-----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, NVSHUdBEAkgkGIdRfTupsM+zIYQnfqC35KQP6m5U8nAoyWn8QRzzqt9TgY+Qav/n dGNR4DWQkD8thEbjKPt5pw== 0001047469-99-031011.txt : 19990812 0001047469-99-031011.hdr.sgml : 19990812 ACCESSION NUMBER: 0001047469-99-031011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMUNEX CORP /DE/ CENTRAL INDEX KEY: 0000719529 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 510346580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12406 FILM NUMBER: 99684080 BUSINESS ADDRESS: STREET 1: 51 UNIVERSITY ST CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2065870430 MAIL ADDRESS: STREET 1: 51 UNIVERSITY STREET CITY: SEATLE STATE: WA ZIP: 98101 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission File Number 0-12406 IMMUNEX CORPORATION (exact name of registrant as specified in its charter) Washington 51-0346580 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 51 University Street, Seattle, WA 98101 (Address of principal executive offices) Registrant's telephone number, including area code (206) 587-0430 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 81,812,042 - --------------------------------- ---------------------------------- Class Outstanding at August 6, 1999 IMMUNEX CORPORATION QUARTERLY REPORT ON FORM 10-Q JUNE 30, 1999 TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements: a) Consolidated Condensed Balance Sheets - 4 June 30, 1999 and December 31, 1998 b) Consolidated Condensed Statements of Operations - 5 for the three-month periods ended June 30, 1999 and June 30, 1998 c) Consolidated Condensed Statements of Operations - 6 for the six-month periods ended June 30, 1999 and June 30, 1998 d) Consolidated Condensed Statements of Cash Flows - 7 for the six-month periods ended June 30, 1999 and June 30, 1999 e) Notes to Consolidated Condensed Financial Statements 8 - 11 Item 2. Management's Discussion and Analysis of Financial 12 - 17 Condition and Results of Operations Item 3. Market Risks 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES
2 PART I. FINANCIAL INFORMATION --------------------- The consolidated condensed financial statements included herein have been prepared by Immunex Corporation without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for the six-month period ended June 30, 1999, are not necessarily indicative of results to be expected for the entire year ending December 31, 1999. Item 1. FINANCIAL STATEMENTS IMMUNEX CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands)
June 30, 1999 December 31, (unaudited) 1998 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 249,757 $ 43,600 Marketable securities 391,054 101,245 Accounts receivable, net 55,669 28,939 Inventories 17,969 23,475 Other current assets 3,404 4,726 --------------- ---------------- Total current assets 717,853 201,985 Property, plant and equipment, net 96,760 90,092 Other assets 46,103 33,248 --------------- ---------------- $ 860,716 $ 325,325 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 51,835 $ 39,256 Accounts payable - AHP 30,395 13,950 Accrued compensation and related items 9,169 13,756 Current portion of long-term obligations 3,478 3,477 Interest payable - AHP 1,538 - Other current liabilities 6,580 5,074 --------------- ---------------- Total current liabilities 102,995 75,513 Convertible note - AHP 450,000 - Other long-term obligations 2,442 2,349 Shareholders' equity: Common stock, $.01 par value 778,605 725,597 Unrealized gain (loss) on investment, net (1,076) 1,228 Accumulated deficit (472,250) (479,362) --------------- ---------------- Total shareholders' equity 305,279 247,463 --------------- ---------------- $ 860,716 $ 325,325 =============== ================
See accompanying notes. 4 Item 1. FINANCIAL STATEMENTS (continued) IMMUNEX CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three months Three months Ended ended June 30, June 30, 1999 1998 ---------------- ---------------- Revenues: Product sales $ 125,854 $ 39,961 Royalty and contract revenue 2,620 24,194 ---------------- ---------------- 128,474 64,155 Operating expenses: Cost of product sales 39,678 7,691 Research and development 30,264 36,910 Selling, general and administrative 52,937 20,780 ---------------- ---------------- 122,879 65,381 ---------------- ---------------- Operating income (loss) 5,595 (1,226) Other income (expense): Interest income 5,075 1,550 Interest expense (1,628) (111) Other income, net 69 70 ---------------- ---------------- 3,516 1,509 ---------------- ---------------- Income before income taxes 9,111 283 Provision for income taxes 2,250 88 ---------------- ---------------- Net income $ 6,861 $ 195 ================ ================ Net income per common share: Basic $ 0.08 $ 0.00 ================ ================ Diluted $ 0.08 $ 0.00 ================ ================ ------------------------------------------ Number of shares used for per share amounts: Basic 81,423 79,630 ================ ================ Diluted 88,531 83,630 ================ ================
See accompanying notes. 5 Item 1. FINANCIAL STATEMENTS (continued) IMMUNEX CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Six months Six months Ended ended June 30, June 30, 1999 1998 ------------------- ------------------- Revenues: Product sales $ 221,091 $ 78,777 Royalty and contract revenue 5,560 27,244 ------------------- ------------------- 226,651 106,021 Operating expenses: Cost of product sales 66,887 14,782 Research and development 58,473 63,816 Selling, general and administrative 97,210 39,217 ------------------- ------------------- 222,570 117,815 ------------------- ------------------- Operating income (loss) 4,081 (11,794) Other income (expense): Interest income 6,949 3,090 Interest expense (1,697) (221) Other income, net 149 241 ------------------- ------------------- 5,401 3,110 ------------------- ------------------- Income (loss) before income taxes 9,482 (8,684) Provision for income taxes 2,370 146 ------------------- ------------------- Net income (loss) $ 7,112 $ (8,830) =================== ==================== Net income (loss) per common share: Basic $ 0.09 $ (0.11) =================== =================== Diluted $ 0.08 $ (0.11) =================== =================== Number of shares used for per share amounts: Basic 81,080 79,680 =================== =================== Diluted 87,615 79,680 =================== ===================
See accompanying notes. 6 Item 1. FINANCIAL STATEMENTS (continued) IMMUNEX CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six months Six months ended ended June 30, June 30, 1999 1998 ------------------- ------------------- Operating Activities: Net income (loss) $ 7,112 $ (8,830) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,728 9,293 Deferred income tax provision 2,075 - License fee received as common stock (990) - Cash flow impact of changes to: Accounts receivable (26,730) (17,958) Inventories 5,561 2,317 Accounts payable, accrued liabilities and other current liabilities 27,424 (355) Other current assets 1,323 436 ------------------- ------------------- Net cash provided by (used in) operating activities 25,503 (15,097) ------------------- ------------------- Investing Activities: Purchases of property, plant and equipment (13,562) (22,453) Purchases of marketable securities (317,166) (85,822) Proceeds from sales and maturities of marketable securities 25,150 44,397 Acquisition of product rights, net (15,500) (5,000) Other (370) (20) ------------------- ------------------- Net cash used in investing activities (321,448) (68,898) ------------------- ------------------- Financing Activities: Proceeds from the issuance of common stock to AHP 40,777 2,330 Proceeds from exercise of stock options 12,232 1,921 Proceeds from AHP convertible note, net 449,000 - Guaranty payment received from AHP - 60,032 Other 93 14 ------------------- ------------------- Net cash provided by financing activities 502,102 64,297 ------------------- ------------------- Net increase (decrease) in cash and cash equivalents 206,157 (19,698) Cash and cash equivalents, beginning of period 43,600 66,176 ------------------- ------------------- Cash and cash equivalents, end of period $ 249,757 $ 46,478 ================== ==================
See accompanying notes. 7 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (unaudited) NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION - ----------------------------------------------- Immunex Corporation (which may be referred to as IMMUNEX, WE, US or OUR) is a biopharmaceutical company that discovers, develops, manufactures and markets innovative therapeutic products for the treatment of human diseases, including cancer, infectious diseases and immunological disorders such as rheumatoid arthritis. We operate in a highly regulated and competitive environment. Our business is regulated primarily by the United States (U.S.) Food and Drug Administration (FDA). The FDA regulates the products we sell, our manufacturing processes and our promotional activities. Obtaining approval for a new therapeutic product is never certain, may take several years and is very costly. Competition in researching, developing and marketing pharmaceutical products is intense. Any of the technologies covering our existing products or products under development could become obsolete or diminished in value by discoveries and developments of other organizations. Our market for pharmaceutical products is primarily the U.S. Our sales are primarily through wholesalers and specialty distributors. The condensed consolidated financial statements are prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management must make some estimates and assumptions that affect reported amounts and disclosures. American Home Products Corporation (AHP), holds a majority interest in Immunex, totaling approximately 54%. All references to AHP include AHP and its various affiliates, divisions and subsidiaries. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- INVENTORIES Inventories are stated at the lower of cost, using a weighted-average method, or market. The components of inventories are as follows (in thousands):
June 30, December 31, 1999 1998 --------------------- --------------------- Raw materials $ 1,198 $ 807 Work in process 12,724 17,953 Finished goods 4,047 4,715 --------------------- --------------------- Totals $ 17,969 $ 23,475 ===================== =====================
Work in process may include product that is essentially complete but is awaiting packaging. 8 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) DEPRECIATION AND AMORTIZATION The cost of buildings and equipment is depreciated evenly over the estimated useful lives of the assets, which range from three to 31.5 years. Leasehold improvements are amortized evenly over either their estimated useful lives, or the term of the lease, whichever is lower. Goodwill is being amortized evenly over a 10 year period. Intangible product rights and other intangible assets are amortized evenly over their estimated useful lives, ranging from five to 15 years. REVENUES Product sales are recognized when product is shipped. We perform ongoing credit evaluations of our customers and we do not require collateral. Product sales are recorded net of reserves for estimated chargebacks, returns, discounts, Medicaid rebates and administrative fees. We maintain reserves at a level that we believe is sufficient to cover estimated future requirements. Revenues received under royalty, licensing and collaborative agreements are recognized based on the terms of the underlying contractual agreements. NOTE 3. REPORTING COMPREHENSIVE INCOME - -------------------------------------- Our investments are considered available-for-sale and are stated at fair value on the balance sheet with the unrealized gains and losses included as a component of shareholders' equity. During the second quarter of 1999 and 1998, there were no material realized gains or losses. Immunex's investment guidelines state that the maximum average life of any one security shall be five years with the maximum weighted average life of the investment portfolio being three years. The following table sets forth the components of comprehensive income (loss), (in thousands):
Three months Three months Six months Six months ended ended ended ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net income (loss) $ 6,861 $ 195 $ 7,112 $ (8,830) Unrealized loss on investments (2,199) (934) (2,304) (3,029) ------------- ------------- ------------- ------------- Comprehensive income (loss) $ 4,662 $ (739) $ 4,808 $ (11,859) ============= ============= ============= =============
9 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) NOTE 4. EARNINGS PER COMMON SHARE - ---------------------------------- Basic earnings per share is calculated by dividing net income or net loss by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average common shares outstanding plus the dilutive effect of outstanding stock options. If we report a net loss, diluted earnings per share will be the same as basic earnings per share because the effect of outstanding stock options being added to weighted average shares outstanding would reduce the loss per share. Accordingly, outstanding stock options are not included in the calculation during net loss periods. The components of calculating net income (loss) per share is set forth in the following table (in thousands, except per share data):
Three months Three months Six months Six months ended ended ended ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net income (loss) $ 6,861 $ 195 $ 7,112 $ (8,830) ============= ============= ============= ============= Weighted average common shares outstanding, basic 81,423 79,630 81,080 79,680 Net effect of dilutive stock options 7,108 4,000 6,535 - ------------- ------------- ------------- ------------- Weighted average common shares outstanding, diluted 88,531 83,630 87,615 79,680 ============= ============= ============= ============= Earnings (loss) per common share, basic $ 0.08 $ 0.00 $ 0.09 $ (0.11) ============= ============= ============= ============= Earnings (loss) per common share, diluted $ 0.08 $ 0.00 $ 0.08 $ (0.11) ============= ============= ============= =============
NOTE 5. STOCK SPLIT On February 23, 1999, the Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend. The record date of the stock split was March 11, 1999, and stockholders were entitled to receive the additional shares on March 25, 1999. All references to retained earnings, common stock, average number of common shares outstanding and per share amounts in the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations prior to the record date of the stock split have been restated to reflect the two-for-one stock split on a retroactive basis. On July 27, 1999, the Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend. The record date of the stock split is August 12, 1999, and stockholders are entitled to receive the additional shares on August 26, 1999. The stock split approved on July 27, 1999 has not been reflected within the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) NOTE 6. AHP CONVERTIBLE NOTE In May 1999, Immunex issued a seven-year, 3% coupon, convertible subordinated note to AHP. The principal amount of the note, purchased in private placement, totaled $450 million, resulting in related debt issuance costs of $1.0 million. The note is convertible into Immunex common stock at a price of $173.68 per share. After three years, Immunex can redeem, or call the note, provided that its closing price for 20 consecutive days exceeds or equals $208.42 per share. After four years, Immunex can call the note at any time if its closing price for 20 days exceeds or equals the conversion price. AHP may convert the note into common stock of Immunex at any time. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION INTRODUCTION Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong. Inaccurate assumptions we might make and known or unknown risks and uncertainties can affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and our actual results may differ materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K. Factors that we think could cause our actual results to differ materially from expected and historical results include, but are not limited to, those discussed in the "Risk Factors" section described in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS OVERVIEW For the three months ended June 30, 1999, we generated net income of $6.9 million, compared to net income of $0.2 million for the comparable 1998 period. For the six-month periods ended June 30, 1999 and 1998, the Company had net income of $7.1 million and a net loss of $8.8 million, repectively. The improvement in operating results is due primarily to U.S. sales of ENBREL-R- (etanercept), which we began selling in November 1998 following U.S. FDA approval of ENBREL for treatment of advanced rheumatoid arthritis. ENBREL is being promoted by AHP in the U.S. through its Wyeth-Ayerst sales and marketing organization. AHP shares in the gross profits from U.S. sales of ENBREL and both companies share the selling, marketing, distribution and other costs to support sales of ENBREL. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) REVENUES
Three months Three months Six months Six months ended ended ended ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------------ ------------ ---------- ---------- ENBREL $ 86.9 $ - $146.5 $ - LEUKINE-R- (sargramostim, GM-CSF) 16.6 16.2 32.6 31.3 NOVANTRONE-R- (mitoxantrone) 11.1 13.1 21.9 26.5 Other product sales 11.3 10.7 20.1 21.0 ------ ------ ------ ------ Total product sales 125.9 40.0 221.1 78.8 Royalty and contract revenue 2.6 24.2 5.6 27.2 ------ ------ ------ ------ Total revenue $128.5 $ 64.2 $226.7 $106.0 ====== ====== ====== ======
Product sales increased to $125.9 million from $40.0 million and to $221.1 million from $78.8 million for the three and six months ended June 30, 1999 and 1998, respectively. The improvement during both 1999 periods is due to sales of ENBREL. Royalty and contract revenue totaled $2.6 million and $5.6 million for the three and six months ended June 30, 1999, compared to $24.2 million and $27.2 million for the comparable 1998 periods. Revenue recognized during the 1999 three and six-month periods reflects recurring amounts recognized under existing royalty and license agreements. In June 1998, we earned $20.0 million from AHP under the terms of the ENBREL Promotion Agreement, when our Biologics License Application for ENBREL for treatment of advanced rheumatoid arthritis was accepted for review by the FDA. Royalty and contract revenue is expected to fluctuate significantly depending on the achievement of milestones under existing agreements and new business opportunities that may be identified. Under the ENBREL Promotion Agreement, we will earn a one-time payment of $10.0 million if net sales of ENBREL in North America exceed $200.0 million in any 12 consecutive months. We expect to earn this payment during the third quarter of 1999. OPERATING EXPENSES Cost of product sales was 31.5% and 19.2% of product sales for the quarters ended June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999 and 1998, cost of product sales was 30.3% and 18.8% of product sales, respectively. The increase in the cost of product sales percentage during the current year period is due to the following: - Launch of ENBREL in November 1998 (ENBREL, like LEUKINE, is a biologic. Biologics generally have a higher manufacturing cost than traditional pharmaceutical products and, in the case of our biologic products, are subject to multiple royalty obligations), and - Unfavorable change in the mix of other products. Cost of product sales as a percentage of product sales is expected to increase in the future if sales of ENBREL continue to grow. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Research and development expense was $30.3 million and $36.9 million for the quarters ended June 30, 1999 and 1998, respectively, and $58.5 million and $63.8 million for the six months ended June 30, 1999 and 1998. Research and development expense in 1998 included the acquisition of the rights outside North America to NUVANCE-TM- (IL-4 receptor) and other receptor product candidates for $10.0 million. Furthermore, in July 1998, we ended our oncology collaboration with AHP. Expenses related to this agreement totaled $4.1 million and $8.3 million during the three and six-month periods ended June 30, 1998, respectively. Exclusive of these expenditures, research and development expense increased $7.5 million and $13.0 million during the three and six-months ended June 30, 1999 versus the comparable 1998 periods. The increase is due primarily to the following: - Spending on development of ENBREL reflecting clinical studies for the treatment of chronic heart failure and European trials for treatment of rheumatoid arthritis, - Spending on NUVANCE-TM- (IL-4R) including a Phase II trial of NUVANCE-TM- to treat ASTHMA, - Increased costs for other market opportunities and product candidates, including NOVANTRONE-R- (mitoxantrone for injection concentrate) for treatment of progressive multiple sclerosis and CD40 Ligand to treat renal cell cancer, and - Increased spending on discovery research. Selling, general and administrative expense increased to $52.9 million from $20.8 million and to $97.2 million from $39.2 million for the three and six-months periods ended June 30, 1999 and 1998, respectively. The increase is due primarily to expenses associated with selling and marketing of ENBREL. Under the terms of the ENBREL Promotion Agreement, AHP assumed a majority of these expenses and will share in the gross profits from U.S. sales of ENBREL. Selling, general and administrative expenses include our share of these expenses and the amount of the gross profits shared with AHP from sales of ENBREL. In addition to expenses incurred under the ENBREL Promotion Agreement, selling, general and administrative expense increased due to the following: - Higher product liability insurance premiums due to higher average limits, - Expenses associated with information systems, - Spending on selling activities related to our oncology products, and - Estimated charges to cover the costs associated with a recall of AMICAR-R- (aminocaproic acid) totaling $0.9 million. OTHER INCOME (EXPENSE) Interest income increased to $5.1 million and $6.9 million for the three and six months ended June 30, 1999 compared to $1.6 million and $3.1 million for the same periods in 1998. The issuance of $450.0 million of convertible debt to AHP, additional equity purchases and improved cash flow from operations resulted in a significant increase in funds available for investment purposes and the interest earned on these funds. The increase in interest income was partially offset by an increase in interest expense, incurred on the convertible notes. Interest expense increased by $1.5 million for both the three and six-months ended June 30, 1999. PROVISION FOR INCOME TAXES The provision for income taxes was $2.3 million and $0.1 million for the quarters ended June 30, 1999 and 1998, and $2.4 million and $0.1 million for the six months ended June 30, 1999 and 1998, respectively. The provision for income taxes during 1999 is primarily for federal income taxes. This tax provision is a non-cash transaction because we will utilize our net operating tax loss carryforwards to satisfy the federal tax liability. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) For 1999 approximately $32 million of income before taxes will result in the reporting of a normal tax provision on our financial statements with a corresponding reduction of goodwill and intangible product rights. To the extent that income before taxes exceeds $32 million in the current year, our net operating tax loss carryforwards, for purposes of financial reporting, will offset the corresponding tax provision. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and marketable securities totaled $640.8 million and $144.8 million at June 30, 1999 and December 31, 1998, respectively. In May, we received $450.0 million in proceeds from the issuance of a convertible note to AHP (see below). The Company's cash reserves are held in a variety of interest-bearing instruments including government and corporate obligations and money market accounts. Operating activities provided cash of $25.5 million during the first six months of 1999. Cash provided by operating activities reflects the improvement in our operating results and, to a lesser extent, favorable changes in our working capital requirements. The increase in accounts receivable from sales of Enbrel was more than offset by increased payables to AHP under the ENBREL Promotion Agreement and decreased inventory levels. Cash used in investing activities totaled $321.4 million for the first six months of 1999. The majority of the cash used for investing activities is due to $317.2 million in purchases of marketable securities, offset by $25.2 million in proceeds from the sales and maturities of marketable securities. In addition, expenditures for capital equipment totaled $13.6 million, primarily for purchases of computer hardware and software and purchases of lab equipment during the first six months of 1999. An additional $15.5 million represents our share of payments to Ares-Serono International S.A. and Genentech, Inc. under TNFR license agreements. Financing activities provided cash of $502.1 million for the six-month period ended June 30, 1999. A majority of this increase can be attributed to the $450.0 million in proceeds from the 3%, seven-year convertible note issued to AHP. The proceeds from this note are expected to be used for the following: - New product development, - Financing strategic acquisitions of products, product candidates, technologies or other businesses, - Increasing working capital required to support sales of ENBREL, - Financing expansion for constructing new manufacturing, research and office facilities, and, - Funding other general working capital requirements. In addition, under the terms of a Governance Agreement with AHP, AHP can purchase additional shares of our common stock in order to maintain its percentage ownership. The purchase price is equal to the fair market value of the shares, as determined in accordance with the Governance Agreement, on the date of AHP's purchase. Under the terms of the Governance Agreement, we received $40.8 million from the issuance of 855,838 additional shares of our common stock to AHP during the first half of 1999. An additional $12.2 million was received from the exercise of employee stock options during the same period. 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR 2000 The "Year 2000" issue is the result of computer programs being unable to differentiate between the year 1900 and the year 2000 because they were written using two digits rather than four to define the applicable year. This could result in a system failure or miscalculations with respect to current programs. We have established a Year 2000 Committee with representatives from all of the functional areas at Immunex. The Year 2000 Committee has been engaged in a comprehensive review of our computer systems and software applications (INFORMATION TECHNOLOGY) and equipment that utilize date sensitive computer chips (EMBEDDED CHIPS). Embedded Chips are utilized in our security systems and certain manufacturing, laboratory and office equipment. Based on this review, we have determined that certain software, hardware and equipment will have to be modified or replaced so that they will properly utilize dates beyond December 31, 1999. Furthermore, we have contacted key third-party suppliers, service providers, distributors, wholesalers and other entities with which we have a business relationship (BUSINESS PARTNERS) to determine their compliance with Year 2000 requirements. We anticipate that required modifications and replacements of our critical systems and applications will be completed prior to the year 2000. However, if such modifications are not completed in a timely manner, or if there were a similar such failure on the part of our Business Partners, there could be a material adverse impact on our operations. Our plan to resolve the Year 2000 issues is organized into three functional areas: Information Technology, Embedded Chips and Business Partners. For each functional area, there are three phases: - Phase I: Assessment - Phase II: Testing and Remediation - Phase III: Implementation and Contingency Planning Assessment activities for each functional area are complete. Testing and remediation has been completed for most systems and is expected to be completed during the third quarter of 1999. As a result of this process, certain software applications have been identified that are not Year 2000 compliant and replacement of those software applications is in process or has been completed. We have initiated the process of developing contingency plans for certain critical business processes. These contingency plans involve, among other actions, adjusting production schedules, increasing inventories, and developing manual workarounds. The Company is continuing to monitor the progress of key Business Partners which have not completed their Year 2000 compliance programs. Contingency planning for key Business Partners has been completed and we are in the process of implementing those plans. The estimated completion dates of each phase of the three functional areas are as follows:
Information Technology Embedded Chips Business Partners ---------------------- -------------------------- -------------------- Phase I Complete Complete Complete Phase II 1999 Third Quarter Complete 1999 Third Quarter Phase III 1999 Third Quarter 1999 Third Quarter 1999 Third Quarter
We are utilizing both internal and external resources to identify, correct and test our computer systems, equipment and other applications for Year 2000 compliance. Our total cost for the Year 2000 project is estimated at approximately $6.3 million ($1.6 million of expense and $4.7 million capital). Through June 30, 1999, we have incurred approximately $4.3 million ($0.9 million of expense and $3.4 million capital). These amounts do not include any internal costs. We plan on utilizing our existing cash reserves to fund our Year 2000 compliance program. 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We have not identified our most reasonably likely worst case scenario with respect to possible losses in connection with Year 2000 related problems. We plan on completing this analysis prior to year-end. The Year 2000 disclosures discussed above are based on numerous expectations which are subject to uncertainties. Certain risk factors which could have a material adverse effect on the Company's results of operations and financial condition include but are not limited to: failure to identify critical systems which will experience failures, errors in the remediation efforts, unexpected failures by key Business Partners, inability to obtain new replacements for non-compliant systems or equipment, failures by governmental agencies causing delays in approval of new products or sales of approved products, general economic downturn relating to Year 2000 failures in the U.S. and in other countries, failures in global banking systems and capital markets, or extended failures by public and private utility companies or common carriers supplying services to the Company. 17 Item 3. MARKET RISKS We invest our cash reserves in marketable securities consisting primarily of U.S. government and corporate obligations. Our marketable securities are subject to interest rate risk. If market interest rates increased relatively by 10%, the effect on our operating results would not be material. In addition, we own common stock in two biotechnology companies with a cost of $4.0 million. 18 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The description of legal proceedings is incorporated by reference to Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of the Company's Shareholders ("Shareholders") was held on Thursday, April 29, 1999 ("Annual Meeting"). Of the 40,418,354 shares outstanding as of the record date, March 9, 1999, there were 38,909,338 shares or 96.27% of the total shares eligible to vote represented in person or proxy. The following proposals were adopted by the margins indicated: 1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and until their successors are elected and qualified.
For Withheld ---------- --------- Edward V. Fritzky 38,591,902 139,235 Joseph J. Carr 38,766,720 142,618 Kirby L. Cramer 38,587,209 141,755 Robert I. Levy 36,405,926 2,503,412 John E. Lyons 38,594,174 139,126 Joseph M. Mahady 38,730,713 178,625 Edith W. Martin 36,018,875 1,275,790 Peggy V. Phillips 38,586,649 142,315 Douglas E. Williams 38,602,639 135,017
2. To approve the adoption of the 1999 Employee Stock Purchase Plan, including the reservation of 500,000 shares of common stock for issuance thereunder. For 34,247,107 Against 349,814 Abstain 41,784 Not Voted 5,779,649
3. To approve the adoption of the 1999 Employee Stock Option Plan, including the reservation of 6,000,000 shares of common stock for issuance thereunder. For 26,488,865 Against 8,096,628 Abstain 53,212 Not Voted 5,779,649
4. To approve an amendment to the Company's Articles of Incorporation that increases the number of authorized shares of common stock by 100,000,000, from 100,000,000 to 200,000,000. For 38,717,730 Against 145,637 Abstain 45,971 Not Voted 1,509,016
19 Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit 3.1 Restated Articles of Incorporation of Immunex Corporation, as filed with the Secretary of State of Washington on May 19, 1999. Exhibit 27 Financial Data Schedule b) Reports on Form 8-K On May 28, 1999, the Company filed a Form 8-K under Item 5 announcing the issuance and sale of a $450.0 million, 3% Convertible Subordinated Note to American Home Products, due 2006. 20 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMMUNEX CORPORATION Date: 8/10/99 /s/ Edward V. Fritzky ------------------ ------------------------------------------- Edward V. Fritzky Chairman and Chief Executive Officer (Principal Executive Officer) Date: 8/9/99 /s/ David A. Mann ------------------ ------------------------------------------- David A. Mann Vice President, Finance and Interim Chief Financial Officer (Principal Financial and Accounting Officer) 21 EX-3.1 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF IMMUNEX CORPORATION Pursuant to RCW 23B.10.070, the following constitutes Restated Articles of Incorporation of the undersigned, a Washington corporation. ARTICLE 1. NAME The name of this corporation is Immunex Corporation. ARTICLE 2. SHARES 2.1 AUTHORIZED CAPITAL The total number of shares which the corporation is authorized to issue is 205,000,000, consisting of 200,000,000 shares of Common Stock having a par value of $.01 per share and 5,000,000 shares of Preferred Stock having a par value of $.01 per share. The Common Stock is subject to the rights and preferences of the Preferred Stock as hereinafter set forth. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation of the corporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designation, preferences, limitations and relative rights of the shares of any series that is wholly unissued or to be established. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. 2.3 DIVIDENDS The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times, whether cumulative or noncumulative, as may be provided by the Board of Directors in designating a particular series of Preferred Stock. If such dividends on the Preferred Stock shall be cumulative, then if dividends shall not have been paid, the deficiency shall be fully paid or the dividends declared and set apart for payment at such rate, but without interest on cumulative dividends, before any dividends on the Common Stock shall be paid or declared and set apart for payment. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this section. 2.4 REDEMPTION The Preferred Stock may be redeemable at such price, in such amount, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation to the extent legally permissible. 2.5 LIQUIDATION In the event of any liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock and dividends accrued thereon to the date of such payment. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution, or winding up of the affairs of the corporation other than the distributive amounts referred to in this section, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. 2.6 CONVERSION Shares of Preferred Stock may be convertible into Common Stock of the corporation upon such terms and conditions, at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. 2.7 VOTING RIGHTS Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE 3. REGISTERED OFFICE AND AGENT The name of the initial registered agent of this corporation and the address of its initial registered office are as follows: Scott G. Hallquist 51 University Street Seattle, WA 98101 ARTICLE 4. PREEMPTIVE RIGHTS No preemptive rights shall exist with respect to shares of stock or securities convertible into shares of stock of this corporation. ARTICLE 5. CUMULATIVE VOTING The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of this corporation. 2 ARTICLE 6. DIRECTORS 6.1 NUMBER AND TERM OF DIRECTORS The number of Directors of this corporation shall be determined in the manner provided by the Bylaws and may be increased or decreased from time to time in the manner provided therein, PROVIDED, HOWEVER, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office. Directors need not be shareholders. Unless a director dies, resigns, or is removed, he shall hold office until the later of the next annual meeting of shareholders or until his successor is elected and qualified, whichever is later. 6.2 REMOVAL OF DIRECTORS Subject to the terms of the Amended and Restated Governance Agreement, dated as of December 15, 1992, among Immunex Corporation, Lederle Oncology Corporation and American Cyanamid Company ("Cyanamid"), as it may be amended or restated from time to time (the "Governance Agreement"), one or more members of the Board of Directors (including the entire Board) may be removed, with or without cause, by the written consent of the holders of record of a majority of the outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class (the "Voting Stock"). 6.3 VACANCIES Any vacancy occurring on the Board of Directors may be filled, subject to the terms of the Governance Agreement, by the affirmative vote of a majority of the remaining directors, though less than a quorum. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board, subject to the Governance Agreement, for a term of office continuing only until the next election of directors by the shareholders. ARTICLE 7. BYLAWS All of the powers of this corporation, insofar as the same may be lawfully vested by these Articles of Incorporation in the Board of Directors, are hereby conferred upon the Board of Directors of this corporation. In furtherance and not in limitation of that power, the Board of Directors, subject to the Governance Agreement, shall have the power to adopt, amend or repeal the Bylaws of this corporation, subject to the power of the shareholders to amend or repeal such Bylaws. The shareholders shall also have the power to amend or repeal the Bylaws of this corporation and to adopt new Bylaws. No action may be taken or effected by written consent of shareholders in lieu of a meeting. ARTICLE 8. SPECIAL SHAREHOLDER MEETINGS Special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board of Directors, or the President of the Corporation. Further, a special meeting of the shareholders shall be held if the holders of not less than 40% of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary one or more written demands for such meeting, describing the purpose or purposes for which it is to be held. 3 ARTICLE 9. MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS Subject to the Governance Agreement, a merger, share exchange, sale of substantially all of the Corporation's assets, or dissolution must be approved by the affirmative vote of a majority of the Corporation's outstanding shares entitled to vote, or if separate voting by voting groups is required then by not less than a majority of all the votes entitled to be cast by that voting group. ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION Subject to the Governance Agreement and except as otherwise provided herein, this corporation reserves the right to amend or repeal by the affirmative vote of the holders of a majority of the outstanding Voting Stock, any of the provisions contained in these Articles of Incorporation in any manner now or hereafter permitted by law, and the rights of the shareholders of this corporation are granted subject to this reservation. ARTICLE 11. LIMITATION OF DIRECTOR LIABILITY To the full extent that the Washington Business Corporation Act (the "Act"), as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of Directors, a Director of this corporation shall not be liable to this corporation or its shareholders for monetary damages for conduct as a Director. Any amendments to or repeal of this Article 11 shall not adversely affect any right or protection of a Director of this corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment or repeal. Notwithstanding any other provisions of law, these Articles of Incorporation (except as hereinafter provided) or the Bylaws of this corporation, the affirmative vote of the holders of not less than 80% of the Voting Stock shall be required to alter, amend or repeal, or to adopt any provisions inconsistent with, this Article 11 or any provision hereof. ARTICLE 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS This corporation shall indemnify its Directors and Officers to the full extent not prohibited by applicable law now or hereafter in force against liability arising out of a proceeding to which such individual was made a party because the individual is or was a Director or an Officer. However, such indemnity shall not apply on account of: (a) acts or omissions of a Director or Officer finally adjudged to be intentional misconduct or a knowing violation of law; (b) conduct of a Director or Officer finally adjudged to be in violation of Section 23B.08.310 of the Act relating to distributions by this corporation; or (c) any transaction with respect to which it was finally adjudged that such Director or Officer personally received a benefit in money, property, or services to which the Director or Officer was not legally entitled. Subject to the foregoing, it is specifically intended that proceedings covered by indemnification shall include proceedings brought by this corporation (including derivative actions), proceedings by government entities and governmental officials or other third party actions. 4 ARTICLE 13. RESOLUTION OF CONFLICTING TERMS Notwithstanding any other provision of these Articles of Incorporation, any conflict between (a) any action taken by this corporation or the Board of Directors, or any provision of these Articles of Incorporation or the Bylaws of this corporation, as each may be amended and/or restated from time to time, on the one hand, and (b) the terms of the Governance Agreement on the other, shall be resolved in favor of the terms of the Governance Agreement unless otherwise agreed to in writing by Cyanamid. Any amendment or repeal of this Article 13 shall require the affirmative vote of the holders of more than 70% of the common stock on a fully diluted basis. ARTICLE 14. ELECTION TO NOT BE COVERED BY STATUTE This corporation elects not to be covered by the provisions of Section 23B.17.020 of the Act. ARTICLE 15. INCORPORATOR The name and address of the incorporator are as follows: Stephen M. Graham 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Dated: May 18, 1999. IMMUNEX CORPORATION /s/ Scott G. Hallquist -------------------------------- Name: Scott G Hallquist --------------------------- Its: Senior Vice President ---------------------------- 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1999 JUN-30-1999 249,757 391,054 43,325 1,067 17,969 717,853 169,328 72,568 860,716 102,995 450,000 0 0 778,605 473,326 860,716 221,091 226,651 66,887 222,570 0 318 1,697 9,482 2,370 7,112 0 0 0 7,112 .09 .08
-----END PRIVACY-ENHANCED MESSAGE-----