent of the Company's outstanding common stock; (ii) each of the
Company's directors; (iii) each Named Executive Officer of the Company; and (iv)
all directors and executive officers of the Company as a group. Dr. Michael G.
Hanna, Jr. (the "Selling Stockholder") has granted the Underwriters a 30-day
option to purchase up to an aggregate of additional shares of
common stock on the same terms and conditions as the Offering to cover
over-allotments, if any, in connection with the Offering. See "Underwriting."
PERCENTAGE OWNED(2)(3)
NAME, TITLE AND SHARES OF COMMON STOCK --------------------------
ADDRESS OF OFFICERS, BENEFICIALLY OWNED AS OF AS OF AFTER
DIRECTORS AND BENEFICIAL OWNERS(1) APRIL 30, 1998(2) APRIL 30, 1998 OFFERING
---------------------------------- ------------------------ -------------- --------
Michael G. Hanna, Ph.D.(4) 5,392,125 31.86% %
Chairman of the Board and Chief Scientific
Officer
Northstar Funds, and 1,383,296 8.17
TD Partners, Ole Dial(5)
2 Pickwick Plaza
Greenwich, CT 06830
Security Insurance Co. of Hartford(6) 1,276,862 7.54
600 Fifth Avenue
New York, NY 10020
Simon R. McKenzie(7) 1,264,809 7.10
President, Chief Executive Officer and Director
Mentor Corporation(8) 1,126,536 6.66
5425 Hollister Avenue
Santa Barbara, CA 93111
Syncor International Corporation(9) 975,817 5.77
6464 Canoga Avenue
Woodland Hills, CA 91367
Dianne Goroff, Ph.D.(10) 182,166 1.07 *
Vice President of Operations
Raymond Schuyler(11) 110,743 * *
Director
Alexander Klibanov, Ph.D.(12) 80,000 * *
Director
Persis M. Strong(13) 65,416 * *
Senior Vice President and President, Bartels
Diagnostics Division
Joseph Caligiuri(14) 27,324 * *
Director
Daniel S. Reale(15) 25,000 * *
Senior Vice President and
President, OncoVAX(CL) Division
Lawrence Bloom(16) 23,750 * *
Senior Vice President, Corporate Development
Steven Gerber, M.D.(17) 9,108 * *
Director
All directors and executive officers 7,071,142 39.16% %
as a group (10 persons)
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Unless otherwise indicated, the address for each person is c/o Intracel
Corporation, 2005 NW Sammamish Road, Suite 107, Issaquah, Washington 98027.
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(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission"). In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock and preferred stock
subject to options and warrants held by that person that are exercisable
within 60 days are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing percentage ownership of any other
person. Options vest over a period of three to five years from the date of
grant. Options granted under the PerImmune Holdings, Inc. 1996 Stock Option
Plan have been adjusted and reflected in the equivalent number of shares of
the Company under the merger and consolidation terms of the options
agreement. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(3) Based on 16,923,318 shares outstanding prior to the Offering (including
10,957,256 shares of common stock, 4,982,718 shares of common stock which
will be issued pursuant to the Preferred Stock Conversion, 54,648 shares of
common stock which will be issued under automatic conversion features of
certain outstanding debt, and 928,696 shares of common stock issuable under
warrants immediately exercisable after the Offering), and shares of
common stock outstanding after the Offering.
(4) Includes 4,554,160 shares of common stock held for Dr. Hanna's personal
account and 837,965 shares of common stock over which Dr. Hanna has sole
voting power under the terms of a voting trust entered into among certain
other founding employees of PerImmune Holdings. Such voting trust will
terminate upon consummation of the Offering.
(5) Includes 15,271 shares of Series A-1 preferred stock (which will be
automatically converted to 30,743 shares of common stock at the conclusion
of the Offering) held by Northstar High Total Return Fund; 244,297 shares
of Series A-1 preferred stock (which will be automatically converted to
491,807 shares of common stock at the conclusion of this offering),
warrants to purchase 188,020 shares of common stock at a price of $7.00 per
share), and 159,074 shares of common stock held by Northstar Advantage High
Total Return Fund; 66,096 shares of Series A preferred stock and 76,846
shares of Series A-1 preferred stock (which will be automatically converted
to 132,192 and 153,692 shares of common stock upon consummation of the
Offering), and warrants to purchase 5,546 shares of common stock at a price
of $4.00 per share) held by TD Partners, Ole Dial; and 222,222 shares of
common stock held by Northstar Balance Sheet Opportunities; but does not
include 45,482 shares of Series A-2 preferred stock held by Northstar High
Yield Fund, which has no voting rights and is not convertible to common
stock; and, warrants to purchase 49,066 shares of common held by Northstar
Advantage High Total Return Fund, and warrants to purchase 49,066 shares of
common held by Northstar High Total Return Fund, which were issued April 1,
1998 and which are expected to remain outstanding after the Offering.
(6) Includes 371,897 shares of Series A preferred stock and 153,690 shares of
Series A-1 preferred stock which will be automatically converted to 743,794
and 307,380 shares of common stock, respectively, upon consummation of the
Offering, and 225,688 shares of common stock.
(7) Includes 319,096 shares of common stock beneficially owned, 200,000 shares
issuable upon exercise of options that are currently fully vested and
exercisable and 679,341 shares issuable upon exercise of warrants to be
granted in accordance with an employment agreement dated January 2, 1998,
and 66,372 shares of common stock held in an escrow account created under a
settlement agreement with a terminated employee, over which McKenzie has
voting control.
(8) Includes 120 shares of Series B-2 preferred stock which will be
automatically converted to 1,126,536 shares of common stock upon
consummation of the Offering.
(9) Includes 100 shares of Series B-1 preferred stock which will be
automatically converted to 975,817 shares of common stock upon consummation
of the Offering.
(10) Includes 91,083 shares issuable upon exercise of options that are currently
fully vested and exercisable and 91,083 shares which will be distributed
from the voting trust upon consummation of the Offering.
(11) Includes 15,372 shares of Series A-1 preferred stock which will be
automatically converted to 30,743 shares of common stock upon consummation
of the Offering, 60,000 shares of common stock, and 20,000 shares of common
stock issuable upon exercise of options which are fully vested and
exercisable.
(12) Includes 40,000 shares of common stock issuable upon exercise of options
which are fully vested and exercisable and 40,000 shares of common stock.
(13) Includes 10,000 shares of common stock and 55,416 shares of common stock
issuable upon exercise of options which are fully vested and exercisable.
(14) Includes 9,108 shares of common stock issuable upon exercise of options
which are fully vested and exercisable and 18,216 shares which will be
distributed from the voting trust upon consummation of the Offering.
(15) Includes 25,000 shares of common stock issuable upon exercise of options
which are fully vested and exercisable.
(16) Includes 20,000 shares of common stock and 3,750 shares of common stock
issuable upon exercise of options which are fully vested and exercisable.
(17) Includes 9,108 shares of common stock issuable upon exercise of options
which are fully vested and exercisable.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation, and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
The authorized capital stock of the Company currently consists of (i)
25,000,000 shares of common stock, and (ii) 5,000,000 shares of preferred stock.
Immediately prior to the date hereof, there were 16,978,035 shares of common
stock outstanding (including 5,077,435 shares of common stock issuable upon the
automatic conversion of the 1,469,462 shares of preferred stock issued and
outstanding, or accrued, on the date hereof; 928,696 shares of common stock
issuable in connection with "in-the-money" warrants issued and outstanding on
the date hereof, which warrants automatically expire 10 days after the
consummation of the Offering; and 54,648 shares of common stock issuable in
connection with three convertible Promissory Notes issued and outstanding on the
date hereof, which Notes automatically convert into common stock upon the
consummation of the Offering) held by approximately 145 holders of record.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
common stock do not have cumulative voting rights and, therefore, holders of a
majority of the shares of common stock voting for the election of directors can
elect all of the directors. In such event, the holders of the remaining shares
of common stock will not be able to elect any directors.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company has not paid any cash dividends since inception
and does not anticipate paying cash dividends in the foreseeable future. In the
event of liquidation, dissolution or winding up of the Company, the holders of
common stock are entitled to share ratably in any corporate assets remaining
after payment of all debts, subject to any preferential rights of any
outstanding preferred stock. See "Dividend Policy."
Holders of common stock have no preemptive, conversion or redemption rights
and are not subject to further calls or assessments by the Company. All of the
outstanding shares of common stock are, and the shares offered by the Company
hereby will be, if issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors have authority to issue up to 5,000,000 shares of
preferred stock and to fix the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Upon consummation of the
Offering, all 1,469,462 shares of convertible preferred stock issued and
outstanding, or accrued, will automatically convert into 5,077,435 shares of the
Company's common stock.
WARRANTS
In connection with several transactions, the Company issued warrants
("Warrants") to buy a total of 1,804,079 shares of common stock, of which
Warrants to purchase 1,706,169 shares of common stock are still outstanding. The
Warrants may be exercised in whole or in part at any time after the date of
issue until the expiration date by delivering the warrant agreement with the
duly executed form of subscription to the Company. Warrants generally expire
five years from the date of issue and are subject to antidilution protection.
Outstanding Warrants to purchase 928,696 shares of common stock are subject
to accelerated expiration upon the earlier of: (i) the Offering; or (ii) the
date immediately prior to the effective date of any consolidation of the Company
with or merger of the Company into any other corporation or entity or the sale
or transfer of all or substantially all of the assets of the Company to another
person or entity.
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Outstanding Warrants to purchase 98,132 shares of common stock are subject
to accelerated expiration ten days after notice by the Company to the holder,
which notice may be provided at any time after the date of the closing of an
underwritten public offering pursuant to an effective registration statement,
that the Company's closing price for common stock on the exchange on which it is
traded has exceeded for twenty consecutive trading days, 150% of the Proceeds to
the Company per share specified on the cover page of this Prospectus. These
warrants are also subject to accelerated expiration on the day prior to the
effective date of any consolidation of the Company with or the merger of the
Company into any other corporation or entity (other than a consolidation or
merger in which the Company is the continuing entity) or the sale or transfer of
all or substantially all of the assets of the Company to another person or
entity.
On July 22, 1994, the Company issued Warrants to purchase 51,999 shares of
common stock to several Series A stockholders in connection with the Preferred
Stock Purchase Agreement between the Company and the Series A preferred
stockholders. After giving effect to a two-for-one split of the common stock
effected as of December 31, 1997 (the "Stock Split"), the remaining outstanding
Warrants are currently exercisable for a total of 67,252 shares of the common
stock at an exercise price of $4.00 per share.
In connection with an additional Preferred Stock Purchase Agreement entered
into by the Company and several Series A-1 preferred stockholders on September
27, 1995, the Company issued Warrants to purchase 86,462 shares of common stock.
After giving effect to the Stock Split, such Warrants are currently exercisable
into 172,924 shares of common stock at an exercise price of $4.00 per share. On
November 21, 1995, the Company issued Warrants to purchase 91,177 shares of
common stock in connection with a second closing under the Preferred Stock
Purchase Agreement dated September 27, 1995. After giving effect to the Stock
Split, such Warrants are currently exercisable into 182,354 shares of common
stock at an exercise price of $7.00 per share.
On December 28, 1995, the Company issued Warrants to purchase 94,010 shares
of common stock in connection with a Warrant and Note Agreement with Northstar
Advantage High Total Return Fund. After giving effect to the Stock Split, such
Warrants are currently exercisable into 188,020 shares of common stock at an
exercise price of $7.00 per share.
On June 11, 1996, the Company issued Warrants to purchase 159,073 shares of
common stock in connection with a Note Agreement with CoreStates Enterprise
Fund. After giving effect to the Stock Split, such Warrants are currently
exercisable into 318,146 shares of common stock at an exercise price of $7.00
per share.
On January 2, 1998, the Company issued Warrants to purchase 679,341 shares
of common stock in connection with an employment agreement between Simon R.
McKenzie, the Company's Chief Executive Officer and the Company. The Warrants
carry an exercise price of $4.50 per share, and expire five years from the date
of issue.
On April 1, 1998, the Company issued Warrants to purchase 98,132 shares of
common stock in connection with a Note and Warrant Purchase Agreement at an
exercise price of $7.64 per share.
CONVERTIBLE NOTES
In January 1997, the Company's subsidiary, PerImmune Holdings, issued three
promissory notes that may each be converted into 18,216 shares of the Company's
common stock. Upon conversion, the rights of each investor under the promissory
notes cease and each investor will be entitled to rights as holders of common
stock. These notes are subject to automatic conversion upon the consummation of
the Offering.
REGISTRATION RIGHTS
Upon consummation of the Offering, certain stockholders who will hold an
aggregate of 11,780,605 shares of common stock (the "Holders"), including
5,774,474 outstanding shares of common stock, 5,077,435 shares of common stock
issuable upon the Preferred Stock Conversion at the consummation of the
Offering, and 928,696 shares of common stock issuable upon exercise of Warrants
that will otherwise expire immediately prior to the Offering, are entitled to
certain registration rights with respect to the common stock under the
Securities Act. Pursuant to the terms of these registration rights, the Company
is required to notify each Holder of each decision of the Company to file a
registration statement. Upon receipt of such
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notice, a Holder may request to include certain of the Holder's shares of common
stock in the Company's registration, subject to the determination of the
managing underwriters that inclusion will not interfere with the offering. These
rights have been waived by the Holders, other than the Selling Stockholder, to
the extent that such Holders had rights to register common stock in the
Offering.
In addition, certain Holders can require the Company to use its best
efforts to prepare and file a registration statement on Form S-3 (or any
successor form) with respect to such Holders' shares of common stock. The right
of the Holders to request the Company to file a registration statement on Form
S-3 is available to the Holders no more than twice during any twelve-month
period.
The Company generally is required to bear the expenses relating to the sale
of shares under registrations contemplated by the registration rights, except
for underwriting fees and discounts. The Company also is obligated to indemnify
the stockholders whose shares are included in any of the Company's registrations
against certain losses and limitations, including certain liabilities under the
Securities Act and state securities laws generally.
Following the Offering, the rights of any Holder to cause the Company to
register shares terminates when all of such Holder's securities subject to the
registration rights can be transferred or sold under the provisions of Rule 144.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW
Classified Board of Directors. The Certificate of Incorporation of the
Company provides for the Board of Directors to be divided into three classes of
directors, as nearly equal in number as is reasonably possible, serving
staggered terms so that the directors' initial terms will expire either at the
1999, 2000 or 2001 annual meeting of the stockholders. Starting with the 1999
annual meeting of the stockholders, one class of directors will be elected each
year for a three-year term.
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interest of
stockholders. With a classified Board of Directors, at least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in the majority of the Board of Directors. As a result, a provision relating to
a classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the common stock because its
provisions could operate to prevent obtaining control of the Board of Directors
in a relatively short period of time. The classification provision could also
have the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company. Under the Delaware
General Corporation Law (the "DGCL"), a director on a classified board may be
removed by the stockholders of the corporation only for cause.
Advance Notice Provisions for Stockholder Nominations of Directors and
Stockholder Proposals. The Bylaws of the Company establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before an annual meeting of stockholders of the Company
(the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the Bylaws of the Company. If the Chairman of the Board
of Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the Bylaws of the Company do not give the Board of Directors any
power to approve or disapprove stockholder nominations for the election of
directors or of any business desired by stockholders to be conducted at an
annual meeting, the Bylaws of the Company (i) may have the effect of precluding
a nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if
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the proper procedures are not followed or (ii) may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its stockholders.
Business Combinations. The Company is subject to the provisions of Section
203 of the DGCL, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in certain transactions and
"business combinations" with an "Interested Stockholder" (as defined in Section
203) for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless either (i) prior to the date
such person becomes an interested stockholder, the Board approves either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time of the consummation of such
transaction, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to the date such person becomes an interested stockholder, the business
combination is approved by the Board and authorized at an annual or special
meeting of stockholders, not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder. A "business combination" includes a merger, asset sale,
or other transaction resulting in a financial benefit to the stockholder. For
purposes of section 203, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own) 15%
or more of the corporation's voting stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation contains certain provisions
permitted under DGCL relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under the DGCL. Each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company, for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, or for any transaction from which the director
derived an improper personal benefit. These provisions will not alter a
director's liability under federal securities laws. The Bylaws of the Company
provide for full indemnification of officers and directors to the full extent
permitted under the DGCL, as it now exists or may in the future by amended (but,
in the case of such amendment, only to the extent that such amendment permits
the Company to provide broader indemnification rights than permitted prior
thereto), or by other applicable law as then in effect, against all expenses,
liabilities and losses actually and reasonably incurred or suffered in
connection with service for or on behalf of the Company, including payment of
expenses in defending an action or proceeding upon receipt of any undertaking by
the person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification. Such indemnification will
continue to an indemnified person who has ceased to be a director, officer,
employee or agent and will inure to the benefit of the indemnified person's
heirs, executors and administrators.
The Company's Bylaws provide that the Company may maintain insurance, at
its expense, to protect itself and any indemnified party against any expense,
liability or loss, whether or not the Company would have the power to indemnify
such person against such expense, liability or loss under the DGCL. The Company,
without further stockholder approval, may enter into contracts with any
indemnified person in furtherance of the indemnification provisions contained in
the Bylaws and may create a trust fund, grant a security interest or use other
means (including without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect indemnification as provided in the
Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock of the Company is
.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the common stock
of the Company. Future sales of substantial amounts of shares of common stock in
the public market following the Offering could adversely affect the market price
of the common stock. Such sales also might make it more difficult for the
Company to sell equity securities or equity-related securities in the future at
a time and price that the Company deems appropriate or at all.
Upon consummation of the Offering, the Company will have shares
of common stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in the Offering will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by affiliates of the Company. The remaining 16,978,035 shares of
common stock will be restricted securities ("Restricted Shares") within the
meaning of the Securities Act. Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules
are summarized below. Holders of substantially all of those shares will have the
right to request the registration of their shares under the Securities Act
following completion of a period of one year, in the case of directors and
executive officers, and 180 days, in the case of such other stockholders, after
the date of this Prospectus, which, upon the effectiveness of such registration,
would permit the free transferability of such shares.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an affiliate of the Company, or person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of the
Company's common stock or (ii) the average weekly trading volume of the
Company's common stock on the Nasdaq Stock Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. A person (or person whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the 90 days immediately preceding the sale and who has beneficially owned
Restricted Shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
The Company's directors, executive officers and certain stockholders, who
in the aggregate hold 7,017,559 shares of common stock of the Company
outstanding immediately prior to the consummation of the Offering have entered
into or are subject to lock-up agreements under which they have agreed not to
sell, directly or indirectly, any shares owned by them for a period of one year,
in the case of directors and executive officers, and 180 days, in the case of
such other stockholders, after the date of this Prospectus without the prior
written consent of the Underwriters. See "Underwriting." Upon expiration of the
lock-up agreements, approximately shares of common stock (including
approximately shares subject to outstanding vested options) will
become eligible for immediate public resale, subject in some cases to vesting
provisions and volume limitations pursuant to Rule 144. The remaining
approximately shares held by existing stockholders will become
eligible for public resale at various times over a period of less than two years
following the consummation of the Offering, subject in some cases to vesting
provisions and volume limitations. of the shares outstanding
immediately following the consummation of the Offering will be entitled to
registration rights with respect to such shares upon termination of lock-up
agreements. The number of shares sold in the public market could increase if
registration rights are exercised. See "Description of Capital
Stock -- Registration Rights".
66
68
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below
(collectively, the "Underwriters"), for whom Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and NationsBanc Montgomery Securities LLC are
acting as representatives (the "Representatives"), have severally agreed to
purchase the number of shares of common stock from the Company set forth
opposite their names below:
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
Donaldson, Lufkin & Jenrette Securities Corporation.........
NationsBanc Montgomery Securities LLC.......................
------
Total.............................................
======
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of common stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of common stock (other than the shares
of common stock covered by the over-allotment option described below) must be so
purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of common stock to the public initially at the price
to the public set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price less a concession not
to exceed $
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $ per share to any other Underwriter and certain other
dealers.
The Company and the Selling Stockholder have granted to the Underwriters an
option to purchase up to additional shares of common stock at the initial
public offering price less underwriting discounts and commissions solely to
cover over-allotments. Such option may be exercised in whole or in part from
time to time during the 30-day period after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
The Company, certain stockholders of the Company and the executive officers
and directors of the Company have agreed not to directly or indirectly offer,
pledge, sell, contract to sell, sell any option or contract to purchase or grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, or enter into any swap or other arrangement that
transfers all or a portion of the economic consequences associated with the
ownership of such common stock, or to cause a registration statement covering
any shares of common stock to be filed, for a period of one year, in the case of
directors and executive officers, and for a period of 180 days, in the case of
such other stockholders, after the closing of the Offering without the prior
written consent of the Underwriters, subject to certain limited exceptions, and
provided that the Company may issue shares of common stock upon vesting of
rights under the Company Stock Option Plan and the PerImmune Stock Option Plan.
See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no established trading market for the
common stock. The initial price to the public for the common stock offered
hereby has been determined by negotiation among the Company and the
Representatives. The factors considered in determining the initial price to the
public include the history of and the prospects for the industry in which the
Company competes, the ability of the Company's management, the past and present
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the Offering and the
recent market prices of securities of generally comparable companies. The
Company has been approved for listing of the common stock on the Nasdaq National
Market.
67
69
The Underwriters do not intend to make sales to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
common stock offered hereby.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of common stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of common stock in
the open market to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for the
Company by Morrison & Foerster LLP, New York, New York. Certain legal matters
will be passed upon for the Underwriters by Brown & Wood LLP, New York, New
York.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997,
and for the year then ended, included in this Prospectus have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of the Company at December 31, 1996
and for the year ended December 31, 1996, the six months ended December 31,
1995, and for the year ended June 30, 1995, appearing in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of PerImmune Holdings, Inc. and
Subsidiary at December 31, 1997 and for the year then ended, included in this
Prospectus have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated financial statements of PerImmune Holdings, Inc. and
Subsidiary as of December 31, 1996 and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the period from
August 3, 1996 through December 31, 1996 and the statements of operations,
changes in stockholders' equity and cash flows of the predecessor company for
the period from January 1, 1996 through August 2, 1996 and for the year ended
December 31, 1995 appearing in this Prospectus have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
In February 1998, the Company's Board of Directors dismissed Ernst & Young
LLP and appointed PricewaterhouseCoopers LLP as the Company's independent
accountants to report on the Company's balance sheet as of December 31, 1997,
and the related consolidated statements of operations, consolidated statements
of stockholders' (deficit) and consolidated statements of cash flows for the
year then ended. The report of Ernst & Young LLP for the year ended December 31,
1996 and June 30, 1995 and for the six months ended December 31, 1995 did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
In February 1998, in conjunction with the acquisition of PerImmune
Holdings, the Company's Board of Directors dismissed KPMG Peat Marwick LLP and
appointed PricewaterhouseCoopers LLP as PerImmune Holdings independent
accountants to report on its balance sheets as of December 31, 1997, and the
related consolidated statements of operations, consolidated statements of
stockholders' equity (deficit) and consoli-
68
70
dated statements of cash flows for the year then ended. The report of KPMG Peat
Marwick at December 31, 1996 and the period from August 3, 1996 through December
31, 1996 did not contain any adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with the audits for the periods presented within this
Prospectus and Registration Statement, there were no disagreements with Ernst &
Young LLP or KPMG Peat Marwick LLP on any matter of accounting principles or
practices, financial disclosure or auditor scope of procedure, which
disagreements if not resolved to the satisfaction of Ernst & Young LLP or KPMG
Peat Marwick LLP would have caused them to make reference thereto in their
report on the financial statements for such years. Prior to retaining
PricewaterhouseCoopers LLP, the Company had not consulted with
PricewaterhouseCoopers LLP regarding the application of accounting principles or
the type of audit opinion that might be rendered on the Company's financial
statements.
During the course of Ernst & Young LLP's audit of the consolidated
financial statements of the Company for the year ended December 31, 1996, Ernst
& Young LLP notified the Company that it had identified two material weaknesses
considered reportable conditions as defined under standards of the American
Institute of Certified Public Accountants. The first of these was failure to
maintain accurate information to monitor financial position, results of
operations and liquidity. The second of these related to the method of
accounting, monitoring and valuation of the Company's "Research Use Only"
inventory. Ernst & Young LLP attributed the cause for these two material
weaknesses to inadequate accounting resources, lack of technical accounting
expertise at the Company and the lack of adequate systems to maintain an account
for "Research Use Only" inventory. In order to remedy these weaknesses, the
Company hired several accounting personnel with technical experience and
expertise in financial management and reporting and has performed an extensive
analysis of the "Research Use Only" inventory as of December 31, 1997 to assure
a consistent and accurate valuation. In connection with the audit of the
consolidated financial statements of the Company for the year ended December 31,
1997, the Company's current auditors did not identify any material weaknesses
considered reportable conditions.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the common stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in the schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
As a result of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and its regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. Upon approval of the common stock
for quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
69
71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INTRACEL CORPORATION
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-2
Report of Ernst & Young LLP, independent auditors......... F-3
Consolidated Balance Sheets as of December 31, 1996 and
1997 and March 31, 1998 (unaudited).................... F-4
Consolidated Statements of Operations for the year ended
June 30, 1995, the six months ended December 31, 1995,
the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1997(unaudited) and 1998
(unaudited)............................................ F-5
Consolidated Statements of Stockholders' Deficit for the
year ended June 30, 1995, the six months ended December
31, 1995, the years ended December 31, 1996 and 1997
and the three months ended March 31, 1998
(unaudited)............................................ F-6
Consolidated Statements of Cash Flows for the year ended
June 30, 1995, the six months ended December 31, 1995,
the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1997 (unaudited) and March
31, 1998 (unaudited)................................... F-7
Notes to Consolidated Financial Statements................ F-8
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-27
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-28
Consolidated Statements of Operations for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-29
Consolidated Statements of Stockholders' Equity (Deficit)
for the year ended December 31, 1997 and the period
from August 3, 1996 through December 31, 1996.......... F-30
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-31
Notes to Consolidated Financial Statements................ F-32
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY AND PREDECESSOR
COMPANY
Report of KPMG Peat Marwick LLP, independent certified
public accountants..................................... F-45
Consolidated Balance Sheet as of December 31, 1996........ F-46
Statements of Operations for the period from August 3,
1996 through December 31, 1996, period from January 1,
1996 through August 2, 1996 and year ended December 31,
1995................................................... F-47
Statements of Stockholders' Equity (Deficit) for the
period from August 3, 1996 through December 31, 1996,
period from January 1, 1996 through August 2, 1996 and
year ended December 31, 1995........................... F-48
Statements of Cash Flows for period from August 3, 1996
through December 31, 1996, period from January 1, 1996
through August 2, 1996 and year ended December 31,
1995................................................... F-49
Notes to Financial Statements............................. F-50
F-1
72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Intracel Corporation
We have audited the accompanying consolidated balance sheet of Intracel
Corporation (the "Company") as of December 31, 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit of the 1997 financial statements in accordance with
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intracel Corporation as of December 31, 1997, and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Seattle, Washington
April 24, 1998, except for the second paragraph
of Note 12 as to which the date is May 14, 1998
and the first paragraph of Note 14 as to
which the date is June 8, 1998.
F-2
73
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Intracel Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Intracel
Corporation and subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
ended June 30, 1995, the six months ended December 31, 1995, and the year ended
December 31, 1996. 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. All audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Intracel
Corporation and subsidiary at December 31, 1996, and the consolidated results of
their operations and their cash flows for the year ended June 30, 1995, the six
months ended December 31, 1995, and the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Seattle, Washington
December 3, 1997, except for
paragraph 3 of Note 6 and
paragraph 9 of Note 10, as to
which the date is January 2,
1998.
F-3
74
INTRACEL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
ASSETS ------------ ------------ ------------
(UNAUDITED)
Cash and cash equivalents................................... $ 3,145,231 $ 1,974,629 $ 732,989
Restricted cash............................................. 2,000,000 2,026,659
Accounts receivable, net.................................... 2,383,828 2,003,249 2,960,416
Inventories, net............................................ 3,945,187 1,821,013 2,176,892
Other assets................................................ 404,679 398,494 797,042
------------ ------------ ------------
Total current assets............................... 9,878,925 8,197,385 8,693,998
Property and equipment, net................................. 3,247,333 3,178,959 5,188,082
Restricted cash............................................. 433,000
Cost in excess of net assets acquired, net.................. 12,563,052 11,654,880 13,647,174
Deferred acquisition costs.................................. 2,862,513
Other assets................................................ 1,665,417 2,147,858 17,683,671
------------ ------------ ------------
Total assets....................................... $ 27,354,727 $ 28,041,595 $ 45,645,925
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current portion of long-term debt........................... $ 3,505,122 $ 2,144,729 $ 2,141,645
Accounts payable............................................ 2,206,033 2,096,995 3,887,236
Accrued liabilities......................................... 1,941,669 4,356,999 6,841,156
------------ ------------ ------------
Total current liabilities.......................... 7,652,824 8,598,723 12,870,037
Line of credit.............................................. 500,000 500,000 500,000
Long-term debt, less current portion........................ 18,551,945 17,027,320 27,820,081
Pension liability........................................... 383,902
------------ ------------ ------------
Total liabilities.................................. 26,704,769 26,126,043 41,574,020
------------ ------------ ------------
Commitments and contingencies
Redeemable and convertible preferred stock, $0.0001 par
value;
5,000,000 shares authorized:
Series A preferred stock, 730,000 shares authorized,
557,656, 603,622, and 615,697 shares issued and
outstanding at December 31, 1996 and 1997, and March 31,
1998, respectively...................................... 4,461,248 4,828,976 4,925,560
Series A-1 preferred stock, 850,000 shares authorized,
738,235, 651,168 and 664,196 shares issued and
outstanding at December 31, 1996 and 1997, and March 31,
1998, respectively...................................... 5,905,880 5,209,340 5,313,532
Series A-3 preferred stock, 200,000 shares authorized,
147,923 and 150,881 shares issued and outstanding at
December 31, 1997, and March 31, 1998, respectively..... 1,183,384 1,207,052
Series B-1 preferred stock, 100 shares authorized, 100
shares issued and outstanding at March 31, 1998......... 4,098,744
Series B-2 preferred stock, 120 shares authorized, 120
shares issued and outstanding at March 31, 1998......... 4,918,493
------------ ------------ ------------
10,367,128 11,221,700 20,463,381
------------ ------------ ------------
Stockholders' deficit:
Series A-2 preferred stock; $0.0001 par value; 155,000
shares authorized; 44,063 and 45,482 shares issued and
outstanding, $4,406,300 and $4,548,200 aggregate
preference in liquidation at December 31, 1997 and March
31, 1998, respectively.................................. 4 5
Common stock, $0.0001 par value; 25,000,000 shares
authorized; 3,967,786, 5,368,578 and 10,917,256 shares
issued and outstanding at December 31, 1996 and 1997 and
March 31, 1998, respectively............................ 397 537 1,092
Additional paid-in capital................................ 2,403,906 11,401,583 46,908,505
Accumulated deficit....................................... (12,021,473) (20,708,272) (63,301,078)
Note receivable due from stockholder...................... (100,000)
------------ ------------ ------------
Total stockholders, deficit........................ (9,717,170) (9,306,148) (16,391,476)
------------ ------------ ============
Total liabilities and stockholders' deficit........ $ 27,354,727 $ 28,041,595 $ 45,645,925
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
75
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31,
YEAR ENDED DECEMBER 31, ------------------------- -------------------------
JUNE 30, 1995 1995 1996 1997 1997 1998
------------- ---------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUE
Product........................... $1,565,795 $ 2,426,158 $14,718,421 $13,452,204 $3,785,095 $ 4,184,287
Contract.......................... 1,279,329
---------- ----------- ----------- ----------- ---------- -----------
Total revenue.............. 1,565,795 2,426,158 14,718,421 13,452,204 3,785,095 5,463,616
COST OF REVENUE
Product........................... 823,988 1,779,172 7,432,679 9,493,058 2,780,196 2,847,232
Contract.......................... 993,904
---------- ----------- ----------- ----------- ---------- -----------
Total cost of revenue...... 823,988 1,779,172 7,432,679 9,493,058 2,780,196 3,841,136
Selling, general and
administrative.................... 1,580,336 2,592,940 5,739,937 8,478,175 1,719,366 4,235,152
Research and development............ 1,173,754 1,118,020 1,042,668 555,840 151,115 2,026,072
Acquired research and development... 2,100,000 37,718,000
Amortization of cost in excess of
net assets acquired............... 151,362 908,172 908,172 227,043 248,043
Reorganization expense.............. 917,442
---------- ----------- ----------- ----------- ---------- -----------
Total operating expense......... 3,578,078 7,741,494 16,040,898 19,435,245 4,877,720 48,068,403
---------- ----------- ----------- ----------- ---------- -----------
Loss from operations............ 2,012,283 5,315,336 1,322,477 5,983,041 1,092,625 42,604,787
Interest expense (income), net...... (68,329) 134,400 2,179,496 2,496,418 640,000 788,019
Gain on pension curtailment......... (800,000)
---------- ----------- ----------- ----------- ---------- -----------
Loss before extraordinary
item.......................... 1,943,954 5,449,736 3,501,973 8,479,459 1,732,625 42,592,806
Extraordinary gain on early
extinguishment of debt............ (1,367,000)
---------- ----------- ----------- ----------- ---------- -----------
Net loss................... $1,943,954 $ 4,082,736 $ 3,501,973 $ 8,479,459 $1,732,625 $42,592,806
========== =========== =========== =========== ========== ===========
Pro forma basic and diluted net loss
per share......................... $ 1.25 $ 2.55
=========== ===========
Shares used in computing pro forma
basic and diluted net loss per
share............................. 7,807,520 16,869,976
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
76
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
SERIES A-2
PREFERRED
STOCK COMMON STOCK NOTE
------------- ------------------- ADDITIONAL RECEIVABLE
PAR PAR PAID-IN ACCUMULATED DUE FROM
SHARES VALUE SHARES VALUE CAPITAL DEFICIT STOCKHOLDERS TOTAL
------ ----- ---------- ------ ----------- ------------ ------------ ------------
BALANCE AT JULY 1, 1994.......... 3,961,676 $ 396 $ 2,197,898 $ (1,225,674) $(100,000) $ 872,620
Sale of common stock, net........ 2,000 8,000 8,000
Preferred stock dividends........ (211,448) (211,448)
Net loss......................... (1,943,954) (1,943,954)
------ -- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT JUNE 30, 1995......... 3,963,676 396 2,205,898 (3,381,076) (100,000) (1,274,782)
Preferred stock dividends........ (266,136) (266,136)
Net loss......................... (4,082,736) (4,082,736)
------ -- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31, 1995..... 3,963,676 396 2,205,898 (7,729,948) (100,000) (5,623,654)
Repurchase of common stock....... (175,114) (17) (326,795) (326,812)
Sale of common stock, net........ 176,000 18 339,712 339,730
Exercise of common stock
options........................ 3,224 8,061 8,061
Other............................ 177,030 177,030
Preferred stock dividends........ (789,552) (789,552)
Net loss......................... (3,501,973) (3,501,973)
------ -- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31, 1996..... 3,967,786 397 2,403,906 (12,021,473) (100,000) (9,717,170)
Sale of Series A-2 preferred
stock.......................... 40,000 $4 3,999,996 4,000,000
Preferred stock dividends........ 4,063 (647,288) (207,340) (854,628)
Repurchase of common stock....... (103,096) (10) (208,740) (208,750)
Sale of common stock, net........ 1,467,142 146 5,760,778 5,760,924
Exercise of common stock
warrants....................... 36,746 4 146,980 146,984
Other............................ (54,049) (54,049)
Repayment of stockholder note
receivable..................... 100,000 100,000
Net loss......................... (8,479,459) (8,479,459)
------ -- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31, 1997..... 44,063 4 5,368,578 537 11,401,583 (20,708,272) (9,306,148)
Common stock issued and stock
options granted in conjunction
with the acquisition of
PerImmune Holdings Inc.
(unaudited).................... 5,478,654 548 35,421,466 35,422,014
Common stock issued in exchange
for 1997 placement costs
(unaudited).................... 70,024 7 315,101 315,108
Preferred stock dividends
(unaudited).................... 1,419 1 (224,445) (224,444)
Other (unaudited)................ (5,200) (5,200)
Net loss (unaudited)............. (42,592,806) (42,592,806)
------ -- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT MARCH 31, 1998
(UNAUDITED).................... 45,482 $5 10,917,256 $1,092 $46,908,505 $(63,301,078) $ $(16,391,476)
====== == ========== ====== =========== ============ ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
77
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
YEAR ENDED SIX MONTHS ENDED ------------------------- --------------------------
JUNE 30, 1995 DECEMBER 31, 1995 1996 1997 1997 1998
------------- ----------------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Operating activities:
Net loss........................... $(1,943,954) $ (4,082,736) $(3,501,973) $(8,479,459) $(1,732,625) $(42,592,806)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Extraordinary gain on early
extinguishment of debt......... (1,367,000)
Amortization and depreciation.... 124,363 414,933 2,190,808 2,262,103 604,686 1,141,945
Gain on pension curtailment...... (800,000)
Acquired research and development
charge......................... 2,100,000 37,718,000
Noncash investment charge........ 339,408
Noncash interest expense......... 1,011,392 1,577,341 465,510 441,337
Noncash inventory charge......... 1,147,831
Noncash charge on fixed assets... 600,618 470,328
Other............................ 58,030
Changes in operating assets and
liabilities:
Accounts receivable, net....... 19,027 29,390 (1,396,363) 380,579 (236,979) (151,082)
Inventories, net............... (21,640) 18,357 (1,826,698) 821,568 812,063 6,961
Other assets................... 4,954 (61,950) (323,181) (80,571) 17,380
Accounts payable............... 103,232 886,963 1,764,048 (109,038) (498,126) 1,174,101
Accrued liabilities............ 267,278 666,231 (1,636,458) (387,292) (996,623) 83,495
----------- ------------ ----------- ----------- ----------- ------------
Net cash used in operating
activities......................... (1,451,694) (1,328,908) (3,059,756) (2,508,930) (1,192,337) (2,960,669)
----------- ------------ ----------- ----------- ----------- ------------
Investing activities:
Restricted cash.................... (2,000,000) (26,659)
Investment in other assets......... (82,129) (321,813)
Purchase of Bartels, Inc........... (13,000,000)
Purchase of assets from Zynaxis,
Inc.............................. (519,000)
Purchase of property and
equipment........................ (106,560) (288,391) (1,587,193) (1,360,209) (301,708) (387,164)
Capitalized patent costs........... (183,995) (25,000)
Investment in GAIFAR............... (283,220)
Investment in and advances to
Bartels Prognostics.............. (348,198) (795,299) (375,000)
Cash acquired in conjunction with
purchase of PerImmune Holdings,
Inc.............................. 2,504,064
----------- ------------ ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities............... (188,689) (13,807,391) (2,402,606) (4,180,508) (676,708) 1,768,428
----------- ------------ ----------- ----------- ----------- ------------
Financing activities:
Proceeds from sale of preferred
stock............................ 3,750,000 5,350,000 1,732,740 1,732,740
Repurchase of common stock......... (326,812) (208,750)
Proceeds from sale of common stock
and exercise of common stock
options.......................... 8,000 347,791 6,248,201
Stock issue costs.................. (245,968)
Exercise of common stock
warrants......................... 146,984
Repayment of stockholder note
receivable....................... 100,000 100,000
Proceeds from the issuance of
long-term obligations............ 54,226 14,845,744 5,960,000 713,339
Debt issue costs................... (668,351) (78,967)
Payments of long-term
obligations...................... (223,413) (3,356,853) (896,345) (2,908,494) (267,105) (44,199)
Other.............................. 119,000 19,751 (9,935) (5,200)
----------- ------------ ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities............... 3,588,813 16,838,891 4,535,283 5,518,836 1,555,700 (49,399)
----------- ------------ ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 1,948,430 1,702,592 (927,079) (1,170,602) (313,345) (1,241,640)
Cash and cash equivalents at
beginning of period................ 421,288 2,369,718 4,072,310 3,145,231 3,145,231 1,974,629
----------- ------------ ----------- ----------- ----------- ------------
Cash and cash equivalents at end of
period............................. $ 2,369,718 $ 4,072,310 $ 3,145,231 $ 1,974,629 $ 2,831,886 $ 732,989
=========== ============ =========== =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
78
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Intracel Corporation (the "Company") develops and manufactures therapeutic
prognostic and diagnostic products for the treatment of cancers and serious
viral diseases. The Company's current and future products are based on several
proprietary platform technologies, including the development of totally human
antibodies, INSTI (a rapid diagnostic format), and ZYMMUNE (a cell counting
technology). These technologies allow the Company to leverage its core
competencies into large, global clinical markets. In 1995, the Company changed
its fiscal year end from June 30 to December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions. Corporate joint ventures are accounted
for under the equity method.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks and
money market funds carried at cost, which approximates market.
Trade accounts receivable
Accounts receivable are presented net of allowances for doubtful accounts
of $60,000, $50,000 and $44,372 at December 31, 1997, 1996 and March 31, 1998
(unaudited), respectively. The Company recorded provisions for doubtful accounts
of approximately $99,000, $11,000 and $15,000 for the periods ended December 31,
1997, 1996 and March 31, 1998 (unaudited), respectively.
Inventories
Inventories consist of raw materials used in the production process and
diagnostic products, research reagents and antibodies held for sale. Inventories
are valued at the lower of first-in, first-out cost or market.
Property and equipment and depreciation
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense as incurred. Significant
betterments are capitalized. Upon retirement or sale the cost of assets disposed
of and the related accumulated depreciation and amortization are removed from
the accounts and any resulting gain or loss is reflected in the consolidated
statements of operations. Depreciation of property and equipment is provided
using primarily the straight-line method over the estimated useful lives of
three to seven years. Leasehold improvements are amortized on a straight-line
method over the shorter of the useful life or the lease term.
Construction in progress includes the costs of constructed machinery.
Construction in progress costs are transferred to other property and equipment
categories when the construction/installation is completed and the asset is
ready for its intended use.
Cost in excess of net assets acquired
Cost in excess of net assets acquired represents the excess of the cost of
purchased subsidiaries over the estimated fair value of the net assets acquired
as of the date of acquisition and is being amortized by the straight-line method
over 10 to 15 years.
F-8
79
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Other assets
Other assets consist primarily of patent and technology costs and an
investment (see Note 11). Patent costs are amortized on a straight-line basis
over the estimated useful lives of four to seventeen years. The investment is
accounted for using the equity method.
Valuation of long lived assets
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including, but not limited to, property and equipment, cost
in excess of net assets acquired, and other assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost to dispose.
Income taxes
The Company follows the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
Stock issuance costs
Proceeds from issuances of capital stock are presented net of specific
incremental costs directly attributable to the related offering.
Revenue recognition
Revenue is recognized when products are shipped.
The Company has entered into various research and development and licensing
agreements. Research and development revenue from cost reimbursement agreements
is recorded as the related expenses are incurred, up to contractual limits and
when the Company meets its performance obligations under the respective
agreements. Contract revenue is recognized under other agreements when
milestones are met and the Company's significant performance obligations have
been satisfied in accordance with the terms of the respective agreements. Cash
received that is related to future performance under such contracts is deferred
and recognized as revenue when earned.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institute of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contract is recognized based on the ratio of total
direct and indirect costs incurred during the period to total estimated costs
using the percentage-of-completion method. Estimates to complete are reviewed
periodically and revised as required in the period the revision is determined.
Provisions are made for the full amount of anticipated losses, if any, on
all contracts in the period in which they are first known and estimable.
Contracts with the U.S. government are subject to government audit upon contract
completion and therefore, all contract costs are potentially subject to
adjustment, even after reimbursement. Management believes adequate provisions
for such adjustments, if any, have been made in the consolidated financial
statements. Expense recovery rates have been audited through 1996.
F-9
80
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Research and development
The Company makes significant investments in research for the development
of new products. Research and development costs are charged to expense as
incurred.
Reorganization expense
The Company recognized reorganization expense of $917,442 in 1996 in
connection with the Company's relocation from Cambridge, Massachusetts to
Issaquah, Washington.
Net loss per share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share." SFAS No. 128
requires the presentation of basic and diluted earnings (loss) per share for all
periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.
Pro forma basic and diluted net loss per share as presented in the
consolidated statements of operations has been computed as described above and
also gives effect to the conversion of the convertible instruments that will
occur upon completion of the Company's initial public offering (as if converted
from the original date of issuance) (See Note 14).
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31, THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, ----------------------- ENDED ENDED
JUNE 30, 1995 1995 1996 1997 MARCH 31, 1997 MARCH 31, 1998
------------- ------------ ---------- ---------- -------------- --------------
(UNAUDITED) (UNAUDITED)
Net loss.......................... $1,943,954 $4,082,736 $3,501,973 $8,479,459 $1,732,625 $42,592,806
Preferred stock dividends......... 211,448 266,136 789,552 1,260,928 207,328 366,345
---------- ---------- ---------- ---------- ---------- -----------
Net loss for common stock......... $2,155,402 $4,348,872 $4,291,525 $9,740,387 $1,939,953 $42,959,151
========== ========== ========== ========== ========== ===========
Weighted average shares of common
stock outstanding (shares used
in computing basic and diluted
net loss per share)............. 3,962,676 3,886,242 3,895,325 4,073,398 3,908,052 10,809,197
========== ========== ========== ========== ========== ===========
Basic and diluted net loss per
share before extraordinary
item............................ $ 0.54 $ 1.47 $ 1.10 $ 2.39 $ 0.50 $ 3.97
Extraordinary item................ (0.35)
---------- ---------- ---------- ---------- ---------- -----------
Basic and diluted net loss per
share........................... $ 0.54 $ 1.12 $ 1.10 $ 2.39 $ 0.50 $ 3.97
========== ========== ========== ========== ========== ===========
Shares used in computing basic and
diluted net loss per share...... 4,073,398 10,809,197
Adjustment to reflect the effect
of the assumed conversion of
convertible instruments......... 3,734,122 6,060,779
---------- -----------
Shares used in computing pro forma
basic and diluted net loss per
share........................... 7,807,520 16,869,976
========== ===========
Pro forma basic and diluted net
loss per share.................. $ 1.25 $ 2.55
========== ===========
F-10
81
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as additional potential common shares related to outstanding
options and warrants which were excluded because they are anti-dilutive.
Supplemental disclosure of cash flow information
Noncash investing and financing activities consisted of:
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31, THREE MONTHS
JUNE 30, DECEMBER 31, ----------------------- ENDED
1995 1995 1996 1997 MARCH 31, 1998
---------- ----------------- ---------- ---------- --------------
(UNAUDITED)
Preferred stock dividends paid with
stock.............................. $211,448 $ 266,136 $ 789,552 $1,260,928 $ 366,344
Acquisition of Zymmune............... 1,500,000
Property and equipment acquired under
capital lease...................... 96,705
Accrued stock issuance costs......... 315,108
Deferred acquisition costs........... 2,862,513
Conversion of note payable into
Series A-2 preferred stock......... 2,000,000
Conversion of accrued interest into
Series A-2 preferred stock......... 267,260
Conversion of Series A-1 preferred
stock into Series A-3 preferred
stock.............................. 1,115,128
Common stock issued in exchange for
1997 stock issuance costs.......... 315,108
Acquisition of Perimmune Holdings,
Inc. ("Holdings" -- See note 11)
Fair value of assets acquired...... 19,248,000
Acquired research and
development...................... 37,718,000
Issuance of Intracel Corporation
common stock..................... 24,654,000
Assumption of long term debt....... 11,778,000
Grant of options to purchase
Intracel Corporation common
stock............................ 10,534,000
Issuance of Series B-1 and B-2
preferred stock.................. 9,017,000
Assumption of acquisition costs.... 3,488,000
Other................................ 73,800
Net cash paid for interest during 1997, 1996, the six months ended December
31, 1995, the year ended June 30, 1995 and the three months ended March 31, 1998
totalled $1,506,390, $1,094,350, $59,071, $22,154 and $21,727 (unaudited),
respectively.
Concentrations of credit risk
The Company's customers are predominantly comprised of government research
organizations and companies in the biomedical research, pharmaceutical and
diagnostic industries throughout the world. No single customer accounted for a
significant amount of the Company's revenues and there were no significant
accounts receivable from a single customer. The Company reviews the credit
histories of potential customers prior to extending credit and maintains
allowances for potential credit losses. The Company maintains cash and cash
equivalents in high credit quality financial institutions. The Company believes
that its risk from concentration of credit is limited.
F-11
82
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Use of estimates and assumptions
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.
The Company believes it is not practicable to estimate a fair market value
different from the preferred stock's carrying value as these securities have
numerous unique features (as described in Note 10) and there is no quoted market
price at December 31, 1997.
The carrying amount of the senior note payable and the line of credit
approximate market value because they have interest rates that vary with market
interest rates. The Company believes it is not practicable to estimate the fair
value for the residual of the long term debt as these securities have numerous
unique features such as detachable warrants and contingent interest rates, as
described in Note 6, and there is no quoted market price at December 31, 1997.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation. The reclassifications had no
effect on previously reported net loss, stockholders' deficit or cash flows.
Unaudited interim financial statements
In the opinion of the Company's management, the March 31, 1998 and 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
statements except for those pertaining to the acquisition of Holdings as
discussed further in Note 11.
New accounting pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This statement requires that changes
in comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The statement will be
effective for fiscal years beginning after December 15, 1997. Reclassification
for earlier periods is required for comparative purposes. The Company is
currently evaluating the impact this statement will have on its financial
statements; however, because the statement requires only additional disclosure,
the Company does not expect the statement to have a material impact on its
reported financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and
F-12
83
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reports revenues. The statement will be effective for fiscal years beginning
after December 15, 1997. Reclassification for earlier periods is required,
unless impracticable, for comparative purposes. The Company is currently
evaluating the impact this statement will have on its financial statements;
however, because the statement requires only additional disclosure, the Company
does not expect the statement to have a material impact on its reported
financial position or results of operations.
3. INVENTORIES:
Inventories consisted of:
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
Raw materials.......................... $ 909,198 $1,100,325 $1,399,995
Work in process........................ 265,712 160,886 173,978
Finished goods......................... 2,770,277 559,802 602,919
---------- ---------- ----------
$3,945,187 $1,821,013 $2,176,892
========== ========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
DECEMBER 31,
-------------------------- MARCH 31
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
Laboratory equipment................ $ 4,173,856 $ 4,183,788 $ 8,258,330
Computer equipment.................. 473,483 550,260 1,249,829
Leasehold improvements.............. 392,786 477,177 506,997
Furniture........................... 337,830 365,532 378,527
Construction in progress............ 1,005,316
----------- ----------- -----------
5,377,955 5,576,757 11,398,999
Accumulated depreciation............ (2,130,622) (2,397,798) (6,210,917)
----------- ----------- -----------
$ 3,247,333 $ 3,178,959 $ 5,188,082
=========== =========== ===========
Depreciation expense for the periods ended December 31, 1997, 1996, the six
months ended December 31, 1995, the year ended June 30, 1995 and the three
months ended March 31, 1998 was $982,740, $861,546, $414,933, $124,363 and
$297,535 (unaudited), respectively.
F-13
84
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of:
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
Acquisition costs...................... $ 375,000 $2,862,513 $2,500,000
Taxes payable.......................... 291,055 828,594 1,034,109
Interest payable....................... 492,752 536,823
Accrued stock issuance costs........... 315,109
Accrued payroll........................ 420,544 304,690 1,048,082
Professional services.................. 701,000
Building maintenance................... 393,000
Other.................................. 362,318 46,093 628,142
---------- ---------- ----------
$1,941,669 $4,356,999 $6,841,156
========== ========== ==========
6. LONG-TERM DEBT:
Long-term debt consisted of:
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Senior note payable to bank, collateralized by
substantially all of the assets of the Company, interest
at the higher of prime plus 1.5% or the federal funds rate
plus 0.5% (10% and 9.75% at December 31, 1997 and 1996,
respectively). If the interest payments are not made on a
timely basis, the stated interest rate will be increased
by a penalty amount. Quarterly principal payments of
$250,000 plus interest payable through December 31, 1996
at which time the payments increase to $500,000 plus
interest through November 16, 2000. The senior note
payable to bank must be repaid to the extent of any net
proceeds from the issuance and sale of equity securities
by the Company. The note includes 182,354 detachable
warrants to purchase common stock at $7.00 per share
expiring November 16, 2002. The warrants were deemed to
have an immaterial fair value for financial reporting
purposes. During April 1998, the Company repaid all of the
senior note payable with the proceeds from the issuance of
$9,000,000 of notes payable to an existing note holder
(the "New Notes"). The New Notes were issued with 98,132
detachable warrants at an exercise price of $7.00 per
share..................................................... $ 8,250,000 $ 6,000,000
F-14
85
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Subordinated note payable, collateralized by substantially
all of the assets of the Company, interest at 8% per year
through November 30, 1997, increasing to 11% thereafter.
Principal is due December 31, 2000. The maturity date may
accelerate under certain circumstances, as disclosed and
defined in the terms of the agreement, including a "change
in control." The note includes 188,020 detachable warrants
to purchase common stock at $7.00 per share expiring
December 28, 2000. The warrants were deemed to have an
immaterial fair value for financial reporting purposes.
The note was issued at an original discount of $1,565,000
which is being amortized over the term of the note. The
unamortized discount equaled $819,000 and $1,252,000 at
December 31, 1997 and 1996, respectively. The proceeds
were used to retire a note payable, resulting in an
extraordinary gain of $1,367,000 during the period ended
December 31, 1995. The Company is required to make
quarterly interest payments and has the option under
certain conditions to add required interest payments to
principal in lieu of paying in cash. Interest payments of
$507,106 and $395,061 were made "in kind" by issuing
additional promissory notes during 1997 and 1996,
respectively.............................................. 5,402,060 6,342,166
Subordinated note payable, collateralized by substantially
all of the assets of the Company, interest at 12% per year
through June 21, 1998, increasing to 13% thereafter.
Principal is due June 30, 2001. The note includes 159,074
detachable warrants to purchase common stock at $7.00 per
share expiring on April 1, 2003. The warrants were deemed
to have an immaterial fair value for financial reporting
purposes. In November 1997, the note and warrant holder
purchased 159,074 shares of the Company's common stock for
$4.50 per share, and simultaneously relinquished to the
Company the warrants to purchase 159,074 shares of common
stock at $7.00 per share. The note was converted to Series
A-2 preferred stock during 1997 (see Note 10)............. 2,000,000
Subordinated note payable to bank, collateralized by
substantially all of the assets of the Company, interest
at 12% through June 11, 1998, increasing to 13%
thereafter. Principal is due June 30, 2001. The maturity
date may accelerate under certain circumstances, as
disclosed and defined in the terms of the agreement,
including a "change in control." The note includes 318,146
detachable warrants to purchase common stock at $7.00 per
share expiring on April 1, 2003. Warrants were deemed to
have an immaterial fair value for financial reporting
purposes. The note includes a provision guaranteeing the
issuer a 20% compounded annual return through any
combination of warrant appreciation or interest payments.
The Company is required to make quarterly interest
payments and has the option under certain conditions to
add required interest payments to principal in lieu of
paying in cash. Interest payments of $366,666 and $269,333
were made "in kind" by issuing additional promissory notes
during 1997 and 1996, respectively........................ 4,269,333 4,635,999
F-15
86
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Subordinated note payable to the Massachusetts Business
Development Corporation in conjunction with a loan
agreement issued by the United States Small Business
Administration, collateralized by equipment purchased with
the proceeds, interest at prime plus 2.75% (11% at
December 31, 1996). Principal of $8,334 plus interest
payable monthly through April 1, 2002. This note was paid
in full by the Company during 1997........................ 566,656
Note payable, in the amount of $450,000, issued in
conjunction with the purchase of certain assets of Zymmune
Diagnostic Systems and collateralized by the related
equipment, inventory, and intellectual property purchased
with the proceeds. Principal plus accrued interest at 6%
due on October 24, 1999. The note requires contingent
payments of up to $1,050,000 based on attaining certain
FDA clinical trial milestones. Zymmune Diagnostic Systems
believes the milestones been achieved and, accordingly,
the Company has accrued the additional amount. The
Company, however, is disputing these amounts (see Note
11)....................................................... 1,500,000 1,500,000
Note payable collateralized by the equipment purchased
with the proceeds, payments of principal plus interest at
11% totaling $15,208 due monthly through August 1, 2002.
Note allows for additional borrowings of up to $1,500,000
for the purchase of manufacturing equipment. Guaranteed by
a bond posted by the State of Washington Economic
Development Council....................................... 664,588
Other..................................................... 69,018 29,296
----------- -----------
22,057,067 19,172,049
Less current portion...................................... (3,505,122) (2,144,729)
----------- -----------
$18,551,945 $17,027,320
=========== ===========
The various debt agreements contain restrictive covenants relating to
quarterly profitability, minimum levels of net worth and liquidity, limitations
on additional debt and dividends, and other nonfinancial covenants including
certain subjective clauses.
The Company received certain amendments and waivers to its debt agreement
and covenants contained therein, retroactive to January 1, 1997 which remain in
effect to June 30, 1998. The amendments and waivers became effective upon the
closing of the merger agreement with PerImmune Holdings, Inc. on January 2, 1998
(see Note 11).
On April 1, 1998 the Company repaid all amounts outstanding under the above
referenced debt agreement.
Future minimum debt payments at December 31, 1997 are as follows:
1998............................................ $ 2,144,729
1999............................................ 3,628,722
2000............................................ 8,485,707
2001............................................ 4,796,064
2002............................................ 116,827
-----------
$19,172,049
===========
F-16
87
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
As of March 31, 1998, the Company's debt increased by approximately
$10,382,000 related to the merger of Holdings. See Note 11 for additional
discussion of the merger.
7. LINE OF CREDIT:
Under the terms of the senior note payable to bank (Note 6), the Company
has a line of credit with an aggregate borrowing capacity of $1.0 million at
prime plus 1.5%. The agreement includes various restrictive covenants which,
among other things, require the Company to maintain certain minimum working
capital and net worth amounts. The line of credit facility has a maturity date
of November 16, 2000.
At December 31, 1997 and 1996, there were $500,000 of borrowings on the
line of credit facility. During April 1998, the Company repaid the line of
credit with the proceeds from the issuance of $9,000,000 of notes payable to an
existing noteholder.
8. INCOME TAXES:
The Company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception.
At December 31, 1997 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17 million which expire through
2012. Utilization of net operating loss carryforwards will be subject to certain
limitations under Section 382 of the Internal Revenue Code.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate of 34%:
SIX MONTHS YEAR ENDED DECEMBER
YEAR ENDED ENDED 31,
JUNE 30, DECEMBER 31, -------------------
1995 1995 1996 1997
---------- ------------ ------- -------
Federal income tax benefit at statutory
rate..................................... (34)% (34)% (34)% (34)%
Change in valuation allowance.............. 34 % 34 % 34 % 34 %
----- ----- ----- -----
===== ===== ===== =====
F-17
88
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are approximately as follows:
DECEMBER 31,
------------------------
1996 1997
---------- ----------
Deferred income tax assets:
Tax loss carryforwards............................ $3,392,000 $5,770,000
Tax credit carryforwards.......................... 96,000 96,000
Property, plant and equipment..................... 171,000
Inventories....................................... 548,000
Other............................................. 333,000 438,000
---------- ----------
3,992,000 6,852,000
Deferred income tax liabilities:
Other............................................. (65,000) (61,000)
---------- ----------
3,927,000 6,791,000
Valuation allowance................................. (3,927,000) (6,791,000)
---------- ----------
Net deferred taxes assets...........................
========== ==========
A full valuation allowance has been recorded at December 31, 1997, 1996,
and March 31, 1998 (unaudited) based on management's determination that the
recognition criteria for realization has not been met.
9. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various lawsuits arising in the normal course of
business, none of which, in the opinion of management, is expected to have a
material adverse effect on the Company's financial position, cash flows,
liquidity or results of operations.
In the ordinary course of business, the Company is subject to extensive and
changing federal regulations within the United States and by other foreign
countries with regard to the manufacturing and marketing of products. To date
the Company has not identified any potential liabilities arising from the
manufacturing and marketing of its products.
The Company has operating leases for its facilities with remaining fixed
terms ranging up to six years. Rental expense was approximately $783,000,
$1,466,000, $200,000, and $192,000 for the years ended December 31, 1997 and
1996, the six months ended December 31, 1995 and the twelve months ended June
30, 1995, respectively.
Future approximate minimum operating lease payments are as follows:
Year ending December 31:
1998................................................... $ 681,347
1999................................................... 335,761
2000................................................... 46,802
2001................................................... 43,491
2002................................................... 43,491
----------
Total minimum lease payments............................. $1,150,892
==========
Refer to Note 12 for discussion of a contingent liability related to a
joint venture investment.
F-18
89
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT:
Preferred stock
The Company is authorized to issue 5 million shares of $0.0001 par value
serial preferred stock. Each series of the preferred stock is a separate class
and, as a class, has a liquidation preference equal to the aggregate purchase
price paid for such class.
The historical share information regarding the Company's preferred stock
activity follows:
SERIES SERIES SERIES SERIES SERIES SERIES
A A-1 A-2 A-3 B-1 B-2
------- -------- ------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
BALANCES AT JULY 1, 1994
Issuance of preferred stock............. 468,755
Dividend payments in kind............... 26,431
------- -------- ------ ------- --- ---
BALANCES AT JUNE 30, 1995............... 495,186
Issuance of preferred stock............. 668,750
Dividend payments in kind............... 20,000 13,261
------- -------- ------ ------- --- ---
BALANCES AT DECEMBER 31, 1995........... 515,186 682,011
Dividend payments in kind............... 42,470 56,224
------- -------- ------ ------- --- ---
BALANCES AT DECEMBER 31, 1996........... 557,656 738,235
Issuance of preferred stock............. 40,000
Conversion of Series A-1 into Series
A-3................................... (139,390) 139,390
Dividend payments in kind............... 45,966 52,323 4,063 8,533
------- -------- ------ ------- --- ---
BALANCES AT DECEMBER 31, 1997........... 603,622 651,168 44,063 147,923
Issuance of preferred stock
(unaudited)........................... 100 120
Dividend payments in kind (unaudited)... 12,075 13,028 1,419 2,958
------- -------- ------ ------- --- ---
BALANCES AT MARCH 31, 1998
(UNAUDITED)........................... 615,697 664,196 45,482 150,881 100 120
======= ======== ====== ======= === ===
Series A, Series A-1, and Series A-3 redeemable and convertible preferred
stock
The Series A, Series A-1, and Series A-3 redeemable and convertible
preferred stocks were issued for net proceeds of $8.00 per share and are
convertible into common stock of the Company at a conversion ratio of two shares
of common stock per one share of preferred stock, which is equivalent to a
conversion price of $4.00 per share. Holders of these preferred shares are
entitled to receive a cumulative 8% annual dividend. Dividends may be paid in
cash or in additional shares ("in kind") at the option of the Company until
January 1, 1999 after which time dividends are payable only in cash. The Company
is required to redeem all outstanding shares at $8.00 per share, plus accrued
dividends, on July 1, 2001 (Series A) and September 22, 2002 (Series A-1 and
Series A-3). Each preferred share has voting rights equivalent to two shares of
common stock except for the Series A-3 which does not have voting rights unless
converted to common stock. The stockholders have a liquidation preference of
$8.00 per share upon the dissolution of the Company. The Company covenants that
it will not amend the articles of incorporation, recapitalize, pay or declare
dividends on junior stock, merge or consolidate, liquidate, dissolve or change
the principal business of the Company as long as 25% of the authorized shares
are outstanding of each series of preferred stock, unless 51% or more of the
preferred stockholders approve the change.
The Series A, Series A-1 and Series A-3 preferred stock is mandatorily
convertible into common stock at a ratio of two shares of common stock per one
share of preferred stock upon the closing of an underwritten public offering
pursuant to an effective registration statement on Form S-1 for the sale of
common stock at a
F-19
90
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
per share price of at least $4.00 per share with aggregate proceeds of at least
$10,000,000, so long as the offering occurs no later than September 19, 1998.
Series A-2 preferred stock
The Series A-2 preferred stock is non-convertible, non-voting and were
issued in conjunction with the exchange of $2,267,260 of subordinated debt and
accrued interest in addition to the receipt of $1,732,740 in cash, resulting in
net proceeds of $100 per share. Holders of these preferred shares are entitled
to receive a cumulative 13.5% dividend in cash or in kind, at the option of the
Company, until February 28, 2007 at which time the dividend rate increases to
19% and is payable only in cash. The Company has the option to redeem these
shares at any time prior to February 28, 2000 for $100 per share. The
stockholders also have the right to elect directors and exchange their shares
for notes if dividend payments are in arrears for a specified period of time.
The stockholders have a liquidation preference of $100 per share upon the
dissolution of the Company. The Company covenants that it will not amend the
Articles of Incorporation, recapitalize, pay or declare dividends on junior
stock, merge or consolidate, liquidate, dissolve or change the principal
business of the Company without prior approval from at least 51% of the A-2
preferred stockholders.
Series B-1 and B-2 preferred stock
The Series B-1 and B-2 redeemable and convertible preferred stock were
issued in conjunction with the merger with Holdings. The stockholders have a
liquidation preference of $45,000 and $50,000 per share, respectively, upon
dissolution of the Company. Holders of these preferred shares are entitled to
receive a cumulative 7% per annum dividend based on the liquidation preference
amount per share. Holders of these preferred shares are entitled to receive
annual dividends in cash, commencing on April 24, 1998 and June 16, 1998,
respectively, and continuing, thereafter, on each subsequent anniversary date.
Each preferred share has voting rights equivalent to 9,108.32 shares of common
stock. The Company covenants that it will not amend certain portions of it's
articles of incorporation, dissolve, merge or consolidate the Company, unless
51% or more of the Series B-1 preferred stockholders and 51% of the Series B-2
preferred stockholders approve the change.
On the fifth anniversary of the Series B-1 and B-2 assumed initial issue
date, the Company shall redeem all of the then outstanding shares at the Series
B-1 and B-2 liquidation preference amount. Each share of Series B-1 and B-2
preferred stock may be converted into common stock, at any time prior to the
respective redemption dates, at the option of the stockholder. The Series B-1
and B-2 shares will automatically convert to common stock immediately prior to
the first registered, underwritten public offering of shares of common stock by
the Company. Theses preferred shares are convertible into 9,108.32 shares of
common stock per one share of Series B-1 preferred stock or Series B-2 preferred
stock.
Common stock
The Company is authorized to issue 25,000,000 shares of $0.0001 par value
voting common stock. Upon liquidation or dissolution, holders of common stock
will be paid only after preferred stock preferences have been satisfied.
On December 31, 1997, all outstanding shares of common stock were split two
for one. All common stock shares and per share amounts have been restated to
reflect this stock split.
In November 1997, the Company issued 1,368,046 shares of common stock for
proceeds of $5,687,124, net of issuance costs of approximately $561,077 and
other noncash transactions of $73,800. In conjunction with this transaction,
36,746 warrants to purchase common shares for $4.00 per share were exercised for
proceeds of $146,980.
F-20
91
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
In January 1998, the Company issued 5,478,654 shares of common stock in
connection with the acquisition of Holdings. The Company also assumed the
outstanding stock options granted to Holdings employees equivalent to 2,340,831
shares of Intracel common stock (Note 11).
Stock options
The Company's 1989 Stock Option Plan (the "Plan"), provides for the
issuance of incentive and nonqualified stock options to employees, directors,
and consultants. There are 800,000 shares of common stock reserved under the
Plan. The Company's Board of Directors establishes the option price per share,
vesting period, and option term at the date of grant. Generally, options are
granted by the Company's Board of Directors at an exercise price of not less
than the fair market value of the Company's common stock at the date of grant.
For stockholders possessing at least a 10% ownership interest, the option price
shall not be less than 110% of the fair market value at the date of grant. The
vesting period of options generally ranges from immediately to ratably over four
years. Option terms generally are five or ten years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Under APB No. 25, because the exercise price of the Company's stock options
generally equals the fair value, as determined by the Board of Directors, of the
underlying stock on the date of grant, no compensation expense is recognized in
the Company's consolidated financial statements.
Information regarding activities in the option plan is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
Options outstanding, July 1, 1994........................... 503,034 $2.00
---------
Options outstanding, June 30, 1995.......................... 503,034 2.00
---------
Options outstanding, December 31, 1995...................... 503,034 2.00
Options granted........................................... 328,000 2.69
Options canceled.......................................... (10,000) 2.50
---------
Options outstanding, December 31, 1996...................... 821,034 2.27
Options granted........................................... 130,000 4.50
Options expired........................................... (82,000) 2.50
---------
Options outstanding, December 31, 1997...................... 869,034 2.58
Options assumed in merger with Holdings, Inc.
(unaudited)............................................ 2,340,831 0.34
Options granted (unaudited)............................... 220,000 7.23
Options canceled (unaudited).............................. (218,625) 1.28
---------
Options outstanding, March 31, 1998 (unaudited)............. 3,211,240 1.35
=========
At December 31, 1996, 1997 and March 31, 1998 the Company granted stock
options in excess of the authorized Plan amount by 124,258, 172,258 and 310,258
(unaudited) shares, respectively. The Company
F-21
92
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
intends to submit for shareholder approval an amendment to its stock option plan
to increase the number of options authorized for issuance.
The following table summarizes information about options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ------------------------------------ ----------- -------- ----------- ----------- --------
$1.00 - $2.50....................... 699,034 $2.14 1.81 years 627,034 $2.09
$4.00 - $4.50....................... 170,000 4.38 5.81 years 26,249 4.25
------- --------
869,034 2.58 2.59 years 653,283 2.18
======= ========
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options granted after January 1, 1996 under the fair value method of that
statement. The fair values of options granted in 1997 and 1996 (no options were
granted during the six months ended December 31, 1995 or the year ended June 30,
1995) were estimated at the date of grant using the minimum value method and the
following weighted-average assumptions:
1996 1997
------- -------
Risk free interest rate................................. 6.41% 6.28%
Expected holding period................................. 4 years 6 years
Dividend yield.......................................... 0.0% 0.0%
The minimum value method was developed for use in estimating the fair value
of options granted by nonpublic entities and, accordingly, excludes
consideration of volatility. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method does not necessarily provide a reliable single measure of the fair value
of its stock options.
The weighted average fair values per share at the date of grant for options
granted were as follows:
YEAR ENDED
DECEMBER 31,
--------------
1996 1997
----- -----
Options granted whose exercise price was equal to the fair
value of the stock on the date of grant................... $0.75 $1.39
===== =====
The following table presents net loss and per share amounts as if the
Company accounted for compensation expense related to stock options under the
fair value method prescribed by SFAS No. 123:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
PRO FORMA PRO FORMA
----------- -----------
Net loss -- as reported........................... $(3,501,973) $(8,479,459)
Net loss -- pro forma............................. (3,532,723) (8,520,920)
Loss per share -- as reported..................... (1.10) (2.39)
Loss per share -- pro forma....................... (1.10) (2.40)
F-22
93
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period.
At December 31, 1997, the following warrants to purchase common stock were
outstanding:
PRICE PER
SHARE,
NUMBER OF SUBJECT TO
SHARES ADJUSTMENT EXPIRATION DATE
- --------- ---------- ------------------
67,252 $4.00 July 22, 1999
172,924 4.00 September 22, 2000
182,354 7.00 November 16, 2002
188,020 7.00 December 28, 2000
318,146 7.00 April 1, 2003
-------
928,696
=======
The outstanding warrants carry registration rights, certain anti-dilutive
rights, and certain adjustments to the number of shares obtainable under the
warrants, as provided in the warrant agreements. The expiration dates of the
warrants may accelerate under certain circumstances, including the closing of an
initial public offering of common stock at a minimum purchase price per share of
$8 to $9 and minimum aggregate proceeds of $10,000,000.
On January 2, 1998, the Company issued Warrants to purchase 679,341 shares
of common stock in connection with an employment agreement between Simon R.
McKenzie, the Company's Chief Executive Officer, and the Company. The Warrants
carry an exercise price of $4.50 per share and expire 5 years from the date of
issue. On April 1, 1998, the Company issued Warrants to purchase 98,132 shares
of common stock in connection with a Note and Warrant Purchase Agreement at an
exercise price of $7.64 per share.
11. ACQUISITIONS:
In April 1996, the Company entered into an agreement with Bartels
Prognostics acquiring certain manufacturing equipment for $360,000. The
agreement also granted the Company exclusive manufacturing and marketing rights
subject to the full payment of $1,000,000 for 644,696 shares, or 23.443%, of
common stock of Bartels Prognostics. The Company accrued $375,000 and paid
$250,000 in 1996 and made the residual payments of $750,000 in 1997, comprising
the total consideration of $1,000,000. Additionally, the Company made advances
to Bartels Prognostics of $45,299 and $98,198 during 1997 and 1996,
respectively. At December 31, 1997 and 1996, advances to Bartels Prognostics are
included in other current assets and the investment in Bartels Prognostics is
included in other assets. The agreement allows for further discussion regarding
the potential future merger of the two entities.
In November 1995, the Company purchased certain assets and assumed certain
liabilities of Bartels, a biotechnology company in the business of developing,
manufacturing, selling, and distributing reagents and cell culture media from
Dade International for an aggregate purchase price of approximately $17,667,000.
The acquisition was financed primarily via a $9,000,000 term loan and a
$1,000,000 revolving credit note from a commercial bank, and a $4,667,000 note
payable to the seller (the note payable to the seller was paid in December 1995
primarily from the proceeds of the December 1995 Subordinated Secured Promissory
Note). The purchase price was allocated to the assets acquired based upon fair
market values. The excess of the purchase price over the fair market value of
the assets acquired has been allocated to cost in excess of net assets acquired.
In-process research and development approximating $1,300,000 was expensed in
1995 in connection with the acquisition. This acquisition was accounted for as a
purchase and, accordingly, the results of operations of the acquired business is
included in the accompanying consolidated statement of operations from the date
of acquisition.
F-23
94
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
In September 1995, the Company purchased certain assets of Zymmune
Diagnostic Systems from Zynaxis, Inc., a developer of drug delivery systems, for
an aggregate purchase price of approximately $2,019,000. The financing consisted
of a note payable to Zynaxis and a series of contingent payments. The contingent
payment liability of $1,050,000 was recorded as a long-term liability due to the
Company's view that the milestones underlying the payments are probable of being
achieved. The note payable and the contingent payments to Zynaxis resulted in a
noncash transaction for the purchase of the assets in the amount of
approximately $1,500,000. Assets purchased included technology, patents,
equipment, and inventory. The purchase price was allocated to the assets
acquired based upon their fair market values. In-process research and
development approximating $800,000 was expensed in 1995 in conjunction with the
transaction. Although the manufacturing milestone was achieved during fiscal
year 1996, the Company has alleged a number of breaches of the agreement by
Zynaxis and has accordingly withheld all payments pending resolution of the
dispute. The Company is currently in settlement negotiations with the assignee
of this agreement (Vexcel, Inc.) and, in management's opinion, expects to settle
the dispute and all claims for an amount substantially less than the value of
the note and contingent payments.
On January 2, 1998, the Company acquired in a tax-free merger all the
capital stock of PerImmune Holdings ("Holdings") which conducts operations
through PerImmune, Inc., its wholly owned subsidiary ("PerImmune"). As a result
of this transaction, Holdings and PerImmune have become subsidiaries of the
Company. In anticipation of this acquisition, the Company placed $2,000,000 of
cash in a restricted escrow account on December 31, 1997 to satisfy requirements
of the holder of the senior note payable. At December 31, 1997, the Company has
deferred certain acquisition costs related to this transaction, including legal,
accounting and other fees. PerImmune is a research oriented healthcare company
that applies biotechnology and other life sciences technologies to develop and
provide products and services. PerImmune's focus is on the development of human
monoclonal antibodies for cancer and infectious disease applications, as well as
cancer vaccines, specific and nonspecific immunotherapy and cardiovascular
disease test products. The aggregate purchase price was approximately
$59,471,000, payable in 5,478,654 shares of Intracel common stock, 2,340,831
options to purchase Intracel common stock, 220 shares of Intracel Series B-1 and
B-2 preferred stock, the assumption of obligations of approximately $11,532,000
and the assumption of other certain liabilities. The acquisition has been
accounted for using the purchase method of accounting and the March 31, 1998
financial statements reflect valuation of all assets, including identifiable
intangibles, at their estimated fair market values. Perimmune's operating
results are included in Intracel's consolidated operating results from the date
of acquisition. The Company recognized a one time expense of $37,718,000 in the
first quarter of 1998, related to acquired in process research and development.
The remaining $21,742,000 of the total purchase price was allocated among the
acquired assets including patents, current product technology and long term
assets including $849,000 recorded as cost in excess of net assets acquired.
The following unaudited pro forma information has been prepared assuming
Holdings had been acquired as of the beginning of the periods presented. The pro
forma information is presented for information purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of those dates. In addition, the pro forma information is not intended
to be a projection of future results.
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
PRO FORMA INFORMATION DECEMBER 31, -------------------
(IN THOUSANDS, EXCEPT PER SHARE) 1997 1997 1998
-------------------------------- ------------ ------- --------
(ACTUAL)
Revenue.................................... $21,341 $ 6,081 $ 5,464
Net loss................................... 20,984 41,571 42,593
Loss per common share
basic and diluted........................ 2.33 3.89 3.97
F-24
95
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. JOINT VENTURE:
During 1995, the Company made a 45% investment in the German American
Institute for AIDS Research (GAIFAR), a German limited liability Company. The
purpose of the entity was to develop and distribute the Company's products
within the Eastern European market. The investment is accounted for under the
equity method. Also during 1995, GAIFAR obtained a 1,000,000 Deustche mark (DM)
unsecured loan through the German government. During 1996, the Company made an
additional contribution of capital approximating $283,000 in accordance with the
loan agreement with the German government. No further capital contributions were
required based on the terms of the financing. As of December 31, 1996, the
Company had written off the entire investment in the joint venture because the
amount was deemed not to be recoverable, which resulted in a charge to
operations of $339,408.
In July of 1997, the Company entered into a termination and sale agreement
which resulted in the transfer of all joint venture shares back to GAIFAR on May
14, 1998, releasing the Company from its guarantee of the 1,000,000 DM loan.
13. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute amounts through payroll deductions.
The Company matches employees' contributions at the discretion of the Company's
Board of Directors. The Company did not match employee contributions to the
401(k) savings plan in the 1997, 1996 and 1995 periods. The Company does not
provide other post-retirement benefits.
In connection with the Company's merger with Holdings, the Company assumed
Holdings' employee pension plan. The Company froze the benefits under the Plan
in February 1998, and determined that the remaining Plan assets and recorded
pension liability exceeded the obligation relating to the participants. As a
result of the curtailment of the plan benefits, the Company recorded income for
the quarter ended March 31, 1998 of $800,000 and reduced the related pension
liability in accordance with Statement of Financial Accounting Standards No. 88,
"Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans."
14. SUBSEQUENT EVENTS:
Refinancing
On June 8, 1998, the Company received a firm commitment letter from a
current debt and equity holder for $35,000,000 which will provide approximately
$8,000,000 of additional funding after the proceeds are applied to repay
existing debt obligations and redeem the Series A-2 preferred stock. This
borrowing arrangement includes warrants to purchase up to approximately
1,622,000 shares of the Company's common stock, expiring on July 1, 2003, and
allows for certain registration rights for these warrant shares. The warrants
are initially exercisable at $10 per share, subject to various adjustments
including adjustment to the price per share of an initial public offering. In
addition, on June 8, 1998, another lender agreed to delay the maturity of
approximately $10,100,000 of the debt assumed from Holdings until January, 2000.
Management believes the proceeds from these debt-related transactions and the
successful launch of OncoVAX(CL) will provide sufficient funding to meet the
Company's continued operations and its research and development of other
products through at least December 31, 1999.
Initial Public Offering
In March 1998, the Company's Board of Directors authorized the Company to
file a Registration Statement with the Securities and Exchange Commission to
permit the Company to proceed with an initial public offering of its common
stock. Upon consummation of such offering, all of the outstanding Series A,
F-25
96
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS: (CONTINUED)
A-1, A-3, B-1, B-2 preferred stock will be converted in common stock and it is
anticipated that certain convertible notes and warrants outstanding immediately
prior to such offering will be converted into or exercised for common stock.
Consequently, the Company anticipates 6,060,779 shares of common stock will be
issued upon conversion or exercise of such preferred stock, convertible notes
and warrants.
F-26
97
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
PerImmune Holdings, Inc.:
We have audited the consolidated balance sheet of PerImmune Holdings, Inc. and
Subsidiary (the "Company") as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit of the 1997 financial statements in accordance with
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PerImmune
Holdings, Inc. and Subsidiary as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
McLean, Virginia
April 2, 1998, except for the
second paragraph of Note 14
as to which the date is June 8, 1998.
F-27
98
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,504,064 $ 2,423,910
Accounts receivable, net.................................. 646,524 1,260,719
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 159,561 749,039
Inventories............................................... 362,840 375,488
Prepaid expenses.......................................... 415,928 293,699
------------ -----------
Total current assets.............................. 4,088,917 5,102,855
Property and equipment, net................................. 2,040,698 7,283,715
Restricted cash............................................. 433,000
Cost in excess of assets acquired, including acquisition
costs, net of accumulated amortization of $383,000 in 1997
and $113,000 in 1996...................................... 1,467,500 1,237,500
------------ -----------
Total assets...................................... $ 8,030,115 $13,624,070
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of notes payable.......................... $ 10,220,505 $ 5,600,000
Current portion of capitalized lease obligations.......... 44,896
Accounts payable.......................................... 616,140 1,950,427
Accrued liabilities....................................... 2,078,283 1,387,334
------------ -----------
Total current liabilities......................... 12,959,824 8,937,761
Capitalized lease obligations, less current portion......... 127,342
Pension liability........................................... 1,183,902 935,879
Notes payable, less current portion......................... 9,234,935
------------ -----------
Total liabilities................................. 14,271,068 19,108,575
------------ -----------
Commitments and contingencies
Series A redeemable and convertible preferred stock -- $0.01
par value; 1,000 shares authorized; 100 shares issued and
outstanding at December 31, 1997 (aggregate liquidation
preference of $4,500,000)................................. 4,280,165
Series B redeemable and convertible preferred stock -- $0.01
par value; 1,000 shares authorized; 120 shares issued and
outstanding at December 31, 1997 (aggregate liquidation
preference of $6,000,000)................................. 5,505,952
------------ -----------
9,786,117
------------ -----------
Stockholders' equity (deficit):
Common stock -- $0.01 par value; 3,000 and 1,000 shares
authorized, respectively; 601.5 and 593.5 shares issued
and outstanding at December 31, 1997 and 1996,
respectively........................................... 6 6
Additional paid-in capital............................. 282,668
Accumulated deficit.................................... (16,309,744) (5,484,511)
------------ -----------
Total stockholders' equity (deficit).............. (16,027,070) (5,484,505)
------------ -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 8,030,115 $13,624,070
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
99
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
PERIOD FROM
AUGUST 3, 1996
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------------
REVENUE:
Contract research and development revenue:
Government............................................. $ 1,869,301 $ 2,750,942
Commercial............................................. 3,909,239 1,105,515
Product sales............................................. 2,110,695 594,157
------------ -----------
Total revenue..................................... 7,889,235 4,450,614
------------ -----------
COST OF CONTRACTS AND SALES:
Contract research and development costs:
Government............................................. 1,584,922 1,968,098
Commercial............................................. 3,431,181 885,942
Cost of products sold..................................... 1,600,054 324,886
------------ -----------
Total costs of contracts and sales................ 6,616,157 3,178,926
------------ -----------
GROSS PROFIT................................................ 1,273,078 1,271,688
------------ -----------
OPERATING EXPENSES:
Research and development.................................. 8,077,491 4,683,020
General and administrative................................ 1,685,880 708,247
Marketing................................................. 554,720
Other..................................................... 607,521 10,151
------------ -----------
Total operating expenses.......................... 10,925,612 5,401,418
------------ -----------
LOSS FROM OPERATIONS........................................ (9,652,534) (4,129,730)
Other income (expense):
Interest income........................................... 200,958
Interest expense.......................................... (1,038,467) (445,590)
Loss on sale-leaseback transaction........................ (335,190)
------------ -----------
LOSS BEFORE INCOME TAXES.................................... (10,825,233) (4,575,320)
Income taxes................................................
------------ -----------
NET LOSS.................................................... (10,825,233) (4,575,320)
Preferred stock accretion................................... 32,332
------------ -----------
Net loss applicable to common stockholders.................. $(10,857,565) $(4,575,320)
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
100
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ------------ ------------
Issuance of common stock................. 585 $6 $ 5,844 $ 5,850
Acquisition costs paid through issuance
of common stock........................ 9 100,000 100,000
Consideration paid in excess of net
assets acquired........................ (105,844) $ (909,191) (1,015,035)
Net loss for the period from August 3,
1996 through December 31, 1996......... (4,575,320) (4,575,320)
--- -- --------- ------------ ------------
Balance at December 31, 1996............. 594 6 (5,484,511) (5,484,505)
Issuance of common stock on December 12,
1997................................... 7 315,000 315,000
Issuance of additional common stock to
investment advisor (note 2)............ 1
Preferred stock accretion................ (32,332) (32,332)
Net loss for the year.................... (10,825,233) (10,825,233)
--- -- --------- ------------ ------------
Balance at December 31, 1997............. 602 $6 $ 282,668 $(16,309,744) $(16,027,070)
=== == ========= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
101
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
PERIOD FROM
AUGUST 3,
YEAR ENDED 1996 THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,825,233) $(4,575,320)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 268,688 185,834
Amortization........................................... 270,000 113,000
Loss on sale-leaseback and disposal of equipment....... 365,985 1,330
Changes in assets and liabilities:
Decrease in accounts receivable...................... 614,195 230,393
Decrease in costs and estimated earnings in excess of
billings.......................................... 589,478 237,825
Decrease (increase) in inventories................... 12,648 (4,840)
Increase in prepaid expenses......................... (122,229) (162,592)
Increase in accounts payable and accrued
liabilities....................................... 329,685 2,170,210
------------ -----------
Net cash used in operating activities............. (8,496,783) (1,804,160)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (314,601) (129,280)
Acquisition costs......................................... (1,250,000)
Proceeds from sale-leaseback and disposal of equipment.... 5,135,564
Payment to investment advisor............................. (1,225,000)
------------ -----------
Net cash provided by (used in) investing
activities...................................... 3,595,963 (1,379,280)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 315,000 5,850
Proceeds from issuance of convertible preferred stock (net
of transaction costs of $746,215)...................... 9,753,785
Repayment of capital lease obligations.................... (40,381)
Proceeds from issuance of notes payable................... 985,570 5,600,000
Payments of notes payable................................. (5,600,000)
Increase in restricted cash............................... (433,000)
------------ -----------
Net cash provided by financing activities......... 4,980,974 5,605,850
------------ -----------
Net increase in cash and cash equivalents................... 80,154 2,422,410
Cash and cash equivalents at beginning of period............ 2,423,910 1,500
------------ -----------
Cash and cash equivalents at end of period.................. $ 2,504,064 $ 2,423,910
============ ===========
Supplemental cash flow information:
Cash paid for:
Interest............................................... $ 1,013,347 $ 138,600
Supplemental disclosure of non-cash financing activities:
Purchase of common stock of PerImmune, Inc. with a note
payable................................................ $ 9,234,935
Acquisition costs paid through issuance of common stock... 100,000
Consideration paid in excess of net assets acquired....... 1,015,035
Preferred stock accretion................................. $ 32,332
Cost in excess of assets acquired included in accrued
liabilities............................................ 500,000
Equipment acquired under capital lease obligations........ 212,619
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
102
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
PerImmune Holdings, Inc. (Holdings) was incorporated on June 28, 1996 for
the purpose of acquiring PerImmune, Inc. (PerImmune) in a leveraged buyout
transaction.
Between 1985 and 1996, PerImmune was owned by Organon Teknika Corporation
(OTC), a subsidiary of Akzo Nobel, Inc., which is wholly owned by Akzo Nobel, NV
(Netherlands). Prior to December 20, 1994, PerImmune operated as a division of
OTC, and was known as Biotechnology Research Institute (BRI). On December 20,
1994, PerImmune, Inc., was formed as a wholly owned subsidiary of OTC with the
issuance of 1,000 shares of common stock in exchange for all the assets and
liabilities related to PerImmune. Effective August 3, 1996, PerImmune was
acquired by Holdings through a leveraged buyout (see note 2). Holdings has no
substantive operations.
The Company is a research oriented healthcare company that applies
biotechnology and other life sciences technologies to develop and provide
products and services. The Company's focus is on the development of human
monoclonal antibodies for cancer and infectious disease applications, as well
as, cancer vaccines, specific and nonspecific immunotherapy and cardiovascular
disease test products. Most of PerImmune's products are intended for human use
and are, therefore, regulated by the United States Food and Drug Administration.
Historically, the Company's primary sources of revenue have been research and
development contracts with affiliated companies, revenues generated from
government contracts and sales of products and services. PerImmune markets its
products in the United States, Europe and other geographic regions.
Basis of Presentation
The consolidated financial statements include the accounts of Holdings and
PerImmune. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of investment.
Inventories
Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets of 3 to 7 years. Expenditures for maintenance, repairs and
renewals of relatively minor items are generally charged to expense as incurred.
F-32
103
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Construction in progress includes the costs of constructed machinery.
Construction in progress costs are transferred to other property and equipment
categories when the construction/installation is completed and the asset is
ready for its intended use.
Cost in Excess of Assets Acquired
Cost in excess of assets acquired represents the excess of cost of an
acquired business over the fair value of the identifiable net tangible and
intangible assets acquired. Cost in excess of assets acquired is amortized using
the straight-line method over 15 years. The Company periodically evaluates the
life and the recoverability of cost in excess of assets acquired by comparing
the estimated future undiscounted operational cash flows to the carrying value
of cost in excess of assets acquired.
Acquisition Costs
Acquisition costs represent costs incurred related to the leveraged buyout
transaction (see note 2). Amortization of acquisition costs is computed using
the straight-line method over five years.
Income Taxes
Income taxes are accounted for using the asset and liability method
pursuant to Statement of Financial Accounting Standard No. 109 (SFAS No. 109),
Accounting for Income Taxes. Deferred taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes for a change in tax rates is recognized in income in
the period that includes the enactment date. The Company establishes valuation
allowances in accordance with the provisions of SFAS No. 109. The Company
continually reviews the adequacy of the valuation allowances and will recognize
deferred tax benefits only when it is more likely than not that the benefits
will be realized. Holdings and its subsidiary file a consolidated U.S. federal
income tax return.
Fair Value of Financial Instruments
The Company has notes payable related to the leveraged buy-out and other
notes payable obligations for which it is not practicable to estimate the fair
value since they are not traded, and no quoted values are readily available for
similar financial instruments.
Stock-based Compensation
The Company accounts for stock option issuances in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, deferred compensation is recorded to the extent that
the fair value of the underlying stock exceeds the exercise price on the date of
grant. Such deferred compensation is amortized over the respective vesting
periods of related option grants. Transactions with non-employees, in which
goods or services are the consideration received for the issuance of equity
instruments, are accounted for under the fair-value based method defined in
Statement of Financial Accounting Standard No. 123 (SFAS No. 123) Accounting for
Stock-Based Compensation (see note 11).
Revenue Recognition -- Contract Research and Development and Licensing
Agreements
The Company has entered into various research and development and licensing
agreements (see note 3). Research and development revenue from cost
reimbursement agreements is recorded as the related expenses are incurred, up to
contractual limits and when the Company meets its performance obligations under
the
F-33
104
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respective agreements. Contract revenue is recognized under other agreements
when milestones are met and the Company's significant performance obligations
have been satisfied in accordance with the terms of the respective agreements.
Cash received that is related to future performance under such contracts is
deferred and recognized as revenue when earned.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institute of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contracts is recognized based on the ratio of total
direct and indirect costs incurred during the period to total estimated costs
using the percentage-of-completion method. Estimates to complete are reviewed
periodically and revised as required in the period the revision is determined.
Provisions are made for the full amount of anticipated losses, if any, on all
contracts in the period in which they are first known and estimable. Contracts
with the U.S. government are subject to government audit upon contract
completion and therefore, all contract costs are potentially subject to
adjustment, even after reimbursement. Management believes adequate provisions
for such adjustments, if any, have been made in the financial statements.
Expense recovery rates have been audited through 1996.
Research and Development Costs
Research and development costs are expensed as incurred.
Concentration of Credit Risk
The Company performs research and development services for nonaffiliated
entities. The Company generally does not require collateral or other security in
extending credit to its customers. Additionally, the U.S. federal government and
Baxter Healthcare Corporation contributed 24% and 34% of total revenue for the
year ended December 31, 1997, respectively and 62% and 14% for the period from
August 3, 1996 through December 31, 1996, respectively.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentation. The reclassifications had no effect on
previously reported net loss, stockholders' equity (deficit) or cash flows.
(2) LEVERAGED BUYOUT
In 1996, Holdings engaged an investment advisor with regards to the
purchase of PerImmune from Akzo Nobel, Inc. for which the investment advisor's
fee totalled $1,250,000. As of December 31, 1996, $1,225,000 of the advisor's
fee was included in accounts payable and the entire amount was paid in full
during 1997. During 1996, the investment advisor also received 8.5 shares of the
Company's common stock in exchange for funding certain related legal expenses on
behalf of the Company totaling $100,000. The shares are protected from dilution
through certain third-party financings. During the year ended December 31, 1997,
the investment advisor was issued one additional share of the Company's common
stock.
Effective August 3, 1996, 100% of PerImmune's common stock was acquired by
Holdings from OTC in exchange for a $9,234,935 note payable (see note 8). The
transaction was accounted for in accordance with Emerging Issues Task Force
Abstracts No. 88-16 (EITF No. 88-16), Basis in Leveraged Buyout Transactions.
Because the transaction was wholly financed by OTC, all such consideration was
determined to be nonmonetary and, under the provisions of EITF 88-16, the assets
and liabilities of PerImmune were carried over at historical cost.
F-34
105
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) LEVERAGED BUYOUT (CONTINUED)
Concurrent with the leveraged buyout, the ownership rights of certain
patents and other technology rights developed under the research and development
contracts with affiliates, which pertain to the business of PerImmune, were
transferred to Holdings. Under the terms of the transfer, Holdings is required
to make certain milestone payments of up to $10 million if specific future
conditions are met, and will make payments of between 5% and 7.5% of net product
sales and 50% of license revenue. The milestone and royalty payments will
continue until the expiration or termination of the related patents covering the
products defined in the agreement. As of December 31, 1997, $500,000 of
milestone payments were included in accrued liabilities for amounts payable to
OTC. No royalty payments have been accrued or are due to OTC.
(3) CONTRACTS AND AGREEMENTS
Agreement with Baxter
On January 1, 1996, PerImmune entered into a research collaboration and
license agreement with Baxter Healthcare Corporation (Baxter) whereby the
Company agreed to provide certain research, development and pilot manufacturing
services for Baxter in exchange for reimbursement of research and development
costs, milestone payments and certain royalty payments. The Company received a
non-refundable milestone payment of $1,500,000 in January 1996 and is reimbursed
for actual costs incurred plus a fee of 16% during the term of the agreement.
Baxter is also obligated to make up to $3,000,000 in additional milestone
payments, if the Company achieves certain stages of U.S. and European regulatory
approvals for the serotherapy products for infectious and autoimmune diseases
under development. In addition, the Company earns a royalty ranging between 4%
and 8% of gross profit with a minimum royalty ranging between 2% and 4% of net
sales, as defined in the agreement, on sales of products depending on whether
the product is a result of previously existing technology of the Company or new
technology resulting from this development agreement. As of December 31, 1997,
no royalty or additional milestone payments has been earned. The agreement has a
term of three years with an option for a fourth year. Either party may terminate
this agreement at any time without cause. All patents and technology developed
under this agreement are the property of Baxter.
Agreement with Arch Development Corporation
PerImmune has a license agreement with the Arch Development Corporation
(Arch) to make and sell products under the patent rights for Apotek Lp(a)
developed at the University of Chicago. The agreement requires the Company to
pay Arch a royalty of 4 percent of related product sales. As of December 31,
1997, the Company has not incurred any royalty expense under this agreement.
Distribution Agreement with Syncor International Corporation
On April 1, 1997, the Company entered into an exclusive distribution
agreement with Syncor International Corporation (Syncor) for the HumaSPECT and
antibody conjugated radiotherapeutic products. Under this agreement, Syncor
accepts title of the product upon receipt and pays the Company a specific
purchase price defined by the agreement. Additionally, Syncor will pay the
Company a royalty of 50% of its net sales of the Company's products less the
specific purchased price, as defined, and right of return exists if the product
received by Syncor has less than one year until its expiration. To date, the
Company has not earned any royalties under this agreement. The Company is
obligated to spend 15% of annual sales of products covered by this agreement on
research and development to improve upon existing products or develop new
products. The Company is required to reimburse Syncor for all expenses related
to marketing these products up to $1,500,000, plus 50% of amounts over
$1,500,000, provided the expenditures are in accordance with the annual market
plan as prepared and agreed by the two companies. For the year ended December
31, 1997, the Company has reimbursed Syncor for marketing expenses of $330,000.
This agreement has a term of five years and is renewable for two additional
two-year terms.
F-35
106
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) CONTRACTS AND AGREEMENTS (CONTINUED)
Agreements with Mentor Corporation
On June 16, 1997, the Company entered into an exclusive distribution
agreement with Mentor Corporation (Mentor) for the AuraTek -- FDP bladder cancer
diagnostic product, which the Company refers to as Accu-D(x), with an initial
term of five years and is automatically renewable for a one year term thereafter
until either party terminates the agreement with 180 days written notice. Under
this agreement, Mentor accepts title of the product shipments upon receipt and
pays the Company a specific purchase price defined by the agreement.
Additionally, Mentor will pay the Company a royalty of 50% of its net sales of
the Company's product, less the specific purchase price as defined in the
agreement. The Company is obligated to provide up to 12,000 units of the product
per year to be used by Mentor for promotional purposes, at no cost to Mentor.
On December 22, 1997, the Company entered into a research, collaboration
and distribution agreement with Mentor whereby the Company agreed to provide
certain research, development and pilot programs for Mentor in exchange for
research and development fees in an aggregate amount of $3,000,000 based on a
milestone payment schedule. As of December 31, 1997, the Company had not earned
any milestone payments. The Company will receive $1,000,000 within five days of
submission of written notice of the completion of each milestone to Mentor. The
Company is required to pay the cost in excess of $3,000,000 for expenditures
within the scope of the project development schedule. The Company is the owner
of all rights to proprietary technical information and the U.S. Patent to which
Mentor was granted exclusive world-wide rights to market, sell and distribute
the program product. This agreement is effective for a ten year period following
the first approval of commercialized use of products under development. Mentor
has the right to terminate this agreement at the expiration of five years from
the date of the first approval of commercialized use of the product based upon
180 days written notice to the Company.
Sigma Agreement
On June 30, 1997, the Company entered into a product development and
license agreement with Sigma Diagnostics, Inc. (SIGMA) for a diagnostic product,
whereby the Company agreed to provide product development and licensing services
for SIGMA in exchange for a product development fee and royalty payment. The
Company is entitled to receive an aggregate amount of $348,000 based on a
milestone payment schedule that requires a payment of $87,000 upon completion of
each respective milestone of which $87,000 was earned in 1997. In addition, the
Company will receive an annual royalty payment ranging between 3.5% and 7% of
the net selling price of the licensed product depending on whether there are any
additional competitors for this product in the marketplace. The Company has sole
and exclusive ownership of the licensed patents, while SIGMA has the exclusive
world-wide right to use and sublicense the project program information. This
agreement has a term of five years and is automatically renewable for a one year
term thereafter until SIGMA terminates the agreement.
Manufacturing/Distribution Agreement with OTC
On August 1, 1997, the Company entered into an exclusive
manufacturing/distribution agreement with OTC for the FDP Dipstick product,
which the Company refers to as Accu-D(x). Under the agreement, the Company paid
OTC $250,000 in exchange for the exclusive right to purchase, at a defined
price, such OTC product for package and resale under trademarks or tradenames
designated by the Company. The Company is obligated to purchase at least 100,000
units of the product annually at $4.00 per unit, starting on August 1, 1998.
This agreement has an initial term of three years and is automatically renewed
in two-year terms until written notice of termination from either the Company or
OTC.
F-36
107
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) CONTRACTS AND AGREEMENTS (CONTINUED)
Other Contracts and Agreements
The Company has entered into various other licensing and research and
development agreements whereby it is committed to participate in research and
development projects, either on a best efforts basis or upon attainment of
certain performance milestones, as defined, or both, for various periods unless
canceled by the respective parties. Such future amounts to be paid to the
Company will primarily be determined on a cost-plus basis, and are subject to
specific performance criteria.
(4) ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996, were as follows:
1997 1996
-------- ----------
Government contracts................................. $123,964 $ 395,952
Product sales and corporate contracts................ 535,560 879,767
-------- ----------
659,524 1,275,719
Allowance for doubtful accounts...................... 13,000 15,000
-------- ----------
$646,524 $1,260,719
======== ==========
(5) INVENTORIES
Inventories at December 31, 1997 and 1996 were as follows:
1997 1996
-------- --------
Finished goods......................................... $ 92,888 $186,837
Work-in-process........................................ 1,337
Raw materials.......................................... 269,952 187,314
-------- --------
$362,840 $375,488
======== ========
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 were as follows:
1997 1996
---------- -----------
Leasehold improvements............................. $ 990,573
Leased property.................................... $ 212,619
Computers.......................................... 667,557 453,946
Machinery and equipment............................ 3,549,485 3,735,691
Construction in progress........................... 1,005,316 5,935,047
---------- -----------
5,434,977 11,115,257
Accumulated depreciation and amortization.......... 3,394,279 3,831,542
---------- -----------
$2,040,698 $ 7,283,715
========== ===========
Sale-Leaseback of Facility
On January 15, 1997, PerImmune exercised its option to purchase the land
and building it occupies in Rockville, Maryland, for a pre-established price of
$7,900,000. Concurrent with the purchase, PerImmune
F-37
108
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) PROPERTY AND EQUIPMENT (CONTINUED)
sold the property to a third-party buyer. The sale included the building and
improvements, and certain equipment. The sales price, excluding settlement and
transfer costs, was $14,150,000, and the loss resulting from this transaction
was approximately $335,000, after consideration of estimated costs for repairs
described below. The Company received approximately $5,136,000 in cash at the
closing of the transaction. This transaction has been treated as a
sale-leaseback. As such, the plant and equipment previously owned by the Company
were removed from the balance sheet and the loss was recognized.
In conjunction with the sale, PerImmune agreed to make certain repairs at
its own expense and to obtain the release of certain liens against the property.
To ensure compliance with these provisions of the agreement, PerImmune deposited
$500,000 (maintenance escrow) and $100,000 (lien escrow) into escrow accounts.
In addition, PerImmune has agreed to deposit, on a monthly basis from February
1997 through January 2002, $3,333 for costs to be used for elevator repairs and
refurbishment (elevator escrow). The Company is entitled to any amounts not
spent for the described purpose. As of December 31, 1997, the balances in the
maintenance escrow and elevator escrow were $393,000 and $40,000, respectively.
Liens against the property have been released and the $100,000 lien escrow was
refunded to the Company in full during 1997.
In connection with the sale leaseback transaction, PerImmune issued the
buyer a warrant for the purchase of 25,000 shares of PerImmune common stock if
PerImmune consummates an initial public offering (IPO) or if certain other
events occur, such as a capital reorganization, recapitalization, dissolution or
liquidation. The warrants are exercisable for three years following the date of
one of the previously described events. The warrants expire in July 1999 if one
of the above events has not occurred. The warrant purchase price in an IPO would
be the offering price and for the other events described above, the price would
be determined by a formula described in the warrant agreement.
(7) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of costs and estimated earnings in excess of
billings on uncompleted contracts as of December 31, 1997 and 1996:
1997 1996
----------- -----------
Costs incurred on uncompleted contracts........... $30,077,868 $28,548,030
Estimated earnings................................ 2,298,118 2,154,438
----------- -----------
Total costs and estimated earnings................ 32,375,986 30,702,468
Less:
Billings to date................................ 32,148,654 29,836,800
Allowance for losses............................ 67,771 116,629
----------- -----------
$ 159,561 $ 749,039
=========== ===========
(8) NOTES PAYABLE
Notes payable at December 31, 1997 and 1996, were as follows:
1997 1996
----------- -----------
8% promissory notes to OTC........................ $ 9,988,005 $14,834,935
Other notes....................................... 232,500
----------- -----------
10,220,505 14,834,935
Less current portion.............................. 10,220,505 5,600,000
----------- -----------
$ $ 9,234,935
=========== ===========
F-38
109
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) NOTES PAYABLE (CONTINUED)
In August 1996, in connection with the leveraged buyout, Holdings issued an
8% promissory note to OTC for $9,234,935 to purchase the outstanding common
stock of PerImmune, Inc. Interest accrued on the note is added to the principal
balance on February 1 and August 1 each year. The note matures in August 1998
and is collateralized by the patents, patent applications, trademarks and plant
and equipment acquired in the leveraged buyout. As of December 31, 1997 and
1996, the principal and accrued interest amount outstanding was $9,988,005 and
$9,234,935, respectively.
Holdings also issued an 8% note for a credit facility permitting draws of
$720,000 per month up to $3,600,000 and a $2,871,532 working capital facility to
provide capital for operations, both with OTC. The Company borrowed $3,600,000
and $2,000,000, respectively, under the facilities as of December 31, 1996.
These notes were collateralized by the patents, patent applications, trademarks
and plant and equipment acquired in the leveraged buyout. These notes matured in
January and August 1997, respectively, and principal and accrued interest were
paid in full.
In January 1997, Holdings issued three uncollateralized, non-interest
bearing promissory notes, for a total face amount of $232,500, to its advisors
on the sale leaseback transaction (see note 6). Each promissory note is
convertible into two shares of Holdings $0.01 par value common stock and have no
specified maturity date. As of December 31, 1997, no conversion had taken place.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1996, were as follows:
1997 1996
---------- ----------
Accrued payroll..................................... $ 157,856 $ 166,853
Accrued bonuses..................................... 327,648 313,004
Accrued interest -- OTC promissory note............. 332,110 306,990
Accrued repair costs (see note 6)................... 393,000
Due to OTC.......................................... 500,000
Other............................................... 367,669 600,487
---------- ----------
$2,078,283 $1,387,334
========== ==========
(10) EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plan
In December 1996, the Company decided to establish a noncontributory
defined benefit pension plan (the Plan) retroactive to the date of the leveraged
buyout. This plan has terms similar to those of the Akzo Nobel Retirement Plan
(ANRP) and covers substantially all of the Company's employees. Under the terms
of this plan employees are given credit for prior service. Pursuant to the terms
of the purchase agreement, the fair value of plan assets equal to the present
value of the accumulated pension benefit obligation (as determined by an
actuarial valuation as of the date of the leveraged buyout) were transferred
from ANRP to PerImmune's new pension trust in April 1997. In February 1998, the
Company froze the benefit accruals under the plan.
F-39
110
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(10) EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan at December
31, 1997 and 1996, and the composition of net periodic pension cost and
significant assumptions for the year ended December 31, 1997 and period from
August 3, 1996 through December 31, 1996:
1997 1996
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of approximately $1,251,865 in 1997 and $1,133,561 in
1996................................................... $ 1,565,486 $ 1,362,971
Effect of anticipated increase in compensation levels..... 770,256 718,744
------------ ------------
Projected benefit obligation................................ 2,335,742 2,081,715
Plan assets at fair value................................... 1,360,127 1,238,260
------------ ------------
Excess of projected benefit obligation over plan assets..... (975,615) (843,455)
Unrecognized net investment gain............................ (208,287) (92,424)
------------ ------------
Total pension liability accrued................... $ (1,183,902) $ (935,879)
============ ============
Net periodic pension cost includes the following components:
Service cost -- benefits earned during the period......... $ 213,981 $ 93,606
Interest cost on projected benefit obligation............. 151,631 61,916
Actual return on assets................................... (173,965) (135,097)
Net amortization and deferred investment gain............. 56,376 92,424
------------ ------------
Net periodic pension cost......................... $ 248,023 $ 112,849
============ ============
Significant assumptions used were as follows:
Discount rate............................................. 7.5% 7.5%
Rate of increase in compensation levels (graded by age of
participant)........................................... 4.0 to 10.5% 4.0 to 10.5%
Expected rate of return of assets......................... 9.5% 9.5%
============ ============
Retirement Savings Plan
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings
up to the Internal Revenue Service annual contribution limit. The Company
matches employee contributions according to a specified formula. The Company's
matching contributions totalled $176,098 and $72,779 for the year ended December
31, 1997, and period from August 3, 1996 through December 31, 1996,
respectively.
(11) STOCKHOLDERS' EQUITY
Syncor Agreement
On April 23, 1997, Holdings issued 100 shares of its Series A Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series A) to
Syncor International Corporation (Syncor) for $4,500,000 less transaction costs
of $246,215. Dividends are payable if and when declared by the Board of
Directors at the rate of 7% of the liquidation preference per annum, where the
liquidation preference is initially defined as $45,000 per share, subject to
certain adjustments. Each share of Series A may be converted into one share of
common stock before the redemption date (as defined below) at the option of the
holder, or is automatically converted on the date of a qualifying initial public
offering, as defined in the agreement. The Company shall redeem the Series A
seven years after the issuance date (the redemption date) in the event that all
shares have not been converted by this date. If such redemption occurs, the
redemption price shall
F-40
111
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) STOCKHOLDERS' EQUITY (CONTINUED)
equal the amount of the liquidation preference plus any declared but unpaid
dividends. No dividends on the Company's common stock may be made while any
shares of preferred stock remain outstanding. In the event of liquidation or
dissolution, Syncor shall be entitled to be paid from the assets of Holdings, in
preference to the common stockholders, but on an equal basis with Preferred
Series B stockholders, the liquidation preference plus all declared but unpaid
dividends. Holdings shall also have the right of first refusal to repurchase
these shares should Syncor wish to sell them. In connection with this issuance,
Syncor and the holders of Holding's stock were also granted certain registration
rights as contained in the registration agreement.
Mentor Agreements
On June 16, 1997, the Company issued 20 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series B) to
Mentor Corporation (Mentor) for $1,000,000. On December 22, 1997, the Company
issued an additional 100 shares of Series B to Mentor for $5,000,000 less
transaction costs of $500,000. Dividends are payable if and when declared by the
Board of Directors at the rate of 7% of the liquidation preference per annum,
where liquidation preferences is defined as $50,000 per share, subject to
certain adjustments. Each share of Series B preferred stock shall have the same
rights, preferences and terms as Series A preferred stock.
Options
On September 27, 1996, Holdings granted 255 stock options to members of
management at an exercise price of $2,725 per option. The options vest over
three years and expire ten years from the date of grant. On May 16, 1997,
Holdings granted an additional 2 stock options to its directors at an exercise
price of $45,000 per option. The options vest over one year and expire ten years
from the date of grant. Stock option activity is summarized as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at August 3, 1996............................ $
Granted.................................................. 255 2,725
Exercised................................................
Canceled.................................................
--- -------
Outstanding at December 31, 1996......................... 255 2,725
Granted.................................................. 2 45,000
Exercised................................................
Canceled.................................................
--- -------
Outstanding at December 31, 1997......................... 257 $ 3,054
=== =======
Options exercisable at December 31, 1997................. 85 $ 2,725
=== =======
The weighted-average remaining contractual life of outstanding options, as
of December 31, 1997 and 1996, was 8.75 and 9.75 years, respectively.
Under APB No. 25, because the exercise price of the Company's stock options
generally equals the fair value, as determined by the Company's management, of
the underlying stock on the date of grant, no compensation expense is recognized
in the Company's consolidated financial statements.
F-41
112
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its stock options under
the fair value method of that statement. The fair value of each option is
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants issued during the
year ended December 31, 1997, and period from August 3, 1996 through December
31, 1996:
1997 1996
------ ------
Risk-free interest rate................................... 6.76% 6.28%
Dividend yield............................................ 0.00% 0.00%
Volatility factor......................................... 70.00% 70.00%
Expected term of option................................... 2 years 3 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
net loss would have been as indicated in the pro forma table below:
PERIOD FROM
YEAR ENDED AUGUST 3, 1996
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------ -----------------
Net loss -- as reported........................ $10,825,233 $4,575,320
Net loss -- pro forma.......................... 10,963,095 4,604,552
Weighted average fair value of options
granted...................................... 16,654 1,377
(12) COMMITMENTS
The Company leases certain equipment under agreements which are classified
as capital leases. Assets under capital leases at December 31, 1997 are included
in the consolidated balance sheet as follows:
Telephone system and equipment.............................. $180,619
Computer equipment.......................................... 32,000
--------
212,619
Less: accumulated depreciation.............................. 23,652
--------
$188,967
========
The Company also leases laboratory, office and manufacturing facilities and
equipment under noncancelable operating leases which expire at various times
through January 31, 2007 (including the lease transaction described in note 6
which is also reflected in the amounts below).
F-42
113
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(12) COMMITMENTS (CONTINUED)
Future minimum lease payments, by year end and in the aggregate, under the
aforementioned capital and operating leases, are as follows:
OPERATING CAPITAL
LEASES LEASES
----------- --------
1998................................................ $ 1,912,291 $ 66,813
1999................................................ 1,766,447 73,976
2000................................................ 1,801,118 69,980
2001................................................ 1,847,568 5,166
2002................................................ 1,902,379
Thereafter.......................................... 8,396,465
----------- --------
$17,626,268 215,935
===========
Less: imputed interest.............................. 43,697
--------
Present value of net minimum obligations............ 172,238
Current portion..................................... 44,896
--------
Long-term obligation................................ $127,342
========
Rent expense was $1,753,790 and $588,311 for the year ended December 31,
1997, and the period from August 3, 1996 through December 31, 1996,
respectively. Rent expense is included in both selling, general and
administrative expenses and costs of contracts in the consolidated statements of
operations.
In July 1997, the Company entered into a licensing agreement with a
computer system company for the non-exclusive rights to its system software and
maintenance services. The total licensing fee for the eighteen month period
ending December 31, 1998 is $210,095 and the total maintenance fee is $48,120.
As of December 31, 1997, the Company had paid $132,215 of the licensing and
maintenance fees and the remaining commitment is included in the above future
minimum lease payments.
On January 2, 1998, the Company entered into a three year employment
agreement with a key member of management. The agreement establishes a minimum
compensation level and certain other terms.
(13) INCOME TAXES
The amount computed by applying the Federal corporate income tax rate of
34% to loss before income taxes is reconciled to the provision for income taxes
as follows:
PERIOD FROM
YEAR ENDED AUGUST 3, 1996
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------ -----------------
Income tax benefit at statutory rates.......... $(3,680,579) $(1,555,609)
State income taxes, net of federal tax
benefit...................................... (486,573) (205,675)
Valuation allowance adjustment................. 4,167,152 1,759,661
Other.......................................... 1,623
----------- -----------
$ $
=========== ===========
F-43
114
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(13) INCOME TAXES (CONTINUED)
Deferred income tax (assets) and liabilities as of December 31, 1997 and
1996 were as follows:
1997 1996
------------ -----------------
Net operating loss carryforwards............... $(5,997,028) $(1,802,118)
Excess of tax over book basis of assets........ (95,820) (193,520)
Allowance for doubtful accounts and other
reserves..................................... (32,000) (11,539)
Accrued expenses............................... (604,924) (520,259)
Other.......................................... 23,610 (11,567)
----------- -----------
Deferred tax assets............................ (6,706,162) (2,539,003)
Valuation allowance............................ 6,706,162 2,539,003
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
At December 31, 1997 the Company has a net operating loss carryforward for
both federal and state purposes of approximately $14,992,000 which expire
through the year 2012. This net operating loss carryforward relates to the
period August 3, 1996 through December 31, 1996 and for the year ended December
31, 1997 (periods subsequent to the leverage buyout) and as such, is not limited
under existing tax laws. However, this carryforward will be limited under the
Internal Revenue Code as a result of the changes in ownership of the Company as
discussed in note 14. A valuation allowance has been established to reflect the
uncertainty of future taxable income to utilize available tax loss
carryforwards.
(14) SUBSEQUENT EVENTS
Merger
On January 2, 1998, the stockholders of Holdings sold all outstanding
shares of Holding's capital stock to Intracel Corporation ("Intracel") through a
tax-free merger. With the consummation of the transaction, Holdings and
Perimmune became subsidiaries of Intracel. Intracel is a privately owned
biotechnology company developing products that improve the treatment options for
patients suffering from serious viral diseases and cancers. The aggregate
purchase price was approximately $59,471,000, payable in 5,478,654 shares of
Intracel common stock, 2,340,838 options to purchase Intracel common stock, 220
shares of Intracel Series B-1 and B-2 preferred stock, Intracel's assumption of
Perimmune's debt of approximately $11,532,000 and Intracel's assumption of other
liabilities. The acquisition will be accounted for using the purchase method of
accounting and accordingly, Intracel's financial statements will reflect
valuation of all of Perimmune's assets, including identifiable intangibles, at
their estimated fair market values. Perimmune's operating results will be
included in Intracel's consolidated operating results from the date of
acquisition.
Refinancing
On June 8, 1998 OTC negotiated with Intracel to delay the maturity of the
8% note payable until January 2000.
F-44
115
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
The Board of Directors and Stockholders
PerImmune Holdings, Inc.:
We have audited the consolidated balance sheet of PerImmune Holdings, Inc. and
subsidiary (the Company) as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
period from August 3, 1996 through December 31, 1996. We have also audited the
statements of operations, stockholders' equity and cash flows of the Predecessor
Company for the period from January 1, 1996 through August 2, 1996 and for the
year ended December 31, 1995. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PerImmune
Holdings, Inc. and subsidiary as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the period from August 3,
1996 through December 31, 1996, and the results of operations and cash flows for
the Predecessor for the period from January 1, 1996 through August 2, 1996 and
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
February 28, 1997, except as to
note 14 which is as of April 23, 1997
and June 16, 1997
F-45
116
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,423,910
Accounts receivable:
Affiliates (Note 3).................................... 218,494
Government............................................. 395,952
Other.................................................. 646,273
Inventories (Note 5)...................................... 375,488
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 7)......................... 749,039
Other current assets...................................... 293,699
-----------
Total current assets........................................ 5,102,855
Plant and equipment, net (Note 6 and 14).................... 7,283,715
Acquisition costs, net (Note 2)............................. 1,237,500
-----------
$13,624,070
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 8).................................... $ 5,600,000
Accounts payable (Note 2)................................. 1,950,427
Accrued liabilities (Note 9).............................. 1,387,334
-----------
Total current liabilities................................... 8,937,761
Accrued pension liability (Note 10)......................... 935,879
Note payable (Note 8)....................................... 9,234,935
-----------
Total liabilities........................................... 19,108,575
Stockholders' deficit (Notes 2 and 11):
Common stock: $.01 par value; 1,000 shares authorized;
593.5 shares issued and outstanding at December 31,
1996................................................... 6
Accumulated deficit....................................... (5,484,511)
-----------
Total stockholders' deficit................................. (5,484,505)
Commitments and contingencies (Notes 3, 4 and 12)
Subsequent events (Note 14)
-----------
$13,624,070
===========
See Accompanying Notes to Financial Statements.
F-46
117
PERIMMUNE HOLDINGS INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF OPERATIONS
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
PERIMMUNE
HOLDINGS PREDECESSOR COMPANY
CONSOLIDATED -----------------------------------
----------------- PERIOD FROM
PERIOD FROM JANUARY 1,
AUGUST 3, 1996 1996
THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 AUGUST 2, 1996 DECEMBER 31, 1995
----------------- -------------- -----------------
Revenues:
Contract research and development revenue:
Affiliates (Note 3)..................... $ 322,652 $ 5,024,245 $10,537,106
Government.............................. 2,750,942 3,420,549 6,578,019
Commercial.............................. 782,863 2,151,763 775,700
Product sales.............................. 594,157 1,631,918 1,407,274
----------- ----------- -----------
4,450,614 12,228,475 19,298,099
----------- ----------- -----------
Costs of contracts and sales:
Contract research and development costs:
Affiliates (Note 3)..................... 300,066 4,312,638 9,545,830
Government.............................. 1,968,098 3,375,008 5,778,534
Commercial.............................. 585,876 1,985,682 643,224
Costs of products sold..................... 324,886 1,102,374 1,124,239
----------- ----------- -----------
3,178,926 10,775,702 17,091,827
----------- ----------- -----------
Gross profit................................. 1,271,688 1,452,773 2,206,272
Operating expenses:
Research and development (Note 1).......... 4,683,020 189,261 359,998
Selling, general and administrative........ 708,247 740,174 1,283,234
Other...................................... 10,151 14,211 28,862
----------- ----------- -----------
Total operating expenses..................... 5,401,418 943,646 1,672,094
----------- ----------- -----------
Income (loss) from operations................ (4,129,730) 509,127 534,178
Interest expense............................. (445,590) -- --
----------- ----------- -----------
Income (loss) before income taxes............ (4,575,320) 509,127 534,178
Provision for income taxes (Note 13)......... -- 68,259 355,688
----------- ----------- -----------
Net income (loss)............................ $(4,575,320) $ 440,868 $ 178,490
=========== =========== ===========
See Accompanying Notes to Financial Statements.
F-47
118
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------ PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ----------- ------------ -----------
PREDECESSOR COMPANY:
Balance at January 1, 1995.............. 1,000 $ 10 $10,242,309 $ -- $10,242,319
Net contribution from parent............ -- -- 100,596 -- 100,596
Net income.............................. -- -- -- 178,490 178,490
----- ---- ----------- ----------- -----------
Balance at December 31, 1995............ 1,000 10 10,342,905 178,490 10,521,405
Net distribution to parent.............. -- -- (1,801,342) -- (1,801,342)
Net income for the period from January
1, 1996 through August 2, 1996....... -- -- -- 440,868 440,868
----- ---- ----------- ----------- -----------
Balance at August 2, 1996................. 1,000 10 8,541,563 619,358 9,160,931
===== ==== =========== =========== ===========
PERIMMUNE HOLDINGS, INC.:
Issuance of common stock of PerImmune
Holdings, Inc. on June 28, 1996...... 585 6 5,844 -- 5,850
Acquisition costs paid through issuance
of common stock (Note 2)............. 8.5 -- 100,000 -- 100,000
Consideration paid in excess of net
assets acquired (Note 2)............. -- -- (105,844) (909,191) (1,015,035)
Net loss for the period from August 3,
1996 through December 31, 1996....... -- -- -- (4,575,320) (4,575,320)
----- ---- ----------- ----------- -----------
Balance at December 31, 1996.............. 593.5 $ 6 $ -- $(5,484,511) $(5,484,505)
===== ==== =========== =========== ===========
See Accompanying Notes to Financial Statements.
F-48
119
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF CASH FLOWS
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
PERIMMUNE HOLDINGS PREDECESSOR COMPANY
CONSOLIDATED ------------------------------------
--------------------- PERIOD FROM
PERIOD FROM AUGUST 3, JANUARY 1, 1996
1996 THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 AUGUST 2, 1996 DECEMBER 31, 1995
--------------------- --------------- -----------------
Cash flows from operating activities:
Net income (loss)................................. $(4,575,320) $ 440,868 $ 178,490
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 298,834 270,148 476,186
Loss on disposal of equipment.................. 1,330 -- 44,342
Decrease (increase) in accounts receivable:
Affiliates................................... (156,721) 2,720,401 991,941
Government................................... 317,372 140,254 (375,722)
Other........................................ 69,742 (439,377) (115,311)
Decrease (increase) in costs and estimated
earnings in excess of billings............... 237,825 (125,687) (158,452)
Increase in inventories........................ (4,840) (57,490) (42,852)
Decrease (increase) in other current assets.... (162,592) 102,105 74,058
Increase (decrease) in accounts payable and
accrued liabilities.......................... 2,062,411 (628,419) (276,783)
Increase in accrued pension liability.......... 112,849 -- --
Increase (decrease) in advance contract
billings..................................... (5,050) (516,568) 132,402
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ (1,804,160) 1,906,235 928,299
----------- ----------- -----------
Cash flows from investing activities:
Acquisition costs................................. (1,250,000) -- --
Capital expenditures.............................. (129,280) (104,893) (1,029,395)
----------- ----------- -----------
Net cash used in investing activities............... (1,379,280) (104,893) (1,029,395)
----------- ----------- -----------
Cash flows from financing activities:
Net contribution from (distribution to) parent
company........................................ -- (1,801,342) 100,596
Proceeds from issuance of common stock............ 5,850 -- --
Proceeds from issuance of notes payable........... 5,600,000 -- --
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 5,605,850 (1,801,342) 100,596
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 2,422,410 -- (500)
Cash and cash equivalents at beginning of year...... 1,500 1,500 2,000
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 2,423,910 $ 1,500 $ 1,500
=========== =========== ===========
Supplementary disclosure of non-cash financing
activities:
Purchase of common stock of PerImmune, Inc. with a
note payable (Note 2).......................... $ 9,234,935 -- --
Acquisition costs paid through issuance of common
stock.......................................... 100,000 -- --
Consideration paid in excess of net assets
acquired....................................... 1,015,035 -- --
=========== =========== ===========
See Accompanying Notes to Financial Statements.
F-49
120
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
PerImmune Holdings, Inc. and Subsidiary is composed of PerImmune Holdings,
Inc. (Holdings) and PerImmune, Inc. (the Company or PerImmune). Holdings was
incorporated on June 28, 1996 for the purpose of acquiring the Company in a
leveraged buyout transaction.
Between 1985 and 1996, the Company was owned by Organon Teknika Corporation
(the Parent Company or OTC), a subsidiary of Akzo Nobel, Inc., which is
wholly-owned by Akzo Nobel, NV (Netherlands). Prior to December 20, 1994, the
Company operated as a division of OTC, and was known as Biotechnology Research
Institute (BRI). On December 20, 1994, PerImmune (the Predecessor Company) was
formed as a wholly-owned corporation of OTC with the issuance of 1,000 shares of
common stock in exchange for all the assets and liabilities related to the
PerImmune business. Effective August 3, 1996, the Company was acquired by
Holdings through a leveraged buyout (see Note 2). Holdings has no substantive
operations.
The Company is a research oriented healthcare company that applies
biotechnology and other techniques of modern biology and chemistry to develop,
produce and sell products intended to improve the quality of life by diagnosing,
preventing and treating human disease. The Company's focus is on the development
of human monoclonal antibodies for cancer and infectious disease applications,
as well as, cancer vaccines, specific and non-specific immunotherapy and
cardiovascular disease test products. Historically, the Company's primary
sources of revenue have been research and development contracts with affiliated
companies, revenues generated from government contracts and sales of products
and services. PerImmune markets its products in the United States, Europe and
other geographic regions.
While the Company was held by OTC, it successfully developed a number of
profitable products for the Parent Company including bladder cancer therapeutic,
food pathogen and HIV tests. Most of PerImmune's products are intended for human
use and are, therefore, regulated by the United States Food and Drug
Administration.
Basis of Presentation
The consolidated financial statements as of December 31, 1996 and for the
period from August 3, 1996 through December 31, 1996 include the accounts of
Holdings and the Company. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The financial statements for the year ended December 31, 1995 and for the
period from January 1, 1996 through August 2, 1996 represent the stand-alone
results of operations of PerImmune, Inc., a wholly-owned subsidiary of OTC.
Due to the change in ownership of the Company, the comparability of the
financial statements is affected. In particular, equity has changed
significantly due to the new ownership and debt related to the acquisition. Cash
and cash equivalents is also different as balances are no longer managed by the
former Parent Company. In addition, certain liabilities which were paid for by
the Parent Company and allocated to the division or the subsidiary through the
intercompany accounts have been recognized by the Company subsequent to the LBO
transaction (see Note 3). Also, certain research and development activities
performed prior to the leveraged buyout for affiliates and were reimbursed under
the contractual arrangements described in Note 3, are subsequently performed for
the Company's benefit and are not reimbursed.
F-50
121
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of investment by the Company.
Inventories
Inventories are stated at the lower of cost or market using the FIFO cost
method.
Plant and Equipment
Plant and equipment are stated at cost. Depreciation on plant and equipment
is computed by the straight-line method over the estimated useful lives of the
assets of 3 to 7 years. Leasehold improvements are amortized on a straight-line
basis over the remaining lease term or asset useful life, whichever is shorter.
Construction in progress represents buildings, leasehold improvements and
other capital expenditures for facilities under construction and machinery
pending installation. This includes the costs of construction, plant and
machinery and costs related to obtaining appropriate regulatory approvals.
Construction in progress costs are transferred to other plant and equipment
categories when the construction/installation is completed, appropriate
regulatory approvals have been obtained and the asset is ready for use.
Acquisition Costs
Acquisition costs represent costs incurred related to the leveraged buyout
transaction (see Note 2). Amortization of acquisition costs is computed on a
straight-line basis over 5 years.
Income Taxes
The Company was included in the Akzo Nobel, Inc. consolidated Federal
income tax return for the year ended December 31, 1995, and for the period
January 1, 1996 through August 2, 1996. The Company will file a separate
consolidated Federal income tax return for the period August 3, 1996 through
December 31, 1996. Prior to August 3, 1996, deferred income taxes were reflected
in stockholders' equity (deficit).
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of changes in tax rates is recognized in the period that such tax rate changes
are enacted.
Fair Value of Financial Instruments
The carrying amount of current financial instruments approximate fair value
because of the short-term nature of these instruments. The Company has notes
payable related to the leveraged buyout for which it is
F-51
122
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not practicable to estimate the fair value of these notes since they are not
traded, and no quoted values are readily available for similar financial
instruments. However, management believes that there has been no permanent
impairment in the value of these notes.
Stock-based Compensation
The Company accounts for share option issuances in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, deferred compensation is recorded to the extent that
the market value of the underlying stock exceeds the exercise price on the date
of grant. Such deferred compensation is amortized over the respective vesting
periods of such option grants. On January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, which allows entities to continue to apply the provisions of APB
No. 25 for financial statement reporting purposes and provide pro forma net
income (loss) footnote disclosures for employee stock option grants made in 1995
and 1996 as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the financial statement
reporting provisions of APB No. 25 and to provide the pro forma disclosure
provisions of SFAS No. 123. Transactions with non-employees, in which goods or
services are the consideration received for the issuance of equity instruments,
are accounted for under the fair-value based method defined in SFAS No. 123 (see
Note 11).
Revenue Recognition -- Contract Research and Development and Licensing
Agreements
The Company has entered into various research and development and licensing
agreements (see Notes 3 and 4). Research and development revenue from
cost-reimbursement agreements is recorded as the related expenses are incurred,
up to contractual limits and when the Company meets its performance obligations
under the respective agreements. Contract revenue is recognized under other
agreements when milestones are met and the Company's significant performance
obligations have been satisfied in accordance with the terms of the respective
agreements. Cash received that is related to future performance under such
contracts is deferred and recognized as revenue when earned.
The Company engages in research and development contracts with Organon
Teknika International (OT BV) and Organon International (OI). Through August 2,
1996, contract revenue is recorded at negotiated rates per direct labor hour
plus material and supplies and a 7% fee. Revenue is recorded as earned as the
contract direct labor hours are incurred and when materials and supplies are
purchased. Subsequent to August 2, 1996, the contract revenue is recorded on a
cost-plus-fixed-fee basis.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institutes of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contracts is recognized based on the total direct and
indirect costs incurred during the period to total estimated costs using the
percentage-of-completion method. Estimates to complete are reviewed periodically
and revised as required in the period the revision is determined. Provisions are
made for the full amount of anticipated losses, if any, on all contracts in the
period in which they are first known and estimable. Contracts with the U.S.
government are subject to government audit upon contract completion and
therefore, all contract costs are potentially subject to adjustment, even after
reimbursement. Management believes adequate provisions for such adjustments, if
any, have been made in the financial statements. Expense recovery rates have
been audited through 1995.
F-52
123
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development, Patent and Royalty Costs
Research and development, patent and royalty costs are expensed as
incurred.
Concentration of Credit Risk
The Company performs research and development services to both affiliated
and non-affiliated entities. The Company generally does not require collateral
or other security in extending credit to its customers. The Company had three
customers which contributed ten percent or more of revenues. OTC contributed 7%,
41% and 55% of total revenues in the period from August 3, 1996 through December
31, 1996, the period from January 1, 1996 through August 2, 1996 and the year
ended 1995, respectively. The U.S. Federal Government contributed 62%, 28% and
34% of total revenues in the period from August 3, 1996 through December 31,
1996, the period from January 1, 1996 through August 2, 1996 and the year ended
1995, respectively. In addition, Baxter Healthcare Corporation contributed 14%
of the Company's revenue for the period from August 3, 1996 through December 31,
1996.
(2) LEVERAGED BUYOUT
In May 1996, Holdings engaged an investment advisor to advise Holdings with
regards to the purchase of PerImmune from Akzo Nobel, Inc., for which the
investment advisor's fee totaled $1,250,000 of which $1,225,000 is included in
accounts payable as of December 31, 1996. The investment advisor also received
8.5 shares of the Company's common stock in exchange for funding certain related
legal expenses on behalf of the Company totaling $100,000. The shares are
protected from dilution through certain future third-party financings.
Effective August 3, 1996, 100% of the Company's common stock was acquired
by Holdings from OTC in exchange for a $9,234,935 note payable (see Note 8). The
transaction was accounted for in accordance with EITF No. 88-16, Basis in
Leveraged Buyout Transactions. Because the transaction was wholly financed by
OTC, all such consideration was determined to be nonmonetary and, under the
provisions of EITF 88-16, the assets and liabilities of PerImmune were carried
over at historical cost.
Concurrent with the leveraged buyout, the ownership rights of certain
patents and other technology rights developed under the research and development
contracts with affiliates, which pertain to the business of PerImmune, were
transferred to Holdings. Under the terms of the transfer, Holdings is required
to make certain milestone payments of up to $10 million if specific future
conditions are met, and will make payments of between 5% and 7.5% of net product
sales and 50% of license revenue. Any future milestone payments will be recorded
as research and development expense when the milestone is achieved.
(3) RELATIONSHIPS WITH RELATED PARTIES
Akzo Nobel, NV
Prior to the leveraged buyout of PerImmune, ownership rights or patents
developed under the research and development contracts with OT BV and OI
belonged to these affiliates. Expenses incurred by the Company in developing and
obtaining these patents plus a fee (Note 1) were charged to Akzo Nobel, NV and
were recorded as contract research and development revenue. These amounts are
shown as accounts receivable from affiliates prior to August 3, 1996.
Organon Teknika Corporation
Prior to the incorporation of PerImmune, Inc., OTC provided certain
accounting, computer and other administrative services to PerImmune for a
management fee which was based on PerImmune's proportionate share of total OTC
expenses using a formula considering revenues, property and equipment and
payroll factors. OTC also paid all payroll taxes, medical claims, pension and
other employee benefit expenses which
F-53
124
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATIONSHIPS WITH RELATED PARTIES (CONTINUED)
were allocated to PerImmune and other affiliates based on the total wages of the
respective participating entities. In addition, OTC paid PerImmune's payroll,
bonuses, general insurance, relocation and personal property tax expenses, which
were charged to PerImmune on a specific identification basis. OTC also provided
materials at its cost for certain products for resale by PerImmune. Subsequent
to PerImmune, Inc.'s incorporation, the Company was responsible for paying its
own payroll taxes, personal property taxes and certain other items. Amounts
arising from the transactions described above were treated as expenses and
contributions from Parent Company by PerImmune. Product sales to OTC were
$432,645, $605,703 and $643,434 in the period from August 3, 1996 through
December 31, 1996, the period from January 1, 1996 through August 2, 1996 and
the year ended 1995, respectively.
Effective August 3, 1996, Holdings and OTC entered into a services
agreement to provide each party, including PerImmune, with mutually agreed-upon
services. OTC will provide Holdings for varying periods of time with such
services as employee benefit plan administration, administrative regulatory
support, patent and trademark prosecution and computer and other services.
Holdings will provide OTC with various product support and research services.
Each party is compensated for services as defined in the agreement, generally
cost plus a fee. Revenues and costs related to the research activities are
recorded as affiliates revenue and costs in the statement of operations.
(4) CONTRACTS AND AGREEMENTS
PerImmune has a license agreement with the Arch Development Corporation
(Arch) to make and sell products under the patent rights for Apotek Lp(a)
developed at the University of Chicago. The agreement requires the Company to
pay Arch a royalty of 4 percent of product sales. PerImmune is also
collaborating with Stanford University to develop an active-specific
immunotherapy vaccine for low grade B-cell lymphomas.
Agreement with Baxter
On January 1, 1996, PerImmune entered into a research collaboration and
license agreement with Baxter Healthcare Corporation (Baxter) whereby the
Company agreed to provide certain research, development and pilot manufacturing
services for Baxter in exchange for reimbursement of research and development
costs, milestone payments and certain royalty payments. The Company received a
non-refundable milestone payment of $1,500,000 in January 1996 and is reimbursed
for actual costs incurred plus a fee of 16% during the term of the agreement.
Baxter is also obligated to make up to $3,000,000 in additional milestone
payments, if the Company achieves certain stages of U.S. and European regulatory
approvals for the serotherapy products for infectious and autoimmune diseases
under development. In addition, the Company earns a royalty ranging between 4%
and 8% of gross profit with a minimum royalty ranging between 2% and 4% of net
sales, as defined in the agreement, on sales of products depending on whether
the product is a result of previously existing technology of the Company or new
technology resulting from this development agreement. As of December 31, 1997,
no royalty or additional milestone payments has been earned. The agreement has a
term of three years with an option for a fourth year. Either party may terminate
this agreement at any time without cause. All patents and technology developed
under this agreement are the property of Baxter.
Other Contracts and Agreements
The Company has entered into various other licensing and research and
development agreements whereby they are committed to participate in research and
development projects, either on a best efforts basis or upon attainment of
certain performance milestones, as defined, or both, for various periods unless
canceled by the respective parties. Such future amounts to be paid to the
Company will primarily be determined on a cost-plus basis, and are subject to
specific performance criteria.
F-54
125
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVENTORIES
Inventories at December 31, 1996, are summarized as follows:
Finished goods............................................ $186,837
Work-in-process........................................... 1,337
Raw materials............................................. 187,314
--------
$375,488
========
(6) PLANT AND EQUIPMENT
Plant and equipment at December 31, 1996, are summarized as follows:
Leasehold improvements.................................. $ 990,573
Computers............................................... 453,946
Machinery and equipment................................. 3,735,691
Construction in progress................................ 5,935,047
-----------
11,115,257
Less accumulated depreciation and amortization.......... 3,831,542
-----------
$ 7,283,715
===========
(7) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of costs and estimated earnings in excess of
billings on uncompleted contracts as of December 31, 1996:
Costs incurred on uncompleted contracts..................... $28,548,030
Estimated earnings.......................................... 2,154,438
-----------
Total costs and estimated earnings.......................... 30,702,468
Less:
Billings to date.......................................... 29,836,800
Allowance for losses...................................... 116,629
-----------
$ 749,039
===========
(8) DEBT OBLIGATIONS
Current notes payable at December 31, 1996 is summarized as follows:
Secured promissory note -- OTC, 8% interest, due January
1997...................................................... $3,600,000
Working capital secured note -- OTC, 8% interest, due August
1997...................................................... 2,000,000
----------
$5,600,000
==========
In August 1996, in connection with the leveraged buyout, Holdings issued an
8% secured promissory note to OTC for $9,234,935 to purchase the outstanding
common stock of PerImmune, Inc. The note matures in August 1998. In addition,
Holdings issued an 8% secured note for a credit facility permitting draws of
$720,000 per month up to $3,600,000 and a $2,871,532 working capital facility to
provide capital for operations, both with OTC. The Company has borrowed
$3,600,000 and $2,000,000, respectively, against the facilities as of December
31, 1996. These notes mature on January and August 1997, respectively, when all
principal and accrued interest is due. The note which matured in January 1997
was repaid in full at that time.
F-55
126
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) DEBT OBLIGATIONS (CONTINUED)
These notes are all secured by the patents, patent applications and trademarks
acquired in the leveraged buyout. The secured promissory note is also secured by
the plant and equipment acquired in the leveraged buyout.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996, are summarized as follows:
Accrued payroll............................................. $ 166,853
Accrued bonuses............................................. 313,004
Accrued interest -- OTC promissory note..................... 306,990
Other....................................................... 600,487
----------
$1,387,334
==========
(10) EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan (the Plan)
covering substantially all of its employees. In December 1996, the Company
decided to establish a noncontributory defined benefit pension plan retroactive
to the date of the leveraged buyout. This plan has terms similar to those of the
Akzo Nobel Retirement Plan (ANRP) and covers substantially all of the Company's
employees. Under the terms of this plan employees are given credit for prior
service. Pursuant to the term of the purchase agreement, the fair value of the
plan assets equal to the present value of the accumulated pension benefit
accrued as determined by an actuarial valuation as of the date of the leveraged
buyout were transferred from the ANRP to PerImmune's new pension trust in April
1997.
The following table sets forth the funded status of the plan at December
31, 1996 and the composition of net periodic pension cost and significant
assumptions for the period from August 3, 1996 through December 31, 1996:
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of approximately $1,133,561............................ $1,362,971
Effect of anticipated increase in compensation levels..... 718,744
----------
Projected benefit obligation................................ 2,081,715
Plan assets at fair value................................... 1,238,260
----------
Excess of projected benefit obligation over plan assets..... (843,455)
Unrecognized prior service cost............................. --
Unrecognized net investment gain............................ (92,424)
----------
Total pension liability..................................... $ (935,879)
==========
Net periodic pension cost includes the following components:
Service cost -- benefits earned during the period......... $ 93,606
Interest cost on projected benefit obligation............. 61,916
Actual return on assets................................... (135,097)
Net amortization and deferred investment gain............. 92,424
----------
Net periodic pension cost................................... $ 112,849
==========
F-56
127
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
Significant assumptions used were as follows:
Discount rate............................................... 7.5%
Rate of increase in compensation levels (graded by age of
participant).............................................. 4.0 to 10.5%
Expected rate of return of assets........................... 9.5%
============
Retirement Savings Plan
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings
up to the Internal Revenue Service annual contribution limit. The Company
matches employee contributions according to a specified formula. The Company's
matching contributions totaled $72,779, $101,890 and $168,040 in the period from
August 3, 1996 through December 31, 1996, the period from January 1, 1996
through August 2, 1996, and the year ended 1995, respectively.
(11) STOCKHOLDERS' EQUITY
Common Stock
On December 20, 1994, PerImmune, Inc. was incorporated and authorized
100,000 shares and issued 1,000 shares of common stock.
On June 28, 1996, PerImmune Holdings, Inc. was formed. A total of 1,000
shares of common stock were authorized and 585 shares were issued for $105,850.
Holding's investment advisor was also issued 8.5 shares of common stock in 1996
in connection with the leveraged buyout (see Note 2).
Options
In August 1996, Holdings granted 255 stock options to members of
management. The options vest over three years and expire ten years from the date
of grant. Stock option activity is summarized as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
Outstanding at August 3, 1996....................... -- $ --
Granted............................................. 255 2,725
Exercised........................................... -- --
Canceled............................................ -- --
--- ------
Outstanding at December 31, 1996.................... 255 $2,725
=== ======
Options exercisable at December 31, 1996............ -- --
=== ======
Options outstanding and exercisable by price range as of December 31, 1996
are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF REMAINING EXERCISE AS OF EXERCISE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE PRICES DECEMBER 31, 1996 PRICES
-------- ----------------- ---------------- --------- ----------------- ---------
$2,725 255 9.75 years $2,725 -- --
====== === ========== ====== === ======
F-57
128
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma Option Information
The per share weighted average fair value of all stock options granted
during 1996 was $1,377 on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 6.28% and an expected life of 3
years.
The Company applies APB No. 25 and related interpretations in accounting
for its stock options granted to employees. Accordingly, the Company has
recognized no compensation expense in connection with its stock option grants
for the period from August 3, 1996 through December 31, 1996, the period from
January 1, 1996 through August 2, 1996, and the year ended 1995. Had
compensation expense been determined based on the fair value at date of grant
for its stock option under SFAS No. 123, net income (loss) would have been
reported as the pro forma amounts indicated below:
PERIOD FROM PERIOD FROM
AUGUST 3, 1996 JANUARY 1, 1996
THROUGH THROUGH YEAR ENDED
NET INCOME (LOSS) DECEMBER 31, 1996 AUGUST 2, 1996 1995
----------------- ----------------- --------------- ----------
As reported....................................... $(4,575,320) $440,868 $178,490
----------- -------- --------
Pro forma......................................... $(4,604,552) $440,868 $178,490
=========== ======== ========
Pro forma net income (loss) reflects only options granted from August 31,
1996 through December 31, 1996. The effects of applying SFAS No. 123 in the pro
forma net income (loss) above may not be representative of the effects on such
pro forma information for future years.
(12) COMMITMENTS
PerImmune leases laboratory, office and manufacturing facilities and
equipment under noncancellable operating leases which expire at various times
through January 1, 2007 (including the lease transaction described in Note 14
which is also reflected in the amounts below).
Future minimum lease payments under these leases are as follows:
1997............................................ $ 1,744,809
1998............................................ 1,797,334
1999............................................ 1,771,120
2000............................................ 1,798,251
2001............................................ 1,849,638
Thereafter...................................... 10,298,844
-----------
$19,259,996
===========
Rent expense was $588,311 for the period from August 3, 1996 through
December 31, 1996, $782,088 for the period from January 1, 1996 through August
2, 1996 and $1,238,370 for the year ended December 31, 1995. Rent expense is
included in both selling, general and administrative expenses and costs of
contracts in the statements of operations.
(13) INCOME TAXES
The Company was included in the Akzo Nobel, Inc., consolidated Federal
income tax return for the year ended December 31, 1995, and for the period
January 1, 1996 through August 2, 1996. They are presented below, however, on a
separate company basis. The Company will file a separate consolidated Federal
income
F-58
129
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES (CONTINUED)
tax return for the period August 3, 1996 through December 31, 1996. The
provision for income tax expense on earnings before income taxes is summarized
below:
PERIMMUNE HOLDINGS
CONSOLIDATED PREDECESSOR COMPANY
------------------ --------------------------
PERIOD FROM PERIOD FROM
AUGUST 3, JANUARY 1,
1996 THROUGH 1996 THROUGH
DECEMBER 31, AUGUST 2, YEAR ENDED
1996 1996 1995
------------------ ------------ ----------
Current................................... $ -- $68,259 $355,688
Deferred.................................. -- -- --
------- ------- --------
Total........................... $ -- $68,259 $355,688
======= ======= ========
The amount computed by applying the Federal corporate income tax rate of
34% to earnings before income taxes is reconciled to the provision for income
taxes as follows:
PERIMMUNE
HOLDINGS
CONSOLIDATED PREDECESSOR COMPANY
------------ --------------------------
PERIOD FROM PERIOD FROM
AUGUST 3, JANUARY 1,
1996 THROUGH 1996 THROUGH
DECEMBER 31, AUGUST 2, YEAR ENDED
1996 1996 1995
------------ ------------ ----------
Income tax computed at statutory rates......... $(1,555,609) $ 173,103 $181,621
State income taxes, net of Federal tax
benefit...................................... (205,675) 23,313 25,243
Expenses not deductible for tax purposes....... 1,623 3,036 3,818
Valuation allowance adjustment................. 1,759,661 (131,193) 145,006
----------- --------- --------
$ -- $ 68,259 $355,688
=========== ========= ========
Deferred income tax (assets)and liabilities as of December 31, 1996 are
summarized as follows:
Excess of book over tax (tax over book) basis of assets..... $ (193,529)
Allowance for doubtful accounts and other reserves.......... (11,539)
Accrued expenses............................................ (520,257)
Non-SRLY net operating loss carryovers...................... (1,802,118)
Other....................................................... (11,567)
-----------
(2,539,010)
Valuation allowance......................................... 2,539,010
-----------
$ --
===========
Prior to the leveraged buyout, the provision for Federal and state income
taxes is recorded using the overall effective tax rate of the consolidated group
applied to the Company's pre-tax earnings before adjustments for permanent
differences. Deferred income tax assets and liabilities are recorded for the
Company's temporary differences using the same effective tax rate. Prior to the
leveraged buyout, the total provision for income taxes represents income taxes
currently payable to the former Parent Company and has been treated as
contributions from parent.
F-59
130
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES (CONTINUED)
At December 31, 1996, the Company has a net operating loss carryforward for
both Federal and state purposes of $4,681,000 which expires in the year 2011.
This net operating loss carryforward relates to the period August 3, 1996
through December 31, 1996 and as such, is not limited under existing tax laws.
However, this carryforward may be significantly limited under the Internal
Revenue Code as a result of future ownership changes by the Company.
It is more likely than not that the net deferred tax assets reflected above
will not be realized in future years. Therefore, a valuation allowance of
$2,539,010 has been established for the year ended December 31, 1996. The
$478,887 difference between the $2,107,355 net increase in the valuation
allowance from December 31, 1995 to December 31, 1996, and the $1,628,468
increase that reconciles expected to actual tax expense in 1996, is related to
the increase in deferred tax assets which results from the LBO transaction.
Future reductions of the valuation allowance will be reported as reductions of
income tax expense in the period(s) in which it becomes more likely than not
that the tax benefits will be realized.
(14) SUBSEQUENT EVENTS
Sale Leaseback of Facility
On January 15, 1997, PerImmune exercised its option to purchase the land
and building it occupies in Rockville, Maryland for a pre-established price of
$7.9 million. Concurrent to the purchase, PerImmune sold the property to a
third-party (Buyer). The sale included part of the building, improvements,
certain equipment and other items previously owned by the Company and shown in
Plant and Equipment at December 31, 1996. The sales price excluding settlement
and transfer costs was $14,150,000, and the loss resulting from this transaction
was approximately $350,000, after consideration of estimated costs for repairs
described below. The Company received approximately $5.2 million at the closing
of the transaction. This transaction will be treated as a sale-leaseback. As
such, the plant and equipment previously owned by the Company will be removed
from the balance sheet and the loss will be recognized immediately.
In conjunction with the sale, PerImmune has agreed to make certain repairs
at its own expense and to obtain the release of certain liens against the
property. To ensure compliance with these provisions of the agreement, PerImmune
deposited $500,000 and $100,000 into escrow accounts. In addition, PerImmune has
agreed to deposit, on a monthly basis from February 1997 through January 2002,
$3,333 for costs to be used for elevator repairs and refurbishment. The Company
is entitled to any amounts not spent for the described purpose.
PerImmune also issued to Buyer in connection with the sale leaseback
transaction a warrant for the purchase of 25,000 shares of PerImmune common
stock if the company consummates an initial public offering (IPO) or if certain
other events occur, such as a capital reorganization, recapitalization,
dissolution or liquidation. The warrants are exercisable on or for three years
following the date of one of the previously described events. The warrants
expire in July 1999 if one of the above events has not occurred. The warrant
purchase price in an IPO would be the offering price and in one of the other
events described above, the price would be determined by a formula described in
the warrant agreement.
In January 1997, Holdings issued three uncollateralized, non-interest
bearing promissory notes, for a total face amount of $232,500, to its advisors
on the sale leaseback transaction (see note 6). Each promissory note is
convertible into two shares of Holdings $0.01 par value common stock and have no
specified maturity date.
F-60
131
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENTS (CONTINUED)
Syncor Agreement
On April 23, 1997, Holdings issued 100 shares of its Series A Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series A) to
Syncor International Corporation (Syncor) for $4.5 million. Dividends are
payable if and when declared by the Board of Directors at the rate of 7% of the
Liquidation Preference per annum, where the Liquidation Preference is initially
defined as $45,000, subject to certain adjustments. Each share of Series A may
be converted into common stock before the Redemption Date (as defined below) at
the option of the holder, or is automatically converted on the date of a
qualifying initial public offering, using a conversion rate as defined in the
agreement. The Company shall redeem the Series A five years after the issuance
date (the Redemption Date) in the event that all shares have not been converted
by this date. If such redemption occurs, the redemption price shall equal the
amount of the Liquidation Preference plus any declared but unpaid dividends. In
the event of liquidation or dissolution, Syncor shall be entitled to be paid
from the assets of Holdings, in preference to the common stockholders, but on an
equal basis with Series B stockholders (see below), the Liquidation Preference
plus all declared but unpaid dividends. Holdings shall also have the right of
first refusal to repurchase these shares should Syncor wish to sell them. In
connection with this issuance, Syncor and the holders of Holding's common stock
were also granted certain registration rights as contained in the Registration
Rights Agreement.
On April 1, 1997, the Company also entered into a distribution agreement
for certain products with Syncor. Under this agreement, Syncor will pay the
Company 50% of net sales, as defined, and right of return exists in certain
situations. The Company is obligated annually to spend 15% of sales of products
covered by this agreement on research and development to improve upon the
existing or develop new products. The Company will also reimburse Syncor for all
expenses related to marketing these products up to $1.5 million, plus 50% of
amounts over $1.5 million provided the expenditures are in accordance with the
annual market plan as prepared by the two companies. This agreement has a term
of five years and is renewable for two additional two-year terms.
Mentor Agreement
On June 16, 1997, the Company issued 20 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series B) to
Mentor Corporation (Mentor) for $1 million. Dividends are payable if and when
declared by the Board of Directors at the rate of 7% of the Liquidation
Preference per annum, where Liquidation Preference is defined as $50,000,
subject to certain adjustments. Each share of Series B shall have the same
rights, preferences and terms as Series A described above. Series A and B shall
have equal preference.
On June 16, 1997, the Company also entered into a distribution agreement
for certain products with Mentor with an initial term of 5 years. Under this
agreement, Mentor will pay the Company 50% of net sales, as defined in the
agreement. The Company is obligated to provide up to 12,000 units of products
per year to be used by Mentor for promotional purposes, which will not be
reimbursed by Mentor.
F-61
132
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary............................ 3
Risk Factors.................................. 8
The Company................................... 19
Use of Proceeds............................... 20
Dividend Policy............................... 20
Capitalization................................ 21
Dilution...................................... 22
Pro Forma Consolidated Financial
Information................................. 23
Selected Financial Data....................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 26
Business...................................... 30
Management.................................... 53
Principal and Selling Stockholders............ 60
Description of Capital Stock.................. 62
Shares Eligible for Future Sale............... 66
Underwriting.................................. 67
Legal Matters................................. 68
Experts....................................... 68
Available Information......................... 69
Index to Consolidated Financial Statements.... F-1
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
SHARES
INTRACEL CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
Registrant, will be substantially as follows:
ITEM AMOUNT
Commission Registration Fee................................. $16,963
*Nasdaq National Market Filing Fee.......................... $ +
*Blue Sky Fees and Expenses (including legal fees).......... $ +
*Accounting Fees and Expenses............................... $ +
*Legal Fees and Expenses.................................... $ +
*Printing and Engraving..................................... $ +
*Registrar and Transfer Agent's Fees........................ $ +
*Underwriters' Expenses..................................... $ +
*Miscellaneous Expenses..................................... $ +
-------
Total............................................. $ +
=======
- ---------------
* Estimated
+ To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of the fiduciary duty as a director, except for
liability, to the extent imposed by applicable law, for: (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) liability for payments of dividends or stock purchases
or redemptions in violation of Section 174 of the Delaware Law; or (iv) any
transaction from which the director derived an improper personal benefit. The
Bylaws provide for the indemnification of officers and directors to the full
extent permitted by the DGCL, as it now exists or may in the future by amended
(but, in the case of such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than permitted
prior thereto), or by other applicable law as then in effect, against all
expenses, liabilities and losses actually and reasonably incurred or suffered in
connection with service for or on behalf of the Company, including payment of
expenses in defending an action or proceeding upon receipt of any undertaking by
the person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification. Such indemnification will
continue to an indemnified person who has ceased to be a director, officer,
employee or agent and will inure to the benefit of the indemnified person's
heirs, executors and administrators.
The Company's Bylaws provide that the Company may maintain insurance, at
its expense, to protect itself and any indemnified party against any expense,
liability or loss, whether or not the Company would have the power to indemnify
such person against such expense, liability or loss under the DGCL. The Company,
without further stockholder approval, may enter into contracts with any
indemnified person in furtherance of the indemnification provisions contained in
the Bylaws and may create a trust fund, grant a security interest or use other
means (including without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect indemnification as provided in the
Bylaws.
The Company has agreed to indemnify the Underwriters and their controlling
persons, and the Underwriters have agreed to indemnify the Company and its
controlling persons, against certain liabilities, including liabilities under
the Securities Act. Reference is made to the Underwriting Agreement filed as
Exhibit 1 hereto.
II-1
134
For information regarding the Company's undertaking to submit to
adjudication the issue of indemnification for violation of the securities, see
Item 17 hereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All references in this Item 15 to common stock reflect a 2-for-1 split
effective December 31, 1997.
COMMON STOCK
In 1996, the Company sold 3,224 shares of common stock in exchange for
$8,061, pursuant to the exercise of stock options. The issuance of such
securities was exempt from registration under Section 4(2) of or Rule 701 under
the Securities Act.
In 1997, the Company sold 1,208,972 shares of common stock in exchange for
$5,440,370, and issued 195,820 shares of common stock in exchange for $862,817
pursuant to the exercise of stock warrants. The issuance of such securities was
exempt from registration under Section 4(2) of or Rule 701 under the Securities
Act.
In January 1998, in connection with the Merger, the Company issued
5,478,654 shares of common stock. The issuance of such securities was exempt
from registration under Section 4(2) of the Securities Act.
In the first quarter of 1998, the Company issued 70,024 shares of common
stock in exchange for $315,104 in underwriting costs associated with the
Company's 1997 sale of common stock. The issuance of such securities was exempt
from registration under Section 4(2) of the Securities Act.
In April 1998, the Company issued 40,000 shares of common stock in exchange
for $100,000 pursuant to the exercise of stock options. The issuance of such
securities was exempt from registration under Section 4(2) of the Securities
Act.
OPTIONS AND WARRANTS
Between January 1995 and April 1998, the Company issued options to purchase
an aggregate of 708,000 shares of common stock to certain of its officers,
directors and key employees under the 1989 Intracel Stock Option Plan and the
1990-91 Intracel Stock Option Plan. The issuance of such securities was exempt
from registration under Section 4(2) of or Rule 701 under the Securities Act.
In September 1995, the Company issued Warrants to purchase 172,924 shares
of common stock at an exercise price of $4.00 per share. The issuance of such
securities was exempt from registration under Rule 506 of Regulation D under the
Securities Act.
Between November 1995 and June 1996, the Company issued Warrants to
purchase 847,594 shares of common stock at an exercise price of $7.00 per share,
of which 159,074 terminated in November 1997. The issuance of such securities
was exempt from registration under Section 4(2) of the Securities Act.
In January 1998, the Company issued Warrants to purchase 679,341 shares of
common stock at an exercise price of $4.50 per share. The issuance of such
securities was exempt from registration under Section 4(2) of the Securities
Act.
In April 1998, the Company issued Warrants to purchase in the aggregate,
98,132 shares of common stock at an exercise price of $7.64 per share. The
issuance of such securities was exempt from registration under Section 4(2) of
the Securities Act.
PREFERRED STOCK
In September and December 1995, the Company issued an aggregate of 668,750
shares of Series A-1 preferred stock, in exchange for $5,350,000. Such preferred
stock will convert into 1,364,093 shares of Common Stock upon consummation of
the Offering. The issuance of such securities was exempt from registration under
Rule 506 of Regulation D under the Securities Act.
II-2
135
In March 1997, the Company issued an aggregate of 40,000 shares of Series
A-2 preferred stock in exchange for the June 1996 $2,000,000 Subordinated
Secured Promissory Note, accrued interest and transaction expenses, and a cash
payment of $1,732,740. The issuance of such securities was exempt from
registration under Section 4(2) of the Securities Act.
In June 1997, the Company issued an aggregate of 139,390 shares of Series
A-3 preferred stock in exchange for 139,390 shares of Series A-1 preferred
stock. Such preferred stock will convert into 309,873 shares of common stock
upon consummation of the Offering. The issuance of such securities was exempt
from registration under Section 4(2) of the Securities Act.
In January 1998, in connection with the Merger, the Company issued 100
shares of Series B-1 preferred stock and 120 shares of Series B-2 preferred
stock to former holders of PerImmune Holdings' capital stock. Such Preferred
Stock will convert into 992,907 shares and 1,146,074 shares, respectively, of
common stock upon consummation of the Offering. The issuance of such securities
was exempt from registration under Section 4(2) of the Securities Act.
PROMISSORY NOTES
In March 1995, the Company issued a Note in the principal amount of
$700,000. The issuance of such securities was exempt from registration under
Section 4(2) of the Securities Act.
In October 1995, the Company issued a Note and a contingent Note in the
aggregate principal amount of $1,500,000, for the purchase of certain assets of
Zymmune Diagnostic Systems, Inc. The issuance of such securities was exempt from
registration under Section 4(2) of the Securities Act.
In November 1995, the Company issued a Senior Term Note in the principal
amount of $9,000,000. The issuance of such securities was exempt from
registration under Section 4(2) of the Securities Act.
In December 1995, the Company issued a Subordinated Secured Promissory Note
in the principal amount of $6,265,000, at a discount of $1,565,000. The issuance
of such securities was exempt from registration under Section 4(2) of the
Securities Act.
In June 1996, the Company issued two Subordinated Secured Promissory Notes,
in the aggregate principal amount of $6,000,000, at a discount of $40,000. The
issuance of such securities was exempt from registration under Section 4(2) of
the Securities Act.
In November 1997, the Company issued a Note in the principal amount of
$713,340. The issuance of such securities was exempt from registration under
Section 4(2) of the Securities Act.
In April 1998, the Company issued a Promissory Note in the aggregate
original principal amount of $9,000,000. The issuance of such securities was
exempt from registration under Section 4(2) of the Securities Act.
II-3
136
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
I. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
1 Underwriting Agreement by and among the Representatives, the
Selling Stockholder and the Company.+
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended.+
3.2 Bylaws of the Company.+
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.+
5 Opinion of Morrison & Foerster LLP.+
10.1 Lease, dated January 15, 1997, between PW Acquisitions 1,
LLC and PerImmune, Inc.
10.2 Lease Agreement, dated April 30, 1991, between Ward
Corporation and Organon Teknika Corporation.
10.3 Commercial Lease Agreement, dated June 1, 1993, between
Rowley Enterprises, Inc. and Polymer Technology
International for the property located at 1871 NW Gilman
Blvd., Issaquah, Washington.
10.4 Lease Agreement, dated August 22, 1988, between Issaquah #1
Limited Partnership and Baxter Healthcare Corporation for
the premises located at I-90 Lake Place, 2005 N.W. Sammish
Road, Issaquah, Washington.
10.5 Lease, dated February 1, 1998, between P.K. Projects Ltd.
and Intracel Corporation for the premises located at
Commerce Parkway, Richmond, British Colombia.
10.6 Agreement and Plan of Reorganization, dated November 26,
1998, among PerImmune Holdings, Inc., Intracel Corporation
and Intracel Acquisition Sub, Inc.
10.7 Employment Agreement, dated January 2, 1998, between Michael
G. Hanna, Jr. and Intracel Corporation.
10.8 Employment Agreement, dated January 2, 1998, between Simon
R. McKenzie and Intracel Corporation.
10.9 Employment Agreement between Daniel Reale and Intracel
Corporation.
10.10 Employment Agreement between Persis Strong and Intracel
Corporation.+
10.11 Employment Agreement between Lawrence Bloom and Intracel
Corporation.+
10.12 Employment Agreement between Carl Foster and Intracel
Corporation.+
10.13 Preferred Stock Purchase Agreement, dated as of March 12,
1997, between Intracel Corporation and Northstar High Total
Return Fund.
10.14 Note and Series A- Warrant Purchase Agreement, dated as of
June 21, 1996, between Intracel Corporation and Northstar
Advantage High Total Return Fund.
10.15 Note and Series A-III Warrant Purchase Agreement, dated as
of June 11, 1996, between Intracel Corporation and
CoreStates Enterprise Fund.
10.16 Note and Warrant Purchase Agreement, dated as of April 1,
1998, between Intracel Corporation and Northstar High Yield
Fund and Northstar High Total Return Fund II.
10.17 Loan and Authority Agreement, dated September 30, 1997,
between the Washington Economic Development Finance
Authority and Intracel Corporation.
10.18 Tax Certificate and Regulatory Agreement, dated September
11, 1997 between the Washington Economic Development Finance
Authority and Intracel Corporation.
10.19 Stock Purchase Agreement, dated July 1, 1996, between
PerImmune Holdings, Inc. and Organon Teknika Corporation.
10.20 Agreements between the Intracel Corporation and Thomas
Jefferson University.
10.21 Product Development and License Agreement, between
PerImmune, Inc, and Sigma Diagnostics, Inc.
II-4
137
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.22 Research, Collaboration and Distribution Agreement, dated
December 22, 1997, between PerImmune, Inc. and Mentor
Corporation.
10.23 Distribution Agreement, dated June 16, 1997, between
PerImmune, Inc. and Mentor Corporation.
10.24 Intellectual Property Agreement, dated August 2, 1996, by
and among Akzo Nobel Pharma International, B.V. and
PerImmune Holdings, Inc.
10.25 Intellectual Property Security Agreement, dated August 13,
1996, by and among PerImmune Holdings, Inc., PerImmune,
Inc., Akzo Nobel Pharma International, B.V. and Organon
Teknika Corporation.
10.26 1989 Stock Option Plan.+
10.27 1996 Stock Option Plan of PerImmune Holdings, Inc.+
21 List of Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants -- Intracel Corporation.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants -- PerImmune Holdings, Inc.
23.3 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of KPMG Peat Marwick LLP, independent certified
public accountants.
24 Power of Attorney (set forth on signature page to
Registration Statement).
27.1 Financial Data Schedule for the year ended December 31, 1997
27.2 Financial Data Schedule for the three months ended March 31,
1998
- ---------------
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered in the Offering, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act, shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
138
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on July 2, 1998.
INTRACEL CORPORATION
By: /s/ SIMON R. MCKENZIE
--------------------------------------
Simon R. McKenzie
President, Chief Executive Officer and
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Simon R. McKenzie and Peggy McGaw, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Form S-1
Registration Statement and to sign any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) of the
Securities Act, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Commission, granting said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises as fully and to all intents and purposes as he might or
could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME AND SIGNATURE TITLE DATE
/s/ MICHAEL G. HANNA Chairman of the Board and Chief July 6, 1998
- ----------------------------------------------------- Scientific Officer
Michael G. Hanna
/s/ SIMON R. MCKENZIE President, Chief Executive July 6, 1998
- ----------------------------------------------------- Officer and Director
Simon R. McKenzie (principal executive officer)
/s/ PEGGY MCGAW Vice President, Finance July 2, 1998
- ----------------------------------------------------- (principal financial and
Peggy McGaw accounting officer)
/s/ RAYMOND SCHUYLER Director July 6, 1998
- -----------------------------------------------------
Raymond Schuyler
/s/ JOSEPH CALIGIURI Director July 6, 1998
- -----------------------------------------------------
Joseph Caligiuri
/s/ STEVEN GERBER Director July 6, 1998
- -----------------------------------------------------
Steven Gerber
/s/ ALEXANDER KLIBANOV Director July 6, 1998
- -----------------------------------------------------
Alexander Klibanov
II-6
139
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
1 Underwriting Agreement by and among the Representatives, the
Selling Stockholder and the Company.+
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended.+
3.2 Bylaws of the Company.+
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.+
5 Opinion of Morrison & Foerster LLP.+
10.1 Lease, dated January 15, 1997, between PW Acquisitions 1,
LLC and PerImmune, Inc.
10.2 Lease Agreement, dated April 30, 1991, between Ward
Corporation and Organon Teknika Corporation.
10.3 Commercial Lease Agreement, dated June 1, 1993, between
Rowley Enterprises, Inc. and Polymer Technology
International for the property located at 1871 NW Gilman
Blvd., Issaquah, Washington.
10.4 Lease Agreement, dated August 22, 1988, between Issaquah #1
Limited Partnership and Baxter Healthcare Corporation for
the premises located at I-90 Lake Place, 2005 N.W. Sammish
Road, Issaquah, Washington.
10.5 Lease, dated February 1, 1998, between P.K. Projects Ltd.
and Intracel Corporation for the premises located at
Commerce Parkway, Richmond, British Colombia.
10.6 Agreement and Plan of Reorganization, dated November 26,
1998, among PerImmune Holdings, Inc., Intracel Corporation
and Intracel Acquisition Sub, Inc.
10.7 Employment Agreement, dated January 2, 1998, between Michael
G. Hanna, Jr. and Intracel Corporation.
10.8 Employment Agreement, dated January 2, 1998, between Simon
R. McKenzie and Intracel Corporation.
10.9 Employment Agreement between Daniel Reale and Intracel
Corporation.
10.10 Employment Agreement between Persis Strong and Intracel
Corporation.+
10.11 Employment Agreement between Lawrence Bloom and Intracel
Corporation.+
10.12 Employment Agreement between Carl Foster and Intracel
Corporation.+
10.13 Preferred Stock Purchase Agreement, dated as of March 12,
1997, between Intracel Corporation and Northstar High Total
Return Fund.
10.14 Note and Series A- Warrant Purchase Agreement, dated as of
June 21, 1996, between Intracel Corporation and Northstar
Advantage High Total Return Fund.
10.15 Note and Series A-III Warrant Purchase Agreement, dated as
of June 11, 1996, between Intracel Corporation and
CoreStates Enterprise Fund.
10.16 Note and Warrant Purchase Agreement, dated as of April 1,
1998, between Intracel Corporation and Northstar High Yield
Fund and Northstar High Total Return Fund II.
10.17 Loan and Authority Agreement, dated September 30, 1997,
between the Washington Economic Development Finance
Authority and Intracel Corporation.
10.18 Tax Certificate and Regulatory Agreement, dated September
11, 1997 between the Washington Economic Development Finance
Authority and Intracel Corporation.
10.19 Stock Purchase Agreement, dated July 1, 1996, between
PerImmune Holdings, Inc. and Organon Teknika Corporation.
10.20 Agreements between the Intracel Corporation and Thomas
Jefferson University.
10.21 Product Development and License Agreement, between
PerImmune, Inc, and Sigma Diagnostics, Inc.
10.22 Research, Collaboration and Distribution Agreement, dated
December 22, 1997, between PerImmune, Inc. and Mentor
Corporation.
140
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10.23 Distribution Agreement, dated June 16, 1997, between
PerImmune, Inc. and Mentor Corporation.
10.24 Intellectual Property Agreement, dated August 2, 1996, by
and among Akzo Nobel Pharma International, B.V. and
PerImmune Holdings, Inc.
10.25 Intellectual Property Security Agreement, dated August 13,
1996, by and among PerImmune Holdings, Inc., PerImmune,
Inc., Akzo Nobel Pharma International, B.V. and Organon
Teknika Corporation.
10.26 1989 Stock Option Plan.+
10.27 1996 Stock Option Plan of PerImmune Holdings, Inc.+
21 List of Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants -- Intracel Corporation.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants -- PerImmune Holdings, Inc.
23.3 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of KPMG Peat Marwick LLP, independent certified
public accountants.
24 Power of Attorney (set forth on signature page to
Registration Statement).
27.1 Financial Data Schedule for the year ended December 31, 1997
27.2 Financial Data Schedule for the three months ended March 31,
1998
- ---------------
+ To be filed by amendment.