-----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, U/LHUvb7kf+BlHfLyM1aay8PcEn8KyyZ68kFCKHbaw5G0ZIw8mWqkiRKGLhcO2A8 oyisVlEK+PmdNUh1cUB3/A== 0000950135-98-001947.txt : 19980331 0000950135-98-001947.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950135-98-001947 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMULOGIC PHARMACEUTICAL CORP /DE CENTRAL INDEX KEY: 0000873731 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133397957 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19117 FILM NUMBER: 98577270 BUSINESS ADDRESS: STREET 1: 610 LINCOLN ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6174666000 MAIL ADDRESS: STREET 1: 610 LINCOLN ST CITY: WALTHAM STATE: MA ZIP: 02154 10-K405 1 IMMULOGIC PHARMACEUTICAL CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 0-19117 IMMULOGIC PHARMACEUTICAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3397957 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
610 LINCOLN STREET, WALTHAM, MASSACHUSETTS 02154 (781) 466-6000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PREFERRED STOCK PURCHASE RIGHTS PAR VALUE $.01 (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 a 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 the Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the last sale price of the Common Stock reported on the Nasdaq National Market on March 12, 1998 was $39,496,033. The number of shares of Common Stock outstanding as of March 12, 1998 was 20,358,780. DOCUMENTS INCORPORATED BY REFERENCE Portions of the ImmuLogic Pharmaceutical Corporation definitive Proxy Statement for the 1998 Annual Meeting of Stockholders incorporated by reference in Part III. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL ImmuLogic Pharmaceutical Corporation (ImmuLogic or the Company) is a biopharmaceutical company, incorporated under the laws of the State of Delaware on March 26, 1987, developing novel products with a primary emphasis on the immunological treatment of addiction and the diagnosis and treatment of allergies. ImmuLogic's technological approach is based on proprietary discoveries and an advanced understanding of the molecular events controlling the human immune system. In 1997, the Company worked closely with the United States Food and Drug Administration (the "FDA") responding to questions regarding the Company's ALLERVAX(R) CAT and RAGWEED clinical programs. As a result of these discussions and the Company's assessment of the associated significant costs and time necessary to commercialize the products, the Company decided to discontinue the programs. Accordingly, in 1997, the Company restructured its operations to focus its efforts on the clinical development of vaccines for the management of cocaine and nicotine addiction and research around its recombinant protein therapeutics for the diagnosis and treatment of allergic diseases. In addition, the Company continued research on a nonparental product for the treatment of multiple sclerosis in collaboration with Schering AG (Schering) which will end on March 31, 1998. Total employees of the Company decreased from 151 at December 31, 1996 to 27 at March 12, 1998. In addition, the Company sub-leased one-third of its facilities effective February 27, 1998, with the entire facility to be sub-leased effective October 1, 1998. The Company is planning for the sale of the majority of the equipment and furniture located in its facility and is in the process of locating new space to accommodate its current level of operations. The Company is considering various strategic alternatives with respect to its business including further restructuring of operations, acquisition of additional technology, strategic alliances, sale or merger or dissolution of the Company. There can be no assurance that the Company will be successful in implementing any further restructuring, strategic alliance, acquisition of additional technology, merger or sale in a timely manner or at all, or that any such action would enhance the competitive position or future success of the Company. TECHNOLOGY AND PRODUCT CANDIDATES Vaccines for the treatment of substance abuse: Cocaine and Nicotine. ImmuLogic is pursuing a novel strategy for the treatment of cocaine addiction through the development of a therapeutic cocaine vaccine. Cocaine abuse is a major medical and public health concern in the United States, with 2.1 million people estimated to be dependent on cocaine. The cumulative effects of cocaine-associated violent crime, loss in individual productivity, illness and death, has led the National Institute on Drug Abuse to identify the development of an effective treatment for cocaine addiction as its top priority. Despite the intense interest in this area, no effective long-term therapies are yet available. The cocaine vaccine being developed at ImmuLogic is designed to induce anti-cocaine antibodies that bind to cocaine in the bloodstream. The purpose of the antibodies is to limit the amount of cocaine that can enter the brain; as a result, the patient would not receive the stimulation associated with cocaine use and is less likely to continue to take it. The vaccine is intended to be used as part of a comprehensive treatment program aimed at relapse prevention. The Company's cocaine vaccine IND application has been cleared by the FDA, and clinical evaluation is planned to begin in mid-1998. In May, 1997, the Company received a $2.2 million cooperative award from the National Institute on Drug Abuse (NIDA) to partially fund development of a cocaine vaccine for the treatment of cocaine addiction. This funding was received through the Institute's Strategic Program for Innovative Research on Cocaine Addiction Pharmacotherapy (SPIRCAP) program. The purpose of the SPIRCAP program is to provide funds to bridge the preclinical and clinical evaluation of cocaine abuse treatments. The funds will be 2 3 directed to preclinical research and subsequent clinical studies to evaluate the safety and efficacy of the vaccine. The funds from this grant will be available over 4 years ending in April, 2001. ImmuLogic also is developing a nicotine vaccine based on similar technology. Smoking is an enormous worldwide health problem and few pharmacotherapies are available to help people to quit smoking. Overcoming nicotine addiction is central to smoking cessation. The nicotine vaccine being developed at the Company is designed to induce in vaccinated subjects anti-nicotine antibodies that bind to nicotine in the bloodstream. The presence of the antibodies should inhibit the entry of nicotine into the brain and reduce both the psychological effects of nicotine and its addictiveness. Thus, if a vaccinated subject smokes a cigarette, little or no effect of the nicotine should be experienced which should reduce the risk that the subject would fall back into a regular smoking habit. As with the cocaine vaccine, the nicotine vaccine is intended to be used as part of a comprehensive treatment program aimed at relapse prevention. The Company's nicotine vaccine is currently in preclinical research. A vaccine candidate has been synthesized and shown to induce nicotine-specific antibodies in animal models. Clinical evaluation is currently scheduled to begin in 1999. Reagents for the Diagnosis of Allergic Diseases. The Company has cloned and sequenced relevant allergenic proteins of cat dander, ragweed pollen, house dust mite, Japanese Cedar pollen, and certain grass pollens. The potential applications for the Company's recombinant protein allergens is based on the observation that those with strong immuno-globulin E (IgE) reactivity may have the greatest diagnostic potential and those with little or no reactivity have more immediate therapeutic prospects. With current molecular techniques and immunochemical methods the Company believes these properties can be easily modified to optimize each recombinant protein for either alternative. Recombinant allergens that have the full IgE reactivity profile equivalent to the native forms can be used to identify allergic individuals in both human and animal populations. These recombinant protein preparations could replace or be used in combination with extracts in in vitro tests or other commercially applied formats in which the allergen is affixed to a matrix for direct IgE binding analysis. The advantages of recombinant proteins are: 1) unequivocal specificity; 2) theoretically limitless supply through recombinant expression techniques; 3) ability to modify the proteins through molecular biology techniques. These forms could be applied to the presently practiced skin testing diagnostic regimens in the U.S. as well as the in vitro diagnostic methods in Europe, Japan and the U.S. Recombinant Proteins as Therapeutic Agents. Purified recombinant protein allergens could be used in conventional immunotherapy treatments. The advantages over extracts are specificity, improved quantitation and characterization of delivered product. Since IgE reactivity may be a disadvantage in conventional immunotherapy, recombinant allergens may have a distinct advantage. Those recombinant allergens that possess IgE reactivity can be modified to eliminate the IgE binding sites but without loss of the T cell epitopes which are crucial for effecting the decrease in allergic reactivity. ALLERVAX(R). ImmuLogic was developing allergy therapeutic products to be administered via subcutaneous injection which it believed would provide substantial improvement in effectiveness, safety and convenience over existing immunotherapy. The Company's approach was to identify the proteins that cause the allergic response and to define the relevant T cell epitopes from each of these proteins. From 1992 to 1996, the Company completed a number of Phase I and Phase II clinical studies for its ALLERVAX(R) CAT and ALLERVAX(R) RAGWEED programs. The Company worked closely with the United States Food and Drug Administration (the "FDA") in 1997 responding to questions regarding the Company's ALLERVAX(R) CAT and ALLERVAX(R) RAGWEED clinical programs. As a result of these discussions and the Company's assessment of the associated significant costs and time necessary to commercialize the products, the Company decided to discontinue the programs. Multiple Sclerosis. The Company's primary effort in the autoimmune disease area was in developing a peptide-based therapeutic to treat multiple sclerosis. In December 1996, ImmuLogic filed an IND application to begin clinical trials of an injectable peptide immunotherapeutic to treat multiple sclerosis. In connection with the reorganization of the Company's development plans in March 1997, the Company reviewed the plans for its injectable multiple sclerosis product and decided to discontinue further development internally. During 3 4 1997, the Company continued research on a nonparental product for the treatment of multiple sclerosis in collaboration with Schering. This collaboration will end on March 31, 1998. COLLABORATION AGREEMENTS Schering AG, Germany. In March 1995, the Company signed a collaboration agreement with Schering AG for the joint development and commercialization of the Company's peptide therapeutic to treat multiple sclerosis. Under this agreement, the Company would have received up to $7,500,000 in research support ($5,625,000 of which had been received through December 31, 1997) and up to $20,000,000 in milestone payments. The Company would pay one-third of the costs associated with clinical development and would receive a substantial royalty on net sales, if any. During 1996, the parties agreed in concept to changes in the collaboration agreement under which milestone payments were restructured to payments made after successful product demonstration. Annual research funding from Schering AG during 1997 was reduced from $2,500,000 to $1,250,000. This funding was dedicated exclusively to the development of a nonparentally administered therapeutic product for multiple sclerosis. During 1998, the Company is expected to receive $312,500 in research funding from Schering AG. The research funding due under the collaboration agreement between the Company and Schering AG will end on March 31, 1998. Schering AG has the right, at its election, to participate in the development and commercialization of the injectable dosage form of this therapeutic should such development and commercialization occur. The Company has no plans to develop this product in the future. If Schering AG elects to develop this product, it will be required to reimburse the Company for a significant portion of development costs incurred to date by the Company and will be obligated to make certain milestones payments to the Company. Schering AG has the right to terminate the collaboration agreement upon 30 days prior written notice to the Company. In addition, Schering Berlin Venture Corporation purchased 1,042,345 shares of the Company's Common Stock for $8,000,000 at the time of entering into the agreement in 1995. In April 1996, ImmuLogic registered these shares under the Securities Act of 1933 pursuant to the registration rights granted to Schering Berlin Venture Corporation in the stock purchase agreement. Upon registration, Schering Berlin Venture Corporation sold these shares on the open market. COMPETITION The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Some companies are engaged in activities similar to those of the Company. Certain of these have greater financial and other resources, larger research and development staffs, and more extensive marketing and manufacturing organizations. Many of these companies have significantly more experience than the Company in preclinical testing, conducting human clinical trials and other regulatory approval procedures. In addition, colleges, universities, governmental agencies and other public and private research organizations conduct research and may market commercial products on their own or through joint ventures. These institutions are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions also compete with the Company in recruiting and retaining highly qualified scientific personnel. The Company faces substantial competition in the treatment of substance abuse. Many pharmaceutical, biotechnology and academic institutions are exploring a variety of approaches for the treatment of cocaine addiction. In the area of smoking cessation, a variety of products including nicotine replacement products and antidepressants have been approved for smoking cessation and would compete with the Company's proposed nicotine vaccine. In addition, new products may be in development which may compete with the Company's proposed nicotine vaccine. There can be no assurance, that the Company's products in the area of substance abuse will be successfully developed or if they are successfully developed, that they would have advantages over current or future available treatments. 4 5 The Company also faces substantial competition in the allergy area. Many pharmaceutical companies have programs focused on enhancing current therapies, such as non-sedating antihistamines, and on developing products which affect immune system mediators further down the allergic cascade. Most of these approaches are aimed at relieving symptoms, reducing side effects, and addressing the inconvenience to the patient. While the Company believes that its recombinant protein products, if successfully developed, would have advantages over currently available treatments, there can be no assurance that such products will be developed or that advantages will materialize. PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS The Company's patent strategy has been to pursue a strong patent portfolio. As of March 12, 1998, the Company had ownership or exclusive rights to approximately 71 patent applications (including divisional applications) in the United States. The Company's pending patent applications cover general immunotherapy, allergy, autoimmune and drug abuse therapy. The Company has 36 issued patents worldwide, and has received another 8 notices of allowance for the Company's US applications which will mature into issued patents within the next several months. The Company is in the process of a critical review of the above patent portfolio to maximize prosecution strategy given the Company's current technology focus, and will discontinue patent applications which are not in line with the Company's current programs planned for product development. The Company has entered into a number of licensing arrangements pursuant to which it has obtained exclusive rights to certain technologies. In 1987, ImmuLogic licensed a patent application from MIT claiming methods and compositions for modulating the immune response of a cellular system. One United States patent was issued in May, 1991, with claims related to methods for use of compositions as vaccines and therapeutics. A United States patent application covering other aspects of the original MIT patent application is pending. The issued claims relate to potential approaches to vaccine therapy and are unrelated to the Company's current research programs in allergy and autoimmune diseases. Under its agreement with MIT, as amended, ImmuLogic is required to make certain benchmark and royalty payments to MIT, including a $750,000 patent allowance fee due in installments. In addition, the Company has obtained exclusive licenses from the University of North Carolina, TVW Telethon ICHR (Perth, Australia) and the University of Melbourne covering inventions and patent applications relating to therapeutic uses of allergenic proteins and peptides of ragweed, house dust mite and grasses, respectively. Under these license agreements, the Company is required to pay royalties based on sales of products derived from the licensed inventions. The Company cannot at this time make a meaningful estimate of its total future costs under the MIT license and its other licensing arrangements because such costs depend on several factors, including the level of future product sales. ImmuLogic has filed or licensed patent applications on the protein sequences for specific allergenic proteins and portions thereof, use of the sequences, and the use of certain T cell epitopes from these sequences in therapeutic compositions. This work was primarily based on extensive in vitro studies using human samples, as well as in vivo animal work, to determine the manner in which T cells respond to allergens and their epitopes. ImmuLogic has licensed patents pertaining to the drugs of abuse therapeutic program for which it pays license fees and may have to pay royalties. In addition, it has filed its own patents. There can be no assurance that patent applications owned by or licensed to the Company will issue or that, if issued, they will provide the Company with significant protection against competitors. In addition, the Company is aware of one issued European patent and one pending European patent application belonging to third parties which may adversely affect the Company's ability to commercialize its multiple sclerosis therapeutic candidate. If the claims contained in these patents are sustained, the Company may need to acquire licenses to those technologies in order to commercialize its multiple sclerosis therapeutic candidate in Europe. The cost or availability of licenses for these technologies is unknown. There may be additional domestic and foreign patent applications pending of which the Company is unaware at this time and which may affect the Company's ability to commercialize any of its products if corresponding patents are issued. There can be no assurance that ImmuLogic will not need to acquire licenses under patents belonging to others 5 6 for technology potentially useful or necessary to ImmuLogic and the cost or availability of such potential licenses is currently unknown. Moreover, there can be no assurance that any patents issued to or licensed by the Company will not be infringed upon or designed around by others. Some of the Company's know-how and technology is not patentable. To protect its rights, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements with ImmuLogic. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technology. GOVERNMENT REGULATION The production and marketing of the Company's products and its research and development activities are subject to regulation for safety and effectiveness by numerous governmental authorities in the United States and other countries. Pharmaceutical products intended for therapeutic or diagnostic use in humans are governed by FDA regulations in the United States and by comparable regulations in foreign countries. The process of completing clinical testing and obtaining FDA approval for a new human drug or biological product requires a number of years and the expenditure of substantial resources. The steps required before a new human pharmaceutical product may be marketed in the United States include (1) preclinical laboratory and animal tests, (2) the submission to the FDA of an application for an IND, (3) adequate and well-controlled human clinical trials to establish the safety and effectiveness of the drug, (4) the submission of a Biological License Application (BLA) or a New Drug Application (NDA) to the FDA, and (5) FDA approval of the BLA or NDA prior to any commercial sale or shipment of the drug. Preclinical studies are commonly conducted in a laboratory in animal models or on human samples in vitro. The results of these studies are submitted to the FDA as part of the IND application prior to commencement of clinical testing in humans. Clinical trials are characterized by three stages. Phase I trials are designed to provide information about product safety and pharmacology. Phase II trials are designed to provide additional information on safety, preliminary evidence of clinical efficacy and definition of an effective dosing regimen. Phase III trials are large-scale studies designed to provide statistical evidence of effectiveness and safety in humans at the designated dose and dosing regimen. Upon completion of clinical testing, which must demonstrate that the product is safe and effective for a specific indication, a BLA or NDA may be filed with the FDA. This application includes details of the manufacturing and testing processes, preclinical studies and clinical trials. FDA approval of the application is required before the applicant may market the new product. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or effectiveness. Also, the FDA may require post-marketing and surveillance programs to monitor the drug's effects. In addition to obtaining FDA approval for each product, each manufacturing establishment for new drugs and biologics must receive some form of approval by the FDA. Under current rules for biologics, the facility must obtain an approved Established License Application (ELA) from the FDA. The facility must be inspected by the FDA, and the approval obtained, prior to interstate marketing of any product. Among the conditions for such approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to the FDA's Good Manufacturing Practice (GMP) regulations, which must be followed at all times. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state or local agencies. In addition to regulations enforced by the FDA, the Company also is subject to regulation relating to occupational health and safety, environmental protection, hazardous substance control, radioactive materials control and waste management and disposal. Although the Company believes that its safety procedures for handling and disposing of hazardous and radioactive materials comply with federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. 6 7 For marketing outside the United States, the Company will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country, and may differ from requirements in the United States. Results of clinical trials conducted outside the United States, if any, may have bearing on the U.S. regulatory processes. There can be no assurance that FDA approval of any ELA, NDA or BLA submitted by the Company will be obtained, or that if obtained, that any such approval will be obtained in a timely manner. EMPLOYEES As of March 12, 1998, the Company had 27 full-time employees, 7 of whom hold Ph.D. degrees. The Company considers its relations with its employees to be good. No Company employee is covered by a collective bargaining agreement. ITEM 2. PROPERTIES The Company's 85,000 square foot headquarters and research and development facility is located in Waltham, Massachusetts under a lease agreement which expires in August 2002. Due to the discontinuation of the Company's ALLERVAX(R) program and the recent downsizing of its workforce, the Company sub-leased one-third of this facility under a sub-lease agreement effective February 27, 1998, with the entire facility being subleased under the above mentioned sublease agreement effective October 1, 1998. The sublease agreement covers the Company's future obligations due after September 30, 1998 under this lease. The Company is currently in the process of locating new space to accommodate its current level of operations. The Company's operating lease for its former Palo Alto, California facility which expires in March 1999, was sub-leased under two agreements which cover the Company's future obligations under this lease. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their respective ages and positions with the Company as of March 27, 1998 are as follows: NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- J. Joseph Marr, M.D.............. 59 President and Chief Operating Officer, Executive Vice President, Research and Development and Chief Scientific Officer J. Richard Crowley............... 42 Chief Financial Officer, Treasurer Dr. J. Joseph Marr was appointed President and COO in March 1997. He joined ImmuLogic in July 1996 as Executive Vice President Research and Development, Chief Scientific Officer, a position he retained upon his appointment as President and COO. In addition, Dr. Marr served as the Company's Acting President and Acting Chief Executive Officer from December 1996 to March 1997. From 1993 to 1996, Dr. Marr held the position of Vice President, Research and Development at Ribozyme Pharmaceuticals. From 1989 to 1993, Dr. Marr was Senior Vice President, Discovery Research at Monsanto/Searle Research and Development where he managed a group of 240 scientists. Dr. Marr also was a consultant with the World Health Organization (WHO) from 1982 to 1992 during which time he designed and implemented certain late stage clinical trials for WHO. Dr. Marr held academic positions from 1982 to 1990 including Professor, Department of Medicine and Department of Biochemistry and Director of Infectious Diseases and Clinical Laboratories at 7 8 the University of Colorado Health Sciences Center. From 1970 to 1982 he was on the faculty of Washington University School of Medicine where he was Associate Professor of Medicine and Director, Microbiology Laboratories and at St. Louis University School of Medicine where he was Vice Chairman, Department of Medicine, Professor of Medicine and Microbiology. Dr. Marr received his B.S. degree from Xavier University and M.D. degree from Johns Hopkins University School of Medicine. J. Richard Crowley is consulting with ImmuLogic in the position of interim Chief Financial Officer. Mr. Crowley is President of Keystone Consulting, a contract financial and operational management services firm. Mr. Crowley's experience from 1983 to 1995 includes senior financial and operational positions with the LittlePoint Corporation, TransNational Financial Services and the Crosby Vandenburgh Group. From 1979 to 1983, Mr. Crowley was with Price Waterhouse, during which time he obtained his C.P.A. Mr. Crowley holds a B.A. in Economics from Providence College. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. There is no family relationship among any of the officers or directors. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market on the Nasdaq National Market under the symbol IMUL. The following table sets forth for the periods indicated the range of high and low closing sale prices per share of the Common Stock as reported by the Nasdaq National Market.
HIGH LOW ---- --- 1996 First Quarter................................... $21 $10 5/8 Second Quarter.................................. 13 1/4 8 5/8 Third Quarter................................... 9 1/16 6 1/2 Fourth Quarter.................................. 10 1/2 6 3/8 1997 First Quarter................................... $ 6 11/16 $ 3 9/16 Second Quarter.................................. 4 3/8 3 1/8 Third Quarter................................... 4 7/64 2 3/4 Fourth Quarter.................................. 3 1/2 1 17/32
On December 31, 1997, there were approximately 304 holders of record of the Company's Common Stock. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain all earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. 8 9 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for the five years ended December 31, 1997 are derived from the financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 and the financial statements and related footnotes included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Consolidated Statement of Operations Data: Total revenues...................... $ 2,049 $ 9,239 $ 7,758 $ 6,335 $ 7,971 Research and development expenses... 17,103 25,882 24,709 27,074 23,096 General and administrative expenses.......................... 6,390 6,830 6,433 7,381 6,592 Net loss............................ (18,119) (18,870) (19,151) (25,306) (18,837) Basic and diluted net loss per share............................. (0.89) (0.93) (1.12) (1.70) (1.30) Weighted average number of common shares outstanding................ 20,273 20,206 17,035 14,843 14,451
DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS) Consolidated Balance Sheet Data: Cash and cash equivalents and short- and long-term investments......... $ 52,293 $ 70,047 $ 85,960 $ 55,912 $ 79,504 Total assets...................... 59,588 79,654 97,579 70,026 94,123 Long-term obligations............... 325 375 425 475 525 Stockholders' equity................ 54,019 71,926 89,535 62,284 87,052
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since inception, the Company has focused on the research and clinical development of products to treat allergies, autoimmune diseases and in 1994, added a program for vaccines for the management of drugs of abuse. No revenues have been derived from the sale of any products, and the Company does not expect to receive revenues from product sales for a number of years. The Company may continue to expend substantial funds for further research and development, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. The Company has incurred substantial annual operating losses since inception and expects to incur substantial operating losses in the future. At December 31, 1997, the Company's accumulated deficit was $131,435,000. As a result, the Company is dependent upon existing cash resources, external financing from equity and debt offerings, or collaborative research, development, manufacturing, and marketing arrangements with corporate partners to finance its operations. To date, the Company's primary sources of working capital have been from the sale of equity securities, interest earned on invested capital and sponsored research funding from collaboration agreements. The Company worked closely with the FDA during 1997, responding to questions raised regarding the Company's ALLERVAX(R) CAT and RAGWEED clinical programs. As a result of these discussions, and the Company's assessment of the associated significant additional costs necessary to commercialize the products, the Company decided to discontinue the programs. During 1997, the Company restructured its operations to focus its efforts on the clinical development of vaccines for the management of cocaine and nicotine addiction and research around its recombinant protein therapeutics for the diagnosis and treatment of allergic diseases. In addition, the Company continued research 9 10 on a nonparental product for the treatment of multiple sclerosis in collaboration with Schering which will end on March 31, 1998. Total employees of the Company decreased from 151 at December 31, 1996 to 27 at March 12, 1998. Total severance paid and accrued during 1997 was $3,147,000, which is included in the statement of operations for the year ended December 31, 1997. In addition, the Company subleased its facilities under a sublease effective February 27, 1998 resulting in a non-cash charge of $444,000 for the writedown of all of the Company's leasehold improvements to net realizable value. The Company is considering various strategic alternatives with respect to its business including further restructuring of operations, acquisition of additional technology, strategic alliances, sale or merger or dissolution of the Company. There can be no assurance that the Company will be successful in implementing any further restructuring, strategic alliance, acquisition of additional technology, merger or sale in a timely manner or at all, or that any such action would enhance the competitive position or future success of the Company. In May, 1997, the Company received a $2.2 million cooperative award from the National Institute on Drug Abuse (NIDA) to partially fund development of a cocaine vaccine for the treatment of cocaine addiction. This funding was received through the Institute's Strategic Program for Innovative Research on Cocaine Addiction Pharmacotherapy (SPIRCAP) program. The purpose of the SPIRCAP program is to provide funds to bridge the preclinical and clinical evaluation of cocaine abuse treatments. The funds will be directed to preclinical research and subsequent clinical studies to evaluate the safety and efficacy of the vaccine. The funds from this grant will be available over 4 years ending in April, 2001. A Phase I clinical trial for the cocaine vaccine is due to begin in mid-1998. RESULTS OF OPERATIONS Years Ended December 31, 1997 and 1996 Total revenues in 1997 were $2,049,000 compared to $9,239,000 in 1996. The decrease in total revenues from 1996 was primarily due to the fact that the Company received a one-time $7,000,000 payment in 1996 from Hoechst Marion Roussel, Inc. (HMR) resolving all obligations related to the collaboration agreement between the Company and HMR, which was terminated by HMR on September 7, 1996. Sponsored research funding from Schering AG was $1,250,000 and $1,875,000 in 1997 and 1996, respectively. Revenue received from the NIH under the Company's SBIR and SPIRCAP grants was $615,000 and $364,000 in 1997 and 1996, respectively. Total operating expenses were $23,492,000 in 1997 compared to $32,712,000 in 1996. Research and development expenses were $17,103,000 in 1997 compared to $25,882,000 in 1996, a decrease of $8,779,000 or 33.9%. The decrease in operating and research and development expenses was primarily due to reduced headcount and related costs due to the discontinuation of the clinical development of the ALLERVAX(R) CAT and ALLERVAX(R) RAGWEED products. Offsetting this decrease was increased severance costs related to the Company's restructuring totaling $1,221,000 and a non-cash charge of $355,000 for the writedown of all of the Company's leasehold improvements to net realizable value. General and administrative expenses were $6,390,000 in 1997 compared to $6,830,000 in 1996, a decrease of $440,000 or 6.4%. The decrease in general and administrative costs was due primarily to reduced headcount and related costs resulting from the Company's restructuring, offset by severance paid to the former chairman of the board of the Company during 1997 totaling $1,054,000 and additional severance costs related to the Company's restructuring totaling $882,000 and a non-cash charge of $89,000 for the writedown of all of the Company's leasehold improvements to net realizable value. Net interest income was $3,325,000 in 1997 compared to $4,603,000 in 1996, a decrease of $1,278,000 or 27.8%. The decrease resulted primarily from a lower average investable cash and investment balance resulting from cash used in operations during 1997. In addition, the Company received interest payments from HMR during 1996 related to capital expenditures made by the Company with respect to the joint manufacture of the ALLERVAX(R) family of allergy therapeutics. 10 11 Years Ended December 31, 1996 and 1995 Total revenues in 1996 were $9,239,000 compared to $7,758,000 in 1995. The increase in total revenues in 1996 was primarily due to a $7,000,000 payment received resolving all obligations related to the collaboration agreement between the Company and HMR, which was terminated by HMR on September 7, 1996. Revenues in 1995 included a license and milestone payment from HMR in the amount of $5,000,000. Offsetting this increase, in part, was lower sponsored research funding received under a license and collaboration agreement with Schering AG. Sponsored research funding from Schering AG was $1,875,000 and $2,500,000 in 1996 and 1995, respectively. Total operating expenses were $32,712,000 in 1996 compared to $31,142,000 in 1995. Total 1995 expenses included $2,130,000 for exit costs relating to the closing of the Company's Palo Alto facility. Research and development expenses were $25,882,000 in 1996 compared to $24,709,000 in 1995, an increase of $1,173,000 or 4.7%. The increase in research and development expenses was primarily due to increased headcount and related costs in the development, clinical, and regulatory areas to support the continuing clinical development of the ALLERVAX(R) CAT and ALLERVAX(R) RAGWEED products. In addition, research and development costs increased due to severance payments made and other costs incurred in connection with the resignation of two executive officers of the Company during 1996. Clinical trial costs increased over the prior year, primarily as a result of the 1996 seasonal ALLERVAX(R) RAGWEED trial. Partially offsetting these increases in research and development were savings from reduced headcount and related costs as a result of the closing of the Company's Palo Alto research facility in May 1995. General and administrative expenses were $6,830,000 in 1996 compared to $6,433,000 in 1995, an increase of $397,000 or 6.2%. The increase in general and administrative costs was due primarily to severance payments made and other costs incurred in connection with the resignation of three additional executive officers of the Company during 1996. This was offset in part by lower headcount and related costs as a result of closing the Company's Palo Alto research facility in May 1995. Net interest income was $4,603,000 in 1996 compared to $4,233,000 in 1995, an increase of $370,000 or 8.7%. The increase resulted primarily from a higher average investable cash and investment balance which was due to the sale of equity securities through two public offerings during the third quarter of 1995. This was offset in part by cash spent on operations during 1996. In addition, increased interest received from HMR related to capital expenditures made by the Company with respect to the joint manufacture of the ALLERVAX(R) family of allergy therapeutics contributed to the increase in interest income. LIQUIDITY AND CAPITAL RESOURCES Since inception, ImmuLogic has financed its operations through the sale of equity securities, sponsored research revenues, license and milestone payments, and interest earned on invested capital. The Company's total cash and investments balance at December 31, 1997 was $52,293,000, which included cash and cash equivalents of $8,437,000, short-term investments of $19,068,000 and long-term investments of $24,788,000. The Company has raised $134,100,000 from public equity offerings, received $24,000,000 from HMR in payments related to the joint collaboration agreement for its ALLERVAX(R) products, $7,000,000 from HMR for a final settlement payment upon the termination of the collaboration agreement between the Company and HMR, and $19,163,000 from HMR related to a Common Stock and a stock option purchase. In addition, the Company has received research support payments of $5,625,000 from Schering AG under a joint collaboration agreement for its multiple sclerosis peptide therapeutic product and $8,000,000 in equity financing from Schering Berlin Venture Corporation. The Company also received a SBIR grant during 1996 from NIDA totaling approximately $700,000 to complete the preclinical development of the Company's therapy to treat cocaine addiction. In addition, the Company received a SPIRCAP grant during 1997 totaling approximately $2,200,000 to partially fund the clinical development of the Company's therapy to treat cocaine addiction which will be received over four years beginning May 1, 1997. Net cash used in operating activities was $17,194,000 in 1997 compared to $16,156,000 and $14,802,000 in 1996 and 1995, respectively. As of December 31, 1997, the Company had invested $19,899,000 in property and equipment primarily in facility 11 12 renovations, laboratory equipment, and the buildout of a GMP-grade manufacturing facility at the Company's Waltham, Massachusetts headquarters. In March 1995, to help the Company support its capital requirements, the Company signed a collaboration agreement with Schering AG for the joint development and commercialization of the Company's peptide therapeutic to treat multiple sclerosis. Under this agreement, the Company would have received up to $7,500,000 in research support ($5,625,000 of which had been received through December 31, 1997) and up to $20,000,000 in milestone payments. The Company would pay one-third of the costs associated with clinical development and would receive a royalty on net sales, if any. During 1996, the parties agreed in concept to changes in the collaboration agreement under which milestone payments were restructured to payments made after successful product demonstration and annual research support funding from Schering AG during 1997 was reduced from $2,500,000 to $1,250,000. This funding was dedicated exclusively to the development of a nonparentally administered therapeutic product for multiple sclerosis. During 1998, the Company is expected to receive $312,500 in research funding from Schering AG. The research funding due under the collaboration agreement between the Company and Schering AG will end on March 31, 1998. Schering AG has the right, at its election, to participate in the development and commercialization of the injectable dosage form of this therapeutic should such development and commercialization occur. The Company has no plans to develop this product in the future. If Schering AG elects to develop this product, it will be required to reimburse the Company for a significant portion of development costs incurred to date and will be obligated to make certain milestones payments to the Company upon achievement of development milestones. Schering AG has the right to terminate the collaboration agreement upon 30 days prior written notice to the Company. There can be no assurance that Schering AG will not terminate the collaboration agreement or that it will devote the resources necessary to develop and commercialize any products resulting from the collaboration. The Company has expended substantial funds for the research and development of its products, and will continue to expend substantial funds for further research and development, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. The Company may seek to obtain additional funds for these purposes through equity or debt financings, collaborative arrangements with corporate partners, or from other sources. No assurance can be given that such additional funds will be available to the Company for such purposes on acceptable terms, if at all. Insufficient funds could require the Company to delay, scale back, or eliminate certain of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise develop or commercialize itself. The Company anticipates that its existing capital resources will enable it to maintain its current and planned operations through at least December 31, 2000. FUTURE OPERATING RESULTS This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," expects," intends" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below, in the section titled "Business -- Factors Which May Affect Future Results" and elsewhere in this Annual Report on Form 10-K for the year ended December 31, 1997. FACTORS WHICH MAY AFFECT FUTURE RESULTS Restructuring of Operations. In 1997, in connection with the reorganization of the Company's development plans, the Company suspended its ALLERVAX(R) CAT, ALLERVAX(R) RAGWEED and its injectable multiple sclerosis program. The Company announced that it would continue its technical efforts in two programs: vaccines for drugs of abuse and recombinant proteins directed to the diagnosis and treatment of allergic diseases. In addition, the Company continued research on a nonparental product for the treatment of multiple sclerosis in collaboration with Schering which will end on March 31, 1998. The Company is 12 13 considering various strategic alternatives with respect to its business, including further restructuring of operations, acquisition of additional technology, strategic alliances, merger or sale or dissolution of the Company. There can be no assurance that the Company will successfully complete any further restructuring of operations, acquisition of additional technology, strategic alliance, merger or sale in a timely manner or at all, or that any such action would enhance the competitive position or future success of the Company. The Company would be required to resolve any claims of creditors before a distribution of all of the assets of the Company to stockholders. Development Stage of the Company's Products. None of the Company's product candidates have completed human clinical testing. All of the Company's product candidates will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and an additional commitment of resources prior to their successful development and commercialization. Government Regulation. The production and marketing of the Company's products and its ongoing research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries. The rigorous preclinical and clinical testing requirements and regulatory approval process can take a number of years and require the expenditure of substantial resources. 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. In addition, the Company cannot predict the extent to which government regulations might have an adverse effect on the production and marketing of the Company's products. See "Business -- Government Regulation". Competition. The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Competitors of the Company in the United States and abroad are numerous and include, among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, many of the Company's competitors have significantly greater experience than the Company in preclinical testing and human clinical trials or pharmaceutical products and obtaining the United States Food and Drug Administration (FDA) and other regulatory approvals of products for use in health care. Accordingly, 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 efficiency and marketing capabilities, areas in which it has limited or no experience. See "Business -- Competition". Patents and Proprietary Rights. The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves complex legal and factual questions. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that patent applications relating to the Company's products or technology will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology. In addition, companies that obtain patents claiming products or processes that are necessary for or useful to the development of the Company's products can bring legal actions against the Company claiming infringement. The Company may be required to obtain licenses from others to develop, manufacture or market its products. There can be no assurance that the Company will be able to obtain such licenses on commercially reasonable terms, if at all, or that the patents underlying the licenses will be valid and enforceable. In addition, the Company is aware of one issued European patent and one pending European patent application belonging to third parties which may adversely affect the Company's ability to commercialize, license, or sell its multiple sclerosis therapeutic candidate. If the claims contained in these patents are sustained, the Company may need to acquire licenses to those technologies in order to develop its multiple sclerosis therapeutic candidate in Europe. The cost or availability of licenses for these technologies is unknown. There may be additional domestic and foreign patent applications pending, of which the Company is unaware, and which may affect its ability to commercialize any of its products. 13 14 Some of the Company's know-how and technology is not patentable. To protect its rights, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technology. See "Business -- Patents and Proprietary Rights". Manufacturing and Marketing. The Company currently has no manufacturing, direct sales or marketing capability. If the Company elects to commercialize and market its products itself, the Company will need to develop these capabilities, and there can be no assurance that the Company will be successful in doing so. If the Company elects to commercialize any products with third parties, there can be no assurance that the Company will be successful in reaching satisfactory arrangements with such parties. Additional Financing Requirements and Access to Capital. ImmuLogic has funded its operations to date primarily through the sale of equity securities, sponsored research revenues, license payments and earnings on invested capital. The Company has expended substantial funds for the research and development of its products, and may in the future expend substantial funds for further research and development, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. The Company may seek to obtain additional funds for these purposes through equity or debt financings, collaborative arrangements with corporate partners or from other sources. However, such additional funds may not be available to the Company for such purposes on acceptable terms, if at all. Insufficient funds could require the Company to delay, scale back or eliminate certain of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise develop or commercialize itself. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Product Liability. The testing, marketing and sale of human health care products entail an inherent risk of allegations of product defects, and there can be no assurance that substantial product liability claims will not be asserted against the Company. To manage its potential liability, the Company maintains clinical trial liability insurance coverage (although it does not currently maintain product liability coverage) and seeks to include indemnity provisions in its contracts with clinical investigators. These indemnities generally do not protect the Company against certain of its own actions such as those involving its negligence or misconduct. In some cases, the Company is required to indemnify its investigators and others against its own actions. All such indemnities are subject to negotiation and their terms and scope may vary. The Company bears the risk that an indemnifying party may not have the financial resources to fulfill its obligations. In addition, the Company could be materially and adversely affected if it were required to pay damages or incur defense expenses in connection with an indemnity claim or beyond the level of its insurance coverage. There is also no assurance that adequate product liability insurance will be available at acceptable cost, if at all, if and when the Company's products are commercialized. Attraction and Retention of Key Employees and Consultants. As the Company continues its research, development and clinical testing and expands into areas and activities requiring additional expertise such as production and marketing, recruiting and retaining qualified scientific and other personnel will be critical to the Company's success. There can be no assurance that the Company will be able to attract and retain such personnel on acceptable terms. The failure to attract and retain management personnel or to develop additional expertise could adversely affect the Company's business. Relationship with Schering AG. The Company has entered into a collaboration agreement with Schering AG for the joint development and commercialization of the Company's peptide therapeutic to treat multiple sclerosis. All funding from Schering AG will be dedicated to the development of a nonparentally administered therapeutic product for multiple sclerosis. The Company will fund all clinical costs for the development of the injectable therapeutic product, including any clinical trials. Although Schering AG has the right, at its election, to participate in the development and commercialization of the injectable dosage form (in which event it would be required to provide additional research funding and make milestone payments after 14 15 successful product demonstration relating to the injectable product), there can be no assurance that Schering AG will elect to participate. The research funding due under the collaboration agreement between the Company and Schering AG is due to end on March 31, 1998. Furthermore, Schering AG has the right to terminate the collaboration agreement upon 30 days prior written notice to the Company. There can be no assurance that Schering AG will not terminate the collaboration agreement, or that it will devote the resources necessary to develop and commercialize any products resulting from the collaboration. Third-Party Reimbursement. In both the domestic and foreign markets, sales of the Company's proposed products will depend in part on the availability of reimbursement from third-party payers such as government health administration authorities, private health insurers and other organizations. Third-party payers are increasingly challenging the price and cost effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. Legislation and regulations affecting the pricing of pharmaceuticals may change before any of the Company's proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for medical products and services. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income" in June 1997. The statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements and is effective for fiscal years beginning after December 31, 1997. The Company believes that the implementation of this statement will not have a material impact on the results of operations. SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997 and is effective for fiscal years beginning after December 31, 1997. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. The Company believes that the implementation of this statement will not have a material impact on the financial statements. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ImmuLogic Pharmaceutical Corporation We have audited the accompanying consolidated balance sheets of ImmuLogic Pharmaceutical Corporation (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1997. 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. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ImmuLogic Pharmaceutical Corporation as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. -------------------------------------- COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 3, 1998, except for the information in the last paragraph of Note D as to which the date is February 27, 1998 16 17 IMMULOGIC PHARMACEUTICAL CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 8,436,836 $ 23,742,140 Short-term investments.................................... 19,068,242 30,880,824 Prepaid expenses and other current assets................. 561,132 625,128 ------------- ------------- Total current assets.............................. 28,066,210 55,248,092 Property and equipment, net................................. 6,684,801 8,932,660 Long-term investments....................................... 24,788,175 15,423,981 Other assets................................................ 48,790 48,790 ------------- ------------- Total assets...................................... $ 59,587,976 $ 79,653,523 ============= ============= LIABILITIES Current liabilities: Accounts payable.......................................... $ 539,243 $ 789,331 Accrued expenses (Note F)................................. 4,654,593 6,513,391 Other current liabilities................................. 50,000 50,000 ------------- ------------- Total current liabilities......................... 5,243,836 7,352,722 Long-term liabilities....................................... 325,000 375,000 ------------- ------------- Total liabilities................................. $ 5,568,836 $ 7,727,722 ------------- ------------- Commitments(Notes D, E, J, K) STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding............... -- -- Common stock, $.01 par value; 40,000,000 shares authorized; 20,340,727 and 20,224,516 shares issued and outstanding at December 31, 1997 and 1996, respectively.................. $ 203,407 $ 202,245 Additional paid-in-capital.................................. 185,250,346 185,039,606 Accumulated deficit......................................... (131,434,613) (113,316,050) ------------- ------------- Total stockholders' equity........................ 54,019,140 71,925,801 ------------- ------------- Total liabilities and stockholders' equity........ $ 59,587,976 $ 79,653,523 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 17 18 IMMULOGIC PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Revenues: License fees................................... -- -- $ 5,000,000 Sponsored research revenues.................... $ 2,048,672 $ 2,239,340 2,758,121 Other revenues................................. -- 7,000,000 -- ------------ ------------ ------------ Total revenues......................... 2,048,672 9,239,340 7,758,121 ------------ ------------ ------------ Operating expenses: Proprietary research and development........... 14,615,582 24,061,291 22,096,555 Sponsored research and development............. 2,486,984 1,820,929 2,612,061 General administrative......................... 6,389,593 6,829,889 6,433,344 ------------ ------------ ------------ Total operating expenses............... 23,492,159 32,712,109 31,141,960 ------------ ------------ ------------ Operating loss................................... (21,443,487) (23,472,769) (23,383,839) Interest income.................................. 3,324,924 4,602,884 4,233,191 ------------ ------------ ------------ Net loss......................................... $(18,118,563) $(18,869,885) $(19,150,648) ============ ============ ============ Basic and diluted net loss per common share...... $ (0.89) $ (0.93) $ (1.12) ============ ============ ============ Weighted average number of common shares outstanding.................................... 20,273,315 20,206,004 17,034,565 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 18 19 IMMULOGIC PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Cash flows for operating activities: Net loss....................................... $(18,118,563) $(18,869,885) $(19,150,648) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 2,447,378 2,786,851 3,050,605 Write-off of leasehold improvements......... 443,881 -- 945,000 Shares issued for 401(k) employer match..... 134,515 150,963 144,360 Compensation expense........................ 7,557 -- -- Gain on sale of equipment................... (13,765) (18,828) (48,842) Changes in assets and liabilities: Prepaid expenses and other current assets...... 63,996 106,374 22,302 Other assets................................... -- 4,800 3,694 Accounts payable and accrued expenses.......... (2,108,886) (266,438) 281,457 Other current and long-term liabilities........ (50,000) (50,000) (50,000) ------------ ------------ ------------ Total adjustments...................... 924,676 2,713,722 4,348,576 ------------ ------------ ------------ Net cash used in operating activities............ (17,193,887) (16,156,163) (14,802,072) Cash flows from investing activities: Purchase of equipment.......................... (629,104) (653,613) (898,151) Purchase of leasehold improvements............. (15,661) (27,368) (978,506) Proceeds from sale of equipment................ 15,130 18,828 608,500 Purchase of short-term investments............. (39,206,494) (59,995,778) (76,530,629) Redemption of short-term investments........... 51,019,076 71,036,259 70,711,444 Purchase of long-term investments.............. (24,294,056) (5,965,026) (24,809,476) Redemption of long-term investments............ 14,929,862 15,513,339 6,039,556 ------------ ------------ ------------ Net cash provided by (used in) investing activities..................................... 1,818,753 19,926,641 (25,857,262) Cash flows from financing activities: Issuance of common stock....................... -- -- 45,701,500 Exercise of stock options...................... 69,830 904,869 416,633 ------------ ------------ ------------ Net cash provided by financing activities........ 69,830 904,869 46,118,133 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents.................................... (15,305,304) 4,675,347 5,458,799 Cash and cash equivalents at beginning of period......................................... 23,742,140 19,066,793 13,607,994 ------------ ------------ ------------ Cash and cash equivalents at end of period....... $ 8,436,836 $ 23,742,140 $ 19,066,793 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 19 20 IMMULOGIC PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NO. OF SHARES OF COMMON ADDITIONAL DEFERRED ACCUMULATED COMMON STOCK STOCK PAID-IN CAPITAL COMPENSATION DEFICIT TOTAL STOCK- ---------------- -------- --------------- ------------ ------------- --------------- BALANCE AT DECEMBER 31, 1994... 15,020,459 $150,205 $137,653,747 $(224,324) $ (75,295,517) $62,284,111 ---------- -------- ------------ --------- ------------- ----------- Issuance of common stock....... 4,802,345 48,023 45,653,477 45,701,500 Exercise of common stock options...................... 92,363 924 415,709 416,633 401(k) employer match.......... 9,304 93 73,175 73,268 Amortization of deferred compensation................. 210,324 210,324 Net loss....................... (19,150,648) (19,150,648) ---------- -------- ------------ --------- ------------- ----------- BALANCE AT DECEMBER 31, 1995... 19,924,471 199,245 183,796,108 (14,000) (94,446,165) 89,535,188 ---------- -------- ------------ --------- ------------- ----------- Exercise of common stock options...................... 287,599 2,876 901,993 904,869 401(k) employer match.......... 12,446 124 150,839 150,963 Acceleration of stock options...................... 190,666 (190,666) Amortization of deferred compensation................. 204,666 204,666 Net loss....................... (18,869,885) (18,869,885) ---------- -------- ------------ --------- ------------- ----------- BALANCE AT DECEMBER 31, 1996... 20,224,516 202,245 185,039,606 -- (113,316,050) 71,925,801 ---------- -------- ------------ --------- ------------- ----------- Exercise of common stock options...................... 85,947 859 68,971 69,830 401(k) employer match.......... 30,264 303 134,212 134,515 Compensation expense........... 7,557 7,557 Net loss....................... (18,118,563) (18,118,563) ---------- -------- ------------ --------- ------------- ----------- BALANCE AT DECEMBER 31, 1997... 20,340,727 $203,407 $185,250,346 -- $(131,434,613) $54,019,140 ========== ======== ============ ========= ============= ===========
The accompanying notes are an integral part of the consolidated financial statements. 20 21 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS ImmuLogic Pharmaceutical Corporation (ImmuLogic or the Company) is a biopharmaceutical company developing novel products with a primary emphasis on the immunological treatment of addiction and the diagnosis and treatment of allergies. ImmuLogic's technological approach is based on proprietary discoveries and an advanced understanding of the molecular events controlling the human immune system. Since inception, the Company has not derived any revenues from the sale of products and has incurred significant operating losses. The Company recently redefined its priorities for product development and plans to focus most of its resources in 1998 on the clinical development of vaccines for the management of cocaine and nicotine addiction research and research around its recombinant protein therapeutics for the diagnosis and treatment of allergic diseases. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, 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 and approval requirements. The Company is considering various strategic alternatives with respect to its business including further restructuring of operations, acquisition of additional technology, strategic alliances, sale or merger or dissolution of the Company. There can be no assurance that the Company will be successful in implementing any further restructuring, strategic alliance, acquisition of additional technology, merger or sale in a timely manner or at all, or that any such action would enhance the competitive position or future success of the Company. B. ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, ImmuLogic Securities Corporation. All intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of short-term interest-bearing instruments, primarily U.S. government sponsored agency notes, commercial paper, and money market accounts with original maturities of three months or less at the date of purchase. These investments are carried at cost plus accrued interest, which approximates market value. Short-term Investments Short-term investments, with a maturity of more than three months but less than twelve months when purchased, consisted of high-grade commercial paper ($12,649,000), and U.S. government sponsored agency notes ($6,419,000) at December 31, 1997, and high-grade commercial paper ($28,437,000) and a U.S. government treasury bill ($2,444,000) at December 31, 1996. Short-term investments are stated at amortized cost plus accrued interest, which approximates market value. 21 22 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term Investments Long-term investments, with a maturity of more than twelve months when purchased, consisted of high-grade commercial paper ($20,415,000) and highly-liquid bank certificates of deposit ($4,373,000) at December 31, 1997 and highly-liquid bank certificates of deposit ($6,188,000), high-grade commercial paper ($5,182,000) and U.S. government sponsored agency notes ($4,054,000) at December 31, 1996. Long-term investments are stated at amortized cost plus accrued interest, which approximates market value. The amortized cost plus accrued interest, which approximates market value, of securities "held-to-maturity" by contractual maturity at December 31, 1997 is as follows:
HELD-TO-MATURITY ---------------- Due within one year......................................... $30,759,000 Due after one year through five years....................... 18,924,000 ----------- Total cash and cash equivalents and investments............. $49,683,000 ===========
Actual maturities may differ from contractual maturities because the issuers of these securities may have the right to prepay obligations without prepayment penalties. Revenue Recognition Payments associated with rights to license or sublicense the Company's technology are recognized as revenue when payments are received. Payments in connection with sponsored research are recognized as revenue is earned under the terms of the agreements. Property and Equipment Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally three years for office equipment and five years for laboratory equipment, furniture, and fixtures. Leasehold improvements are stated at cost and are amortized over the lesser of the life of the lease or their estimated useful lives. Maintenance and repairs are charged to expense as incurred, while major betterments are capitalized. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Research and Development All research and development costs are expensed as incurred. Income Taxes The Company follows the liability method of accounting for income taxes whereby a deferred tax liability is measured by the enacted tax rates which will be in effect when any differences between the financial statements and tax basis of assets reverse. The deferred tax liability can be reduced by net operating losses being carried forward for tax purposes. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Net Loss per Common Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS) "Earnings Per share," which requires the disclosure of Basic Earnings per Common Share 22 23 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and Diluted Earnings per Common Share for all periods presented. The basic loss per common share is computed based upon the weighted average number of common shares outstanding. The Company had 1,993,218, 2,750,000 and 2,852,000 options outstanding at December 31, 1997, 1996 and 1995, respectively. These options have not been included in the calculation of dilutive common equivalent shares however, since the effect of their inclusion would be anti-dilutive. As a result, adoption of SFAS 128 has not affected the amounts previously reported in any period. Reclassifications Certain amounts in 1996 and 1995 have been reclassified to conform to the 1997 presentation. New Accounting Pronouncements The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income" in June 1997. The statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements and is effective for fiscal years beginning after December 31, 1997. The Company believes that the implementation of this statement will not have a material impact on the financial statements. SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997 and is effective for fiscal years beginning after December 31, 1997. SFAS 131 established standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. The Company believes that the implementation of this statement will not have a material impact on the financial statements. Year 2000 The Company does not expect costs incurred with the Year 2000 conversion to be material. C. PROPERTY AND EQUIPMENT At December 31, 1997 and 1996, property and equipment consisted of:
1997 1996 ------------ ------------ Leasehold improvements.................................. $ 9,650,314 $ 9,634,653 Laboratory equipment.................................... 8,585,267 8,012,674 Furniture and fixtures.................................. 719,310 700,931 Office equipment........................................ 944,063 943,551 ------------ ------------ $ 19,898,954 $ 19,291,809 Less accumulated depreciation and amortization.......... (13,214,153) (10,359,149) ------------ ------------ Property and equipment, net............................. $ 6,684,801 $ 8,932,660 ============ ============
Depreciation and amortization expense associated with property and equipment was approximately $2,447,000, $2,582,000, and $2,840,000 in 1997, 1996, and 1995, respectively. D. RESTRUCTURING OF OPERATIONS During 1997, the Company restructured its operations, discontinuing further clinical trials of its ALLERVAX(R) CAT and RAGWEED programs and concentrating future efforts on the clinical development of vaccines for the management of cocaine and nicotine addiction and research around its recombinant protein therapeutics for the diagnosis and treatment of allergic diseases. 23 24 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of this action, the Company downsized its workforce during 1997 and incurred $3,147,000 in severance costs for the termination of 66 employees, including $1,054,000 paid in accordance with the severance agreement entered into with the Former Chairman of the Board and scientific founder of the Company. Total employees of the Company decreased from 151 at December 31, 1996 to 27 as of March 1, 1998 as a result of the above mentioned 66 terminations and an additional 58 voluntary terminations. At December 31, 1997, remaining accrued expenses related to unpaid severance liabilities totaled $1,725,000, the majority of which will be paid out in 1998. In addition, as a result of the downsizing, the Company entered into a sub-lease agreement for its Waltham, Massachusetts facility effective February 27, 1998, with the entire facility being subleased effective October 1, 1998. The sublease agreement covers the Company's future obligations due after September 30, 1998 under this lease. A non-cash charge of $444,000 was incurred during 1997 for the writedown of all of the Company's leasehold improvements to net realizable value in accordance with the provisions of SFAS 121 "Impairment of Long-Lived Assets". The Company is currently planning for the sale of the majority of the equipment and furniture contained in the Waltham, Massachusetts facility and is in the process of locating new space to accommodate its current level of operations. E. PALO ALTO FACILITY CONSOLIDATION In 1995, the Company consolidated its research operations resulting in the closure of the Company's research facility in Palo Alto, California. The closure of the Palo Alto facility resulted in exit costs of $2,130,000, consisting of $430,000 for termination benefits, $945,000 for the write-down of leasehold improvements, $610,000 for rent payments and expenses during shutdown, and $145,000 for other exit costs. Exit costs related to non-cash items were $1,050,000, primarily for the writedown of leasehold improvements to estimated net realizable value. In addition, the Company has entered into sub-lease agreements for the Palo Alto, California facility that cover its remaining lease obligations which expire in March 1999. At December 31, 1997 amounts remaining in accrued expenses relating to the shutdown totaled $353,000, primarily for the loss resulting from subtenant lease payments to be received over the remainder of the lease. F. ACCRUED EXPENSES At December 31, 1997 and 1996, accrued expenses consisted of:
1997 1996 ---------- ---------- Payroll and payroll taxes.......................... $1,796,047 $1,239,791 Rent............................................... 1,015,756 1,063,448 Clinical trials.................................... 535,524 1,355,450 Consulting......................................... 278,216 308,935 Legal and audit.................................... 203,195 424,924 Drug supply........................................ 72,117 457,295 Other.............................................. 753,738 1,663,548 ---------- ---------- Total accrued expenses............................. $4,654,593 $6,513,391 ========== ==========
G. AGREEMENT WITH HOECHST MARION ROUSSEL In February 1992, the Company entered into a collaboration agreement with Hoechst Marion Roussel, Inc. (HMR) (formerly Marion Merrell Dow, Inc.) relating to the worldwide development and commercialization of the Company's family of five injectable ALLERVAX(R) allergy therapeutic products (the Collaboration Agreement). In March 1995, the Company and HMR signed a letter agreement for the joint manufacture of ALLERVAX(R) products. On March 7, 1996, HMR notified the Company that it was withdrawing from the 24 25 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Collaboration Agreement, effective September 7, 1996. The Company and HMR worked together to effect an orderly transition of responsibilities as the ALLERVAX(R) program shifted entirely to the Company. On October 30, 1996, the Company received a payment in the amount of $7,000,000, resolving all obligations relating to the program in a manner agreeable to both the Company and HMR. In addition, HMR transferred ALLERVAX(R) CEDAR and MITE peptide inventories to the Company to be used in future product development activities. No value has been attributed to these peptides as the Company is still considering plans to develop these programs beyond the research stage. Under the terms of the Collaboration Agreement, upon termination of the collaboration, the Company regained all rights to the Company's ALLERVAX(R) allergy program including all injectable and oral therapeutics and complimentary recombinant allergy diagnostics. At the time of execution of the Collaboration Agreement, HMR made a $7,000,000 payment to the Company and through December 31, 1996 had made license and milestone payments of $17,000,000 and a final settlement payment of $7,000,000 which is recorded as other revenues in the Company's 1996 statement of operations. In addition, HMR purchased, in December 1991, 1,000,000 shares of the Company's Common Stock for $18,000,000. As of March 22, 1996, HMR had sold these shares on the open market. H. AGREEMENT WITH SCHERING AG In March 1995, the Company signed a collaboration agreement with Schering AG for the joint development and commercialization of the Company's peptide therapeutic to treat multiple sclerosis. Under this agreement, the Company would have received up to $7,500,000 in research support ($5,625,000 of which had been received through December 31, 1997) and up to $20,000,000 in milestone payments. The Company would pay one-third of the costs associated with clinical development and would receive a royalty on net sales, if any. During 1996, the parties agreed in concept to changes in the collaboration agreement under which milestone payments were restructured to payments made after successful product demonstration and research support funding from Schering AG during 1997 was reduced from $2,500,000 to $1,250,000. This funding was dedicated exclusively to the development of a nonparenterally administered therapeutic product for multiple sclerosis. If the Company decides to move forward, the Company will fund all clinical development costs for the injectable therapeutic product for multiple sclerosis. During 1998, the Company is expected to receive $312,500 in research funding from Schering AG. The research funding due under the collaboration agreement between the Company and Schering AG will end on March 31, 1998. Schering AG has the right, at its election, to participate in the development and commercialization of the injectable dosage form of this therapeutic should such development and commercialization occur. The Company has no plans to develop this product in the future. If Schering AG elects to develop this product, it will be required to reimburse the Company for a significant portion of development costs incurred to date and will be obligated to make certain milestone payments to the Company upon achievement of development milestones. Schering AG has the right to terminate the collaboration agreement upon 30 days prior written notice to the Company. In addition, Schering Berlin Venture Corporation purchased 1,042,345 shares of the Company's Common Stock for $8,000,000 at the time of entering into the agreement. In April 1996, ImmuLogic registered these shares under the Securities Act of 1933 pursuant to the registration rights granted to Schering Berlin Venture Corporation in the stock purchase agreement. Upon registration, Schering Berlin Venture Corporation sold these shares on the open market. I. STOCKHOLDERS' EQUITY Common Stock At December 31, there were 20,340,727 and 20,224,516 common shares outstanding for the years 1997 and 1996, respectively. 25 26 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Preferred Stock The Company has authorized a single class of preferred stock, par value $.01, consisting of 1,000,000 shares. This preferred stock may be issued in series with such rights, preferences and privileges as the Board of Directors may determine. Shareholder Rights Plan On July 11, 1995, the Board of the Company declared a dividend of one preferred stock purchase right (a Right) for each outstanding share of the Company's Common Stock to stockholders of record at the close of business on August 1, 1995. The Company adopted the plan to protect shareholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all shareholders. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, $.01 par value (the Preferred Stock), at a purchase price of $75 in cash per unit subject to adjustment. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an Acquiring Person) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock, or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 30% or more of such outstanding shares of Common Stock. The Rights are not exercisable until the Distribution Date and will expire at the close of business on August 1, 2005, unless earlier redeemed or exchanged by the Company as described below. In the event that any stockholder becomes an Acquiring Person, except pursuant to a Permitted Offer, each Right will thereafter entitle the holder thereof to receive, upon exercise, that number of shares of Common Stock which equals the exercise price of the Right divided by one-half of the current market price (as defined in the Rights Agreement) of the Common Stock at the date of the occurrence of the event. Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $10 per share and will be entitled to an aggregate dividend of 1,000 times the dividend declared per share on Common Stock. In the event of liquidation, the holders of the Preferred Stock will be entitled to a minimum preferential liquidation payment of $1,000 per share and will be entitled to an aggregate payment of 1,000 times the payment made per share of Common Stock. Each share of Preferred Stock will have 1,000 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation, or other transaction in which Common Stock is exchanged, each share of Preferred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock. These rights are subject to adjustment for any stock split, stock dividend, recapitalization, or similar event. At December 31, 1997, 20,340,727 preferred stock purchase rights were outstanding. Stock Options The Company has several stock option plans under which incentive and nonqualified stock options to purchase a total of 3,969,169 shares (net of expirations) shares of Common Stock may be granted to employees, outside directors and consultants. The options are generally granted at fair market value on the date of the grant, generally vest ratably over a three, four or five year period and expire ten years from the date of grant. At December 31, 1997, there were 2,487,468 shares of Common Stock reserved for issuance under all the Company's stock option plans. 26 27 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS 123, "Accounting for Stock-Based Compensation" requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company has adopted the disclosure provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its employee and outside director stock options. Had compensation costs for the Company's employee and director stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net loss and basic and diluted net loss per share for the years ended December 31, 1997, 1996 and 1995 would have been as follows:
1997 1996 1995 ----------------------- ----------------------- ----------------------- NET LOSS NET LOSS NET LOSS NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE ---------- --------- ---------- --------- ---------- --------- IN (000'S) IN (000'S) IN (000'S) As Reported................ $(18,119) $(0.89) $(18,870) $(0.93) $(19,151) $(1.12) ======== ====== ======== ====== ======== ====== Proforma................... $(19,227) $(0.95) $(20,740) $(1.03) $(19,534) $(1.15) ======== ====== ======== ====== ======== ======
The effects of applying SFAS 123 in this proforma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of approximately 4 years, expected volatility of 63%, a dividend yield of 0% and a risk-free interest rate of 6.5%, 6.3% and 6.2% for the years ended December 31, 1997, 1996 and 1995 respectively. From inception through December 31, 1997, the Company has granted options for 3,474,919 shares (net of cancellations) under all its stock option plans, of which options for 1,481,701 shares have been exercised. In 1996, 247,500 shares under the stock option plans were accelerated in connection with the resignation of three executive officers of the Company. Accordingly, an increase in deferred compensation and additional paid-in-capital in the amount of $190,666 in total for all officers to recognize the acceleration was recorded as of the resignation date of each officer. The Company's stock option plan activity is summarized as follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF OPTIONS PRICE ---------- -------- OUTSTANDING AT DECEMBER 31, 1994............................ 2,175,573 $ 7.63 Granted during 1995....................................... 993,500 9.72 Exercised during 1995..................................... (92,363) 4.51 Canceled during 1995...................................... (224,238) 10.69 ---------- ------ OUTSTANDING AT DECEMBER 31, 1995............................ 2,852,472 8.21 Granted during 1996....................................... 596,250 10.07 Exercised during 1996..................................... (287,599) 3.72 Canceled during 1996...................................... (410,900) 8.26 ---------- ------ OUTSTANDING AT DECEMBER 31, 1996............................ 2,750,223 9.12 Granted during 1997....................................... 549,650 4.09 Exercised during 1997..................................... (85,947) .81 Canceled during 1997...................................... (1,220,708) 8.87 ---------- ------ OUTSTANDING AT DECEMBER 31, 1997............................ 1,993,218 $ 8.25 ========== ======
27 28 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) There were 1,524,870, 1,342,401, and 837,629 options exercisable for the years ended December 31, 1997, 1996, and 1995, respectively. The weighted average fair value of the options granted during 1997, 1996 and 1995, as calculated using the Black-Scholes option pricing model, were estimated at $2.20, $5.47 and $5.35, respectively. The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS - ---------------------------------------------------------- ---------------------------- WEIGHTED- AVERAGE RANGE OF REMAINING WEIGHTED- WEIGHTED- EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------- ----------- ------------ -------------- ----------- -------------- $ 0.25-$ 5.00 474,018 9.21 $ 3.92 256,232 $ 3.86 5.01- 10.00 971,500 6.78 7.79 814,398 7.73 10.01- 15.00 495,700 6.95 12.12 403,315 12.16 15.01- 20.25 52,000 7.76 19.24 50,925 19.25 --------- ---- ------ --------- ------ $ 0.25-$20.25 1,993,218 7.43 $ 8.25 1,524,870 $ 8.64 ========= ==== ====== ========= ======
Although the majority of the Company's stock options outstanding have an exercise price in excess of the fair market value of the Company's stock at December 31, 1997, total proceeds to the Company if all stock options were exercised would be $13,170,000. J. LICENSE AGREEMENT In May 1987, the Company entered into an agreement with the Massachusetts Institute of Technology (MIT) under which the Company was granted a worldwide, exclusive license under certain patent applications. In connection with the license grant, the Company issued 185,000 shares of its Common Stock at a price of $.01 per share and made a payment of $250,000 to MIT. The license agreement, as amended, calls for royalties to be paid on the sale of products using the technology covered by the patents and for an additional payment of $750,000, $125,000 of which was paid in April 1992 and the remainder to be paid in annual installments of $50,000, beginning in April 1993 and ending in April 2005, subject to an acceleration provision tied to the allowance of certain pending patent claims. At December 31, 1997, the financial statements included $50,000 in other current liabilities and $325,000 in long-term liabilities related to the license agreement. K. LEASE COMMITMENTS In September 1992, the Company entered into an operating lease agreement for a headquarters and research and development facility in Waltham, Massachusetts. This lease agreement expires in August 2002 and is renewable at the Company's option for up to the three additional five-year periods. Under the terms of this lease, the Company is obligated to pay its prorated share of common operating expenses and real estate taxes as well as base rent (see Note D). With respect to the Company's operating lease for its Palo Alto, California research facility, which expires in March 1999, the Palo Alto research facility was sub-leased under two agreements, which cover the Company's future obligations under this lease. Rental expense incurred under all of the Company's operating lease agreements was $1,704,000, $1,595,000 and $2,310,000 in 1997, 1996, and 1995, respectively. 28 29 IMMULOGIC PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments for the respective years ended December 31 are as follows:
OPERATING LEASES ---------------- 1998.......................................... $ 1,931,076 1999.......................................... 1,439,217 2000.......................................... 1,282,876 2001.......................................... 1,311,348 2002.......................................... 874,232 After 2002.................................... -- ----------- Minimum lease payments........................ $ 6,838,749 Sub-leases for the Waltham facility........... (5,374,970) Sub-leases for the Palo Alto facility......... (858,000) ----------- Net minimum lease payments.................... $ 605,779 ===========
L. EMPLOYEE BENEFITS The Company has a 401(k) savings plan (the Plan) which is available to all of its qualified permanent employees. Participants may contribute up to 15 percent of their annual compensation to the Plan, subject to certain limitations. The employer match to the Plan is in the form of Company Common Stock and is calculated as the lesser of up to one-half of six percent of a participant's total compensation or $2,000 annually in value of Common Stock. The fair market value on the date of issuance of the Common Stock pursuant to the matching contributions totaled approximately $90,000, $158,000 and $144,000 in 1997, 1996 and 1995, respectively. M. INCOME TAXES At December 31, 1997 the Company had available for federal income tax purposes net operating loss carryforwards of approximately $130,000,000 expiring in the years 2002 through 2012, which are available to reduce future federal income taxes. The Company also has available research and experimentation tax credits of approximately $3,700,000 at December 31, 1997, expiring in the years 2002 through 2012. The net operating loss carryforwards are subject to limitation in any given year in the event of certain events, including significant changes in ownership. The Company has established a valuation reserve against the entire deferred tax asset arising from these carryforwards due to the uncertainty of earning sufficient taxable income and accordingly, has not given recognition to these tax benefits in the accompanying financial statements. The Company has been in a tax loss position since inception. As a result, the effective tax rate for the Company is 0%. Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31, ---------------------------- 1997 1996 ------------ ------------ Deferred tax assets: Net operating loss carryforwards............... $ 51,879,838 $ 45,107,906 Depreciation................................... 2,621,384 1,897,273 Accrued expenses............................... 324,653 472,484 MIT license agreement.......................... 150,000 170,000 Gain/loss on sale of equipment................. (209,177) (209,177) Other.......................................... 31,132 30,064 ------------ ------------ Total deferred tax assets........................... 54,797,830 47,468,550 Valuation allowance................................. (54,797,830) (47,468,550) ------------ ------------ Net deferred tax assets............................. $ -- $ -- ============ ============
29 30 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the section titled "Election of Directors" in the definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders ("1998 Proxy Statement"), which the Company intends to file with the Securities and Exchange Commission (the "Commission") no later than April 30, 1998. Information relating to the Company's executive officers as of March 12, 1998 is furnished in Part I hereof under a separate unnumbered caption titled "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the section titled "Executive Compensation" in the Company's 1998 Proxy Statement, which the Company intends to file with the Commission no later than April 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the section titled "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Company's 1998 Proxy Statement, which the Company intends to file with the Commission no later than April 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the section titled "Certain Transactions" in the Company's 1998 Proxy Statement, which the Company intends to file with the Commission no later than April 30, 1998. 30 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Documents filed as part of this report: 1. FINANCIAL STATEMENTS The following financial statements and supplementary data are included in Part II Item 8 filed as part of this Form 10-K:
Report of Independent Accounts Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES The Financial Statement Schedules have been omitted because they are either not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K The Exhibit Index is set forth on page 33 of this Form 10-K immediately preceding the exhibits filed as part of this annual report on Form 10-K and is incorporated by reference herein. (B) Reports filed on Form 8-K for the quarter ended December 31, 1997. On November 26, 1997, the Company filed with the Securities and Exchange Commission a Current Report on Form 8-K relating to the restructuring of the Company's operations. 31 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. IMMULOGIC PHARMACEUTICAL CORPORATION By: /s/ J. JOSEPH MARR ------------------------------------ J. Joseph Marr President, Chief Operating Officer Date: March , 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE DATE TITLE --------- ---- ----- /s/ J. JOSEPH MARR March 12, 1998 President, Chief Operating Officer - ----------------------------------- (Principal Executive Officer) J. Joseph Marr /s/ J. RICHARD CROWLEY March 12, 1998 Chief Financial Officer - ----------------------------------- (Principal Financial Officer) J. Richard Crowley /s/ C. GARRISON FATHMAN March 12, 1998 Director - ----------------------------------- C. Garrison Fathman /s/ SAMUEL C. FLEMING March 12, 1998 Director - ----------------------------------- Samuel C. Fleming /s/ PAUL A. FRIEDMAN March 12, 1998 Director - ----------------------------------- Paul A. Friedman /s/ CARL S. GOLDFISCHER March 12, 1998 Director - ----------------------------------- Carl S. Goldfischer /s/ GERALDINE A. HENWOOD March 12, 1998 Director - ----------------------------------- Geraldine A. Henwood /s/ RICHARD F. POPS March 12, 1998 Director - ----------------------------------- Richard F. Pops
32 33 EXHIBIT INDEX IMMULOGIC PHARMACEUTICAL CORPORATION ANNUAL REPORT FORM 10-K -- 1997
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.01(16) Restated Certificate of Incorporation of the Registrant, as amended. 3.02(1) Amended and Restated By-laws of the Registrant. 4.01(1) Specimen certificate for shares of the Registrant's Common Stock. 4.02(1) Description of capital stock (contained in the Restated Certificate of Incorporation the Registrant, as amended, filed as Exhibit 3.01) +10.01(1) License Agreement between the Registrant and Massachusetts Institute of Technology, dated as of April 3, 1987 (the "MIT Agreement"). 10.02(3) Amendment, dated November 1, 1991, to MIT Agreement. 10.03(5) Amendment, dated October 1, 1992, to MIT Agreement. +10.04(7) Amendment, dated April 1, 1994, to the MIT Agreement. 10.05(1) Research Collaboration and License Agreement between the Registrant and Merck & Co., Inc., dated September 29, 1989 ( the "Merck Agreement"). 10.06(5) Amendment, dated June 29, 1992, to the Merck Agreement. 10.07(1) Agreement between the Registrant and the University of North Carolina, dated July 27, 1989. +10.08(1) License Agreement and Sponsored Research Agreement between the Registrant and the University of Melbourne, dated December 15, 1989. 10.09(9) Agreement to Vary Licensed and Sponsored Research Agreement, dated December 15, 1992, between the Registrant and The University of Melbourne. +10.10(1) Agreement between the Registrant and Princess Margaret Children's Medical Research Foundation (Inc.) ("Princess Margaret"), dated June 1, 1990. 10.11(1) Series C Convertible Preferred Stock Purchase Agreement between the Registrant and certain Series C Preferred Stock Purchasers, dated October 4, 1989. *10.12(1) Amended and Restated 1987 Stock Option Plan, as amended. *10.13(5) 1993 Director's Stock Option Plan. 10.14(1) Lease Agreement between the Registrant and 855 Cal Associates for the lease of premises at 855 California Avenue, Palo Alto, California, dated December 12, 1988. 10.15(5) Lease Agreement, dated March 12, 1992, between the Registrant and 855 Cal Associates for the lease of premises at 855 California Avenue, Palo Alto, California. 10.16(3) Office Lease, dated November 13, 1991, between the Registrant and Lincoln Street Trust. 10.17(2) Stock Purchase Agreement, dated November 20, 1991, between Registrant and Marion Merrell Dow, Inc. 10.18(10) Amendment effective December 12, 1994 to the Stock Purchase Agreement, dated November 20, 1991, between the Registrant and Marion Merrell Dow, Inc. +10.19(4) Research Collaboration Agreement, dated February 14, 1992, between the Registrant and Marion Merrell Dow, Inc. +10.20(10) Letter Agreement, dated March 2, 1995 between the Registrant and Marion Merrell Dow, Inc. relating to the joint manufacturing strategy. 10.21(11) Amendment to the Collaboration Agreement between the Registrant and Marion Merrell Dow, Inc. effective October 3, 1994. +10.22(5) Agreement to Vary License Agreement, dated as of December 18, 1991, among the Registrant, Princess Margaret and Western Australian Research Institute for Child Health Ltd. ("WARICH").
33 34
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.23(9) Amendment to License Agreement effective December 18, 1991 among the Registrant, Princess Margaret and WARICH. 10.24(6) Amendment to License Agreement effective December 18, 1991 among the Registrant, Princess Margaret and WARICH. 10.25(11) License and Collaboration Agreement dated as of March 17, 1995 between the Registrant and Schering AG, Germany. 10.26(11) Stock Purchase Agreement dated as of March 17, 1995 between the Registrant and Schering Berlin Venture Corporation. 10.27(14) Rights Agreement dated as of August 1, 1995, between the Registrant and the First National Bank of Boston. *10.28(13) Severance Plan for Executive Officers adopted July 11, 1995. *10.29(15) Form of Employment Agreement, dated November 16, 1995 between the Registrant and Executive Officers. *10.30(16) Amendment to Registrant's 1993 Directors' Stock option Plan *10.31(17) Severance and Settlement Agreement and Release dated as of December 4, 1996 between the Registrant and Robert J. Gerety. *10.32(17) Severance and Settlement Agreement dated as of March 4, 1997 between the Registrant and Malcolm L. Gefter. 10.33(17) Agreement dated October 25, 1996 between the Registrant and Hoechst Marion Roussel, Inc. 10.34(17) Amendment No. 1 to Rights Agreement dated as of April 3, 1996. *10.35(17) Consultation Agreement dated as of January 1, 1992 between the Registrant and C. Garrison Fathman. *10.36(7) Amendment dated April 11, 1994 to the Consultation Agreement between the Registrant and C. Garrison Fathman. *10.37(10) Amendment dated January 16, 1995 to the Consultation Agreement between the Registrant and C. Garrison Fathman. *10.38(17) Letter Agreement dated December 8, 1995 extending the Consultation Agreement between the Registrant and C. Garrison Fathman. 10.39(18) Consultation Agreement dated May 13, 1997 between the Registrant and J. Richard Crowley. 10.40 Sublease dated January 22, 1998 between the Registrant as sublandlord and Scriptgen Pharmaceuticals, Inc. as subtenant for the facility at 610 Lincoln Street, Waltham, Massachusetts. 21.01(1) Subsidiaries of the Registrant. 23.01 Consent of Coopers & Lybrand L.L.P. 27.01 Financial Data Schedule
- --------------- + Confidential treatment requested as to certain portions. * Management contract or compensatory plan or arrangement filed as an exhibit to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-39592). (2) Incorporated by reference to the Company's Current Report on Form 8-K, dated December 13, 1991, as amended on Form 8, dated January 16, 1992. (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-44642). (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (5) Incorporated by reference to the Company's Registration Statement on Form S-3 (File No. 33- 57138). 34 35 (6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1994. (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (10) Incorporated by reference to the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1994. (11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1995. (12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995. (13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1995. (14) Incorporated by reference to the Company's Form 8-K filed on July 27, 1995, as amended by Form 8-K/A on August 2, 1995, with respect to the adoption of the Rights Agreement. (15) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (17) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997. 35 EX-10.40 2 SUBLEASE DATED JANUARY 29, 1998 1 EXHIBIT 10.40 Execution Copy SUBLEASE ARTICLE I REFERENCE DATA 1.1 SUBJECTS REFERRED TO. Each reference in this Sublease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section 1.1: Date of Sublease: January 22, 1998 Sublandlord: Immulogic Pharmaceutical Corporation Sublandlord's Address: 610 Lincoln Street, Waltham, Massachusetts 02154 Subtenant: SCRIPTGEN Pharmaceuticals, Inc. Subtenant's Address: 200 Boston Avenue Medford, Massachusetts 02155 Overlandlord: Lincoln Street Trust, u/d/t dated July 6, 1963 and recorded with the Middlesex South District Registry of Deeds in Book 10333, Page 194 Overlandlord's Address: P.O. Box 9189, Waltham, Massachusetts 02254 Attention: Real Estate Manager Overlease: Lease dated November 29, 1991 between Overlandlord as landlord and Sublandlord as tenant, as amended by First Amendment to Lease dated May 8, 1992, a copy of which is attached hereto as Exhibit A. Overleased Premises: The building situated on the Land (defined in the Overlease) at 610 Lincoln Street, Waltham, Massachusetts, as described in the Overlease, containing approximately 85,430 rentable square feet of space. Premises: The Premises are that portion of the Overleased Premises described in Section 2.1 hereof. -1- 2 Rentable Floor Area of Premises: Date: Square Feet: February 1, 1998 28,476 July 1, 1998 56,954 October 1, 1998 85,430 Commencement Date: February 1, 1998 Term Expiration Date: August 31, 2002 Monthly Fixed Rent: The Monthly Fixed Rent shall consist of Monthly Base Rent and Monthly Improvements Rent in the amounts set forth below: Monthly Base Rent: Period: Rent: 2/1/98-6/30/98 $35,595.00 7/1/98-9/30/98 $71,192.50 10/1/98-8/31/02 $106,787.50 Monthly Improvements Rent: Period: Rent: 2/1/98-6/30/98 $30,849.00 7/1/98-9/30/98 $61,700.17 10/1/98-8/31/02 $92,549.17 Permitted Uses: All uses permitted in the Overlease. Security Deposit: $500,000, subject to reduction in accordance with the provisions of Section 8.6 hereof. 1.2 EXHIBITS. The exhibits listed below in this section are incorporated in this Sublease by reference and are to be construed as part of this Sublease: EXHIBIT A Overlease EXHIBIT B Floor Plan of Premises EXHIBIT C Letter of Credit EXHIBIT D Sign 3 ARTICLE II PREMISES AND TERM 2.1 PREMISES. Subject to and with the benefit of the provisions of this Sublease, Sublandlord hereby subleases the Premises to Subtenant, and Subtenant subleases the Premises from Sublandlord. From the Commencement Date through June 30, 1998, the Premises shall mean the second floor of the Building. From July 1, 1998 through September 30, 1998, the Premises shall mean the second and third floors of the Building. From October 1, 1998 for the remainder of the Term, the Premises shall mean all of the Overleased Premises. The Premises are subleased in their condition "as is" on the date of this Sublease. Subtenant accepts the Premises in such condition. Sublandlord shall be responsible for the repair of any material damage to the Premises caused by Sublandlord's actions in vacating the Premises between the date of this Sublease and the delivery of possession of the Premises to Subtenant. Sublandlord further grants Subtenant the right to use, as appurtenant to the Premises and in common with Sublandlord, Overlandlord, and all others now or hereafter entitled thereto (a) such lobbies, hallways, stairways, elevators and common areas in the Building as are necessary for access to and from the Premises, and (b) four (4) parking spaces for each 1,000 rentable square feet of space included in the Premises from time to time. 2.2 TERM. To have and to hold beginning on the Commencement Date and continuing until the Term Expiration Date (the "Term"). Provided that Subtenant is not in default hereunder beyond applicable grace or cure periods, the Subtenant shall have the right to extend the term of this Sublease for three (3) additional periods of five (5) years each on all of the terms and conditions set forth in Section 2.4.1 of the Overlease, except that (a) Subtenant shall provide Sublandlord with not less than fourteen (14) months notice of its desire to exercise each such extension option, and (b) the Annual Fixed Rent to be paid by Subtenant to Sublandlord shall be equal to ninety five percent (95%) of the then prevailing market rate, as such prevailing market rate is determined by Sublandlord and Overlandlord in accordance with the provisions of Section 2.4.1 of the Overlease. Subtenant shall have no further extension rights. In the event Subtenant exercises either of the foregoing extension options, all references in this Sublease to the Term shall mean the Term as so extended. In connection with the determination of fair market rent under the Overlease, Sublandlord agrees to (i) promptly provide to Subtenant Overlandlord's estimate of the prevailing market rate, (ii) consult with subtenant before agreeing to accept or reject Overlandlord's estimate, (iii) select an arbitrator reasonably acceptable to Subtenant in the event Subtenant desires to arbitrate Overlandlord's determination of fair market rent in accordance with the provisions of the Overlease, and -3- 4 (iv) consult with Subtenant throughout such arbitration process. Subtenant shall exercise its option to rescind its election to extend the Term by notice to Sublandlord within three (3) days of the date of the final arbitrator's decision. ARTICLE III RENT 3.1 MONTHLY FIXED RENT. Subtenant shall pay Sublandlord the Monthly Fixed Rent as follows: So much of the Monthly Fixed Rent as is equal to the installment of Annual Fixed Rent payable under the Overlease shall be paid directly to the Overlandlord on or before the 25th day of the month prior to the month such Annual Fixed Rent is due under the Overlease. Subtenant shall provide simultaneous evidence of such payment to Sublandlord. The remainder of the Monthly Fixed Rent shall be payable in advance on the first calendar day of each month in the Term; and for any portion of a calendar month at the beginning of or end of the Term, the corresponding fraction of the Monthly Fixed Rent in advance. 3.2 OPERATING EXPENSES. Under Section 2.6.1 of the Overlease, Sublandlord is required to pay (a) 100% of Landlord's Operating Expenses, and (b) an amount equal to the excess (if any) of Landlord's Taxes over Base Taxes, as such terms are defined in the Overlease (collectively, the "Expense Pass Throughs"). Subtenant shall pay Sublandlord as Additional Rent hereunder (i) one third (1/3) of such Expense Pass Throughs for the period beginning February 1, 1998 and ending June 30, 1998, (ii) two thirds (2/3) of such Expense Pass Throughs for the period beginning July 1, 1998 and ending September 30, 1998, and (iii) 100% of such Expense Pass Throughs for the period beginning October 1, 1998 and continuing for the remainder of the Term. Subtenant shall pay directly to the Overlandlord, such amount within 10 days of monthly billing by Sublandlord, which bills shall include, where applicable, copies of the applicable statements from Overlandlord. Subtenant shall provide simultaneous evidence of such payment to Sublandlord. Any surplus shall be promptly refunded to Subtenant and any deficit in such payment shall be promptly paid by Subtenant after the Overlandlord finally determines the amounts payable by the Sublandlord under the Overlease. 3.3 PAYMENT. To the extent not paid directly to Overlandlord, all payments of Monthly Fixed Rent and Expense Pass Throughs shall be made to Sublandlord at Sublandlord's Address set forth in Section 1.1 or to such other address as Sublandlord may designate by notice to Subtenant from time to time. ARTICLE IV SUBLANDLORD'S COVENANTS AND WARRANTIES -4- 5 4.1 SUBLANDLORD'S OBLIGATIONS. Sublandlord shall make reasonable efforts to cause Overlandlord to fulfill its obligations set forth in the Overlease with respect to the Premises. 4.2. OVERLEASE. The copy of the Overlease attached hereto as Exhibit A is true, accurate and complete, and represents the entire agreement between Sublandlord and Overlandlord with respect to the Premises. Except as shown on Exhibit A, the Overlease has not been modified, amended or terminated and is in full force and effect. Sublandlord will not amend, modify or agree to terminate the Overlease without Subtenant's prior consent, which may be withheld in Subtenant's sole discretion. Notwithstanding the foregoing, the Sublandlord shall be permitted to terminate this Sublease in the event Sublandlord obtains a direct lease between the Subtenant and the Overlandlord on all of the terms and conditions set forth in this Sublease (a "Replacement Lease"). Subtenant agrees to execute and deliver the Replacement Lease at Sublandlord's request. Sublandlord is not in default under the Overlease, nor has Sublandlord done or failed to do anything which with notice, the passage of time or both could ripen into a default. To Sublandlord's knowledge, Overlandlord is not in default under any of its obligations under the Overlease. 4.3 QUIET ENJOYMENT. Upon payment of the rent and performance of and compliance with the covenants, terms and conditions upon Subtenant's part to be performed and complied with hereunder, Subtenant shall lawfully, peacefully and quietly have, hold, occupy and enjoy the Premises during the Term without hindrance or molestation by Sublandlord or any persons lawfully claiming by, through or under Sublandlord, subject to the terms and conditions of this Sublease and the Overlease. ARTICLE V SUBTENANT'S COVENANTS Subtenant covenants during the Term and such further time as Subtenant occupies any part of the Premises: 5.1 SUBTENANT'S PAYMENTS. Subtenant shall pay all Monthly Fixed Rent, Expense Pass Throughs and all other additional rent payable hereunder when due. Subtenant shall also pay all costs of utilities furnished to the Premises. To the extent such utilities are not separately metered to the Premises, Subtenant shall pay to Sublandlord, as Additional Rent, the following portion of such common utilities charged to Sublandlord (i) one third (1/3) of such utilities for the period beginning February 1, 1998 and ending June 30, 1998, (ii) two thirds (2/3) of such utilities for the period beginning July 1, 1998 and ending September 30, 1998, and (iii) 100% of such utilities for the period beginning October 1, 1998 and continuing for the remainder of the Term. -5- 6 5.2 MAINTENANCE AND REPAIR. Subtenant shall maintain the Premises in the condition required by the Overlease. 5.3 OCCUPANCY AND USE. Subtenant shall not use the Premises for any uses other than the Permitted Uses, and shall not make any use of the Premises which is prohibited by any applicable law, ordinance, code, regulation, license, permit, variances or governmental order. 5.4 ASSIGNMENT AND SUBLETTING. Except as permitted by the terms of the Overlease, Subtenant shall not assign, transfer, mortgage or pledge this Sublease, or sublease (which term shall be deemed to include the granting of concessions and licenses and the like) all or any part of the Premises, or suffer or permit this Sublease or the leasehold estate hereby created or any other rights arising under this Sublease to be assigned, transferred or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the occupancy of the Premises by anyone other than Subtenant. Any attempted assignment, transfer, mortgage, pledge, sublease or encumbrance in violation of the foregoing shall be void. If any assignment or sublease is permitted, and, if the aggregate rent and other charges payable to Subtenant thereunder (including without limitation any amounts paid for leasehold improvements or on account of Subtenant's costs associated therewith, but deducting Subtenant's costs such as architect's fees, brokerage fees, tenant improvements and the like) exceed the aggregate rent and other charges paid hereunder with respect to the space in question, Subtenant shall pay to Sublandlord, as additional rent, one-half the amount of such excess. ARTICLE VI CASUALTY AND TAKING 6.1 TERMINATION OF OVERLEASE. In the event that during the Term, all or any part of the Premises or the Overleased Premises are destroyed or damaged by fire or other casualty or taken by eminent domain, and either Sublandlord or Overlandlord terminates the Overlease pursuant to its terms because of such damage, destruction or taking, then this Sublease shall likewise terminate on the same date that the Overlease terminates. Sublandlord shall give Subtenant prompt notice of such termination and the date on which it shall occur. Subtenant shall also have the same right to terminate this Sublease as the Sublandlord has to terminate the Overlease as tenant under Section 6.1 of the Overlease, except such termination election must be made within five (5) days of the expiration of the twelve (12) month period set forth in Section 6.1 of the Overlease. 6.2 REPAIR AND RESTORATION. In the event any such damage, destruction or taking of the Premises occurs and this Sublease is not terminated pursuant to Section 6.1 above, then Sublandlord shall cause Overlandlord to repair and restore -6- 7 the Premises as required by the terms of the Overlease. A just proportion of the Monthly Fixed Rent, and any other additional rent hereunder shall be abated until Overlandlord shall have put the Premises or what may remain thereof into proper condition for use and occupancy, and in the case of a taking which permanently reduces the area of the Premises, a just proportion of such rent shall be abated for the remainder of the Term. 6.3 RESERVATION OF AWARD. Any and all rights to receive awards made for damages to the Premises and the leasehold hereby created accruing by reason of exercise of eminent domain or by reason of anything lawfully done in pursuance of public or other authority, are reserved to Sublandlord and Overlandlord. Subtenant hereby releases and assigns to Sublandlord and Overlandlord all Subtenant's rights to such award and covenants to deliver such further assignments and assurances thereof as Sublandlord or Overlandlord may from time to time request. ARTICLE VII OVERLEASE 7.1 SUBLEASE SUBJECT TO OVERLEASE. This Sublease is subject to the Overlease. Subject to this Section 7.1, all terms and conditions of the Overlease (except for: Section 1.1, Section 2.1.1, Section 2.4, Section 2.4.1, the second sentence of the first paragraph of Section 2.5, Section 3.1, Section 3.2, the last sentence of Section 5.11, the second sentence of Section 5.2, Section 8.3, the personal representation and warranties set forth in Section 8.16 (such representations and warranties being made by the Subtenant but not by the persons executing this Lease on behalf of Subtenant) Article X, the first sentence of Article XII and Exhibit B) are incorporated into and made a part of this Sublease as if Sublandlord were the landlord thereunder and Subtenant were the tenant. In case of conflict between the incorporated provisions of the Overlease and the remaining provisions of this Sublease, the latter shall control. Subtenant assumes and agrees to perform the tenant's obligations under the Overlease during the Term, except that the obligation to pay rent or other amounts to Overlandlord under the Overlease shall not be an obligation of Subtenant, and Subtenant shall instead pay the rent under this Sublease. Subtenant shall not commit or suffer any act or omission that will violate any of the provisions of the Overlease. Overlandlord has covenanted under the Overlease to perform repairs and maintenance and provide services pursuant to the Overlease. Sublandlord shall exercise due diligence in attempting to cause Overlandlord to perform its obligations under the Overlease for the benefit of Subtenant. In addition, if Overlandlord defaults in its obligations under the Overlease to maintain the Premises or to furnish services to the Premises and such default materially interferes with Subtenant's use and enjoyment of the Premises, Sublandlord authorizes Subtenant to deal directly with Overlandlord regarding such default (but no such authorization shall relieve -7- 8 Sublandlord of its obligation to use due diligence and/or reasonable efforts, as set forth above in this Section 7.1 or above in Section 4.1, respectively). If the Overlease terminates as a result of a default or breach of Sublandlord or Subtenant under this Sublease and/or the Overlease, then the defaulting party shall be liable to the nondefaulting party for the direct damage suffered as a result of such termination. Sublandlord covenants not to commit or suffer any act or omission that will violate the Overlease. Neither Sublandlord nor Subtenant shall be liable to the other under this Section 7.1 of any indirect, special or consequential damages, including business interruption or lost profits. 7.2 EXCLUDED OBLIGATIONS. Notwithstanding anything to the contrary herein, the incorporated provisions of the Overlease are amended or qualified as follows: i. Sublandlord shall not be liable under any circumstances for a loss of or injury to property, or interference with Subtenant's business, however occurring, incidental to any failure to furnish any utilities or services. ii. Sublandlord shall have no responsibility to perform or construct (or to pay the cost of performing or constructing) any repair, maintenance or improvement in or to the Premises except to the extent required of it as tenant under the Overlease. iii. Rent shall be abated under this Sublease only to the extent that Sublandlord receives a corresponding rent abatement under the Overlease (provided, however, that the foregoing limitation shall not apply for any period during which Sublandlord fails to deliver the Premises to Subtenant on the dates set forth in this Sublease). iv. Wherever the Overlease grants to Sublandlord a grace or cure period, the corresponding grace or cure period under this Sublease shall be two (2) business days shorter in duration. The parties acknowledge that Sublandlord's ability to satisfy certain of its obligations to Subtenant under this Sublease is contingent upon the full and timely performance of Overlandlord's obligations under the Overlease. The parties further acknowledge that, while Sublandlord will use reasonable efforts to cause Overlandlord to perform its obligations under the Overlease, Sublandlord will not be liable to Subtenant for any breach of Sublandlord's obligations under this Sublease, nor shall such breach diminish Sublandlord's rights hereunder, where the same is caused by or attributable to the failure of Overlandlord to perform its obligations under the Overlease. 7.3 OVERLANDLORD'S RIGHTS. Overlandlord shall have all rights with respect to the Premises which it has reserved to itself as landlord under the Overlease. -8- 9 7.4 TERMINATION OF OVERLEASE. In the event that Overlandlord terminates the Overlease pursuant to its terms or the Overlease otherwise terminates or expires, this Sublease shall likewise and simultaneously terminate. ARTICLE VIII MISCELLANEOUS 8.1 NOTICES FROM ONE PARTY TO THE OTHER. All notices required or permitted hereunder shall be in writing and addressed, if to the Subtenant, at Subtenant's Address, Attention Karen A. Hamlin, Senior Director of Operations, with a copy to David B. Currie, Esq., Choate, Hall & Stewart, Exchange Place, Boston, MA 02109, or such other address as Subtenant shall have last designated by notice in writing to Sublandlord and, if to Sublandlord, at Sublandlord's Address or such other address as Sublandlord shall have last designated by notice in writing to Subtenant. Any notice shall be deemed duly given when mailed to such address postage prepaid, via recognized overnight courier or by registered or certified mail, return receipt requested, or when delivered to such address by hand. 8.2 ESTOPPEL CERTIFICATE. Upon not less than 20 days prior notice by the requesting party, either party shall execute, acknowledge and deliver to the other a statement in writing, addressed to such person as the requesting party shall designate, certifying (a) that this Sublease is unmodified and in full force and effect, (b) the dates to which Monthly Fixed Rent and additional rent have been paid, and (c) that the requesting party is not in default hereunder (or, if in default, specifying the nature of such default in reasonable detail). Any such certificate may be relied upon by the person to which it is addressed as to the facts stated therein. 8.3 BROKERAGE. Subtenant and Sublandlord mutually represent and warrant that they have dealt with no broker in connection with this transaction except for Lynch Murphy Walsh & Partners and Fallon Hines & O'Connor (the "Brokers"). Each agrees to defend, indemnify and save the other harmless from and against any and all cost, expense or liability suffered by the other as a result of any breach of such representation and warranty. Sublandlord shall pay the commission due to the Brokers. 8.4. APPLICABLE LAW AND CONSTRUCTION. This Sublease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. If any term, covenant, condition or provision of this Sublease or the application thereof to any person or circumstances shall be declared invalid or unenforceable by the final ruling of a court of competent jurisdiction having final review, the remaining terms, covenants, conditions and provisions of this Sublease and their -9- 10 application to persons or circumstances shall not be affected thereby and shall continue to be enforced and recognized as valid agreements of the parties. There are no oral or written agreements between Sublandlord and Subtenant affecting this Sublease. This Sublease may be amended, and the provisions hereof may be waived or modified, only by instruments in writing executed by Sublandlord and Subtenant. The titles of the several Articles and Sections contained herein are for convenience only and shall not be considered in construing this Sublease. Unless repugnant to the context, the words "Sublandlord" and "Subtenant" appearing in this Sublease shall be construed to mean those named above and their respective heirs, executors, administrators, successor and assigns, and those claiming through or under them respectively. If there be more than one tenant, the obligations imposed by this Sublease upon Subtenant shall be joint and several. 8.5 CONSENT BY OVERLANDLORD. This Sublease is conditioned upon procuring the consent of Overlandlord to this Sublease in accordance with the Overlease (the "Consent"), and the Sublandlord and Subtenant shall cooperate with each other in seeking Overlandlord's Consent. If Consent is not obtained within ten (10) business days of the date of this Sublease (the "Consent Period"), this Sublease may be terminated by Sublandlord or Subtenant upon the delivery of notice to the other party hereto. If this Sublease is so terminated: (i) all consideration previously paid by Subtenant to Sublandlord on account of this Sublease shall be returned to Subtenant; and (ii) the parties thereupon shall be relieved of any further liability or obligation under this Sublease, except for those liabilities or obligations which have accrued and remain unperformed as of the date this Sublease is so terminated. 8.6 SECURITY DEPOSIT. Sublandlord acknowledges receipt of the Security Deposit from Subtenant simultaneously with the execution hereof. The Security Deposit will be held by Sublandlord, as security in an interest bearing account, for and during the Term, which deposit shall be returned to Subtenant, within 30 days after the expiration or termination of this Sublease, provided there exists no breach of any undertaking of Subtenant. Provided Subtenant is not in default of this Sublease, all interest on the Security Deposit shall be paid to Subtenant on an annual basis on each anniversary of the Commencement Date. If all or any part of the Security Deposit is applied to an obligation of Subtenant hereunder, Subtenant shall immediately upon request by Sublandlord restore the Security Deposit to its original amount. Subtenant shall not have the right to call upon Sublandlord to apply all or any part of the Security Deposit to cure any default or fulfill any obligation of Subtenant, but such use shall be solely in the discretion of Sublandlord. Provided Subtenant is not in default of any of its obligations hereunder, the Security Deposit shall be reduced to $250,000 (and $250,000 refunded to Subtenant) within 10 days -10- 11 after Subtenant provides evidence reasonably satisfactory to Sublandlord that Subtenant has successfully completed a public offering of Subtenant's common stock which raised not less than $30,000,000. Notwithstanding the foregoing, the Subtenant shall be permitted to provide the Security Deposit by delivery of a letter of credit in the form attached hereto as Exhibit C, which letter of credit shall be drawn on a bank approved by Sublandlord in its reasonable discretion. 8.7 SIGNAGE RIGHTS. Sublandlord agrees that, subject to Overlandlord's consent, Subtenant shall be permitted to construct a sign on the Premises substantially similar in size and design to Sublandlord's existing sign. Sublandlord's sign shall be removed from the Premises on or about the date Sublandlord vacates the Building. 8.8 ACCESS. Sublandlord shall not take any steps to deny Subtenant access to the Premises 24 hours a day. 8.9 PERMITS. Subtenant shall have the right to terminate this Sublease during the Consent Period in the event Subtenant is not satisfied, in its discretion, that it will be able to obtain all permits and approvals necessary for the operation of its business at the Premises. Subtenant's termination right shall be void if not exercised within the Consent Period. EXECUTED as a sealed instrument in two or more counterparts on the day and year first above written. Sublandlord: Immulogic Pharmaceutical Corporation By: /s/ J. Joseph Marr --------------------------- Title: President and CEO Subtenant: SCRIPTGEN Pharmaceuticals, Inc. By: /s/ Mark T. Weedon --------------------------- Title: President and CEO -11- 12 The undersigned, Lincoln Street Trust, as landlord under the "Overlease" described in the above Sublease, hereby consents (a) to the execution of such Sublease and the terms and conditions set forth therein, and (b) to the installation by Subtenant of a sign on the Premises consistent with the design set forth on Exhibit __ attached hereto. Nothing herein shall be interpreted to modify the undersigned's rights and obligations under the Overlease. Overlandlord: Lincoln Street Trust By: /s/ Michael D. Bank ------------------------------ Name: , as Trustee and not individually hereunto duly authorized -12- EX-23.01 3 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTS We consent to the incorporation by reference in the registration statements of ImmuLogic Pharmaceutical Corporation on Form S-3 (File No. 333-3086) and Form S-8 (File Nos. 33-89024, 33-89020, 33-89022, 33-50858, 33-42489, 33-42552, 33-41921, 333-08423 and 333-08425) of our report dated February 3, 1998, except for the information in the last paragraph of Note D as to which the date is February 27, 1998, on our audit of the consolidated financial statements of ImmuLogic Pharmaceutical Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand, L.L.P. - ----------------------------- Coopers & Lybrand, L.L.P. Boston, Massachusetts March 26, 1998 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AT 12/31/97 FILED IN THE 1997 FORM 10K; CONSOLIDATED BALANCE SHEET, STATEMENT OF OPERATIONS FOR THE YEAR ENDED 12/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K, DECEMBER 31, 1997. 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 8,437 43,856 0 0 0 28,066 19,899 (13,214) 59,588 5,244 0 0 0 203 53,816 59,588 0 2,049 0 0 23,492 0 0 (18,119) 0 0 0 0 0 (18,119) (0.89) (0.89) Marketable securities includes long term investments of $24,788.
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