-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R5uOY+ZiBBnywaJxNm0w8+oPm6rQwFhQoGlV6SDrud8c50fYBRVAZciozBuzvJlJ F60Iv8iPWvD3j2dTkGNnmQ== 0000833299-97-000008.txt : 19970403 0000833299-97-000008.hdr.sgml : 19970403 ACCESSION NUMBER: 0000833299-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERAGEN INC CENTRAL INDEX KEY: 0000833299 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 042662345 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19855 FILM NUMBER: 97573795 BUSINESS ADDRESS: STREET 1: 97 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748 BUSINESS PHONE: 5084352331 MAIL ADDRESS: STREET 1: 97 SOUTH ST CITY: HOPKINTON STATE: MA ZIP: 01748 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 Commission file number 0-19855 SERAGEN, INC. (Exact name of registrant as specified in its charter) Delaware 04-2662345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 97 South Street, Hopkinton, MA 01748 (Address of principal executive offices)(Zip Code) (508) 435-2331 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value 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 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. [X] Aggregate market value, based upon the closing sale price of the shares as reported by the Nasdaq Stock Market, of voting stock held by non-affiliates at March 27, 1997: $9,478,775 (excludes shares held by executive officers, directors, and beneficial owners of more than 10% of the Company's Common Stock). Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the registrant, or that such person is controlled by or under common control with the registrant. Common Stock outstanding at March 27, 1997 was 18,048,881 shares. -1- PART I ITEM 1. BUSINESS General Seragen is a leader in the discovery and development of a new class of therapeutic products called fusion proteins or fusion toxins ("fusion proteins"). This technology has led to the discovery of a number of molecules, two of which have been studied in clinical trials for the treatment of cancers and autoimmune diseases. The Company's lead molecule, DAB389IL-2, is currently completing Phase III clinical trials for cutaneous T-cell lymphoma ("CTCL") and a Phase I/II clinical trial for psoriasis. Seragen plans to file, in 1997, a Biologic License Application ("BLA") with the U.S. Food and Drug Administration ("FDA") for approval of the molecule's use in CTCL patients who have received previous treatment with other agents. The Company has requested consideration for accelerated approval from the FDA, a process which provides for a decision in as little as six months on applications for products intended to treat certain life-threatening illnesses. The FDA will decide at the time of filing if the Company's BLA qualifies for the accelerated approval process. A second molecule developed from the same technology, DAB389EGF, is in a Phase I/II clinical trial for non-small cell lung cancer. Seragen's proprietary Fusion proteins consist of fragments of diphtheria toxin genetically fused to a ligand (a targeting and binding mechanism) that targets specific receptors on the surface of disease-causing cells. The Fusion proteins are designed to: - bind to specific receptors present on the surface of disease-causing cells; - penetrate the target cells; and - destroy the target cells' ability to manufacture proteins, thereby killing the targeted cells and destroying their ability to spread disease. Seragen builds its Fusion proteins from a template based on the genetic components of the diphtheria toxin molecule. Using this platform, the Company has genetically engineered six Fusion proteins, each of which consists of fragments of diphtheria toxin fused to a different targeting ligand, such as a polypeptide hormone or growth factor. The Company has conducted clinical trials of two proteins, DAB389IL-2 and DAB389EGF, for applications in oncology, dermatology, HIV, and autoimmune disorders. Although it has created four other proteins, namely DAB389IL-4, DAB389IL-6, DAB389CD-4, and DAB389MSH, for oncology, infectious disease, and autoimmune disorders, the Company has, at this point, focused its clinical efforts on its two leading molecules, DAB389IL-2 and DAB389EGF. The Company entered into a strategic alliance with Eli Lilly and Company ("Lilly") in 1994 to develop DAB389IL-2 for cancer. The Lilly alliance has provided Seragen with funding to take its first product through Phase III clinical trials for CTCL. Through this alliance, Lilly has exclusive worldwide development, distribution, and marketing rights to DAB389IL-2 for the treatment of cancer, except in certain Asian countries. All pre-clinical and clinical programs other than those covered by the Lilly alliance have thus far been funded by the Company independently. During 1996, the Company effected three issuances of preferred stock to meet certain of its financing needs. On May 29, 1996, the Company raised net proceeds of $3.8 million through the sale of 4,000 shares of the Company's non-voting convertible Series A Preferred Stock ("Series A Shares") to investors outside the United States. On July 1, 1996, the Company restructured its arrangement with certain guarantors of the Company's June 1995 $23.8 million bank financing so that the guarantors directly assumed the Company's liability to the banks. In exchange for the guarantors satisfaction of the Company's liability to the banks, the Company issued 23,800 shares of its Series B Preferred Stock ("Series B Shares") to the guarantors. The Series B shareholders also received warrants to purchase a total of 5,950,000 shares of Seragen Common Stock at an exercise price of $4.00 per share. In addition to these warrants, the investors may receive additional warrants pursuant to anti-dilution provisions. In connection with this, the Company entered into a -2- number of transactions by which the Company transferred all of its patents to a subsidiary, which in turn made a collateral assignment of the patents to the Series B shareholders as security for dividend payments. See "Liquidity and Capital Resources." On September 30, 1996, the Company raised proceeds of $5 million through the sale of 5,000 shares of the Company's non-voting convertible Series C Preferred Stock ("Series C Shares") in a private placement with Boston University. On February 18, 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to Boston University ("Boston University" or "B.U.") or a designated affiliate for $5 million. The closing of the transaction is subject to, among other things, approval by the Company's stockholders. B.U. has paid the Company $4.5 million as a deposit and has assumed responsibility for the facility's operations, including responsibility for operating costs. The Company currently may use this deposit to fund its operations. At the closing, a majority of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Both the deposit and the operating costs paid by B.U. are subject to refund in the event that conditions for closing are not met. Simultaneously, the Company entered into a service agreement with B.U. providing for the purchase by the Company of certain services related to product research, development, manufacturing, clinical trials, quality control, and quality assurance. This service contract expires in January 1999 and is subject to early termination provisions, as defined, including the option of B.U. to terminate the agreement if losses during a contract year exceed $9.0 million and the Company does not reimburse B.U. for the losses in excess of $9.0 million. The service contract may be renewed for two successive one-year terms at the option of the Company. The Company has the option to repurchase the assets comprising the manufacture and clinical operations facilities. The Company has agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of this contract, respectively. The fees can be mutually increased or decreased, but may not be reduced to less than $4.3 million per contract year. The service agreement is expected to substantially reduce operating costs in research and development as Seragen will be contracting solely for the services that the Company requires for clinical and manufacturing purposes. The Company was organized as a Massachusetts corporation in 1979 in a joint venture between Boston University and several of its scientific faculty members. It adopted its present name in 1980 and was reincorporated as a Delaware corporation in February 1982. Since 1985, the Company has focused substantially all of its efforts and resources on research and development of its Fusion protein technology. Boston University became the Company's majority stockholder in 1987 and was the Company's principal source of working capital from that time until the Company's initial public offering in April 1992. The Company's executive offices and laboratories are located at 97 South Street, Hopkinton, Massachusetts 01748, and its telephone number is (508) 435-2331. Product Development Update The Company's Fusion protein technology has led to the discovery of a number of molecules, two of which have been subjects of clinical trials for the treatment of cancers and/or autoimmune diseases. The Company's lead molecule, DAB389IL-2, is currently in Phase III clinical trials for CTCL and a Phase I/II clinical trial for psoriasis. A second molecule developed from the same technology, DAB389EGF, is in a Phase I/II clinical trial for non-small cell lung cancer and may be applicable in a variety of solid tumor cancers. Interleukin-2 ("IL-2") Fusion Protein (DAB389IL-2) Seragen has designed two versions of an Interleukin-2 fusion protein that combine the cell-killing action of diphtheria toxin and the specific cell-targeting ability of the growth factor, IL-2. IL-2 Fusion proteins bind to the IL-2 receptor ("IL-2R") on activated lymphocytes and malignant T-cells and B-cells. Once bound to the surface receptor, the molecule is internalized and the cell-killing portion of the fusion toxin passes into the cell where it inhibits protein synthesis, ultimately causing cell death. -3- DAB486IL-2, Seragen's first version of IL-2 Fusion protein to be studied, was evaluated in a series of Phase I/II clinical trials and established the Company's rationale for IL-2R targeted therapy. Clinical evaluation of DAB486IL-2 was discontinued shortly after the development of DAB389IL-2 because DAB389IL-2 is more potent biologically and more economical to manufacture. Cancer Cancer is characterized by uncontrolled growth of malignant cells capable of forming secondary tumors or metastases at remote sites. Conventional cancer therapy includes surgery, chemotherapy and radiation. Patients may be treated with one of these approaches but are more commonly treated with combinations. Although chemotherapy and radiation are effective methods for killing cells, they can not target specific cells and, therefore, they cause serious adverse effects in patients. Response rates to cancer therapy vary enormously depending on the stage of disease and the type of cancer. In the case of some solid tumors, early diagnosis and treatment can result in cures and/or long-term remissions. In later stage disease, treatment is generally ineffective. New therapies are particularly needed to induce remission of any duration in patients with solid tumors and refractory non-Hodgkin's lymphoma. Recent efforts to improve cancer therapy have focused on ways to target malignant cells more selectively. Seragen's receptor-targeted Fusion proteins are part of the emerging field of targeted therapeutics, a field which also includes monoclonal antibodies and receptor antagonists. Research indicates that IL-2 receptors are expressed on the surface of some malignant cells in a variety of T-cell and B-cell leukemias and lymphomas, including non-Hodgkin's lymphoma and CTCL. In 1995, 50,900 new patients were diagnosed with non-Hodgkin's lymphoma alone in the U.S. (See Table I.) Table 1
ESTIMATED NEW BLOOD AND LYMPH CANCER CASES, U.S. 1995 - ----------------------------------------------------- Leukemia: Lymphocytic Leukemia................... 11,000 Granulocytic Leukemia.................. 11,100 Other & Unspecified Leukemia........... 3,600 Total............................... 25,700 Other Blood & Lymph Tissues: Hodgkin's Disease...................... 7,800 Non-Hodgkin's Lymphoma................. 50,900 Multiple-Myeloma....................... 12,500 Total .............................. 71,200
Source: A Journal of the American Cancer Society. January/February 1996 Vol.46 No.1 Based on research data and screening studies conducted by Seragen, the Company estimates that approximately 50% of these new patients will have IL-2 receptors on the surface of their malignant cells. This population of patients represents the initial potential market for the use of DAB389IL-2 in treating cancer. Cutaneous T-Cell Lymphoma (CTCL) CTCL is an infrequent, low-grade, non-Hodgkin's lymphoma, composed of malignant T-lymphocytes, and typically manifesting itself in the skin. Worldwide, the prevalence and incidence are low. In the United States, estimates of prevalence range from 5,000 to 10,000 cases with an incidence of 500 to 1,000 new cases diagnosed each year. -4- There is currently no formally approved drug therapy for CTCL. CTCL patients experience significant disability from frequent skin infection, disfigurement, pruritus (itching), and pain, and the disease is ultimately fatal. Patients with patch/plaque skin lesions alone are often treated with topical therapies such as nitrogen mustard, psoralen phototherapy, or electron beam radiation. However, remission without maintenance therapy is unusual, and patients often experience acute and chronic adverse effects and may eventually become unresponsive to these agents. Patients with generalized skin involvement, lymph node enlargement, and/or visceral involvement require combination and/or systemic therapies. These therapies (chemotherapy, interferon-alpha, and/or retinoids) are variably applied depending on the particular treating center's experience. Efficacy of these treatments is inconsistent and often associated with significant short and long term adverse effects. In addition, extension of survival does not appear to be influenced by aggressive combination therapy. There is a critical medical need, therefore, for an additional, more effective and less toxic therapy to manage this malignancy. CTCL Clinical Trial Status Seragen has been investigating the usefulness of IL-2 fusion toxin proteins (DAB486IL-2 and DAB389IL-2) in patients with refractory IL-2 receptor-expressing lymphomas, including CTCL, since 1988. Treatment courses have consisted of an intravenous infusion of 15-60 minutes daily for five days, administered either once a month or every three weeks. Patients treated were no longer experiencing any clinical benefit from previously administered therapies. Six of 36 patients treated with the first molecule (DAB486IL-2) demonstrated a response as measured by at least a 50% reduction in tumor burden. The duration of response ranged from 3 months to more than six years in one patient who had a complete response and was still in remission as of this writing. Investigation continued in a Phase I/II dose-escalation trial of DAB389IL-2 in which 13 of 35 CTCL patients responded to treatment with at least a 50% reduction in tumor burden. Five of these patients cleared completely. Duration of response ranged from two to 23 months (as of the latest available information) with a median duration of six months; responses occurred at varying dose levels without a discernible difference in effectiveness among the doses used. These responses are notable because the patients enrolled in these early clinical trials were not receiving any clinical benefit from a variety of previously administered treatments. Based on the response rates seen in the Phase I/II patients, Seragen designed a Phase III program with extensive consultation from oncologists and dermatologists experienced in treating CTCL. Seragen designed this program together with its strategic alliance partner, Lilly. See "Strategic Alliance with Eli Lilly and Company." The FDA also provided guidance and comments. Seragen and Lilly finalized the protocol and initiated the Phase III program in May 1995. The first Phase III study targeted more seriously ill patients who have received extensive previous therapy and need immediate systemic (as opposed to topical) treatment. The second Phase III study is a placebo-controlled trial for earlier stage patients who have received less extensive therapy. Both of these studies are randomized and blinded to evaluate two dose levels of DAB389IL-2 in different CTCL patient populations. A third Phase III study is an open-label study for CTCL patients who have relapsed after a previous response to DAB389IL-2, patients with stable disease after eight courses of therapy in the second study and patients who had progressive disease while on placebo in the second study. The criteria for response in each of these studies have been strictly defined based on objective, measurable assessments of the patients' disease. Seragen believes these criteria set the standard for determining meaningful clinical responses among patients with CTCL. Enrollment in the first study was completed in July 1996, and approximately one-half of the number of patients sought have been enrolled in the second study. Thirty-two patients have enrolled in the third study. Based on a preliminary analysis of the first study and discussions with the FDA, Seragen plans to file a BLA during the third quarter of 1997. The BLA filing will be based on data from the first Phase III study together with data from the earlier Phase I/II clinical trials in CTCL. The Company will request consideration for -5- accelerated approval from the FDA, a process which can provide for a decision in as little as six months on applications for products intended to treat certain life-threatening illnesses. The FDA will decide at the time of filing if the Company's BLA qualifies for the accelerated approval process. The FDA has already granted "Orphan Drug" status to DAB389IL-2 for the treatment of CTCL. This designation provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases and includes a seven-year marketing exclusivity for qualified products. Autoimmune Diseases To defend the body against foreign agents, the human immune system employs specialized cells, including T-cells, which recognize disease-causing viruses, bacteria, and parasites as foreign. T-cells, an important component of the immune system, control the network of immune responses by regulating the activity of other cells in the immune system and by killing foreign cells. The same immune response that protects the body from foreign agents can also cause disease when it inappropriately attacks the body's own cells and proteins. In autoimmune diseases, the immune network mistakenly identifies "self" as "foreign" and, among other actions, produces T-cells that attack normal body cells. Such prevalent diseases as rheumatoid arthritis, psoriasis, multiple sclerosis and alopecia areata are autoimmune diseases. (See Table II.) Table II
AUTOIMMUNE DISEASE PREVALENCE (U.S.) ----------------------------------------- Psoriasis(Total)................................... 6,000,000 (Moderate-to-Severe) ............................... 1,500,000 Rheumatoid Arthritis................................ 2,500,000 Multiple Sclerosis.................................. 350,000 Alopecia Areata..................................... 2,000,000 Other............................................... 1,500,000
Source: Scientific American Medicine and National Psoriasis Foundation Conventional approaches for treating autoimmune diseases rely on broadly active immunosuppressive agents, such as corticosteroids, cyclosporine A, and methotrexate. These agents do not have specific targets, may be difficult to tolerate, and are not selective in their suppression of the immune response. Typically, they must be administered continuously to achieve therapeutic effect; resistance may develop and/or toxicity may require discontinuation of therapy. Seragen believes that specifically targeted cytotoxic agents, such as DAB389IL-2, could induce remission in certain autoimmune diseases following a brief course of therapy and may not cause the long-term toxicity that can occur with broad spectrum immunosuppressants. Research indicates that activated, high affinity IL-2 receptor-expressing lymphocytes are present in the circulation and in the affected tissue of patients in acute phases of certain autoimmune diseases, including rheumatoid arthritis, psoriasis, multiple sclerosis and alopecia areata. These findings suggest that autoimmune disorders characterized by the presence of high affinity IL-2 receptor-bearing lymphocytes may, therefore, be treatable with DAB389IL-2. Psoriasis Psoriasis is one of the most common chronic skin disorders, with an estimated two to three percent of the world population affected, including approximately 6 million Americans. In the United States, some 150,000 to 260,000 new cases are reported annually. A 1993 estimate placed the overall cost of treating psoriasis in the U.S. at over $3.0 billion. The major markets for psoriasis treatments are in the United States and Europe, while incidence rates are much lower in Asia (<=0.3%). Psoriasis is a lifelong disease characterized by chronic recurrence of thickened, red patches of skin covered with silvery scales. Occurrence involves -6- excessive proliferation of the outer layer of the skin, the epidermis. Normally, a person's epidermis is renewed by the formation of new cells about once a month, unnoticeably. In psoriasis, however, new cell production speeds up and a new outer layer of skin is reproduced every three or four days, creating psoriatic lesions. Skin involvement can range from a few psoriatic plaques on less visible parts of the body to involvement of large, prominent areas. Treatment may be required for local symptoms (such as pain, itching and the reduction of manual dexterity), cosmetic problems (such as prominent and unsightly hand, leg, or facial lesions), or both. The social and economic impact of the disease is often underestimated by physicians, other health care providers, and the general public. Especially in more severe cases, the emotional and physical impact can be disabling. The majority (approximately 70%) of psoriatic cases are mild (with <=10% body surface area ("BSA") involvement); 20 to 25% of psoriasis cases are moderate (10-20% BSA) to severe (>=20% BSA). Standard treatment for mild cases is topical medication with steroids and emollients. Light treatment with augmented ultraviolet A ("UVA") and ultraviolet B ("UVB") irradiation of the skin and systemic drugs (methotrexate and etretinate), either alone or in combination, are used to treat the patient with moderate-to-severe psoriasis. Because psoriasis is a chronic disease, the treatment goal is first to induce remission and then to use maintenance therapy to sustain the remission for as long as possible. Many of the current treatments for moderate-to-severe psoriasis have toxic side effects. To keep the toxicity of the treatments under control and to extend their usefulness, a maintenance treatment strategy is frequently employed whereby light treatment and systemic drugs are rotated. Even with this rotational therapy, however, estimates indicate that treatment is ineffective or causes unacceptable side effects for 40-50% of the moderate-to-severely affected patient population. The most commonly used therapies to treat moderate-to-severe psoriasis are light treatments (known as "PUVA" and "Goeckerman" treatments). PUVA therapy is time-consuming, inconvenient, and expensive. Patients can receive these treatments only for a limited time because of the significantly increased risk of skin cancer. Although methotrexate is now being used to treat psoriasis, it has the potential for inducing serious adverse effects on the liver and can generally be prescribed for limited periods of time. Dermatologists are also apprehensive about treatment with cyclosporine because of its potent immunosuppression, and its toxicity to the kidneys. DAB389IL-2 Opportunity in Psoriasis Intravenous ("IV") Formulation Seragen believes that the opportunity for an intravenous formulation of DAB389IL-2 in the psoriasis market lies in the moderate-to-severe patient population. An agent like DAB389IL-2 could provide targeted immunomodulation therapy against the component of the immune system believed to be involved in the pathogenesis of psoriasis, the CD8+ cytotoxic T-lymphocyte. An IV product's market would probably be limited to administration by clinics and major hospitals. Cost comparisons to current therapies, however, suggest that treatment with DAB389IL-2 could compete successfully with other systemic therapies. Subcutaneous ("SC") Formulation Seragen believes that the market for DAB389IL-2 as a psoriasis therapeutic would be substantially increased if the agent did not require frozen storage and IV administration (as the Company's present formulation does). For a subcutaneous product to capture a significant share of the psoriasis market, the product would have to be as effective as PUVA treatment, have a good safety profile and be easily administered. A lyophilized formulation would enable the dermatologist (or patient) to store the drug in a refrigerator. Subcutaneous delivery would eliminate the need for a professional trained in IV administration and could permit the local dermatologist, primary care physician, or even the patient to administer the drug. The Company is investigating subcutaneous administration of its newly developed lyophilized formulation of the agent to meet this need. Although there is no good animal model of psoriasis, encouraging results from subcutaneous administration of DAB389IL-2 in an animal tumor model have demonstrated that this route of administration can reduce tumor burden. This result is expected to be indicative of a potential anti-psoriatic effect. Seragen currently plans to initiate its first clinical trial of a subcutaneous formulation of DAB389IL-2 for psoriasis in 1998. -7- Topical Administration Some 70% of psoriatics have mild disease, for which the primary current treatments are emollients and steroids. A topically applied product for patients with mild disease could generate a much larger market opportunity, estimated at 3 to 4 million patients in the U.S. Preliminary investigation of a topical delivery technology is currently under way at Seragen. Status of Clinical Trials of DAB389IL-2 in Psoriasis Two clinical studies of DAB389IL-2 in moderate-to-severe psoriasis patients who had received prior treatment with multiple systemic therapies have been completed. A third trial is currently underway. The studies are summarized below. In both of the two completed studies, the patients' psoriasis was evaluated according to the standard Psoriasis Area and Severity Index ("PASI"). Both schedules investigated in these trials showed a significant decrease in disease severity with DAB389IL-2 administration. The trials recorded approximately 40% mean improvement in patients who had long-standing psoriasis, little or no history of spontaneous improvement or resolution, and a history of failure with treatments ranging from topical treatments to phototherapy to methotrexate and cyclosporine. In both trials, disease severity scores continued to decrease after the end of dosing. The weekly schedule of dosing produced a more rapid initial rate of improvement than the monthly schedule. Open-label, Dose Escalation Study The first clinical study of DAB389IL-2 in psoriasis was an open-label, dose-escalation trial evaluating DAB389IL-2 at dose levels of 2 to 9 micrograms per kilogram of body weight per day ("ug/kg/d") administered daily for five days a week every four weeks. Twenty-four patients (15 males and 9 females) were enrolled in the study. Ages ranged from 21 to 62 years with a mean age of 43. All patients had chronic, extensive plaque-type psoriasis of long-standing duration with a mean disease duration of 16.3 years. In 50% of the patients, psoriatic lesions covered 10% to 29% of the body surface area. Scalp and nails were affected in 22 of the 24 patients (92%), and 11 of the 24 patients (46%) had arthritis, a condition often associated with advanced psoriasis. The mean disease severity score declined steadily over the study period. By the end of the second course, the mean disease severity score had decreased by 34% from baseline in all dose groups. Improvement continued after the third course with a mean decrease in severity of 49%, after the fourth course with a mean decrease in severity of 54%, and after the sixth course with a mean decrease in severity of 68%. All these decreases were statistically significant (p<0.05). This early trial, indicated that treatment with DAB389IL-2 could reduce disease severity scores in this severely affected group of patients and warranted further study. Double-blind, Placebo Controlled Study The second study of DAB389IL-2 in psoriasis was a randomized, double-blind, placebo controlled study with three dose groups of 5, 10, and 15 ug/kg/d administered three consecutive days per week for four consecutive weeks. Forty-one patients (22 males and 19 females) were enrolled in the study. Ages ranged from 20 to 75 years with a mean age of 45; the patients had suffered from psoriasis from one to 53 years, with a mean disease duration of 18.3 years. Patients were randomly assigned to one of four protocol groups at each of eight investigational sites. Twelve patients were assigned to the placebo group, 11 were assigned to the low dose group, ten were assigned to the mid-dose group, and eight were assigned to the high dose group. -8- This trial was terminated prematurely (in December 1995) to allow the Company to conduct a broad safety review of DAB389IL-2 when one patient in the trial experienced unexpected blood clotting. After a review of this event, of the data from this trial, and the data from other trials of DAB389IL-2, the FDA authorized the Company to resume its investigation of DAB389IL-2 in psoriasis. Analysis of the available data indicated that the degree of patient improvement in this second psoriasis trial was consistent with the results of the earlier study. Overall, 12 of the 27 patients (44%) who received at least one dose of DAB389IL-2, and who had not been responding well to other therapies, exhibited at least 50% improvement from baseline disease severity scores. Statistical analysis of mean PASI scores showed that there was a statistically significant decrease in the mean disease severity score compared to baseline in all dose groups (p<0.05) and that the decrease in disease severity scores was statistically significant in DAB389IL-2 treated patients compared to placebo patients (p<0.05). Skin thickness of psoriatic plaque in the treated patients was reduced also (as measured by the difference in epidermal thickness observed in microscopic evaluation of specific plaques). Furthermore, quality-of-life index scores of patients treated with DAB389IL-2 suggested that quality of life improved with treatment. Similar responses were observed at all dose levels evaluated, although the frequency and severity of adverse events were less at lower doses. This suggested that efficacy of DAB389IL-2 in psoriasis should be further tested at the more economically desirable lower dose levels. Current Open-label, Dose Escalation Study The accumulated data from the first two psoriasis studies indicated that induced meaningful clinical responses in as many as 50% of psoriasis patients who had previously been treated heavily with other therapies. Tolerability issues suggest that three doses per week administered weekly, especially at the higher doses tested, may be too frequent. Other observations indicate that clinical improvement after a single five-day treatment may induce maximum response two weeks after administration. These data suggest that monthly administration may not be frequent enough. Therefore, the Company designed a third psoriasis trial to evaluate the safety and efficacy of administration of the lower dose range of DAB389IL-2 on a bi-weekly schedule. This ongoing Phase I/II study is designed to enroll 30 patients. Based on previous enrollment rates, Seragen expects enrollment to be complete by mid-1997. If the data from this study, in combination with data from the previous two studies, warrant it, the Company plans to design a Phase III program in moderate-to-severe psoriasis to commence as early as the first half of 1998. Other Potential Opportunities for DAB389IL-2 Rheumatoid Arthritis Rheumatoid arthritis ("RA") is a chronic, systemic disease characterized by persistent inflammation of the joints. RA is believed to be caused by an autoimmune response against joint tissue. Furthermore, expression of the high-affinity IL-2 receptor on activated lymphocytes is known to play a pivotal role in the pathogenesis of many autoimmune diseases, including RA. The Rheumatic Disease Clinics of North America report that RA affects approximately 1% of the world's population, including approximately 7,500,000 people in the United States, Western Europe and Japan. An estimated 20% of RA patients suffer from a severe form of the disease. The Company believes that this population may represent a potential market for DAB389IL-2, although the Company is not currently pursuing clinical development of this application for DAB389IL-2. In the past Seragen conducted three clinical trials of DAB389IL-2 in patients with rheumatoid arthritis: one double-blind, placebo-controlled dose-finding trial evaluating at three dose levels versus placebo; one follow-up open-label study evaluating the safety of up to four courses per year; and one open-label study evaluating the safety of concurrent administration of DAB389IL-2 and methotrexate ("MTX") in patients using methotrexate as anti-arthritic therapy. Patients in the double-blind, placebo controlled trial had suffered from severe progressive RA for an average of ten years and were not experiencing clinical benefit from currently available therapies, including -9- methotrexate. A number of patients who received DAB389IL-2 in that study demonstrated improvement according to at least four standard rheumatological criteria. As commonly noted in studies of RA, however, patients who received placebo in this study also showed some improvement, to the extent that the results in the treated patients were not deemed statistically significant. No additive toxicities were seen in the combination MTX study during concurrent administration of DAB389IL-2 and MTX. Depending on the availability of financial resources, the Company may evaluate further clinical development of DAB389IL-2 (including subcutaneous administration) in patients with RA. HIV Infection/AIDS Human immunodeficiency virus ("HIV") infection ultimately leads to severe life-threatening impairment of the immune system, resulting in the viral disease state known as acquired immune deficiency syndrome ("AIDS"). HIV causes immunosuppression by attacking and destroying T-cells, which coordinate much of the network of normal immune responses. The World Health Organization estimates that between 8,000,000 and 10,000,000 people are currently infected with HIV worldwide. Research has demonstrated that T-cell activation is required for replication of HIV. The activation event results in expression of the high affinity IL-2 receptor on HIV-infected lymphocytes. Seragen has performed a series of in vitro experiments which demonstrated the ability of DAB389IL-2 to target specifically and kill HIV-infected lymphocytes. Thus, administration of DAB389IL-2 may decrease the number of HIV-infected cells in the body, potentially reducing the amount of virus. Because the target for DAB389IL-2 is a receptor present on the activated T-cells that reproduce HIV, the use of DAB389IL-2 is an approach to treating HIV infection that should not be affected by the high rate of viral mutation that is a hallmark of the disease. This approach, therefore, would presumably not lead to viral resistance. The HIV-related application for DAB389IL-2 may lie in adjunctive therapy in combination with the nucleotide analogs (AZT, ddC, ddI, 3TC) and protease inhibitors, all of which target viral replication but are expected eventually to become ineffective as viral resistance develops. A preliminary safety study of DAB389IL-2 has been conducted in HIV infected patients. Twenty four patients were enrolled in a double-blind, randomized, dose-ranging study in patients with HIV infection. DAB389IL-2 was found to be safe at the very low doses tested. An additional study is currently planned which will evaluate subcutaneous administration of DAB389IL-2. However, the Company currently lacks the financial resources to pursue development of this application for DAB389IL-2 at this time. There can be no assurance that DAB389IL-2 or any of the Company's other potential products will have an application in treating HIV. Subcutaneous administration, however, should lead to higher dose concentrations of DAB389IL-2 in the lymphatics at the sites of HIV replication. Additional Potential Applications for DAB389IL-2 Agents like DAB389IL-2, which specifically target immune system cells, may offer a new therapeutic approach to the treatment of other disorders, such as multiple sclerosis ("MS") and alopecia areata ("AA"). However, the Company has not conducted any trials to evaluate the efficacy of DAB389IL-2 or the Company's other potential products in treating these disorders. There can be no assurance that any of the Company's products will have an application in treating MS or AA. Multiple Sclerosis MS is a disorder that affects the central nervous system. The pathological hallmark of the disease are zones of demyelination of nerve tissue, known as plaques, that vary in size and location. The cause is unknown, but abnormal immune mechanisms appear to play a role in the disease, and a viral cause is possible. It is postulated that viral infection, followed by an autoimmune response in genetically susceptible individuals, initiates the disease process. -10- MS is a disease that most commonly begins in young adulthood (onset of symptoms is rare before 15 years of age or after 40 years of age), and the course of disease is remarkably variable. There are approximately 350,000 cases in the U.S. now, and incidence of the disease appears to be increasing. Although new therapies have been approved to treat MS, therapy remains unsatisfactory. Agents like DAB389IL-2, which specifically target activated immune-system cells, may offer a new therapeutic approach to the treatment of MS. The Company is currently evaluating alternatives for studying the effects of DAB389IL-2 on this devastating disease. Alopecia Areata AA is an inflammatory disease of the hair follicle resulting in hair loss in small patches, or in the total scalp (alopecia totali), or in the total body (alopecia universalis). It affects both children and adults and affects both sexes equally. The total number of AA patients in the United States is about two million, with 50,000 to 100,000 new cases occurring annually. It affects all races and is seen worldwide. Evidence indicates that an immune system mechanism may be involved in the process leading to AA. Scientists speculate that AA follows a path similar to psoriasis, where an inflammatory component contributes to the development and maintenance of the condition. Because there are currently no effective therapies for AA, there may be an opportunity for DAB389IL-2 in this market. Dermatologists may be interested in DAB389IL-2 because it is targeted against a key component believed to be involved in the pathogenesis of the disease, the activated T-cell. The Company is currently evaluating options for studying the effects of DAB389IL-2 in AA. EGF Fusion Protein (DAB389EGF) In the U.S., the American Cancer Society estimates approximately one million new cases of solid tumor cancers per year, with approximately 500,000 related deaths each year. A significant percentage of these cases are possible candidates for treatment with a targeted therapeutic approach utilizing DAB389EGF. In several carcinomas, research has indicated that the level of EGF-receptor expression correlates strongly with the progression of the disease. Increased EGF-receptor expression is associated with refractory tumors. Enhanced EGF-receptor expression may, therefore, characterize a subset of highly aggressive tumor cells with greater metastatic potential. DAB389EGF binds specifically to the Epidermal Growth Factor ("EGF") receptor on target cells and may have therapeutic potential in solid tumors, including breast, bladder, lung, colon, prostate, esophageal, thyroid, gastric, renal, endometrial, cervical, brain and ovarian carcinomas, all of which express the EGF receptor. A cell-killing agent such as DAB389EGF may be useful for a variety of solid tumors bearing EGF receptors, including a number of tumors that are inadequately treated by any currently available therapy. Pre-clinical tests involving animal models have indicated that DAB389EGF administration results in cell death and tumor regression of EGF-receptor expressing malignancies. Lung Cancer Lung cancer is the most common organ malignancy in the U.S., with an estimated 170,000 new cases occurring in 1995. The 1995 incidence rate for lung cancer worldwide was 517,000, with worldwide incidence expected to reach 2,000,000 by the year 2000. About 60% of newly diagnosed lung malignancies are non-small cell tumors. In 1995, 157,000 Americans died of lung cancer; worldwide deaths aggregate 457,000. Lung cancer is now the leading cause of cancer deaths in the U.S. Non-small cell lung cancer ("NSCLC") has been selected as the first cancer indication to be investigated for DAB389EGF, based upon: 1) in vitro studies comparing the sensitivity of various primary tumors to DAB389EGF, and 2) the clinical improvement of an NSCLC patient in the Company's Phase I clinical trial of DAB389EGF. -11- If responses can be demonstrated, there may be an opportunity for DAB389EGF to be used in combination with the commonly used chemotherapeutic, cisplatin, as a first-line, post surgical therapy in stage II and III NSCLC. In the longer term, opportunities may exist for DAB389EGF to be used in combination with Lilly's gemcitabine, recently approved for pancreatic cancer. In early studies, gemcitabine in combination with other chemotherapeutic agents has demonstrated some promise in NSCLC. Status of Clinical Trials of DAB389EGF in Solid Tumor Cancers To date, the Company has conducted two companion Phase I clinical trials in patients with EGF-receptor expressing malignancies. The trials enrolled 52 patients to evaluate the safety of five different doses administered either consecutively or episodically. The doses administered ranged from 0.3 to 15 ug/kg/d. The patients enrolled had varying types of EGF-receptor ("EGF-R") expressing tumors, most of which were prostate, gastrointestinal, or breast tumors. All patients had metastatic disease. One of two patients enrolled with lung cancer (adenocarcinoma) had a greater than 50% reduction in tumor burden at the 6.0 ug/kg/d dose level in the episodic schedule. Three additional patients judged to have stable disease for the six-month study period were one patient with head and neck cancer (0.6 ug/kg/d, episodic dosing schedule) and two patients with prostate cancer (1.2 and 4.2 ug/kg/d, consecutive dosing schedule). A Phase I/II study is currently being conducted in patients with NSCLC. This is a dose escalation study with projected enrollment of more than 30 patients. Results are expected late in 1997. Adverse Events Associated with Clinical Trials of Fusion Proteins In all clinical trials of Seragen's Fusion proteins described in this document, and as commonly noted during investigation of and treatment with most, if not all, biological agents, adverse events associated with administration of the particular Fusion protein under investigation did occur. These events included, but were not limited to, flu-like symptoms, rash, and transient elevation of liver enzyme (transaminase) levels. Some patients have experienced adverse events requiring hospitalization. These adverse events included problems associated with the patients' underlying disease as well as those associated with treatment. In some cases, patients experiencing adverse events discontinued participation in the trial. In the majority of cases, patients continued to participate. Further testing in a larger number of patients is required to determine the safety and effectiveness of Seragen's Fusion proteins in psoriasis, rheumatoid arthritis, and lung cancer. Further testing may also be required to determine the safety and effectiveness of DAB389IL-2 in CTCL. Strategic Alliance with Eli Lilly and Company On August 3, 1994, the Company and Lilly signed an agreement to form a global strategic alliance that gives Lilly exclusive worldwide development, distribution, and marketing rights, except in certain Asian countries, to the Company's IL-2 Fusion protein for the treatment of cancer. Lilly also has the option to obtain worldwide development, distribution, and marketing rights for additional indications for IL-2 Fusion protein and for other Company products under development upon presentation of Phase II data. The Company retains exclusive rights to promote IL-2 Fusion protein and future Fusion proteins for dermatologic applications outside of oncology and will be responsible for bulk manufacturing for all indications. On August 4, 1994, under the terms of the alliance, Lilly made an initial payment to the Company of $10 million, $5 million representing payment for 787,092 shares of Company Common Stock at approximately $6.35 per share and $5 million representing an advance against Lilly's purchase of bulk product from the Company. Lilly is also required to pay the Company an additional $3 million based on the meeting of certain regulatory milestones in the development of IL-2 Fusion protein for cancer therapy. No regulatory milestone payments have been achieved to date under the agreement. In addition, Lilly reimburses the Company for costs incurred in the clinical development of IL-2 Fusion protein for cancer -12- therapy, including costs for Phase III clinical trials, the preparation of an FDA application and any FDA filing fees. The Company recorded approximately $588,000, $3,337,000 and $3,979,000 of contract revenue for such reimbursed development costs during the years ended December 31, 1994, 1995 and 1996, respectively. On May 28, 1996, Lilly and the Company amended the Sales and Distribution Agreement relating to the $5.0 million advance paid by Lilly in August 1994 against Lilly's future purchases of bulk product from the Company. The amended agreement states that the $5.0 million payment is non-refundable and Seragen has no obligation to refund the advance should no bulk purchases be made by Lilly. To the extent Lilly purchases bulk product in the future, the Company is required to pay Lilly a royalty equal to 75% of the purchase price, up to $5.0 million of total royalties. The Company has determined that the sale of bulk products under these terms will result in a potential obligation of $1.2 million if all of the $5.0 million in royalties are paid to Lilly. Accordingly, the Company recorded $5.0 million in revenue and a $1.2 million obligation on the potential sales of bulk material in the year ended December 31, 1996. Manufacturing The manufacture of the Company's Fusion proteins originates at the genetic level. First, genes that direct production of the toxic and translocation domains of the diphtheria toxin molecule are fused with genes that direct production of the desired receptor targeting domain to create a new, recombinant gene. The recombinant gene is then placed in a strain of bacteria (E. coli) which is grown by fermentation using standard biotechnology techniques. During fermentation, the recombinant gene is expressed in the bacteria resulting in the production of Fusion proteins. The fusion protein is then extracted from the bacteria and purified. Since fusion proteins are produced in recombinant bacteria using well established technology, the Company believes that its fusion proteins can be reliably produced in commercial quantities. To date the Company has produced all of its fusion proteins in the laboratory and has produced its IL-2 Fusion Protein and EGF Fusion Protein in its manufacturing facilities. The Company's manufacturing facilities are operated in accordance with current Good Manufacturing Practices ("cGMP"). The Company entered into an agreement to sell its manufacturing facility to Boston University in February 1997 pursuant to an asset purchase agreement (see "Business -- General"). Simultaneously, the Company entered into a service agreement with B.U. under which B.U. will provide certain services related to product research, development, manufacturing, clinical trials, quality control and quality assurance required by Seragen to continue clinical trials and to produce commercial quantities of DAB389IL-2 for sale. Such services will be performed to specifications outlined in the service contract. In order for this manufacturing facility to produce material that can be marketed, it must be inspected and licensed by the FDA. The Company regularly contracts with a variety of firms for certain quality control testing and fill-finish services, some of which services are essential to the Company. As of January 1996, Lilly is the Company's fill/finish contractor. Generally, these agreements may be terminated at any time by any of the parties thereto. Competition The therapeutic products which the Company is developing will compete with existing therapies for market share. In addition, a number of companies, including biotechnology companies and pharmaceutical companies, acting independently or in collaboration, are pursuing the development of novel pharmaceuticals which target the same diseases which the Company is targeting. Furthermore, academic institutions, government agencies and other public organizations conducting research may seek patent protection, discover new drugs or establish collaborative arrangements for drug research which may be competitive with the targeted therapeutic products being developed by the Company. -13- The Company's fusion proteins are designed to target cells bearing specific receptors implicated in a variety of diseases. Accordingly, competition will depend in part on the specific therapeutic applications for which the Company's compounds are developed and ultimately approved. Many of the Company's existing or potential competitors (including competitors that may be in the process of developing fusion protein products utilizing other toxins) have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market products. In addition, many of these competitors have greater experience in pre-clinical testing and human clinical trials than the Company. These competitors may develop and introduce products and processes competitive with or superior to those of the Company. In addition, the Company expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. The development by others of new treatment methods for those diseases for which the Company is developing targeted therapeutic products could render such products non-competitive or obsolete. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. A number of companies, including both large pharmaceutical companies and biotechnology companies, have been actively pursuing the development of monoclonal antibodies and immunotoxin conjugates for more than a decade. The Company is aware of two patents issued to the National Cancer Institute, United States Patent 4,892,827 and United States Patent 5,082,927 (the "Pastan Patents"), which relate to fusion proteins similar to those of the Company, in which the cytotoxic agent is pseudomonas exotoxin. Certain competitors of the Company, including certain large pharmaceutical companies, are known to have been engaged, at least in the past, in the development of fusion proteins under the Pastan Patents as potential therapeutic products for some of the same diseases which the Company is targeting. The Company is unable to assess the effect that such efforts may have on the Company's competitive position or business. Patents, Licenses and Proprietary Rights In November 1983, the Company entered into an agreement with Harvard University in Cambridge, Massachusetts, whereby the Company was granted a worldwide license under United States Patent 4,675,382 and all foreign patents and patent applications corresponding to United States Patent 4,675,382 (the "Murphy Patents"). The Harvard license provides the Company with the exclusive right to manufacture, have manufactured, sell or have sold, products made in accordance with the Murphy Patents for human and veterinary therapeutic and diagnostic uses for the life of the patents. Under certain circumstances, the license may become non-exclusive. Under the license, the Company has agreed to pay Harvard University an annual license fee until a product is marketed, and thereafter, a royalty on net sales, including a minimum royalty amount if certain sales levels are not met. The Murphy Patents relate to fusion proteins expressed as the product of a fused gene wherein the protein's naturally occurring binding domain is deleted and replaced at the genetic level by a gene encoding a cell-specific polypeptide ligand. The Company believes that the Murphy Patents are fundamental to the use of the genetically constructed diphtheria toxin molecules being developed by the Company. Although the scope of patent protection is difficult to quantify, the Company believes that, due in large part to the Murphy Patents, its patents or licenses to patents should afford adequate protection to conduct its business. The Company has also been prosecuting a patent application family directed to its core fusion protein technology and which represents an improvement in the technology disclosed in the Murphy patents. Applications are pending in the United States and many foreign countries. The Company expects that several U.S. patents directed to these improvements will issue within the next twelve months. Once issued, these patents should provide intellectual property protection of the Company's core technology for many years after the expiration of the Murphy patents. -14- The Company also has the rights to obtain licenses (many of which are, or will be, exclusive licenses) to patents and patent applications which have been filed by its institutional collaborators. Worldwide, the Company owns or holds exclusive licensing rights to over 40 issued patents, covering certain aspects of its technology, products, and the methods for their production and use. The Company intends to file patent applications with respect to subsequent developments and improvements when it believes patent protection is in its best interest. There can be no assurance that the Company's patent applications will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology. Boston University acquired Nycomed's majority interest and technology rights in the Company in August of 1987. Under the terms of the purchase and sale agreement, Nycomed received a grant of a royalty on future sales of the Company's fusion protein products as well as a right of first negotiation to market the Company's fusion protein products in Norway, Denmark, Sweden, Finland, Iceland, Belgium, the Netherlands and Luxembourg (the "Territory"). The agreement provides that, when in the business judgment of the Company it is appropriate for the Company to enter into agreements with third parties with respect to the marketing of such products, the Company will negotiate exclusively with Nycomed for 90 days with respect to the rights to market the Company's fusion protein products in the Territory. The Company has conducted such negotiations with Nycomed regarding the Company's IL-2 Fusion Protein and EGF Fusion Protein, and no agreement was reached for the marketing of these products. The Company therefore believes that any rights Nycomed may have had for marketing of the Company's IL-2 Fusion Protein and EGF Fusion Protein in the Territory have expired. The Company may need to obtain other licenses to other patents of which it is unaware. There can be no assurance that licenses will be available from the owners of such patents, or, if available, will be available on terms acceptable to the Company. Moreover, there can be no assurance that all United States or foreign patents that may pose a risk of infringement have been identified. The Company pursues a policy of seeking patent protection to preserve its proprietary technology and its right to capitalize on the results of its research and development activities and, to the extent it may be necessary and advisable, to exclude others from appropriating its proprietary technology. While the Company pursues such a policy, it also relies upon trade secrets, unpatented proprietary information and continuing technological innovation to develop and maintain its competitive position. There can be no assurance, however, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to such trade secrets, proprietary information or technology or that the Company can meaningfully protect its rights in such secrets, information and technology. All employees of the Company have signed confidentiality agreements under which they agree not to use or disclose proprietary information of the Company without the consent of the Company. Relationships between the Company's scientific consultants and collaborative research partners provide access to the Company's know-how that is generally protected by confidentiality agreements with the parties involved. However, there can be no assurance that these confidentiality agreements will be honored. In December 1994, the Company entered into a license agreement with Ajinomoto Company, Inc. which provides the Company with exclusive worldwide rights under Ajinomoto's IL-2 gene patents for the Company's fusion proteins. The Company made an up-front payment of $100,000 under this agreement and is required to make a payment of $4.3 million by May 31, 1997, which it has not made. See "Management's Discussion and Analysis of Financial Condition And Results of Operations"). In addition, the Company is required to pay a royalty of 4% of Seragen revenues or end-user revenues depending on certain conditions. Seragen is required to pay minimum royalties of $100,000 in 1997, $200,000 in 1998 and $300,000 each year thereafter. In July 1996, the Company transferred all of its patents (the "Patents") to Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the Company with an irrevocable worldwide exclusive license from STI to the Company with respect to the Patents (the "Irrevocable License Agreement"). Under the Irrevocable License Agreement, the Company is obligated to pay quarterly royalties in an amount equal to the amount of any dividend that the Series B -15- shareholders are entitled to receive but have not received by the royalty due date (which is one day after each quarterly dividend payment date for the Series B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock to Company's Series B shareholders. STI's Class B Common Stock provides for cumulative dividends payable in the same amount as any royalties payable by the Company under the Irrevocable License Agreement. STI also provided the Company with a collateral assignment of the Patents made by STI in favor of the Series B shareholders. Pursuant to an escrow arrangement, the collateral assignment of the Patents is required to be delivered to the Series B shareholders in the event that, after notice, STI fails for 60 days to pay any dividend due in respect of its Class B Common Stock. The Company did not make its royalty payment due January 1, 1997, and does not anticipate making its royalty payment due April 1, 1997. STI did not pay Class B Common Stock dividends due January 1, 1997 and April 1, 1997, and does not anticipate paying Class B Common Stock dividends due April 1, 1997. To the Company's knowledge, the Series B shareholders have not provided notice of the STI dividend payment failure to the escrow agent. In the event that STI redeems its Class B Common Stock, the escrow agent is required to deliver a reassignment of the Patents to the Company. Research and Licensing Agreements The Company has engaged in sponsored research programs through external research under agreements with various academic institutions and companies, and under consulting agreements with scientists affiliated with such institutions. Under the agreements, the Company provides periodic research funding and typically maintains options to obtain exclusive licenses to patents and patent applications which may be filed as a result of the sponsored research by the institutional partner. In general, where a patent is licensed, the license is co-terminus with the patent. From April 1, 1984, through December 31, 1996, the Company maintained a research agreement with Boston University Medical Center Hospital, formerly known as University Hospital, in Boston, Massachusetts (the "UH Research Agreements") in support of research on fusion proteins under the direction of Dr. John R. Murphy. The Company has entered into a license agreement with University Hospital (the "UH License Agreement") under which the Company has acquired exclusive rights to certain patent applications and patents arising out of the research under the UH Research Agreements. Under the UH License Agreement, the Company has been granted an exclusive license to six existing U.S. patents and patent applications and to their foreign counterparts. The Company maintained a research agreement with Beth Israel Hospital in Boston, Massachusetts (the "BIH Research Agreement"), which began August 1984 and continued until December 31, 1995, related to the control of T-cell mediated response by targeted agents under the direction of Dr. Terry B. Strom. Under the BIH Research Agreement, the Company was granted an option to obtain an exclusive license to any patent application filed on any invention conceived or reduced to practice during the course of the research. Several patent applications have been filed pursuant to the BIH Research Agreement. Two of these describe methods of treating immunological diseases and transplant rejection and have been issued as United States Patents 5,011,684 and 5,336,489 and both have been exclusively licensed to the Company. The Company believes that this method will be broadly useful in the treatment of autoimmune diseases and allograft rejection. The third, which issued as United States Patent 5,152,980, relates to a method of inducing tolerance to a foreign antigen, which the Company believes will be useful in helping it to keep therapies from being disabled by the body's immune system. The Company has exercised its option on this patent to obtain an exclusive license. Including the arrangements described above, the Company has incurred consulting fees to a stockholder and directors of approximately $162,000, $173,000 and $181,000 in 1994, 1995 and 1996, respectively. The Company has also incurred expenses relating to research grants to, and clinical trials performed at, Boston University Medical Center Hospital and Beth Israel Hospital of approximately $367,000, $335,000 and $175,000 in 1994, 1995 and 1996, respectively. -16- Government Regulation Regulation by governmental authorities in the United States and foreign countries is a significant factor in the future manufacturing and marketing of the Company's potential products and in its ongoing research and product development activities. All of the Company's products currently under development will require regulatory approval by governmental agencies prior to their commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in many foreign countries. Various other federal, and in some cases state and local, statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, transport, recordkeeping, promotion and marketing of such products. The lengthy process of seeking these approvals, and the subsequent ongoing compliance with applicable federal, state and local statutes and regulations, require the expenditure of substantial resources. There can be no assurance that, even after such time and expenditures, regulatory approvals will be obtained for any products developed by the Company. Moreover, if regulatory approval of a product is granted, such approval will entail limitations on the indicated uses for which it may be marketed. Further, even if such regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer or non-compliance with FDA regulations may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. The manufacturer is also subject to continuing FDA inspection, review and post-market requirements. In addition, there can be no assurance that this regulatory framework will not change or that additional regulation will not arise at any stage of the Company's product development which may affect approval or delay an application or require additional expenditures by the Company. Delays in obtaining regulatory approvals would adversely affect the marketing of products developed by the Company and the Company's ability to receive product revenues or royalties. The Company has entered into a strategic alliance with Lilly in connection with the development, production, marketing and sale of its IL-2 Fusion Protein for cancer and cancer related bone marrow transplantation. The Company may enter into additional corporate partnerships and other agreements in connection with the development, manufacturing, marketing and sale of IL-2 Fusion Proteins for other indications and for all other fusion proteins for any indications. Such arrangements would be subject to fair trade regulation by numerous governmental authorities in the United States and other countries. There can be no assurance that any agreements entered into by the Company and international pharmaceutical partners on terms favorable to the Company would be found to be binding and enforceable if subject to any judicial or administrative action by any governmental authority. If the agreement with Lilly were terminated, and the Company failed to establish additional partnerships in developing, producing, marketing and selling certain of its products, such failure could have a material adverse effect on the Company. In both the U.S. and foreign markets, the Company's ability to commercialize its products successfully may also depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty may exist as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available to enable the Company to maintain price levels or sales volume sufficient to realize an appropriate return on its investment in product development. Clinical Trials Process The Company expects that its potential products in the United States will be regulated by the Center for Biologics Evaluation and Research ("CBER") of the FDA. Currently, the steps required before a new biological product can be produced and marketed include pre-clinical studies, the filing of an Investigational New Drug ("IND") application, human clinical trials, and the approval of a Biologic License Application ("BLA"). Pre-clinical studies are conducted in the laboratory and in animal model systems to gain preliminary information on the drug's efficacy and metabolism and to identify potential -17- safety issues. The results of these studies are submitted to the FDA as part of the IND application for review and approval before the commencement of testing in humans. Human clinical testing typically includes a three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine a safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to develop preliminary efficacy data, optimal dosages and additional safety data. In Phase III, large scale, multicenter, well-controlled clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA. In some cases, the initial human testing is in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide efficacy results traditionally obtained in Phase II clinical trials. These trials are frequently referred to as Phase I/II clinical trials. Phase II/III clinical trials refer to a combined phase of human pharmaceutical trials designed to provide evidence of efficacy and safety of a compound in patients with the targeted disease. In some instances, a product license application may be approved based on data from Phase II/III clinical trials. The FDA has issued regulations governing clinical trials, and the failure to comply with these regulations can result in delay in obtaining approvals or the denial of the application. The results of the pre-clinical and clinical testing, together with chemistry and manufacturing information, product labeling and other information are then submitted to the FDA in the form of a BLA. The Company's application may be subject to the provisions of the Prescription Drug User Fee Act of 1992 which would require payment at the time of submission. Commercial manufacturing and marketing of biologic products may occur only after approval of a BLA. In responding to a BLA, the FDA may grant marketing approval, request additional information, or deny the application if it determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that approvals will be granted on a timely basis, if at all, or if granted will cover all the clinical indications for which the Company is seeking approval. In addition, approvals may contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of clinical use. Seeking and obtaining regulatory approval, including the full clinical trial process, for a new therapeutic product may take at least several years and may require the expenditure of substantial resources. Orphan Drug Designation The Orphan Drug Act of 1983 generally provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases or conditions affecting fewer than 200,000 persons in the United States. These incentives include a seven-year marketing exclusivity and funding for qualified clinical trials. The Company has received Orphan Drug designation for DAB389IL-2 in CTCL and may seek Orphan Drug designation for other qualified products. From time to time, proposals have been introduced in Congress to limit Orphan Drug exclusivity. Accelerated Drug Approval Under current guidelines, the FDA will accelerate approval of certain new drugs and biological products for serious or life-threatening illnesses, with provisions for any necessary continued study of the drugs' clinical benefits after approval or with restrictions on use, if necessary. These procedures are intended to expedite marketing of drugs or biologicals for patients suffering from such illnesses when the product provides meaningful therapeutic benefit compared to existing treatment. Drugs or biological products approved under these procedures must meet the requisite standards for safety and effectiveness under the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act, and thus will have full approval for marketing, but will be subject to significant post-approval limitations at least for some period of time. The Company believes that several of its intended products may qualify for accelerated approval under these regulations. The Company has requested consideration for accelerated approval from the FDA for DAB389IL-2 in heavily pretreated CTCL patients. No final decision will be made by the FDA until the time of BLA submission. -18- National Institutes of Health Regulations The Company has complied with National Institutes of Health ("NIH") Recombinant DNA Guidelines on a voluntary basis and expects to continue to do so. Such guidelines, among other things, restrict or prohibit certain recombinant DNA experiments and establish levels of biological and physical containment that must be met for various types of research. The federal government has proposed a new interagency biotechnology science coordinating committee to obtain a unified approach to the regulation of recombinant DNA activities. Foreign Regulations Regulations concerning the marketing of human therapeutic products are generally imposed by foreign governments and may have an impact on the Company's anticipated operations. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement levels vary widely from country to country. The Company attempts to conduct its development activities in a manner that will comply with most foreign regulations. Other Regulations The Company's activities will also be regulated in part by the Atomic Energy Act, the Occupational Safety and Health Act, the Environmental Protection Act, and other local, state and federal regulations, including those governing the use and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could adversely impact the Company's operations. From time to time other federal, state and local agencies have indicated an interest in implementing further regulation of biotechnology activities. There can be no assurance that additional regulations will not be adopted and, if adopted, that such regulations will not have a material adverse impact on the Company. Research and Development Spending During each of the three fiscal years ended December 31, 1994, 1995 and 1996, the Company spent approximately $18.1 million, $14.1 million and $14.0 million, respectively, on research and development activities. In 1994, approximately $2.8 million of the research and development activities related to a charge to licensed technology for research and development. None of this spending involved customer-sponsored research. Employees As of December 31, 1996, the Company had a total of 126 employees, each of whom has entered into a confidentiality agreement with the Company. Thirteen of them held Ph.D. degrees. None of the Company's employees is covered by a collective bargaining agreement. In connection with the agreement to sell the Company's manufacturing and clinical operations to B.U., at the closing, approximately 100 of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Business Outlook This report contains forward-looking statements that are based on the Company's current expectations. Among the forward-looking statements in this report are (i) the statements in this "Business" section discussing the potential applications of the Company's fusion proteins existing or in development, (ii) the potential markets for the Company's products, (iii) the status and anticipated timing of the Company's product development, (iv) the potential efficacy of the Company's products, the methods by which the Company may develop its products, (v) the effect of the Company's patent and other intellectual property rights, (vi) the anticipated results of the Company's clinical trials and other tests, and (vii) the Company's arrangements with B.U., -19- Lilly, Ajinomoto, the Company's agreement to sell a portion of its assets to B.U. and the contract with B.U. for the provision of certain services. Other forward-looking statements are the statements in the "Management's Discussion and Analysis" section including (i) the Company's anticipated future operating results and liquidity requirements, (ii) the Company's ability to fund operations, (iii) the Company's ability to restructure its agreements with Ajinomoto, (iv) the Company's agreement to sell a portion of its assets to B.U. and the contract with B.U. for the provision of certain services, (v) the Company's ability to restructure its obligations to its preferred shareholders, (vi) the Company's ability to satisfy its obligations under the Seragen Biopharmaceuticals, Ltd. ("SBL") Shareholders' Agreement, and (vii) the Company's ability to raise funds through an equity offering or through collaborative or other arrangements with others. However, this paragraph does not necessarily include an exhaustive list of the forward-looking statements contained in this report. Because the Company's actual results may differ materially from any forward-looking statements made by or on behalf of the Company, this section discusses important factors that could affect the Company's actual future results, including its revenues, expenses, and net income. Early Stage of Product Development. Seragen has not yet marketed or generated revenues from the commercialization of its potential therapeutic products. All of the Company's potential products require significant development, laboratory and clinical testing and regulatory review prior to their commercialization, which takes a number of years. The Company expects that even its products currently at the most advanced stages of development will not be available for commercial sale or use for several years, if at all. The Company's products now in pre-clinical trials may not be successful in human clinical trials. Products currently in, or which in the future advance to, various phases of human clinical trials, may not prove to be efficacious, or unintended or toxic side effects may occur. There can be no assurance that regulatory approvals will be obtained for any products developed by the Company. Generally, only a small percentage of new pharmaceutical products are approved for sale. Moreover, if regulatory approval of a product is granted, the approval may limit the indicated uses for which the product may be marketed. Even if regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review. Discovery of previously unknown problems with a product or manufacturer may result in restrictions on the use of this product or its manufacturer, including withdrawal of the product from the market. History of Operating Losses and Accumulated Deficit. The Company has experienced significant operating losses in each year since its inception and, as of December 31, 1996, had an accumulated deficit of approximately $187 million. The Company expects to incur significant additional operating losses over the next several years and expects cumulative losses to increase as the Company's research and development and clinical trial efforts continue. The Company's ability to achieve a profitable level of operations depends in large part on completing product development and commercialization, obtaining regulatory approvals for its products, and making the transition from research and development to manufacturing and marketing. There can be no assurance that the Company will ever achieve a profitable level of operations. Additional Financing Requirements and Access to Capital Funding. The Company has expended and will continue to expend substantial funds on the research and development of its products, establishment of commercial-scale manufacturing facilities and marketing of its products. It is assumed that the Company's strategic partner Lilly will provide the funds required for the CTCL clinical trial under the terms of its agreement with the Company. However, Lilly has the right to terminate its funding of this trial based on findings that occur as clinical trials progress and based on input from regulatory agencies. If Lilly exercises its option to terminate its funding of the CTCL trial, the Company may need additional funding in order to continue the trial if the Company elects to and the Company may not be able to -20- negotiate other collaborative arrangements on acceptable terms. There can be no assurance that the Company's alliance with Lilly will continue. The Company's ability to finance its operations beyond May 1997 is dependent upon its ability to raise additional capital primarily through additional financings or strategic alliances. No assurance can be given that additional funds will be available to the Company to finance its development on acceptable terms, if at all, or, if available, that such arrangements would not require the Company to relinquish rights to certain products or markets in exchange for funding. If adequate additional funds cannot be raised the Company's business will be materially and adversely affected and the Company may be required to suspend operations. Reliance on Fusion Protein Technology; Technological Change and Competition. The Company's future success is entirely dependent on the clinical and commercial viability of its fusion protein products. The biotechnology industry is subject to rapid and significant technological change. The Company has numerous competitors, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions, and others. The Company's competitors may succeed in developing other fusion proteins, technologies and products that are more effective than any being developed by the Company, or that would render the Company's technology and products obsolete and noncompetitive. Many of these competitors (including certain competitors developing other fusion protein products) have substantially greater financial and technical resources, and production and marketing capabilities than the Company. Many of the Company's competitors have significantly greater experience than the Company in undertaking pre-clinical testing and human clinical trials of new or improved pharmaceutical products and obtaining FDA and other regulatory approvals of products for use in health care. The Company has limited experience in conducting and managing pre-clinical and clinical testing necessary to obtain these approvals. The Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing and marketing capabilities, areas in which it has limited or no experience. Dependence on Boston University for Services. Assuming that the Company completes its planned sale of its manufacturing and clinical operations to B.U., the Company will have no independent manufacturing and clinical operations and will depend upon B.U.'s ability to provide certain services relating to product research, development, manufacturing, clinical trials, quality control, and quality assurance. The initial employees providing such services will be former employees of Seragen. B.U.'s success will depend, in large part, on its continued ability to attract and retain highly qualified scientific and business personnel. Competition for such personnel and relationships is intense. B.U. may terminate its service agreement if its annual losses exceed $9 million. The Company may not be able to contract with another party for these services in that event, may be required to pay more for these services, and may incur significant delays in its product development and clinical trial efforts if it should be unable to continue to utilize the services of the operating facilities it has agreed to sell to B.U. Dependence on Collaborative Partners. If Lilly terminates its funding of the CTCL clinical trials or declines to exercise its options with respect to other fusion protein indications, the Company may be required to seek other collaborative arrangements to develop and commercialize its products in the future. There can be no assurance that the Company will be able to negotiate any other collaborative arrangements on acceptable terms, or that any such collaborative arrangements will be successful. Patents, Licenses and Proprietary Rights. There can be no assurance that any of the Company's licenses or issued patents will provide it with significant protection against competitors, that patent applications will result in patents being issued to the Company or its institutional collaborators, or that the Company will be able to exercise its rights to obtain such licenses. Moreover, in certain circumstances, exclusive licenses may become nonexclusive. The Company's success will depend, in part, on its ability to obtain patent protection for its products, both in the United States and in other countries. The patent position of biotechnology firms generally is highly uncertain and -21- involves complex legal and factual questions. There can be no assurance that the Company's patent applications will result in patents being issued or that, if issued, patents will afford protection against its competitors. Competitors have filed applications for patents or have been issued patents, and they may obtain additional patents and other proprietary rights relating to products intended to be comparable in function to products being developed by the Company, as well as products or processes competitive with those of the Company. The scope and validity of these patents, the extent to which the Company may be required to obtain licenses under any such patents or other proprietary rights, and the cost and availability of license agreements are presently unknown. The Company is required to pay Boston University and Nycomed certain royalties on the sales by the Company of certain products. In addition, Boston University retains a security interest in certain technology and could reacquire all ownership rights in the technology upon a default by the Company under the terms of its agreement. The Company's Patents are the subject of a collateral assignment made by STI in favor of the Series B shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." If the Patents were to be transferred pursuant to this collateral assignment, the Company would not have any direct or indirect ownership interest in the Patents. If the Company failed in these circumstances to make all required payments under the Irrevocable License Agreement with STI, the Company could lose the right afforded by the Irrevocable License Agreement to use the Patents and could then be required to renegotiate the terms of its license for use of the Patents. There is no assurance that the Company would be able to renegotiate on terms advantageous to the Company. The Company may need to obtain licenses to certain other United States and foreign patents for certain products or processes contemplated by the Company. There can be no assurance that licenses will be available from the owners of such patents or will be available on terms acceptable to the Company. Moreover, there can be no assurance that all United States and foreign patents that may pose a risk of infringement have been identified. The Company also relies on unpatented proprietary technology. There can be no assurance that the Company can adequately protect its rights in unpatented proprietary technology, or that others will not independently develop substantially equivalent proprietary technology or otherwise gain access to the Company's proprietary technology. Absence of Manufacturing Experience. To be successful, the Company's products must be manufactured in commercial quantities, in compliance with regulatory requirements, and at acceptable costs. Production in commercial quantities will create technical, regulatory and financial challenges for the Company. The Company has never engaged in large-scale manufacturing. The Company regularly contracts with a variety of firms for testing and manufacturing services, some of which services are essential to the Company. Generally, these agreements may be terminated at any time by any of these third parties. Need for Commercial Sales and Marketing Capabilities. Although the Company may market certain of its products through a direct sales force if and when regulatory approvals are obtained, it currently has no marketing or sales staff. Significant additional expenditures, management resources and time will be required to develop a sales force to the extent that the Company determines not to, or is unable to, arrange third party distribution for its products. Product Liability. The testing, marketing and sale of human health care products entail an inherent risk of product liability or allegations thereof. Product liability claims may be asserted against the Company. The Company's existing product liability coverage may not be adequate either currently or as and when the Company further develops products. There can be no assurance that the Company will be able to maintain or increase its current insurance coverage -22- in the future on acceptable terms or that any claims against the Company will not exceed the amount of its coverage. ITEM 2. PROPERTIES The Company leases approximately 87,000 square feet of laboratory, office and production space in three buildings in Hopkinton, Massachusetts. A portion of this space contains production operations which the Company believes it operates in compliance with cGMP as defined by the FDA. One of the current leases on a portion of the larger of the Company's facilities (38,400 of 64,000 square feet) was guaranteed by Boston University. This guarantee expired in 1996. The lease on this 64,000 square foot facility expires in July 2002. The Company has options to renew this lease for two additional successive periods of five years each. The Company believes that these facilities are adequate for its operations as currently contemplated. In connection with the agreement to sell the Company's manufacturing and clinical operations to B.U., it is anticipated that the facility leases will be assigned to B.U. at the closing. The Company plans to sublease a portion of this space from B.U. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings and no proceedings are known to be contemplated by governmental agencies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of Shareholders of the Company was held on December 18, 1996. The following matter was voted upon: (1) The shareholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of shares of authorized common stock from 30 million shares to 70 million shares. This proposal was approved with 13,237,682 votes for the proposal, 1,245,018 votes against the proposal and 42,155 abstentions. -23- PART II ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCK MATTERS The Company's common stock is quoted on the Nasdaq National Market System ("Nasdaq NMS") under the symbol SRGN. The following table sets forth for the periods indicated high and low reported sale prices for the Company's common stock as reported on Nasdaq.
High Low ---- --- 1995 First Quarter........................ 7 4 1/2 Second Quarter....................... 7 1/8 5 3/8 Third Quarter........................ 7 63/64 5 3/16 Fourth Quarter....................... 6 3/4 4 1/8 1996 First Quarter........................ 5 1/4 3 1/8 Second Quarter....................... 5 1/2 3 7/8 Third Quarter........................ 4 1/4 2 5/8 Fourth Quarter....................... 3 1/8 1
As of March 27, 1997, there were 682 holders of record of the Company's common stock. The last reported sale price of the common stock as reported on Nasdaq NMS on March 27, 1997 was $1.00. The Company has never paid cash dividends on its common stock. The Company pays cash dividends on its Series B Preferred Stock, although these dividends currently are in arrears, and pays common stock dividends on its Series A and C Preferred Stock. Among the criteria that must be satisfied in order to qualify for continued designation on the Nasdaq NMS is the requirement that the Company maintain net tangible assets of at least $4 million. As of December 31, 1996, the Company had net tangible assets deficit of $4.8 million. Therefore, the Company currently does not satisfy this requirement. Another requirement for continued designation on the Nasdaq NMS is that the Company's shares of Common Stock have a minimum bid price of at least $1.00 per share. On March 27, 1997, the Company's Common Stock price was quoted on Nasdaq NMS at a high bid price of $1.00 and a low bid price of $.938. Nasdaq has not yet notified the Company that the Common Stock fails to meet these requirements, but the Company anticipates receiving such a notification from Nasdaq in the near future. -24- ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for, and as of the end of, each of the years in the five-year period ended December 31, 1996 which have been derived from the audited financial statements of the Company. Financial statements for the three fiscal years ended December 31, 1996 are included elsewhere in this report. This selected financial data should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Contract revenue and license fees ........................... $ 12,500 $ 138,226 $ 588,350 $ 3,337,388 $ 10,542,315 Operating Expenses: Cost of contract revenue and license fees .................... - - 588,350 3,337,388 5,704,243 Research and development .............. 15,319,750 13,718,973 15,240,195 14,086,632 13,959,405 General and administrative ............ 5,096,643 4,357,583 4,903,963 4,904,226 7,208,465 Licensed technology for research and development ..................... - - 2,824,217 - - ------------ ------------ ------------ ------------ ------------ Total operating expenses ............ 20,416,393 18,076,536 23,556,725 22,328,246 26,872,113 ------------ ------------ ------------ ------------ ------------ Loss from operations .................. (20,403,893) (17,938,310) (22,968,375) (18,990,858) (16,329,798) Loss incurred in connection with Canadian affiliate .................. - - - (390,136) (2,923,864) Interest income ....................... 610,033 611,784 438,338 92,924 120,740 Interest expense ...................... (1,554,102) (53,505) (113,756) (1,813,128) (5,453,638) ------------ ------------ ------------ ------------ ------------ Net loss .............................. (21,347,962) (17,380,031) (22,643,793) (21,101,198) (24,586,580) ============ ============ ============ ============ ============ Preferred stock dividends ............. - - - - 10,394,918 ============ ============ ============ ============ ============ Net loss applicable to common stockholders ........................ $(21,347,962) $(17,380,031) $(22,843,793) $(21,101,198) $(34,981,478) ============ ============ ============ ============ ============ Net loss per common share ............. $ (2.13) $ (1.26) $ (1.45) $ (1.29) $ (2.09) ============ ============ ============ ============ ============ Weighted average common shares used in computing net loss per share ........................... 10,030,965 13,775,341 15,631,333 16,355,587 16,724,493 =========== =========== =========== ========== ==========
DECEMBER 31, ---------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Cash and cash equivalents ............... $ 12,196,639 $ 10,104,179 $ 5,536,782 $ 435,460 $ 1,548,392 Marketable securities ................... - - 2,034,948 - - Working capital (deficit) ............... 10,605,189 8,612,996 3,859,854 (1,298,886) (5,927,902) Total assets ............................ 17,726,047 18,099,705 17,039,292 16,299,508 8,444,608 Short-term debt ......................... - 170,572 197,453 248,494 5,402,268 Long-term debt .......................... - 483,364 3,038,778 15,977,899 1,200,000 Deferred revenue ........................ - - 5,000,000 5,000,000 - Canadian affiliate put option liability ............................. - - - 2,076,000 2,400,000 Total liabilities ....................... 2,007,588 2,893,194 13,255,070 26,741,003 13,291,212 Accumulated deficit ..................... (91,148,311) (108,528,342) (131,172,135) (152,273,333) (187,254,811) Total stockholders's equity (deficit) . 15,718,459 15,206,511 3,784,222 (10,441,495) (4,846,604)
-25- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is engaged in the discovery, research and development of pharmaceutical products for human therapeutic applications. Since 1985, the Company has focused substantially all of its efforts and resources on research and development of its fusion protein technology. The Company's fusion proteins were developed using proprietary technology and have potential applications in a wide range of human diseases. To date, the Company has not generated any revenues from the sale of fusion protein products, and the Company does not expect to receive any such revenues in 1997. The Company has generated no profit since its inception and expects to incur additional operating losses over the next several years. In February 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to B.U. or a designated affiliate for $5 million and in connection therewith entered into a service agreement with B.U. pursuant to which B.U. will provide the Company with certain services related to product research, development, manufacturing, clinical trials, quality control and quality assurance. The terms of this transaction are discussed more fully below under "Liquidity and Capital Resources". The Company's business is subject to significant risks, including the ability to raise additional capital, the uncertainties associated with the regulatory approval process and with obtaining and enforcing patents important to the Company's business. The Company expects to incur substantial operating losses over the next several years due to continuing expenses associated with its research and development programs, including pre-clinical testing and clinical trials. Operating losses may also fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred. Results of Operations 1996 to 1995 The Company incurred a net loss of $35.0 million for the year ended December 31, 1996 compared to $21.1 million for the year ended December 31, 1995. The increase in net loss during 1996 was primarily due to (i) the payment and accretion of a total of $10.4 million in dividends associated with the Series A, B and C Preferred Stock in 1996 including warrants valued at $8.6 million issued to the Series B shareholders, (ii) the expensing of $3.0 million of prepaid interest associated with the restructuring of the June 1995 guaranteed loans, and (iii) an increase of $2.5 million in the charge for the potential obligation of the Company to the investors in SBL in connection with certain put rights. These increases in expense were partially offset by a net decrease in loss from operations of $2.7 million primarily due to increases in revenue discussed below. The Company's revenues for the year ended December 31, 1996 were $10.5 million as compared to $3.3 million for the year ended December 31, 1995. This increase of $7.2 million in 1996 was primarily the result of the receipt of a one-time $1.5 million fee relating to the exercise by a third party of a prepaid option to license certain patents in the field of transplantation in the third quarter of 1996, the recognition of $5.0 million of revenue in the second quarter of 1996 for which cash had been previously paid by Lilly in August 1994 and an increase of $700,000 primarily in contract revenue from Lilly associated with the Phase III clinical trial for IL-2 Fusion Protein for cancer therapy. Total operating expenses increased by $4.6 million to $26.9 million in 1996 from $22.3 million in 1995. Expenses associated with the cost of contract revenue and license fees increased by $2.4 million to $5.7 million in 1996 compared to $3.3 million in 1995. This increase reflects the potential obligation of $1.2 million on the potential sales of bulk product to Lilly, an increase of approximately $700,000 for the acceleration of clinical development activity under the Phase III clinical trial for IL-2 Fusion Protein for cancer -26- therapy and an increase of $500,000 related to a sub-license fee payable on the $1.5 million patent license revenue mentioned above. Research and development expenses were substantially unchanged for the year ended December 31, 1996 as compared to the year ended December 31, 1995. However, there was a decrease of approximately $300,000 due to the decision by the Company in 1996 to focus its financial resources on IL-2 Fusion Protein for cancer and psoriasis therapies thereby reducing clinical development in other IL-2 Fusion Protein indications. There was also a decrease of $200,000 in non-reimbursable research grants and outside pre-clinical testing. These decreases were partially offset by an increase of $400,000 in facility engineering and validation fees. General and administrative expenses increased by $2.3 million to $7.2 million in 1996 from $4.9 million in 1995. This increase was primarily the result of a non-cash charge of $2.1 million in the second quarter of 1996 for commission expense associated with the amendment to the Sales and Distribution Agreement between the Company and Lilly. Losses incurred in connection with the Company's Canadian affiliate increased $2.5 million to $2.9 million in 1996 from $400,000 in 1995. This increase reflects the Company's decision in 1996 to reduce its investment in the affiliate to zero and reflect a liability for the current put obligation of $2.4 million held by the shareholders of the Canadian affiliate. Interest income was substantially unchanged for the year ended December 31, 1996 as compared to the year ended December 31, 1995. Interest expense increased $3.7 million in 1996 to $5.5 million from $1.8 million in 1995 primarily due to the expensing of $3.0 million of prepaid interest and $475,000 of debt issuance costs associated with the repayment of the June 1995 loans and to higher loan balances in 1996 as compared to 1995. The Company recorded $10.4 million in preferred stock dividends in 1996 related to the Series A, B and C Preferred Stock issuances. The $10.4 million in preferred stock dividends consisted of (i) the value associated with the Series B Preferred Stock warrants of $8.6 million, (ii) cash dividends of $1.2 million, and (iii) stock dividends and issuance costs of $610,000. 1995 to 1994 The Company incurred a net loss of $21.1 million for the year ended December 31, 1995 compared to a net loss of $22.6 million for the year ended December 31, 1994. The Company's revenues for the year ended December 31, 1995 were $3.3 million associated with contract revenue from Lilly for certain development costs of IL-2 Fusion Protein for cancer therapy, as compared to $588,000 for the year ended December 31, 1994. Total operating expenses decreased by $1.3 million to $22.3 million in 1995 from $23.6 million in 1994. The decrease in total operating expenses was primarily due to a 1994 non-cash charge in research and development for the acquisition of a license and reductions in research and development expenses, partially offset by increases in expenses associated with the cost of contract revenue. Expenses associated with the cost of contract revenue were $3.3 million in 1995 as compared to $588,000 in 1994. This increase of $2.7 million reflects the acceleration of clinical development activity under the corporate strategic alliance with Lilly. For comparative purposes, the following discussion of research and development expenses includes the cost of contract revenue. Research and development expenses increased $1.6 million to $17.4 million in 1995 from $15.8 million in 1994. This increase was primarily due to the cost associated with the Phase III clinical trial for IL-2 Fusion Protein for cancer therapy, the hiring of additional scientists and support staff, and the initiation of a Phase II clinical trial for IL-2 Fusion Protein for psoriasis. This increase was partially offset by reductions in external research grants, consulting fees and seminar expenses. In 1994, a non-cash charge of $2.8 million was charged to research and development for the acquisition of an exclusive worldwide license from Ajinomoto Company, Inc. for the rights to the IL-2 gene. General and administrative expenses were substantially unchanged for the year ended December 31, 1995 as compared to the year ended December 31, 1994. -27- In 1995, a non-cash charge of approximately $390,000 was recorded to reflect the obligation by the Company to the shareholders of the Canadian affiliate. Interest income decreased approximately $345,000 to $93,000 in 1995 from $438,000 in 1994 primarily due to lower average balances of cash equivalents and marketable securities in 1995. Interest expense increased approximately $1.7 million in 1995 to $1.8 million due to borrowings under the lines of credit which commenced in June 1995. Liquidity and Capital Resources As of March 28, 1997, the Company had approximately $2.4 million in cash and cash equivalents including a deposit of $4.5 million made by Boston University in connection with the sale of the Company's manufacturing and clinical operations. The net book value of the assets to be sold to Boston University was $4.6 million representing substantially all of the property and equipment, consisting primarily of leasehold improvements to the Company's manufacturing facility, laboratory facilities and laboratory equipment as of February 14, 1997. The Company expects to incur further substantial research and development expenses as it continues development of its fusion proteins. The Company also expects to incur substantial administrative and commercialization expenses in the future. The Company's continuing operating losses and requirements for working capital will depend on many factors, including the progress and costs associated with its research, pre-clinical and clinical development efforts, and the level of resources which the Company must devote to obtaining regulatory approvals to manufacture and sell its products. On February 18, 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to B.U. or a designated affiliate for $5 million. The closing of the transaction is subject to, among other things, approval by the Company's stockholders. B.U. has paid the Company $4.5 million as a deposit and has assumed responsibility for the facility's operations, including responsibility for operating costs. The Company currently may use this deposit to fund its operations. At the closing, a majority of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Both the deposit and the operating costs paid by B.U. are subject to refund in the event that conditions for closing are not met. Simultaneously, the Company entered into a service agreement with B.U. providing for the purchase by the Company of certain services related to product research, development, manufacturing, clinical trials, quality control, and quality assurance. This service contract expires in January 1999 and is subject to early termination provisions, as defined, including the option of B.U. to terminate the agreement if losses during a contract year exceed $9.0 million and the Company does not reimburse B.U. for the losses in excess of $9.0 million. The service contract may be renewed for two successive one-year terms at the option of the Company. The Company has the option to repurchase the assets comprising the manufacture and clinical operations facilities. The Company has agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of this contract, respectively. The fees can be mutually increased or decreased, but may not be reduced to less than $4.3 million per contract year. The service agreement is expected to substantially reduce operating costs in research and development as Seragen will be contracting solely for the services that the Company requires for clinical and manufacturing purposes. On August 3, 1994, the Company and Lilly signed an agreement to form a global strategic alliance that gives Lilly exclusive worldwide development, distribution, and marketing rights, except in certain Asian countries, to the IL-2 fusion protein for the treatment of cancer. Lilly reimburses the Company for costs incurred in the clinical development of IL-2 Fusion Protein for cancer therapy, including costs for Phase III clinical trials, the preparation of an FDA application and any FDA filing fees. The Company recorded approximately $588,000, $3,337,000 and $3,979,000 of contract revenue for such reimbursed -28- development costs during the years ended December 31, 1994, 1995 and 1996, respectively. Lilly is also required to pay the Company an additional $3 million based on the Company meeting certain regulatory milestones in the development of IL-2 Fusion Protein for cancer therapy. No regulatory milestone payments have been achieved to date under the agreement. In December 1994, the Company entered into a license agreement with Ajinomoto Company, Inc. which provides the Company with exclusive worldwide rights under Ajinomoto's IL-2 gene patents for the Company's fusion proteins. The Company has made an up-front payment of $100,000 under this agreement. In addition, the Company is required to pay a royalty of 4% of Seragen revenues or end-user revenues depending on certain conditions. Seragen is required to pay minimum royalties of $100,000 in 1997, $200,000 in 1998 and $300,000 each year thereafter. Under the terms of the license agreement, the Company was required to make a payment of $4.3 million by March 31, 1997. However, Ajinomoto has deferred this payment to May 31, 1997. The Company is in discussions with Ajinomoto regarding amending the terms of the agreement. The Company also is exploring alternative sources of funding to make the May 31 payment. No agreement in principle has been reached, however, and there can be no assurance that the Company will be able to make the required payment. On November 21, 1995, the Company formed Seragen Biopharmaceuticals Ltd. ("SBL"), a privately held Canadian research and development company located in Montreal. In a private financing, a group of six Canadian investors contributed approximately $10.0 million, acquiring units representing 51% of SBL. The investors have the option to exercise one of three different put rights related to their SBL shares after January 1, 1999, or earlier upon the occurrence of certain events. Included among these certain events is any failure of the Company's common stock to be listed on a national security exchange or an inter-dealer quotation system. Issues regarding the Company's continued eligibility for listing on the Nasdaq National Market System (see "Market for the Registrant's Securities and Related Stock Matters") may make the investors' put rights currently exercisable. Put Right 1 obligates the Company to purchase the investors' 1,557,097 shares at $8.57 (Canadian $) plus 11.4% compounded annually. Put Right 2 obligates the Company to purchase the investors' shares at a price of 20 times SBL's per share income over the four most recent quarters. Put Right 3 obligates the Company to exchange the investors' shares for the Company's shares (or the value of such shares) using the product of $8.57 (Canadian $) and the number of puts exercised divided by 9.487. The Company has the option to settle Put Right 1 in cash or common stock, but the investor can require 50% of the price to be paid in cash. The Company has the option to settle the Put Rights 2 and 3 in cash or Seragen common stock. In certain specific circumstances relating to the trading status of Seragen's common stock when the Company must settle the put rights in cash. The put rights will terminate if SBL sells shares in an initial public offering. As of December 31, 1996, the Company has recorded a $2.4 million liability which reflects the Company's current put obligation. The Company is currently in default of its obligation to file a registration statement relating to resale of shares underlying the put rights. On May 29, 1996, the Company raised net proceeds of $3.8 million through the sale of 4,000 shares of convertible Series A Preferred Stock ("Series A Shares") to investors outside the United States under Regulation S of the Securities Act of 1993. The Series A Shares are convertible at the option of the holders, beginning July 15, 1996, into shares of common stock. As of December 31, 1996, 895 Series A Shares had been converted into 566,400 shares of Common Stock at conversion prices ranging from $1.022 to $2.774 per share. The Series A Shares were reflected at $2,015,522 at December 31,1996 representing their liquidation value, which includes accrued dividends payable from the issuance date through December 31, 1996. See Note J to the Company's financial statements. On July 1, 1996, the Company restructured its arrangement with the guarantors of the Company's $23.8 million bank financing under which the guarantors directly assumed the liability with the banks and the Company was released from its liability to the banks. In exchange for the guarantors satisfying the Company's liability to the banks, the guarantors were issued 23,800 shares of Series B Preferred Stock ("Series B Shares"). Each Series B Share is convertible at any time at the holder's option into shares of Seragen common stock. In addition, the Company transferred all of its patents (the "Patents") to Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the Company with an irrevocable worldwide exclusive license from STI to the Company with respect to the Patents (the "Irrevocable License Agreement"). Under the Irrevocable License Agreement, the Company is obligated to pay quarterly -29- royalties in an amount equal to the amount of any dividend that the Series B shareholders are entitled to receive but have not received by the royalty due date (which is one day after each quarterly dividend payment date for the Series B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock to the guarantors. STI's Class B Common Stock provides for cumulative dividends payable in the same amount as any royalties payable by the Company under the Irrevocable License Agreement. STI also provided the Company with a collateral assignment of the Patents made by STI in favor of the Series B shareholders. Pursuant to an escrow arrangement, the collateral assignment of the Patents is required to be delivered to the Series B shareholders in the event that, after notice, STI fails for 60 days to pay any dividend due in respect of its Class B Common Stock. The Company did not make its royalty payment due January 1, 1997, and does not anticipate making its royalty payment due April 1, 1997. STI did not pay Class B Common Stock dividends due January 1, 1997, and does not anticipate paying Class B Common Stock dividends due April 1, 1997. To the Company's knowledge, the Series B shareholders have not provided notice of the STI dividend payment failure to the escrow agent. In the event that STI redeems its Class B Common Stock, the escrow agent is required to deliver a reassignment of the Patents to the Company. The holders of the Series B shares also received warrants to purchase a total of 5,950,000 shares of Seragen common stock at an exercise price of $4.00 per share. The Company has estimated the average fair market value of the warrants to be $1.45 per warrant or $8,617,951 for the 5,950,000 issued and outstanding warrants. The value ascribed to the warrants and the restructuring costs have been accreted through a charge to retained deficit and an offset to additional paid-in capital. In addition, subject to the antidilution provisions of the warrants, the Company issued 2,217,196 warrants at an exercise price of $4.00 per share in the year ended December 31, 1996. Dividends payable of approximately $583,000 were outstanding at December 31, 1996 and are included in accrued expenses. See Note E to the Company's financial statements. The Company does not anticipate making the dividend payment of approximately $600,000 due on March 31, 1997. On September 30, 1996, the Company raised net proceeds of approximately $5 million through the sale of 5,000 shares of the Company's non-voting convertible Series C Preferred Stock ("Series C Shares") in a private placement with Boston University under Regulation D of the Securities Act of 1933. The Series C Shares are convertible at the option of the holder into shares of Seragen Common Stock. See Note J to the Company's financial statements. The Company anticipates that existing cash and cash equivalents and the reimbursement for clinical costs for the development of IL-2 Fusion Protein for cancer therapy will be sufficient to fund the Company's working capital requirements through approximately May 1997 provided that the Company is able to amend its current agreement with Ajinomoto or have the May 31, 1997 $4.3 million payment that is required under the agreement made by another party. In addition, the Company must complete the sale of its manufacturing and clinical operation facilities to B.U. or the $4.5 million deposit and operating expenses will be subject to refund to B.U. (See Notes B, E, I and L in the "Notes to the Financial Statements" regarding significant future obligations.) The Report of Independent Accountants on the Company's Financial Statements for the fiscal year ended December 31, 1996 includes an explanatory paragraph concerning uncertainties surrounding the Company's ability to continue as a going concern. This may adversely affect the Company's ability to raise additional capital. See Note A in the "Notes to the Financial Statements." The Company's ability to finance its operations beyond May 1997 is dependent upon its ability to raise additional capital through debt or equity financings, possible additional payments under the strategic alliance with Lilly, or such other sources of financing, including strategic partnerships, as may be available. The Company is exploring a possible equity offering, although the terms of such offering have not been finalized. There can be no assurance that the Company will be successful in an equity offering or that the amount raised will be sufficient to fund the Company's operating expenses until other sources of funds can be secured. Management of the Company believes that to be able to complete a new equity financing successfully, the holders of the Company's -30- Series A, Series B and Series C Preferred stock will be required to convert such securities in connection with the offering. Management is in discussions with such holders but there is no assurance that such agreements can be reached or if reached will be on satisfactory terms. The Company is seeking to obtain additional funds through collaborative or other arrangements with corporate partners and others. There can be no assurance that the Company will be successful in securing collaborative or other arrangements with corporate partners or others on acceptable terms, if at all. If the Company does not consummate an equity financing or additional collaborative or other arrangements with corporate partners, then the Company's current cash position may not be sufficient to meet its financial obligations and may fund operations only through May 1997. If adequate additional funds are not available, the Company may be required to delay, scale back or eliminate certain of its clinical trials, manufacturing or development activities or certain other aspects of its business and may be required to cease operations, which would have a material adverse affect on the Company. -31- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Index to Financial Statements and Schedule Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . 33 Financial Statements: Balance Sheets as of December 31, 1995 and 1996. . . . . . . . . . . 35 Statements of Operations for the years ended December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . 37 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . 38 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 39 -32- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Seragen, Inc.: We have audited the accompanying balance sheet of Seragen, Inc. (a Delaware Corporation) as of December 31, 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seragen, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note A, the Company has experienced significant operating losses since inception and has a working capital deficit as of December 31, 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note A. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen LLP Boston, Massachusetts March 28, 1997 -33- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Seragen, Inc.: We have audited the balance sheet of Seragen, Inc. as of December 31, 1995 and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seragen, Inc. as of December 31, 1995 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note A, the Company has experienced recurring operating losses and has a working capital deficit. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note A. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Coopers & Lybrand L.L.P. Boston, Massachusetts February 23, 1996 -34- SERAGEN, INC. BALANCE SHEETS
DECEMBER 31, ------------------------------- ASSETS 1995 1996 ------------- -------------- Current assets: Cash and cash equivalents......................................................... $ 435,460 $ 1,548,392 Restricted cash................................................................... 435,318 610,318 Contract receivable............................................................... 686,055 485,261 Unbilled contract receivable...................................................... 496,147 833,983 Prepaid expenses and other current assets......................................... 335,238 285,356 ------------- ------------- Total current assets................................................. 2,388,218 3,763,310 Property and equipment, net......................................................... 5,198,136 4,604,115 Investment in affiliate............................................................. 2,599,864 -- Deferred commission................................................................. 2,060,000 -- Prepaid interest.................................................................... 3,528,677 -- Other assets........................................................................ 524,613 77,183 ------------- ------------- Total assets......................................................... $ 16,299,508 $ 8,444,608 ============= ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) Current liabilities: Accounts payable.................................................................. 725,326 1,111,477 Current maturities of long-term debt.............................................. 248,494 37,418 Accrued commission payable........................................................ 300,000 -- Accrued expenses.................................................................. 2,413,284 3,177,467 Preferred stock redemption liability............................................... -- 1,236,753 Short-term obligation, less unamortized discount.................................. -- 4,128,097 ------------- ------------- Total current liabilities............................................ 3,687,104 9,691,212 ------------- ------------- Non-current liabilities: Long-term debt, less current maturities........................................... 12,537,417 -- Deferred revenue.................................................................. 5,000,000 -- Long-term obligation, less unamortized discount................................... 3,440,482 -- Lilly contract obligation......................................................... -- 1,200,000 Canadian affiliate put option liability........................................... 2,076,000 2,400,000 ------------- ------------- Total non-current liabilities........................................ 23,053,899 3,600,000 ------------- ------------- Commitments and contignencles Stockholders' (deficit); Preferred stock, $.01 par value; 5,000,000 shares authorized Convertible preferred stock, Series A, $.01 par value; issued and outstanding 3,105 shares at December 31, 1996, $2,015,522 liquidation preference........................................................ -- 2,015,522 Convertible preferred stock, Series B, $.01 par value; issued and outstanding 23,800 shares at December 31, 1996, $23,800,000 liquidation preference........................................................ -- 23,800,000 Convertible preferred stock, Series C, $.01 par value; issued and outstanding 5,000 shares at December 31, 1996, $5,100,000 liquidation preference........................................................ -- 5,100,000 Common Stock, $.01 par value; 70,000,000 shares authorized; issued 16,521,212 and 17,199,458 shares at December 31, 1995 and 1996, respectively................................................... 165,212 171,994 Additional paid in capital...................................................... 141,759,580 151,323,022 Accumulated deficit............................................................. (152,273,333) (187,254,811) ------------- ------------- (10,348,541) (4,844,273) Less-treasury stock (14,632 and 777 shares at cost at December 31, 1995 and 1996, respectively).................................................. (92,954) (2,331) ------------- ------------- Total stockholders' (deficit)........................................ (10,441,495) (4,846,604) ------------- ------------- Total liabilities and stockholders' (deficit)........................ $ 16,299,508 $ 8,444,608 ============= =============
The accompanying notes are an integral part of the financial statements. -35- SERAGEN, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1995 1996 ----------- ------------ ------------
Revenue: Contract revenue and license fees ....... $ 588,350 $ 3,337,388 $ 10,542,315 Operating expenses: Cost of contract revenue and license fees 588,350 3,337,388 5,704,243 Researcg and development ................ 15,240,195 14,086,632 13,959,405 General and administrative .............. 4,903,963 4,904,226 7,208,465 Licensed technology for research and development .......................... 2,824,217 - - ------------ ------------ ------------ 23,556,725 22,328,246 26,872,113 ------------ ------------ ------------ Loss from operations ................. (22,968,375) (18,990,858) (16,329,798) Loss incurred in connection with Canadian affiliate ............................... - 390,136 2,923,864 Interest Income ........................... 438,338 92,924 120,740 Interest expense .......................... 113,756 1,813,128 5,453,638 ------------ ------------ ------------ Net loss ........................ (22,643,793) (21,101,198) (24,586,560) ============ ============ ============ Preferred stock dividends and accretion ... - - 10,394,918 ============ ============ ============ Net loss applicable to common stockholders ............................ $(22,643,793) ($21,101,198) ($34,981,478) ============ ============ ============ Net loss per common share ................. $ (1.45) ($ 1.29) ($ 2.09) ============ ============ ============ Weighted average common shares used in computing net loss per share .... 15,631,333 16,355,587 16,724,493 ============ ============ ============
The accompanying notes are an integral part of the financial statements. -36- PAGE SERAGEN, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1994, 1995 and 1996
Series A Series B Series C Convertible Convertible Convertible Additional Preferred Stock Preferred Stock Preferred Stock Common Stock Paid-In Capital --------------- --------------- --------------- ------------ --------------- Balance, December 31, 1993 ................. - - - $142,698 $123,899,530 Private placement of units net of offering costs, exercise of stock options .................................. - - - 11,442 6,831,268 Shares issued under corporate partner agreement, net of costs .................. - - - 7,871 4,857,667 Purchase of treasury stock ................. - - - - Sales of treasury stock .................... - - - 130 (20,342) Net loss ................................... - - - - - ----------- ----------- ---------- -------- ------------ Balance, December 31, 1994 ................. - - - 162,141 134,858,314 Exercise of stock options .................. - - - 872 84,216 Warrants issued in connection with lines of credit .......................... - - - - 4,104,898 Warrants issued in connection with investment in affiliate .................. - - - - 814,000 Shares issued for commission related to corporate partner agreement - - - 2,200 1,757,800 Purchase of treasury stock ................. - - - - - Sales of treasury stock .................... - - - 289 (29,748) Net loss ................................... - - - - - ----------- ----------- ---------- -------- ------------ Balance, December 31, 1995 ................. - - - 165,212 141,708,580 Exercise of stock options .................. - - - 1,088 79,144 Stock issuance ............................. - - - 50 20,457 Issuance of preferred stock ................ $ 4,000,000 $23,800,000 $8,000,000 - - Warrants issued in connection with Series B preferred stock ................. - - - - 8,815,000 Preferred stock redemption liability ....... (1,236,753) - - - - Dividends .................................. 171,688 - 100,000 - - Preferred stock conversion ................. (919,413) - - 5,004 813,749 Purchase of treasury stock ................. - - - - - Sale of treasury stock ..................... - - - - (67,903) Net loss ................................... - - - - - ----------- ----------- ---------- -------- ------------ Balance, December 31, 1996 ................. $ 2,015,622 $23,800,000 $6,100,000 $171,884 $151,323,022 =========== =========== ========== ======== ============ Accumulated Treasury Stockholder's Deficits Stock Equity (Deficit) -------- ----- ---------------- Balance, December 31, 1993 ................. $(108,826,342) $ (7,376) $ 15,203,811 Private placement of units net of offering costs, exercise of stock options .................................. - - 6,642,711 Shares issued under corporate partner agreement, net of costs .................. - - 4,665,726 Purchase of treasury stock ................. - (150,800) (150,800) Sales of treasury stock .................... - 83,777 83,585 Net loss ................................... (22,643,793) - (22,843,783) -------------- --------- ------------ Balance, December 31, 1994 ................. (131,172,136) (74,098) 3,784,222 Exercise of stock options .................. - - 84,788 Warrants issued in connection with loss of credit .......................... - - 4,154,896 Warrants issued in connection with investment in affiliate .................. - - 914,000 Shares issued for commission related to corporate partner agreement ........... - - 1,750,000 Purchase of treasury stock ................. - (201,939) (201,839) Sales of treasury stock .................... - 183,083 153,636 Net loss ................................... (21,101,195) - (21,101,198) -------------- --------- ------------ Balance, December 31, 1995 ................. (152,273,333) (92,964) (10,441,495) Exercise of stock options .................. - - 80,212 Stock issuance ............................. - - 20,502 Issuance of preferred stock ................ (338,840) - 32,481,360 Warrants issued in connection with Series B preferred stock ................. (8,181,000) - - Preferred stock redemption liability ....... - - (1,238,753) Dividends .................................. (1,438,278) - (1,166,590) Preferred stock conversion ................. - - - Purchase of treasury stock ................. - (107,780) (107,750) Sale of treasury stock ..................... - 188,373 130,470 Net loss ................................... (24,588,580) - (24,588,560) -------------- --------- ------------ Balance, December 31, 1996 ................. $(137,264,,811) $ (2,331) $ (4,848,804) ============== ========= ============
The accompanying notes are an integral part of the financial statements. -37- SERAGEN, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net loss ................................................... $(22,643,793) $(21,101,198) $(24,586,560) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................ 1,131,144 969,104 945,225 Loss incurred in connection with Canadian affiliate ...... - 390,136 2,923,884 Loss on disposal of property and equipment ............... (49,229) 2,240 71,811 Loss from sale of marketable securities .................. 42,650 - - Compensation associated with stock issuance .............. - - 20,502 Purchase of technology license ........................... 2,724,217 - - Amortization of discount on long-term debt ............... 28,651 687,614 687,615 Amortization of prepaid interest ......................... - 636,319 3,528,677 Amortization of debt issuance costs ...................... - 79,719 442,117 Changes in operating assets and liabilities: Grant receivable ......................................... 121,139 - - Contract receivable ...................................... (246,571) (439,484) 200,794 Unbilled contract receivable ............................. (341,779) (154,368) (337,836) Prepaid expenses and other current assets ................ 51,416 192,955 49,882 Accounts payable ......................................... 26,760 94,701 386,151 Deferred commission ...................................... (2,060,000) - 2,060,000 Accrued commission payable ............................... 2,360,000 (300,000) (300,000) Accrued expenses ......................................... 392,821 385,070 180,888 Deferred revenue ......................................... 5,000,000 - (5,000,000) Lilly contract obligation ................................ - - 1,200,000 ------------ ------------ ------------ Net cash used in operating activities ...................... (13,482,574) (18,557,192) (17,526,870) ------------ ------------ ------------ Cash flows from investing activities: Purchase of marketable securities ........................ (20,878,601) - - Proceeds from sales of marketable securities ............. 18,800,903 2,034,948 - Purchases of property and equipment ...................... (348,398) (351,840) (423,015) Proceeds from sales of property and equipment ............ 9,000 - - Decrease in other assets ................................. 14,363 2,970 5,353 (Increase) decrease restricted cash account .............. (169,974) (47,445) (175,000) ------------ ------------ ------------ Net cash (used in) provided by investing activities ........ 2,572,607 1,638,633 (592,662) ------------ ------------ ------------ Cash flows from financing activites: Proceeds from preferred stock issuances .................. - - 9,000,000 New proceeds from common stock issuances ................. 11,372,004 238,424 210,682 Purchases of treasury stock .............................. (150,500) (201,939) (107,750) Proceeds from sale/leaseback ............................. 416,853 - - Proceeds from issuance of long-term debt ................. - 12,500,000 11,300,000 Repayments of long-term debt ............................. (170,573) (197,452) (248,493) Debt and preferred stock issuance costs .................. - (521,796) (338,680) Dividends paid ........................................... - - (583,295) ------------ ------------ ------------ Net cash provided by financing activities .................. 11,467,784 11,817,237 19,232,464 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....... (4,567,397) (5,101,322) 1,112,932 Cash and cash equivalents, beginning of period ............. 10,104,179 5,536,782 435,460 ------------ ------------ ------------ Cash and cash equivalents, end of period ................... $ 5,536,782 $ 435,460 $ 1,548,392 ============ ============ ============ Supplemental disclosures of cash flows information: Cash paid for interest ................................... $ 85,105 $ 489,195 $ 761,981 ============ ============ ============ Supplemental non cash activities: Issuance of common stock for strategic alliance with Lilly $ - $ 1,760,000 $ - Issuance of warrants and put rights to shareholders of Canadian affiliate ..................................... $ - $ 2,990,000 $ - Conversion of series A preferred stock to common stock ... $ - $ - $ 919,413 Conversion of long-term debt to series B preferred stock . $ - $ - $ 23,800,000 Issuance of warrants to series B preferred stockholders .. $ - $ - $ 8,618,000 Preferred stock dividends ................................ $ - $ - $ 271,688
The accompanying notes are an integral part of the financial statements. -38- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS A. NATURE OF BUSINESS: Seragen, Inc. (the "Company" or "Seragen") is engaged in the research and development of a new class of therapeutic products known as fusion proteins. The Company was established in 1979 and became a majority-owned investment of Boston University ("Boston University" or "B.U.") in 1987. Substantially all of the Company's cash requirements from that time until the Company's initial public offering in April 1992 were funded by loans from B.U. The Company completed its initial public offering in April 1992, a second public offering of common stock in March 1993 and a private placement of units in February 1994. In August 1994, the Company signed an agreement to form a global strategic alliance with Eli Lilly and Company ("Lilly") (see Notes D and J). In June 1995, the Company finalized three separate lines of credit which guaranteed a total of $23.8 million in bank financing (see Note E) which were subsequently converted into Series B Preferred Stock. In November 1995, the Company formed Seragen Biopharmaceuticals Ltd. ("SBL"), an affiliate to conduct research and development and clinical trials of the Company's proprietary fusion protein products in Canada (see Note G). In May 1996, the Company raised $3.8 million through the sale of Series A Preferred Stock (see Note J). On September 30, 1996, the Company raised $5 million through the sale of Series C Preferred Stock (see Note J). In February 1997, substantially all property and equipment was sold to Boston University for $5 million (see Note B) and the Company entered into a service agreement under which B.U. will perform research and development activities on behalf of the Company. In connection with the sale, at closing, approximately 100 of the Company's employees will be transferred to B.U. The Company has incurred losses of approximately $187 million since inception and has funded these losses principally through the issuance of debt and equity securities. The Company has a working capital deficit as of December 31, 1996, and is dependent on raising additional capital in the short term to satisfy its ongoing capital needs and to continue its operations. Management continues to pursue additional funding arrangements and strategic partnerings; however, no assurance can be given that such financing will in fact be available to the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to obtain financing on acceptable terms in order to maintain operations through the next fiscal year, it could be forced to curtail or discontinue its operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. B. SALE OF ASSETS TO BOSTON UNIVERSITY: On February 18, 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to Boston University ("Boston University" or "B.U.") or a designated affiliate for $5 million. The closing of the transaction is subject to, among other things, approval by the Company's stockholders. B.U. has paid the Company $4.5 million as a deposit and has assumed responsibility for the facility's operations, including responsibility for operating costs. The Company currently may use this deposit to fund its operations. At the closing, a majority of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Both the deposit and the operating costs paid by B.U. are subject to refund in the event that conditions for closing are not met. Simultaneously, the Company entered into a service agreement with B.U. providing for the purchase by the Company of certain services related to product research, development, manufacturing, clinical trials, quality control, and quality assurance. This service contract expires in January 1999 and is subject to early termination provisions, as defined, including the option of B.U. to terminate the agreement if losses during a contract year exceed $9.0 million and the Company does not reimburse B.U. for the losses in excess of $9.0 million. The service contract may be renewed for two successive one-year terms at the option of the Company. The Company has the option to repurchase the assets -39- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS comprising the manufacture and clinical operations facilities. The Company has agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of this contract, respectively. The fees can be mutually increased or decreased, but may not be reduced to less than $4.3 million per contract year. (See Pro Forma information at Note O). C. SIGNIFICANT ACCOUNTING POLICIES: Cash Equivalents The Company considers all highly liquid investments that have a maturity on date of acquisition of three months or less to be cash equivalents. Cash equivalents at December 31, 1995 and 1996 consist of money market funds. Restricted Cash The Company maintains a restricted cash balance of $610,318 at December 31, 1996, of which $435,318 is available under a letter of credit required by a lessor with whom the Company has entered into a sale/leaseback arrangement. The remaining $175,000 is available under a letter of credit required by an officer of the Company with whom the Company has entered into an employment agreement. Concentration of Credit Risk The Company invests its excess cash in deposits with federally insured banks and money market funds. At December 31, 1995 and 1996, all investments are in funds which have an average maturity of less than one year. The Company recorded revenues of greater than 10% of total revenues under its corporate alliance with Lilly and Novartis (see Note D). Property and Equipment Property and equipment are stated at cost. Betterments and major repairs are capitalized and included in property and equipment accounts while expenditures for maintenance and repairs are charged to expense. When assets are retired or otherwise disposed of, the cost of the assets and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in income. The accompanying statements of operations provides for depreciation and amortization using the straight-line method over their useful lives, as follows:
DECEMBER, 31 ESTIMATED ------------------------------ USEFUL LIFE 1995 1996 ----------- ----------- ----------- Laboratory equipment ....................... 3 - 7 Years $ 3,563,970 $ 3,302,145 Production equipment ....................... 3 - 7 Years 292,738 378,474 Furniture and fixtures ..................... 3 - 8 Years 595,887 627,989 Leasehold improvements ..................... Life of Lease 9,519,120 9,683,789 Laboratory equipment not placed in service .. - 67,200 - ----------- ----------- 14,038,915 13,992,397 Less accumulated depreciation and amortization (8,840,779) (9,388,282) ----------- ----------- $ 5,198,136 $ 4,604,115 =========== ===========
Subsequent to December 31, 1996, substantially all property and equipment was sold to B.U., see Note B. -40- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS Net Loss Per Common Share The net loss per common share is computed based upon the weighted average number of common shares outstanding. Preferred stock and common equivalent shares are not included in the per share calculation where the effect of their inclusion would be antidilutive. Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Revenue Recognition Contract revenue is recognized as earned under the contract provisions. License fees are recognized as earned. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from those estimates. Industry Uncertainties The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, the ability to raise additional capital, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA government regulations. D. COLLABORATIVE ARRANGEMENTS: Eli Lilly On August 3, 1994, the Company and Lilly signed an agreement to form a global strategic alliance that gives Lilly exclusive worldwide development, distribution, and marketing rights, except in certain Asian countries, to the Company's Interleukin-2 Fusion Protein (IL-2 Fusion Protein) for the treatment of cancer. Lilly also has the option to obtain worldwide development, distribution, and marketing rights for additional indications for IL-2 Fusion Protein and for other Company products under development. The Company retains exclusive rights to promote IL-2 Fusion Protein and future fusion proteins for dermatologic applications outside of oncology and will be responsible for bulk manufacturing for all indications. On August 4, 1994, under the terms of the alliance, Lilly made an initial payment to the Company of $10 million, $5 million representing payment for 787,092 shares of common stock at approximately $6.35 per share and $5 million representing an advance against Lilly's purchase of bulk product from the Company. Lilly is also required to pay the Company an additional $3 million based on the meeting of certain regulatory milestones in the development of IL-2 -41- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS Fusion Protein for CTCL. No regulatory milestone payments have been achieved to date under this agreement. In addition, Lilly reimburses the Company for costs incurred in the clinical development of IL-2 Fusion Protein for cancer therapy, including costs for Phase III clinical trials. The Company recorded approximately $588,000, $3,337,000 and $3,979,000 of contract revenue for such reimbursed development costs during the years ended December 31, 1994, 1995 and 1996, respectively. In connection with this agreement, the Company paid $600,000 in cash and issued 220,000 shares of common stock valued at $1,760,000 to its investment bank for services provided in connection with the Lilly agreement. In 1995, the Company charged $300,000 of such payments to additional paid in capital and recorded the additional payments as prepaid expense to be recognized upon the recognition of contract revenues and license fees from Lilly in future periods. On May 28, 1996, Lilly and the Company amended the Sales and Distribution Agreement relating to the $5.0 million advance paid by Lilly in August 1994 against Lilly's future purchases of bulk product from the Company. Associated with the original agreement was $2,060,000 of deferred commission expense. The amended agreement states that the $5.0 million payment is non-refundable and Seragen has no obligation to refund the advance should no bulk purchases be made by Lilly. To the extent Lilly purchases bulk product in the future, the Company is required to pay Lilly a royalty equal to 75% of the purchase price, up to $5.0 million of total royalties. The Company has determined that the sale of bulk products under these terms will result in a potential obligation of $1.2 million if all of the $5.0 million in royalties are paid to Lilly. Accordingly, the Company recorded $5.0 million in revenue, a $1.2 million obligation on the potential sales of bulk material and $2,060,000 in commission expense in the year ended December 31, 1996. Novartis In March 1996, the Company entered into a license agreement with Novartis, formerly Sandoz Pharmaceutical, Limited, whereby the Company granted Novartis a non-exclusive sub-license of certain patents in exchange for a $1.5 million non-refundable payment. Under the terms of the license agreement, beginning on January 1, 2001 Novartis will be required to pay a 0.75% royalty on the net sales price of licensed products that are sold under the sub-license agreement. The agreement is to remain in effect until expiration of the Company's licensed patents, or earlier upon termination as defined. E. LOAN GUARANTEES AND SERIES B PREFERRED STOCK: On June 7, 1995, the Company finalized three separate lines of credit which were guaranteed by three different entities for a total of $23.8 million in bank financing for the Company. Boston University, the Company's majority stockholder, was the lead guarantor and provided a guaranty of $11.8 million. Two other guarantors guaranteed a total of $12 million. Upon the closing of the lines of credit, the Company issued warrants to the guarantors to purchase 2,776,664 shares of its common stock at an exercise price of $4.75 per share. The warrants were exercisable immediately and expire in 2005. The Company estimated the fair market value of the warrants on the date of issuance to be $1.50 per warrant or a total of $4,164,996. The Company recorded this amount as prepaid interest to be recognized as interest expense over the four-year life of the loan guarantees. As of December 31, 1995, the Company borrowed $12.5 million of the total $23.8 million and recorded the borrowings as long-term debt. The Company borrowed the remaining $11.3 million available through June 30, 1996. On July 1, 1996, the Company restructured its arrangement with the guarantors of the Company's $23.8 million bank financing under which the guarantors directly assumed the liability with the banks and the Company was released from its liability to the banks. In exchange for the guarantors satisfying the Company's liability to the banks, the guarantors were issued 23,800 shares of Series B Convertible Preferred Stock ("Series B Shares"). Each Series B Share is convertible at any time at the holder's option into a number of shares of Seragen Common Stock determined by dividing $1,000 by the average of the closing sale prices of the Company's Common Stock as reported on the Nasdaq Stock Market for the ten consecutive trading days immediately preceding the conversion date. -42- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS The holders of Series B Shares are entitled to receive a cumulative cash dividend payable quarterly in arrears on the last day of March, June, September, and December of each year commencing on September 30, 1996 at an annual rate equal to the prime rate plus 1 1/2% through June 1999 and at an increasing percentage rate thereafter up to a maximum rate of the prime rate plus 5% in July 2003. The Series B shareholders also received warrants to purchase a total of 5,950,000 shares of Seragen Common Stock at an exercise price of $4.00 per share. The Company has estimated the average fair market value of the warrants to be $1.45 per warrant or $8,617,951 for the 5,950,000 issued and outstanding warrants at the time of issuance. The value ascribed to the warrants and the issuance costs have been recorded as a preferred stock dividend with an offset to additional paid-in capital. The warrants are exercisable commencing on January 1, 1997 and expire on July 1, 2006. In addition to the warrants issued on July 1, 1996, the investors may receive additional warrants for certain dilutive events, subject to various provisions as defined. As of December 31, 1996 the investors received warrants to purchase an additional 2,217,196 shares of Seragen Common Stock related to the antidilution provisions. These additional warrants are priced, exercisable and expire under the same terms of the initial July warrants. The holders of the Series B Shares are entitled to vote, on any matter submitted to a vote of the shareholders of the Company, and are entitled to the number of votes equal to the product of (x) the number of Series B Shares held on the record date for the determination of the stockholders entitled to vote on such matters or, if no record date is established, in accordance with applicable provisions of Delaware law, and (y) $1,000, divided by $4.00. Each Series B Share has a liquidation preference equal to the sum of (a) $1,000, plus (b) an amount equal to any accrued and unpaid dividends from the date of issuance of the Series B Shares so that such amount must be paid on each Series B Share in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company before any distribution or payment is made to any holders of any shares of the Common Stock or any other class or series of the Company's capital stock which is junior to the Series B Shares. At any time, with the approval of the Company's Board of Directors, Audit Committee or comparable body, the Company may redeem any or all of the Series B Shares at a price of $1,000 per share plus any accrued and unpaid dividends from the date of issuance. In connection with the restructuring of the bank debt into Series B Preferred Stock, the Company expensed approximately $3.0 million of prepaid interest and $558,000 of debt issuance costs associated with the outstanding loans. Preferred stock dividends related to the Series B Shares were approximately $9.9 million in 1996, which consists of $8.6 million for the value ascribed to the warrants, $1.2 million in cash dividends and $99,000 in preferred stock issuance costs. Dividends payable of approximately $583,000 were outstanding at December 31, 1996 and are included in accrued expenses in the accompanying balance sheets. F. TECHNOLOGY PURCHASE AND ROYALTY AGREEMENT: In 1988, B.U. sold to the Company all rights, title and interest to certain technology in exchange for a continuing royalty on all revenue derived from such technology, as defined, until the expiration of all patents relative to the technology. Upon the expiration of all patents, the Company will pay B.U. a royalty on revenues, as defined, for a period of 10 years after the expiration of all patents. B.U. has retained a collateral interest in the technology as long as royalties are due. Upon an event of default, the technology will revert to B.U. No royalty amounts were due or have been paid to date under this agreement. This technology has been assigned as collateral to the Series B Preferred Stockholders. G. INVESTMENT IN CANADIAN AFFILIATE: On November 21, 1995, the Company formed Seragen Biopharmaceuticals Ltd. ("SBL"), a privately held Canadian research and development company located in Montreal. In a private financing, a group of six Canadian investors contributed approximately $10.0 million, acquiring units representing 51% of SBL. Each unit -43- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS consists of either a share of Class A or Class B Common Stock of SBL and a warrant to acquire of a share of Seragen Common Stock. The Company issued warrants to purchase 519,033 shares of Seragen Common Stock at an exercise price of $8.79 per share. The warrants become exercisable on October 1, 1997 and expire on September 30, 2005. The Canadian investors have the option to exercise one of three different put rights related to their SBL shares after January 1, 1999, or earlier upon the occurence of certain events as defined. The Company is currently in default of its obligation to register certain shares underlying certain put rights of SBL. Put Right 1 obligates the Company to purchase the investors' 1,557,097 shares at $8.57 (Canadian $) plus 11.4% compounded annually. The Company has the option to settle in cash or common stock but the investor can require 50% of the purchase price to be paid in cash. Put Right 2 obligates the Company to purchase the investors' shares at a price of 20 times SBL's per share income over the four most recent quarters. Put Right 3 obligates the Company to exchange the investors' shares for the Company's shares (or the value of such shares) using the product of $8.57 (Canadian $) and the number of puts exercised divided by 9.487. The Company has the option to settle Put Rights 2 and 3 in cash or Seragen common stock. The put rights will terminate if SBL sells shares in an initial public offering. The Company received 49% of SBL's Class A and Class B shares in exchange for the warrants to purchase Seragen Common Stock, granting of the put rights and granting SBL the exclusive right to promote, sell and distribute in Canada pharmaceutical formulations comprising fusion proteins for all indications of fusion proteins and for the treatment of HIV in certain countries (subject to the rights granted to Lilly). SBL, with the Company's assistance, will conduct research and development and clinical trials of the Company's proprietary fusion protein products in Canada. In 1995, the Company determined the fair market value of the warrants and the put rights to be $914,000 and $2,076,000, respectively. The Company recorded these amounts as an investment in affiliate under the equity method. Loss incurred in connection with Canadian affiliate consists of the Company's proportionate share of SBL's loss, based on the equity method and accretion of its obligation under the put rights. At December 31, 1996, the Company reduced its investment to zero and reflected an affiliate put option liability of $2,400,000 which reflects the Company's maximum current obligation under the put options as of December 31, 1996. Summarized unaudited financial information for Seragen Biopharmaceuticals Ltd. for 1996 as follows: Summarized unaudited financial information for Seragen Biopharmaceuticals Ltd. for 1996 as follows:
BALANCE SHEET DATA AS OF STATEMENT OF OPERATIONS DATA ------------------------ ---------------------------- DECEMBER 31, 1996 FOR THE YEAR ENDED DECEMBER 31, 1996 ----------------- ------------------------------------ (Unaudited) (Unaudited) Current assets $9,231,018 Investment income $419,111 Noncurrent assets 10,410 Operating expenses 440,338 Current liabilities 14,743 Net loss (21,227) Stockholders' Equity 9,226,685
H. INCOME TAXES: As of December 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $176 million expiring at various dates from 1997 through 2011 which are available to reduce future federal income taxes. Pursuant to a quasi-reorganization in 1985, approximately $11 million of these loss carryforwards will be credited to additional paid-in capital if realized. (Upon consummation of this quasi-reorganization, approximately $14 million of accumulated deficit was charged to additional paid-in capital.) In addition, the Company had research and experimental and investment tax credit carryforwards of approximately $5 million. The tax credits expire at various dates from 1997 through 2011. The Tax Reform Act of 1986 contains provisions which may limit the net operating loss and credit carryforwards available to be used in any given year as the result of significant changes in equity ownership. -44- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS The net operating loss carryforwards and tax credits expire approximately as follows:
NET OPERATING RESEARCH INVESTMENT TAX LOSS TAX CREDIT CREDIT EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS - --------------- ------------- ------------- --------------- 1997 1,765,000 109,000 4,000 1998 2,504,000 168,000 7,000 1999 3,548,000 216,000 19,000 2000 2,224,000 - 15,000 2001 223,000 - - 2002 - 2011 165,408,000 4,419,000 - ------------ ---------- ------- $175,672,000 $4,912,000 $45,000 ------------ ---------- -------
The components of the Company's deferred tax assets are as follows:
Net Operating loss carryforwards $ 62,631,000 $ 69,694,000 Research and development credits 4,625,000 4,912,000 Investment tax credits 49,000 45,000 Temporary differences 266,000 1,727,000 ------------ ------------ 67,571,000 76,378,000 Valuation allowance (67,571,000) (76,378,000) ------------ ------------ $ - $ - ============ ============
The valuation allowance has been provided due to the uncertainty surrounding the realization of the deferred tax assets. I. SHORT-TERM OBLIGATIONS: Equipment Loan On February 19, 1993, the Company obtained an equipment loan of $750,000 collateralized by certain existing used equipment. The Company also issued a warrant to purchase 10,757 shares of common stock at a purchase price of $12.55 per share in connection with this equipment loan. The warrant expires on February 19, 2000. The loan bears interest at 10.68% per annum. Amounts outstanding under this loan were approximately $248,000 and $37,000 as of December 31, 1995 and 1996, respectively. License Fees In December 1994, the Company entered into a license agreement with Ajinomoto Company, Inc. which provides the Company with exclusive worldwide rights with respect to the Company's fusion proteins under Ajinomoto's IL-2 gene patents. As a result of this agreement, the Company has acquired the right to market IL-2 Fusion Protein products in Japan, Korea, China, Hong Kong and -45- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS Taiwan. The Company has made an up-front payment of $100,000 under this agreement and is required to make a payment of $4.3 million by May 31, 1997. The future obligation has been discounted at a 20% discount rate, resulting in an obligation of $3.4 million and $4.1 million at December 31, 1995 and 1996, respectively. The present value of this license fee was recorded as research and development expense in the year ended December 31, 1994. J. CAPITAL STOCK: In December 1996, the stockholders approved an increase in the number of authorized shares of common stock to 70,000,000. The Company has 5,000,000 shares of preferred stock authorized to be issued from time to time in one or more series. Each series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. On September 30, 1996, the Company raised $5 million through the sale of 5,000 shares of the Company's non-voting convertible Series C Preferred Stock ("Series C Shares") in a private placement to Boston University under Regulation D of the Securities Act of 1933. The Series C Shares are convertible at the option of the holder into shares of Seragen Common Stock at a per share conversion price equal to the lesser of $2.75 or 73 percent of the average closing bid prices for a five day period prior to the conversion date. Terms of the Series C Shares also provide for 8% cumulative dividends payable in shares of Seragen Common Stock at the time of each conversion. Each Series C Share has a liquidation preference equal to $1,000 plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series C Shares in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company. Series C Shares which remain outstanding on March 30, 1998 will be automatically converted into shares of the Company's Common Stock. The Company's Series C Shares were reflected at $5,100,000 (including $100,000 dividend payable) at December 31, 1996. In July 1996, the Company issued 23,800 shares of Seragen convertible Series B Preferred Stock pursuant to the conversion of the loan guarantees (see Note E). On May 29, 1996, the Company raised gross proceeds of $4 million (approximately $3.8 million net of offering fees) through the sale of 4,000 shares of Seragen convertible Series A Preferred Stock ("Series A Shares") to investors outside the United States under Regulation S of the Securities Act of 1993. The Series A Shares are convertible at the option of the holders, beginning July 15, 1996, into shares of Seragen Common Stock at a per share conversion price equal to the lesser of $4.125 or 73 percent of the average closing bid prices for a five day period prior to the conversion date up to a maximum of 3,321,563 shares of Seragen Common Stock. Any shares the investor is unable to convert due to this limitation may be exchanged for $1,150 per share in cash. Terms of the Series A Shares also provide for 8% cumulative dividends payable in shares of Seragen Common Stock at the time of each conversion. The holders of the Series A Shares are not entitled to vote separately, as a series or otherwise, on any matter submitted to a vote of the shareholders of the Company. Each Series A Share has a liquidation preference equal to the sum of (a) $1,000, plus (b) an amount equal to any accrued and unpaid dividends from the date of issuance of the Series A Shares so that such amount must be paid on each Series A Share in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company before any distribution or payment is made to any holders of any shares of the Common Stock or any other class or series of the Company's capital stock which is junior to the Series A Shares. Any shares which remain outstanding on November 29, 1997 will be automatically converted into shares of Seragen Common Stock. As of December 31, 1996, 895 Series A Shares were converted into 566,400 shares of Common Stock at conversion prices ranging from $1.022 to $2.774 per share. The Series A Shares were reflected at $2,015,522 at December 31,1996 representing their liquidation value which includes accrued dividends payable from the issuance date through December 31, 1996. At December 31, 1996, $1,236,753 was reclassified to a current liability representing the 1,361,313 shares of common stock that would be -46- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS required to be redeemed due to the conversion cap limitation as of December 31, 1996. In June 1995, the Company issued 220,000 shares of common stock at $8.00 per share in payment of commissions incurred in connection with the formation of the alliance with Lilly. In August 1994, under the terms of the alliance with Lilly, the Company received $5 million representing payment for 787,092 shares of common stock at approximately $6.35 per share. In February 1994, the Company completed a private placement of units consisting of 1,127,004 shares of common stock at $6.00 per share and warrants to purchase an additional 281,751 shares of common stock at an exercise price of $10 per share which were immediately exercisable and expire on February 4, 1999. The net proceeds of this private placement were approximately $6.5 million. K. STOCK OPTIONS AND WARRANTS: Employee Stock Option Plans The Company's stock option plans allow for the grant of incentive stock options at prices not less than fair value on the date of grant, as determined by the Board of Directors, and nonqualified stock options at prices determined by the Board of Directors. The Company granted options under the 1981 Stock Option Plan until the plan termination in 1991. Accordingly, no additional grants may be made under this plan; however, options outstanding may still be exercised prior to their expiration date. The options generally vest ratably over 4 years and expire 10 years from date of issuance. The Company's 1992 Long Term Incentive Plan (the "1992 Plan") provides for the grant of incentive stock options, nonstatutory options, stock appreciation rights, restricted stock, deferred stock and other stock based awards. Officers, employees and consultants are eligible to receive awards under this plan; however, only officers and employees of the Company are eligible to receive incentive stock options. Incentive stock options will not be granted at less than fair market value or exercisable later than ten years from the date of the grant. Nonstatutory options will be exercisable at the price established by the Board of Directors or a committee thereof. Common shares in the amount of 2,300,000 were reserved for issuance pursuant to this plan in January 1992. In December 1996, the Board of Directors approved an amendment to the Company's 1992 Plan increasing the number of shares available under the plan from 2,300,000 to 8,000,000. The Company is seeking shareholder approval at its 1997 Annual Meeting of Shareholders for such amendment. All incentive stock options issued to date pursuant to this plan vest over a three to five-year period. Non-Employee Directors Non-Qualified Stock Option Plan The Company's 1992 Non-Employee Directors Non-Qualified Stock Option Plan provides for the granting of nonstatutory stock options at fair market value to Directors of the Company who are not officers or employees of the Company or Trustees of B.U. There are 200,000 common shares reserved for issuance pursuant to this plan. Commencing with the first date on which elected to serve as a director of the Company or on February 5, 1992, whichever is later, each eligible Director shall be granted an option to purchase 5,000 shares of Common Stock at the fair market value of the Common Stock on the date the option is granted, provided, however, that for any eligible Director who has previously -47- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS been awarded options to purchase stock in connection with his service as a director of the Company, the grant shall be reduced by the number of shares underlying the previous grants. At the commencement of each subsequent twelve month period in which the Director is elected to continue in office, an additional option to purchase 1,000 shares at fair market value shall be granted. The options acquired under the plan shall be exercisable upon completion of a full term of office as a member of the Board of Directors after the grant and if for any reason the term is not completed, or if the Director has failed to attend at least seventy-five percent (75%) of the regularly called meetings of the Board of Directors during such term, the option will be forfeited. Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan (the "Purchase Plan") allows employees to purchase the Company's common stock, and 200,000 common shares were reserved for issuance pursuant to this plan. All employees of the Company who have been employed for at least three months by the Company are eligible to participate in this plan. Shares are purchased through the accumulation of payroll deductions of 1% to 10% of each participant's compensation (up to a maximum of $25,000 per year). The purchase price of the shares is 85% of the fair market value of the stock at certain predetermined dates, as defined. The Company issued 34,432, 29,864, and 42,855 shares under the Purchase Plan in the years ended December 31, 1994, 1995 and 1996, respectively. In February 1997, the Board of Directors voted to terminate the Purchase Plan. A summary of the status of the Company's stock options as of December 31, 1994, 1995 and 1996 and changes during the year ended on those dates is presented below:
1994 1995 1996 ------------------- ------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year.... 1,637,570 $10.02 1,954,330 $9.12 1,773,440 $8.36 Granted........................... 452,432 6.25 283,264 5.57 5,728,529 1.37 Exercised......................... (43,189) 1.50 (117,014) 0.98 (111,825) 0.72 Canceled.......................... (92,483) 13.38 (347,140) 12.46 (587,178) 9.79 --------- --------- --------- Outstanding at end of year.......... 1,954,330 9.12 1,773,440 8.36 6,803,029 2.60 ========= ========= ========= Options exercisable at year-end..... 1,130,500 1,072,887 1,283,802 ========= ========= ========= Options available for future grant.. 901,759 904,349 1,416,006 ========= ========= =========
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option and purchase plans. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued and requires the Company to elect either expense recognition or disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by SFAS No. 123 would require fair-value based financial accounting to recognize compensation expense for the employee stock compensation plans. The Company has determined that it will elect the disclosure-only alternative. The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted and stock issued pursuant to the employee stock purchase plan as of December 31, 1996 using the Black Scholes option pricing model prescribed by SFAS No. 123. -48- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS The assumptions used and the weighted average information for the years ended December 31, 1995 and 1996 are as follows: The assumptions used and the weighted average information for the years ended December 31, 1995 and 1996 are as follows:
DECEMBER 31, 1995 DECEMBER 31, 1996 ----------------- ----------------- Risk-free interest rates............... 6.01% - 7.47% 5.52% - 6.73% Expected dividend yield................ - - Expected lives......................... 7.5 years 7.5 years Expected volatility.................... 96% 96% Weighted-average grant-date fair value options granted during the period........................... $5.57 $1.37 Weighted-average exercise price........ Weighted-average remaining contractual $8.36 $2.60 life of options oustanding........... 6.20 years 9.25 years Weighted-average exercise price of 1,072,987 and 1,283,802 options exercisable at December 31, 1995 and 1996, respectively............... $8.16 $7.37 The effect of applying SFAS No. 123 would be as follows: DECEMBER 31, 1995 DECEMBER 31, 1996 ----------------- ----------------- Pro forma net loss applicable to common stockholders..... $(21,311,315) $(35,932,478) Pro forma net loss per common share...................... $ (1.30) $ (2.15)
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The total fair value of the options granted and stock issued under the employee stock purchase plan during 1995 and 1996 was computed as approximately $1,235,000 and $6,795,000, respectively. Of these amounts approximately $210,000 and $951,000 would be charged to operations for the years ended December 31, 1995 and 1996, respectively. The remaining amount, approximately $6,230,000 would be amortized over the remaining vesting periods. The resulting pro forma compensation expense may not be representative of the amount to be expected in future years as pro forma compensation expense may vary based upon the number of options granted. The pro forma net loss applicable to common stockholders and pro forma net loss per common share presented above have been computed assuming no tax benefit. The effect of a tax benefit has not been considered since a substantial portion of the stock options granted are incentive stock options and the Company does not anticipate a future deduction associated with the exercise of these stock options. Warrants As of December 31, 1996, the following warrants were outstanding: As of December 31, 1996, the following warrants were outstanding:
WARRANTS OUTSTANDING EXERCISE PRICE EXPIRATION DATE -------------------- -------------- --------------- Equipment Loan 10,757 $12.55 Feb. 2, 2000 Private Placement 281,751 10.00 Feb. 4, 1999 Loan Guarantee 2,776,664 4.75 Jun. 7, 2005 Canadian Affiliate 519,033 8.79 Sep. 30, 2005 Series B Preferred Stock 8,167,196 4.00 Jul. 1, 2006
-49- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS L. COMMITMENTS AND CONTINGENCIES: Lease Commitments The Company has a renewable 10-year lease for its primary operating facility which expires in August 2002. Rent includes the Company's proportionate share of all real estate taxes and operating costs related to the facility. The Company leases certain other facilities and equipment under leases with varying terms and containing renewal options and escalation clauses related to increases in certain operating costs of the lessor. The rental expense for all operating leases was approximately $1,014,000, $1,281,000 and $1,420,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Approximate future minimum lease payments at December 31, 1996 are as follows:
OPERATING LEASES ----------- 1997 ...................................................... 1,372,000 1998 ...................................................... 1,064,000 1999 ...................................................... 870,000 2000 ...................................................... 776,000 2001 ...................................................... 776,000 Thereafter ................................................ ---------- Total minimum lease payments .............................. $5,891,000 ==========
Substantially all of the Company's operating leases and commitments were assumed by B.U. in connection with the sale of substantially all of the Company's assets to B.U. (see Note B). Royalty Arrangements The Company has several royalty arrangements, whereby it is obligated to pay royalties on revenue as defined. Employment Contracts The Company has entered into employment contracts with key employees that provide for minimum salary and severance payments as defined. Employee Benefits The Company has a 401(k) savings plan in which substantially all of its permanent employees are eligible to participate. Participants may contribute up -50- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS to 15% of their annual compensation to the plan, subject to certain limitations. Although the Company may make matching contributions, there were no such contributions to the plan in 1994, 1995 and 1996. M. RELATED PARTIES Consulting Contracts The Company incurred consulting fees to stockholders and directors of approximately $126,000, $155,000 and $169,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company also incurred expenses relating to research grants to, and clinical trials performed at, the institution employing a stockholder and a director of approximately $219,000, $185,000 and $175,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company also recorded $63,000 of grant revenue on an NIH grant relating to a subcontract from this institution in 1996. The full amount is paid as of December 31, 1996. The Company incurred consulting fees to other option holders of approximately $36,000, $18,000 and $12,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company also incurred expenses relating to research grants to the institution employing one of the option holders of approximately $150,000 for each of the years ended December 31, 1994 and 1995, respectively. N. ACCRUED EXPENSES: Accrued expenses consists of the following:
DECEMBER 31, ----------------------------- 1995 1996 ---------- ---------- Clinical and research .................. $ 845,426 $1,158,421 Professional service fees .............. 131,632 219,062 Payroll, vacation and benefits ......... 736,965 632,778 Other expenses ......................... 699,261 583,911 Dividends .............................. -- 583,295 ---------- ---------- $2,413,284 $3,177,467 ========== ==========
O. PRO FORMA INFORMATION (UNAUDITED): On February 18, 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to B.U. or a designated affiliate for $5 million. The closing of the transaction is subject to, among other things, approval by the Company's stockholders. B.U. has paid the Company $4.5 million as a deposit and has assumed responsibility for the facility's operations, including responsibility for operating costs. The Company currently may use this deposit to fund its operations. At the closing, a majority of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Both the deposit and the operating costs paid by B.U. are subject to refund in the event that conditions for closing are not met. Simultaneously, the Company entered into a service agreement with B.U. providing for the purchase by the Company of certain services related to product research, development, manufacturing, clinical trials, quality control, and quality assurance. This service contract expires in January 1999 and is subject to early termination provisions, as defined, including the option of B.U. to terminate the agreement if losses during a contract year exceed $9.0 million and the Company does not reimburse B.U. for the losses in excess of $9.0 million. The service contract may be renewed for two successive one-year terms at the option of the Company. The Company has the option to repurchase the assets comprising the manufacture and clinical operations facilities. The Company has -51- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of this contract, respectively. The fees can be mutually increased or decreased, but may not be reduced to less than $4.3 million per contract year. The service agreement is expected to substantially reduce operating costs in research and development as Seragen will be contracting solely for the services that the Company requires for clinical and manufacturing purposes. The following unaudited pro forma financial information reflects the Company's balance sheet, as of December 31, 1996 and the Company's historical statement of operations for the year ended December 31, 1996, assuming the transactions described above were consummated on January 1, 1996. The unaudited pro forma financial statements do not purport to be indicative of the results which would actually have been reported if the transactions had been effected on that date or which may be reported in the future. -52- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS SERAGEN, INC. UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1996
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Current assets: Cash and cash equivalents................................................. $ 1,548,392 $5,000,000(a) $ 6,548,392 Restricted cash........................................................... 610,318 - 610,318 Contract receivable....................................................... 485,261 - 485,261 Unbillied contract receivalbe............................................. 833,983 - 833,983 Prepaid expenses and other current assets................................. 285,356 - 285,356 ------------- ---------- ------------- Total current assets................................................. 3,763,310 5,000,000 8,763,310 Property and equipment, net.................................................. 4,604,115 (4,595,594)(b) 8,521 Other assets................................................................. 77,183 - 77,183 ------------- ---------- ------------- Total assets......................................................... $ 8,444,608 $ 404,406 $ 8,849,014 ============= ========== ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) Current liabilities: Accounts payable.......................................................... 1,111,477 - 1,111,477 Current maturities of long-term debt...................................... 37,418 - 37,418 Accrued expenses.......................................................... 3,177,467 - 3,177,467 Preferred stock redemption liability...................................... 1,236,753 - 1,236,753 Short-term obligation, less unamortized discount.......................... 4,128,097 - 4,128,097 ------------- ---------- ------------- Total current liabilities............................................ 9,691,212 - 9,691,212 ------------- ---------- ------------- Non-current liabilities: Lilly contract obligation................................................. 1,200,000 - 1,200,000 Canadian affiliate put option liability................................... 2,400,000 - 2,400,000 ------------- ---------- ------------- Total non-current liabilities........................................ 3,600,000 - 3,600,000 ------------- ---------- ------------- Commitments and contingencies Stockholders' (deficit): Preferred stock, $.01 par value; 5,000,000 shares authorized Convertible preferred stock, Series A, $.01 par value; issued and outstanding 3,105 shares at December 31, 1996, $2,015,522 liquidation preference................................................. 2,015,522 - 2,015,522 Convertible preferred stock Series B, $.01 par value; issued and oustanding 23,800 shares at December 31, 1996, $23,800,000 liquidation preference................................................. 23,800,000 - 23,800,000 Convertible preferred stock Series C, $.01 par value; issued and oustanding 5,000 shares at December 31, 1996, $5,100,000 liquidation preference................................................. 5,100,000 - 5,100,000 Common stock, $.01 par value; 70,000,000 shares authorized; issued 17,199,458 shares at December 31, 1996................................. 171,994 - 171,994 Additional paid in capital................................................... 151,323,022 404,406(c) 151,727,428 Accumulated deficit.......................................................... (187,254,811) - (187,254,811) ------------- ---------- ------------- (4,844,273) 404,406 (4,439,867) Less-treasury stock (777 shares at cost at December 31, 1996................. (2,331) - (2,331) ------------- ---------- ------------- Total stockholders' (deficit)..................................... (4,846,604) 404,406 (4,442,198) ------------- ---------- ------------- Total liabilities and stockholders' (deficit)..................... $ 8,444,608 $ 404,406 $ 8,849,014 ============= ========== =============
-53- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS SERAGEN, INC. UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1996 The following pro forma adjustments are required to reflect the sale of the majority of the Company's property and equipment, the assignment of certain capital and operating leases to Boston University and the Company's service contract with Boston University as discussed in Note B above. The net book value and estimated disposition costs are based on the estimated fair value, as determined by the management of the Company. Such allocation will be revised to reflect changes in assets through the date of closing and the determination of actual disposition costs. Notes to Pro Forma Balance Sheet (a) Reflects an increase in cash for the receipt of the purchase price. $5,000,000 (b) Reflects a reduction in property and equipment for the net book value of assets sold. $4,595,594 (c) Reflects the excess of the purchase price over the net book value of the asset sold as additional paid in capital. $404,406 -54- SERAGEN, INC. NOTES TO FINANCIAL STATEMENTS UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
HISTORICAL ADJUSTMENTS PRO FORMA ------------ ------------- ------------ Revenue: Contract revenue and license fees ....... $ 10,542,315 $ -- $ 10,542,315 Operating expenses: Cost of contract revenue and license fees 5,704,243 -- 5,704,243 Research and development ................ 13,959,405 (13,236,892)(a) 722,513 Contract R&D with affiliate ............. -- 5,521,342 (b) 5,521,342 General and administrative .............. 7,208,465 (1,669,337)(a) 5,539,128 ------------ ------------ ------------ 26,872,113 (9,384,887) 17,487,226 ------------ ------------ ------------ Loss from operations ................. (16,329,798) 9,384,887 (6,944,911) Loss incurred in connection with Canadian affiliate ...................... 2,923,864 -- 2,923,864 Interest income ........................... 120,740 -- 120,740 Interest expense .......................... 5,453,638 -- 5,453,638 ------------ ------------ ------------ Net loss ............................. (24,586,560) 9,384,887 (15,201,673) ============ ============ ============ Preferred stock dividends ................. 10,394,918 -- 10,394,918 ------------ ------------ ------------ Net loss applicable to common stockholders $(34,981,478) $ 9,384,887 $(25,596,591) ============ ============ ============ Net loss per common share ................. $ (2.09) $ -- $ (1.53) ============ ============ ============ Weighted average common shares used in computing net loss per share ........ 16,724,493 -- 16,724,493 ============ ============ ============
The following pro forma adjustments are required to reflect the sale of the majority of the Company's property and equipment, the assignment of certain capital and operating leases to Boston University, the Company's service contract with Boston University and the transfer of the majority of the Company's employees to B.U. as discussed in Note B. The pro forma adjustments will be revised to reflect changes in assets through the date of closing and the determination of actual disposition costs. Notes to Pro Forma Balance Sheet (a) Reflects the estimated reduction of operating expenses due to the sale of property and equipment, the transfer of employees to B.U. and reductions in the related research and development and general and administrative activities. $14,906,229 (b) Reflects the contracted cost for the initial contract year of research and development activities to be received through the service contact with B.U. $5,521,342 -55- ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On March 12, 1997, the Board of Directors of the Company at the recommendation of the Company's Audit Committee voted to replace Coopers & Lybrand L.L.P. with Arthur Andersen LLP as the Company's independent accountants effective March 12, 1997. Coopers & Lybrand L.L.P.'s reports for the last two fiscal years contained no adverse opinions, disclaimers, or qualifications or modifications as to uncertainty, audit scope or accounting principles, except that the report on the 1995 financial statements included an explanatory paragraph concerning factors which raise substantial doubt about the Company's ability to continue as a going concern. During such two fiscal year period and the subsequent interim period since then, there have been no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Coopers & Lybrand L.L.P., would have caused it to make reference to the subject matter of disagreement in connection with its reports. -56- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following identifies the Company's current directors, each of the eight persons who has been nominated by the Board of Directors for election as a Director of the Company, and the Company's executive officers. All ages indicated are as of March 28, 1997.
NAME AGE POSITIONS WITH THE COMPANY - ---- --- -------------------------- Reed R. Prior ................ 45 Chairman of the Board of Directors, Chief Executive Officer and Director Gerald S. J. Cassidy ......... 56 Director Elizabeth Chen ............... 33 Vice President of Business Development Kenneth G. Condon ............ 49 Director Norman A. Jacobs ............. 59 Director Jean C. Nichols, Ph.D. ........ 45 President, Chief Technology Officer and Director John R. Silber, Ph.D. ......... 34 Director
Each director holds office until the next annual meeting of shareholders and until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. The Company's by-laws authorize the Board of Directors from time to time to determine the number of its members. The Company's officers are elected annually by the Board of Directors at a meeting held immediately following each annual meeting of shareholders or as soon thereafter as necessary and convenient in order to fill vacancies or newly created offices. Each officer holds office until his or her successor is duly elected and qualified, or until his or her earlier death, resignation, or removal. The Board of Directors may remove any officer elected or appointed by the Board whenever in its judgement the best interests of the Company will be served, but removal of an executive officer is to be without prejudice to any contractual rights of the person so removed. There are no family relationships among any of the Company's directors and executive officers. There are no arrangements or understandings between any director or executive officer and any other person pursuant to which that director or executive officer was or is to be selected. Reed R. Prior -- Mr. Prior was elected Chairman of the Board of Directors and a member of the Executive Committee of the Company and Chief Executive Officer and Treasurer in November 1996. Prior to joining the Company, Mr. Prior served as President and Chief Executive Officer of ActiMed Laboratories, a privately-held medical diagnostics company. From 1992 to 1995, he was President and Chief Executive Officer of Receptor Laboratories, Inc., a start-up biopharmaceutical firm which was sold to Cytel Corporation in July 1995. From 1990 to 1991, Mr. Prior served as President and Chief Executive Officer of Genex Corporation, which merged with Enzon, Inc. in October 1991. From 1986 to 1990, Mr. Prior was President and Chief Executive Officer of i-Stat Corporation, a development stage medical diagnostics company. Mr. Prior earned a B.S. in biophysics from Lyman Briggs College, a residential science and mathematics -57- college within Michigan State University, and received an M.B.A. from Harvard Business School. John E. Bagalay, Jr., Ph.D., Esq.; -- Dr. Bagalay has served as a member of the Board of Directors of the Company since March 1991. Dr. Bagalay has been Managing Director of Community Technology Fund, the venture capital fund of Boston University, since 1989. From 1984 to 1988, Dr. Bagalay served as General Counsel of Lower Colorado River Authority, a regulated electric utility in Austin, Texas. Prior to that time, he was General Counsel of Houston First Financial Group and General Counsel of Texas Commerce Bancshares, Inc. He is a director of Cytogen Corp., a director and member of the Compensation Committee of Wave Systems Corp. and of Hymedix, Inc., and a director of several privately held companies. Gerald S.J. Cassidy -- Mr. Cassidy has served as a member of the Board of Directors of the Company since December 1987. Mr. Cassidy is the founder since 1975, Chairman of The Cassidy Companies, Inc., a holding company specializing in corporate public affairs services. Prior to the establishment of The Cassidy Companies, he worked as a Trial Attorney in the South Florida Migrant Legal Services Program, as Executive Director and General Counsel of the Democratic National Committee's 1973 Reform Commission, and on two separate occasions, from 1969 to 1973 and from 1974 to 1975, as General Counsel of the U.S. Senate's Select Committee on Nutrition and Human Needs. He has been a featured speaker on legislative issues at numerous governmental, university, industry, and trade association conferences. He is a member of the Board of Trustees of Tougaloo College, the Steering Committee of the Capital Campaign for Villanova University, the Board of Overseers for the School of Nutrition at Tufts University, the Board of Trustees of Fontbonne College, the Board of Directors of the Children's Inn at the National Institute of Health, and a member of the Board of Trustees of the Washington Theological Union. Mr. Cassidy holds a B.S. from Villanova University and a J.D. from the Cornell University School of Law. In 1995 he received an Honorary Doctor of Social Science Degree from Villanova University. Elizabeth C. Chen -- Ms. Chen joined the Company in January 1997 as Vice President of Business Development. Prior to joining the Company, Ms. Chen had been Vice President - General Manager of ActiMed Laboratories, Inc., a privately-held medical technology company. From 1992 - 1996, Ms. Chen was an independent consultant to a number of venture capital funds and a variety of start-up biotech companies. From 1985 - 1992, Ms. Chen held a number of positions in business development and marketing planning at Merck & Company, Inc., Migliara/Kaplan and T. Rowe Price. Ms. Chen holds a B.A. in Organizational Behavior from Yale and an M.B.A. from The Wharton School of the University of Pennsylvania. Kenneth G. Condon, C.P.A. -- Mr. Condon has served as a member of the Board of Directors of the Company since January 1992. Mr. Condon has also served as Boston University's Treasurer since 1992 and its Vice President for Financial Affairs since 1986. Prior to his serving in such capacity, Mr. Condon served as Associate Vice President for Financial and Business Affairs, Comptroller, Acting Comptroller and Manager of Unrestricted Funds of Boston University. Mr. Condon is Chairman of the Board and Director of Bayfunds, Inc. and a member of several advisory boards of BayBanks, Inc. Mr. Condon also serves as Treasurer and as a Director of the Financial Executives Institute of Massachusetts, and as a member of the Board of Trustees of Newbury College. Mr. Condon is a Certified Public Accountant and holds a B.S. in Economics and Mathematics from Tufts University and an M.B.A. in Finance from the Wharton School of Finance. Norman A. Jacobs -- Mr. Jacobs has served as a member of the Board of Directors of the Company since 1990. Mr. Jacobs has served as President of Becton Dickinson Transdermal Systems, a unit of Becton Dickinson and Company, since September 1990. From January 1990 to September 1990, Mr. Jacobs acted as a consultant to biotechnology companies, including Seragen. From 1986 through 1989, Mr. Jacobs was President of BioTechnica International, a genetic engineering research company. Mr. Jacobs was one of the founders, in 1962, of Amicon Corporation, which is a manufacturer of laboratory separation systems and adhesives and polymer specialty materials. He served as President of Amicon from 1971 through 1983, and as President of the Amicon Division of W.R. Grace from 1983 to 1985. He earned an M.B.A. from Harvard Business School, an M.S. in Chemical Engineering from M.I.T., and a B.E. in Chemical Engineering from Yale. -58- John R. Murphy, Ph.D.; -- Dr. Murphy has served as a member of the Board of Directors of the Company since 1985. Since 1984, he has held various positions at the Boston University School of Medicine and is currently Professor of Medicine, Biochemistry and Microbiology at the Boston University School of Medicine, and Chief of Biomolecular Medicine at the Boston University Medical Center/University Hospital. From 1973 to 1984, he was an Assistant and Associate Professor of Microbiology and Molecular Genetics at Harvard University. Dr. Murphy holds a Bachelor of Arts degree in Zoology and a Masters degree in Microbiology from the University of Connecticut and a Doctorate degree from the University of Connecticut School of Medicine. Dr. Murphy completed his postdoctoral training at Harvard University as a Research Fellow of Biology. Jean C. Nichols, Ph.D. -- Dr. Nichols was elected President and Chief Technology Officer and a member of the Board of Directors of the Company in November 1996. From 1992 to 1996, she served as Senior Vice President, and from 1987 to August 1992, as Vice President of Development for the Company. From 1984 to 1987, Dr. Nichols was Director of Research and Development, and from 1983 to 1984, served as the Company's scientific liaison. Dr. Nichols received a B.S. in Biology and a Ph.D. in Bacteriology and Immunology from the University of North Carolina. Upon completion of her studies, Dr. Nichols was a Research Fellow at the Harvard Medical School. Before joining the Company, she held the position of Instructor in the Department of Microbiology and Molecular Genetics at the Harvard Medical School. John R. Silber, Ph.D. -- Dr. Silber has served as a member of The Board of Directors of the Company since August 1987. He is the Chancellor of Boston University and has been a member of its Board of Trustees since 1971. Dr. Silber received a B.A. from Trinity University and an M.A. and Ph.D. in philosophy from Yale University. Dr. Silber is Chairman of the Massachusetts State Board of Education, a Trustee of the WGBH Educational Foundation, Vice President of the United States Strategic Institute in Washington, D.C., and a director of U.S. Surgical Corporation. Dr. Silber is also Chairman of Americans for Medical Progress. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, there was compliance during the fiscal year ended December 31, 1996 with all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners. -59- ITEM 11. EXECUTIVE COMPENSATION Summary of Executive Compensation The following table summarizes the compensation for services rendered in all capacities to the Company during the fiscal years ended December 31, 1996, 1995, and 1994, of the chief executive officer of the Company and each of the four most highly compensated persons who served as executive officers of the Company during the last fiscal year (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) ---------------------- OTHER LONG-TERM NAME AND ANNUAL COMPENSATION PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION SECURITIES - ------------------ ---- --------- -------- ------------ UNDERLYING OPTIONS # --------- Reed R. Prior 1996 $ 55,417(2) $100,000(3) $17,845(4) 4,885,747 Chairman, Chief Executive Officer and Treasurer George W. Masters(5) 1996 237,812(6) 30,000(7) 41,130(8) 50,000 Chairman, Chief Executive 1995 300,000 - 42,248(9) 40,000 Officer and Treasurer 1994 275,000(10) 70,000(11) 44,716(12) 40,000 Jean C. Nichols, Ph.D. 1996 195,542(13) - - 692,752(14) President and Chief 1995 190,000 - - 18,000(15) Technology Officer 1994 175,000 38,500(11) - 17,500(15) Leonard F. Estis, Ph.D.(14) 1996 146,667 - - 9,328 Vice President for Research & 1995 160,000 - - 15,000 Development 1994 152,000 30,000(11) - 17,500 Thomas N. Konatich(15) 1996 138,125(16) - 21,372(17) 10,348 Vice President for Finance, 1995 145,000 - - 12,000 Chief Financial Officer 1994 130,000 26,000(11) - 15,000
____________ (1) Portions of Annual Compensation have been deferred under the Company's Employee Savings Plan. These amounts are included in calculation of "Salary" and "Bonus" as reflected in the table. (2) In fiscal year 1996, Mr. Prior was paid $55,417 base salary for his partial year of service to the Company. His annual base salary was $350,000. (3) In fiscal year 1996, Mr. Prior was paid a $100,000 signing bonus. (4) Amount includes payment of a housing allowance of $17,845. (5) Mr. Masters served as Vice Chairman, Chief Executive Officer and President through November 5, 1996. Pursuant to the terms of his Retirement and Consulting Contract, he remained a consultant to the Company through February 28, 1997. (6) Mr. Masters was paid $237,812 for his partial year of service to the Company. His annual base salary was $300,000. Included in Mr. Masters' salary is $25,000 for consulting fees rendered to the Company in 1996 pursuant to Mr. Masters' Retirement and Consulting Agreement. -60- (7) Pursuant to Mr. Masters' Retirement and Consulting Agreement, bonus payment for services rendered to the Company in fiscal 1996 were paid in fiscal year 1997. (8) Amount includes payment of a housing allowance of $21,130 and accrued vacation payment of $20,000. (9) Amount includes payment of a housing allowance of $35,248. (10) In fiscal year 1994, Mr. Masters was paid $275,000, which represents three months at $200,000 base salary, and nine months at $300,000 base salary. (11) Bonus payments for services rendered to the Company in fiscal year 1994 were paid in fiscal year 1995. (12) Amount includes payment of a housing allowance of $44,716. (13) In fiscal year 1996, Dr. Nichols was paid $195,542, which represents $190,000 base salary through November 5, 1996, and $225,000 base salary from November 6, 1996 through December 31, 1996. (14) Represents an option granted on December 18, 1996 comprised of (i) 514,164 shares and (ii) 164,409 shares which were granted upon cancellation of options for an equal number of shares. Also includes an option for 14,179 shares which was canceled on December 18, 1996. See "Aggregated Fiscal Year-end Option Values" table and "Ten-Year Option Repricings" table. (15) Represents options which were canceled as of December 18, 1996, and reissued at a lower price, such options are included in fiscal year 1996. See "Aggregated Fiscal Year-end Option Values" table and "Ten-Year Option Repricings" table. (16) Dr. Estis served as Vice President of Research and Development through November 29, 1996. (17) Mr. Konatich served as Vice President for Finance and Chief Financial Officer through November 15, 1996. (18) In fiscal year 1996, Mr. Konatich was paid $138,125, which represents six months at $145,000 base salary, and four and one-half months at $175,000 base salary. (19) Amount includes payment of accrued vacation of $21,372. -61- PAGE Option Grants The following table sets out the material terms of each grant of a stock option to a Named Executive Officer during the last fiscal year, including the number of options granted, the exercise price and the expiration date of each option, as well as the percent that the grant represents of total options granted to employees during the fiscal year. In addition, in accordance with SEC rules, the table discloses hypothetical gains that would exist for the respective options. These gains are based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted over the full option term. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and overall market conditions. OPTION GRANTS IN LAST FISCAL YEAR OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE ------------------------- AT ASSUMED ANNUAL RATE % OF TOTAL OF STOCK PRICE NO. OF SECURITIES OPTIONS APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ---- NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($) - ---- ------------- ----------- ------ ---- ----- ------ Reed R. Prior 4,885,747 85.4% $1.31 12/18/06 4,034,350 10,223,835 George W. Masters(2) 50,000 0.9% $5.00 12/05/06 -- -- Jean C. Nichols, Ph.D. 14,179(3) 0.2% $4.25 04/26/06 37,897 96,040 678,573(4) 11.9% $1.31 02/18/06 560,324 1,419,970 Leonard F. Estis, Ph.D.(5) 9,328 0.2% $4.25 04/26/06 24,932 63,182 Thomas N. Konatich(6) 10,348 0.2% $4.25 04/26/06 27,658 70,091
____________ (1) All options were granted under the Company's Amended 1992 Long Term Incentive Plan ("1992 Plan") and were based on the fair market value of the Company's Common Stock on the date of grant except in the case of the option granted to George Masters. All options vest either monthly or quarterly over a three to five year period. Under the terms of the 1992 Plan, upon a change in control or a potential change in control (each as defined in the 1992 Plan), the vesting of all options listed above will be accelerated such that the options will be fully vested and, unless otherwise determined by the committee administering the plan, those options will be cashed out. In the event of a merger or consolidation, the options terminate unless they are assumed by the merged or consolidated corporation or that corporation issues substitute options; however, if that corporation does not assume the options or issue substitute options, the options immediately vest in full. Additionally, under the 1992 Plan, optionees may settle any tax withholding obligations with the Company's Common Stock. The Committee that administers the 1992 Plan has authority: to substitute new options for previously granted options (including previously granted options having higher option exercise prices); to accelerate the vesting of options upon the occurrence of the optionee's termination due to death, disability or retirement; and generally to amend the terms of any option, including the exercise price (so long as the optionee consents to any amendment that impairs his or her rights). (2) Mr. Masters terminated employment with the Company on November 6, 1996. (3) Represents options which were canceled as of December 18, 1996 and reissued at a lower price. See "Summary Compensation Table" and "Ten-Year Option Repricings". (4) Represents an option granted on December 18, 1996 comprised of (i) 514,164 shares and (ii) 164,409 shares which were granted upon cancelation of options for an equal number of shares. See "Summary Compensation Table" table and "Ten-Year Option Repricings". -62- (5) Dr. Estis terminated employment with the Company on November 29, 1996. (6) Mr. Konatich terminated employment with the Company on November 15, 1996. Fiscal Year-End Option Values The following table sets forth the number of shares covered by both exercisable and unexercisable stock options as of December 31, 1996, and the value of the "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the year-end price of Common Stock. AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL YEAR OPTIONS AT FISCAL YEAR END(#) END($)(1) ----------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Reed R. Prior 203,571 4,682,176 0 0 George W. Masters(2) 246,000 154,000 0 0 Jean C. Nichols, Ph.D. 87,698 640,874 0 0 Leonard F. Estis, Ph.D.(3) 115,903 0 0 0 Thomas N. Konatich(4) 48,198 0 0 0
_____________ (1) Amounts based on the last reported sale price of the Common Stock as of December 31, 1996 of $1.00. (2) Mr. Masters terminated employment with the Company on November 6, 1996. (3) Dr. Estis terminated employment with the Company on November 29, 1996. (4) Mr. Konatich terminated employment with the Company on November 15, 1996. -63- TEN-YEAR OPTION REPRICINGS The following table sets forth information regarding all repricing of options held by the Named Executive Officers during the last ten fiscal years.
NUMBER OF MARKET PRICE EXERCISE SECURITIES OF STOCK AT PRICE AT TIME LENGTH OF ORIGINAL UNDERLYING TIME OF OF REPRICING OPTION TERM OPTIONS REPRICING OR OR NEW REMAINING AT DATE OF REPRICED OR AMENDMENT AMENDMENT EXERCISE REPRICING OR NAME DATE AMENDED(#) ($) ($) PRICE($) AMENDMENT NAME - ---- ---- ---------- --- --- -------- -------------- Reed R. Prior - - - - - - George W. Masters(1) - - - - - - Jean C. Nichols, Ph.D.(2) 12/18/96 19,230 1.313 15.00 1.313 1 Year & 9 Months 12/18/96 15,000 1.313 15.00 1.313 2 Years & 2 Months 12/18/96 80,500 1.313 15.00 1.313 5 Years & 1 Month 12/18/96 17,500 1.313 6.50 1.313 7 Years & 2 Months 12/18/96 18,000 1.313 5.50 1.313 8 Years & 4 Months 12/18/96 14,179 1.313 4.25 1.313 9 Years & 4 Months Leonard F. Estis, Ph.D.(3) - - - - - - Thomas N. Konatich(4) - - - - - -
_____________ (1) Mr. Masters terminated employment with the Company on November 6, 1996. (2) All prior vesting of original options for Dr. Nichols has been forfeited. All repriced options commenced vesting on December 18, 1996, and have a three year term. (3) Dr. Estis terminated employment with the Company on November 29, 1996. (4) Mr. Konatich terminated employment with the Company on November 15, 1996. Director Compensation Fees. The Company pays its Directors who are neither officers nor employees of the Company, nor Trustees of Boston University, an annual retainer of $10,000, plus $1,000 per meeting of the Board of Directors of the Company and $500 per meeting of any committee of the Board of Directors which occurs on a day other than that on which a Board of Directors meeting occurs. Non-Employee Director Stock Options. Under the Company's 1992 Non-Employee Director Non-Qualified Stock Option Plan (the "Director Plan"), Directors who are not officers or employees of the Company, or Trustees of Boston University (as long as Boston University owns greater than 5% of any class of the Company's outstanding securities), and who are elected to serve as a Director of the Company on any date on or after February 5, 1992, are awarded options under the Director Plan. Commencing on the first date on which elected to serve, each such Director is granted an option to purchase 5,000 shares of Common Stock at a purchase price equal to the fair market value of the Common Stock (e.g., the -64- last reported sale price on the Nasdaq NMS) on the day the option is granted, except that any such grant to a Director who was awarded options to purchase stock in connection with his service as a Director of the Company prior to February 5, 1993 is to be reduced by the number of shares underlying the previous grants. At the commencement of each subsequent 12 month period in which a Director is elected to continue in office, an additional option to purchase 1,000 shares of Common Stock at fair market value is to be granted. Each option has a term of five years and becomes exercisable in full upon the recipient's completion after the date of grant of a full term of office as a member of the Board of Directors. If the term is not completed, or if the Director has failed to attend at least 75% of the regularly called meetings during the term, the option will be forfeited. Options cease to be exercisable 60 days after the date the optionee ceases to be a Director for any reason other than death or disability. Options cease to be exercisable 180 days after the date the optionee ceases to be a Director by reason of disability or death. In no event, however, is an option exercisable after the expiration date of the option. On May 13, 1996, Dr. Bagalay, Mr. Cassidy, Mr. Condon, Mr. Jacobs and Dr. Murphy each received an option to purchase 1,000 shares at an exercise price of $4.625 per share under the Director Plan. As of March 21, 1997, no other directors have received options under the Director Plan. Other Director Arrangements. Dr. Murphy, a Director, and Dr. Howell, a former Director, have consulting agreements with the Company. See "Executive Compensation -- Employment and Consulting Agreements; Change in Control Arrangements" and "Certain Transactions." Employment and Consulting Agreements; Change in Control Arrangements Employment Agreement with Reed R. Prior. In November 1996, the Company entered into an employment agreement with Reed R. Prior pursuant to which Mr. Prior is serving as Chief Executive Officer and Chairman of the Board. Mr. Prior is also the Treasurer of the Company. Mr. Prior's initial annual base salary is $350,000. In addition, the Company pays Mr. Prior up to $4,500 per month as reimbursement for rental of an apartment, living expenses and weekly commuting between the Company's offices and his permanent residence. Mr. Prior was reimbursed for his moving expenses to relocate to an apartment in the Boston area. The Company will reimburse Mr. Prior for any additional taxes as a result of living, commuting or moving expenses. Mr. Prior is entitled to participate in the bonus and benefit programs that are available to the Company's employees, and is entitled to health, life and disability insurance. Pursuant to Mr. Prior's employment agreement, in December 1996, the Company issued to Mr. Prior an option to purchase 4,885,747 shares of common stock equal to 8.5% of the Company's common stock, on a fully diluted basis, at a price of $1.31 per share, to vest in 48 monthly increments during the term of the agreement. The agreement also provides for anti-dilution protections which, among other things, require the Company to issue additional options as necessary to cause the number of shares underlying his stock option to equal but not exceed 8.5% of the Company's outstanding Common Stock on a fully diluted basis. These anti-dilution provisions will be applicable until the Company sells $20,000,000 in equity or convertible securities to non-affiliated persons. The Company has the obligation to register and maintain registration for resale of such shares on Form S-8. Mr. Prior is entitled to receive payments in the event of certain transactions that may be deemed a "change in ownership" of the Company. A "change in ownership" includes (1) any acquisition of all or substantially all of the Company's equity securities or operating assets, whether by way of merger, sale of assets, stock purchase, tender offer or otherwise, or (2) the sale or out-licensing of the majority (in value) of the Company's technology assets. In this event, Mr. Prior is entitled to receive an "Asset Value Realization Bonus" equal to 8.5% of the net proceeds from the change in -65- ownership transaction. The amount that the Company must pay Mr. Prior will be reduced by the amount of gain recognized by Mr. Prior as a result of his sale of Common Stock of the Company acquired as a result of exercise of options (or deemed sales in certain circumstances when he is able to, but does not, sell). Mr. Prior has executed a waiver releasing the Company from any obligations that it may have under his employment agreement with respect to the Company's sale of its operating facility to B.U. The Company's agreement with Mr. Prior continues until terminated by either party on written notice of not less than 30 days. The employment agreement may be terminated by the Company with or without "just cause." In the event the Company terminates Mr. Prior's employment other than for "just cause," or in the event that Mr. Prior terminates his employment for "good reason," the Company is required to pay Mr. Prior as severance a lump sum payment equal to one year's salary based on the annual rate in effect on the date of termination. Upon such termination, the Company will also provide Mr. Prior with accelerated vesting of his stock options. "Just cause," as defined in the agreement, consists of fraud, a felony conviction, or a breach of a material term of the agreement or willful failure to perform material duties which are not cured following written notice (all as defined in the agreement). "Good reason," as defined in the agreement, includes (i) the refusal by the Board of Directors of a bona fide financing offer, (ii) refusal of the Board of Directors to approve major spending cuts or operational changes, (iii) breach by the Company of a material term under the employment agreement, (iv) a change in ownership, and (v) a change in control. Mr. Prior is entitled to receive a lump sum payment equal to one year's salary in the event of death or of physical or mental disability of a nature sufficient to result in his termination by the Board. Pursuant to the terms of the agreement, the Company established an irrevocable letter of credit in an amount equal to $175,000, naming Mr. Prior as the beneficiary as partial security for the payment of severance. The agreement also includes non-competition, confidentiality and indemnification provisions. Employment Agreement with Jean C. Nichols. On November 6, 1996, the Company entered into an employment agreement with Jean C. Nichols, Ph.D., pursuant to which Dr. Nichols was promoted to and serves as President and Chief Technology Officer of the Company. Dr. Nichols' agreement also provides that she serve as a director of the Company. Dr. Nichols' annual base salary is $225,000. Dr. Nichols is entitled to participate in the bonus and benefit programs that are available to the Company's employees, and is entitled to health, life and disability insurance. Pursuant to Dr. Nichols' employment agreement, in December 1996, the Company issued to Dr. Nichols an option to purchase 678,573 shares of common stock at a price of $1.31 per share, to vest in 36 equal monthly increments during the term of the agreement and canceled options for 164,409 shares of common stock. Such option in addition to an existing option for 50,000 shares equal 1.275% of the Company's common stock, on a fully diluted basis. The agreement also provides for anti-dilution protections which, among other things, require the Company to issue additional options as necessary to cause the number of shares underlying her stock options to equal but not exceed 1.275% of the Company's outstanding Common Stock on a fully diluted basis. These anti-dilution provisions will be applicable until the Company sells $20,000,000 in equity or convertible securities to non-affiliated persons. The Company has the obligation to register and maintain registration for resale of such shares on Form S-8. The Company's agreement with Dr. Nichols continues until terminated by either party on written notice of not less than 30 days. The employment agreement may be terminated by the Company for cause. In the event the Company terminates Dr. Nichols' employment other than for cause, the Company is required to pay to Dr. Nichols one year's salary based on the annual rate in effect on the date of termination. "Cause," as defined in the agreement, consists of fraud, a felony conviction, or a breach of a material term of the agreement or willful failure to perform material duties which are not cured following written notice (all as defined in the agreement). Dr. Nichols is entitled to receive one year's salary in the event of death or disability. The agreement also includes non-competition, confidentiality and indemnification provisions. -66- Option plans. Under the Company's 1992 Plan, upon a change in control or a potential change in control (each as defined in the 1992 Plan), the vesting of options granted to the named executive officers under the 1992 Plan will be accelerated, and the value of the options will, unless otherwise determined by the Compensation Committee, be cashed out at a price to be determined at the time of the cash out. See footnote 1 to the "Option Grants in Last Fiscal Year" table. Although the exact amount to be paid by the Company cannot be determined, such amount could be in excess of $100,000 for each of the Named Executive Officers. Agreements with others. In November 1996, the Company entered into a retirement and consulting agreement with Mr. Masters, former chief executive officer and president. Pursuant to this agreement, Mr. Masters was paid a consulting fee of $12,500 per month during the initial consulting period beginning November 6, 1996 and ending December 31, 1996. Mr. Masters was paid $5,000 per month during the period beginning January 1, 1997 and ending February 28, 1997. Mr. Masters was also entitled to receive a $30,000 bonus for services rendered during fiscal year 1996, which was paid in 1997. The Company had a consulting agreement with Dr. Murphy, a Director of the Company who has declined to stand for reelection in 1997. Pursuant to this agreement, Dr. Murphy was paid a consulting fee of $100,000 per year, and was paid that amount during the fiscal year ended 1996, to provide consulting services on biotechnology matters. The agreement expired December 31, 1996. The Company anticipates extending this agreement into 1997 at a rate of $50,000 per year. The Company may elect to impose a two year noncompetition period following the termination or cancellation of the agreement, provided the Company compensates Dr. Murphy during such period at one-half the rate of compensation in effect at the time the termination or cancellation occurs. Dr. James M. Howell, former Chairman of the Board of Directors, also had a consulting agreement with the Company. Pursuant to this agreement, Dr. Howell was paid a consulting fee of $68,750 in fiscal year 1996 to provide consulting services on business matters. The agreement was terminated on November 30, 1996. Pursuant to the agreement, Dr. Howell agreed not to compete with the Company during the term of the agreement and for a period of one year following the termination of the agreement. Dr. Howell is also subject to certain confidentiality obligations. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee during fiscal year 1996 were Messrs. Cassidy and Jacobs. In June 1995, the Company finalized three separate lines of credit which were guaranteed by three different entities for a total of $23.8 million in guaranteed bank financing for the Company. Seragen issued warrants to the guarantors for the purchase of 2,776,664 shares of Common Stock at an exercise price of $4.75 per share. These warrants are immediately exercisable and expire in 2005. Boston University, Seragen's majority stockholder, was the lead guarantor, providing a guaranty of $11.8 million in exchange for a warrant to purchase 1,376,666 shares of Common Stock. Two other guarantors provided guarantees to secure loans of $12 million. Gerald S.J. Cassidy, a member of the Company's Board of Directors, was one of the two guarantors, providing a guaranty of $2 million in exchange for a warrant to purchase 233,332 shares of Common Stock. Leon C. Hirsch and Turi Josefsen provided guaranties of the remaining $10 million in exchange for warrants to purchase an aggregate of 1,166,666 shares of Common Stock (see "Share Ownership"). In July 1996, the Company restructured its arrangement with the guarantors of the Company's $23.8 million loan financing obtained in June 1995 to release the Company of its liability to the banks involved. The new agreement replaced -67- the lines of credit with shares of the Company's convertible Series B Preferred Stock ("Series B Shares"). Each Series B Share is convertible at any time at the investor's option into a number of shares of Seragen Common Stock determined by dividing $1,000 by the average of the closing sale prices of the Common Stock as reported on the Nasdaq Stock Market for the ten consecutive trading days immediately preceding the conversion date. The holders of Series B Shares are entitled to receive a cumulative dividend payable in arrears in cash quarterly on the last day of each calendar quarter commencing on September 30, 1996 at an annual rate equal to the prime rate plus 1 1/2% through June 1999 and at an increasing percentage rate thereafter up to a maximum rate of the prime rate plus 5% form and after July 1, 2003. The holders of Series B shares are entitled to vote on any matters submitted to the Company's shareholders. Each share is entitled to a vote equivalent to 250 shares of common stock. The investors also received warrants to purchase a total of 5,950,000 shares of Seragen Common Stock (250,000 warrants for every $1,000,000 of preferred stock purchased) at an exercise price of $4.00 per share. The warrants are exercisable commencing on January 1, 1997 and expire on July 1, 2006. In addition, each investor is entitled to receive additional warrants pursuant to certain anti-dilution provisions. Each additional warrant will be issued at an exercise price of $4.00 per share and will be exercisable commencing on January 1, 1997 and expiring on July 1, 2006 (see "Share Ownership"). Each Series B Share has a liquidation preference equal to $1,000, plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series B Shares. At any time, with the approval of the Company's Board of Directors, Audit Committee or comparable body, the Company may redeem any or all of the Series B Shares for cash. The redemption price per share of Series B Preferred Stock is $1,000, plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series B Preferred Stock. In addition, the Company transferred all of its patents (the "Patents") to Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the Company with an irrevocable worldwide exclusive license from STI to the Company with respect to the Patents (the "Irrevocable License Agreement"). Under the Irrevocable License Agreement, the Company is obligated to pay quarterly royalties in an amount equal to the amount of any dividend that the Series B shareholders are entitled to receive but have not received by the royalty due date (which is one day after each quarterly dividend payment date for the Series B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock to the guarantors. STI's Class B Common Stock provides for cumulative dividends payable in the same amount as any royalties payable by the Company under the Irrevocable License Agreement. STI also provided the Company with a collateral assignment of the Patents made by STI in favor of the Series B shareholders. Pursuant to an escrow arrangement, the collateral assignment of the Patents is required to be delivered to the Series B shareholders in the event that, after notice, STI fails for 60 days to pay any dividend due in respect of its Class B Common Stock. The Company did not make its royalty payment due January 1, 1997, and does not anticipate making its royalty payment due April 1, 1997. STI did not pay Class B Common Stock dividends due January 1, 1997, and does not anticipate paying Class B Common Stock dividends due April 1, 1997. To the Company's knowledge, the Series B shareholders have not provided notice of the STI dividend payment failure to the escrow agent. In the event that STI redeems its Class B Common Stock, the escrow agent is required to deliver a reassignment of the Patents to the Company. -68- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 28, 1997 by (i) each person known by the Company to own beneficially 5% or more of its outstanding Common Stock, (ii) each Director of the Company, (iii) each named executive officer of the Company and (iv) all Directors and executive officers as a group. Except as otherwise indicated, the named beneficial owner has sole voting and investment power with respect to the shares beneficially owned. SHARE OWNERSHIP
PERCENTAGE BENEFICIALLY OWNED (1)(2) NAME(**) NUMBER OF SHARES PERCENT - -------- ---------------- ------- Boston University 28,949,368(3)(4)(5) 74.8% 881 Commonwealth Avenue Boston, MA 02215 Leon C. Hirsch 10,247,681(3)(6) 36.2% 150 Glover Avenue Norwalk, CT 06856 Turi Josefsen 4,391,862(3)(7) 19.6% 150 Glover Avenue Norwalk, CT 06856 P.R.I.F., L.P. 1,905,042(8) 9.5% 175 Bloor Street East South Tower, 6th Floor Toronto, Canada AG John E. Bagalay, Jr 4,000(9) * Gerald S.J. Cassidy 2,958,084(3)(10) 14.1% 700 13th Street, N.W., Suite 400 Washington, DC 20005 Kenneth G. Condo, C.P.A. 5,200(5)(11) * Leonard F. Estis, Ph.D. 1,136 * Norman A. Jacobs 19,000(12) * Thomas N. Konatich 905(13) * George W. Masters 42,313(14) * -69- John R. Murphy, Ph.D. 175,050(15) * Jean C. Nichols, Ph.D. 190,450(16) 1.0% Reed R. Prior 712,503(17) 3.8% John R. Silber, Ph.D. 178,500(18) * All Officers and Directors as a Group 4,287,141 19.4%
______________________ * Represents beneficial ownership of less than 1% of the Common Stock. ** Addresses are given for persons who beneficially own 5% or more of the Company's outstanding Common Stock only. (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of March 28, 1997 that such person or persons has the right to acquire within 60 days after such date. (2) Percentage of ownership is based on 18,048,881 shares of Common Stock outstanding as of March 28, 1997. (3) Includes 23,494,571 shares of Common Stock issuable upon conversion of 23,800 shares of Series B Preferred Stock and assumes that shares of Series B Preferred Stock are convertible at a conversion price of $1.013, the conversion price in effect on March 28, 1997, based on the average of the closing sale prices of the Common Stock for the ten consecutive trading days preceding that date. (4) Includes 3,360,625 shares of Common Stock issuable upon conversion of 5,000 shares of Series C Preferred Stock and accrued dividends thereon (the maximum number of shares of Common Stock into which the Series C shares may convert). (5) The Boston University Nominee Partnership is a partnership that was created to act as the record holder of certain securities owned by Boston University. Dr. Bagalay and Mr. Condon are general partners of such partnership and are required to vote and take other actions with respect to such shares of Common Stock as instructed by duly authorized officers of Boston University. Officers of Boston University are duly authorized by the actions of the Trustees of Boston University. General partners of the Boston University Nominee Partnership (Dr. Bagalay and Mr. Condon) and the Trustees of Boston University (Dr. Silber) disclaim beneficial ownership of such shares. Includes 15,000 shares issuable upon exercise of stock options exercisable within 60 days, a warrant to purchase 1,376,666 shares exercisable at $4.75 per share, a warrant to purchase 4,249,431 shares exercisable at $4.00 per share, 11,648,569 shares of Common Stock issuable upon conversion of 11,800 shares of Series B Preferred Stock and 3,360,625 shares of Common Stock issuable upon conversion of 5,000 shares of Series C Preferred Stock. Boston University has entered into a Stockholders Agreement with respect to the election of directors and other matters (see "Certain Transactions"). (6) Represents a warrant to purchase 816,666 shares exercisable at $4.75 per share, a warrant to purchase 2,520,847 shares exercisable at $4.00 per share, and Series B Preferred Stock convertible into 6,910,168 shares of Common Stock. Does not include 1,430,362 shares issuable upon exercise of warrants and does not include 2,961,500 shares of Common Stock issuable upon conversion of 3,000 shares of Series B Preferred Stock held by Turi Josefsen, Mr. Hirsch's wife, as to which Mr. Hirsch disclaims beneficial ownership. Mr. Hirsch has entered into a Stockholders Agreement with respect to the election of directors. (See "Certain Transactions"). (7) Represents a warrant to purchase 350,000 shares exercisable at $4.75 per share, a warrant to purchase 1,080,362 shares exercisable at $4.00 per share, and Series B Preferred Stock convertible into 2,961,500 shares of Common Stock. Does not include 3,337,513 shares issuable upon exercise of warrants and -70- does not include 6,910,168 shares of Common Stock issuable upon conversion of 7,000 shares of Series B Preferred Stock held by Leon C. Hirsch, Ms. Josefsen's husband, as to which Ms. Josefsen disclaims beneficial ownership. Ms. Josefsen has entered into a Stockholders Agreement with respect to the election of directors. (See "Certain Transactions"). (8) Includes 1,905,042 shares of Common Stock issuable upon conversion of 2,402 shares of Series A Preferred Stock and accrued dividends thereon (the maximum number of shares of Common Stock that the Series A shares may convert into). P.R.I.F., L.P. ("PRIF") is a limited partnership, the sole general partner of which is HB and Co., Inc. ("HB"). HB has the exclusive authority to manage, control and administer investments and affairs of PRIF. The holder of all issued and outstanding shares of HB is Lillian Brachfeld. Henry Brachfeld is the sole director of HB and, as the sole executive officer of HB, is its President and Secretary. This information is based solely on a Schedule 13D filed with the Securities and Exchange Commission and dated June 21, 1996. (9) Represents 4,000 shares issuable upon exercise of options held by Dr. Bagalay that are exercisable within 60 days. (10) Includes 9,000 shares issuable upon exercise of options held by Mr. Cassidy that are exercisable within 60 days, a warrant to purchase 233,332 shares exercisable at $4.75 per share, a warrant to purchase 720,249 shares exercisable at $4.00 per share, and 1,974,334 shares of Common Stock issuable upon conversion of 2,000 shares of Series B Preferred Stock. Mr. Cassidy's shares of Series B Preferred Stock and warrant are owned jointly with his wife, Loretta P. Cassidy. Mr. and Mrs. Cassidy have entered into a Stockholders Agreement with respect to the election of directors and other matters (see "Certain Transactions"). (11) Represents 4,000 shares issuable upon exercise of options held by Mr. Condon that are exercisable within 60 days. (12) Represents 19,000 shares issuable upon exercise of options held by Mr. Jacobs that are exercisable within 60 days. (13) Mr. Konatich resigned as Chief Financial Officer effective November 15, 1996. (14) Includes 25,000 shares issuable upon exercise of options exercisable by Mr. Masters within 60 days and a warrant to purchase 1,250 shares exercisable at $10.00 per share. Mr. Masters retired from his position as Vice Chairman, Chief Executive Officer, President and a member of the Board of Directors effective November 6, 1996. (15) Represents 124,000 shares issuable upon exercise of options held by Dr. Murphy that are exercisable within 60 days. (16) Represents 181,944 shares issuable upon exercise of options held by Dr. Nichols that are exercisable within 60 days. (17) Represents 712,503 shares issuable upon exercise of options held by Mr. Prior that are exercisable within 60 days. Mr. Prior has entered into a Stockholders Agreement with respect to the election of directors. See "Certain Transactions." (18) Includes a warrant to purchase 7,500 shares exercisable at $10.00 per share. Dr. Silber's shares and warrant are owned jointly with his wife, Kathryn U. Silber. -71- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In August 1987, Boston University, Nycomed (formerly Nyegaard & Co. AS) and the Company entered into a purchase and sale agreement whereby Boston University, which then owned approximately 6% of the Company's outstanding Common Stock, acquired from Nycomed 1,691,761 shares of the Company's Common Stock, which represented all of Nycomed's ownership interest in the Company and approximately 71% of the then outstanding Common Stock of the Company. As part of this transaction, Boston University acquired all of Nycomed's rights to technology, inventions, patents and other proprietary rights (the "Technology") which were primarily related to or useful in the development of the Company's fusion protein products and also acquired the world-wide exclusive rights to manufacture, use, sell and market the products (the "Products") which were derived from or include the Technology (the "Technology and Marketing Rights"). In exchange for the acquisition of these assets, Boston University paid $25,000,000 to Nycomed and assumed Nycomed's obligations to the Company, including a commitment to finance and carry out the Company's research and development program and an obligation to guaranty the Company's leases at its facilities in Hopkinton, Massachusetts. In addition, pursuant to the agreement, the Company is obligated to pay Nycomed a continuing royalty with respect to sales of the Products and to give Nycomed rights of first negotiation to market the Products in the territory covered by the agreement. In connection with this agreement, Nycomed and Boston University entered into a Noncompetition and Confidentiality Agreement, whereby Nycomed agreed to maintain in confidence proprietary information and intellectual property in connection with the Company's business and not to compete with the Company's business. The Noncompetition and Confidentiality Agreement expired in August 1992. The Company believes that the expiration of this Agreement will not materially adversely affect the Company's business. In connection with the sale of stock to Boston University, Nycomed also transferred to Boston University a debt owed to Nycomed by the Company in the principal amount of $1,050,000. In 1988, Boston University converted this debt plus accrued interest thereon into 95,488 shares of Common Stock, based on a conversion price equal to $15.00 per share of Common Stock. In connection with Boston University's acquisition of the majority interest in the Company in 1987, Boston University guaranteed the Company's obligations under a $10,000,000 line of credit with The First National Bank of Chicago (the "Bank") to provide short-term operating funds for the Company (the "Guaranty"). Boston University pledged certain collateral to the Bank to secure the Guaranty. In 1992, the Company repaid the Bank's line of credit and thereby terminated the Guaranty. In return for providing the Guaranty, the Company issued to Boston University a warrant (the "Bank Warrant"), which enabled Boston University to purchase up to 500,000 shares of Common Stock at an exercise price of $11.80 per share, at any time prior to January 28, 1993. The Bank Warrant expired unexercised. In January 1988, pursuant to a Technology Purchase and Royalty Agreement (the "Technology Agreement") which was contemplated at the time Boston University acquired the Technology from Nycomed, Boston University transferred to the Company the Technology and Marketing Rights obtained from Nycomed in exchange for a continuing royalty with respect to sales of the Products until the expiration of all patents relative to the Technology. Thereafter, the Company agreed to pay Boston University a reduced royalty based on a percentage of net sales for a period of 10 years after the expiration of such patents. The Technology Agreement provides Boston University with a security interest in the Technology and Marketing Rights, whereby upon a default by the Company in the terms of the Technology Agreement, the Technology and Marketing Rights would -72- automatically be transferred back to Boston University. A default under the Technology Agreement shall occur if, among other things, the Company breaches is obligations under the Technology Agreement. As of March 28, 1997, Boston University beneficially owned 8,299,077 shares (or approximately 46%) of the Company's outstanding Common Stock. In addition, Boston University beneficially owns a stock option to purchase 15,000 shares, a warrant to purchase 1,376,666 shares, a warrant to purchase 2,950,000 shares subject to anti-dilution provisions (as defined), shares issuable on conversion of 11,800 shares of Series B Preferred Stock and shares issuable on conversion of 5,000 shares of Series C Preferred Stock. As of March 28, 1997, if all securities were converted to common stock, Boston University would own 28,949,368 shares of common stock. Dr. John R. Murphy, a director of the Company who has declined to stand for reelection in 1997, had a consulting agreement with the Company pursuant to which he received consulting fees of $100,000 in the fiscal year ended 1996. Dr. James M. Howell, former Chairman of the Board of Directors, had a consulting agreement with the Company pursuant to which he received consulting fees of $68,750 in the fiscal year ended 1996. In June 1995, the Company finalized three separate lines of credit which were guaranteed by three different entities for a total of $23.8 million in guaranteed bank financing for the Company. Seragen issued warrants to the guarantors for the purchase of 2,776,664 shares of Common Stock at an exercise price of $4.75 per share. These warrants are immediately exercisable and expire in 2005. Boston University, Seragen's majority stockholder, was the lead guarantor, providing a guaranty of $11.8 million in exchange for a warrant to purchase 1,376,666 shares of Common Stock. Two other guarantors provided guarantees to secure loans of $12 million. Gerald S.J. Cassidy, a member of the Company's Board of Directors, was one of the two guarantors, providing a guaranty of $2 million in exchange for a warrant to purchase 233,332 shares of Common Stock. Leon C. Hirsch and Turi Josefsen provided guaranties of the remaining $10 million in exchange for warrants to purchase an aggregate of 1,166,666 shares of Common Stock (see "Share Ownership"). In July 1996, the Company restructured its arrangement with the guarantors of the Company's $23.8 million loan financing obtained in June 1995 to release the Company of its liability to the banks involved. The new agreement replaced the lines of credit with shares of the Company's convertible Series B Preferred Stock ("Series B Shares"). Each Series B Share is convertible at any time at the investor's option into a number of shares of Seragen Common Stock determined by dividing $1,000 by the average of the closing sale prices of the Common Stock as reported on the Nasdaq Stock Market for the ten consecutive trading days immediately preceding the conversion date. The holders of Series B Shares are entitled to receive a cumulative dividend payable in arrears in cash quarterly on the last day of each calendar quarter commencing on September 30, 1996 at an annual rate equal to the prime rate plus 1 1/2% through June 1999 and at an increasing percentage rate thereafter up to a maximum rate of the prime rate plus 5% form and after July 1, 2003. The holders of Series B shares are entitled to vote on any matters submitted to the Company's shareholders. Each share is entitled to a vote equivalent to 250 shares of common stock. The investors also received warrants to purchase a total of 5,950,000 shares of Seragen Common Stock (250,000 warrants for every $1,000,000 of preferred stock purchased) at an exercise price of $4.00 per share. The warrants are exercisable commencing on January 1, 1997 and expire on July 1, 2006. In addition, each investor is entitled to receive additional warrants pursuant to certain anti-dilution provisions. Each additional warrant will be issued at an exercise price of $4.00 per share and will be exercisable commencing on January 1, 1997, and expiring on July 1, 2006 (see "Share Ownership"). -73- In addition, the Company transferred all of its patents (the "Patents") to Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the Company with an irrevocable worldwide exclusive license from STI to the Company with respect to the Patents (the "Irrevocable License Agreement"). Under the Irrevocable License Agreement, the Company is obligated to pay quarterly royalties in an amount equal to the amount of any dividend that the Series B shareholders are entitled to receive but have not received by the royalty due date (which is one day after each quarterly dividend payment date for the Series B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock to the guarantors. STI's Class B Common Stock provides for cumulative dividends payable in the same amount as any royalties payable by the Company under the Irrevocable License Agreement. STI also provided the Company with a collateral assignment of the Patents made by STI in favor of the Series B shareholders. Pursuant to an escrow arrangement, the collateral assignment of the Patents is required to be delivered to the Series B shareholders in the event that, after notice, STI fails for 60 days to pay any dividend due in respect of its Class B Common Stock. The Company did not make its royalty payment due January 1, 1997, and does not anticipate making its royalty payment due April 1, 1997. STI did not pay Class B Common Stock dividends due January 1, 1997, and does not anticipate paying Class B Common Stock dividends due April 1, 1997. To the Company's knowledge, the Series B shareholders have not provided notice of the STI dividend payment failure to the escrow agent. In the event that STI redeems its Class B Common Stock, the escrow agent is required to deliver a reassignment of the Patents to the Company. Each Series B Share has a liquidation preference equal to $1,000, plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series B Shares. At any time, with the approval of the Company's Board of Directors, Audit Committee or comparable body, the Company may redeem any or all of the Series B Shares for cash. The redemption price per share of Series B Preferred Stock is $1,000, plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series B Preferred Stock. In September 1996, the Company raised $5 million through the sale of 5,000 shares of the Company's non-voting convertible Series C Preferred Stock ("Series C Shares") in a private placement with Boston University Regulation D under the Securities Act of 1933. The Series C Shares are convertible at the option of the holder into shares of Seragen Common Stock at a per share conversion price equal to the lesser of $2.75 or 73% of the average closing bid. Terms of the Series C shares also provide for 8% cumulative dividends payable in shares of Seragen Common Stock at the time of each conversion (see "Share Ownership"). Notwithstanding this, however, the maximum aggregate number of shares of Common Stock that the Company may issue on exercise of Series C Shares is 3,360,625. Any holder of Series C Shares unable to convert Series C Shares as a result of the limitation described in the preceding sentence is entitled to require the Company to repurchase those shares for $1,150 per Series C Share. Each Series C Shares has a liquidation preference equal to $1,000, plus an amount equal to any accrued and unpaid dividends from the date of issuance of the Series C Shares, in the event of liquidation, dissolution or winding up of the Company. Series C Shares that remain outstanding on March 30, 1998, will be converted automatically into shares of Common Stock. On November 6, 1996, the Company entered into a Stockholders Agreement (the "Stockholders Agreement") together with Boston University, Leon C. Hirsch, Turi Josefsen, Gerald S.J. Cassidy and Loretta P. Cassidy (collectively, together with Boston University, the "Stockholders"), and Reed R. Prior with respect to the election of directors and other matters. Pursuant to this agreement, the Stockholders have agreed to vote their respective shares to (i) maintain the number of persons comprising the Board of Directors at nine, (ii) not to elect more than two persons designated by or affiliated with Boston University to the Board of Directors, and (iii) to elect three outside directors with experience in the pharmaceutical industry reasonably acceptable to Mr. Prior. In addition, the agreement grants Mr. Prior rights of co-sale in the event Boston University chooses to sell over 50% of its stock in the Company to a third party. Boston University also agrees to pay its pro-rata share of Mr. Prior's Asset Value Realization Bonus (as defined in Mr. Prior's employment agreement) in the event that the Company fails to pay such bonus. -74- On February 18, 1997, the Company entered into an agreement to sell its manufacturing and clinical operations facilities to B.U. or a designated affiliate for $5 million. The closing of the transaction is subject to, among other things, approval by the Company's stockholders. B.U. has paid the Company $4.5 million as a deposit and has assumed responsibility for the facility's operations, including responsibility for operating costs. The Company currently may use this deposit to fund its operations. At the closing, a majority of the Company's employees involved in the manufacturing and clinical operations will become employees of B.U. Both the deposit and the operating costs paid by B.U. are subject to refund in the event that conditions for closing are not met. Simultaneously, the Company entered into a service agreement with B.U. providing for the purchase by the Company of certain services related to product research, development, manufacturing, clinical trials, quality control, and quality assurance. This service contract expires in January 1999 and is subject to early termination provisions, as defined, including the option of B.U. to terminate the agreement if losses during a contract year exceed $9.0 million and the Company does not reimburse B.U. for the losses in excess of $9.0 million. The service contract may be renewed for two successive one-year terms at the option of the Company. The Company has the option to repurchase the assets comprising the manufacture and clinical operations facilities. The Company has agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2 of this contract, respectively. The fees can be mutually increased or decreased, but may not be reduced to less than $4.3 million per contract year. The service agreement is expected to substantially reduce operating costs in research and development as Seragen will be contracting solely for the services that the Company requires for clinical and manufacturing purposes. -75- PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K Location in Form 10-K (a) 1. Financial Statements of Seragen, Inc. Reports of Independent Accountants................................33 Balance Sheets as of December 31, 1995 and 1996...................35 Statements of Operations for the years ended December 31, 1994, 1995 and 1996..................................36 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996......................37 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996...............................................38 Notes to Financial Statements.....................................39 2. Schedules - None 3. Exhibits The exhibits listed in the accompanying Exhibit Index on pages 77 - 84 hereof are filed or incorporated by reference as part of this Annual Report on Form 10-K. 4. Executive Compensation Plans and Arrangements The Company's Compensation Plans and Arrangements are denoted by (***) on the Exhibit Index appearing on pages 77 - 84 hereof and are incorporated by reference as a part of this Annual Report on Form 10-K. (b) Reports on Form 8-K A Current Report on Form 8-K for November 6, 1996 event, relating to the Registrant's announcement that, effective immediately, the board had elected Reed R. Prior chairman, chief executive officer and treasurer of the company. The board also elected Jean Nichols president, chief technology officer, and a member of Seragen's board of directors. Former vice chairman and CEO George Masters announced his retirement but that he would remain as a consultant to the company. In addition, James Howell stepped down as chairman and also retired from the board of directors; and chief financial officer Thomas N. Konatich resigned from the company, effective November 12, 1996. A Current Report on Form 8-K for February 18, 1997 event, relating to the Registrant's announcement that it had entered into an agreement to sell its manufacturing and clinical operations facility to B.U. or its designated affiliate for $5,000,000. A Current Report on Form 8-K for March 12, 1997 event, relating to the Registrant's announcement that the Board of Directors of the Company, at the recommendation of the Company's Audit Committee, voted to replace Coopers & Lybrand L.L.P. with Arthur Andersen LLP as the Company's independent accountants effective March 12, 1997. -76- EXHIBIT INDEX Exhibit Number Notes Description Page - ------- ----- ----------- ---- (2.1) (16) Asset Purchase Agreement, dated as of February 14, 1997, between the Registrant and Trustees of Boston University (3.3) (14) Restated Certificate of Incorporation, as amended, of the Registrant, dated May 28, 1996 (previously filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-45515) (3.4) (15) Restated By-Laws of the Registrant, as amended (previously filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1, File No. 33-45515) (4.1) (1) Article 4 of the Restated Certificate of Incorporation (see Exhibit 3.3) (4.2) (1) Form of Common Stock Certificate (previously filed as Exhibit 4.2 thereto) (4.3) (1) Form of Purchase Agreement executed by Gerald M. Stern, Gerald M. Stern-Keogh Account, Gerald M. Stern-IRA Account, Ira A. Lipman, Guardsmark, Inc., Aegis Select Limited Partnership, BancBoston Ventures Inc., Charles River Partnership II, Charles River Partnership III, Charles River Partnership IV, Allstate Insurance Company, Robert E. Thorne, William R. Breetz, Gerald S. J. Cassidy, James R. Welch and John R. Whiting, Jonathan D. Schiller, Walter J. Zackrison, Francis D. Burke, Fred Chicos, Donald E. Griesdorn, Edward J. King, Maximillian Ma, Morrie Moss and David R. Thissen (previously filed as Exhibit 4.3 thereto) (4.4) (1) Agreement and Plan of Corporate Reorganization, among the Registrant, Seragen Diagnostics, Inc., Nyegaard & Co. A.S. and certain stockholders of the Registrant, dated May 28, 1985 (previously filed as Exhibit 4.4 thereto) (4.5) (14) Amended Certificate of Designation of Series A Preferred Stock of the Registrant, dated May 28, 1996 (4.6) (14) Certificate of Designation of Series B Preferred Stock of the Registrant, dated June 28, 1996 (4.7) (14) Certificate of Correction of Amended Certificate of Designation of Series A Preferred Stock of the Registrant, dated August 6, 1996 (4.8) (16) Certificate of Designation of Series C Preferred Stock of the Registrant, dated September 27, 1996. (9.1) (1) Voting Trust Agreement, dated May 28, 1985, among Stein H. Annexstad and certain stockholders of the Registrant (previously filed as Exhibit 9.1 thereto) (9.2) (1) Assignment of Voting Trust Agreement, dated August 28, 1987, between Stein H. Annexstad and Charles W. Smith (previously filed as Exhibit 9.2 thereto) -77- (10.1) (1) Agreement and Plan of Recapitalization, dated as of January 1, 1992, by and between the Trustee of Boston University and the Registrant (previously filed as Exhibit 10.1 thereto) (10.2) (1) First Amendment to Agreement and Plan of Recapitalization, dated as of March 17, 1992, by and between the Trustees of Boston University and the Registrant (previously filed as Exhibit 10.1A thereto) (10.3) Lease Agreement for premises at 97 A-F South Street, Hopkinton, Massachusetts, dated June 26, 1986, between the Registrant and Harold Nahigian, as amended June 13, 1988 (previously filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 33-45515) and Lease Agreement extending the original lease for premises at 97 A-K South Street, Hopkinton, Massachusetts, between the Registrant and Harold Nahigian (previously filed as Exhibit 10.45 to the Registrant's Form 10-Q for the three months ending March 31, 1995). (10.4) (1) Guaranty of Lease, dated August 28, 1987, made by Boston University to Harold Nahigian (previously filed as Exhibit 10.3 thereto) (10.5)*** (1) 1981 Stock Option Plan, as amended and restated October 19, 1988 (previously filed as Exhibit 10.7 thereto) (10.6)*** (1) 1992 Long Term Incentive Plan (previously filed as Exhibit 10.8 thereto) (10.7)*** (1) 1992 Non-Employee Director Non-Qualified Stock Option Plan (previously filed as Exhibit 10.9 thereto) (10.8)* (1) Development Agreement, dated June 30, 1982, between the Registrant and I.S.V.T. Sclavo, SPA, as amended January 1, 1986 (previously filed as Exhibit 10.10 thereto) (10.9) (1) Scientific and Product Development Collaborative Agreement, dated July 25, 1983, between the Registrant and the Chemo-Sero-Therapeutic Research Institute, as amended February 28, 1985 (previously filed as Exhibit 10.11 thereto) (10.10)* (1) License Agreement, dated November 29, 1983, between the Registrant and Harvard College (previously filed as Exhibit 10.14 thereto) (10.11)* (1) License and Royalty Agreement, dated June 1, 1990, between the Registrant and the Beth Israel Hospital Association (previously filed as Exhibit 10.15 thereto) (10.12)* (1) Purchase and Sale Agreement, dated August 28, 1987, by and among Nycomed AS, Boston University and the Registrant (previously filed as Exhibit 10.18 thereto) (10.13) (1) Noncompetition and Confidentiality Agreement, dated August 28, 1987, by and between the Registrant and Nycomed AS (previously filed as Exhibit 10.19 thereto) -78- (10.14)* (1) Royalty Agreement, dated August 28, 1987, by and among the Registrant, Boston University and Nycomed AS (previously filed as Exhibit 10.20 and 10.20A thereto) (10.15)* (1) Technology Purchase and Royalty Agreement, dated January 28, 1988, by and between the Registrant and Boston University (previously filed as Exhibit 10.21 thereto) (10.16)* (1) License Agreement by and between Molecular Genetics, Inc., and Stanford University, and assigned, effective September 1, 1989 from Molecular Genetics, Inc., to The Registrant (previously filed as Exhibit 10.26 thereto) (10.17)*** (1) Consulting Agreement, dated as of January 1, 1992, by and between the Registrant and Dr. John R. Murphy (previously filed as Exhibit 10.32 to the Registrant's Registration Statement on Form S-1, File No. 33-45515), amended as of October 1, 1994 (previously filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1994), Amended as of October 1, 1995 (previously filed as Exhibit 10.51 to the Registrant's Form 10-Q for the nine months ending September 30, 1995) and as amended January 1, 1996 (previously filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) (10.18)*** (1) Consulting Agreement, dated as of January 1, 1992, by and between the Registrant and James M. Howell (previously filed as Exhibit 10.33 thereto) and amended as of June 1, 1995 (previously filed as Exhibit 10.46 to the Registrant's Form 10-Q for the six months ending June 30, 1995 thereto) (10.19) (1) Lease Agreement for premises at 116 South Street, Hopkinton, Massachusetts, dated April 15, 1987, between the Registrant and Jelric Realty Trust, as amended October 31, 1987 (previously filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, File No. 33-45515), and amended December 15, 1992 previously filed as Exhibit 10.34 to the Registrant's Registration Statement on Form S-1, File No. 33-57002) (10.20) (1) Lease Agreement for premises at 118 South Street, Hopkinton, Massachusetts, dated May 8, 1986, between the Registrant and Jelric Realty Trust, as amended January 1987 and October 31, 1989 (previously filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, File No. 33-45515), and amended December 15, 1992 (previously filed as Exhibit 10.35 to the Registrant's Registration Statement on Form S-1, File No. 33-57002) (10.21) (1) Lease Agreement for premises at 120 South Street, dated December 15, 1985, between the Registrant and Jelric Realty Trust, as amended January 1987 and October 31, 1989 (previously filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, File No. 33-45515), and amended December 15, 1992 (previously filed as Exhibit 10.36 to the Registrant's Registration Statement on Form S-1, File No. 33-57002) -79- (10.22)* (2) License and Royalty Agreement dated November 18, 1992, between the Registrant and University Hospital (previously filed as Exhibit 10.37 thereto) (10.23)* (1) Sponsored Research Agreement, effective August 1, 1984, between the Registrant and Beth Israel Hospital, as amended January 1, 1986, August 1, 1986, August 18, 1987, July 14, 1988, June 1, 1991 (previously filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, File No. 33-45515), and amended as of January 1, 1993 (previously filed as Exhibit 10.38 to the Registrant's Registration Statement on Form S-1 File No. 33-57002), Amendment 7, Sponsored Research Agreement dated March 1, 1994 (previously filed as Exhibit 10.36 to the Registrant's Form 10-K for year ending December 31, 1993), and Amendment 8, Sponsored Research Agreement dated June 1, 1994 (previously filed as Exhibit 10.36 to the Registrant's Form 10-Q for the six months ending June 30, 1994) (10.24) (1) Consulting Agreement, dated January 15, 1987, by and between the Registrant and Dr. Terry B. Strom, as amended July 14, 1987, August 18, 1987 (previously filed as Exhibit 10.30 to the Registrant's Registration Statement on Form S-1 File No. 33-45515), amended as of January 1, 1993 (previously filed as Exhibit 10.39 to the Registrant's Registration Statement on Form S-1 File No. 33-57002), amended as of January 1, 1995 (previously filed as Exhibit 10.47 to the Registrant's Form 10-Q for the six months ending June 30, 1995) and amended as of January 1, 1996 (previously filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) (10.25) (2) License Agreement, dated as of December 28, 1992, between the Registrant and Genentech, Inc. (previously filed as Exhibit 10.40 thereto) (10.26) (2) License Agreement, dated as of December 28, 1992, between the Registrant and Genentech, Inc. (previously filed as Exhibit 10.41 thereto) (10.27) (2) Letter Agreement, dated January 20, 1993, between the Registrant and Goldman, Sachs & Co. (previously filed as Exhibit 10.42 thereto) (10.28) (2) Loan and Security Agreement, dated February 19, 1993, between the Registrant and MMC/GATX Partnership No. I (previously filed as Exhibit 10.43 thereto) -80- (10.29) (2) Research Agreement, effective as of January 1, 1992, between the Registrant, Dr. John R. Murphy and University Hospital (previously filed as Exhibit 10.44 to the Registrant's Registration Statement on Form S-1 File No. 33-57002), amended as of January 1, 1994 (previously filed as Exhibit 10.42 to the Registrant's Form 10-Q for the three months ending March 31, 1994), amended as of January 1, 1995 between the Registrant, Dr. John R. Murphy and Boston University Medical Center (formerly University Hospital) (previously filed as Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1994), amended as of January 1, 1996 (previously filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) (10.30)*** (3) Employment Agreement, dated March 18, 1993, by and between the Registrant and Mr. George W. Masters (previously filed as Exhibit 10.43) (10.31)*** (4) Employment Agreement, dated June 1, 1993, by and between the Registrant and Mr. Anthony J. Clemento, Jr. (previously filed as Exhibit 10.44) (10.32)*** (4) Employment Agreement, dated June 20, 1993, by and between the Registrant and Mr. Thomas N. Konatich. (previously filed as Exhibit 10.45) (10.33) (5) Master Lease Agreement, dated November 5, 1993, by and between the Registrant and Comdisco Electronics Group (previously filed as Exhibit 10.46) (10.34)* (7) License Agreement, dated as of May 23, 1994, between the Registrant and Genentech, Inc. (previously filed as Exhibit 10.47) (10.35) (7) Stock Purchase Agreement, dated August 3, 1994, by and between the Registrant and Eli Lilly and Company (previously filed as Exhibit 10.48) (10.36)* (7) Development Agreement, dated August 3, 1994, by and between the Registrant and Eli Lilly and Company (previously filed as Exhibit 10.49) (10.37)* (7) Sales and Distribution Agreement, dated August 3, 1994, by and between the Registrant and Eli Lilly and Company (previously filed as Exhibit 10.50) (10.38) (8) Equipment Lease Agreement, dated September 16, 1994 by and between the Registrant and Comdisco Electronics Group (previously filed as Exhibit 10.51) (10.39) (9) Equipment Lease Agreement, dated December 20, 1994, by and between the Registrant and Comdisco Electronics Group (previously filed as Exhibit 10.44) -81- (10.40)* (10) Amendment to (1) the Development Agreement, dated August 3, 1994, by and between the Registrant and Eli Lilly and Company (previously filed as Exhibit 10.49 to the Registrant's Form 10-Q for the six months ending June 30, 1994), and (2) the Sales and Distribution Agreement dated August 3, 1994, by Exhibit 10.50 to the Registrant's Form 10-Q for the six months ending June 30, 1994 (previously filed as Exhibit 10.48) (10.41)*** (10) Employment Agreement, dated January 1, 1995, by and between the Registrant and Dr. Jean C. Nichols (previously filed as Exhibit 10.49) (10.42) (11) Sublease Agreement for premises at 99 South Street, Hopkinton, Massachusetts, dated October 12, 1995, between the Registrant and SierraCom, a division of Sierra Networks, Inc. (previously filed as Exhibit 10.50) (10.43) (12) Credit Agreement dated as of May 22, 1995 between the Registrant and The First National Bank of Chicago (previously filed as Exhibit 99.2) (10.44) (12) Credit Agreement dated as of May 22, 1995 between the Registrant and The Bank of New York (previously filed as Exhibit 99.3) (10.45) (12) Credit Agreement dated as of May 22, 1995 between the Registrant and NationsBank, N.A. (previously filed as Exhibit 99.4) (10.46) (12) Subscription and Registration Agreement dated as of May 31, 1995 by and among the Registrant and the investors listed therein (previously filed as Exhibit 99.5) (10.47) (12) Collateral Assignment of Patents by the Registrant and jointly in favor of the guarantors listed therein (previously filed as Exhibit 99.6) (10.48) (12) Escrow Agreement dated as of May 22, 1995 between the Registrant, the guarantors listed therein and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., as escrow agent (previously filed as Exhibit 99.7) (10.49) (12) Reassignment of Patents by the Registrant to the guarantors listed therein (previously filed as Exhibit 99.8) (10.50) (13) Shareholders' Agreement, dated November 22, 1995, by and between the Registrant and Seragen Biopharmaceuticals, LTD (previously filed as Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) (10.51)* (13) Technology Rights and Marketing Agreement dated November 21, 1995, by and between the Registrant and Seragen Biopharmaceuticals, LTD (previously filed as Exhibit 10.54 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) (10.52) (13) Warrant Indenture Agreement, dated November 21, 1995, by and between the Registrant and Seragen Biopharmaceuticals, LTD (previously filed as Exhibit 10.55 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995) -82- (10.53)* (14) Sales and Distribution Agreement, dated August 3, 1994 (previously filed as Exhibit 10.50 to the Registrant's Form 10-Q, for the six months ending June 30, 1994) as amended by Amendment dated June 30, 1995 (previously filed as Exhibit 10.48 to the Registrant's Form 10-Q, for the six months ending June 30, 1995) as amended by Amendment dated May 28, 1996 (previously filed as Exhibit 10.56) (10.54) (14) Subscription and Registration Agreement, dated June 28, 1996, by and between the Registrant, Seragen Technology, Inc. and the persons listed on Schedule 1 thereto (previously filed as Exhibit 10.57) (10.55) (14) Form of Warrant due July 1, 2006 (previously filed as Exhibit 10.58) (10.56) (14) Collateral Assignment of Patents, dated July 1, 1996, by and between Seragen Technology, Inc. and the persons listed on Schedule A thereto (previously filed as Exhibit 10.59) (10.57) (14) Reassignment of Patents, dated July 1, 1996, by and between the Registrant and the persons listed on Schedule A thereto (previously filed as Exhibit 10.60) (10.58) (14) Escrow Agreement, dated July 1, 1996, by and between Seragen Technology, Inc. and the persons listed on Schedule A thereto (previously filed as Exhibit 10.61) (10.59) (14) Assignments of Patents, dated June 28, 1996, by and between the Registrant and Seragen Technology, Inc. (previously filed as Exhibit 10.62) (10.60) (14) Irrevocable License Agreement, dated June 28, 1996 by and between the Registrant and Seragen Technology, Inc. (previously filed as Exhibit 10.63) (10.61)*** (15) Employment Agreement, dated November 6, 1996, by and between the Registrant and Reed Prior (previously filed as Exhibit 10.64) (10.62)*** (15) Employment Agreement, dated November 6, 1996, by and between the Registrant and Jean C. Nichols, Ph.D. (previously filed as Exhibit 10.65) (10.63) (15) Stockholders Agreement, dated November 6, 1996, by and between the Registrant and Boston University, Leon Hirsch, Turi Josefsen, Gerald S.J. Cassidy, Loretta P. Cassidy and Reed R. Prior (previously filed as Exhibit 10.66) (10.64)*** (15) Retirement and Consulting Agreement, dated November 6, 1996, by and between the Registrant and Mr. George W. Masters (previously filed as Exhibit 10.67) (10.65)** (16) Service Agreement, dated as of February 14, 1997, between the Registrant and Trustees of Boston University (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (previously filed as Exhibit 10.68) -83- (10.66)*** Amendment to Employment Agreement, dated December 88 18, 1996, by and between the Registrant and Mr. Reed R.Prior (filed herewith) (10.67)*** Amendment to Employment Agreement, dated December 91 18,1996, by and between the Registrant and Dr. Jean C.Nichols (filed herewith) (10.68)*** Waiver to Employment Agreement, dated January 6, 94 1997, by and between the Registrant and Mr. Reed R. Prior (filed herewith) (10.69)*** Waiver to Employment Agreement, dated January 6, 95 1997, by and between the Registrant and Dr. Jean C. Nichols (filed herewith) (10.70)*** Waiver No.2 to Employment Agreement, dated January 96 31, 1997, by and between the Registrant and Mr. Reed R. Prior (filed herewith) (10.71)*** Waiver No.2 to Employment Agreement, dated January 97 31, 1997, by and between the Registrant and Dr. Jean C. Nichols (filed herewith) (10.72)*** Amendment to 1992 Long Term Incentive Plan, dated 98 December 18, 1996, (filed herewith) (10.73)*** Employment Agreement, dated as of January 15, 1997, 121 by and between the Registrant and Ms. Elizabeth C. Chen (filed herewith) (10.74)*** Waiver to Employment Agreement, dated 3/28/97, by 140 and between the Registrant and Mr. Reed R. Prior (filed herewith) (10.75)*** Waiver to Employment Agreement, dated 3/28/97, by 141 and between the Registrant and Ms. Elizabeth C. Chen (filed herewith) (21) List of Subsidiaries (filed herewith) 142 (23.1) Consent of Arthur Andersen LLP (filed herewith) 143 (23.1) Consent of Coopers & Lybrand L.L.P (filed herewith) 144 (27) Financial Data Schedule 145 NOTES: (*) All exhibit descriptions followed by (*) indicate documents with respect to which Confidential Treatment has been granted. (**) All exhibit descriptions followed by (**) indicate documents with respect to which the Registrant has filed a Confidential Treatment request with the Commission. (***) All exhibit descriptions followed by (***) indicate documents herein provided or incorporated by reference with respect to Executive Compensation Plans and Arrangements. (1) All exhibit descriptions followed by (1) were previously filed as Exhibits to, and incorporated herein by reference from, the Registrant's Registration Statement on Form S-1, File No. 33-45515. (2) All exhibit descriptions followed by (2) were previously filed with the Commission as Exhibits to, and incorporated by reference from, the Registrant's Registration Statement on Form S-1 File No. 33-57002. (3) All exhibit descriptions followed by (3) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Annual Report on Form 10-K for the year ending December 31, 1992. (4) All exhibit descriptions followed by (4) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the six months ending June 30, 1993. -84- (5) All exhibit descriptions followed by (5) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Annual Report on Form 10-K for the year ending December 31, 1993. (6) All exhibit descriptions followed by (6) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the three months ending March 31, 1994. (7) All exhibit descriptions followed by (7) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the six months ending June 30, 1994. (8) All exhibit descriptions followed by (8) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the six months ending September 30, 1994. (9) All exhibit descriptions followed by (9) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Annual Report on Form 10-K for the year ending December 31, 1994. (10) All exhibit descriptions followed by (10) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the six months ending June 30, 1995. (11) All exhibit descriptions followed by (11) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the nine months ending September 30, 1995. (12) All exhibit descriptions followed by (12) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 8-K for June 7, 1995 event. (13) All exhibit descriptions followed by (13) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Annual Report on Form 10-K for the year ending December 31, 1995. (14) All exhibit descriptions followed by (14) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the six months ending June 30, 1996. (15) All exhibits descriptions followed by (15) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 10-Q, for the nine months ending September 30, 1996. (16) All exhibit descriptions followed by (16) were previously filed as Exhibits to, and incorporated by reference from, the Registrant's Form 8-K for February 18, 1997 event. -85- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Seragen, Inc. By: /s/ Reed R. Prior Dated: March 31, 1997 ------------------------------ Reed R. Prior Chairman of the Board And Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Reed R. Prior Chairman of the Board, March 31, 1997 ------------------------------- Chief Executive Officer Reed R. Prior and Director (Principal Executive Officer) /s/ Jean C. Nichols, Ph.D. President, Chief Technology March 31, 1997 ------------------------------- Officer and Director Jean C. Nichols, Ph.D. (Principal Financial and Accounting Officer) /s/ John E. Bagalay, Jr., Ph.D. Director March 31, 1997 ------------------------------- John E. Bagalay, Jr. Ph.D. /s/ Gerald S. J. Cassidy Director March 31, 1997 ------------------------------- Gerald S.J. Cassidy /s/ Kenneth G. Condon Director March 31, 1997 ------------------------------- Kenneth G. Condon /s/ Norman A. Jacobs Director March 31, 1997 ------------------------------- Norman A. Jacobs -86- /s/ John R. Murphy, Ph.D. Director March 31, 1997 ------------------------------- John R. Murphy, Ph.D. /s/ John R. Silber, Ph.D. Director March 31, 1997 ------------------------------- John R. Silber, Ph.D. -87- EX-10.66 2 AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit No. 10.66 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT Amendment No. 1 to Employment Agreement (the "Amendment") dated as of December 18, 1996 between Seragen, Inc. (the "Company") and Reed Prior ("Prior"). WHEREAS, the Company and Prior entered an Employment Agreement dated as of November 6, 1996 (the "Employment Agreement"); and WHEREAS, the Company and Prior desire to amend the Employment Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. Capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Employment Agreement. 2. Paragraph 3(c) of the Employment Agreement is hereby amended to read as follows: (c) Stock Options. On or before December 18, 1996, the Company shall grant Prior stock options under the Seragen, Inc. 1992 Long Term Incentive Plan, a true copy of which is attached as Exhibit D (the "Plan"), to purchase sufficient shares of the Company's common stock, par value $0.01 per share ("Common Stock"), to equal 8.5% of the then outstanding Common Stock, measured on a Fully Diluted Basis (as the term is defined in Paragraph 4), at the then fair market value per share of Common Stock. To the extent permitted by federal income tax law, options issued under the Plan to Prior shall be "incentive stock options". The stock options shall be evidenced by an Incentive Stock Option Agreement and, if required, a Non-Qualified Stock Option Agreement substantially in the form of Exhibits A and B to this Agreement (the "Stock Option Agreements") except as expressly provided otherwise herein. Both Stock Option Agreements shall provide that: (i) the options issued thereunder shall vest, i.e., become exercisable, 2.0833% on the date of execution of this Agreement (the "Effective Date") and on the first day of each calendar month thereafter so that Prior shall be fully (100%) vested on the first day of the month immediately before the fourth anniversary of the Effective Date; (ii) upon a Change in Ownership (as the term is defined in Paragraph 4), in place of the vesting schedule provided in clause "i" above the options shall vest retroactively as of the Effective Date 25% on the Effective Date and an additional 2.0833% on the first day of each calendar month thereafter so that Prior shall be fully (100%) vested on the first day of the month immediately following the third anniversary of the Effective Date; (iii) upon the termination by the Company of Prior's employment without Just Cause or Prior's termination for Good Reason (as the terms are defined in Paragraph 4), in place of the -1- vesting schedules provided in clauses "i" and "ii" above the options shall vest retroactively as of the Effective Date 25% on the Effective Date and at the accelerated rate of an additional 3.125% on the first day of each calendar month thereafter so that Prior shall be fully (100%) vested on the first day of the month immediately following the second anniversary of the Effective Date; (iv) options issued shall, to the extent vested, be fully exercisable until the tenth (10th) anniversary of the Effective Date; (v) the options shall be exercisable in accordance with the terms of the Plan, including the right to pay the option exercise price in whole or in part by surrendering shares of the Company's common stock held by Prior for at least six months prior to the exercise date with an aggregate fair market value equal to the option exercise price or in accordance with a cashless exercise program established with a securities brokerage firm and approved by the Company, and shall provide that stock certificates shall be issued outright and free of escrow no later than three (3) days after the date of exercise; (vi) stock certificates issued pursuant to the exercise of an option shall not include any legends or be subject to any transfer restrictions, except for restrictions required by Section 16 of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder; (vii) the Company shall not terminate any option issued to Prior upon a "Change in Control" as defined in the Plan without Prior's written approval; (viii) in the event that before a Target Equity Financing (as defined in Paragraph 4) the Company grants options or other equity interests to management, employees, directors or consultants or the Company sells shares of its Common Stock or any equity securities or securities convertible or exchangeable into any equity securities of the Company, as part of a plan or series of plans of financing, or the number of shares of Common Stock outstanding on a Fully Diluted Basis increases as a result of a change in the conversion ratio of any class of securities convertible or exchangeable into any equity securities of the Company, the Company shall grant Prior additional stock options under the Plan covering that number of shares of Common Stock necessary to cause Prior's proportionate holdings of the outstanding Common Stock, on a Fully Diluted Basis, immediately after the grant or sale of such options, shares or other equity interests to equal his proportionate holdings of the outstanding Common Stock, on a Fully Diluted Basis, immediately prior to the grant or sale of such options, shares or other equity interests, but not to exceed 8-1/2% of the Common Stock on a Fully Diluted Basis; (ix) all additional stock options shall have the same terms and conditions, and shall vest as though they were granted on the same date as the initial options that are required to be issued on or before December 18, 1996; (x) each option shall include all other rights and benefits under the Plan, including Section 11 of the Plan (regarding accelerated vesting on Change in Control); and (xi) the Company has registered, or within 60 days of the Effective Date shall at its own expense register, under the Securities Act of 1933 all shares issued or to be issued pursuant to the exercise of the stock options on Form S-8, the obligation to maintain such registration to continue following Prior's termination of employment. Prior agrees that, if requested by an underwriter of the Company's securities, Prior will comply with any reasonable customary lock-up periods in connection with the -2- Company's offering of securities provided that all other executive officers and directors of the Company also must comply with such restrictions and provided that no such lock-up periods shall exceed 180 days. The Plan shall be amended as necessary to provide or permit the issuance of the options described in this Paragraph 3(c). The Board shall in good faith take all necessary action to effect the terms of this Agreement and to register the underlying shares of Common Stock under applicable securities laws as provided herein. 3. Except as modified herein, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the day and year first above written. /s/ Reed R. Prior --------------------------------- Reed R. Prior SERAGEN, INC. By: /s/ Jean C. Nichols ------------------------------ Jean C. Nichols President and Chief Technology Officer rpemp.amd EX-10.67 3 AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit No. 10.67 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT Amendment No. 1 to Employment Agreement (the "Amendment") dated as of December 18, 1996 between Seragen, Inc. (the "Company") and Jean C. Nichols, Ph.D. (the "Executive"). WHEREAS, the Company and the Executive entered an Employment Agreement dated as of November 6, 1996 (the "Employment Agreement"); and WHEREAS, the Company and the Executive desire to amend the Employment Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. Capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Employment Agreement. 2. The first paragraph of Section 3.6 of the Employment Agreement is hereby amended to read as follows: 3.6 Stock Options. On or before December 18, 1996, the Company shall grant the Executive stock options under the Seragen, Inc. 1992 Long Term Incentive Plan (the "Plan") to purchase a number of shares of the Company's common stock, par value $0.01 per share ("Common Stock"), equal to (a) 1.275% of the outstanding Common Stock on the date of grant, measured on a fully diluted basis, taking into account all options, warrants, conversion rights and other rights issued by the Company to acquire equity securities issued prior to the actual date of grant and based upon the exercise or conversion price that would apply if such options, warrants, conversion rights, and other rights were exercised or converted on the grant date, less (b) the stock options to purchase 54,000 shares of Common Stock previously granted by the Company to the Executive listed on Schedule I hereto. All stock options previously granted by the Company to the Executive other than the stock options to purchase 54,000 shares of Common Stock listed on Schedule I hereto shall be cancelled immediately upon the grant of options pursuant to this Agreement. To the extent permitted by federal income tax law, options issued under the plan to the Executive shall be "incentive stock options". The stock options shall be evidenced by an Incentive Stock Option Agreement and, if required, a Non-Qualified Stock Option Agreement substantially in the form of Exhibits A and B to this Agreement (the "Stock Option Agreements"), except as expressly provided otherwise herein. The exercise price per share of Common Stock for Stock Options granted pursuant to this Agreement shall be the Fair Market Value as defined in the Plan. Both Stock Option Agreements 1 shall provide that (i) the options issued thereunder shall vest, i.e., become exercisable, in monthly installments of 2.7778% commencing on the Effective Date and on the first day of each calendar month thereafter so that the Executive shall be fully (100%) vested on the first day of the month immediately before the third anniversary of the Effective Date; (ii) upon a Change in Ownership (as hereinafter defined) in place of the vesting schedule provided in clause "i" above the options shall vest retroactively as of the Effective Date 25% on the Effective Date and an additional 2.0833% on the first day of each calendar month thereafter so that the Executive shall be fully (100%) vested on the first day of the month immediately following the third anniversary of the Effective Date; (iii) upon the termination by the Company of the Executive's employment without Just Cause or the Executive's termination for Good Reason (as the terms are defined in Section 4) in place of the vesting schedules provided in clauses "i" and "ii" above, the options shall vest retroactively as of the Effective Date 25% on the Effective Date and at the accelerated rate of an additional 3.125% on the first day of each calendar month thereafter so that the Executive shall be fully (100%) vested on the first day of the month immediately following the second anniversary of the Effective Date; (iv) options issued shall, to the extent vested, be fully exercisable until the tenth (10th) anniversary of the date of grant; (v) the options shall be exercisable in accordance with the terms of the Plan, including the right to pay the option exercise price in whole or in part by surrendering shares of the Company's common stock held by the Executive for at least six months prior to the exercise date with an aggregate fair market value equal to the option exercise price or in accordance with a cashless exercise program established with a securities brokerage firm and approved by the Company, and shall provide that stock certificates shall be issued outright and free of escrow no later than three (3) days after the date of exercise; (vi) stock certificates issued pursuant to the exercise of an option shall not include any legends or be subject to any transfer restrictions, except for restrictions required by Section 16 of the Securities Exchange Act of 1934, as amended; (vii) the Company shall not terminate any option issued to the Executive upon a "Change in Control" (as defined in the Plan) without the Executive's prior written approval; (viii) in the event that at any time before a Target Equity Financing (as hereinafter defined), the Company grants options or other equity interests to management, employees, directors or consultants or the Company sells shares of its Common Stock or any equity securities or securities convertible or exchangeable into any equity securities of the Company, as part of a plan or series of plans of financing, or the number of shares of Common Stock outstanding on a fully diluted basis increases as a result of a change in the conversion ratio of any class of securities convertible or exchangeable into an equity securities of the Company, the Company shall grant to the Executive additional stock options under the Plan covering that number of shares of Common Stock necessary to cause the Executive's proportionate holdings of the outstanding Common Stock, on a fully diluted basis, immediately after the grant or sale of such options, shares or other equity interests to equal her proportionate holdings of the outstanding Common Stock, on a fully diluted basis, immediately prior to the grant or sale of such options, shares or 2 other equity interests, but not to exceed 1.275% of the Common Stock on a fully diluted basis; (ix) all additional stock options shall have the same terms and conditions, and shall vest as though they were granted on the same date as the initial options that are required to be issued on or before December 18, 1996; (x) each option shall include all other rights and benefits under the Plan, including Section 11 of the Plan (regarding accelerated vesting on Change in Control); and (xi) the Company has registered, or within 60 days of the Effective Date shall at its own expense register, under the Securities Act of 1933 all shares issued or to be issued pursuant to the exercise of the stock options on Form S-8, the obligation to maintain such registration to continue following the Executive's termination of employment. The Executive agrees that, if requested by an underwriter of the Company's securities, the Executive will comply with any reasonable customary lock-up periods in connection with the Company's offering of securities provided that all other executive officers and directors of the Company also must comply with such restrictions and provided that no such lock-up periods shall exceed 180 days. The Plan shall be amended as necessary to provide or permit the issuance of the options described in this Section 3.6. All additional stock options shall have the same terms and conditions, and shall vest as though they were granted on the same date, as the options issued pursuant to this Section. For purposes of determining the outstanding Common Stock on a fully diluted basis, all shares of Common Stock issuable upon exercise of options outstanding under the Plan or any other stock option plan (including the options granted to the Executive pursuant to this Agreement) and all shares of Common Stock issuable on exercise of all other outstanding options, warrants, conversion rights or other rights issued by the Company to acquire equity securities shall be deemed to be outstanding. 3. Except as modified herein, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the day and year first above written. /s/ Jean C. Nichols -------------------------- Jean C. Nichols SERAGEN, INC. By: /s/ Reed R. Prior -------------------------- Reed R. Prior Chief Executive Officer, President and Treasurer jnemp.amd 3 EX-10.68 4 WAIVER TO EMPLOYMENT AGREEMENT Exhibit No. 10.68 WAIVER Reference is made to the Employment Agreement dated as of November 6, 1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between the Company and the undersigned (together the "Agreement"). Pursuant to the Agreement, the Company agreed to file a registration statement on Form S-8 (the "Registration Statement") registering under the Securities Act of 1993 all shares issued or to be issued pursuant to the exercise of the stock options granted to Prior pursuant to the Agreement on or before January 6, 1997. The undersigned hereby waives with respect to the Agreement the Company's obligation to file the Registration Statement by the January 6, 1997 deadline, and agrees that the Company shall have met its obligation to file the Registration Statement if the Registration Statement is filed on or before July 1, 1997. Except as expressly waived herein, all other obligations of the Company contained in the Agreement shall remain in full force and in effect. EXECUTED as of the 6th day of January, 1997. /s/ Reed R. Prior ---------------------------- Reed R. Prior EX-10.69 5 WAIVER TO EMPLOYMENT AGREEMENT Exhibit No. 10.69 WAIVER Reference is made to the Employment Agreement dated as of November 6, 1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between the Company and the undersigned (together the "Agreement"). Pursuant to the Agreement, the Company agreed to file a registration statement on Form S-8 (the "Registration Statement") registering under the Securities Act of 1993 all shares issued or to be issued pursuant to the exercise of the stock options granted to Nichols pursuant to the Agreement on or before January 6, 1997. The undersigned hereby waives with respect to the Agreement the Company's obligation to file the Registration Statement by the January 6, 1997 deadline, and agrees that the Company shall have met its obligation to file the Registration Statement if the Registration Statement is filed on or before July 1, 1997. Except as expressly waived herein, all other obligations of the Company contained in the Agreement shall remain in full force and in effect. EXECUTED as of the 6th day of January, 1997. /s/ Jean C. Nichols, Ph.D. ------------------------------- Jean C. Nichols, Ph.D. EX-10.70 6 WAIVER NO. 2 TO EMPLOYMENT AGREEMENT Exhibit No. 10.70 WAIVER NO. 2 Reference is made to the Employment Agreement dated as of November 6, 1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between the Company and the undersigned and as amended by Waiver to Employment Agreement dated as of January 6, 1997 between the Company and the undersigned (together the "Agreement"). Pursuant to Section 3 (c)(viii) of the Agreement, the Company agreed to grant Mr. Prior certain additional options upon the occurrence of certain events. The undersigned hereby waives with respect to the Agreement the Company's obligation to grant the additional options immediately upon the occurrence of such events and agrees that the Company may grant such additional options based on the number of shares of Common Stock outstanding on a Fully Diluted Basis on the last day of each calendar quarter. Except as expressly waived herein, all other obligations of the Company contained in the Agreement shall remain in full force and in effect. EXECUTED as of the 31st day of January, 1997. /s/ Reed R. Prior --------------------------- Reed R. Prior EX-10.71 7 WAIVER NO. 2 TO EMPLOYMENT AGREEMENT Exhibit No.10.71 WAIVER NO. 2 Reference is made to the Employment Agreement dated as of November 6, 1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between the Company and the undersigned and as amended by Waiver to Employment Agreement dated as of January 6, 1997 between the Company and the undersigned (together the "Agreement"). Pursuant to Section 3.6 (viii) of the Agreement, the Company agreed to grant Dr. Nichols certain additional options upon the occurrence of certain events. The undersigned hereby waives with respect to the Agreement the Company's obligation to grant the additional options immediately upon the occurrence of such events and agrees that the Company may grant such additional options based on the number of shares of Common Stock outstanding on a Fully Diluted Basis on the last day of each calendar quarter. Except as expressly waived herein, all other obligations of the Company contained in the Agreement shall remain in full force and in effect. EXECUTED as of the 31st day of January, 1997. /s/ Jean C. Nichols, Ph.D. ------------------------------- Jean C. Nichols, Ph.D. EX-10.72 8 AMENDMENT TO 1992 LONG TERM INCENTIVE PLAN Exhibit No. 10.72 As amended through December 18, 1996 SERAGEN, INC. 1992 LONG TERM INCENTIVE PLAN SECTION 1. Purpose The purpose of the Seragen, Inc. 1992 Long Term Incentive Plan (the "Plan") is to promote the interests of Seragen, Inc. (the "Company") and its Subsidiaries, Affiliates and stockholders by enabling the Company to attract, retain and reward persons who serve as employees of and consultants to the Company and its Subsidiaries and Affiliates, and strengthening the mutuality of interests between such employees, consultants and the Company's shareholders, by offering them performance-based stock incentives and/or other equity interests or equity-based incentives in the Company, as well as performance based incentives payable in cash. Certain terms used herein are defined in Section 17 of the Plan. SECTION 2. Stock Subject to the Plan. The maximum aggregate number of shares of Stock reserved and available for distribution under the Plan shall be eight million, (8,000,000) shares of Stock. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. Subject to Section 6(b)(iv) below, if any shares of Stock that have been optioned under the Plan cease to be subject to a Stock Option, or if any such shares of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock Purchase Right or Other Stock-Based award granted hereunder are forfeited or any such award otherwise terminates, without a payment being made to the participant in the form of Stock, such shares shall be available for distribution in connection with future awards under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future distribution under the Plan. In the event of any recapitalization, Stock dividend, Stock split, reclassification or other change in corporate structure affecting the Stock, the aggregate number of shares reserved for issuance under the Plan, the number and option price of shares subject to outstanding options granted under the Plan, the number and purchase price of shares subject to outstanding Stock Appreciation Rights under the Plan, and the number of shares subject to other outstanding awards granted under the Plan, shall be appropriately increased or decreased proportionately, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any stock Appreciation Right or Limited Stock Appreciation Right associated with any Stock Option. Subject to the provisions of Section II hereof, in the event of a merger or consolidation of the Company with another corporation, all the outstanding Stock Options issued hereunder shall terminate unless otherwise determined by the Committee and all Deferred Stock and Restricted Stock which is subject to forfeiture or which has not been received shall be forfeited or not received, unless otherwise determined by the Committee or unless the Board arranges to have the merged or consolidated corporation assume such Stock Options, Deferred Stock or Restricted Stock or issue substitute Stock Options, Deferred Stock or Restricted Stock therefor; provided, however, that in the event the merged or consolidated corporation does not assume such Stock Options, Deferred Stock or Restricted Stock or issue substitute Stock Options, Deferred Stock or Restricted Stock therefor, (i) each optionee shall have the right, immediately prior to such merger or consolidation, to exercise his Stock Option(s) in whole or in part without regard to any installment restrictions as to time of exercise otherwise imposed under the Plan, and (ii) each holder of Deferred Stock or Restricted Stock shall have the right, immediately prior thereto, to receive and own all such stock without regard to any restrictions otherwise imposed under the Plan. SECTION 3. Eligibility. Employees (including employees who serve as officers and directors) and consultants (including directors who serve as consultants) and members of the Scientific and Medical Advisory Board (whether or not employees or serving in other consulting roles) of the Company and its Subsidiaries and Affiliates and who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan; provided, however, that only Employees of the Company and its Subsidiaries are eligible to be granted Incentive Stock Options under the Plan. SECTION 4. Administration. The Plan shall be administered by a Committee of not less than two (2) Disinterested Persons, who shall be appointed by the Board and who shall serve at the pleasure of the Board. If no Committee has been appointed to administer the Plan, the functions of the Committee specified in the Plan shall be administered by the Board, except that at any time after a registration of the Company's Stock under Section 12 of the Exchange Act, administration by a Committee of two (2) or more Disinterested Persons is required. The Committee shall have full authority to grant, pursuant to the terms of the Plan, to Employees eligible under Section 3: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Limited Stock Appreciation Rights, (iv) Restricted Stock, (v) Deferred Stock, (vi) Stock Purchase Rights or (vii) Other Stock-Based Awards. 2 In particular, the Committee shall have the authority: (i) to select the persons to whom Stock Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible persons; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting, acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or Deferred Stock under Sections 5(k) or 5(l) as applicable, instead of Stock); (v) to determine whether and under what circumstances a Stock Option may be settled in Stock, Restricted Stock and/or Deferred Stock under Sections 5(k) or (l), as applicable, instead of cash; (vi) to determine whether, to what extent and under what circumstances grants and/or other awards under the Plan and/or other cash awards made by the Company are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan and/or cash awards made outside of the Plan, or on an additive basis; (vii) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); and (viii) to determine the terms and restrictions applicable to Stock Purchase Rights and the Stock purchased by exercising such Rights. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); 3 and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan participants. The Plan is intended to comply with Rule 16b-3 under the Exchange Act (and with any amended or successor rule) for those persons who are subject to Section 16(b) of said Act. If any provision in this Plan with respect to such persons would be contrary to said Rule, it shall be deemed to be null and void to the extent permissible by law and deemed appropriate by the Committee. SECTION 5. Stock Options. Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Each Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options, and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights or Limited Stock Appreciation Rights); provided that in no event shall any employee be granted in any calendar year Stock Options to purchase more than five million (5,000,000) shares of Stock: Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: a. Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant and may be equal to, greater than or less than one hundred percent (100%) of the Fair Market Value of the Stock at the date of grant; provided, however, that the option price per share of Stock purchasable under an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Stock at the date of grant; and provided further however, that in the case of an Incentive Stock Option granted to an Employee who, at the time of grant, owns Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Company, its Subsidiaries or Affiliates, the option price per share of Stock shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Stock at the date of grant. b. Option Term. The term of each Stock Option shall be fixed by the Committee, but no 4 Stock Option shall be exercisable more than ten (10) years after the date the Option is granted or more than five (5) years after grant in the case of any employee who owns stock constituting ten percent (10%) of the total combined voting power of the Company or any parent or Subsidiary. c. Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Sections 2, 5(f) and 5(g), unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable in the first six (6) months following the granting of the Option. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine in its sole discretion. d. Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, (a) payment in full or in part may be made in the form of unrestricted Stock already owned by the optionee, (b) in the case of the exercise of a Non-Qualified Stock Option, payment in full or in part may be made in the form of Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee), (c) payment in full or in part may be made in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Committee, or (d) payment in full or in part may be made by any combination of (a), (b) or (c) above. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, such Restricted Stock or Deferred Stock (and any replacement shares relating thereto) shall remain (or be) restricted or deferred, as the case may be, in accordance with the original terms of the Restricted Stock award or Deferred Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions or deferral limitations, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Stock shall be issued until full payment therefor has been made. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Stock, and compliance with the applicable requirements, if any, of Section 13(a), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to such Stock Option. 5 e. Non-Transferability of Options. No Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution or as required pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder, or as otherwise deemed appropriate by the Committee and set forth in the applicable option agreement. f. Termination by Death. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. g. Termination by Reason of Disability. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of twelve (12) months (or such period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such twelve (12) months period (or such shorter period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercisable after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. h. Termination by Reason of Retirement. Subject to Section 5(j), if an optionee's employment by the company and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of ninety (90) days (or such other period as the Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such ninety (90) day period (or such other period as the Committee may specify at grant), any unexercised Stock Option held by such optionee shall 6 thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock option will thereafter be treated as a Non-Qualified Stock Option. i. Other Termination. Unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three (3) months or the balance of such Stock Option's term if the optionee is involuntarily terminated without Cause by the Company and any Subsidiary or Affiliate. For purposes of the Plan, "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. j. Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. Incentive Stock options shall not be treated as "incentive stock options" to the extent that the aggregate Fair Market Value (determined at the time an Incentive Stock Option is granted) of Stock with respect to which Incentive Stock Options meeting the requirements of Section 422(b) of the Code are exercisable for the first time by any participant during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000, and such excess shall be treated as a Non-Qualified Stock Option. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement: (i) if (x) a participant's employment is terminated by reason of death, Disability or Normal or Early Retirement, and (y) the portion of any Incentive Stock Option exercisable during the post-termination period specified under Sections 5(f), (g) or (h) that is greater than the portion of such option that is exercisable as an "incentive stock option" during such post-termination period under Section 422, shall be treated as a Non-Qualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of a Change 7 in Control, any portion of such option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. k. Buyout Provisions. The Committee may at any time offer to purchase an Option previously granted for a payment in cash, Stock, Deferred Stock or Restricted Stock, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. l. Settlement Provisions. If the option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to an exercised Option take the form of Deferred or Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Deferred or Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. m. Additional Options. The Committee in its sole discretion may authorize the grant of Non-Qualified Stock Options which provide for the subsequent grant of additional Non-Qualified Stock Option effective upon the occurrence of certain events specified in the applicable option agreement SECTION 6. Stock Appreciation Rights. a. Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. b. Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and 8 conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted to an optionee subject to Section 16(b) of the Exchange Act shall not be exercisable during the first six (6) months of its term and exercise shall be permitted only in accordance with Rule 16b-3 under the Exchange Act to the extent applicable. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock option would be transferable under Section 5(e) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) In its sole discretion, the Committee may grant Limited Stock Appreciation Rights under this Section 6, i.e., Stock Appreciation Rights that become exercisable only in the event of a Change in Control or a Potential Change in Control, subject to such terms and conditions as the Committee may specify or grant. Such Limited Stock Appreciation Rights shall be settled solely in cash. (vi) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change of Control Price, subject to such terms and conditions as the Committee may specify at grant. 9 SECTION 7. Restricted Stock. a. Administration. Shares of Restricted Stock may be issued either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7 (b)), the time or times within with such awards may be subject to forfeiture, and all other terms and conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. b. Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be equal to, less than or greater than their par value and may be zero. (ii) Awards of Restricted Stock must be accepted within a period of sixty (60) days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock award agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each participant receiving a Restricted stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such-participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. c. Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: 10 (i) Subject to the provisions of the Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restricted Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restriction in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. Shares issued to any person subject to Section 16(b) of the Exchange Act may not be disposed of within six (6) months of grant, except as may be permitted under Rule 16b-3(c) issued under the Exchange Act. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 13(e), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant promptly. d. Minimum Value Provision. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock award, subject to such performance, future service deferral and other terms and conditions as may be specified by the Committee. 11 SECTION 8. Deferred Stock. a. Administration. Deferred Stock may be awarded either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom and the time or times at which Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any person, the price (if any) to be paid by the recipient of Deferred Stock, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the other terms and conditions of the award in addition to those set forth in Section 8(b). The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. b. Terms and Conditions. The shares of Deferred Stock awarded pursuant to this Section 8 shall be subject to the following terms and conditions: (i) Subject to the provisions of the Plan and the award agreement referred to in Section 8(b)(vi) below, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 8(b)(v), where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. In the case of any person subject to Section 16(b) of the Exchange Act, no share certificates will be delivered earlier than six (6) months from the date on which such shares are deemed to have been granted (according to the opinion of Company's counsel) under Rule 16b-3 of the Exchange Act. (ii) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Stock, or otherwise reinvested, all as determined at or after the time of the award by the Committee, in its sole discretion. (iii) Subject to the provision of the award agreement and this Section 8, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Deferral Period for a given award, the Deferred Stock in question will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. 12 (iv) Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to further defer receipt of an award (or an installment of an award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least twelve (12) months prior to completion of the Deferral Period for such Deferred Stock award (or such installment). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock agreement executed by the Company and the participant. c. Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Deferred Stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 9. Stock Purchase Rights. a. Awards and Administration. Subject to Section 3 above, the Committee may grant eligible participants Stock Purchase Rights which shall enable such participants to purchase Stock (including Deferred Stock and Restricted Stock): (i) at its Fair Market Value on the date of grant; (ii) at fifty percent (50%) of such Fair Market Value on such date; (iii) at an amount equal to Book Value on such date; or (iv) at an amount equal to the par value of such Stock on such date. The Committee shall also impose such deferral, forfeiture and/or other terms and conditions as it shall determine, in its sole discretion, on such Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase Rights awards need not be the same with respect to each 13 participant. Each Stock Purchase Right award shall be confirmed by, and be subject to the terms of, a Stock Purchase Rights Agreement. b. Exercisability. Stock Purchase Rights shall generally be exercisable for such period after grant as is determined by the Committee not to exceed thirty (30) days. Stock which may be purchased pursuant to Stock Purchase Rights of persons potentially subject to Section 16(b) of the Exchange Act shall not be sold until six (6) months and one (1) day after the grant date. SECTION 10. Other Stock-Based Awards. a. Administration. Other awards of Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based" Awards"), including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Stock awards or options valued by reference to Book Value or Subsidiary performance, may be granted alone, in addition to or in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock or Stock Purchase Rights granted under the Plan and/or cash awards made outside of the Plan. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee shall also provide for the grant of Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. b. Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 10 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement referred to in Section 10(b)(v) below, shares subject to awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. The Committee may further provide, in its sole discretion, that shares subject to awards under this Section 10 made to persons potentially subject to Section 16(b) of the Exchange Act may not be sold until six (6) months and one (1) day after the grant date. 14 (ii) Subject to the provisions of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 10 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (iii) Any award under Section 10 and any Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreements, as determined by the Committee, in its sole discretion. (iv) In the event of the participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 10. (v) Each award under this Section 10 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and by the participant. (vi) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 10 may be issued for no cash consideration. Stock (including securities convertible into Stock) purchased pursuant to a purchase right awarded under this Section 10 shall be priced at least fifty percent (50%) of the Fair Market Value of the Stock on the date of grant. SECTION 11. Change in Control Provisions. a. Impact of Event. In the event of: (1) a Change in Control, or (2) a Potential Change in Control, but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), the following acceleration and valuation provisions shall apply: (i) Any Stock Appreciation Rights (including, without limitation, any Limited Appreciation Rights) outstanding for at least six (6) months and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully 15 exercisable and vested. (ii) The restrictions and deferral limitations applicable to any Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares shall be deemed fully vested. (iii) The value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the Change in Control Price as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (b) Definition of "Change in Control". For purposes of Section 11(a), a "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, other than Boston University (collectively, the Group), including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; or (ii) When, during any period, of twenty-four (24) consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such twenty-four (24) month period shall be deemed to have satisfied such twenty-four (24) month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendations or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such twenty-four (24) month period) or by prior operations of this Section 11(b)(ii); or (iii) The occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise. 16 (c) Definition of Potential Change in Control. For purposes of Section 11(a), a "Potential Change in Control" means the happening of any one of the following: (i) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by an entity, person or group other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee), or Boston University of securities of the Company representing five percent (5%) or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for the purposes of the Plan. d. Change in Control Price. For purposes of this Section 11, "Change in Control Price" means the highest price per share paid in any transaction reported on the National Association of Securities Dealers Automated Quotation System, or paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the sixty (60) day period immediately preceding the occurrence of the Change in Control period (or, where applicable, the occurrence of the Potential Change in control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights (or Limited Stock Appreciation Rights) or, where applicable, the date on which a cashpoint occurs under Section 11(a)(ii). SECTION 12. Amendment and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Limited Stock Appreciation Right, Restricted or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award theretofore granted, without the optionee or participant's consent, or which, without the approval of the Company's shareholders, would: a. change the pricing terms of Section 9(a); b. change the classification of persons eligible to participate in the Plan; c. extend the maximum option period under Section 5(d) of the Plan. 17 The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. However, no amendment shall be effective if shareholder approval is required under Section 16 of the Exchange Act or Section 422 of the Code unless the shareholders approve or ratify the amendment within the requisite time frame pursuant to procedures as may be required by the Exchange Act or the Code, as applicable. SECTION 13. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that, unless the Board determines otherwise with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 14 General Provisions. a. The Committee may require each person purchasing shares of Stock pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to compliance with such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and shall further be subject to the approval of counsel for the Company with respect to such compliance. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 18 b. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. c. The adoption of the Plan shall not confer upon any person any right to continue employment or in any other status with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment or any contractual arrangement of any person participating hereunder at any time. d. No later than the date as of which an amount first becomes incredible in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. e. The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or in Deferred Stock or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Stock Purchase Rights and other Plan awards). f. The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. g. No security or derivative security hereunder shall be transferable by a participant other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as referenced in Rule 16b-3 of the Exchange Act. SECTION 15. Effective Date of Plan. The Plan shall be effective as of January 31, 1992 subject to the approval of the Plan by a majority of the votes cast by the holders of the Company's Common Stock pursuant to Rule 16b-3 (b) of the Exchange Act. Any grants made under the Plan prior to such approval shall be effective when made (unless otherwise specified by the Board at the time of grant), but shall be 19 conditioned on, and subject to, such approval of the Plan by such shareholders. SECTION 16. Term of Plan. No Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred Stock award, Stock Purchase Right or Other Stock-Based Award shall be granted pursuant to the Plan on or after the tenth anniversary of the date of shareholder approval or Board approval, whichever is earlier, but awards granted prior to such tenth anniversary may extend beyond that date. SECTION 17. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least twenty percent (20%) of the combined voting power of all classes of stock of such entity or at least twenty percent (20%) of the ownership interests in such entity. b. "Board" means the Board of Directors of the Company. c. "Book Value" means, as of any given date, on a per share basis, (i) the shareholders' equity in the Company as of the end of the immediately preceding fiscal year as reflected in the Company's consolidated balance sheet, subject to such adjustments as the Board shall specify at or after grant, divided by (ii) the number of then outstanding shares of Stock as of such year-end date (as adjusted by the Committee for subsequent events). d. "Cause" shall have the meaning set forth in Section 5(i) above. e. "Change in Control" shall have the meaning set forth in Section 11(b) above. f. "Change in Control Price" shall have the meaning set forth in Section 11(d) above. g. "Code" means the Internal Revenue Code of 1986, as amended. h. "Commission" means the Securities and Exchange Commission. i. "Committee" means the Committee referred to in Section 4 of the Plan. 20 j. "Company" means Seraglio, Inc., a Delaware corporation. k. "Deferral Period" shall have the meaning set forth in Section 8(a) above. l. "Deferred Stock" means an award made pursuant to Section 8 above of the right to receive Stock at the end of a specified deferral period. m. "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. n. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. o. "Elective Deferral Period" shall have the meaning set forth in Section 8(b)(v) above. p. "Employee" means any person, including officers and directors, employed by the Company or any Affiliate or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. q. "Exchange Act" means the Securities Exchange Act of 1934, as amended. r. "Early Retirement" means retirement, with the express consent of the Company at or before the time of such retirement, from active employment with the Company and any Subsidiary or Affiliate pursuant to the early retirement provisions of the applicable qualified retirement plan of such entity. s. "Fair Market Value" means, as of any given date the last reported sales price of such share on the current day (or most recent business day for trading if a holiday or weekend) on the New York Stock Exchange, or, if the Common Stock is not then listed or admitted to trading on the New York Stock Exchange, on such other principal stock exchange on which such stock is then listed or admitted to trading, or, if no sale takes place on such day on any such exchange, the average of the closing bid and asked prices on such day as officially quoted on any such exchange, or, if the Common Stock is not then listed or admitted to trading on any stock exchange, the market price for each such trading day shall be the last sale reported on the NASDAQ National Market System as published in The Wall Street Journal or, if no such sale is so reported, the average of the reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automated Quotation system, or, if such price at the time is not available from such system, as furnished by any similar system then engaged in the business of reporting such prices and selected by the Board or, if there is no such system, as furnished by any member of the National 21 Association of Securities Dealers, selected by the Board. If the Common Stock is neither listed on a national securities exchange nor reported on the NASDAQ National Market System nor traded on the over-the-counter market, fair market value shall be such value as the Board, in good faith, shall determine. Notwithstanding any provision of the Plan to the contrary, no determination made with respect to the Fair Market Value of Common Stock subject to an Option shall be inconsistent with the method required for incentive options under Code Section 422. t. "Incentive Stock Option" means any Stock option intended to qualify as an "Incentive Stock option" within the meaning of Section 422 of the Code. u. "Incumbent Directors" shall have the meaning set forth in Section 11(b)(ii) above. v. "Limited Stock Appreciation Right" shall have the meaning set forth in Section 6(b)(v) above. w. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. x. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65. y. "Other Stock-Based Award" means an award under Section 10 above that is valued in whole or in part by reference to, or is otherwise based on, Stock. z. "Plan" means this Seraglio, Inc. 1992 Long Term Incentive Plan, as amended from time to time. aa. "Potential Change" shall have the meaning set forth in Section 11(c) above. bb. "Restricted Period" shall have the meaning set forth in Section 7(c)(i) above. cc. "Restricted Stock" means an award of shares of Stock that is subject to restrictions under Section 7 above. dd. "Retirement" means Normal or Early Retirement. ee. "Stock" means the Common Stock, $.01 par value, of the Company. ff. "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 above to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock 22 Option (or portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). gg. "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock and Deferred Stock, if the Committee so determines) granted pursuant to Section 5 above. hh. "Stock Purchase Right" means the right to purchase Stock pursuant to Section 9. ii. "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 23 EX-10.73 9 EMPLOYMENT AGREEMENT Exhibit No. 10.73 EMPLOYMENT AGREEMENT Employment Agreement dated as of January 15, 1997 between Seragen, Inc. (the "Company"), having an office at 97 South Street, Hopkinton, Massachusetts 01748, and Elizabeth Chen ("Chen"), residing at 122 West Montgomery Street, Baltimore, Maryland 21230. Unless otherwise specifically provided, all capitalized terms are defined in Section 5. 1. Term of Employment. Subject to the terms and conditions of this Agreement, the Company hereby employs Chen, and Chen hereby accepts employment by the Company, commencing on January 15, 1997 (the "Effective Date") and continuing until the date Chen is terminated or otherwise resigns pursuant to Section 4 of this Agreement, except that any rights or obligations arising before such date (including the right to future severance payments) shall remain in full force and effect after such date. 2. Duties. (a) General. Effective as of the Effective Date, Chen is hereby engaged to serve as Vice President of Business Development of the Company. Chen shall report solely to the Chief Executive Officer of the Company, shall perform such executive duties as may be assigned to her from time to time by the Company's Chief Executive Officer and shall possess such other titles, without additional compensation, as may be assigned or granted to her from time to time by the Company's Chief Executive Officer or Board of Directors. If such additional titles involve significant additional responsibilities, Chen and the Company shall negotiate in good faith to determine any additional compensation that shall be paid to Chen. Except as provided in Section 2(b)(i) hereof, Chen agrees to devote her full business time, energy and skill to the Company's affairs and shall at all times act with due regard to the best interests of the Company. 1 (b) Outside Commitments. Chen represents and agrees that (i) except for service on the Baltimore City Judicial Nominating Commission, which involves no more than an average of six (6) days of work per year, she is not currently employed by, nor does she sit on the Board of Directors of, any other company or institution; and (ii) during her employment by the Company, except as provided in (i) above, she shall not accept employment by or serve as a consultant to, any company or other institution except with the prior consent of the Chief Executive Officer or Board of Directors of the Company. 3. Compensation and Other Benefits. For all services to be rendered by Chen and all covenants undertaken by her pursuant to this Agreement, the Company shall pay and Chen shall accept the compensation set forth in this Section 3. (a) Salary. The Company shall pay Chen a salary at the rate of One Hundred Seventy-Five Thousand Dollars ($175,000) per annum during the term of her employment hereunder, payable in accordance with the Company's normal payroll practices for its senior management. The Company may, at any time, in the discretion of its Board of Directors increase, but not decrease, Chen's base salary based upon merit as a result of positive reviews of Chen's performance by the Chief Executive Officer. (b) Stock Options. The Company shall grant Chen stock options (the "Options") under the Seragen, Inc. 1992 Long Term Incentive Plan (the "Plan") to purchase sufficient shares of the Company's common stock, par value $.01 per share ("Common Stock"), to equal 2.0% of the then outstanding Common Stock, measured on a Fully Diluted Basis (as the term is defined in Section 5), at the Fair Market Value (as defined in the Plan) per share of Common Stock on the date of grant. To the extent permitted by federal income tax law, options issued to Chen under the Plan shall be "incentive stock options" (as defined in Section 422 of the Internal Revenue Code (the "Code")). The Options shall be evidenced by a Stock Option Agreement (the "Option Agreement") setting forth the terms and conditions applicable to the Options. 2 (i) Vesting. The Option Agreement shall provide that: (1) the Options shall vest, i.e., become exercisable as follows: (A) 1/48 of the Options, multiplied by the number of calendar months or partial calendar months that have elapsed from November 11, 1996 until the date of grant of the Options, shall vest immediately upon the grant of Options and (B) 1/48 of the Options shall vest on the first day of each calendar month thereafter, so that Chen shall be fully (100%) vested on October 1, 2000; (2) upon the termination by the Company of Chen's employment without Just Cause or Chen's termination for Good Reason (as the terms are defined in Section 5), in place of the vesting schedule provided in Section 3(b)(i)(1) above, the number of Options that shall vest as of the date of such termination shall be equal to the sum of (A) 25% of the Options and (B) 3.125% of the Options, multiplied by the number of calendar months or partial calendar months that have elapsed from November 11, 1996 until the date of such termination; and (3) upon the a Change in Ownership (as the term is defined in Section 5), in place of the vesting schedule provided in Section 3(b)(i)(1) above, the Options shall become fully (100%) vested. (ii) General Provisions. (1) The Options shall, to the extent vested, be fully exercisable until the tenth (10th) anniversary of the date of grant, except that the Options will expire 15 days after a termination of employment with Just Cause. To the extent that any Options that are "incentive stock options" are not exercised before the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Options will remain outstanding for the remainder of their term but will thereafter be treated as non-qualified stock options. (2) The Options shall be exercisable in accordance with the terms of the Plan, including the right to pay the option exercise price in whole or in part by surrendering shares 3 of Common Stock or Restricted Stock (as such term is defined in the Plan) held by Chen for at least six months prior to the exercise date with an aggregate Fair Market Value equal to the option exercise price or in accordance with a cashless exercise program established with a securities brokerage firm and approved by the Company, and shall provide that stock certificates to be issued upon exercise of vested Options shall be issued outright and free of escrow no later than three (3) days after the date of exercise. (3) Stock certificates issued pursuant to the exercise of an Option shall include only such legends as are required to comply with federal or state securities law or regulations. (4) The Options shall include all rights and benefits under the Plan, including Section 11 (relating to accelerated vesting on a Change in Control), and the Company shall not terminate any Option issued to Chen upon a Change in Control (as defined in the Plan) without Chen's written approval. (5) In the event that the Company grants options or other equity interests to management, employees, directors or consultants, or the Company sells shares of its Common Stock or any equity securities or securities convertible or exchangeable into any equity securities of the Company, as part of a plan or series of plans of financing, or the number of shares of Common Stock outstanding on a Fully Diluted Basis increases as a result of a change in the conversion ratio of any class of securities convertible or exchangeable into any equity securities of the Company, the Company shall grant Chen additional stock options under the Plan covering that number of shares of Common Stock necessary to cause Chen's proportionate holdings of the outstanding Common Stock on a Fully Diluted Basis, immediately after the grant or sale of such options, shares or other equity interests to equal her proportionate holdings of the outstanding Common Stock, on a Fully Diluted Basis, immediately prior to the grant or sale of 4 such options, shares or other equity interests (the "Dilution Options"), but not to exceed two percent (2%) of the Common Stock on a Fully Diluted Basis. Dilution Options will be granted on the last day of the calendar quarter during which such grant or sale of options, shares or other equity interests is completed, based on the number of shares of Common Stock outstanding on a Fully Diluted Basis on the last day of such calendar quarter, except that, in the case of any target Equity Financing (as the term is defined in Section 5) from which the Company receives proceeds of at least Ten Million ($10,000,000) Dollars, the Dilution Options will be granted immediately upon the consummation of such Target Equity Financing. Dilution Options will have an exercise price equal to the fair market value per share of Common Stock on the date of grant of such Dilution Options, and will otherwise be subject to the same terms and conditions, and will vest and remain exercisable on the same terms, as are set forth in Section 3(b) for all other Options granted to Chen. Chen's right to receive Dilution Options pursuant to this subsection 3(b)(ii)(5) will terminate after the Company has received cumulative proceeds (since the date of execution of this Agreement) of at least Twenty Million ($20,000,000) Dollars from one or more Target Equity Financings. (6) The Company shall, on or before July 1, 1997, at its own expense register under the Securities Act of 1933 the maximum aggregate number of shares issuable under the Plan on a Registration Statement on Form S-8 and use its best efforts to maintain the effectiveness of such Registration Statement for as long as any of the Options or Dilution Options remain outstanding. (c) Commuting and Living Expense Reimbursement. The Company shall, within ten (10) days of receipt of reasonable substantiation, reimburse Chen for (i) all reasonable costs incurred by her in connection with obtaining lodging accommodations in the vicinity of the Company's principal office in order to carry out her duties and responsibilities under this 5 Agreement and weekly travel between such location and her family residence located in Baltimore, Maryland, plus (ii) any federal, state or local income or payroll taxes incurred by Chen with respect to payments made under this Section 3(c), including this subsection 3(c)(ii), so that Chen shall be made whole on an after tax basis. (d) Vacation and Employee Benefits. Chen shall be entitled to paid vacations in accordance with the policies of the Company from time to time in effect, subject to a minimum of four (4) weeks per year, and shall be eligible to participate in any pension, profit sharing or similar plan and any health, hospitalization, medical, accident, disability, sick leave, supplementary income benefit, life insurance or other similar benefit plan or program of the Company now existing or hereafter established and available to the Company's employees generally or to key employees as a group to the extent her age, health, and other qualifications make her eligible to participate. Furthermore, Chen shall be entitled to such additional benefits as may be granted to her from time to time by the Chief Executive Officer or the Board of Directors of the Company. (e) Severance. Upon the termination of Chen's employment for any reason, the Company shall pay Chen for up to four (4) weeks of any unused accrued vacation time, together with all salary and other benefits accrued through the date of termination. If either Chen shall voluntarily terminate her employment for Good Reason (as defined in Section 5) or Chen's employment hereunder is terminated by the Company without Just Cause (as defined in Section 5), the Company shall provide Chen with the following severance benefits: (i) upon the date of such termination the Company shall pay Chen, as termination and severance pay, in a lump sum, an amount equal to twelve (12) months' salary based on her then salary rate; and (ii) upon the date of such termination the Company shall pay Chen, in a lump sum, the amount of any remaining obligations under any lease for local lodging, up to a maximum of one year; and 6 (iii) the Company will continue to provide Chen and her family with the same group health plan benefits coverage provided to them prior to Chen's termination for the maximum period set forth in the continuation coverage requirements under "COBRA", and the Company will provide such coverage without cost or charge of any nature to Chen or any member of her family, other than any applicable deductible or co-payment, for such maximum period, but in no event for a period longer than twelve (12) months following the date of Chen's termination. (f) Death or Disability. If Chen's employment is terminated by death or disability, the Company shall pay to Chen's estate or to Chen, as the case may be, the balance of her accrued and unpaid salary through the date of such termination and unreimbursed expenses and her unused accrued vacation time (up to four (4) weeks). For the purposes of this section, the word "disability" shall have the same meaning as in the Company's then-applicable long-term disability policy that would qualify Chen for full benefits under the policy. (g) Employment. All compensation payable and other benefits provided under this Section 3 shall be subject to customary withholding for income, F.I.C.A. and other employment taxes. The value of stock issued pursuant to the exercise of an Option or Dilution Option shall be measured solely in accordance with IRS rules and regulations. (h) Asset Value Realization Bonus. The Company and its shareholders presently intend to develop the business of the Company over the long term through the efforts of Chen and the other employees of the Company, which efforts are intended to result in a substantial increase in the value of the Common Stock and of the Options granted to Chen under Section 3(b) above. If, however, a Change in Ownership of the Company (as the term is defined in Section 5) is Effected (as hereinafter defined) during the term of Chen's employment with the Company or at any time before the first anniversary of Chen's termination of employment, then the Company shall pay Chen a bonus (the "Asset Value Realization Bonus") equal to two percent (2%) of the Net 7 Proceeds (as hereinafter defined) for any acquisition that is part of the Change in Ownership, which amount shall be reduced (but not below zero) by the Option Stock Gain (as hereinafter defined) recognized by Chen as a result of the sale by her of Common Stock acquired upon the exercise of Options or Dilution Options granted to her under Section 3(b) above. The Company shall pay the Asset Value Realization Bonus, or any increase in the Asset Value Realization Bonus, on or before the closing of any acquisition that is part of a Change in Ownership. If any part of the Net Proceeds is payable after closing (the "Deferred Payments"), however, then the Company may defer the payment of the part of the Asset Value Realization Bonus allocable to the Deferred Payments until receipt of the Deferred Payments, provided the payor of the Deferred Payments has agreed in writing to pay directly to Chen the Asset Value Realization Bonus allocable to the Deferred Payments as and when such Deferred Payments are made to the Company or its shareholders. "Net Proceeds" shall mean the total cash plus any property received directly or indirectly by the Company or its shareholders in kind with respect to all acquisitions constituting the Change in Ownership, reduced by all investment banking fees, brokerage fees, appraisal fees, and other professional expenses directly attributable to the acquisitions. A transaction shall be "Effected" by a certain date if it is consummated by that date or is the subject matter of an agreement or memorandum of intent executed by that date and subsequently consummated. "Option Stock Gain" shall mean the difference between the net proceeds from Chen's sale of Common Stock and the net cost to Chen to exercise the Options and Dilution Options for such stock on the assumption that Chen has, in fact, exercised all vested options and sold all Common Stock received on such exercise as of the date of the Change in Ownership; Chen shall for this purpose be deemed to have sold all Common Stock that (i) she owns at the time of the Change of Ownership or could then own if she exercised all vested options, (ii) she is permitted to sell, and (iii) in the event of a merger or sale of securities, she has received an offer to purchase, and is permitted to sell, on the same terms and conditions as those of the transactions 8 that constitute the Change in Ownership. Chen's right to receive an Asset Value Realization Bonus under this Section 3(h) shall terminate (i) upon a restructuring that eliminates the liquidation preferences of all preferred stock and other equity securities of the Company senior to the Common Stock (including the Class A Common Stock expected to be issued in 1997) or (ii) if all shares of preferred stock and other equity securities senior to the Common Stock (including the Class A Common Stock expected to be issued in 1997) cease to be outstanding, as a result of, their conversion into Common Stock or for any other reason. 4. Termination of Employment. (a) Termination by Company. The Company may terminate Chen's employment hereunder at any time without Just Cause, effective upon not less than thirty (30) days' prior written notice. The Company may terminate Chen's employment hereunder with Just Cause immediately without notice. If the termination is for Just Cause, the Company shall provide Chen as soon as practicable with a written explanation of the facts on which the termination is based. For the purposes of this Agreement, the Company shall be deemed to have terminated Chen without Just Cause if (i) Chen shall have notified the Company in writing that she has Good Reason (as defined in Section 5) to terminate employment with the Company, (ii) the Company shall not have eliminated such Good Reason within thirty (30) days of such notice, and (iii) Chen shall have given notice of termination of her employment more than thirty (30) days after delivery of such notice of Good Reason and less than sixty (60) days after delivery of such notice of Good Reason. (b) Termination by Chen. Chen may terminate her employment hereunder at any time upon not less than thirty (30) days' prior written notice. Upon Chen's voluntary termination of employment without Good Reason pursuant to this Section 4(b), Chen shall not be entitled to the severance benefits described in Section 3(e) above. 9 (c) Disability. If Chen shall incur a disability, the Company may terminate Chen's employment upon not less than thirty (30) days' prior written notice. Upon such termination, Chen shall be entitled to receive from the Company only those payments set forth in Section 3(f) hereof. For the purposes of this section, the word "disability" shall have the same meaning as in the Company's then-applicable long-term disability policy that would qualify Chen for full benefits under the policy. 5. Definitions. (a) Just Cause. For the purposes of this Agreement, "Just Cause" shall mean: (i) the commission by Chen of an act of, or omission of an act that would constitute, willful and material malfeasance or gross negligence in the performance of her duties on behalf of the Company; (ii) the commission by Chen of a willful act of material fraud in the performance of her duties on behalf of the Company; (iii) the conviction of Chen for commission of a felony; or (iv) the breach by Chen of any material term of this Agreement or the continuing willful failure of Chen to perform her material duties to the Company (other than any such failure resulting from Chen's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such breach or failure are given to Chen by the Chief Executive Officer of the Company or the Board of Directors of the Company. No notice, however, shall be due for a breach or failure to perform that cannot be cured or for any act described in clauses (i), (ii) or (iii) above. For purposes of this Section 5(a), no act, or failure to act, on Chen's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith and without reasonable belief that her action or omission was in the best interests of the Company. 10 (b) Good Reason. For the purposes of this Agreement, "Good Reason" shall mean: (i) the Company shall have materially breached its obligations under this Agreement (including any substantial change in Chen's duties or responsibilities), and such breach is not cured within twenty (20) days of Chen's sending a written notice of such breach; (ii) the Company shall have incurred a Change in Ownership; (iii) the Company shall have incurred a Change in Control; (iv) the Company shall be Insolvent; (v) the Company shall have acted in bad faith to cause Chen to resign from the Company; (vi) the Options shall not have been granted within six (6) months of the date of execution of this Agreement; or (vii) the Dilution Options shall not have been granted within the time period set forth in Section 3(b). Good Reason shall not arise in any situation in which Chen shall have given written consent to the act or failure to act of the Company. (c) Insolvency. For the purposes of this Agreement, the Company shall be "Insolvent" if (i) it commences any case, proceeding or other action (A) under the Federal Bankruptcy Code seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, or the Company shall make a general assignment for the benefit of its creditors, or (ii) there shall be commenced against the Company any case, proceeding or other action of a nature referred to in Section 5(c)(i) above, which case, proceeding or other action 11 results in the entry of an order for relief from which no stay has been granted within sixty (60) days, or (iii) for a period in excess of sixty (60) days, the Company shall generally not, or shall be unable to, pay its debts as they become due or shall admit in writing its inability to pay its debts. (d) Change in Ownership. For purposes of this Agreement, a "Change in Ownership" of the Company shall mean (i) the acquisition by any "person" or group of "persons" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 ("Exchange Act")), whether by way of merger, sale of assets, stock purchase, tender offer or otherwise, of (A) all or substantially all of the equity securities of the Company or (B) all or substantially all of the operating assets of the Company and its subsidiaries taken as a whole, or (ii) the sale or out-licensing after the date hereof of the majority (in value) of the technology assets of the Company and its subsidiaries taken as a whole, which shall not include the sale of the Company's manufacturing and clinical operations facilities to Boston University or Boston University's designated affiliate. (e) Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall have the same meaning as provided in Section 11(b) of the Plan as in effect on the date hereof. (f) Fully Diluted Basis. For purposes of this Agreement, "Fully Diluted Basis" shall mean that all shares of Common Stock issuable upon exercise of options outstanding under the Plan or any other stock option plan (including the Options and Dilution Options granted to Chen pursuant to this Agreement) and all shares of Common Stock issuable on exercise of all other outstanding options, warrants, conversion rights or other rights issued by the Company to acquire equity securities shall be deemed to be outstanding. (g) Target Equity Financing. Target Equity Financing shall mean the sale or issuance of stock of the Company or of debt securities of the Company with conversion rights, other than 12 (i) stock or debt securities sold or issued to a shareholder and/or affiliated investment entities who as of the Effective Date collectively own at least 1% of the Common Stock as measured on a Fully Diluted Basis or (ii) stock issued as a result of the exercise of options presently outstanding or issued pursuant to the Plan. 6. Confidentiality. (a) Chen acknowledges that during the course of her employment with the Company she will have access to and may obtain, develop or learn of Confidential Information (as defined below). (b) Chen agrees that while employed by the Company and thereafter she shall hold such Confidential Information in strictest confidence and that, except pursuant to her employment with the Company, she shall not at any time, during or after the conclusion of her employment with the Company, or in any manner, either directly or indirectly, use (for her own benefit or otherwise), divulge, disclose or communicate to any unauthorized person, firm or corporation in any manner whatsoever any Confidential Information. (c) Under this Agreement, the term "Confidential Information" shall include but not be limited to any of the following information relating to the Company learned by Chen during or as a result of her employment or prior consulting engagement with the Company: (i) information relating to the products, product development activities, research, technical and/or scientific know-how, plans, projects, processes or manner of operations; (ii) computer databases, software programs and information relating to the nature of the hardware or software and how said hardware and software are used in combination or alone; (iii) methods of selling, pricing and business operations in general as well as specific; 13 (iv) the identity of customers, market research information and any other information in any form relating to such customers and their relationships or dealings with the Company or any subsidiary or affiliate thereof; (v) any trade secret or confidential information of or concerning any customers, affiliates or business relations; and (vi) any other trade secret or information of a confidential or proprietary nature. (d) While an employee of the Company, Chen shall use, divulge, disclose or communicate Confidential Information only in the scope of her employment with the Company. Chen shall not at any time after the termination of her employment with the Company, for whatever reason, use, divulge, disclose, or communicate for any purpose any Confidential Information. (e) Chen will not make or use any notes or memoranda relating to any Confidential Information except for the benefit of the Company, and will, at the Company's request, return each original and every copy of any and all notes, memoranda, correspondence, diagrams or other records, in written or other form, that she may at any time have within her possession or control that contain any Confidential Information. (f) Notwithstanding the above, this Section 6 shall not apply to any matter which is now or becomes part of the public domain, other than through Chen's improper act or omission, was known to Chen prior to the commencement of her employment or any prior consulting arrangements with the Company or is disclosed to Chen by a third party which did not obtain the information, directly or indirectly, under an obligation of confidence to the Company. Further, this agreement shall not apply to information which Chen is required to disclose by enforceable legal process. 7. Non-Competition. Chen acknowledges and recognizes the highly competitive nature of the business conducted by the Company. Accordingly, Chen agrees that, in consideration of the premises 14 contained herein, she shall not, for her own benefit or for the benefit of any other person or entity, while employed by the Company and for a one-year period thereafter: (a) become an employer, officer, director, owner, employee, partner, consultant or other participant in any entity, or assist any person, which competes with or which is about to compete with the Company in the business of developing, manufacturing, marketing or selling pharmaceutical products based upon diphtheria fusion toxins or any other technology owned by the Company before Chen's termination (a "Competitive Business"); or (b) own any interest in any entity which engages, or is about to engage in a Competitive Business; provided, however, that Chen shall have the right to acquire as a passive investor an equity interest of not more than one percent (1%) of the issued and outstanding shares of any publicly traded corporation's stock. 8. Company Right to Inventions. Chen shall promptly disclose, grant and assign to the Company for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to diphtheria fusion toxins or other technology created by the Company, which she may develop or acquire while employed by the Company (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof that may at any time be granted for or upon any such invention, improvement or technical information. In connection therewith: (a) Chen shall without charge, but at the expense of the Company, promptly at all times hereafter execute and deliver such applications, assignments, descriptions and other instruments as may be reasonably necessary or proper in the reasonable opinion of the Company to vest title to any such inventions, improvements, technical information, patent applications, patents, copyrights or reissues thereof in the Company and to enable it to obtain and maintain the entire right and title thereto throughout the world; and 15 (b) Chen shall render to the Company at its expense (including a reasonable payment for the time involved in case she is not then in its employ) all such assistance as it may reasonably require in the prosecution of applications for said patents, copyrights or reissues thereof, in the prosecution or defense of interferences which may be declared involving any of said applications, patents or copyrights and in any litigation in which the Company may be involved relating to any such patents, inventions, improvements or technical information. 9. Breach. In the event of breach by Chen of any provision of Sections 6, 7 and 8 hereof, the remedy at law will be deemed inadequate, and the Company will be entitled, in addition to any other remedies available by law, to appropriate injunctive and other relief. Should any provision hereof be adjudged to any extent invalid by any competent tribunal, such provision will be deemed modified to the extent necessary to make it enforceable. 10. Indemnity. To the extent permitted by law, the Company shall indemnify Chen and hold her harmless for all acts or decisions made by her in good faith while performing services for the Company or any designee of the Company and shall pay or reimburse Chen all expenses as and when incurred, including attorneys' fees, actually and necessarily incurred by Chen in connection with the defense of any action, suit or proceeding to which Chen may be made a party by reason of her performing services hereunder and in connection with any related appeal including the cost of court settlements. The Company shall also use its best efforts to obtain coverage for her under any insurance policy obtained during the term of this Agreement covering the other officers and directors of the Company against lawsuits. 11. Notices. All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be deemed to have been given when sent by facsimile or when mailed at any general or branch United States Post Office enclosed in a certified postpaid envelope and addressed to the address of the respective party stated below or to such changed address as the party may have fixed by notice: 16 To the Company: Seragen, Inc. 97 South Street Hopkinton, MA 01748 Attention: Chief Executive Officer Fax No.: (508) 485-9805 To Chen: Ms. Elizabeth Chen 122 West Montgomery Street Baltimore, Maryland 21230 Fax No.: (410) 385-0961 12. Legal Fees. The Company shall pay Chen's reasonable legal fees incurred with respect to the preparation of this Agreement and other documents related to her employment by the Company. 13. Miscellaneous. (a) Construction. This Agreement shall be construed, interpreted and governed by the laws of the State of Delaware without regard to the principles of conflicts of laws. (b) Binding Agreement; Assignability. This Agreement shall be binding upon and inure to the benefit of Chen, her legal representatives, heirs and distributees, and the Company, its successors and assigns; provided, however, that because this Agreement is a personal service contract, Chen shall not assign any of her employment duties or obligations hereunder and any purported assignment shall be null and void ab initio. (c) Previous Agreements. This Agreement supersedes all other agreements between the Company and Chen relating to Chen's employment by the Company. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to its subject matter, and no waiver, modification or change of any of its provisions shall be valid unless in writing and signed by the party against whom such claimed waiver, modification or change is sought to be enforced. 17 (e) Waiver. The waiver of any breach of any duty, term or condition of this Agreement shall not be deemed to constitute a waiver of any preceding or succeeding breach of the same or of any other duty, term or condition of this Agreement. (f) Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof or to affect the meaning thereof. (g) Survival. The provisions of Sections 6, 7, 8 and 10 shall survive termination of this Agreement. (h) Representations and Warranties of Chen. Chen represents and warrants that her performance of all of the terms of this Agreement and as an employee of the Company does not and will not breach any consulting, employment, non-compete or other agreement to keep in confidence proprietary information, knowledge, or data acquired by her in confidence or in trust from a third party prior to her employment with the Company. (i) Representations and Warranties of Company. (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to do business in the Commonwealth of Massachusetts and has full power and authority to operate its businesses as now operated and to perform this Employment Agreement in accordance with its terms. (ii) The execution and delivery of this Employment Agreement to Chen and the carrying out of the provisions hereof have been duly authorized by the Board of Directors of the Company. (iii) This Employment Agreement shall be, when duly executed and delivered, a legal and binding obligation of the Company, enforceable in accordance with its terms. (iv) Neither the execution nor delivery of this Employment Agreement, nor the compliance with its terms, shall constitute a violation or breach of the Certificate of 18 Incorporation, as amended to date, or of the by-laws, as currently in effect, of the Company or of any agreement between the Company and any other party. (j) Capitalized Terms. All capitalized terms shall have the meanings provided in Section 5 unless provided elsewhere. (k) Arbitration. Except as provided in Paragraph 9 above, any claim or controversy arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts. Such arbitration shall be conducted in the City of Boston in accordance with the rules then-existing of the American Arbitration Association for commercial disputes. In any such arbitration each party shall have the right to demand (i) a written statement setting forth, for each cause of action, a detailed statement of the facts on which it is based and a description of how the amount demanded was calculated; and (2) to demand inspection and copying of relevant documents and things in the possession or control of any of the other parties, prior to the arbitration hearing. The arbitrator shall have authority to order compliance with, and shall otherwise supervise, such demands for written statements and/or for pre-hearing inspection and copying. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. SERAGEN, INC. By:_________________________ (L.S.) ELIZABETH CHEN 19 EX-10.74 10 WAIVER TO EMPLOYMENT AGREEMENT Exhibit 10.74 March 28, 1997 Seragen, Inc. 97 South Street Hopkinton, MA 01748 Re: Employment Agreement Gentlemen: The undersigned hereby confirms that the term "Change in Ownership" as defined in the Employment Agreement dated November 6, 1996 between the undersigned and Seragen, Inc. (the "Company") does not include the sale of the Company's manufacturing and clinical operations facilities to Boston University or Boston University's designated affiliate pursuant to the Assets Purchase Agreement dated as of February 14, 1997 between the Company and Boston University. Sincerely yours, /s/ Reed R. Prior Reed R. Prior EX-10.75 11 WAIVER TO EMPLOYMENT AGREEMENT Exhibit 10.75 March 28, 1997 Seragen, Inc. 97 South Street Hopkinton, MA 01748 Re: Employment Agreement Gentlemen: The undersigned hereby confirms that the term "Change in Ownership" as defined in the Employment Agreement dated November 6, 1996 between the undersigned and Seragen, Inc. (the "Company") does not include the sale of the Company's manufacturing and clinical operations facilities to Boston University or Boston University's designated affiliate pursuant to the Assets Purchase Agreement dated as of February 14, 1997 between the Company and Boston University. Sincerely yours, /s/ Elizabeth C. Chen Elizabeth C. Chen EX-21 12 LIST OF SUBSIDIARIES EXHIBIT 21 List of Subsidiaries Subsidiary Name Jurisdiction of Incorporation - --------------- ----------------------------- Seragen Technology, Inc. Delaware EX-23.1 13 CONSENT OF ARTHUR ANDERSEN LLP Exhibit No 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K, into the Company's previously filed Registration Statements Nos. 333-12613, 33-93792, 33-84556, 33-74396, and 33-59644. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Boston, Massachusetts March 28, 1997 EX-23.2 14 CONSENT OF COOPERS & LYBRAND L.L.P. Exhibit No 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Seragen, Inc. on Form S-3 (File No.'s 333-12613, 33-93792 and 33-74396) and on Form S-8 (File No.'s 33-84556 and 33-59644) of our report, which includes an explanatory paragraph concerning factors which raise substantial doubt about the Company's ability to continue as a going concern, dated February 23, 1996, on our audits of the financial statements of Seragen, Inc. as of December 31, 1995 and for the years ended December 31, 1995 and 1994 which report is included in the 1996 Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts March 27, 1997 EX-27 15 ARTICLE 5 FINANCIAL DATE SCHEDULE
5 This schedule contains summary financial information extracted from financial statements for the twelve month period ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 2,158,710 0 1,319,244 0 0 3,763,310 4,604,115 0 8,444,608 9,691,212 0 0 30,915,522 171,994 0 8,444,608 0 10,542,315 0 26,872,113 2,923,864 0 5,453,638 0 0 (34,981,478) 0 0 0 (34,981,478) 0 0
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