1
Millennium Pharmaceuticals, Inc.
SELECTED FINANCIAL DATA
Year Ended December 31, 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
Statements of Operations Data:
(in thousands, except share and per share data)
Revenue under strategic alliances $ -- $ 7,963 $ 22,880 $ 31,764 $ 89,933
Costs and expenses:
Research and development 2,859 10,990 17,838 34,803 74,828
General and administrative 1,530 3,240 3,292 7,973 16,517
Acquired in-process R&D -- -- -- -- 83,800
Amortization of intangible asset -- -- -- -- 2,397
- ---------------------------------------------------------------------------------------------------------------------
4,389 14,230 21,130 42,776 177,542
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (4,389) (6,267) 1,750 (11,012) (87,609)
Interest income (expense), net 101 (105) (466) 2,244 2,977
Minority Interest -- -- -- -- 3,410
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,288) $ (6,372) $ 1,284 $ (8,768) $ (81,222)
- ---------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share
(pro forma in 1995 and 1996) $ 0.09 $ (0.40) $ (2.87)
Shares used in computing basic net
income (loss) per share 13,851,639 21,696,894 28,322,722
Diluted net income (loss) per share
(pro forma in 1995 and 1996) $ 0.07 $ (0.40) $ (2.87)
Shares used in computing diluted net
income (loss) per share 17,853,914 21,696,894 28,322,722
Year Ended December 31, 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
(in thousands)
Cash, cash equivalents and
marketable securities $4,629 $ 6,105 $17,847 $63,848 $ 96,557
Working capital 3,517 3,151 10,498 60,273 85,571
Total assets 6,156 10,101 25,105 87,744 144,513
Long-term debt, net of current portion -- 3,067 1,467 -- --
Capital lease obligations, net of
current portion 826 2,359 2,499 9,308 19,809
Stockholders' equity $4,164 $ 1,559 $13,096 $66,639 $ 91,755
The net income (loss) per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards (FAS) No.
128, "Earnings per Share."
[29]
2
Millennium Pharmaceuticals, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Millennium Pharmaceuticals, Inc. ("Millennium" or "the Company") is applying a
comprehensive platform of genomics and related technologies to pursue multiple
opportunities in the discovery and development of life-science-based products
and services. Most of the Company's activities currently are directed at the
field of human healthcare. During 1997, the Company expanded its capabilities
and extended the application of its core technologies through an acquisition,
establishment of three subsidiaries, and a major alliance with Monsanto Company
("Monsanto").
On February 10, 1997, the Company acquired ChemGenics Pharmaceuticals Inc.
("ChemGenics") for 4,783,688 shares of Company Common Stock at $21.50 per share,
approximately $103 million in the aggregate, in exchange for all outstanding
shares of common stock of ChemGenics. In addition, a principal shareholder of
ChemGenics received approximately $4 million in settlement of a promissory note
and repurchase of warrants previously issued by ChemGenics, and outstanding
warrants were purchased from another shareholder of ChemGenics for approximately
$.5 million. Upon the closing of the acquisition, ChemGenics became a
wholly-owned subsidiary of Millennium. In May 1997, ChemGenics was merged into
Millennium and ceased to be a separate company. At the time of the acquisition,
ChemGenics had approximately 70 employees and occupied approximately 11,500
square feet of laboratory and office space in Cambridge, Massachusetts.
In May 1997, the Company established Millennium BioTherapeutics, Inc. ("MBio"),
a subsidiary whose mission is to discover and develop therapeutic proteins and
antibodies, vaccines, gene therapy, and antisense products. Pursuant to a
Technology Transfer and License Agreement, the Company transferred and/or
licensed certain technology to MBio in exchange for 9,000,000 shares of the
subsidiary's Series A Convertible Preferred Stock. At that time, MBio entered
into a strategic alliance with Eli Lilly and Company ("Lilly") for the discovery
and development of novel therapeutic proteins. Under the terms of a related
stock purchase agreement, Lilly made an equity in vestment of $20 million of
Series B Convertible Preferred Stock of MBio. Lilly owns approximately 18%
of the outstanding capital stock of MBio.
In September 1997, the Company established two wholly-owned subsidiaries,
Millennium Predictive Medicine, Inc. ("MPMx"), whose mission is to develop
products and services to optimize the prevention, diagnosis, treatment and
management of disease, and Millennium Information, Inc. ("MInfo"), whose mission
is to generate and integrate biomedical data and develop information products
and services for use by the healthcare industry. MPMx and MInfo devoted
substantially all their activities in 1997 to establishing business plans and
recruiting key employees.
In October 1997, the Company entered into a collaborative agreement with
Monsanto under which the Company granted to Monsanto exclusive rights to its
technologies in the field of plant agriculture, as well as a non-exclusive
license to its technologies outside the plant agriculture field. Under this
agreement, Millennium agreed to collaborate exclusively with a new subsidiary of
Monsanto in the application of those technologies.
[30]
3
To date, all of the Company's revenues have resulted from payments from
strategic partners and United States government research grants. The Company has
not received any revenue from the sale of products.
The Company has entered into several strategic alliances: in March 1994 with
Hoffmann-La Roche, Inc. ("Roche") in obesity and type II diabetes; in October
1995, March 1996 and, through MBio, in May 1997 with Eli Lilly and Company
("Lilly") in atherosclerosis, select areas of oncology, and therapeutic
proteins, respectively; in December 1995 with Astra AB ("Astra") in inflammatory
respiratory diseases; in July 1996 with the Wyeth-Ayerst Division of American
Home Products ("AHP") in certain disorders of the central nervous system; and in
October 1997 with Monsanto in plant agriculture. In addition, through its
acquisition of ChemGenics the Company became engaged in alliances with Pfizer,
Inc. ("Pfizer") in the area of antifungal treatments and with AHP in the area of
bacterial diseases. These agreements have provided the Company with various
combinations of equity investments, up-front and follow-on fees and research
funding and may provide certain additional payments contingent upon the
attainment of research and regulatory milestones and royalty and/or profit
sharing payments based on sales of any products resulting from the
collaborations. From inception through December 31, 1997, the Company has
received approximately $185 million in revenues and equity payments under all of
its alliances.
The Company intends to enter into additional strategic alliances. The Company
expects to incur increasing expenses and may incur increasing operating losses
for at least the next several years, primarily due to expansion of its
facilities and its research and development programs. The receipt of payments
under strategic alliance and licensing arrangements will be subject to
significant fluctuation in both timing and amounts, which may result in periods
of profitability and periods of losses. Therefore, the Company's results of
operations for any period may not be comparable to the results of operations for
any other period.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and December 31, 1996
Revenue under strategic alliances increased to $89.9 million for the year ended
December 31, 1997 (the "1997 Period") from $31.8 million for the year ended
December 31, 1996 (the "1996 Period"). During the 1997 Period, the Company
recognized revenue from six partners, Roche, Lilly, Astra, AHP, Pfizer and
Monsanto, in nine alliances. During the 1996 Period, the Company recognized
strategic alliance revenue from four partners, Roche, Lilly, Astra, and AHP, in
five alliances. The 1997 Period included a $38.0 million up-front payment from
Monsanto received in December, as well as a full year of research funding under
five alliances, revenues under the former ChemGenics alliances beginning
February 1997, and an up-front payment and funding under the MBio-Lilly alliance
beginning in May 1997. The 1996 Period included an up-front license fee from AHP
and various research milestone payments. Effective March 1996, Lilly exercised
its option to enter into a strategic alliance with the Company in select areas
of oncology. As a result, the Company recognized $2.8 million of revenue that
had been previously deferred.
Research and development expenses increased to $74.8 million for the 1997 Period
from $34.8 million for the 1996 Period. The increase was primarily attributable
to increased payroll and personnel expenses associated with staffing growth due
to the ChemGenics acquisition, the establishment and staffing of MBio, and other
additional research and development personnel. Related to these costs were
increases in facilities expenses, increases in expenditures for the purchase of
laboratory supplies, and increased equipment depreciation. The Company expects
research and development expenses to continue to increase as personnel are added
and as
[31]
4
research and development facilities are expanded to accommodate the Company's
existing strategic alliances and additional commitments that the Company may
undertake in the future.
General and administrative expenses increased to $16.5 million for the 1997
Period from $8.0 million for the 1996 Period. The increase was primarily
attributable to increased payroll and personnel expenses as the Company hired
additional management and administrative personnel, as well as to increases in
facilities expenses, consulting, and other professional fees associated with the
expansion and increased complexity of the Company's operations and business
development efforts. The Company anticipates that general and administrative
expenses will continue to increase as the Company continues to grow.
In connection with the ChemGenics acquisition, the Company incurred a
non-recurring charge of $83.8 million for acquired in-process research and
development, as well as amortization expense of $2.4 million. The in-process
research and development was charged to operations because in management's
opinion technological feasibility for the acquired research and development has
not been established and will require a significant amount of additional
expenditures over a number of years.
The Company had net interest income of $3.0 million for the 1997 Period and net
interest income of $2.2 million for the 1996 Period. The increase in net
interest income was attributable to an increase in interest income resulting
from an increase in the Company's average cash balance offset in part by an
increase in interest expense resulting from additions to obligations under
capitalized leases during 1997. The minority interest of $3.4 million represents
the entire net loss of MBio. This loss is attributed completely to the minority
stockholder because the minority stockholder has provided all equity funding for
MBio.
Years Ended December 31, 1996 and December 31, 1995
Revenue under strategic alliances increased to $31.8 million for the 1996 Period
from $22.9 million for the year ended December 31, 1995 (the "1995 Period").
During the 1996 Period, the Company recognized strategic alliance revenue from
four partners, Roche, Lilly, Astra, and AHP. During the 1995 Period, strategic
alliance revenue was primarily received from Roche, however in the fourth
quarter of 1995, the Company received license fees from new collaborations with
Lilly and Astra. The 1996 Period also included an up-front license fee from AHP
and various research milestone payments. Effective March 1996, Lilly exercised
its option to enter into a strategic alliance in select areas of oncology. In
connection with the execution of this agreement, the Company recognized $2.8
million of revenue that had been previously deferred.
Research and development expenses increased to $34.8 million for the 1996 Period
from $17.8 million for the 1995 Period. The increase was primarily attributable
to increased payroll and personnel expenses as the Company hired additional
research and development personnel, increased purchases of laboratory supplies,
increased equipment depreciation and facilities expenses in connection with the
expansion of the Company's research efforts and increased costs associated with
the collection of patient information and DNA samples.
General and administrative expenses increased to $8.0 million for the 1996
Period from $3.3 million for the 1995 Period. The increase was primarily
attributable to increased payroll and personnel expenses as the Company hired
additional management and administrative personnel, and professional fees in
connection with the overall scale-up of the Company's operations and business
development efforts.
The Company had net interest income of $2.2 million for the 1996 Period and net
interest expense of $.5 million for the 1995 Period. The transition to net
interest income was due to increased interest income earned on higher balances
of cash and investment securities.
[32]
5
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
strategic alliances, a public offering, private placement of equity securities,
and issuance of debt and capital leases. Through December 31, 1997, the Company
recognized approximately $152 million of revenue under strategic alliances. In
May 1996, the Company completed an initial public offering of common stock
resulting in proceeds, net of underwriting discounts and offering costs, of
$57.1 million. The private placement of equity securities has provided the
Company with aggregate gross proceeds of approximately $45.9 million. The
Company has obtained $4.0 million in long-term debt, $33.8 million in capital
lease financings, and $1.1 million to finance the build-out of an 8,000 square
foot in-house animal facility. As of December 31, 1997, the Company had
approximately $96.6 million in cash, cash equivalents and marketable securities.
During 1997 the Company acquired assets under capital leases totaling $17.4
million and expended an additional $4.3 million for equipment and leasehold
improvements. At December 31, 1997 the aggregate outstanding commitments under
capital lease obligations was $25.7 million. The Company expects capital
expenditures to continue at a level at least as significant as expenditures in
1997 over the next several years as it expands facilities and acquires equipment
to support increased research and development efforts. In addition, the Company
has entered into commitments to provide security deposits associated with
facilities leases of approximately $7.4 million during 1998.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $14.4 million to offset future federal and state taxable income
through 2012. Due to the degree of uncertainty related to the ultimate
realization of such prior losses, no benefit has been recognized as of December
31, 1997. Moreover, utilization of such losses in future years may be limited
under the change of stock ownership rules of the Internal Revenue Service.
The Company believes that existing cash and marketable securities and
anticipated cash payments from its strategic alliances will be sufficient to
support the Company's operations until at least the end of 1999. The Company's
forecast of the period of time through which its financial resources will be
adequate to support its operations is forward-looking information, and, as such,
actual results may vary. Factors that may cause actual results to vary include
those set forth below under the heading "Factors Affecting Future Operating
Results."
IMPACT OF YEAR 2000
Based on a recent assessment, the Company determined that it will not be
required to modify or replace significant portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company's systems are based upon technology acquired
in the last few years. Therefore, the Company presently believes that no signi-
ficant modifications to existing software are needed based on presently
available information.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report to Stockholders contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends,"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below and
elsewhere in this Annual Report to Stockholders and in the Section titled
"Business-Factors which May Affect Results" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission, which Section is incorporated herein by reference.
[33]
6
To date, the Company has not developed or commercialized any products or
services based on its technological approaches. There can be no assurance that
these approaches will enable the Company to successfully discover and develop
life-science-based products and services. In addition, the Company faces intense
competition from commercial and academic organizations, many of which are larger
and better financed.
The Company has a substantial accumulated deficit. The Company expects that it
may incur losses for at least the next several years and that such losses may
increase as the Company expands its research and development activities. The
Company will require substantial additional funds for its research and
development programs, operating expenses, the pursuit of regulatory approvals
and expansion of its production, sales and marketing capabilities. Adequate
funds for these purposes, whether through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds could require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise develop or commercialize itself.
The Company's strategy for development and commercialization of therapeutic and
diagnostic products based upon its discoveries and technologies depends upon the
formation of various strategic alliances, licensing and technology transfer
arrangements. There can be no assurance that current or any future strategic
alliances, licensing, or technology transfer arrangements ultimately will be
successful. If any of the Company's strategic partners were to breach or
terminate its agreement with the Company or otherwise fail to conduct its
collaborative activities successfully in a timely manner, such breach,
termination or other failure could have a material adverse effect on the
Company's business, financial condition and results of operations.
Proprietary rights relating to the products, methods and services of the Company
will be protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. There can be no assurance that any pending patent
applications relating to the products, methods and services of the Company will
result in patents being issued or that any such patents will afford protection
against competitors with similar technology. There may be pending or issued
third-party patents relating to the methods and services of the Company and the
Company may need to acquire licenses to, or to contest the validity of, any such
patents. It is likely that significant funds would be required to defend any
claim that the Company infringes a third-party patent. There can be no assurance
that any license required under any such patent would be made available.
During 1997, the Company significantly increased the scale of its operations to
support the expansion of its disease research programs and alliances, including
the acquisition of ChemGenics Pharmaceuticals Inc. in February 1997, the
establishment of subsidiaries, and the establishment of a major technology
transfer arrangement with Monsanto. The resulting growth in personnel and
facilities could place significant strains on the Company's management,
operations and systems. Inability to manage such growth effectively could have a
material adverse effect on the Company's business, financial position and
results of operations.
Other factors that may affect the Company's future operating results include the
inherent risk of product liability claims which may result from testing,
marketing and sale of pharmaceutical products, fluctuations in the Company's
quarterly operating results, the Company's ability to continue to attract and
retain qualified management and scientific staff, and the ability of the
Company's alliance partners or the Company to obtain on a timely basis
regulatory approvals for marketing and sale of products and to compete
successfully in the market.
[34]
7
Millennium Pharmaceuticals, Inc.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Millennium Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Millennium
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Millennium Pharmaceuticals, Inc. at December 31, 1997 and 1996, and the
consolidated results of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
February 12, 1998
Boston, Massachusetts
[35]
8
Millennium Pharmaceuticals, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996
(in thousands, except par value and shares)
- ---------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 69,236 $ 10,088
Marketable securities 27,321 53,760
Due from strategic partners 778 5,710
Prepaid expenses and other current assets 4,595 2,513
- ---------------------------------------------------------------------------------------------
Total current assets 101,930 72,071
Property and equipment, net 29,030 15,191
Restricted cash and other assets 5,140 482
Intangible asset, net 8,413 --
- ---------------------------------------------------------------------------------------------
Total assets $144,513 $ 87,744
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,165 $ 2,262
Accrued expenses 4,294 1,284
Deferred revenue 3,053 3,543
Current portion of long-term debt -- 1,467
Current portion of capital lease obligations 5,847 3,241
- ---------------------------------------------------------------------------------------------
Total current liabilities 16,359 11,797
Capital lease obligations, net of current portion 19,809 9,308
Minority interest 16,590 --
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value;
5,000,000 shares authorized, none issued -- --
Common Stock, $0.001 par value;
100,000,000 shares, authorized; 29,169,398 shares in 1997 and
23,914,151 shares in1996 issued and outstanding 29 24
Additional paid-in capital 193,254 87,790
Deferred compensation (1,992) (2,768)
Notes receivable from officers (166) (245)
Unrealized loss on marketable securities (4) (18)
Accumulated deficit (99,366) (18,144)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 91,755 66,639
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $144,513 $ 87,744
[36]
9
Millennium Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1997 1996 1995
(in thousands, except per share and share data)
- -------------------------------------------------------------------------------------------------
Revenue under strategic alliances $ 89,933 $ 31,764 $ 22,880
Costs and expenses:
Research and development 74,828 34,803 17,838
General and administrative 16,517 7,973 3,292
Acquired in-process R&D 83,800 -- --
Amortization of intangible asset 2,397 -- --
- -------------------------------------------------------------------------------------------------
177,542 42,776 21,130
- -------------------------------------------------------------------------------------------------
Income (loss) from operations (87,609) (11,012) 1,750
Interest income 4,412 3,131 358
Interest expense (1,435) (887) (824)
Minority interest 3,410 -- --
- -------------------------------------------------------------------------------------------------
Net income (loss) $ (81,222) $ (8,768) $ 1,284
- -------------------------------------------------------------------------------------------------
Basic net income (loss) per share
(pro forma in 1995 and 1996) $ (2.87) $ (0.40) $ 0.09
Shares used in computing basic net
income (loss) per share 28,322,722 21,696,894 13,851,639
Diluted net income (loss) per share
(pro forma in 1995 and 1996) $ (2.87) $ (0.40) $ 0.07
Shares used in computing diluted
net income (loss) per share 28,322,722 21,696,894 17,853,914
[37]
10
Millennium Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1997 1996 1995
(in thousands)
- --------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $(81,222) $ (8,768) $ 1,284
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Acquired in-process R&D 83,800 -- --
Depreciation and amortization 12,168 3,867 1,726
Minority interest (3,410) -- --
Net loss on asset disposal 433 199 --
Amortized interest income -- (280) --
Stock compensation 1,614 795 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,706) (1,818) (533)
Due from strategic partners 4,932 (3,967) (1,463)
Restricted cash and other assets (4,465) (288) (18)
Accounts payable and accrued expenses 2,962 1,856 442
Deferred revenue (1,480) 433 3,110
- --------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 13,626 (7,971) 4,548
Investing activities
Purchase of property and equipment (4,256) (3,210) (760)
Sale of marketable securities 58,728 52,595 1,172
Purchase of marketable securities (30,778) (99,113) (8,432)
- --------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 23,694 (49,728) (8,020)
Financing activities
Proceeds from sale of Common Stock and warrants -- 57,403 110
Proceeds from sale of subsidiary stock 20,000 -- --
Acquisition of ChemGenics, net of cash acquired 7,087 -- --
Net proceeds from employee stock purchases 2,039 653 --
Loan to officer 79 (21) --
Payments on long-term debt (1,467) (1,600) (934)
Payments of capital lease obligations (5,910) (2,734) (1,473)
Proceeds from sale of Preferred Stock -- 3,500 10,250
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 21,828 57,201 7,953
Increase (decrease) in cash and cash equivalents 59,148 (498) 4,481
Cash and cash equivalents at beginning of year 10,088 10,586 6,105
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 69,236 $ 10,088 $10,586
- --------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Equipment acquired under capital leases $ 17,426 $ 11,142 $ 2,215
[38]
11
Millennium Pharmaceuticals, Inc.
Statements of Stockholders' Equity
(in thousands, except shares) Convertible Preferred Stock Common Stock
- -----------------------------------------------------------------------------------------------------
shares amount shares amount
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1994 9,700,000 $ 10 2,963,280 $ 3
Issuance of Series B
Convertible Preferred Stock 750,000 1
Issuance of Series C
Convertible Preferred Stock 1,333,333 1
Issuance of Common Stock in
exchange for note from officer 533,364
Issuance of Common Stock 1,047,543 1
Repurchase of Common Stock (332,261)
Net income
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 11,783,333 12 4,211,926 4
Issuance of Series D
Convertible Preferred Stock 388,888
Conversion of Convertible Preferred
Stock to Common Stock (12,172,221) (12) 12,172,221 12
Issuance of Common Stock 5,175,000 5
Repurchase of Common Stock (342,818)
Exercise of stock warrants 300,000 1
Employee stock purchases 2,343,197 2
Issuance of Common Stock in
exchange for note from officer 54,625
Forgiveness of notes from officers
Deferred stock compensation
Stock compensation earned
Unrealized loss on marketable securities
Net loss
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 23,914,151 24
Issuance of Common Stock 4,783,688 5
Repurchase of Common Stock (87,130)
Exercise of stock warrants 123,589
Employee stock purchases 415,312
Forgiveness of notes from officers
Stock compensation expense
Write off deferred stock compensation
Stock compensation earned
Unrealized gain on marketable securities
401K stock match 19,788
Net loss
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 29,169,398 $ 29
[39]
12
Unrealized
Note Loss on Total
(in thousands, except shares) Additional Deferred Receivable Marketable Accumulated Stockholders'
Paid-in Capital Compensation From Officers Securities Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 12,206 $(10,660) $ 1,559
Issuance of Series B
Convertible Preferred Stock 2,249 2,250
Issuance of Series C
Convertible Preferred Stock 7,999 8,000
Issuance of Common Stock in
exchange for note from officer 159 $(266) (107)
Issuance of Common Stock 109 110
Repurchase of Common Stock
Net income 1,284 1,284
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 22,722 (266) (9,376) 13,096
Issuance of Series D
Convertible Preferred Stock 3,500 3,500
Conversion of Convertible Preferred
Stock to Common Stock
Issuance of Common Stock 57,097 57,102
Repurchase of Common Stock (3) (3)
Exercise of stock warrants 300 301
Employee stock purchases 654 656
Issuance of Common Stock in
exchange for note from officer 33 (54) (21)
Forgiveness of notes from officers 75 75
Deferred stock compensation 3,487 $(3,487)
Stock compensation earned 719 719
Unrealized loss on marketable securities $(18) (18)
Net loss (8,768) (8,768)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 87,790 (2,768) (245) (18) (18,144) 66,639
Issuance of Common Stock 102,844 (247) 102,602
Repurchase of Common Stock (23) (23)
Exercise of stock warrants
Employee stock purchases 2,062 2,062
Forgiveness of notes from officers 79 79
Stock compensation expense 370 370
Write off deferred stock compensation (119) 119
Stock compensation earned 904 904
Unrealized gain on marketable securities 14 14
401K stock match 330 330
Net loss (81,222) (81,222)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 193,254 $(1,992) $(166) $(4) $(99,366) $91,755
[40]
13
Millennium Pharmaceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
[1] BASIS OF PRESENTATION
The Company
The Company, incorporated in January 1993, is applying a comprehensive platform
of genomics and related technologies in the discovery and development of
life-science-based products and services, primarily in the field of human
healthcare. The consolidated financial statements include the accounts of the
Company and its 82% owned subsidiary, Millennium BioTherapeutics, Inc. ("MBio"),
as well as its wholly-owned subsidiaries, Millennium Predictive Medicine, Inc.
("MPMx") and Millennium Information, Inc. ("MInfo"). As more fully described in
Note 3, the consolidated financial statements include the accounts of ChemGenics
Pharmaceuticals Inc. ("ChemGenics") subsequent to February 10, 1997. All
intercompany transactions have been eliminated in consolidation.
Risks and Uncertainties
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
[2] SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Marketable Securities
Cash equivalents consist principally of money market funds and corporate bonds
with original maturities of three months or less at the date of purchase. Cash
equivalents and marketable securities at December 31, 1997 and 1996 are
classified as available-for-sale.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and marketable securities.
The Company's cash equivalents and marketable securities are held by high-credit
quality financial institutions. By policy, the Company limits the credit
exposure to any one financial institution. At December 31, 1997, the Company had
no significant concentrations of credit risk.
Property and Equipment
Equipment consists principally of assets held under capitalized leases and is
stated at the present value of future minimum lease obligations. Depreciation is
recorded over the shorter of the estimated useful life or the term of the lease
using the straight-line method. Leasehold improvements are stated at cost and
are amortized over the remaining life of the building lease.
Intangible Asset
Goodwill recorded in connection with the ChemGenics acquisition (See Note 3) is
being amortized over a period of four years.
[41]
14
Revenue Recognition
The Company recognizes revenue under strategic alliances as research services
are performed, reimbursable expenses are incurred, certain milestones are
achieved or license fees are earned.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Financial Accounting Standards Board
("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," as this
alternative requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, when the exercise price
of options granted under these plans equals the market price of the underlying
stock on the date of grant, no compensation expense is required.
Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
financial statements.
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and income tax bases of assets and liabilities, as well as net operating loss
carryforwards, and are measured using the enacted tax rates and laws that will
be in effect when the differences reverse. Deferred tax assets may be reduced by
a valuation allowance to reflect the uncertainty associated with their ultimate
realization.
Fair Value of Financial Instruments
The carrying amounts reported in the Company's balance sheets for other current
assets and long-term debt approximate their fair value. The fair values of the
Company's long-term debt are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Net Income (Loss) Per Share
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Pursuant to the previous
requirements of the Securities and Exchange Commission ("SEC"), common shares
and common share equivalents issued by the Company during the twelve-month
period prior to the initial public offering of the Company's common stock had
been included in the calculations as if they were outstanding for all periods
prior to the offering in May 1996 whether or not they were anti-dilutive. In
February 1998, the SEC issued Staff Accounting Bulletin 98 which, among other
things, conformed prior SEC requirements to Statement 128 and eliminated
inclusion of such shares in the computation of earnings per share. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 and SEC requirements.
[42]
15
Net loss per share for 1997 is computed using the weighted average number of
common shares outstanding. Pro forma income (loss) per share for 1996 and 1995
is computed using the weighted average number of common shares, convertible
preferred shares assuming conversion at date of issuance, and dilutive
equivalent shares from stock options and warrants using the treasury stock
method. At December 31, 1995, the difference between basic and diluted shares
used in the computation of earnings per share is the 4,002,275 weighted average
common equivalent shares resulting from outstanding common stock options and
warrants. Historical earnings per share for 1996 and 1995 have not been
presented since such amounts are not deemed meaningful due to the significant
change in the Company's capital structure that occurred in connection with the
initial public offering.
Reclassifications
Certain balances reported in previous years have been reclassified to conform to
the 1997 presentation.
[3] MERGER
On February 10, 1997, the Company acquired ChemGenics for 4,783,688 shares of
Common Stock at $21.50 per share, approximately $103 million in the aggregate.
In addition, a principal shareholder of ChemGenics received approximately $4
million in settlement of a promissory note and repurchase of warrants previously
issued by ChemGenics, and outstanding warrants were purchased from another
shareholder of ChemGenics for approximately $.5 million. The transaction has
been recorded as a purchase for accounting purposes. Consequently, the operating
results of ChemGenics have been included in the Company's financial statements
from the date of acquisition, and the fair value of the issued shares has been
allocated to the assets purchased and liabilities assumed based upon their
respective fair values. The acquisition resulted in goodwill of $10.8 million
which is being amortized over a period of four years. The 1997 amortization
expense recorded was $2.4 million. In connection with the acquisition, the
Company incurred a non-recurring charge of $83.8 million for acquired in-process
research and development which was charged to operations because in management's
opinion technological feasibility for the acquired research and development had
not been established.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of ChemGenics had occurred at the beginning of
1997 and 1996:
Year ended December 31, 1997 December 31, 1996
(in thousands, except share and per share amounts)
- ---------------------------------------------------------------------------------------------
PRO FORMA:
Revenues under strategic alliances $ 90,426 $ 35,337
Net loss $ (82,386) $ (107,171)
Net loss per share $ (2.86) $ (4.05)
Shares used in calculating net loss per share 28,860,068 26,480,582
The pro forma net loss and net loss per share amounts for each period above
include the acquired in-process research and development charge. The pro forma
consolidated results do not purport to be indicative of results that would have
occurred had the acquisition been in effect for the periods presented, nor do
they purport to be indicative of the results that will be obtained in the
future.
[4] SUBSIDIARIES
Millennium BioTherapeutics, Inc.
In May 1997, the Company established Millennium BioTherapeutics, Inc. ("MBio")
as a subsidiary and, pursuant to a Technology Transfer and License Agreement,
transferred and/or
[43]
16
licensed certain technology to MBio in exchange for 9,000,000 shares of the
subsidiary's Series A Convertible Preferred Stock. At that time, MBio entered
into a strategic alliance with Eli Lilly and Company ("Lilly") for the discovery
and development of novel therapeutic proteins (Footnote 5). Under the terms of a
related stock purchase agreement, Lilly purchased $20 million of Series B
Convertible Preferred Stock of MBio for an approximate 18% equity interest in
MBio. The accompanying consolidated financial statements include the accounts of
MBio since inception. The minority interest included in the accompanying
consolidated balance sheet reflects the equity interest of Lilly in MBio as of
the balance sheet date, and the minority interest included in the accompanying
consolidated statement of operations represents the minority stockholder's
interest in the net loss of MBio for the year ended December 31, 1997. Since the
minority stockholder has provided all equity funding, the entire net loss of
MBio is attributed to the minority stockholder.
The Company is not required to provide any funds for the operations of MBio, but
has entered into certain agreements with this subsidiary to provide specific
services and facilities at negotiated fees. Such fees amounted to $5.6 million
in 1997. All such intercompany transactions have been eliminated in
consolidation.
Millennium Predictive Medicine, Inc. and Millennium Information, Inc. In
September 1997, the Company established a wholly-owned subsidiary, Millennium
Predictive Medicine, Inc. ("MPMx") to develop products and services to optimize
the prevention, diagnosis, treatment and management of disease. In addition, in
September 1997 the Company incorporated Millennium Information, Inc. ("MInfo")
to generate and integrate biomedical data and develop information products and
services for use by the healthcare industry. These subsidiaries devoted
substantially all their activities in 1997 to establishing business plans and
recruiting key employees. Any intercompany expenses with these subsidiaries have
been eliminated in consolidation.
[5] REVENUES--STRATEGIC ALLIANCES
The Company has formed strategic alliances with major participants in
marketplaces where its discovery expertise and technology platform are
applicable. These agreements include alliances based on the transfer of the
Company's technology platform, alliances which combine technology transfer with
a focus on a specific disease or therapeutic approach, and disease-based
programs under which the Company conducts research funded by its partners.
Technology-based alliance
In October 1997, the Company entered into its major technology transfer alliance
through a collaborative agreement with Monsanto Company ("Monsanto"). Under this
agreement, the Company granted to Monsanto exclusive rights to its technologies
in the field of plant agriculture, as well as a non-exclusive license to its
technologies outside the plant agriculture field. Millennium has agreed to
collaborate exclusively with Monsanto in the application of those technologies
through the establishment of a subsidiary, wholly-owned by Monsanto. Monsanto
has agreed to pay $118 million in up-front, licensing, and technology transfer
fees over the five year term of the agreement. The agreement also provides for
payments from Monsanto to the Company of up to $100 million over five years
contingent upon achieving mutually agreed upon research objectives, and provides
further that Millennium will receive royalty payments from the sale of products,
if any, originating from the research conducted by the Monsanto subsidiary. The
Company received $38 million in revenues under this agreement in 1997.
MBio alliance
In May 1997, the Company, through its MBio subsidiary, entered into a
collaborative agreement with Eli Lilly and Company ("Lilly") in connection with
its program to discover and
[44]
17
develop therapeutic proteins. The agreement covers an initial three year period
during which Lilly will provide $8 - $10 million annually in research funding,
with a two year renewal option at the same funding level. Under the terms of the
agreement, MBio and Lilly will jointly fund the collaborative program and each
company will share the rights to use and commercialize the resulting
discoveries. Additional licensing fees, development milestones and royalties
will be payable by Lilly in connection with specific therapeutic protein product
candidates identified through the collaboration and licensed by Lilly. MBio
received approximately $5.5 million in revenues under this alliance in 1997.
Disease-based/technology alliances
The Company's disease-based alliances and alliances which combine
technology-transfer with a disease focus are generally structured as research
collaborations. Under these arrangements, the Company performs research in a
specific disease area aimed at discoveries leading to novel pharmaceutical
(small molecule) products. These alliances generally provide research funding
over an initial period, with renewal provisions which vary by agreement. Under
these agreements, the Company's partners are required to make additional
payments upon the achievement of specific research and product development
milestones, and will pay royalties or in some cases profit-sharing payments to
the Company based upon any product sales resulting from the collaboration. The
Company realized revenues of approximately $46.3 million from seven such
alliances in 1997, $31.8 million from five such alliances in 1996, and $22.9
million from three such alliances in 1995.
Alliances beginning in 1997
Through its merger with ChemGenics, the Company became engaged in an alliance
with the Wyeth-Ayerst Division of American Home Products ("AHP") to discover and
develop antibacterial drugs for human use, as well as a collaboration with
Pfizer, Inc. ("Pfizer") to discover and develop antifungal treatments for human
use. Under the terms of the AHP agreement, as amended in 1997, AHP is funding
and collaborating with the Company over a five year period ending in December
2001. Under the terms of the Pfizer agreement, as amended in 1997, Pfizer is
funding a discovery program through December 1998.
Alliances beginning in 1996
In July 1996, the Company entered into a strategic alliance with AHP to discover
and develop targets and assays to identify and develop small molecule drugs and
vaccines for treatment and prevention of disorders of the central nervous
system. In addition, this agreement provides for the license and transfer of
certain technology to AHP. If certain specified research objectives are not met,
AHP may terminate the agreement after three years or five years.
Alliances beginning in 1995
In December 1995, the Company entered into a strategic alliance with Astra AB in
the field of inflammatory respiratory diseases. After three years, Astra has the
option to continue the strategic alliance through the fifth year, or extend the
agreement through seven years. In October 1995, the Company entered into a
strategic alliance with Lilly in the field of atherosclerosis. Under the terms
of this agreement, Lilly purchased $8 million of Series C Convertible Preferred
Stock, subsequently converted into 1,333,333 shares Common Stock. The Lilly
alliance included an option permitting Lilly to fund research in other fields.
Effective March 1996, Lilly exercised this option and entered into a strategic
alliance with the Company in select areas of oncology. If certain specified
research objectives are not met, Lilly may terminate these agreements after
three years. Moreover, these agreements may be voluntarily terminated by Lilly
at any time after three years.
[45]
18
Alliances beginning in 1994
In March 1994, the Company entered into a five-year strategic alliance with
Hoffmann-La Roche Inc. ("Roche") in the fields of obesity and type II diabetes.
Under the terms of a related stock purchase agreement, an affiliate of Roche
purchased $6 million of Series B Convertible Preferred Stock, subsequently
converted into 2,000,000 shares of Common Stock.
[6] MARKETABLE SECURITIES
Marketable securities consist of high-grade corporate bonds, which are carried
at fair value, with the unrealized gains and losses reported in a separate
component of stockholders' equity. At December 31, 1997 and 1996 these
securities had a cost of $27.3 million and $53.8 million, and an estimated fair
value of $27.3 million and $53.8 million, resulting in gross unrealized gains of
$4 thousand and $12 thousand and gross unrealized losses of $8 thousand and $30
thousand respectively. There have been no realized gains or losses on sales of
any securities in 1997, 1996, or 1995.
The amortized cost and estimated fair value of debt securities at December 31,
by contractual maturity, are shown below ($ in thousands).
1997 1996
- --------------------------------------------------------------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------
Due in one year or less $27,325 $27,321 $43,637 $43,639
Due in one year to two years -- -- 10,141 10,121
- --------------------------------------------------------------------------------------
$27,325 $27,321 $53,778 $53,760
[7] PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 ($ in
thousands):
1997 1996
- --------------------------------------------------------------------------------
Equipment $37,452 $18,827
Leasehold improvements 4,576 2,468
- --------------------------------------------------------------------------------
42,028 21,295
Less accumulated depreciation and amortization 12,998 6,104
- --------------------------------------------------------------------------------
$29,030 $15,191
[8] COMMITMENTS
Lease commitments
The Company conducts the majority of its operations in leased facilities with
leased equipment. At December 31, 1997 and 1996, respectively, the Company
has capitalized leased equipment totaling $33.5 million and $17.3 million,
with related accumulated amortization of $12.0 million and $6.0 million.
The Company leases its primary laboratory and office space under an operating
lease agreement with a fixed term of ten years and a five-year renewal option.
The Company leases additional laboratory and office facilities under operating
leases expiring in 1998, 1999, 2000, and 2003, with various renewal options. In
November 1997, the Company entered into a lease commitment for a new laboratory
and office facility to be constructed during 1998 and planned for occupancy in
the first quarter of 1999, with a fifteen year term beginning upon occupancy. In
addition to minimum lease commitments, these lease agreements require payment of
the Company's pro rata share of property taxes and building operating expenses.
At December 31, 1997, the Company has pledged $4.3 million of marketable
securities as security for two letters of credit for the same amount with the
purpose of securing leased facilities.
[46]
19
At December 31, 1997, future minimum commitments under leases with
non-cancelable terms of more than one year are as follows ($ in thousands):
Capital Leases Operating Leases
- ---------------------------------------------------------------------------------
Year
1998 $ 7,494 $ 5,494
1999 7,678 3,165
2000 6,326 2,332
2001 5,870 2,180
2002 3,025 2,180
Thereafter 5 2,078
- ---------------------------------------------------------------------------------
Total $30,398 $17,429
Less amount representing interest 4,742
- ---------------------------------------------------------------------------------
Present value of minimum lease payments 25,656
Less current portion of capital lease obligations 5,847
- ---------------------------------------------------------------------------------
Capital lease obligations $19,809
Total rent expense was $4.2 million in 1997, $2.4 million in 1996 and $1.5
million in 1995. Sublease rental income in the amount of $.4 million was
recorded in 1995. Interest paid under all financing and leasing arrangements
during 1997, 1996 and 1995 approximated interest expense.
External Collaborations
In April 1997 the Company joined a corporate consortium with Affymetrix Inc. and
Bristol-Myers Squibb to fund a five-year research program in functional genomics
at the Whitehead Institute for Biomedical Research. Under this agreement, the
Company receives certain licensing rights to developments arising from the
consortium. In addition, the Company funds research efforts of various academic
collaborators in connection with its research and development programs. Total
future commitments under these agreements are approximately $4.4 million in
1998, $3.5 million in 1999, $2.5 million in 2000, $2.5 million in 2001, and $1.3
million in 2002.
[9] STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 5,000,000 authorized shares of Preferred Stock, $0.001 par
value, issuable in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.
Common Stock Warrants
At December 31, 1997, the Company has outstanding exercisable warrants to
purchase 385,470 shares of Common Stock with a weighted average exercise
price of $3.46 per share which expire through 2004.
Stock Option Plans
The 1993 Incentive Stock Plan (the 1993 Plan) allows for the granting of
incentive and nonstatutory options to purchase up to 5,400,000 shares of Common
Stock. Incentive options granted to employees generally vest over a four-year
period. Nonstatutory options granted to consultants and other nonemployees
generally vest over the period of service to the Company.
In December 1995, the Company amended the terms of outstanding option agreements
to allow option holders the right to immediately exercise outstanding options,
with the subsequent
[47]
20
share issuances being subject to a repurchase option by the Company under
certain conditions according to the original option vesting schedule and
exercise price. At December 31, 1997, 759,111 shares issued under the 1993 Plan
are subject to the Company's repurchase option.
The 1996 Equity Incentive Plan (the 1996 Plan) effectively succeeded the 1993
Plan. The terms and conditions of the 1996 Plan are substantially consistent
with those of the 1993 Plan and provide for the granting of options to purchase
4,100,000 shares of Common Stock, effective March 13, 1997.
The 1996 Director Option Plan (the Director Plan) provides that upon adoption,
each then eligible non-employee director be granted a nonstatutory option to
purchase 20,000 shares of Common Stock. Thereafter, each new non-employee
director will be granted a nonstatutory option to purchase 30,000 shares of
Common Stock upon election to the Board of Directors. Upon completion of the
vesting of each option grant under the Director Plan, each non-employee director
will be granted a new nonstatutory option to purchase 20,000 shares of Common
Stock. All options will be issued at the then fair market value of the Common
Stock, vest ratably over four years and expire ten years after date of grant. A
total of 250,000 shares of Common Stock have been reserved for issuance under
the Director Plan.
Under the Employee Stock Purchase Plan (the Stock Purchase Plan), eligible
employees may purchase Common Stock at a price per share equal to 85% of the
lower of the fair market value of the Common Stock at the beginning or end of
each offering period. Participation in the offering is limited to 10% of the
employee's compensation or $25,000 in any calendar year. The first offering
period commenced on October 1, 1996. A total of 350,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan. At December 31, 1997,
subscriptions were outstanding for an estimated 25,000 shares at $15.89 per
share.
On March 13, 1997, the Board of Directors adopted the Company's 1997 Equity
Incentive Plan (the 1997 Plan) covering 2,000,000 shares of Common Stock. The
terms and conditions of the 1997 Plan are substantially consistent with those of
the 1993 Plan and the 1996 Plan.
On May 27, 1997, the Board of Directors of MBio adopted the MBio 1997 Equity
Incentive Plan (the MBio 1997 Plan). The plan allows for the granting of
incentive and nonstatutory options to purchase up to 1,000,000 shares of Common
Stock of MBio. Incentive options granted to employees generally vest over a
four-year period and may be exercised sooner subject to stock repurchase
provisions that vest over the same period as the original option grant.
Nonstatutory options granted to consultants and other nonemployees generally
vest over the period of service to the Company.
On November 3, 1997, the Board of Directors of MPMx adopted the MPMx 1997 Equity
Incentive Plan (the MPMx 1997 Plan). The plan allows for the granting of
incentive and nonstatutory options to purchase up to 1,200,000 shares of Common
Stock of MPMx. Incentive options granted to employees generally vest over a
four-year period and may be exercised sooner subject to stock repurchase
provisions that vest over the same period as the original option grant.
Nonstatutory options granted to consultants and other nonemployees generally
vest over the period of service to the Company.
Upon employment in 1994, the chief executive officer was granted an option to
purchase 533,364 shares of Common Stock for $0.30 per share. In connection
therewith, the Company agreed to loan the officer up to $267,000 at 7% per
annum, upon exercise of the option. In November 1995, the officer exercised this
option and was issued the Common Stock, subject
[48]
21
to a repurchase option by the Company that lapses over four years. The resulting
loan, secured by a pledge of all shares issued under the option, and related
interest, is being forgiven ratably over 48 months subject to the officer's
continued employment.
During 1995 and 1996, the Company granted options to purchase 1,580,682 shares
of Common Stock at exercise prices below the deemed fair value for accounting
purposes of the stock options at the date of grant. The Company recorded an
increase to additional paid-in capital and a corresponding charge to deferred
compensation in the amount of approximately $3.5 million to recognize the
aggregate difference between such deemed fair value and the exercise price. The
deferred compensation is being amortized over the option vesting period of four
years.
The following table presents the combined activity of the 1993 Plan, 1996 Plan,
1997 Plan and the Director Plan for the years ended December 31, 1997, 1996, and
1995:
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
Outstanding at January 1 2,762,156 $ 9.19 2,724,261 $ .24 3,134,529 $ .14
Granted 3,436,163 $14.79 2,497,958 $10.23 1,349,974 $ .36
Exercised (338,903) $ 3.46 (2,398,265) $ .29 (1,580,907) $ .17
Canceled (395,781) $11.49 (61,798) $ 2.42 (179,335) $ .10
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31 5,463,635 $12.92 2,762,156 $ 9.19 2,724,261 $ .24
Options exercisable at
December 31 1,821,654 $ 5.91 1,251,982 $ 1.78 2,148,851 $ .24
The weighted average per share fair value of options granted during 1997, 1996
and 1995 was $14.79, $6.01 and $0.16, respectively.
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1997 for the above plans:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Contractual Life Average Average
Exercise Prices Number (Yrs.) Exercise Price Number Exercise Price
- ----------------------------------------------------------------------------------------------------------
$ 0.10-$ 0.30 419,995 6.96 $ 0.21 419,995 $ 0.21
$ 0.45-$ 3.60 838,307 7.12 $ 1.32 768,512 $ 1.31
$ 4.21-$10.00 258,309 8.30 $ 7.25 100,356 $ 6.97
$12.00-$16.00 1,087,118 9.23 $14.58 210,425 $14.63
$16.50-$18.75 1,834,616 9.20 $17.05 204,897 $17.38
$19.00-$22.13 1,025,290 9.43 $19.90 117,469 $19.86
- ----------------------------------------------------------------------------------------------------------
5,463,635 1,821,654
At December 31, 1997, 7,722,440 shares of Common Stock were reserved for
issuance upon exercise of stock options and warrants.
In 1997, the MBio 1997 Plan and the MPMx 1997 Plan granted a combined 1,271,535
options to purchase common shares at a weighted exercise price of $.45, all of
which were outstanding at December 31, 1997. At December 31, 1997, options for
64,314 shares at a weighted average exercise price of $.71 were exercisable.
[49]
22
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1997 for the MBio and MPMx
plans:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------
Weighted Average
Remaining
Contractual Life
Exercise Prices Number (Yrs.) Number
- --------------------------------------------------------------------------
$0.05 678,000 9.84 14,098
$0.90 593,535 9.75 50,216
- --------------------------------------------------------------------------
1,271,535 64,314
FAS 123 Disclosures
Pursuant to the requirements of FAS 123, the following are the pro forma
consolidated net income (loss) and consolidated net income (loss) per share for
1997, 1996 and 1995 as if the compensation cost for the stock option and stock
purchase plans had been determined based on the fair value at the grant date for
grants in 1997, 1996 and 1995 ($ in thousands):
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $(81,222) $(94,668) $(8,768) $(12,096) $1,284 $1,250
Net income (loss) per share $ (2.87) $ (3.34) $ (0.40) $ (0.54) $ 0.09 $ 0.07
The fair value of stock options and common shares issued pursuant to the Stock
Option and Stock Purchase Plans at the date of grant were estimated using the
Black-Scholes model with the following weighted average assumptions:
Stock Options Stock Purchase Plan
- -------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Expected life (years) 4.5 3.7 2.4 .5 .5 n/a
Interest rate 6.12% 5.94% 6.19% 6.14% 6.14% n/a
Volatility .5 .7 .7 .7 .7 n/a
The Company has never declared dividends on any of its capital stock and does
not expect to do so in the foreseeable future.
The effects on 1995, 1996 and 1997 pro forma net income (loss) and net income
(loss) per share of expensing the estimated fair value of stock options and
common shares issued pursuant to the Stock Option and Stock Purchase Plans are
not necessarily representative of the effects on reported results of operations
for future years as the periods presented include only one, two and three years,
respectively, of option grants and share purchases under the Company's plans.
[10] INCOME TAXES
In 1997 and 1995, the Company utilized $.2 million and $.5 million respectively
of carry forward tax benefits to offset the current period income tax provision.
In 1996, the Company incurred net losses.
The difference between the Company's "expected" tax provision (benefit), as
computed by applying the U.S. federal corporate tax rate of 34% to income (loss)
before provision for income taxes, and actual tax is reconciled in the following
chart ($ in thousands):
[50]
23
1997 1996 1995
- -------------------------------------------------------------------------------------------------
Expected tax provision (benefit) at 34% $ (28,710) $(2,981) $ 420
State tax provision (benefit) net of federal benefit (5,067) (526) 74
Write off of purchased research and development 33,520 -- --
Amortization of goodwill 958 -- --
Change in valuation allowance for deferred tax assets
allocated to tax expense (175) 3,492 (515)
Other (558) -- --
Non deductible expense 32 15 21
- -------------------------------------------------------------------------------------------------
$ -- $ -- $ --
At December 31, 1997, the Company has unused net operating loss carryforwards of
approximately $14.4 million available to reduce federal and state taxable
income, and research and development tax credits of approximately $6.0 million
available to offset federal income taxes, both of which expire through 2012. Due
to the degree of uncertainty related to the ultimate use of the loss
carryforwards and tax credits, the Company has fully reserved these tax
benefits.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 are as follows ($ in
thousands):
1997 1996
- ------------------------------------------------------------------------
Net operating loss carryforward $ 5,758 $ 6,709
Research and development tax credit carryforward 6,422 2,342
Capitalized research costs 7,640 --
Property and other intangible assets 1,315 --
Other 1,255 598
- ------------------------------------------------------------------------
Total deferred tax assets 22,390 9,649
Valuation allowance $(22,390) $(9,649)
Net deferred tax assets $ -- $ --
The valuation allowance increased by $12.7 million during 1997 due primarily to
the increase in research and development tax credits and the addition of various
deferred tax assets related to the ChemGenics merger offset by the utilization
of net operating loss carryforwards. The valuation allowance increased by $3.7
million during 1996 due primarily to the increase in net operating losses and
research and development tax credits. The deferred tax assets acquired from
ChemGenics are subject to review and possible adjustments by the Internal
Revenue Service and may be limited due to the change in ownership provisions of
the Internal Revenue Code.
Any subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1997 would be allocated as follows ($ in
thousands):
Reported in the statement of operations $21,175
Reported in additional paid-in-capital 1,215
- --------------------------------------------------------------------------------
$22,390
[11] SUBSEQUENT EVENTS
In January 1998, the Company extended the term of one facility lease from
October 1998 to September 1999. Additional future minimum lease commitments,
exclusive of property taxes and other charges are $1.3 million and $1.4 million
in 1998 and 1999, respectively.
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