FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- ------------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
7 Powder Horn Drive, Warren, NJ 07059
- ------------------------------------------ ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes _x__ No ___
At August 8, 1997, 12,316,231 shares of Common Stock, 92 shares of Series A
Convertible Preferred Stock, and 5,000 shares of Series B convertible Preferred
Stock par value $.01 per share, were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Condensed Financial Statements
Condensed Balance Sheets as of
June 30, 1997 (unaudited)
and December 31, 1996 3
Unaudited Condensed Statement of 4
Operations - Six Month Periods Ended
June 30, 1997 and 1996
Unaudited Condensed Statements of
Operations - Three-Month Periods Ended
June 30 1997 and 1996 5
Unaudited Condensed Statements of
Cash Flows - Six-Month Periods Ended
June 30, 1997 and 1996 6
Notes to Unaudited Condensed Financial
Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II OTHER INFORMATION 18
Signatures 22
2
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements
CELGENE CORPORATION
CONDENSED BALANCE SHEETS
ASSETS June 30, 1997 Dec 31, 1996
------ ---------------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,357,867 $ 922,961
Marketable securities available
for sale 4,588,917 16,892,023
Accounts receivable 980,552 378,595
Other current assets 742,293 635,841
------------- -------------
Total current assets 12,669,629 18,829,420
Plant and equipment, net 1,986,298 1,940,615
Deferred costs -- 126,577
Other assets 79,167 41,250
------------- -------------
$ 14,735,094 $ 20,937,862
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,172,208 $ 1,552,674
Accrued expenses 1,439,021 881,604
------------- -------------
Total current liabilities 3,611,229 2,434,278
Convertible debentures -- 2,026,043
Convertible debentures - accrued interest -- 412,532
------------- -------------
Total liabilities 3,611,229 4,872,853
------------- -------------
Stockholders' equity:
Preferred stock
Series A convertible, redeemable, 4.9%
cumulative preferred, par value $.01 per
share. Authorized 5,000 shares issued
and outstanding 120 shares and 267
shares at June 30, 1997, and December 31,
1996, respectively; includes
$385,838 and $533,416 accretion at
June 30, 1997 and December 31, 1996,
respectively 6,385,838 13,883,416
Series B Convertible, redeemable, 9 %
cumulative preferred, par value $.01 per share
Authorized 20,000 shares; issued and
outstanding 5,000 shares at
June 30, 1997; includes $85,817
accretion of deemed dividend and
warrants at June 30, 1997 4,132,740 --
Common stock, par value $.01 per share
Authorized 20,000,000 shares; issued
12,094,386 and 10,611,422 shares
at June 30, 1997 and December 31,
1996, respectively 120,944 106,114
Additional paid-in capital 105,014,853 94,770,176
Unamortized deferred compensation -
restricted stock -- (1,133)
Accumulated deficit (104,430,581) (92,599,039)
Net unrealized gain on marketable
securities available for sale 310 5,714
Common stock in treasury, at cost
29,985 and 24,271 shares at
29,985 shares at June 30,1997
and December 31, 1996 (100,239) (100,239)
------------- -------------
Total stockholders' equity 11,123,865 16,065,009
------------- -------------
$ 14,735,094 $ 20,937,862
============= =============
See accompanying notes to financial statements.
3
CELGENE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Month Period Ended June 30,
-------------------------------
1997 1996
---- ----
Revenues:
Chirally pure intermediates $ 759,740 $ 1,018,805
Research contracts 635,082 335,000
------------- -------------
Total revenues 1,394,822 1,353,805
Expenses:
Cost of goods sold 462,269 448,615
Research and development 9,109,591 6,320,423
Selling, general and administrative 3,527,208 1,366,545
------------- -------------
Total expenses 13,099,068 8,135,583
------------- -------------
Operating loss ($ 11,704,246) ($ 6,781,778)
Interest income 342,781 630,665
Interest expense 94,489 308,850
------------- -------------
Net loss (11,455,954) (6,459,963)
Accretion of premium payable on
Preferred Stock Series A and B 316,021 382,200
Accretion of deemed dividend and
fair value of warrants
on Series B Preferred Stock 59,567 --
------------- -------------
Net loss applicable to common
shareholders ($ 11,831,542) ($ 6,842,163)
============= =============
Net loss applicable to common
shareholders per share of common
stock ($ 1.05) ($ .75)
============= =============
Weighted average number of shares of
common stock outstanding 11,284,000 9,079,000
============= =============
See accompanying notes to financial statements.
4
CELGENE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Ended June 30,
---------------------------------
1997 1996
---- ----
Revenues:
Chirally pure intermediates $ 254,842 $ 502,300
Research contracts 385,083 185,000
------------- -------------
Total revenues 639,925 687,300
Expenses:
Cost of goods sold 251,305 179,093
Research and development 4,836,844 3,582,457
Selling, general and administrative 2,160,798 804,994
------------- -------------
Total expenses 7,248,947 4,566,544
------------- -------------
Operating loss ($ 6,609,022) ($ 3,879,244)
Interest income 134,547 478,363
Interest expense 26,110 101,257
------------- -------------
Net loss (6,500,585) (3,502,138)
Accretion of premium payable on
Preferred Stock Series A and B 179,238 305,753
Accretion of deemed dividend
and fair value of warrants
on Series B Preferred Stock 59,567 --
------------- -------------
Net loss applicable to common
shareholders ($ 6,739,390) ($ 3,807,891)
============= =============
Net loss applicable to common
shareholders per share of common
stock ($ .58) ($ .42)
============= =============
Weighted average number of shares of
common stock outstanding 11,766,000 9,079,000
============= =============
See accompanying notes to financial statements.
5
CELGENE CORPORATION
CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
Six-month Period Ended June 30,
-------------------------------
1997 1996
---- ----
Operating activities:
- --------------------
Net loss ($ 11,455,954) ($ 6,459,963)
Non-cash items:
Depreciation and amortization 535,431 449,005
Amortization of deferred compensation 1,133 3,684
Interest on convertible debentures 94,489 174,712
Issuance of stock award 55,625 --
Change in current assets and liabilities:
Increase (Decrease) in accounts
payable and accrued expenses 975,190 (374,066)
Increase in accounts receivable (601,957) (331,259)
Increase in other current assets (143,171) (580,539)
------------- -------------
Net cash used in operating activities ($ 10,539,214) ($ 7,118,426)
Investment activities:
Capital expenditures (454,537) (638,166)
Proceeds from sales and maturities of
marketable securities available for
sale 32,036,330 77,602,229
Purchase of marketable securities
available for sale (19,738,628) (93,174,641)
------------- -------------
Net cash provided by (used in)
investment activities 11,843,165 (16,210,578)
Financing activities:
Net proceeds from exercise of common
stock options 12,695 233,026
Redemption of Series A Preferred Stock (722,490) --
Net proceeds from sale of preferred stock 4,840,748 23,829,625
------------- -------------
Net cash provided by financing activities 4,130,953 24,062,651
------------- -------------
Net change in cash and cash equivalents $ 5,434,904 $ 733,647
------------- -------------
Cash and cash equivalents at
beginning of period 922,961 337,165
------------- -------------
Cash and cash equivalents at end of
period $ 6,357,865 $ 1,070,812
============= =============
Non-cash investing activities:
Net change in net, unrealized
gain(loss) on securities
available for sale $ 5,404 $ 8,404
============= =============
See accompanying notes to financial statements.
6
CELGENE CORPORATION
CONDENSED STATEMENTS OF CASH FLOW (Continued)
(Unaudited)
Six-Month Period Ended June 30,
-------------------------------
1997 1996
---- ----
Non-cash financing activities:
Issuance of common stock upon the
conversion of convertible
debentures and accrued interest
thereon, net $ 2,331,303 $ 2,566,323
============= =============
Issuance of common stock upon the
conversion of Series A Convertible
Preferred Stock and accretion
thereon, net $ 7,066,057 $ 912,445
============= =============
Issuance of common stock upon
exercise of options through the
return of previously outstanding
common stock $ -- $ 99,996
============= =============
Accretion of premium payable on
Preferred Stock Series A and B $ 316,021 $ 382,200
============= =============
Accretion of deemed dividend and
warrants on Series B Preferred
Stock $ 59,567 $ --
============= =============
See accompanying notes to financial statements
7
CELGENE CORPORATION
Notes to Unaudited Condensed Financial Statements
June 30, 1997
1. Basis of Presentation
The unaudited condensed financial statements have been prepared from the
books and records of Celgene Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial information
pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results may not be indicative of the results that may be
expected for the year.
The interim condensed financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
latest annual report on Form 10K.
2. Series B Convertible Preferred Stock
On June 9, 1997, the Company completed a $20 million private placement
financing agreement with Chancellor LGT Asset Management, Inc.
("Chancellor"). The Company consummated $5 million of this financing
through the sale and issuance of 5,000 shares of Series B Convertible
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock")
at a purchase price of $1,000 per share on June 9, 1997. The Company
received net proceeds, after offering costs of $4,840,748. Subject to the
satisfaction of certain conditions, the Company may, at its option, during
specified periods ending June 9, 1998, issue and sell to such purchasers up
to an additional 15,000 shares of Series B Preferred Stock, at an aggregate
purchase price of $15 million, in increments of $5 million (5,000 shares).
With respect to the 3rd and 4th increments ($10 million) certain FDA
approvals are necessary before Chancellor is obligated to buy the
additional Series B Preferred Stock.
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-3 (Registration No. 333-32115, declared
effective August 6, 1997) with respect to the resale of shares of common
stock issuable upon conversion of the Series B Preferred Stock and agreed
to use its best efforts to keep such Registration Statement effective until
such date as all of the shares of Common Stock issuable upon conversion of
Series B Preferred Stock have been resold, or until such time as all of the
shares held by the Series B Selling Stockholders can be sold immediately
without compliance with the registration requirement of the Securities Act
pursuant to Rule 144.
Chancellor entered into an agreement with the Company not to offer, sell,
pledge, hypothecate or otherwise dispose of any shares of Common Stock
during any Lock-Up Period, which commenced on June 9, 1997 and expires as
to 50% of the shares of Common Stock issuable upon conversion of the Series
B Preferred Stock upon the earlier of (A) June 1, 1998 or (B) the receipt
by the Company of a letter from the FDA granting
8
accelerated approval of the Company's New Drug Application to market
SYNOVIR(R) for any indication, and expiring as to 100% of such shares of
Common Stock upon the earlier of (X) June 1, 1999 or (Y) any date on which,
pursuant to the terms of the Certificate of Designation, the Closing Price
for any fifteen (15) consecutive trading days is at or above 150% of the
Conversion Price then in effect.
Each Selling Stockholder who purchased Series B Preferred Stock also agreed
(i)to enter into customary lock-up agreements in connection with any future
underwritten public offerings of the Common Stock by the Company, (ii)
that, for so long as it owns Series B Preferred Stock it will not enter
into, directly or indirectly, any hedge, put position, short position, or
other similar instrument or position with respect to any equity security of
the Company; and (iii) not to offer, sell or otherwise dispose of any
equity securities of the Company during the ten-day period preceding the
date on which the Conversion Price for Series B Preferred may be adjusted.
The Series B Preferred, plus dividends at the rate of 9% per year,
compounded quarterly, subject to certain restrictions, is convertible into
Common Stock at the Conversion Rate, as follows:
Conversion Rate = Original Series B Issue Price + Accretion
-----------------------------------------
Conversion Price
The Conversion Price shall equal $6.50 (the "Initial Conversion Price");
provided, however, that the Conversion Price may be reset on each Reset
Date as described in the following two paragraphs.
A "Reset Date" shall mean one or more of the following dates, if on any
such date(s) the average Closing Price (as defined below) for the ten (10)
trading days ending on such Reset Date is lower than the Initial Conversion
Price (or the Conversion Price as reset in accordance with this paragraph):
(i) the dates of the Second Closing, Third Closing
or Fourth Closing (all as defined in the
Securities Purchase Agreement dated June 9, 1997
between the Company and Chancellor;
(ii) June 1, 1998; and
(iii) July 9, 2002, with respect to the Shares of
Series B Preferred Stock that have not been
redeemed.
Upon the occurrence of a Reset Date, the Conversion Price shall thereafter
equal the average Closing Price for the ten (10) trading days ending on
such reset Date(s); provided, however, that if the Conversion Price in
effect on any Date of Conversion is lower than the Floor Price in effect on
such Date of Conversion, then the Conversion Price shall equal the Floor
Price for such Date of Conversion. For conversions occurring prior to June
2, 1998, the Floor Price shall be $6.00; for conversions occurring on a
Date of Conversion on or after June 2, 1998 and prior to June 2, 1999, the
Floor Price shall be $5.00; for conversions occurring on a Date of
Conversion on or after June 2, 1999 and prior to June 9, 2002, the Floor
Price shall be $3.575. For conversions occurring on a Conversion Date on or
after June 9, 2002, there shall be no Floor Price.
9
Each outstanding share of Series B Preferred generally shall automatically
be converted into Common Stock on the later of (a) June 2, 1998 or (b) the
date on which the Company receives a letter from the United States Food &
Drug Administration granting accelerated approval of the Company's New Drug
Application to market SYNOVIR for the AIDS/cachexia indication, at the
Conversion Price in effect on the date of such automatic conversion;
provided, however, that Automatic Conversion shall not occur prior to June
2, 1998 unless the average Closing Price for the 15 trading days prior to
the date of automatic conversion is equal to or above the Floor Price then
in effect and the Common Stock continues to be listed for quotation and
trading on the Nasdaq National Market. Any outstanding shares on June 2,
1999 shall be automatically converted into common stock at any point after
that date regardless of any FDA approval if the average closing price for
15 trading days prior to the date of automatic conversion exceeds 200% of
the closing price then in effect.
The Series B Preferred Stock ranks senior to the other equity securities of
the Company. Subject to certain restrictions, each share of Series B
Preferred issued and outstanding shall have the number of votes equal to
the number of shares of Common Stock into which it shall have been
convertible as of the record date of the stockholders' meeting at which
action is proposed to be taken. The holders of Series B Preferred Stock and
the holders of Common Stock generally shall vote together as one class upon
all matters submitted to stockholders for a vote. The holders representing
75% or more of the outstanding shares of Series B Preferred Stock, voting
as a single class, generally will be required to authorize the incurrence
of indebtedness or the issuance of securities having a preference over, or
on parity with, the Series B Preferred. The holders representing a majority
of the outstanding shares of Series B Preferred Stock, voting as a single
class, generally will be required: (a) to effect a sale or transfer of all
or substantially all of the Company's assets or to effect a merger which
results in the holders of the Company's capital stock prior to the
transaction owning less than 50% of the voting power of the Company's
capital stock after the transaction; (b) to declare any dividend or make
any other distribution other than as contemplated in the Certificate of
Incorporation of the Company; (c) to acquire for more than $5,000,000 in
cash or Celgene securities, assets or stock in any other company; or (d) to
enter into any corporate event that could be considered a "liquidation" or
sale of the Company (except for bankruptcy).
Upon request of the purchasers of the Series B Preferred (but no later than
June 1, 1998) (in either case, the "Issuance Date"), the Company will issue
warrants to acquire a number of shares of Common Stock equal to (i)
1,500,000 divided by the Conversion Price in effect on the Issuance Date
(230,769 warrants as of June 30, 1997) plus (ii) 37.5% of the Conversion
Shares issuable on such Issuance Date upon conversion of all shares of
Series B Preferred Stock issued through the Issuance Date (288,461 warrants
as of June 30, 1997). All such warrants will have a term of four years from
the Issuance Date and an exercise price equal to 115% of the Conversion
Price in effect on the Issuance Date. The fair value of warrants at the
issuance date was $1.28 per warrant.
Through June 30, 1997 the Company had accrued $85,817 representing
accretion of the deemed dividend and value of warrants and the 9%
cumulative dividend on the Series B Preferred Stock. The deemed
10
dividend represents the difference between the Series B Preferred Stock
conversion price and the Company's Common Stock fair market value at the
date of issuance. The deemed dividend and the fair value of the warrants
will be accreted over the lock-up period subject to the acceleration
contingencies. If such contingencies are met, the unaccreted amount will be
fully recognized at that time. The unaccreted amount at June 30, 1997 was
approximately $894,000.
3. Series A Convertible Preferred Stock
On March 13, 1996, in a private placement, the Company completed the sale
of 503 shares of Series A Convertible Preferred Stock, par value $.01 per
share (the "Series A Preferred Stock"), at an issue price of $50,000 per
share. The Company received net proceeds, after offering costs, of
$23,829,625. The Preferred Stock, plus accretion at a rate of 4.9% per
year, is convertible into common stock of the Company at the option of the
holders thereof at a conversion price per share of common stock equal,
generally, to the lesser of (i) $18.81 or (ii) 90% of the average closing
price per share of the common stock for the seven trading days immediately
prior to the date of conversion. The average closing price per share of
common stock for the seven trading days immediately prior to June 30, 1997
was $8.03. The Company may redeem the shares in increments of no less than
$1.5 million, on thirty business days written notice to the stockholders,
at a price that equals a specified premium, ranging from 120% to 130%, of
the purchase price plus dividends. Under certain conditions, upon receipt
of a conversion notice from the holder, the Company has the right (i) to
redeem shares presented for conversion, or (ii) to defer conversion for 90
days in exchange for warrants to purchase additional shares of common stock
as specified in the Certificate of Designation of Series A Preferred Stock.
Any shares of Series A Preferred Stock outstanding on March 13, 1998 shall
be converted automatically into common stock on such date at the conversion
price then in effect. The holders of Preferred Stock have no voting rights.
In exchange for the Company agreeing to reduce the maximum conversion price
to $8.50 per share of common stock from $18.81 per share of common stock
holders of 58 shares of the Series A Preferred Stock have agreed to a
lock-up through December 1, 1997.
A registration statement covering the shares of Common Stock of the Company
underlying the Series A Preferred Stock was filed and declared effective on
June 10, 1996. Through June 30, 1997 the Company had accrued $1,190,746
representing accretion of premium on the Series A Preferred Stock of which
$385,838 relates to preferred shares not yet tendered for conversion.
As of June 30, 1997, 383 shares (as of August 11, 1997, 411 shares) of the
Series A Preferred Stock, with their respective accrued accretion, had been
redeemed or converted into 2,423,492 (2,645,337 at August 11, 1997) shares
of common stock. As of June 30, 1997 the Company had issued warrants that
entitle certain stockholders of the Series A Preferred Stock to purchase
162,203 shares of common stock at an exercise price of $11.50. The warrants
were issued in exchange for the deferral of conversion for 90 days. These
warrants are exercisable for a period of two years from the date of
issuance.
11
4. Convertible Debentures
During 1995, the Company sold in a private placement offering, 8%
convertible debentures due July 31, 1997 in the aggregate principal amount
of $12,000,000, and received net proceeds, after offering costs, of
$11,022,570. The recorded value of the debentures at the date of issuance
was discounted to produce a market interest rate approximating 13.5%. Such
debentures are convertible into common stock of the Company at the option
of either the holders thereof or the Company. The holders of the
convertible debentures may convert the debentures into common stock of the
Company at a conversion price that varies and is based upon the market
price (as defined) of the common stock on the date of conversion.
During the quarter ended June 30, 1997, the convertible debenture fully
converted. As of June 30, 1997, convertible debentures in the aggregate
principal amount of $12,000,000, plus accrued interest, had been converted
into a total of 1,709,845 shares of common stock. No interest was paid in
cash.
5. Marketable Securities Available for Sale
Marketable securities available for sale at June 30, 1997 include debt
securities with maturities ranging from July, 1997 to April, 1998.
A summary of marketable securities at June 30, 1997 is as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Loss Value
--------------------- ------------------- ------------------- ----------------------
Corporate
bonds $2,502,238 $ 315 -- $2,502,553
Commercial
paper $2,086,369 -- ($ 5) $2,086,364
---------- ---------- ---------- ----------
Total $4,588,607 $ 315 ($ 5) $4,588,917
========== ========== ========== ==========
The net change in the gross unrealized gain for the period ended June 30, 1997
was an increase of $13,448. The proceeds from sales for the quarter ended June
30, 1997 included gross realized gains and losses of $254 and $290 respectively.
The commercial paper rating is A1P1 or better and the corporate bonds are
A-rated or better.
12
PART I - FINANCIAL INFORMATION ITEM 2.- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Six-month period ended June 30, 1997 vs.
Six-month period ended June 30, 1996
Total revenues. The Company's total revenues for the six months ended
June 30, 1997 increased by 3% to approximately $1,395,000 from approximately
$1,354,000 in the same period of 1996.
Chirally pure intermediate revenues. Chirally pure intermediate
revenues for the six months ended June 30, 1997 decreased by 25% to
approximately $760,000 from approximately $1,019,000 in the same period of 1996.
The decrease in chirally pure intermediate revenues was due primarily to the
sporadic nature of orders.
Research contract revenues. Research contract revenues for the six
months ended June 30, 1997 increased by 90% to approximately $635,000 from
$335,000 for the same period of 1996. This increase was primarily due to an
increase in R&D support from BASF, a major multinational agrochemical customer.
Cost of goods sold. Cost of goods sold in the six months ended June 30,
1997 increased by 3% to approximately $462,000 from approximately $449,000 in
the same period of 1996. The increase in cost of goods sold was due primarily to
the fixed nature of certain manufacturing costs.
Research and development expenses. Research and development expenses
for the six months ended June 30, 1997 increased by 44% to approximately $9.1
million from approximately $6.3 million in the same period in 1996. This
increase was due primarily to an increase of approximately $1.6 million of
expenses associated with the Company's immunotherapeutic and SYNOVIR(R) program,
$859,000 of expenses associated with the new Celgro(TM) subsidiary and $527,000
of expenses associated with the chiral pharmaceutical development program. The
major factors contributing to the increased cost of the Company's
immunotherapeutic and SYNOVIR(R) programs resulted from increases in the
following expense categories: manufacturing costs for developmental quantities
of SYNOVIR(R), approximately $739,000; personnel related expenses, approximately
$443,000; preclinical and clinical trial expenses and expenses associated with
preparing an NDA, approximately $177,000; and other ongoing research expenses,
approximately $241,000. The major components contributing to the increased costs
of the new Celgro(TM) division are personnel related expenses, approximately
$468,000; facilities related spending, approximately $193,000; and other
on-going research expenses, approximately $198,000. The higher costs associated
with the Company's chiral pharmaceutical program are due primarily to higher
preclinical and clinical trial expenses, approximately $267,000; personnel
related costs, approximately $118,000; and other on-going research expenses,
approximately $142,000.
13
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended June 30, 1997 increased by 158%
to approximately $3.5 million from approximately $1.4 million in the six month
period ended June 30, 1996. This increase was primarily due to the formation of
a small sales and marketing group and associated expenses for market research
and the development of a launch program and materials, approximately $825,000; a
Medical Affairs department, approximately $136,000 (both in anticipation of the
SYNOVIR(R) launch upon approval by the FDA); higher legal fees, approximately
$226,000; costs associated with the formation of the Celgro subsidiary,
approximately $209,000; higher insurance costs, approximately $119,000; higher
personnel related expenses, approximately $371,000; and other administrative
expenses, approximately $215,000.
Interest income and interest expense. Interest income for the six month
period ended June 30, 1997 decreased by 47% to approximately $343,000 from
approximately $631,000 in the same period of 1996. This decrease was
attributable to lower average cash balances in 1997. Interest expense for six
month period ended June 30, 1997 decreased by 69% to approximately $94,000 from
approximately $309,000. This decrease was due to the conversion to equity of the
remaining 8% Convertible Debentures.
Net loss. The net loss for the six month period ended June 30, 1997
increased by 77% to approximately $11.5 million from approximately $6.5 million
in the same period of 1996. This increase was due primarily to higher spending
on the immunotherapeutics and Synovir programs, the creation of the Celgro(TM)
subsidiary, and the continued development of the chiral pharmaceutical programs.
Three-month period ended June 30, 1997 vs.
Three-month period ended June 30, 1996
Total revenues. The Company's total revenues for the three months ended
June 30, 1997 decreased by 7% to approximately $640,000 from approximately
$687,000 in the same period of 1996.
Chirally pure intermediate revenues. Chirally pure intermediate
revenues for the three months ended June 30, 1997 decreased by 49% to
approximately $255,000 from approximately $502,000 in the same period of 1996.
The decrease in chirally pure intermediate revenues was due primarily to the
sporadic nature of orders.
Research contract revenues. Research contract revenues for the three
months ended June 30, 1997 increased by 108% to approximately $385,000 from
$185,000 for the same period of 1996. This increase was primarily due to an
increase in R&D support from BASF, a major multinational agrochemical customer.
Cost of goods sold. Cost of goods sold in the three months ended June
30, 1997 increased by 40% to approximately $251,000 from approximately $179,000
in the same period of 1996. This increase in cost
14
of goods sold was due primarily to the fixed nature of certain manufacturing
costs.
Research and development expenses. Research and development expenses
for the three months ended June 30, 1997 increased by 35% to approximately $4.8
million from approximately $3.6 million in the same period in 1996. This
increase was due to an increase of approximately $700,000 of expenses associated
with the Company's immunotherapeutic and SYNOVIR(R) program, $400,000 of
expenses associated with the new Celgro(TM) subsidiary, $300,000 of expenses
associated with the chiral pharmaceutical development program partially offset
by lower expenses associated with the chiral intermediate program, approximately
$200,000. The major factors contributing to the increased cost of the Company's
immunotherapeutic and SYNOVIR(R) programs resulted from increases in the
following expense categories: manufacturing costs for developmental quantities
of SYNOVIR(R), approximately $580,000; personnel related expenses, approximately
$225,000; and other ongoing research expenses, approximately $25,000 partially
offset by lower preclinical and clinical trial expenses, $175,000. The major
components contributing to the increased costs of the new Celgro(TM) division
are personnel related expenses, approximately $247,000; facilities related
spending, approximately $120,000; and other on-going research expenses,
approximately $33,000. The higher costs associated with the Company's chiral
pharmaceutical program are due primarily to higher preclinical and clinical
trial expenses, approximately $216,000; personnel related costs, approximately
$44,000; and other on-going research expenses, approximately $40,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 1997 increased by
168% to approximately $2.2 million from approximately $800,000 in the three
month period ended June 30, 1996. This increase was primarily due to the
formation of a small sales and marketing group and associated expenses for
market research and the development of a launch program and materials,
approximately $543,000; a Medical Affairs department, approximately $97,000
(both in anticipation of the SYNOVIR(R) launch upon approval by the FDA); higher
personnel related expenses, approximately $266,000; higher legal expenses,
approximately $203,000; higher recruiting and consulting fees, approximately
$110,000; and other administrative expenses, approximately $180,000.
Interest income and interest expense. Interest income for the three
month period ended June 30, 1997 decreased by 72% to approximately $135,000 from
approximately $478,000 in the same period of 1996. This decrease was
attributable to lower average cash balances in 1997. Interest expense for three
month period ended June 30, 1997 decreased by 74% to approximately $26,000 from
approximately $101,000. This decrease was due to the conversion to equity of the
remaining portion of the 8% Convertible Debentures.
Net loss. The net loss for the three month period ended June 30, 1997
increased by 86% to approximately $6.5 million from approximately $3.5 million
in the same period of 1996. This increase was due
15
primarily to higher spending on the immunotherapeutics and Synovir programs, the
creation of the Celgro(TM) subsidiary, and the continued development of the
chiral pharmaceutical programs.
Liquidity and Capital Resources
Since inception, the Company has financed its working capital
requirements primarily through private and public sales of its debt and equity
securities, income earned on the investment of the proceeds from the sale of
such securities, and revenues from product sales. The Company has raised
approximately $81.0 million in net proceeds from two public and three private
offerings, including its initial public offering in July 1987.
In July 1995, the Company issued and sold in a private placement
offering $12.0 million aggregate principal amount of 8% Convertible Debentures
due July 31, 1997 for total net proceeds, after offering costs, of approximately
$11.0 million. As of June 30, 1997, the entire $12.0 million principal amount of
the 8% Convertible Debentures had been converted into Common Stock. In March
1996, the Company issued and sold in a private placement offering 503 shares of
Series A Convertible Preferred Stock at $50,000 per share, for total gross
proceeds of approximately $25.2 million and net proceeds, after offering costs,
of approximately $23.8 million. In June, 1997 the Company issued and sold in a
private placement offering 5,000 shares of Series B Convertible Preferred Stock
at $1,000 per share, for total gross proceeds of $5.0 million and net proceeds,
after offering costs, of approximately $4.8 million. The Company's Series B
Preferred Stock purchase agreement provides for the sale of an additional $15
million of Series B Preferred Stock in $5 million increments through June 2,
1998, at the Company's option. The third and fourth increments ($10 million) are
subject to certain FDA approvals. The second $5 million is available to the
Company after October 1, 1997. See Notes 2, 3 and 4 to the Financial Statements.
The Company's net working capital at June 30, 1997, decreased by 45% to
approximately $9.1 million from approximately $16.4 million at December 31,
1996. This decrease in working capital was due primarily to the use of cash to
fund operations. The Company's net working capital at June 30, 1997 consisted
principally of cash, cash equivalents, and marketable securities.
Cash and cash equivalents increased by $5,435,000 in the six months
ended June 30, 1997. This increase was due to shifting certain investments out
of marketable securities and into short-term mutual funds.
The Company's rate of spending may increase as the result of increased
clinical trial costs and expenses associated with the regulatory approval
process and commercialization of products now in development. In order to assure
funding for the Company's future operations, the Company may need to seek
additional capital resources
16
beyond the Series B Preferred stock financing. However, no assurances can be
given that the Company will be successful in raising additional capital. If the
Company is unable to raise additional funds, the Company believes that its
current financial resources could fund operations based on reduced levels of
research and development and administrative activities through 1997.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("EPS"), which is
effective as of December 31, 1997. This standard changes the way companies
compute EPS to require all companies to show "basic" and "dilutive" EPS and is
to be retroactively applied, including each 1997 interim quarter. The statement
is not expected to have a material effect on the Company's calculation of EPS.
Cautionary Statements For Forward Looking Information
The Management Discussion and Analysis of Financial Condition and Results of
Operations provided above contains certain forward-looking statements which
involve known and unknown risks, delays, uncertainties and other factors not
under the Company's control which may cause actual results, performance or
achievements of the Company to be materially different from the results,
performance or other expectations implied by these forward looking statements.
These factors include results of current or pending clinical trials, actions by
the FDA and those factors detailed in the company's filings with the Securities
and Exchange Commission.
17
PART II - OTHER INFORMATION
Item 1.- None
Item 2.- Changes in Securities
On June 9, 1997, the Company announced that it had negotiated a $20 million
private placement financing agreement with Chancellor LGT Asset Management, Inc.
("Chancellor") on behalf of certain Chancellor clients. The Company consummated
$5 million of this financing through the sale and issuance of 5,000 shares of
Series B Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock") at a purchase price of $1,000 per share on June 9, 1997. Subject to the
satisfaction of certain conditions, the Company may, at its option, during
specified periods ending June 9, 1998, issue and sell to such purchasers up to
an additional 15,000 shares of Preferred Stock, at an aggregate purchase price
of $15 million, in increments of 5,000 shares, or $5 million.
The Company agreed to file, and has filed, with the Securities and Exchange
Commission, a Registration Statement on Form S-3 (Registration No. 333-32115,
declared effective August 6, 1997) with respect to the resale of shares of
common stock issuable upon conversion of the Preferred Stock and agreed to use
its best efforts to keep such Registration Statement effective until such date
as all of the shares of Common Stock have been resold, or such time as all of
the shares held by the Series B Selling Stockholders can be sold immediately
without compliance with the registration requirement of the Securities Act
pursuant to Rule 144.
Each Selling Stockholder that purchased Series B Preferred Stock from the
Company entered into an agreement with the Company not to offer, sell, pledge,
hypothecate or otherwise dispose of any shares of Common Stock during any
Lock-Up Period, which commenced on June 9, 1997 and expires as to 50% of the
shares of Common Stock issuable upon conversion of the Series B Preferred Stock
upon the earlier of (A) June 1, 1998 or (B) the receipt by the Company of a
letter from the FDA granting accelerated approval of the Company's New Drug
Application to market SYNOVIR(R) for any indication, and expiring as to 100% of
such shares of Common Stock upon the earlier of (X) June 1, 1999 or (Y) any date
on which, pursuant to the terms of the Certificate of Designation, the Closing
Price for any fifteen (15) consecutive trading days is at or above 150% of the
Conversion Price then in effect.
Each Selling Stockholder who purchased Series B Preferred Stock also
agreed (i)to enter into customary lock-up agreements in connection with any
future underwritten public offerings of the Common Stock by the Company, (ii)
that, for so long as it owns Series B Preferred Stock (i) it will not enter
into, directly or indirectly, any hedge, put position, short position, or other
similar instrument or position with respect to any equity security of the
Company; and (iii) not to offer, sell or otherwise dispose of any equity
securities of the Company during the ten-day period preceding the date on which
the Conversion Price for Series B Preferred may be adjusted.
18
The Series B Preferred, plus dividends at the rate of 9% per year, compounded
quarterly, subject to certain restrictions, is convertible into Common Stock at
the Conversion Rate, as follows:
Conversion Rate = Original Series B Issue Price + Accretion
-----------------------------------------
Conversion Price
The Conversion Price shall equal $6.50 (the "Initial Conversion Price");
provided, however, that the Conversion Price may be reset on each Reset Date as
described in the following two paragraphs.
A "Reset Date" shall mean one or more of the following dates, if on any such
date(s) the average Closing Price (as defined below) for the ten (10) trading
days ending on such Reset Date is lower than the Initial Conversion Price (or
the Conversion Price as reset in accordance with this paragraph):
(i) the dates of the Second Closing, Third Closing
or Fourth Closing (all as defined in the
Securities Purchase Agreement dated June 9, 1997
between the Company and the purchasers of the
Series B Preferred (the "Series B Purchase
Agreement");
(ii) June 1, 1998; and
(iii) July 9, 2002, with respect to the Shares of
Preferred Stock that have not been redeemed.
Upon the occurrence of a Reset Date, the Conversion Price shall thereafter equal
the average Closing Price for the ten (10) trading days ending on such reset
Date(s); provided, however, that if the Conversion Price in effect on any Date
of Conversion is lower than the Floor Price in effect on such Date of
Conversion, then the Conversion Price shall equal the Floor Price for such Date
of Conversion. For conversions occurring prior to June 2, 1998, the Floor Price
shall be $6.00; for conversions occurring on a Date of Conversion on or after
June 2, 1998 and prior to June 2, 1999, the Floor Price shall be $5.00; for
conversions occurring on a Date of Conversion on or after June 2, 1999 and prior
to June 9, 2002, the Floor Price shall be $3.575. For conversions occurring on a
Conversion Date on or after June 9, 2002, there shall be no Floor Price.
Each outstanding share of Series A Preferred generally shall automatically be
converted into Common Stock on the later of (a) June 2, 1998 or (b) the date on
which the Company receives a letter from the United States Food & Drug
Administration granting accelerated approval of the Company's New Drug
Application to market SYNOVIR for the AIDS/cachexia indication, at the
Conversion Price in effect on the date of such automatic conversion; provided,
however, that Automatic Conversion shall not occur prior to June 2, 1998 unless
the average Closing Price for the 15 trading days prior to the date of automatic
conversion is equal to or above the Floor Price then in effect and the Common
Stock continues to be listed for quotation and trading on the Nasdaq National
Market.
Subject to certain restrictions, each share of Series B Preferred issued and
outstanding shall have the number of votes equal to the number of shares of
Common Stock into which it shall have been convertible as of the record date of
the stockholders' meeting at which action is proposed to be taken. The holders
of Series B Preferred Stock and the holders of Common Stock generally
19
shall vote together as one class upon all matters submitted to stockholders for
a vote. The holders representing 75% or more of the outstanding shares of Series
B Preferred Stock, voting as a single class, generally will be required to
authorize the incurrence of indebtedness or the issuance of securities having a
preference over, or on parity with, the Series B Preferred. The holders
representing a majority of the outstanding shares of Series B Preferred Stock,
voting as a single class, generally will be required: (a) to effect a sale or
transfer of all or substantially all of the Company's assets or to effect a
merger which results in the holders of the Company's capital stock prior to the
transaction owning less than 50% of the voting power of the Company's capital
stock after the transaction; (b) to declare any dividend or make any other
distribution other than as contemplated in the Certificate of Incorporation of
the Company; (c) to acquire for more than $5,000,000 in cash or Celgene
securities, assets or stock in any other company; or (d) to enter into any
corporate event that could be considered a "liquidation" or sale of the Company
(except for bankruptcy).
Upon request of the purchasers of the Series B Preferred (but no later than June
1, 1998) (in either case, the "Issuance Date"), the Company will issue warrants
to acquire a number of shares of Common Stock equal to (i) 1,500,000 divided by
the Conversion Price in effect on the Issuance Date (230,769 warrants as of June
30, 1997) plus (ii) 37.5% of the Conversion Shares issuable on such Issuance
Date upon conversion of all shares of Series B Preferred Stock issued through
the Issuance Date (288,461 warrants as of June 30, 1997). All such warrants will
have a term of four years from the Issuance Date and an exercise price equal to
115% of the Conversion Price in effect on the Issuance Date.
Item 3.- None
Item 4.- Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 24, 1997. At this
meeting stockholders of the Company were asked to vote for the election of
directors, and act upon the proposals,(i) to approve the amendment of the
Corporation's 1992 Long-Term Incentive Plan to increase the number of shares of
the Company's common stock that may be issued pursuant to stock incentives
granted under such Plan from 1,000,000 to 1,400,000;(ii) to amend the Celgene
Corporation 1995 Non-Employee Directors' Plan to increase the number of shares
of the Company's common stock that may be issued pursuant to stock incentives
granted under such Plan from 250,000 to 350,000; and (iii) to ratify the
appointment of KPMG Peat Marwick LLP as the independent certified public
accountants of the Company for the year ending December 31, 1997. All nominated
directors were elected, the proposal to amend the Corporation's 1992 Long-Term
Incentive Plan was approved, the proposal to amend the Corporation's 1995
Non-Employee Directors' Plan was approved, and the proposal regarding the
appointment of auditors was approved, by the following votes:
20
A. Election of Directors:
Name Number of Shares
-----------------------------------------------------------------------
For Withheld Abstained
John W. Jackson 7,995,581 298,792 -
Sol J. Barer 7,995,581 298,792 -
Frank T. Cary 7,998,781 295,592 -
Richard C. E. Morgan 8,000,881 293,492 -
Walter L. Robb 8,000,881 293,492 -
Lee J. Schroeder 7,994,181 300,192 -
Arthur Hull Hayes, Jr. 7,994,181 299,992 -
B. Adoption of the amendment to the Corporation's 1992 Long-Term Incentive
Plan:
Number of Shares
-----------------------------------------------------------------------
For Against Abstained
7,605,700 620,749 67,924
C. Adoption of the amendment to the Corporation's 1995 Non-Employee Directors'
Plan:
Number of Shares
-----------------------------------------------------------------------
For Against Abstained
7,593,895 622,254 78,224
D. Appointment of Auditors:
Number of Shares
-----------------------------------------------------------------------
For Against Abstained
8,204,608 50,619 39,146
Item 5. None
Item 6. Exhibits
A. 27 Financial Data Schedule - Article 5 for second quarter
Form 10-Q.
B. Current report on Form 8K filed on June 10, 1997 with respect to
Item 5.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELGENE CORPORATION
DATE August 14, 1997 BY /s/John W. Jackson
----------------------------- -------------------------------------
John W. Jackson
Chairman of the Board
Chief Executive Officer
DATE August 14, 1997 BY /s/Sanford Kaston
----------------------------- ------------------------------------
Sanford Kaston
Controller
(Chief Accounting Officer)
22