- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-Q/A
AMENDMENT NO. 1
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-19612
IMCLONE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
<Table>
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)
</Table>
(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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
CLASS OUTSTANDING AS OF NOVEMBER 11, 2003
----- -----------------------------------
Common Stock, par value $.001 74,959,472 Shares
</Table>
- --------------------------------------------------------------------------------
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EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10 Q/A to our Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2003 (the "10-Q") for
the purpose of correcting a typographical error. The reference in the 10-Q to
U.S. Patent No. 6,217,888 in the 16th paragraph under Part I, Item 1, Note (9)-
Commitments and Contingencies and the first paragraph under Part II, Item 1,
D-Intellectual Property Litigation was inadvertently incorrect. The correct U.S.
Patent No. is 6,217,866.
Except as noted above, the Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 2003, remains as originally filed with the
Securities and Exchange Commission on November 12, 2003. All information in this
Amendment No. 1 on Form 10-Q/A is as of November 13, 2003 and does not reflect
any subsequent information or events other than the changes referred to above.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE AND SHARE DATA)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 38,765 $ 72,877
Securities available for sale............................. 99,642 174,778
Prepaid expenses.......................................... 5,093 3,119
Amounts due from corporate partners....................... 15,524 12,363
Current portion of note receivable........................ 450 300
Withholding tax assets.................................... 370 10,150
Other current assets...................................... 2,817 11,598
--------- ---------
Total current assets.................................... 162,661 285,185
--------- ---------
Property, plant and equipment, net.......................... 226,846 183,539
Patent costs, net........................................... 1,648 1,593
Deferred financing costs, net............................... 2,413 3,694
Note receivable, less current portion....................... 9,325 9,700
Other assets................................................ 416 795
--------- ---------
$ 403,309 $ 484,506
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 22,100 $ 23,717
Accrued expenses (including $1,906 and $4,093 due to
Bristol-Myers Squibb Company ("BMS") at September 30,
2003 and December 31, 2002, respectively)............... 19,914 37,377
Withholding tax liability................................. 21,006 38,811
Industrial Development Revenue Bonds tax liability........ 1,019 953
Interest payable.......................................... 1,100 4,442
Current portion of deferred revenue....................... 50,078 38,362
Current portion of long-term debt......................... -- 2,200
Current portion of long-term liabilities.................. 11 79
--------- ---------
Total current liabilities............................... 115,228 145,941
--------- ---------
Deferred revenue, less current portion...................... 299,136 284,142
Long-term debt, less current portion........................ 240,000 240,000
Other long-term liabilities, less current portion........... 44 52
--------- ---------
Total liabilities....................................... 654,408 670,135
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; authorized 4,000,000
shares; reserved 1,200,000 series B participating
cumulative preferred stock.............................. -- --
Common stock, $.001 par value; authorized 200,000,000
shares; issued 75,108,383 and 73,839,536 at September
30, 2003 and December 31, 2002, respectively;
outstanding 74,919,133 and 73,650,286 at September 30,
2003 and December 31, 2002, respectively................ 75 74
Additional paid-in capital................................ 368,580 346,952
Accumulated deficit....................................... (616,265) (530,106)
Treasury stock, at cost; 189,250 shares at September 30,
2003 and December 31, 2002.............................. (4,100) (4,100)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale........ 611 1,551
--------- ---------
Total stockholders' deficit........................... (251,099) (185,629)
--------- ---------
$ 403,309 $ 484,506
========= =========
</Table>
See accompanying notes to consolidated financial statements.
1
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenues:
License fees and milestone revenue............... $ 13,908 $ 4,996 $ 35,987 $ 13,254
Royalty revenue.................................. 214 622 517 1,310
Collaborative agreement revenue.................. 9,461 9,416 24,525 30,586
-------- -------- -------- --------
Total revenues................................ 23,583 15,034 61,029 45,150
-------- -------- -------- --------
Operating expenses:
Research and development......................... 28,780 43,504 117,212 119,449
Marketing, general and administrative............ 13,750 12,341 30,852 36,943
(Recovery) write-down of withholding tax asset... (3,384) -- (3,384) 3,384
Industrial Development Revenue Bonds tax
expense....................................... -- 25 65 75
Expenses associated with the amended BMS
Commercial Agreement.......................... -- -- -- 2,250
-------- -------- -------- --------
Total operating expenses...................... 39,146 55,870 144,745 162,101
-------- -------- -------- --------
Operating loss..................................... (15,563) (40,836) (83,716) (116,951)
-------- -------- -------- --------
Other:
Interest income.................................. (897) (2,259) (3,580) (7,427)
Interest expense................................. 2,240 3,162 7,000 10,003
Gain on securities available for sale............ (509) (264) (1,314) (1,500)
-------- -------- -------- --------
Net interest and other expense................ 834 639 2,106 1,076
-------- -------- -------- --------
Loss before income taxes...................... (16,397) (41,475) (85,822) (118,027)
Provision for income taxes.................... 123 550 337 550
-------- -------- -------- --------
Net loss...................................... $(16,520) $(42,025) $(86,159) $(118,577)
======== ======== ======== ========
Net loss per common share -- basic and diluted..... $ (0.22) $ (0.57) $ (1.16) $ (1.62)
======== ======== ======== ========
Weighted average shares outstanding................ 74,505 73,385 74,009 73,350
======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
2
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2003 2002
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $ (86,159) $(118,577)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 8,528 7,000
Amortization of deferred financing costs................ 1,281 1,279
Expense associated with issuance of options and
warrants............................................... 461 11
(Recovery) write-down of withholding tax asset.......... (3,384) 3,384
Gain on securities available for sale................... (1,314) (1,500)
Loss on disposal of fixed asset......................... 30 --
Changes in:
Prepaid expenses...................................... (1,974) (381)
Amounts due from corporate partners (including amounts
received from BMS of $14,431 and $8,377 for the nine
months ended September 30, 2003 and 2002,
respectively)........................................ (3,161) (8,640)
Withholding tax assets................................ 9,780 --
Other current assets.................................. 8,781 (5,519)
Note receivable....................................... 225 --
Other assets.......................................... 379 (635)
Accounts payable...................................... (1,617) 1,092
Accrued expenses...................................... (17,463) 14,550
Withholding tax liability............................. (14,421) --
Interest payable...................................... (3,342) (3,242)
Industrial Development Revenue Bonds tax liability.... 66 78
Deferred revenue (including amounts received from BMS
of $60,000 and $140,000 for the nine months ended
September 30, 2003 and 2002, respectively)........... 26,710 126,804
--------- ---------
Net cash (used in) provided by operating
activities........................................ (76,594) 15,704
--------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (51,729) (60,165)
Purchases of securities available for sale................ (177,210) (327,470)
Sales and maturities of securities available for sale..... 252,720 383,142
Proceeds from property, plant and equipment disposals..... 5 --
Additions to patents...................................... (196) (243)
--------- ---------
Net cash provided by (used in) investing
activities........................................ 23,590 (4,736)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options................... 5,566 2,751
Proceeds from issuance of common stock under the employee
stock purchase plan..................................... 509 413
Proceeds from issuance of common stock to Merck KGaA...... 15,000 --
Proceeds from repayment of note receivable -- officer and
stockholder............................................. 93 --
Proceeds from short-swing profit rule..................... -- 565
Payment of Industrial Development Revenue Bond............ (2,200) --
Payments of other liabilities............................. (76) (358)
--------- ---------
Net cash provided by financing activities.......... 18,892 3,371
--------- ---------
Net (decrease) increase in cash and cash
equivalents....................................... (34,112) 14,339
Cash and cash equivalents at beginning of period............ 72,877 38,093
--------- ---------
Cash and cash equivalents at end of period.................. $ 38,765 $ 52,432
========= =========
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized of
$4,434 and $1,441 for the nine months ended September
30, 2003 and 2002, respectively......................... $ 13,257 $ 13,403
========= =========
Non-cash financing activity:
Capital asset and lease obligation addition............. $ -- $ 58
========= =========
</Table>
See accompanying notes to consolidated financial statements.
3
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The numbers are shown in the text to these Notes to the Unaudited
Consolidated Financial Statements as actual amounts. Tables and charts note
where numbers are shown in thousands.
(1) BASIS OF PRESENTATION AND LIQUIDITY
The accompanying consolidated financial statements of ImClone Systems
Incorporated ("ImClone Systems" or the "Company") as of September 30, 2003 and
for the three and nine months ended September 30, 2003 and 2002 are unaudited.
The accompanying unaudited consolidated balance sheets and statements of
operations and of cash flows have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the disclosures
required by GAAP for complete financial statements. The financial statements
reflect all adjustments, consisting only of normal, recurring adjustments, which
are in the opinion of management, necessary for a fair presentation for the
interim periods. 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 fiscal year ended December 31, 2002, as filed
with the SEC.
The results of operations for the interim periods are not necessarily
indicative of results to be expected for the entire fiscal year or any other
period.
The Company believes that its existing cash on hand, marketable securities
and amounts to which it is entitled should enable the Company to maintain its
current and planned operations at least through September 2004. The Company is
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 contingent
amounts include $500,000,000 in cash-based payments under the development,
promotion, distribution and supply agreement (the "Commercial Agreement") dated
September 19, 2001 with Bristol-Myers Squibb Company ("BMS") and E.R. Squibb &
Sons L.L.C. ("E.R. Squibb"), as well as up to $10,000,000 in equity-based
milestone payments under the development and license agreement with Merck KGaA
for the Company's lead product candidate, the investigational IgG1 monoclonal
antibody ERBITUX(TM) (cetuximab) and up to $18,500,000 in cash-based milestone
payments under the development agreement with Merck KGaA, for the Company's
investigational monoclonal antibody vaccine, BEC2. There can be no assurance
that the Company will achieve these milestones. In order to fund its future
capital needs, the Company may require significant levels of additional capital
and the Company intends 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, or combinations of the
foregoing. There is no assurance that the Company will be successful in
consummating any such arrangements. If adequate funds are not available, the
Company may be required to significantly curtail its planned operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 provides guidance on how to determine when an arrangement
that involves multiple revenue-generating activities or deliverables should be
divided into separate units of accounting for revenue recognition purposes, and
if this division is required, how the arrangement consideration should be
allocated among the separate units of accounting. The guidance in the consensus
is effective for revenue arrangements entered into in quarters beginning after
June 15, 2003. The adoption of EITF 00-21 could affect the timing or pattern of
revenue recognition for future collaborative research and or license agreements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure",
4
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effective for fiscal years ending after December 15, 2002. This standard amends
SFAS No. 123 "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company has elected to
continue to follow the intrinsic value method of accounting for employee stock
options in accordance with the provisions of Accounting Principles Board Opinion
("APB") Opinion No. 25 "Accounting for Stock Issued to Employees." APB No. 25
does not require the recognition of compensation expense unless the exercise
price of employee stock options is less than the market price of the Company's
stock on the date of grant. During 2002 and 2003, the Company's stock option
grants were based on the closing market price of its stock on the date of grant.
SFAS No. 148 also amends certain disclosure requirements related to stock-based
employee compensation, which the Company has adopted and which are reflected
under "Stock-Based Compensation Plans" below.
In August 2001, Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations" was issued by the Financial
Accounting Standards Board ("FASB") and was effective for the Company in the
first quarter of the year ending 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
and a gain or loss upon settlement is incurred. The adoption of this statement
did not have a material effect on the Company's financial statements.
STOCK BASED COMPENSATION PLANS
The Company has two types of stock-based compensation plans: a stock option
plan and a stock purchase plan. The Company accounts for its stock-based
compensation plans in accordance with the provisions of APB No. 25, and related
interpretations including the Statement of Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- An Interpretation of APB Opinion No. 25" ("Interpretation No.
44"). Accordingly, compensation expense would be recorded on the date of grant
of an option to an employee or member of the Board of Directors (the "Board")
only if the market price of the underlying stock on the date of grant exceeds
the exercise price. During 2002 and 2003 the Company's stock option grants were
based on the closing market price of its stock on the date of grant.
The fair value of stock options was estimated using the Black-Scholes
option-pricing model. The Black-Scholes model considers a number of variables,
including the exercise price and the expected life of the option, the current
price of the common stock, the expected volatility and the dividend yield of the
underlying common stock, and the risk-free interest rate during the expected
term of the option. The following table summarizes the weighted average
assumptions used:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2003 2002
----- -----
Expected life (years)....................................... 2.92 3.05
Risk free interest rate..................................... 2.00% 2.85%
Volatility factor........................................... 88.00% 88.00%
Dividend yield.............................................. 0.00% 0.00%
</Table>
Changes in assumptions used could have a material effect on the pro forma
results.
5
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net loss and loss per share
if the compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates for awards consistent with the fair
value method of SFAS No. 123.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss as reported......................... $16,520 $42,025 $ 86,159 $118,577
Add: Stock based employee compensation
expense included in net income............. 128 4 128 11
Deduct: Total stock-based employee
compensation expense determined under fair
value based method......................... 7,977 15,085 27,599 57,280
------- ------- -------- --------
Pro forma net loss......................... $24,369 $57,106 $113,630 $175,846
======= ======= ======== ========
Basic and diluted net loss per common share:
As reported................................ $ (0.22) $ (0.57) $ (1.16) $ (1.62)
Pro forma.................................. $ (0.33) $ (0.78) $ (1.54) $ (2.40)
</Table>
The pro forma effect on the net loss for the three and nine months ended
September 30, 2003 and 2002 is not necessarily indicative of the pro forma
effect on future periods' operating results.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and consist of the
following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
Land........................................................ $ 4,899 $ 4,899
Building and building improvements.......................... 66,176 64,849
Leasehold improvements...................................... 12,104 11,904
Machinery and equipment..................................... 44,596 40,317
Furniture and fixtures...................................... 3,369 3,080
Construction in progress.................................... 136,539 91,065
-------- --------
Total cost................................................ 267,683 216,114
Less accumulated depreciation and amortization.............. (40,837) (32,575)
-------- --------
Property, plant and equipment, net........................ $226,846 $183,539
======== ========
</Table>
The Company is building a multiple product manufacturing facility (the
"Multiple Product Facility") adjacent to its single product manufacturing
facility (the "Single Product Facility") in Branchburg, New Jersey. This new
facility will be a multi-use facility with capacity of up to 110,000 liters
(production volume). The 250,000 square foot facility will cost approximately
$260,000,000, and is being built on land purchased in July 2000. The actual cost
of the new facility may change depending upon various factors. The Company has
incurred approximately $126,036,000 in conceptual design, engineering,
pre-construction and construction costs (which are included in construction in
progress in the preceding table), excluding capitalized interest of
approximately $7,048,000, through September 30, 2003. Through September 30,
2003, committed purchase orders totaling approximately $128,100,000 have been
placed with subcontractors and for equipment related to this project. In
addition, $68,820,000 in engineering, procurement, construction management and
validation
6
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs were committed. As of September 30, 2003, $115,809,000 has been paid
relating to these committed purchase orders. During August 2002, the Company
executed an escrow agreement with Branchburg Township (the "Township"). The
agreement required the Company to deposit $5,040,000 in an escrow account until
the Company supplies the Township with certain New Jersey Department of
Environmental Protection permits and also certain water and sewer permits
related to the construction of this facility. Interest that accrues on the
escrow deposit was allocated two-thirds to the Company and one-third to the
Township. The escrow deposit was requested by the Township to insure that funds
would be available to restore the site to its original condition should the
Company fail to obtain such permits required for construction at the site. The
Company has satisfied the permit requirements of the Township and received the
escrow principal and accrued interest totaling $5,101,000 in April 2003.
In January 2002, the Company purchased real estate consisting of a 7.5-acre
parcel of land located adjacent to the Company's Single Product Facility and
pilot facility in Branchburg, New Jersey. The real estate includes an existing
50,000 square foot building, 40,000 square feet of which is warehouse space and
10,000 square feet of which is office space. The purchase price for the property
and building was approximately $7,020,000, of which approximately $1,125,000
related to the purchase of the land and approximately $5,895,000 related to the
purchase of the building. The Company is using this property for warehousing and
material logistics for its Branchburg campus. As of September 30, 2003, the
Company has incurred approximately $1,262,000 for the retrofit of this facility.
The logistics facility was ready for its intended use and put into operation
during January 2003 and depreciation commenced at that time.
The process of preparing consolidated financial statements in accordance
with GAAP requires the Company to evaluate the carrying values of its long-lived
assets. The recoverability of the carrying values of the Company's Single
Product Facility and its Multiple Product Facility currently being built will
depend on (1) receiving United States Food and Drug Administration ("FDA")
approval of ERBITUX, (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.
(3) CONTRACT MANUFACTURING SERVICES
In September 2000, the Company entered into a three-year commercial
manufacturing services agreement with Lonza Biologics plc ("Lonza") relating to
ERBITUX. This agreement was amended in June 2001, September 2001, and August
2003 to include additional services and potentially to extend the term of the
agreement. The total cost for services to be provided under the commercial
manufacturing services agreement is approximately $86,913,000. The Company
incurred costs of zero and $15,578,000 during the three months ended September
30, 2003 and 2002, respectively and $23,189,0000 and $30,105,000 were incurred
for the nine months ended September 30, 2003 and 2002, respectively, and
$85,022,000 was incurred from inception through September 30, 2003, for services
provided under the commercial manufacturing services agreement.
Under the September 2000 agreement, Lonza manufactures ERBITUX at the
5,000-liter scale under current Good Manufacturing Practices ("cGMP") and
delivers it to the Company. The costs associated with this agreement are
included in research and development expenses when incurred and will continue to
be so classified until such time as ERBITUX may be approved for sale or until
the Company obtains binding 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. During the
term of the agreement, certain batches were cancelled at negotiated rates agreed
to by the parties. All existing commitments under this agreement were completed
during the three months ended June 30, 2003, but an August 2003 amendment to the
agreement allows for potential manufacture of a limited number of additional
batches.
7
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Statements of Operations. The Company did not incur any costs associated with
this agreement during the three or nine months ended September 30, 2003, and
$1,175,000 and $4,700,000 was incurred in the three and nine months ended
September 30, 2002, respectively. From inception to September 30, 2003, the
Company incurred approximately $7,183,000 for services provided under this
agreement. As of September 30, 2003, Merck KGaA has reimbursed the Company in
full for all the services provided under this agreement and Lonza has completed
its responsibilities under such agreement.
On January 2, 2002, the Company executed a letter of intent with Lonza to
enter into a long-term supply agreement. The long-term supply agreement would
have applied to a large scale manufacturing facility that Lonza is constructing,
which would have been able to produce ERBITUX in 20,000-liter batches. The
Company paid Lonza $3,250,000 upon execution of the letter of intent for the
exclusive right to negotiate a long-term supply agreement for a portion of the
facility's manufacturing capacity. In September 2002, the Company wrote-off the
deposit as a charge to marketing, general and administrative expenses, because
the exclusive negotiation period ended on September 30, 2002. In light of the
assistance the Company provided to BMS with respect to preserving and then
relinquishing the manufacturing capacity described above, BMS paid the Company
$3,250,000 in April 2003 and this amount is recognized as a reduction to
marketing, general and administrative expenses in the nine months ended
September 30, 2003.
(4) WITHHOLDING TAX ASSETS AND LIABILITY
Federal and applicable state tax law requires 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. As
of December 31, 2002, the Company recorded a gross New York State and City
withholding tax liability of approximately $6,800,000 related to this matter. On
March 13, 2003, the Company entered into a closing agreement with New York
State, paying $4,500,000 by March 31, 2003, 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 President and Chief Executive Officer,
Dr. Samuel D. Waksal. On June 17, 2003, New York State notified the Company
that, based on the warrant issue identified below, it is continuing a previously
conducted audit of the Company and is evaluating the terms of the closing
agreement to determine whether or not it should be re-opened. The liability of
approximately $2,300,000, representing the difference between the gross
liability of $6,800,000 and the settlement amount per the closing agreement paid
in March 2003, will remain on the Company's Consolidated Balance Sheets until
New York State concludes its previously conducted audit.
On March 13, 2003, the Company initiated discussions with the Internal
Revenue Service (the "IRS") relating to federal income taxes on the exercise of
non-qualified stock options on which income tax was not
8
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 has 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
attributable 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 then-current and former officers, directors and advisors
(including the three individuals discussed herein and the one individual
discussed in Note 9) 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 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.
The IRS has commenced audits of the Company's income tax and employment tax
returns, and New York State has commenced audits of the Company's employment tax
returns, for tax years 1999 through 2001. On July 31, 2003, the Company received
an Information Document Request in connection with the IRS employment tax audit.
The Company is cooperating fully with the IRS and New York State with respect to
these audits, and intends to continue to do so.
The Company has recognized assets at the time of exercise relating to the
individuals described herein. These assets are based on the fact that
individuals are required by law to pay their personal income taxes, which
relieves the Company of its liability for such withholding taxes, but not
interest and penalties, 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 these individuals both during and after
their employment with the Company. The Company decided to write-down certain of
these assets as noted below.
One of the former officers and directors to whom warrants were issued and
previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the
Company's former Chief Scientific Officer, and previously its President and
Chief Executive Officer. In June 2003, Dr. Harlan W. Waksal represented to the
Company that he has paid the taxes associated with the exercise of these
warrants and further agreed to indemnify the Company for any withholding taxes
that may be assessed and are attributable to the Company's failure to deduct
income and payroll taxes on all warrants and options that he or his transferee
has previously exercised, subject to the consent of Dr. Harlan W. Waksal, which
cannot be unreasonably withheld. Therefore, the Company removed the respective
asset and liability of $9,759,000 from its Consolidated Balance Sheet as of June
30, 2003.
9
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Two of the other former officers and directors to whom warrants were issued
and previously treated as non-compensatory warrants were Dr. Samuel D. Waksal
and the Company's 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 were
previously exercised. During the three months ended September 30, 2003, Mr.
Landes represented to the Company that he has paid the taxes associated with his
exercise of these warrants. Therefore, the Company has eliminated the liability
of $3,384,000 primarily attributable to withholding taxes on warrants exercised
by Mr. Landes from its September 30, 2003 Consolidated Balance Sheet and has
recognized a benefit of $3,384,000 as a recovery of withholding tax asset in the
Consolidated Statements of Operations in the three and nine months ended
September 30, 2003.
Regarding Dr. Samuel D. Waksal, the Company determined that subsequent to
the Company's receipt of a "refusal to file" letter from the FDA 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
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 or should such individuals pay the taxes, the Company would reduce
operating expenses for the difference between the withholding tax liabilities
and settlement amounts in the period of settlement.
Amounts related to the following items are included in withholding tax
liability:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
Withholding tax related to exercise of stock options and
warrants.................................................. $20,826 $38,349
Other....................................................... 180 462
------- -------
$21,006 $38,811
======= =======
</Table>
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
5 1/2% Convertible Subordinated Notes due March 1, 2005..... $240,000 $240,000
11 1/4% Industrial Development Revenue Bond................. -- 2,200
-------- --------
240,000 242,200
Less current portion........................................ -- (2,200)
-------- --------
$240,000 $240,000
======== ========
</Table>
In February 2000, the Company completed a private placement of $240,000,000
in convertible subordinated notes due March 1, 2005. The Company received net
proceeds from this offering of approximately $231,500,000, after deducting costs
associated with the offering.
10
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holders may convert all or a portion of the notes 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. The notes are subordinated to
all existing and future senior indebtedness. As of March 6, 2003, the Company
has the option to redeem any or all of the notes at specified redemption prices,
plus accrued and unpaid interest to the day preceding the redemption date. The
Company was required to file with the SEC and obtain the effectiveness of a
shelf registration statement covering resales of the notes and the common stock.
Such registration statement was declared effective in July 2000. Upon the
occurrence of a "fundamental change" as defined in the indenture, holders of the
notes may require the Company to redeem the notes at a price equal to 100% of
the principal amount to be redeemed.
On May 2, 2003, the Company informed the trustee for the Convertible
Subordinated Notes of its withholding tax issues discussed in Note 4, and the
delay in filing its 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 Company filed its Form 10-K on June 23, 2003. The
indenture for the Convertible Subordinated Notes includes covenants requiring
the Company to timely pay taxes and timely make filings under the Securities
Exchange Act of 1934. 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 without the default being cured. 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 were 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.
In August 1990, the New York Industrial Development Agency (the "NYIDA")
issued $2,200,000 principal amount of its 11 1/4% Industrial Development Revenue
Bonds due May 2004 (the "1990 IDA Bonds"). The proceeds from the sale of the
1990 IDA Bonds were used by the Company at its research and development facility
in New York City. The Company granted a security interest in certain equipment
located in this New York City facility purchased with the proceeds from the 1990
IDA Bonds to secure the obligations of the Company relating to the 1990 IDA
Bonds. In April 2003, the Company discovered that it was in breach of certain
covenants in its 1990 IDA Bonds. These bonds were tax-exempt and the Company was
required to continue to use the proceeds for a qualified tax-exempt purpose (in
this case, manufacturing), until maturity. 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 had 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 recognized a tax liability of $1,019,000 and
$953,000 in its Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002, respectively. This tax liability was estimated based upon the
rates specified for use in IRS closing agreements for tax-exempt bonds, as
applied to interest payments made on the 1990 IDA Bonds during the relevant
period. The 1990 IDA Bonds were redeemed in full, pursuant to the bond
indenture, on June 30, 2003.
(6) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed based on the net
loss for the relevant period, divided by the weighted average number of common
shares outstanding during the period. For purposes of the diluted loss per share
calculation, the exercise or conversion of all potential common shares is not
included since their effect would be anti-dilutive for all periods presented.
Potential common shares outstanding which represent new shares that could be
issued under convertible debt, stock options and stock warrants by the
11
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company totaled approximately 18,327,000 and 17,869,000 for the periods ended
September 30, 2003 and 2002, respectively.
(7) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive loss:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- ---------
(IN THOUSANDS)
Net loss.................................. $(16,520) $(42,025) $(86,159) $(118,577)
Other comprehensive income (loss):
Unrealized holding gain (loss) arising
during the period.................... (95) (130) 374 428
Reclassification adjustment for realized
gain included in net loss............ (509) (264) (1,314) (1,500)
-------- -------- -------- ---------
Total other comprehensive loss....... (604) (394) (940) (1,072)
-------- -------- -------- ---------
Total comprehensive loss.................. $(17,124) $(42,419) $(87,099) $(119,649)
======== ======== ======== =========
</Table>
(8) COLLABORATIVE AGREEMENTS
(A) MERCK KGAA
In April 1990, the Company entered into a development and commercialization
agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen
product candidate. 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
antigen 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 antigen in North America. In return, the
Company has recognized research support payments totaling $4,700,000 and is not
entitled to any 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 September 30, 2003, 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. The Company incurred approximately $33,000 and $27,000 in the three
months ended September 30, 2003 and 2002, respectively, and approximately
$41,000 and $181,000 for the nine months ended September 30, 2003 and 2002,
respectively, associated with this agreement. 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, 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-exclusive development rights in Japan, the Company has received
$30,000,000 through September 30, 2003, in up-front cash fees and early cash
payments based on the
12
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
achievement of defined milestones. An additional $20,000,000 has been received
through September 30, 2003, based upon the achievement of further milestones for
which Merck KGaA received equity in the Company and $10,000,000 more equity
payments are possible depending upon the achievement of further defined
milestones.
The chart below details the equity milestone payments received from Merck
KGaA through September 30, 2003:
<Table>
<Caption>
NUMBER OF
REVENUE COMMON SHARES PRICE PER
DATE AMOUNT OF MILESTONE RECOGNIZED ISSUED TO MERCK KGAA SHARE
- ---- ------------------- ---------- -------------------- ---------
August 2001............... $5,000,000 $1,760,000 63,027 $79.33
May 2003*................. $6,000,000 $ -- 334,471 $17.94
June 2003*................ $3,000,000 $ -- 150,007 $20.00
July 2003**............... $3,000,000 $ -- 92,276 $32.51
July 2003**............... $3,000,000 $ -- 90,944 $32.99
</Table>
- ---------------
* Entire amount of proceeds was recorded as a capital transaction during the
second quarter of 2003.
** Entire amount of proceeds was recorded as a capital transaction during the
third quarter of 2003.
The equity interests underlying the milestone payments are priced at
varying premiums to the then-market price of the common stock depending upon the
timing of the achievement of the respective milestones. 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 receive back
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 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 Single
Product 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 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. In
order to support clinical trials, Merck KGaA has agreed to purchase ERBITUX
manufactured by Lonza and the Company for use in these trials and has further
agreed to reimburse the Company for one-half of the outside contract service
costs incurred with respect to the Phase III clinical trial of ERBITUX for the
treatment of head and neck cancer in combination with radiation. In September
2002, the Company entered into a binding term sheet, effective as of April 15,
2002, for the supply of ERBITUX to Merck KGaA, which replaces previous supply
arrangements. The term sheet provides for Merck KGaA to purchase bulk and
finished ERBITUX ordered from the Company during the term of the December 1998
development and license agreement at a price equal to the Company's fully loaded
cost of goods. The term sheet also provides for Merck KGaA to use reasonable
efforts to enter into its own contract manufacturing agreements for supply of
ERBITUX by 2004 and obligates Merck KGaA to reimburse the
13
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company for costs associated with transferring technology and any other services
requested by Merck KGaA relating to establishing its own manufacturing or
contract manufacturing capacity. Amounts due from Merck KGaA related to these
arrangements totaled approximately $4,553,000 and $2,462,000 at September 30,
2003 and December 31, 2002, respectively, and are included in amounts due from
corporate partners in the Consolidated Balance Sheets. The Company recorded
collaborative agreement revenue related to these arrangements in the
Consolidated Statements of Operations totaling approximately $3,930,000 and
$1,997,000 for the three months ended September 30, 2003 and 2002, respectively,
and $8,378,000 and $14,219,000 for the nine months ended September 30, 2003 and
2002, respectively. Of these amounts, $3,606,000 and $1,470,000 for the three
months ended September 30, 2003 and 2002, respectively, and $7,016,000 and
$12,323,000 for the nine months ended September 30, 2003 and 2002, respectively,
related to reimbursable costs associated with supplying ERBITUX to Merck KGaA
for use in clinical trials. A portion of the ERBITUX sold to Merck KGaA was
produced in prior periods and the related manufacturing costs have been expensed
in prior periods when the related raw materials were purchased and the
associated direct labor and overhead was consumed or, in the case of contract
manufacturing, when such services were performed. These costs totaled $3,606,000
and $704,000 for the three months ended September 30, 2003 and 2002,
respectively and $7,016,000 and $7,051,000 for the nine months ended September
30, 2003 and 2002, respectively. Reimbursable research and development expenses
were incurred and totaled approximately $324,000 and $527,000 for the three
months ended September 30, 2003 and 2002, respectively, and $1,362,000 and
$1,896,000 for the nine months ended September 30, 2003 and 2002, respectively.
These amounts have been recorded as research and development expenses and also
as collaborative agreement revenue in the Consolidated Statements of Operations.
Reimbursable administrative expenses were incurred and totaled approximately
$111,000 and $144,000 for the three months ended September 30, 2003 and 2002,
respectively, and $283,000 and $417,000 for the nine months ended September 30,
2003 and 2002, respectively. These amounts have been recorded as marketing,
general and administrative expenses and also as collaborative agreement revenue
in the Consolidated Statements of Operations.
In June 2003, the Company agreed to supply a fixed quantity of ERBITUX for
use in Merck KGaA's medical affairs program on different ordering and pricing
terms than those provided in the binding term sheet, including prepayment by
Merck KGaA for a portion of such supply. The Company has recorded this
prepayment as deferred revenue on the Consolidated Balance Sheet until such time
as the product is shipped to Merck KGaA.
(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 the Commercial Agreement with BMS and E.R. Squibb, relating
to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibb are
co-developing and co-promoting ERBITUX in the United States and Canada with the
Company, and are co-developing and co-promoting ERBITUX with the Company and
either together or co-exclusively with Merck KGaA.
On March 5, 2002, the Company amended the Commercial Agreement with E.R.
Squibb and BMS. The amendment changed certain economics of the Commercial
Agreement and has expanded the clinical and strategic roles of BMS in the
ERBITUX development program. One of the principal economic changes to the
14
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commercial Agreement is that the Company received payments of $140,000,000 on
March 7, 2002 and $60,000,000 on March 5, 2003. Such payments are in lieu of the
$300,000,000 milestone payment the Company would have received upon acceptance
by the FDA of the ERBITUX BLA under the original terms of the Commercial
Agreement. In addition, the Company agreed to resume and has resumed
construction of its Multiple Product Facility. The terms of the Commercial
Agreement, as amended on March 5, 2002, are set forth in more detail below.
ACQUISITION AGREEMENT
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.
STOCKHOLDER AGREEMENT
Pursuant to the Stockholder Agreement, the Company's Board was increased
from ten to twelve members in October 2001. BMS received the right to nominate
two directors to the Company's Board (each a "BMS director") so long as its
ownership interest in ImClone Systems is 12.5% or greater. If BMS' ownership
interest is 5% or greater but less than 12.5%, BMS will have the right to
nominate one BMS director, and if BMS' ownership interest is less than 5%, BMS
will have no right to nominate a BMS director. If the size of the Board is
increased to a number greater than twelve, the number of BMS directors would be
increased, subject to rounding, such that the number of BMS directors is
proportionate to the lesser of BMS' then-current ownership interest and 19.9%.
Notwithstanding the foregoing, BMS will have no right to nominate any BMS
directors if (i) the Company has terminated the Commercial Agreement due to a
material breach by BMS or (ii) BMS' ownership interest were to remain below 5%
for 45 consecutive days.
Based on the number of shares of common stock acquired pursuant to the
tender offer, BMS has the right to nominate two directors. BMS designated Andrew
G. Bodnar, M.D., J.D., BMS' Senior Vice President, Strategy and Medical &
External Affairs, as one of the initial BMS directors. The nomination of Dr.
Bodnar was approved by the Board on November 15, 2001. The other BMS director
position was initially filled by Peter S. Ringrose, M.A, Ph.D. Dr. Ringrose
retired in 2002 from his position of Chief Scientific Officer and President,
Pharmaceutical Research Institute at BMS, and also resigned from his director
position with the Company. BMS has not yet designated a replacement to fill Dr.
Ringrose's vacated Board seat.
Voting of Shares -- During the period in which BMS has the right to
nominate at least one BMS director, BMS and its affiliates are required to vote
all of their shares in the same proportion as the votes cast by all of the
Company's other stockholders with respect to the election or removal of non-BMS
directors.
Committees of the Board of Directors -- During the period in which BMS has
the right to nominate at least one BMS director, BMS also has the right, subject
to certain exceptions and limitations, to have one member of each committee of
the Board be a BMS director.
Approval Required for Certain Actions -- The Company may not take any
action that constitutes a prohibited action under the Stockholder Agreement
without the consent of the BMS directors, until September 19, 2006 or earlier,
if any of the following occurs: (i) a reduction in BMS's ownership interest to
below 5% for 45 consecutive days, (ii) a transfer or other disposition of shares
of the Company's common stock by BMS or any of its affiliates such that BMS and
its affiliates own or have control over less than 75% of the maximum number of
shares of the Company's common stock owned by BMS and its affiliates at any time
after September 19, 2001, (iii) an acquisition by a third party of more than 35%
of the outstanding shares of the Company's common stock, (iv) a termination of
the Commercial Agreement by BMS due to significant regulatory or safety concerns
regarding ERBITUX, or (v) a termination of the Commercial Agreement due to a
material breach by BMS. Such prohibited actions include (i) issuing additional
shares or securities
15
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
convertible into shares in excess of 21,473,002 shares of the Company's common
stock in the aggregate, subject to certain exceptions; (ii) incurring additional
indebtedness if the total of (A) the principal amount of indebtedness incurred
since September 19, 2001 and then-outstanding, and (B) the net proceeds from the
issuance of any redeemable preferred stock then-outstanding, would exceed the
Company's amount of indebtedness for borrowed money 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 our aggregate value at the time
the binding agreement relating to such acquisition was entered into; (iv)
disposing of all or any substantial portion of the Company's non-cash assets;
(v) entering into non-competition agreements that would be binding on BMS, its
affiliates or any BMS director; (vi) taking certain actions that would have a
discriminatory effect on BMS or any of its affiliates as a stockholder; and
(vii) issuing capital stock with more than one vote per share.
Limitation on Additional Purchases of Shares and Other Actions -- Subject
to the exceptions set forth below, until September 19, 2006 or, if earlier, the
occurrence of any of (i) an acquisition by a third party of more than 35% of the
Company's outstanding shares, (ii) the first anniversary of a reduction in BMS's
ownership interest in the Company to below 5% for 45 consecutive days, or (iii)
the Company's taking a prohibited action under the Stockholder Agreement without
the consent of the BMS directors, neither BMS nor any of its affiliates will
acquire beneficial ownership of any shares of the Company's common stock or take
any of the following actions: (i) encourage any proposal for a business
combination with the Company's or an acquisition of our shares; (ii) participate
in the solicitation of proxies from holders of shares of the Company's common
stock; (iii) form or participate in any "group" (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934) with respect to shares of the
Company's common stock; (iv) enter into any voting arrangement with respect to
shares of the Company's common stock; or (v) seek any amendment to or waiver of
these restrictions.
The following are exceptions to the standstill restrictions described
above: (i) BMS Biologics may acquire beneficial ownership of shares of the
Company's common stock either in the open market or from the Company pursuant to
the option described below, so long as, after giving effect to any such
acquisition of shares, BMS' ownership interest would not exceed 19.9%; (ii) BMS
may make, subject to certain conditions, a proposal to the Board to acquire
shares of the Company's common stock if the Company provides material non-public
information to a third party in connection with, or begin active negotiation of,
an acquisition by a third party of more than 35% of the outstanding shares;
(iii) BMS may acquire shares of the Company's common stock if such acquisition
has been approved by a majority of the non-BMS directors; and (iv) BMS may make,
subject to certain conditions, including that an acquisition of shares be at a
premium of at least 25% to the prevailing market price, non-public requests to
the Board to amend or waive any of the standstill restrictions described above.
Certain of the exceptions to the standstill provisions described above will
terminate upon the occurrence of: (i) a reduction in BMS's ownership interest in
the Company to below 5% for 45 consecutive days, (ii) a transfer or other
disposition of shares of the Company's common stock by BMS or any of its
affiliates such that BMS and its affiliates own or have control over less than
75% of the maximum number of shares owned by BMS and its affiliates at any time
after September 19, 2001, (iii) a termination of the Commercial Agreement by BMS
due to significant regulatory or safety concerns regarding ERBITUX, or (iv) a
termination of the Commercial Agreement by the Company due to a material breach
by BMS.
Option to Purchase Shares in the Event of Dilution -- BMS Biologics has the
right under certain circumstances to purchase additional shares of common stock
from the Company at market prices, pursuant to an option granted to BMS by the
Company, in the event that BMS's ownership interest is diluted (other than by
any transfer or other disposition by BMS or any of its affiliates). BMS can
exercise this right (i) once per year, (ii) if the Company issues shares of
common stock in excess of 10% of the then-outstanding shares in one day, and
(iii) if BMS's ownership interest is reduced to below 5% or 12.5%. BMS
Biologics' right to purchase additional shares of common stock from the Company
pursuant to this option will terminate on
16
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 19, 2006 or, if earlier, upon the occurrence of (i) an acquisition by
a third party of more than 35% of the outstanding shares, or (ii) the first
anniversary of a reduction in BMS's ownership interest in the Company to below
5% for 45 consecutive days.
Transfers of Shares -- Until September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares of the Company's common stock or enter into
any arrangement that transfers any of the economic consequences associated with
the ownership of shares. After September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares or enter into any arrangement that transfers
any of the economic consequences associated with the ownership of shares, except
(i) pursuant to registration rights granted to BMS with respect to the shares,
(ii) pursuant to Rule 144 under the Securities Act of 1933, as amended or (iii)
for certain hedging transactions. Any such transfer is subject to the following
limitations: (i) the transferee may not acquire beneficial ownership of more
than 5% of the then-outstanding shares of common stock; (ii) no more than 10% of
the total outstanding shares of common stock may be sold in any one registered
underwritten public offering; and (iii) neither BMS nor any of its affiliates
may transfer shares of common stock (except for registered firm commitment
underwritten public offerings pursuant to the registration rights described
below) or enter into hedging transactions in any twelve-month period that would,
individually or in the aggregate, have the effect of reducing the economic
exposure of BMS and its affiliates by the equivalent of more than 10% of the
maximum number of shares of common stock owned by BMS and its affiliates at any
time after September 19, 2001. Notwithstanding the foregoing, BMS Biologics may
transfer all, but not less than all, of the shares of common stock owned by it
to BMS or to E.R. Squibb or another wholly-owned subsidiary of BMS.
Registration Rights -- The Company granted BMS customary registration
rights with respect to shares of common stock owned by BMS or any of its
affiliates.
COMMERCIAL AGREEMENT
Rights Granted to E.R. Squibb -- Pursuant to the Commercial Agreement, as
amended on March 5, 2002, the Company granted to E.R. Squibb (i) the exclusive
right to distribute, and the co-exclusive right to develop and promote (together
with the Company) any prescription pharmaceutical product using the compound
ERBITUX (the "product") in the United States and Canada, (ii) the co-exclusive
right to develop, distribute and promote (together with the Company and together
or co-exclusively with Merck KGaA and its affiliates) the product in Japan, and
(iii) the non-exclusive right to use the Company's registered trademarks for the
product in the United States, Canada and Japan (collectively, the "territory")
in connection with the foregoing. In addition, the Company agreed not to grant
any right or license to any third party, or otherwise permit any third party, to
develop ERBITUX for animal health or any other application outside the human
health field without the prior consent of E.R. Squibb (which consent may not be
unreasonably withheld).
Rights Granted to the Company -- Pursuant to the Commercial Agreement, E.R.
Squibb has granted to the Company and the Company's affiliates a license,
without the right to grant sublicenses (other than to Merck KGaA and its
affiliates for use in Japan and to any third party for use outside the
territory), to use solely for the purpose of developing, using, manufacturing,
promoting, distributing and selling ERBITUX or the product, any process,
know-how or other invention developed solely by E.R. Squibb or BMS that has
general utility in connection with other products or compounds in addition to
ERBITUX or the product ("E.R. Squibb Inventions").
Up-Front and Milestone Payments -- The Commercial Agreement provides for
up-front and milestone payments by E.R. Squibb to the Company of $900,000,000 in
the aggregate, of which $200,000,000 was paid on September 19, 2001,
$140,000,000 was paid on March 7, 2002, $60,000,000 was paid on March 5, 2003,
$250,000,000 is payable upon receipt of marketing approval from the FDA with
respect to an initial indication
17
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Distribution Fees -- The Commercial Agreement provides that E.R. Squibb
shall pay the Company distribution fees based on a percentage of "annual net
sales" of the product (as defined in the Commercial Agreement) 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 the product in Japan by E.R. Squibb or ImClone Systems 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 shall pay the Company
the amount of such distribution fee, and in the event of an operating loss, the
Company shall credit E.R. Squibb the amount of such distribution fee.
Development of the Product -- Responsibilities associated with clinical and
other ongoing studies are apportioned between the parties as determined by the
product development committee described below. The Commercial Agreement provides
for the establishment of clinical development plans setting forth the activities
to be undertaken by the parties for the purpose of obtaining marketing
approvals, providing market support and developing new indications and
formulations of the product. After transition of responsibilities for certain
clinical and other studies, each party is primarily responsible for performing
the studies designated to it in the clinical development plans. In the United
States and Canada, the Commercial Agreement provides that E.R. Squibb is
responsible for 100% of the cost of all clinical studies other than those
studies undertaken post-launch which are not pursuant to an IND (e.g. Phase IV
studies), the cost of which is shared equally between E.R. Squibb and ImClone
Systems. As between E.R. Squibb and ImClone Systems, each is responsible for 50%
of the costs of all studies in Japan. The Company has also agreed, and may agree
in the future, to share with E.R. Squibb, on terms other than the foregoing,
costs of clinical trials that the Company believes are not potentially
registrational but should be undertaken prior to launch in the United States,
Canada or Japan. Except as otherwise agreed upon by the parties, the Company
will own all registrations for the product and is primarily responsible for the
regulatory activities leading to registration in each country. E.R. Squibb will
be primarily responsible for the regulatory activities in each country after the
product has been registered in that country. Pursuant to the terms of the
Commercial Agreement, as amended, Andrew G. Bodnar, M.D., J.D., Senior Vice
President, Strategy and Medical & External Affairs of BMS, and a member of the
Company's Board of Directors, will oversee the implementation of the clinical
and regulatory plan for ERBITUX.
Distribution and Promotion of the Product -- Pursuant to the Commercial
Agreement, E.R. Squibb has agreed to use all commercially reasonable efforts to
launch, promote and sell the product in the territory with the objective of
maximizing the sales potential of the product and promoting the therapeutic
profile and benefits of the product in the most commercially beneficial manner.
In connection with its responsibilities for distribution, marketing and sales of
the product in the territory, E.R. Squibb is performing all relevant functions,
including but not limited to the provision of all sales force personnel,
marketing (including all advertising and promotional expenditures), warehousing
and physical distribution of the product.
However, the Company has the right, at its election and sole expense, to
co-promote with E.R. Squibb the product in the territory. Pursuant to this
co-promotion option, which the Company has exercised, the Company is entitled on
and after April 11, 2002 (at the Company's sole expense) to have the Company's
field organization participate in the promotion of the product consistent with
the marketing plan agreed upon by the parties, provided that E.R. Squibb will
retain the exclusive rights to sell and distribute the product. Except for the
Company's 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 as between E.R. Squibb and ImClone Systems, each
is responsible for 50% of the distribution, sales, marketing costs and other
related costs and expenses in Japan.
18
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Manufacture and Supply -- The Commercial Agreement provides that the
Company is responsible for the manufacture and supply of all requirements of
ERBITUX in bulk form ("API") for clinical and commercial use in the territory,
and that E.R. Squibb will purchase all of its requirements of API for commercial
use from the Company. The Company will supply API for clinical use at the
Company's fully burdened manufacturing cost, and will supply API for commercial
use at the Company's fully burdened manufacturing cost plus a mark-up of 10%.
Upon the expiration, termination or assignment of any existing agreements
between ImClone Systems and third party manufacturers, E.R. Squibb will be
responsible for processing API into the finished form of the product.
Management -- The parties have formed the following committees for purposes
of managing their relationship and their respective rights and obligations under
the Commercial Agreement:
- a Joint Executive Committee (the "JEC"), which consists of certain senior
officers of each party. The JEC is co-chaired by a representative of each
of BMS and the Company. The JEC is responsible for, among other things,
managing and overseeing the development and commercialization of ERBITUX
pursuant to the terms of the Commercial Agreement, approving the annual
budgets and multi-year expense forecasts, and resolving disputes,
disagreements and deadlocks arising in the other committees;
- a Product Development Committee (the "PDC"), which consists of members of
senior management of each party with expertise in pharmaceutical drug
development and/or marketing. The PDC is chaired by the Company's
representative. The PDC is responsible for, among other things, managing
and overseeing the development and implementation of the clinical
development plans, comparing actual versus budgeted clinical development
and regulatory expenses, and reviewing the progress of the registrational
studies;
- a Joint Commercialization Committee (the "JCC"), which consists of
members of senior management of each party with clinical experience and
expertise in marketing and sales. The JCC is chaired by a representative
of BMS. The JCC is responsible for, among other things, overseeing the
preparation and implementation of the marketing plans, coordinating the
sales efforts of E.R. Squibb and the Company, and reviewing and approving
the marketing and promotional plans for the product in the territory; and
- a Joint Manufacturing Committee (the "JMC"), which consists of members of
senior management of each party with expertise in manufacturing. The JMC
is chaired by the Company's representative (unless a determination is
made that a long-term inability to supply API exists, in which case the
JMC will be co-chaired by representatives of E.R. Squibb and the
Company). The JMC is responsible for, among other things, overseeing and
coordinating the manufacturing and supply of API and the product, and
formulating and directing the manufacturing strategy for the product.
Any matter, which is the subject of a deadlock (i.e., no consensus
decision) in the PDC, the JCC or the JMC, will be referred to the JEC for
resolution. Subject to certain exceptions, deadlocks in the JEC will be resolved
as follows: (i) if the matter was also the subject of a deadlock in the PDC, by
the co-chairperson of the JEC designated by the Company, (ii) if the matter was
also the subject of a deadlock in the JCC, by the co-chairperson of the JEC
designated by BMS, or (iii) if the matter was also the subject of a deadlock in
the JMC, by the co-chairperson of the JEC designated by the Company. All other
deadlocks in the JEC will be resolved by arbitration.
Right of First Offer -- E.R. Squibb has a right of first offer with respect
to the Company's investigational IMC-KDR monoclonal antibodies should the
Company decide to enter into a partnering arrangement with a third party with
respect to IMC-KDR antibodies at any time prior to the earlier to occur of
September 19, 2006 and the first anniversary of the date which is 45 days after
any date on which BMS's ownership interest in ImClone Systems is less than 5%.
If the Company decides to enter into a partnering arrangement during such
period, the Company must notify E.R. Squibb. If E.R. Squibb notifies the Company
that it is interested
19
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in such an arrangement, the Company will provide its proposed terms to E.R.
Squibb and the parties will negotiate in good faith for 90 days to attempt to
agree on the terms and conditions of such an arrangement. If the parties do not
reach agreement during this period, E.R. Squibb must propose the terms of an
arrangement which it is willing to enter into, and if the Company rejects such
terms the Company may enter into an agreement with a third party with respect to
such a partnering arrangement (provided that the terms of any such agreement may
not be more favorable to the third party than the terms proposed by E.R.
Squibb).
Right of First Negotiation -- If at any time during the restricted period
(as defined below), the Company is interested in establishing a partnering
relationship with a third party involving certain compounds or products not
related to IMC-KDR antibodies, the Company must notify E.R. Squibb and E.R.
Squibb will have 90 days to enter into a non-binding heads of agreement with the
Company with respect to such a partnering relationship. In the event that E.R.
Squibb and ImClone Systems do not enter into a non-binding heads of agreement,
the Company is free to negotiate with third parties without further obligation
to E.R. Squibb. The "restricted period" means the period from September 19, 2001
until the earliest to occur of (i) September 19, 2006, (ii) a reduction in BMS's
ownership interest in ImClone Systems to below 5% for 45 consecutive days, (iii)
a transfer or other disposition of shares of the Company's common stock by BMS
or any of its affiliates such that BMS and its affiliates own or have control
over less than 75% of the maximum number of shares of the Company's common stock
owned by BMS and its affiliates at any time after September 19, 2001, (iv) an
acquisition by a third party of more than 35% of the outstanding Shares, (v) a
termination of the Commercial Agreement by BMS due to significant regulatory or
safety concerns regarding ERBITUX, or (vi) the Company's termination of the
Commercial Agreement due to a material breach by BMS.
Restriction on Competing Products -- During the period from the date of the
Commercial Agreement until September 19, 2008, the parties have agreed not to,
directly or indirectly, develop or commercialize a competing product (defined as
a product that has as its only mechanism of action an antagonism of the EGF
receptor) in any country in the territory. In the event that any party proposes
to commercialize a competing product or purchases or otherwise takes control of
a third party which has developed or commercialized a competing product, then
such party must either divest the competing product within 12 months or offer
the other party the right to participate in the commercialization and
development of the competing product on a 50/50 basis (provided that if the
parties cannot reach agreement with respect to such an agreement, the competing
product must be divested within 12 months).
Ownership -- The Commercial Agreement provides that the Company own all
data and information concerning ERBITUX and the product and (except for the E.R.
Squibb Inventions) all processes, know-how and other inventions relating to the
product and developed by either party or jointly by the parties. E.R. Squibb,
however, has the right to use all such data and information, and all such
processes, know-how or other inventions, in order to fulfill its obligations
under the Commercial Agreement.
Product Recalls -- If E.R. Squibb is required by any regulatory authority
to recall the product in any country in the territory (or if the JCC determines
such a recall to be appropriate), then E.R. Squibb and ImClone Systems shall
bear the costs and expenses associated with such a recall (i) in the United
States and Canada, in the proportion of 39% for ImClone Systems and 61% for E.R.
Squibb and (ii) in Japan, in the proportion for which each party is entitled to
receive operating profit or loss (unless, in the territory, the predominant
cause for such a recall is the fault of either party, in which case all such
costs and expenses shall be borne by such party).
Mandatory Transfer -- Each of BMS and E.R. Squibb has agreed under the
Commercial Agreement that in the event it sells or otherwise transfers all or
substantially all of its pharmaceutical business or pharmaceutical oncology
business, it must also transfer to the transferee its rights and obligations
under the Commercial Agreement.
20
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Indemnification -- Pursuant to the Commercial Agreement, each party has
agreed to indemnify the other for (i) its negligence, recklessness or wrongful
intentional acts or omissions, (ii) its failure to perform certain of its
obligations under the agreement, and (iii) any breach of its representations and
warranties under the agreement.
Termination -- 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 JEC 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 PDC concerning such
additional clinical studies.
The Company has also agreed, and may agree in the future, to share with
E.R. Squibb, on terms other than the foregoing, costs of clinical trials that
the Company believes are not potentially registrational but should be undertaken
prior to launch in the United States, Canada or Japan. The Company has incurred
$987,000 pursuant to such cost sharing for the three months ended September 30,
2003 and $2,115,000 for the nine months ended September 30, 2003. The Company
has also incurred $186,000 related to the agreement with respect to development
in Japan for the three months ended September 30, 2003 and $590,000 for the nine
months ended September 30, 2003.
The Company incurred approximately $2,250,000 during the nine months ended
September 30, 2002 in legal and other advisor fees associated with the amendment
to the Commercial Agreement with BMS and affiliates, which has been expensed and
included as a separate line item in operating expenses in the Consolidated
Statements of Operations.
Amounts due from BMS related to this agreement totaled approximately
$10,935,000 and $9,739,000 at September 30, 2003 and December 31, 2002,
respectively, and are included in amounts due from corporate partners in the
Consolidated Balance Sheets. The Company recorded collaborative agreement
revenue related to this agreement in the Consolidated Statements of Operations
totaling approximately $5,387,000 and $7,248,000 for the three months ended
September 30, 2003 and 2002, respectively and $15,819,000 and $15,769,000 for
the nine months ended September 30, 2003 and 2002, respectively. Of these
amounts, $1,125,000 and $2,560,000 for the three months ended September 30, 2003
and 2002, respectively and $4,336,000 and $6,367,000 for the nine months ended
September 30, 2003 and 2002, respectively, related to reimbursable costs
associated with supplying ERBITUX for use in clinical trials associated with
this agreement. A portion of the related manufacturing costs have been expensed
in prior periods when the related raw materials were purchased and the
associated direct labor and overhead was consumed or, in the case of contract
manufacturing, when such services were performed. These costs totaled $1,125,000
and $462,000 for the three months ended September 30, 2003 and 2002,
respectively and $4,336,000 and $4,271,000 for the nine months ended September
30, 2003 and 2002, respectively. Reimbursable research and development and
marketing expenses were incurred and totaled approximately $4,262,000 and
$4,688,000 for the three months ended September 30, 2003 and 2002, respectively,
and $11,483,000 and $9,402,000 for the nine months ended September 30, 2003 and
2002, respectively. These amounts have been recorded as research and development
21
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and marketing, general and administrative expenses and also as collaborative
agreement revenue in the Consolidated Statements of Operations.
In June 2002, the Company and BMS agreed that certain ERBITUX clinical
trial costs incurred by the Company but billed to BMS under the Commercial
Agreement would in fact be borne by the Company due to such trials'
non-registrational nature. This resulted in the issuance of credit memos to BMS
during the nine months ended September 30, 2002 totaling approximately
$2,949,000, which ultimately reduced collaborative agreement revenue and license
fee revenue in the nine months ended September 30, 2002.
License fees and milestone revenue consists of the following:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
-------- ------- ------- -------
(IN THOUSANDS)
BMS:
ERBITUX license fee revenue................... $13,811 $4,841 $35,640 $12,907
Merck KGaA:
ERBITUX license fee revenue................... 56 56 167 167
BEC2 license fee revenue...................... 41 41 122 122
Other........................................... -- 58 58 58
------- ------ ------- -------
Total license fees and milestone revenue........ $13,908 $4,996 $35,987 $13,254
======= ====== ======= =======
</Table>
Collaborative agreement revenue from corporate partners consists of the
following:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS)
BMS:
ERBITUX research and development expenses.... $3,757 $4,592 $10,286 $ 8,477
ERBITUX supplied for use in clinical
trials.................................... 1,125 2,560 4,336 6,367
ERBITUX marketing expenses................... 505 96 1,197 925
Merck KGaA:
ERBITUX research and development expenses.... 324 527 1,362 1,896
ERBITUX supplied for use in clinical
trials.................................... 3,606 1,470 7,016 12,323
ERBITUX administrative expenses.............. 111 144 283 417
BEC2 research and development expenses....... 33 27 41 181
BEC2 administrative expenses................. -- -- 4 --
------ ------ ------- -------
Total collaborative agreement revenue.......... $9,461 $9,416 $24,525 $30,586
====== ====== ======= =======
</Table>
22
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due from corporate partners consist of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
BMS:
ERBITUX................................................... $10,935 $ 9,739
Merck KGaA:
ERBITUX................................................... 4,553 2,462
BEC2...................................................... 36 162
------- -------
Total amounts due from corporate partners................... $15,524 $12,363
======= =======
</Table>
Deferred revenue consists of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
BMS:
ERBITUX commercial agreement.............................. $341,198 $316,839
Merck KGaA:
ERBITUX development and license agreement................. 3,389 3,556
Prepayment of ERBITUX supplied for medical affairs
program................................................ 2,640 --
BEC2 development and commercialization agreement.......... 1,987 2,109
-------- --------
Total deferred revenue................................. 349,214 322,504
Less: current portion....................................... (50,078) (38,362)
-------- --------
Total long-term deferred revenue....................... $299,136 $284,142
======== ========
</Table>
The Company receives royalty revenue from a strategic corporate alliance
with Abbott Laboratories in diagnostics. Royalty revenue for the three months
ended September 30, 2003 and 2002 primarily includes amounts associated with the
Abbott Laboratories alliance totaling $212,000 and $620,000, respectively.
Royalty revenue for the nine months ended September 30, 2003 and 2002 primarily
includes amounts associated with the Abbott Laboratories alliance totaling
$514,000 and $1,308,000, respectively.
(9) COMMITMENTS AND CONTINGENCIES
Beginning in January 2002, a number of complaints asserting claims under
the federal securities laws against the Company and certain of its directors and
officers were filed in the U.S. District Court for the Southern District of New
York. Those actions were consolidated under the caption Irvine v. ImClone
Systems Incorporated et al., No. 02 Civ. 0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The corrected
consolidated amended complaint named the Company, as well as its former
President and Chief Executive Officer, Dr. Samuel D. Waksal, its former Chief
Scientific Officer and then-President and Chief Executive Officer, Dr. Harlan W.
Waksal, its former director and then-Chairman of the Board of Directors, Robert
F. Goldhammer, current or former directors Richard Barth, David Kies, Paul
Kopperl, John Mendelsohn and William Miller, its former General Counsel, John
Landes, and its Vice President for Marketing and Sales, Ronald Martell, as
defendants. The complaint asserted claims for securities fraud under sections
10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of
a purported class of persons who purchased the Company's publicly traded
securities between March 27, 2001 and January 25, 2002. The complaint also
asserted claims against Dr. Samuel D. Waksal under section 20A of the Exchange
23
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Act on behalf of a separate purported sub-class of purchasers of the Company's
securities between December 27, 2001 and December 28, 2001. The complaint
generally alleged that various public statements made by or on behalf of the
Company or the other defendants during 2001 and early 2002 regarding the
prospects for FDA approval of ERBITUX were false or misleading when made, that
the individual defendants were allegedly aware of material non-public
information regarding the actual prospects for ERBITUX at the time that they
engaged in transactions in the Company's common stock and that members of the
purported stockholder 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. The complaint sought to proceed on
behalf of the alleged class described above, sought monetary damages in an
unspecified amount and seeks recovery of plaintiffs' costs and attorneys' fees.
On November 25, 2002, all defendants other than Dr. Samuel D. Waksal filed a
motion to dismiss the complaint for failure to state a claim. On June 3, 2003,
the court granted that motion in part, dismissing the complaint as to defendants
Messrs. Goldhammer, Barth, Kies, Kopperl, Landes, Martell, Mendelsohn and
Miller, but not dismissing it as to the Company and Dr. Harlan W. Waksal. The
Company, Dr. Harlan W. Waksal and Dr. Samuel D. Waksal each filed an answer to
the complaint on June 27, 2003. On July 31, 2003 plaintiffs filed a motion for
class certification. The Company has until November 21, 2003 to oppose class
certification. Document discovery is ongoing in the action.
Separately, on September 17, 2002, an individual purchaser of the Company's
common stock filed an action on his own behalf asserting claims against the
Company, Dr. Samuel D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and
20(a) of the Exchange Act and SEC Rule 10b-5. That action is styled Flynn v.
ImClone Systems Incorporated, et al., No. 02 Civ. 7499 and, in contrast to the
Irvine case discussed above, this case was not filed against any of the
Company's outside directors. In this case, plaintiff alleges that he purchased
shares on various dates in late 2001, that various public statements made by the
Company or the other defendants during 2001 regarding the prospects for FDA
approval of ERBITUX were false or misleading when made and that plaintiff relied
on such allegedly false and misleading information in making his purchases.
Plaintiff seeks compensatory damages of not less than $180,000 and punitive
damages of $5,000,000, together with interest, costs and attorneys' fees. On
November 25, 2002, both defendants other than Dr. Samuel D. Waksal filed a
motion to dismiss the complaint for failure to state a claim. On June 3, 2003,
the court denied that motion. Discovery has commenced in the action.
Beginning on January 13, 2002, and continuing thereafter, nine separate
purported shareholder derivative actions were filed against members of the
Company's board of directors, certain of its present and former officers, and
the Company, as nominal defendant, among others, advancing claims based on
allegations similar to the allegations in the federal securities class action
complaints. Four of these derivative cases were filed in the Delaware Court of
Chancery and have been consolidated in that court under the caption In re
ImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.
Three of these derivative actions were filed in New York State Supreme Court in
Manhattan, (styled Boghosian v. Barth, et al., Index No. 100759/02, Johnson v.
Barth, et al. Index No. 601304/02, and Henshall v. Bodnar, et al., Index No.
603121/02) and have been consolidated under the caption In re ImClone Systems,
Inc. Shareholder Derivative Litigation, Index No. 02-100759. All of these state
court actions have been stayed in deference to the proceeding in the U.S.
District Court for the Southern District of New York. Two purported derivative
actions, Lefanto v. Waksal, et al., No. 02 Civ. 0163 (RO) and Forbes v. Barth,
et al., No. 02 Civ. 1400 (RO), have been filed in the U.S. District Court for
the Southern District of New York and have been consolidated under the caption
In re ImClone Systems, Inc. Shareholder Derivative Litigation, Master File No.
02-CV-163 (RO). A supplemental verified consolidated amended derivative
complaint in these federal actions was filed on August 8, 2003. It asserts,
purportedly on behalf the Company, claims for breach of fiduciary duty by
certain current and former members of the Company's board of directors, among
others, based on allegations including that they improperly disclosed
information relating to the regulatory and marketing prospects for ERBITUX and
that they failed to maintain adequate controls and to exercise due care with
regard to the
24
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's ERBITUX application to the FDA. On or before November 25, 2003, the
Company and the Directors anticipate filing a motion to dismiss the supplemental
verified consolidated amended derivative complaint.
On October 8, 2003, certain mutual funds that are past or present common
stockholders of BMS filed an action in New York State court asserting that they
were misled into purchasing or holding their shares of BMS common stock as the
result of various public statements by BMS and certain present or former
officers or directors of BMS, and that the Company allegedly aided and abetted
certain of these misstatements. The action is styled FSS Franklin Global Health
Care Fund, et al. v. Bristol-Myers Squibb Co., et al., Index No. 603168/03. By
stipulation, the time for all defendants to respond to the complaint has been
extended until December 19, 2003.
The Company intends to vigorously defend itself against the claims asserted
in these actions. The Company is unable to predict the outcome of these actions
at this time. Because the Company does not believe that a loss is probable, no
legal reserve has been established.
The Company has received subpoenas and requests for information in
connection with investigations by the SEC, 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 "refusal to file" letter dated December
28, 2001, and trading in the Company's securities by certain Company insiders in
2001. The Company has also received subpoenas and requests for information
pertaining to document retention issues in 2001 and 2002, and to certain
communications regarding ERBITUX in 2000. The Company is cooperating with all of
these inquiries and intends to continue to do so.
On June 19, 2002, the Company received a written "Wells Notice" from the
staff of the SEC, indicating that the staff of the SEC is considering
recommending that the SEC bring an action against the Company relating to the
Company's disclosures immediately following the receipt of a "refusal to file"
letter from the FDA on December 28, 2001 for the Company's BLA for ERBITUX. The
Company filed a Wells submission on July 12, 2002 in response to the staff's
Wells Notice.
The Company incurred legal fees associated with these matters of
approximately $1,007,000 and $2,973,000 for the three months ended September 30,
2003 and 2002, respectively, and $3,186,000 and $9,249,000 during the nine
months ended September 30, 2003 and 2002, respectively. The Company has
estimated and recorded a receivable totaling $2,166,000 and $5,340,000 as of
September 30, 2003 and December 31, 2002, respectively, for a portion of the
above mentioned legal fees that the Company believes are recoverable from its
insurance carriers. This receivable is included in other current assets in the
Consolidated Balance Sheets.
On August 7, 2002, a federal grand jury in the Southern District of New
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on December 27, 2001 he directed a family member to
sell shares of the Company's common stock and attempted to sell shares that he
owned in advance of an expected announcement that the FDA had issued a "refusal
to file" letter with respect to the Company's application for approval of
ERBITUX. The Company received such a "refusal to file" letter from the FDA on
December 28, 2001, and announced the receipt of that letter following the close
of trading that day. On June 10, 2003, Dr. Samuel D. Waksal was sentenced to an
eighty-seven month prison term and ordered to pay $4,200,000 in fines and
restitution.
On August 14, 2002, after the federal grand jury indictment of Dr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of that indictment, the Company filed an action in New York State
Supreme Court seeking recovery of certain compensation, including advancement of
certain defense costs, that the Company had paid to or on behalf of Dr. Samuel
D. Waksal. That action,
25
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No. 02/602996, is
in its earliest stages. On July 25, 2003, Dr. Samuel D. Waksal filed a demand
for arbitration seeking to have all claims in connection with the Company's
action against Dr. Samuel D. Waksal resolved in arbitration. By Order dated
September 19, 2003, the Court granted Dr. Samuel D. Waksal's motion and the
action was stayed pending arbitration. On September 25, 2003, Dr. Samuel D.
Waksal submitted a Demand for Arbitration with the American Arbitration
Association (the "AAA"), by which Dr. Samuel D. Waksal asserts claims to enforce
the terms of his separation agreement, including provisions relating to
advancement of legal fees, expenses, interest and indemnification, for which Dr.
Samuel D. Waksal claims unspecified damages of $10 million. The Demand for
Arbitration also seeks to resolve the claims that the Company asserted in the
New York State Supreme Court action. On November 7, 2003, the Company filed an
Answer and Counterclaims by which the Company denied Dr. Samuel D. Waksal's
entitlement to advancement of legal fees, expenses and indemnification, and
asserted claims seeking recovery of certain compensation, including stock
options, cash payments and advancement of certain defense costs that the Company
had paid to or on behalf of Dr. Samuel D. Waksal. The arbitration is in its
initial stages. Because the Company does not believe that a loss is probable, no
legal reserve has been established.
In October 2001, the Company entered into a sublease for a four-story
building at 325 Spring Street, New York, New York, which includes between 75,000
and 100,000 square feet of usable space. The Company is currently analyzing its
options with respect to this subleased space, which may or may not be designed,
improved or used by the Company in the future, depending on its business needs
and alternative uses. The Company expects to reach decisions and take actions
regarding the use of this space before the end of 2003. The accounting impact of
this decision (which may include a significant charge against earnings) is
expected to be included in the fourth quarter of 2003, and is expected to
reflect the Company's estimate of the anticipated eventual disposition of the
space, including a potential sublease to third parties. The sublease has a term
of 22 years, followed by two five-year renewal option periods. The future
minimum lease payments remaining at September 30, 2003, are approximately
$49,258,000 over the term of the sublease. In order to induce the sublandlord to
enter into the sublease, the Company made a loan to the sublandlord in the
principal amount of a $10,000,000 note receivable. The loan is secured by a
leasehold mortgage on the prime lease as well as a collateral assignment of
rents by the sublandlord. The loan 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, the Company paid the owner a consent fee in the
amount of $500,000.
In January 2003, 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. 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
promptly informed the IRS, the SEC and the United States Attorney's Office,
responsible for the prosecution of Dr. Samuel D. Waksal, of this issue. In order
to confirm whether its liability in this regard was limited to Dr. Samuel D.
Waksal's failure to pay income taxes, the Company contacted current and former
officers, directors and employees who had exercised non-qualified stock options
in 1999 and 2000 to confirm that those individuals had satisfied their personal
income tax liabilities, which payments would reduce or eliminate the Company's
potential liability for failure to withhold income taxes on the exercise of
non-qualified stock options. In the course of doing so, the Company became aware
of another potential income and employment tax withholding liability associated
with the exercise of certain warrants granted in the early years of the
Company's existence that were held by certain former officers, directors and
employees, including Dr. Samuel D. Waksal, John B. Landes, Dr. Harlan W. Waksal
and Robert F. Goldhammer. Again, the Company promptly informed the IRS, the SEC
and the United States Attorney's Office of this issue. On June 17, 2003, New
York State notified the Company that, based on the issue identified above, it is
continuing a previously conducted audit of the Company and is evaluating the
26
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms of the closing agreement to determine whether or not it should be
re-opened. On March 31, 2003, the Company received notification from the SEC
that it was conducting an informal inquiry into both of these matters and, on
April 2, 2003, the Company received a request from the SEC for the voluntary
production of related documents and information. The Company is cooperating
fully with this SEC inquiry and the United States Attorney's Office and is
updating the applicable taxing authorities on an ongoing basis and intends to
continue to do so.
The IRS has commenced audits of the Company's income tax and employment tax
returns, and New York State has commenced audits of the Company's employment tax
returns, for tax years 1999 through 2001. On July 31, 2003, the Company received
an Information Document Request in connection with the IRS employment tax audit.
The Company is cooperating fully with the IRS and New York State with respect to
these audits, and intends to continue to do so.
The Company has not recognized withholding tax liabilities in respect of
exercises of certain warrants by Robert F. Goldhammer, one of the four former
officers or directors to whom warrants were issued and previously treated as
non-compensatory warrants. Based on the Company's investigation, it 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 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 the Company 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 taxes on the exercise of such warrants and
any stock options by Mr. Goldhammer, the aggregate 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 in Note 4 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 that could be imposed by taxing authorities
would be substantial. The potential interest on the withholding tax liabilities
recorded on the Consolidated Balance Sheets could be up to a maximum amount of
approximately $9,200,000 at September 30, 2003. 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.
On October 28, 2003, a complaint was filed by Yeda Research and Development
Company Ltd. ("Yeda") against ImClone Systems and Aventis Pharmaceuticals, Inc.
in the U.S. District Court for the Southern District of New York (03 CV 8484).
This action alleges and seeks that three individuals associated with Yeda should
also be named as co-inventors on U.S. Patent No. 6,217,866. The Company intends
to vigorously defend against the claims asserted in this action, which is in its
earliest stages. The Company is unable to predict the outcome of this action at
the present time. Because the Company does not believe that a loss is probable,
no legal reserve has been established.
27
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) CERTAIN RELATED PARTY TRANSACTIONS
In September 2001 and February 2002, the Company entered into employment
agreements with six senior executive officers, including, in September 2001,
then-President and Chief Executive Officer, Dr. Samuel D. Waksal, and then-Chief
Operating Officer, Dr. Harlan W. Waksal. The September 2001 agreements each have
three-year terms and the February 2002 agreement had a one-year term. The
February 2002 agreement was amended in April 2002 and is now expired. The
employment agreements provided for stated base salaries, minimum bonuses and
benefits aggregating $3,765,000 annually. Dr. Samuel D. Waksal resigned and
entered into a separation agreement with the Company in May 2002 and Dr. Harlan
W. Waksal was appointed President and Chief Executive Officer. Dr. Harlan W.
Waksal resigned from the position of President and Chief Executive Officer and
was named the Company's Chief Scientific Officer in April 2003. On July 18,
2003, Dr. Harlan W. Waksal provided the Company with notice of his termination
effective July 22, 2003 in connection with his employment agreement. Pursuant to
his employment agreement with the Company, Dr. Harlan W. Waksal received a lump
sum payment totaling approximately $4,424,000 and is entitled to receive for
defined periods of time the continuation of certain benefits including health
care and life insurance coverage through July 2006, with an estimated cost of
$38,000. The related expense of $4,462,000 is included in marketing, general and
administrative expenses in the Consolidated Statements of Operations for the
three and nine months ended September 30, 2003. In addition, all outstanding
stock options held by Dr. Harlan W. Waksal, comprising options to purchase
1,000,000 shares of common stock of the Company at a per share exercise price of
$50.01 that were granted on September 19, 2001, were deemed amended such that
the 666,666 options that remained unvested as of the date of his resignation
vested immediately on that date. The amended stock option awards can be
exercised at any time until the end of the term of such awards. No compensation
expense attributable to the stock options was recorded because the change in
terms is in accordance with the terms of the original award and also because the
fair market value of the Company's common stock was below the $50.01 exercise
price on the date the option award was amended. In October 2002, the Company
accepted the resignation and entered into a separation agreement with the
Company's former General Counsel, John B. Landes, who held one of the
aforementioned employment agreements. See Note 11 for discussion of the
separation agreements.
In August 2002 and September 2002, the Company entered into one-year
agreements with two executive officers. The employment agreements provided for
aggregate stated base salaries of $390,000 and are now expired.
Certain transactions engaged in by the Company's former President and Chief
Executive Officer, Dr. Samuel D. Waksal, in securities of the Company were
deemed to have resulted in "short-swing profits" under Section 16 of the
Exchange Act. In accordance with Section 16(b) of the Exchange Act, Dr. Samuel
D. Waksal paid the Company an aggregate amount of approximately $486,000 in
March 2002, and an additional amount of approximately $79,000 in July 2002, as
disgorgement of "short-swing profits" he was deemed to have realized. The
amounts received were recorded as an increase to Additional paid-in capital.
(11) SEPARATION AGREEMENTS
On May 22, 2002, the Company accepted the resignation of its then-President
and Chief Executive Officer, Dr. Samuel D. Waksal. In connection with the
resignation, on May 24, 2002 the Company and Dr. Samuel D. Waksal executed a
separation agreement whereby Dr. Samuel D. Waksal received a lump sum payment
totaling $7,000,000 and was entitled to receive for defined periods of time the
continuation of certain benefits including health care and life insurance
coverage with an estimated cost of $283,000. The related expense of $7,283,000
was included in Marketing, general and administrative expenses in the
Consolidated Statements of Operations for the nine months ended September 30,
2002. In addition, 1,250,000 stock option awards granted to Dr. Samuel D. Waksal
on September 19, 2001 which were exercisable at a per share exercise price of
$50.01 and constituted all outstanding stock option awards held by Dr. Samuel D.
Waksal,
28
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were deemed amended such that the unvested portion vested immediately as of the
date of termination. The amended stock option awards can be exercised at any
time until the end of the term of such awards. No compensation expense was
recorded because the fair market value of the Company's common stock was below
the $50.01 exercise price on the date the option award was amended. On August 7,
2002, a federal grand jury indicted Dr. Samuel D. Waksal. The Company has
learned that Dr. Samuel D. Waksal, in contravention of Company policy, directed
the destruction of certain of his personal records that were, or could be
perceived to be relevant to the pending government investigations. Accordingly,
on August 14, 2002, after the federal grand jury indictment of Dr. Samuel D.
Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to certain
counts of that indictment, the Company filed an action in New York State Supreme
Court seeking recovery of certain compensation, including advancement of certain
defense costs, that the Company had paid to or on behalf of Dr. Samuel D.
Waksal. That action, styled ImClone Systems Incorporated v. Samuel D. Waksal,
Index No. 02/602996, is in its earliest stages. On July 25, 2003, Dr. Samuel D.
Waksal filed a demand for arbitration seeking to have all claims in connection
with the Company's action against Dr. Samuel D. Waksal resolved in arbitration.
By Order dated September 19, 2003, the Court granted Dr. Samuel D. Waksal's
motion and the action was stayed pending arbitration. On September 25, 2003, Dr.
Samuel D. Waksal submitted a Demand for Arbitration with the American
Arbitration Association (the "AAA"), by which Dr. Samuel D. Waksal asserts
claims to enforce the terms of his separation agreement, including provisions
relating to advancement of legal fees, expenses, interest and indemnification,
for which Dr. Samuel D. Waksal claims unspecified damages of $10 million. The
Demand for Arbitration also seeks to resolve the claims that the Company
asserted in the New York State Supreme Court action. On November 7, 2003, the
Company filed an Answer and Counterclaims by which the Company denied Dr. Samuel
D. Waksal's entitlement to advancement of legal fees, expenses and
indemnification, and asserted claims seeking recovery of certain compensation,
including stock options, cash payments and advancement of certain defense costs
that the Company had paid to or on behalf of Dr. Samuel D. Waksal. The
arbitration is in its initial stages.
In October 2002, the Company accepted the resignation of its then-General
Counsel, John B. Landes. The Company and Mr. Landes executed a separation
agreement whereby Mr. Landes was to receive his stated base salary from the date
of termination through October 2003 and certain benefits including healthcare
and life insurance coverage through December 2002. In May 2003, the Company
suspended payments under this separation agreement in response to the
withholding tax liabilities discussed in Note 4.
(12) 2002 STOCK OPTION PLAN
In June 2002, the shareholders approved and the Company adopted the 2002
Stock Option Plan. The plan provides for the granting of both incentive stock
options and non-qualified stock options to purchase 3,300,000 shares of the
Company's common stock to employees, directors, consultants and advisors of the
Company. Options granted under the plan generally vest over one to five year
periods and, unless earlier terminated, expire ten years from the date of grant.
Incentive stock options granted under the 2002 stock option plan may not exceed
825,000 shares of common stock, may not be granted at a price less than the fair
market value of the stock at the date of grant and may not be granted to
non-employees.
In September 2003, the shareholders approved an amendment to the plan that
increased the maximum total number of shares of common stock currently available
for grant of options under the plan from 3,300,000 shares to 6,600,000 shares,
and increased the number of shares of common stock with respect to which
incentive stock options may be granted under the plan from 825,000 shares to
1,650,000 shares.
(13) ANNUAL INCENTIVE PLAN
In September 2003, the shareholders approved and the Company adopted the
Annual Incentive Plan. The plan permits the Compensation Committee to grant
performance awards based upon pre-established performance goals to executives of
the Company and its subsidiaries selected by the Compensation
29
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Committee, whether or not such executives, at the time of grant, are subject to
the limit on deductible compensation under Section 162(m) of the Internal
Revenue Code. The Annual Incentive Plan became effective as of January 1, 2003.
(14) EMPLOYEE BENEFIT PLAN
All employees of the Company who meet certain minimum age and period of
service requirements are eligible to participate in a 401(k) defined
contribution plan. The 401(k) plan allows eligible employees to defer up to 25
percent of their annual compensation, subject to certain limitations imposed by
federal law. The amounts contributed by employees are immediately vested and
non-forfeitable. Under the 401(k) plan, the Company, at management's discretion,
may match employee contributions and/or make discretionary contributions.
Neither the employee contributions nor voluntary matching contributions are
invested in the Company's securities. Total expense incurred by the Company was
$83,000 and $66,000 for the three months ended September 30, 2003 and 2002,
respectively, and $299,000 and $244,000 for the nine months ended September 30,
2003 and 2002, respectively.
30
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A. LITIGATION
1. FEDERAL SECURITIES ACTIONS
Beginning in January 2002, a number of complaints asserting claims under
the federal securities laws against us and certain of our directors and officers
were filed in the U.S. District Court for the Southern District of New York.
Those actions were consolidated under the caption Irvine v. ImClone Systems
Incorporated et al., No. 02 Civ. 0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The corrected
consolidated amended complaint named us, as well as our former President and
Chief Executive Officer, Dr. Samuel D. Waksal, our former Chief Scientific
Officer and then-President and Chief Executive Officer, Dr. Harlan W. Waksal,
our former director and then-Chairman of our Board of Directors, Robert
Goldhammer, current or former directors Richard Barth, David Kies, Paul Kopperl,
John Mendelsohn and William Miller, our former General Counsel, John Landes, and
our Vice President for Marketing and Sales, Ronald Martell, as defendants. The
complaint asserted claims for securities fraud under sections 10(b), 20(a) and
Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of a purported
class of persons who purchased our publicly traded securities between March 27,
2001 and January 25, 2002. The complaint also asserted claims against Dr. Samuel
D. Waksal under section 20A of the Exchange Act on behalf of a separate
purported sub-class of purchasers of our securities between December 27, 2001
and December 28, 2001. The complaint generally alleged that various public
statements made by or on behalf of us or the other defendants during 2001 and
early 2002 regarding the prospects for United States Food and Drug
Administration ("FDA") approval of ERBITUX were false or misleading when made,
that the individual defendants were allegedly aware of material non-public
information regarding the actual prospects for ERBITUX at the time that they
engaged in transactions in our common stock and that members of the purported
stockholder class suffered damages when the market price of our common stock
declined following disclosure of the information that allegedly had not been
previously disclosed. The complaint sought to proceed on behalf of the alleged
class described above, sought monetary damages in an unspecified amount and
seeks recovery of plaintiffs' costs and attorneys' fees. On November 25, 2002,
all defendants other than Dr. Samuel D. Waksal filed a motion to dismiss the
complaint for failure to state a claim. On June 3, 2003, the court granted that
motion in part, dismissing the complaint as to defendants Messrs. Goldhammer,
Barth, Kies, Kopperl, Landes, Martell, Mendelsohn and Miller, but not dismissing
it as to the Company and Dr. Harlan W. Waksal. The Company, Dr. Harlan W. Waksal
and Dr. Samuel D. Waksal each filed an answer to the complaint on June 27, 2003.
On July 31, 2003 plaintiffs filed a motion for class certification. The Company
has until November 21, 2003 to oppose class certification. Document discovery is
ongoing in the action.
Separately, on September 17, 2002, an individual purchaser of our common
stock filed an action on his own behalf asserting claims against the Company,
Dr. Samuel D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and 20(a) of
the Exchange Act and SEC Rule 10b-5. That action is styled Flynn v. ImClone
Systems Incorporated, et al., No. 02 Civ. 7499 and, in contrast to the Irvine
case discussed above, this case was not filed against any of our outside
directors. In this case, the plaintiff alleges that he purchased shares on
various dates in late 2001, that various public statements made by us or the
other defendants during 2001 regarding the prospects for FDA approval of ERBITUX
were false or misleading when made and that plaintiff relied on such allegedly
false and misleading information in making his purchases. Plaintiff seeks
compensatory damages of not less than $180,000 and punitive damages of $5
million, together with interest, costs and attorneys' fees. On November 25,
2002, both defendants other than Dr. Samuel D. Waksal filed a motion to dismiss
the complaint for failure to state a claim. On June 3, 2003, the court denied
that motion. Discovery has commenced in the action.
31
We intend to vigorously defend against the claims asserted in these
actions. We are unable to predict the outcome of these actions at this time.
Because we do not believe that a loss is probable, no legal reserve has been
established.
2. DERIVATIVE ACTIONS
Beginning on January 13, 2002, and continuing thereafter, nine separate
purported shareholder derivative actions were filed against members of our board
of directors, certain of our present and former officers, and us, as nominal
defendant, among others, advancing claims based on allegations similar to the
allegations in the federal securities class action complaints. Four of these
derivative cases were filed in the Delaware Court of Chancery and have been
consolidated in that court under the caption In re ImClone Systems Incorporated
Derivative Litigation, Cons. C.A. No. 19341-NC. Three of these derivative
actions were filed in New York State Supreme Court in Manhattan, (styled
Boghosian v. Barth, et al., Index No. 100759/02, Johnson v. Barth, et al., Index
No. 601304/02, and Henshall v. Bodnar, et al., Index No. 603121/02) and have
been consolidated under the caption In re ImClone Systems, Inc. Shareholder
Derivative Litigation, Index No. 02-100759. All of these state court actions
have been stayed in deference to the proceeding in the U.S. District Court for
the Southern District of New York. Two purported derivative actions, Lefanto v.
Waksal, et al., No. 02 Civ. 0163 (RO) and Forbes v. Barth, et al., No. 02 Civ.
1400 (RO), have been filed in the U.S. District Court for the Southern District
of New York and have been consolidated under the caption In re ImClone Systems,
Inc. Shareholder Derivative Litigation, Master File No. 02 CV 163 (RO). A
supplemental verified consolidated amended derivative complaint in these
consolidated federal actions was filed on August 8, 2003. It asserts,
purportedly on behalf of the Company, claims including breach of fiduciary duty
by certain current and former members of our board of directors, among others,
based on allegations including that they improperly disclosed information
relating to the regulatory and marketing prospects for ERBITUX and that they
failed to maintain adequate controls and to exercise due care with regard to the
Company's ERBITUX application to the FDA. On or before November 25, 2003, we and
our Directors anticipate filing a motion to dismiss the supplemental verified
consolidated amended derivative complaint.
On October 8, 2003, certain mutual funds that are past or present common
stockholders of BMS filed an action in New York State court asserting that they
were misled into purchasing or holding their shares of BMS common stock as the
result of various public statements by BMS and certain present or former
officers or directors of BMS, and that the Company allegedly aided and abetted
certain of these misstatements. The action is styled FSS Franklin Global Health
Care Fund, et al. v. Bristol-Myers Squibb Co., et al., Index No. 603168/03. By
stipulation, the time for all defendants to respond to the complaint has been
extended until December 19, 2003.
We intend to vigorously defend against the claims asserted in these
actions, which are in their earliest stages. We are unable to predict the
outcome of these actions at this time. Because we do not believe that a loss is
probable, no legal reserve has been established.
B. GOVERNMENT INQUIRIES AND INVESTIGATIONS
As previously reported, we have received subpoenas and requests for
information in connection with investigations by the Securities and Exchange
Commission (the "SEC"), 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 "refusal to file" letter dated December 28, 2001 and trading in our
securities by certain ImClone Systems insiders in 2001. We have also received
subpoenas and requests for information pertaining to document retention issues
in 2001 and 2002, and to certain communications regarding ERBITUX in 2000. We
are cooperating with all of these inquiries and intend to continue to do so.
On June 19, 2002, we received a written "Wells Notice" from the staff of
the SEC, indicating that the staff of the SEC is considering recommending that
the SEC bring an action against us relating to our disclosures immediately
following the receipt of a "refusal to file" letter from the FDA on December 28,
2001
32
for our BLA for ERBITUX. We filed a Wells submission on July 12, 2002 in
response to the staff's Wells Notice.
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. On March 13, 2003, we
entered into a closing agreement with New York Sate, 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. At the same time, we informed the
Internal Revenue Service, the SEC and the United States Attorney's Office,
responsible for the prosecution of Dr. Samuel D. Waksal, of this issue. In order
to confirm whether our liability in this regard was limited to Dr. Samuel D.
Waksal's failure to pay income taxes, we contacted current and former officers
and employees who had exercised non-qualified stock options to confirm that
those individuals had properly reported and paid their personal income tax
liabilities for the years 1999 and 2000 in which they exercised options, which
would reduce or eliminate our potential liability for failure to withhold income
taxes on the exercise of those options. In the course of doing so, we became
aware of another potential income and employment tax withholding liability
associated with the exercise of certain warrants granted in the early years of
our existence that were held by certain former officers, directors and
employees, including our former President and Chief Executive Officer, Samuel D.
Waksal, our former General Counsel, John B. Landes, our former Chief Scientific
Officer, Harlan W. Waksal, and our former director and Chairman of the Board,
Robert F. Goldhammer. Again, we promptly informed the Internal Revenue Service,
the SEC and the United States Attorney's Office of this issue. We also informed
New York State of this issue. On June 17, 2003, New York State notified us that,
based on this issue, 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.
The IRS has commenced audits of our income tax and employment tax returns,
and New York State has commenced audits of our employment tax returns, for tax
years 1999 through 2001. On July 31, 2003, we received an Information Document
Request in connection with the IRS employment tax audit. We are cooperating
fully with the IRS and New York State with respect to these audits, and intend
to continue to do so.
On March 31, 2003, we received notification from the SEC that it was
conducting an informal inquiry into both of these matters and on April 2, 2003,
we received a request from the SEC for the voluntary production of related
documents and information. We are cooperating fully with this SEC inquiry and
are updating the applicable taxing authorities on an ongoing basis and intend to
continue to do so.
C. INDICTMENT AND PLEA OF DR. SAMUEL D. WAKSAL; ACTION AGAINST DR. SAMUEL D.
WAKSAL
On August 7, 2002, a federal grand jury in the Southern District of New
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on December 27, 2001 he directed a family member to
sell shares of our common stock and attempted to sell shares that he owned in
advance of an expected announcement that the FDA had issued a "refusal to file"
letter with respect to our application for approval of ERBITUX. We received such
a "refusal to file" letter from the FDA on December 28, 2001 and announced our
receipt of that letter following the close of trading that day. On June 10,
2003, Dr. Samuel D. Waksal was sentenced to an eighty-seven month prison term
and ordered to pay $4,200,000 in fines and restitution.
On August 14, 2002, after the federal grand jury indictment of Dr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of that indictment, we filed an action in New York State Supreme
Court seeking recovery of certain compensation, including advancement of certain
defense costs, that we had paid to or on behalf of Dr. Samuel D. Waksal. That
action, styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No.
02/602996, is in its earliest stages. On July 25, 2003,
33
Dr. Samuel D. Waksal filed a demand for arbitration seeking to have all claims
in connection with our action against Dr. Samuel D. Waksal resolved in
arbitration. By Order dated September 19, 2003, the Court granted Dr. Samuel D.
Waksal's motion and the action was stayed pending arbitration. On September 25,
2003, Dr. Samuel D. Waksal submitted a Demand for Arbitration with the American
Arbitration Association (the "AAA"), by which Dr. Samuel D. Waksal asserts
claims to enforce the terms of his separation agreement, including provisions
relating to advancement of legal fees, expenses, interest and indemnification,
for which Dr. Samuel D. Waksal claims unspecified damages of $10 million. The
Demand for Arbitration also seeks to resolve the claims that we asserted in the
New York State Supreme Court action. On November 7, 2003, we filed an Answer and
Counterclaims by which we denied Dr. Samuel D. Waksal's entitlement to
advancement of legal fees, expenses and indemnification, and asserted claims
seeking recovery of certain compensation, including stock options, cash payments
and advancement of certain defense costs that we had paid to or on behalf of Dr.
Samuel D. Waksal. The arbitration is in its initial stages. Because we do not
believe that a loss is probable, no legal reserve has been established.
D. INTELLECTUAL PROPERTY LITIGATION
On October 28, 2003, a complaint was filed by Yeda Research and Development
Company Ltd. ("Yeda") against ImClone Systems and Aventis Pharmaceuticals, Inc.
in the U.S. District Court for the Southern District of New York (03 CV 8484).
This action alleges and seeks that three individuals associated with Yeda should
also be named as co-inventors on U.S. Patent No. 6,217,866. We intend to
vigorously defend against the claims asserted in this action, which is in its
earliest stages. We are unable to predict the outcome of this action at the
present time. Because we do not believe that a loss is probable, no legal
reserve has been established.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<Table>
<Caption>
EXHIBIT INCORPORATION
NO. DESCRIPTION BY REFERENCE
- ------- ----------- -------------
3.1 Certificate of Incorporation, as amended through December A (3.1)
31, 1998
3.1A Amendment dated June 2, 1999 to the Company's Certificate of B (3.1A)
Incorporation, as amended
3.1B Amendment dated June 12, 2000 to the Company's Certificate C (3.1A)
of Incorporation, as amended
3.1C Amendment dated August 9, 2002 to the Company's Certificate D (3.1C)
of Incorporation, as amended
3.2 Amended and Restated By-Laws of the Company E (3.2)
4.1 Indenture dated as of February 29, 2000 by and between the F (10.74)
Company and The Bank of New York, as Trustee
4.2 Form of 5 1/2% Convertible Subordinated Notes Due 2005 F (10.75)
4.3 Rights Agreement dated as of February 15, 2002 between the G (99.2)
Company and EquiServe Trust Company, N.A., as Rights Agent
4.4 Stockholder Agreement, dated as of September 19, 2001, H (99.D2)
among, Bristol-Myers Squibb Company, Bristol-Myers Squibb
Biologics Company and the Company
31.1* Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
31.2* Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
</Table>
34
- ---------------
* Filed herewith.
(A) Previously filed with the Commission; incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(B) Previously filed with the Commission; incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(C) Previously filed with the Commission; incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(D) Previously filed with the Commission; incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(E) Previously filed with the Commission; incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
(F) Previously filed with the Commission; incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(G) Previously filed with the Commission; incorporated by reference to the
Company's Current Report on Form 8-K dated February 15, 2002.
(H) Previously filed with the Commission; incorporated by reference to the
Company's Schedule 14D-9 filed on September 28, 2001.
(b) Reports on Form 8-K
During the third quarter of 2003, the Company filed or furnished the
following reports on Form 8-K:
(1) Report on Form 8-K dated July 3, 2003 filing under Items 5, 7 and
12 the Company's first quarter financial results press release;
(2) Report on Form 8-K dated July 9, 2003 filing under Items 5 and 7 a
press release of the Company; and
(3) Report on Form 8-K dated August 14, 2003 filing under Items 5 and
7 a press release of the Company.
35
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)
By /s/ DANIEL S. LYNCH
--------------------------------------
Daniel S. Lynch
Senior Vice President and Chief
Administrative Officer; Acting Chief
Executive Officer
Date: November 13, 2003
By /s/ MICHAEL J. HOWERTON
--------------------------------------
Michael J. Howerton
Vice President, Finance and Business
Development; Acting Chief Financial
Officer and Secretary
Date: November 13, 2003
36