===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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
(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
Registrant's telephone number, including area code
NOT APPLICABLE
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 [ ] No [X]
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, 2002
----- ---------------------------------
Common Stock, par value $.001 73,385,235 Shares
================================================================================
EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 for the purpose of amending and restating
Item 1 of Part I, containing our unaudited consolidated financial statements and
related notes as of June 30, 2002 and for the three and six month periods ended
June 30, 2002 and 2001. See Notes 2, 3 and 15 to the unaudited consolidated
financial statements for further discussion of the restatement and related
disclosures. We have also updated Item 2 of Part I, Management Discussion and
Analysis of Financial Condition and Results of Operations, to give effect to the
restatement. In addition, we have amended Item 6 of Part II to reflect the
filing of updated certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and we have filed
certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Other
than the changes regarding the restatement and related disclosures, no other
information in this Amendment No. 1 has been updated to reflect any subsequent
information or events since the original filing of this Form 10-Q on August 14,
2002. This Amendment should be read together with our Annual Report on Form 10-K
for the year ended December 31, 2002 filed with the U.S. Securities and Exchange
Commission on June 23, 2002.
IMCLONE SYSTEMS INCORPORATED
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets - June 30, 2002
and December 31, 2001.................................................................. 1
Unaudited Consolidated Statements of Operations - Three and six months ended
June 30, 2002 and 2001................................................................. 2
Unaudited Consolidated Statements of Cash Flows - Six months ended
June 30, 2002 and 2001................................................................. 3
Notes to Unaudited Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 29
Signatures............................................................................. 30
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............... 31
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ -----------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 65,535 $ 38,093
Securities available for sale.................................................................... 286,077 295,893
Prepaid expenses................................................................................. 5,679 3,891
Amounts due from corporate partners (Note 9)..................................................... 16,562 8,230
Current portion of withholding tax assets........................................................ 9,958 -
Other current assets............................................................................. 4,395 3,547
------------ -----------
Total current assets......................................................................... 388,206 349,654
------------ -----------
Property and equipment, net........................................................................ 145,420 107,248
Patent costs, net.................................................................................. 1,632 1,513
Deferred financing costs, net...................................................................... 4,556 5,404
Note receivable.................................................................................... 10,000 10,000
Withholding tax assets............................................................................. 168 13,510
Other assets....................................................................................... 4,518 383
------------ -----------
$ 554,500 $ 487,712
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................................. $ 14,947 $ 16,919
Accrued expenses................................................................................. 22,660 11,810
Withholding tax liability........................................................................ 38,779 38,779
Industrial Development Revenue Bonds tax liability............................................... 903 851
Interest payable................................................................................. 4,442 4,446
Current portion of deferred revenue (Note 9)..................................................... 36,627 20,683
Current portion of long-term debt ............................................................... 2,200 --
Current portion of long-term liabilities......................................................... 236 426
------------ -----------
Total current liabilities.................................................................... 120,794 93,914
------------ -----------
Deferred revenue, less current portion (Note 9).................................................... 298,612 182,813
Long-term debt, less current portion............................................................... 240,000 242,200
Other long-term liabilities, less current portion.................................................. 57 79
------------ -----------
Total liabilities............................................................................ 659,463 519,006
------------ -----------
Commitments and contingencies (Notes 3 and 10)
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; authorized 4,000,000 shares; reserved 1,200,000 series B
participating cumulative preferred stock........................................................ - -
Common stock, $.001 par value; authorized 200,000,000 shares; issued 73,573,160 and 73,348,271
at June 30, 2002 and December 31, 2001, respectively; outstanding 73,383,910 and 73,159,021 at
June 30, 2002 and December 31, 2001, respectively............................................... 74 73
Additional paid-in capital....................................................................... 345,295 341,735
Accumulated deficit.............................................................................. (448,709) (372,157)
Treasury stock, at cost; 189,250 shares at June 30, 2002 and December 31, 2001................... (4,100) (4,100)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale............................................... 2,477 3,155
------------ -----------
Total stockholders' deficit ................................................................. (104,963) (31,294)
------------ -----------
$ 554,500 $ 487,712
============ ===========
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,
------------------------------ ----------------------------
2002 2001 2002 2001
-------------- ------------- -------------- ------------
RESTATED RESTATED RESTATED RESTATED
(NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2)
Revenues:
License fees and milestone revenue (Note 9)..................... $ 1,595 $ 3,136 $ 8,258 $ 27,232
Research and development funding and royalties.................. 38 115 688 763
Collaborative agreement revenue (Note 9)........................ 9,932 644 21,170 3,895
--------- --------- ----------- ---------
Total revenues................................................ 11,565 3,895 30,116 31,890
========= ========= =========== =========
Operating expenses:
Research and development........................................ 38,167 24,390 75,945 49,486
Marketing, general and administrative........................... 16,479 6,223 24,602 9,951
Write-down of withholding tax assets............................ 3,384 -- 3,384 --
Industrial Development Revenue Bonds tax expense................ 25 25 50 50
Expenses associated with the amended Bristol-Myers
Squibb Company ("BMS") Commercial Agreement................... -- -- 2,250 --
--------- --------- ----------- ---------
Total operating expenses...................................... 58,055 30,638 106,231 59,487
========= ========= =========== =========
Operating loss.................................................... (46,490) (26,743) (76,115) (27,597)
--------- --------- ----------- ---------
Other:
Interest income................................................. (2,904) (3,262) (5,168) (7,827)
Interest expense................................................ 3,348 3,200 6,841 6,516
Loss (gain) on securities and investments....................... (435) 2,850 (1,236) 4,468
--------- --------- ----------- ---------
Net interest and other expense................................ 9 2,788 437 3,157
--------- --------- ----------- ---------
Net loss..................................................... $ (46,499) $ (29,531) $ (76,552) $ (30,754)
========= ========= =========== =========
Net loss per common share:
Basic and diluted:
Net loss per common share..................................... $ (0.63) $ (0.44) $ (1.04) $ (0.46)
========= ========= =========== =========
Weighted average shares outstanding............................... 73,356 67,051 73,332 66,657
========= ========= =========== =========
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,
--------------------------
2002 2001
------------ ----------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
Cash flows from operating activities:
Net loss.............................................................................................. $ (76,552) $ (30,754)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization....................................................................... 4,656 1,558
Amortization of deferred financing costs............................................................ 848 848
Expense associated with issuance of options and warrants............................................ 7 687
Gain on securities available for sale............................................................... (1,236) (908)
Write-down of investment in Valigen N.V. ........................................................... -- 4,375
Write-off of convertible promissory note receivable from A.C.T. Group, Inc.......................... -- 1,000
Changes in:
Prepaid expenses................................................................................... (1,788) (1,183)
Amounts due from corporate partners (including amounts received from BMS of $6,887 for the six
months ended June 30, 2002)....................................................................... (8,332) --
Note receivable - officer.......................................................................... -- (15)
Other current assets............................................................................... (848) 2,816
Withholding tax assets............................................................................. 3,384 (7,119)
Other assets....................................................................................... (4,135) (75)
Interest payable................................................................................... (4) 1
Accounts payable................................................................................... (1,972) (4,811)
Accrued expenses................................................................................... 10,850 (2,026)
Withholding tax liability.......................................................................... -- 7,119
Industrial Development Revenue Bonds tax liability................................................. 52 56
Deferred revenue (including amounts received from BMS of $140,000 for the six months ended
June 30, 2002).................................................................................... 131,743 3,807
Fees potentially refundable to Merck KGaA.......................................................... -- (28,000)
------------ ----------
Net cash provided by (used in) operating activities............................................... 56,673 (52,624)
------------ ----------
Cash flows from investing activities:
Acquisitions of property and equipment.............................................................. (42,686) (28,196)
Purchases of securities available for sale.......................................................... (241,356) (30,346)
Sales and maturities of securities available for sale............................................... 251,730 87,646
Investment in Valigen N.V. ......................................................................... -- (2,000)
Loan to A.C.T. Group, Inc........................................................................... -- (1,000)
Additions to patents................................................................................ (203) (431)
------------ ----------
Net cash (used in) provided by investing activities............................................... (32,515) 25,673
------------ ----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants................................................ 2,745 3,744
Proceeds from issuance of common stock under the employee stock purchase plan....................... 323 348
Proceeds from short-swing profit rule............................................................... 486 --
Purchase of treasury stock.......................................................................... -- (1,830)
Payment of preferred stock dividends................................................................ -- (5,764)
Redemption of series A preferred stock.............................................................. -- (20,000)
Payments of other liabilities....................................................................... (270) (357)
------------ ----------
Net cash provided by (used in) financing activities............................................... 3,284 (23,859)
------------ ----------
Net increase (decrease) in cash and cash equivalents.............................................. 27,442 (50,810)
Cash and cash equivalents at beginning of period...................................................... 38,093 60,325
------------ ----------
Cash and cash equivalents at end of period............................................................ $ 65,535 $ 9,515
============ ==========
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized of $780 and $1,120 for the six months ended
June 30, 2002 and 2001, respectively............................................................... $ 6,776 $ 6,781
============ ==========
Non-cash financing activity:
Capital asset and lease obligation addition........................................................ $ 58 $ --
============ ==========
See accompanying notes to consolidated financial statements
Page 3
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PREPARATION
The consolidated financial statements of ImClone Systems Incorporated
("ImClone Systems" or the "Company") as of June 30, 2002 and for the three and
six months ended June 30, 2002 and 2001 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, 2001, as filed with the
Securities and Exchange Commission ("SEC").
Results for the interim periods are not necessarily indicative of results
for the full years.
Pursuant to the guidance in Emerging Issues Task Force Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred ("EITF No. 01-14"), the Company changed its classification for
corporate partner reimbursements effective January 1, 2002 to characterize such
reimbursements received for research and development and marketing expenses
incurred as collaborative agreement revenue in the consolidated statements of
operations. Prior to January 1, 2002, the Company characterized such
reimbursements as a reduction of expenses in the consolidated statements of
operations. As prescribed in EITF No. 01-14, all comparative financial
statements for prior periods have been reclassified to comply with this
guidance.
(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its Consolidated Balance Sheets as of June 30,
2002 and December 31, 2001, primarily to reflect a withholding tax liability and
withholding tax assets primarily relating to the exercises of certain
non-qualified stock options and compensatory warrants described below. The
restatement includes recording withholding tax assets of $10,126,000 and
$13,510,000 as of June 30, 2002 and December 31, 2001, respectively; a
withholding tax liability of $38,779,000 as of June 30, 2002 and December 31,
2001; an Industrial Development Revenue Bonds tax liability of $903,000 and
$851,000 as of June 30, 2002 and December 31, 2001, respectively; a cumulative
increase to accumulated deficit of $29,556,000 as of June 30, 2002; and a
cumulative increase to accumulated deficit of $26,120,000 as of December 31,
2001. The $26,120,000 increase to accumulated deficit reflects the fourth
quarter 2001 write-down of the $25,269,000 asset noted below regarding Dr.
Samuel D. Waksal and $851,000 in additional tax expense and interest expense for
the years 1995 through 2001 in connection with its outstanding Industrial
Development Revenue Bonds issued in 1990 (the "1990 IDA Bonds").
The Company has restated its Consolidated Statements of Operations for the
three and six months ended June 30, 2002, primarily to reflect the write-down of
the $3,384,000 withholding tax asset discussed below. In addition, the Company
has restated its Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 to reflect the additional tax expense and
interest expense for the 1990 IDA Bonds. Due to the restatement, the net loss
for the three and six months ended June 30, 2002 increased to $46,499,000 and
$76,552,000 from $43,089,000 and $73,116,000, respectively; and the basic and
diluted net loss per common share increased to $0.63 and $1.04 from $0.59 and
$1.00, respectively. Also due to the restatement, the net loss for the three and
six months ended June 30, 2001 increased to $29,531,000 and $30,754,000 from
$29,503,000 and $30,698,000, respectively; with no impact on the basic and
diluted net loss per common share.
Federal and applicable state tax laws require an employer to withhold
income taxes at the time of an employee's exercise of non-qualified stock
options or warrants issued in connection with the performance of services by the
employee. An employer that does not do so is liable for the taxes not withheld
if the employee fails to pay his or her taxes for the year in which the
non-qualified stock options or warrants are exercised. In 2000 and prior years,
the Company generally did not require the withholding of federal, state or local
income taxes and in certain years, employment payroll taxes at the time of the
exercise of non-qualified stock options or warrants. Prior to 1996, the Company
did not comply with tax reporting requirements with respect to the exercise of
non-qualified stock options or warrants.
In January 2003, the New York State Department of Taxation and Finance
("New York State") notified the Company that it was liable for the New York
State and City income taxes that were not withheld because one or more of the
Company's employees who exercised certain non-qualified stock options in 1999
and 2000 failed to pay New York State and City income taxes for those years. At
December 31, 2002, the Company recorded a gross New York State and City
withholding tax liability of approximately $6,800,000. On March 13, 2003, the
Company entered into a closing agreement with New York State, paying $4,500,000
to settle the matter. The Company believes that substantially all of the
underpayment of New York State and City income
Page 4
tax identified by New York State is attributable to the exercise of
non-qualified stock options by its former President and Chief Executive Officer,
Dr. Samuel D. Waksal.
On March 13, 2003, the Company initiated discussions with the Internal
Revenue Service ("IRS") relating to federal income taxes on the exercise of
non-qualified stock options on which income tax was not properly withheld.
Although the IRS has not yet asserted that the Company is required to make a
payment with respect to such failure to withhold, the IRS may assert that such a
liability exists, and may further assert that the Company is liable for interest
and penalties. The Company has requested and received confirmation from all of
its current and substantially all of its former employees who exercised
non-qualified stock options in 1999 and 2000, on which no income tax was
withheld, that they have reported the appropriate amount of income on their tax
returns and paid the taxes shown as due on those returns. Based on this
information, the Company determined that all but an insignificant amount of the
potential liability for withholding taxes with respect to exercises of
non-qualified stock options in 1999 and 2000 is attributed to those amounts
related to Dr. Samuel D. Waksal.
In addition, in the course of the Company's investigation into its
potential liability in respect of the non-qualified stock options described
above, the Company identified certain warrants that were granted in 1991 and
prior years to current and former officers, directors and advisors (including
the four individuals discussed herein) that the Company previously treated as
non-compensatory warrants and thus not subject to tax withholding and
information reporting requirements upon exercise. Accordingly, when exercised in
2001 and prior years, the Company did not deduct income and payroll taxes upon
exercise or report applicable information to the taxing authorities. Based on
the information discovered in the course of the Company's recent investigation,
the Company now believes that such treatment was incorrect, and that the
exercise of such warrants by current and former officers of the Company should
have been treated in the same manner for withholding and reporting purposes as
the exercise of non-qualified stock options. The Company has informed the
relevant authorities, including the IRS and New York State, of this matter and
intends to resolve its liability in respect of these warrants with these taxing
authorities in conjunction with its resolution of the matter described above.
On June 17, 2003, New York State notified the Company that, based on the issue
identified above, they are continuing a previously conducted audit of the
Company and are evaluating the terms of the closing agreement to determine
whether or not it should be re-opened.
On April 2, 2003, the Company received a request from the SEC for the
voluntary production of documents and information relating to the above matters.
The Company is cooperating fully with the SEC, and intends to continue to do so,
while also updating the United States Attorney's Office on an ongoing basis.
One of the officers and directors to whom warrants were issued and
previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the
Company's Chief Scientific Officer. In June 2003, Dr. Harlan W. Waksal
represented that he has paid the taxes associated with the exercise of these
warrants and further agreed to indemnify the Company for any withholding taxes
that may be assessed and are attributable to the Company's failure to deduct
income and payroll taxes on all warrants and options that he or his transferee
have previously exercised, subject to the consent of Dr. Harlan W. Waksal, which
can not be unreasonably withheld.
Two of the other officers and directors to whom warrants were issued
and previously treated as non-compensatory warrants are Dr. Samuel D. Waksal and
its former General Counsel, John B. Landes. The Company has made demands on both
of these individuals to pay the taxes associated with the exercise of these
warrants and certain non-qualified stock options and to indemnify the Company
against any liability that it may incur to taxing authorities in respect of the
warrants or non-qualified stock options that they have previously exercised.
The Company has recognized assets at the time of exercise relating to
the above individuals. These assets are based on the fact that individuals are
required by law to pay their personal income taxes, as well as the Company's
determination that these individuals had the means and intention to satisfy
their tax liabilities and legal claims the Company has against the individuals
both during and after their employment with the Company. The Company decided to
write-down these assets during the periods noted in the paragraph below.
Regarding Dr. Samuel D. Waksal, the Company determined that subsequent
to its receipt of a "refusal to file" letter from the United States Food and
Drug Administration on December 28, 2001, with respect to its rolling Biologics
License Application for ERBITUX, his financial condition deteriorated and
therefore the recoverability of the asset became doubtful. Regarding Mr. Landes,
based on the limited information available to it, due to the decrease in the
Company's stock price during 2002 and corresponding decrease in the value of
Mr. Landes' ownership of the Company's securities, the Company determined that
recoverability of the asset became doubtful. Based upon these determinations,
the asset write-downs of $25,269,000 and $3,384,000 were recorded during the
fourth quarter of 2001 for Dr. Samuel D. Waksal and the second quarter of 2002
for Mr. Landes, respectively. The withholding tax liabilities relating to Dr.
Samuel D. Waksal and Mr. Landes will remain on the Company's Consolidated
Balance Sheets, until such time as these liabilities are satisfied. Should the
Company negotiate settlements with the IRS and New York State tax authorities
for amounts less than those noted above, the Company would reduce operating
expenses for the difference between the withholding tax liabilities and
settlement amounts in the period of settlement.
Page 5
In April 2003, the Company discovered that it is in breach of certain
covenants in its outstanding 1990 IDA Bonds. These bonds are tax-exempt and the
Company is required to continue to use the proceeds for a qualified tax-exempt
purpose (in this case, manufacturing), until maturity. These bonds, in principal
amount of $2,200,000, bearing 11.25% annual interest, mature on May 1, 2004.
While the bond proceeds were originally used for manufacturing purposes, a
recent internal investigation concluded that in August 1995, this qualified
purpose was abandoned and the proceeds have been used for a non-qualified
purpose in later periods. As a result, the bond proceeds likely became taxable
to the bondholders in August 1995. The Company is required to indemnify the
bondholders from any taxes imposed upon them. The Company intends to attempt to
settle any tax liability directly with the relevant taxing authorities using
procedures established for that purpose. Based on the Company's understanding of
these procedures, the Company has recognized a tax liability of $903,000 and
$851,000 on the Consolidated Balance Sheets as of June 30, 2002 and December 31,
2001, respectively. The Company recorded Industrial Development Revenue Bonds
tax expense of $50,000 for the six months ended June 30, 2002 and 2001, and
interest expense of $2,000 and $6,000 for the same periods, respectively. On May
22, 2003, the Company notified the bond trustee of its intent to redeem in full
the bonds by repaying the principal amount plus accrued and unpaid interest and
has reclassified this debt to current liabilities on the Consolidated Balance
Sheet as of June 30, 2002. This redemption is scheduled to occur on June 30,
2003.
The following tables present the impact of the restatement on a condensed
basis:
JUNE 30, 2002 DECEMBER 31, 2001
--------------------------------- --------------------------------
AS PREVIOUSLY AS PREVIOUSLY
CONSOLIDATED BALANCE SHEETS REPORTED AS RESTATED REPORTED AS RESTATED
-------- ----------- -------- -----------
Current portion of employee withholding tax assets.. $ -- $ 9,958,000 $ -- $ --
Total current assets................................ 378,248,000 388,206,000 349,654,000 349,654,000
Withholding tax assets.............................. -- 168,000 -- 13,510,000
Total assets........................................ 544,374,000 554,500,000 474,202,000 487,712,000
Withholding tax liability........................... -- 38,779,000 -- 38,779,000
Industrial Development Revenue Bonds tax liability.. -- 903,000 -- 851,000
Current portion of long-term debt................... -- 2,200,000 -- --
Total current liabilities........................... 78,912,000 120,794,000 54,284,000 93,914,000
Long-term debt, less current portion................ 242,200,000 240,000,000 242,200,000 242,200,000
Total liabilities................................... 619,781,000 659,463,000 479,376,000 519,006,000
Accumulated deficit................................. (419,153,000) (448,709,000) (346,037,000) (372,157,000)
Total stockholders' deficit......................... (75,407,000) (104,963,000) (5,174,000) (31,294,000)
Total liabilities and stockholders' deficit......... $ 544,374,000 $ 554,500,000 $ 474,202,000 $ 487,712,000
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- --------------------------------
AS PREVIOUSLY AS PREVIOUSLY
CONSOLIDATED STATEMENTS OF OPERATIONS REPORTED AS RESTATED REPORTED AS RESTATED
-------- ----------- -------- -----------
Write-down of withholding tax assets................ $ -- $ 3,384,000 $ -- $ --
Industrial Development Revenue Bonds tax expense.... -- 25,000 -- 25,000
Total operating expenses............................ 54,646,000 58,055,000 30,613,000 30,638,000
Operating loss...................................... (43,081,000) (46,490,000) (26,718,000) (26,743,000)
Interest expense.................................... 3,347,000 3,348,000 3,197,000 3,200,000
Net interest and other expense...................... 8,000 9,000 2,785,000 2,788,000
Net loss............................................ $ (43,089,000) $ (46,499,000) $ (29,503,000) $ (29,531,000)
Net loss per common share........................... $ (0.59) $ (0.63) $ (0.44) $ (0.44)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- --------------------------------
AS PREVIOUSLY AS PREVIOUSLY
CONSOLIDATED STATEMENTS OF OPERATIONS REPORTED AS RESTATED REPORTED AS RESTATED
-------- ----------- -------- -----------
Write-down of withholding tax assets................ $ -- $ 3,384,000 $ -- $ --
Industrial Development Revenue Bond tax expense..... -- 50,000 -- 50,000
Total operating expenses............................ 102,797,000 106,231,000 59,437,000 59,487,000
Operating loss...................................... (72,681,000) (76,115,000) (27,547,000) (27,597,000)
Interest expense.................................... 6,839,000 6,841,000 6,510,000 6,516,000
Net interest and other expense...................... 435,000 437,000 3,151,000 3,157,000
Net loss............................................ $ (73,116,000) $ (76,552,000) $ (30,698,000) $ (30,754,000)
Net loss per common share........................... $ (1.00) $ (1.04) $ (0.46) $ (0.46)
Page 6
The restatement did not impact the amounts presented in the
Consolidated Statements of Cash Flows for net cash provided by (used in)
operating activities, net cash (used in) provided by investing activities or net
cash provided by (used in) financing activities, although it did impact certain
components of cash flows from operating activities.
Amounts related to the following items are included in withholding tax
assets:
JUNE 30, DECEMBER 31,
2002 2001
--------------- --------------
Dr. Harlan W. Waksal*.................................... $ 9,958,000 $ 9,958,000
John B. Landes........................................... -- 3,384,000
Other.................................................... 168,000 168,000
--------------- --------------
10,126,000 13,510,000
Less: Current portion (9,958,000) --
--------------- --------------
$ 168,000 $ 13,510,000
=============== ==============
* - In June 2003, Dr. Harlan W. Waksal represented that he has paid the
taxes associated with the exercise of these warrants and further agreed to
indemnify the Company for any withholding taxes that may be assessed and are
attributable to the Company's failure to deduct income and payroll taxes on
all warrants and options that he or his transferee has previously
exercised, subject to the consent of Dr. Harlan W. Waksal, which can not be
unreasonably withheld.
Amounts related to the following items are included in withholding tax
liability:
JUNE 30, DECEMBER 31,
2002 2001
--------------- --------------
Withholding tax related to the exercise of stock options
and warrants........................................... $ 38,349,000 $ 38,349,000
Other.................................................... 430,000 430,000
--------------- --------------
$ 38,779,000 $ 38,779,000
=============== ==============
Amounts related to the following items are included in Industrial
Development Revenue Bonds tax liability:
JUNE 30, DECEMBER 31,
2002 2001
--------------- --------------
Tax related to the 1990 IDA Bonds........................ $ 662,000 $ 612,000
Accrued interest on tax related to the 1990 IDA Bonds.... 241,000 239,000
--------------- --------------
$ 903,000 $ 851,000
=============== ==============
(3) WITHHOLDING TAX CONTINGENCIES
The Company has not recognized withholding tax liabilities in respect
of exercises of certain warrants by the Company's then-current and now-former
Chairman of the Board, Robert F. Goldhammer, the final of the four officers or
directors to whom warrants were issued and previously treated as
non-compensatory warrants. Based on the Company's investigation, the Company
believes that, although such warrants were compensatory, such warrants were
received by Mr. Goldhammer in connection with the performance of services by him
in his capacity as a director, rather than as an employee, and, as such, are not
subject to tax withholding requirements. In addition, in 1999, Mr. Goldhammer
erroneously received a portion of a stock option grant to him in the form of
incentive stock options, which under federal law may only be granted to
employees. There can be no assurance, however, that the taxing authorities will
agree with the Company's position and will not assert that it is liable for the
failure to withhold income and employment taxes with respect to the exercise of
such warrants and any stock options by Mr. Goldhammer. If the Company became
liable for the failure to withhold these taxes on the exercise of such warrants
and any stock options by Mr. Goldhammer, the potential liability, exclusive of
any interest or penalties, would be approximately $12,600,000.
The Company has not recognized accruals for penalties and interest that
may be imposed with respect to the withholding tax issues described above and
other related contingencies, including the period covered by the statute of
limitations and the Company's determination of certain exercise dates because it
does not believe that losses from such contingencies are probable. With respect
to the statute of limitations and the Company's determination of certain
exercise dates, while the Company does not believe a loss is probable, there is
a potential additional liability with respect to these issues that may be
asserted by a taxing authority. If taxing authorities assert such issues and
prevail related to these withholding tax issues and other related contingencies,
Page 7
including penalties, the liability which could be imposed by taxing authorities
would be substantial. The potential interest on the withholding tax liability
recorded on the Company's Consolidated Balance Sheet could be up to a maximum
amount of $5,900,000 at June 30, 2002. Potential additional withholding tax
liability on other related contingencies amounts to approximately $11,000,000,
exclusive of any interest or penalties, and excluding the amount potentially
attributable to Mr. Goldhammer noted above.
(4) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
Land..................................................... $ 4,899,000 $ 2,733,000
Building and building improvements....................... 61,306,000 50,720,000
Leasehold improvements................................... 8,367,000 8,302,000
Machinery and equipment.................................. 37,131,000 33,057,000
Furniture and fixtures................................... 2,088,000 2,031,000
Construction in progress................................. 58,876,000 33,080,000
--------------- ---------------
Total cost......................................... 172,667,000 129,923,000
Less accumulated depreciation and amortization........... (27,247,000) (22,675,000)
--------------- ---------------
Property and equipment, net.............................. $ 145,420,000 $ 107,248,000
=============== ===============
The Company is building a second commercial manufacturing facility adjacent
to its new product launch manufacturing facility in Somerville, New Jersey. This
new facility will be a multi-use facility with capacity of up to 110,000 liters
(working volume). The 250,000 square foot facility will cost approximately
$233,000,000, and is being built on land purchased in December 2000. The actual
cost of the new facility may change depending upon various factors. The Company
incurred approximately $52,617,000, (included in construction in progress above)
excluding capitalized interest of approximately $1,234,000, in conceptual
design, engineering and pre-construction costs through June 30, 2002. Through
July 22, 2002, committed purchase orders totaling approximately $40,217,000 have
been placed for subcontracts and equipment related to this project. In addition,
$22,770,000 in engineering, procurement, construction management and validation
costs were committed.
In January 2002, the Company purchased real estate consisting of a 7.5-acre
parcel of land located adjacent to the Company's product launch manufacturing
facility and pilot facility in Somerville, New Jersey. The real estate includes
an existing 50,000 square foot building, 40,000 square feet of which is
warehouse space and 10,000 square feet of which is office space. The purchase
price for the property and building was approximately $7,020,000, of which
approximately $1,125,000 related to the purchase of the land and approximately
$5,895,000 related to the purchase of the building and building improvements.
The Company intends to use this property for warehousing and logistics for its
Somerville campus.
On May 20, 2002, the Company purchased real estate consisting of a 6.94-acre
parcel of land located across the street from the Company's product launch
manufacturing facility in Somerville, New Jersey. The real estate includes an
existing 46,000 square feet of office space. The purchase price for the property
was approximately $4,515,000, of which approximately $1,041,000 was related to
the purchase of the land and approximately $3,474,000 was related to the
purchase of the building. The Company intends to use this property as the
administrative building for the Somerville campus. As of June 30, 2002, the
Company has incurred approximately $422,000 for the retrofit of this facility.
The total cost for the retrofit will be approximately $5,187,000.
The process of preparing consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires the Company to evaluate the carrying values of its long-lived assets.
The recoverability of the carrying values of the Company's product launch
manufacturing facility, its second commercial manufacturing facility and its
warehousing and logistics facility will depend on (1) receiving FDA approval of
our interventional therapeutic product candidate for cancer, ERBITUX(TM), (2)
receiving FDA approval of the manufacturing facilities and (3) the Company's
ability to earn sufficient returns on ERBITUX. Based on management's current
estimates, the Company expects to recover the carrying value of such assets.
(5) MANUFACTURING CONTRACT SERVICES
In December 1999, the Company entered into a development and manufacturing
services agreement with Lonza Biologics PLC ("Lonza"). This agreement was
amended in April 2001 to include additional services. Under the agreement, Lonza
was responsible for process development and scale-up to manufacture ERBITUX in
bulk form under current Good Manufacturing Practices ("cGMP") conditions. These
steps were taken to assure that the manufacturing process would produce bulk
material that conforms with the Company's reference material. The Company did
not incur any costs associated with this agreement
Page 8
during the three months ended June 30, 2002 and 2001. Approximately $38,000 and
$3,600,000 was incurred in the six months ended June 30, 2002 and 2001,
respectively, and $7,068,000 from inception through June 30, 2002. As of June
30, 2002, Lonza has completed its responsibilities under the development and
manufacturing services agreement.
In September 2000, the Company entered into a three-year commercial
manufacturing services agreement with Lonza relating to ERBITUX. This agreement
was amended in June 2001 and again in September 2001 to include additional
services. The total cost for services to be provided under the three-year
commercial manufacturing services agreement is approximately $87,050,000. The
Company has incurred approximately $7,410,000 and $3,075,000 in the three months
ended June 30, 2002 and 2001, respectively, and $14,528,000 and $4,875,000 in
the six months ended June 30, 2002 and 2001, respectively, and $24,840,000 from
inception through June 30, 2002 for services provided under the commercial
manufacturing services agreement.
Under the December 1999 and September 2000 agreements, Lonza is
manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is
delivering it to the Company over a term ending no later than December 2003. The
costs associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as ERBITUX may be approved for sale or until the Company obtains
obligations from its corporate partners to purchase such product. In the event
of such approval or obligations from its corporate partners, the subsequent
costs associated with manufacturing ERBITUX for commercial sale will be included
in inventory and expensed when sold. In the event the Company terminates the
commercial manufacturing services agreement without cause, the Company will be
required to pay 85% of the stated costs for each of the first ten batches
cancelled, 65% of the stated costs for each of the next ten batches cancelled
and 40% of the stated costs for each of the next six batches cancelled. The
batch cancellation provisions for certain additional batches that we are
committed to purchase require the Company to pay 100% of the stated costs of
cancelled batches scheduled within six months of the cancellation, 85% of the
stated costs of cancelled batches scheduled between six and twelve months
following the cancellation and 65% of the stated costs of cancelled batches
scheduled between twelve and eighteen months following the cancellation. These
amounts are subject to mitigation should Lonza use its manufacturing capacity
caused by such termination for another customer. At June 30, 2002, the estimated
remaining future commitments under the amended commercial manufacturing services
agreement are $38,160,000 in 2002 and $24,050,000 in 2003.
In December 2001, the Company entered into an agreement with Lonza to
manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck
KGaA (the "2,000L Lonza Agreement"). The costs associated with the agreement are
reimbursable by Merck KGaA and accordingly are accounted for as collaborative
agreement revenue and such costs are also included in research and development
expenses in the consolidated statement of operations. The Company has incurred
approximately $1,175,000 in the three months ended June 30, 2002, $3,525,000 in
the six months ended June 30, 2002, and $6,008,000 from inception through June
30, 2002 for services provided under this agreement. Approximately $2,350,000
and $133,000 were reimbursable by Merck KGaA at June 30, 2002 and December 31,
2001, respectively, and included in amounts due from corporate partners in the
consolidated balance sheets. At June 30, 2002, the estimated remaining future
commitment by the companies under this agreement is $1,175,000 in 2002.
In January 2002, the Company executed a letter of intent with Lonza to enter
into a long-term supply agreement. The long-term supply agreement would apply to
a large scale manufacturing facility that Lonza is constructing. The Company
expects such facility would be able to produce ERBITUX in 20,000 liter batches.
The Company paid Lonza $3,250,000 for the exclusive negotiating right of a
long-term supply agreement, which amount is included in Other assets at June 30,
2002 in the consolidated balance sheet. Such negotiations commenced shortly
thereafter and are continuing. Under certain conditions such payment shall be
refunded to the Company. Provided the Company enters into a long-term supply
agreement, such payment shall be creditable against the 20,000 liter batch
price.
(6) INVESTMENT IN VALIGEN N.V.
In May 2000, the Company made an equity investment in ValiGen N.V.
("ValiGen"), a private biotechnology company specializing in therapeutic target
identification and validation using the tools of genomics and gene expression
analysis. The Company purchased 705,882 shares of ValiGen's series A preferred
stock and received a five-year warrant to purchase 388,235 shares of ValiGen's
common stock at an exercise price of $12.50 per share. The aggregate purchase
price was $7,500,000. The Company assigned a value of $594,000 to the warrant
based on the Black-Scholes Pricing Model. The ValiGen series A preferred stock
contains voting rights identical to holders of ValiGen's common stock. Each
share of ValiGen series A preferred stock is convertible into one share of
ValiGen common stock. The Company may elect to convert the ValiGen series A
preferred stock at any time; provided, that the ValiGen preferred stock will
automatically convert into ValiGen common stock upon the closing of an initial
public offering of ValiGen's common stock with gross proceeds of not less than
$20,000,000. The Company also received certain protective rights and customary
registration rights under this arrangement. The Company recorded this original
investment in ValiGen using the cost method of accounting. During the second
quarter of 2001, the Company purchased 160,000 shares of ValiGen's series B
preferred stock for $2,000,000. The
Page 9
terms of the series B preferred stock are substantially the same as the series A
preferred stock. The investment in ValiGen represented approximately 7% of
ValiGen's outstanding equity at the time of purchase. As of June 30, 2001, the
Company had completely written-off its investment in ValiGen based on the
modified equity method of accounting. Included in loss on securities and
investments are write-downs of the Company's investment in Valigen of $2,775,000
and $4,375,000 for the three and six months ended June 30, 2001, respectively.
In the spring of 2001, the Company also entered into a no-cost Discovery
Agreement with ValiGen to evaluate certain of its technology. The Company's
former President and Chief Executive Officer is a member of ValiGen's Board of
Directors.
(7) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed based on the net
loss for the relevant period, divided by the weighted average number of common
shares outstanding during the period. For purposes of the diluted loss per share
calculation, the exercise or conversion of all potential common shares is not
included since their effect would be anti-dilutive for all periods presented. As
of June 30, 2002, and 2001, the Company had approximately 16,897,000 and
18,238,000, respectively, potential common shares outstanding which represent
new shares, which could be issued under convertible debt, stock options, and
stock warrants.
(8) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
RESTATED RESTATED RESTATED RESTATED
(NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2)
Net loss.................................................... $ (46,499,000) $ (29,531,000) $ (76,552,000) $ (30,754,000)
Other comprehensive income (loss):
Unrealized holding gain arising during the period......... 277,000 17,000 558,000 1,955,000
Reclassification adjustment for realized gain included in
net loss................................................. (435,000) (926,000) (1,236,000) (908,000)
--------------- --------------- -------------- ---------------
Total other comprehensive income (loss)................. (158,000) (909,000) (678,000) 1,047,000
--------------- --------------- -------------- ---------------
Total comprehensive loss.................................... $ (46,657,000) $ (30,440,000) $ (77,230,000) $ (29,707,000)
=============== =============== =============== ===============
(9) COLLABORATIVE AGREEMENTS
(a) MERCK KGaA
Effective April 1990, the Company entered into a development and
commercialization agreement with Merck KGaA with respect to BEC2 and the
recombinant gp75 antigen. The agreement has been amended a number of times, most
recently in December 1997. The agreement grants Merck KGaA a license, with the
right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75
outside North America. The agreement also grants Merck KGaA a license, without
the right to sublicense, to use, sell, or have sold, but not to make BEC2 within
North America in conjunction with the Company. Pursuant to the terms of the
agreement the Company has retained the rights, (1) without the right to
sublicense, to make, have made, use, sell, or have sold BEC2 in North America in
conjunction with Merck KGaA and (2) with the right to sublicense, to make, have
made, use, sell, or have sold gp75 in North America. In return, the Company has
recognized research support payments totaling $4,700,000 and is entitled to no
further research support payments under the agreement. Merck KGaA is also
required to make payments of up to $22,500,000, of which $4,000,000 has been
recognized, through June 30, 2002, based on milestones achieved in the licensed
products' development. Merck KGaA is also responsible for worldwide costs of up
to DM17,000,000 associated with a multi-site, multinational phase III clinical
trial for BEC2 in limited disease small-cell lung carcinoma. This expense level
was reached during the fourth quarter of 2000 and all expenses incurred from
that point forward are being shared 60% by Merck KGaA and 40% by the Company.
Such cost sharing applies to all expenses beyond the DM17,000,000 threshold. The
Company has incurred approximately $33,000 in the three months ended June 30,
2002 and did not incur any expenses in the three months ended June 30, 2001. The
Company has incurred approximately $154,000 and $122,000 in reimbursable
research and development expenses associated with this agreement in the six
months ended June 30, 2002 and 2001, respectively. These amounts have been
recorded as research and development expenses and also as collaborative
agreement revenue in the consolidated statements of operations. Merck KGaA is
also required to pay royalties on the eventual sales of BEC2 outside of North
America, if any. Revenues from sales, if any, of BEC2 in North America will be
distributed in accordance with the terms of a co-promotion agreement to be
negotiated by the parties.
Page 10
In December 1998, the Company entered into a development and license
agreement with Merck KGaA with respect to ERBITUX. In exchange for granting
Merck KGaA exclusive rights to market ERBITUX outside of the United States and
Canada and co-development rights in Japan, the Company received through June 30,
2002, $30,000,000 in up-front fees and early cash-based milestone payments based
on the achievement of defined milestones. In March 2001, the Company satisfied a
condition relating to obtaining certain collateral license agreements associated
with the ERBITUX development and license agreement with Merck KGaA. The
satisfaction of this condition allowed for the recognition of $24,000,000 in
previously received milestone payments and initiated revenue recognition of the
$4,000,000 up-front payment received in connection with this agreement. An
additional $30,000,000 can be received, of which $5,000,000 has been received as
of June 30, 2002, assuming the achievement of further milestones for which Merck
KGaA will receive equity in the Company. The equity underlying these milestone
payments will be priced at varying premiums to the then-market price of the
common stock depending upon the timing of the achievement of the respective
milestones. If issuing shares of common stock to Merck KGaA would result in
Merck KGaA owning greater than 19.9% of our common stock, the milestone shares
will be a non-voting preferred stock, or other non-voting stock convertible into
the Company's common stock. These convertible securities will not have voting
rights. They will be convertible at a price determined in the same manner as the
purchase price for shares of the Company's common stock if shares of common
stock were to be issued. They will not be convertible into common stock if, as a
result of the conversion, Merck KGaA would own greater than 19.9% of the
Company's common stock. This 19.9% limitation is in place through December 2002.
Merck KGaA will pay the Company a royalty on future sales of ERBITUX outside of
the United States and Canada, if any. This agreement may be terminated by Merck
KGaA in various instances, including (1) at its discretion on any date on which
a milestone is achieved (in which case no milestone payment will be made), or
(2) for a one-year period after first commercial sale of ERBITUX in Merck KGaA's
territory, upon Merck KGaA's reasonable determination that the product is
economically unfeasible (in which case Merck KGaA is entitled to a return of 50%
of the cash-based up front fees and milestone payments then paid to date, but
only out of revenues received by ImClone, if any, based upon a royalty rate
applied to the gross profit from ERBITUX sales or a percentage of ERBITUX fees
and royalties received from a sublicensee on account of the sale of ERBITUX in
the United States and Canada). In August 2001, the Company and Merck KGaA
amended this agreement to provide, among other things, that Merck KGaA may
manufacture ERBITUX for supply in its territory and may utilize a third party to
do so upon the Company's reasonable acceptance. The amendment further released
Merck KGaA from its obligations under the agreement relating to providing a
guaranty under a $30,000,000 credit facility relating to the build-out of the
Company's product launch manufacturing facility. In addition, the amendment
provides that the companies have co-exclusive rights to ERBITUX in Japan,
including the right to sublicense, and that Merck KGaA has waived its right of
first offer in the case of a proposed sublicense by the Company of ERBITUX in
the Company's territory. In consideration for the amendment, the Company agreed
to a reduction in royalties payable by Merck KGaA on sales of ERBITUX in Merck
KGaA's territory.
In conjunction with Merck KGaA, the Company has expanded the trial of
ERBITUX plus radiotherapy in squamous cell carcinoma of the head and neck into
Europe, South Africa, Israel, Australia and New Zealand. In order to support
these clinical trials, Merck KGaA has agreed to purchase from the Company
ERBITUX manufactured by the Company and also by Lonza under the development and
manufacturing services agreement and the 2000L Lonza Agreement for use in this
and other trials and further agreed to reimburse the Company for one-half of the
outside contract service costs incurred with respect to this Phase III clinical
trial of ERBITUX for the treatment of head and neck cancer in combination with
radiation. Amounts due from Merck KGaA related to these arrangements totaled
approximately $8,372,000 and $1,503,000 at June 30, 2002 and December 31, 2001,
respectively, and are included in amounts due from corporate partners in the
consolidated balance sheets. The Company recorded collaborative agreement
revenue related to these arrangements in the consolidated statements of
operations totaling approximately $7,200,000 and $461,000 in the three months
ended June 30, 2002, and 2001, respectively and $12,222,000 and $3,590,000 in
the six months ended June 30, 2002, and 2001, respectively. Of these amounts,
$6,544,000 and $10,853,000 in the three and six months ended June 30, 2002,
respectively, and $393,000 and $1,423,000 in the three and six months ended June
30, 2001, respectively, related to reimbursable costs associated with supplying
ERBITUX to Merck KGaA for use in clinical trials. A portion of the ERBITUX sold
to Merck KGaA was produced in prior periods and the related manufacturing costs
have been expensed in prior periods when the related raw materials were
purchased and the associated direct labor and overhead was consumed or, in the
case of contract manufacturing, when such services were performed. These costs
totaled $3,713,000 and $6,214,000 for the three and six months ended June 30,
2002, respectively. Reimbursable research and development expenses were incurred
and totaled approximately $656,000 and $1,369,000 in the three and six months
ended June 30, 2002 and $68,000 and $2,167,000 in the three and six months ended
June 30, 2001. These amounts have been recorded as research and development
expenses and also as collaborative agreement revenue in the consolidated
statements of operations.
(b) BRISTOL-MYERS SQUIBB COMPANY
On September 19, 2001, the Company entered into an acquisition agreement
(the "Acquisition Agreement") with BMS and Bristol-Myers Squibb Biologics
Company, a Delaware corporation ("BMS Biologics"), which is a wholly-owned
subsidiary of BMS, providing for the tender offer by BMS Biologics to purchase
up to 14,392,003 shares of the Company's common stock for $70.00 per share, net
to the seller in cash. In connection with the Acquisition Agreement, the Company
Page 11
entered into a stockholder agreement with BMS and BMS Biologics, dated as of
September 19, 2001 (the "Stockholder Agreement"), pursuant to which all parties
agreed to various arrangements regarding the respective rights and obligations
of each party with respect to, among other things, the ownership of shares of
the Company's common stock by BMS and BMS Biologics. Concurrent with the
execution of the Acquisition Agreement and the Stockholder Agreement, the
Company entered into a development, distribution and supply agreement (the
"Commercial Agreement") with BMS and its wholly-owned subsidiary E.R. Squibb &
Sons, L.L.C. ("E.R. Squibb"), relating to ERBITUX, pursuant to which, among
other things, the Company is co-developing and co-promoting ERBITUX in the
United States and Canada, and co-developing ERBITUX (together with Merck KGaA)
in Japan.
On October 29, 2001, pursuant to the Acquisition Agreement, BMS Biologics
accepted for payment pursuant to the tender offer 14,392,003 shares of the
Company's common stock on a pro rata basis from all tendering shareholders and
those conditionally exercising stock options.
On March 5, 2002, the Company amended the Commercial Agreement with E.R.
Squibb and BMS. The amendment changed certain economics of the Commercial
Agreement and has expanded the clinical and strategic roles of BMS in the
ERBITUX development program. One of the principal economic changes to the
Commercial Agreement is that the Company received $140,000,000 on March 7, 2002
and an additional payment of $60,000,000 is payable on March 5, 2003. Such
payments are in lieu of the $300,000,000 milestone payment the Company would
have received under the original terms of the agreement upon acceptance by the
FDA of the ERBITUX rolling Biologic License Application submitted for marketing
approval to treat irinotecan-refractory colorectal cancer. In addition, the
Company agreed to resume construction of its second commercial manufacturing
facility as soon as reasonably practicable after the execution of the amendment.
In exchange for the rights granted to BMS under the amended Commercial
Agreement, the Company can receive up-front and milestone payments totaling
$900,000,000 in the aggregate, of which $200,000,000 was received on September
19, 2001, $140,000,000 was received on March 7, 2002, $60,000,000 is payable on
March 5, 2003, $250,000,000 is payable upon receipt of marketing approval from
the FDA with respect to an initial indication for ERBITUX and $250,000,000 is
payable upon receipt of marketing approval from the FDA with respect to a second
indication for ERBITUX. All such payments are non-refundable and non-creditable.
Payments received under the amended Commercial Agreement with BMS and E.R.
Squibb are being deferred and recognized as revenue based on the percentage of
actual product research and development costs incurred to date by both BMS and
the Company to the estimated total of such costs to be incurred over the term of
the agreement. Except for the Company's expenses incurred pursuant to a
co-promotion option, E.R. Squibb is also responsible for 100% of the
distribution, sales and marketing costs in the United States and Canada, and as
between the Company and E.R. Squibb, each party will be responsible for 50% of
the distribution, sales, and marketing costs and other related costs and
expenses in Japan. The Commercial Agreement provides that E.R. Squibb shall pay
the Company a 39% distribution fee on net sales of ERBITUX by E.R. Squibb in the
United States and Canada. The Commercial Agreement also provides that the
distribution fees for the sale of ERBITUX in Japan by E.R. Squibb or the Company
shall be equal to 50% of operating profit or loss with respect to such sales for
any calendar month. In the event of an operating profit, E.R. Squibb will pay
the Company the amount of such distribution fee, and in the event of an
operating loss, the Company will credit E.R. Squibb the amount of such
distribution fee. The Commercial Agreement provides that the Company will be
responsible for the manufacture and supply of all requirements of ERBITUX in
bulk form for clinical and commercial use in the United States, Canada and Japan
and that E.R. Squibb will purchase all of its requirements of ERBITUX in bulk
form for commercial use from the Company. The Company will supply ERBITUX for
clinical use at the Company's fully burdened manufacturing cost, and will supply
ERBITUX for commercial use at the Company's fully burdened manufacturing cost
plus a mark-up of 10%. In addition to the up-front and milestone payments, the
distribution fees for the United States, Canada and Japan and the 10% mark-up on
the commercial supply of ERBITUX, E.R. Squibb is also responsible for 100% of
the cost of all clinical studies other than those studies undertaken post-launch
which are not pursuant to an Investigational New Drug Application ("INDA")
(e.g., phase IV studies), the cost of which will be shared equally between E.R.
Squibb and the Company. As between E.R. Squibb and the Company, each will be
responsible for 50% of the cost of all clinical studies in Japan.
Unless earlier terminated pursuant to the termination rights discussed
below, the Commercial Agreement expires with regard to the Product in each
country in the Territory on the later of September 19, 2018 and the date on
which the sale of the Product ceases to be covered by a validly issued or
pending patent in such country. The Commercial Agreement may also be terminated
prior to such expiration as follows:
- by either party, in the event that the other party materially breaches
any of its material obligations under the Commercial Agreement and has
not cured such breach within 60 days after notice;
- by E.R. Squibb, if the joint executive committee (the "JEC") formed by
BMS and the Company determines that there exists a significant concern
regarding a regulatory or patient safety issue that would seriously
impact the long-term viability of all products; or
Page 12
- by either party, in the event that the JEC does not approve additional
clinical studies that are required by the FDA in connection with the
submission of the initial regulatory filing with the FDA within 90 days
of receiving the formal recommendation of the product development
committee concerning such additional clinical studies.
The Company incurred approximately $2,250,000 during the three months ended
March 31, 2002 in advisor fees associated with the amendment to the Commercial
Agreement with BMS and affiliates, which have been expensed and included as a
separate line item in operating expenses in the consolidated statement of
operations.
Amounts due from BMS related to this agreement totaled approximately
$8,157,000 and $6,714,000 at June 30, 2002 and December 31, 2001, respectively,
and are included in amounts due from corporate partners in the consolidated
balance sheets. The Company recorded collaborative agreement revenue related to
this agreement in the consolidated statements of operations totaling
approximately $2,426,000 and $8,521,000 in the three and six months ended June
30, 2002, respectively. Of these amounts, $1,960,000 and $3,810,000 in the three
and six months ended June 30, 2002, respectively, related to reimbursable costs
associated with supplying ERBITUX for use in clinical trials associated with
this agreement. The related manufacturing costs have been expensed in prior
periods when the related raw materials were purchased and the associated
manufacturing direct labor and overhead was consumed or, in the case of contract
manufacturing, when such services were performed. Reimbursable research and
development and marketing expenses were incurred and totaled approximately
$466,000 and $4,711,000 in the three and six months ended June 30, 2002. These
amounts have been recorded as research and development and marketing, general
and administrative expenses and also as collaborative agreement revenue in the
consolidated statements of operations.
In June 2002, the Company and BMS agreed that certain reimbursable ERBITUX
clinical trial costs would in fact be borne by the Company. This resulted in the
issuance of credit memos to BMS during the three months ended June 30, 2002
totaling approximately $2,949,000, which ultimately reduced collaborative
agreement revenue and license fee revenue in the three and six months ended June
30, 2002.
License fees and milestone revenues consist of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
BMS ERBITUX license fee revenue.................................. $ 1,499,000 $ -- $ 8,066,000 $ --
Merck KGaA ERBITUX milestone revenue............................. -- 2,000,000 -- 26,000,000
Merck KGaA BEC2 milestone revenue................................ -- 1,000,000 -- 1,000,000
Merck KGaA ERBITUX and BEC2 license fee revenue.................. 96,000 96,000 192,000 192,000
Other............................................................ -- 40,000 -- 40,000
------------- ------------- ------------- -------------
Total license fees and milestone revenues.................... $ 1,595,000 $ 3,136,000 $ 8,258,000 $ 27,232,000
============= ============= ============= =============
Collaborative agreement revenue (see note 1) from corporate partners
consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
BMS, reimbursable ERBITUX research and development expenses...... $ 1,740,000 $ -- $ 7,692,000 $ --
BMS, reimbursable ERBITUX marketing expenses..................... 686,000 -- 829,000 --
Merck KGaA, reimbursable ERBITUX research and development
expenses....................................................... 656,000 68,000 1,369,000 2,167,000
Merck KGaA, reimbursable ERBITUX product costs for use in
clinical trials................................................ 6,544,000 393,000 10,853,000 1,423,000
Merck KGaA, reimbursable administrative expenses................. 273,000 183,000 273,000 183,000
Merck KGaA, reimbursable BEC2 research and development expenses.. 33,000 -- 154,000 122,000
------------- ------------- ------------- -------------
Total collaborative agreement revenue......................... $ 9,932,000 $ 644,000 $ 21,170,000 $ 3,895,000
============= ============= ============= =============
Page 13
Amounts due from corporate partners consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
---------------- -------------
Due from BMS, ERBITUX research and development and marketing expenses...................... $ 8,157,000 $ 6,714,000
Due from Merck KGaA, ERBITUX research and development and administrative expenses.......... 1,604,000 666,000
Due from Merck KGaA, reimbursement of ERBITUX manufacturing costs for use in clinical
trials................................................................................... 6,768,000 837,000
Due from Merck KGaA, BEC2 research and development expenses................................ 33,000 13,000
---------------- -------------
Total amounts due from corporate partners............................................... $ 16,562,000 $ 8,230,000
================ =============
Deferred revenue consists of the following:
JUNE 30, DECEMBER 31,
2002 2001
---------------- -------------
BMS, ERBITUX Commercial Agreement.......................................................... $ 329,382,000 $ 197,447,000
Merck KGaA, ERBITUX development and license agreement...................................... 3,667,000 3,778,000
Merck KGaA, BEC2 development and commercialization agreement............................... 2,190,000 2,271,000
---------------- -------------
335,239,000 203,496,000
Less: current portion...................................................................... (36,627,000) (20,683,000)
---------------- -------------
$ 298,612,000 $ 182,813,000
================ =============
(10) OTHER CONTINGENCIES
The Company and certain of its officers and directors are named as
defendants in a number of complaints filed beginning in January 2002 on behalf
of purported classes of its stockholders asserting claims under Section 10(b) of
the Securities and Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange Act. By order dated
June 4, 2002 these actions were consolidated under the caption of the
first-filed of these actions, Irvine v. Imclone Systems Incorporated et at., No.
02 Civ. 0109(RO). The original complaints in these actions allege generally that
various public statements made by the Company or its senior officers during 2001
and early 2002 regarding the prospects for FDA approval of ERBITUX were false or
misleading when made, that various Company insiders were aware of material,
non-public information regarding the actual prospects for ERBITUX at the time
that those insiders engaged in transactions in the Company's common stock and
that members of the purported shareholder class suffered damages when the market
price of the Company's common stock declined following disclosure of the
information that allegedly had not been previously disclosed. On December 28,
2001, the Company disclosed that it had received a "refusal to file" letter from
the FDA relating to its biologics license application for ERBITUX. Thereafter,
various news articles purported to describe the contents of the FDA's "refusal
to file" letter. During this period, the market price of the Company's common
stock declined. The complaints in the various actions seek to proceed on behalf
of a class of the Company's present and former stockholders, other than
defendants or persons affiliated with the defendants, seek monetary damages in
an unspecified amount and seek recovery of plaintiffs' costs and attorneys'
fees. A consolidated amended complaint is expected to be filed shortly.
Beginning on January 13, 2002 and continuing thereafter, eight separate
purported stockholders derivative actions have been filed against the members of
its board of directors and the Company, as nominal defendant, making allegations
similar to the allegations in the federal securities class action complaints.
All of these actions assert claims, purportedly on the Company's behalf, for
breach of fiduciary duty by certain members of the board of directors based on
the allegation that certain directors engaged in transactions in the Company's
common stock while in possession of material, non-public information concerning
the regulatory and marketing prospects for ERBITUX. Another complaint,
purportedly asserting direct claims on behalf of a class of the Company's
shareholders but in fact asserting derivative claims that are similar to those
asserted in these eight cases, was filed in the U.S. District Court for the
Southern District of New York on February 13, 2002, styled Dunlap v. Waksal, et
al., No. 02 Civ. 1154 (RO). The Dunlap complaint asserts claims against the
board of directors for breach of fiduciary duty purportedly on behalf of all
persons who purchased shares of the Company's common stock prior to June 28,
2001 and then held those shares through December 6, 2001. It alleges that the
members of the purported class suffered damages as a result of holding their
shares based on allegedly false information about the financial prospects of the
Company that was disseminated during this period.
All of these actions are in their earliest stages and a reserve has not been
established in the accompanying consolidated financial statements because the
Company does not believe at this time that a loss is probable or estimable. The
Company intends to contest vigorously the claims asserted in these actions.
The Company has received subpoenas and requests for information in
connection with investigations by the Securities and Exchange Commission, the
Subcommittee on Oversight and Investigations of the U.S. House of
Representatives Committee on Energy and Commerce and the U.S. Department of
Justice relating to the circumstances surrounding the
Page 14
disclosure of the FDA letter dated December 28, 2001 and trading in the
Company's securities by certain Company insiders in 2001. The Company is
cooperating with all of these inquiries and intends to continue to do so.
On June 19, 2002, the Company received a written "Wells Notice" from the
staff of the Securities and Exchange Commission, indicating that the staff is
considering recommending the Commission bring an action against the Company
relating to the Company's disclosure immediately following its receipt of a
Refusal-to-File letter from the FDA on December 28, 2001 for its biologics
license application for ERBITUX. The Company filed a Wells submission on July
12, 2002 in response to the staff's Wells Notice. The Company has also received
permission from the Commission to file a supplemental Wells submission, and the
Company anticipates that it will make this submission in September of this year.
The Company has incurred legal fees associated with these matters totaling
approximately $5,724,000 during the six months ended June 30, 2002. In addition,
the Company has estimated and recorded a receivable totaling $2,350,000 for a
portion of the above mentioned legal fees that the Company believes are
recoverable from its insurance carriers. This receivable is included in Other
current assets in the consolidated balance sheet at June 30, 2002.
(11) CERTAIN RELATED PARTY TRANSACTIONS
In September 2001 and February 2002, the Company entered into employment
agreements with six senior executive officers, including the then President and
Chief Executive Officer and the then Chief Operating Officer. The then President
and Chief Executive Officer resigned in May 2002 and the then Chief Operating
Officer was appointed to President and Chief Executive Officer. The September
agreements each have three-year terms and the February agreement has a one-year
term. The February 2002 agreement was amended in April 2002. The term of
employment for the present CEO will be automatically extended for one additional
day each day during the term of employment unless either the Company or the
Executive otherwise gives notice. The employment agreements provide for stated
base salaries, and minimum bonuses and benefits aggregating $3,765,000 annually.
Certain transactions engaged in by the Company's former President and Chief
Executive Officer, Dr. Samuel Waksal, in securities of the Company were deemed
to have resulted in "short-swing profits" under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"). In accordance with Section 16(b) of
the Exchange Act, Dr. Waksal has paid the Company an aggregate amount of
approximately $486,000, in March 2002, and an additional amount of approximately
$79,000 in July 2002, as disgorgement of "short-swing profits" he was deemed to
have realized. The amount received in March 2002 was recorded as an increase to
additional paid-in capital.
(12) STOCKHOLDER RIGHTS PLAN
On February 15, 2002, the Company's Board of Directors approved a
Stockholder Rights Plan and declared a dividend of one right for each share of
its common stock outstanding at the close of business on February 19, 2002. In
connection with the Board of Directors' approval of the Stockholders Rights
Plan, Series B Participating Cumulative Preferred Stock was created. Under
certain conditions, each right entitles the holder to purchase from the Company
one-hundredth of a share of series B Participating Cumulative Preferred Stock at
an initial purchase price of $175 per share. The Stockholder Rights Plan is
designed to enhance the Board's ability to protect stockholders against, among
other things, unsolicited attempts to acquire control of the Company that do not
offer an adequate price to all of the Company's stockholders or are otherwise
not in the best interests of the Company and its stockholders.
Subject to certain exceptions, rights become exercisable (i) on the tenth
day after public announcement that any person, entity, or group of persons or
entities has acquired ownership of 15% or more of the Company's outstanding
common stock, or (ii) 10 business days following the commencement of a tender
offer or exchange offer by any person that would, if consummated, result in such
person acquiring ownership of 15% or more of the Company's outstanding common
stock, (collectively an "Acquiring Person").
In such event, each right holder will have the right to receive the number
of shares of common stock having a then current market value equal to two times
the aggregate exercise price of such rights. If the Company were to enter into
certain business combination or disposition transactions with an Acquiring
Person, each right holder will have the right to receive shares of common stock
of the acquiring company having a value equal to two times the aggregate
exercise price of the rights.
The Company may redeem these rights in whole at a price of $.001 per right.
The rights expire on February 15, 2012.
Page 15
(13) SEPARATION AGREEMENT
On May 22, 2002, the Company accepted the resignation of its President and
Chief Executive Officer, Dr. Samuel D. Waksal. In connection with the
resignation, on May 24, 2002 the Company and Dr. Waksal executed a separation
agreement whereby Dr. Waksal received a lump sum payment totaling $7,000,000 and
is entitled to receive for defined periods of time the continuation of certain
benefits including health care and life insurance coverage with an estimated
cost of $283,000. The related expense of $7,283,000 is included in Marketing,
general and administrative expenses in the consolidated statement of operations
for the three and six months ended June 30, 2002. In addition, 1,250,000 stock
option awards granted to Dr. Waksal on September 19, 2001 which were exercisable
at a per share exercise price of $50.01 and constituted all outstanding stock
option awards held by Dr. Waksal, were deemed amended such that the unvested
portion vested immediately as of the date of termination. The amended stock
option awards can be exercised at any time until the end of the term of such
awards. No compensation expense was recorded because the fair market value of
the Company's common stock was below the $50.01 exercise price on the date the
option award was amended. On August 7, 2002, a federal grand jury indicted Dr.
Samuel D. Waksal. The Company has recently learned that Dr. Waksal, in
contravention of Company policy, directed the destruction of certain documents
that were, or could be perceived to be, material to the pending government
investigations. Accordingly, on August 14, 2002, the Company filed an action
against Dr. Waksal in New York State Supreme Court seeking repayment of amounts
paid to him by the Company pursuant to the separation agreement, cancellation or
recovery of other benefits provided under that agreement (including cancellation
of all stock options that vested as a result of the agreement), disgorgement of
amounts previously advanced by the Company on behalf of Dr. Waksal for his legal
fees and expenses, and repayment of certain amounts paid under Dr. Waksal's
previous employment agreement. The action is in its earliest stages.
(14) 2002 STOCK OPTION PLAN
In June 2002, the shareholders approved and the Company adopted the 2002
Stock Option Plan. The plan provides for the granting of both incentive stock
options and non-qualified stock options to purchase 3,300,000 shares of the
Company's common stock to employees, directors, consultants and advisors of the
Company. Options granted under the plan generally vest over one to five year
periods and unless earlier terminated, expire ten years from the date of grant.
Incentive stock options granted under the 2002 stock option plan may not exceed
825,000 shares of common stock, may not be granted at a price less than the fair
market value of the stock at the date of grant and may not be granted to
non-employees.
(15) CONVERTIBLE SUBORDINATED NOTES
In February 2000, the Company completed a private placement of $240,000,000
in 5 1/2% Convertible Subordinated Notes due March 1, 2005, which notes are
outstanding at June 30, 2002. On May 2, 2003, the Company informed the trustee
for the Convertible Subordinated Notes of its withholding tax issues and the
delay in filing its Annual Report on Form 10-K for the year ended December 31,
2002 and of the Company's intention to satisfy its tax liabilities upon
completion of its discussions with the relevant taxing authorities and to file
its Form 10-K as soon as possible. The indenture for the Convertible
Subordinated Notes includes covenants requiring the Company to timely pay taxes
and timely make Exchange Act filings. Under the indenture, there can be no
acceleration of payment of the notes until the Company receives a notice of
default from the trustee or a specified percentage of the note holders and a
60-day grace period lapses. The Company has not received any such notice. If, at
some point in the future, the Company were to receive such a notice and if it
was determined at that time that the Company was not in compliance with
applicable covenants, the Company intends to and believes it would be able to
cure such non-compliance within the 60-day grace period.
Page 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note 2 to our Consolidated Financial Statements
included herein and below under the "Liquidity and Capital Resources" section,
we have restated our Consolidated Financial Statements for the three and six
months ended June 30, 2002 and 2001. All amounts included in this discussion and
analysis reflect the effects of the restatement. The following discussion and
analysis by our management is provided to identify certain significant factors
that affected our financial position and operating results during the periods
included in the accompanying financial statements.
CRITICAL ACCOUNTING POLICIES
During January 2002, the Securities and Exchange Commission ("SEC")
published a Commission Statement in the form of Financial Reporting Release No.
61, which requested that all registrants discuss their most "critical accounting
policies" in management's discussion and analysis of financial condition and
results of operations. The SEC has defined critical accounting policies as those
that are both important to the portrayal of a company's financial condition and
results, and that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. While our significant accounting policies
are summarized in Note 2 to our consolidated financial statements included in
Form 10-K for the fiscal year ended December 31, 2001, we believe the following
accounting policies to be critical:
Revenue Recognition - We adopted Staff Accounting Bulletin No. 101
("SAB 101") in the fourth quarter of 2000 with an effective date of January 1,
2000, implementing a change in accounting policy with respect to revenue
recognition. Beginning January 1, 2000, non-refundable fees received upon
entering into collaborative agreements in which the Company has continuing
involvement are recorded as deferred revenue and recognized over the estimated
service period. See Note 7.
Payments received under the development, promotion, distribution and
supply agreement (the "Commercial Agreement") dated September 19, 2001 and as
amended on March 5, 2002 with Bristol-Myers Squibb Company ("BMS") and E.R.
Squibb & Sons, L.L.C., a Delaware limited liability company and a wholly-owned
subsidiary of BMS ("E.R. Squibb"), relating to ERBITUX, are being deferred and
recognized as revenue based upon the actual product research and development
costs incurred to date by BMS, E.R. Squibb and ImClone Systems as a percentage
of the estimated total of such costs to be incurred over the term of the
agreement. Of the $340,000,000 in upfront payments we received from BMS through
June 30, 2002, approximately $8,066,000 was recognized as revenue during the six
months ended June 30, 2002 and $10,618,000 from the commencement of the
agreement through June 30, 2002.
The methodology used to recognize revenue deferred involves a number of
estimates and judgments, such as the estimate of total product research and
development costs to be incurred under the Commercial Agreement. Changes in
these estimates and judgments can have a significant effect on the size and
timing of revenue recognition.
Non-refundable milestone payments, which represent the achievement of a
significant step in the research and development process, pursuant to
collaborative agreements other than the Commercial Agreement with BMS, are
recognized as revenue upon the achievement of the specified milestone.
Production Costs - The costs associated with the manufacture of ERBITUX
are included in research and development expenses when incurred and will
continue to be so classified until such time as ERBITUX may be approved for sale
or until we obtain obligations from our corporate partners for supply of such
product. In the event of such approval or obligations from our corporate
partners, the subsequent costs associated with manufacturing ERBITUX for
commercial sale will be included in inventory and expensed as cost of goods sold
when sold. If ERBITUX is approved by the United States Food and Drug
Administration ("FDA"), any subsequent sale of this inventory, previously
expensed, will result in revenue from product sales with no corresponding cost
of goods sold.
Withholding Taxes - The estimated amounts recorded in the accompanying
Consolidated Financial Statements do not include penalties and interest that may
be imposed with respect to the withholding tax issues described herein and other
related contingencies, including the period covered by the statute of
limitations and our determination of certain exercise dates because we do not
believe that losses from such contingencies are probable. With respect to the
statute of limitations and our determination of certain exercise dates, while we
do not believe a loss is probable, there is a potential additional liability
with respect to these issues that may be asserted by a taxing authority.
However, if our assessment of these withholding tax issues and other related
contingencies is incorrect, the liability that could be imposed by taxing
authorities may be substantial. The potential interest on the withholding tax
liabilities recorded on our Consolidated Balance Sheet could be up to a maximum
amount of $5,900,000 at June 30, 2002. Potential additional withholding tax
liability on other related contingencies amount to approximately $11,000,000,
exclusive of any interest or penalties, and excluding the amount potentially
attributable to Mr. Goldhammer noted herein.
Litigation - We are currently involved in certain legal proceedings as
discussed in "Contingencies" Note 10 to the financial statements. In accordance
with Statement of Financial Accounting Standards No. 5, no legal reserve has
been established in our financial statements for these matters because we do not
believe at this time that a loss is probable or estimable. However, if in a
future period, we deem it probable that an unfavorable ruling in any such legal
proceeding will occur and such amount is estimable, there exists the possibility
of a material adverse impact on the operating results of that period.
Long-Lived Assets - We review long-lived assets for impairment when
events or changes in business conditions indicate that their full carrying value
may not be recovered. Assets are considered to be impaired and written down to
fair value if expected associated undiscounted cash flows are less than carrying
amounts. Fair value is generally determined as the present value of the expected
associated cash flows. We recently built a product launch manufacturing facility
and are building a
Page 17
second commercial manufacturing facility and a logistics and warehousing
facility, which are summarized in Note 4 to the financial statements. The
product launch manufacturing facility is dedicated to the clinical and
commercial production of ERBITUX and the second commercial manufacturing
facility will be a multi-use production facility. ERBITUX is currently being
produced for clinical trials and potential commercialization. The logistics and
warehousing facility will be the primary storage location for ERBITUX. We
believe that ERBITUX will ultimately be approved for commercialization. As such,
we believe that the full carrying value of both the product launch manufacturing
facility and the second commercial manufacturing facility and the logistics and
warehouse facility will be recovered. Changes in business conditions in the
future could change our judgments about the carrying value of these facilities,
which could result in the recognition of material impairment losses.
Manufacturing Contracts - As summarized under "Manufacturing Contract
Services," Note 5 to the financial statements, we have entered into certain
development and manufacturing services agreements with Lonza Biologics plc
("Lonza") for the clinical and commercial production of ERBITUX. We have
commitments from Lonza to manufacture ERBITUX at the 5,000 liter scale through
December 2003. On June 30, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement with Lonza were
$38,160,000 in 2002 and $24,050,000 in 2003. If ERBITUX were not to receive
regulatory approval when anticipated, it is possible that a liability would need
to be recognized for any remaining commitments to Lonza.
Valuation of Stock Options - We apply APB Opinion No. 25 and related
interpretations in accounting for our stock options and warrants. Accordingly,
compensation expense is recorded on the date of grant of an option to an
employee or member of the Board of Directors only if the fair market value of
the underlying stock at the time of grant exceeds the exercise price. In
addition, we have granted options to certain Scientific Advisory Board members
and outside consultants, which are required to be measured at fair value and
recognized as compensation expense in our consolidated statement of operations.
Estimating the fair value of stock options and warrants involves a number of
judgments and variables that are subject to significant change. A change in the
fair value estimate could have a significant effect on the amount of
compensation expense recognized.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues for the six months ended June 30, 2002 and 2001 were
$30,116,000 and $31,890,000, respectively, a decrease of $1,774,000, or 6% in
2002. Revenues for the six months ended June 30, 2002 primarily included
$8,066,000 in license fee revenue and $8,521,000 in collaborative agreement
revenue from our amended ERBITUX Commercial Agreement with BMS and its
wholly-owned subsidiary, E.R. Squibb. The Collaborative Agreement revenue
represents certain research and development and marketing expenses that have
been incurred by us and are reimbursable by BMS as provided for in the amended
Commercial Agreement. License fee revenue from payments under this agreement (of
which $140,000,000 was received in 2002 and $200,000,000 was received in 2001)
are being recognized as revenue over the product research and development life
of ERBITUX. An additional $60,000,000 is payable on March 5, 2003, $250,000,000
is payable upon receipt of marketing approval from the FDA with respect to an
initial indication for ERBITUX and $250,000,000 is payable upon receipt of
marketing approval from the FDA with respect to a second indication for ERBITUX.
All such payments are non-refundable and non-creditable. We also recognized
$12,495,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA. In addition, we recognized $111,000 of the
$4,000,000 up-front payment received upon entering into the ERBITUX development
and license agreement with Merck KGaA. This revenue is being recognized ratably
over the anticipated life of the agreement. Revenues for the six months ended
June 30, 2002 also included $688,000 in royalty revenue from our strategic
corporate alliance with Abbott Laboratories ("Abbott") in diagnostics and
$81,000 in license fee revenue and $154,000 in collaborative agreement revenue
from our strategic corporate alliance with Merck KGaA for our principal cancer
vaccine product candidate, BEC2. Revenues for the six months ended June 30, 2001
primarily included $26,000,000 in milestone revenue and $3,773,000 in
collaborative agreement revenue from our ERBITUX development and license
agreement with Merck KGaA. These milestone payments were received in prior
periods and were originally recorded as fees potentially refundable to corporate
partner because they were refundable in the event a condition relating to
obtaining certain collateral license agreements was not satisfied. This
condition was satisfied in March 2001. In addition, we recognized $111,000 of
the $4,000,000 up-front payment received upon entering into this agreement. This
revenue is being recognized ratably over the anticipated life of the agreement.
Revenues for the six months ended June 30, 2001 also included $763,000 in
royalty revenue from our strategic corporate alliance with Abbott in diagnostics
and $1,000,000 in milestone revenues and $81,000 in license fee revenues and
$122,000 of collaborative agreement revenue from our strategic corporate
alliance with Merck KGaA for BEC2.
Page 18
OPERATING EXPENSES
Total operating expenses for the six months ended June 30, 2002 and 2001
were $106,231,000 and $59,487,000, respectively, an increase of $46,744,000, or
79% in 2002. Operating expenses for the six months ended June 30, 2002 included
a $2,250,000 advisor fee associated with completing the amended Commercial
Agreement.
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT
Research and development expenses for the six months ended June 30, 2002 and
2001 were $75,945,000 and $49,486,000, respectively, an increase of $26,459,000
or 53% in 2002. Research and development expenses for the six months ended June
30, 2002 and 2001, as a percentage of total operating expenses, excluding the
advisor fee associated with the amended Commercial Agreement, the write-down of
withholding tax assets and the Industrial Development Revenue Bonds tax expense,
in the six months ended June 30, 2002, were 76% and 83%, respectively. Research
and development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses, costs
to manufacture our product candidates, particularly ERBITUX, prior to any
approval that we may obtain of a product candidate for commercial sale or
obligations of our corporate partners to acquire product from us, quality
assurance and quality control costs, and costs to conduct our clinical trials
and associated regulatory activities. Research and development expenses include
costs that are reimbursable by our corporate partners. The increase in research
and development expenses for the six months ended June 30, 2002 was primarily
attributable to (1) the costs associated with full scale production at our
product launch manufacturing facility, (2) costs related to the manufacturing
services agreements with Lonza, (3) expenditures in the functional areas of
product development and pilot plant manufacturing associated with ERBITUX and
our antibody-based angiogenesis inhibitor product candidate for the treatment of
cancer, IMC-2C6 and (4) increased expenditures associated with discovery
research. We expect research and development costs to increase in future periods
as we continue to manufacture ERBITUX prior to any approval of the product that
we may obtain for commercial use or until we receive committed purchase
obligations of our corporate partners. In the event of such approval or
committed purchase obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for supply to E.R. Squibb for commercial
use will be included in inventory and expensed as cost of goods sold when sold.
We expect research and development costs associated with discovery research and
product development also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. Marketing, general and administrative expenses include amounts
reimbursable from our corporate partners. Marketing, general and administrative
expenses for the six months ended June 30, 2002 and 2001 were $24,602,000 and
$9,951,000, respectively, an increase of $14,651,000, or 147% in 2002. The
increase in marketing, general and administrative expenses primarily reflected
(1) the separation compensation and other post-employment benefits associated
with the resignation of the Company's former President and Chief Executive
Officer (2) legal expenses associated with the pending class action lawsuits,
shareholder derivative lawsuits and investigations by the SEC, the Subcommittee
on Oversight and Investigation of the U.S. House of Representatives Committee on
Energy and Commerce and the U.S. Department of Justice, (3) costs associated
with our marketing efforts, (4) additional administrative staffing required to
support our commercialization efforts for ERBITUX and (5) expenses associated
with general corporate activities. Other than the legal expenses component
discussed in (2) above and related costs, whose level in the future is uncertain
because it depends upon the manner in which these investigations and proceedings
progress, we expect marketing, general and administrative expenses to increase
in future periods to support our continued commercialization efforts for
ERBITUX.
OPERATING EXPENSE: WRITE-DOWN OF WITHHOLDING TAX ASSETS
The write-down of withholding tax assets for the six months ended June 30,
2002 was $3,384,000 to reflect the write-down of the asset attributable to our
former General Counsel, John B. Landes. Based on the limited information
available to us, due to the decrease in our stock price during 2002 and
corresponding decrease in the value of Mr. Landes' ownership of the Company's
securities, we determined that recoverability of the asset became doubtful and
therefore the asset write-down was recorded during the second quarter of 2002.
OPERATING EXPENSES: INDUSTRIAL DEVELOPMENT REVENUE BONDS TAX EXPENSE
Industrial Development Revenue Bonds tax expense for each of the six months
ended June 30, 2002 and 2001 was $50,000. In April 2003, we discovered that we
are in breach of tax covenants in our 1990 IDA Bonds. The Consolidated
Statements of Operations for the six months ended June 30, 2002 and 2001 reflect
additional withholding tax expense of $50,000 relating to the 1990 IDA Bonds.
Page 19
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Interest income was $5,168,000 for the six months ended June 30, 2002
compared with $7,827,000 for the six months ended June 30, 2001, a decrease of
$2,659,000, or 34% in 2002. The decrease was primarily attributable to a
decrease in interest rates associated with our portfolio of debt securities.
Interest expense was $6,841,000 and $6,516,000 for the six months ended
June 30, 2002 and 2001, respectively, an increase of $325,000 or 5% in 2002. We
have increased interest expense by $2,000 and $6,000 for the six months ended
June 30, 2002 and 2001, respectively, versus the amounts previously reported.
These increases represent additional accrued interest on the 1990 IDA Bonds
discussed above. Interest expense for the six months ended June 30, 2002 and
2001 was offset by the capitalization of interest costs of $780,000 and
$1,120,000, respectively, during the construction period of our product launch
manufacturing facility and a second commercial manufacturing facility for which
design, engineering, and pre-construction costs have been incurred. Interest
expense for both periods included (1) interest on the 5 -1/2% convertible
subordinated notes due March 1, 2005 (the "Convertible Subordinated Notes")
issued in February 2000, (2) interest on the outstanding 1990 IDA Bonds and (3)
interest recorded on various capital lease obligations under a 1996 financing
agreement and a 1998 financing agreement with Finova Technology Finance, Inc.
("Finova"). We recorded gains on securities and investments of $1,236,000 and
losses of $4,467,000 for the six months ended June 30, 2002 and 2001,
respectively. The losses on securities and investments for the six months ended
June 30, 2001 included $4,375,000 in write-downs of our investment in ValiGen
N.V. and a $1,000,000 write-off of our convertible promissory note from A.C.T.
Group, Inc.
NET LOSSES
We had a net loss of $76,552,000 or $1.04 per share for the six months
ended June 30, 2002, compared with a net loss of $30,754,000 or $0.46 per share
for the six months ended June 30, 2001. The increase in the net loss was due to
the factors noted above.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues for the three months ended June 30, 2002 and 2001 were
$11,565,000 and $3,895,000, respectively, an increase of $7,670,000, or 197% in
2002. Revenues for the three months ended June 30, 2002 primarily included
$1,499,000 in license fee revenue and $2,426,000 in collaborative agreement
revenue from our amended Commercial Agreement with BMS and its wholly-owned
subsidiary, E.R. Squibb. The Collaborative Agreement revenue represents certain
research and development and marketing expenses that have been incurred by us
and are reimbursable by BMS as provided for in the amended Commercial Agreement.
License fee revenue from payments under this agreement (of which $140,000,000
was received in 2002 and $200,000,000 was received in 2001) are being recognized
over the product research and development life of ERBITUX. We also recognized
$7,473,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA. In addition, we recognized $55,000 of the
$4,000,000 up-front payment received upon entering into the ERBITUX development
and license agreement with Merck KGaA. This revenue is being recognized ratably
over the anticipated life of the agreement. Revenues for the three months ended
June 30, 2002 also included $38,000 in royalty revenue from our strategic
corporate alliance with Abbott in diagnostics and $41,000 in license fee revenue
and $33,000 in collaborative agreement revenue from our strategic corporate
alliance with Merck KGaA for BEC2. Revenues for the three months ended June 30,
2001 primarily included $2,000,000 in milestone revenue and $644,000 in
collaborative agreement revenue from our ERBITUX development and license
agreement with Merck KGaA. These milestone payments were received in prior
periods and were originally recorded as fees potentially refundable to corporate
partner because they were refundable in the event a condition relating to
obtaining certain collateral license agreements was not satisfied. This
condition was satisfied in March 2001. In addition, we recognized $55,000 of the
$4,000,000 up-front payment received upon entering into this agreement. This
revenue is being recognized ratably over the anticipated life of the agreement.
Revenues for the three months ended June 30, 2001 also included $115,000 in
royalty revenue from our strategic corporate alliance with Abbott in diagnostics
and $1,000,000 in milestone revenues and $41,000 in license fee revenues from
our strategic corporate alliance with Merck KGaA for BEC2.
OPERATING EXPENSES
Total operating expenses for the three months ended June 30, 2002 and
2001 were $58,055,000 and $30,638,000, respectively, an increase of $27,417,000,
or 89% in 2002.
Page 20
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30, 2002
and 2001 were $38,167,000 and $24,390,000, respectively, an increase of
$13,777,000 or 56% in 2002. Such amounts for the three months ended June 30,
2002 and 2001 represented 70% and 80%, respectively, of total operating
expenses, excluding the write-down of withholding tax assets and the Industrial
Development Revenue Bonds tax expense. Research and development expenses include
costs associated with our in-house and collaborative research programs, product
and process development expenses, costs to manufacture our product candidates,
particularly ERBITUX, prior to any approval that we may obtain of a product
candidate for commercial sale or obligations of our corporate partners to
acquire product from us, quality assurance and quality control costs, and costs
to conduct our clinical trials and associated regulatory activities. Research
and development expenses include costs that are reimbursable by our corporate
partners. The increase in research and development expenses for the three months
ended June 30, 2002 was primarily attributable to (1) the costs associated with
full scale production at our product launch manufacturing facility, (2) costs
related to the manufacturing services agreements with Lonza, (3) expenditures in
the functional areas of product development and pilot plant manufacturing
associated with ERBITUX and IMC-2C6 and (4) increased expenditures associated
with discovery research. We expect research and development costs to increase in
future periods as we continue to manufacture ERBITUX prior to any approval of
the product that we may obtain for commercial use or until we receive committed
purchase obligations of our corporate partners. In the event of such approval or
committed purchase obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for supply to E.R. Squibb for commercial
use will be included in inventory and expensed as cost of goods sold when sold.
We expect research and development costs associated with discovery research and
product development also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. Marketing, general and administrative expenses include amounts
reimbursable from our corporate partner. Marketing, general and administrative
expenses for the three months ended June 30, 2002 and 2001 were $16,479,000 and
$6,223,000, respectively, an increase of $10,256,000, or 165% in 2002. The
increase in marketing, general and administrative expenses primarily reflected
(1) the separation compensation and other post-employment benefits associated
with the resignation of the Company's former President and Chief Executive
Officer (2) legal expenses associated with the pending class action lawsuits,
shareholder derivative lawsuits and investigations by the SEC, the Subcommittee
on Oversight and Investigation of the U.S. House of Representatives Committee on
Energy and Commerce and the U.S. Department of Justice, (3) costs associated
with our marketing efforts, (4) additional administrative staffing required to
support our commercialization efforts for ERBITUX and (5) expenses associated
with general corporate activities. Other than the legal expenses component
discussed in (2) above and related costs, whose level in the future is uncertain
because it depends upon the in which these investigations and proceedings
progress, we expect marketing, general and administrative expenses to increase
in future periods to support our continued commercialization efforts for
ERBITUX.
OPERATING EXPENSE: WRITE-DOWN OF WITHHOLDING TAX ASSETS
The write-down of withholding tax assets for the three months ended June 30,
2002 was $3,384,000 to reflect the write-down of the asset attributable to our
former General Counsel, John B. Landes. Based on the limited information
available to us, due to the decrease in our stock price during 2002 and
corresponding decrease in the value of Mr. Landes' ownership of the Company's
securities, we determined that recoverability of the asset became doubtful and
therefore the asset write-down was recorded during the second quarter of 2002.
OPERATING EXPENSES: INDUSTRIAL DEVELOPMENT REVENUE BONDS TAX EXPENSE
Industrial Development Revenue Bonds tax expense for each of the three
months ended June 30, 2002 and 2001 was $25,000. In April 2003, we discovered
that we are in breach of tax covenants in our 1990 IDA Bonds. The Consolidated
Statements of Operations for the three months ended June 30, 2002 and 2001
reflect additional withholding tax expense of $25,000 relating to the 1990 IDA
Bonds.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Interest income was $2,904,000 for the three months ended June 30, 2002
compared with $3,262,000 for the three months ended June 30, 2001, a decrease of
$358,000, or 11% in 2002. The decrease was primarily attributable to a decrease
in interest rates associated with our portfolio of debt securities.
Page 21
Interest expense was $3,348,000 and $3,200,000 for the three months
ended June 30, 2002 and 2001, respectively, an increase of $148,000 or 5% in
2002. We have increased interest expense by $1,000 and $3,000 for the three
months ended June 30, 2002 and 2001, respectively, versus the amounts previously
reported. These increases represent additional accrued interest on the 1990 IDA
Bonds discussed above. Interest expense for the three months ended June 30, 2002
and 2001 was offset by the capitalization of interest costs of $481,000 and
$626,000, respectively, during the construction period of our product launch
manufacturing facility and a second commercial manufacturing facility for which
design, engineering, and pre-construction costs have been incurred. Interest
expense for both periods included (1) interest on the Convertible Subordinated
Notes issued in February 2000, (2) interest on the outstanding 1990 IDA Bonds
and (3) interest recorded on various capital lease obligations under a 1996
financing agreement and a 1998 financing agreement with Finova. We recorded
gains on securities and investments of $435,000 and losses of $2,850,000 for the
three months ended June 30, 2002 and 2001, respectively. The losses on
securities and investments for the three months ended June 30, 2001 included a
$2,775,000 write-down of our investment in ValiGen N.V and a $1,000,000
write-off of our convertible promissory note from A.C.T. Group, Inc.
NET LOSSES
We had a net loss of $46,499,000 or $0.63 per share for the three
months ended June 30, 2002, compared with a net loss of $29,531,000 or $0.44 per
share for the three months ended June 30, 2001. The increase in the net loss was
due to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, our principal sources of liquidity consisted of cash
and cash equivalents and securities available for sale of approximately
$352,000,000. From our inception on April 26, 1984 through June 30, 2002, we
have financed our operations primarily through the following means:
- Public and private sales of equity securities and convertible
notes in financing transactions have raised approximately
$492,652,000 in net proceeds
- We have earned approximately $109,531,000 from license fees,
contract research and development fees, reimbursements from
our corporate partners and royalties from collaborative
partners. Additionally, we have approximately $335,239,000 in
deferred revenue related to up-front payments received from
our amended Commercial Agreement for ERBITUX with BMS, our
ERBITUX development and license agreement with Merck KGaA and
our BEC2 development and commercialization agreement with
Merck KGaA. These amounts are being recognized as revenue over
the expected lives of the respective agreements
- We have earned approximately $52,282,000 in interest income
- The sale of the IDA Bonds in each of 1985, 1986 and 1990
raised an aggregate of $6,300,000, 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 outstanding
We may, from time to time, consider a number of strategic alternatives
designed to increase shareholder value, which could include joint ventures,
acquisitions and other forms of alliances, as well as the sale of all or part of
the Company.
Until September 19, 2006, or earlier upon the occurrence of certain
specified events, we may not take any action that constitutes a prohibited
action under our stockholder agreement with BMS and Bristol-Myers Squibb
Biologics Company, a Delaware corporation ("BMS Biologics"), which is a
wholly-owned subsidiary of BMS, without the consent of the BMS directors. Such
prohibited actions include (i) issuing additional shares or securities
convertible into shares in excess of 21,473,002 shares of our common stock in
the aggregate, subject to certain exceptions; (ii) incurring additional
indebtedness if the total of the principal amount of such indebtedness incurred
since September 19, 2001 and then-outstanding, and the net proceeds from the
issuance of any redeemable preferred stock then-outstanding, would exceed the
amount of indebtedness outstanding as of September 19, 2001 by more than $500
million; (iii) acquiring any business if the aggregate consideration for such
acquisition, when taken together with the aggregate consideration for all other
acquisitions consummated during the previous twelve months, is in excess of 25%
of the aggregate value of the Company at the time we enter into the binding
agreement relating to such acquisition; (iv) disposing of all or any substantial
portion of our non-cash assets; (v) issuing capital stock with more than one
vote per share.
Page 22
In September 2001, we entered into the ERBITUX Commercial Agreement
with BMS and E.R. Squibb, pursuant to which, among other things, together with
E.R Squibb we are (a) co-developing and co-promoting ERBITUX in the United
States and Canada, and (b) co-developing ERBITUX (together with Merck KGaA) in
Japan. The Commercial Agreement was amended on March 5, 2002 to change certain
economics of the agreement and has expanded the clinical and strategic roles of
BMS in the ERBITUX development program. Pursuant to the amended Commercial
Agreement, we can receive up-front and milestone payments totaling $900,000,000
in the aggregate, of which $200,000,000 was received upon the signing of the
agreement. The remaining $700,000,000 in payments comprises $140,000,000 paid on
March 7, 2002, $60,000,000 payable on March 5, 2003, $250,000,000 payable upon
receipt of marketing approval from the FDA with respect to an initial indication
for ERBITUX and $250,000,000 payable upon receipt of marketing approval from the
FDA with respect to a second indication for ERBITUX. All such payments are
non-refundable and non-creditable. Except for our expenses incurred pursuant to
the co-promotion option, E.R. Squibb is responsible for 100% of the
distribution, sales and marketing costs in the United States and Canada, and
E.R. Squibb and the Company, each will be responsible for 50% of the
distribution, sales, marketing costs and other related costs and expenses in
Japan. The Commercial Agreement provides that E.R. Squibb shall pay us
distribution fees based on a percentage of annual sales of ERBITUX by E.R.
Squibb in the United States and Canada. The distribution fee is 39% of net sales
in the United States and Canada. The Commercial Agreement also provides that the
distribution fees for the sale of ERBITUX in Japan by E.R. Squibb or us shall be
equal to 50% of operating profit or loss with respect to such sales for any
calendar month. In the event of an operating profit, E.R. Squibb will pay us the
amount of such distribution fee, and in the event of an operating loss, we will
credit E.R. Squibb the amount of such distribution fee. The Commercial Agreement
provides that we will be responsible for the manufacture and supply of all
requirements of ERBITUX in bulk form for clinical and commercial use in the
United States, Canada and Japan and that E.R. Squibb will purchase all of its
requirements of ERBITUX in bulk form for commercial use from us. We will supply
ERBITUX for clinical use at our fully burdened manufacturing cost, and will
supply ERBITUX for commercial use at our fully burdened manufacturing cost plus
a mark-up of 10%. In addition to the up-front and milestone payments, the
distribution fees for the United States, Canada and Japan and the 10% mark-up on
the commercial supply of ERBITUX, E.R. Squibb is also responsible for 100% of
the cost of all clinical studies other than those studies undertaken
post-launch, which are not pursuant to an Investigational New Drug Application
("INDA") (e.g., phase IV studies), the cost of which will be shared equally
between E.R. Squibb and ImClone Systems. As between E.R. Squibb and the Company,
each will be responsible for 50% of the cost of all clinical studies in Japan.
In February 2000, we completed a private placement of $240,000,000 in 5
- -1/2% convertible subordinated notes due March 1, 2005. We received net proceeds
of approximately $231,500,000, after deducting expenses associated with the
offering. Accrued interest on the notes was approximately $4,400,000 at June 30,
2002. A holder may convert all or a portion of a note into common stock at any
time on or before March 1, 2005 at a conversion price of $55.09 per share,
subject to adjustment under certain circumstances. We may redeem some or all of
the notes prior to March 6, 2003 if specified common stock price thresholds are
met. On or after March 6, 2003, we may redeem some or all of the notes at
specified redemption prices.
In December 1999, we entered into a development and manufacturing
services agreement with Lonza. This agreement was amended in April 2001 to
include additional services. Under the agreement, Lonza is responsible for
process development and scale-up to manufacture ERBITUX in bulk form under cGMP
conditions. These steps were taken to assure that the manufacturing process
would produce bulk material that conforms with our reference material and to
support in part, our regulatory filing with the FDA. As of June 30, 2002, Lonza
has completed its responsibilities under the development and manufacturing
service agreement. We had incurred approximately $7,068,000 for services
provided under this agreement through June 30, 2002. In September 2000, we
entered into a three-year commercial manufacturing services agreement with Lonza
relating to ERBITUX. This agreement was amended in June 2001 and again in
September 2001 to include additional services. As of June 30, 2002, we had
incurred approximately $24,840,000 for services provided under the commercial
manufacturing services agreement. Under these two agreements, Lonza is
manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is
delivering it to us over a term ending no later than December 2003. The costs
associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as ERBITUX may be approved for sale or until we obtain obligations
from our corporate partners for supply of such product. In the event of such
approval or obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for commercial sale will be included in
inventory and expensed as cost of goods sold when sold. In the event we
terminate (i.e., the cancellation of batches of bulk product) the commercial
manufacturing services agreement without cause, we will be required to pay 85%
of the stated costs for each of the first ten batches cancelled, 65% of the
stated costs for each of the next ten batches cancelled and 40% of the stated
costs for each of the next six batches cancelled. The batch cancellation
provisions for certain additional batches that we are committed to purchase
require us to pay 100% of the stated costs of cancelled batches scheduled within
six months of the cancellation, 85% of the stated costs of cancelled batches
scheduled between six and twelve months following the cancellation and 65% of
the stated costs of cancelled batches scheduled between twelve and eighteen
months following the cancellation. These amounts are subject to mitigation
should Lonza use its manufacturing capacity caused by such termination for
another customer. At June
Page 23
30, 2002, the estimated remaining future commitments under the amended
commercial manufacturing services agreement are $38,160,000 in 2002 and
$24,050,000 in 2003.
In December 2001, we entered into an agreement with Lonza to
manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck
KGaA. We had incurred approximately $6,008,000 for services provided under this
agreement, of which $3,658,000 was reimbursed by Merck KGaA. The remaining
$2,350,000 that is due from Merck KGaA is included in Amounts due from corporate
partners in the consolidated balance sheet at June 30, 2002. At June 30, 2002,
the estimated remaining future commitments under this agreement is $1,175,000 in
2002.
On January 2, 2002 we executed a letter of intent with Lonza to enter
into a long-term supply agreement. The long-term supply agreement would apply to
a large scale manufacturing facility that Lonza is constructing. We expect such
facility would be able to produce ERBITUX in 20,000 liter batches. We paid Lonza
$3,250,000 for the exclusive rights to reserve and negotiate a long-term supply
agreement for a portion of the new facility's overall capacity. Such
negotiations commenced shortly thereafter and are continuing. Under certain
conditions, such payment shall be refunded to us. If we enter into a long-term
supply agreement, such payment will be creditable to us against the 20,000 liter
batch price, such credit to be spread evenly over the batches manufactured each
year of the initial term of the long-term supply agreement.
We cannot be certain that we will be able to enter into agreements for
commercial supply with third party manufacturers on terms acceptable to us. Even
if we are able to enter into such agreements, we cannot be certain that we will
be able to produce or obtain sufficient quantities for commercial sale of our
products. Any delays in producing or obtaining commercial quantities of our
products could have a material adverse effect on our business, financial
condition and results of operations.
Effective April 1990, we entered into a development and
commercialization agreement with Merck KGaA with respect to BEC2 and the
recombinant gp75 antigen. The agreement has been amended a number of times, most
recently in December 1997. The agreement grants Merck KGaA a license, with the
right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75
outside North America. The agreement also grants Merck KGaA a license, without
the right to sublicense, to use, sell, or have sold, but not to make BEC2 within
North America in conjunction with ImClone Systems. Pursuant to the terms of the
agreement we have retained the rights, (1) without the right to sublicense, to
make, have made, use, sell, or have sold BEC2 in North America in conjunction
with Merck KGaA and (2) with the right to sublicense, to make, have made, use,
sell, or have sold gp75 in North America. In return, we have recognized research
support payments totaling $4,700,000 and are entitled to no further research
support payments under the agreement. Merck KGaA is also required to make
payments of up to $22,500,000, of which $4,000,000 has been recognized, based on
milestones achieved in the licensed products' development. Merck KGaA is also
responsible for worldwide costs of up to DM17,000,000 associated with a
multi-site, multinational phase III clinical trial for BEC2 in limited disease
small-cell lung carcinoma. This expense level was reached during the fourth
quarter of 2000 and all expenses incurred from that point forward are being
shared 60% by Merck KGaA and 40% by ImClone Systems. Such cost sharing applies
to all expenses beyond the DM17,000,000 threshold. Merck KGaA is also required
to pay royalties on the eventual sales of BEC2 outside of North America, if any.
Revenues from sales, if any, of BEC2 in North America will be distributed in
accordance with the terms of a co-promotion agreement to be negotiated by the
parties.
In December 1998, we entered into a development and license agreement
with Merck KGaA with respect to ERBITUX. In exchange for granting Merck KGaA
exclusive rights to market ERBITUX outside of the United States and Canada and
co-development rights in Japan, we received through June 30, 2002, $30,000,000
in up-front fees and early cash-based milestone payments based on the
achievement of defined milestones. An additional $30,000,000 can be received, of
which $5,000,000 has been received as of June 30, 2002, assuming the achievement
of further milestones for which Merck KGaA will receive equity in ImClone
Systems. The equity underlying these milestone payments will be priced at
varying premiums to the then-market price of the common stock depending upon the
timing of the achievement of the respective milestones. If issuing shares of
common stock to Merck KGaA would result in Merck KGaA owning greater than 19.9%
of our common stock, the milestone shares will be a non-voting preferred stock,
or other non-voting stock convertible into our common stock. These convertible
securities will not have voting rights. They will be convertible at a price
determined in the same manner as the purchase price for shares of our common
stock if shares of common stock were to be issued. They will not be convertible
into common stock if, as a result of the conversion, Merck KGaA would own
greater than 19.9% of our common stock. This 19.9% limitation is in place
through December 2002. Merck KGaA will pay us a royalty on future sales of
ERBITUX outside of the United States and Canada, if any. This agreement may be
terminated by Merck KGaA in various instances, including (1) at its discretion
on any date on which a milestone is achieved (in which case no milestone payment
will be made), or (2) for a one-year period after first commercial sale of
ERBITUX in Merck KGaA's territory, upon Merck KGaA's reasonable determination
that the product is economically unfeasible (in which case Merck KGaA is
entitled to a return of 50% of the cash-based up front fees and milestone
payments then paid to date, but only out of revenues received, if any, based
upon a royalty rate applied to the gross profit from ERBITUX sales or a
percentage of ERBITUX fees and royalties from a sublicensee on account of the
sale of ERBITUX in the United States and Canada). In August 2001, ImClone
Systems and Merck KGaA amended this agreement to provide, among other things,
that Merck KGaA may manufacture ERBITUX for
Page 24
supply in its territory and may utilize a third party to do so upon ImClone
Systems' reasonable acceptance. The amendment further released Merck KGaA from
its obligations under the agreement relating to providing a guaranty under a
$30,000,000 credit facility relating to the build-out of the product launch
manufacturing facility. In addition, the amendment provides that the companies
have co-exclusive rights to ERBITUX in Japan, including the right to sublicense
and Merck KGaA waived its right of first offer in the case of a proposed
sublicense by ImClone Systems of ERBITUX in ImClone Systems' territory. In
consideration for the amendment, we agreed to a reduction in royalties payable
by Merck KGaA on sales of ERBITUX in Merck KGaA's territory.
We have obligations under various capital leases for certain
laboratory, office and computer equipment and also certain building
improvements, primarily under a 1998 financing agreement with Finova. This
agreement allowed us to finance the lease of equipment and make certain building
and leasehold improvements to existing facilities. Each lease has a fair market
value purchase option at the expiration of its 48-month term. We have entered
into six individual leases under the financing agreement with an aggregate cost
of $1,942,000. This financing arrangement is now expired.
We rent our current New York corporate headquarters and research
facility under an operating lease that expires in December 2004. In 2000 we
completed renovations of the facility to better suit our needs, at a cost of
approximately $2,800,000.
In October 2001, we entered into a sublease for a four-story building
in downtown New York to serve as our future corporate headquarters and research
facility. The space, to be designed and improved in the future, includes between
75,000 and 100,000 square feet of usable space, depending on design, and
includes possible additional expansion space. The sublease has a term of 22
years, followed by two five-year renewal option periods. The future minimum
lease payments are approximately $50,625,000 over the term of the sublease. In
order to induce the sublandlord to enter into the sublease, we made a loan to
and accepted from the sublandlord a $10,000,000 note receivable. The note is
secured by a leasehold mortgage on the prime lease as well as a collateral
assignment of rents by the sublandlord. The note receivable is payable by the
sublandlord over 20 years and bears interest at 5 -1/2% in years one through
five, 6 -1/2% in years six through ten, 7 -1/2% in years eleven through fifteen
and 8 -1/2% in years sixteen through twenty. In addition, we paid the owner a
consent fee in the amount of $500,000.
On May 1, 2001, we entered into a lease for an approximately 4,000
square foot portion of a 15,000 square foot building known as 710 Parkside
Avenue, Brooklyn, New York and we have leased an adjacent 6,250 square foot
building known as 313-315 Clarkson Avenue, Brooklyn, New York, (collectively
"the premises") to serve as our new chemistry and high throughput screening
facility. The term of the lease is for five years with five successive one-year
extensions. As of June 30, 2002, we have incurred approximately $3,778,000,
excluding capitalized interest of approximately $83,000 for the retrofit of this
facility to better fit our needs. The total cost for the retrofit will be
approximately $4,300,000.
We built a new 80,000 square foot product launch manufacturing facility
adjacent to the pilot facility in Somerville, New Jersey. The product launch
manufacturing facility was built on a 5.7 acre parcel of land we purchased in
December 1999 for approximately $700,000. The product launch manufacturing
facility contains three 10,000 liter (working volume) fermenters and is
dedicated to the clinical and commercial production of ERBITUX. The cost of the
facility was approximately $53,000,000, excluding capitalized interest of
approximately $1,966,000. The cost for the facility has come from our cash
reserves, which were primarily obtained through the issuance of debt and equity
securities. The product launch manufacturing facility was ready for its intended
use and put in operation in July 2001 and we commenced depreciation at that
time.
We have completed conceptual design and preliminary engineering plans
and are currently reviewing detailed design plans for, and proceeding with
construction of, the second commercial manufacturing facility. The second
commercial manufacturing facility will be a multi-use facility of approximately
250,000 square feet and will contain up to 10 fermenters with a total capacity
of up to 110,000 liters (working volume). The facility will be built on a 7.12
acre parcel of land that we purchased in July 2000 for approximately $950,000.
The cost of this facility, consisting of two completely fitted out suites and a
third suite with utilities only, is expected to be approximately $233,000,000,
excluding capitalized interest. The actual cost of the new facility may change
depending upon various factors. We have incurred approximately $52,617,000,
excluding capitalized interest of approximately $1,234,000, in conceptual
design, engineering, equipment and construction costs through June 30, 2002.
On January 31, 2002 we purchased a 7.5 acre parcel of land located
adjacent to the Company's product launch manufacturing facility and pilot
facility in Somerville, New Jersey. The real estate includes an existing 50,000
square foot building, 40,000 square feet of which is warehouse space and 10,000
square feet of which is office space. The purchase price for the property and
building was approximately $7,020,000, of which approximately $1,125,000 was
related to the purchase of the land and approximately $5,895,000 was related to
the purchase of the building. We intend to use this property for warehousing and
logistics for our Somerville campus.
Page 25
On May 20, 2002, we purchased real estate consisting of a 6.94 acre parcel
of land located across the street from the Company's product launch
manufacturing facility in Somerville, New Jersey. The real estate includes an
existing 46,000 square feet of office space. The purchase price for the property
was approximately $4,515,000, of which approximately $1,041,000 was related to
the purchase of the land and approximately $3,474,000 was related to the
purchase of the building. We intend to use this property as the administrative
building for the Somerville campus. As of June 30, 2002, we have incurred
approximately $422,000 for the retrofit of this facility. The total cost for the
retrofit will be approximately $5,187,000.
Total capital expenditures made during the six months ended June 30, 2002
were $42,686,000 and primarily included $1,579,000 related to the purchase of
equipment for and leasehold improvement costs associated with our corporate
office and research laboratories in our New York facility, $23,437,000 related
to the conceptual design, preliminary engineering plans, capitalized interest
costs and construction costs for a second commercial manufacturing facility,
$1,125,000 and $5,895,000 for the land and building, respectively, for the
warehousing and logistics building, $1,041,000 and $3,474,000 for the land and
building, respectively, for the purchase of and $422,000 for the retrofit of the
central operations building, $3,198,000 for the retrofit of the Brooklyn
chemistry lab, $725,000 related to improving and equipping our product launch
manufacturing facility, and $1,031,000 related to improving and equipping our
pilot manufacturing facility.
Federal and state tax laws require an employer to withhold income taxes at
the time of an employee's exercise of non-qualified stock options or warrants
issued in connection with the performance of services by the employee. An
employer that does not do so is liable for the taxes not withheld if the
employee fails to pay his or her taxes for the year in which the non-qualified
stock options or warrants are exercised. In 2000 and prior years, we generally
did not require the withholding of federal, state or local income taxes and in
certain years, employment payroll taxes at the time of the exercise of
non-qualified stock options or warrants. Prior to 1996, we did not comply with
tax reporting requirements with respect to the exercise of non-qualified stock
options or warrants.
In January 2003, the New York State Department of Taxation and Finance ("New
York State") notified us that we were liable for the New York State and City
income taxes that were not withheld because one or more of our employees who
exercised certain non-qualified stock options in 1999 and 2000 failed to pay New
York State and City income taxes for those years. At December 31, 2002, we
recorded a gross New York State and City withholding tax liability of
approximately $6,800,000. On March 13, 2003, we entered into a closing agreement
with New York State, paying $4,500,000 to settle the matter. We believe that
substantially all of the underpayment of New York State and City income tax
identified by New York State is attributable to the exercise of non-qualified
stock options by our former President and Chief Executive Officer, Dr. Samuel D.
Waksal.
On March 13, 2003, we initiated discussions with the Internal Revenue
Service ("IRS") relating to federal income taxes on the exercise of
non-qualified stock options on which income tax was not properly withheld.
Although the IRS has not yet asserted that we are required to make a payment
with respect to such failure to withhold, the IRS may assert that such a
liability exists, and may further assert that we are liable for interest and
penalties. We have requested and received confirmation from all of our current
and substantially all of our former employees who exercised non-qualified stock
options in 1999 and 2000 on which no income tax was withheld, that they have
reported the appropriate amount of income on their tax returns and paid the
taxes shown as due on those returns. Based on this information, we determined
that all but an insignificant amount of the potential liability for withholding
taxes with respect to exercises of non-qualified stock options in 1999 and 2000
is attributed to those amounts related to Dr. Samuel D. Waksal.
In addition, in the course of our investigation into our potential liability
in respect of the non-qualified stock options described above, we identified
certain warrants that were granted in 1991 and prior years to current and former
officers, directors and advisors (including the four individuals discussed
herein) that we previously treated as non-compensatory warrants and thus not
subject to tax withholding and information reporting requirements upon exercise.
Accordingly, when exercised in 2001 and prior years, we did not deduct income
and payroll taxes upon exercise or report applicable information to the taxing
authorities. Based on the information discovered in the course of our recent
investigation, we now believe that such treatment was incorrect, and that the
exercise of such warrants by current and former officers of the Company should
have been treated in the same manner for withholding and reporting purposes as
the exercise of non-qualified stock options. We have informed the relevant
authorities, including the IRS and New York State, of this matter and intend to
resolve our liability in respect of these warrants with these taxing authorities
in conjunction with our resolution of the matter described above. On June 17,
2003, New York State notified us that, based on the issue identified above, they
are continuing a previously conducted audit of the Company and are evaluating
the terms of the closing agreement to determine whether or not it should be
re-opened.
On April 2, 2003, we received a request from the SEC for the voluntary
production of documents and information relating to the above matters. We are
cooperating fully with the SEC, and intend to continue to do so, while also
updating the United States Attorney's Office on an ongoing basis.
Page 26
One of the officers and directors to whom warrants were issued and
previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the
Company's Chief Scientific Officer. In June 2003, Dr. Harlan Waksal represented
that he has paid the taxes associated with the exercise of these warrants and
represented that he further agreed to indemnify us for any withholding taxes
that may be assessed and are attributable to our failure to deduct income and
payroll taxes on all warrants and options that he or his transferee has
previously exercised, subject to the consent of Dr. Harlan W. Waksal, which can
not be unreasonably withheld.
Two of the other officers and directors to whom warrants were issued
and previously treated as non-compensatory warrants are Dr. Samuel D. Waksal and
our former General Counsel, John B. Landes, who entered into a separation
agreement with us during October 2002. We have made demands on both of these
individuals to pay the taxes associated with the exercise of these warrants and
certain non-qualified stock options and to indemnify us against any liability
that we may incur to taxing authorities in respect of the warrants or
non-qualified stock options that they have previously exercised.
The Company has not recognized withholding tax liabilities in respect
of exercises of certain warrants by our then-current and now-former Chairman of
the Board, Robert F. Goldhammer, the final of the four officers or directors to
whom warrants were issued and previously treated as non-compensatory warrants.
Based on our investigation, we believe that, although such warrants were
compensatory, such warrants were received by Mr. Goldhammer in connection with
the performance of services by him in his capacity as a director, rather than as
an employee, and, as such, are not subject to tax withholding requirements. In
addition, in 1999, Mr. Goldhammer erroneously received a portion of a stock
option grant to him in the form of incentive stock options, which under federal
law may only be granted to employees. There can be no assurance, however, that
the taxing authorities will agree with our position and will not assert that we
are liable for the failure to withhold income and employment taxes with respect
to the exercise of such warrants and any stock options by Mr. Goldhammer. If we
were liable for the failure to withhold these taxes on the exercise of such
warrants and any stock options by Mr. Goldhammer, the potential liability,
exclusive of any interest or penalties, would be approximately $12,600,000.
We believe that our existing cash on hand, marketable securities and
amounts to which we are entitled should enable us to maintain our current and
planned operations through 2003. We are also entitled to reimbursement for
certain marketing and research and development expenditures and certain other
payments, some of which are payable upon the achievement of research and
development milestones. Such amounts include $560,000,000 in cash-based payments
of which $60,000,000 is payable on March 5, 2003, as well as up to $25,000,000
in equity-based milestone payments under our ERBITUX development and license
agreement with Merck KGaA and up to $18,500,000 in cash-based milestone payments
under our BEC2 development agreement with Merck KGaA. There can be no assurance
that we will achieve these milestones. Our future working capital and capital
requirements will depend upon numerous factors, including, but not limited to:
- progress and cost of our research and development programs,
pre-clinical testing and clinical trials
- our corporate partners fulfilling their obligations to us
- timing and cost of seeking and obtaining regulatory approvals
- timing and cost of manufacturing scale-up and effective
commercialization activities and arrangements
- level of resources that we devote to the development of
marketing and sales capabilities
- costs involved in filing, prosecuting and enforcing patent
claims
- technological advances
- legal costs and the outcome of outstanding legal proceedings
and investigations
- status of competition
- our ability to maintain existing corporate collaborations and
establish new collaborative arrangements with other companies
to provide funding to support these activities
- the adequacy of our estimates of liabilities for tax-related
matters discussed above
In order to fund our capital needs after 2003, 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,
Page 27
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.
Below is a table that presents our contractual obligations and
commercial commitments as of June 30, 2002:
PAYMENTS DUE BY YEAR
------------------------------------------------------------------------
2005 AND
TOTAL 2002 2003 2004 THEREAFTER
------------ ------------ ------------ ------------ ------------
Current portion of long-term debt .......... $ 2,200,000 $ -- $ 2,200,000 $ -- $ --
Long-term debt, less current portion........ 240,000,000 -- -- -- 240,000,000
Capital lease obligations including interest 299,000 170,000 76,000 15,000 38,000
Operating leases ........................... 54,637,000 1,020,000 3,024,000 3,521,000 47,072,000
Construction commitments ................... 62,987,000 23,208,000 38,287,000 1,492,000 --
Lonza ...................................... 63,385,000 39,335,000 24,050,000 -- --
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations ......... $423,508,000 $ 63,733,000 $ 67,637,000 $ 5,028,000 $287,110,000
============ ============ ============ ============ ============
NEW JERSEY STATE TAX LAW CHANGES
In July 2002, the State of New Jersey ("NJ") enacted various income tax
law changes, which are retroactive to January 1, 2002. One of the provisions of
the new law is the suspension of the utilization of net operating losses for
2002 and 2003. This provision would negatively affect the Company if it
generates NJ taxable income in 2002 and 2003 because it would not be able to
utilize its NJ net operating loss carryover to offset such taxable income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On August 17, 2001, Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" was issued and will be
effective for the Company in the first quarter of the year ended December 31,
2003. The new rule requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred.
When the liability is initially recorded, a cost is capitalized by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. To settle the liability,
the obligation for its recorded amount is paid or a gain or loss upon settlement
is incurred. Management will be analyzing this requirement to determine the
effect on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for
Restructuring Costs. SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company will record a liability for a cost associated with an exit
or disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 will require a company to disclose information about its exit
and disposal activities, the related costs, and changes in those costs in the
notes to the interim and annual financial statements that include the period in
which an exit activity is initiated and in any subsequent period until the
activity is completed. SFAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
Under SFAS 146, a company may not restate its previously issued financial
statements and the new Statement grandfathers the accounting for liabilities
that a company had previously recorded under Emerging Issues Task Force Issue
94-3. The Company is currently evaluating the impact of adoption of this
statement.
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 our business, including without limitation, the risks and uncertainties
associated with completing pre-clinical and clinical trials of our compounds
that demonstrate such compounds' safety and effectiveness; obtaining additional
financing to support our operations; obtaining and maintaining regulatory
approval for such compounds and complying with other governmental regulations
applicable to our 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 our 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; obtaining and protecting
proprietary rights; legal costs and the outcome of outstanding legal proceedings
and investigations, including, but not limited to, our investigations pertaining
to tax withholding issues; avoiding delisting of our securities on the Nasdaq
Stock Market; and those other factors set forth in "Risk Factors" in the
Company's most recent Registration Statement and Form 10-K.
Page 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NO. DESCRIPTION
3.1C Amendment dated August 9, 2002 to the Company's Certificate of
Incorporation, as amended
10.90 Employment Agreement dated as of February 1, 2002 between the
Company and Clifford R. Saffron, as amended by letter
agreement dated as of April 18, 2002
10.91 Separation Agreement dated as of May 22, 2002 between the
Company and Samuel D. Waksal
10.92 Agreement of Sale and Purchase between 4/33 Building
Associates, LP and ImClone Systems Incorporated pertaining to
33 Chubb Way, Branchburg, New Jersey executed as of March 1,
2002
99.8 ImClone Systems Incorporated 2002 Stock Option Plan.
99.9 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 -
Updated
99.10 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 -
Updated
(b) Reports on Form 8-K
On June 26, 2002, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission reporting events under Item 5.
Page 29
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: June 23, 2003 By /s/ DANIEL S. LYNCH
------------------------------------
Daniel S. Lynch
Senior Vice President and Chief
Administrative Officer
Acting Chief Executive Officer
Date: June 23, 2003 By /s/ MICHAEL J. HOWERTON
------------------------------------
Michael J. Howerton
Vice President, Finance and
Business Development
Secretary and Acting
Chief Financial Officer
Page 30
SECTION 302 CERTIFICATIONS -
CERTIFICATION
I, Michael J. Howerton, Vice President, Finance and Business Development,
Secretary and Acting Chief Financial Officer of ImClone Systems Incorporated
(the "Company"), certify that:
1. I have reviewed this Amendment No. 1 to our Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 2002 of the
Company;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared; and
b) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
Date: June 23, 2003
/s/ MICHAEL J. HOWERTON
---------------------------
Michael J. Howerton
Acting Chief Financial Officer
Page 31
CERTIFICATION
I, Daniel S. Lynch, Senior Vice President, Chief Administrative Officer and
Acting Chief Executive Officer of ImClone Systems Incorporated (the "Company"),
certify that:
1. I have reviewed this Amendment No. 1 to our Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 2002 of the
Company;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared; and
b) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
Date: June 23, 2003
/s/ DANIEL S. LYNCH
--------------------------
Daniel S. Lynch
Acting Chief Executive Officer
Page 32