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Exhibit 13
Millennium Annual Report
Essential Inspiration
Extraordinary Innovation
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Millennium Pharmaceuticals, Inc.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
(in thousands, except share and per
share data)
Revenue under strategic alliances $ 7,963 $ 22,880 $ 31,764 $ 89,933 $ 133,682
Costs and expenses:
Research and development 10,990 17,838 34,803 74,828 114,190
General and administrative 3,240 3,292 7,973 16,517 24,419
Acquired in-process R&D -- -- -- 83,800 --
Amortization of intangible asset -- -- -- 2,397 2,702
- ----------------------------------------------------------------------------------------------------------------
14,230 21,130 42,776 177,542 141,311
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (6,267) 1,750 (11,012) (87,609) (7,629)
Interest income (expense), net (105) (466) 2,244 2,977 3,788
Minority interest -- -- -- 3,410 14,179
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $(6,372) $ 1,284 $ (8,768) $ (81,222) $ 10,338
- ----------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share (pro
forma in 1995 and 1996) $ 0.09 $ (0.40) $ (2.87) $ 0.34
Shares used in computing basic net
income (loss) per share 13,851,639 21,696,894 28,322,722 30,319,175
Diluted net income (loss) per share (pro
forma in 1995 and 1996) $ 0.07 $ (0.40) $ (2.87) $ 0.33
Shares used in computing diluted net
income (loss) per share 17,853,914 21,696,894 28,322,722 31,508,308
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
(in thousands)
Cash, cash equivalents and marketable
securities $ 6,105 $ 17,847 $ 63,848 $ 96,557 $ 190,964
Working capital 3,151 10,498 60,273 85,571 178,395
Total assets 10,101 25,105 87,744 144,513 257,954
Long-term debt, net of current portion 3,067 1,467 - - -
Capital lease obligation, net of current
portion 2,359 2,499 9,308 19,809 24,827
Stockholders' equity $ 1,559 $ 13,096 $ 66,639 $ 91,755 $ 206,362
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Millennium Pharmaceuticals, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Millennium Pharmaceuticals, Inc. ("Millennium" or "the Company") incorporates
large-scale genetics, genomics, high throughput screening, and informatics in an
integrated science and technology platform. We apply this technology platform
primarily in discovering and developing proprietary therapeutic and diagnostic
human healthcare products and services. The Company has two subsidiaries,
Millennium BioTherapeutics, Inc. ("MBio") and Millennium Predictive Medicine,
Inc. ("MPMx"). MBio is focused on developing therapeutic proteins and
antibodies, vaccines and gene therapy, and antisense products. MPMx is focused
on Diagnomics(TM) (genomics-based diagnostics) and pharmacogenomics
(correlation of patient genotypes to drug responses), and on generating and
integrating diverse biomedical data to provide products and services to the
healthcare industry. Within the parent company, referred to herein as "MPI,"
Millennium focuses on the development of small-molecule drugs, on continuing
development and integration of the platform, on high-throughput processes and
services, and on information and informatics technologies that support our
strategic alliances and discovery efforts across the entire organization.
During 1998, Millennium expanded efforts in our subsidiaries and in the parent
company. We hired additional staff in research and drug discovery, informatics,
biotherapeutics and diagnostics/prognostics, as well as in other support areas.
Millennium formed MPMx and Millennium Information, Inc. ("MInfo") in September
1997. MInfo was established to generate and integrate biomedical data and
develop information products and services for use by the healthcare industry.
During 1998, Millennium combined the operations of these two subsidiaries. In
January 1999, MInfo was merged with MPMx, and MPMx was the surviving corporation
of the merger.
In September 1998, Millennium formed a broad alliance with Bayer AG ("Bayer").
Under the terms of this agreement, Bayer will receive access to key technologies
in gene research as well as a flow of genomics-based drug development targets
that Millennium discovers through our research efforts. This collaboration also
gives Millennium residual rights to develop, on our own behalf, certain products
derived from research conducted under the alliance. As part of the agreement,
Bayer invested $96.6 million in November 1998 for approximately 4.96 million
common shares of Millennium stock and made an up-front license payment of $33.4
million.
To date, all of Millennium's revenues have resulted from payments from strategic
partners and United States government research grants. We have not received any
revenue from the sale of products. Millennium's strategic alliances through the
end of 1998 include the following: two agreements with the Wyeth-Ayerst Division
of American Home Products ("AHP") in certain disorders of the central nervous
system and in bacterial diseases; an agreement with Astra AB ("Astra") in
inflammatory respiratory diseases; an agreement with Bayer in cardiovascular
disease, areas of oncology not covered by Millennium's alliance with Lilly,
osteoporosis, pain, liver fibrosis, hematology and viral infections; two
agreements with Eli Lilly and Company ("Lilly") in atherosclerosis, and in
select areas of oncology, as well as a third agreement, through MBio, in
therapeutic proteins; an agreement with Hoffmann-La Roche, Inc. ("Roche") in
obesity and type 2 diabetes; an agreement with Monsanto Company
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("Monsanto") in plant agriculture; and an agreement with Pfizer, Inc. ("Pfizer")
in the area of antifungal treatments. 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.
During 1999, we expect to continue to pursue additional alliances, and will
consider joint development and acquisition opportunities that may provide
Millennium with access to products on the market or in later stages of
commercial development than those represented within our current programs. We
expect that Millennium will incur increasing expenses and may incur increasing
operating losses for at least the next several years, primarily due to expansion
of facilities and research and development programs, and as a result of efforts
to advance acquired products or our own development programs to
commercialization. Our revenues under strategic alliance and licensing
arrangements may fluctuate from period to period or year to year in both timing
and amounts; these fluctuations, as well as fluctuations in spending, may result
in periods of profitability and periods of losses. Therefore, Millennium'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, 1998 AND DECEMBER 31, 1997
Revenue under strategic alliances increased to $133.7 million for the year ended
December 31, 1998 (the "1998 Period") from $89.9 million for the year ended
December 31, 1997 (the "1997 Period"). During the 1998 Period, Millennium
recognized revenue from all seven of its partners in ten alliances. During the
1997 Period, Millennium recognized revenue from six partners, AHP, Astra, Lilly,
Monsanto, Roche and Pfizer, in nine alliances. The 1998 Period included a $33.4
million one-time payment from Bayer received in November. In addition, during
1998, Monsanto provided $38.2 million in a combination of program and technology
transfer fees, performance payments for achievement of research objectives, and
payments for administrative and facilities services. The 1998 Period included a
full year of research funding under our eight other alliances as well. The 1997
Period included a one-time license fee of $38 million from Monsanto in the
fourth quarter.
Research and development expenses increased to $114.2 million for the 1998
Period from $74.8 million for the 1997 Period. The increase was primarily
attributable to increased personnel expenses, facilities expenses, increases in
spending for laboratory supplies, and external collaborations and increased
equipment depreciation. We expect research and development expenses to continue
to increase as personnel are added and as research and development activities
are expanded to accommodate our existing strategic alliances and additional
commitments that we may undertake in the future.
General and administrative expenses increased to $24.4 million for the 1998
Period from $16.5 million for the 1997 Period. The increase was primarily
attributable to increased expenses for 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 our
operations and business development efforts. We expect that general and
administrative expenses will continue to increase as Millennium continues to
grow.
During 1997, Millennium acquired ChemGenics Pharmaceuticals Inc. ("ChemGenics")
for approximately 4.8 million shares of common stock at $21.50 per share.
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In connection with the ChemGenics acquisition, Millennium incurred a
nonrecurring charge of $83.8 million for acquired in-process research and
development in 1997, and amortization expense of $2.7 million in 1998 and $2.4
million in 1997. The in-process research and development was charged to
operations because, in management's opinion, technological feasibility for the
acquired research and development had not been established and would require a
significant amount of additional expenditures over a number of years.
Millennium had net interest income of $3.8 million for the 1998 Period and net
interest income of $3.0 million for the 1997 Period. Interest income increased
in 1998 due to the increase in our average cash balance. Interest expense grew
in 1998 due to increases in capital lease obligations during that year. The
minority interest of $14.2 million in 1998 and $3.4 million in 1997 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, 1997 AND DECEMBER 31, 1996
Revenue under strategic alliances increased to $89.9 million for the 1997 Period
from $31.8 million for the year ended December 31, 1996 (the "1996 Period").
During 1997, Millennium recognized revenue from six partners in nine alliances.
During the 1996 Period, we recognized revenue from four partners, AHP, Astra,
Lilly and Roche, in five alliances. The 1997 Period included an up-front license
fee of $38 million from Monsanto in the fourth quarter, a full year of funding
under five alliances, 11 months of funding under two alliances and a partial
year of funding under the MBio alliance with Lilly. 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, we 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 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 purchases of laboratory supplies
and increased equipment depreciation.
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 expenses for additional management and administrative
personnel, as well as to increases in facilities expenses, consulting and
professional fees.
Millennium had net interest income of $3.0 million for the 1997 Period and net
interest income of $2.2 million for the 1996 Period. Interest income grew
because of an increase in our average cash balance. Interest expense grew due to
additional capitalized lease obligations during 1997. The minority interest in
1997 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.
LIQUIDITY AND CAPITAL RESOURCES
Millennium has financed 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, 1998, Millennium has
recognized approximately $286 million of revenue under strategic alliances. In
November 1998, Bayer invested $96.6 million for approximately 4.96 million
shares of Millennium common stock. In May 1996, we 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 aggregate gross proceeds of approximately
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$45.9 million. We have obtained $4.0 million in long-term debt, $49.1 million in
capital lease financings and $1.1 million to finance a facility construction
project. As of December 31, 1998, Millennium had approximately $191 million in
cash, cash equivalents and marketable securities.
During 1998, Millennium acquired assets under capital leases totaling $15.2
million and expended an additional $7.6 million for equipment, leasehold
improvements and construction in progress. At December 31, 1998, the aggregate
outstanding commitment under capital lease obligations was $33.5 million. We
expect capital expenditures to continue at a level at least as significant as
expenditures in 1998 over the next several years as we expand facilities and
acquire equipment to support increased research and development and other
efforts. In addition, we have entered into commitments to provide security
deposits associated with facilities leases of approximately $10.8 million
through December 31, 1998.
The Company maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of the Company's Investment Policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments which would require
disclosure under this item.
As of December 31, 1998, Millennium had net operating loss carryforwards of
approximately $16.5 million to offset future federal and state taxable income
through 2013. Due to the degree of uncertainty related to the ultimate
realization of such prior losses, no benefit has been recognized as of December
31, 1998. Moreover, Millennium's ability to utilize these losses in future years
may be limited under the change of stock ownership rules of the Internal Revenue
Service.
Millennium believes that existing cash and marketable securities and anticipated
cash payments from its strategic alliances will be sufficient to support our
operations for the foreseeable future. Our forecast of the period of time
through which our financial resources will be adequate to support operations is
forward-looking information, and, as such, actual results may vary. Factors that
may cause actual results to vary include those described below under the heading
"Factors Affecting Future Operating Results."
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year. Any computer program
that has date-sensitive software may recognize a date using "00" as the year
1900 rather than the Year 2000. It is possible that this incorrect recognition
of dates could cause system failures or miscalculations of data. If these errors
were to occur in Millennium systems, they could cause us to be unable to process
data and engage in normal business activities.
Millennium has determined that we have Year 2000 exposure in the following
areas: (i) software and hardware embedded in our laboratory equipment and used
in our research and development programs, (ii) computer software and hardware
used in our business and facilities operations and (iii) computer systems used
by vendors and suppliers with whom we do business. In addition, we have Year
2000 exposure with respect to internally developed informatics application
software that is used by Millennium and certain alliance partners who have
access to our technology platform.
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Millennium has a Year 2000 task force that is evaluating our internal computer
programs, systems and equipment and overseeing our Year 2000 efforts. We are
using both internal and external resources to identify potential issues, costs
and solutions to address Year 2000 concerns. For this effort, we are using
procedures outlined in the Government Accounting Office's Y2K Guide. We have
completed a preliminary inventory of our informatics applications, and we are
conducting an in-depth assessment of this inventory. In addition, we have
inventoried a substantial amount of software and hardware embedded in our
laboratory and facilities equipment as part of our effort to determine Year 2000
compliance. We are also making inquiries of our important suppliers and vendors
to assess their Year 2000 readiness. We have inventoried software used in our
business operations as well. We intend to identify critical systems and
equipment on which to focus our inquiries and testing.
To date, we have identified aspects of our computer hardware, network
infrastructure and business systems that are not Year 2000 compliant. We have
obtained and begun to implement vendor recommendations for correcting these
deficiencies. We have also identified aspects of internally developed software
applications that are not Year 2000 compliant and have begun testing and
corrective programs in this area. In addition, we expect to complete an
inventory and assessment of critical laboratory and facilities equipment and
systems by the end of the first quarter of 1999. We expect to complete testing
and remediation for critical computer hardware, network infrastructure, business
systems and internally developed software applications by the end of the third
quarter of 1999. We expect to complete testing and any remediation of critical
laboratory and facilities equipment by the end of the year. We are not
experiencing and do not anticipate any forward-looking problems.
At the current time, we expect to be able to correct the problems of which we
are aware in a reasonable and timely manner. As we have not completed our
evaluation of all of our critical systems, software or equipment, there can be
no assurance that we will not find problems that will require us to incur
substantial costs to correct or will disrupt our business. Should such problems
occur, they could have a material adverse effect on our business, financial
position or results of operations.
We do not currently have contingency plans for all critical aspects of our
systems and operations in the event that we or any of our important suppliers or
vendors are not able to become Year 2000 compliant. We expect to develop
contingency plans for critical areas if we determine that we or any important
vendors or suppliers are not likely to become Year 2000 compliant.
We have not incurred material remediation costs to date and we do not currently
expect that the aggregate cost of our efforts will be material to our operations
or financial position taken as a whole. However, it is possible that remediation
costs will be greater than we anticipate and that such costs could have a
material adverse effect on our financial position or results of operations. Our
alliance partners or collaborators may also experience disruption as a result of
the Year 2000 issue. If our alliance partners and collaborators experience
disruption, it is possible that our alliances with these partners could be
adversely affected, which could have a material adverse effect on our financial
position and results of operations.
There can be no assurance that we will identify all Year 2000 compliance
problems as a result of our efforts or that we will be able to correct
compliance problems that are identified in a timely manner. If we are unable, in
a timely manner, to identify and correct compliance problems in critical systems
and equipment, our business, financial position and results of operations could
be adversely affected.
FACTORS AFFECTING FUTURE OPERATING RESULTS
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This Annual Report to Stockholders contains forward-looking statements. For this
purpose, any statements contained in the Annual Report that are not statements
of historical fact may be considered to be forward-looking statements. Although
not a complete list of words that might identify forward-looking statements, we
use the words "believes," "anticipates," "plans," "expects," "intends" and
similar expressions to identify forward-looking statements. There are a number
of important factors that could cause Millennium's actual results to differ
materially from those indicated by forward-looking statements. These factors
include, but are not limited, those listed 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, 1998, as filed with the Securities and Exchange Commission,
incorporated herein by reference.
To date, Millennium has not developed or commercialized any products or services
based on our technological approaches. There can be no assurance that these
approaches will enable us to successfully discover and develop
life-science-based products and services. In addition, we face intense
competition from commercial and academic organizations, many of which are larger
and better financed.
Millennium has a substantial accumulated deficit. We may incur losses for at
least the next several years, or may show periods of profitability and periods
of losses. Losses may increase as we expand our infrastructure, research and
development, and commercialization activities. We will require substantial
additional funds for our research and development programs, operating expenses,
the pursuit of regulatory approvals and expansion of our 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 us. Insufficient funds could require us to delay, scale back or
eliminate certain of our research and product development programs or to license
third parties to commercialize products or technologies that we would otherwise
develop or commercialize ourselves.
Millennium's strategy for development and commercialization of therapeutic and
diagnostic products based upon our 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 our strategic partners was to breach or terminate its
agreement with us 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 our business, financial condition and results
of operations.
Proprietary rights relating to Millennium's future products, and to our methods
and services 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 our products, methods and services 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 our methods and services and we may need to
acquire licenses to, or to contest the validity of, any such patents. It is
likely that we would need to expend significant funds to defend any claim that
Millennium infringes a third-party patent. There can be no assurance that any
license required under any such patent would be made available.
During 1998, Millennium significantly increased the scale of our operations to
support the expansion of our disease research programs and alliances. The
resulting growth in personnel and facilities could place significant strains on
our 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.
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Other factors that may affect our future operating results include the inherent
risk of product liability claims which may result from testing, marketing and
sale of pharmaceutical products, fluctuations in our quarterly operating
results, our ability to continue to attract and retain qualified management and
scientific staff, and the ability of our alliance partners or ourselves to
obtain on a timely basis regulatory approvals for marketing and sale of products
and to compete successfully in the market.
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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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
February 8, 1999
Boston, Massachusetts
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Millennium Pharmaceuticals, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
(in thousands, except par value and shares)
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ASSETS
Current assets:
Cash and cash equivalents $138,284 $ 69,236
Marketable securities 52,680 27,321
Due from strategic partners 6,660 778
Prepaid expenses and other current assets 5,033 4,595
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Total current assets 202,657 101,930
Property and equipment, net 38,170 29,030
Restricted cash and other assets 11,416 5,140
Intangible asset, net 5,711 8,413
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Total assets $257,954 $144,513
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,918 $ 3,165
Accrued expenses 6,186 4,294
Deferred revenue 2,501 3,053
Current portion of capital lease obligations 8,657 5,847
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Total current liabilities 24,262 16,359
Capital lease obligations, net of current portion 24,827 19,809
Minority interest 2,503 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: 34,923,204 shares in 1998
and 29,169,398 shares in 1997 issued and outstanding 35 29
Additional paid-in capital 296,370 193,254
Deferred compensation (957) (1,992)
Notes receivable from officers (87) (166)
Other Comprehensive income (loss) 29 (4)
Accumulated deficit (89,028) (99,366)
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Total stockholders' equity 206,362 91,755
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Total liabilities and stockholders' equity $257,954 $144,513
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Millennium Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998 1997 1996
(in thousands, except per share and share data)
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Revenue under strategic alliances $ 133,682 $ 89,933 $ 31,764
Costs and expenses:
Research and development 114,190 74,828 34,803
General and administrative 24,419 16,517 7,973
Acquired in-process R&D -- 83,800 --
Amortization of intangible asset 2,702 2,397 --
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141,311 177,542 42,776
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Loss from operations (7,629) (87,609) (11,012)
Interest income 6,198 4,412 3,131
Interest expense (2,410) (1,435) (887)
Minority interest 14,179 3,410 --
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Net income (loss) $ 10,338 $ (81,222) $ (8,768)
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Basic net income (loss) per share (pro forma in 1996) $ 0.34 $ (2.87) $ (0.40)
Shares used in computing basic net income (loss) per share 30,319,175 28,322,722 21,696,894
Diluted net income (loss) per share (pro forma in 1996) $ 0.33 $ (2.87) $ (0.40)
Shares used in computing diluted net income (loss) per share 31,508,308 28,322,722 21,696,894
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Millennium Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1998 1997 1996
(in thousands)
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OPERATING ACTIVITIES
Net income (loss) $ 10,338 $ (81,222) $ (8,768)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Acquired in-process R&D -- 83,800 --
Depreciation and amortization 16,284 12,168 3,867
Minority interest (14,179) (3,410) --
Net loss on asset disposal 97 433 199
Amortized interest income -- -- (280)
Stock compensation 2,029 1,693 774
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (438) (1,706) (1,818)
Due from strategic partners (5,882) 4,932 (3,967)
Restricted cash and other assets (6,276) (4,465) (288)
Accounts payable and accrued expenses 5,645 2,962 1,856
Deferred revenue (552) (1,480) 433
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Net cash provided by (used in) operating activities 7,066 13,705 (7,992)
INVESTING ACTIVITIES
Purchase of property and equipment (7,590) (4,256) (3,210)
Sale of marketable securities 59,606 58,728 52,595
Purchase of marketable securities (84,932) (30,778) (99,113)
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Net cash provided by (used in) investing activities (32,916) 23,694 (49,728)
FINANCING ACTIVITIES
Proceeds from sale of Common Stock and warrants 96,600 -- 57,403
Proceeds from sale of subsidiary stock -- 20,000 --
Acquisition of ChemGenics, net of cash acquired -- 7,087 --
Net proceeds from employee stock purchases 5,699 2,039 653
Payments on long-term debt -- (1,467) (1,600)
Payments of capital lease obligations (7,401) (5,910) (2,734)
Proceeds from sale of Preferred Stock -- -- 3,500
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 94,898 21,749 57,222
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Increase (decrease) in cash and cash equivalents 69,048 59,148 (498)
Cash and cash equivalents at beginning of year 69,236 10,088 10,586
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Cash and cash equivalents at end of year $ 138,284 $ 69,236 $ 10,088
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NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 15,229 $ 17,426 $ 11,142
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Millennium Pharmaceuticals, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares) Convertible Preferred Stock Common Stock
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shares amount shares amount
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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
Net loss
Unrealized loss on marketable securities
Comprehensive 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
401K stock match 19,788
Net loss
Unrealized gain on marketable securities
Comprehensive loss
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 29,169,398 29
Issuance of Common Stock 4,957,660 5
Repurchase of Common Stock (55,200)
Exercise of stock warrants 23,090
Employee stock purchases 796,938 1
Forgiveness of notes from officers
Stock compensation expense
Write off deferred stock compensation
Stock compensation earned
401K stock match 31,318
Net income
Unrealized gain on marketable securities
Comprehensive income
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 34,923,204 $ 35
15
Notes Other
Additional Receivable Comprehensive Total
Paid-in Deferred from Income Accumulated Stockholders'
Capital Compensation Officers (Loss) Deficit Equity
- ----------------------------------------------------------------------------------------
$ 22,722 $(266) $ (9,376) $ 13,096
3,500 3,500
57,097 57,102
(3) (3)
300 301
654 656
33 (54) (21)
75 75
3,487 $(3,487)
719 719
(8,768) (8,768)
$(18) (18)
--------
(8,786)
- -------------------------------------------------------------------------------------
87,790 (2,768) (245) (18) (18,144) 66,639
102,844 (247) 102,602
(23) (23)
2,062 2,062
79 79
370 370
(119) 119
904 904
330 330
(81,222) (81,222)
14 14
--------
(81,208)
- -------------------------------------------------------------------------------------
193,254 (1,992) (166) (4) (99,366) 91,755
96,595 96,600
(23) (23)
5,629 5,630
79 79
565 565
(182) 182
853 853
532 532
10,338 10,338
33 33
--------
10,371
- -------------------------------------------------------------------------------------
$296,370 $ (957) $ (87) $ 29 $(89,028) $206,362
16
Millennium Pharmaceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
[1] BASIS OF PRESENTATION
THE COMPANY
Millennium Pharmaceuticals, Inc. incorporates large-scale genetics, genomics,
high throughput screening, and informatics in an integrated science and
technology platform. Millennium applies this technology platform primarily in
discovering and developing proprietary therapeutic and diagnostic human
healthcare products and services. 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 subsidiary,
Millennium Predictive Medicine, Inc. ("MPMx"). As more fully described in Note
4, 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
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, 1998 and 1997 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, 1998, 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.
17
INTANGIBLE ASSET
Goodwill recorded in connection with the ChemGenics acquisition (See Note 4) is
being amortized over a period of four years.
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 of Financial Accounting Standards ("SFAS") 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
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS 130 resulted in revised disclosures
but had no effect on the financial position, results of operations or liquidity
of the Company. Comprehensive income is reported by the Company in the
statements of stockholders' equity.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 established
standards for the way that public business enterprises report information about
operating segments in annual financial statements and interim financial reports.
SFAS No. 131 also established standards for related disclosures about products
and services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position. The Company has
identified three operating segments which, under the applicable provision of
SFAS No. 131, have been aggregated into one reportable segment. The Company
conducts business exclusively in the United States.
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. The Company believes the adoption of this new
accounting standard will not have a significant effect to its financial
statements as the Company's investment policies prohibit the use of derivatives.
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.
18
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
Net income per share for 1998 is computed using the weighted-average number of
common shares and dilutive-equivalent shares from stock options and warrants
using the treasury stock method. Net loss per share for 1997 is computed using
the weighted-average number of common shares outstanding. Pro forma net loss per
share for 1996 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, 1998, the difference between basic and
diluted shares used in the computation of earnings per share is the 1,189,133
weighted-average common equivalent shares resulting from outstanding common
stock options and warrants. Historical earnings per share for 1996 has not been
presented since such amount is not deemed meaningful due to the significant
change in the Company's capital structure that occurred in connection with the
initial public offering.
[3] 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 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 (See Note 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 sheets reflects the equity interest of Lilly
in MBio as of the balance sheet date and the minority interest included in the
accompanying consolidated statements of operations represents the minority
stockholder's interest in the net loss of MBio for the years ended December 31,
1998 and 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 $12.2 million
and $5.6 million in 1998 and 1997, respectively. The Company has subleased
approximately $0.6 million of equipment to MBio under an existing capital lease
agreement. All such intercompany transactions have been eliminated in
consolidation.
MILLENNIUM PREDICTIVE MEDICINE, 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. The accompanying consolidated
financial statements include the accounts of MPMx and MInfo since
19
inception. During 1998, Millennium combined the operations of these two
subsidiaries. In January 1999, MInfo was merged with MPMx, and MPMx was the
surviving entity of the merger. All intercompany transactions with these
subsidiaries have been eliminated in consolidation.
[4] MERGER
On February 10, 1997, the Company acquired ChemGenics Pharmaceuticals Inc.
("ChemGenics") for 4,783,688 shares of Common Stock at $21.50 per share,
approximately $103 million in 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. Amortization expense recorded was $2.7 million in 1998 and $2.4
million in 1997. In connection with the acquisition, in 1997, the Company
incurred a nonrecurring 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.
[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-focused
programs under which the Company conducts research funded by its partners. 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
20
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.
ALLIANCES BEGINNING IN 1998
In September 1998, the Company entered into a strategic alliance with Bayer AG
("Bayer"). In November 1998, Bayer made an equity investment of $96.6 million
for approximately 4.96 million shares of Millennium Common Stock. In addition,
Bayer paid $33.4 million as an up-front licensing fee.
The primary goal of the alliance is for the Company to supply 225 drug targets
to Bayer over a period of five years. These targets will be identified as
relevant for cardiovascular disease, areas of oncology not covered by
Millennium's alliance with Lilly, osteoporosis, pain, liver fibrosis, hematology
and viral infections. Future payments which may be made over the full alliance
term include $219 million of ongoing license and research program funding, as
well as a potential of up to $116 million of performance payments for delivery
of targets. Bayer has the right to cancel the agreement after two and three
years if certain minimum target delivery objectives are not met.
ALLIANCES BEGINNING IN 1997
In October 1997, the Company entered into a 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 nonexclusive license to its
technologies outside the plant agriculture field. The Company has agreed to
collaborate exclusively with Monsanto in the application of those technologies
through the establishment of a subsidiary wholly owned by Monsanto. Monsanto
agreed to pay $118 million in up-front, licensing and technology transfer fees
over the five-year term of the agreement. Monsanto may also pay the Company up
to $100 million over five years, contingent upon the achievement of mutually
agreed-upon research objectives. Millennium will also receive royalty payments
from the sale of products, if any, originating from the research conducted by
the Monsanto subsidiary. Millennium realized $38.2 million in revenues
associated with technology transfer and license fees, achievement of mutually
agreed-upon research objectives, and administrative services under the agreement
in 1998, and $38.0 million in revenues as an up-front payment in 1997.
In May 1997, the Company, through MBio, entered into a collaborative agreement
with Lilly in connection with its program to discover and develop therapeutic
proteins. The agreement covers an initial three-year period during which Lilly
is providing $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 are jointly funding 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 recorded approximately
$9.1 million in revenues under this alliance in 1998 and $5.5 million under this
alliance 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. AHP has the right to terminate the agreement in November 1999 if certain
research objectives are not met. Under the terms of the Pfizer agreement, as
amended in 1997 and 1998, Pfizer is funding a discovery program that is
scheduled to conclude in December 2000.
ALLIANCES BEGINNING BEFORE 1997
21
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 in September of 1999, 2000 or 2001.
In December 1995, the Company entered into a strategic alliance with Astra AB
("Astra") in the field of inflammatory respiratory diseases. Under the
agreement, as amended in December 1998, Astra will continue to fund a discovery
program in inflammatory respiratory diseases for a four-year period concluding
in December 2002. Astra has the right to terminate the agreement in December
2000, and will be obligated to provide an early termination payment if it
exercises the early termination right.
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 of 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. In December 1998, the Company and Lilly amended
certain terms of the oncology alliance and Lilly agreed to extend the program
through March 2001.
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 2 diabetes.
Under the terms of a related stock purchase agreement, an affiliate of Roche
purchased $6 million of Series B Convertible Preferred Stock, subsequently
converted into 2,000,000 shares of Common Stock. This alliance is expected to
conclude in March 1999.
[6] MARKETABLE SECURITIES
Marketable securities consist of high-grade corporate bonds, which are carried
at fair value, with the unrealized gains and losses reported in a separate
component of stockholders' equity. There have been no realized gains or losses
on sales of any securities in 1998, 1997 or 1996.
The amortized cost and estimated fair value of debt securities at December 31,
by contractual maturity, are shown below ($ in thousands):
1998 1997
- ------------------------------------------------------------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
- ------------------------------------------------------------------------------
Due in one year or less $37,406 $37,435 $27,325 $27,321
Due in one year to two years 15,245 15,245 -- --
---------------------------------------------
$52,651 $52,680 $27,325 $27,321
- ------------------------------------------------------------------------------
22
[7] PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 ($ in
thousands):
1998 1997
- -------------------------------------------------------------------------------------
Equipment $52,921 $37,452
Leasehold improvements and construction in progress 9,779 4,576
- -------------------------------------------------------------------------------------
62,700 42,028
Less accumulated depreciation and amortization 24,530 12,998
- -------------------------------------------------------------------------------------
$38,170 $29,030
[8] COMMITMENTS
LEASE COMMITMENTS
The Company conducts the majority of its operations in leased facilities with
leased equipment. At December 31, 1998 and 1997, respectively, the Company has
capitalized leased equipment totaling $46.4 million and $33.5 million, with
related accumulated amortization of $21.2 million and $12.0 million.
The Company leases its laboratory and office space under operating lease
agreements with various terms and renewal options, including major facilities
with lease expirations in 2003, 2013 and 2014. One of these facilities was under
construction during 1998, and is expected to be occupied in the first quarter of
1999. In addition to minimum lease commitments, these lease agreements require
the Company to pay its pro rata share of property taxes and building operating
expenses. At December 31, 1998, the Company has pledged $10.8 million of
marketable securities as security for three letters of credit for the same
amount with the purpose of securing leased facilities.
At December 31, 1998, future minimum commitments under leases with
noncancelable terms of more than one year are as follows ($ in thousands):
CAPITAL OPERATING
LEASES LEASES
- -------------------------------------------------------------------------------------------------------------
Year:
1999 $10,378 $ 15,163
2000 9,922 14,892
2001 9,115 14,133
2002 6,377 13,093
2003 3,306 12,891
Thereafter 340 101,574
------------------------
Total 39,438 $171,746
Less amount representing interest 5,954
-------
Present value of minimum lease payments 33,484
Less current portion of capital lease obligations 8,657
-------
Capital lease obligations $24,827
- ---------------------------------------------------------------------------------------------------------------
23
Total rent expense was $8.5 million in 1998, $4.2 million in 1997 and $2.4
million in 1996. Sublease rental income in the amount of $0.4 million was
recorded in 1998. Interest paid under all financing and leasing arrangements
during 1998, 1997 and 1996 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 fixed commitments under these agreements are approximately $6.4
million in 1999, $3.4 million in 2000, $2.6 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, 1998, the Company has outstanding exercisable warrants to
purchase 357,470 shares of Common Stock with a weighted-average exercise price
of $3.49 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 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, 1998, 173,548 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 nonemployee director be granted a nonstatutory option to
purchase 20,000 shares of Common Stock. Thereafter, each new nonemployee
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 nonemployee 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.
24
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 began 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, 1998,
subscriptions were outstanding for an estimated 42,000 shares at $13.28 per
share.
In March 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.
In 1994, the Company granted its chief executive officer an option to purchase
533,364 shares of Common Stock for $0.30 per share. In connection with the
grant, the Company agreed to provide a loan of up to $267,000 at 7% per annum
upon option exercise. In November 1995, the officer exercised this option. The
Company made the loan and issued the Common Stock, subject to a repurchase
option that lapses over four years. The loan and related interest, secured by a
pledge of the shares issued, are 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, 1998, 1997 and
1996:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
SHARES SHARES SHARES
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 5,463,635 $12.92 2,762,156 $ 9.19 2,724,261 $ .24
Granted 1,897,365 $18.77 3,436,163 $14.79 2,497,958 $10.23
Exercised (693,618) $ 5.85 (338,903) $ 3.46 (2,398,265) $ .29
Canceled (554,187) $17.35 (395,781) $11.49 (61,798) $ 2.42
--------------------------------------------------------------------------------
Outstanding at December 31 6,113,195 $15.13 5,463,635 $12.92 2,762,156 $ 9.19
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31 2,435,654 $11.51 1,821,654 $ 5.91 1,251,982 $ 1.78
- --------------------------------------------------------------------------------------------------------------------------
The weighted-average per share fair value of options granted during 1998, 1997
and 1996 was $10.96, $14.79 and $6.01, respectively.
25
The following table presents weighted-average price and life information about
significant option groups outstanding at December 31, 1998 for the above plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE LIFE EXERCISE EXERCISE
PRICES NUMBER (YRS.) PRICE NUMBER PRICE
- -------------------------------------------------------------------------------------------------------------
$0.10-$12.00 1,024,078 6.64 $ 2.53 893,625 $ 1.86
$12.63-$15.75 1,097,338 8.54 $14.62 405,373 $14.49
$16.00-$16.75 1,047,853 8.32 $16.53 421,291 $16.53
$17.00-$18.88 1,571,461 8.97 $18.22 348,893 $17.97
$19.00-$21.00 1,019,945 8.55 $19.78 346,256 $19.75
$21.75-$22.38 352,520 9.54 $21.96 20,216 $22.16
- -------------------------------------------------------------------------------------------------------
6,113,195 2,435,654
At December 31, 1998, 7,060,823 shares of Common Stock were reserved for
issuance upon exercise of stock options and warrants.
In May 1997, the Board of Directors of MBio adopted the MBio 1997 Equity
Incentive Plan (the MBio 1997 Plan). The plan as amended allows for the granting
of incentive and nonstatutory options to purchase up to 1,500,000 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.
In November 1997, the Board of Directors of MPMx adopted the MPMx 1997 Equity
Incentive Plan (the MPMx Plan). In April 1998, the Board of Directors of MInfo
adopted the MInfo 1998 Equity Incentive Plan (the MInfo Plan). Both plans allow
for the granting of incentive and nonstatutory options to purchase up to
1,200,000 shares of common stock of each subsidiary. 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. In connection with the
merger of MPMx and MInfo in January 1999, options issued under the MInfo plan
were canceled, and employees were granted options to purchase shares of MPMx.
The MPMx Plan was amended to increase the number of shares reserved to
2,200,000.
Through December 31, 1998, the MBio 1997 Plan, the MPMx 1997 Plan and the MInfo
1998 Plan granted a combined 3,078,539 options to purchase common shares of
these subsidiaries at a weighted exercise price of $0.44 per share. During 1998,
options for 2,103,248 shares at a weighted exercise price of $0.43 per share
were exercised, and options for 41,281 shares at a weighted exercise price of
$0.52 per share were canceled. At December 31, 1998, options for 934,010 shares
at a weighted-average exercise price of $0.47 per share were outstanding and
exercisable, and 1,574,062 shares are subject to the plan's repurchase option.
26
The following table presents weighted-average price and life information about
significant option groups outstanding at December 31, 1998 for the MBio and MPMx
plans:
OPTIONS OUTSTANDING AND EXERCISABLE
- ------------------------------------------------------------------------
WEIGHTED- WEIGHTED-AVERAGE
AVERAGE EXERCISE
REMAINING PRICE
EXERCISE CONTRACTUAL LIFE
PRICES NUMBER (YRS.)
- ------------------------------------------------------------------------
$.05 497,210 9.14 $.05
$.90-$ 1.10 436,800 9.14 $.95
- ------------------------------------------------------------------------
934,010 $.47
SFAS NO. 123 DISCLOSURES
Pursuant to the requirements of SFAS No. 123, the following are the pro forma
consolidated net income (loss) and consolidated net income (loss) per share for
1998, 1997 and 1996 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 1998, 1997 and 1996 (in thousands, except per-share data):
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
AS REPORTED PRO AS REPORTED PRO AS REPORTED PRO
FORMA FORMA FORMA
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $10,338 $(6,782) $(81,222) $(94,668) $(8,768) $(12,096)
Basic net income (loss) per share 0.34 (0.22) (2.87) (3.34) (0.40) (0.54)
Diluted net income (loss) per share 0.33 (0.22) (2.87) (3.34) (0.40) (0.54)
The fair value of stock options and common shares issued pursuant to the Stock
Option and Stock Purchase Plans at the date of grant were estimated using the
Black-Scholes model with the following weighted-average assumptions:
STOCK OPTIONS STOCK PURCHASE PLAN
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Expected life (years) 4.4 4.5 3.7 .5 .5 .5
Interest rate 5.36% 6.12% 5.94% 5.15% 6.14% 6.14%
Volatility .7 .7 .7 .7 .7 .7
The Company has never declared dividends on any of its capital stock and does
not expect to do so in the foreseeable future.
27
The effects on 1996, 1997 and 1998 pro forma net income (loss) and net income
(loss) per share of expensing the estimated fair value of stock options and
common shares issued pursuant to the Stock Option and Stock Purchase Plans are
not necessarily representative of the effects on reported results of operations
for future years as the periods presented include only two, three and four
years, respectively, of option grants and share purchases under the Company's
plans.
[10] INCOME TAXES
The difference between the Company's "expected" tax provision (benefit), as
computed by applying the U.S. federal corporate tax rate of 34% to income (loss)
before minority interest and provision for income taxes, and actual tax is
reconciled in the following chart ($ in thousands):
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Loss before minority interest $(3,841) $(84,632) $(8,768)
- ---------------------------------------------------------------------------------------------------------------
Expected tax benefit at 34% $(1,306) $(28,774) $(2,981)
State tax benefit net of federal benefit (231) (5,078) (526)
Write off of purchased research and development -- 33,520 --
Amortization of goodwill 1,081 958 --
Change in valuation allowance for deferred tax assets
allocated to tax expense (458) (1,019) 3,492
Stock compensation expense 788 361
Nondeductible expenses 126 32 15
- --------------------------------------------------------------------------------------------------------------
Income tax provision $ -- $ -- $ --
At December 31, 1998, the Company has unused net operating loss carryforwards of
approximately $16.5 million available to reduce federal and state taxable
income, and research and development tax credits of approximately $12.7 million
available to offset federal and state income taxes, both of which expire through
2013. Due to the degree of uncertainty related to the ultimate use of the loss
carryforwards and tax credits, the Company has fully reserved these tax
benefits.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 are as follows ($ in
thousands):
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Net operating loss carryforwards $ 6,556 $ 5,758
Research and development tax credit carryforwards 12,720 6,422
Capitalized research costs 5,875 7,640
Property and other intangible assets 3,310 1,315
Other 1,739 1,255
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax assets 30,200 22,390
Valuation allowance (30,200) (22,390)
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
28
The valuation allowance increased by $7.8 million during 1998 due primarily to
the increase in research and development tax credits and of net operating loss
carryforwards. The valuation allowance increased by $12.7 million during 1997
due primarily to the increase in research and development tax credits and the
addition of various deferred tax assets related to the ChemGenics merger offset
by the utilization of net operating loss carryforwards. The deferred tax assets
acquired from ChemGenics are subject to review and possible adjustments by the
Internal Revenue Service and may be limited due to the change in ownership
provisions of the Internal Revenue Code.
Any subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 would be allocated as follows ($ in
thousands):
Reported in the statement of operations $27,420
Reported in additional paid-in capital 2,780
- -----------------------------------------------------------
$30,200
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