1
Exhibit 13.3
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Balance Sheets
(In thousands)
DECEMBER 31,
1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 25,337 $ 18,828
Securities available-for-sale 53,390 5,182
Current portion of note receivable 804 640
Contract research revenue receivables 3,635 1,455
Due from related party 1,532 --
Inventories 4,384 --
Prepaid expenses and other current assets 2,533 1,333
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Total current assets 91,615 27,438
Restricted marketable security -- 750
Property and equipment, net 21,453 17,955
Note receivable, less current portion 445 1,249
Deposits and other assets 316 234
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$113,829 $ 47,626
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,830 $ 3,248
Trade payable - clinical materials -- 238
Accounts payable 3,106 970
Accrued expenses 6,751 4,280
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Total current liabilities 13,687 8,736
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Notes payable, less current portion 5,015 6,598
Deferred rent 1,513 1,123
Due to related party 1,000 --
Commitments
Shareholders' equity:
Convertible preferred stock, no par value, 8,000 shares
authorized; 330 shares and 207 shares issued and outstanding at
December 31, 1996 and 1995, respectively, at liquidation value 26,586 14,086
Common stock, no par value, 50,000 shares authorized;
18,059 shares and 15,061 shares issued and outstanding
at December 31, 1996 and 1995, respectively 148,597 93,554
Additional paid-in capital 1,283 2,379
Unrealized gains (losses) on securities available-for-sale (37) 10
Accumulated deficit (83,815) (78,860)
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Total shareholders' equity 92,614 31,169
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$113,829 $ 47,626
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See accompanying notes to consolidated financial statements.
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IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Operations
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
1996 1995 1994
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Revenues:
Sales $ 1,505 $ -- $ --
Contract research revenues 14,254 12,136 5,143
License fees 14,250 11,500 2,300
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Total revenues (including related party revenues of
$5,500 and $8,583 in 1996 and 1995, respectively) 30,009 23,636 7,443
Operating expenses:
Cost of sales 1,384 -- --
Research and development 26,763 22,488 21,191
General and administrative 7,298 6,112 4,768
Acquired technology rights -- 11,437 --
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Total operating expenses 35,445 40,037 25,959
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Loss from operations (5,436) (16,401) (18,516)
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Interest income (expense):
Interest income 3,178 1,387 956
Interest expense (2,697) (2,278) (471)
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Net interest income (expense) 481 (891) 485
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Net loss (4,955) (17,292) (18,031)
Convertible preferred stock dividends (696) -- --
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Net loss applicable to common stock $(5,651) $(17,292) $(18,031)
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Net loss per common share $ (0.34) $ (1.18) $ (1.65)
Shares used in computing net loss per common share 16,573 14,650 10,931
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See accompanying notes to consolidated financial statements.
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IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
(In thousands)
Convertible
preferred stock Common stock Additional Unrealized gains Total
--------------- ---------------- paid-in (losses) on securities Accumulated shareholders'
Shares Amount Shares Amount capital available-for-sale deficit equity
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Balance at December 31, 1993 -- $ -- 9,425 $ 77,512 $1,699 $-- $(43,537) $ 35,674
Issuance of common stock
under stock option plan -- -- 24 26 -- -- -- 26
Issuance of common stock
under employee stock
purchase plan -- -- 38 85 -- -- -- 85
Issuance of common stock
in stock offerings -- -- 4,241 10,156 -- -- -- 10,156
Change in unrealized gains
(losses) on securities
available-for-sale -- -- -- -- -- (14) -- (14)
Net loss -- -- -- -- -- -- (18,031) (18,031)
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Balance at December 31, 1994 -- -- 13,728 87,779 1,699 (14) (61,568) 27,896
Issuance of common stock
under stock option plans -- -- 167 697 -- -- -- 697
Issuance of common stock
under employee stock
purchase plan -- -- 63 256 -- -- -- 256
Issuance of series A-1 and
A-2 convertible preferred
stock pursuant to terms of
a collaborative agreement 138 7,149 -- -- -- -- -- 7,149
Issuance of common stock
and series B convertible
preferred stock to acquire
technology rights 69 6,937 1,000 4,500 -- -- -- 11,437
Issuance of common stock for
services -- -- 103 322 -- -- -- 322
Amortization of fair value
change in common stock
warrants -- -- -- -- 680 -- -- 680
Change in unrealized gains
(losses) on securities
available-for-sale -- -- -- -- -- 24 -- 24
Net loss -- -- -- -- -- -- (17,292) (17,292)
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Balance at December 31, 1995 201 14,086 15,061 93,554 2,379 10 (78,860) 31,169
Issuance of common stock
under stock option plans -- -- 182 459 -- -- -- 459
Issuance of common stock
under employee stock
purchase plan -- -- 160 845 -- -- -- 845
Issuance of common stock
in public offering -- -- 2,070 46,277 -- -- -- 46,277
Issuance of common stock
for services -- -- 17 359 -- -- -- 359
Issuance of common stock
from exercise of stock
warrants -- -- 569 7,103 (2,348) -- -- 4,755
Issuance of series A-3 and
series A-6 convertible
preferred stock pursuant
to terms of a collaborative
agreement 123 12,500 -- -- -- -- -- 12,500
Amortization of fair value
change in common stock
warrants -- -- -- -- 1,252 -- -- 1,252
Change in unrealized gains
(losses) on securities
available-for-sale -- -- -- -- -- (47) -- (47)
Net loss -- -- -- -- -- -- (4,955) (4,955)
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Balance at December 31, 1996 330 $26,586 18,059 $148,597 $1,283 (37) $(83,815) $92,614
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See accompanying notes to consolidated financial statements.
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IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
1996 1995 1994
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Cash flows from operating activities:
Net loss $ (4,955) $(17,292) $(18,031)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,643 2,401 2,422
Deferred rent 390 450 425
Other non-cash expenses (104) -- --
Gains (losses) on sales of securities available-for-sale -- 5 (1)
Acquired technology rights -- 11,437 --
Issuance of common stock for services 359 322 --
Amortization of fair value change in common stock warrants 1,252 680 --
Change in assets and liabilities:
Inventories (4,384) -- --
Prepaid expenses, deposits and other assets (4,994) (713) (268)
Note receivable 640 495 562
Accounts payable, accrued expenses and other liabilities 5,608 2,193 (740)
Trade payable - clinical materials (238) (543) (3,506)
Deferred contract research revenue -- (2,024) --
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Net cash used in operating activities (3,783) (2,589) (19,137)
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Cash flows from investing activities:
Purchase of property and equipment (6,301) (1,315) (1,619)
Purchase of marketable securities and securities available-for-sale (72,771) (8,218) (6,551)
Sales and maturities of marketable securities and
securities available-for-sale 25,265 10,715 14,962
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Net cash provided by (used in) investing activities (53,807) 1,182 6,792
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Cash flows from financing activities:
Proceeds from notes payable 2,475 2,500 7,500
Payments on notes payable (3,440) (4,058) (1,400)
Proceeds from issuance of common stock, net 52,564 953 10,267
Proceeds from issuance of convertible preferred stock, net 12,500 7,149 --
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Net cash provided by financing activities 64,099 6,544 16,367
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Net increase in cash and cash equivalents 6,509 5,137 4,022
Cash and cash equivalents, beginning of year 18,828 13,691 9,669
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Cash and cash equivalents, end of year $ 25,337 $ 18,828 $ 13,691
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Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,469 $ 1,518 $ 466
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See accompanying notes to consolidated financial statements.
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IDEC Pharmaceuticals Corporation and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business: IDEC Pharmaceuticals Corporation (the "Company")
was incorporated on July 19, 1985, under the laws of the State of California to
engage in the research and development of targeted therapies for the treatment
of cancer and autoimmune and inflammatory diseases.
Principles of Consolidation: The consolidated financial statements include
the financial statements of IDEC Pharmaceuticals Corporation and its wholly
owned subsidiary IDEC Seiyaku. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents: For the purposes of financial statement
presentation, the Company considers all highly liquid investments in debt
securities with original maturities of three months or less to be cash
equivalents.
Securities Available-for-Sale: Securities available-for-sale are carried at
fair value, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The cost of securities sold is
based on the specific identification method.
Inventories: Inventories, which consist primarily of finished goods, are
stated at the lower of cost or market. Cost is determined in a manner which
approximates the first-in, first-out (FIFO) method.
Property and Equipment: Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years. Amortization of leasehold improvements is calculated
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.
Fair Value of Financial Instruments: The carrying amount of cash, cash
equivalents and securities available-for-sale, note receivable, contract
research revenue receivables, due from related party, accounts payable, accrued
expenses, trade payable - clinical materials and notes payable are considered
to be representative of their respective fair values because of the short-term
nature of those investments. A reasonable estimate of fair value is not
practicable for the liability, due to related party, at December 31, 1996, due
to the inherent difficulty of evaluating the timing of the payments.
Research and Development Costs: All research and development costs are
expensed in the period incurred. Clinical grant costs are fully accrued upon
patient enrollment.
Contract Research Revenues and License Fees: Contract research revenues are
recognized at the time research and development activities are performed under
the terms of the research contracts. Contract research revenue earned in
excess of contract payments received is classified as contract research revenue
receivables. License fees include milestone payments and non-refundable fees
from the sale of product rights under agreements with third parties. Revenues
from milestone payments are recognized when the results or events stipulated in
the agreement have been achieved.
Stock Based Compensation: Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"). Statement No. 123 allows
companies to expand the use of fair value accounting for stock compensation
plans or requires companies that elect to retain the current approach for
recognizing stock-based compensation expense under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), to make annual pro forma disclosures of the Company's operating results
as if they had adopted the fair value method. Management of the Company has
retained the approach under APB Opinion No. 25 for recognizing stock-based
compensation.
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of:
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of
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Long-Lived Assets and for Long Lived Assets to be Disposed Of" ("Statement No.
121"). Statement No. 121 requires losses from impairment to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
before interest are less than the assets' carrying amount. The adoption of
Statement No. 121 did not have a material effect on the Company's consolidated
financial statements for the year ended December 31, 1996.
Income Taxes: Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Net Loss Per Common Share: Computations of net loss per common share use
the weighted average number of common shares outstanding. Common equivalent
shares from common stock options, warrants and convertible preferred stock are
excluded from the computations as their effect is anti-dilutive. Net loss is
reduced by convertible preferred stock dividend requirements in calculating net
loss applicable to common stock.
Use of Estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting periods to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
Reclassifications: Certain balances in 1995 and 1994 have been reclassified
to conform with the presentation in 1996.
NOTE 2: SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at December 31, 1996 and 1995 consist of the
following (tables in thousands):
1996
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Gross Gross
Amortized unrealized unrealized Market
costs gains losses value
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Corporate securities $ 40,227 $ 3 $ (38) $40,192
Commercial paper 9,979 -- -- 9,979
Certificate of deposits 1,499 -- -- 1,499
U.S. government agencies 1,722 -- (2) 1,720
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$ 53,427 $ 3 $ (40) $53,390
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1995
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Gross Gross
Amortized unrealized unrealized Market
costs gains losses value
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Corporate securities $ 2,828 $ 1 $ -- $ 2,829
U.S. government agencies 2,344 9 -- 2,353
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$ 5,172 $ 10 $ -- $ 5,182
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The net unrealized holding gain (loss) on securities available-for-sale
included as a separate component of shareholders' equity at December 31, 1996
and 1995 totaled $(37,000) and $10,000, respectively. The gross realized gains
on sales of securities available-for-sale for the year ended December 31, 1995
totaled $4,000 and the gross realized losses for the year ended December 31,
1995 totaled $9,000.
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The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1996, by contractual maturity are shown below (table in
thousands):
Amortized Estimated
Cost Fair Value
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Due in one year or less $ 47,704 $ 47,667
Due after one year through two years 5,723 5,723
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$ 53,427 $ 53,390
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NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 consists of the
following (table in thousands):
1996 1995
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Furniture and fixtures $ 1,158 $ 608
Machinery and equipment 11,061 8,153
Leasehold improvements 16,359 15,639
Construction in progress 1,480 --
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30,058 24,400
Accumulated depreciation and amortization (8,605) (6,445)
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$21,453 $17,955
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NOTE 4: NOTE RECEIVABLE
In November 1992, the Company loaned $3,200,000 to the landlord of its
headquarters in San Diego, California, to assist in financing construction of
leasehold improvements. The promissory note bears interest at 8.75 percent and
matures in January 2000. Interest and principal payments are due monthly and
are paid from the landlord's rents received from the Company (Note 10).
NOTE 5: NOTES PAYABLE
Notes payable at December 31, 1996 and 1995, consist of the following (table
in thousands):
1996 1995
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17.53% note, due in monthly installments with a final payment of $375
due at maturity in 1999, secured by equipment, lease deed of trust,
and a patent and trademark collateral assignment $ 1,745 $ 2,245
17.74% note, due in monthly installments with a final payment of $375
due at maturity in 1998, secured by equipment, lease deed of trust,
and a patent and trademark collateral assignment 1,355 1,919
Prime plus 1% note, due in monthly installments with a final payment of $750
due at maturity in 1998, secured by equipment, lease deed of trust,
and a patent and trademark collateral assignment 2,710 3,839
10.18% note, due in monthly installments, maturing 1997, secured by equipment 710 1,413
9.32% to 10.62% capital lease obligations, due in monthly installments,
maturing 2000 2,263 --
Other notes, due in monthly installments, maturing thru 1997, secured by equipment 62 430
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8,845 9,846
Current portion (3,830) (3,248)
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$ 5,015 $ 6,598
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Machinery and equipment recorded under capital leases was $2,151,000, net of
accumulated depreciation of $547,000 at December 31, 1996.
The aggregate maturities of notes payable for each of the four years
subsequent to December 31, 1996, are as
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follows: 1997, $3,830,000; 1998, $3,242,000; 1999, $980,000; and 2000,
$793,000.
NOTE 6: 401(K) EMPLOYEE SAVINGS PLAN
The Company has a qualified 401(k) Employee Savings Plan ("401(k) Plan"),
available to substantially all employees over the age of 21. The Company may
make discretionary contributions to the 401(k) Plan, which vest immediately.
There were no discretionary contributions for the years ended December 31,
1996, 1995 and 1994.
NOTE 7: RESEARCH AND DEVELOPMENT
In December 1995, the Company and Eisai Co. Ltd. ("Eisai") entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to
$37,500,000 in milestone payments and support for research and development.
Eisai will receive exclusive rights in Asia and Europe to develop and market
resulting products emerging from the collaboration, with the Company receiving
royalties on eventual product sales by Eisai. Eisai may terminate these
agreements based on a reasonable determination that the products do not justify
continued development or marketing. Included in contract research revenues for
1996 and 1995 is $5,500,000 and $2,500,000, respectively, to fund product
development, which approximates the research and development costs incurred
under the program. In 1996 and 1995, the Company recognized $750,000 and
$2,000,000, respectively, in license fees under these agreements.
In December 1994, the Company and Seikagaku Corporation ("Seikagaku")
entered into a collaborative development agreement and a license agreement
aimed at the development and commercialization of a PRIMATIZED anti-CD23
antibody. Under the terms of these agreements, Seikagaku may provide up to
$26,000,000 in milestone payments and support for research and development. The
Company and Seikagaku will share co- exclusive, worldwide rights to all
products emerging from the collaboration, with the Company receiving royalties
on eventual product sales by Seikagaku. Seikagaku may terminate these
agreements based on a reasonable determination that the products do not justify
continued development or marketing. Included in contract research revenues for
1996 and 1995 is $3,500,000 and $2,500,000, respectively, to fund product
development, which approximates the research and development costs incurred
under the program. In 1996 and 1995, the Company recognized $1,000,000 in
license fees under these agreements for each of the respective years.
In November 1993, the Company entered into a collaborative development
agreement and a license agreement with Mitsubishi Chemical Corporation
("Mitsubishi Chemical"), for the development of a PRIMATIZED anti-B7 antibody.
Under the terms of the collaboration, Mitsubishi may provide up to $12,000,000
in milestone payments and support for research and development. The Company
will be reimbursed for its research efforts, receive milestone payments, retain
certain marketing rights and receive royalties on sales of any products
commercialized by Mitsubishi Chemical. Mitsubishi Chemical may terminate this
agreement if certain development objectives are not attained. The development
agreement with Mitsubishi expired on December 31, 1996. Included in contract
research revenues for 1996, 1995 and 1994 is $2,000,000, $2,047,000 and
$1,500,000, respectively, to fund product development, which approximates the
research and development costs incurred under the program. Included in license
fees are milestone and licensing payments of $1,000,000 and $300,000 for 1995
and 1994, respectively, earned under these agreements.
In October 1992, the Company and SmithKline Beecham p.l.c. ("SmithKline
Beecham") entered into a collaborative research and license agreement aimed at
the development and commercialization of therapeutic products based on the
Company's PRIMATIZED anti-CD4 antibodies. Under the terms of the agreement,
the Company will receive aggregate payments that have the potential of reaching
in excess of $60,000,000, subject to the attainment of certain milestones. The
Company will receive funding for anti-CD4 related research and development
programs, royalties and a share of co-promotion profits (in North America) on
sales of products which may be commercialized as a result of the agreement.
SmithKline Beecham may terminate this agreement based on a reasonable
determination that the products do not justify continued development or
marketing. Included in contract research revenues for 1995 and 1994 is
$3,488,000 and $3,201,000, respectively, to fund product development, which
approximates the research and development costs incurred under the program.
Included in license fees are milestone and licensing payments of $4,000,000 and
$2,000,000 for 1996 and 1994, respectively, earned under these agreements.
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The Company performed research under certain other contracts and,
accordingly, realized revenues and recognized expenses in the accompanying
consolidated statements of operations.
Related Party Arrangements: In March 1995, the Company and Genentech, Inc.
("Genentech") entered into a collaborative agreement for the clinical
development and commercialization of the Company's anti-CD20 monoclonal
antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. In
February 1996, the parties extended this collaboration to include two
radioconjugates, IDEC-Y2B8 and IDEC-In2B8, also for the treatment of B-cell
lymphomas. Concurrent with the collaborative agreement the Company and
Genentech also entered into an expression technology license agreement for a
proprietary gene expression technology developed by the Company and a preferred
stock purchase agreement providing for certain equity investments in the
Company by Genentech (Note 8). Under the terms of these agreements, the
Company may receive payments totaling $57,000,000, subject to the attainment of
certain milestone events. In addition, the Company and Genentech will
co-promote IDEC-C2B8 and IDEC-Y2B8 in the United States and the Company and
Genentech's sublicensee will co-promote IDEC-C2B8 in Canada, with the Company
receiving a share of profits. Under the terms of separate agreements with
Genentech, commercialization of IDEC-C2B8 outside the United States will be the
responsibility of F. Hoffmann-La Roche Ltd, one of the world's largest
pharmaceuticals firms, except in Japan where Zenyaku Kogyo Co., Ltd.
("Zenyaku") will be responsible for development, marketing and sales. The
Company will receive royalties on sales outside the U.S. and Canada.
Additionally, the Company will receive royalties on sales of Genentech products
manufactured using the Company's proprietary gene expression system. Genentech
may terminate this agreement for any reason beginning on the date of
availability of data from the first Phase III clinical trial of IDEC-C2B8.
Included in inventory at December 31, 1996, is $4,018,000 in finished goods
inventory that will be sold to Genentech. Included in contract research
revenues for 1996 and 1995 is $1,500,000 and $1,083,000, respectively, to fund
specific product development, which approximates the research and development
costs incurred under the program. In 1996 and 1995, the Company recognized
$4,000,000 and $5,500,000, respectively, in license fees under these
agreements.
In June 1991, the Company and Zenyaku entered into a product rights
agreement and a stock purchase agreement under which the Company granted
Zenyaku a license to manufacture, use and sell certain products for cancer and
autoimmune therapeutic applications. In November 1995, the Company and Zenyaku
terminated the product rights agreement and concurrently the Company, Zenyaku
and Genentech entered into a joint development, supply and license agreement
where Zenyaku received exclusive rights to develop, market and sell IDEC-C2B8
in Japan which resulted in the Company recognizing $2,000,000 in license fees
from Zenyaku.
NOTE 8: SHAREHOLDERS' EQUITY
Convertible Preferred Stock: In March 1995, the Company issued 1,000,000
shares of its common stock and 69,375 shares of its 10 percent Series B
Nonvoting Cumulative Convertible Preferred Stock ("Series B Preferred Stock")
for the repurchase of all Merrill Lynch/Morgan Stanley, L.P. ("ML/MS") rights
in the Company's lymphoma products. The stock issuances resulted in a non-cash
charge to operating expenses in 1995 of $11,437,000, representing the purchase
of the acquired technology rights. The Series B Preferred Stock has a
liquidation preference of $100 per share. Dividends shall accrue until March
15, 1997, thereafter, accrued dividends shall be payable quarterly. No
dividends or other distribution shall be paid or declared, other than common
stock dividends on the Company's common stock, or on its Series A-7 Convertible
Preferred Stock which is not yet issued, unless and until accrued dividends on
the Series B Preferred Stock have been paid. On March 16, 1997, the Series B
Preferred Stock and accrued dividends will automatically be converted into
common stock. Cumulative dividends in arrears at December 31, 1996 totaled
approximately $1,248,000 or $17.96 per share. Each share of Series B Preferred
Stock is convertible into the number of shares of common stock as equals 100
divided by the higher of $3.75 or the average closing price of the Company's
common stock as reported by the Nasdaq National Market for the 19 trading days
ending on March 1, 1997.
Additionally, the Company issued 22,993 shares of its Series A-3 Nonvoting
Convertible Preferred Stock ("Series A-3 Preferred Stock") in March 1996,
100,000 shares of its Series A-6 Nonvoting Convertible Preferred Stock ("Series
A-6 Preferred Stock") in May 1996, 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock ("Series A-1 Preferred Stock") in April 1995, and
37,521 shares of its Series A-2 Nonvoting Convertible Preferred Stock ("Series
A-2 Preferred Stock") in August 1995, to Genentech pursuant to the terms of a
preferred
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stock purchase agreement. The preferred stock purchase agreement was entered
into concurrently with a collaboration agreement as described in Note 7. The
Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred
Stock and Series A-6 Preferred Stock have a liquidation preference per share of
$50, $67, $217 and $75, respectively, net of issuance costs. Each share of
Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred
Stock is convertible at any time into ten shares of common stock. Each share
of Series A-6 Preferred Stock is convertible into the number of shares of
common stock as equals 75 divided by the average closing price of the Company's
common stock as reported by the Nasdaq National Market for the 20 trading days
following the earlier of (i) FDA approval of IDEC-C2B8 or (ii) September 16,
2000.
Common Stock: In May 1996, the shareholders approved an increase in the
number of authorized common shares to 50,000,000 shares. In June 1996, the
Company completed a public offering of 2,070,000 shares of its common stock
resulting in net proceeds of $46,277,000. In March 1995, the Company issued
1,000,000 shares of its common stock for the repurchase of all ML/MS rights in
the Company's lymphoma products, see convertible preferred stock above. In
June 1994, the Company completed a public offering of 2,800,000 shares of its
common stock resulting in net proceeds of $6,821,000. In December 1994, the
Company issued 1,441,000 shares of its common stock pursuant to the terms of a
collaborative research and license agreement with SmithKline Beecham resulting
in net proceeds of $3,335,000.
Stock Option Plans: The Company has two active stock option plans.
The 1988 Employee Stock Option Plan (the "Option Plan") was approved by the
shareholders in 1988 and was subsequently amended. Under the Option Plan,
options for the purchase of the Company's common stock may be granted to key
employees (including officers), directors and outside consultants. Options may
be designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except under a provision of the plan which
allows them to accelerate their vesting under certain conditions. Options
under the Option Plan, which have a term of up to ten years, are exercisable at
a price per share not less than the fair market value (85 percent of fair
market value for nonqualified options) on the date of grant. The aggregate
number of shares authorized for issuance under the Option Plan is 4,680,000.
In September 1993, the Company adopted the 1993 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which was approved by the shareholders in
May 1994 and was subsequently amended. A total of 250,000 shares of common
stock are reserved for issuance to individuals who serve as non-employee
members of the Board of Directors. Options under the Directors Plan, which
have a term of up to ten years, are exercisable at a price per share not less
than the fair market value on the date or grant and vest over four years.
A summary of the status of the Company's two active stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ended on those
dates is presented below (table in thousands, except per share amounts):
11
Directors Plan Option Plan
--------------------------- ---------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1993 -- $ -- 1,731 $ 5.65
Granted 35 5.63 2,052 3.18
Exercised -- -- (24) 0.95
Cancelled -- -- (1,413) 6.61
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 35 5.63 2,346 2.96
Granted 70 3.38 311 3.90
Exercised (10) 5.63 (157) 4.07
Cancelled (10) 2.38 (33) 5.58
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 85 4.15 2,467 2.97
Granted 35 19.13 1,443 20.79
Exercised (10) 4.00 (172) 2.43
Cancelled (5) 19.13 (196) 10.10
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 105 $ 8.45 3,542 $ 9.86
- ------------------------------------------------------------------------------------------------------------
The following table summarizes information about the Directors Plan and the
Option Plan options outstanding as of December 31, 1996 (table in thousands,
except year and per share amounts):
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------
Directors Plan:
$ 2.38 -- $ 5.63 75 7.92 $ 4.18 75 $ 4.18
19.13 -- 19.13 30 9.00 19.13 30 19.13
Option Plan:
$ 0.88 -- $ 2.56 885 6.47 2.34 543 2.21
3.00 -- 3.00 944 7.70 3.00 685 3.00
3.25 -- 16.00 474 8.09 7.62 78 6.22
20.13 -- 20.13 928 9.06 20.13 4 20.13
20.25 -- 26.13 311 9.62 24.93 -- --
Employee Stock Purchase Plan: In May 1993, the shareholders adopted the
Company's Employee Stock Purchase Plan (the "Purchase Plan"), which was
subsequently amended. A total of 345,000 shares of common stock are reserved
for issuance. Under the terms of the Purchase Plan, employees can choose to
have up to 10 percent of their annual compensation withheld to purchase shares
of common stock. The purchase price of the common stock is at 85 percent of
the lower of the fair market value of the common stock at the enrollment or
purchase date. During 1996, 1995 and 1994, 160,000, 63,000 and 38,000 shares,
respectively, were issued under the Purchase Plan.
Pro Forma Information: The Company has retained the approach under APB
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Option Plan,
Directors Plan and Purchase Plan. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with Statement No.
123, the Company's net loss per share applicable to common stock would have
been increased to the pro forma amounts indicated below (table in thousands,
except per share amounts):
1996 1995
- ------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock As reported $ (5,651) $(17,292)
Pro forma (10,152) (17,608)
Net loss per common share As reported $ (0.34) $ (1.18)
Pro forma (0.61) (1.20)
12
Pro forma net loss applicable to common stock reflects only options and
purchase rights granted in 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options and stock purchase rights under
Statement No. 123 is not reflected in the pro forma net loss amounts presented
above since compensation cost is reflected over the stock option vesting and
stock purchase subscription periods and compensation cost for stock options and
stock purchase rights granted prior to January 1, 1995 are not considered. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of zero percent;
expected volatility of 66.8 percent; risk-free interest rate of 6.2 percent;
and an expected option life of 5.5 years. The per share weighted-average fair
value of stock options granted during 1996 and 1995 at an exercise price equal
to the fair market value on the date of grant was $13.25 and $2.42,
respectively, on the date of grant using the Black-Scholes option-pricing
model. The fair value of each purchase right is estimated on the date of
enrollment using the Black-Scholes option-pricing model with the following
assumptions used in 1996 and 1995: dividend yield of zero percent; expected
volatility of 66.8 percent; risk-free interest rates between 5.6 percent and
5.9 percent; and an expected life between 0.3 year and 2.0 years. The per share
weighted-average fair value of stock purchase rights granted during 1996 and
1995 was $9.05 and $2.65, respectively, on the subscription date using the
Black-Scholes option-pricing model.
Stock Warrants: Under an investment agreement and in part subject to the
Company's accomplishments of certain research and development objectives, SR
One Limited, SmithKline Beecham's venture capital subsidiary, purchased 200,000
common stock warrants in each 1993 and 1992. In October 1996, these warrants
were exercised for 400,000 shares of common stock resulting in net proceeds of
$4,755,000.
In December 1994 and August 1995, concurrent with the completion of a debt
financing, the Company issued warrants for the purchase of 294,000 and 46,000
shares, respectively, of common stock. Such warrants have a six-year term and
are immediately exercisable at prices ranging between $2.29 and $6.22 per
share. The holders of the warrants have the option to exchange their warrants,
without the payment of cash or consideration, for a number of common shares
equal to the difference between the number of shares resulting by dividing the
aggregate exercise price of the warrants by the fair market value of the common
stock on the date of exercise and the number of shares that would have been
otherwise issued under the exercise. In September 1996, 196,000 warrants were
exchanged for 169,000 shares of the Company's common stock.
At December 31, 1996, 144,000 warrants to purchase common stock were
outstanding.
NOTE 9: INCOME TAXES
The following table summarizes the tax effects of temporary differences that
give rise to significant portions of the deferred tax assets at December 31,
1996 and 1995 (table in thousands):
1996 1995
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses $ 531 $ 253
Property and equipment, principally due to difference in depreciation 448 16
Deferred rent expense 607 451
Amortization of fair value change in common stock warrants 776 273
Capitalized state research and experimentation costs 2,090 1,883
Acquired technology rights 4,336 4,591
Research and experimentation credit 5,078 3,907
Net operating loss carryforwards 24,247 22,938
Other 333 252
- ------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 38,446 34,564
Valuation allowance (38,446) (34,564)
- ------------------------------------------------------------------------------------------------------------
Net deferred taxes $ -- $ --
- ------------------------------------------------------------------------------------------------------------
In 1996, 1995 and 1994, the Company recognized an increase in the valuation
allowance of $3,882,000, $7,652,000 and $8,614,000, respectively.
As of December 31, 1996, the Company had net operating loss and research and
experimentation tax credit
13
carryforwards for Federal income tax purposes of approximately $66,345,000 and
$3,476,000, respectively, which expire beginning in 1999. Net operating loss
carryforwards and research and experimentation tax credit carryforwards as of
December 31, 1996 for state income tax purposes are approximately $18,166,000
and $1,602,000, respectively, which expire beginning in 1997 and 1999,
respectively.
The utilization of net operating losses and tax credits incurred prior to
the Company's initial public offering in 1991, may be subject to an annual
limitation under the Internal Revenue Code, due to a cumulative change in
ownership of more than 50 percent. However, the Company believes that such
limitations will not have a material impact upon the utilization of such net
operating loss carryforwards.
NOTE 10: COMMITMENTS
Lease Commitments: In July 1992, the Company entered into a 15-year
operating lease for its headquarters, which commenced in 1993. The Company has
the option to extend the term of the lease for two additional periods of five
years each. In connection with the lease agreement, the Company loaned
$3,200,000 to the landlord (Note 4). In August 1996, the Company entered into a
7-year lease for additional office and warehouse facilities. The Company has
the option to extend the term of this lease for two additional years. In
addition to the monthly lease payments, both lease agreements provide for the
Company to pay all operating costs associated with the facilities. The lease
agreements provide for scheduled rental increases; accordingly lease expense is
recognized on a straight-line basis over the term of the leases.
Future minimum lease payments under all operating leases as of December 31,
1996, are as follows (table in thousands):
1997 $ 2,906
1998 3,158
1999 3,422
2000 3,559
2001 3,702
2002 and thereafter 22,295
- ------------------------------------------------------------------------------------------------------------
Total minimum lease payments $39,042
- ------------------------------------------------------------------------------------------------------------
Lease expense under all operating leases totaled $3,011,000, $3,097,000 and
$3,076,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
License Agreements: In connection with its research and development
efforts, the Company has entered into various license agreements which provide
the Company with rights to develop, produce and market products using certain
know-how, technology and patent rights maintained by the parties. Terms of the
various license agreements require the Company to pay royalties from future
sales, if any, on specified products using the resulting technology. As of
December 31, 1996, such royalties have not commenced on the aforementioned
license agreements.
14
IDEC Pharmaceuticals Corporation and Subsidiary
Independent Auditors' Report
The Board of Directors and Shareholders
IDEC Pharmaceuticals Corporation:
We have audited the accompanying consolidated balance sheets of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
February 7, 1997