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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 No. 0-19153
NEXELL THERAPEUTICS INC.
(Exact name of Registrant as specified in its charter)
Delaware 06-1192468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Parker, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(949) 470-9011
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Common Stock Subscription Warrants
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 ___
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of
the Registrant was approximately $47,384,000 on February 28, 2001 based on the
closing price of the Common Stock on such date. For purposes of this
calculation, shares owned by officers, directors, and 5% stockholders known to
the Registrant are deemed to be owned by affiliates.
The aggregate number of outstanding shares of Common Stock, $.001 par
value, of the Registrant was 20,925,509 on March 29, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (the "2001
Proxy Statement") to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year (April 30, 2001) are incorporated by reference
in Part III.
PART I
ITEM 1. BUSINESS
Disclosure Regarding Forward Looking Statements
This Report on Form 10-K contains certain statements that are "Forward
Looking Statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Those statements include, among other things, the discussions of the
Company's business strategy and expectations contained in "Item 1 - Business"
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations." Although the Company believes that the expectations
reflected in Forward Looking Statements are reasonable, management can give no
assurance that such expectations will prove to be correct. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, or projections
involving anticipated revenues, expenses, earnings, levels of capital
expenditures, liquidity or indebtedness or other aspects of operating results or
financial position. All phases of the operations of the Company are subject to a
number of uncertainties, risks and other influences (including the timely
commencement and success of the Company's clinical trials and other research
endeavors, delays in receiving FDA or other regulatory approvals, the
development of competing therapies and/or technologies, the terms of any future
strategic alliances, and the possible need for additional capital), many of
which are outside the control of the Company and any one of which, or a
combination of which, could materially affect the results of the Company's
operations and whether the Forward Looking Statements made by the Company
ultimately prove to be accurate.
General
Nexell Therapeutics Inc. ("Nexell" or the "Company") is an Irvine,
California-based biotechnology company. Nexell's principal subsidiary, Nexell of
California, Inc. ("NCI") is developing products utilizing cell selection
technology in cell therapy for cancer and other life-threatening diseases. NCI
is a leader in cell selection technology and currently sells cell selection
products in Europe, the United States and Canada. The Company previously
operated two other biotechnology subsidiaries engaged in the discovery and
development of biopharmaceuticals, Innovir Laboratories, Inc. ("Innovir") and
Vimrx Genomics, Inc. ("VGI"), both of which have ceased operations.
All references to common share and per share information have been
adjusted to give retroactive effect to a one-for-four reverse stock split
effected by the Company on June 15, 2000.
Business of NCI
NCI is engaged in the development, manufacture, marketing and
distribution of cell selection systems, including specialized instruments,
biologicals, reagents, sterile plastics sets and related products used in ex
vivo stem cell research and therapies. NCI's products are used in the research
and clinical treatment of diseases, including various forms of cancer,
autoimmune diseases, gene therapy and dendritic cell therapy.
NCI currently markets an FDA and European Commonwealth approved
Isolex(R) Cell Selection system
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that consists of automated, cell processing instruments along with companion
reagents/biologicals kits and sterile path plastic disposable sets. These
systems are used for the clinical isolation of specific stem cell populations
from blood and bone marrow (positive cell selection). In positive cell
selection, a targeted blood stem cell population is selected away from other
contaminating cells and released for reinfusion and regeneration of the patient
blood forming system following chemotherapy or for further biological
manipulation. For each selection procedure, the customer typically uses one
reagent kit and one disposable set. Consequently, the installed base of cell
selection instruments should generate a stream of future consumables revenues in
excess of the revenue resulting from the placement of the instrument itself. NCI
has offered four versions of the Isolex(R) Cell Selection instrument; these
include the smaller scale Isolex(R) 50 Cell Separator for research use; the
clinical scale semi-automated Isolex(R) 300 Cell Separator; and the fully
automated Isolex(R) 300i Cell Separator. An additional version of the Isolex(R)
300i which allows simultaneous positive cell selection (capturing and releasing
of cells that are desired) and negative selection (further eliminating cells
that are not wanted) in a single procedure is marketed outside the U.S. only.
Late in 1999 and during 2000, the Company introduced an upgraded software,
version 2.5, with further enhancement to the Isolex(R) 300i systems features and
performance. This software is available for positive (U.S.) and positive-
negative (Europe) Isolex 300I automated devices. The U.S. version of the
Isolex(R) 2.5 received FDA Pre-Market Approval in May 2000. In 2000, the Company
also launched a monocyte enrichment kit in Europe to be used with the Isolex(R)
in research studies to enrich for another blood cell type, the monocyte.
Monocytes can be cultured to become dendritic cells which are immune system
cells that process antigens and train the immune system to respond to specific
antigens. Investigators are now testing dendritic cells as a component of tumor
vaccines to better stimulate anti-tumor immune responses. The Company intends to
provide ongoing product enhancements to keep the Isolex(R) platform competitive.
In addition to the positive selection Isolex(R) Cell Separator, NCI
markets the MaxSep(R) System. The semi-automated MaxSep(R) System is a negative
selection system in which undesired cells are removed from a diverse population
of cells. The MaxSep(R) System is currently marketed for therapeutic purposes in
Europe.
NCI also markets various cell storage and handling products that are
typically utilized in the cell processing cycle by NCI's cell selection system
customers. These products include the following: Cryocyte(TM) containers used in
the freezing of blood components; Lifecell(R) X-Fold, and Opticyte(TM)
containers, all of which provide a closed system environment for culturing
cells; the Solution Transfer Pump, an automated, programmable pump for filling
bags and splitting cell cultures; and Harvester(TM), a cell collection device
used primarily to reduce large cell volumes. In addition, NCI markets an in
vitro tumor diagnostic product, the Cytonex(TM) Immunocytochemistry ("ICC") kit.
The Company believes that these products are complementary to the Isolex(R) cell
selection systems, and provide enhanced customer support.
Relationship with Baxter Healthcare Corporation
Overview
The Company's significant operating activities began with its December
1997 acquisition of the business of the Immunotherapy Division (the "Division")
of the Biotech Business Group of Baxter Healthcare Corporation ("Baxter"). In
connection therewith, the Company entered into several agreements with Baxter by
which Baxter agreed to perform certain activities related to the Division. In
1999, the parties entered into additional agreements to restructure Baxter's
ownership interest in the Company and NCI and to modify their business
arrangements.
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December 1997 - Acquisition of the Immunotherapy Division
In December 1997, the Company acquired substantially all of the assets
of the Division. In exchange for these assets, Baxter received (i) 2,750,000
shares of Nexell Common Stock ("Common Stock"), (ii) 66,304 shares of the
Company's Series A Convertible Preferred Stock, convertible into Common Stock at
a conversion price of $22.00 per share, (iii) 19.5% of the outstanding common
stock of NCI, (iv) a warrant to purchase an additional 6% of the then
outstanding common stock of NCI for an aggregate $6,000,000, and (v) the right
to receive payments up to $21,000,000 from NCI upon the occurrence of certain
future events. The $21,000,000 represents the maximum potential amount that
could be paid by the Company when, and if, certain FDA and European regulatory
approvals are obtained. As the amount of the contingent consideration, if any,
was not determinable nor was the achievement of the approvals considered
probable at the date of the acquisition, it was excluded from the determination
of the cost of the acquisition. Depending on the progress in certain of the
Company's therapeutic programs, a payment of up to $2,000,000 could be required
for milestones achieved in 2001. In addition, Baxter purchased $30,000,000
principal amount of NCI's 6 1/2% convertible subordinated debentures. Many of
these terms have been renegotiated as set forth below.
Marketing, Sales and Distribution Agreement ("Distribution
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Agreement"). NCI appointed Baxter as its exclusive worldwide marketing, sales
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and distribution entity for NCI's Isolex(R) and Maxsep(R) products and reagent
kits, with the right of first offer with respect to acquiring such rights for
NCI's future products. NCI agreed to supply to Baxter products and kits at a
discount to NCI's suggested retail price. The Distribution Agreement was, by its
terms, to expire December 17, 2008. However, as described below, as of November
30, 1999, the parties terminated the agreement.
Services Agreement. Baxter agreed to provide the following services as
------------------
necessary to meet NCI's requirements: access to Baxter's Information Management
Center; quality and compliance training; access to the Baxter Institute for
Training and Development; and access to specific accounts through Baxter's
General Ledger and Fixed Assets Systems. NCI agreed to pay only for those
services requested. In addition, Baxter agreed to manufacture, warehouse and
manage inventory for certain clinical codes under protocols in accordance with
the terms of the Hardware and Disposables Supply Agreement and the Hardware and
Disposables Manufacturing Agreement and, at its option, to manufacture certain
prototype products for the research market at a cost to NCI of time and
materials plus 20%. Baxter's obligation to provide the services was extended
until June 30, 1999, at which time (as described below) the Services Agreement
was terminated.
Hardware and Disposables Manufacturing Agreement. Baxter agreed to
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manufacture on a non-exclusive basis for NCI certain Isolex(R) and Maxsep(R)
products and components and to complete assembly of Isolex(R) and Maxsep(R)
instruments and disposable sets. NCI agreed to pay Baxter's Fully Loaded Cost
for the products and components for the first three years, and Baxter's Fully
Loaded Cost plus 15% for the remaining years. Baxter's "Fully Loaded Cost" means
the cost to Baxter of manufacturing the items, including any royalties payable
by Baxter in connection with such manufacturing. The Agreement expires on
December 17, 2002.
Antibody Manufacturing and Storage Agreement. Baxter agreed to
--------------------------------------------
manufacture on a non-exclusive basis for NCI certain antibodies, reagents and
reagent kits used in connection with the Isolex(R) and Maxsep(R) products. NCI
agreed to pay Baxter's Fully Loaded Cost for the antibodies, reagents and
reagent kits for the first three years, and Baxter's Fully Loaded Cost plus 15%
for the remaining years. The Agreement expires on December 17, 2002.
Hardware and Disposables Supply Agreement. Baxter agreed to supply to
-----------------------------------------
NCI certain of Baxter's products and components in conjunction with the
manufacture, use and sale of Isolex(R) and Maxsep(R) products. Baxter granted to
NCI the exclusive worldwide royalty-free right to distribute such products and
components in
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connection with ex vivo cell processing, subject to certain exceptions. NCI
agreed to pay Baxter's Fully Loaded Cost for the products and components for the
first three years, Baxter's Fully Loaded Cost plus 15% for the next two years
and Baxter's Fully Loaded Cost plus 30% for the remaining years. The Agreement
expires on December 17, 2008.
License Agreements. Pursuant to four separate sublicense agreements,
------------------
Baxter sublicensed to NCI its rights under the following licenses: license from
Baxter and Becton, Dickinson & Company ("Becton Dickinson") to certain CD34+
cell population and related antibody and method patents (the "First License");
license from Becton Dickinson to certain B cell antibodies; license from Chiron
Therapeutics to certain breast cancer antibodies; and license from Professor
Bernd Dorken to certain B Cell antibodies. In addition, pursuant to a royalty
assignment and agreement, Baxter assigned to NCI its rights to receive royalties
under three sublicenses Baxter had previously granted under the First License.
Non-Competition and Confidentiality Agreement. Each party agreed not
---------------------------------------------
to, directly or indirectly, engage in, render advisory services to an entity
that engages in, or be a joint venturer, partner, licensor or shareholder of
more than 2% of any entity that engages in, the marketing, sale or distribution
of any product that directly competes with certain products of the other. In the
case of Baxter's products, such protected products are for use in on-line
separation of human blood into its constituents. In the case of the Company's
and NCI's products, such protected products are for use in ex vivo cell
selection or genetic alteration and/or expansion in combination with such
selection. Baxter's non-competition obligations expire on the later of December
17, 2004, one year after the date on which Baxter does not own 10% of NCI's
common stock nor has a seat on NCI's board of directors, or the termination of
the Marketing, Sales and Distribution Agreement. The Company's obligations
expire on the later of December 17, 2004, or one year after the date on which
the Company does not have voting control of NCI nor has a seat on NCI's board of
directors. NCI's obligations expire on the later of December 17, 2010, or the
termination of the Hardware and Disposables Supply Agreement.
The Company and Baxter are also parties to a Registration Rights
Agreement dated December 17, 1997 whereby the Company has granted certain demand
and piggyback rights to Baxter.
The Company, certain current and former directors of the Company, and
Baxter are also parties to a Voting Agreement, dated December 17, 1997, pursuant
to which all parties agreed to vote all of their Common Stock in favor of one
Baxter-nominated director. In addition, Baxter has agreed to vote all of its
Common Stock in favor of the nominees for director recommended by the Company's
nominating committee, or, if there is no such committee, by a majority of the
Board of Directors. The Voting Agreement will remain in effect as long as Baxter
continues to own at least 3% of the Common Stock. Baxter's obligations under the
Voting Agreement will terminate if the "Threshold" (as set forth in a Side
Letter Agreement dated November 24, 1999 between the parties described below) is
met.
January 1999 through June 1999 - Transfers of Ownership and Assets
In early 1999, the Company and Baxter agreed that it would be in the
best interests of both parties to (i) restructure Baxter's ownership interests
in the Company and NCI, and (ii) modify certain business arrangements among the
Company, NCI and Baxter. In January 1999, the Company and Baxter agreed that the
Company would purchase Baxter's interest in NCI (other than Baxter's right to
milestone payments), resulting in the Company owning 100% of NCI. In exchange
for the common stock, warrant and convertible debentures of NCI then held by
Baxter, Baxter received (i) 750,000 shares of Common Stock, (ii) a warrant to
purchase an additional 1,300,000 shares of Common Stock at an exercise price of
$4.60 per share, (iii) a change in the conversion price of the 70,282 shares of
Series A Convertible Preferred Stock then held by Baxter (an increase
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from 66,304 shares resulting from dividends payable in kind) from $22.00 to
$11.00 per share, and (iv) approximately $33,000,000 principal amount of the
Company's 6 1/2% convertible subordinated debentures (replacing the $30,000,000
principal amount of NCI's 6 1/2% convertible subordinated debentures, plus
accrued interest).
Following the closing on May 28, 1999 (which occurred after
stockholder approval of the transaction at the Company's May 25, 1999 annual
meeting of stockholders), NCI became a wholly owned subsidiary of the Company.
As of December 31, 2000, Baxter owns approximately 18% of the outstanding Common
Stock without giving effect to the possible conversion or exercise by Baxter or
others of additional securities they own.
In June 1999, the Company and Baxter entered into a series of
agreements dated June 30, 1999 pursuant to which, among other things, Baxter
transferred the sales, marketing and distribution responsibilities for Isolex(R)
and the Company's other cell therapy products to the Company. Pursuant to an
asset transfer agreement, the Company agreed to purchase from Baxter the
finished goods inventory, copies of customer lists and accounting books and
records, hardware and related assets leased or owned, and agreements with
customers and service contracts, all relating to the products previously
marketed and distributed by Baxter under the Distribution Agreement. In
addition, certain Baxter personnel transferred to the Company and became part of
the Company's worldwide sales force. The purchase price for the transferred
assets was equal to the price Baxter as a distributor had originally paid to NCI
for the finished goods inventory plus the net book value of all other
transferred assets. The closing for the transfer of assets in the United States
and Canada occurred on June 30, 1999 and in the rest of the world occurred on
November 30, 1999. For the year ended December 31, 1999, the Company's cost of
repurchasing the inventory in the United States was approximately $1,000,000 and
in the rest of the world was approximately $2,000,000. Additionally, the Company
purchased approximately $1,200,000 in devices classified as fixed assets.
In connection with the asset transfer, the Company and Baxter also
entered into a royalty agreement pursuant to which Baxter will receive a royalty
of 5% on the Company's net sales of Isolex(R) and related cell therapy products
from January 1, 2001 until December 17, 2008. (Baxter was also entitled to a
royalty of 5% on the Company's net sales of the foregoing products in excess of
$50,000,000 in the year 2000, which did not occur). In addition, Baxter extended
a $20,000,000 line of credit to the Company pursuant to a credit agreement,
which agreement terminated by its terms without being drawn on, upon the closing
of the November 1999 financing described below.
As of June 30, 1999 and November 30, 1999, respectively, the Services
Agreement and Distribution Agreement were terminated. The Company now has direct
control of sales of its Isolex(R) and cell therapy products through its field
sales group in the United States and its European headquarters in Belgium. For
regions outside the United States, Canada and Western Europe, NCI and its
European subsidiary are entering into arrangements with third party distributors
for distribution of the Isolex(R) and cell therapy products. The Company is
entering into distribution agreements with distributors unrelated to Baxter in
portions of Northern and Southern Europe and East Asia. In addition, NCI's
European subsidiary has executed an agreement with a Baxter subsidiary for
distribution in Eastern Europe, portions of North Africa and the Middle East.
NCI and its European subsidiary have also entered into several interim services
agreements with Baxter pursuant to which Baxter will continue to provide
services in Europe and certain other regions relating to warehouse and shipping,
information systems, general infrastructure and administrative support, quality
assurance and regulatory affairs.
Baxter has also agreed to continue to provide worldwide services
relating to the installation, repair and maintenance of NCI's cell therapy
products pursuant to the terms of several instrument services agreements dated
June 30, 1999 and November 30, 1999 covering various regions of the world where
such products are
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sold. Pursuant to the agreements, NCI (or its European affiliate, Nexell
International SPRL) will provide training to Baxter personnel, and such
personnel will provide the services as requested by NCI or its customers. NCI
will pay for the services an amount equal to Baxter's Fully Loaded Cost, plus
15% in the case of the United States, Canada and Europe, and plus 20% in the
rest of the world. The instrument services agreements expire upon termination of
the Manufacturing Agreement.
Notwithstanding the termination of the Distribution Agreement, the
parties have agreed that Baxter's obligations with respect to the delivery of
Isolex(R) and other cell therapy products under the Manufacturing Agreement,
Antibody Agreement and Supply Agreement shall remain in full force and effect.
The assets purchased from Baxter in conjunction with the termination
of the supply and manufacturing agreements were accounted for as an asset
purchase for cash. The types of items purchased include saleable inventory,
Isolex(R) devices that are located in customer sites both in the United States
and in Europe and minor amounts of promotional materials. The purchase price for
the inventory was equal to the price Baxter as a distributor had originally paid
to the Company. The Isolex(R) devices were purchased and recorded at their net
book value, which the Company believes approximated the fair market value.
November 1999 - Private Placement Financing
On November 24, 1999, the Company closed a private placement of its
securities to certain institutional investors pursuant to the terms of a
securities agreement (the "Securities Agreement"). The private placement
consisted of the issuance of (i) 63,000 shares of the Company's newly designated
Series B Cumulative Convertible Preferred Stock ("Series B Preferred Stock"),
convertible at the option of the holder at any time until November 24, 2006 (at
which time the conversion is automatic) into shares of Common Stock at $11.00
per share, subject to anti-dilution adjustment in certain circumstances; (ii)
one right per share of Series B Preferred Stock to put such share to Baxter
International Inc. ("Baxter International"), an affiliate of Baxter, from
November 24, 2002 until November 24, 2004 unless earlier terminated (the "Put
Rights"); (iii) warrants to purchase up to 750,000 shares of Common Stock at a
purchase price of $12.00 per share, subject to anti-dilution adjustment in
certain circumstances, exercisable for five years; and (iv) a class of
performance warrants to purchase shares of Common Stock at a purchase price of
$.04 per share, subject to anti-dilution adjustment in certain circumstances,
exercisable after five years. The number of performance warrants that may be
exercised adjust based upon the closing price of the Common Stock at the date of
exercise, ranging from zero (if the closing price exceeds $20.00 per share) to
1,500,000 shares (if the closing price is equal to or less than $12.00 per
share). Net proceeds to the Company from the private placement were
approximately $60,400,000. The Company used a portion of the proceeds to retire
all of the approximately $33,900,000 of the Company's convertible debentures
held by Baxter, and intends to use the remainder of the proceeds for general
corporate purposes.
On November 24, 1999, the Company and Baxter International entered
into an agreement (the "Side Letter Agreement") to provide that the conversion
price for the Series B Preferred Stock purchased by Baxter International in the
event the Put Rights are exercised (the "Put Series B Preferred Stock") would be
adjusted on November 24, 2004 (or earlier, if 100% of the Series B Preferred
Stock is put to Baxter International) but only in the event that an amount in
excess of $15,000,000 is purchased by Baxter International, as follows: (i) for
the Put Series B Preferred Stock in an amount up to $53,000,000 (computed on the
basis of the liquidation preference for such stock) (the "Threshold"), the
conversion price would be adjusted to equal the closing price of the Common
Stock on the respective date or dates such Series B Preferred Stock was
purchased by Baxter International (including purchases below the $15,000,000
amount), less a 5% discount (subject to a floor price equal to the closing price
of the Common Stock on November 24, 1999, unless shareholder approval is
obtained if required by the rules of the Nasdaq Stock Market); (ii) for the Put
Series B Preferred Stock in an amount in
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excess of the Threshold, then the conversion price would be adjusted to equal
the closing price of the Common Stock on November 24, 1999. The dollar amount of
the Put Series B Preferred Stock would be deemed to accrue interest (payable in
kind in shares of Series B Preferred Stock) from the respective date or dates
the Series B Preferred Stock is put to Baxter International to the date the
adjusted conversion price is determined, at a rate equal to the applicable
three-year U.S. Treasury Note rate at the date of each such purchase, plus 100
basis points. In the event that the foregoing conversion adjustments would not
be permissible under Delaware law, the Company has agreed to take such action as
is appropriate to exchange the Put Series B Preferred Stock for an equal number
of shares of a new series of preferred stock of the Company, having the
identical terms, conditions, preferences and rights of the Series B Preferred
Stock, except that it would bear the conversion price adjustment described
above.
The Company and Baxter International also entered into a Put Agreement
dated November 24, 1999 pursuant to which the parties made certain
representations to each other, and agreed to take certain actions in connection
with, and to provide for certain rights and remedies regarding the transactions
contemplated by, the Securities Agreement.
On December 17, 1999 and 2000, respectively, pursuant to the terms of
the Series A Preferred Stock owned by Baxter, the Company issued 4,216 and 4,469
additional shares, respectively, of Series A Preferred Stock to Baxter
representing dividends payable in kind.
On December 21, 2000, the Company entered into a sale-leaseback
agreement under which the Company sold certain fixed assets to Baxter that were
subsequently leased back to the Company over a three year term. See Note 9 to
the Consolidated Financial Statements for a further description of this
transaction.
Acquisition of CellPro Assets
On January 29, 1999, the Company completed the purchase of certain
assets of CellPro Incorporated ("CellPro"). Assets purchased included
substantially all of CellPro's intellectual property rights, patents, antibodies
and related cell banks, and license rights. These assets were acquired in
exchange for 470,553 shares of Common Stock with a fair market value of
$3,000,000. The fair market value was determined based upon the average closing
price of the Common Stock for the 15 business days which ended prior to the
closing of $6.36 per share. The transaction was accounted for as an asset
purchase.
The intellectual property and other assets acquired by NCI consists of
patents (granted and pending), license agreements, antibodies and related master
cell banks and working cell banks for such antibodies, clinical and research
protocols, copyrights, copyright registration applications, trademarks and
trademark applications, software, supply agreements, marketing materials and
books and records. Some of the monoclonal antibody lines included in the
purchased assets may expand the potential range of diseases for which therapies
utilizing the Isolex(R) technology may be developed. Similarly, the data from
clinical trials conducted by CellPro, the rights to which were acquired by NCI,
could lead to additional diseases or other medical indications which could be
treated using the Isolex(R) technology. Additionally, included in the assets are
rights to two diagnostic kits related to the detection and enumeration of
certain types of cancer cells. NCI began marketing the first of these kits, the
Cytonex(TM) Immunocyto Chemistry kit in mid-year 1999. The second diagnostic
product, the Tumor Enrichment Column (TEC(TM)), is in clinical testing under a
Phase II National Cancer Institute Small Business Innovation Program grant.
8
Innovir Laboratories, Inc.
In June 1998, the Company determined that the operations of its 85% owned
subsidiary, Innovir, no longer fit into the Company's long-term business
strategy. At that time, the Company had completed its funding commitments to
Innovir under its December 31, 1997 agreement, and notified Innovir that no
further funding would be provided. Innovir closed its Cambridge, England
operations on or about November 30, 1998, and closed its remaining operations,
located in Gottingen, Germany and New York, New York, on December 31, 1998.
Innovir completed technology sales and license arrangements during 1999 and in
2000 sold its investment in Ribozyme Pharmaceuticals Inc. stock for $3,818,000.
Innovir is considering applying these proceeds to the payment of its debt and
will continue to seek additional opportunities to out license its remaining
technology. Innovir's common stock was delisted from the Nasdaq Small-Cap Market
and later from the OTC Bulletin Board and now trades via "pink sheets"
maintained by the National Quotation Bureau, LLC.
Patents and Licenses
NCI
NCI's intellectual property estate includes four general patent families:
1. Selection systems;
2. Bioreactor and culture systems;
3. Reagents for use in selection; and
4. Cell culture and cell compositions.
The selection system encompasses the Isolex(R) Cell Separator and similar
instruments. This patent family includes patents and patent applications
directed to the basic selection device having two magnets for capturing the
paramagnetic beads and patents and applications directed to the specific device
configuration. The disposable set for the Isolex(R) 300i Cell Separator
incorporates a spinning membrane technology, used for cell washing, in the
Company's instruments under terms of its Hardware and Disposables Supply
Agreement with Baxter.
At the time of the acquisition of NCI, Baxter granted to NCI sublicenses of
substantially all of Baxter's rights under four license agreements, and NCI
assumed substantially all of Baxter's obligations as licensee thereunder,
including payment of all royalties, annual maintenance fees and other required
payments. Two of the sublicenses are under licenses to Baxter from Becton
Dickinson and relate, respectively, to (i) CD34+ technology for use in
applications other than diagnostic applications and (ii) certain antibodies
which attach to CD20+ and CD10+ B cells. A third sublicense is under a non-
exclusive license from Chiron Therapeutics, and relates to the manufacture, use
and sale of specific antibodies and cell lines for the ex vivo therapeutic
treatment of human cancer. The fourth sublicense is under a non-exclusive
license from Professor Bernd Dorken and relates to certain cell lines for the
production of antibodies to be used in the extracorporeal therapeutic treatment
or diagnosis of Non-Hodgkins lymphoma and other specified malignancies.
Nexell has also completed two worldwide licensing agreements with Diaclone
S.A. ("Diaclone") in Besancon, France. The first agreement grants Nexell an
exclusive license to Diaclone's CD2 antibody, a marker for human T-cells. The
second agreement provides access to six additional antibodies, including CD138,
useful for identification of myeloma cells; CD25, a T cell activation marker
that may facilitate the removal of alloreactive cells from a stem cell graft
prior to transplant; CD56 and CD16, markers for NK (natural killer) cells; CD14,
a monocyte marker; and CD4, a marker for T-helper cells.
In October 1999, the United States Patent and Trademark Office (the "Patent
Office") issued to NCI a patent relating to a peptide which binds to CD34+
antibody and releases CD34 cells, which is a critical
9
component of the Isolex(R) system. A similar patent has been issued in Europe
and Australia. These patents relate to the method of using a peptide to compete
for the binding site of a cell-capturing antibody, thereby displacing the
antibody and releasing the target cells essentially free of contamination by any
of the reagents used in the cell selection process. These released cells can
then be used for transplantation, cell therapy, or as target cells for gene
therapy.
In 1999, the Patent Office issued two new patents to NCI and allowed
one additional patent relating to the infusion of culture derived neutrophil
(white blood cells responsible for fighting bacterial infections) precursor
cells for the treatment of neutropenia (a common side effect of high dose
chemotherapy characterized by a deficiency of neutrophils and an increased
susceptibility to infection). Human neutrophil precursor cells are a type of
immature blood cell that mature into neutrophils, a major blood cell type
involved in fighting bacterial infections. In 2000, three U.S. patents were
issued to the Company relating to the composition and clinical use of neutrophil
precursors. A U.S. patent extending patent coverage on the Company's peptide
release system for cell selection was also issued. These patents complement and
extend previously issued U.S. patents on methods and use of these cells. An
additional U.S. patent to which Nexell has licensing rights from the National
Institutes of Health ("NIH") was also issued. This patent relates to the use of
substances that bind a retrovirus and a cell to enhance transduction (uptake and
incorporation of retrovirus into cells). A transduction process is a component
of many retroviral vector gene therapy procedures.
As part of the acquisition of intellectual property from CellPro, as
discussed above, NCI also has patent rights to one U.S. patent on culture
expansion of CD34 cells, and patents relating to CellPro's Ceprate(R) cell
processing device. In 1999, NCI was in receipt of two additional U.S. patents as
part of the CellPro acquisition relating to linking compounds to bind antibodies
to other moieties.
Other Intellectual Property
Certain of the Company's subsidiaries in the past had pursued
development of several potential therapeutic compounds. Hypericin, a chemically
synthesized analog of St. John's wort, was under investigation by the Company
for treatment of glioblastoma multiforme, a serious form of brain cancer, among
other diseases. The Company is completing Phase IIA clinical trials in a variety
of proliferative dermatological disorders at which time it will cease active
commercial development of this compound. The Company is considering
out-licensing the compound to other parties. Pursuant to an agreement dated June
1, 1988, as amended, between the Company and New York University and YEDA
Research Development Co., Ltd., an Israeli corporation engaged in the commercial
exploitation of scientific developments by scientists at the Weizmann Institute
of Science in Israel (New York University and YEDA, collectively, the "Hypericin
Licensors"), the Company was granted a limited worldwide exclusive license to
commercialize and exploit natural hypericin and synthetic hypericin.
VM301 is a drug candidate that was under investigation by the Company
for treatment of wound healing. The Company continues ongoing limited
development but intends to ultimately out-license VM301 to other parties. The
patent rights to VM301 are owned by the Company.
Manufacturing
Nexell has no manufacturing capability and has contracted with Baxter
to manufacture and package its Isolex(R) and MaxSep(R) products as well as
supplies used by those products. See "Relationship with Baxter Healthcare
Corporation." Nexell also contracts with Dynal, a Swedish reagent company, for
the supply of paramagnetic beads for use in cell selection. The Company also
contracts with certain other companies for supply of monoclonal antibodies,
reagents and/or plastics.
10
Government Regulation
The Company has acquired or developed technologies which are intended
to lead to commercialization of diagnostic and therapeutic medical products.
Some of these products are currently undergoing, or will be required to undergo,
a long and costly process for development, manufacture, FDA approval and sale,
and may be subject as well to state and foreign regulations.
In order for drug or biologic products to obtain pre-market approval
from the FDA, the Company must conduct pre-clinical studies to generate
preliminary information on the product's efficacy and safety. An Investigational
New Drug application must then be filed in order to proceed with human clinical
trials. These clinical trials, which are done in three phases, normally take
three to eight years to complete. If the clinical trials are successful, the
Company will file a New Drug Application ("NDA") containing both the
pre-clinical and clinical data to receive approval to market the product. This
process requires substantial expense, time and effort and there is no guarantee
that approval will be granted on a timely basis, if at all.
Medical devices follow a similar process for approval although the
length and difficulty of the process varies with the level of controls that the
FDA determines are necessary to insure their safety and effectiveness. Based on
these controls, the devices are put into three classes, i.e., Class I, Class II,
Class III. Two types of pre-market approval are granted on devices. A 510(K)
clearance may be given if the device is deemed to be "substantially" equivalent
to a legally marketed Class II device. A Pre-Market Approval ("PMA") application
is necessary for Class III, highest risk devices. It requires valid scientific
evidence, including clinical trials, to demonstrate the safety and effectiveness
of the device and usually requires tests similar to a filing for a drug or
biologic product. A 510(K) clearance generally requires 6 months to a year to
obtain. For Class II devices, clinical data is collected under an
Investigational Device Exemption ("IDE"). Data for successful clinical trials
would then be submitted as part of a PMA. Like the NDA, there is no guarantee
that approval of the PMA will be granted.
The Company's principal product, the Isolex(R) 300i was cleared for
marketing in Europe in June 1996, in Canada in May 1999 and in the U.S. through
the PMA process in July 1999. The Company is conducting clinical studies to
pursue new indications for its products and to investigate new products.
Competition
The biomedical industry is highly competitive. Competition in each of
the fields in which the Company is engaged is intense and expected to increase
as knowledge and interest in the technology and products being developed by the
Company increase. The Company faces competition from biotechnology companies,
large pharmaceutical companies, academic institutions, government agencies and
public and private research organizations, many of which have extensive
resources and experience in research and development, clinical testing,
manufacturing, regulatory affairs, distribution and marketing. Some of these
entities have significant research and development activities in areas upon
which the Company's programs focus. Many of the Company's competitors possess
substantially greater research and development, financial, technical, marketing
and human resources than the Company and may be in a better position to develop,
manufacture and market products. The Company is similarly subject to substantial
competition from pharmaceutical, chemical and biotechnology firms seeking to
develop therapeutics for various diseases.
In general, NCI faces competition from cell processing device
companies. Like NCI, there are several product-focused companies attempting to
develop turn-key devices for cell processing. Although the sale of CellPro's
intellectual property to NCI effectively eliminated CellPro as a competitor in
the cell separation market, other competitors or potential competitors remain,
including Miltenyi Biotec GmbH, Eligix, Inc., and
11
Aastrom Biosciences Inc. NCI's competitive position will be determined in part
by which cell selection products are ultimately approved for sale by regulatory
authorities. See "Government Regulation" above.
Risk Factors
Following are certain risk factors associated with the Company. These risks
and uncertainties are not the only ones present. Others that are currently
unknown, or are currently not considered important, may impair the Company's
business or the trading price of its securities.
The Company has a history of operating losses and may not be profitable.
Since commencing its operations in January 1987, through December 31, 2000,
the Company has incurred an accumulated deficit of approximately $199,373,000.
These losses have resulted principally from costs incurred in research and
development of the Isolex(R) system and the Company's cell culture technologies,
general and administrative expenses, and the prosecution of patent applications.
The Company had no significant operating revenues until 1998. Revenues since
1998 have been principally derived from sales of Isolex(R) devices and related
disposables. The Company expects to incur substantial additional losses over the
next several years, whether or not it continues to generate revenues, as it
continues to develop its products. The Company expects that these additional
losses will result primarily from research and development programs, including
preclinical and clinical trials, and the establishment of marketing and
distribution capabilities necessary to support commercialization efforts for its
products. The Company cannot predict with any certainty the amount of future
losses. The Company's ability to continue to generate revenue and operating
income in the future will depend on many factors, including:
. establishing manufacturing, sales and marketing capabilities for its
products internally and through collaborative arrangements;
. cost and timing of regulatory approvals and commercial sales of its
products;
. level of competing technologies and market developments;
. protection of its patent and other intellectual rights;
. continued scientific progress in its research and development
programs; and
. timing and investment in new technologies
The Company expects to continue to incur net operating losses for the
foreseeable future and can give no assurance that it will ever be profitable.
Failure to obtain and maintain required regulatory approvals would restrict
the Company's ability to sell its products and earn revenues.
The Company's development activities of its technologies are intended to
lead to new drugs, biologics and medical devices that must obtain the approval
of the FDA before sales may be made in the United States, and the approval of
foreign regulators before sales may be made in foreign jurisdictions. The
process of obtaining and maintaining regulatory approvals for new drugs,
biologics and medical devices is lengthy,
12
expensive and uncertain. The manufacturing, distribution, advertising and
marketing of these products are also subject to extensive regulation. If the
Company cannot demonstrate the safety, reliability and efficacy of its product
candidates, it will not obtain required regulatory approvals and revenues will
suffer. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the FDA to grant premarket
clearance or premarket approval, withdrawal of marketing clearances or
approvals, and criminal prosecution. The FDA also has the authority to request
recall, repair, replacement or refund of the cost of any product manufactured or
distributed by the Company.
Even after regulatory approval of a product is granted, that approval may
be subject to limitations on the indicated uses for which it may be marketed. In
addition, the FDA, other regulatory agencies and governments in other countries
continue to review and inspect marketed products, manufacturers and
manufacturing facilities after regulatory approval is granted. Later discovery
of previously unknown problems with a product, manufacturer or facility may
result in restrictions on the product or manufacturer, including withdrawal of
the product from the market. Further, governmental agencies may establish
additional regulations that could prevent or delay regulatory approval of the
Company's products.
If the Company does not successfully complete clinical trials, it will not be
able to obtain FDA approval and sell its products.
To be able to market products in the United States, the Company must
demonstrate, through extensive preclinical studies and clinical trials, the
safety and efficacy of its processes and product candidates, together with the
cells produced by such processes in such products, for application in the
treatment of humans. The Company has completed pivotal clinical trials to
demonstrate the safety and biological activity of patient cells isolated and
collected in the Isolex(R) 300i system. The Company plans to conduct additional
trials to demonstrate safety and efficacy for new indications and for
enhancements to the Isolex(R) 300i. If the Company's clinical trials for new
indications or product enhancements to the Isolex(R) 300i, or its other products
are not successful, its products may not be marketable.
The Company's ongoing studies may be delayed or halted for various reasons,
including:
. lack of effectiveness of its products, or the perception by
physicians that the products are not effective;
. failure of patients to enroll in the trials at the rate the Company
expects;
. doubts among physicians and patients regarding the utility of stem
cell therapy; and
. side effects as a result of the treatment.
In addition, the FDA and foreign regulatory authorities have substantial
discretion in the approval process. The FDA and foreign regulatory authorities
may not agree that the Company has demonstrated that its products are safe and
effective.
13
If the licenses the Company depends on are breached or terminated, the Company
would lose its right to develop and sell the products covered by the licenses.
The Company has obtained licenses to third-party technology to conduct
parts of its business, including technology supporting critical components of
the Isolex(R) system. The Company is the exclusive licensee in the field of
therapeutic research to patented technology from Becton Dickinson Company and
Johns Hopkins University, which technology relates to stem cell separation and
particularly relates to the separation of CD34 blood stem cells. If the
licensors breach or terminate this or other licenses, the Company may lose its
rights to develop and market the products for the purposes covered by the
licenses, including the rights to develop and market the Isolex(R) system. The
Company may not be able to obtain additional licenses as may be required for the
development of its products on reasonable terms or at all.
If the Company's patent and other intellectual property protection is
inadequate, its sales and profits could suffer or competitors could force its
products out of the market.
The Company owns or licenses patents on which its products rely in four
general patent families:
. selection systems;
. bioreactor and culture systems;
. reagents for use in selection; and
. cell culture and cell compositions.
Four of the Company's licensed patents relating to CD34 stem cell
separation, a critical application of the Isolex(R) system, currently are set to
expire in 2004, 2007, 2110 and 2111, respectively. The Company may not be able
to extend these or any other patents. Competitors may develop products based
upon the same principles as the Company's products, including the Isolex(R)
system, and market those products after the Company's patents expire, or may
design around the Company's existing patents. If this happens, the Company's
sales would suffer and profits could be severely impacted. In addition, patents
may be issued to others that prevent the manufacture or sale of the Company's
products. The Company may have to license those patents and pay significant fees
or royalties to the owners of the patents in order to keep marketing its
products. This would cause profits on sales to suffer.
The Company has filed patent applications with respect to its potential
products. These patent applications and others that may be filed by the Company
may not issue. The scope of any patent that issues may not be sufficient to
protect the Company's technology. The laws of foreign jurisdictions in which the
Company sells and intends to sell its products may not protect the Company's
rights to the same extent as the laws of the United States.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology advances. The Company enters into
confidentiality agreements with its employees and others, but these agreements
may not be effective in protecting proprietary information. Others may
independently develop substantially equivalent proprietary information or obtain
access to the Company's know-how.
If the Company does not keep pace with technological and market changes, its
products may become obsolete and the Company's business may suffer.
The market for the Company's products is very competitive and is
subject to rapid technological changes. Competitors may have developed, or could
in the future develop, new technologies that compete with
14
the Company's products or even render its products obsolete. Numerous
investigators are working in the fields for which the Company's products are
intended for use. Given the unpredictable nature of medical research and
clinical development, studies have been and will continue to be published that
are not supportive of the intended uses of the Company's products. Even if the
Company is able to demonstrate improved or equivalent results of its products
compared to existing products, practitioners may not switch to the Company's new
products. Given the experience and expertise associated with traditional cancer
treatment methods, if the Company cannot develop its cell selection procedure to
lead to a less expensive and quicker recovery time than seen with alternative
treatment methods, it will suffer a competitive disadvantage. Researchers are
continually learning more about cancer that may lead to new technologies to
treat the disease. To the extent that others develop new technologies that
address cancer treatment, the Company's business will suffer.
The market for the Company's products will depend on acceptance by physicians
and patients.
Market acceptance and demand for the Company's products will depend
largely on acceptance by physicians and patients of the products as safe and
effective treatments and on the pricing of alternative products. The Company's
technologies or product candidates may not be accepted by the marketplace as
readily as competing or alternative processes or methodologies. Sales of the
Company's products have generated growing but modest revenues to date. The
Isolex(R) 300i cell selection system has been approved for marketing in the
United States. This is the only one of our stem cell selection products that has
received such approval. The Company cannot assure that any of its products will
gain any significant degree of market acceptance in the United States or
internationally among physicians, hospital personnel, other health care
providers and third-party payers, even if reimbursement and necessary regulatory
approvals are obtained. The Company believes that the commercial success of its
products will depend on such acceptance. Acceptance will also depend upon the
Company's ability to train physicians, hospital personnel and other health care
providers to use the Isolex(R) system and its other products, and the
willingness of such individuals to learn to use these products. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The success of sales of the Company's products may depend upon reimbursements by
third-party payers.
In the United States, physicians, hospitals and other health care
providers that perform medical services generally rely on third-party payers,
such as government and private health insurance plans and health maintenance
organizations, to reimburse all or part of the cost associated with the
treatment of patients. The Company's ability to successfully commercialize its
product candidates will also depend on the extent to which these third party
payers will pay for the products and related treatments. Reimbursement by third
party payers depends on factors such as the payers' determination that use of
the products is safe and effective, medically necessary and not experimental or
investigational, appropriate for the patient and cost-effective. At present,
most third-party payers will reimburse for stem cell transplantation based on
fixed case rates. Many payers, however, still consider stem cell selection to be
experimental and investigational and have not included reimbursement for the
selection process in those case rates. A number of transplant centers in the
United States have in fact succeeded in negotiating higher case rates to include
reimbursement for the stem cell selection process, but there can be no assurance
that most or all of the Company's customers will have such success in the United
States or foreign jurisdictions. Accordingly, reimbursement in the United States
or foreign jurisdictions may not be available or maintained for the Isolex(R)
system or any of the Company's product candidates.
If third party payers do not approve the Company's products for
reimbursement, sales will suffer as transplant centers and patients opt for
competing products or alternative treatments. If the Company does not obtain
approvals for adequate third-party reimbursements, it may not be able to
establish or maintain price levels sufficient to realize an appropriate return
on its investment in product development. Any limits on
15
reimbursement available from third-party payers may reduce the demand for, or
negatively affect the price of, the Company's products.
The Company has limited experience with manufacturing and depends on third
parties, who may not perform, manufacture, or distribute its products outside
the United States, Canada and Western Europe.
The Company has no in-house manufacturing capability and relies
exclusively on Baxter for the manufacture of its Isolex(R) and MaxSep(R)
products, as well as the supplies associated with these products. The Company
also contracts with Dynal Biotech, a Norwegian reagent company, for the supply
of paramagnetic beads for use in cell selection. The Company contracts with
other companies for supply of monoclonal antibodies, reagents and/or plastics.
The Company relies on Baxter affiliates and other companies for the distribution
and servicing of its products outside of the United States, Canada and Western
Europe. If third parties do not successfully carry out their contractual duties
or meet expected deadlines, or if the Company's supply of certain components or
other materials is limited or interrupted, it would not be able to conduct
clinical trials or market its product candidates on a timely and
cost-competitive basis, if at all. The Company's revenues may suffer as a
consequence. The Company may not be able to maintain favorable agreements with
these parties and may not be able to locate acceptable contractors, or enter
into favorable agreements with them, to replace existing contractors or to
manufacture and distribute new products. If third party agreements terminate at
a critical time, the Company may not have manufacturing or distribution
capabilities to meet demand for its products.
To be successful, the Company's products must be manufactured in
compliance with regulatory requirements and at acceptable costs. Manufacturing
facilities of the Company's products are subject to Good Manufacturing Practices
("GMP") regulations, international quality standards and other regulatory
requirements. Failure by the Company's contractors to maintain their facilities
in accordance with GMP regulations, international quality standards or other
regulatory requirements may entail a delay or termination of production, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Given the Company's limited sales and marketing experience, it may not be able
to develop effective methods to sell and market its products.
Until late 1999, the Company relied on Baxter for sales and marketing
of its products. The Company has established internal sales and marketing
capabilities and is now primarily responsible for sales and marketing of its
products. The Company's internal capabilities are inexperienced and may not be
effective. If the Company is not able to develop an effective sales and
marketing organization, it will have to arrange for such activities to be
performed by contracted third parties. The Company may not be able to enter into
favorable agreements with such third parties, if at all. Such failures could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Intellectual property litigation could harm the Company's business.
The Company's success will depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. Litigation, which is very expensive, may be necessary to enforce or
defend the Company's patents or proprietary rights and may not end favorably for
the Company.
On March 2, 2000, the Company filed suit in the U.S. District Court in
Delaware (civil case number 00-141) against Miltenyi Biotec GmbH of Germany and
its related U.S. companies, Miltenyi Biotec, Inc. and
16
AmCell Corporation (collectively "Miltenyi"). The suit charges Miltenyi with
patent infringement (U.S. Patents 4,714,680 and 4,965,204), breach of contract
and deceptive trade practices. Becton Dickinson and The Johns Hopkins
University, both of whom have proprietary rights associated with the Company's
technology, have joined with the Company in the suit. The Company is seeking
damages and injunctive relief. The parties are currently engaged in pretrial
discovery and a trial is expected sometime in 2001. Miltenyi Biotec GmbH of
Germany is contesting whether jurisdiction is proper in the Delaware court. In
the fall of 2000, AmCell Corporation moved for summary judgment of non-
infringement of the patents. The Company has opposed this motion and has itself
moved for summary judgment of infringement of the patents. A decision on these
cross motions is expected in Spring 2001.
Public attitudes towards cell therapy may negatively affect regulatory approval
or public perception of the Company's products.
The commercial success of the Company's product candidates will depend
in part on public acceptance of the use of cell therapy for the prevention or
treatment of human diseases. Public attitudes may be influenced by claims that
cell therapy is unsafe, and cell therapy may not gain the acceptance of the
public or the medical community. Adverse effects in the field of cell therapy
that have occurred or may occur in the future also may result in greater
governmental regulation of the Company's product candidates and potential
regulatory delays relating to the testing or approval of its product candidates.
The ethical, legal and social implications of the Company's research using stem
cells could prevent it from developing or gaining acceptance for commercially
viable products in this area.
The Company's research programs may involve the use of human stem cells
that would be derived from human tissue. The use of certain human stem cells
gives rise to ethical, legal and social issues regarding the appropriate use of
these cells. In the event that the Company's research related to human stem
cells becomes the subject of adverse commentary or publicity, the market price
for its common stock could be significantly harmed.
The Company faces certain risks associated with international sales of its
products.
A number of risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs and difficulties in
staffing, coordinating and managing international operations. Additionally, the
Company's business, financial condition and results of operations may be
adversely affected by fluctuations in international currency exchange rates as
well as constraints on the Company's ability to maintain or increase prices. The
international nature of the Company's business subjects it and its
representatives, agents and distributors to laws and regulations of the foreign
jurisdictions in which they operate or in which the Company's products are sold.
The regulation of medical devices and cellular products in a number of such
jurisdictions, particularly in the European Union, continues to develop. The
Company cannot assure that new laws or regulations, or new interpretations of
existing laws and regulations, will not have a material adverse effect on its
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. The Company may
not be able to successfully further commercialize its current products or
successfully commercialize any future products in any international market.
17
The Company may not successfully compete in the biotechnology industry.
The Company competes with biotechnology companies, pharmaceutical
companies, academic institutions, government agencies and public and private
research organizations. Many of these entities have extensive resources and
experience in research and development, clinical testing, manufacturing,
regulatory affairs, distribution and marketing. Some of these entities have
significant research and development activities in areas upon which the
Company's programs focus. Many of the Company's competitors possess
substantially greater research and development, financial, technical, marketing
and human resources than the Company and may be in a better position to develop,
manufacture and market products. The Company is aware of existing products that
compete with its products and other products in development that may compete
with its products. If the Company cannot successfully compete with existing or
new products, its marketing and sales will suffer and it may not ever be
profitable.
If the Company needs additional financing and cannot obtain it, product
development and sales may be limited.
The Company may need to change its plans for development of its
proposed products to address difficulties with clinical studies or for sales of
its existing products to accommodate market demands. If that occurs, the Company
may need to spend more funds than currently anticipated. The Company may not be
able to obtain additional funds on commercially reasonable terms or at all. If
adequate funds are not available, the Company may be required to delay or
terminate research and development programs, curtail capital expenditures,
reduce business development and other operating activities or to obtain
financing on terms not favorable to it.
If the Company does not attract and retain key management, consultants and
scientific personnel, its business may suffer.
The Company is highly dependent on its current management, consultants
and scientific personnel. The Company's success will largely depend upon its
ability to retain its current key personnel and consultants and to attract and
retain new highly qualified personnel. Expertise in the field of ex vivo cell
research and cellular therapy is not generally available in the market, and
competition for qualified consultants, management and scientific personnel is
intense. The Company may not be successful in retaining existing or hiring new
key consultants and personnel, which may have an adverse effect on it.
The Company may not have adequate insurance and may have substantial exposure to
payment of product liability claims.
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products during research and
development efforts, including clinical trials, or after commercialization
results in adverse effects. As a result, the Company may incur significant
product liability exposure, which could exceed existing product liability
insurance coverage. The Company may not be able to maintain its product
liability insurance at an acceptable cost, if at all. If claims or losses exceed
its liability insurance coverage, the Company's financial condition would be
adversely affected.
18
The Company's stock price and warrant price could be volatile and could decline.
The market prices for securities of biotechnology companies are highly
volatile, and there are significant price and volume fluctuations in the market
that may be unrelated to particular companies' operating performances. The
Company's stock price could decline suddenly due to factors such as the
following:
. results of clinical trials;
. the amount of its cash resources and ability to obtain additional
funding;
. timing of regulatory approvals and changes in government regulation;
. fluctuations in operating results;
. announcements by the Company or others of technological innovations or
new products;
. failure to meet estimates or expectations of securities analysts;
. rate of product acceptance;
. developments in or disputes over patent or other proprietary rights;
. public concern as to the safety of products developed by the Company
or by others;
. changes in recommendations by securities analysts, if any; and
. general market conditions.
Any of these events may cause the price of the Company's shares to fall,
which may adversely affect its business and financing opportunities. In
addition, the stock market in general and the market prices for biotechnology
companies in particular have experienced significant volatility that often has
been unrelated to the operating performance or financial conditions of such
companies. These broad market and industry fluctuations may adversely affect the
trading price of the Company's shares, regardless of its operating performance
or prospects. For example, during the year ended December 31, 2000, the price of
the Company's common stock has fluctuated from a low of $2.69 to a high of
$60.50, and the price of its publicly traded warrants has fluctuated from a low
of $.6875 to a high of $13.875.
Outstanding shares of convertible preferred stock and warrants could cause
substantial dilution.
As of December 31, 2000, the Company's outstanding convertible preferred
stock and warrants included:
. 78,967 shares of Series A Cumulative Convertible Preferred Stock,
convertible into 7,178,818 shares of common stock at a conversion
price of $11.00 per share;
. 63,000 shares of Series B Cumulative Convertible Preferred Stock,
convertible into 5,727,272 shares of common stock at a conversion
price of $11.00 per share;
. Class B Warrants to purchase 750,000 shares of common stock for a
price of $12.00 per share;
. warrants to purchase 1,300,000 shares of common stock for a price of
$4.60 per share; and
. warrants to purchase 361,130 shares of common stock for a price of
$5.40 per share.
19
If holders of the preferred stock and warrants listed above converted
or exercised all of their shares as of December 31, 2000, the holders would
receive approximately 17,549,000 shares of common stock (representing
approximately 46% of the Company's outstanding shares on a fully diluted basis,
including approximately 2,232,000 shares of common stock upon the exercise of
stock options outstanding as of December 31, 2000). Investors in the Company's
common stock or warrants could experience substantial dilution of their
investment upon conversion of the preferred stock or exercise of the warrants or
upon issuance of Common Stock to Acqua Wellington North American Equities Fund,
Ltd. described below. The Company's outstanding equity securities also include
Class A Warrants to purchase up to 1,500,000 shares of common stock for a price
of $.04 per share, which are not exercisable, if at all, until November 24,
2004.
In addition, unlike common stock, certain of these securities provide
for anti dilution protection in the event, among other things, of certain
issuances of common stock, or derivative securities convertible into or
exercisable for common stock, below certain prices. If one or more of these
events occur, the conversion or exercise price of the derivative securities
would decrease and the number of shares of common stock that may be acquired
upon conversion or exercise would increase. Furthermore, reference is made to
the Company's January 2001 transaction with Acqua Wellington North American
Equities Fund, Ltd. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
Future sales of shares may depress the price of the Company's common stock.
If shareholders sell a substantial number of shares of the Company's
common stock in the public market, or investors perceive that these sales might
occur, the market price of the Company's common stock could decrease. Such a
decrease could make it difficult for the Company to raise capital by selling
stock or to pay for acquisitions using stock. To the extent outstanding options
or warrants are exercised or additional shares of capital stock are issued,
investors purchasing the Company's common stock or securities convertible into
common stock may incur additional dilution. The Company's employees hold a
significant number of options to purchase shares, many of which are presently
exercisable. Employees may exercise their options and sell shares shortly after
such options become exercisable, particularly if they need to raise funds to pay
for the exercise of such options or to satisfy tax liabilities that they may
incur in connection with exercising their options.
If common shareholders do not receive dividends, common shareholders must rely
on stock appreciation for any return on their investment.
The Company has never declared or paid cash dividends on any of its
common stock. The Company currently intends to retain any earnings for future
growth and, therefore, does not anticipate paying cash dividends in the future
on its common stock. As a result, only appreciation of the price of the
publicly-traded warrants and/or common stock will provide a return to investors
who purchase or acquire the Company's publicly-traded securities.
Employees
Nexell had 105 full-time employees at December 31, 2000. The Company
believes that relations with its employees are satisfactory.
20
Consultants
The Company is dependent on third parties for significant aspects of
its research and development operations. In certain cases, consultants are used
to perform or supervise such activities. Consultants have been retained to
assist in interpretation of FDA and international regulations and to monitor
human clinical trials. The Company also retains financial consultants.
The Company's consultants generally are employed by and/or have
consulting agreements with entities other than the Company, some of which may
conflict or compete with the Company, and generally devote only a portion of
their time to the affairs of the Company.
Regulations or policies now in effect or adopted in the future by
their respective employers may limit the ability of such persons to consult with
the Company. The loss of the services of certain of such persons may adversely
affect the Company.
Executive Officers of the Company
The following is a list of current executive officers of the Company
and of individuals who may be deemed to be executive officers of the Company.
Name Age Position
---- --- --------
Richard L. Dunning 55 Chairman of the Board
William A. Albright, Jr. 43 Chief Executive Officer, President, Chief Financial
Officer and Treasurer
Dennis E. Van Epps, Ph.D. 54 Vice President, Research and Development, NCI
Amy Ross, Ph.D. 47 Vice President, Scientific Operations, NCI
David J. Hirsch 47 Vice President, Global Sales & Marketing, NCI
Michel L. E. Bergh, Ph.D. 49 Vice President, Business Development, NCI
____________________________
RICHARD L. DUNNING was elected Chairman of the Board of Directors in
May 1999 and was Chief Executive Officer of the Company from April 1996 until
March 1, 2001. Prior to joining the Company, Mr. Dunning served as Executive
Vice President and Chief Financial Officer of the DuPont Merck Pharmaceutical
Company (now DuPont Pharmaceuticals Company) from 1991-1995. Mr. Dunning also
serves as a director of Epoch Pharmaceuticals, Inc., Endorex Corp. and
Progenitor Cell Therapies, Inc.
WILLIAM A. ALBRIGHT, JR. was appointed President and Chief Operating
Officer of the Company in July 2000 and on March 1, 2001 he became Chief
Executive Officer and relinquished his position as Chief Operating Officer. Mr.
Albright joined the Company as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary in May 1999. Prior to joining the Company he was a
consultant to the healthcare industry. From 1996 to 1998, he was Chief Financial
Officer of LocalMed, Inc., a venture-stage medical device company developing
products for interventional cardiology. From 1994 to 1996, he was Chief
Financial Officer of Connetics Corp., a biopharmaceutical company. He joined
Connetics as the third employee and helped build
21
the organization from the venture-backed spin-off of Genentech Inc. into a
freestanding publicly traded company. Earlier in his career he held senior
positions within the medical device group of Eli Lilly and Company.
DENNIS E. VAN EPPS, Ph.D. joined NCI as Vice President of Research and
Development in January 1998. He is responsible for leading research efforts for
the Company, doing technology assessment and developing Company strategy. Prior
to joining NCI, he was Vice President of Research for Baxter Healthcare
Immunotherapy Division from 1993 to December 1997.
AMY ROSS, Ph.D. joined NCI as Vice President Diagnostics in December
1998 and in July 2000 was named Vice President, Scientific Operations. Prior to
joining NCI, she was Senior Director of Diagnostic Applications at CellPro, Inc.
from 1995 where she established CellPro's MRDx Diagnostics clinical laboratory.
DAVID J. HIRSCH joined NCI as Vice President, Global Sales and
Administration in April 1999. In July 2000, he was appointed to the position of
Vice President, Global Sales and Marketing. He has extensive executive and
management experience in the healthcare industry, having previously served as
General Manager, GFI Pharmaceutical Services, Inc. from 1997, Vice President and
Chief Operating Officer of the Cancer Therapy and Research Center Research
Foundation from 1995, Director, Sales Operations and Planning at Boehringer
Mannheim Pharmaceuticals, and as Director, Sales Operations and other sales
management positions at Schering-Plough, Inc.
MICHEL L.E. BERGH, Ph.D. has served as Vice President, Business
Development of the Company since September 1999. Prior to joining the Company,
he served as Vice President, Business Development of LocalMed, Inc., a
manufacturer of medical devices for interventional cardiology. Previously, he
held executive positions in business development and research at Shaman
Pharmaceuticals, Schering-Plough, Inc. and Genzyme Corporation.
ITEM 2. PROPERTIES.
The Company currently occupies a building at 9 Parker, Irvine,
California consisting of approximately 59,600 square feet. This facility is
under a lease which provides for a current monthly rental of $45,155 plus real
estate taxes and operating costs. The current term expires November 30, 2004
with two five-year renewal options.
The Company occupied 2,343 square feet of office space at 2751
Centerville Road, Suite 210, Wilmington, Delaware under a lease at a monthly
rental of $4,588. The Company terminated this lease in 2000 as the result of the
decision to relocate its corporate headquarters to Irvine, California.
The Company also occupies 377 square meters (approximately 4,058 square
feet) of office space at I. Meyskensstraat 224, B-1780 Wemmel, Belgium, under a
lease with a monthly rental of 168,333 BEF (approximately $4,000). The lease
expires on July 1, 2008 with options to terminate the lease in 2005 or 2008 with
six months notice.
22
ITEM 3. LEGAL PROCEEDINGS.
On March 2, 2000, the Company filed suit in the U.S. District Court in
Delaware (civil case number 00-141) against Miltenyi Biotec GmbH of Germany and
its related U.S. companies, Miltenyi Biotec, Inc. and AmCell Corporation
(collectively "Miltenyi"). The suit charges Miltenyi with patent infringement
(U.S. Patents 4,714,680 and 4,965,204), breach of contract and deceptive trade
practices. Becton Dickinson and The Johns Hopkins University, both of whom have
proprietary rights associated with the Company's technology, have joined with
the Company in the suit. The Company is seeking damages and injunctive relief.
The parties are currently engaged in pretrial discovery and a trial is expected
sometime in 2001. Miltenyi Biotec GmbH of Germany is contesting whether
jurisdiction is proper in the Delaware court. In the fall of 2000, AmCell
Corporation moved for summary judgment of non-infringement of the patents. The
Company has opposed this motion and has itself moved for summary judgment of
infringement of the patents. A decision on these cross motions is expected in
Spring 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Price of Common Stock
The Common Stock and the Common Stock Subscription Warrants are currently
traded on The Nasdaq Stock Market National Market System under the symbols NEXL
and NEXLW, respectively. The following table sets forth for the Common Stock the
high and low sales prices for each calendar quarter from January 1, 1999 through
December 31, 2000. All amounts have been retroactively adjusted for the
Company's one-for-four reverse stock split which was effected on June 15, 2000.
1999 High Low
---- ---- ---
First Quarter $ 7.64 $ 4.00
Second Quarter 9.76 4.12
Third Quarter 8.76 5.52
Fourth Quarter 6.24 4.12
2000
----
First Quarter $60.50 $ 4.75
Second Quarter 23.13 10.50
Third Quarter 15.50 7.53
Fourth Quarter 8.44 2.69
On February 28, 2001, there were 1,196 shareholders of record of the Common
Stock.
The Company has not paid a cash dividend and does not anticipate the
payment of cash dividends on Common Stock in the foreseeable future. The holders
of the Company's Series A Cumulative Convertible Preferred Stock and the holders
of the Company's Series B Cumulative Convertible Preferred Stock are entitled to
annual stock dividends and semi-annual cash dividends, respectively. Cash
dividends of $1,880,000 were
23
paid in 2000 to holders of the Company's Series B Cumulative Convertible
Preferred Stock. In addition, the terms of the Company's Amended and Restated
Certificate of Incorporation applicable to its Series B Cumulative Convertible
Preferred Stock limit the ability of the Company to pay dividends on Common
Stock.
Recent Sales of Unregistered Securities
Not applicable.
24
ITEM 6. SELECTED FINANCIAL DATA.
Consolidated Statements of Operations Data:
Year Ended December 31,
-----------------------
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenue $ 18,180,000 $ 14,961,000 $ 13,443,000 $ 5,002,000 --
Cost of goods sold 11,369,000 9,617,000 8,166,000 $ 4,630,000 --
------------ ------------- ------------- ------------- ------------
Gross profit 6,811,000 5,344,000 5,277,000 372,000 --
Operating expenses:
Research and development 15,177,000 18,858,000 24,427,000 14,507,000 2,950,000
Purchased research and
development -- -- -- 39,862,000 14,484,000
General and administrative 11,492,000 9,903,000 10,221,000 7,215,000 4,300,000
Selling, marketing and distribution 8,567,000 7,768,000 3,625,000 61,000 --
Goodwill and intangible asset
amortization 4,067,000 3,781,000 3,602,000 412,000 --
Restructuring costs -- 502,000 2,625,000 -- --
------------ ------------- ------------- ------------- ------------
Total operating expenses 39,303,000 40,812,000 44,500,000 62,057,000 21,734,000
------------ ------------- ------------- ------------- ------------
Operating loss (32,492,000) (35,468,000) (39,223,000) (61,685,000) (21,734,000)
Other (income) expense:
Royalty and licensing (income) expense 22,000 (855,000) (176,000) 150,000 100,000
Interest income (1,217,000) (1,069,000) (2,972,000) (2,216,000) (1,792,000)
Interest expense 8,000 1,903,000 2,036,000 196,000 329,000
Gain on sale of equity investments (3,231,000) -- -- -- --
Contract settlement -- -- 900,000 -- --
Minority interest in net loss of
consolidated subsidiaries -- -- (4,161,000) (3,474,000) (116,000)
Other, net 21,000 226,000 113,000 (142,000) (395,000)
------------ ------------- ------------- ------------- ------------
Total other (income) expenses (4,397,000) 205,000 (4,260,000) (5,486,000) (1,874,000)
Net loss (28,095,000) (35,673,000) (34,963,000) (56,199,000) (19,860,000)
------------ ------------- ------------- ------------- ------------
Preferred stock dividends (6,371,000) (4,418,000) (3,988,000) (166,000) --
------------ ------------- ------------- ------------- ------------
Net loss applicable to common stock $(34,466,000) $ (40,091,000) $ (38,951,000) $ (56,365,000) $(19,860,000)
============ ============= ============= ============= ============
Basic and diluted loss per share $ (1.84) $ (2.24) $ (2.32) $ (4.07) $ (2.02)
============ ============= ============= ============= ============
Weighted average number of shares of
common stock outstanding 18,761,000 17,861,000 16,821,000 13,864,000 9,850,000
============ ============= ============= ============= ============
The share and loss per share data has been restated to retroactively reflect the
one-for-four reverse stock split in June 2000 (see Note 3 to the Consolidated
Financial Statements).
25
Consolidated Balance Sheets Data:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Working capital $ 16,891,000 $ 28,831,000 $ 32,017,000 $ 61,354,000 $ 44,848,000
Total assets 75,455,000 93,839,000 89,344,000 121,947,000 51,692,000
Total liabilities 14,015,000 10,625,000 40,529,000 34,239,000 301,000
Minority interest in subsidiary -- -- -- 4,161,000 2,381,000
Accumulated deficit (199,373,000) (169,398,000) (133,533,000) (98,570,000) (42,371,000)
Shareholders' equity 61,440,000 83,214,000 48,815,000 83,547,000 46,210,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Years Ended December 31, 2000 and 1999
Net sales in fiscal 2000 increased to $18,180,000 from $14,961,000 in
fiscal 1999, an increase of $3,219,000 or 22%. This increase was the result of
several factors. There were also factors that negatively impacted net sales in
2000. Both these positive and negative factors are summarized as follows:
. changes in the Company's Marketing, Sales and Distribution
Agreement ("Distribution Agreement") with Baxter in the last half
of 1999
. regulatory approval of the Isolex 300i in the United States in
July 1999
. sales force issues
. marketplace factors
. foreign currency impacts
As more fully described in the discussion of the Years Ended December
31, 1999 and 1998 below, through June 1999, Baxter had exclusive worldwide
distribution rights for NCI's products and, therefore sales for the six months
ended June 30, 1999 represented sales made to Baxter. See Item 1 - "Relationship
with Baxter Healthcare Corporation" regarding termination of the Distribution
Agreement in 1999. In 1999, sales were decreased by $4,359,000 as a result of
non-recurring charges to repurchase unsold inventory from Baxter as a result of
the termination of the Distribution Agreement. In addition, sales were increased
in 2000 as a result of the United States approval of the Isolex 300I system in
July 1999.
The termination of the Distribution Agreement and subsequent turnover
of the European sales force resulted in a significant rebuilding of the European
sales function which was not completed until the second quarter of 2000.
Similarly, the training of a United States sales force following approval of the
Isolex 300i system was not completed until the end of the first quarter of 2000.
Both of these factors negatively impacted 2000 net sales.
In the Spring of 2000, an apparent decrease in the total number of
new Investigational Device Exemptions (IDE's), in the Company's view affected
customer use of the Company's products in research protocols. Management
believes this adversely impacted associated sales of its approved kit and
disposable products. Also in the Spring of 1999, data presented from non-NCI
studies indicated that high dose chemotherapy showed no significant benefit
versus conventional therapy for the treatment of breast cancer, which
significantly reduced the selection market in this field of use.
As a result of the restructuring of the Distribution Agreement,
beginning in December 1999 the Company made direct sales to European customers.
Prior to that time, all sales had been made to Baxter
26
for global distribution in United States dollars. Sales subsequent to December
1999 were negatively impacted by the declining value of the Euro in relation to
the United States dollar throughout 2000.
The gross profit in fiscal 2000 increased to $6,811,000 from $5,344,000, an
increase of $1,467,000 or 27%. The gross profit percentage in 2000 was 37%
versus 36% in 1999. The increase in the gross profit percentage relates to costs
recorded in 1999 related to the impact of changes in the Distribution Agreement,
spreading substantially fixed overhead costs over a large sales base and changes
in sales mix.
Research and development expenses decreased $3,681,000 or 20% from
$18,858,000 in 1999 to $15,177,000 in 2000. The decrease resulted from the wind-
down of former Innovir activities and reduced new product development costs
after the initial approval of the Isolex 300i.
General and administrative expenses increased $1,589,000 or 16% to
$11,492,000 in 2000 from $9,903,000 in 1999. This increase was primarily due to
one-time charges related to separation agreements with former employees,
including certain officers, as a result of which the Company incurred charges
for severance and acceleration of stock option vesting; the creation of a
European headquarters upon completion of the restructuring of the Distribution
Agreement; and increased headcount and related costs to support the July 1999
launch of the Isolex system. These were partially offset by reductions in
headcount in October 2000 consistent with the Company's recently completed
strategic planning.
Selling, marketing and distribution expenses increased to $8,567,000 in
2000 from $7,768,000 in 1999, an increase of $799,000 or 10%. The increase
relates to 1) the ramp up of marketing efforts for the U.S. launch of the Isolex
(R) 300 and Isolex(R) 300i, which received final approval from the FDA in July
1999, and 2) the assumption of the direct sales and distribution
responsibilities from Baxter related to the restructuring of the Distribution
Agreement on June 30, 1999, including creation of a European headquarters with a
fully staffed sales and marketing function.
Goodwill and intangible asset amortization increased by $286,000 or 8% to
$4,067,000 in 2000 from $3,781,000 in 1999. This was the result of the
acquisition of certain assets of CellPro Incorporated in January 1999, the
acquisition of Baxter's minority interest in NCI in May 1999 and the acquisition
of several antibody licenses in 1999 and 2000.
Other income was $4,397,000 in 2000 while other expense of $205,000 was
incurred in 1999. Significant factors in this change are discussed below.
Net royalty and licensing expense was $22,000 in 2000 while net royalty and
licensing income of $855,000 was realized in 1999. This change was primarily
related to the sale and licensing of certain Innovir assets to Ribozyme
Pharmaceuticals Inc. ("RPI") and Amgen, Inc. in 1999.
Interest income increased from $1,069,000 in 1999 to $1,217,000 in 2000 due
to improved performance in the Company's mutual fund in which it invests the
majority of its excess cash and improved cash management.
Interest expense decreased from $1,903,000 in 1999 to $8,000 in 2000 as a
result of the repayment of approximately $34,000,000 in convertible debentures
from the proceeds of the Company's private placement financing that was
completed in November 1999.
The gain on sale of equity investment of $3,231,000 in 2000 was a result of
the sale of the Company's investment in RPI common stock in August 2000.
27
The foregoing resulted in a net loss of $28,095,000 for fiscal 2000, a
decreased loss of $7,578,000 or 21% from the 1999 net loss of $35,673,000. The
net loss applicable to common stock likewise declined by $5,625,000 or 14% from
$40,091,000 in 1999 to $34,466,000 in 2000.
Years Ended December 31, 1999 and 1998
Net sales in fiscal 1999 increased to $14,961,000 from $13,443,000 in
fiscal 1998, an increase of $1,518,000 or 11%. The increase reflected the launch
of the Isolex (R) 300i in the U.S. following FDA approval on July 2, 1999,
offset by charges to repurchase $4,359,000 of inventory from Baxter in 1999
related to the termination of the Distribution Agreement. Through June 1999,
Baxter had exclusive worldwide distribution rights for NCI's products and,
therefore, all 1998 sales and sales for the six months ended June 30, 1999
represented sales made to Baxter. The Distribution Agreement specified that
products were sold to Baxter at the current global suggested retail price
("SRP") (independently established by the Company) less a predetermined
distributor margin of 30%. The term of the Distribution Agreement was originally
for eleven (11) years with provisions to extend or terminate upon mutual
agreement and allowed for annual adjustments to the pricing structure. However,
any price increases were limited to actual increases in the fully loaded product
cost and the increase in the U.S. Consumer Price Index from the prior year. The
effect of such future increases in product cost on gross margins was minimal as
the SRP was also tied to the fully loaded cost increases. The Distribution
Agreement provided for an increased distributor margin based on the extent to
which Baxter was able to meet or exceed agreed upon sales projections contained
in the Distribution Agreement for that year. See Item 1 - "Relationship with
Baxter Healthcare Corporation" regarding termination of the Distribution
Agreement in 1999.
In 1999 and 1998, the Company sold to Baxter $8,032,000 and $13,443,000,
respectively, of products, including reagent kits, disposables, Cryocyte,
Lifecell and other products. Products were sold to Baxter at SRP less the
predetermined distributor margin of 30%.
The gross profit in fiscal 1999 increased to $5,344,000 from $5,277,000, an
increase of $67,000 or 1%. The gross profit percentage in 1999 was 36% versus
39% in 1998. The decline in the gross profit percentage related to costs
recorded as a result of the restructuring of the Distribution Agreement in 1999
that were not included in Nexell results in 1998.
Research and development expenses decreased $5,569,000 or 23% from
$24,427,000 in 1998 to $18,858,000 in 1999. The decrease resulted primarily from
changes made in late 1998 to discontinue all Innovir operations and related
research and development activities and scaling back research programs within
the Company for development programs other than Hypericin and VM301. The
remaining research and development spending was primarily related to the cell
therapy business. Approximately $17,600,000 of the research and development
spending in 1999 related to the cell therapy business as compared to
approximately $16,100,000 in 1998.
General and administrative expenses decreased $318,000 or 3% to $9,903,000
in 1999 from $10,221,000 in 1998. This decrease was primarily due to the closing
of Innovir operations and the relocation of the Company's headquarters to
Irvine, California. This was partially offset by the creation of a European
headquarters upon completion of the restructuring of the Distribution Agreement.
Goodwill and intangible asset amortization of $3,781,000 and $3,602,000 in
1999 and 1998, respectively, primarily related to the acquisition of NCI from
Baxter.
28
Selling, marketing and distribution expenses increased to $7,768,000 in
1999 from $3,625,000 in 1998, an increase of $4,143,000 or 114%. The increase
relates to 1) the ramp up of marketing efforts for the U.S. launch of the Isolex
(R) 300 and Isolex(R) 300i, which received final approval from the FDA on July
2, 1999, and 2) the assumption of the direct sales and distribution
responsibilities from Baxter related to the restructuring of the Distribution
Agreement on June 30, 1999.
Restructuring costs of $502,000 recorded in 1999 relate to the relocation
of the corporate headquarters as described above. The 1998 restructuring costs
of $2,625,000 relate to the closure of the Innovir operations. In 1998, the
Company had discontinued funding its 85% owned subsidiary, Innovir, and in order
to reduce operating expenses, Innovir closed all operations. All employees were
terminated and fixed assets of the closed facilities were sold.
The Company recorded net losses of $157,000, $9,862,000 and $10,049,000 in
1999, 1998 and 1997, respectively, related to the operations of Innovir. The
remaining termination payments of $381,000 were accrued as of December 31, 1998
and paid in 1999.
Net royalty and licensing income increased $679,000 to $855,000 in 1999
from 1998 primarily related to the sale and licensing of certain Innovir assets
to RPI and Amgen, Inc.
Interest income decreased from $2,972,000 in 1998 to $1,069,000 in 1999 due
to a lower average cash and cash equivalents balance in 1999 primarily as a
result of cash used in operations of $27,851,000.
A contract settlement was recorded in the third quarter of 1998 related to
the termination of a research agreement with Columbia University, while no such
expense was recorded in 1999.
The minority interest in the net loss of a consolidated subsidiary was
fully recognized in 1998, and therefore, no such offset was recorded in 1999.
The foregoing resulted in a net loss of $35,673,000 for fiscal 1999, an
increased loss of $710,000 or 2% from fiscal 1998.
Liquidity and Capital Resources
The Company had $12,119,000 in cash and cash equivalents as of December 31,
2000 as compared to $28,695,000 as of December 31, 1999 and $33,091,000 as of
December 31, 1998. Working capital was $16,891,000 at December 31, 2000 as
compared to $28,831,000 at December 31, 1999. The $16,576,000 decrease in cash
and cash equivalents in 2000 resulted from cash used in the operations of the
Company of $24,077,000 partially offset by cash provided by investing activities
of $2,951,000 and cash provided by financing activities of $4,716,000. The
$11,940,000 decrease in working capital principally resulted from the decrease
in cash partially offset by a $1,682,000 increase in other current assets and a
$2,200,000 increase in short-term marketable securities.
Net cash used in operations was $24,077,000 in 2000 compared to $27,851,000
in 1999 and $23,263,000 in 1998. Operating cash used decreased in 2000 as
compared to 1999 primarily as a result of the decrease in net loss, an increase
in non-cash compensation and a reduction in the amount of the increase in trade
accounts receivable. These cash flow increases were partially offset by a
decrease in accrued interest on long-term debt, an increase in the gain on sale
of equity investments, an increase in the receivable from related party and
decreases in accounts payable and accrued expenses and in the accounts payable
to related party. Operating cash used increased in 1999 as compared to 1998
primarily due to increases in trade accounts receivable, inventory and other
current assets and other assets.
29
Net cash provided by investing activities was $2,951,000 in 2000 compared
to cash used in investing activities of $3,172,000 in 1999 and $1,128,000 in
1998. Proceeds from sale of short-term marketable securities were $3,818,000 in
2000, which was partially offset by capital expenditures of $1,040,000. Use of
cash in investing activities in 1999 and 1998 were primarily related to
purchases of equipment of $3,323,000 and $1,128,000, respectively.
Net cash provided by financing activities was $4,716,000 in 2000 compared
to $26,632,000 in 1999 and cash used of $386,000 in 1998. Cash provided by
financing activities in 2000 consisted of proceeds from issuance of common stock
in connection with option and warrant exercises and from the sale of equipment
subject to leaseback partially offset by the payment of preferred stock
dividends. Cash provided by financing activities in 1999 consisted primarily of
net proceeds from the sale of preferred stock partially offset by the repayment
of long term debt. Cash used in financing activities in 1998 consisted of
capital lease payments.
Cash dividends are payable on the Company's Series B Preferred Stock at the
rate of 3% of the liquidation preference, payable semi-annually and will be
approximately $1,900,000 per year (see Note 10 to the Consolidated Financial
Statements for a description of the Series B Preferred Stock).
The Company, in the ordinary course of business, routinely explores
possible business transactions that may lead to an acquisition. In general, in
order to conserve cash the Company's preference is to use its stock as
consideration for any potential acquisition or similar corporate transaction.
In January 2001, the Company entered into a Common Stock Purchase Agreement
with Acqua Wellington North American Equities Fund, Ltd. ("Acqua Wellington")
pursuant to which it may, from time to time and at the Company's sole
discretion, beginning in January 2001 and ending November 2002, present Acqua
Wellington with draw down notices constituting an offer to purchase its Common
Stock over an agreed to number of consecutive trading days. Acqua Wellington
will be required to purchase a pro rata portion of shares on each day during the
trading period on which the daily weighted average price of the Common Stock
exceeds a threshold price determined by the Company and set forth in the draw
down notice. In addition, the Company may, at its sole discretion, grant Acqua
Wellington an option to purchase additional shares during such trading period.
The aggregate amount Acqua Wellington will be required to invest during any draw
down period will depend on the threshold price established by the Company for
the draw down period. Acqua Wellington may, at its sole discretion, elect not to
purchase shares if the threshold price is set at less than $3.00 per share. The
aggregate amount to be invested by Acqua Wellington under terms of this
agreement is up to a maximum of $23 million in addition to a $2 million draw
down, representing 749,063 shares of the Company's common stock, executed on the
date of the agreement. From January 2001 through March 29, 2001, the Company
sold an additional 1,091,552 shares of its Common Stock for $2,000,000 under
this agreement.
The Common Stock Purchase Agreement that the Company has entered into with
Acqua Wellington provides that Acqua Wellington may purchase shares of Common
Stock at a discount of up to 11.0%, to be determined based on the Company's
market capitalization at the start of the draw-down period. Additionally, the
Company may, at its sole discretion, offer discounts in excess of this amount
and on March 28, 2001 did sell 444,444 shares at a discount of 22.5% from the
volume weighted average share price for March 26, 2001 which was established as
the draw down pricing period. As a result, the Company's existing common
stockholders will experience immediate dilution upon the purchase of any shares
of the Company's Common Stock by Acqua Wellington.
The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its proposed
products. Based on current projections, which are subject to change, the
Company's management believes that the current balance of cash and cash
equivalents combined with assets held that may be readily liquidated, its
ability to adjust spending based on results of operations and market conditions
and potential funds available under the financing arrangement with Acqua
Wellington is sufficient to fund its operations through at least fiscal 2001.
Thereafter, the Company may require additional funds, which it may seek to raise
through public or private equity or debt financings, collaborative or other
arrangements with
30
corporate sources, or through other sources of financing. There can be no
assurance that such additional funds will be available to the Company on terms
favorable to the Company, or at all.
New & Proposed Accounting Standards
In June 1998, Statement of Financial Accounting Standards No. 133 -
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133)
was issued, as amended, and is effective for all periods of fiscal years
beginning after June 15, 2000. In June 2000, Statement of Financial Accounting
Standards No. 138-"Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of SFAS No. 133" was issued. SFAS No. 133 as
amended by SFAS No. 138 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 as amended requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company believes that implementation of SFAS No. 133 as amended will have no
material impact on its financial statements.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", as amended, which for the Company became effective during
the fiscal quarter beginning October 1, 2000. SAB No. 101 summarizes certain of
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company's adoption of SAB No.
101 had no material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in interest rates and foreign currency
exchange rates.
Interest Rate Risk
The Company maintains excess cash in a mutual fund, the "BlackRock Low
Duration Bond Portfolio" (the "fund"), which invests in asset backed securities,
bonds and various other commercial obligations. The fund may, from time to time,
use certain derivatives in its investment strategy. Additionally, the Company
maintains excess cash required for short-term needs in daily money market funds
with financial institutions.
Two of the main risks disclosed by the fund are interest rate risk and
credit risk. Typically, when interest rates rise, there is a corresponding
decline in the market value of bonds such as those held by the fund. Credit risk
refers to the possibility that the issuer of the bond will not be able to make
principal and interest payments. The Company addresses these risks by actively
monitoring the fund's performance and investment holdings. The Company does not
enter into financial instruments for trading or speculative purposes.
The Company's interest income is most sensitive to fluctuations in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash as well as the value of
the mutual fund in which excess cash is invested.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment of excess cash in a mutual fund, which
invests in asset backed securities, bonds and various other
31
commercial obligations. The fund may, from time to time, use certain derivatives
in its investment strategy. The fund's portfolio managers make all investment
decisions and the Company has no control over such investment decisions or the
fund's use of derivatives.
Foreign Currency Risk
Changes in foreign exchange rates, and in particular a strengthening of the
U.S. dollar, may negatively affect the Company's consolidated sales and gross
margins as expressed in U.S. dollars. To date, the Company has not entered into
any foreign exchange contracts to hedge its exposure to foreign exchange rate
fluctuations. However, as its international operations grow, the Company may
enter into foreign exchange contracts to manage its foreign exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on page F-1.
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 2000, 1999, and 1998.
All other financial statement schedules are omitted because they are not
applicable or the required information is disclosed in the Consolidated
Financial Statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain of the information required in response to this item is
incorporated by reference to the 2001 Proxy Statement. See also "Executive
Officers of the Company" hereinabove.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this item is incorporated by
reference to the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this item is incorporated by
reference to the 2001 Proxy Statement.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this item is incorporated by
reference to the 2001 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Lists.
1. See Index to Financial Statements on page F-1.
2. See Item 8 regarding financial statement schedules.
3. Exhibits.
Exhibit Description
-----------
Number
------
2.4 Asset Purchase Agreement dated October 10, 1997 by and among
Baxter Healthcare Corporation ("Baxter"), the Company and NCI
(1)
2.5 Asset Acquisition Agreement dated February 18, 1999, by and
among Baxter, the Company and NCI (2)
2.6 Securities Agreement dated as of November 24, 1999 among the
Company and the Purchasers named in Schedule I thereto (certain
schedules are omitted and the Company agrees to furnish
supplementally a copy to the Commission upon request) (3)
3.1 The Company's Amended and Restated Certificate of Incorporation
as amended to date (24)
3.2 The Company's Amended and Restated By-Laws as amended to date
(25)
4.4 Warrant Agreement dated June 17, 1996 between the Company and
American Stock Transfer & Trust Company (4)
4.5 The Certificate of Amendment of the Certificate of Incorporation
of the Company filed with the Delaware Secretary of State on
December 16, 1997 creating the Series A Preferred Stock and
amendments subsequent thereto (included in Exhibit 3.1 above)
4.6 The Certificate of Amendment of the Certificate of Incorporation
of the Company filed with the Delaware Secretary of State on May
25, 1999 modifying the Series A Preferred Stock (included in
Exhibit 3.1 above)
4.7 The Company's Series 1 6 1/2% Convertible Subordinated Debenture
Due November 30, 2004 issued May 28, 1999 to Baxter (5)
4.8 The Company's Series 2 6 1/2% Convertible Subordinated Debenture
Due November 30, 2004 issued May 28, 1999 to Baxter (5)
33
Exhibit Description
-----------
Number
------
4.9 The Company's Certificate of Designation filed with the Delaware
Secretary of State on November 24, 1999 creating the Series B
Preferred Stock (included in Exhibit 3.1 above)
10.3 The Company's Amended and Restated 1990 Incentive and Non-
Incentive Stock Option Plan, as amended to date*
10.11 The Company's 1995 Outside Directors Stock Option Plan (7)*
10.12 Letter agreement dated August 7, 1995 between the Company and
Lindsay A. Rosenwald, M.D. (7)*
10.13 Stock Option Agreement dated August 7, 1995 between the Company
and Lindsay A. Rosenwald, M.D. (7)*
10.14 Consulting and Stock Option Agreement dated November 17, 1995
between the Company and Eric A. Rose, M.D. (7)*
10.15 Stock Option Agreement dated November 17, 1995 between the
Company and Donald G. Drapkin (7)*
10.16 The Company's 1996 Non-Employee Director Restricted Stock Award
Plan (7)*
10.18 Research Agreement dated as of March 7, 1997 among the Company,
The Trustees of Columbia University in the City of New York and
Vimrx Genomics, Inc. (8)
10.19 The Company's 1997 Incentive and Non-Incentive Stock Option
Plan, as amended to date (26)*
10.20 Employment Agreement dated October 30, 1996 between the
Registrant and Richard L. Dunning (4)*
10.21 Employment Agreement dated August 26, 1996 between the
Registrant and David A. Jackson, Ph.D. (4)*
10.22 Factor IX Research Agreement dated March 28, 1997 between
Registrant and the Trustees of Columbia University in the City
of New York (9)
10.24 Employment Agreement dated May 19, 1997 between the Company and
L. William McIntosh (10)*
10.24(a) Letter Agreement dated May 28, 1998 between NCI and L. William
McIntosh (2)*
10.24(b) Letter Agreement dated May 28, 1998 between the Company and L.
William McIntosh (2)*
10.25 Hardware and Disposables Manufacturing Agreement between NCI and
Baxter, dated as of December 17, 1997 (11)
10.26 Antibody Manufacturing and Storage Agreement between NCI and
Baxter, dated as of December 17, 1997 (12)
10.27 Hardware and Disposables Supply Agreement between NCI and
Baxter, dated as of December 17, 1997 (13)
34
Exhibit Description
-----------
Number
------
10.28 Marketing, Sale and Distribution Agreement between NCI and
Baxter, dated as of December 17, 1997 (14)
10.29 Non-Competition and Confidentiality Agreement between the
Company and Baxter, dated as of December 17, 1997 (15)
10.30 Sublicense (Chiron) between NCI and Baxter, dated as of December
17, 1997 (16)
10.31 Sublicense (Dorken) between NCI and Baxter, dated as of December
17, 1997 (17)
10.32 Sublicense (First Becton-Dickinson) between NCI and Baxter,
dated as of December 17, 1997 (18)
10.33 Sublicense (Second Becton-Dickinson) between NCI and Baxter,
dated as of December 17, 1997 (19)
10.34 Warrant, dated December 31, 1997, issued by Innovir to the
Company (20)
10.35 Agreement, dated December 31, 1997, between the Company and
Innovir relating to future equity purchases (20)
10.37 Termination Agreement dated November 11, 1998 between the
Company, VGI and Columbia (21)
10.38 Asset Purchase Agreement, dated October 28, 1998, between
CellPro, Incorporated and NCI (2)
10.39 The Company's Common Stock Purchase Warrant issued May 28, 1999
to Baxter (5)
10.40 Asset Transfer Agreement dated June 30, 1999 among the Company,
NCI and Baxter (22)
10.41 Royalty Agreement dated June 30, 1999 among the Company, NCI and
Baxter (22)
10.42 Credit Agreement dated June 30, 1999 between the Company and
Baxter (22)
10.43 Letter Agreement dated as of April 15, 1999 between the Company
and Richard L. Dunning (23)*
10.44 Letter Agreement dated as of August 20, 1999 between the Company
and L. William McIntosh (23)*
10.45 Letter Agreement dated as of April 15, 1999 between the Company
and David A. Jackson, Ph.D. (23)*
10.46 Form of Put Right Certificate (3)
10.47 Form of Class A Warrant (3)
10.48 Form of Class B Warrant (3)
10.49 Registration Rights Agreement dated as of November 24, 1999
among the Company and the Investors identified therein (3)
10.50 Side Letter Agreement dated as of November 24, 1999 among the
Company, Baxter International, Inc. and the other parties
signatory thereto (3)
35
Exhibit Description
-----------
Number
------
10.51 Put Agreement dated as of November 24, 1999 between the Company
and Baxter International, Inc. (3)
10.52 Voting Agreement dated December 17, 1997 among Baxter, the
Company and certain other parties (27)
10.53 Registration Rights Agreement dated December 17, 1997 between
Baxter and the Company (27)
10.54 Non-Incentive Stock Option Agreement dated November 9, 1999
between the Company and Joseph A. Mollica (27)*
10.55 Non-Incentive Stock Option Agreement dated November 9, 1999
between the Company and Richard L. Casey (27)*
10.56 Non-Incentive Stock Option Agreement dated November 9, 1999
between the Company and Richard C. Piazza (27)*
10.57 Non-Incentive Stock Option Agreement dated November 9, 1999
between the Company and Victor W. Schmitt (27)*
10.58 Non-Incentive Stock Option Agreement dated November 9, 1999
between the Company and Victor W. Schmitt (27)*
10.59 Stock Option Agreement dated March 12, 1996 between the Company
and Donald G. Drapkin (27)*
10.60 Amendment dated May 25, 1999 to Consulting and Stock Option
Agreement dated November 17, 1995 between the Company and Eric
A. Rose, M.D. (27)*
10.61 Amendment dated May 25, 1999 to Stock Option Agreement dated
November 17, 1995 between the Company and Donald G. Drapkin
(27)*
10.62 Form of Indemnification Agreement between the Company and
Members of the Board of Directors (27)
10.63 Amendment dated November 30, 1999 to Asset Transfer Agreement
dated June 30, 1999, among the Company, NCI and Baxter (27)
10.64 Distribution Agreement with Takara Shuzo Co., Ltd. (28)
10.65 Co-Development Agreement with Takara Shuzo Co., Ltd. (28)
10.66 Letter Agreement between L. William McIntosh and the Company
dated August 10, 2000 (29)*
10.67 Sale-leaseback agreement between Baxter Healthcare Corp. and the
Company dated December 21, 2000
10.68 Non-Incentive Stock Option Agreement dated February 18, 2000
between the Company and Dennis E. Van Epps*
10.69 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and William A. Albright, Jr.*
36
Exhibit Description
-----------
Number
------
10.70 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and Michel L. E. Bergh*
10.71 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and Richard L. Dunning*
10.72 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and David J. Hirsch*
10.73 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and Amy Ross*
10.74 Non-Incentive Stock Option Agreement dated July 3, 2000 between
the Company and Dennis E. Van Epps*
10.75 Non-Incentive Stock Option Agreement dated October 10, 2000
between the Company and David J. Hirsch*
10.76 Non-Incentive Stock Option Agreement dated October 10, 2000
between the Company and Daniel Levitt*
10.77 Non-Incentive Stock Option Agreement dated October 10, 2000
between the Company and Amy Ross*
10.78 Non-Incentive Stock Option Agreement dated December 7, 2000
between the Company and Richard L. Casey*
10.79 Non-Incentive Stock Option Agreement dated December 7, 2000
between the Company and Joseph A. Mollica*
10.80 Non-Incentive Stock Option Agreement dated December 7, 2000
between the Company and C. Richard Piazza*
10.81 Non-Incentive Stock Option Agreement dated December 7, 2000
between the Company and Eric A. Rose*
10.82 Non-Incentive Stock Option Agreement dated December 7, 2000
between the Company and Victor W. Schmitt*
10.83 1998 Non-Incentive Stock Option Plan of the Company for
Directors, Employees and Consultants of Nexell of California,
Inc., as amended to date*
10.84 Common Stock Purchase Agreement dated January 9, 2001, between
Acqua Wellington North American Equities Fund, Ltd. and the
Company (30)
21 List of Subsidiaries (27)
23(a) Consent of KPMG LLP
Note: The Company's Commission File No. for all filings is No. 0-19153.
* Denotes management contract or compensatory plan or arrangement.
37
(1) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed January 2, 1998 and incorporated herein by reference thereto.
(2) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference thereto.
(3) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed December 7, 1999 and incorporated herein by reference thereto.
(4) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by
reference thereto.
(5) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed June 29, 1999 and incorporated herein by reference thereto.
(6) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference thereto.
(7) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference thereto.
(8) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed March 21, 1997 and incorporated herein by reference thereto.
(9) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference thereto.
(10) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 and incorporated herein
by reference thereto.
(11) Filed as Exhibit number 10.1 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(12) Filed as Exhibit number 10.2 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(13) Filed as Exhibit number 10.3 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(14) Filed as Exhibit number 10.4 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(15) Filed as Exhibit number 10.5 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(16) Filed as Exhibit number 10.6 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(17) Filed as Exhibit number 10.7 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
38
(18) Filed as Exhibit number 10.8 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(19) Filed as Exhibit number 10.9 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(20) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference thereto.
(21) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 and incorporated herein
by reference thereto.
(22) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference thereto.
(23) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 and incorporated herein
by reference thereto.
(24) Filed as Exhibit 4.1 to the Company's registration statement on Form S-8
filed with the Commission on July 6, 2000 (Registration Number 333-40860),
and incorporated herein by reference thereto.
(25) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference thereto.
(26) Filed as Exhibit 4.3 to the Company's registration statement on Form S-8
filed with the Commission on July 6, 2000 (Registration Number 333-40860),
and incorporated herein by reference thereto.
(27) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated herein by
reference thereto.
(28) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference thereto.
(29) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and incorporated herein
by reference thereto.
(30) Filed as Exhibit 10.1 to the Company's Post Effective Amendment No. 1 to
its registration statement on Form S-3 filed with the Commission on
January 10, 2001 (Registration Number 333-51440), and incorporated herein
by reference thereto.
(b) Reports on Form 8-K.
None.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Nexell Therapeutics Inc.
By: /s/ Richard L. Dunning
---------------------------------------
Richard L. Dunning
Chairman of the Board
Dated: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard L. Dunning Chairman of the Board March 29, 2001
- ------------------------------------
Richard L. Dunning
/s/ William A. Albright, Jr. Director, Chief Executive Officer, President, March 29, 2001
- ------------------------------------
William A. Albright, Jr. Chief Financial Officer and Treasurer
(Principal Executive, Financial and Accounting
Officer)
/s/ Daniel Levitt, M.D., Ph.D Director March 29, 2001
- ------------------------------------
Daniel Levitt, M.D., Ph.D.
/s/ Victor W. Schmitt Director March 29, 2001
- ------------------------------------
Victor W. Schmitt
/s/ Eric A. Rose, M.D. Director March 29, 2001
- ------------------------------------
Eric A. Rose, M.D.
/s/ Richard L. Casey Director March 29, 2001
- --------------------------------------------
Richard L. Casey
/s/ Joseph A. Mollica Director March 29, 2001
- --------------------------------------------
Joseph A. Mollica
/s/ C. Richard Piazza Director March 29, 2001
- --------------------------------------------
C. Richard Piazza
40
Index to Financial Statements
Consolidated Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2000, 1999 and 1998 F-5 to F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-34
F-1
[LOGO OF KPMG]
Plaza Tower
600 Anton Boulevard, Suite 700
Costa Mesa, CA 92626
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nexell Therapeutics Inc.:
We have audited the accompanying consolidated balance sheets of Nexell
Therapeutics Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2000. In connection with our audits of the consolidated financial statements, we
have also audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nexell
Therapeutics Inc. and subsidiaries as of December 31, 2000 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, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
February 9, 2001
[GRAPHIC]
F-2
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
===============================================================================================================================
December 31,
-------------------------------------------
Assets 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,119,000 $ 28,695,000
Trade receivables net of allowance for doubtful accounts of
$37,000 and $26,000 in 2000 and 1999, respectively 2,940,000 2,033,000
Receivables from related party 1,576,000 1,248,000
Inventory 3,831,000 4,409,000
Short term marketable securities 3,000,000 800,000
Other current assets 3,953,000 2,271,000
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 27,419,000 39,456,000
- -------------------------------------------------------------------------------------------------------------------------------
Fixed assets, net 8,164,000 10,932,000
Intangible assets, net 39,372,000 43,191,000
Other assets 500,000 260,000
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 75,455,000 $ 93,839,000
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,812,000 $ 3,194,000
Accounts payable due to related party 2,821,000 4,279,000
Accrued expenses 2,807,000 3,152,000
Capital leases-current portion 638,000 --
Deferred revenue-current portion 450,000 --
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 10,528,000 10,625,000
Capital lease obligation-non current portion 1,912,000 --
Deferred revenue-non current portion 1,575,000 --
Total liabilities 14,015,000 10,625,000
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies and other matters (notes 8 and 14) -- --
Shareholders' equity:
Convertible preferred stock; $.001 par value, 1,150,000 shares
authorized
Series A; 78,967 and 74,498 issued and outstanding at 100 100
December 31, 2000 and 1999, respectively (liquidation
value $79,162,000 and $74,685,000)
Series B; 63,000 issued and outstanding at December 31, 100 100
2000 and 1999 (liquidation value $63,194,000 and
$63,192,000)
Common stock; $.001 par value, 80,000,000 and 160,000,000 19,000 18,000
shares authorized at December 31, 2000 and 1999,
respectively, 19,084,894 and 18,178,737 shares issued and
outstanding at December 31, 2000 and 1999, respectively
Additional paid-in capital 258,188,800 252,796,800
Unearned compensation -- (198,000)
Accumulated other comprehensive income (loss) 2,605,000 (5,000)
Accumulated deficit (199,373,000) (169,398,000)
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 61,440,000 83,214,000
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 75,455,000 $ 93,839,000
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31,
---------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $ 18,180,000 $ 14,961,000 $13,443,000
Cost of goods sold 11,369,000 9,617,000 8,166,000
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 6,811,000 5,344,000 5,277,000
Operating expenses:
Research and development 15,177,000 18,858,000 24,427,000
General and administrative 11,492,000 9,903,000 10,221,000
Selling, marketing and distribution 8,567,000 7,768,000 3,625,000
Goodwill and intangible amortization 4,067,000 3,781,000 3,602,000
Restructuring costs -- 502,000 2,625,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses $ 39,303,000 $ 40,812,000 $ 44,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating loss (32,492,000) (35,468,000) (39,223,000)
Other (income) expenses:
Royalty and licensing (income) expense 22,000 (855,000) (176,000)
Interest income (1,217,000) (1,069,000) (2,972,000)
Interest expense 8,000 1,903,000 2,036,000
Gain on sale of equity investment (3,231,000) -- --
Contract settlement -- -- 900,000
Minority interest in net loss of consolidated subsidiaries -- -- (4,161,000)
Other, net 21,000 226,000 113,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total other (income) expenses $ (4,397,000) $ 205,000 $ (4,260,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (28,095,000) (35,673,000) (34,963,000)
Preferred stock dividends (6,371,000) (4,418,000) (3,988,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (34,466,000) $(40,091,000) $(38,951,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share $ (1.84) $ (2.24) $ (2.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares of common stock outstanding $ 18,761,000 $ 17,861,000 $ 16,821,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholder's Equity
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock paid-in
------------------------
Shares Amount Shares Amount Shares Amount capital
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 as previously 66,304 $100 - - 66,898,726 $67,000 $182,538,900
reported
One-for-four reverse stock split (note 3) - - (50,174,045) (50,000) 50,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1997, as adjusted 66,304 $100 - - 16,724,681 $17,000 $182,588,900
Issuance of shares in connection with
acquisition of Immunotherapy - - - - 1,030 - -
Exercise of special options - - - - 231,835 - -
Amortization of options - - - - - - -
Preferred dividends 3,978 - - - - - -
Net loss - - - - - - -
Translation adjustment - - - - - - -
Comprehensive loss
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 70,282 $100 - - 16,957,546 $17,000 $182,588,900
Issuance of shares in connection with
exercise of underwriter options - - - - 120,285 - 922,000
Issuance of Series B shares in connection - - - -
with private placement, net of issuance - - - -
costs of $2,577,000 63,000 100 60,422,900
Preferred dividends 4,216 - - - - - -
Issuance of shares in connection with
acquisition of CellPro - - - - 470,553 - 3,000,000
Retirement of CellPro shares - - - - (156,850) - (628,000)
Issuance of shares in connection with
exchange in interest in subsidiary - - - - 750,000 1,000 6,281,000
Issuance of shares in exchange for certain
Innovir preferred shares - - - - 17,500 - 153,000
Non-cash exercise of options - - - - 19,703 - (24,000)
Amortization of options - - - - - - -
Option repricing - - - - - - 81,000
Net loss - - - - - - -
Translation adjustment - - - - - - -
Comprehensive loss
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 74,498 $100 63,000 $100 18,178,737 $18,000 $252,796,800
Exercise of options - - - - 600,042 1,000 2,706,000
Exercise of warrants - - - - 306,115 - 1,339,000
Preferred dividends 4,469 - - - - - -
Amortization of options - - - - - - (16,000)
Option repricing and changes in terms - - - - - - 1,363,000
Net loss - - - - - - -
Translation adjustment - - - - - - -
Adjustment to market of equity investment - - - - - - -
Comprehensive loss
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 78,967 $100 63,000 $100 19,084,894 $19,000 $258,188,800
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholder's Equity
Unearned Accumulated Other Accumulated Comprehensive
Compensation Comprehensive Income Deficit Total Loss
(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 as $(449,000) $ (40,000) $ (98,570,000) $ 83,547,000
previously reported
One-for-four reverse stock split
- ------------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1997, as $(449,000) $ (40,000) $ (98,570,000) $ 83,547,000
adjusted
Issuance of shares in connection with
acquisition of Immunotherapy - - - -
Exercise of special options - - - -
Amortization of options 171,000 - - 171,000
Preferred dividends - - - -
Net loss - - (34,963,000) (34,963,000) (34,963,000)
Translation adjustment - 60,000 - 60,000 60,000
------
Comprehensive loss $(34,903,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $(278,000) $ 20,000 $(133,533,000) $ 48,815,000
Issuance of shares in connection with
exercise of underwriter options - - - 922,000
Issuance of Series B shares in
connection with private placement, - - -
net of issuance costs of $2,577,000 60,423,000
Preferred dividends - - (192,000) (192,000)
Issuance of shares in connection with
acquisition of CellPro - - - 3,000,000
Retirement of CellPro shares - - - (628,000)
Issuance of shares in connection with
exchange in interest in subsidiary - - - 6,282,000
Issuance of shares in exchange for
certain Innovir preferred shares - - - 153,000
Non-cash exercise of options - - - (24,000)
Amortization of options 161,000 - - 161,000
Option repricing (81,000) - - -
Net loss - - (35,673,000) (35,673,000) (35,673,000)
Translation adjustment - (25,000) - (25,000) (25,000)
-------
Comprehensive loss $(35,698,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 $(198,000) $ (5,000) $(169,398,000) $ 83,214,000
Exercise of options - - - 2,707,000
Exercise of warrants - - - 1,339,000
Preferred dividends - - (1,880,000) (1,880,000)
Amortization of options 198,000 - - 182,000
Option repricing and changes in terms - - - 1,363,000
Net loss - - (28,095,000) (28,095,000) (28,095,000)
Translation adjustment - (241,000) - (241,000) (241,000)
Adjustment to market of equity investment - 2,851,000 - 2,851,000 2,851,000
---------
Comprehensive loss $(25,485,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 $ - $2,605,000 $(199,373,000) $ 61,440,000
F-6
NEXELL THERAPEUTICS INC. and Subsidiaries
Consolidated Statement of Cash Flow
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (28,095,000) $(35,673,000) $(34,963,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 7,683,000 6,999,000 6,610,000
Noncash compensation 1,545,000 161,000 171,000
Accrued interest on long-term debt -- 1,901,000 1,956,000
Loss from disposal of equipment 20,000 163,000 --
Deferred revenue (225,000) -- --
Gain on sale of equity investments (3,231,000) -- --
Closure of facilities and related costs 100,000 112,000 2,265,000
Minority interest in net loss -- -- (4,161,000)
Changes in operating assets and liabilities
Increase in trade accounts receivable (907,000) (2,033,000) --
(Increase) decrease in inventory 578,000 (2,020,000) (162,000)
(Increase) decrease in other current assets and other
assets (2,273,000) (2,448,000) 1,129,000
(Increase) decrease in receivable from related party (328,000) 2,945,000 1,147,000
Increase in accounts payable and accrued expenses 264,000 1,485,000 766,000
Increase (decrease) in accounts payable to related party (1,458,000) 557,000 1,979,000
Increase in deferred revenue 2,250,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (24,077,000) $(27,851,000) $(23,263,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of equipment (1,040,000) (3,323,000) (1,128,000)
Proceeds from sale of equipment 173,000 151,000 --
Proceeds from sale of short-term marketable securities 3,818,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 2,951,000 $ (3,172,000) (1,128,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sales of preferred stock, net -- 60,423,000 --
Proceeds from issuance of common stock in connection with
the exercise of warrants/options 4,046,000 922,000 --
Purchase/retirement of common stock -- (628,000) --
Repayment of long-term debt -- (34,029,000) --
Proceeds from sale of equipment subject to leaseback 2,550,000 -- --
Dividends on preferred stock (1,880,000) -- --
Repayment of capital leases -- (56,000) (386,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 4,716,000 $ 26,632,000 $ (386,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (166,000) (5,000) 38,000
Net decrease in cash and cash equivalents (16,576,000) (4,396,000) (24,739,000)
Cash and cash equivalents at beginning of period 28,695,000 33,091,000 57,830,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,119,000 $ 28,695,000 $ 33,091,000
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid for interest -- $ 3,934,000 $ 79,000
Cash paid for taxes $ 24,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
F-7
NEXELL THERAPEUTICS INC. and Subsidiaries
Consolidated Statements of Cash Flow
Non cash investing and financing activities:
In January 1999, the Company issued 470,553 shares of Common Stock valued at
$3,000,000 in exchange for certain intangible assets.
In May 1999, the Company issued 750,000 shares of Common Stock valued at
$6,282,000 to Baxter Healthcare Corporation in exchange for its minority
interest in Nexell of California, Inc.
In June 1999, the Company issued 17,500 shares of Common Stock valued at
$153,000 to certain Innovir shareholders in exchange for their outstanding
Innovir preferred stock.
In December 2000, 1999 and 1998, the Company issued 4,469, 4,216 and 3,978
shares, respectively, of Series A Preferred Stock as in-kind dividends. The
Company accrued $4,481,000 in Series A Preferred Stock dividends and $1,890,000
in Series B Preferred Stock dividends in 2000, $3,331,000 in Series A Preferred
Stock dividends and $191,000 in Series B Preferred Stock dividends in 1999 and
$3,331,000 in Series A Preferred Stock dividends and zero in Series B Preferred
Stock dividends in 1998.
During 2000, the Company recognized net unrealized gains on securities held for
investment of $2,851,000, which are included as a component of comprehensive
loss.
In December 2000, the Company entered into an agreement to sell certain
equipment to Baxter Healthcare Corporation. This equipment, with a value of
$2,550,000, was subsequently leased back to the Company under a three-year lease
that has been accounted for as a capital lease.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(1) The Business
Operations
Nexell Therapeutics Inc. ("Nexell" or the "Company") is an Irvine,
California-based biotechnology company. Nexell's principal subsidiary,
Nexell of California, Inc. ("NCI"), is developing products utilizing cell
selection technology in cell therapy for cancer and other life-threatening
diseases. NCI is a leader in cell selection technology and currently sells
cell selection products in Europe, the United States and Canada.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared on a going-concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained
operating losses and negative cash flows from operations since inception;
however, management believes that existing cash and cash equivalents and
other liquid assets, its ability to adjust spending based on results of
operations and market conditions and potential funds availability under its
equity financing arrangement with Aqua Wellington North American Equities
Fund, Ltd. will enable the Company to continue to operate for the
foreseeable future.
Consolidation
The accompanying consolidated financial statements include the
accounts of Nexell, NCI and its subsidiaries, Vimrx Genomics, Inc., Innovir
Laboratories, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Foreign Currency Translation
The financial position and results of operations of the Company's
foreign subsidiaries are determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at
the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments resulting from the use of differing exchange rates
from period to period are included in accumulated other comprehensive loss
in shareholders' equity. Gains and losses resulting from foreign currency
transactions included in the Company's results of operations were not
material in any of the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents of $12,119,000 and $28,695,000 at December
31, 2000 and 1999, respectively, consist of money market deposits, bank
deposits and a mutual fund that invests in short duration bonds. For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments which have maturities of three
months or less when acquired to be cash
F-9
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
equivalents. The Company holds no collateral for these financial
instruments. Cash and cash equivalents subject the Company to
concentrations of credit risk.
Inventories
Inventories, which consist only of finished goods, are stated at the
lower of cost or market determined under the FIFO method.
Fixed Assets
Fixed assets consist of office and laboratory equipment and
leasehold improvements stated at cost.
Equipment is depreciated on a straight-line basis over its estimated
useful lives that range from 3 to 15 years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset. The cost and related accumulated
depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
Expenditures for maintenance and repairs that do not materially extend
the useful lives of the assets are charged to operations as incurred.
Intangible Assets
Goodwill represents the excess of acquisition costs over the fair
value of net assets of purchased businesses and is being amortized on a
straight-line basis over 12.5 years. Other intangibles primarily consist of
patents, trademarks, license agreements and the estimated fair value of the
workforce acquired in the 1997 acquisition of NCI. Such intangibles are
being amortized on a straight-line basis over periods from 4 to 15 years.
In 1998, when management determined that Innovir's operations would be
shut down and the employment of the workforce would be discontinued, the
remaining value of the related goodwill, $517,000, was charged to expense.
Other Assets
Other assets consist of security deposits which will be recovered upon
termination of the related leases, prepaid VAT deposits and a long-term
prepaid royalty.
Revenue Recognition
The Company recognizes revenue from the sale of instruments,
biologicals, reagents and related products at the time such products are
shipped from the finished goods warehouse. Upon shipment, title and risk of
loss transfers to the customer and the earnings process is considered
complete. Except for warrantied defects, sales of the Company's products
are not subject to right of return. The Company recognizes revenue from a
long-term technology and distribution agreement over the life of the
agreement.
F-10
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax assets may be
reduced, if necessary, by a valuation allowance for any tax benefits which
are not expected to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock Based Compensation
The Company accounts for stock-based compensation arrangements with
employees using the intrinsic-value method pursuant to Accounting
Principles Board Opinion No. 25 (APB No. 25) Accounting For Stock Issued To
Employees, and related interpretations. Accordingly, no accounting
recognition is given to stock options issued to employees that are granted
at fair market value until they are exercised. Under the provisions of FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25", issued in March
2000 and which the Company has adopted, changes in vesting schedules,
exercise prices and number of shares awarded result in revaluing options at
the date of the change by a charge to compensation expense. Pro forma net
loss and net loss per share are presented in note 11 as if the fair value
method had been applied.
Stock options issued to non-employees are recorded at the fair value
of the stock options at the performance commitment date. Upon exercise, net
proceeds, including income tax benefit realized, are credited to equity.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding during the period. Diluted net loss
per share is computed using the weighted average number of shares of common
stock outstanding and potentially dilutive common shares outstanding during
the period. Potentially dilutive common shares consist of stock options and
warrants using the treasury stock method but are excluded if their effect
is antidilutive.
F-11
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Stock options and warrants, excluding Class A performance warrants
(see note 10), to purchase 4,643,061, 4,960,209, and 2,871,856 shares of
common stock were outstanding at December 31, 2000, 1999 and 1998,
respectively. Stock options and warrants outstanding were not included in
the computation of diluted earnings per share as the Company incurred
losses in all periods presented.
Impairment of Long-Lived Assets
The Company reviews fixed assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Recoverability of these
assets is measured by comparison of its carrying amount, including the
unamortized portion of any allocated goodwill, to future undiscounted cash
flows the assets are expected to generate. If fixed assets and certain
identifiable intangibles are considered to be impaired, the impairment to
be recognized equals the amount by which the carrying value of the assets,
including any allocated goodwill, exceeds fair market value. Measurement of
the amount of impairment may be based on appraisal, market values of
similar assets or estimates of future discounted cash flows resulting from
use and ultimate disposition of the asset.
Fair Value of Financial Instruments
Financial instruments include receivables, accounts payable and
investments. The carrying amount of these instruments approximate fair
value due either to their short-term nature or because the Company believes
the instrument could be exchanged in a current transaction for that
carrying amount.
Comprehensive Loss
Comprehensive loss consists of net loss, net unrealized gains on
securities and foreign currency translation adjustments and is presented in
the table below. Accumulated other comprehensive income (loss) is included
as a component of shareholders' equity.
2000 1999 1998
------------ ------------ ------------
Net loss $(28,095,000) $(35,673,000) $(34,963,000)
Net unrealized gain
in investment securities 2,851,000 -- --
Translation adjustment (241,000) (25,000) 60,000
------------ ------------ ------------
Total comprehensive loss ($25,485,000) ($35,698,000) $(34,903,000)
============ ============ ============
The cumulative foreign currency translation adjustment included as a
component of accumulated other comprehensive income (loss) was $(246,000),
$(5,000), and $20,000 at December 31, 2000, 1999 and 1998, respectively.
No income tax expense or benefit was allocated to the net unrealized
gain in investments or to the foreign currency translation adjustments
recorded in 2000, 1999 and 1998, respectively, due to the Company's
significant net operating loss tax carryforwards.
F-12
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
assets and liabilities as well as the disclosure of contingent assets and
liabilities as of the dates of the balance sheets and revenues and expenses
for the periods presented. Actual results could differ from those
estimates.
New and Proposed Accounting Standards
Statement of Financial Accounting Standards No. 133 -" Accounting for
Derivative Instruments and Hedging Activities" , as amended, is effective
January 1, 2001 and requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company believes that
implementation of SFAS No. 133 as amended will have no material impact on
its financial statements.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", as amended, which for the Company became effective
during the fiscal quarter beginning October 1, 2000. SAB No. 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company
adoption of SAB No. 101 had no material impact on the Company's financial
statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25". Under the
provisions of this Interpretation, which the Company has adopted, changes
in vesting schedules, exercise prices and number of shares awarded result
in revaluing options at the date of the change by a charge to compensation
expense. Adoption of this guidance resulted in $1,408,000 being recognized
as compensation expense in 2000 as a result of the accelerated vesting of
certain options after the July 1, 2000 adoption date.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(3) Reverse Stock Split
At the June 14, 2000 annual meeting of stockholders, the stockholders
approved, and on June 15, 2000 the Company effected, a one-for-four reverse
stock split of the Company's outstanding common stock. An amount equal to
the par value of the common shares exchanged as a result of this reverse
stock split was transferred from common stock to additional paid in
capital. This transfer has been reflected in the Consolidated Statement of
Changes in Shareholder's Equity at December 31, 1997. All prior period
common share and per share information presented in the Consolidated
Financial Statements and notes thereto have been adjusted to give
retroactive effect to the reverse stock split.
F-13
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(4) Acquisitions
Acquisition of 80.5% of the Immunotherapy Division of the Biotech Business
Group of Baxter Healthcare Corporation
On December 17, 1997, the Company completed its acquisition of the
intellectual property and intangible assets, other than trademarks, of the
Immunotherapy Division (the "Division") of the Biotech Business Group of
Baxter, for 2,750,000 shares of the Company's Common Stock and 66,304
shares of the Company's Series A Preferred Stock; and the transfer of such
intangible assets to a newly organized subsidiary, NCI, in exchange for
80.5% of NCI's common stock. Concurrently, NCI acquired the tangible
assets, business, trademarks and certain obligations of the Division in
exchange for the payment to Baxter of 19.5% of NCI's common stock and a
warrant entitling Baxter to purchase an additional 6% of NCI's common stock
for $6,000,000. In addition, the Company purchased $10,000,000 principal
amount of NCI's 6.5% convertible subordinated debentures for $10,000,000
and Baxter purchased $30,000,000 principal amount of such debentures for
$30,000,000. The Company's debentures eliminate on consolidation. The
acquisition was accounted for as a purchase.
The fair values of the 2,750,000 shares of the Company's Common Stock,
the 66,304 shares of the Company's Series A Preferred Stock and the warrant
to purchase an additional 6% of NCI's common stock were $23,696,000,
$66,304,000 and $2,100,000, respectively, as of the closing date of
December 17, 1997.
In addition, the Company entered into a series of agreements pursuant
to which Baxter agreed to (i) perform manufacturing services; (ii) supply
certain products and components; (iii) have the exclusive rights to
distribute certain of the products and instruments which it sold to NCI;
(iv) provide engineering and product development services and certain
transitional services for NCI; (v) sublicense certain technology to NCI;
and (vi) comply with a noncompetition and confidentiality agreement. In
connection with the product development agreement, the Company may pay up
to $21,000,000 to Baxter as and when certain product development and
regulatory approvals are achieved. The $21,000,000 represents the maximum
potential amount that could be paid by the Company when, and if, certain
FDA and European regulatory approvals are obtained and is not related to
the provision of services by Baxter. As the amount of the contingent
consideration, if any, was not determinable nor was the achievement of the
approvals considered probable at the date of acquisition, it was excluded
from the determination of the cost of the acquisition. Upon obtaining the
respective regulatory approval, the Company will record a liability for the
related contingent consideration and an increase to goodwill to be
amortized over the remaining estimated useful life of the originally
recorded goodwill of 12.5 years.
Baxter provides manufacturing services to the Company on an ongoing
basis with respect to NCI's products at cost, and marketing services are
provided at a certain margin.
F-14
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Acquisition of Minority Interest in NCI
In May 1999, Nexell acquired the minority interest of Baxter in the
Company's principal business unit and then 80.5% subsidiary, NCI. NCI is
now a wholly owned subsidiary of Nexell. Baxter retained its right to
certain milestone payments from NCI.
Baxter's 19.5% interest in NCI (consisting of common stock, warrants
and convertible subordinated debentures), was exchanged for:
. 750,000 shares of common stock;
. An adjustment of the conversion price of the 70,282 outstanding
shares of the Company's Series A Preferred Stock owned by Baxter
from $22.00 per share to $11.00 per share, which Series A
Preferred Stock was convertible as of June 17, 1999 into
approximately 6,394,000 shares of common stock, subject to
adjustment for stock splits and combinations, certain dividends
and distributions and reclassification, exchange or substitution;
. A warrant expiring May 27, 2006 to purchase 1,300,000 shares of
common stock at a price of $4.60 per share, subject to adjustment
from time to time in the event of cash dividends, stock
dividends, stock subdivision, stock splits, stock combinations or
reverse stock splits; and
. Approximately $33,000,000 principal amount of 6 l/2% Convertible
Subordinated Debentures ("Debentures") (replacing the $30,000,000
principal amount of NCI's 6 l/2% convertible subordinated
debentures plus accrued interest through the closing date of the
acquisition) convertible, commencing November 30, 2002, into
common stock at a conversion price equal to 95% of the average of
the closing prices of the common stock on the NASDAQ Stock Market
for the 30 consecutive trading days preceding the date of
conversion. The Debentures bore interest at 6 l/2% per annum and
were due November 30, 2004. Interest was to accrue until November
30, 2002, and, together with one-third of the outstanding
principal, was to be payable annually commencing November 30,
2002. Approximately $22,000,000 in principal amount of Debentures
was to be convertible into common stock commencing November 30,
2002 at the discretion of Baxter, and approximately $11,000,000
in principal amount of Debentures was to be convertible only with
permission of the Company. The Debentures were retired in
November 1999 in connection with the Company's private placement
financing (see note 10).
As a result of the May 1999 transaction, the Company recorded
approximately $6,282,000 in additional goodwill which is equal to the fair
market value of the common stock issued. Such goodwill is being amortized
over twelve years.
F-15
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Acquisition of CellPro Assets
On January 29, 1999, the Company completed the purchase of certain
assets of CellPro Incorporated ("CellPro"). Assets purchased included
substantially all of CellPro's intellectual property rights, patents,
antibodies and related cell banks, and license rights. These assets were
acquired in exchange for 470,553 shares of common stock with a fair market
value of $3,000,000. The fair market value was determined based upon the
average closing price of the Common Stock for the 15 business days which
ended prior to the closing, or $6.36 per share. The transaction was
accounted for as an asset purchase and the purchase price was allocated to
patents and licenses.
In March 1999, the Company repurchased from CellPro and retired
156,851 shares of Common Stock in exchange for a cash payment of $628,000
(5) Restructuring Costs
In 1998, the Company discontinued funding its 85% owned subsidiary,
Innovir, and in order to reduce operating expenses, Innovir has closed all
operations and has discontinued research and development activities.
Innovir continues to seek partners, licensees or purchasers of its
technology.
The three operating locations, Cambridge, England, Gottingen, Germany,
and New York, were closed in 1998. The total number of employees terminated
as a result of the restructuring was 44, all of which were terminated by
December 31, 1998, with termination payments completed in 1999.
Fixed assets of the closed facilities, consisting mainly of laboratory
equipment, were sold. Approximately zero and $100,000 of fixed assets held
for sale were included in fixed assets, net, on the accompanying
consolidated balance sheets as of December 31, 2000 and 1999. The fixed
asset impairment charge was determined as the difference between the net
book value of the assets and the estimated net proceeds from sale.
The Company relocated its corporate headquarters in early 1999. In
conjunction with the closure of the former headquarters in Wilmington,
Delaware in 1999, the Company recorded a restructuring charge of $502,000
comprised of $390,000 in severance related costs and a fixed asset
impairment charge of $112,000. Due to the office closure, the Company
decided to dispose of substantially all of the existing office furniture
and fixtures. Based upon an independent third-party appraisal of the
furniture and fixtures, the Company recorded a charge of approximately
$112,000 at the time such assets were removed from service to reduce the
assets' carrying amount to the estimated fair value of $25,000. All such
assets were sold in 1999.
In addition, eight employees were terminated as a result of the
restructuring and move of the Company's headquarters. The employees were
notified in January 1999 of their pending termination and the termination
benefits they were to receive. All severance related payments of $390,000
were made prior to December 31, 1999.
F-16
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(6) Research Contracts and Other Agreements
In the normal course of business, the Company is party to various
research contracts, collaborative agreements, employment agreements, and
other commitments. Significant contracts and agreements are described
below.
Research Agreements with Columbia University
In November 1998, the Company entered into an agreement with Columbia
University to terminate certain research agreements. The Company paid
Columbia $900,000 and was released from all obligations to Columbia under
those agreements. The $900,000 termination payment is presented as
"Contract settlement" on the accompanying consolidated statements of
operations. No assets were written off nor were any liabilities assumed as
a result of the termination of this agreement.
Agreements with Baxter
As described in note 4, the Company is party to numerous contracts
with Baxter.
Under the terms of the Hardware and Disposable Manufacturing
Agreement, the Antibody Manufacturing and Storage Agreement and the
Hardware and Disposables Supply Agreement, NCI purchased products from
Baxter, and Baxter purchased products from NCI under the Marketing, Sales
and Distribution Agreement (see note 8).
In 1999, the Company terminated certain agreements with Baxter whereby
the Company assumed direct control for all sales and distribution of its
products. As a result, the Company repurchased $4,359,000 of inventory
previously sold to Baxter. Additionally, the Company entered into a royalty
agreement pursuant to which Baxter will receive a royalty of 5% of net
sales of Isolex and related cell therapy products from January 1, 2001
through December 17, 2008.
Hypericin Agreement
Pursuant to an agreement with New York University and YEDA Research
Development Co., Ltd., the Company was granted a worldwide exclusive
license to commercialize and exploit natural hypericin and synthetic
hypericin compounds to inactivate viruses and retroviruses as a therapeutic
or preventive treatment for viral or retroviral diseases, and for anti-
glioma (brain tumor) indications. The agreement requires the Company to
protect the licensors and their related parties (consultants and
scientists) from damages arising out of the conduct of the research project
and the use or practice of the research technology, products or processes
by the Company or its related parties. The Company must also maintain
employer's liability insurance for all its employees engaged in work
involving the research project.
In addition, the Company is required to make royalty and related
payments to the licensors under the agreements consisting of: (1) royalties
of 7% on net sales of products licensed; (2) royalties of
F-17
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
4.4% on net sales of products sublicensed; (3) 40% of payments from third
parties to fund research and development and (4) 12% of consideration
received from an entity selling licensed products.
Commencing June 1, 1993, minimum annual royalty payments of $100,000
are due until the later of the expiration of the licensors' patent or 15
years from the first commercial sale of products under the agreement. The
minimum annual royalty was paid during 2000, 1999 and 1998.
The Hypericin license agreement covers thirteen patents and patent
applications. Seven patents have been issued in the United States, with
expiration dates from February 2007 to April 2013. For the remaining
unissued U.S. patents, the earliest expiration date will be seventeen years
from the date of issue. The foreign patents, all of which are counterparts
to the U.S. patents, have been issued in various countries with various
expiration dates (85 individual foreign patents by country issued for the
13 patents). Most of the foreign patents have 20-year terms, and none of
the foreign patents will expire before its U.S. counterpart expires. The
Company has not recorded any commercial sales under the agreement to date.
Takara Shuzo Co., Ltd. Distribution and Co-Development Agreement
On May 9, 2000, the Company announced it had entered into a strategic
alliance with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing,
foods and biomedical company in Japan. Pursuant to such agreements, Takara
will become the exclusive distributor of the Company's cell therapy
products in Japan, Korea, Taiwan and China and the parties will engage in
development collaborations in gene therapy. In exchange for the
distribution rights, Takara paid the Company a non-refundable net fee of
$2.25 million. This amount is being recognized as revenue over the five
year term of the agreement.
(7) Investments
At December 31, 2000 and 1999, a portion of the Company's excess cash
was invested in a mutual fund, the "Black Rock Low Duration Bond Portfolio"
(the "fund") which invests in asset backed securities, bonds and various
other commercial obligations. The fund may, from time to time, use certain
derivatives in its investment strategy. For financial statement purposes,
amounts invested in the fund are considered to be cash equivalents. Amounts
invested in the mutual fund were $4,720,000 and $28,113,000 at December 31,
2000 and 1999, respectively. Additionally, the Company maintains excess
cash required for short-term needs in daily money market funds with
financial institutions.
During 1996, the Company purchased for $800,000 an aggregate of
457,143 shares of the common stock of Epoch Pharmaceuticals, Inc.
("Epoch"), warrants to purchase 450,000 shares of Epoch's common stock at
$2.00 per share and warrants to purchase an additional 450,000 common
shares at $3.00 per share, which warrants expired on October 1, 1997 and
October 1, 1998, respectively. In connection therewith, Epoch released the
Company and its affiliates from any claims Epoch might have with respect to
Innovir's subsidiary, Ribonetics. These securities are freely tradeable and
accordingly are reflected in the financial statements at market value.
On August 13, 1999 Innovir closed the sale of a family of patents and
patent applications to Ribozyme Pharmaceuticals, Inc. ("RPI"), a Boulder,
Colorado-based company engaged in the research
F-18
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
and development of ribozyme technology. The patent and patent applications
sold are related to certain proprietary chemically modified ribozymes. In
the sale, Innovir received $25,000 cash, 134,000 shares of RPI common stock
and seven-year warrants to purchase 350,000 additional shares of RPI common
stock at $12.00 per share. During 2000, the Company sold all 134,000 shares
of RPI common stock for $3,818,000, recognizing a gain of $3,231,000.
The investment in Epoch is accounted for under Statement of Financial
Accounting Standards No. 115 - "Accounting for Certain Investments in Debt
and Equity Securities", as the investment does not represent more than 20
percent of the voting stock of the investee and the Company does not
exercise significant influence over the investee's operations and financial
policies. The investment in Epoch is classified as available-for-sale.
(8) Supplemental Balance Sheet Information
Fixed assets consist of the following:
December 31,
---------------------------
2000 1999
----------- ------------
Office and laboratory equipment $11,268,000 $14,076,000
Computers 2,464,000 1,841,000
Leasehold improvements 1,474,000 1,432,000
----------- -----------
15,206,000 17,349,000
----------- -----------
Less: accumulated depreciation 7,042,000 6,417,000
----------- -----------
Fixed assets, net $ 8,164,000 $10,932,000
=========== ===========
Accrued expenses consist of the following:
December 31,
---------------------------
2000 1999
----------- -----------
Miscellaneous accrued expenses $ 1,280,000 $ 596,000
Professional fees ----- 256,000
Accrued payroll and related costs 1,055,000 1,656,000
Relocation 393,000 534,000
Royalties 79,000 110,000
----------- -----------
$ 2,807,000 $ 3,152,000
=========== ===========
Intangible assets are comprised of the following:
December 31,
---------------------------
2000 1999
----------- ------------
Goodwill $36,075,000 $36,075,000
Patents and trademarks 10,230,000 10,230,000
Workforce 3,490,000 3,490,000
Other 1,611,000 1,260,000
----------- -----------
51,406,000 51,055,000
Less: accumulated amortization 12,034,000 7,864,000
----------- -----------
Intangible assets, net $39,372,000 $43,191,000
=========== ===========
F-19
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Accounts receivables from related parties are due primarily from
Baxter. The 2000 and 1999 receivables from related party of $1,576,000 and
$1,248,000, respectively, are related to receivables due on product sales
under the Marketing, Sales and Distribution Agreement and in geographic
areas in which Baxter continued to distribute the Company's products
subsequent to the November 1999 termination of the Marketing, Sales and
Distribution Agreement. Sales to Baxter were $ 1,513,000, $8,032,000 and
$13,443,000 in the years ended 2000, 1999 and 1998, respectively.
Accounts payable due to related parties are due primarily to Baxter.
The $2,821,000 and $4,279,000 due in 2000 and 1999, respectively, relate to
payments due for purchases of inventory under the Hardware and Disposables
Manufacturing, Hardware and Disposables Supply, Antibody Manufacturing and
Storage, and Services Agreements.
The various agreements with Baxter provide for net 60 day payment
terms and net payments are settled by check or bank wires within the 60 day
terms. The Agreements provide for right of offset between the Company and
Baxter.
(9) Leases
The Company leases its facilities and certain equipment under
noncancelable operating leases expiring through November 2004. The facility
lease provides for monthly rental payments adjusted yearly based upon the
consumer price index. Rental expense for the years ended December 31, 2000,
1999 and 1998 for operating leases aggregated approximately $916,000,
$969,000, and $930,000, respectively.
At December 31, 2000, the future minimum lease commitments under these
leases are as follows:
Year Ended December 31, Operating Leases
----------------------- ----------------
2001 $ 744,000
2002 714,000
2003 670,000
2004 635,000
2005 -0-
----------
Total minimum lease payments $2,763,000
==========
In 2000, the Company executed an agreement to sell certain
equipment, the majority of which was partially depreciated, to Baxter at
its then current net book value. This equipment was subsequently leased
back to the Company under a three-year lease that has been accounted for as
a capital lease. Included in fixed assets are assets held under capital
leases totalling $2,550,000.
F-20
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Future minimum lease payments under capital lease obligations at
December 31, 2000 are as follows:
2001 $ 910,000
2002 910,000
2003 1,292,000
----------
Total minimum lease payments 3,112,000
Less amount representing interest 562,000
----------
Net present value of minimum lease payments 2,550,000
Less current portion 638,000
----------
Long term capital lease obligation $1,912,000
==========
(10)Shareholders' Equity
On June 15, 2000, the Company effected a one-for-four reverse split of
its common stock and concurrently reduced the authorized shares of common
stock, par value $.001, from 160,000,000 to 80,000,000. The Company's
Board, at its sole discretion, can issue series of preferred stock with
each series having its own rights, privileges, and qualifications
determined by the Board. The Company is authorized to issue up to 1,150,000
shares of preferred stock, of which 78,967 shares of Series A Preferred and
63,000 shares of Series B Preferred are outstanding.
Series A Preferred Stock rights are as follows:
On May 25, 1999, the shareholders of the Company approved certain
changes to the terms of the Series A Preferred Stock through an amendment
to the Certificate of Incorporation to:
. Set the conversion price of the Series A Preferred Stock at $11.00
per share. The Certificate of Incorporation previously provided
that the conversion price be set in July 1999 based on the market
price of the common stock at that time, subject to a maximum
conversion price of $30.00 per share and a minimum conversion price
of $22.00 per share.
. Eliminate the anti-dilution provision reducing the conversion price
of the Series A Preferred Stock in the event the Company were to
issue common stock, or securities convertible into common stock,
prior to June 17, 1999 at a price below the conversion price then
in effect.
Holders of Series A shares have no voting rights and are entitled to
receive dividends payable in-kind at the rate of 6% of the Liquidation
Preference ($1,000 per share) per share per annum, as and when declared by
the Board of Directors, before any dividend or distribution is declared,
set apart or paid upon the common stock. The Series A shares are not
subject to any mandatory redemption or sinking fund provisions.
At December 31, 2000, 1999 and 1998, Series A share dividends
amounting to $4,481,000, $4,227,000 and $3,988,000, respectively, were
payable. As of December 17, 2000, $4,469,000 of in-kind dividends were
declared by the Board of Directors.
F-21
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Series B Preferred Stock rights are as follows:
On November 24, 1999, the Company entered into a Securities Agreement
(the "Securities Agreement") with John Hancock Mutual Life Insurance
Company, Metropolitan Life Insurance Company, Massachusetts Mutual Life
Insurance Company, The Lincoln National Life Insurance Company, and certain
of their affiliates (the "Purchasers").
Pursuant to the terms of the Securities Agreement, the Company issued
and sold to the Purchasers, for an aggregate price of $63,000,000, 63,000
shares of newly-designated Series B Cumulative Convertible Preferred Stock
of the Company (the "Series B Preferred Stock"), Put Rights (the "Put
Rights") issued by Baxter, Class A Warrants of the Company (the "Class A
Warrants"), and Class B Warrants of the Company (the "Class B Warrants").
Each share of the Series B Preferred Stock is convertible at the
option of the holder at any time until November 24, 2006 (at which time
conversion is automatic), into common stock at a price of $11.00 per share,
subject to anti-dilution adjustment in certain circumstances. The Series B
Preferred Stock is convertible, in the aggregate, into 5,727,272 shares of
common stock.
Holders of Series B Preferred Stock do not have voting rights except
as required by Delaware law and for certain matters specified in the
Certificate of Designation. Cash dividends are payable on the Series B
Preferred Stock at the rate of 3% of the liquidation preference, payable
semi-annually. No dividends may be declared or paid on the common stock or
Series A Preferred Stock if dividends on Series B Preferred Stock are in
arrears. Also, in the event of any cash dividends on Common Stock, the
holders of Series B Preferred Stock are entitled to participate on an as-if
converted basis.
The Put Rights provide the Purchasers with the ability to cause Baxter
to purchase the Series B Preferred Stock from November 24, 2002 until
November 24, 2004, unless terminated earlier under the circumstances
described in the Put Right Certificate. The purchase price to be paid by
Baxter would reflect a per annum compounded return to the Purchasers equal
to 5.91%.
The Class A Warrants are exercisable for 15 business days commencing
November 24, 2004 (provided the Put Right has not been exercised), at an
exercise price of $.04 per share, subject to anti-dilution adjustment in
certain circumstances, into a number of shares of common stock, up to a
maximum of 1,500,000 shares, that is dependent on the average of the last
reported sale prices of the common stock for the 10 trading days preceding
November 24, 2004. The maximum number of shares is issuable if the price of
the common stock is $12.00 or less, and no shares are issuable if the price
of the common stock is greater than $20.00. If the stock price is between
$12.01 and $20.00, the number of shares that is issuable decreases by
250,000 for each $2.00 increment that the stock price exceeds $12.00. The
Class A Warrants may only be transferable together with the Series B
Preferred Stock.
The Class B Warrants are currently exercisable until December 16,
2004, for an aggregate of 750,000 shares of common stock, at an exercise
price of $12.00, subject to anti-dilution adjustment in certain
circumstances.
F-22
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
During 2000, Series B Preferred cash dividends amounting to $1,880,000
were paid.
(11) Stock Option Plans
Stock Option Plans - Employees, Directors and Consultants
The Company has four stock option plans (the "1990 Plan," the "1995
Directors' Plan," the "1997 Plan," and the "1998 Plan").
Under the 1990 Plan, 600,000 shares of common stock were reserved for
issuance upon exercise of either incentive or non-incentive options, which
were granted from time to time by a committee of the Board of Directors to
employees, directors, consultants, agents, independent contractors, and
others who contributed to the Company's success. The terms of the options
were up to ten years and were exercisable as determined by the committee,
provided that the option did not become exercisable before six months from
the date of grant. The grant prices could be no less than 50% and 100% of
the fair market value for non-incentive and incentive options,
respectively, and were generally granted at the market close price on the
day prior to the grant. The options accelerated upon a change in control as
defined in the 1990 Plan. The Plan expired on July 9, 2000, and no
additional options are available for grant under the 1990 Plan. Generally,
options vested at a rate of 25% per annum on the anniversary date of grant.
In August 1995, the Company adopted the 1995 Directors' Plan
authorizing the issuance of five-year options to purchase an aggregate of
230,000 shares at an exercise price equal to the fair market value of
common stock at date of grant. All of the options were granted to Directors
under the 1995 Directors' Plan and no further options are available for
grant. As of December 31, 2000, all options available under the 1995
Directors' Plan have been exercised.
On May 25, 1999, the 1997 Plan was amended to increase the number of
shares issuable upon exercise of options granted under the 1997 Plan from
500,000 to 750,000 shares and on June 14, 2000, the 1997 Plan was amended
to increase the number of shares of common stock issuable upon exercise of
options granted under the 1997 Plan from 750,000 to 1,312,500 shares. The
shares of common stock are reserved for issuance upon exercise of either
incentive or non-incentive options, which may be granted from time to time
by a committee of the Board of Directors to employees, directors,
consultants, agents, independent contractors and others who contribute to
the Company's success. The terms of the options may be up to ten years and
are exercisable as determined by the committee, provided that the option
does not become exercisable before six months from the date of grant. The
grant prices must be no less than 50% and 100% of the fair market value for
non-incentive and incentive options, respectively, and are generally
granted at the market close price on the day prior to the grant. The
options accelerate upon a change in control as defined in the 1997 Plan. At
December 31, 2000, there were 119,837 options available for grant under the
1997 Plan. Generally, options vest 25% per annum on the anniversary date of
grant.
Under the terms of the 1998 Plan, up to an aggregate of (i) 250,000
shares of NCI common stock and (ii) 750,000 shares of common stock of the
Company were reserved for issuance upon the exercise of non-incentive
options which may be granted from time to time by a committee of the Board
F-23
NEXELL THERAPEUTICS INC. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
of Directors to employees, directors, consultants, agents, independent
contractors and others who contribute to the Company's success. The terms
of the options may be up to ten years and are exercisable as determined by
the committee. Each grant originally provided for an exercise price of
$5.00 per share of NCI common stock (approximately $6.68 per share of
common stock of the Company in the event such options became exercisable
for the Company's common stock). As a result of NCI becoming a wholly owned
subsidiary of the Company in May 1999, all outstanding options converted
automatically to options to purchase common stock of the Company. The
options accelerate upon a change in control as defined in the 1998 Plan. At
December 31, 2000, there were 27,682 options available for grant under the
1998 Plan. Generally, options vest at 25% per annum on the anniversary date
of the grant.
The Company had consultant option agreements with certain consultants
who were also directors of the Company. A total of 325,000 options were
granted under these consulting agreements with a five year term with an
exercise price of $3.76. In 1995, the aggregate value of these options were
determined to be $351,000 and was amortized over the vesting period and has
been fully amortized as of December 31, 2000. All such options have been
exercised.
A total of 50,000 options with a ten year term at an exercise price of
$5.88 were granted in connection with a March 1996 agreement whereby
certain directors agreed to guarantee operating funds if needed through
September 1996. All 50,000 options remain outstanding at December 31, 2000
and expire on March 12, 2006.
Presented below is a summary of stock option plans activity for the
years shown:
Weighted Avg. Options Weighted Avg.
Options Exercise Price Exercisable Exercise Price
-------- -------------- ----------- --------------
Balance at December 31, 1997 977,187 $ 7.16 403,989 $ 5.60
Granted 1,076,692 6.64 -
Exercised - - -
Cancelled (144,504) 7.76 -
--------------------------------------------------------------------------------
Balance at December 31, 1998 1,909,375 $ 6.84 637,197 $ 6.24
Granted 791,675 6.08 -
Exercised (19,703) 2.76 -
Cancelled (441,282) 10.32 -
--------------------------------------------------------------------------------
Balance at December 31, 1999 2,240,065 $ 5.96 1,073,281 $ 5.44
Granted 998,255 15.82 -
Exercised (600,042) 4.64 -
Cancelled (406,347) 16.99 -
--------------------------------------------------------------------------------
Balance at December 31, 2000 2,231,931 $ 8.73 1,039,014 $ 6.55
================ ====== ========= ======
F-24
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following table summarizes information for options outstanding and
exercisable at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -----------------------
Number Weighted Number
Range of Outstanding Average Weighted Exercisable Weighted
Exercise As of Remaining Average As of Average
Prices 12/31/2000 Contractual Life Exercise Price 12/31/2000 Exercise Price
- --------------------------------- ---------- ---------------- -------------- ---------- --------------
$ 0.00 $ 5.88 210,043 7.58 $ 4.66 136,533 $ 4.57
$ 6.00 $ 6.00 237,334 6.33 $ 6.00 216,450 $ 6.00
$ 6.12 $ 6.64 215,688 7.48 $ 6.40 152,147 $ 6.44
$ 6.68 $ 6.68 740,245 7.49 $ 6.68 407,898 $ 6.68
$ 6.76 $11.25 240,699 8.16 $ 8.07 110,361 $ 8.45
$13.38 $13.38 21,500 9.47 $13.38 0 $ 0.00
$13.88 $13.88 6,250 9.42 $13.88 0 $ 0.00
$14.88 $14.88 432,797 9.50 $14.88 0 $ 0.00
$15.50 $15.50 50,000 9.50 $15.50 0 $ 0.00
$16.00 $16.00 77,375 9.18 $16.00 15,625 $16.00
- --------------------------------- --------- ---- ------ --------- ------
$ 0.00 $16.00 2,231,931 7.97 $ 8.73 1,039,014 $ 6.55
Note: Option prices and quantities for the 1998 Plan have been adjusted due
to the conversion from options for NCI stock to options for Nexell stock as
described above.
At December 31, 2000, there were 147,519 additional shares available
for grant under the Plans. The per share weighted-average fair value of the
options granted during 2000, 1999 and 1998 are estimated at $14.02, $5.20
per share and $4.80 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999 1998
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected volatility 176% 109% 88%
Risk free interest rate 6.1% 5.6% 5.3%
Expected Life 5 years 5 years 5 years
------- ------- -------
The Company applies APB 25 in accounting for its employee stock option
plans and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the grant price
of the option at the date of grant. In the event that the fair value of the
underlying common stock is equal to or below the grant price of the option
at the date of grant, no compensation expense is recognized in the
financial statements. Had the Company determined compensation cost based on
the fair value at the date of grant for its stock options under
F-25
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
SFAS 123, the Company's net loss applicable to common stock would have been
increased to the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net Loss:
As reported $34,481,000 $40,091,000 $38,951,000
Pro forma $39,417,000 $43,291,000 $41,307,000
Loss per share:
As reported $ 1.84 $ 2.24 $ 2.32
Pro forma $ 2.10 $ 2.42 $ 2.46
Warrants to Acquire Common Stock
As of December 31, 2000, the Company had 1,303,923 common stock
subscription warrants (the "Warrants") (Nasdaq National Market NEXLW)
outstanding to purchase 361,130 shares of common stock at an exercise price
of $5.40 per share, exercisable through June 20, 2006. The Warrants, which
have been issued pursuant to a Warrant Agreement dated June 17, 1996,
previously had an exercise price of $6.00 per share and had been
exercisable for 549,798 shares, but the exercise price and exchange ratio
were adjusted as a result of additional issuances of derivative securities
by the Company in 1999 (see below).
In December 1996, the Company issued other warrants to an individual
to purchase 91,250 shares of common stock at an exercise price of $.04 per
share, exercisable through May 21, 2006. Warrants were exercised to
purchase 30,416 shares in the year ended December 31, 1997 and warrants
were exercised to purchase 60,834 shares in the year ended December 31,
2000. There were no warrants outstanding at December 31, 2000.
In May 1999, the Company issued warrants to Baxter to purchase
1,300,000 shares of common stock at an exercise price of $4.60 in exchange
for warrants Baxter had held in NCI (see note 4).
In November 1999 the Company issued Class A Warrants and Class B
Warrants to certain institutional investors (see note 10).
As of December 31, 2000, there were total warrants outstanding to
purchase 3,911,130 shares of common stock exercisable at a weighted-average
exercise price of $4.34.
Compensation Expense
The grant of nonemployee director restricted stock was charged to
unearned compensation in shareholders' equity at the intrinsic value and is
recognized in expense over the vesting period of four years. The fair value
of the stock options granted to certain consultants, some of whom are also
directors, was estimated on the date of grant using the Black-Scholes
option pricing model and charged to unearned compensation in shareholders'
equity and is recognized in expense over the vesting period of two to five
years. Compensation expense recognized under the Nonemployee Director
Restricted
F-26
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Stock Award Plan and for stock options granted to certain consultants, some
of whom are also directors, was $137,000, $161,000 and $171,000 in 2000,
1999 and 1998, respectively. All compensation expense related to these
plans was recognized by December 31, 2000. The grant of a stock option to a
former officer of the Company at lower than market value in 1999 was
charged to unearned compensation in shareholder's equity at the intrinsic
value and was being recognized in expense over the vesting period of four
years. During 2000, the former officer terminated his employment and the
remaining expense of approximately $1,400,000 was recognized as a result of
the accelerated vesting of the former officer's options. Compensation
expense recognized related to these stock options was $61,000 and $20,000
in 2000 and 1999, respectively.
(12) Employee Benefit Plans
Effective January 1, 1998, the Company established a defined
contribution plan which is available to all employees 18 years or older.
Participants may contribute up to 15% of their compensation and are 100%
vested in their contributions. The Company matches 50% of each
participant's contribution up to a maximum of 3% of a participant's
compensation. The Company's matching contributions totaled approximately
$267,000, $250,000 and $202,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
(13) Income Taxes
The components of loss before income taxes are as follows for the
years ended December 31:
2000 1999 1998
----------------------------------------------------
U.S. $(26,903,000) $(34,729,000) $(33,205,000)
Foreign (1,192,000) (944,000) (1,758,000)
----------------------------------------------------
Total $(28,095,000) $(35,673,000) $(34,963,000)
====================================================
Income tax expense, consisting solely of state and local taxes, was
$19,000, $11,000 and $2,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
F-27
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The differences between income taxes for financial reporting purposes
and the U.S. statutory rate are primarily due to permanent differences and
the change in valuation allowance.
The components of the deferred taxes at December 31, 2000 and 1999
are as follows:
2000 1999
------------ ------------
Net operating loss carryforwards $ 60,242,000 $ 62,846,000
Research & Other tax credit carryforwards 5,891,000 4,285,000
Capitalized R & D expenses 4,172,000 3,262,000
Accrued expenses and other 3,475,000 3,279,000
------------ ------------
Total deferred tax asset 73,780,000 73,672,000
Valuation allowance (73,780,000) (73,672,000)
------------ ------------
Net deferred tax asset -- --
============ ============
Deferred tax assets and liabilities reflect the net tax effects of
temporary differences between carrying amounts of assets and liabilities
for financial reporting purposes and the carrying amounts used for federal
income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences
representing net future deductible amounts become deductible. Due to the
uncertainty of the Company's ability to realize the benefit of the deferred
tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 2000 and 1999.
As of December 31, 2000, the Company has net operating loss
carryforwards for federal and state income tax purposes of approximately
$151,451,000 and $98,764,000, respectively, which will expire beginning in
the year 2000 through the year 2020 if not utilized. Of the $131,394,000 in
federal net operating losses, $36,823,000 is restricted based on separate
return limitation year rules. These losses can only be used to offset
income from the subsidiaries in which the losses originated.
As of December 31, 2000, the Company has tax credit carryforwards for
federal and state income tax purposes of approximately $4,235,000 and
$1,656,000, respectively, which are available to offset future tax
liabilities, if any, through 2020.
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss and tax credit carryforwards is limited following a
greater than 50% change in ownership during a three-year period. Due to the
Company's prior and current year equity transactions, the Company's net
operating loss and tax credit carryforwards may be subject to an annual
limitation generally determined by multiplying the value of the Company on
the date of the ownership change by the federal long-term rate. Any unused
annual limitation may be carried forward to future years for the balance of
the net operating loss and tax credit carryforward period.
F-28
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(14) Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or
liquidity.
(15) Geographic Information
The Company operates in one industry segment: the development,
manufacture and marketing and distribution of specialized instruments,
biologicals, reagents, sterile plastic sets and related products used in ex
vivo cell research and therapies.
Year ended December 31,
Revenues by geographic area 2000 1999 1998
----- ---- ----
United States $11,244,000 $14,451,000 $13,443,000
Europe 6,167,000 510,000 ---
Rest of World 769,000 --- ---
----------- ----------- -----------
$18,180,000 $14,961,000 $13,443,000
=========== =========== ===========
F-29
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Operating loss by geographic area:
United States $(23,837,000) $(34,869,000) $(35,091,000)
Europe (7,468,000) (599,000) ---
Rest of World (1,187,000) --- (4,132,000)
------------ ------------ ------------
$(32,492,000) $(35,468,000) $(39,223,000)
============ ============ ============
Identifiable assets:
United States $ 69,932,000 $ 92,481,000 $ 88,941,000
Europe 5,523,000 1,188,000 ---
Rest of World --- 170,000 403,000
------------ ------------ ------------
$ 75,455,000 $ 93,839,000 $ 89,344,000
============ ============ ============
Depreciation and amortization:
United States $ 7,360,000 $ 6,987,000 $ 6,312,000
Europe 323,000 12,000 ---
Rest of World --- --- 298,000
------------ ------------ ------------
$ 7,683,000 $ 6,999,000 $ 6,610,000
============ ============ ============
Capital expenditures:
United States $ 182,000 $ 3,054,000 $ 1,102,000
Europe 858,000 269,000 ---
Rest of World --- --- 26,000
------------ ------------ ------------
$ 1,040,000 $ 3,323,000 $ 1,128,000
============ ============ ============
Prior to 1999, all sales were made to Baxter in the United States for
global distribution. The Company reported all sales within the United
States, while Baxter distributed products within the United States and
throughout the world. The Company operated foreign subsidiaries in the
United Kingdom and Germany. In 1998, management adopted a plan to close the
operations of those subsidiaries. The 1998 operating loss for Rest of World
resulted solely from the operations of those two subsidiaries. The 2000 and
1999 operating losses for Europe were mainly the result of the operations
of the Company's Belgium subsidiary, which was established in 1999.
The Company generated approximately 5%, 67% and 100% of revenues from
one customer, Baxter, in 2000, 1999 and 1998, respectively.
(16) Subsequent Event (UNAUDITED)
In January 2001, the Company entered into a Common Stock Purchase
Agreement with Acqua Wellington North American Equities Fund, Ltd. ("Acqua
Wellington") pursuant to which it may, from time to time and at the Company's
sole discretion, beginning in January 2001 and ending November 2002, present
Acqua Wellington with draw down notices constituting an offer to purchase its
common stock over an agreed to number of consecutive trading days. Acqua
Wellington will be required to purchase a pro rata portion of shares on each day
during the trading period on which the daily weighted average price of the
common stock exceeds a threshold price determined by the Company and set forth
in the draw down notice. In addition, the Company may, at its sole discretion,
grant Acqua Wellington an option to purchase additional shares during such
trading period. The aggregate amount Acqua Wellington will be required to invest
during any draw down period will depend on the threshold price established by
the Company for the draw down period. Acqua Wellington may, at its sole
discretion, elect not to purchase shares if the threshold price is set at less
than $3.00 per share. The aggregate amount to be invested by Acqua Wellington
under terms of this agreement is up to a maximum of $23 million in addition to a
$2 million draw down, representing 749,063 shares of the Company's common stock,
executed on the date of the agreement. From January 2001 through March 29, 2001,
the Company sold an additional 1,091,552 shares of its common stock for
$2,000,000 under this agreement.
F-30
NEXELL THERAPEUTICS INC, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(17) Selected Quarterly Financial Data (UNAUDITED)
Selected quarterly financial information for each of the two most
recent fiscal years is as follows:
3 Months 3 Months 3 Months 3 Months Year Ended
Ended March Ended June Ended September Ended December December
31, 2000 30, 2000 30, 2000 31, 2000 31, 2000
---------------------------------------------------------------------------------------
Revenue $4,784,000 $ 4,630,000 $ 4,498,000 $4,268,000 $18,180,000
Gross profit 2,241,000 1,961,000 1,767,000 842,000 6,811,000
Net loss 7,731,000 8,254,000 5,492,000 6,618,000 28,095,000
Net loss applicable to
common stock $9,306,000 $ 9,841,000 $ 7,079,000 $8,240,000 $34,466,000
Basic and diluted loss
per share $ 0.51 $ 0.53 $ 0.37 $ 0.43 $ 1.84
3 Months 3 Months 3 Months 3 Months Year Ended
Ended March Ended June Ended September Ended December December
31, 1999 30, 1999 30, 1999 31, 1999 31, 1999
---------------------------------------------------------------------------------------
Revenue $5,513,000 $ 1,563,000 $ 2,243,000 $5,642,000 $14,961,000
Gross profit 2,355,000 (17,000) 323,000 2,683,000 5,344,000
Net loss 6,119,000 8,991,000 11,922,000 8,641,000 35,673,000
Net loss applicable to
common stock $7,158,000 $10,042,000 $12,973,000 $9,918,000 $40,091,000
Basic and diluted loss
per share $ .41 $ .57 $ .71 $ .55 $ 2.24
F-31
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Balance at Balance
Beginning At End
of Year Additions Deductions of Year
------- --------- ---------- -------
2000 Allowance for Doubtful $26,000 $12,000 (a) $1,000 $37,000
Accounts
1999 Allowance for Doubtful - - $26,000 (a) - - $26,000
Accounts
1998 Allowance for Doubtful - - - - - - - -
Accounts
- ------------------------------------------
(a) Provision charged to earnings
S-1
INDEX TO EXHIBITS
Exhibit
Number Description Method of Filing
------ ----------- ----------------
2.4 Asset Purchase Agreement dated October 10, 1997 by and among Baxter
Healthcare Corporation ("Baxter"), the Company and NCI. (1)
2.5 Asset Acquisition Agreement dated February 18, 1999, by and among
Baxter, the Company and NCI. (2)
2.6 Securities Agreement dated as of November 24, 1999 among the Company and
the Purchasers named in Schedule I thereto (certain schedules are
omitted and the Company agrees to furnish supplementally a copy to the
Commission upon request). (3)
3.1 The Company's Amended and Restated Certificate of Incorporation as
amended to date. (24)
3.2 The Company's Amended and Restated By-Laws as amended to date. (25)
4.4 Warrant Agreement dated June 17, 1996 between the Company and American
Stock Transfer & Trust Company. (4)
4.5 The Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the Delaware
Secretary of State on December 16, 1997 creating the Series
A Preferred Stock and amendments subsequent thereto
(included in Exhibit 3.1 above).
4.6 The Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the Delaware
Secretary of State on May 25, 1999 modifying the Series A
Preferred Stock (included in Exhibit 3.1 above).
4.7 The Company's Series 1 6 1/2% Convertible Subordinated Debenture Due
November 30, 2004 issued May 28, 1999 to Baxter. (5)
4.8 The Company's Series 2 6 1/2% Convertible Subordinated Debenture Due
November 30, 2004 issued May 28, 1999 to Baxter. (5)
4.9 The Company's Certificate of Designation filed with the
Delaware Secretary of State on November 24, 1999 creating
the Series B Preferred Stock (included in Exhibit 3.1
above).
10.3 The Company's Amended and Restated 1990 Incentive and Non-Incentive Filed herewith
Stock Option Plan, as amended to date. electronically
Exhibit
Number Description Method of Filing
------ ----------- ----------------
10.11 The Company's 1995 Outside Directors Stock Option Plan. (7)
10.12 Letter agreement dated August 7, 1995 between the Company and Lindsay A.
Rosenwald, M.D. (7)
10.13 Stock Option Agreement dated August 7, 1995 between the Company and
Lindsay A. Rosenwald, M.D. (7)
10.14 Consulting and Stock Option Agreement dated November 17, 1995 between
the Company and Eric A. Rose, M.D. (7)
10.15 Stock Option Agreement dated November 17, 1995 between the Company and
Donald G. Drapkin. (7)
10.16 The Company's 1996 Non-Employee Director Restricted Stock Award Plan. (7)
10.18 Research Agreement dated as of March 7, 1997 among the Company, The
Trustees of Columbia University in the City of New York and Vimrx
Genomics, Inc. (8)
10.19 The Company's 1997 Incentive and Non-Incentive Stock Option Plan, as
amended to date. (26)
10.20 Employment Agreement dated October 30, 1996 between the Registrant and
Richard L. Dunning. (4)
10.21 Employment Agreement dated August 26, 1996 between the Registrant and
David A. Jackson, Ph.D. (4)
10.22 Factor IX Research Agreement dated March 28, 1997 between Registrant and
the Trustees of Columbia University in the City of New York. (9)
10.24 Employment Agreement dated May 19, 1997 between the Company and L.
William McIntosh. (10)
10.24(a) Letter Agreement dated May 28, 1998 between NCI and L. William McIntosh.
(2)
10.24(b) Letter Agreement dated May 28, 1998 between the Company and L. William
McIntosh. (2)
10.25 Hardware and Disposables Manufacturing Agreement between NCI and Baxter,
dated as of December 17, 1997. (11)
10.26 Antibody Manufacturing and Storage Agreement between NCI and Baxter,
dated as of December 17, 1997. (12)
10.27 Hardware and Disposables Supply Agreement between NCI and Baxter, dated
as of December 17, 1997. (13)
Exhibit
Number Description Method of Filing
------ ----------- ----------------
10.28 Marketing, Sale and Distribution Agreement between NCI and Baxter, dated
as of December 17, 1997. (14)
10.29 Non-Competition and Confidentiality Agreement between the Company and
Baxter, dated as of December 17, 1997. (15)
10.30 Sublicense (Chiron) between NCI and Baxter, dated as of December 17,
1997. (16)
10.31 Sublicense (Dorken) between NCI and Baxter, dated as of December 17,
1997. (17)
10.32 Sublicense (First Becton-Dickinson) between NCI and Baxter, dated as of
December 17, 1997. (18)
10.33 Sublicense (Second Becton-Dickinson) between NCI and Baxter, dated as of
December 17, 1997. (19)
10.34 Warrant, dated December 31, 1997, issued by Innovir to the Company. (20)
10.35 Agreement, dated December 31, 1997, between the Company and Innovir
relating to future equity purchases. (20)
10.37 Termination Agreement dated November 11, 1998 between the Company, VGI
and Columbia. (21)
10.38 Asset Purchase Agreement, dated October 28, 1998, between CellPro,
Incorporated and NCI. (2)
10.39 The Company's Common Stock Purchase Warrant issued May 28, 1999 to
Baxter. (5)
10.40 Asset Transfer Agreement dated June 30, 1999 among the Company, NCI and
Baxter. (22)
10.41 Royalty Agreement dated June 30, 1999 among the Company, NCI and Baxter.
(22)
10.42 Credit Agreement dated June 30, 1999 between the Company and Baxter. (22)
10.43 Letter Agreement dated as of April 15, 1999 between the Company and
Richard L. Dunning. (23)
10.44 Letter Agreement dated as of August 20, 1999 between the Company and L.
William McIntosh. (23)
10.45 Letter Agreement dated as of April 15, 1999 between the Company and
David A. Jackson, Ph.D. (23)
10.46 Form of Put Right Certificate. (3)
Exhibit
Number Description Method of Filing
------ ----------- ----------------
10.47 Form of Class A Warrant. (3)
10.48 Form of Class B Warrant.(3)
10.49 Registration Rights Agreement dated as of November 24, 1999 among the
Company and the Investors identified therein. (3)
10.50 Side Letter Agreement dated as of November 24, 1999 among the Company,
Baxter International, Inc. and the other parties signatory thereto. (3)
10.51 Put Agreement dated as of November 24, 1999 between the Company and
Baxter International, Inc. (3)
10.52 Voting Agreement dated December 17, 1997 among Baxter, the Company and
certain other parties. (27)
10.53 Registration Rights Agreement dated December 17, 1997 between Baxter and
the Company. (27)
10.54 Non-Incentive Stock Option Agreement dated November 9, 1999 between the
Company and Joseph A. Mollica. (27)
10.55 Non-Incentive Stock Option Agreement dated November 9, 1999 between the
Company and Richard L. Casey. (27)
10.56 Non-Incentive Stock Option Agreement dated November 9, 1999 between the
Company and Richard C. Piazza. (27)
10.57 Non-Incentive Stock Option Agreement dated November 9, 1999 between the
Company and Victor W. Schmitt. (27)
10.58 Non-Incentive Stock Option Agreement dated November 9, 1999 between the
Company and Victor W. Schmitt. (27)
10.59 Stock Option Agreement dated March 12, 1996 between the Company and
Donald G. Drapkin. (27)
10.60 Amendment dated May 25, 1999 to Consulting and Stock Option Agreement
dated November 17, 1995 between the Company and Eric A. Rose, M.D. (27)
10.61 Amendment dated May 25, 1999 to Stock Option Agreement dated November
17, 1995 between the Company and Donald G. Drapkin. (27)
10.62 Form of Indemnification Agreement between the Company and Members of the
Board of Directors. (27)
Exhibit
Number Description Method of Filing
------ ----------- ----------------
10.63 Amendment dated November 30, 1999 to Asset Transfer Agreement dated June
30, 1999, among the Company, NCI and Baxter. (27)
10.64 Distribution Agreement with Takara Shuzo Co., Ltd. (28)
10.65 Co-Development Agreement with Takara Shuzo Co., Ltd. (28)
10.66 Letter Agreement between L. William McIntosh and the Company dated
August 10, 2000 (29)
10.67 Sale-leaseback agreement between Baxter Healthcare Corp. and the Company Filed herewith
dated December 21, 2000 electronically
10.68 Non-Incentive Stock Option Agreement dated February 18, 2000 between the Filed herewith
Company and Dennis E. Van Epps electronically
10.69 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and William A. Albright, Jr. electronically
10.70 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and Michel L. E. Bergh electronically
10.71 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and Richard L. Dunning electronically
10.72 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and David J. Hirsch electronically
10.73 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and Amy Ross electronically
10.74 Non-Incentive Stock Option Agreement dated July 3, 2000 between the Filed herewith
Company and Dennis E. Van Epps electronically
10.75 Non-Incentive Stock Option Agreement dated October 10, 2000 between the Filed herewith
Company and David J. Hirsch electronically
10.76 Non-Incentive Stock Option Agreement dated October 10, 2000 between the Filed herewith
Company and Daniel Levitt electronically
10.77 Non-Incentive Stock Option Agreement dated October 10, 2000 between the Filed herewith
Company and Amy Ross electronically
10.78 Non-Incentive Stock Option Agreement dated December 7, 2000 between the Filed herewith
Company and Richard L. Casey electronically
10.79 Non-Incentive Stock Option Agreement dated December 7, 2000 between the Filed herewith
Company and Joseph A. Mollica electronically
10.80 Non-Incentive Stock Option Agreement dated December 7, 2000 between the Filed herewith
Company and C. Richard Piazza electronically
Exhibit
Number Description Method of Filing
------ ----------- ----------------
10.81 Non-Incentive Stock Option Agreement dated December 7, 2000 between the Filed herewith
Company and Eric A. Rose electronically
10.82 Non-Incentive Stock Option Agreement dated December 7, 2000 between the Filed herewith
Company and Victor W. Schmitt electronically
10.83 1998 Non-Incentive Stock Option Plan of the Company for Directors, Filed herewith
Employees and Consultants of Nexell of California, Inc., as amended to electronically
date.
10.84 Common Stock Purchase Agreement dated January 9, 2001, between Acqua
Wellington North American Equities Fund, Ltd. and the Company (30)
21 List of Subsidiaries (27)
23(a) Consent of KPMG LLP Filed herewith
electronically
Note: The Company's commission file number for all filings is number 0-19153.
(1) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed January 2, 1998 and incorporated herein by reference thereto.
(2) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference thereto.
(3) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed December 7, 1999 and incorporated herein by reference thereto.
(4) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by
reference thereto.
(5) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed June 29, 1999 and incorporated herein by reference thereto.
(6) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference thereto.
(7) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference thereto.
(8) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed March 21, 1997 and incorporated herein by reference thereto.
(9) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference thereto.
(10) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 and incorporated herein
by reference thereto.
(11) Filed as Exhibit number 10.1 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(12) Filed as Exhibit number 10.2 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(13) Filed as Exhibit number 10.3 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(14) Filed as Exhibit number 10.4 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(15) Filed as Exhibit number 10.5 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(16) Filed as Exhibit number 10.6 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(17) Filed as Exhibit number 10.7 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(18) Filed as Exhibit number 10.8 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(19) Filed as Exhibit number 10.9 to the Company's Current Report on Form 8-K
filed January 2, 1998 and incorporated herein by reference thereto.
(20) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference thereto.
(21) Filed as the same number Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 and incorporated herein by
reference thereto.
(22) Filed as the same number Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference thereto.
(23) Filed as the same number Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 and incorporated herein by
reference thereto.
(24) Filed as Exhibit 4.1 to the Company's registration statement on Form S-8
filed with the Commission on July 6, 2000 (Registration Number 333-40860),
and incorporated herein by reference thereto.
(25) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference thereto.
(26) Filed as Exhibit 4.3 to the Company's registration statement on Form S-8
filed with the Commission on July 6, 2000 (Registration Number 333-40860),
and incorporated herein by reference thereto.
(27) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated herein by
reference thereto.
(28) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference thereto.
(29) Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and incorporated herein
by reference thereto.
(30) Filed as Exhibit 10.1 to the Company's Post Effective Amendment No. 1 to
its registration statement on Form S-3 filed with the Commission on
January 10, 2001 (Registration Number 333-51440), and incorporated herein
by reference thereto.