UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-19612
IMCLONE SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2834797
- -------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
180 VARICK STREET, NEW YORK, NY 10014
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(212) 645-1405
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Registrant's telephone number, including area code
Not Applicable
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 13, 1999
----------------------------- ---------------------------------
Common Stock, par value $.001 25,540,495 Shares
IMCLONE SYSTEMS INCORPORATED
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited)
and December 31, 1998 1
Unaudited Consolidated Statements of Operations - Three
and six months ended June 30, 1999 and 1998 2
Unaudited Consolidated Statements of Cash Flows - Six
months ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
IMCLONE SYSTEMS INCORPORATED
Consolidated Balance Sheets
(in thousands, except per share and share data)
June 30, December 31,
Assets 1999 1998
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents ......................... $ 2,672 $ 3,888
Securities available for sale ..................... 38,006 42,851
Prepaid expenses .................................. 434 470
Other current assets .............................. 1,378 1,196
--------- ---------
Total current assets ................... 42,490 48,405
--------- ---------
Property and equipment:
Land .............................................. 340 340
Building and building improvements ................ 10,690 10,519
Leasehold improvements ............................ 4,878 4,846
Machinery and equipment ........................... 8,427 7,834
Furniture and fixtures ............................ 641 640
Construction in progress .......................... 1,860 115
--------- ---------
Total cost ............................. 26,836 24,294
Less accumulated depreciation
and amortization ............................. (13,742) (12,877)
--------- ---------
Property and equipment, net ............ 13,094 11,417
--------- ---------
Patent costs, net ...................................... 892 860
Deferred financing costs, net .......................... 41 46
Other assets ........................................... 1,581 1,524
--------- ---------
$ 58,098 $ 62,252
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................... $ 944 $ 1,109
Accrued expenses and other ......................... 3,568 4,847
Interest payable ................................... 43 45
Deferred revenue ................................... -- 75
Fee potentially refundable from corporate partner .. 12,000 4,000
Current portion of long-term liabilities ........... 919 744
Preferred stock dividends payable .................. 3,702 2,512
--------- ---------
Total current liabilities .............. 21,176 13,332
--------- ---------
Long-term debt ......................................... 2,200 2,200
Other long-term liabilities, less current portion ...... 1,586 1,546
--------- ---------
Total liabilities ...................... 24,962 17,078
--------- ---------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $1.00 par value; authorized
4,000,000 shares; issued and outstanding
Series A Convertible: 400,000 at June 30,
1999 and December 31, 1998 (preference
in liquidation $43,702 and $42,512,
respectively) ................................. 400 400
Common stock, $.001 par value; authorized
60,000,000 shares; issued 25,397,474 and
24,567,312 at June 30, 1999 and December 31,
1998, respectively; outstanding 25,346,657,
and 24,516,495 at June 30, 1999 and December
31, 1998, respectively ........................ 25 25
Additional paid-in capital ......................... 188,118 184,853
Accumulated deficit ................................ (155,055) (138,846)
Treasury stock, at cost; 50,817 shares
at June 30, 1999 and
December 31, 1998 ............................. (492) (492)
Note receivable - officer and stockholder .......... (137) (142)
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on securities
available for sale, net .................. 277 (624)
--------- ---------
Total stockholders' equity ............ 33,136 45,174
--------- ---------
$ 58,098 $ 62,252
========= =========
See accompanying notes to consolidated financial statements.
Page 1
IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Product development milestone revenues .... $ -- $ -- $ -- $ 1,000
Research and development funding from third
parties and other .................... 254 765 883 1,615
-------- -------- -------- --------
Total revenues .............. 254 765 883 2,615
-------- -------- -------- --------
Operating expenses:
Research and development .................. 7,151 4,675 13,505 8,846
General and administrative ................ 1,675 1,546 3,677 2,959
-------- -------- -------- --------
Total operating expenses ..... 8,826 6,221 17,182 11,805
-------- -------- -------- --------
Operating loss ................................. (8,572) (5,456) (16,299) (9,190)
-------- -------- -------- --------
Other:
Interest income ........................... (564) (777) (1,168) (1,607)
Interest expense .......................... 123 110 246 200
Loss (gain) on securities available
for sale ............................... -- (1) 832 (2)
-------- -------- -------- --------
Net interest and other income .. (441) (668) (90) (1,409)
-------- -------- -------- --------
Net loss ....................................... (8,131) (4,788) (16,209) (7,781)
Preferred dividends (including assumed
incremental yield attributable to
beneficial conversion feature of $336
and $317 for the three months ended
June 30, 1999 and 1998, respectively
and $672 and $635 for the six months
ended June 30, 1999 and 1998,
respectively) ............................. 934 967 1,862 1,825
-------- -------- -------- --------
Net loss to common stockholders ................ $ (9,065) $ (5,755) $(18,071) $ (9,606)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.36) $ (0.24) $ (0.73) $ (0.40)
======== ======== ======== ========
Weighted average shares outstanding ............ 24,986 24,273 24,718 24,251
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
Page 2
IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
--------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net loss ................................................ $(16,209) $ (7,781)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........................ 925 883
Expense associated with issuance
of options and warrants .......................... 1,064 310
Loss (gain) on securities available for sale ......... 832 (2)
Changes in:
Prepaid expenses .................................. 138 20
Other current assets .............................. (284) (49)
Other assets ...................................... (135) (35)
Interest payable .................................. (2) (25)
Accounts payable .................................. (165) (151)
Accrued expenses and other ........................ (1,279) (744)
Deferred revenue .................................. (75) 75
Fee potentially refundable from corporate partner . 8,000 --
-------- --------
Net cash used in operating activities ...... (7,190) (7,499)
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment ............... (2,010) (570)
Purchases of securities available for sale ........... (18,508) (28,760)
Sales and maturities of securities available for sale 23,500 37,997
Additions to patents ................................. (87) (81)
-------- --------
Net cash provided by investing activities . 2,895 8,586
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants . 3,335 150
Proceeds from issuance of common stock under the
employee stock purchase plan ..................... 50 --
Proceeds from equipment and building improvement
financings ....................................... 94 593
Payments of other liabilities ........................ (411) (514)
Interest received on note receivable - officer
and stockholder .................................. 11 --
-------- --------
Net cash provided by financing activities .. 3,079 229
-------- --------
Net (decrease) increase in cash and cash equivalents ..... (1,216) 1,316
Cash and cash equivalents at beginning of period ......... 3,888 2,558
-------- --------
Cash and cash equivalents at end of period ............... $ 2,672 $ 3,874
======== ========
See accompanying notes to consolidated financial statements.
Page 3
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The consolidated financial statements of ImClone Systems Incorporated ("ImClone"
or the "Company") as of June 30, 1999 and for the three and six months ended
June 30, 1999 and 1998 are unaudited. In the opinion of management, these
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
Results for the interim periods are not necessarily indicative of results for
the full years.
(2) Commitments
The Company signed a definitive agreement in April 1999 with Boehringer
Ingelheim Pharmaceuticals KG ("BI Pharmaceuticals") for the further development,
production scale-up and manufacture of the Company's lead therapeutic product
candidate, C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. The
Company estimates that the total cost under the agreement, including the cost of
additional amounts of material the Company has the right to request, will be
DM12,100,000 or $6,392,000. As of June 30, 1999, the Company has incurred
approximately DM3,940,000, of which DM3,130,000 has been paid, for services
provided under this agreement.
(3) Related Party Transactions
In January 1998, the Company accepted a promissory note totaling approximately
$131,000 from its President and CEO in connection with the exercise of a warrant
to purchase 87,305 shares of the Company's common stock, $.001 par value (the
"Common Stock"). The note is due no later than two years from issuance and is
full recourse. Interest was paid on the first anniversary date of the promissory
note at an annual rate of 8.5% and is payable on the stated maturity or any
accelerated maturity. At June 30, 1999, the total amount due the Company,
including interest, was approximately $137,000 and is classified in the
stockholders' equity section of the balance sheet as a note receivable from
officer and stockholder.
In October 1998, the Company accepted an unsecured promissory note totaling
$100,000 from its Executive Vice President and COO. The note was payable on
demand including interest at the annual rate of 8.25% for the period that the
loan is outstanding. In April 1999, the note, including all interest, was paid
in full.
In January 1999, the Company accepted an unsecured promissory note totaling
$60,000 from its Vice President, Product and Process Development. The note was
payable upon the earlier of on the Company's demand or July 28, 1999 including
interest at an annual rate of 8.75% for the period that the loan was
outstanding. The loan was made in connection with the acceptance of employment
and the corresponding relocation of the officer. At June 30, 1999, the total
amount due the Company, including interest, was approximately $62,000 and is
included as a component of other current assets. In July 1999, the note,
including all interest, was paid in full.
(4) Earnings Per Share
Basic and diluted Earnings Per Share ("EPS") are computed based on the net loss
for the relevant period, adjusted for cumulative Series A Convertible Preferred
Stock (the "Series A Preferred Stock" or "Series A Preferred Shares") dividends
and the assumed incremental yield attributable to the beneficial conversion
feature in the preferred stock, divided by the weighted average number of shares
outstanding during the period. Potentially dilutive securities, including
convertible preferred stock, options and warrants, have not been included in the
diluted EPS computation because they are anti-dilutive.
Page 4
(5) Comprehensive Income (Loss)
The following table reconciles net loss to comprehensive loss:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
Net loss ................................... $ (8,131,000) $ (4,788,000) $(16,209,000) $ (7,781,000)
Other comprehensive income:
Unrealized holding gain arising
during the period ....................... 56,000 135,000 69,000 204,000
Less: Reclassification adjustment for
realized gain (loss) included
in net loss ................... -- -- (832,000) 2,000
------------ ------------ ------------ ------------
Total other comprehensive income ..... 56,000 135,000 901,000 202,000
------------ ------------ ------------ ------------
Total comprehensive loss ................... $ (8,075,000) $ (4,653,000) $(15,308,000) $ (7,579,000)
============ ============ ============ ============
(6) Loss on Securities Available for Sale
In October 1997, the Company entered into a Collaborative Research and License
Agreement with CombiChem Inc. ("CombiChem"). Concurrent with this agreement, the
Company entered into a Stock Purchase Agreement pursuant to which the Company
purchased 312,500 shares of common stock of CombiChem, as adjusted, for a total
purchase price of $2,000,000. The investment has been classified as available
for sale and a long-term asset. The market value of the investment in CombiChem
has declined substantially from the date of original investment and the Company
has deemed this decline in market value to be other than temporary. Accordingly,
the cost basis in the investment in CombiChem has been adjusted and a loss on
securities available for sale of $828,000 was recorded in March 1999. These
securities have not been sold by the Company.
(7) Common Stock
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved the amendment of the Company's certificate of incorporation to increase
the total number of shares of Common Stock the Company is authorized to issue
from 45,000,000 shares to 60,000,000 shares.
(8) Stock Options and Warrants
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved an amendment to the Company's 1996 Incentive Stock Option Plan (the
"1996 ISO Plan") to increase the total number of shares of Common Stock which
may be issued pursuant to options which may be granted under the 1996 ISO Plan
from 3,000,000 to 4,000,000, which number shall be reduced by the number of
shares of Common Stock which have been or may be issued pursuant to options
granted under the Company's 1996 Non-Qualified Stock Option Plan (the "1996
Non-Qualified Plan").
The stockholders also approved amendments to the Company's 1996 Non-Qualified
Plan to (i) increase the total number of shares of Common Stock which may be
issued pursuant to options which may be granted under the 1996 Non-Qualified
Plan from 3,000,000 to 4,000,000, which number shall be reduced by the number of
shares of common stock which have been or may be issued pursuant to options
granted under the Company's 1996 ISO Plan, and (ii) increase the annual option
grant made to members of the Board of Directors and the Chairman who are not
full-time employees of the Company under the 1996 Non-Qualified Plan. The annual
option grant to non-employee members of the Board of Directors increased from
2,500 to 15,000 and the annual option grant to the Chairman increased from 2,500
to 30,000.
Page 5
The stockholders approved the grant of an option to the Company's President and
Chief Executive Officer to purchase 1,000,000 shares of Common Stock at a per
share exercise price equal to $18.25, the last reported sale price of the Common
Stock on the date shareholder approval was obtained at the annual shareholders
meeting. The option will vest no later than six years from the grant date and
specified amounts are subject to earlier vesting if specified Company Common
Stock price thresholds are met.
The stockholders approved the grant of an option to the Company's Executive Vice
President and Chief Operating Officer to purchase 650,000 shares of Common Stock
at a per share exercise price equal to $18.25, the last reported sale price of
the Common Stock on the date shareholder approval was obtained at the annual
shareholders meeting. The option will vest no later than six years from the
grant date and specified amounts are subject to earlier vesting if specified
Company Common Stock price thresholds are met.
(9) Reclassification
Certain amounts previously reported have been reclassified to conform to the
current year's presentation.
(10) Collaborative Agreements
The Company has a development and license agreement with Merck KGaA ("Merck")
with respect to C225, its lead interventional therapeutic product for the
treatment of cancer. In exchange for certain marketing and development rights,
the Company can receive up to $60,000,000 in milestone payments ($30,000,000 of
which are equity based) assuming the achievement of certain milestones and a
$30,000,000 secured line of credit or guaranty for the build-out of a
manufacturing facility for the commercial production of C225. The agreement
provides that among other reasons, it may be terminated by either party if the
Company and Merck failed to agree on a production concept for the manufacturing
facility or if Merck had not provided the Company with the credit facility or
guaranty by April 15, 1999, in which case Merck is entitled to receive back all
milestone payments made to date. Additionally, the Company must timely obtain
certain collateral license agreements, and the failure to do so will entitle
Merck to receive back all milestone payments made to date. In April 1999 the
parties agreed on the production concept for the manufacturing facility and are
currently working toward securing the credit facility or guaranty. As of June
30, 1999, the Company has received $12,000,000 in milestone payments. These
payments have been recorded as fees potentially refundable from corporate
partner and will be recognized as revenue upon Merck's providing the credit
facility or guaranty and the Company's obtaining the defined collateral license
agreements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis by our management is provided to identify
certain significant factors which affected our financial position and operating
results during the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 and 1998
Revenues.
Revenues for the six months ended June 30, 1999 and 1998 were $883,000 and
$2,615,000, respectively, a decrease of $1,732,000, or 66%. Revenues for the six
months ended June 30, 1999 primarily consisted of (i) $150,000 in research
support from our partnership with American Home Products Corporation ("American
Home") in infectious disease vaccines, (ii) $533,000 in research and support
payments from our research and license agreement with Merck for our principal
cancer vaccine product candidate, BEC2, and (iii) $195,000 in royalty revenue
from our strategic alliance with Abbott Laboratories ("Abbott") in diagnostics.
Revenues for the six months ended June 30, 1998 consisted of (i) $150,000 in
research support from our partnership with American Home in infectious disease
vaccines, (ii) $1,000,000 in milestone revenue and $1,250,000 in research and
support payments from our research and license agreement with Merck for BEC2
(iii) $117,000 in royalty revenue from our strategic alliance with Abbott in
Page 6
diagnostics and (iv) $98,000 from a Phase I Small Business Innovation Research
grant from the National Cancer Institute for a program in cancer-related
angiogenesis. The decrease in revenues for the six months ended June 30, 1999
was primarily attributable to (i) the decrease in research and support revenue
as a result of the completion of all research and support payments due from our
research and license agreement with Merck for BEC2 and (ii) a decrease in
milestone revenue which can vary widely from period to period depending upon the
timing of the achievement of various research and development milestones for
products under development.
Operating; Research and Development Expenses.
Total operating expenses for the six months ended June 30, 1999 and 1998 were
$17,182,000 and $11,805,000, respectively, an increase of $5,377,000, or 46%.
Research and development expenses for the six months ended June 30, 1999 and
1998 were $13,505,000 and $8,846,000, respectively, an increase of $4,659,000 or
53%. Such amounts for the six months ended June 30, 1999 and 1998 represented
79% and 75%, respectively, of total operating expenses. The increase in research
and development expenses for the six months ended June 30, 1999 was primarily
attributable to (i) the costs associated with an agreement for the supplemental
further development and manufacture of clinical grade C225, our lead
interventional therapeutic product candidate for cancer, to support ongoing and
future human clinical trials, (ii) the costs associated with the initiation of
Phase III clinical studies of C225, (iii) expenditures in the functional areas
of product development, manufacturing, clinical and regulatory affairs
associated with C225 and (iv) expenditures associated with additional staffing
in the area of discovery research.
General and Administrative Expenses.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with corporate partners
and technology licensors, and expenses associated with applying for patent
protection for our technology and products. Such expenses for the six months
ended June 30, 1999 and 1998 were $3,677,000 and $2,959,000, respectively, an
increase of $718,000, or 24%. The increase in general and administrative
expenses primarily reflected (i) additional support staffing for the expanding
research, development, clinical manufacturing and marketing efforts of the
Company, particularly with respect to C225 and (ii) expenses associated with the
pursuit of strategic corporate alliances and other corporate development
expenses. We expect general and administrative expenses to increase in future
periods to support our planned increases in research, development, clinical and
manufacturing efforts.
Interest and Other Income or Loss and Interest Expense.
Interest income was $1,168,000 for the six months ended June 30, 1999 compared
to $1,607,000 for the six months ended June 30, 1998, a decrease of $439,000, or
27%. The decrease was primarily attributable to the decrease in our investment
portfolio as a result of funding our operations. Interest expense was $246,000
and $200,000 for the six months ended June 30, 1999 and 1998, respectively, an
increase of $46,000 or 23%. Interest expense for both periods primarily included
(i) interest on an outstanding Industrial Development Revenue Bond issued in
1990 (the "1990 IDA Bond") with a principal amount of $2,200,000 and (ii)
interest recorded on various capital lease obligations under a December 1996
Financing Agreement (the "1996 Financing Agreement") and an April 1998 Financing
Agreement (the "1998 Financing Agreement") with Finova Technology Finance, Inc.
("Finova"). The increase was primarily attributable to entering into additional
capital leases. We recorded losses on securities available for sale for the six
months ended June 30, 1999 in the amount of $832,000 as compared to gains of
$2,000 for the six months ended June 30, 1998. The loss for the six months ended
June 30, 1999 is primarily attributable to the $828,000 write-down of our
investment in CombiChem Inc. ("CombiChem") as a result of other an than
temporary decline. See "Liquidity and Capital Resources".
Net Losses.
We had net losses to common stockholders of $18,071,000 or $0.73 per share for
the six months ended June 30, 1999 compared with $9,606,000 or $0.40 per share
for the six months ended June 30, 1998. The increase in the net losses and per
share net loss to common stockholders was due primarily to the factors noted
above.
Page 7
Three Months Ended June 30, 1999 and 1998
Revenues.
Revenues for the three months ended June 30, 1999 and 1998 were $254,000 and
$765,000, respectively, a decrease of $511,000, or 67%. Revenues for the three
months ended June 30, 1999 consisted of (i) $75,000 in research support from our
partnership with American Home in infectious disease vaccines, (ii) $108,000 in
research and support payments from our research and license agreement with Merck
for BEC2, and (iii) $71,000 in royalty revenue from our strategic alliance with
Abbott in diagnostics. Revenues for the three months ended June 30, 1998
consisted of (i) $75,000 in research support from our partnership with American
Home in infectious disease vaccines, (ii) $625,000 in research and support
payments from our research and license agreement with Merck for BEC2 (iii)
$65,000 in royalty revenue from our strategic alliance with Abbott in
diagnostics. The decrease in revenues for the three months ended June 30, 1999
was primarily attributable to the decrease in research and support revenue as a
result of the completion of all research and support payments due from our
research and license agreement with Merck for BEC2.
Operating; Research and Development Expenses.
Total operating expenses for the three months ended June 30, 1999 and 1998 were
$8,826,000 and $6,221,000, respectively, an increase of $2,605,000, or 42%.
Research and development expenses for the three months ended June 30, 1999 and
1998 were $7,151,000 and $4,675,000, respectively, an increase of $2,476,000 or
53%. Such amounts for the three months ended June 30, 1999 and 1998 represented
81% and 75%, respectively, of total operating expenses. The increase in research
and development expenses for the three months ended June 30, 1999 was primarily
attributable to (i) the costs associated with an agreement for the supplemental
further development and manufacture of clinical grade C225 to support ongoing
and future human clinical trials, (ii) the costs associated with the initiation
of Phase III clinical studies of C225, (iii) expenditures in the functional
areas of product development, manufacturing, clinical and regulatory affairs
associated with C225 and (iv) expenditures associated with additional staffing
in the area of discovery research.
General and Administrative Expenses.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with corporate partners
and technology licensors, and expenses associated with applying for patent
protection for our technology and products. Such expenses for the three months
ended June 30, 1999 and 1998 were $1,675,000 and $1,546,000, respectively, an
increase of $129,000, or 8%. The increase in general and administrative expenses
primarily reflected (i) additional support staffing for the expanding research,
development, clinical manufacturing and marketing efforts of the Company,
particularly with respect to C225 and (ii) expenses associated with the pursuit
of strategic corporate alliances and other corporate development expenses. We
expect general and administrative expenses to increase in future periods to
support our planned increases in research, development, clinical and
manufacturing efforts.
Interest and Other Income and Interest Expense.
Interest income was $564,000 for the three months ended June 30, 1999 compared
to $777,000 for the three months ended June 30, 1998, a decrease of $213,000, or
27%. The decrease was primarily attributable to the decrease in our investment
portfolio as a result of funding our operations. Interest expense was $123,000
and $110,000 for the three months ended June 30, 1999 and 1998, respectively, an
increase of $13,000 or 12%. Interest expense for both periods primarily included
(i) interest on an outstanding 1990 IDA Bond with a principal amount of
$2,200,000 and (ii) interest recorded on various capital lease obligations under
the 1996 Financing Agreement and the 1998 Financing Agreement with Finova. The
increase was primarily attributable to entering into additional capital leases.
Page 8
Net Losses.
We had net losses to common stockholders of $9,065,000 or $0.36 per share for
the three months ended June 30, 1999 compared with $5,755,000 or $0.24 per share
for the three months ended June 30, 1998. The increase in the net losses and per
share net loss to common stockholders was due primarily to the factors noted
above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, our principal sources of liquidity consisted of cash and cash
equivalents and short-term securities available for sale of approximately
$40,678,000. We have financed our operations since inception primarily through:
o the proceeds from the public and private sales of our equity securities.
o license fees.
o contract research and development fees.
o royalties received under agreements with collaborative partners.
o interest earned on these funds.
o the sale of three issues of Industrial Development Revenue Bonds (the "IDA
Bonds") through the New York Industrial Development Agency (the "NYIDA").
Since inception:
o public and private sales of equity securities in financing transactions
have raised approximately $163,799,000 in net proceeds.
o we have earned approximately $33,738,000 from license fees, contract
research and development fees and royalties from collaborative partners,
including approximately $883,000 earned during the six months ended June
30, 1999. Additionally, we have received $12,000,000 in potentially
refundable milestone fees from our C225 development and license agreement
with Merck. These amounts have yet to be recognized as revenue. See
Footnote 8, "Collaborative Agreements", of the Notes to Consolidated
Financial Statements.
o we have earned approximately $9,631,000 in interest income, including
approximately $1,168,000 earned during the six months ended June 30,1999.
o the sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an
aggregate of $6,313,000, the proceeds of which have been used for the
acquisition, construction and installation of our research and development
facility in New York City, and of which $2,200,000 is currently
outstanding.
We signed a definitive agreement in April 1999 with Boehringer Ingelheim
Pharmaceuticals KG ("BI Pharmaceuticals") for the further development,
production scale-up and manufacture of the Company's lead therapeutic product
candidate, C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. We
estimate that the total cost under the agreement, including the cost of
additional amounts of material we have the right to request, will be
DM12,100,000 or $6,392,000. As of June 30, 1999, we have incurred approximately
DM3,940,000, of which DM3,130,000 has been paid, for services provided under
this agreement.
In October 1997, we entered into a Collaborative Research and License Agreement
with CombiChem to discover and develop novel small molecules against selected
targets for the treatment of cancer. At the same time as we entered into this
agreement, we entered into a Stock Purchase Agreement pursuant to which we
purchased 312,500 shares of common stock of CombiChem, as adjusted, for a total
purchase price of $2,000,000. The investment has been classified as a long-term
asset. The market value of our investment in CombiChem had declined
substantially from the date of our investment. In March 1999, we deemed this
decline in market value to be other than temporary. Accordingly, we have
adjusted our cost basis in the investment and recorded a loss on securities
available for sale of $828,000 in the first quarter of 1999. These securities
have not been sold and we will continue to monitor our cost investment in
CombiChem.
Page 9
We have obligations under various capital leases for certain laboratory, office
and computer equipment and also certain building improvements primarily under
the 1996 Financing Agreement and the 1998 Financing Agreement with Finova. The
1996 Financing Agreement allowed us to finance the lease of equipment and make
certain building and leasehold improvements to existing facilities involving
amounts totaling approximately $2,500,000. Each lease has a fair market value
purchase option at the expiration of a 42-month term. Pursuant to the 1996
Financing Agreement, we issued to Finova a warrant expiring December 31, 1999 to
purchase 23,220 shares of our common stock at an exercise price of $9.69 per
share. We recorded a non-cash debt discount of approximately $125,000 in
connection with this financing, which discount is being amortized over the
42-month term of the first lease. The 1996 Financing Agreement with Finova
expired in December 1997 and we utilized only $1,745,000 of the full $2,500,000
under the agreement. In April 1998, we entered into the 1998 Financing Agreement
with Finova totaling approximately $2,000,000. The terms of the 1998 Financing
Agreement are substantially similar to the now expired 1996 Financing Agreement
except that each lease has a 48-month term. As of June 30, 1999, we had entered
into twelve individual leases under both the 1996 Financing Agreement and the
1998 Financing Agreement aggregating a total cost of $3,695,000. The 1998
Financing Agreement expired in May 1999.
We have spent and will continue to spend in the future substantial funds to
continue the research and development of our products, conduct pre-clinical and
clinical trials, establish clinical-scale and commercial-scale manufacturing in
our own facilities or in the facilities of others, and market our products. We
have continued to engage in discussions with major pharmaceutical and
biopharmaceutical companies regarding various alternatives concerning the
funding of research and development for certain of our products. No assurance
can be given that we will be successful in consummating any such alternatives.
Such strategic alliances could include up-front license fees plus milestone fees
and revenue sharing. There can be no assurance that we will be successful in
achieving such alliances, nor can we predict the amount of funds which might be
available to us if we entered into such alliances or the time at which such
funds would be made available or the other terms of any such alliances.
In January 1998, we completed the construction and commissioning of a new 1,750
square foot process development center at our Somerville, New Jersey facility at
a cost of approximately $1,650,000.
Under our agreement with Merck for C225, we developed, in consultation with
Merck, a production concept for a new manufacturing facility for the commercial
production of C225. Merck is to provide us, subject to certain conditons, with a
$30 million secured line of credit or guaranty for the build-out of this
facility. We have determined to erect this facility adjacent to our current
manufacturing facility in New Jersey which supplies C225 to support our clinical
trials.
We rent our New York City facility under a lease which was scheduled to expire
in March 1999. We renewed the entire lease for a term commencing as of January
1, 1999 through December 2004 and have begun to retrofit the facility to better
suit our needs at an expected cost of approximately $2,000,000.
The 1990 IDA Bond in the outstanding principal amount of $2,200,000 becomes due
in 2004. We will incur annual interest on the 1990 IDA Bond aggregating
approximately $250,000. In order to secure our obligations to the NYIDA under
the 1990 IDA Bond, we have granted the NYIDA a security interest in facility
equipment purchased with the bond proceeds.
The holders of the 400,000 shares of Series A Convertible Preferred Stock are
entitled to receive cumulative dividends at an annual rate of $6.00 per share.
Dividends accrue as of the issuance date of the Series A Preferred Shares and
are payable on the outstanding Series A Preferred Shares in cash on December 31
of each year beginning December 31, 1999 or at the time of conversion or
redemption of the Series A Preferred Shares on which the dividend is to be paid,
whichever is sooner. Accrued dividends were $3,702,000 at June 30, 1999.
Total capital expenditures made during the six months ended June 30, 1999 were
$2,542,000, of which $532,000 have been reimbursed in accordance with the terms
of the 1998 Financing Agreement with Finova. Of the total capital expenditures
made during the six-months ended June 30, 1999, $1,392,000 related to the
purchase of equipment for and costs associated with the retrofit of our
corporate office and research laboratories in New York. The balance of capital
additions include $933,000 associated with the build-out of the commercial
manufacturing facility to be erected adjacent to our current
Page 10
manufacturing facility in New Jersey. The remaining $217,000 related to
improving and equipping our existing manufacturing facility.
We expect that our existing capital resources and expected future cash flows
should enable us to maintain our current and planned operations through June
2001. Certain milestone payments, including $18,000,000 in cash based milestone
payments and $30,000,000 in equity based milestone payments from our C225
development and license agreement with Merck, are to be paid subject to our
attaining research and development milestones. There can be no assurance that we
will achieve these milestones. Additionally, the termination of the agreement
due to Merck's failure to provide the credit facility or guaranty or our failure
to obtain the necessary collateral license agreements would require us to return
all milestone payments made to date. Our future working capital and capital
requirements will depend upon numerous factors, including, but not limited to:
o progress of our research and development programs, pre-clinical testing
and clinical trials.
o our corporate partners fulfilling their obligations to us.
o timing and cost of seeking and obtaining regulatory approvals.
o timing and cost of manufacturing scale-up and effective commercialization
activities and arrangements.
o level of resources that we devote to the development of marketing and
sales capabilities.
o costs involved in filing, prosecuting and enforcing patent claims.
o technological advances.
o status of competitors.
o our ability to maintain existing and establish new collaborative
arrangements with other companies to provide funding to support these
activities.
o costs of establishing both clinical scale and commercial scale
manufacturing capacity in our facility and those of others.
In order to fund our capital needs after June 2001, we will require significant
levels of additional capital and we intend to raise the capital through
additional arrangements with corporate partners, equity or debt financings, or
from other sources including the proceeds of product sales, if any. There is no
assurance that we will be successful in consummating any such arrangements. If
adequate funds are not available, we may be required to significantly curtail
our planned operations.
Uncertainties associated with the length and expense of pre-clinical and
clinical testing of any of our product candidates could greatly increase the
cost of development of such products and affect the timing of any anticipated
revenues from product sales. Our failure to obtain regulatory approval for any
product will preclude its commercialization. In addition, our failure to obtain
sufficient patent protection for our products may make certain of our products
commercially unattractive.
At December 31, 1998, we had net operating loss carryforwards for federal income
tax purposes of approximately $129,485,000 which expire at various dates from
2000 through 2018. At December 31, 1998 we had research credit carryforwards of
approximately $3,642,000 which expire at various dates between years 2009 and
2018. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
the annual utilization of a company's net operating loss and research credit
carryforwards may be limited if the company experiences a change in ownership of
more than 50 percentage points within a three-year period. Since 1986, we
experienced two such ownership changes. Accordingly, our net operating loss
carryforwards available to offset future federal taxable income arising before
such ownership changes are limited to $5,159,000 annually. Similarly, we are
restricted in using our research credit carryforwards arising before such
ownership changes to offset future federal income tax expense.
Year 2000
The "Year 2000 problem" involves mainly the inability of certain computer
programs and microprocessing devices to differentiate between the year 1900 and
the year 2000 because two-digit rather than four-digit fields were used to
identify the year. There are a variety of related "date" problems, including the
use by older programs and devices of algorithms that will fail to correctly
identify the year 2000 and certain other years in the twenty-first century as
leap years. A Year 2000 problem could cause a computer system or microprocessor
that is date sensitive to malfunction, resulting in system failures. Such
failures could cause disruptions of our operations, including, without
limitation, the systems in place at our Branchburg clinical-scale manufacturing
facility, computers, communication devices and laboratory instrumentation
Page 11
and systems which use dated information in our research and development and
scientific testing or, possibly, in our pre-clinical or clinical trials.
To deal with the Year 2000 problem we have developed a year 2000 program that
has three main phases: (i) review of information technology ("IT") and non-IT
systems for the purposes of assessing the potential impact of Year 2000 on our
business and identifying non-Year 2000 compliant systems; (ii) remediation and
development of contingency plans; and (iii) testing. These phases are not
necessarily sequential. We have a Year 2000 team to coordinate and carry out the
various phases and Reporting Responsible Persons in each critical area,
including computer hardware, software, other hardware, laboratory equipment,
collaborators and process/clinical development. While we believe that our
program is and will be adequate to address Year 2000 problems, there can be no
assurance that our operations will not be adversely affected. While we have
devoted significant resources to dealing with the Year 2000 problem, our efforts
to date have not caused the deferral of any other significant IT projects.
We have reviewed the potential impact of the "Y2K" bug on our research and
development, product development, manufacturing, financial, communication and
administrative operations. We determined which systems are critical to our
business. We also determined which systems were non-year 2000 compliant.
We are in the process of remediating through corrective programming
modifications or system replacement all mission critical systems that we
identified as non-compliant. We estimate that this process is substantially
completed and that it will be finished by September 30, 1999. In addition, for
systems that we have identified as non-mission critical, we also intend to
either correct them through programming changes or replace them with compliant
software and any necessary hardware or, possibly, simply discontinue using the
system.
We have already developed testing protocols and have begun testing for all
mission-critical systems. We have substantially completed these testing
protocols and expect to be finished no later than September 30, 1999. We are
also in the process of testing other systems, and expect to have completed that
process no later than September 30, 1999.
We have incurred approximately $350,000 on our Year 2000 program through June
30, 1999. This includes the purchase of third-party software and required
hardware to run such software as well as the cost of modifying software. We
estimate that any additional costs incurred to complete the second phase will
not be material.
In addition to the review of internal systems, we have identified and begun to
make inquiries of our critical suppliers, corporate partners, manufacturers,
clinical study sites, service suppliers, communications providers, lessors,
utilities, and banks whose system failures or non-compliant products could have
an adverse impact on our operations. We expect to complete the identification
and assessment process for such entities prior to September 30, 1999. While we
are not currently aware of any material Year 2000 problems involving such
entities that are likely to adversely affect us, there can be no assurance that
there will not be such problems or that, if discovered, they will be timely
remediated.
We are in the process of developing contingency plans to deal with possible
disruptions of important operations such as discovery research, product
development, manufacturing and ongoing clinical trials. Such disruptions could
affect the development and ultimate marketing of potential products as well as
put us at a competitive disadvantage relative to companies that have corrected
such problems. These contingency plans may need to be refined as more
information becomes available.
Certain Factors Affecting Forward-Looking Statements--Safe Harbor Statement
Those statements contained herein that do not relate to historical
information are forward-looking statements. There can be no assurance that the
future results covered by such forward-looking statements will be achieved.
Actual results may differ materially due to the risks and uncertainties inherent
in the Company's business, including without limitation, the risks and
uncertainties associated with completing pre-clinical and clinical trials of the
Company's compounds that demonstrate such compounds' safety and effectiveness;
obtaining additional financing to support the Company's operations; obtaining
and maintaining regulatory approval for such compounds and complying with other
governmental
Page 12
regulations applicable to the Company's business; obtaining the raw materials
necessary in the development of such compounds; consummating collaborative
arrangements with corporate partners for product development; achieving
milestones under collaborative arrangements with corporate partners; developing
the capacity and ability to manufacture, as well as market and sell the
Company's products, either directly or with collaborative partners; developing
market demand for and acceptance of such products; competing effectively with
other pharmaceutical and biotechnological products; obtaining adequate
reimbursement from third party payors; attracting and retaining key personnel;
protecting proprietary rights; failing to remedy Year 2000 problems by the
Company or the failure by those entities associated with the Company; and those
other factors set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview and Risk Factors," in the
Company's most recent Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our holdings of financial instruments are comprised of a mix of any of U.S.
corporate debt, foreign corporate debt, U.S. government debt, foreign
government/agency guaranteed debt and commercial paper. All such instruments are
classified as securities available for sale. Generally, we do not invest in
portfolio equity securities or commodities or use financial derivatives for
trading purposes. Our debt security portfolio represents funds held temporarily
pending use in our business and operations. We manage these funds accordingly.
We seek reasonable assuredness of the safety of principal and market liquidity
by investing in rated fixed income securities while at the same time seeking to
achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We typically
invest in the shorter-end of the maturity spectrum, or if longer, in highly
liquid debt instruments with periodic interest rate adjustments. We also have
certain foreign exchange currency risk, see footnote 2. We do not consider it
necessary to implement a currency hedging program since currently, we do not
generally enter into contracts denominated in foreign currencies.
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
1999:
2004 and
1999 2000 2001 2002 2003 Thereafter Total Fair Value
--------- ---------- --------- ------ ------ ------------ -------- -----------
Fixed Rate - $2,739,000 - - - - $2,739,000 $2,744,000
Average
Interest Rate - 5.10% - - - - 5.20% -
Variable Rate - - $1,136,000(1) - - $33,952,000(1) $35,088,000 $35,262,000
Average
Interest Rate - - 5.43% - - 5.17% 5.18% -
-------- ---------- ------------ ------ ------ ------------- ----------- -----------
- $2,739,000 $1,136,000(1) - - $33,952,000(1) $37,827,000 $38,006,000
======== ========== ============ ====== ====== ============= =========== ===========
(1) These holdings consist of U.S. corporate and foreign corporate floating rate
notes. Interest on the securities are adjusted at fixed dates using prevailing
interest rates. These holdings are highly liquid and we consider the potential
for loss of principal to be minimal.
Page 13
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders was held on May 24, 1999 (the
"Annual Meeting").
(b) The directors elected at the Annual Meeting were Richard Barth, Jean
Carvais, Vincent T. DeVita, Jr., Robert F. Goldhammer, David M. Kies, Paul B.
Kopperl, John Mendelsohn, William R. Miller, Harlan W. Waksal and Samuel D.
Waksal. Such persons are all of the directors of the Company whose term of
office as a director continued after the Annual Meeting.
(c) The matters voted upon at the Annual Meeting and the results of the
voting, including broker non-votes, where applicable, are set forth below.
(i) Election of directors
Broker
Name In Favor Withheld Non-Votes
---- -------- -------- ---------
Richard Barth 21,134,026 602,958 N/A
Jean Carvais 21,134,026 602,958 N/A
Vincent T. DeVita, Jr. 21,134,026 602,958 N/A
Robert F. Goldhammer 21,134,026 602,958 N/A
David M. Kies 21,134,026 602,958 N/A
Paul B. Kopperl 21,134,026 602,958 N/A
John Mendelsohn 21,134,026 602,958 N/A
William R. Miller 21,134,026 602,958 N/A
Harlan W. Waksal 21,134,026 602,958 N/A
Samuel D. Waksal 21,134,026 602,958 N/A
(ii) The stockholders approved an amendment to the Company's 1996
Incentive Stock Option Plan (the "1996 ISO Plan") to increase the
total number of shares of Common Stock which may be issued pursuant
to options which may be granted under the 1996 ISO Plan from
3,000,000 to 4,000,000, which number shall be reduced by the number
of shares of Common Stock which have been or may be issued pursuant
to options granted under the Company's 1996 Non-Qualified Stock
Option Plan (the "1996 Non-Qualified Plan"). The stockholders voted
7,365,864 shares in favor, 2,431,698 shares against, 74,069 shares
abstained from voting and there were 11,865,353 broker non-votes.
(iii) The stockholders approved amendments to the Company's 1996
Non-Qualified Plan to (i) increase the total number of shares of
Common Stock which may be issued pursuant to options which may be
granted under the 1996 Non-Qualified Plan from 3,000,000 to
4,000,000, which number shall be reduced by the number of shares of
common stock which have been or may be issued pursuant to options
granted under the Company's 1996 ISO Plan, and (ii) increase the
annual option grant made to members of the Board of Directors and
the Chairman who are not full-time employees of the Company under
the 1996 Non-Qualified Plan. The stockholders voted 7,326,707 shares
in favor, 2,460,425 shares against, 84,499 shares abstained from
voting and there were 11,865,353 broker non-votes.
(iv) The stockholders approved a proposal to amend the Company's
certificate of incorporation to increase the total number of shares
of Common Stock the Company is authorized to issue from 45,000,000
shares to 60,000,000 shares. The stockholders voted 21,245,136
shares in favor, 424,054 shares against and 67,794 shares abstained
from voting. Broker non-votes were not applicable.
Page 14
(v) The stockholders approved the grant of an option to the Company's
President and Chief Executive Officer to purchase 1,000,000 shares
of common stock pursuant to a specified vesting schedule. The
stockholders voted 7,512,857 shares in favor, 2,322,720 shares
against, 131,454 shares abstained from voting and there were
11,769,953 broker non-votes.
(vi) The stockholders approved the grant of an option to the Company's
Executive Vice President and Chief Operating Officer to purchase
650,000 shares of common stock pursuant to a specified vesting
schedule. The stockholders voted 7,364,733 shares in favor,
2,372,994 shares against, 133,904 shares abstained from voting and
there were 11,865,353 broker non-votes.
(vii) The stockholders ratified the appointment by the Board of Directors
of KPMG LLP as the Company's independent certified public
accountants for the fiscal year ending December 31, 1999. The
stockholders voted 21,635,440 shares in favor, 50,475 shares against
and 51,069 shares abstained from voting. Broker non-votes were not
applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit No. Description
3.1A Amendment dated June 4, 1999 to the Company's
certificate of incorporation, as amended
10.72 Agreement for Supply of Material dated as of
January 1, 1997 between the Company,
Connaught Laboratories Limited, a
Pasteur Merieux Company, and Merck KGaA*
10.73 Development and Supply Agreement dated
as of April 30, 1999 between the Company
and Boehringer Ingelheim Pharma KG*
27.1 Financial Data Schedule
99.6 1996 Non-Qualified Stock Option Plan, as amended.
99.7 1996 Incentive Stock Option Plan, as amended.
* Confidential treatment has been requested for a portion of this
exhibit.
(b) Reports on Form 8-K
None.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMCLONE SYSTEMS INCORPORATED
(Registrant)
Date: August 16, 1999 By /s/ Samuel D. Waksal
----------------------------------------
Samuel D. Waksal
President and Chief Executive Officer
Date: August 16, 1999 By /s/ Carl S. Goldfischer
----------------------------------------
Carl S. Goldfischer
Vice President, Finance and Chief
Financial Officer
Page 16