CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Operations-Years Ended December 31, 1997,
1998, and 1999 F-4
Consolidated Statements of Stockholders' Equity(Deficit)-Years Ended
December 31, 1997, 1998, 1999 F-5
Consolidated Statements of Cash Flows-Years Ended December 31, 1997,
1998 and 1999 F-8
Notes to Consolidated Financial Statements F-10
F-1
INDEPENDENT AUDITORS' REPORT
The Board of directors and Stockholders
CELGENE CORPORATION:
We have audited the accompanying consolidated balance sheets of Celgene
Corporation and subsidiary as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of Celgene
Corporation and subsidiary as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
January 27, 2000
F-2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1998 1999
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,066,953 $ 15,255,422
Marketable securities available for sale 2,056,890 4,271,221
Accounts receivable, net of allowance of $43,386 and
121,437 at December 31, 1998 and 1999, respectively 2,662,389 4,928,472
Inventory 1,571,408 2,456,059
Other current assets 229,060 895,602
------------ ------------
Total current assets 9,586,700 27,806,776
Plant and equipment, net 2,262,130 2,336,242
Other assets 79,167 2,190,652
------------ ------------
Total assets $ 11,927,997 $ 32,333,670
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,848,853 $ 2,358,563
Accrued expenses 3,041,859 6,761,889
Capitalized lease obligations 225,372 179,885
------------ ------------
Total current liabilities 7,116,084 9,300,337
Capitalized lease obligation-net of current portion 195,578 22,924
Other non-current liabilities - 225,000
Long term convertible notes 8,348,959 38,494,795
------------ ------------
Total liabilities 15,660,621 48,043,056
------------ ------------
Stockholders' deficit:
Preferred Stock, $.01 par value per share
5,000,000 shares authorized; none outstanding
at December 31, 1998 and 1999 - -
Common stock, $.01 par value per share
30,000,000 authorized; issued and outstanding 16,612,973
and 17,703,646 shares at December 31, 1998 and
December 31,1999, respectively 166,130 177,036
Additional paid-in capital 140,714,314 150,599,750
Accumulated deficit (144,613,068) (166,394,268)
Accumulated other comprehensive loss - (91,904)
------------ ------------
Total stockholders' deficit (3,732,624) (15,709,386)
------------ ------------
Total liabilities and stockholders' deficit $ 11,927,997 $ 32,333,670
============ ============
See accompanying notes to consolidated financial statements.
F-3
Celgene Corporation
Consolidated Statements of Operations
Years Ended December 31,
1997 1998 1999
------------ ------------ ------------
Revenues:
Product sales $ - $3,265,490 $ 24,052,124
Research contracts 1,122,193 535,000 2,157,500
------------ ------------ ------------
Total revenues 1,122,193 3,800,490 26,209,624
Expenses:
Cost of goods sold - 282,307 2,982,713
Research and development 17,380,390 19,771,953 19,646,129
Selling, general and administrative 9,145,456 16,218,486 26,235,802
------------ ------------ ------------
Total expenses 26,525,846 36,272,746 48,864,644
------------ ------------ ------------
Operating loss (25,403,653) (32,472,256) (22,655,020)
Other income and expense:
Interest income 495,580 705,215 694,390
Interest expense 111,771 255,832 2,838,480
------------ ------------ ------------
Loss before tax benefit (25,019,844) (32,022,873) (24,799,110)
Tax benefit (note 9) - - 3,017,910
------------ ------------ ------------
Loss from continuing operations (25,019,844) (32,022,873) (21,781,200)
Discontinued operations: (note 10)
Loss from operations (427,183) (59,837) -
Gain on sale of chiral assets - 7,014,830 -
------------ ------------ ------------
Net loss (25,447,027) (25,067,880) (21,781,200)
Accretion of premium payable
on preferred stock and warrants 521,397 24,648 -
Deemed dividend for preferred stock
conversion discount 953,077 - -
------------ ------------ ------------
Net loss applicable to common
stockholders $(26,921,501) $(25,092,528) $(21,781,200)
============ ============ ============
Per share basic and diluted: (note 2)
Loss from continuing operations $ (2.05) $ (1.98) $ (1.28)
Discontinued operations:
Loss from operations (0.03) (0.00) -
Gain on sale of chiral assets - 0.43 -
------------ ------------ ------------
Net loss applicable to common stockholders $ (2.20) $ (1.55) $ (1.28)
============ ============ ============
Weighted average number of shares of
common stock outstanding 12,215,000 16,160,000 17,012,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
Celgene Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1998 and 1999
Common Stock Preferred Stock
------------ ---------------
Shares Amount Shares Amount
------ ------ ------ ------
Balances at January 1, 1997 10,611,422 $106,114 267 $13,883,416
Exercised stock options 2,986 30
Shares issued in lieu of cash bonus 5,000 50
Amortization of deferred compensation
Conversion of convertible debenture 441,248 4,412
Issuance of Series B Preferred Stock-net 5,000 4,046,923
Conversion of preferred stock 2,166,193 21,662 (5,180) (14,654,071)
Accretion of premium on preferred stock 521,397
Redemption of preferred stock (13) (721,287)
Deemed dividend on Series B Preferred
Stock and fair value of warrants 953,077
Comprehensive loss:
Net loss
Net change in unrealized gain (loss) on
investment securities
Total comprehensive loss
Treasury shares issued
Issuance of common stock,net 2,201,100 22,011
--------------------------------------------------------------------------------
Balances at December 31, 1997 15,427,949 $154,279 74 $ 4,029,455
Treasury Stock Additional Unamortized
-------------------------- Paid-in Deferred
Shares Amount Capital Compensation
------ ------ ------- ------------
Balances at January 1, 1997 (29,985) $(100,239) $ 94,770,176 $ (1,133)
Exercised stock options 20,187
Shares issued in lieu of cash bonus 55,575
Amortization of deferred compensation 1,133
Conversion of convertible debenture 2,326,892
Issuance of Series B Preferred Stock-net 793,825
Conversion of preferred stock 14,632,409
Accretion of premium on preferred stock
Redemption of preferred stock
Deemed dividend on Series B Preferred
Stock and fair value of warrants
Comprehensive loss:
Net loss
Net change in unrealized gain (loss) on
investment securities
Total comprehensive loss
Treasury shares issued 7,097 23,704 55,250
Issuance of common stock,net 18,184,119
---------------------------------------------------------------------------------------
Balances at December 31, 1997 (22,888) $ (76,535) $130,838,433 -
Accumulated
Other
Comprehensive
Accumulated Income
Deficit (Loss) Total
------- ------ -----
Balances at January 1, 1997 $ (92,599,039) $ 5,714 $16,065,009
Exercised stock options 20,217
Shares issued in lieu of cash bonus 55,625
Amortization of deferred compensation 1,133
Conversion of convertible debenture 2,331,304
Issuance of Series B Preferred Stock-net 4,840,748
Conversion of preferred stock -
Accretion of premium on preferred stock (521,397) -
Redemption of preferred stock (721,287)
Deemed dividend on Series B Preferred -
Stock and fair value of warrants (953,077) -
Comprehensive loss: -
Net loss (25,447,027) (25,447,027)
Net change in unrealized gain (loss) on
investment securities (5,714) (5,714)
------------
Total comprehensive loss (25,452,741)
------------
Treasury shares issued 78,954
Issuance of common stock,net 18,206,130
--------------------------------------------------------------------------------
Balances at December 31, 1997 $(119,520,540) - $15,425,092
See accompanying notes to consolidated financial statements.
F-5
Celgene Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1998 and 1999 (Continued)
Common Stock Preferred Stock
------------ ---------------
Shares Amount Shares Amount
------ ------ ------ ------
Balances at December 31, 1997 15,427,949 $ 154,279 74 $4,029,455
Exercised stock options 283,120 2,831
Exercise of warrants 118,230 1,183
Costs related to secondary offering
Conversion of preferred stock 575,669 5,757 (74) (4,054,103)
Accretion of premium on preferred stock 24,648
Shares issued for employee benefit plans 8,317 83
Sale of common stock 199,688 1,997
Net loss and comprehensive loss
--------------------------------------------------------------------------------
Balances at December 31,1998 16,612,973 $ 166,130 - $ -
Additional Unamortized
Treasury Stock Paid-in Deferred
--------------
Shares Amount Capital Compensation
------ ------ ------- ------------
Balances at December 31, 1997 (22,888) $(76,535) $130,838,433 $ -
Exercised stock options 2,028,715
Exercise of warrants 986,883
Costs related to secondary offering (73,136)
Conversion of preferred stock 4,048,346
Accretion of premium on preferred stock
Shares issued for employee benefit plans 22,888 76,535 387,070
Sale of common stock 2,498,003
Net loss and comprehensive loss
--------------------------------------------------------------------------------
Balances at December 31,1998 - $ - $140,714,314 $ -
Accumulated
Other
Comprehensive
Accumulated Income
Deficit (Loss) Total
------- ------ -----
Balances at December 31, 1997 $(119,520,540) $ - $ 15,425,092
Exercised stock options 2,031,546
Exercise of warrants 988,066
Costs related to secondary offering (73,136)
Conversion of preferred stock -
Accretion of premium on preferred stock (24,648) -
Shares issued for employee benefit plans 463,688
Sale of common stock 2,500,000
Net loss and comprehensive loss (25,067,880) (25,067,880)
---------------------------------------------------------------------------
Balances at December 31,1998 $(144,613,068) $ - $ (3,732,624)
See accompanying notes to consolidated financial statements.
F-6
Celgene Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1998 and 1999 (Continued)
Common Stock Preferred Stock Treasury Stock
------------ --------------- --------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balances at December 31,1998 16,612,973 $166,130 - $ - - $ -
Exercised stock options 949,323 9,493
Exercise of warrants 59,434 594
Shares issued for employee benefit plans 81,916 819
Issuance of options related to to license
agreement
Comprehensive loss:
Net loss
Net change in unrealized gain (loss)on
investment securities
Total comprehensive loss
----------------------------------------------------------------------------------
Balances at December 31,1999 17,703,646 $177,036 - $ - - $ -
==================================================================================
Additional Unamortized
Paid-in Deferred Accumulated
Capital Compensation Deficit
------- ------------ -------
Balances at December 31,1998 $140,714,314 $ - $(144,613,068)
Exercised stock options 8,028,139
Exercise of warrants 361,398
Shares issued for employee benefit plans 799,004
Issuance of options related to to license agreement
agreement 696,895
Comprehensive loss:
Net loss (21,781,201)
Net change in unrealized gain (loss)on
investment securities
Total comprehensive loss
-------------------------------------------------------------------------
Balances at December 31,1999 $150,599,750 $ - $(166,394,269)
=========================================================================
Accumulated
Other
Comprehensive
Income
(Loss) Total
------ -----
Balances at December 31,1998 $ - $ (3,732,624)
Exercised stock options 8,037,632
Exercise of warrants 361,992
Shares issued for employee benefit plans 799,823
Issuance of options related to to license
agreement 696,895
Comprehensive loss:
Net loss (21,781,201)
Net change in unrealized gain (loss)on
investment securities (91,904) (91,904)
--------------
Total comprehensive loss (21,873,105)
--------------------------------------
Balances at December 31,1999 $ (91,904) $(15,709,387)
=======================================
See accompanying notes to consolidated financial statements.
F-7
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1997 1998 1999
------------ ------------ -----------
Cash flows from operating activities:
Loss from continuing operations $(25,019,844) $(32,022,873) $(21,781,200)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation 380,364 812,555 993,389
Provision for losses on accounts receivable - 43,386 78,051
Amortization of convertible debt costs 126,577 - -
Amortization of deferred compensation 1,133 - -
Interest on convertible debentures 68,736 - -
Issuance of stock award 55,625 - -
Amortization of debt issuance costs - - 250,000
Amortization of discount on convertible note - - 145,836
Shares issued for employee benefit plans 78,954 463,688 799,823
Change in current assets & liabilities:
Increase in inventory - (1,571,408) (884,651)
Increase(decrease) in accounts payable
and accrued expenses (379,091) 4,659,517 2,454,740
Increase in accounts receivable (1,051,789) (1,275,391) (2,344,133)
(Increase)decrease in other assets 150,304 124,206 (416,544)
------------ ------------ -----------
Net cash used in continuing operations (25,589,031) (28,766,320) (20,704,689)
Net cash used in discontinued operations (302,996) (59,837) -
------------ ------------ -----------
Net cash used in operating activities (25,892,027) (28,826,157) (20,704,680)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (1,240,775) (788,661) (1,782,090)
Proceeds from sales and maturities of marketable
securities available for sale 47,470,593 8,559,604 2,495,992
Purchases of marketable securities
available for sale (30,584,284) (10,616,494) (4,802,227)
Proceeds from sale of chiral assets - 7,500,000 -
Purchase of licence rights - - (450,000)
------------ ------------ -----------
Net cash provided by (used in) investing activities 15,645,534 4,654,449 (4,538,325)
------------ ------------ -----------
Cash flows from financing activities:
Net proceeds from secondary offering 18,206,130 - -
Costs related to secondary offering - (73,136) -
Proceeds from sale of stock - 2,500,000 -
Proceeds from exercise of common stock
options and warrants 20,217 3,019,612 8,399,624
Redemption of Series A preferred stock (721,287) - -
Net proceeds from issuance of preferred stock 4,840,748 - -
Capital lease buyout - (400,414) (218,141)
Capital lease funding 561,169 260,195 -
Debt issuance costs (750,000)
Net proceeds from Issuance of convertible notes - 8,348,959 30,000,000
------------ ------------ -----------
Net cash provided by financing activities 22,906,977 13,655,216 37,431,483
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents 12,660,484 (10,516,492) 12,188,469
Cash and cash equivalents at beginning of year 922,961 13,583,445 3,066,953
------------ ------------ -----------
Cash and cash equivalents at end of year $ 13,583,445 $3,066,953 $ 15,255,422
============ ========== ============
See accompanying notes to consolidated financial statements.
F-8
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
1997 1998 1999
---- ---- ----
Non-cash investing activity:
Change in net unrealized gain(loss) on
marketable securities available for sale $ (5,714) $ - $(91,904)
=========== =========== ==========
Issuance of options Related to License Agreement $ - $ - $696,895
=========== =========== ==========
Non-cash financing activities:
Issuance of common stock upon the conversion
of convertible debentures and accrued interest
thereon, net $ 2,331,304 $ - $ -
=========== =========== ==========
Accretion of premium payable on preferred
stock and warrants $ 521,397 $ 24,648 $ -
=========== =========== ==========
Deemed dividend for preferred stock conversion
discount $ 953,077 $ - $ -
=========== =========== ==========
Issuance of common stock upon the conversion
of convertible preferred stock and accrued
accretion thereon, net $14,654,071 $ 4,054,103 $ -
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 20,599 $ 19,766 $1,504,441
=========== =========== ==========
Cash received related to tax benefit $ - $ - $3,017,910
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-9
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
(1) NATURE OF BUSINESS AND LIQUIDITY
Celgene Corporation and its subsidiary (collectively "Celgene" or the
"Company") is an independent biopharmaceutical company engaged in the
discovery, development and commercialization of novel human pharmaceuticals
for the treatment of cancer and immunological diseases. The Company's
primary therapeutic focus is on the development of orally administered,
small molecule pharmaceuticals that regulate tumor necrosis factor alpha,
or TNF-(alpha), and are anti-angiogenic. TNF-(alpha) has been linked to the
cause and symptoms of many chronic inflammatory and immunological diseases.
Anti-angiogenic drugs inhibit the growth of undesirable blood vessels,
including those that promote tumor growth. Our lead product, THALOMID(TM)
(thalidomide), was approved for sale in the United States by the U.S. Food
and Drug Administration, ("FDA"), on July 16, 1998. THALOMID is approved
for the treatment of erythema nodosum leprosum, ("ENL"), an inflammatory
complication of leprosy. Our cancer and immunology pharmaceutical pipeline
is highlighted by two classes of novel and proprietary oral therapeutic
agents, IMiDs, or ImmunoModulatory Drugs, and SelCIDs, or Selective
Cytokine Inhibitory Drugs. Both classes are being developed for the
treatment of cancer, chronic inflammatory diseases, such as inflammatory
bowel disease and rheumatoid arthritis, and other diseases of the immune
system.
The Company expects that its rate of spending will increase as the result
of increased clinical trial costs, increased expenses associated with the
regulatory approval process and commercialization of products now in
development, increased costs related to the commercialization of THALOMID,
and increased working capital requirements. This increased spending will be
mitigated by the collection of receivables resulting from sales of
THALOMID. It is anticipated that the increasing sales of THALOMID, as well
as existing cash resources, will be sufficient to fund operations through
2000.
The consolidated financial statements include the parent Company and its
subsidiary Celgro. All inter-company transactions have been eliminated. The
preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those estimates. The Company
is subject to certain risks and uncertainties such as uncertainty of
product development, uncertainties regarding regulatory approval, no
assurance of market acceptance of products, risk of product liability,
uncertain scope of patent and proprietary rights, intense competition, and
rapid technological change.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
At December 31, 1998 and 1999, cash equivalents consisted principally
of funds invested in money market funds, and United States government
securities such as treasury bills and notes.
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(B) MARKETABLE SECURITIES
The Company classifies all of its marketable securities as securities
available for sale. Such securities are held for an indefinite period
of time and were intended to be used to meet the ongoing liquidity
needs of the Company. Realized gains and losses are included in
operations and are measured using the specific cost identification
method.
(C) INVENTORY
Inventories are priced at lower of cost or market using the first-in,
first-out (FIFO) method. Prior to FDA approval, the raw material,
formulation and encapsulation costs related to Thalomid production
were recorded as research and development expense.
(D) LONG-LIVED ASSETS
Plant and equipment are stated at cost. Depreciation of plant and
equipment is provided using the straight-line method. The estimated
useful lives of fixed assets are as follows:
Laboratory equipment and machinery 5-10 years
Furniture and fixtures 5-10 years
Amortization of leasehold improvements is calculated using the
straight-line method over the term of the lease or the life of the
asset, whichever is shorter. Maintenance and repairs are charged to
operations as incurred, while renewals and improvements are
capitalized.
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances occur that indicate that the
carrying amount of the assets may not be recoverable. The Company
assesses the recoverability of long-lived assets held and to be used
based on undiscounted cash flows and measures the impairment, if any,
using discounted cash flows.
(E) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
(F) INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect for years in which the temporary differences are
expected to reverse.
Research and development tax credits will be recognized as a reduction
of the provision for income taxes when realized.
(G) REVENUE RECOGNITION
Revenue from the sale of products is recognized upon product shipment.
Revenue under research contracts is recorded as earned under the
contracts, generally as services are provided.
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
Revenue is recognized immediately for nonrefundable license fees when
agreement terms require no additional performance on the part of the
Company.
(H) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
(I) EARNINGS PER SHARE
"Basic" earnings per common share equals net income divided by
weighted average common shares outstanding during the period.
"Diluted" earnings per common share equals net income divided by the
sum of weighted average common shares outstanding during the period
plus common stock equivalents if dilutive. The Company's basic and
diluted per share amounts are the same since the assumed exercise of
stock options, and warrants, and the conversion of convertible
debentures and preferred stock are all anti-dilutive. The amount of
common stock equivalents excluded from the calculation were 3,770,954
in 1997, 3,863,535 in 1998 and 5,296,624 in 1999.
(J) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income (loss) consists of
net losses and the change in net unrealized gains (losses) on
securities and is presented in the consolidated statements of
stockholders' equity (deficit). SFAS No. 130 requires only additional
disclosures in the financial statements; it does not affect the
Company's financial position or results of operations.
(K) PRESENTATION
In connection with the disposition of the Company's chiral
intermediate operation in January 1998 (see note 10), the 1997 and
1998 financial results applicable to continuing operations exclude
amounts from this discontinued operation.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value, which equals carrying value, of marketable securities
available for sale is based on quoted market prices. The convertible
notes approximate fair value due to interest rates approximating
market rates. For all other financial instruments their carrying value
approximates fair value due to the short maturity of these
instruments.
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued and, as amended, is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133, standardizes
the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and requires derivative
instruments to be recognized as assets and liabilities and be recorded
at fair value. The Company is currently not party to any derivative
instruments. Any future transactions involving derivative instruments
will be evaluated based on SFAS No. 133.
(M) OTHER ASSETS
Other Assets include certain patent rights, the cost of which is
amortized using the straight line method over the life of the patents.
The weighted average remaining patent life at December 31, 1999 is 12
years.
(3) INVENTORY
DECEMBER 31,
--------------------------------------
1998 1999
------------------ -----------------
Raw materials $ 440,400 $ 1,411,663
Work in process 535,494 647,841
Finished goods 595,514 396,555
------------------ -----------------
$ 1,571,408 $ 2,456,059
================== =================
Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were
expensed as research and development costs.
(4) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
DECEMBER 31,
------------------------------------
1998 1999
------------------ ----------------
Leasehold improvements $ 4,008,246 $ 4,375,013
Laboratory equipment and machinery 4,874,733 5,323,897
Furniture and fixtures 470,667 605,623
Leased equipment 675,304 675,304
------------------ ----------------
10,028,950 10,979,837
Less: accumulated depreciation 7,766,820 8,643,595
------------------ ----------------
$ 2,262,130 $ 2,336,242
================== ================
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
------------------------------------
1998 1999
----------------- -----------------
Professional and consulting fees $ 787,381 $ 905,072
Accrued compensation 1,650,048 3,098,540
Accrued interest and royalties 361,809 1,989,394
Other 242,621 768,883
----------------- -----------------
$ 3,041,859 $ 6,761,889
================= =================
(6) CONVERTIBLE DEBT
On September 16, 1998, the Company issued a convertible note to an
institutional investor in the amount of $8,750,000. The note has a five
year term and a coupon rate of 9.25% with interest payable on a semi-annual
basis. The note contains a conversion feature that allows the note holder
to convert the note into common shares at $11 per share. The Company can
redeem the note after three years at 103% of the principal amount, (two
years if the Company's stock trades at $24.75 or higher for a period of 20
consecutive trading days). This note was issued at a discount of $437,500
which is being amortized over three years.
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five year
term and a coupon rate of 9% with interest payable on a semi-annual basis.
The note contains a conversion feature that allows the note holder to
convert the note into common shares after one year at $18 per share. The
Company can redeem the note after three years at 103% of the principal
amount, (two years under certain conditions). Issuance costs of $750,000
incurred in connection with this note are being amortized over three years.
On July 6, 1999, the Company issued to a third institutional investor a
convertible note in the amount of $15,000,000. The note has a five year
term and a coupon rate of 9% with interest payable on a semi-annual basis.
The note contains a conversion feature that allows the note holder to
convert the note into common shares after one year at $19 per share. The
Company can redeem the note after three years at 103% of the principal
amount, (two years under certain conditions). There was no fee or discount
associated with this note.
At 12/31/99, the fair value of the Company's convertible notes exceeded
their carrying value, reflecting the increase to $70 per share in the
market value of the Company's common stock at that date.
(7) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority to issue, at any time, without
further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of those
shares.
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
SERIES A CONVERTIBLE PREFERRED STOCK
During 1996, in a private placement, the Company completed the sale of 503
shares of Series A Convertible Preferred Stock, par value $.01 per share,
at an issue price of $50,000 per share. All of the shares of the Series A
Convertible Preferred Stock with their respective accrued accretion, had
been converted or redeemed into 3,342,202 shares of common stock at
December 31, 1998.
During 1996, the Company had issued warrants valued at $138,156, that
entitle certain stockholders of the Series A Convertible Preferred Stock to
purchase 153,507 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. All these warrants either expired or were exercised for 3,418 shares
of common stock at December 31, 1998. In connection with the private
placement, the Company also granted to certain executives and affiliates of
the placement agent warrants, valued at $60,168, to purchase an aggregate
of 66,853 shares of common stock at an exercise price of $20.52, subject to
proportional adjustment in the event that the Company undertakes a stock
split, stock dividend, recapitalization or similar event. These warrants
are exercisable for a period of five years from the date of issuance. As of
December 31, 1999, 35,039 warrants were exercised to purchase 23,322 shares
of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
During 1997, in a private placement, the Company completed the sale of
5,000 shares of Series B Convertible Preferred Stock (the "Series B
Preferred"), par value $.01 per share, at an issue price of $1,000 per
share. The Company received net proceeds, after offering costs of
$4,840,748. Shares could be converted at an initial conversion price of
$6.50 per share. All shares of the Series B Preferred had been converted
into 788,469 shares of common stock at December 31, 1998.
Upon request of the purchasers of the Series B Preferred, the Company is
required to 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 December 31, 1999) plus (ii) 37.5% of
the conversion shares issuable on such issuance date upon conversion of all
shares of Series B Preferred issued through the issuance date (288,461
warrants as of December 31, 1999). 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 ($6.50 at December 31,
1999). The fair value of warrants at the issuance date was $1.28 per
warrant. As of December 31, 1999 no warrants have been exercised.
RIGHTS PLAN
During 1996, the Company adopted a shareholder rights plan ("Rights Plan").
The Rights Plan involves the distribution of one "Right" as a dividend on
each outstanding share of the Company's common stock to each holder of
record on September 26, 1996. Each Right shall entitle the holder to
purchase one-tenth of a share of common stock. The Rights trade in tandem
with the common stock until, and are exercisable upon, certain triggering
events, and the exercise price is based on the estimated long term value of
the Company's common stock. In certain circumstances, the Rights Plan
permits the holders to purchase shares of the Company's common stock at a
discounted rate. The Company's Board of Directors retains the right at all
times prior to acquisition of 15% of our voting common stock by an
acquiror, to discontinue the Rights Plan through the redemption of all
rights or to amend the Rights Plan in any respect.
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(8) STOCK BASED COMPENSATION
(A) STOCK OPTIONS
The Company has two Incentive Plans that provide for the granting of
options, restricted stock awards, stock appreciation rights,
performance awards and other stock-based awards to employees and
officers of the Company to purchase not more than an aggregate of
1,400,000 shares of common stock under the 1992 plan and 1,500,000
shares of common stock under the 1998 plan, subject to adjustment
under certain circumstances. The Management Compensation and
Development Committee of the Board of Directors (the "Committee")
determines the type, amount and terms, including vesting, of any
awards made under the Incentive Plans. The Plans terminate in 2002 and
2008, respectively.
With respect to options granted under the Incentive Plans, the
exercise price may not be less than the fair market value of the
common stock on the date of grant. In general, each option granted
under the Plans vests evenly over a three or four year period and
expires 10 years from the date of grant, subject to earlier expiration
in case of termination of employment. The vesting period for options
and restricted stock awards granted under the Plans is subject to
certain acceleration provisions if a change in control, as defined in
the Plans, occurs.
On June 16, 1995, the stockholders of the Company approved the 1995
Non-Employee Directors' Incentive Plan, which provides for the
granting of non-qualified stock options to purchase an aggregate of
not more than 350,000 shares of common stock (subject to adjustment
under certain circumstances) to directors of the Company who are not
officers or employees of the Company ("Non-Employee Directors"). Each
new Non-Employee Director, upon the date of election or appointment,
receives an option to purchase 20,000 shares of common stock.
Additionally, upon the date of each annual meeting of stockholders,
each continuing Non-Employee Director receives an option to purchase
10,000 shares of common stock (or a pro rata portion thereof for
service less than one year). The shares subject to each non-employee
director's option grant of 20,000 shares vest in four equal annual
installments commencing on the first anniversary of the date of grant.
The shares subject to an annual meeting option grant vest in full on
the date of the first annual meeting of stockholders held following
the date of grant. On June 22, 1999, the stockholders of the Company
approved an amendment to the 1995 Non-Employee Directors' Incentive
Plan that a.) increased the number of shares to 600,000 and b.)
provided for a discretionary grant upon the date of each annual
meeting of an additional option to purchase up to 5,000 shares to a
non-employee director who serves as a member (but not a chairman) of a
committee of the Board of Directors and up to 10,000 shares to a
non-employee director who serves as the chairman of a committee of the
Board of Directors. All options are granted at an exercise price that
equals the fair market value of the Company's common stock at the
grant date and expire 10 years after the date of grant. This plan
terminates in 2005.
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
The weighted-average fair value per share for stock options granted
was $9.26 for the 1999 options, $3.97 for the 1998 options and $3.93
for those granted in 1997. The company estimated the fair values using
the Black-Scholes option pricing model and used the following
assumptions:
1997 1998 1999
---------------- ------------- ----------------
Risk-free interest rate 6.37% 5.68% 6.38%
Expected stock price volatility 55% 66% 46%
Expected term until exercise (years) 3.09 2.86 4.98
Expected dividend yield 0% 0% 0%
The Company does not record compensation expense for stock option
grants. The following table summarizes results as if compensation
expense was recorded for the annual option grants under the fair value
method:
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA) 1997 1998 1999
--------------------------------------------------- ---------- ------------- --------------
Net loss applicable to common stockholders:
As reported $ (26,922) $ (25,093) $ (21,781)
Pro forma (28,652) (26,745) (25,491)
Net loss per share basic and diluted:
As reported (2.20) (1.55) (1.28)
Pro forma (2.35) (1.66) (1.50)
The pro forma effects on net loss and net loss per share for 1997,
1998 and 1999 may not be representative of the pro forma effects in
future years since compensation cost is allocated on a straight-line
basis over the vesting periods of the grants, which extends beyond the
reported years.
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
The following table summarizes the stock option activity for the
aforementioned Plans:
OPTIONS OUTSTANDING
----------------------------------------
SHARES
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
-------------------- ---------------- --------------------
Balance January 1, 1997 442,845 2,006,214 $ 9.60
Authorized 500,000 -- --
Expired (74,797) -- --
Granted (492,775) 492,775 9.39
Exercised -- (6,986) 7.83
Cancelled 142,027 (142,027) 9.36
-------------------- ---------------- --------------------
Balance December 31, 1997 517,300 2,349,976 9.59
Authorized 1,620,000 -- --
Expired (85,095) -- --
Granted (559,983) 559,983 8.87
Exercised -- (283,120) 7.18
Cancelled 198,726 (198,726) 10.74
-------------------- ---------------- --------------------
Balance December 31, 1998 1,690,948 2,428,113 9.62
Authorized 250,000 -- --
Expired (70,047) -- --
Granted (890,530) 890,530 19.26
Exercised -- (949,323) 8.46
Cancelled 42,053 (42,053) 10.66
-------------------- ---------------- --------------------
Balance December 31, 1999 1,022,424 2,327,267 $13.76
==================== ================ ====================
The following table summarizes information concerning options
outstanding under the Plans at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/99 PRICE TERM (YRS.) AT 12/31/99 PRICE
-------------- ----------- -------- ----------- ----------- --------
5.00 - 9.00 627,518 $ 7.78 6.8 322,966 $ 7.25
9.01-13.00 450,920 10.69 6.9 294,861 10.69
13.01-18.00 1,137,329 15.93 8.2 349,407 14.43
18.01 + 111,500 37.74 9.8 - -
---------- ------------ --- ------- ----------
2,327,267 $ 13.76 7.6 967,234 $ 10.89
========== ============ === ======= ==========
(B) STOCK AWARDS
On January 1, 1997, the Company awarded 5,000 shares to the Company's
Chairman and Chief Executive Officer, which were immediately vested.
The fair value of $55,625 for this award was expensed.
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(C) WARRANTS
In connection with the retention of an investment firm to assist in
the sale and issuance of the Series A Convertible Preferred Stock, the
Company, in 1996 granted to such firm, warrants to purchase until
March 10, 2001, 66,853 shares of common stock at a price of $20.52.
There were 31,814 warrants outstanding as of December 31, 1999.
In connection with the placement of the Series B Convertible Preferred
Stock in June, 1997, the Company has an obligation to issue warrants
to purchase 519,230 shares of common stock until June 1, 2002, at a
price of $7.48 per share. As of December 31, 1999 these warrants were
outstanding.
(9) INCOME TAXES
At December 31, 1998 and 1999, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
1998 1999
---------------- -----------------
Deferred assets:
Federal and state net operating loss carryforwards $ 54,779,000 $ 73,147,000
Research and experimentation tax credit carryforwards 3,235,000 3,984,000
Plant and equipment, principally due to differences in depreciation 772,000 1,075,000
Patents, principally due to differences in amortization 62,000 58,000
Accrued expenses 665,000 560,000
---------------- -----------------
Total deferred tax assets 59,513,000 78,824,000
Valuation allowance (59,513,000) (78,824,000)
---------------- -----------------
Net deferred tax assets $ -- $ --
================ =================
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At December
31, 1999, the Company had Federal net operating loss carryforwards of
approximately $184,000,000 and state net operating loss carryforwards of
approximately $121,000,000 that will expire in the years 2001 through 2019.
State net operating loss carryforwards differ from Federal net operating
loss carryforwards primarily due to the fact that the Company sold
approximately $39,000,000 of its state net operating loss carry forwards
during 1999 and approximately $24,000,000 has expired. The Company also has
research and experimentation credit carryforwards of approximately
$3,984,000 that expire in the years 2001 through 2019. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs. Of the deferred tax
asset related to the Federal and state net operating loss carryforwards,
approximately $12,500,000 relates to a tax deduction for non qualified
stock options. The Company will increase paid in capital when these
benefits are realized for tax purposes.
(10) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex
Corporation for Cambrex to acquire Celgene's chiral intermediate business
for approximately $15 million. The Company received $7.5 million upon the
closing of the transaction, and will receive future royalties with a
present value not exceeding $7.5 million, with certain minimum royalty
payments in the third through sixth year following the closing of the
transaction. Included in the transaction are the rights to Celgene's
enzymatic technology for the production of chirally pure intermediates for
the pharmaceutical industry,
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
including the current pipeline of third party products and the equipment
and personnel associated with the business.
(11) MARKETABLE SECURITIES AVAILABLE FOR SALE
Marketable securities available for sale at December 31, 1999 include debt
securities with maturities ranging from January 2000 to August 2004. A
summary of marketable securities at December 31, 1999 is as follows:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------------- -------------- --------------- ----------------
Government Bonds & Notes $2,313,125 - $(25,579) $2,287,546
Government Agencies 2,050,000 - (66,325) 1,983,675
---------------- -------------- --------------- ----------------
Total $4,363,125 - $(91,904) $4,271,221
================ ============== =============== ================
Marketable securities available for sale at December 31, 1998 include debt
securities with maturities ranging from March, 1999 to October, 2002.
Marketable securities at December 31, 1998 include Corporate Bonds
($1,006,890) and US Government and agency obligations ($1,050,000). The
cost equaled fair market value.
(12) COMMITMENTS AND CONTINGENCIES
(A) LEASES
Celgene leases its main laboratory and office facilities in Warren
Township, New Jersey. The current lease term for the main laboratory
and office space expires in 2002 and has one five-year renewal option.
Annual payments are $330,000. The lease provides that at the end of
each five-year term, the rent will be increased based upon the change
in the consumer price index, but in no case shall the increase be
greater than 20%. Celgene is also required to pay additional amounts
for real estate taxes, utilities, and maintenance. Total rental
expense amounted to $477,000, $486,000 and $479,000 in 1997, 1998 and
1999, respectively. Celgene has subleased 12,500 square feet of this
facility to Cambrex Corporation for up to three years for the Chiral
Intermediate business which Cambrex purchased on January 9, 1998.
In November, 1999, the Company leased an additional 29,000 square feet
of office and laboratory space in the same building facility in
Warren, New Jersey adjacent to our existing leased space. The initial
term of the lease extends to July 2010 with two five year renewal
options.
In March 1999, the Company entered into a lease agreement with The New
Jersey Economic Development Authority (NJEDA) to lease approximately
18,000 square feet of office and laboratory space in North Brunswick,
New Jersey for Celgro, our agrochemical subsidiary. The lease
agreement is for ten years commencing January 1, 2000 and provides for
two five year renewal terms.
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
In July, 1997, the Company entered into an equipment leasing
agreement; under the agreement, the Company can lease up to $1,000,000
of equipment for a three year term after which the Company can
purchase the equipment for a nominal value. Through December 31, 1999,
the Company has leased $675,000 of laboratory equipment under this
agreement.
The following table shows the approximate minimum lease commitments
for the next five years:
2001 2001 2002 2003 2004 After 2004
---------------- --------------- -------------- -------------- --------------- --------------
$1,257,000 $1,106,000 $1,086,000 $1,122,000 $1,131,000 $4,903,000
(B) EMPLOYMENT AGREEMENTS
Celgene has employment agreements with certain officers and employees.
The related outstanding commitment for 2000 is approximately $1.3
million. Employment contracts provide for an increase in compensation
reflecting annual reviews and related salary adjustments.
(C) CONTRACTS
Pursuant to the terms of a research and development agreement with The
Rockefeller University, the Company has purchased for cash and stock
options the world-wide exclusive license to manufacture and market any
drugs, including Thalomid, which may result from the research
performed at Rockefeller and funded by the Company. The portion of the
agreement that provides for research services to be performed
byRockefeller is renewable for one year terms upon agreement of both
parties. Under terms of the current research agreement extension, the
Company is committed to pay Rockefeller $504,000 annually for
research.
The Company has an agreement with Penn Pharmaceutical, Ltd. of Great
Britain ("Penn") for the production of Thalomid. Penn manufactures
Thalomid and sells it exclusively to the Company. The agreement is
renewable for one year terms and has been renewed for 2000, for
facility payments totaling approximately $480,000.
In October 1997, the Company entered into a contract with Boston
University to manage the surveillance registry which is intended to
monitor compliance to the requirements of the Company's S.T.E.P.S.
(System for THALOMID Education and Prescribing Safety) program for all
Thalomid patients. The contract has been renewed for 2000. Under the
terms of the agreement quarterly payments of approximately $395,000
are required. The contract is renewable for one year terms upon
agreement of both parties.
In December 1997, the Company entered into a research agreement with
the University of Glasgow for clinical testing and evaluation of
certain of Celgene's patented compounds. Under terms of the agreement,
the Company agreed to pay the University approximately $200,000 in two
annual installments. The term of the original agreement was for two
years and has been extended through 2000.
In June 1998, the Company entered into a research agreement with a
contract research organization to manage the pivotal clinical trial
for d-methylphenidate encompassing four separate protocols. The
agreement is for approximately two years and is estimated at
approximately $5.0 million over the life of the agreement.
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
In December 1998, the Company entered into an exclusive license
agreement with EntreMed, Inc. whereby EntreMed granted to us an
exclusive license to its patent and technology rights for thalidomide.
In return EntreMed will receive royalties on all sales of THALOMID.
(D) CONTINGENCIES
The Company believes it maintains insurance coverage adequate for its
current needs.
The Company's operations are subject to environmental laws and
regulations which impose limitations on the discharge of pollutants
into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. The Company
reviews the effects of such laws and regulations on its operation and
modifies its operations as appropriate. The Company believes that it
is in substantial compliance with all applicable environmental laws
and regulations.
(13) SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. As discussed in
Note 1, the Company manages its operations as one line of business of
discovery, development and commercialization of orally administered, small
molecule drugs for the treatment of cancer and immunological diseases.
Additionally, our chiral chemistry program develops chirally pure versions
of existing compounds for both pharmaceutical and agrochemical markets. The
Company markets and sells its products in the United States. During 1999,
no single customer accounted for more than 3% of the Company's product
sales.
(14) SUBSEQUENT EVENT
On January 19, 2000, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission for the sale of 2,416,000
shares of the Company's common stock plus an over-allotment option for
362,400 shares. Of the 2,416,000 shares, 416,000 represents shares to be
issued to a selling stockholder related to the conversion by the selling
stockholder of approximately 50% of the convertible notes issued January
20, 1999. The notes will be converted just prior to pricing the offering,
and the proceeds from the sale of the 416,000 shares will be for the
account of the selling stockholder. An amendment to the Form S-3, for the
inclusion of recent developments and 1999 fourth quarter and full year
unaudited financial data, was filed on January 27, 2000.
On February 8, 2000, the Company announced that it was increasing the share
offering to 3,000,000 shares. The proceeds from the sale of 516,000 shares
are for the account of the convertible noteholder and the proceeds from the
sale of the remaining 2,484,000 are for the account of the Company.
F-22