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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 MARCH 31, 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 MAY 13, 2002
Common Stock, par value $.001 73,361,837 Shares
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EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2002 for the purpose of amending and restating
Item 1 of Part I, containing our unaudited consolidated financial statements and
related notes as of March 31, 2002 and for the three month periods ended March
31, 2002 and 2001. See Notes 2, 3 and 13 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 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 May 15,
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, 2003.
IMCLONE SYSTEMS INCORPORATED
INDEX
PAGE NO
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets - March 31, 2002
and December 31, 2001.................................................................. 1
Unaudited Consolidated Statements of Operations - Three months ended
March 31, 2002 and 2001................................................................ 2
Unaudited Consolidated Statements of Cash Flows - Three months ended
March 31, 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.. 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 27
Signatures............................................................................. 28
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............... 29
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 114,684 $ 38,093
Securities available for sale ............................................ 300,055 295,893
Prepaid expenses.......................................................... 3,476 3,891
Amounts due from corporate partners (Note 9).............................. 12,632 8,230
Other current assets...................................................... 4,550 3,547
------------- -------------
Total current assets................................................. 435,397 349,654
------------- -------------
Property and equipment, net.................................................. 123,023 107,248
Patent costs, net............................................................ 1,525 1,513
Deferred financing costs, net................................................ 4,982 5,404
Notes receivable............................................................. 10,000 10,000
Withholding tax assets....................................................... 13,510 13,510
Other assets ................................................................ 3,637 383
------------- -------------
$ 592,074 $ 487,712
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................................... $ 13,574 $ 16,919
Accrued expenses.......................................................... 16,811 11,810
Withholding tax liability................................................. 38,779 38,779
Industrial Development Revenue Bonds tax liability........................ 877 851
Interest payable.......................................................... 1,203 4,446
Current portion of deferred revenue (Note 9).............................. 35,760 20,683
Current portion of long-term liabilities.................................. 330 426
------------- -------------
Total current liabilities............................................ 107,334 93,914
------------- -------------
Deferred revenue, less current portion (Note 9).............................. 301,074 182,813
Long-term debt............................................................... 242,200 242,200
Other long-term liabilities, less current portion............................ 25 79
------------- -------------
Total liabilities.................................................... 650,633 519,006
------------- -------------
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 cummulative preferred stock........... -- --
Common stock, $.001 par value; authorized 120,000,000 shares; issued
73,531,112 and 73,348,271 at March 31, 2002 and December 31, 2001,
respectively; outstanding 73,341,862 and 73,159,021 at March 31, 2002
and December 31, 2001, respectively.................................... 74 73
Additional paid-in capital................................................ 345,042 341,735
Accumulated deficit....................................................... (402,210) (372,157)
Treasury stock, at cost; 189,250 shares at March 31, 2002 and
December 31, 2001...................................................... (4,100) (4,100)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale....................... 2,635 3,155
------------- -------------
Total stockholders' deficit.......................................... (58,559) (31,294)
------------- -------------
$ 592,074 $ 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
MARCH 31,
------------------------------
2002 2001
------------- -------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
Revenues:
License fees and milestone revenue (Note 9)............................... $ 6,663 $ 24,096
Research and development funding and royalties............................ 650 648
Collaborative agreement revenue (Note 9).................................. 11,238 3,251
------------- -------------
Total revenues......................................................... 18,551 27,995
------------- -------------
Operating expenses:
Research and development.................................................. 37,778 25,096
Marketing, general and administrative..................................... 8,123 3,728
Industrial Development Revenue Bonds tax expense.......................... 25 25
Expenses associated with the amended Bristol-Myers Squibb Company
("BMS") Commercial Agreement........................................... 2,250 --
------------- -------------
Total operating expenses............................................... 48,176 28,849
------------- -------------
Operating loss............................................................... (29,625) (854)
------------- -------------
Other:
Interest income........................................................... (2,264) (4,565)
Interest expense.......................................................... 3,493 3,316
Loss (gain) on securities and investments................................. (801) 1,618
------------- -------------
Net interest and other expense......................................... 428 369
------------- -------------
Net loss............................................................. $ (30,053) $ (1,223)
============= =============
Net loss per common share:
Basic and diluted:
Net loss per common share.............................................. $ (0.41) $ (0.02)
============= =============
Weighted average shares outstanding.......................................... 73,307 66,258
============= =============
See accompanying notes to consolidated financial statements
Page 2
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------- -------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
Cash flows from operating activities:
Net loss..................................................................... $ (30,053) $ (1,223)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 2,190 606
Amortization of deferred financing costs.................................. 422 422
Expense associated with issuance of options and warrants.................. 4 421
(Gain) loss on securities available for sale.............................. (801) 18
Write-down of investment in Valigen N.V................................... - 1,600
Changes in:
Prepaid expenses....................................................... 415 (835)
Amounts due from corporate partners (including amounts received from
BMS of $6,533 for the three months ended March 31, 2002)............. (4,402) -
Note receivable - officer.............................................. - (8)
Other current assets................................................... (1,003) (611)
Withholding tax assets................................................. - (7,119)
Other assets........................................................... (3,254) 12
Interest payable....................................................... (3,243) (3,238)
Accounts payable....................................................... (3,345) (6,034)
Accrued expenses....................................................... 5,001 2,060
Withholding tax liability.............................................. - 7,119
Industrial Development Revenue Bonds tax liability..................... 26 28
Deferred revenue (including amounts received from BMS of $140,000
for the three months ended March 31, 2002)........................... 133,338 (97)
Fees potentially refundable to Merck KGaA.............................. - (24,000)
------------- -------------
Net cash provided by (used in) operating activities.................. 95,295 (30,879)
------------- -------------
Cash flows from investing activities:
Acquisitions of property and equipment.................................... (17,922) (15,074)
Purchases of securities available for sale................................ (138,819) (11,456)
Sales and maturities of securities available for sale..................... 134,938 25,554
Additions to patents...................................................... (55) (69)
------------- -------------
Net cash used in investing activities................................ (21,858) (1,045)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants...................... 2,651 1,204
Proceeds from issuance of common stock under the employee stock
purchase plan.......................................................... 167 178
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............................................. (150) (203)
------------- -------------
Net cash provided by (used in) financing activities.................. 3,154 (26,415)
------------- -------------
Net increase (decrease) in cash and cash equivalents................. 76,591 (58,339)
Cash and cash equivalents at beginning of period............................. 38,093 60,325
------------- -------------
Cash and cash equivalents at end of period................................... $ 114,684 $ 1,986
============= =============
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized of $300 and $494
for the three months ended March 31, 2002 and 2001, respectively....... $ 6,613 $ 6,623
============= =============
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 March 31, 2002 and for the three
months ended March 31, 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 March
31, 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 $13,510,000 as of March
31, 2002 and December 31, 2001; a withholding tax liability of $38,779,000 as of
March 31, 2002 and December 31, 2001; an Industrial Development Revenue Bonds
tax liability of $877,000 and $851,000 as of March 31, 2002 and December 31,
2001, respectively; a cumulative increase to accumulated deficit of $26,146,000
as of March 31, 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
the Company's outstanding Industrial Development Revenue Bonds issued in 1990
(the "1990 IDA Bonds").
The Company has restated its Consolidated Statements of Operations for
the three months ended March 31, 2002 and 2001 to reflect additional tax expense
and interest expense for the 1990 IDA Bonds. Due to the restatement, the net
loss for the three months ended March 31, 2002 and 2001 increased to $30,053,000
and $1,223,000 from $30,027,000 and $1,195,000, respectively, with no impact on
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 tax identified by New York State
is attributable to the exercise of non-qualified stock options by its former
Page 4
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 $877,000 and
$851,000 on the Consolidated Balance Sheets as of March 31, 2002 and December
31, 2001, respectively. The Company recorded Industrial Development Revenue
Bonds tax expense of $25,000 for the three months ended March 31, 2002 and 2001,
and interest expense of $1,000 and $3,000 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. This redemption is scheduled to occur on June 30, 2003.
The following tables present the impact of the restatement on a
condensed basis:
MARCH 31, 2002 DECEMBER 31, 2001
-------------------------------- ------------------------------
AS PREVIOUSLY AS PREVIOUSLY
CONSOLIDATED BALANCE SHEETS REPORTED AS RESTATED REPORTED AS RESTATED
---------------- ------------- ------------- -------------
Withholding tax assets ....................... $ -- $ 13,510,000 $ -- $ 13,510,000
Total assets ................................. 578,564,000 592,074,000 474,202,000 487,712,000
Withholding tax liability .................... -- 38,779,000 -- 38,779,000
Industrial Development Revenue Bonds tax
liability.................................. -- 877,000 -- 851,000
Total current liabilities .................... 67,678,000 107,334,000 54,284,000 93,914,000
Total liabilities ............................ 610,977,000 650,633,000 479,376,000 519,006,000
Accumulated deficit .......................... (376,064,000) (402,210,000) (346,037,000) (372,157,000)
Total stockholders' deficit .................. (32,413,000) (58,559,000) (5,174,000) (31,294,000)
Total liabilities and stockholders' deficit .. $ 578,564,000 $ 592,074,000 $ 474,202,000 $ 487,712,000
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
-------------------------------- ------------------------------
AS PREVIOUSLY AS PREVIOUSLY
CONSOLIDATED STATEMENTS OF OPERATIONS REPORTED AS RESTATED REPORTED AS RESTATED
---------------- ------------- ------------- -------------
Industrial Development Revenue Bonds tax
expense.................................... $ -- $ 25,000 $ -- $ 25,000
Total operating expenses...................... 48,151,000 48,176,000 28,824,000 28,849,000
Operating loss................................ (29,600,000) (29,625,000) (829,000) (854,000)
Interest expense.............................. 3,492,000 3,493,000 3,313,000 3,316,000
Net interest and other expense................ 427,000 428,000 366,000 369,000
Net loss...................................... $ (30,027,000) $ (30,053,000) $ (1,195,000) $ (1,223,000)
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 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:
MARCH 31, DECEMBER 31,
2002 2001
-------------- ---------------
Dr. Harlan W. Waksal*.................................... $ 9,958,000 $ 9,958,000
John B. Landes........................................... 3,384,000 3,384,000
Other.................................................... 168,000 168,000
-------------- ---------------
$ 13,510,000 $ 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
Page 6
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. Wakscal, which can not be unreasonably
withheld.
Amounts related to the following items are included in withholding tax
liability:
MARCH 31, 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:
MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
Tax related to the 1990 IDA Bonds........................ $ 637,000 $ 612,000
Accrued interest on tax related to the 1990 IDA Bonds.... 240,000 239,000
-------------- --------------
$ 877,000 $ 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,
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 $5,200,000 at March 31, 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.
Page 7
(4) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the
following:
MARCH 31, DECEMBER 31,
2002 2001
--------------- ---------------
Land......................................................................... $ 3,858,000 $ 2,733,000
Building and building improvements........................................... 57,062,000 50,720,000
Leasehold improvements....................................................... 8,330,000 8,302,000
Machinery and equipment...................................................... 35,108,000 33,057,000
Furniture and fixtures....................................................... 2,073,000 2,031,000
Construction in progress..................................................... 41,414,000 33,080,000
--------------- ---------------
Total cost........................................................... 147,845,000 129,923,000
Less accumulated depreciation and amortization............................... (24,822,000) (22,675,000)
--------------- ---------------
Property and equipment, net.................................................. $ 123,023,000 $ 107,248,000
=============== ===============
The Company is building a second commercial manufacturing facility
adjacent to its new product launch manufacturing facility in 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
$225,000,000, 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 $36,790,000, (included in construction in progress above)
excluding capitalized interest of approximately $1,040,000, in conceptual
design, engineering and pre-construction costs through March 31, 2002. Through
April 26, 2002, committed purchase orders totaling approximately $43,676,000
have been placed for subcontracts and equipment related to this project. In
addition, $49,471,000 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 improvements 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.
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 and its second commercial manufacturing facility
currently in process 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 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 the Company's reference material. The Company has incurred
approximately $38,000 in the three months ended March 31, 2002, and $7,068,000
from inception through March 31, 2002 for services provided 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 $86,955,000. The Company has incurred approximately $7,070,000 in
the three months ended March 31, 2002, and $17,383,000 from inception through
March 31, 2002 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 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
Page 8
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 March
31, 2002, the estimated remaining future commitments under the amended
commercial manufacturing services agreement are $45,522,000 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 $1,762,000 in the three months ended March 31, 2002, and
$4,245,000 from inception through March 31, 2002 for services provided under
this agreement. Approximately $1,895,000 and $133,000 was reimbursable by Merck
KGaA at March 31, 2002 and December 31, 2001, respectively, and included in
amounts due from corporate partners in the consolidated balance sheets. At March
31, 2002, the estimated remaining future commitments under this agreement are
$2,938,000 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
March 31, 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 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 determined based on the modified equity method of
accounting. Included in loss on securities and investments for the three months
ended March 31, 2001 is a $1,600,000 write-down of the Company's investment in
Valigen. 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 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. Potentially dilutive securities,
including convertible preferred stock, convertible debt, options and warrants,
have not been included in the diluted loss per common share computation because
they are anti-dilutive.
Page 9
(8) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
--------------- -------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
Net loss..................................................................... $ (30,053,000) $ (1,223,000)
Other comprehensive income (loss):
Unrealized holding gain arising during the period......................... 281,000 1,938,000
Reclassification adjustment for realized (gain) loss included in net loss. (801,000) 18,000
--------------- -------------
Total other comprehensive income (loss).............................. (520,000) 1,956,000
--------------- -------------
Total comprehensive income (loss)............................................ $ (30,573,000) $ 733,000
=============== =============
(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 March 31, 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 $121,000 and $122,000 in reimbursable
research and development expenses associated with this agreement in the three
months ended March 31, 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.
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 March
31, 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 March 31, 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.
Page 10
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 ERBITUX manufactured by
Lonza for use in these 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
agreements totaled approximately $6,381,000 and $1,503,000 at March 31, 2002 and
December 31, 2001, respectively, and are included in amounts due from corporate
partners in the consolidated balance sheets. The Company has incurred
reimbursable research and development expenses totaling approximately $5,022,000
and $3,129,000 in the three months ended March 31, 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.
Reimbursable costs associated with supplying ERBITUX to Merck KGaA for
use in clinical trials totaled approximately $4,309,000 during the three months
ended March 31, 2002 and are included in collaborative agreement revenue in the
consolidated statements of operations. The related manufacturing costs, except
for cost incurred under the 2,000L Lonza Agreement, 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.
(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 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 role 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
Page 11
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
- 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.
In connection with the amended Commercial Agreement the Company
incurred and recorded reimbursable research and development and marketing
expenses totaling approximately $4,248,000 in the three months ended March 31,
2002. These amounts have also been recorded as collaborative agreement revenue
for the three months ended March 31, 2002 in the consolidated statements of
operations.
Page 12
Reimbursable costs associated with ERBITUX used in clinical trials
totaled approximately $1,847,000 during the three months ended March 31, 2002
and are included in collaborative agreement revenue in the consolidated
statement of operations. 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 provided.
License fees and milestone revenues consists of the following:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
--------------- -------------
BMS ERBITUX license fee revenue.............................................. $ 6,567,000 $ --
Merck KGaA ERBITUX milestone revenue......................................... -- 24,000,000
Merck KGaA ERBITUX and BEC2 license fee revenue.............................. 96,000 96,000
--------------- -------------
Total license fees and milestone revenues............................ $ 6,663,000 $ 24,096,000
=============== =============
Collaborative agreement revenue (see note 1) from corporate partners consists of
the following:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
--------------- -------------
BMS reimbursement of ERBITUX research and development ($5,952,000)
and marketing ($143,000) expenses......................................... $ 6,095,000 $ --
Merck KGaA reimbursement of ERBITUX research and development expenses........ 713,000 2,099,000
Merck KGaA reimbursement of ERBITUX product costs for use in clinical
trials.................................................................... 4,309,000 1,030,000
Merck KGaA reimbursement of BEC2 research and development expenses........... 121,000 122,000
--------------- -------------
Total collaborative agreement revenue................................ $ 11,238,000 $ 3,251,000
=============== =============
Amounts due from corporate partners consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
--------------- -------------
Due from BMS, ERBITUX research and development and marketing expenses........ $ 6,130,000 $ 6,714,000
Due from Merck KGaA, ERBITUX research and development expenses............... 2,083,000 666,000
Due from Merck KGaA, reimbursement of ERBITUX product costs for use
in clinical trials........................................................ 4,298,000 837,000
Due from Merck KGaA, BEC2 research and development expenses.................. 121,000 13,000
--------------- -------------
Total amounts due from corporate partners............................ $ 12,632,000 $ 8,230,000
=============== =============
Deferred revenue consists of the following:
MARCH 31, DECEMBER 31,
2002 2001
--------------- ---------------
BMS, ERBITUX Commercial Agreement............................................ $ 330,881,000 $ 197,447,000
Merck KGaA, ERBITUX development and license agreement........................ 3,722,000 3,778,000
Merck KGaA, BEC2 development and commercialization agreement................. 2,231,000 2,271,000
--------------- ---------------
336,834,000 203,496,000
Less: current portion........................................................ (35,760,000) (20,683,000)
--------------- ---------------
$ 301,074,000 $ 182,813,000
=============== ===============
Page 13
(10) OTHER CONTINGENCIES
The Company and certain of its officers and directors are named as
defendants in a number of complaints filed 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. A motion is pending that will result in the
consolidation of these and any subsequently-filed actions that assert similar
claims. The 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.
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 six 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. The Company
intends to contest vigorously the claims asserted in these actions.
The Company has incurred legal fees associated with these matters
totaling approximately $3,279,000 during the three months ended March 31, 2002.
In addition, the Company has estimated and recorded a receivable totaling
$1,639,000 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 assets in the consolidated balance sheet at March 31, 2002.
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 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.
(11) CERTAIN RELATED PARTY TRANSACTIONS
In September 2001 and February 2002, the Company entered into
employment agreements with six senior executive officers, including the Chief
Executive Officer and Chief Operating Officer. The September agreements each
have three-year terms and the February agreement has a one-year term. The term
of employment for each of the CEO and COO 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 a
stated base salaries, and minimum bonuses and benefits aggregating $3,765,000
annually.
Certain transactions engaged in by the Company's 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, as disgorgement of "short-swing profits"
he realized. This amount was recorded as an increase to additional paid-in
capital.
Page 14
(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
our 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 which do
not offer an adequate price to all of the Company's stockholders or are
otherwise not in best interests of the Company and the Company's 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 which 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.
(13) 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 March 31, 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 15
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 months
ended March 31, 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 where the Company has continuing
involvement are recorded as deferred revenue and recognized over the estimated
service period.
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 upfront payments we received from BMS through
March 31, 2002, approximately $6,567,000 was recognized as revenue during the
three months ended March 31, 2002 and $9,120,000 from the commencement of the
agreement through March 31, 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.
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 $5,200,000 at March 31, 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. However, if we deem it probable
that an unfavorable ruling in any such legal proceeding will occur, 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 the present value of the expected associated
cash flows. We recently built a product launch manufacturing facility and are
building a second commercial manufacturing 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. 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
Page 16
manufacturing 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 March 31, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement with Lonza were
$45,522,000 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.
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.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
REVENUES
Revenues for the three months ended March 31, 2002 and 2001 were
$18,551,000 and $27,995,000, respectively, a decrease of $9,444,000, or 34% in
2002. Revenues for the three months ended March 31, 2002 primarily included
$6,567,000 in license fee revenue and $6,095,000 in collaborative agreement
revenue from our amended ERBITUX Commercial Agreement with BMS and its
wholly-owned subsidiary, E.R. Squibb. The collaborative agreement revenue is a
reimbursement of certain research and development and marketing expenses 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. 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 $5,022,000 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 March 31, 2002 also included $650,000 in royalty
revenue from our strategic corporate alliance with Abbott Laboratories
("Abbott") in diagnostics and $41,000 in license fee revenue and $121,000 in
collaborative agreement revenue from our strategic corporate alliance with Merck
KGaA for our principal cancer vaccine product candidate, BEC2. Revenues for the
three months ended March 31, 2001 primarily included $24,000,000 in milestone
revenue and $3,129,000 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 March 31,
2001 also included
Page 17
$648,000 in royalty revenue from our strategic corporate alliance with Abbott in
diagnostics and $41,000 in license fee revenues and $122,000 of collaborative
agreement revenue from our strategic corporate alliance with Merck KGaA for
BEC2.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 2002 and
2001 were $48,176,000 and $28,849,000, respectively, an increase of $19,327,000,
or 67% in 2002. Operating expenses for the three months ended March 31, 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 three months ended March 31,
2002 and 2001 were $37,778,000 and $25,096,000, respectively, an increase of
$12,682,000 or 51% in 2002. Research and development expenses for the three
months ended March 31, 2002 and 2001, as a percentage of total operating
expenses, excluding the advisor fee associated with the amended Commercial
Agreement and the Industrial Development Revenue Bonds tax expense, in the three
months ended March 31, 2002, were 82% and 87%, 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 three months ended March 31, 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
(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 March 31, 2002 and 2001 were $8,123,000 and
$3,728,000, respectively, an increase of $4,395,000, or 118% in 2002. The
increase in marketing, general and administrative expenses primarily reflected
(1) 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, (2) costs associated
with our marketing efforts, (3) additional administrative staffing required to
support our commercialization efforts for ERBITUX and (4) expenses associated
with general corporate activities. Other than the legal expenses component
discussed in (1) above, whose level in the future is uncertain because it
depends upon the matter 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 EXPENSES: INDUSTRIAL DEVELOPMENT REVENUE BONDS TAX EXPENSE
Industrial Development Revenue Bonds tax expense for each of the three
months ended March 31, 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 March 31, 2002 and 2001
reflect additional withholding tax expense of $25,000 relating to the 1990 IDA
Bonds.
Page 18
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Interest income was $2,264,000 for the three months ended March 31,
2002 compared with $4,565,000 for the three months ended March 31, 2001, a
decrease of $2,301,000, or 50% in 2002. The decrease was primarily attributable
to a decrease in interest rates associated with our portfolio of debt
securities.
Interest expense was $3,493,000 and $3,316,000 for the three months
ended March 31, 2002 and 2001, respectively, an increase of $177,000 or 5% in
2002. We have increased interest expense by $1,000 and $3,000 for the three
months ended March 31, 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
March 31, 2002 and 2001 was offset by the capitalization of interest costs of
$300,000 and $494,000, 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
$801,000 and losses of $1,618,000 for the three months ended March 31, 2002 and
2001, respectively. The losses on securities and investments for the three
months ended March 31, 2001 included a $1,600,000 write-down of our investment
in ValiGen N.V.
NET LOSSES
We had a net loss of $30,053,000 or $0.41 per share for the three
months ended March 31, 2002, compared with a net loss of $1,223,000 or $0.02 per
share for the three months ended March 31, 2001. The increase in the net loss
was due to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, our principal sources of liquidity consisted of cash
and cash equivalents and securities available for sale of approximately
$415,000,000. From our inception on April 26, 1984 through March 31, 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 $97,966,000 from license fees,
contract research and development fees, reimbursements from
our corporate partners and royalties from collaborative
partners. Additionally, we have approximately $336,834,000 in
deferred revenue related to up-front payments received from
our amended Commercial Agreement for ERBITUX, 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 $49,378,000 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-Meyers 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
Page 19
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.
In September 2001, we entered into a commercial agreement with BMS and
its wholly-owned subsidiary, E.R. Squibb, relating to ERBITUX, 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 each 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 $1,100,000 at
March 31, 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
current Good Manufacturing Practices ("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 March 31, 2002, we had incurred approximately
$7,068,000 for services provided under the development and manufacturing
services agreement. 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 March 31, 2002, we had incurred approximately $17,383,000 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
Page 20
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 March 31, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement are $45,522,000 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 $4,245,000 for services provided under this
agreement, of which $2,350,000 was reimbursed by Merck KGaA. The remaining
$1,895,000 that is due from Merck KGaA is included in amounts due from corporate
partners in the consolidated balance sheet at March 31, 2002. At March 31, 2002,
the estimated remaining future commitments under this agreement is $2,938,000 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. 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 March 31, 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 March 31, 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
Page 21
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 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 $50,775,000 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 March 31, 2002, we have incurred approximately $2,204,000 for
the retrofit of this facility to better fit our needs. The total cost for the
retrofit will be approximately $4,000,000.
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.
Page 22
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 $225,000,000,
excluding capitalized interest. The actual cost of the new facility may change
depending upon various factors. We have incurred approximately $36,790,000,
excluding capitalized interest of approximately $1,040,000, in conceptual
design, engineering, equipment and construction costs through March 31, 2002.
On January 31, 2002 we purchased a 7.5 acre parcel of land located at
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
improvements was approximately $7,020,000. We intend to use this property for
warehousing and logistics for our Somerville campus.
Total capital expenditures made during the three months ended March 31,
2002 were $17,922,000 and primarily included $763,000 related to the purchase of
equipment for and leasehold improvement costs associated with our corporate
office and research laboratories in our New York facility, $7,416,000 related to
the conceptual design, preliminary engineering plans 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,
$1,541,000 for the retrofit of the Brooklyn chemistry lab, $544,000 related to
improving and equipping our product launch manufacturing facility, and $314,000
related to improving and equipping our pilot manufacturing facility.
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,
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
Page 23
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.
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 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 at least 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
Page 24
- 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, 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 March 31, 2002:
PAYMENTS DUE BY YEAR
------------------------------------------------------------------------
2005 AND
TOTAL 2002 2003 2004 THEREAFTER
------------ ------------ ----------- ------------ ------------
Long-term debt ..................... $242,200,000 $ -- $ -- $ 2,200,000 $240,000,000
Capital lease obligations
including interest ............. 349,000 288,000 61,000 -- --
Operating leases ................... 55,133,000 1,556,000 3,024,000 3,512,000 47,041,000
Construction commitments ........... 102,592,000 55,000,000 47,592,000 -- --
Lonza .............................. 72,510,000 48,460,000 24,050,000 -- --
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations.. $472,784,000 $105,304,000 $ 74,727,000 $ 5,712,000 $287,041,000
============ ============ ============ ============ ============
At December 31, 2001, we had net operating loss carryforwards for
United States federal income tax purposes of approximately $437,189,000, which
expire at various dates from 2002 through 2021. At December 31, 2001 we had
research credit carryforwards of approximately $19,415,000, which expire at
various dates from 2008 through 2021. Under Section 382 of the Internal Revenue
Code of 1986, as amended, a corporation's ability to use net operating loss and
research credit carryforwards may be limited if the corporation experiences a
change in ownership of more than 50 percentage points within a three-year
period. Since 1986, we have experienced two such ownership changes. As a result,
we are only permitted to use in any one year approximately $5,159,000 of our
available net operating loss carryforwards that occurred prior to February 1996.
Similarly, we are limited in using our research credit carryforwards. We have
determined that our November 1999 public stock offering, our February 2000
private placement of convertible subordinated notes, our August 2001 issuance of
common stock to Merck KGaA associated with an equity milestone payment under the
ERBITUX development and license agreement and our September 2001 acquisition
agreement with BMS and BMS Biologies, which provided for the tender offer by BMS
Biologies 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, did not cause an additional
ownership change that would further limit the use of our net operating losses
and research credit carryforwards. Of our $437,189,000 in net operating loss
carry forwards, we have approximately $395,245,000 (of which $390,086,000 will
carryforward to 2003) available to use in 2002, approximately $5,159,000
available to use in each year from 2003 through 2010 and approximately $672,000
available to use in 2011. Any of the aforementioned net operating loss
carryforwards, which are not utilized, are available for utilization in future
years, subject to the statutory expiration dates of such net operating loss
carryforwards.
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.
Page 25
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 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 -
Updated
99.2 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 January 25, 2002, the Company filed three Current Reports on Form
8-K and on each of February 19, 2002 and March 6, 2002 the Company filed a
Current Report on Form 8-K with the Securities and Exchange Commission reporting
events under Item 5.
Page 27
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 28
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 March 31, 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 29
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 March 31, 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 30