-----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, Fm0TrPH17xqp+SDixjoT+ZE15/P8vaSG0WU6n5IfyIR38h0CBuNGDb6pvfthLoby sM6tw5quJcHq4zNkgtV+cQ== 0000891092-98-000109.txt : 19980401 0000891092-98-000109.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891092-98-000109 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMCLONE SYSTEMS INC/DE CENTRAL INDEX KEY: 0000765258 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 042834797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19612 FILM NUMBER: 98580117 BUSINESS ADDRESS: STREET 1: 180 VARICK ST CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2126451405 MAIL ADDRESS: STREET 1: 180 VARICK ST CITY: NEW YORK STATE: NY ZIP: 10014 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-19612 IMCLONE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 04-2834797 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 180 Varick Street, New York, NY 10014 (Address of principal executive offices) (Zip Code) (212) 645-1405 (Regristrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of March 27, 1998 was $178,172,328. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of March 27, 1998 ----------------------------- --------------------------------- Common Stock, par value $.001 24,327,685 Documents Incorporated by Reference: The registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 1998 to be filed with the Commission not later than 120 days after the close of the registrant's fiscal year, has been incorporated by reference, in whole or in part, into Part III, Items 10, 11, 12 and 13 of this Annual Report on Form 10-K. IMCLONE SYSTEMS INCORPORATED 1997 Form 10-K Annual Report TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 20 PART III Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21 ------------------------ Cautionary Factors With Respect to Forward-Looking Statements Those statements contained herein that do not relate to historical information are forward-looking statements. There can be no assurance that the future results covered by such forward-looking statements will be achieved. Actual results may differ materially due to the risks and uncertainties inherent in the Company's business, including without limitation, the risks and uncertainties associated with completing pre-clinical and clinical trials of the Company's compounds that demonstrate such compounds' safety and effectiveness; obtaining additional financing to support the Company's operations; obtaining and maintaining regulatory approval for such compounds and complying with other governmental regulations applicable to the Company's business; obtaining the raw materials necessary in the development of such compounds; consummating collaborative arrangements with corporate partners for product development; achieving milestones under collaborative arrangements with corporate partners; developing the capacity to manufacture, market and sell the Company's products, either directly or with collaborative partners; developing market demand for and acceptance of such products; competing effectively with other pharmaceutical and biotechnological products; obtaining adequate reimbursement from third party payors; attracting and retaining key personnel; protecting proprietary rights; and those other factors set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview and Risk Factors," all as are further discussed herein. (i) PART I Item 1. Business. GENERAL ImClone Systems Incorporated (the "Company" or "ImClone") is a biopharmaceutical company engaged primarily in the research and development of therapeutic products for the treatment of cancer and cancer-related disorders. The Company's product candidates include interventional therapeutics for cancer and cancer vaccines. The Company was incorporated in Delaware in 1984. The Company's principal executive offices and laboratories are located at 180 Varick Street, New York, New York 10014 and the telephone number is (212) 645-1405. DEVELOPMENT PROGRAMS C225 Cancer Therapeutic. The Company's lead interventional therapeutic for cancer is a chimerized (part mouse, part human) antibody that acts to block the Epidermal Growth Factor receptor ("EGFr"). EGFr has been shown to be over-expressed in the cells of approximately one-third of all solid cancers. It is also expressed in select normal tissue. In vivo animal studies with human tumors have shown that C225 in combination with various chemotherapeutic agents (doxorubicin, cisplatin or paclitaxel) demonstrates a pronounced enhancement of the anti-tumor effect of the chemotherapeutic agents, resulting in the elimination of human tumors established in these animals. The studies have demonstrated long-term tumor-free survival of animals. The Company's research has also shown that C225 used alone has efficacy in renal cell carcinoma animal models. Since December 1994, the Company has initiated several Phase Ib/IIa clinical trials of C225 at Memorial Hospital (the patient care arm of Memorial Sloan-Kettering Cancer Center) ("Sloan-Kettering"), Yale Cancer Center, University of Virginia, MD Anderson Cancer Center and the University of Alabama, among others. These studies have involved intravenous administration of escalating doses of C225, both with and without chemotherapeutic agents, in patients with various solid cancers. Several of these studies are ongoing. These studies have shown that the drug is generally well-tolerated. In 1997, the Company initiated Phase Ib/IIa studies in head and neck cancer patients using C225 alone (begun in July 1997), in conjunction with cisplatin (begun in April 1997) and in conjunction with radiation (begun in April 1997). Additionally, in December 1997, the Company initiated a multi-center, open label Phase II clinical trial to evaluate the effect of C225 on time to progression of disease in 53 patients with metastatic renal cell carcinoma. ImClone expects to initiate Phase II/III studies to evaluate the potential of C225 in various additional tumor types, such as head and neck and pancreatic cancers. BEC2 Cancer Vaccine. BEC2 is a monoclonal anti-idiotypic antibody which the Company believes may be useful to prevent or delay the onset of recurrent primary tumors or metastatic disease. The antibody, which mimics the ganglioside GD3, has been tested since 1991 in Phase I clinical trials at Sloan-Kettering against certain forms of cancer, including small cell lung carcinoma and melanoma. BEC2 has shown prolonged survival of patients with small cell lung carcinoma in a pilot study at Sloan-Kettering. The Company has granted Merck KGaA, formerly E. Merck ("Merck"), a German-based pharmaceutical company, rights to manufacture and market BEC2 worldwide, except that in North America, Merck does not have the right to manufacture BEC2 and the Company has retained the right to co-promote BEC2. It is the intent of the parties that ImClone will be the bulk product manufacturer to support worldwide sales. In return, Merck is paying ImClone research support, and is required to pay milestone fees and royalties on future sales, if any, and will share revenues in North America. A Phase III multinational clinical trial for BEC2 in treatment of limited disease small cell lung carcinoma has been opened and patients are being screened for treatment. Chimerized Monoclonal Antibody Inhibitor of Angiogenesis. The Company has developed a monoclonal antibody, c-p1C11, which is specific for the KDR receptor for Vascular Endothelial Growth Factor ("VEGF"). The antibody is currently in pre-clinical studies in preparation for the filing of an Investigational New Drug ("IND") Application and the further testing of the product as a cancer therapeutic. The Company is also preparing a humanized form of the antibody, in conjunction with MRC Collaborative Centre. KDR and VEGF are known to be involved in angiogenesis, which is the natural process of growth of new blood vessels. A therapeutic product that would inhibit angiogenesis could be of value in treatment of cancer as well as other diseases that depend on growth of blood vessels, such as diabetic retinopathy, macular degeneration and rheumatoid arthritis. 1 RESEARCH PROGRAMS In addition to concentrating on its products in clinical development, the Company performs ongoing research in a number of related areas. Interventional Therapeutics ImClone conducts an interventional cancer therapeutic research program in the development of inhibitors of tyrosine kinase receptors (growth factor receptors) associated with tumor cell regeneration and support. In addition to its chimerized monoclonal antibody in development, the Company is seeking to develop other antibodies that inhibit angiogenesis. In connection with this research and development of the chimerized angiogenesis inhibitor, the Company is sponsoring research programs at various academic institutions to test KDR specific therapeutics in animal models. The Company has also initiated a program to develop small molecule antagonists of growth factor receptors, including both angiogenic growth factor receptors and EGF receptors. In October 1997, the Company entered into an agreement with CombiChem, Inc. ("CombiChem"), a combinatorial chemistry company, pursuant to which the Company has access to CombiChem's library of small molecules for screening in ImClone's assays for identification of lead candidates. See "Corporate Collaborations and Out-licensing Arrangements - CombiChem, Inc." The Company has also entered into an agreement with the Institute for Molecular Medicine in Freiburg, Germany to screen small molecule therapeutic candidates, including those provided by the compound libraries of CombiChem, against various tyrosine receptors. The Company is conducting research on the validation of vascular-specific cadherin ("VE-cadherin") as a novel potential drug target to inhibit cancer-associated angiogenesis. VE-cadherin is believed to play an important role in angiogenesis by enabling the assembly of endothelial cells into vascular tubes. Cancer growth is dependent on the formation of a capillary blood vessel network in the tumor, and VE-cadherin antagonists may thus have utility as anti-cancer agents. ImClone will test monoclonal antibodies against VE-cadherin as potential angiogenesis inhibitors and use its high-throughput assays for the identification of small molecule VE-cadherin inhibitors. In connection with this program, the Company has also acquired exclusive rights to VE-cadherin-2 and to antibodies to VE-cadherin and initiated a collaboration with Mario Negri Institute for Pharmacological Research (Milan, Italy) to conduct pharmacological research in the role of VE-cadherins in angiogenesis. See "Research Collaborations and In-Licensing Arrangements - Mario Negri Institute for Pharmacological Research." The National Cancer Institute (the "NCI") has awarded to the Company a Phase I Small Business Innovation Research ("SBIR") grant of approximately $100,000 to support its VE-cadherin program. Cancer Vaccines ImClone seeks to discover potential cancer vaccines as another route to cancer treatment. Cancer vaccines would activate immune responses to tumors to protect against local spread, distant metastases or recurrence of cancer. Choosing appropriate cancer cell targets and generating effective immune responses are the focus of ImClone's cancer vaccine program. For example, research is being conducted on a possible malignant melanoma vaccine based on the tumor associated antigen known as gp75. Patients with malignant melanoma are known to produce antibodies and T cells that recognize gp75. Animal studies have shown that a gp75 cancer vaccine is highly effective in eliciting an immune response against melanoma cells and preventing growth of experimental melanoma tumors in mice. Endothelial Stem Cell Technology The Company has proprietary technology capable of isolating endothelial stem cells and is exploring uses of endothelial stem cells for stimulation of collateral blood circulation in ischemias (e.g., myocardial ischemia and peripheral vascular disease) as well as for gene therapy delivery. The Company is considering whether to pursue this research directly or through its recently established wholly-owned subsidiary, EndoClone Incorporated. 2 Hematopoiesis The Company is conducting research in hematopoiesis (growth and development of blood cell elements) aimed at discovering factors to support hematopoietic stem cells and to control the proliferation, differentiation and functional deterioration of hematopoietic elements. The Company has an exclusive license from The National Institutes of Health ("NIH") to the delta-like ("DLK") protein and gene for use in stem cell and gene therapy. DLK is a member of a family of proteins which appear to have the ability to maintain cells in an undifferentiated state. The Company also has entered into a non-exclusive license and supply agreement with Immunex Corporation ("Immunex") for use of the FLK-2/FLT-3 ligand for ex vivo cell therapies. Immunex has taken a license from the Company to the FLK-2 receptor, limited to the use by Immunex in the manufacture of the FLK-2/FLT-3 ligand. Immunex is currently testing the ligand in human trials, for stem cell mobilization, and for tumor inhibition. The Company also has rights to a recombinant mutein form of Interleukin-6 ("Interleukin-6m" or "IL-6m") which it has tested in human trials in cancer patients to seek to stimulate platelet production. The Company is currently monitoring third party research with IL-6m to explore the possibility that IL-6m may be a critical factor in liver cell regeneration. LICENSED DIAGNOSTICS AND INFECTIOUS DISEASE VACCINES The Company has licensed its diagnostic and infectious disease vaccine product areas, based on its earlier research, to corporate partners for further development and commercialization. The Company has granted the Wyeth/Lederle vaccine and pediatrics division of American Home Products Corporation ("American Home") a worldwide license to manufacture and market its infectious disease vaccines, which are in development. In January 1998, this agreement was extended to allow the continuation through September 1999 of pre-clinical research in preparation for clinical trials of infectious disease candidate vaccines for the treatment of gonorrhea. ImClone receives annual funding under this agreement in the amount of $300,000. The Company has also entered into a strategic alliance with Abbott Laboratories ("Abbott") pursuant to which the Company has licensed certain of its diagnostic products to Abbott on a worldwide basis. In mid-1995, Abbott launched in Europe its first DNA-based test, using the Company's proprietary Repair Chain Reaction ("RCR") DNA probe technology, for the diagnosis of the sexually transmitted disease chlamydia. Abbott has added tests for gonorrhea and mycobacteria, and has launched sales in the U.S. as well. In June 1997, the Company received two milestone payments from Abbott totaling $1,000,000 as a result of a patent issuance in Europe for the Company's RCR technology. The issuance of the patent also entitles the Company to receive royalty payments on sales in covered European countries for products using the Company's RCR technology. Abbott will be entitled to deduct from royalties otherwise due, 25% of such royalties due for a two-year period and 50% thereafter until a total of $500,000 has been deducted. In December 1996, the Company and Abbott modified this agreement to provide for an exclusive sublicensing agreement with Chiron Diagnostics ("Chiron") for the Company's patented DNA signal amplification technology, AMPLIPROBE. Under the terms of the agreement all sales of Chiron branched DNA diagnostic probe technology in countries covered by Company patents will be subject to a royalty to Abbott to be passed through to the Company. For the year ended December 31, 1997, the Company earned a total of $381,000 in royalty fees pursuant to its strategic alliance with Abbott. RESEARCH AND DEVELOPMENT ImClone initiated its in-house research and development in 1986. The Company has assembled a scientific staff with a variety of complementary skills in a broad base of advanced research technologies, including oncology, immunology, molecular and cell biology, antibody engineering, protein and synthetic chemistry and high-throughput screening. The Company has also recruited a staff of technical and professional employees to carry out manufacturing of clinical trial materials at its Somerville, New Jersey manufacturing facility. In addition to its research programs pursued in-house, ImClone collaborates with certain academic institutions and corporations to support research in areas of ImClone's product development efforts. The Company has also entered into collaborations with major pharmaceutical companies in order to obtain funding and product development and commercialization assistance for certain of its therapeutic product candidates in exchange for specific product licensing rights. The Company intends to enter into additional agreements of this nature with appropriate pharmaceutical company partners with the resources and experience to 3 assist the Company financially to successfully bring its products to market, both in the U.S. and abroad. There can be no assurance, however, that the Company will be successful in consummating any such arrangements. The Company has recorded expenses of approximately $16,455,000, $11,482,000, and $8,768,000 for research and development in the years ended December 31, 1997, 1996 and 1995, respectively. RESEARCH COLLABORATIONS AND IN-LICENSING ARRANGEMENTS The Company's primary research collaborations which are non-clinical in nature are the following. CombiChem, Inc, San Diego, California. In October 1997, the Company entered into a Collaborative Research and License Agreement with CombiChem, a private company, to discover and develop novel small cell molecules for use against selected targets for the treatment of cancer. The companies are utilizing CombiChem's Discovery Engine and Universal Informer Library to generate small molecules for screening in ImClone's assays for identification of lead candidates. ImClone is providing CombiChem with research funding through October 1999 in the amount of $500,000 annually (of which the first $500,000 was paid in October 1997), milestone payments and royalties on marketed products resulting from the collaboration, if any. Concurrently with the execution of the Collaborative Research and License Agreement, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 250,000 shares of the common stock of CombiChem, as adjusted, for aggregate consideration of $2,000,000. CombiChem has agreed to use the proceeds from the sale of its stock to ImClone for general corporate purposes. Mario Negri Institute for Pharmacological Research, Milan, Italy. The Company has a supported research agreement with Mario Negri Institute for Pharmacological Research pursuant to which it supports the work of Dr. Elisabetta Dejana who is investigating the role of a recently discovered protein family, VE-cadherins, in angiogenesis. VE-cadherins are believed to enable the formation of capillary blood vessels in solid tumors. In connection with the commencement of this supported research program, the Company also acquired proprietary rights to VE-cadherin-2 and to antibodies to VE-cadherin. The NCI has awarded to the Company a Phase I SBIR grant in the amount of $100,000 to support its VE-cadherin program. Memorial Sloan-Kettering Cancer Center, New York, New York. The Company has a supported research agreement with Sloan-Kettering to support research in several areas, including potential cancer vaccine product, gp75. The Company has an exclusive license from Sloan-Kettering to the gp75 tumor antigen and to the BEC2 cancer vaccine and is required under the license to make good faith efforts to proceed diligently with the manufacture and sale of these products. Princeton University, Princeton, New Jersey. The Company has supported research under the direction of certain faculty members at Princeton University. The Company supported the research of Dr. Arnold Levine, Chairman of Princeton's Department of Molecular Biology, in the area of the p53 tumor suppressor gene. The Company has an exclusive license to the results of this research, which license is terminable by the university if the Company does not meet certain milestones in connection with the development of the licensed technology. The Company has also funded research of Dr. Ihor Lemischka of Princeton University on tyrosine kinase receptors, including FLK-2, antibodies and ligands to such receptors, and hematopoietic stem cells. The Company has an exclusive license from Princeton to the results of this research, which license is terminable by the university if the Company does not meet certain developmental milestones. MRC Collaborative Centre, Mill Hill, United Kingdom. The Company is funding research at the MRC Collaborative Centre on the humanization of its C225 and anti-KDR antibodies and in the expression of its C225 antibody in a non-mouse cell line. The University of North Carolina at Chapel Hill. The Company supports research at The University of North Carolina at Chapel Hill in a number of areas, including work of Dr. P. Frederick Sparling in connection with vaccine candidates for N. gonorrhea and N. meningitidis, the results of which are exclusively licensed to the Company. The Company also has exclusively licensed from the university rights in connection with IL-6m. The Company's primary in-licensing arrangements which have resulted in the transfer of intellectual property rights to the Company are the following: 4 National Institutes of Health. In October 1996, the Company obtained an exclusive, worldwide patent license from the NIH for the DLK protein and gene. The agreement provides the Company with an exclusive license to stem cell and gene therapy applications of the DLK protein and gene, as well as related diagnostic uses. Rhone-Poulenc Rorer. In June 1994, the Company obtained an exclusive worldwide license from the pharmaceutical company, Rhone-Poulenc Rorer, Inc. ("Rhone-Poulenc Rorer") to pending patent applications covering the use of EGFr monoclonal antibodies in combination with specific chemotherapeutic regimens. The University of California at San Diego. In April 1993, the Company obtained an exclusive worldwide license from the University of California to a United States patent covering monoclonal antibodies that bind to EGFr. The Company's C225 product is the chimerized form of one such antibody. Generally, subject to earlier termination provisions contained in the agreements, the licenses described above terminate upon the expiration of the life of any patent or a related period on unpatented technology. CLINICAL COLLABORATIONS The Company's principal collaborations that are related to its clinical trials are the following: Memorial Sloan-Kettering Cancer Center. The Company has agreements with Sloan-Kettering to support research in several areas, including the study of potential cancer vaccine products BEC2 and gp75. The Company has an exclusive license to the results of the research in the areas covered by the agreements. The BEC2 antibody has been tested since 1991 in Phase I clinical trials at Sloan-Kettering against certain forms of cancer, including small cell lung carcinoma and melanoma. The Company also has agreements with certain institutions by which such institutions serve as sites for certain of the Company's clinical trials. For example, for its C225 trials, the Company has entered into such agreements with Yale Cancer Center, Sloan-Kettering, the University of Virginia, MD Anderson Cancer Center and the University of Alabama, among others. For its BEC2 trials, it is anticipated that numerous institutions in both the United States and Europe will serve as clinical trial sites. The European Organization for Research and Treatment of Cancer ("EORTC"), an oncology research clinical group, is involved in the Phase III multi-national clinical trial for BEC2 in the treatment of limited disease small cell lung carcinoma, having responsibility for monitoring the trial in Europe at various centers, as well as randomizing patients and managing data for the worldwide study. It is anticipated that Quintiles, Inc., a contract research organization, will serve as the Company's representative in coordinating and monitoring the study in the United States. The Company anticipates that arrangements similar to the above may be employed for certain future Phase II/III studies for C225. CORPORATE COLLABORATIONS AND OUT-LICENSING ARRANGEMENTS To facilitate commercialization of certain of its products, ImClone has entered into agreements with major pharmaceutical companies. Although the terms of each agreement differ, these agreements generally provide for ImClone to receive license fees, research funding and royalties on net sales of any future products during the life of any relevant patent. In some cases, license fees include payments related to the achievement of regulatory or product development milestones. Merck KGaA (Darmstadt, Germany) The Company entered into a research and license agreement with Merck in December 1990, which was subsequently amended, most recently in December 1997 (the "Amended License Agreement"). Under the Amended License Agreement, the Company has granted Merck a license, with the right to sublicense, to manufacture and market the Company's BEC2 product and its recombinant gp75 antigen, for all indications throughout the world; except that in North America the Company has granted Merck a sole license, without the right to sublicense, to market but not to manufacture BEC2. The Company retains the right to co-promote BEC2 within North America. It is the intent of the parties that ImClone will be the bulk product manufacturer to support worldwide sales. The Company is required to give Merck the opportunity to negotiate a license in North America to gp75 before granting such a license to any third party. The Amended License Agreement requires Merck to make research support and 5 milestone payments to ImClone based on milestones achieved in the licensed products' development, and to make royalty payments to ImClone on all sales of the licensed products outside North America, if any, with a portion of the earlier funding received by the Company under the agreement being creditable against the amount of royalties due to the Company. The Amended License Agreement provides for milestone payments of a total of $22,500,000 of which $3,000,000 have been earned to date. Gross sales of BEC2 in North America will be distributed in accordance with the terms of a co-promotion agreement for BEC2 to be negotiated by the parties. Pursuant to the Amended License Agreement, conduct of the clinical trials and regulatory submissions outside North America are the responsibility of Merck and within North America are the responsibility of ImClone. Costs worldwide to conduct a multi-site, multi-national Phase III clinical trial to obtain approval for the indication of the treatment of limited disease small cell lung carcinoma for BEC2, including out-of-pocket costs of ImClone (but not including costs of establishing a manufacturing facility) for manufacturing materials for clinical trials, conduct of clinical trials and regulatory submissions (other than drug approval fees which are the responsibility of Merck or ImClone in their respective territories) are the responsibility of Merck; provided, however, that should the expenses of such clinical trial exceed 17 million Deutsche Marks, such excess expenses will be shared 60% by Merck and 40% by ImClone. Costs for the conduct of additional clinical trials for other indications shall be subject to separate budgets to be negotiated by the parties. ImClone is responsible for providing the supply of the active agent outside of North America at the expense of Merck, and it is the intention of the parties that the cost of goods sold in North America be paid out of gross sales of any licensed product in North America in accordance with a co-promotion agreement to be negotiated. The Amended License Agreement terminates upon the later of the last to expire of any patents issued and covered by the technology or fifteen years from the date of the first commercial sale, after which such license shall survive without further royalty payment and is irrevocable. The Amended License Agreement may be terminated earlier by ImClone in the event Merck fails to pursue in a timely fashion regulatory approval or sale of a licensed product in a country in which it has the right to do so. It also may be terminated earlier by Merck if milestones are not achieved. In the year ended December 31, 1997, the Company recorded $3,667,000 in revenue from Merck under the Amended License Agreement, which is composed of milestone and research and support payments. In connection with the December 1997 amendment to the Amended License Agreement, Merck purchased from the Company 400,000 shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Shares" or "Series A Preferred Stock") for total consideration of $40,000,000, before issuance costs of $3,000. The holders of the Series A Preferred Shares are entitled to receive annual cumulative dividends of $6.00 per share. Dividends accrue as of the issuance date of the Series A Preferred Shares and are payable on the outstanding Series A Preferred Shares in cash on December 31 of each year beginning December 31, 1999 or at the time of conversion or redemption of the Series A Preferred Shares on which the dividend is to be paid, whichever is sooner. Up to 100,000 Series A Preferred Shares are currently convertible into the Company's common stock, $.001 par value (the "Common Stock") and an additional 100,000 Series A Preferred Shares will become convertible on each of January 1, 2000, January 1, 2001 and January 1, 2002. During the period from issuance through December 31, 1999, the Series A Preferred Shares are convertible at a price equal to $12.50 per share; during the period from January 1, 2000 through December 31, 2000 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 1999; during the period from January 1, 2001 through December 31, 2001 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2000; during the period from January 1, 2002 through December 31, 2002 the Series A Preferred Shares are convertible at a price equal to 88% of the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2001; and anytime after January 1, 2003 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2002. The conversion price is subject to adjustment in the case of certain dilutive events. Further, in the event the average market price of the Common Stock for the five consecutive trading days ending one trading day prior to any trading day during which any Series A Preferred Shares are outstanding exceeds 150% of the conversion price then in effect, the Company has the right to require the holder of the Series A Preferred Shares to convert all such shares that may be convertible. The Company may also redeem in whole or any part of the Series A Preferred Shares then outstanding at a redemption price of $120 per Preferred Share, plus accrued and unpaid dividends thereon. In connection with the purchase of the Series A Preferred Shares, Merck was granted certain registration rights with respect to the shares of Common Stock underlying the Preferred Shares, and Merck agreed to refrain from selling such shares of Common Stock for certain specified periods of time. In accordance with the terms of the Series A Preferred Stock, the holder is able to realize an assured incremental yield of $5,455,000 on the conversion of the Series A Preferred Stock if 6 converted from January 1, 2002 through December 31, 2002. Such amount is being amortized as a preferred stock dividend over a five-year period beginning with the day of issuance. Accrued dividends on the Series A Preferred Stock were $112,000 plus the incremental yield on the conversion discount of $51,000 at December 31, 1997. Abbott Laboratories The Company entered into a research and license agreement with Abbott in December 1992, which provides Abbott an exclusive worldwide license to manufacture and distribute diagnostic products arising out of certain of ImClone's research in diagnostics, including but not limited to ImClone's RCR and Ampliprobe technologies for cancer detection and prognosis. This agreement requires Abbott to exercise its best reasonable efforts to develop and commercialize products incorporating RCR technology, failing which it can lose its exclusive license to this technology. Abbott has the right on 30 days notice to ImClone to terminate a product license in a particular country. In mid-1995, Abbott launched in Europe its first DNA-based test, using the Company's RCR technology, for the diagnosis of the sexually transmitted disease chlamydia. Abbott has added tests for gonorrhea and mycobacteria, and has launched sales in the U.S. as well. In December 1996, the Company and Abbott modified this agreement to provide for an exclusive sublicensing agreement with Chiron for the Company's patented DNA signal amplification technology, AMPLIPROBE. Under the terms of the agreement all sales of Chiron branched DNA diagnostic probe technology in countries covered by Company patents will be subject to a royalty to Abbott to be passed through to the Company. Under the agreement Abbott has paid ImClone up-front fees and research support, and is obligated to pay milestone fees and royalties on sales. In June 1997, the Company received two milestone payments from Abbott totaling $1,000,000 as a result of a patent issuance in Europe for the Company's RCR technology, which is partially creditable against royalties as set forth below. The issuance of the patent also entitles the Company to receive royalty payments on sales in covered European countries for products using the Company's RCR technology. Abbott will be entitled to deduct from royalties otherwise due, 25% of such royalties due for a two-year period and 50% thereafter until a total of $500,000 has been deducted. For the year ended December 31, 1997, the Company earned a total of $381,000 in royalty fees pursuant to its strategic alliance with Abbott. The agreement terminates upon the later of the last to expire of any patents issued covered by the technology or, if no patents are granted, twenty years, subject to certain earlier termination provisions contained in the agreement. American Home Products In December 1987, the Company entered into a vaccine development and licensing agreement with American Cyanamid Company ("Cyanamid") that provided Cyanamid an exclusive worldwide license to manufacture and sell vaccines developed during the research period of the agreement. In connection with the agreement, Cyanamid purchased 410,001 shares of Common Stock of the Company. During the three-year research period of the agreement, which period expired in December 1990, the Company was engaged in the development of two vaccine candidates, the first of which was for N. gonorrhea based on recombinant proteins, and the second of which was for Herpes Simplex Virus based on recombinant glycoproteins B and D. In September 1993, the Company and Cyanamid, through its Lederle-Praxis Biologicals division, entered into a research collaboration agreement which by its terms supersedes the earlier agreement as to N. gonorrhea vaccine candidates, but not as to Herpes Simplex Virus vaccine candidates. The successor to Cyanamid, American Home, has the responsibility under this agreement to pay research support to the Company, as well as milestone fees and royalties on sales of any N. gonorrhea vaccine that might arise from the collaboration. In January 1998, this agreement was extended to continue annual research funding payable to ImClone in the amount of $300,000 through September 1999 and to extend through such date the period by which American Home is required to have initiated clinical trials with a vaccine candidate. American Home has the responsibility under both agreements for conducting pre-clinical and clinical trials of the vaccine candidates, obtaining regulatory approval, and manufacturing and marketing the vaccines. There are penalties payable by American Home in the event it fails to have filed for the commencement of clinical trials by certain dates yet intends to continue to develop the product, otherwise the product will revert to ImClone. American Home is required to pay royalties to ImClone in connection with sales of the vaccines. In the year ended December 31, 1997, the Company recorded revenues of $300,000 under the American Home agreements. 7 Immunex Corporation In December 1996, the Company entered into technology cross-licensing agreements with Immunex relating to FLK-2/FLT-3 ligand and its receptor. FLT-3 ligand is a hematopoietic growth factor. Under the terms of the agreements, the Company has granted to Immunex an exclusive worldwide license to the receptor for use in the manufacture of the ligand. In return, the Company will receive an initial payment and a royalty based on the sales of the ligand by Immunex and its sub-licensees, if any. In addition, Immunex has granted the Company a non-exclusive license in the United States and Canada to use its patented FLK-2/FLT-3 ligand, manufactured by Immunex, for ex-vivo stem cell expansion together with an exclusive license to distribute the ligand with its own proprietary products for ex-vivo expansion. Immunex has agreed to seek to obtain the consent of its parent company, American Home, to expand the territory of this license to include the world outside North America. Immunex will also supply FLK-2/FLT-3 ligand to ImClone. The Company has been advised that Immunex is conducting human clinical studies with FLK-2/FLT-3 ligand for stem cell mobilization and for tumor inhibition. Subject to earlier termination provisions contained in the agreements, ImClone's license terminates in December 2001, subject to a five- year renewal period, and Immunex's license terminates thirteen years after the first commercial sale of the product. In the year ended December 31, 1997, the Company recorded no revenue from Immunex under this agreement. MANUFACTURING For the Company to support its ongoing research and development it maintains, supplies and staffs a facility for the preparation, analysis and distribution of clinical supplies to various study centers. The Company operates a clinical grade manufacturing facility for biologics in Somerville, New Jersey that includes laboratories, storage areas, mechanical systems and qualified staff for the production of and analysis of biological materials according to the appropriate Federal, state and local regulations. At this facility, the Company is currently producing C225, the EGFr antibody, to supply its clinical trials, and packaging and distributing to clinical sites both the BEC2 antibody and C225 antibody. This facility is operated according to current Good Manufacturing Practices ("cGMP") which is a requirement for product manufactured for use in clinical trials and for commercial sale. In January 1998, ImClone completed the construction and commissioning of a new 1,750 square foot process development center at this facility dedicated to manufacturing process optimization for existing products and the pre-clinical and Phase I development of new biological therapeutics. ImClone has also established relationships with qualified contract vendors to perform specialized testing and manufacturing operations not performed by ImClone. The Company has in the past and expects to continue to establish defined development and manufacturing arrangements with third party qualified contract vendors to perform bulk and final product development and production to support ImClone clinical program needs. The materials that are used to manufacture the Company's products include qualified cell lines developed by the Company and specially qualified raw materials and components which the Company can obtain from a number of sources. ImClone maintains necessary Quality Control and Quality Assurance oversights of all materials used in the manufacture of the Company's clinical supplies. Should any of the Company's products be approved for commercial sale, such products will need to be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. Although the Company has developed products in the laboratory and in some cases has produced sufficient quantities of materials for pre-clinical and clinical trials, production in later stage clinical trials or commercial quantities may create technical challenges for the Company. If the Company commercializes its products, the Company may adapt its Somerville, New Jersey facility for use as its commercial-scale manufacturing facility. To this end, the Company has taken steps to complete a formal design concept for large scale manufacturing at this facility. The Company is also evaluating the requirements of establishing a separate commercial manufacturing facility at the Company's New Jersey location or at some other location. The Company has limited experience in later stage clinical-scale manufacturing and no experience in commercial-scale manufacturing, and no assurance can be given that the Company will be able to make the transition to later stage clinical or commercial production. 8 MARKETING The Company does not have pharmaceutical marketing experience. If the Company were to market its products itself or with a partner, significant additional expenditures and management resources would be required to develop an internal sales force and there can be no assurance that the Company would be successful in penetrating the markets for any products developed or that internal marketing capabilities would successfully be developed at all. The Company has co-promotion rights for commercialization of its BEC2 cancer vaccine product in North America pursuant to its Amended License Agreement with Merck, and expects that, in other instances, it may enter into development agreements with third parties that may include co-marketing or co-promotion arrangements. In the alternative, the Company could grant exclusive marketing rights to its corporate partners in return for up-front fees, milestone payments and royalties on sales. Under these arrangements, the Company's partner may have the responsibility for a significant portion of development of the product and regulatory approval. In the event that the partner fails to develop a marketable product or fails to market a product successfully, the Company's business may be adversely affected. PATENTS AND TRADE SECRETS The Company seeks patent protection for its proprietary technology and products, both in the United States and abroad. Patent applications have been submitted and are pending in the United States, Canada, Europe and Japan as well as other countries. The patent position of biopharmaceutical firms generally is highly uncertain and involves complex legal and factual questions. The Company currently is exclusive licensee or assignee of 39 issued patents world-wide, 24 of which are issued United States patents. The Company has the exclusive right to develop certain anti-EGFr receptor antibodies with potential anti-tumor activity under a United States patent owned by the University of California. Ten of the Company's U.S. patents are licensed from Princeton University. Six of the Princeton patents relate to hematopoietic receptor genes and the proteins they encode, such as the tyrosine kinase receptors FLK-1 and FLK-2. The other four Princeton patents relate to a DNA signal amplification system and p53 detection systems. To date, the Company is the assignee or exclusive licensee of approximately 35 families of United States and foreign patent applications. The patent applications relate to a number of technologies including the use of EGFr antibodies with chemotherapeutic agents; anti-idiotypic antibodies for treating cancer, such as BEC2, antibodies to receptor tyrosine kinases, such as FLK-1 and FLK-2; methods for amplifying and detecting DNA, such as the RCR technology; and hematopoietic factors. With respect to C225, the Company's EGFr cancer inhibiting antibody, the Company is the exclusive licensee of an issued U.S. patent from the University of California covering certain monoclonal antibodies that inhibit epidermal cell growth. The Company is also the exclusive licensee from Rhone-Poulenc Rorer of a family of patent applications seeking to cover antibodies to EGFr used in conjunction with chemotherapeutic agents. The EGFr antibodies being developed by the Company include chimerized monoclonal antibodies. Chimerized monoclonal antibodies are the subject of patent applications and patents held by third parties. ImClone also has pending patent applications covering the chimeric and humanized forms of the antibody and fragments thereof, in synergy with anti-neoplastic agents, such as doxorubicin and cisplatin. Additionally, humanized forms of the antibody and antibody fragments, are claimed, as well as methods of inhibiting human tumors with C225 alone. The Company's proprietary position with respect to its anti-tumor BEC2 monoclonal anti-idiotypic antibody is based on a patent application filed by Sloan-Kettering and exclusively licensed to the Company. The Company is aware that patents have been issued in the United States and Europe to a third party covering anti-idiotypic antibodies and/or their use in the treatment of tumors. With respect to the Company's research on inhibitors to angiogenesis based on the FLK-1 receptor, the Company is the exclusive licensee of a family of patents and patent applications covering the FLK-1 receptor and antibodies thereto. The Company is also the assignee of a family of patent applications filed by Company scientists covering angiogenesis-inhibiting antibodies to receptors that bind VEGF. A specific patent application of such family claims specifically the use of FLK-1 receptor antibodies to isolate cells expressing the FLK-1 receptor on their cell surface. Additionally, the Company is a co-owner of a recently filed patent application claiming the use of FLK-1 9 receptor antibodies to isolate endothelial progenitor cells that express FLK-1 on their cell surface. At present, the Company is seeking exclusive rights to this invention from the co-owners. The Company is also the exclusive licensee of a family of patent applications covering novel cadherin molecules that are involved in endothelial cell interactions; such interactions are believed to be involved in angiogenic processes. The subject patent applications cover antibodies that bind to, and affect, the cadherin molecules. The United States Patent and Trademark Office has granted two patents for the Company's cysteine-depleted IL-6 molecular variant, IL-6m, and the DNA that encodes IL-6m. The patent and patent applications are co-owned by the Company and the University of North Carolina, whose rights have been exclusively licensed to the Company. The Company is aware of patents issued to a third party in the United States and Europe covering cysteine depleted proteins. In addition, the Company is aware of third-party patents for both recombinant and native IL-6 and methods for its production. The Company is aware of a European patent for the DNA encoding for human recombinant IL-6 and methods for its production which has been exclusively licensed on a worldwide basis to a pharmaceutical company. The Company has entered into a Settlement Agreement with the pharmaceutical company whereby the pharmaceutical company has agreed to not enforce its patent against the Company based on the Company's use of its IL-6m patent or patent applications. The Company's diagnostics program has been licensed for commercial development to Abbott. The program includes target amplification and detection methods, such as RCR technology, signal amplification methods, such as AMPLIPROBE, and p53 mutation detection for assisting in cancer diagnosis. The Company's proprietary position with respect to its diagnostics program is based on numerous families of patents and patent applications, of which ImClone is either the assignee or exclusive licensee. The Company currently is exclusive licensee of an issued patent assigned to Princeton University related to the underlying technology for its AMPLIPROBE DNA amplification and detection system. The Company is aware that patent applications have been filed by, and that patents have been issued to, third parties in the field of signal amplification technology for DNA assays. With respect to certain aspects of its technology, such as methods of isolating and purifying antibodies and other proteins, collections of plasmids in viable host systems, and antibodies that are specific for proteins that are of interest to ImClone, the Company currently relies on, and intends to continue to rely on, trade secrets, unpatented proprietary know-how and continuing technological innovation to protect its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or techniques. Relationships between ImClone and its employees, scientific consultants and collaborators provide these persons with access to ImClone's trade secrets, know-how and technological innovation under confidentiality agreements with the parties involved. Similarly, ImClone employees and consultants have entered into agreements with ImClone which require that they do not disclose confidential information of ImClone and that they assign to ImClone all rights to any inventions made while in ImClone's employ relating to ImClone's activities. GOVERNMENT REGULATION The research and development, manufacture and marketing of human pharmaceutical and diagnostic products are subject to regulation primarily by the Food and Drug Administration ("FDA") in the United States and by comparable authorities in other countries. These national agencies and other federal, state and local entities regulate, among other things, research and development activities and the testing, manufacturing, safety, handling, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the products that the Company is developing. Noncompliance with applicable requirements can result in refusal to approve product license or other applications, or revocation of approvals previously granted. Noncompliance also can result in fines, criminal prosecution, recall or seizure of products, total or partial suspension of production or refusal to allow the Company to enter into supply contracts. The process of obtaining requisite FDA approval has historically been costly and time consuming. Current FDA requirements before a new human drug, biological product or new diagnostic product (a medical device for which efficacy must be proven) may be marketed in the United States include (i) the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the product's safety, (ii) filing with the FDA of an IND application to conduct human clinical trials for drugs or biologics, (iii) the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use and (iv) filing by a company and approval by the FDA of a New Drug Application ("NDA") for a 10 drug product or a Biological License Application ("BLA") for a biological product to allow commercial manufacturing of the drug or biologic. Pre-clinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulation. The results of the pre-clinical tests are submitted to the FDA as part of an IND. Clinical trials involve the administration of the product to patients under the supervision of a qualified principal investigator. Such trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, the initial introduction of the drug into human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to (i) determine the biological or clinical activity of the product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. If Phase II evaluations indicate that a product is effective and has an acceptable safety profile, Phase III trials may be undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at multiple clinical study sites. The FDA reviews the results of the clinical trials and may order the temporary or permanent discontinuation of clinical trials at any time if it believes that clinical subjects are being exposed to an unacceptable health risk. Investigational products used in both pre-clinical and clinical tests must be produced in compliance with cGMP regulations pursuant to FDA regulations. In October 1988, the FDA issued new procedures designed to speed the availability of new therapies to patients suffering from life-threatening diseases such as AIDS and cancer. These procedures permit early consultation with and commitment from the FDA regarding pre-clinical and clinical studies necessary to gain market approval and to permit NDA's and BLA's to be approved on the basis of expanded Phase II clinical data results. Under current law, each domestic and foreign drug product manufacturing establishment must be registered with, and determined to be adequate by, the FDA before product approval. Domestic manufacturing establishments are subject to inspections by the FDA for compliance with cGMP regulations and licensing specifications after an NDA, BLA or PMA has been approved. Domestic and foreign manufacturing facilities are subject to periodic FDA inspections and inspections by the foreign regulatory authorities where applicable. Sales outside the United States of products the Company develops also will be subject to regulatory requirements governing human clinical trials and marketing for drugs and biological products. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources. Products that have not been approved by the FDA for sale in the United States may be exported for sale outside of the United States only if they have been approved in any one of the following countries: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. The Company's research and development programs involve the use of biohazardous materials. Accordingly, the Company's business is subject to regulations under federal, state and local laws regarding work force safety, environmental protection and hazardous substance control, and to other present and possible future federal, state and local regulations. The Company believes that its safety procedures for handling hazardous materials comply with the requirements of such laws and regulations. The Company's ability to earn sufficient returns on its products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available. COMPETITION Competition in the biopharmaceutical industry is intense and based significantly on scientific and technological factors, the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain governmental approval for testing, manufacturing and marketing. The Company competes with specialized biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including cancer, and many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical 11 companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with the Company in recruiting and retaining highly qualified scientific personnel and consultants. The Company's ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital to the Company. The Company is aware of certain products under development or manufactured by competitors that are used for the prevention, diagnosis or treatment of certain diseases the Company has targeted for product development. Various companies are developing biopharmaceutical products that potentially directly compete with the Company's product candidates, including in areas such as the use of small molecules to EGFr or antibodies to those receptors to treat cancer, the use of anti-idiotypic antibody or recombinant antigen approaches to cancer vaccine therapy, the development of inhibitors to angiogenesis, and the use of hematopoietic growth factors to treat blood system disorders to or for stem cell or gene therapy. Some of these product candidates are in advanced stages of clinical trials. The Company's products under development and in clinical trials are expected to address major markets within the cancer sector. The Company's competition will be determined in part by the potential indications for which the Company's compounds are developed and ultimately approved by regulatory authorities. Additionally, the timing of market introduction of some of the Company's potential products or of competitors' products may be an important competitive factor. Accordingly, the relative speed with which the Company can develop products, complete pre-clinical testing, clinical trials and approval processes and supply commercial quantities to market are expected to be important competitive factors. The Company expects that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent position. HUMAN RESOURCES ImClone initiated its in-house research and development in 1986. The Company has assembled a scientific staff with a variety of complementary skills in a broad base of advanced research technologies, including oncology, immunology, molecular and cell biology, antibody engineering, protein and synthetic chemistry and high-throughput screening. The Company has also recruited a staff of technical and professional employees to carry out manufacturing of clinical trial materials at its Somerville, New Jersey facility. Of the Company's 110 full-time personnel on March 27, 1998, 44 were employed in its product development, clinical and manufacturing programs, 39 in research and 27 in administration. The Company's staff includes 15 persons with Ph.D.s and 2 with M.D.s. Item 2. Properties. RESEARCH FACILITY--NEW YORK, NEW YORK The Company currently occupies two contiguous leased floors at 180 Varick Street in New York City, in which it is using approximately 30,000 of a total available 40,000 square feet on the two floors. A portion of the lease expired in 1993 and a portion expires in March 1999. The Company has extended the 1993 expired portion of the lease through March 1997 at 85% of each year's fair market rental value and from 1997 to March 1999 at 100% of each year's fair market rental value, for a portion of the premises. The rate for the remaining portion of the premises is $264,000 annually through March 31, 1997 and $285,000 annually through March 31, 1999. Rent expense for the New York facility was approximately $554,000, $508,000 and $493,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company is currently in discussions regarding the extension of the lease and considering other alternatives. The acquisition, construction and installation of the Company's New York research and development facilities were financed principally through the sale of Industrial Development Revenue Bonds (the "IDA Bonds") issued by the New York City Industrial Development Agency (the "NYIDA"). These facilities secure the payment of debt service on the outstanding IDA Bonds. MANUFACTURING FACILITY--SOMERVILLE, NEW JERSEY In June 1992, the Company acquired certain property and a building in Somerville, New Jersey at a cost to the Company of approximately $4,665,000, including expenses. The Company has retrofitted the building to serve as its clinical-grade manufacturing facility. When purchased, the facility had in place various features, including 12 clean rooms, air handling, electricity and water for injection systems and administrative offices. The cost for completion of facility modifications was approximately $5,400,000. Currently the facility is being operated to develop and manufacture materials for the Company's clinical trials. Under certain circumstances, the Company also may use the facility for the manufacturing of commercial products. The timing and any additional costs of adapting the facility for commercial manufacturing depend on several factors, including the progress of products through clinical trials. In January 1998, ImClone completed the construction and commissioning of a new 1,750 square foot process development center at this facility dedicated to manufacturing process optimization for existing products and the pre-clinical and Phase I development of new biological therapeutics. In addition, the Company has taken steps to complete a formal design concept for large scale manufacturing at this facility. Item 3. Legal Proceedings. There is no material legal proceeding pending against the Company or any of its property, nor was any such proceeding terminated during the fourth quarter of the year ended December 31, 1997. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. MARKET INFORMATION The Company's Common Stock is traded in the over-the-counter market and prices are reported on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "IMCL". The following table sets forth, for the periods indicated, the range of high and low sale prices for the Common Stock on the Nasdaq National Market, as reported by The Nasdaq Stock Market. The quotations shown represent inter-dealer prices without adjustment for retail mark-ups, mark downs or commissions and may not necessarily reflect actual transactions. High Low ---- --- Year ended December 31, 1997 First Quarter ............. $ 10 1/8 $ 5 3 /4 Second Quarter ............ $ 7 7/8 $ 4 5 /8 Third Quarter ............. $ 8 1/8 $ 4 5 /8 Fourth Quarter ............ $ 8 1/2 $ 5 21/32 High Low ---- --- Year ended December 31, 1996 First Quarter ............. $ 9 3/8 $ 6 Second Quarter ............ $ 17 3/8 $ 7 1/4 Third Quarter ............. $ 9 7/8 $ 5 3/4 Fourth Quarter ............ $ 11 $ 6 7/8 STOCKHOLDERS As of the close of business on March 27, 1998, there were approximately 195 holders of record of the Company's Common Stock. The Company estimates that there are approximately 4,900 beneficial owners of its Common Stock. 13 DIVIDENDS The Company has never declared cash dividends on its Common Stock and has no present intention of declaring such cash dividends in the foreseeable future. Pursuant to the terms of the Company's Series A Preferred Stock, the holders of Series A Preferred Shares are entitled to receive cumulative dividends at the annual rate of $6.00 per share, compounded annually, which dividends began to accrue when the Series A Preferred Shares were issued on December 15, 1997. Dividends on the outstanding Series A Preferred Shares are payable in cash on December 31st of each year beginning on December 31, 1999, or at the time of conversion, whichever is sooner. Series A Preferred Shares are of senior rank to all shares of Common Stock with respect to payment of dividends. RECENT SALES OF UNREGISTERED SECURITIES In December 1997, the Company sold to Merck 400,000 Series A Preferred Shares for total consideration of $40,000,000 pursuant to an exemption from registration under Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In March 1997, the Company issued 20,000 shares of unregistered Common Stock to a single individual upon exercise of outstanding warrants for aggregate consideration of $30,000. In March 1997, the Company issued an aggregate of 190,000 shares of unregistered Common Stock jointly to two individuals upon exercise of outstanding warrants for aggregate consideration of $285,000. Such issuances were consummated as private sales pursuant to Section 4(2) of the Securities Act. Item 6. Selected Financial Data
Year Ended December 31, -------------------------------------------------------- (In thousands, except per share data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Statements of Operations Data: Revenues $ 5,348 $ 600 $ 800 $ 950 $ 5,403 Operating expenses: Research and development 16,455 11,482 8,768 11,816 13,876 General and administrative 5,356 3,961 3,739 3,348 4,375 Interest and other income (1,523) (918) (3,120) (3,186) (573) Interest and other expense 551 823 1,054 821 587 Equity in loss of affiliate -- -- -- 342 1,140 --------- --------- -------- -------- -------- Loss before extraordinary item (15,491) (14,748) (9,641) (12,191) (14,002) Extraordinary loss on extinguishment of debt -- 1,267 -- -- -- --------- --------- -------- -------- -------- Net loss (15,491) (16,015) (9,641) (12,191) (14,002) Preferred dividends (including incremental yield of $51) 163 -- -- -- -- --------- --------- -------- -------- -------- Net loss to common stockholders $ (15,654) $ (16,015) $ (9,641) $(12,191) $(14,002) ========= ========= ======== ======== ======== Basic and diluted net loss per common share: Loss before extraordinary item $ (0.67) $ (0.76) $ (0.72) $ (1.12) $ (1.58) Extraordinary loss on extinguishment of debt -- 0.07 -- -- -- --------- --------- -------- -------- -------- Net loss $ (0.67) $ (0.83) $ (0.72) $ (1.12) $ (1.58) ========= ========= ======== ======== ======== Weighted average shares outstanding 23,457 19,371 13,311 10,903 8,879
(In thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance Sheet Data: Cash and securities (1) $ 59,610 $ 13,514 $ 10,207 $ 3,032 $ 7,301 Working capital 56,671 7,695 3,735 (1,470) 1,215 Total assets 75,780 25,885 22,803 17,467 24,208 Long-term obligations 3,430 2,775 4,235 4,487 3,636 Accumulated deficit (117,464) (101,973) (85,958) (76,317) (64,126) Stockholders' equity 68,226 16,589 11,823 8,176 14,812 14 (1) Includes $532,000 as of December 31, 1993 which was restricted for use only for construction and equipping the Company's New York City facility under the terms of certain industrial development bonds. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis by management is provided to identify certain significant factors which affected the Company's financial position and operating results during the periods included in the accompanying financial statements. OVERVIEW AND RISK FACTORS The Company is a biopharmaceutical company engaged primarily in the research and development of therapeutic products for the treatment of selected cancers and cancer-related disorders. The products under development include cancer therapeutics, cancer vaccines and inhibitors of angiogenesis. Since its inception in April 1984, the Company has devoted substantially all of its efforts and resources to research and development conducted on its own behalf and through collaborations with corporate partners and academic research and clinical institutions. The Company has generated a cumulative net loss of approximately $117,464,000 for the period from its inception to December 31, 1997. The Company expects to incur significant additional operating losses over each of the next several years. The major sources of the Company's working capital have been the proceeds from the public and private sale of equity securities, the sale of the IDA Bonds by the NYIDA (the proceeds of which have been used for the acquisition, construction and installation of the Company's research and development facility in New York City), license fees and contract research and development fees and royalties from collaborative partners and interest earned on these funds. Substantially all of the Company's products are in various stages of development, clinical studies or research. Substantially all the Company's revenues were generated from license and research arrangements with collaborative partners. The Company's revenues under its research and license agreements with corporate sponsors have fluctuated and are expected to fluctuate significantly from period to period. Similarly, the Company's results of operations have fluctuated and are expected to fluctuate significantly from period to period. These variations have been, and are expected to be, based primarily on the timing of entering into supported research and license agreements, the status of the Company's various products, the timing and level of revenues from sales by its partner in diagnostics, Abbott, of products bearing the Company's technology, the addition or termination of research programs or funding support, performance by the Company's corporate collaborators of their funding and marketing obligations, the achievement of specified research or development milestones, including those relating to the Company's Amended License Agreement with Merck, and variations in the level of expenditures for the Company's proprietary products during any given period. The Company's products will require substantial additional development and clinical testing and investment prior to commercialization. To achieve profitable operations, the Company, alone or with others, must successfully develop, introduce and market its products. No assurance can be given that any of the Company's product development efforts will be successfully completed, that required regulatory approvals can be obtained or that any products, if developed, will be successfully manufactured or marketed or achieve customer acceptance. RESULTS OF OPERATIONS Years Ended December 31, 1997 and December 31, 1996 Revenues Revenues for the years ended December 31, 1997 and 1996 were $5,348,000 and $600,000 respectively, an increase of $4,748,000. Revenue for the year ended December 31, 1997 consisted of (i) $300,000 in research support from the Company's partnership with American Home Products in infectious disease vaccines, (ii) $2,000,000 in milestone payments and $1,667,000 in research and support payments from the Company's Amended License Agreement with Merck, and (iii) $1,000,000 in milestone payments and $381,000 in royalty revenue from the Company's strategic alliance with Abbott in diagnostics. Revenues for the year ended December 31, 1996 consisted of (i) $300,000 in research support from the Company's partnership with the Wyeth/Lederle vaccine and pediatrics division of American Home in infectious disease vaccines, (ii) $225,000 in royalty revenue from the Abbott alliance, and (iii) $75,000 in license 15 fees from the Company's cross-licensing agreement with Immunex for novel hematopoietic growth factors. Increased revenues for the year ended December 31, 1997 were primarily attributable to the Company's having achieved development milestones under the Company's Amended License Agreement with Merck and the Company's strategic license with Abbott. Operating; Research and Development Expenses Total operating expenses for the years ended December 31, 1997 and 1996 were $21,811,000 and $15,443,000, respectively, an increase of $6,368,000 or 41%. Research and development expenses for the years ended December 31, 1997 and 1996 were $16,455,000 and $11,482,000, respectively, an increase of $4,973,000 or 43%. Such amounts for the years ended December 31, 1997 and December 31, 1996 represented 75% and 74%, respectively, of total operating expenses. The increase in research and development expenses for the year ended December 31, 1997 was partly attributable to a one-time $2,233,000 non-cash compensation expense recorded in connection with the extension of the term of an officer's warrant to purchase 397,000 shares of Common Stock. The increase is also attributable to costs associated with additional staffing, contract manufacturing and testing, and expenditures in the functional areas of product development, manufacturing and clinical and regulatory affairs to support the Company's lead therapeutic product candidate, C225, as well as travel-related expenses to pursue strategic partnerships for C225 and other product candidates. The remaining increase reflects growth in the area of discovery research for future product candidates. General and Administrative Expenses General and administrative expenses include administrative personnel costs, costs incurred in connection with pursuing arrangements with corporate partners and technology licensors, and expenses associated with applying for patent protection for the Company's technology and products. Such expenses for the years ended December 31, 1997 and 1996 were $5,356,000 and $3,961,000, respectively, an increase of $1,395,000 or 35%. The increase in general and administrative expenses primarily reflects (i) $279,000 non-cash compensation expense recorded in connection with an option grant to an officer of the Company and (ii) additional support staffing for the expanding research, clinical, development and manufacturing efforts of the Company, particularly with respect to C225. The Company expects general and administrative expenses to increase in future periods to support planned increases in research and development. Interest and Other Income and Expenses Interest and other income was $1,523,000 for the year ended December 31, 1997 compared to $918,000 for the year ended December 31, 1996, an increase of $605,000 or 66%. The increase was primarily attributable to the increased interest income earned from higher cash balances in the Company's investment portfolio resulting from the proceeds received from a public offering of Common Stock completed in March 1997 and a private placement of Series A Preferred Stock completed in December 1997. Interest expense was $551,000 and $823,000 for the years ended December 31, 1997 and 1996, respectively, a decrease of $272,000 or 33%. Interest expense for both periods primarily included interest on two then outstanding IDA Bonds with an aggregate principal amount of $4,313,000 ($2,113,000 of which was repaid in December 1997) and interest recorded on the liability to Pharmacia and UpJohn Inc. ("Pharmacia"), for the reacquisition of the worldwide rights to IL-6m as well as clinical material manufactured and supplied by Pharmacia to the Company. The decrease was primarily attributable to the May 1996 exchange of debt for Common Stock with the Oracle Group and a Company Director. Net Losses The Company had net losses to common stockholders of $15,654,000 or $0.67 per share for the year ended December 31, 1997, compared with $16,015,000 or $0.83 per share for the year ended December 31, 1996. The year ended December 31, 1996 included a $1,267,000 or $0.07 per share extraordinary loss on early extinguishment of debt. This extraordinary loss resulted from the issuance of Common Stock in lieu of cash repayment of a $2,500,000 loan due the Oracle Group and a $180,000 long-term note owed to a Company Director. The decrease in the 16 per share net loss to common stockholders is due primarily to the increased number of shares of Common Stock outstanding as a result of the March 1997 public offering of Common Stock. Years Ended December 31, 1996 and December 31, 1995 Revenues Revenues for the years ended December 31, 1996 and 1995 were $600,000 and $800,000, respectively, a decrease of $200,000. Revenues for 1996 consisted of (i) $300,000 in research support from the Company's corporate partnership with the Wyeth/Lederle vaccine and pediatrics division of American Home, (ii) royalty revenue of $225,000 from the Company's strategic alliance with Abbott, (iii) and $75,000 in license fees from the Company's cross-licensing agreement with Immunex. Revenues for 1995 consisted of (i) $300,000 in research support from the Company's corporate partnership with the Wyeth/Lederle vaccine and pediatrics division of American Home, and (ii) contract research fees of $500,000 from the Company's strategic alliance with Abbott. Operating; Research and Development Expenses Total operating expenses for the years ended December 31, 1996 and December 31, 1995 were $15,443,000 and $12,507,000, respectively, an increase of $2,936,000 or 23%. Research and development expenses for the years ended December 31, 1996 and December 31, 1995 were $11,482,000 and $8,768,000, respectively, an increase of $2,714,000 or 31%. Such amounts for the years ended December 31, 1996 and December 31, 1995 represented 74% and 70%, respectively, of total operating expenses. The increase in research and development expenses is primarily attributable to costs incurred for C225, the Company's lead therapeutic product candidate. This includes additional staffing and expenditures in the functional areas of product development, manufacturing and clinical and regulatory affairs to support the manufacture of C225 for human clinical trials and travel-related expenses to pursue strategic partnerships for C225 (and other product candidates). The remaining increase reflects growth in the area of discovery research for future product candidates. General and Administrative Expenses General and administrative expenses include administrative personnel costs, costs incurred in connection with pursuing arrangements with corporate partners and technology licensors, and expenses associated with applying for patent protection for the Company's technology and products. Such expenses for the year ended December 31, 1996 were $3,961,000 compared to $3,739,000 for the year ended December 31, 1995, an increase of $222,000 or 6%. The increase primarily reflects additional staffing to support the expanding research, clinical, development and manufacturing efforts of the Company, particularly with its lead therapeutic product candidate, C225. The Company expects general and administrative expenses to increase in future years to support planned increases in research and development. Interest and Other Income and Expenses Interest and other income was $918,000 for the year ended December 31, 1996 as compared to $3,120,000 for the year ended December 31, 1995, a decrease of $2,202,000 or 71%. Other income for the year ended December 31, 1995 included the Company's sale of the remaining one-half of its shares of capital stock of Cadus Pharmaceutical Corporation, a company it assisted in founding in 1992, for $3,000,000 to High River, LP. The greater interest income earned during the year ended December 31, 1996 reflects the Company's improved cash position from the November 1995 and February 1996 public sales of shares of its Common Stock. Interest expense was $823,000 and $1,054,000 for the years ended December 31, 1996 and December 31, 1995, respectively, a decrease of $231,000 or 22%. Such expense for both years primarily included interest on two then outstanding IDA Bonds with an aggregate principal amount of $4,313,000 ($2,113,000 of which was repaid in December 1997), interest recorded on the liability to Pharmacia for the reacquisition of the worldwide rights to IL-6m and the contract manufacture of clinical material, and interest accrued and the amortization of the non-cash debt discount recorded in connection with the Company's August 1995 financing with the Oracle Group. 17 Net Losses The Company had net losses to common stockholders of $16,015,000 or $0.83 per share, and $9,641,000 or $0.72 per share, for the years ended December 31, 1996 and December 31, 1995, respectively. The net loss to common stockholders for the year ended December 31, 1996 included a $1,267,000 or $0.07 per share extraordinary loss on early extinguishment of debt through the May issuance of Common Stock in lieu of cash repayment of a $2,500,000 loan due the Oracle Group and a $180,000 long-term note owed to a Company Director. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company's principal sources of liquidity consisted of cash and cash equivalents and securities available for sale of approximately $59,600,000. The Company has financed its operations since inception primarily through the public and private sales of equity securities, the sale of the IDA Bonds through the NYIDA, license fees and contract research and development fees and royalties received under agreements with collaborative partners and interest earned on these funds. Since inception, public and private sales of equity securities have raised approximately $163,799,000 in net proceeds, including approximately $23,200,000 raised in a public offering of 3,000,000 shares of Common Stock in March 1997 and approximately $39,997,000 raised in a private placement of 400,000 Series A Preferred Shares in December 1997. The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an aggregate of $6,313,000, the proceeds of which have been used for the acquisition, construction and installation of the Company's research and development facility in New York City, and of which $2,200,000 is currently outstanding. Since inception, the Company has earned approximately $28,662,000 from license fees, contract research and development fees and royalties from collaborative partners, including approximately $5,348,000 received in 1997. Since inception the Company has earned approximately $5,447,000 in interest income, including approximately $1,523,000 in 1997. The Company has obligations under various capital leases for certain laboratory, office and computer equipment and also certain building improvements primarily under a December 1996 financing agreement with Finova Technology Finance, Inc. ("Finova"). The agreement allows the Company to finance the lease of equipment and make certain building and leasehold improvements to existing facilities involving amounts aggregating approximately $2,500,000. As of December 31, 1997, the Company had entered into six individual leases aggregating a total cost of $1,745,000. Each lease has a fair market value purchase option at the expiration of a 42-month term. Pursuant to the agreement, the Company issued to Finova a warrant expiring December 31, 1999 to purchase 23,220 shares of Common stock at an exercise price of $9.69 per share. The Company recorded a non-cash debt discount of approximately $125,000 in connection with this financing, which discount is being amortized over the 42-month term of the first lease. The financing agreement with Finova expired in December 1997 and the Company did not utilize the full $2,500,000 under the agreement. The Company anticipates that it will enter into a new financing agreement with Finova during the second quarter of 1998 aggregating approximately $2,000,000; however, no assurance can be given that such agreement will be consummated. The Company has expended and will continue to expend in the future substantial funds to continue the research and development of its products, conduct pre-clinical and clinical trials, establish clinical-scale and commercial-scale manufacturing in its own facilities or in the facilities of others, and market its products. The Company has entered into preliminary discussions with several major pharmaceutical companies regarding various alternatives concerning the funding of research and development for certain of its products. No assurance can be given that the Company will be successful in consummating any such alternatives. These discussions have included potential significant strategic alliances for the development and commercialization of the Company's lead product candidate, C225. Such strategic alliances could include up-front license fees plus milestone fees and revenue sharing. There can be no assurance that the Company will be successful in achieving such alliances, nor can the Company predict the amount of funds which might be available to it if it entered into such alliances or the time at which such funds would be made available. In January 1998, the Company completed the construction and commissioning of a new 1,750 square foot process development center at its Somerville, New Jersey facility at a cost of approximately $1,650,000. The Company has also taken steps to complete a formal design concept for large scale manufacturing at this facility. If the Company adapts this facility to large scale manufacturing or does so at another location, it will incur substantial additional costs. The lease on the Company's New York City facility expires in March 1999. The Company is currently in discussions regarding the extension of the lease and is considering other alternatives, such as relocating 18 its executive offices and laboratories to a new facility. Were the Company to relocate its executive offices and laboratories, it would incur substantial additional costs. The IDA Bond issued in 1990 (the "1990 IDA Bond") in the outstanding principal amount of $2,200,000 becomes due in 2004. If the lease on the Company's New York City facility is terminated, the 1990 IDA Bond provides that it will become due 60 days prior to such termination. Interest payable on the 1990 IDA Bond will aggregate approximately $250,000 during 1998. The Company has granted the NYIDA a security interest in substantially all facility equipment located in the New York facility to secure the obligations of the Company to the NYIDA under the 1990 IDA Bond. In December 1997, the Company paid off the outstanding principal on the IDA Bond issued in 1986 in the aggregate principal amount of $2,113,000, plus accrued and unpaid interest thereon. The holders of the Series A Preferred Shares are entitled to receive cumulative dividends at an annual rate of $6.00 per share. Dividends accrue as of the issuance date of the Series A Preferred Shares and are payable on the outstanding Series A Preferred Shares in cash on December 31 of each year beginning December 31, 1999 or at the time of conversion or redemption of the Series A Preferred Shares on which the dividend is to be paid, whichever is sooner. Accrued dividends were $112,000 plus the incremental yield on the conversion discount of $51,000 at December 31, 1997. Total capital expenditures made during the year ended December 31, 1997 were $2,981,000. Of the total capital expenditures made during the year ended December 31, 1997, $1,324,000 has been reimbursed in accordance with the terms of the Finova agreement discussed above which provides for improvements and equipping of the Company's manufacturing facility in New Jersey. The balance of capital additions was for equipment and computer-related purchases for both the New Jersey facility and the corporate office and research laboratories in New York. The Company anticipates that its existing capital resources, including the on-going research support of its corporate partners, should enable it to maintain its current and planned operations through the end of the year 2000. However, the receipt of such ongoing research support is subject to attaining research and development milestones, certain of which have not yet been achieved. There can be no assurance that the Company will achieve these milestones. The Company's future working capital and capital requirements will depend upon numerous factors, including the progress of the Company's research and development programs, pre-clinical testing and clinical trials, the Company's corporate partners fulfilling their obligations to the Company, the timing and cost of seeking regulatory approvals, the cost of manufacturing scale-up and effective commercialization activities and arrangements, the level of resources that the Company devotes to the development of marketing and sales capabilities, the costs involved in filing, prosecuting and enforcing patent claims, technological advances, the status of competitors and the ability of the Company to maintain existing and establish new collaborative arrangements with other companies to provide funding to the Company to support these activities. In order to fund its capital needs after the end of the year 2000, the Company will require significant levels of additional capital and intends to raise the capital through additional arrangements with corporate partners, equity or debt financings or from other sources. There is no assurance the Company will be successful in consummating any such arrangements. If adequate funds are not available, the Company may be required to significantly curtail its planned operations. Uncertainties associated with the length and expense of pre-clinical and clinical testing of any of the Company's products could greatly increase the cost of development of such product and affect the timing of anticipated revenues from product sales, and failure by the Company to obtain regulatory approval for any product will preclude its commercialization. In addition, the failure by the Company to obtain patent protection for its products may make certain of its products commercially unattractive. At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $115,000,000 which expire at various dates from 2000 through 2012. At December 31, 1997 the Company had research credit carryforwards of approximately $2,303,000 which expire at various dates between years 2001 and 2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of the Company's net operating loss and research credit carryforwards may be limited if the Company experiences a change in ownership of more than 50 percentage points within a three-year period. Since 1986, the Company experienced two ownership changes. Accordingly, the Company is significantly limited in utilizing its tax net operating loss carryforwards arising before such ownership changes to offset future federal taxable income. Similarly, the Company is significantly restricted in using its research credit carryforwards arising before such ownership changes to offset future federal income tax expense. 19 OTHER ITEMS The Company is evaluating the risks and costs associated with the year 2000 conversion. The Company intends to communicate with those organizations with which it does business to ensure that year 2000 issues will be resolved in a timely manner. If necessary modifications and conversions by those with which the Company does business are not completed timely, the year 2000 conversion issue may have a material adverse effect on the Company's consolidated financial position and results of operations. Based on the Company's ongoing evaluation, management does not currently believe that the costs to achieve year 2000 compliance will be material to the Company's financial position or results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable. Item 8. Financial Statements and Supplementary Data. The response to this item is submitted as a separate section of this report commencing on Page F-1. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. Not Applicable. PART III The information required by "Item 10. - Directors and Executive Officers of the Registrant"; "Item 11. - Executive Compensation"; "Item 12. - Security Ownership of Certain Beneficial Owners and Management"; and "Item 13. - Certain relationships and Related Transactions" is incorporated into Part III of this Annual Report on Form 10-K by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 1998. 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1)and(2). The response to this portion of Item 14. is submitted as a separate section of this report commencing on page F-1. (a) (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K). Incorporation Exhibit No. Description by Reference - ----------- ----------- ------------ 3.1 Certificate of Incorporation, and all amendments thereto N (3.1) 3.2 Amended and Restated By-Laws of the Company M (3.2) 4.1 Form of Warrant issued to the Company's officers and directors under Warrant Agreements A (4.1) 4.2 Stock Purchase Agreement between Erbamont Inc. and the Company, dated May 1, 1989 A (4.2) 4.3 Stock Purchase Agreement between American Cyanamid Company (Cyanamid) and the Company dated December 18, 1987 A (4.3) 4.4 Form of Subscription Agreement entered into in connection with September 1991 private placement A (4.4) 4.5 Form of Warrant issued in connection with September 1991 private placement A(4.5) 4.6 Preferred Stock Purchase Agreement between the Company and Merck KGaA ("Merck") dated December 3, 1997 P 4.7 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock P 10.1 Company's 1986 Employee Incentive Stock Option Plan, including form of Incentive Stock Option Agreement F (10.1) 10.2 Company's 1986 Non-qualified Stock Option Plan, including form of Non-qualified Stock Option Agreement F (10.2) 10.3 Company's 401(k) Plan F (10.3) 10.4 Research and License Agreement between Merck and the Company dated December 19, 1990 B (10.4) 10.5 Hematopoietic Growth Factors License Agreement between Erbamont, N.V. and the Company, dated May 1, 1989, and Supplemental Amendatory Agreement between Erbamont, N.V. and the Company dated September 28, 1990 B (10.6) 10.6 Agreement between Cyanamid and the Company dated December 18, 1987 and supplemental letter agreement between Cyanamid and the Company dated September 6, 1991 B (10.7) 10.7 Agreement between Hadasit Medical Research Services & Development, Ltd. and the Company B (10.8) 10.8 Agreement between Hadasit Medical Research Services & Development, Ltd. and the Company dated September 21, 1989 B (10.9) 10.9 Supported Research Agreement between Memorial Sloan-Kettering Cancer Center (MSKCC) and the Company dated March 26, 1990 A (10.10) 10.10 License Agreement between MSKCC and the Company, dated March 26, 1990 B (10.11) 10.11 License Agreement between MSKCC and the Company, dated March 26, 1990 B (10.12) 10.12 License Agreement between MSKCC and the Company, dated March 26, 1990 B (10.13) 10.13 Research Agreement between the Trustees of Princeton University (Princeton) and the Company dated January 1, 1991 B (10.14) 10.14 Research Agreement between Princeton and the Company dated May 1, 1991 B (10.15) 10.15 Research Agreement between Princeton and the Company dated May 1, 1991 B (10.16) 10.16 License Agreement between Princeton and the Company dated March 20, 1991 B (10.17) 10.17 License Agreement between Princeton and the Company dated May 29, 1991 B (10.18) 10.18 License Agreement between Princeton and Oncotech, Inc. dated September 3, 1987 B (10.19) 10.19 Supported Research Agreement between The University of North Carolina at Chapel Hill ("UNC") and the Company effective July 5, 1988 B (10.20) 10.20 License Agreement between UNC and the Company dated July 5, 1988 B (10.21) 10.21 License Agreement between UNC and the Company dated July 27, 1988 B (10.22) 10.22 Supported Research Agreement between UNC and the Company effective April 1, 1989 B (10.23) 10.23 License Agreement between UNC and the Company dated July 1, 1991 B (10.24) 10.24 Agreement between Celltech Limited and the Company dated May 23, 1991 B (10.25) 10.25 Form of Non-disclosure and Discovery Agreement between employees of the Company and the Company A (10.30) 10.26 Industrial Development Bond Documents: A (10.31) 10.26.1 Industrial Development Revenue Bonds (1985 ImClone Systems Incorporated Project) A (10.31.1) 21 10.26.1.1 Lease Agreement, dated as of October 1, 1985, between the New York City Industrial Development Agency (NYCIDA) and the Company, as Lessee A (10.31.1.3) 10.26.1.2 Indenture of Trust, dated as of October 1, 1985, between NYCIDA and United States Trust Company of New York (US Trust), as Trustee A (10.31.1.2) 10.26.1.3 Company Sublease Agreement, dated as of October 1, 1985, between the Company and NYCIDA A (10.31.1.3) 10.26.1.4 Tax Regulatory Agreement, dated October 9, 1985, from NYCIDA and the Company to US Trust, as Trustee A (10.31.1.4) 10.26.1.5 Lessee Guaranty Agreement, dated as of October 1, 1985, between the Company and US Trust, as Trustee A (10.31.1.5) 10.26.1.6 First Supplemental Indenture of Trust, dated as of November 1, 1985 from the NYCIDA to US Trust A (10.31.1.6) 10.26.1.7 Third Supplemental Indenture of Trust, dated as of October 12, 1990 from NYCIDA to US Trust A (10.31.1.7) 10.26.2 Industrial Development Revenue Bonds (1986 ImClone Systems Incorporated Project) A (10.31.2) 10.26.2.1 First Amendment to Company Sublease Agreement, dated as of December 1, 1986, between the Company, as Sublessor, and NYCIDA as Sublessee A (10.31.2.1) 10.26.2.2 First Amendment to Lease Agreement, dated as of December 1, 1986, between NYCIDA and the Company, as Lessee A (10.31.2.2) 10.26.2.3 Second Supplement Indenture of Trust, dated as of December 1, 1986 between NYCIDA and US Trust, as Trustee A (10.31.2.3) 10.26.2.4 Tax Regulatory Agreement, dated December 31, 1986, from NYCIDA and the Company to US Trust, as Trustee A (10.31.2.4) 10.26.2.5 First Amendment to Lessee Guaranty Agreement, dated as of December 1, 1986, between the Company and US Trust, as Trustee A (10.31.2.5) 10.26.2.6 Bond Purchase Agreement, dated as of December 31, 1986, between NYCIDA and New York Muni Fund, Inc., as Purchaser A(10.31.2.6) 10.26.2.7 Letter of Representation and Indemnity Agreement, dated as of December 31, 1986, from the Company to NYCIDA and New York Muni Fund, Inc., as Purchaser A(10.31.2.7) 10.26.3 Industrial Development Revenue Bonds (1990 ImClone Systems Incorporated Project) A(10.31.3) 10.26.3.1 Lease Agreement, dated as of August 1, 1990, between NYCIDA and the Company, as lessee A(10.31.3.1) 10.26.3.2 Company Sublease Agreement, dated as of August 1, 1990, between the Company, as Sublessor, and NYCIDA A (10.31.3.2) 10.26.3.3 Indenture of Trust, dated as of August 1, 1990, between NYCIDA and US Trust, as Trustee A (10.31.3.3) 10.26.3.4 Guaranty Agreement, dated as of August 1, 1990, from the Company to US Trust, as Trustee A (10.31.3.4) 10.26.3.5 Tax Regulatory Agreement, dated August 1, 1990, from the Company and NYC.IDA to US Trust, as Trustee A(10.31.3.5) 10.26.3.6 Agency Security Agreement, dated as of August 1, 1990, from the Company, as Debtor, and the NYCIDA to US Trust, as Trustee A(10.31.3.6) 10.26.3.7 Letter of Representation and Indemnity Agreement, dated as of August 14, 1990, from the Company to NYCIDA, New York Mutual Fund, Inc., as the Purchaser and Chase Securities, Inc., as Placement Agent Company to NYCIDA A(10.31.3.7) 10.27 Lease Agreement between 180 Varick Street Corporation and the Company, dated October 8, 1985, and Additional Space and Modification Agreement between 180 Varick Street Corporation and the Company, dated June 13, 1989 A(10.32) 10.28 License Agreement between The Board of Trustees of the Leland Stanford Junior University and the Company effective May 1, 1991 A(10.33) 10.29 License Agreement between Genentech, Inc. and the Company dated December 28, 1989 A(10.34) 10.30 License Agreement between David Segev and the Company dated December 28, 1989 B(10.35) 10.31 Letter of Intent between the Company and Dr. David Segev dated November 18, 1991 C(10.40) 10.32 Agreement between the Company and Celltech Limited dated March 11, 1992 C(10.42) 10.33 Agreement of Sale dated June 19, 1992 between the Company and Korsch Tableting Inc. D(10.45) 10.34 Research and License Agreement, having an effective date of December 15, 1992, between the Company and Abbott Laboratories E(10.46) 10.35 Research and License Agreement between the Company and Chugai Pharmaceutical Co., Ltd. dated January 25, 1993 E(10.47) 22 10.36 License Agreement between the Company and the Regents of the University of California dated April 9, 1993 G (10.48) 10.37 Contract between the Company and John Brown, a division of Trafalgar House, dated January 19, 1993 H (10.49) 10.38 Collaboration and License Agreement between the Company and the Cancer Research Campaign Technology, Ltd., signed April 4, 1994, with an effective date of April 1, 1994. G (10.50) 10.39 Termination Agreement between the Company and Erbamont Inc. dated July 21, 1993 H (10.51) 10.40 Research and License Agreement between the Company and Cyanamid dated September 15, 1993 G (10.52) 10.41 Clinical Trials Agreement between the Company and the National Cancer Institute dated November 23, 1993 H (10.53) 10.42 License Agreement between the Company and UNC dated December 1, 1993 G (10.54) 10.43 Notice of Termination for the research collaboration between the Company and Chugai Pharmaceutical Co., Ltd. dated December 17, 1993 H (10.55) 10.44 License Agreement between the Company and Rhone-Poulenc Rorer dated June 13, 1994 I (10.56) 10.45 Offshore Securities Subscription Agreement between ImClone Systems Incorporated and GFL Ultra Fund Limited dated August 12, 1994 I (10.57) 10.46 Offshore Securities Subscription Agreement between ImClone Systems Incorporated and GFL Ultra Fund Limited dated November 4, 1994 I (10.58) 10.47 Offshore Securities Subscription Agreement between ImClone Systems Incorporated and Anker Bank Zuerich dated November 10, 1994 I (10.59) 10.48 Option Agreement, dated as of April 27, 1995, between ImClone Systems Incorporated and High River Limited Partnership relating to capital stock of Cadus Pharmaceutical Corporation J (10.60) 10.49 Option Agreement, dated as of April 27, 1995, between ImClone Systems Incorporated and High River Limited Partnership relating to 300,000 shares of Common Stock of ImClone Systems Incorporated J (10.61) 10.50 Option Agreement, dated as of April 27, 1995, between ImClone Systems Incorporated and High River Limited Partnership relating to 150,000 shares Common Stock of ImClone Systems Incorporated J (10.62) 10.51 Stock Purchase Agreement, dated as of August 10, 1995, by and between ImClone Systems Incorporated and the members of the Oracle Group J (10.63) 10.52 Form of Warrant issued to the members of the Oracle Group J (10.64) 10.53 Loan Agreement, dated as of August 10, 1995, by and between ImClone Systems Incorporated and the members of the Oracle Group J (10.65) 10.54 Security Agreement, dated as of August 10, 1995, by and between ImClone Systems Incorporated and the members of the Oracle Group J (10.66) 10.55 Mortgage, dated August 10, 1995, made by ImClone Systems Incorporated for the benefit of Oracle Partners, L.P., as Agent J (10.67) 10.56 Financial Advisory Agreement entered into between the Company and Genesis Merchant Group Securities dated November 2, 1995 K (10.68) 10.57 Repayment Agreement (with Confession of Judgment, and Security Agreement) entered into between the Company and Pharmacia, Inc. on March 6, 1996 K (10.69) 10.58 License Amendment entered into between the Company and Abbott Laboratories on August 28, 1995,amending the Research and License Agreement between the parties dated December 15, 1992 K (10.70 10.59 Amendment of September 1993 to the Research and License Agreement between the Company and Merck of April 1, 1990 K (10.71) 10.60 Amendment of October 1993 to the Research and License Agreement between the Company and Merck of April 1, 1990 K (10.72) 10.61 Employment agreement dated May 17, 1996 between the Company and Carl S. Goldfischer L (10.73) 10.62 Financial Advisory Agreement dated February 26, 1997 between the Company and Hambrecht & Quist LLC L (10.74) 10.63 Exchange Agreement exchanging debt for Common Stock dated as of April 15, 1996 among the Company and members of The Oracle Group. L (10.75) 10.64 Collaborative Research and License Agreement between the Company and CombiChem, Inc. dated October 10, 1997 L (10.76) 23 10.65 Amendment of May 1996 to Research and License Agreement between the Company and Merck of April 1, 1990 O 10.66 Amendment of December 1997 to Research and License Agreement between the Company and Merck of April 1, 1990 O 21.1 Subsidiaries P 23.1 Consent of KPMG Peat Marwick LLP P 27.1 Financial Data Schedule P 99.1 1996 Incentive Stock Option Plan, as amended N (99.1) 99.2 1996 Non-Qualified Stock Option Plan, as amended N (99.2) - ---------- A Previously filed with the Commission; incorporated by reference to Registration Statement on Form S-1, File No. 33-43064. B Previously filed with the Commission; incorporated by reference to Registration Statement on Form S-1, File No. 33-43064. Confidential treatment was granted for a portion of this exhibit. C Previously filed with the Commission; incorporated by reference to Registration Statement on Form S-1, File No. 33-48240. Confidential treatment was granted for a portion of this exhibit. D Previously filed with the Commission; incorporated by reference to the Company's Annual Report on Form 10-K, filed June 26, 1992. E Previously filed with the Commission; incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. Confidential treatment was granted for a portion of this Exhibit. F Previously filed with the Commission; incorporated by reference Amendment No. 1 to Registration Statement on to Form S-1, File No. 33-61234. G Previously filed with the Commission; incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Confidential Treatment was granted for a portion of this Exhibit. H Previously filed with the Commission; incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. I Previously filed with the Commission; incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. J Previously filed with the Commission; incorporated by reference to Registration Statement on Form S-2, File No. 33-98676. K Previously filed with the Commission, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. L Previously filed with the Commission; incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, as amended. Confidential treatment was granted for a portion of this Exhibit. M Previously filed with the Commission; incorporated by reference to the Company's Current Report on Form 8-K dated January 21, 1998. N Previously filed with the Commission; incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. O Filed herewith. Confidential treatment has been requested with respect to certain portions of this Exhibit. P Filed herewith. 24 (b) Reports on Form 8-K On December 9, 1997, the Company filed with the Securities and Exchange Commission (the "Commission") a Current Report on Form 8-K dated December 4, 1997 relating to the Company's entering into an amendment with Merck to the Company's Research and License Agreement with Merck and the purchase by Merck from the Company of 400,000 shares of Series A Preferred Stock (Item 5). On October 15, 1997, the Company filed with the Commission a Current Report on Form 8-K dated October 10, 1997 relating to the Company's entering into a Collaborative Research and License Agreement with CombiChem and the purchase of shares of CombiChem Common Stock (Item 5). 25 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. IMCLONE SYSTEMS INCORPORATED March 27, 1998 By /s/ Samuel D. Waksal ---------------------------------- Samuel D. Waksal President and Chief Executive Officer 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 date indicated. Signature Title Date --------- ----- ---- /s/ Robert F. Goldhammer Chairman of the Board of Directors March 27, 1998 - -------------------------- (Robert F. Goldhammer) /s/ Samuel D. Waksal President, Chief Executive Officer March 27, 1998 - -------------------------- and Director (Samuel D. Waksal) (Principal Executive Officer) /s/ Harlan W. Waksal Executive Vice President, March 27, 1998 - -------------------------- Chief Operating Officer and Director (Harlan W. Waksal) /s/ Carl S. Goldfischer Vice President, Financial and March 27, 1998 - -------------------------- Strategic Planning and Chief Financial (Carl S. Goldfischer) Officer (Principal Financial Officer) /s/ Richard Barth Director March 27, 1998 - -------------------------- (Richard Barth) /s/ Jean Carvais Director March 27, 1998 - -------------------------- (Jean Carvais) /s/ Vincent T. DeVita, Jr. Director March 27, 1998 - -------------------------- (Vincent T. DeVita, Jr.) /s/ David M. Kies Director March 27, 1998 - -------------------------- (David M. Kies) __________________________ Director March 27, 1998 (Paul B. Kopperl) /s/ John Mendelsohn Director March 27, 1998 - -------------------------- (John Mendelsohn) /s/ William R. Miller Director March 27, 1998 - -------------------------- (William R. Miller) 26 FINANCIAL STATEMENTS Index to Financial Statements Financial Statements Independent Auditors' Report ............................................. F-2 Balance Sheets at December 31, 1997 and 1996 ............................. F-3 Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995 ....................................... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996, and 1995 ................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 ....................................... F-6 Notes to Financial Statements ............................................ F-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors of ImClone Systems Incorporated: We have audited the financial statements of ImClone Systems Incorporated as listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ImClone Systems Incorporated as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP ---------------------------- KPMG Peat Marwick LLP New York, New York February 20, 1998 F-2 IMCLONE SYSTEMS INCORPORATED Balance Sheets (in thousands, except share data) December 31, December 31, Assets 1997 1996 ----------- ------------ Current assets: Cash and cash equivalents ......................... $ 2,558 $ 2,734 Securities available for sale ..................... 57,052 10,780 Prepaid expenses .................................. 596 122 Amount due from officer and stockholder ........... -- 101 Other current assets .............................. 589 479 --------- --------- Total current assets ............. 60,795 14,216 --------- --------- Property and equipment: Land .............................................. 340 340 Building and building improvements ................ 8,969 8,969 Leasehold improvements ............................ 4,832 4,832 Machinery and equipment ........................... 6,315 5,159 Furniture and fixtures ............................ 550 536 Construction in progress .......................... 2,159 320 --------- --------- Total cost ....................... 23,165 20,156 Less accumulated depreciation and amortization ........................... (11,294) (9,606) --------- --------- Property and equipment, net ...... 11,871 10,550 --------- --------- Patent costs, net ...................................... 944 977 Deferred financing costs, net .......................... 55 65 Other assets ........................................... 2,115 77 --------- --------- $ 75,780 $ 25,885 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable .................................. $ 1,731 $ 1,059 Accrued expenses and other ........................ 1,440 1,366 Interest payable .................................. 68 238 Deferred revenue .................................. 208 -- Current portion of long-term liabilities .......... 677 3,858 --------- --------- Total current liabilities ........ 4,124 6,521 --------- --------- Long-term debt ......................................... 2,200 2,200 Other long-term liabilities, less current portion ...... 1,230 575 --------- --------- Total liabilities ................ 7,554 9,296 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value; authorized 4,000,000 shares; issued and outstanding Series A Convertible: 400,000 and none at December 31, 1997 and December 31, 1996, respectively (preference in liquidation $40,112 and none, respectively) ............. 400 -- Common stock, $.001 par value; authorized 45,000,000 shares; issued 24,265,072 and 20,248,122 at December 31, 1997 and December 31, 1996, respectively; outstanding 24,214,255 and 20,233,699 at December 31, 1997 and December 31, 1996, respectively .............. 24 20 Additional paid-in capital ........................ 185,706 118,760 Accumulated deficit ............................... (117,464) (101,973) Treasury stock, at cost; 50,817 and 14,423 shares at December 31, 1997 and December 31, 1996, respectively .......... (492) (169) Unrealized gain (loss) on securities available for sale ........................... 52 (49) --------- --------- Total stockholders' equity ....... 68,226 16,589 --------- --------- $ 75,780 $ 25,885 ========= ========= See accompanying notes to financial statements. F-3 IMCLONE SYSTEMS INCORPORATED Statements of Operations (in thousands, except per share data) Year Ended December 31, ------------------------------- 1997 1996 1995 ------- -------- -------- Revenues: License fees from third parties ...... $ 3,000 $ 75 $ -- Research and development funding from third parties and other ........ 2,348 525 800 -------- -------- -------- Total revenues ..................... 5,348 600 800 -------- -------- -------- Operating expenses: Research and development ............. 16,455 11,482 8,768 General and administrative ........... 5,356 3,961 3,739 -------- -------- -------- Total operating expenses ........... 21,811 15,443 12,507 -------- -------- -------- Operating loss ......................... (16,463) (14,843) (11,707) -------- -------- -------- Other: Interest and other income ............ (1,523) (918) (3,120) Interest expense ..................... 551 823 1,054 -------- -------- -------- Net interest and other income ...... (972) (95) (2,066) -------- -------- -------- Loss before extraordinary item ......... (15,491) (14,748) (9,641) Extraordinary loss on extinguishment of debt ................ -- 1,267 -- -------- -------- -------- Net loss ............................... (15,491) (16,015) (9,641) Preferred dividends (including incremental yield of $51) ............. 163 -- -- -------- -------- -------- Net loss to common stockholders ........ $(15,654) $(16,015) $ (9,641) ======== ======== ======== Net loss per common share: Basic and diluted: Loss before extraordinary item ..... $ (0.67) $ (0.76) $ (0.72) Extraordinary loss on extinguishment of debt ............ -- 0.07 -- -------- -------- -------- Net loss ............................. $ (0.67) $ (0.83) $ (0.72) ======== ======== ======== Weighted average shares outstanding .... 23,457 19,371 13,311 ======== ======== ======== See accompanying notes to financial statements. F-4 IMCLONE SYSTEMS INCORPORATED Statements of Stockholders' Equity Years Ended December 31, 1995, 1996, and 1997 (in thousands, except share data)
Preferred Stock Common Stock Additional ------------------------- -------------------------- Paid-in Accumulated Shares Amount Shares Amount Capital Deficit ---------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 ....... -- $ -- 12,577,685 $ 13 $ 84,630 $ (76,317) ----------- ----------- ----------- ----------- ----------- ----------- Issuance of common stock ............ 4,000,000 4 11,998 Options exercised ................... 156,750 162 Warrants exercised .................. 15,300 23 Payment of promissory notes ......... 57,184 36 Proceeds from promissory notes ...... 2 Debt discount ....................... 1,063 Net loss ............................ (9,641) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 ....... -- $ -- 16,806,919 $ 17 $ 97,914 $ (85,958) ----------- ----------- ----------- ----------- ----------- ----------- Issuance of common stock ............ 2,200,000 2 13,560 Options exercised ................... 266,275 846 Warrants exercised .................. 604,892 1 2,960 Options granted to non-employees .... 95 Extinguishment of debt .............. 357,333 3,260 Debt discount ....................... 125 Treasury shares ..................... (1,720) Changes in unrealized loss on securities available for sale ... Net loss ............................ (16,015) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 ....... -- $ -- 20,233,699 $ 20 $ 118,760 $ (101,973) ----------- ----------- ----------- ----------- ----------- ----------- Issuance of preferred stock ......... 400,000 400 39,597 Issuance of common stock ............ 3,000,000 3 23,152 Options exercised ................... 147,450 223 Warrants exercised .................. 869,500 1 1,385 Options granted to non-employees .... 189 Options/warrants granted to employees .......................... 2,512 Treasury shares ..................... (36,394) Changes in unrealized gain on securities available for sale ... Preferred stock dividends ........... (112) Net loss ............................ (15,491) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 ....... 400,000 $ 400 24,214,255 $ 24 $ 185,706 $ (117,464) =========== =========== =========== =========== =========== ===========
Unrealized (Loss) on Securities Treasury Available Stock for Sale Total ---------- ----------- ----------- Balance at December 31, 1994 ....... $ (150) $ -- $ 8,176 ---------- ----------- ----------- Issuance of common stock ............ 12,002 Options exercised ................... 162 Warrants exercised .................. 23 Payment of promissory notes ......... 36 Proceeds from promissory notes ...... 2 Debt discount ....................... 1,063 Net loss ............................ (9,641) ---------- ----------- ----------- Balance at December 31, 1995 ....... $ (150) $ -- $ 11,823 ---------- ----------- ----------- Issuance of common stock ............ 13,562 Options exercised ................... 846 Warrants exercised .................. 2,961 Options granted to non-employees .... 95 Extinguishment of debt .............. 3,260 Debt discount ....................... 125 Treasury shares ..................... (19) (19) Changes in unrealized loss on securities available for sale ... (49) (49) Net loss ............................ (16,015) ---------- ----------- ----------- Balance at December 31, 1996 ....... $ (169) $ (49) $ 16,589 ---------- ----------- ----------- Issuance of preferred stock ......... 39,997 Issuance of common stock ............ 23,155 Options exercised ................... 223 Warrants exercised .................. 1,386 Options granted to non-employees .... 189 Options/warrants granted to employees .......................... 2,512 Treasury shares ..................... (323) (323) Changes in unrealized gain on securities available for sale ... 101 101 Preferred stock dividends ........... (112) Net loss ............................ (15,491) ---------- ----------- ----------- Balance at December 31, 1997 ....... $ (492) $ 52 $ 68,226 ========== =========== =========== See accompanying notes to financial statements. F-5 IMCLONE SYSTEMS INCORPORATED Statements of Cash Flows (in thousands)
Year Ended December 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net loss .............................................. $ (15,491) $ (16,015) $ (9,641) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ....................... 1,797 1,704 1,789 Expense associated with issuance of options and warrants ......................... 2,729 95 -- Extraordinary loss on extinguishment of debt ........ -- 1,267 -- Discounted interest amortization .................... -- 156 222 Write-off of fixed assets ........................... -- -- 2 Write-off of patent costs ........................... 146 -- 126 Loss on sale of investments ......................... 2 -- -- Changes in: Prepaid expenses .................................. (474) (7) (37) Other current assets .............................. (110) (453) 42 Due from officer .................................. 101 31 24 Other assets ...................................... (37) (14) 115 Interest payable .................................. (170) (105) 328 Accounts payable .................................. 672 67 (624) Accrued expenses and other ........................ 75 540 421 Deferred revenue .................................. 208 -- -- --------- --------- --------- Net cash used in operating activities .......... (10,552) (12,734) (7,233) --------- --------- --------- Cash flows from investing activities: Acquisitions of property and equipment ................ (1,657) (272) (36) Purchases of securities available for sale ............ (241,623) (32,665) -- Sales of securities available for sale ................ 195,450 21,836 -- Investment in CombiChem, Inc .......................... (2,000) -- -- Additions to patents .................................. (212) (343) (186) --------- --------- --------- Net cash used in investing activities .......... (50,042) (11,444) (222) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of preferred stock ......... 39,997 -- -- Net proceeds from issuance of common stock ............ 23,154 13,562 12,002 Proceeds from exercise of stock options and warrants............................................ 1,581 3,807 185 Purchase of treasury stock ............................ (323) (19) -- Proceeds from long-term notes payable ................. -- -- 2,680 Proceeds from short-term notes payable ................ -- -- 100 Repayment of long-term debt ........................... (2,113) -- -- Repayment of short-term notes payable ................. -- -- (284) Payments of other liabilities ......................... (1,878) (645) (53) --------- --------- --------- Net cash provided by financing activities ..... 60,418 16,705 14,630 --------- --------- --------- Net (decrease) increase in cash and cash equivalents .... (176) (7,473) 7,175 Cash and cash equivalents at beginning of period ........ 2,734 10,207 3,032 --------- --------- --------- Cash and cash equivalents at end of period .............. $ 2,558 $ 2,734 $ 10,207 ========= ========= =========
See accompanying notes to financial statements. F-6 IMCLONE SYSTEMS INCORPORATED Notes To Financial Statements (1) Organization and Basis of Preparation ImClone Systems Incorporated (the "Company") is a biopharmaceutical company engaged primarily in the research and development of therapeutic products for the treatment of cancer and cancer related disorders. The Company employs accounting policies that are in accordance with generally accepted accounting principles in the United States. The biopharmaceutical industry is subject to rapid and significant technological change. The Company has numerous competitors, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. These competitors may succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. 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 pre-clinical testing and human clinical trials of new or improved pharmaceutical products and in obtaining Food and Drug Administration ("FDA") and other regulatory approvals on products for use in health care. The Company is aware of various products under development or manufactured by competitors that are used for the prevention, diagnosis or treatment of certain diseases the Company has targeted for product development, some of which use therapeutic approaches that compete directly with certain of the Company's product candidates. The Company has limited experience in conducting and managing pre-clinical testing necessary to enter clinical trials required to obtain government approvals and has limited experience in conducting clinical trials. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company, which could adversely affect the Company's ability to further develop and market its products. 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 the Company has limited or no experience. (2) Summary of Significant Accounting Policies (a)Cash Equivalents Cash equivalents consist primarily of U.S. Government instruments, commercial paper, master notes and other readily marketable debt instruments. The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents. (b) Investments in Securities The Company classifies its investment in debt and equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. At December 31, 1997, all investments in securities were classified as available-for-sale. F-7 (c) Long-Lived Assets Long-lived assets include: o Fixed assets are stated at cost. Depreciation of fixed assets is provided by straight-line methods over estimated useful lives of three to twelve years, and leasehold improvements are being amortized over the related lease term (including optional renewal periods (Note 12)) or the service lives of the improvements, whichever is shorter. o Patent and patent application costs are amortized on a straight-line basis over their respective expected useful lives, up to a 15-year period. Capitalized patent costs are reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amount may not be recoverable. The Company assesses the recoverability of net capitalized patent costs by determining if the unamortized balance can be recovered through future cash flows. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered. Assets are considered to be impaired and written down to fair value if expected associated cash flows are less than the carrying amounts. Fair value is generally the present value of the expected associated cash flows. (d) Deferred Financing Costs Costs incurred in obtaining the Industrial Development Revenue Bonds (Note 6) are amortized using the straight-line method over the terms of the related bonds. (e) Gain on Sale of Investment in Affiliate Cadus Pharmaceutical Corporation ("Cadus") was incorporated in January 1992 to develop novel classes of therapeutics that target signal transduction pathways. The Company held a 50% investment in the capital stock of Cadus through November 1994. During 1994 and 1995, the Company sold its capital stock holding in Cadus to High River Limited Partnership ("High River"). The Statement of Operations for the year ended December 31, 1995 includes in interest and other income the gain on the sale of the Cadus stock sold during that period. In exchange for receiving a now-expired right to repurchase all the outstanding shares of capital stock of Cadus held by High River, the Company granted to High River two options to purchase shares of the Company's common stock (the "Common Stock"). One option is for 150,000 shares at an exercise price per share equal to $2.00, subject to adjustment under certain circumstances, and the other option is for 300,000 shares at an exercise price per share equal to $0.69, subject to adjustment under certain circumstances. Both options will expire on April 26, 2000. (f) Revenue Recognition License fees are recognized if the Company enters into license agreements with third parties that provide for the payment of non-refundable fees when the agreement is signed or when all parties concur that specified goals are achieved. These fees are recognized as license fee revenues in accordance with the terms of the particular agreement. Research and development funding revenue is derived from collaborative agreements with third parties and is recognized in accordance with the terms of the respective contracts. Revenue from certain agreements is recognized using the percentage of completion method based on contract costs incurred to date compared with total estimated contract costs. Royalty revenue is recognized upon receipt by the Company and is derived from sales of products by corporate partners using licensed Company technology. Revenue recognized in the accompanying statements of operations is not subject to repayment. Revenue received that is related to future performance under such contracts is deferred and recognized as revenue when earned. (g) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the market price on the date of grant of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 123, "Accounting for Stock-Based Compensation," F-8 which permits entities to recognize as expense over the vesting period the fair value of all stock based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (h) Research and Development Research and development expenditures made pursuant to certain research and development contracts with academic institutions, and other research and development costs, are expensed as incurred. (i) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) Net Loss Per Share The Company adopted the provisions of SFAS No. 128, "Earnings Per Share" ("EPS") for the year ended December 31, 1997. This statement simplifies the standards for computing EPS and makes them more comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the statement of operations of all entities with complex capital structures. SFAS 128 also requires a reconciliation of the numerator and denominator of the diluted EPS calculation. Potentially dilutive securities, including convertible preferred stock, options and warrants, have not been included in the diluted EPS computation because they are anti-dilutive. (l) Reclassification Certain amounts previously reported have been reclassified to conform to current year's presentation. F-9 (3) Securities Available-For-Sale The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security type at December 31, 1997 and 1996, were as follows: At December 31, 1997:
Gross Unrealized Gross Amortized Holding Unrealized Cost Gains Holding Losses Fair Value ---- ----- -------------- ---------- Commercial paper ........................ $ 12,104,000 $ 4,000 $ -- $ 12,108,000 U.S. Government debt .................... 23,568,000 24,000 (5,000) 23,587,000 U.S. corporate debt ..................... 3,992,000 4,000 -- 3,996,000 Foreign corporate debt .................. 4,719,000 7,000 -- 4,726,000 Foreign Government/Agency guaranteed debt......................... 12,617,000 18,000 -- 12,635,000 ------------ ------------ ------------ ------------ $ 57,000,000 $ 57,000 $ (5,000) $ 57,052,000 ============ ============ ============ ============ At December 31, 1996: U.S. Government debt .................... $ 10,829,000 $ -- $ (49,000) $ 10,780,000 ============ ============ ============ ============
Maturities of debt securities classified as available-for-sale were as follows at December 31, 1997: Years Ended December 31, Amortized Cost Fair Value -------------- ---------- 1998 ...................... $25,849,000 $25,859,000 1999 ...................... 6,984,000 6,983,000 2000 ...................... 24,167,000 24,210,000 ----------- ----------- $57,000,000 $57,052,000 =========== =========== Proceeds from the sale of investment securities available-for-sale were $195,450,000 and $21,836,000 in 1997 and 1996, respectively. Gross realized gains included in income in 1997 were $1,000 and gross realized losses included in income 1997 were $3,000. There were no realized gains or losses in 1996. F-10 (4) Other Assets The following items are included in other assets: December 31, December 31, 1997 1996 ---------- ---------- Deposits ....................................... $ 115,000 $ 77,000 Investment in CombiChem, Inc. .................. 2,000,000 -- ---------- ---------- $2,115,000 $ 77,000 ========== ========== In October 1997, the Company entered into a Collaborative Research and License Agreement with CombiChem, Inc. ("CombiChem"), a private company, to discover and develop novel small molecules for use against selected targets for the treatment of cancer. The companies are utilizing CombiChem's Discovery EngineTM and Universal Informer LibraryTM to generate small-molecules for screening in the Company's assays for identification of lead candidates. The Company is providing CombiChem with research funding through October 1999 in the amount of $500,000 annually (of which the first $500,000 was paid in October 1997), milestone payments and royalties on marketed products resulting from the collaboration, if any. Concurrent with the execution of the Collaborative Research and License Agreement, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 250,000 shares of common stock of CombiChem, as adjusted, for aggregate consideration of $2,000,000. The Company has recorded its investment in CombiChem using the cost method of accounting which approximates market value. (5) Accrued Expenses and Other The following items are included in accrued expenses and other: December 31, December 31, 1997 1996 ----------- ----------- Salaries and other payroll related expenses ............................. $ 773,000 $ 782,000 Legal and accounting fees ...................... 169,000 217,000 Other .......................................... 498,000 367,000 ========== ========== $1,440,000 $1,366,000 ========== ========== (6) Long-term Debt Long-term debt consists of the following: December 31, December 31, 1997 1996 ----------- ----------- 10.75% Bond due 1997 .......................... $ -- $ 2,113,000 11.25% Bond due 2004 ........................... 2,200,000 2,200,000 ----------- ----------- 2,200,000 4,313,000 Less current portion ........................... -- (2,113,000) =========== =========== $ 2,200,000 $ 2,200,000 =========== =========== On December 31, 1986, the New York City Industrial Development Agency (the "NYIDA") issued on behalf of the Company an Industrial Development Revenue Bond (the "1986 Bond") in the amount of $2,113,000 with a F-11 maturity date of December 15, 1994. The proceeds from the sale of the 1986 Bond were used by the Company for the acquisition, construction and installation of the Company's research and development facility in New York City. During December 1994, the 1986 Bond's original maturity date of December 15, 1994 was extended to June 15, 1996. During June 1996, the Company and the NYIDA extended the maturity date an additional eighteen months to December 15, 1997. The Company repaid the obligation on December 15, 1997. In August 1990, the NYIDA issued another Industrial Development Revenue Bond (the "1990 Bond") in the amount of $2,200,000. The 1990 Bond is due May 1, 2004. If the Company terminates its lease on its New York City facility (the "Lease") the 1990 Bond will become due 60 days prior to such date. The Lease is scheduled to expire in March 1999 and the Company is currently in discussions regarding its extension and considering other alternatives. The proceeds from the sale of the 1990 Bond were used by the Company for the acquisition, construction and installation of the Company's research and development facility in New York City. The Company has granted a security interest in substantially all equipment located in its New York City facility to secure the obligations of the Company to the NYIDA relating to the 1990 Bond. Interest expense on the 1986 and 1990 Bonds for the years ended December 31, 1997 and 1996 was $465,000 and $475,000 respectively. (7) Other Long-term Liabilities Other long-term liabilities are comprised of the following: December 31, December 31, 1997 1996 ----------- ----------- Liability to reacquire IL-6m rights .......... $ 283,000 $ 1,917,000 Liability under capital lease obligations .... 1,469,000 354,000 Liability under license agreement ............ 43,000 49,000 Preferred stock dividends payable ............ 112,000 -- ----------- ----------- 1,907,000 2,320,000 Less current portion ......................... (677,000) (1,745,000) ----------- ----------- $ 1,230,000 $ 575,000 =========== =========== In July 1993, the Company entered into an agreement with Erbamont, Inc., now a subsidiary of Pharmacia and Upjohn, Inc. ("Pharmacia"), to acquire the worldwide rights to IL-6m, a blood cell growth factor, which had been licensed to Pharmacia pursuant to a development and licensing agreement. In consideration of the return of rights and the transfer of certain material and information, the Company had paid $1.4 million and had further obligations to Pharmacia totaling $283,000 at December 31, 1997. In February 1998, such amount was paid off in its entirety. In addition, the Company is required to pay Pharmacia up to $2.7 million in royalties on eventual sales of IL-6m, if any. The Company is obligated under various capital leases for certain laboratory, office and computer equipment and also certain building improvements primarily under a December 1996 financing agreement with Finova Technology Finance, Inc. ("Finova"). The agreement allows the Company to finance the lease of equipment and make certain building and leasehold improvements to existing facilities involving amounts aggregating approximately $2,500,000. As of December 31, 1997, the Company had entered into six individual leases aggregating a total cost of $1,745,000. Each lease has a fair market value purchase option at the expiration of a 42-month term. Pursuant to the agreement, the Company issued to Finova a warrant expiring December 31, 1999 to purchase 23,220 shares of Common Stock at an exercise price of $9.69 per share. The Company recorded a non-cash debt discount of approximately $125,000 in connection with this financing, which discount is being amortized over the 42-month term of the first lease. The financing agreement with Finova expired in December 1997 and the Company did not utilize the full $2,500,000 under the agreement. The Company anticipates that it will enter into a new financing agreement with Finova during the second quarter of 1998 aggregating approximately $2,000,000; however, no assurance can be given that such agreement will be consummated. See Notes 12 and 14. F-12 At December 31, 1997 and 1996, the gross amount of laboratory and office equipment and building improvements and the related accumulated depreciation and amortization recorded under all capital leases were as follows: December 31, December 31, 1997 1996 ----------- ----------- Laboratory, office and computer equipment ........ $ 1,204,000 $ 406,000 Building improvements ............................ 831,000 297,000 ----------- ----------- 2,035,000 703,000 Less accumulated depreciation and amortization ... (291,000) (190,000) ----------- ----------- $ 1,744,000 $ 513,000 =========== =========== In connection with the Company's production and eventual marketing of certain products, the Company entered into a license agreement that requires minimum annual royalty payments throughout the term of the agreement. The agreement expires in 2004 and calls for minimum annual payments of $10,000, which are creditable against royalties that may be due from sales. To the extent the minimum annual royalties are not expected to be offset by sales, the Company has charged the net present value of these payments to operations. An interest rate of 10% was used to discount the cash flows. In July 1995, a director loaned the Company $180,000 in exchange for a long-term note due two years from issuance at an annual interest rate of 8%. As part of the transaction, the director was granted 36,000 warrants to purchase Company Common Stock at $1.50 per share and an additional 36,000 warrants to purchase Common Stock at $3.00 per share. In May 1996, the Company and the director exchanged the note for 24,000 shares of Common Stock and the Company paid the accrued and unpaid interest on the note in the amount of $10,000 in cash. The Company recorded an extraordinary loss of $39,000 on the extinguishment of the debt. The Company has registered such shares of Common Stock with the Securities and Exchange Commission (the "Commission") under a registration statement in accordance with the provisions of the Securities Act of 1933 (the "1933 Act"). On August 11, 1995, the Oracle Group purchased 1,000,000 shares of Common Stock for a purchase price of $1.5 million and made a loan to the Company in the aggregate amount of $2.5 million with a two-year maturity, but subject to mandatory prepayment, in whole or in part, upon the occurrence of certain events, including the raising of certain additional funds. The loan carried an annual interest rate of 8%. The Oracle Group includes Oracle Partners, LP, Quasar International Partners C.V., Oracle Institutional Partners LP, Sam Oracle Fund, Inc. and Warren B. Kanders. The Oracle Group also received warrants exercisable at any time until August 10, 2000 entitling the holders thereof to purchase 500,000 shares of Common Stock at a price of $1.50 per share and 500,000 shares of Common Stock at a price of $3.00 per share. As a result of the Company's offerings of shares of its Common Stock in November 1995 and February 1996, the Oracle Group was entitled to require the Company to apply 20 percent of the gross proceeds of the sale of the shares of Common Stock from the offerings to repay the loan. In May 1996, the Company and the Oracle Group exchanged the notes in the aggregate outstanding principal amount of $2.5 million for 333,333 shares of Common Stock and the Company paid the accrued and unpaid interest on the notes in the amount of $143,000 in cash. The Company recorded an extraordinary loss of $1,228,000 on the extinguishment of the debt. The Company has registered such shares of Common Stock with the Commission under a registration statement in accordance with the provisions of the 1933 Act. (8) Research Agreements The Company has entered into several research and development agreements with third parties. Generally, the agreements provide for the Company to receive research and development funding, milestone payments, royalties, or license fees or a combination thereof. In return, the Company has granted licenses to these third parties to market or manufacture and market certain of its products in specified fields of use and in specified geographic areas. Pursuant to the Company's research and license agreement with Merck KGaA ("Merck"), the Company has the right to co-promote its BEC2 product in North America. F-13 Revenues for the years ended December 31, 1997, 1996, and 1995 were $5,348,000, $600,000, and $800,000 respectively. Revenues for each year consisted of $300,000 in research support from the Company's corporate partnership with the Wyeth-Lederle vaccine and pediatrics division of American Home Products Corporation ("American Home") in infectious disease vaccines. The year ended December 31, 1997 included $2,000,000 in milestone payments and $1,667,000 in research and support payments from the Company's research and license agreement with Merck. In addition, revenues for the years ended December 31, 1997 and 1995 included milestone payments of $1,000,000 and $500,000, respectively, from the Company's strategic alliance with Abbott Laboratories ("Abbott") in diagnostics. The years ended December 31, 1997 and 1996 also included royalty revenue of $381,000 and $225,000, respectively, from the Abbott alliance. Finally, the year ended December 31, 1996 included $75,000 in license fees from the Company's cross-licensing agreement with Immunex Corporation ("Immunex") for novel hematopoietic growth factors. Revenues were derived from the following geographic areas: Year Ended December 31, --------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- United States ............ $1,681,000 $ 600,000 $ 800,000 Europe ................... 3,667,000 -- -- ---------- ---------- ---------- $5,348,000 $ 600,000 $ 800,000 ========== ========== ========== (9) Preferred Stock In connection with the December 1997 amendment to the Company's research and license agreement with Merck, Merck purchased from the Company in December 1997 400,000 shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Shares" or "Series A Preferred Stock") for total consideration of $40,000,000, before issuance costs of $3,000. The holders of the Series A Preferred Shares are entitled to receive annual cumulative dividends of $6.00 per share. Dividends accrue as of the issuance date of the Series A Preferred Shares and are payable on the outstanding Series A Preferred Shares in cash annually on December 31 of each year beginning December 31, 1999 or at the time of conversion or redemption of the Series A Preferred Shares on which the dividend is to be paid, whichever is sooner. Up to 100,000 Series A Preferred Shares are currently convertible and an additional 100,000 Series A Preferred Shares will become convertible on each of January 1, 2000, January 1, 2001 and January 1, 2002. During the period from issuance through December 31, 1999, the Series A Preferred Shares are convertible at a price equal to $12.50 per share; during the period from January 1, 2000 through December 31, 2000 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 1999; during the period from January 1, 2001 through December 31, 2001 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2000; during the period from January 1, 2002 through December 31, 2002 the Series A Preferred Shares are convertible at a price equal to 88% of the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2001; and anytime after January 1, 2003 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2002. The conversion price is subject to adjustment in the case of certain dilutive events. Further, in the event the average market price of the Common Stock for the five consecutive trading days ending one trading day prior to any trading day during which any Series A Preferred Shares are outstanding exceeds 150% of the conversion price then in effect, the Company has the right to require the holder of the Series A Preferred Shares to convert all such shares that may be convertible. The Company may also redeem in whole or any part of the Series A Preferred Shares then outstanding at a redemption price of $120 per Preferred Share, plus accrued and unpaid dividends thereon. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings, available for distribution to its stockholders, before any amount shall be paid the holders of the Common Stock or holders of shares of other classes or series of capital stock of the Company, an amount equal to the preference in liquidation; provided that, if the assets are insufficient to pay the full amount due to the holders of Series A Preferred Shares, such holders will receive a pro rata portion thereof. In accordance with the terms of the Series A Preferred Stock, the holder is able to realize an assured incremental yield of $5,455,000 on the conversion of the Series A Preferred Stock if converted from January 1, 2002 through December 31, 2002. Such amount is being amortized as a preferred stock dividend over a five-year period beginning with the day of issuance. Accrued dividends were $112,000 plus the incremental yield on the conversion discount of $51,000 at December 31, 1997. F-14 (10) Stock Options and Warrants (a) Stock Option Plans: In February 1986, the Company adopted and the shareholders thereafter approved an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan (the "86 Plans"). In February 1996, the Company's Board of Directors adopted and the shareholders thereafter approved an additional Incentive Stock Option Plan and Non-Qualified Stock Option Plan (the "96 Plans"). Combined, the 86 Plans and 96 Plans, as amended, provide for the granting of options to purchase up to 4,500,000 shares of Common Stock to key employees, directors, consultants and advisors of the Company. Incentive stock options may not be granted at a price less than the fair market value of the stock at the date of grant and may not be granted to non-employees. Options under both the 86 Plans and 96 Plans, unless earlier terminated, expire ten years from the date of grant. Certain options granted under these plans vest over one-to-five-year periods. At December 31, 1997, options to purchase 2,377,095 shares of Common Stock were outstanding and 1,592,156 shares were available for grant. Options may no longer be granted under the 86 Plans pursuant to the terms of the Plans. A summary of stock option activity follows: Weighted average exercise Number of price per shares share ---------- --------- Balance at December 31, 1994 ................ 892,079 $ 6.83 1995 activity: Granted .................................. 752,000 1.91 Exercised ................................ (156,750) 1.04 Canceled ................................. (120,375) 1.45 --------- Balance at December 31, 1995 ................ 1,366,954 2.34 1996 activity: Granted .................................. 1,077,875 9.32 Exercised ................................ (266,275) 3.18 Canceled ................................. (74,977) 2.58 --------- Balance at December 31, 1996 ................ 2,103,577 5.80 1997 activity: Granted .................................. 456,194 6.62 Exercised ................................ (147,450) 1.51 Canceled ................................. (35,226) 8.60 --------- Balance at December 31, 1997 ................ 2,377,095 $ 6.19 ========= During the years ended December 31, 1997 and 1996, the Company granted options to purchase 32,000 shares and 116,000 shares, respectively, of its Common Stock to certain Scientific Advisory Board members in consideration for future services. The fair value of these grants was $124,000 and $756,000, respectively, as calculated using the Black-Scholes option pricing model. Compensation expense is being recognized ratably over the respective vesting period of the options. See Note 10(c) for weighted average assumptions used. During the years ended December 31, 1997 and 1996, the Company recognized approximately $189,000 and $95,000, respectively, in compensation expense relating to the options granted to Scientific Advisory Board members. During April 1995, the Company completed the sale of the remaining one-half of its shares of capital stock of Cadus for $3.0 million to High River. In exchange for receiving a now-expired right to repurchase all the F-15 outstanding shares of capital stock of Cadus held by High River, the Company granted to High River two options to purchase shares of Common Stock. One option is for 150,000 shares at an exercise price per share equal to $2.00, subject to adjustment under certain circumstances, and the other option is for 300,000 shares at an exercise price per share equal to $0.69, subject to adjustment under certain circumstances. Both options will expire on April 26, 2000. The 450,000 options have a weighted average exercise price of $1.13. On February 2, 1995, exercise prices for certain outstanding options granted under the 1986 Plans with original exercise prices in excess of $1.25 per share were offered to be repriced to $1.25 per share, by vote of a Special Subcommittee of the Compensation Committee of the Board of Directors. Benefit of repricing was confined to individuals who continued to serve the Company as employees or consultants, and 645,000 options were repriced. In connection with the offer of repricing, the vesting schedule of those choosing to accept repriced options was extended to June 30, 1995 for options already vested or to vest prior to June 30, 1995. The closing trading price of the Company's Common Stock on February 2, 1995 was $0.69. (b) Warrants As of December 31, 1997, a total of 2,406,145 shares of Common Stock were issuable upon exercise of outstanding warrants. Such warrants have been issued to certain officers, directors and other employees of the Company, certain Scientific Advisory Board members, certain investors and certain credit providers and investors. A summary of warrant activity follows: Weighted average exercise Number of price per shares share ---------- --------- Balance at December 31, 1994 ............... 2,472,567 $ 10.01 1995 activity: Granted ................................. 1,434,300 3.03 Exercised ............................... (15,300) 1.50 Canceled ................................ -- -- --------- Balance at December 31, 1995 ............... 3,891,567 3.15 1996 activity: Granted ................................. 23,220 9.69 Exercised ............................... (604,892) 4.89 Canceled ................................ (34,250) 12.92 --------- Balance at December 31, 1996 ............... 3,275,645 2.41 1997 activity: Granted ................................. 397,000 1.50 Exercised ............................... (869,500) 1.56 Canceled ................................ (397,000) 1.50 --------- Balance at December 31, 1997 ............... 2,406,145 $ 2.71 ========= In March 1997, the Company extended for a two-year period the term of an officer's warrant to purchase 397,000 shares of the Company's Common Stock at a per share exercise price equal to $1.50. In connection with this transaction, the Company recognized non-cash compensation expense of approximately $2,233,000. During September 1996, the Company repriced certain warrants held by investors to purchase 80,700 shares of Common Stock in order to promote their exercise prior to pending expiration. The warrants were repriced to an amount which was ten percent less than the average closing price for the Common Stock for the thirty days leading F-16 up to and including the day prior to the date of exercise. The fair market value of the warrants was reflected as a cost of capital. During November 1996, the Company repriced certain warrants held by investors to purchase 130,000 shares of Common Stock in order to promote their exercise prior to pending expiration. The warrants were repriced to an amount which was ten percent less than the average closing price for the Common Stock for the thirty days leading up to and including the day prior to the date of exercise. The fair market value of the warrants was reflected as a cost of capital. In December 1995, the Company granted its President a ten-year warrant to purchase 350,000 shares of Common Stock at an exercise price equal to the $5.50 trading price of the Common Stock on the date of grant. The grant of the warrant was approved by shareholders at the Company's Annual Meeting held June 3, 1996. On February 2, 1995, exercise prices for certain granted and outstanding warrants were offered to be repriced to $1.50 per share. The benefit of the repricing was confined to individuals who continued to serve the Company as employees, directors or consultants, and 2,048,217 warrants were repriced. In consideration for the offer of repricing, those choosing to accept the repriced warrants were to pay the Company the difference in value before and after repricing as calculated by use of the Black-Scholes model, which payment could be made through promissory notes to the Company. The closing trading price of the Company's Common Stock on February 2, 1995 was $.69. The outstanding warrants expire and are exercisable for the number of shares of Common Stock as shown below: December 1999 ............................................ 47,820 March 2000 ................................................ 12,300 July 2000 ................................................. 72,000 August 2000 .............................................. 925,000 November 2000 ............................................ 12,720 March 2001 ............................................... 2,500 May 2001 ................................................. 971,805 June 2003 ................................................ 12,000 December 2005 ............................................. 350,000 --------- Total .................................................. 2,406,145 ========= (c) SFAS No. 123: In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock Based Compensation." The following table summarizes the weighted average fair value of stock options and warrants granted to employees and directors during the years ended December 31, 1997 and 1996:
Option Plans ------------------------------------------------------------------------ 1997 1996 1995 ------------------- -------------------- ------------------- Shares $ Shares $ Shares $ ------ ------- ------ ------- ------ ------- Exercise price equals market value at date of grant .................. 424,194(1) $ 4.29 961,875(1) $ 5.56 602,000 $ 1.07 Exercise price exceeds market value at date of grant .................. -- $ -- -- $ -- 795,000 $ 0.32
(1) Does not include 32,000 shares in 1997 and 116,000 shares in 1996 under options granted to non-employees. The fair value of these non-employee grants has been recorded as compensation expense as prescribed under SFAS 123 and is being recognized ratably over the respective vesting period of the options. F-17
Warrants ------------------------------------------------------------------------ 1997 1996 1995 ------------------- -------------------- ------------------- Shares $ Shares $ Shares $ ------ ------- ------ ------- ------ ------- Exercise price equals market value at date of grant .................. -- $ -- 23,220 $ 5.39 1,434,300 $ 0.64 Exercise price is less than market value at date of grant ............ 397,000(1) $ 5.91 -- $ -- -- $ -- Exercise price exceeds market value at date of grant .................. -- $ -- -- $ -- 2,048,217 $ 0.29
(1) The only grant of warrants during 1997 was the extension of an officer's warrant to purchase 397,000 shares of Common Stock. The extension has been considered a cancellation of the original grant and the issuance of a new below market grant. Accordingly, the Company recognized compensation expense consistent with APB Opinion No. 25. The fair value of stock options and warrants was estimated using the Black-Scholes option pricing model. The Black-Scholes model considers a number of variables including the exercise price and the expected life of the option, the current price of the Common Stock, the expected volatility and the dividend yield of the underlying Common Stock, and the risk-free interest rate during the expected term of the option. The following summarizes the weighted average assumptions used:
Option Plans Warrants --------------------------------------- ---------------------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- ---------- ---------- --------- Expected life (years) ... 5.0 3.5 2.5 2.0 2.0 (1) 2.0 Interest rate ........... 6.00% 5.00% 5.00% 6.00% 5.00% 5.00% Volatility .............. 72.29% 85.13% 85.13% 72.29% 85.13% 85.13% Dividend yield .......... 0% 0% 0% 0% 0% 0%
(1) The weighted average expected life does not include the warrants repriced in 1996 as they were exercised simultaneously. The estimated volatility for the year ended December 31, 1997 reflects the performance of the Company's Common Stock over the fourteen-month period ended March 1998. The estimated volatility for the years ended December 31, 1996 and 1995 reflects the performance of the Company's Common Stock over the twelve-month period ended December 1996. The expected life of the options and warrants reflects the anticipated holding period prior to exercise. The estimated risk-free interest rate used is based on risk-free investment products with similar terms. F-18 The following table summarizes information concerning stock options outstanding at December 31, 1997:
Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/97 Term Price at 12/31/97 Price - ------------------------------ ----------- ----------- -------- ----------- -------- $0.563 - 1.063 ............... 413,625 3.61 $ 0.78 358,625 $ 0.73 1.25 - 2.00 ................. 329,625 3.42 1.60 319,125 1.61 3.75 - 5.938 ................ 189,000 8.01 5.05 124,002 5.14 6.00 ........................ 302,250 9.90 6.00 -- -- 6.125 - 8.125 ............... 161,626 8.73 7.15 36,502 7.13 8.30 - 10.00 ................ 356,800 8.61 8.63 153,459 8.57 10.875 - 16.00 .............. 624,169 8.18 10.99 260,060 11.09 --------- --------- 2,377,095 7.03 6.19 1,251,773 4.69 ========= =========
As of December 31, 1997, the outstanding warrants to purchase 2,406,145 common shares were all exercisable. The weighted average remaining contractual term at December 31, 1997 for the 12,300 outstanding warrants exercisable at $.63 per share is 2.2 years, the 24,600 exercisable at $.69 per share is 2.0 years, the 1,437,525 exercisable at $1.50 per share is 3.1 years, the 498,500 exercisable at $3.00 per share is 2.6 years, the 350,000 exercisable at $5.50 per share is 8.0 years, the 12,000 exercisable at $7.00 per share is 5.5 years, the 23,220 exercisable at $9.69 per share is 2.0 years, the 6,000 exercisable at $10.00 per share is 2.9 years, and the 42,000 exercisable at $13.33 per share is 3.3 years. The Company applies APB Opinion 25 and related Interpretations in accounting for its options and warrants. Except as previously indicated, no compensation cost has been recognized for its stock option and warrant grants. Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below.
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ----------- ------------- ------------- Net loss to common stockholders As reported $(15,654,000) $ (16,015,000) $ (9,641,000) Pro forma (13,511,000) (19,653,000) (11,728,000) Loss per share Basic and diluted: As reported (0.67) (0.83) (0.72) Pro forma (0.58) (1.01) (0.88)
The pro forma effect on the loss for the years ended December 31, 1997, 1996, and 1995 is not necessarily indicative of the pro forma effect on future years operating results since it does not take into effect the pro forma compensation expense related to grants made prior to January 1, 1995. F-19 (11) Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and December 31, 1996 are presented below. December 31, December 31, 1997 1996 ------------ ------------ Deferred tax assets: Liability to reacquire IL-6m rights and materials .................. $ 262,000 $ 863,000 Research and development credit carryforward ................... 2,303,000 1,883,000 Compensation relating to the issuance of stock options and warrants .......................... 189,000 2,740,000 Net operating loss carryforwards ........ 52,408,000 44,374,000 Other ................................... 1,116,000 958,000 ------------ ------------ Total gross deferred tax assets ............ 56,278,000 50,818,000 Less valuation allowance ................ (56,278,000) (50,818,000) ------------ ------------ Net deferred tax assets ................. -- -- ------------ ------------ Deferred tax liabilities: Total gross deferred tax liabilities ........................... -- -- ------------ ------------ Net deferred tax ........................ $ -- $ -- ============ ============ At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $115,000,000 which expire at various dates from 2000 through 2012. At December 31, 1997, the Company had research credit carryforwards of approximately $2,303,000 which expire at various dates between years 2001 and 2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of the Company's net operating loss and research credit carryforwards may be limited if the Company experiences a change in ownership of more than 50 percentage points within a three-year period. Since 1986, the Company experienced two ownership changes. Accordingly, the Company is significantly limited in utilizing its tax net operating loss carryforwards arising before such ownership changes to offset future federal taxable income. Similarly, the Company is significantly restricted in using its research credit carryforwards arising before such ownership changes to offset future federal income tax expense. (12) Commitments Leases The Company leases premises under an operating lease, a portion of which expired in 1993 and a portion of which expires in 1999. The Company has extended the 1993 expired portion of the lease through 1997 at 85% of each year's fair market rental value and from 1997 to 1999 at 100% of each year's fair market rental value, for a portion of the premises. The rate for the remaining portion of the premises is $264,000 annually through March 31, 1997 and $285,000 annually through March 31, 1999. Rent expense for leased premises was approximately $554,000, $508,000, and $493,000 for the years ended December 31, 1997, 1996 and 1995, respectively. See also Note 7. F-20 Future minimum lease payments under the capital and operating leases are as follows: Capital Operating Years ending December 31, Leases Leases ----------- ----------- 1998 .................................... $ 510,000 $ 564,000 1999 .................................... 559,000 323,000 2000 .................................... 505,000 9,000 2001 .................................... 143,000 1,000 2002 .................................... 3,000 -- ----------- ----------- 1,720,000 897,000 Less interest expense .................... (251,000) -- ----------- ----------- $ 1,469,000 $ 897,000 =========== =========== Supported Research The Company has entered into various research and license agreements with certain academic institutions and others to supplement the Company's research activities and to obtain for the Company rights to certain technology. The agreements generally require the Company to fund the research and to pay royalties based upon percentages of revenues, if any, on sales of products developed from technology arising under these agreements. Consulting Agreements The Company has consulting agreements with several of its Scientific Advisory Board members and other consultants. These agreements generally are for a term of one year or are terminable at the Company's option. (13) Retirement Plans The Company maintains a 401(k) retirement plan available to all full-time, eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain contributions to the plan. No such contributions have been made to the plan during the years ended December 31, 1997, 1996 and 1995. (14) Supplemental Cash Flow Information and Non-cash Investing and Financing Activities are as follows: Year Ended December 31, -------------------------------- 1997 1996 1995 ---------- --------- -------- Cash paid during the year for: Interest ................................. $ 707,000 $ 817,000 $504,000 ========= ========= ======== Non-cash investing and finance activities: Finova capital asset and lease obligations additions ................... 1,324,000 421,000 -- ========= ========= ======== Fair value of Finova warrant .............. -- 125,000 -- ========= ========= ======== Other capital lease obligations ........... 28,000 -- -- ========= ========= ======== Unrealized gain (loss) on securities available-for-sale ...................... 101,000 (49,000) -- ========= ========= ======== Extinguishment of Oracle Group debt for stock .......................... -- 2,500,000 -- ========= ========= ======== Extinguishment of director debt for stock .......................... -- 180,000 -- ========= ========= ======== Preferred Stock dividend .................. 163,000 -- -- ========= ========= ======== F-21 (15) Related Party Transactions Through March 1995, the Company made miscellaneous noninterest-bearing cash advances to the President and CEO of the Company totaling approximately $156,000. The officer provided the Company with a demand promissory note pursuant to which the officer was obligated to repay the debt over a twenty-four month period ending April 30, 1997. In March 1997, the Company accepted a new promissory note (the "new promissory note") in the aggregate amount of $110,000 from the officer. The new promissory note was payable as to $15,000 no later than May 15, 1997 and the remainder upon the earlier of on demand by the Company or December 31, 1997 and bore interest at the rate of 5% compounded quarterly. The new promissory note covered the remaining balance of the original note, interest thereon and additional miscellaneous cash advances made since the date of the original note totaling $15,000. At December 31, 1997, the new promissory note was paid in full by the officer. In January 1996, the Company paid Concord International Investment Group, LP, approximately $163,000 for services rendered by it to the Company in connection with structuring a contemplated product related financing for C225. Mr. Robert F. Goldhammer, Chairman of the Board of Directors, is a limited partner of Concord International Investment Group, LP. In August 1995 and January 1996, the Company paid Delano & Kopperl Financial Advisors, Inc. a total of approximately $69,000 for services rendered by it to the Company in connection with structuring a contemplated product related financing for C225. Paul B. Kopperl, a director of the Company, is President, director, and 25% shareholder of Delano & Kopperl Financial Advisors, Inc. In January 1998, the Company accepted a promissory note totaling approximately $131,000 from its President and CEO in connection with the exercise of a warrant to purchase 87,305 shares of the Company's Common Stock. The note is due no later than two years from issuance and bears annual interest at the rate of 8.5%. (16) Fair Value of Financial Instruments For the years ended December 31, 1997 and 1996, the following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and cash equivalents, accounts payable, accrued and other current liabilities The carrying amounts approximate fair value because of the short maturity of those instruments. Long-term debt Discounted cash flow analyses were used to determine the fair value of long-term debt because quoted market prices on these instruments were unavailable. The fair value of these instruments approximated the carrying amount. F-22 (17) Summary of Quarterly Results of Operations (Unaudited) The following unaudited quarterly financial information includes, in management's opinion, all normal and recurring adjustments necessary to fairly present the Company's results of operations and related information for the periods presented.
Quarter Ended --------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ----------- ------------ ----------- Year ended December 31, 1997: Revenues ................................. $ 75,000 $ 3,196,000 $ 742,000 $ 1,335,000 Operating expenses ....................... 6,478,000 4,529,000 4,359,000 6,445,000 ----------- ----------- ----------- ---------- Operating loss ........................... (6,403,000) (1,333,000) (3,617,000) (5,110,000) Net interest and other income ............ (50,000) (295,000) (283,000) (344,000) ----------- ----------- ----------- ---------- Net loss ................................. (6,353,000) (1,038,000) (3,334,000) (4,766,000) Preferred stock dividends (including incremental yield of $51,000) ..................... -- -- -- 163,000 ----------- ----------- ----------- ---------- Net loss to common stockholders .......... $(6,353,000) $(1,038,000) $(3,334,000) $(4,929,000) =========== =========== =========== =========== Basic and diluted net loss per common share ....................... $ (0.30) $ (0.04) $ (0.14) $ (0.20) =========== =========== =========== =========== Year ended December 31, 1996: Revenues ................................. $ 75,000 $ 75,000 $ 75,000 $ 375,000 Operating expenses ....................... 3,066,000 3,438,000 3,714,000 5,225,000 ----------- ----------- ----------- ---------- Operating loss ........................... (2,991,000) (3,363,000) (3,639,000) (4,850,000) Net interest and other expense (income) ............................... 154,000 (61,000) (97,000) (91,000) ----------- ----------- ----------- ---------- Loss before extraordinary item ........... (3,145,000) (3,302,000) (3,542,000) (4,759,000) Extraordinary loss on extinguishment of debt ................. -- 1,267,000 -- -- ----------- ----------- ----------- ---------- Net loss ................................. $(3,145,000) $(4,569,000) $(3,542,000) $(4,759,000) =========== =========== =========== =========== Basic and diluted net loss per common share: Loss before extraordinary item ........... $ (0.18) $ (0.17) $ (0.18) $ (0.24) Extraordinary loss on extinguishment of debt ................................ -- 0.06 -- -- ----------- ----------- ----------- ---------- Net loss per common share ................ $ (0.18) $ (0.23) $ (0.18) $ (0.24) =========== =========== =========== ===========
F-23 EX-4.6 2 PREFERRED STOCK PURCHASE AGREEMENT Exhibit 4.6 PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of December 3, 1997 by and between ImClone Systems Incorporated, a Delaware corporation, with a principal place of business at 180 Varick Street, 7th Floor, New York, New York 10014, USA (the "Company"), and Merck KGaA, Frankfurter Strasse 250, D-64271, Darmstadt 1, Germany (the "Buyer"). WHEREAS: A. The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"); B. The Buyer wishes to purchase, in the amounts and upon the terms and conditions stated in this Agreement, shares of the Company's Series A Convertible Preferred Stock, $1.00 par value per share (the "Series A Preferred Stock"); and "C. WHEREAS, the parties have also on this day entered into an amendment to their Research and License Agreement dated December 19, 1990, as previously amended by amendments dated each of September 1, 1993, November 2, 1993 and May 14, 1996" (the "Amendment"). NOW THEREFORE, the Company and the Buyer hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. a. Purchase of Preferred Stock. The Company shall issue and sell to the Buyer on the Closing Date (as defined below) and the Buyer shall purchase 400,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Shares"), which shall be convertible into shares (the "Conversion Shares") of the Company's common stock, $.001 par value (the "Common Stock") in accordance with the terms of the form of Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock attached hereto as Exhibit A (the "Certificate of Designations"). The per share purchase price for the Series A Preferred Shares shall be One Hundred Dollars ($100). b. Form of Payment. The Buyer shall pay the $40,000,000 purchase price for the Series A Preferred Shares (the "Purchase Price") by wire transfer of United States Dollars to the Company on the Closing Date (as defined below). The Company shall deliver to the Buyer a stock certificate, duly executed on behalf of the Company, representing the Series A Preferred Shares (the "Stock Certificate") on the Closing Date. 1 c. Closing Date. The date and time of the issuance and sale of the Series A Preferred Shares (the "Closing Date") shall be no later than 4:00 p.m. New York Eastern Standard Time on December 15, 1997 or such other date to which the parties may mutually agree. 2. BUYER REPRESENTATIONS AND WARRANTIES The Buyer represents and warrants to the Company that: a. Organization and Qualification. The Buyer is a corporation duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated. The Buyer is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect on it. "Material Adverse Effect" means any material adverse effect on operations, properties or financial condition. b. Investment Purpose. The Buyer is purchasing the Series A Preferred Shares for its own account for investment only and not with a view towards the public sale or distribution thereof except pursuant to sales registered under the 1933 Act or an exemption therefrom. c. Accredited Investor Status. The Buyer is an "accredited investor" as that term is defined in Rule 501(a)(3) of Regulation D. d. Reliance on Exemptions. The Buyer understands that the Series A Preferred Shares are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemption and the eligibility of the Buyer to acquire the Series A Preferred Shares. e. Information. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Series A Preferred Shares which have been requested by the Buyer. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. The Buyer understands that its investment in the Series A Preferred Shares involves a high degree of risk. f. Governmental Review. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Series A Preferred Shares. 2 g. Transfer or Resale. The Buyer understands that (i) the Series A Preferred Shares and the Conversion Shares have not been and are not being registered under the 1933 Act or any United States state securities laws or any other laws, and may not be transferred unless (a) subsequently registered thereunder, or (b) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (ii) any sale of such securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) except as specified in this Agreement, neither the Company nor any other person is under any obligation to register such securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. The Buyer agrees that in no event will it make a disposition of such securities unless and until it shall have first (i) notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition; and (ii) with respect to the Series A Preferred Shares, it shall have obtained the prior written consent of the Company. h. Legends. The Buyer understands that the Series A Preferred Shares and the Conversion Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates): The securities represented by this certificate have not been registered under the United States Securities Act of 1933, as amended. The securities have been acquired for investment and may not be sold, transferred or assigned unless an effective registration statement for the securities under said Act, or an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, that registration is not required under said Act has been received. The securities represented by this certificate are subject to certain restrictions on transfer as set forth in a Preferred Stock Purchase Agreement dated as of December 3, 1997, a copy of which is available for inspection at the executive offices of the Company. i. Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Buyer and is a valid and binding agreement of the Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. 3 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Buyer that: a. Organization and Qualification. The Company is a corporation duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect on it. b. Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Company and is a valid and binding agreement of the Company enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. c. Capitalization. The authorized capital stock of the Company consists of (i) 45,000,000 shares of Common Stock of which 24,185,955 shares were outstanding as of September 30, 1997, and (ii) 4,000,000 shares of Preferred Stock, $1.00 par value, none of which were issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. No shares of Common Stock or Preferred Stock are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation, as amended, as in effect on the date hereof ("Certificate of Incorporation") and the Company's By-laws, as in effect on the date hereof (the "By-laws"). d. Issuance of Shares. The Series A Preferred Shares are duly authorized and, upon issuance in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable, and free from all taxes, liens and charges with respect to the issue thereof. e. No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not result in a violation of the Company's Certificate of Incorporation or By-laws or cause the Company to be in breach of any agreement by which it is bound. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations which either singly or in the aggregate do not have a Material Adverse Effect. Except as required under the 1933 Act and any applicable United States state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement in accordance with the terms hereof. f. Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding 4 would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement of any of the documents contemplated herein. g. No Material Adverse Change. Since September 30, 1997 there has occurred no change which could reasonably be expected to have a Material Adverse Effect on the Company. 4. COVENANTS a. Best Reasonable Efforts. The parties shall use their best reasonable efforts timely to satisfy each of the conditions described in Section 5 and 6 of this Agreement. b. Form D, Blue Sky Laws. The Company agrees to file a Form D with respect to the Series A Preferred Stock as required under Regulation D. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Series A Preferred Stock for, or obtain exemption for the Series A Preferred Stock for, sale to the Buyer at the closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States. c. Reservation of Shares. The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the conversion of the Series A Preferred Shares. d. Market Stand-Off Agreement. The Buyer hereby agrees that, during the period of duration specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the 1933 Act, the Buyer and any Affiliate (as that term is defined under Rule 405 under the 1933 Act) shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time except insofar as such securities are covered by such registration statement; provided, however, that such agreement shall not exceed 90 days. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to such securities of the Buyer (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. e. Stand-Still Agreement. Except for the acquisition of Conversion Shares, for the exercise of any rights as a holder of Conversion Shares or as otherwise contemplated by this Agreement, the Buyer hereby agrees that for a period of five years from the date hereof, without the prior written consent of the Company, neither the Buyer nor any Affiliate (as that term is defined in Rule 405 under the 1933 Act) of the Buyer (regardless of whether such person or entity is an Affiliate on the date hereof) will (i) acquire, offer to acquire, or agree to acquire, directly or 5 indirectly, by purchase or otherwise, any voting securities or direct or indirect rights or options to acquire any voting securities of the Company, (ii) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies' to vote (as such terms are used in the proxy rules of the SEC), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the Company, (iii) form, join or in any way participate in a "group" within the meaning of Section 13(d) (3) of the United States Securities Exchange Act of 1934, as amended with respect to any voting securities of the Company, or (iv) otherwise act, alone or in concert with others, to seek to control or influence the management, board of directors or policies of the Company. Buyer acknowledges that the Company would not have an adequate remedy at law for money damages in the event that this covenant were not performed in accordance with its terms and therefore agree that the Company shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which it may be entitled, at law or in equity. f. Resales of Conversion Shares. Except pursuant to a registration statement provided in Article 8 hereof, the Buyer hereby agrees that Conversion Shares shall only be sold by it and any Affiliate (as defined in Rule 405 under the 1933 Act) in accordance with the following: (i) Conversion Shares relating to Tranche I (as defined in the Certificate of Designations) (a) shall not be sold prior to December 31, 1998; and (b) shall not be sold during the period December 31, 1998 through December 31, 1999 in an amount that is excess of that amount specified in Rule 144 (e) (1) of the 1933 Act. (ii) Conversion Shares relating to Tranche II (as defined in the Certificate of Designations) (a) shall not be sold prior to December 31, 2000; and (b) shall not be sold during the period December 31, 2000 through December 31, 2001 in an amount that is in excess of that amount specified in Rule 144 (e) (1) of the 1933 Act. (iii) Conversion Shares relating to Tranche III (as defined in the Certificate of Designations) (a) shall not be sold prior to December 31, 2001; and (b) shall not be sold during the period December 31, 2001 through December 31, 2002 in an amount that is in excess of that amount specified in Rule 144 (e) (1) of the 1933 Act. (iv) Conversion Shares relating to Tranche IV (as defined in the Certificate of Designations) (a) shall not be sold prior to December 31, 2002; and (b) shall not be sold during the period December 31, 2002 through December 31, 2003 in an amount that is in excess of that amount specified in Rule 144 (e) (1) of the 1933 Act. 6 5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to sell the Series A Preferred Shares is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. The parties shall have executed this Agreement and delivered the same to each other. b. The Buyer shall have delivered the Purchase Price to the Company. c. The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer at or prior to the Closing Date and an officers' certificate to such effect delivered to the Company. d. The parties shall have executed the Amendment. 6. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The obligation of the Buyer hereunder to purchase the Series A Preferred Shares is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Buyer's sole benefit and may be waived by the Buyer at any time in its sole discretion: a. The parties shall have executed this Agreement and delivered the same to each other. b. The Company shall have caused the Certificate of Designations to be filed with the Secretary of State for the State of Delaware of the United States at or before the Closing Date. c. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date and an officers' certificate to such effect delivered to the Buyer. d. The Company shall have delivered to the Buyer the Stock Certificate. e. The parties shall have executed the Amendment. 7 7. REGISTRATION RIGHTS The Buyer shall have the right to request, once for Conversion Shares relating to each tranche, that the Company effect registration with respect to all or part of Conversion Shares relating to the relevant tranche. Upon written request of the Buyer in compliance with the preceding sentence that the Company effect registration with respect to all or a part of the Registrable Securities, the Company will, as expeditiously as reasonably possible: a. prepare and file with the Commission a registration statement on Form S-3 or on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate, as the case may be, and which form shall be available for the sale of the Registrable Securities; provided, that before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, the Company will (i) furnish to one counsel selected by the Buyer copies of all such documents proposed to be filed, which documents will be subject to reasonable advance review of such counsel, and (ii) notify the Buyer of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; b. keep such registration effective for a period of no longer than two (2) years after the date of filing of such registration statement or until the Buyer has completed the distribution described in the registration statement relating thereto, whichever first occurs; c. prepare and file with the Commission such amendments and supplements to such registration statements and the Prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement; d. furnish to the Buyer such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the Prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and such other documents as the Buyer may reasonably request in order to facilitate the disposition of the Registrable Securities owned by the Buyer; e. advise the Buyer and the managing underwriters, if any, and, if requested by the Buyer or the managing underwriters, if any, confirm such advice in writing, when a registration statement or any amendment thereto has been filed with the Commission and when the registration statement or any post-effective amendment thereto has become effective; 8 f. use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of the Registrable Securities for sale in any jurisdiction, at the earliest possible time; g. cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed; h. provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; i. immediately notify the Buyer at any time when a Prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the Prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and will promptly prepare and furnish to the Buyer a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; j. make available for inspection by the Buyer, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by the Buyer or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspectors in connection with such registration statement; provided, however, that such Inspectors shall first agree in writing with the Company that any Records that are reasonably and in good faith designated by the Company as confidential at the time of delivery of such Records shall be kept confidential by such Inspectors; and k. in connection with underwritten offerings, use its reasonable best efforts to obtain a comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by comfort letters as the Buyer reasonably requests. The Buyer agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(i) hereof, the Buyer will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until the Buyer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 7(i) hereof, and, if so directed by the Company, the Buyer will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in the Buyer's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 9 8. PIGGYBACK REGISTRATION If the Company proposes to file a registration statement under the 1933 Act with respect to an offering by the Company of any class of securities after the Closing Date (other than a registration statement on Form S-4 or S-8 or any successor form to such Forms, or filed in connection with a merger, exchange offer or an offering of securities solely to the existing stockholders in connection with a merger, exchange offer or an offering of securities solely to the existing stockholders in connection with a rights offering or solely to employees of the Company), then the Company shall give written notice of such proposed filing to the Buyer at least twenty days before the anticipated filing date, and such notice shall offer Buyer the opportunity to register such amount of Registrable Securities as Buyer may request. The Company shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Buyer to include such securities in such offering on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, (i) if the managing underwriter or underwriters of such proposed underwritten offering delivers a written notice to the Buyer that the total amount of securities which the Buyer, the Company and any other persons or entities (other than such other persons or entities with whom the Company has agreements on the date hereof prohibiting reduction or limitation as contemplated herein) having registration rights, intend to include in such offering is sufficiently large as to materially and adversely affect the success of such offering, then the amount of securities to be offered for the accounts of the Buyer and for the accounts of such other persons or entities shall be reduced or limited in proportion to their respective amounts of securities to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter; provided, that no reduction shall be made in the securities to be offered for the account of the Company; and (ii) if such proposed underwritten offering involves only equity securities and the managing underwriter or underwriters thereof shall have delivered a written notice to the Buyer that the inclusion of any Registrable Securities in such offering will materially and adversely affect the success of such offering, then no Registrable Securities shall be included in such offering. 9. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 7 or Section 8 hereof shall be borne by the Company. All Selling Expenses relating to securities so registered shall be borne by the Buyer. 10. INDEMNIFICATION. a. Indemnification by the Company. The Company will, and it hereby does, agree to indemnify and hold harmless, to the full extent permitted by law, the Buyer, its directors and officers and each other person, if any, who controls the Buyer within the meaning of the 1933 Act or the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts personally paid in any settlement) to which the Buyer, any such director or officer or controlling person may become subject under the 1933 Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect 10 thereof) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the 1933 Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse the Buyer and each such director, officer or controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending such loss, claim, liability, action or proceedings; provided, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expenses arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information furnished to the Company by the Buyer for use in the preparation thereof; and provided, further, that the Company will not be liable to the Buyer or any other person, if any, who controls the Buyer, under the indemnity agreement in this Section 10(a) with respect to any preliminary prospectus as amended or supplemented as the case may be, to the extent that any such loss, claim, damage or liability of the Buyer or controlling person results from the fact that the Buyer sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final prospectus (including any documents incorporated by reference therein), whichever is most recent, if the Company has previously furnished copies thereof to the Buyer and such final prospectus, as then amended or supplemented, has corrected any such misstatement or omission. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Buyer or any such director, officer or controlling person and shall survive the transfer of such securities by the Buyer. It is agreed that the indemnity agreement contained in this Section 10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent has not been unreasonably withheld). b. Indemnification by the Buyer. The Buyer will, if the Registrable Securities are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 10) the Company, any underwriter and their respective controlling persons within the meaning of the 1933 Act and the Exchange Act, and all other prospective sellers and their respective controlling persons with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Buyer for use in the preparation of such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any underwriter or any of the Buyer or any of its directors, officers and controlling persons and shall survive the transfer of such securities by the Buyer; provided, however, that the obligations of the Buyer hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions 11 in respect thereof) if such settlement is effected without the consent of the Buyer (which consent shall not be unreasonably withheld). c. Notices of Claims, Etc. Each party entitled to indemnification under this Section 10 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided, that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 10, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. d. Contribution. If the indemnification provided for in this Section 10 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. 12 11. DEFINITIONS The term "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the 1933 Act or the Exchange Act. The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar successor federal statute. The term "person" shall mean an individual, partnership, corporation, limited liability company, trust, unincorporated organization or government or political department or agency thereof or other entity. The term "Prospectus" shall mean the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the 1933 Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of Registrable Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference into such Prospectus. The term "Registrable Securities" shall mean any Conversion Shares. As to any Registrable Securities, such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the 1933 Act and such securities shall have been disposed of pursuant to such effective registration statement, (ii) such securities shall have been distributed pursuant to Rule 144, Rule 144A, or any similar provision then in force, under the 1933 Act, (iii) such securities shall have been otherwise transferred, new certificates or other evidences of ownership for them not bearing a legend restricting further transfer and not subject to any stop transfer order or other restrictions on transfer shall have been delivered by the Company and subsequent disposition of such securities shall not require registration or qualification of such securities under the 1933 Act or any state securities laws then in force or (iv) the sale of such securities by the Buyer shall no longer require registration under the 1933 Act or such securities shall cease to be outstanding. The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the 1933 Act and the applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. The term "Registration Expenses" shall mean all expenses incurred in effecting anyregistration pursuant to this Agreement, including without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel 13 for the Company, blue sky fees and expenses and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses. The term "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of the Registrable Securities and fees and disbursements of counsel for the Buyer (other than the fees and disbursements of counsel constituting a part of blue sky fees and expenses and included in Registration Expenses). 12. GOVERNING LAW; MISCELLANEOUS. a. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware of the United States without regard to the principles of conflict of laws. b. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when such counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional originally executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. c. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. f. Notices. Any notice or communication hereunder shall be in writing and delivered by messenger, overnight courier, first class mail, (return receipt requested) or telex or telecopy (with such telex or telecopy confirmed promptly in writing by first class mail return receipt requested), as follows: 14 If to the Company: ImClone Systems Incorporated 180 Varick Street, 7th Floor New York, NY 10014 Telephone: (212) 645-1405 Telecopy: (212) 645-2054 Attention: Corporate Secretary With copy to: Howard, Darby and Levin 1330 Avenue of the Americas New York, NY 10019 Telephone: (212) 841-1000 Telecopy: (212) 841-1010 Attention: Lawrence A. Darby III, Esq. If to the Buyer: Merck KGaA Frankfurter Strasse 250 D-64271 Darmstadt 1 Germany Telephone: (011) 49 61 51 72 21 24 Telecopy: (011) 49 61 51 72 34 35 Attention: Edward R. Roberts, President, World Pharmaceuticals With copy to: Coudert Brothers 1114 Avenue of the Americas New York, NY 10036-7703 Telephone: (212) 626-4682 Telecopy: (212) 626-4120 Attention: Edwin S. Matthews, Jr., Esq. or in each case, to such address or telex or telecopy number as such party may designate in writing to the other by written notice given in the manner specified herein. All such communications shall be deemed to have been given, delivered or made when so delivered personally, by overnight courier or first class mail or sent by telex or telecopy (confirmation received), or five business days after being so mailed. 15 g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent may be withheld for any reason in the sole discretion of the party from whom consent is sought). h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. The representations, warranties and agreements of the Company and the Buyer set forth in Sections 2, 3, 4, 7, 8, 9, 10, 11 and 12 shall survive the closing. j. Publicity. The Company and the Buyer shall have the right to approve before issuance any press releases, SEC or NASD filings, or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of the Buyer, to make any press release or SEC or NASD filings with respect to such transactions as is required by applicable law and regulations. k. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. IN WITNESS WHEREOF, the Buyer and the Company have caused this Preferred Stock Purchase Agreement to be duly executed as of the date first above-written. IMCLONE SYSTEMS INCORPORATED By: /s/ Samuel D. Waksal ------------------------------------ Name: Samuel D. Waksal ---------------------------------- Its: President & CEO ----------------------------------- MERCK KGaA By: /s/ E. R. Roberts ------------------------------------ Name: E. R. Roberts ---------------------------------- Its: Head of Pharmaceuticals ----------------------------------- 16 Exhibit A to Preferred Stock Purchase Agreement CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF IMCLONE SYSTEMS INCORPORATED IMCLONE SYSTEMS INCORPORATED (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation, as amended, of the Company and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company at a meeting duly held on December 3, 1997, adopted resolutions providing for the designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of four hundred thousand (400,000) shares of Series A Convertible Preferred Stock (the "Series A Preferred Shares") of the Company, as follows: RESOLVED, that the Company is authorized to issue 400,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Shares") which shall have the following powers, designations, preferences and other special rights: II. Dividends. The holders of the then outstanding Series A Preferred Shares shall be entitled to receive, out of funds legally available therefor, cumulative dividends at the annual rate of 6% of the Stated Value thereof compounded annually (pro-rated for any portion of the applicable period during which such Series A Preferred Shares are outstanding). Dividends shall be payable on the Series A Preferred Shares then outstanding in cash (i) annually on December 31st of each year beginning on December 31, 1999 or (ii) at the time of conversion or redemption (as 17 provided herein) of the Series A Preferred Shares on which the dividend is to be paid, whichever is sooner. Dividends on the Series A Preferred Shares shall accumulate and accrue from the date of original issuance and shall accrue from day to day thereafter, whether or not earned or declared. Until any such dividend in arrears is paid, dividends shall continue to accrue on each Series A Preferred Share but the percentage rate expressed herein shall be applied to the Stated Value thereof plus all dividends thereon (including dividends computed pursuant to this sentence). III. Conversion of Series A Preferred Shares. The holders of the Series A Preferred Shares shall have the right, at their option, to convert the Series A Preferred Shares into shares of Common Stock on the following terms and conditions: A. Each Series A Preferred Share shall be convertible at any time as hereinafter provided (or, if such Series A Preferred Share is called for redemption, at any time up to and including, but not after, the close of business on the fifth full business day prior to the date fixed for such redemption, unless default shall be made by the Company in providing the funds for the payment of the redemption price), into fully paid and nonassessable shares (calculated to the nearest whole share) of Common Stock of the Company as constituted at the time of such conversion, at the conversion price in effect at the time of conversion determined as hereinafter provided (the "Conversion Price"). Each Series A Preferred Share shall have a value of $100 (the "Stated Value") and the number of shares of Common Stock issuable upon conversion of each of the Series A Preferred Shares shall be determined by dividing the Stated Value thereof by the Conversion Price then in effect. Every reference herein to the Common Stock of the Company (unless a different intention is expressed) shall be to the shares of the Common Stock of the Company, $.001 par value, as such stock exists immediately after the issuance of the Series A Preferred Shares provided for hereunder, or to stock into which such Common Stock may be changed from time to time thereafter. B. The Series A Preferred Shares shall be convertible as of the dates set forth in (i) - (iv) below. (i) up to 100,000 Series A Preferred Shares ("Tranche I") shall be convertible at any time on or after the date on which the Series A Preferred Shares are issued (the "Issuance Date"); (ii) up to an additional 100,000 Series A Preferred Shares ("Tranche II") shall be convertible at any time on or after January 1, 2000 (the "Second Anniversary Date"); (iii) up to an additional 100,000 Series A Preferred Shares ("Tranche III") shall be convertible at any time on or after January 1, 2001 (the "Third Anniversary Date"); and (iv) up to an additional 100,000 Series A Preferred Shares ("Tranche IV") shall be convertible at any time on or after January 1, 2002 (the "Fourth Anniversary Date"). C. The Series A Preferred Shares shall be convertible at the Conversion Prices set forth in (i) - (v) below. 18 1. Series A Preferred Shares converted on or after the Issuance Date and before the Second Anniversary Date shall be convertible at a per share Conversion Price equal to $12.50; (ii) Series A Preferred Shares converted on or after the Second Anniversary Date and before the Third Anniversary Date shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Second Anniversary Date; (iii) Series A Preferred Shares converted on or after the Third Anniversary Date and before the Fourth Anniversary Date shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Third Anniversary Date; (iv) Series A Preferred Shares converted on or after the Fourth Anniversary Date and before January 1, 2003 shall be convertible at a per share Conversion Price equal to 88% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Fourth Anniversary Date; and (v) Series A Preferred Shares converted on or after January 1, 2003 shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one (1) trading day prior to the receipt by the Company of the Conversion Notice (as defined below). D. Notwithstanding anything to the contrary contained herein, in the event (i) the Conversion Price in effect from time to time under Section 2(c) is less than the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Issuance Date, and (ii) the number of shares of Common Stock that would be issued at such Conversion Price would exceed that number of shares of Common Stock permitted to be issued by the Company without shareholder approval under the rules of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") (the "Permissible Shares"), then the Company shall issue the Permissible Shares as herein provided, and with respect to those shares exceeding the Permissible Shares (the "Excess Shares") the Company shall use its reasonable best efforts to take such action as will permit it to issue the Excess Shares, and if the Company is unable to obtain such required permission within a reasonable period of time, the Company shall repurchase the Excess Shares at a per share purchase price equal to the Stated Value, plus accrued and unpaid dividends thereon. E. Notwithstanding anything to the contrary contained herein, should the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to any trading day during which any of the Series A Preferred Shares are outstanding exceed 150% of the Conversion Price then in effect, then so long as such price is in excess of such percentage the Company, in its sole discretion, may require the holder of such Series A Preferred Shares to convert all such Series A Preferred Shares as may then be convertible. 19 F. "Average Market Price" of any security for any period shall be computed as the arithmetic average of the closing prices for such security for each trading day in such period on the NASDAQ National Market, or, if the NASDAQ National Market is not the principal trading market for such security, on the principal trading market for such security, or, if market value cannot be calculated for such period on any of the foregoing bases, the average fair market value during such period as reasonably determined in good faith by the Board of Directors of the Company. G. The Conversion Price shall be subject to adjustments from time to time as follows: 1. If and whenever on or after the Issuance Date the Company issues, sells or exchanges other than in an Excluded Issuance (as hereinafter defined), any share of Common Stock for a consideration per share less than the Average Market Price of the Common Stock for the five (5) consecutive trading days ending one trading day prior to such event (the "Actual Price") (a "Dilutive Event"), then forthwith upon such issue or sale the Conversion Price shall be decreased by multiplying the Conversion Price in effect immediately before the Dilutive Event by a fraction, the numerator of which is the number of shares of Common Stock that are Outstanding on an As-Converted Basis (as defined below) immediately before the Dilutive Event plus the number of shares of Common Stock that could be purchased at the Actual Price at the time of the Dilutive Event for the aggregate consideration paid or payable upon the sale or issuance of Common Stock in the Dilutive Event, and the denominator of which is the number of shares of Common Stock that are Outstanding on an As-Converted Basis immediately before the Dilutive Event plus the number of shares that are acquired or to be acquired upon the sale or issuance of the Common Stock in the Dilutive Event. For purposes of this paragraph (1), "Outstanding on an As-Converted Basis immediately before the Dilutive Event" means the sum of (i) all Common Stock issued and outstanding immediately before the Dilutive Event plus (ii) ---- all Common Stock issuable upon the exercise of options or warrants or conversion of convertible securities outstanding immediately before the Dilutive Event. 2. "Excluded Issuance" means the issue or sale of (i) shares of Common Stock by the Company pursuant to the exercise of options and warrants outstanding immediately prior to the Issuance Date (as adjusted pursuant to the terms of such securities to give effect to stock dividends or stock splits or a combination of shares in connection with a recapitalization, merger, consolidation or other reorganization occurring after the Issuance Date), (ii) options to acquire Common Stock pursuant to a resolution of, or a stock option plan approved by a resolution of, the Board of Directors of the Company (or the compensation committee or stock option committee thereof) to the Company's employees, directors or Scientific Advisory Board members, or (iii) shares of Common Stock issued by the Company as dividends on, or upon conversion of, the Series A Preferred Shares. 20 3. If after the Issuance Date the Company in any manner grants or issues any option, warrant or convertible security and the price per share for which shares of Common Stock are issuable upon the exercise of any such option, warrant or convertible security is less than the Actual Price with respect to such date of grant or issuance, then such shares of Common Stock shall be deemed to have been issued and sold by the Company at the time of the granting or issuance of such option, warrant or convertible security for such price per share and the Conversion Price shall be adjusted in accordance with paragraph (i) above. For purposes of this paragraph, the "price per share" for which shares of Common Stock are issuable upon the conversion or exercise of any option, warrant or convertible security shall be equal to the sum of the amounts of consideration (if any) received or receivable by the Company with respect to such shares of Common Stock upon the granting or issuance of the option, warrant or convertible security and upon exercise or conversion of the option, warrant or convertible security. No further adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon the exercise or conversion of such option, warrant or convertible security. 4. If after the Issuance Date the purchase price provided for in any option or warrant, the additional consideration (if any) payable upon the issue, conversion or exchange of any convertible security, or the rate at which any convertible security is convertible into or exchangeable for Common Stock changes at any time, any Conversion Price previously adjusted with respect to such option, warrant or convertible security and in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such option, warrant or convertible security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. 5. Upon the expiration of any option or warrant or the termination of any right to convert any convertible security, after the Issuance Date, without the exercise of any such option or warrant, any Conversion Price then in effect hereunder shall be adjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such option, warrant or convertible security, to the extent outstanding immediately prior to such expiration or termination, never been issued. 6. In case any option or warrant is issued in connection with the issue or sale of other securities of the Company, together comprising one (1) integrated transaction in which no specific consideration is allocated to such option or warrant by the parties thereto, the option or warrant shall be deemed to have been issued for a consideration of $.0l. 7. If the Company shall consolidate with or merge into any corporation or reclassify its outstanding shares of Common Stock (other than by way of subdivision or reduction of such shares) (each 21 a "Major Transaction"), then each Series A Preferred Share shall thereafter be convertible into the number of shares of stock or securities (the "Resulting Securities") or property of the Company, or of the entity resulting from such consolidation or merger, to which a holder of the number of shares of Common Stock delivered upon conversion of such Series A Preferred Share would have been entitled upon such Major Transaction had the holder of such Series A Preferred Share exercised its right of conversion and had such Common Stock been issued and outstanding and had such holder been the holder of record of such Common Stock at the time of such Major Transaction, and the Company shall make lawful provision therefor as a part of such consolidation, merger or reclassification. 8. If at any time, or from time to time after the Issuance Date, the Company shall (i) declare and pay, on or in respect of, its Common Stock any dividend payable in shares of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a greater number of shares, or reduce the number of outstanding Series A Preferred Shares by combining such Series A Preferred Shares into a smaller number of Series A Preferred Shares, the Conversion Price in effect at the time of the taking of a record for such dividend or the taking of such other action shall be proportionately decreased as of such time, and conversely (iii) if at any time, or from time to time, the Company shall reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, or subdivide the outstanding Series A Preferred Shares into a greater number of Series A Preferred Shares, the Conversion Price in effect at the time of the taking of any such action shall be proportionately increased as of such time. 9. Anything in this Section 2 to the contrary notwithstanding, the Company shall not be required to give effect to any adjustment in the Conversion Price unless and until the net effect of one or more adjustments, determined as above provided, shall have resulted in a change of the Conversion Price by at least $0.05, provided, however, that when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Price by at least $0.05 such change in the Conversion Price shall thereupon be given effect. 10. The Company shall not issue any fraction of a share of Common Stock upon any conversion, but shall pay in cash therefor at the Conversion Price then in effect multiplied by such fraction. 11. Notice of Adjustments of Conversion Rate. Whenever the Conversion Price is adjusted as provided herein, the Company shall promptly (and, in any event, not later than the fifteenth (15th) day following the occurrence of the event requiring such adjustment) compute the adjusted Conversion Price in accordance herewith and shall prepare a report setting forth such adjustment. The Company will promptly (and, in any event, not later than such fifteenth (15th) day) furnish a copy of each such report and such verification to the holder of any Series A Preferred Share. The Company will also keep copies of all such reports and such 22 verifications at its principal office, and will cause the same to be available for inspection at such office during normal business hours by the holder of any Series A Preferred Shares. 12. Notice of Certain Corporate Action. In case: (1) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus; or (2) (a) of any reclassification of the Common Stock of the Company, or (b) of any consolidation, merger or share exchange to which the Company is a party and for which approval of any stockholders of the Company is required, or (c) of the conveyance, transfer, sale or lease of all or substantially all of the assets of the Company; or (3) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company, ten (10) business days prior to the applicable record, expiration or effective date hereinafter specified, shall give to each holder of Series A Preferred Shares a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the effective date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, (y) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. H. On presentation and surrender to the Company (or at any office or agency maintained for the transfer of the Series A Preferred Shares) of the certificates of Series A Preferred Shares so to be converted, duly endorsed in blank for transfer or accompanied by proper instruments of assignment or transfer in blank (a "Conversion Notice"), with signatures guaranteed, the holder of such Series A Preferred Shares shall be entitled, subject to the limitations herein contained, to receive in exchange therefor a certificate or certificates for fully paid and nonassessable shares, which certificates shall be delivered by the fifth trading day after the date of delivery of the Conversion Notice, and cash for fractional shares, of Common Stock on the foregoing basis. The Series A Preferred Shares shall be deemed to have been converted, and the person converting the same to have become the holder of record of Common Stock, for all purposes as of the date of delivery of the Conversion Notice. 23 I. The Company shall, so long as any of the Series A Preferred Shares are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Shares outstanding, such number of shares of Common Stock as it shall reasonably believe shall from time to time be sufficient to effect the conversion of all of the Series A Preferred Shares then outstanding. J. The Company shall pay any and all taxes which may be imposed upon it with respect to the issuance and delivery of Common Stock upon the conversion of the Series A Preferred Shares as herein provided. The Company shall not be required in any event to pay any transfer or other taxes by reason of the issuance of such Common Stock in names other than those in which the Series A Preferred Shares surrendered for conversion are registered on the Company's records, and no such conversion or issuance of Common Stock shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company and its transfer agent, if any, that such tax has been paid. IV. Voting Rights. Holders of Series A Preferred Shares shall have no voting rights, except as required by law, by Section 7 hereof and, to the extent permitted by applicable laws and regulations, as provided in this Section 3. If during any fiscal year of the Company, the Company shall be in arrears in the payment of any dividend on the Series A Preferred Shares for a period of six months or more during such fiscal year, then at the annual meeting of shareholders relating to such fiscal year, the holders of the Series A Preferred Shares shall have the right to designate a nominee for director to be included on the slate of the Company's nominees for directors for such annual meeting of shareholders, and further, shall have the right, voting as a class, to elect such nominee as a director of the Company at such annual meeting of shareholders. V. Redemption. The Company may, but shall not be obligated to, at any time, and from time to time, redeem on the terms and conditions herein provided, the whole or any part of the Series A Preferred Shares then outstanding at a redemption price of $120 per Preferred Share, plus accrued and unpaid dividends thereon, in accordance with the following procedures: A. In case of redemption of only part of the Series A Preferred Shares at any time outstanding, the Company shall designate the amount of Series A Preferred Shares so to be redeemed and shall redeem such Series A Preferred Shares ratably from each tranche. B. Notice of every redemption shall be given by mail to every holder of record of any Series A Preferred Shares then to be redeemed, at least thirty (30), but no more than ninety (90), days prior to the date fixed as the date for the redemption thereof, at the respective addresses of such holders as the same shall appear on the stock transfer books of the Company. The notice shall state that the Series A Preferred Shares shall be redeemed by the Company at the redemption price specified above, upon the surrender for cancellation, at the time and place designated in such notice, of the certificates representing the Series A Preferred Shares to be redeemed, properly endorsed in blank for transfer, or accompanied by proper instruments of assignment and transfer in blank, with signatures guaranteed, and bearing all necessary transfer tax stamps thereto affixed and canceled. On 24 and after the date specified in the notice described above, each holder of Series A Preferred Shares called for redemption shall be entitled to receive therefor the specified redemption price upon presentation and surrender at the place designated in such notice of the certificates for Series A Preferred Shares called for redemption, properly endorsed in blank for transfer or accompanied by proper instruments of assignment or transfer in blank, with signatures guaranteed, and bearing all necessary transfer tax stamps thereto affixed and canceled. C. If the Company shall give notice of redemption as aforesaid (and unless the Company shall fail to pay the redemption price of the Series A Preferred Shares presented for redemption in accordance with such notice), all Series A Preferred Shares called for redemption shall be deemed to have been redeemed on the date specified in such notice, whether or not the certificates for such Series A Preferred Shares shall be surrendered for redemption, and such Series A Preferred Shares so called for redemption shall from and after such date cease to represent any interest whatsoever in the Company or its property, and the holders thereof shall have no rights other than the right to receive such redemption price without any interest thereof from and after such date. VI. Liquidation, Dissolution, Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings, available for distribution to its stockholders (the "Preferred Funds"), before any amount shall be paid to the holders of the Common Stock or holders of shares of other classes or series of capital stock of the Company (the "Junior Shares"), an amount equal to the Stated Value per Series A Preferred Share outstanding plus accrued and unpaid dividends thereon, provided that, if the Preferred Funds are insufficient to pay the full amount due to the holders of Series A Preferred Shares, then each holder of Series A Preferred Shares shall receive a percentage of the Preferred Funds equal to the full amount of Preferred Funds payable to such holder as a percentage of the full amount of Preferred Funds payable to all holders of Series A Preferred Shares. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Notwithstanding the foregoing, to the extent that Series A Preferred Shares shall be converted or redeemed, as the case may be, the Company may issue shares of other classes or series of preferred stock of the Company that are of equal rank with the Series A Preferred Shares (the "Pari Passu Shares"), and such Pari Passu Shares shall be entitled to distributions of the Preferred Funds on the same basis as the Series A Preferred Shares. Neither the consolidation nor merger of the Company with or into any other corporation or corporations, nor the sale or transfer by the Company of less than substantially all of its assets, shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. No holder of Series A Preferred Shares shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the Company other than the amounts provided for herein. VII. Preferred Rank. Except with respect to any Pari Passu Shares that the Company may issue from time to time pursuant to Section 5, all Series A Preferred Shares shall be of senior rank to all Junior Shares in respect to the preferences as to dividends and distributions and payments upon the liquidation, dissolution or winding up of the Company. In the event dividends on the Series A Preferred Shares are in arrears, the Company shall not be entitled to pay dividends on any, Junior 25 Shares or Pari Passu Shares. The rights of the Junior Shares shall be subject to the preferences and relative rights of the Series A Preferred Shares. Notwithstanding the foregoing, the Company may authorize and issue additional or other preferred stock which is of junior rank, or equal rank as permitted by Section 5, with the Series A Preferred Shares in respect of the preferences as to dividends and distributions and payments upon the liquidation, dissolution or winding up of the Company; provided, however, that for so long as the Series A Preferred Shares remain outstanding the Company shall not issue any capital stock which is senior in rank to the Series A Preferred Shares in respect of any of the foregoing preferences. In the event of the merger or consolidation of the Company with or into another corporation, the Series A Preferred Shares shall maintain their relative powers, designations and preferences provided for herein. VIII. Vote to Change the Terms of Series A Preferred Shares. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares shall be required to amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A Preferred Shares. IN WITNESS WHEREOF, the Company has caused this certificate to be signed by, its President, and its Secretary, this 3rd day of December 1997. IMCLONE SYSTEMS INCORPORATED By: /s/ Samuel D. Waksal --------------------------------- Name: Samuel D. Waksal ------------------------------- Title: President & CEO ------------------------------ ATTEST By: /s/ John B. Landes --------------------------------- Name: John B. Landes ------------------------------- Title: Secretary ------------------------------ 26 EX-4.7 3 CERTIFICATE OF DESIGNATIONS Exhibit 4.7 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF IMCLONE SYSTEMS INCORPORATED IMCLONE SYSTEMS INCORPORATED (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation, as amended, of the Company and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company at a meeting duly held on December 3, 1997, adopted resolutions providing for the designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of four hundred thousand (400,000) shares of Series A Convertible Preferred Stock (the "Series A Preferred Shares") of the Company, as follows: RESOLVED, that the Company is authorized to issue 400,000 Tshares of Series A Convertible Preferred Stock (the "Series A Preferred Shares") which shall have the following powers, designations, preferences and other special rights: (1) Dividends. The holders of the then outstanding Series A Preferred Shares shall be entitled to receive, out of funds legally available therefor, cumulative dividends at the annual rate of 6% of the Stated Value thereof compounded annually (pro-rated for any portion of the applicable period during which such Series A Preferred Shares are outstanding). Dividends shall be payable on the Series A Preferred Shares then outstanding in cash (i) annually on December 31st of each year beginning on December 31, 1999 or (ii) at the time of conversion or redemption (as provided herein) of the Series A Preferred Shares on which the dividend is to be paid, whichever is 1 sooner. Dividends on the Series A Preferred Shares shall accumulate and accrue from the date of original issuance and shall accrue from day to day thereafter, whether or not earned or declared. Until any such dividend in arrears is paid, dividends shall continue to accrue on each Series A Preferred Share but the percentage rate expressed herein shall be applied to the Stated Value thereof plus all dividends thereon (including dividends computed pursuant to this sentence). (2) Conversion of Series A Preferred Shares. The holders of the Series A Preferred Shares shall have the right, at their option, to convert the Series A Preferred Shares into shares of Common Stock on the following terms and conditions: (a) Each Series A Preferred Share shall be convertible at any time as hereinafter provided (or, if such Series A Preferred Share is called for redemption, at any time up to and including, but not after, the close of business on the fifth full business day prior to the date fixed for such redemption, unless default shall be made by the Company in providing the funds for the payment of the redemption price), into fully paid and nonassessable shares (calculated to the nearest whole share) of Common Stock of the Company as constituted at the time of such conversion, at the conversion price in effect at the time of conversion determined as hereinafter provided (the "Conversion Price"). Each Series A Preferred Share shall have a value of $100 (the "Stated Value") and the number of shares of Common Stock issuable upon conversion of each of the Series A Preferred Shares shall be determined by dividing the Stated Value thereof by the Conversion Price then in effect. Every reference herein to the Common Stock of the Company (unless a different intention is expressed) shall be to the shares of the Common Stock of the Company, $.001 par value, as such stock exists immediately after the issuance of the Series A Preferred Shares provided for hereunder, or to stock into which such Common Stock may be changed from time to time thereafter. (b) The Series A Preferred Shares shall be convertible as of the dates set forth in (i) - (iv) below. (i) up to 100,000 Series A Preferred Shares ("Tranche I") shall be convertible at any time on or after the date on which the Series A Preferred Shares are issued (the "Issuance Date"); (ii) up to an additional 100,000 Series A Preferred Shares ("Tranche II") shall be convertible at any time on or after January 1, 2000 (the "Second Anniversary Date"); (iii) up to an additional 100,000 Series A Preferred Shares ("Tranche III") shall be convertible at any time on or after January 1, 2001 (the "Third Anniversary Date"); and (iv) up to an additional 100,000 Series A Preferred Shares ("Tranche IV") shall be convertible at any time on or after January 1, 2002 (the "Fourth Anniversary Date"). (c) The Series A Preferred Shares shall be convertible at the Conversion Prices set forth in (i) - (v) below. 2 (i) Series A Preferred Shares converted on or after the Issuance Date and before the Second Anniversary Date shall be convertible at a per share Conversion Price equal to $12.50; (ii) Series A Preferred Shares converted on or after the Second Anniversary Date and before the Third Anniversary Date shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Second Anniversary Date; (iii) Series A Preferred Shares converted on or after the Third Anniversary Date and before the Fourth Anniversary Date shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Third Anniversary Date; (iv) Series A Preferred Shares converted on or after the Fourth Anniversary Date and before January 1, 2003 shall be convertible at a per share Conversion Price equal to 88% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Fourth Anniversary Date; and (v) Series A Preferred Shares converted on or after January 1, 2003 shall be convertible at a per share Conversion Price equal to 100% of the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one (1) trading day prior to the receipt by the Company of the Conversion Notice (as defined below). (d) Notwithstanding anything to the contrary contained herein, in the event (i) the Conversion Price in effect from time to time under Section 2(c) is less than the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to the Issuance Date, and (ii) the number of shares of Common Stock that would be issued at such Conversion Price would exceed that number of shares of Common Stock permitted to be issued by the Company without shareholder approval under the rules of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") (the "Permissible Shares"), then the Company shall issue the Permissible Shares as herein provided, and with respect to those shares exceeding the Permissible Shares (the "Excess Shares") the Company shall use its reasonable best efforts to take such action as will permit it to issue the Excess Shares, and if the Company is unable to obtain such required permission within a reasonable period of time, the Company shall repurchase the Excess Shares at a per share purchase price equal to the Stated Value, plus accrued and unpaid dividends thereon. (e) Notwithstanding anything to the contrary contained herein, should the Average Market Price (as defined below) of the Common Stock for the five (5) consecutive trading days ending one trading day prior to any trading day during which any of the Series A Preferred Shares are outstanding exceed 150% of the Conversion Price then in effect, then so long as such price is in excess of such percentage the Company, in its sole discretion, may require the holder of such Series A Preferred Shares to convert all such Series A Preferred Shares as may then be convertible. 3 (f) "Average Market Price" of any security for any period shall be computed as the arithmetic average of the closing prices for such security for each trading day in such period on the NASDAQ National Market, or, if the NASDAQ National Market is not the principal trading market for such security, on the principal trading market for such security, or, if market value cannot be calculated for such period on any of the foregoing bases, the average fair market value during such period as reasonably determined in good faith by the Board of Directors of the Company. (g) The Conversion Price shall be subject to adjustments from time to time as follows: (i) If and whenever on or after the Issuance Date the Company issues, sells or exchanges other than in an Excluded Issuance (as hereinafter defined), any share of Common Stock for a consideration per share less than the Average Market Price of the Common Stock for the five (5) consecutive trading days ending one trading day prior to such event (the "Actual Price") (a "Dilutive Event"), then forthwith upon such issue or sale the Conversion Price shall be decreased by multiplying the Conversion Price in effect immediately before the Dilutive Event by a fraction, the numerator of which is the number of shares of Common Stock that are Outstanding on an As-Converted Basis (as defined below) immediately before the Dilutive Event plus the number of shares of Common Stock that could be purchased at the Actual Price at the time of the Dilutive Event for the aggregate consideration paid or payable upon the sale or issuance of Common Stock in the Dilutive Event, and the denominator of which is the number of shares of Common Stock that are Outstanding on an As-Converted Basis immediately before the Dilutive Event plus the number of shares that are acquired or to be acquired upon the sale or issuance of the Common Stock in the Dilutive Event. For purposes of this paragraph (1), "Outstanding on an As-Converted Basis immediately before the Dilutive Event" means the sum of (i) all Common Stock issued and outstanding immediately before the Dilutive Event plus (ii) all Common Stock issuable upon the exercise of options or warrants or conversion of convertible securities outstanding immediately before the Dilutive Event. (ii) "Excluded Issuance" means the issue or sale of (i) shares of Common Stock by the Company pursuant to the exercise of options and warrants outstanding immediately prior to the Issuance Date (as adjusted pursuant to the terms of such securities to give effect to stock dividends or stock splits or a combination of shares in connection with a recapitalization, merger, consolidation or other reorganization occurring after the Issuance Date), (ii) options to acquire Common Stock pursuant to a resolution of, or a stock option plan approved by a resolution of, the Board of Directors of the Company (or the compensation committee or stock option committee thereof) to the Company's employees, directors or Scientific 4 Advisory Board members, or (iii) shares of Common Stock issued by the Company as dividends on, or upon conversion of, the Series A Preferred Shares. (iii) If after the Issuance Date the Company in any manner grants or issues any option, warrant or convertible security and the price per share for which shares of Common Stock are issuable upon the exercise of any such option, warrant or convertible security is less than the Actual Price with respect to such date of grant or issuance, then such shares of Common Stock shall be deemed to have been issued and sold by the Company at the time of the granting or issuance of such option, warrant or convertible security for such price per share and the Conversion Price shall be adjusted in accordance with paragraph (i) above. For purposes of this paragraph, the "price per share" for which shares of Common Stock are issuable upon the conversion or exercise of any option, warrant or convertible security shall be equal to the sum of the amounts of consideration (if any) received or receivable by the Company with respect to such shares of Common Stock upon the granting or issuance of the option, warrant or convertible security and upon exercise or conversion of the option, warrant or convertible security. No further adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon the exercise or conversion of such option, warrant or convertible security. (iv) If after the Issuance Date the purchase price provided for in any option or warrant, the additional consideration (if any) payable upon the issue, conversion or exchange of any convertible security, or the rate at which any convertible security is convertible into or exchangeable for Common Stock changes at any time, any Conversion Price previously adjusted with respect to such option, warrant or convertible security and in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such option, warrant or convertible security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (v) Upon the expiration of any option or warrant or the termination of any right to convert any convertible security, after the Issuance Date, without the exercise of any such option or warrant, any Conversion Price then in effect hereunder shall be adjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such option, warrant or convertible security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (vi) In case any option or warrant is issued in connection with the issue or sale of other securities of the Company, together comprising one (1) integrated transaction in which no specific consideration is allocated to such option 5 or warrant by the parties thereto, the option or warrant shall be deemed to have been issued for a consideration of $.0l. (vii) If the Company shall consolidate with or merge into any corporation or reclassify its outstanding shares of Common Stock (other than by way of subdivision or reduction of such shares) (each a "Major Transaction"), then each Series A Preferred Share shall thereafter be convertible into the number of shares of stock or securities (the "Resulting Securities") or property of the Company, or of the entity resulting from such consolidation or merger, to which a holder of the number of shares of Common Stock delivered upon conversion of such Series A Preferred Share would have been entitled upon such Major Transaction had the holder of such Series A Preferred Share exercised its right of conversion and had such Common Stock been issued and outstanding and had such holder been the holder of record of such Common Stock at the time of such Major Transaction, and the Company shall make lawful provision therefor as a part of such consolidation, merger or reclassification. (viii) If at any time, or from time to time after the Issuance Date, the Company shall (i) declare and pay, on or in respect of, its Common Stock any dividend payable in shares of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a greater number of shares, or reduce the number of outstanding Series A Preferred Shares by combining such Series A Preferred Shares into a smaller number of Series A Preferred Shares, the Conversion Price in effect at the time of the taking of a record for such dividend or the taking of such other action shall be proportionately decreased as of such time, and conversely (iii) if at any time, or from time to time, the Company shall reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, or subdivide the outstanding Series A Preferred Shares into a greater number of Series A Preferred Shares, the Conversion Price in effect at the time of the taking of any such action shall be proportionately increased as of such time. (ix) Anything in this Section 2 to the contrary notwithstanding, the Company shall not be required to give effect to any adjustment in the Conversion Price unless and until the net effect of one or more adjustments, determined as above provided, shall have resulted in a change of the Conversion Price by at least $0.05, provided, however, that when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Price by at least $0.05 such change in the Conversion Price shall thereupon be given effect. (x) The Company shall not issue any fraction of a share of Common Stock upon any conversion, but shall pay in cash therefor at the Conversion Price then in effect multiplied by such fraction. 6 (xi) Notice of Adjustments of Conversion Rate. Whenever the Conversion Price is adjusted as provided herein, the Company shall promptly (and, in any event, not later than the fifteenth (15th) day following the occurrence of the event requiring such adjustment) compute the adjusted Conversion Price in accordance herewith and shall prepare a report setting forth such adjustment. The Company will promptly (and, in any event, not later than such fifteenth (15th) day) furnish a copy of each such report and such verification to the holder of any Series A Preferred Share. The Company will also keep copies of all such reports and such verifications at its principal office, and will cause the same to be available for inspection at such office during normal business hours by the holder of any Series A Preferred Shares. (xii) Notice of Certain Corporate Action. In case: (1) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus; or (2) (a) of any reclassification of the Common Stock of the Company, or (b) of any consolidation, merger or share exchange to which the Company is a party and for which approval of any stockholders of the Company is required, or (c) of the conveyance, transfer, sale or lease of all or substantially all of the assets of the Company; or (3) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company, ten (10) business days prior to the applicable record, expiration or effective date hereinafter specified, shall give to each holder of Series A Preferred Shares a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the effective date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, (y) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. (h) On presentation and surrender to the Company (or at any office or agency maintained for the transfer of the Series A Preferred Shares) of the certificates of Series A Preferred Shares so to be converted, duly endorsed in blank for transfer or 7 accompanied by proper instruments of assignment or transfer in blank (a "Conversion Notice"), with signatures guaranteed, the holder of such Series A Preferred Shares shall be entitled, subject to the limitations herein contained, to receive in exchange therefor a certificate or certificates for fully paid and nonassessable shares, which certificates shall be delivered by the fifth trading day after the date of delivery of the Conversion Notice, and cash for fractional shares, of Common Stock on the foregoing basis. The Series A Preferred Shares shall be deemed to have been converted, and the person converting the same to have become the holder of record of Common Stock, for all purposes as of the date of delivery of the Conversion Notice. (i) The Company shall, so long as any of the Series A Preferred Shares are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Shares outstanding, such number of shares of Common Stock as it shall reasonably believe shall from time to time be sufficient to effect the conversion of all of the Series A Preferred Shares then outstanding. (j) The Company shall pay any and all taxes which may be imposed upon it with respect to the issuance and delivery of Common Stock upon the conversion of the Series A Preferred Shares as herein provided. The Company shall not be required in any event to pay any transfer or other taxes by reason of the issuance of such Common Stock in names other than those in which the Series A Preferred Shares surrendered for conversion are registered on the Company's records, and no such conversion or issuance of Common Stock shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company and its transfer agent, if any, that such tax has been paid. (3) Voting Rights. Holders of Series A Preferred Shares shall have no voting rights, except as required by law, by Section 7 hereof and, to the extent permitted by applicable laws and regulations, as provided in this Section 3. If during any fiscal year of the Company, the Company shall be in arrears in the payment of any dividend on the Series A Preferred Shares for a period of six months or more during such fiscal year, then at the annual meeting of shareholders relating to such fiscal year, the holders of the Series A Preferred Shares shall have the right to designate a nominee for director to be included on the slate of the Company's nominees for directors for such annual meeting of shareholders, and further, shall have the right, voting as a class, to elect such nominee as a director of the Company at such annual meeting of shareholders. (4) Redemption. The Company may, but shall not be obligated to, at any time, and from time to time, redeem on the terms and conditions herein provided, the whole or any part of the Series A Preferred Shares then outstanding at a redemption price of $120 per Preferred Share, plus accrued and unpaid dividends thereon, in accordance with the following procedures: 8 (a) In case of redemption of only part of the Series A Preferred Shares at any time outstanding, the Company shall designate the amount of Series A Preferred Shares so to be redeemed and shall redeem such Series A Preferred Shares ratably from each tranche. (b) Notice of every redemption shall be given by mail to every holder of record of any Series A Preferred Shares then to be redeemed, at least thirty (30), but no more than ninety (90), days prior to the date fixed as the date for the redemption thereof, at the respective addresses of such holders as the same shall appear on the stock transfer books of the Company. The notice shall state that the Series A Preferred Shares shall be redeemed by the Company at the redemption price specified above, upon the surrender for cancellation, at the time and place designated in such notice, of the certificates representing the Series A Preferred Shares to be redeemed, properly endorsed in blank for transfer, or accompanied by proper instruments of assignment and transfer in blank, with signatures guaranteed, and bearing all necessary transfer tax stamps thereto affixed and canceled. On and after the date specified in the notice described above, each holder of Series A Preferred Shares called for redemption shall be entitled to receive therefor the specified redemption price upon presentation and surrender at the place designated in such notice of the certificates for Series A Preferred Shares called for redemption, properly endorsed in blank for transfer or accompanied by proper instruments of assignment or transfer in blank, with signatures guaranteed, and bearing all necessary transfer tax stamps thereto affixed and canceled. (c) If the Company shall give notice of redemption as aforesaid (and unless the Company shall fail to pay the redemption price of the Series A Preferred Shares presented for redemption in accordance with such notice), all Series A Preferred Shares called for redemption shall be deemed to have been redeemed on the date specified in such notice, whether or not the certificates for such Series A Preferred Shares shall be surrendered for redemption, and such Series A Preferred Shares so called for redemption shall from and after such date cease to represent any interest whatsoever in the Company or its property, and the holders thereof shall have no rights other than the right to receive such redemption price without any interest thereof from and after such date. (5) Liquidation, Dissolution, Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings, available for distribution to its stockholders (the "Preferred Funds"), before any amount shall be paid to the holders of the Common Stock or holders of shares of other classes or series of capital stock of the Company (the "Junior Shares"), an amount equal to the Stated Value per Series A Preferred Share outstanding plus accrued and unpaid dividends thereon, provided that, if the Preferred Funds are insufficient to pay the full amount due to the holders of Series A Preferred Shares, then each holder of Series A Preferred Shares shall receive a percentage of the Preferred Funds equal to the full amount of Preferred Funds payable to such holder as a percentage of the full amount of Preferred Funds payable to all holders of Series A Preferred Shares. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Notwithstanding the foregoing, to the extent that Series A Preferred Shares shall be converted or 9 redeemed, as the case may be, the Company may issue shares of other classes or series of preferred stock of the Company that are of equal rank with the Series A Preferred Shares (the "Pari Passu Shares"), and such Pari Passu Shares shall be entitled to distributions of the Preferred Funds on the same basis as the Series A Preferred Shares. Neither the consolidation nor merger of the Company with or into any other corporation or corporations, nor the sale or transfer by the Company of less than substantially all of its assets, shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. No holder of Series A Preferred Shares shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the Company other than the amounts provided for herein. (6) Preferred Rank. Except with respect to any Pari Passu Shares that the Company may issue from time to time pursuant to Section 5, all Series A Preferred Shares shall be of senior rank to all Junior Shares in respect to the preferences as to dividends and distributions and payments upon the liquidation, dissolution or winding up of the Company. In the event dividends on the Series A Preferred Shares are in arrears, the Company shall not be entitled to pay dividends on any, Junior Shares or Pari Passu Shares. The rights of the Junior Shares shall be subject to the preferences and relative rights of the Series A Preferred Shares. Notwithstanding the foregoing, the Company may authorize and issue additional or other preferred stock which is of junior rank, or equal rank as permitted by Section 5, with the Series A Preferred Shares in respect of the preferences as to dividends and distributions and payments upon the liquidation, dissolution or winding up of the Company; provided, however, that for so long as the Series A Preferred Shares remain outstanding the Company shall not issue any capital stock which is senior in rank to the Series A Preferred Shares in respect of any of the foregoing preferences. In the event of the merger or consolidation of the Company with or into another corporation, the Series A Preferred Shares shall maintain their relative powers, designations and preferences provided for herein. (7) Vote to Change the Terms of Series A Preferred Shares. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares shall be required to amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A Preferred Shares. 10 IN WITNESS WHEREOF, the Company has caused this certificate to be signed by, its President, and its Secretary, this 3rd day of December 1997. IMCLONE SYSTEMS INCORPORATED By: /s/ Samuel D. Waksal --------------------------------- Name: Samuel D. Waksal ------------------------------- Title: President & CEO ------------------------------ ATTEST By: /s/ John B. Landes --------------------------------- Name: John B. Landes ------------------------------- Title: Secretary ------------------------------ 11 EX-10.65 4 AMENDMENT TO MAY 1996 Exhibit 10.65 Amendment of May 1996 to the Research and License Agreement between ImClone Systems Incorporated and Merck KGaA WHEREAS ImClone Systems (hereinafter "ImClone") and Merck KGaA (hereinafter "Merck") are parties to a Research and License Agreement effective April 1, 1990 which has been previously amended on September 1, 1993 and on November 2, 1993; and WHEREAS the parties intend to further modify the Agreement to represent the current intent of the parties with respect to the development of BEC-II and gp75, the parties hereby modify and amend the Agreement in the following respects: 1. The recitation of the parties on page one of the Agreement shall replace the name E. Merck with the name Merck KGaA. 2. Section 1.16 shall be modified to read in its entirety as follows: "1.16 The term "Research and Development Protocol" shall mean the plan for the conduct of the Research and Development, as set forth in Schedule E attached hereto and specifically incorporated herein, and as may be amended by the parties from time to time, including with respect to Alternative Product(s)." 3. Section 1.17 shall be modified to read in its entirety as follows: "1.17 The term "Research and Development Period" shall mean that four year period during which the initial research on BEC-II and gp75 was performed, in accordance with the terms of Article 3 hereof, which four year period has concluded." 1 4. Section 2.1 shall be modified to read in its entirety as follows: "2.1 ImClone hereby grants to Merck an exclusive license, with the right to sublicense, in the Field under Licensed Patents and/or Licensed Technology to make, have made, use, sell, or have sold Licensed Products worldwide, with the exception of North America. ImClone retains all rights to the Licensed Patents and the Licensed Technology other than granted hereby." 5. Section 2.2 shall be modified to read in its entirety as follows: "2.2 Merck hereby grants to ImClone an exclusive license, with the right to sublicense, to all rights which it may have to Licensed Technology to make, have made, use, sell or have sold Licensed Products in North America." 6. Section 2.3 shall be modified to read in its entirety as follows: "2.3 If, during the term of the Agreement, ImClone intends to grant a license, exclusive or otherwise (or right to distribute) in the Field, under Licensed Patent(s) and/or Licensed Technology, to make, use or sell Licensed Product(s) in North America, it shall so notify Merck in writing and afford Merck the opportunity to negotiate terms for such a license. Should the parties not enter into such a license in writing within ninety (90) days of such written notification to Merck, the offer shall be deemed formally withdrawn." 7. Section 2.5(b) shall be modified to read in its entirety as follows: "2.5 ImClone hereby grants to Merck an exclusive license, with a right to sublicense, in the Field, to such rights as ImClone may hold to Improvements, to make, have made, use, sell or have sold Licensed Products worldwide outside North America." 2 8. Section 2.5(c) shall be modified in its entirety to read as follows: "2.5(c) If ImClone grants Merck a license (or right to distribute) under Section 2.3 above, then ImClone shall grant Merck a license (or right to distribute) in the Field to such rights as ImClone may hold to Improvements to make, have made, use, sell or have sold Licensed Products in North America." 9. Section 2.5(d) shall be modified so that the first sentence shall read in its entirety as follows (the remainder of the section shall remain unchanged): "2.5(d) Merck hereby grants to ImClone an exclusive license, with the right to sublicense, to such rights as Merck may hold to Improvements, to make, have made, use, sell or have sold Licensed Products in North America, at conditions to be negotiated in good faith by the parties hereto." 10. Section 3.2 shall be modified to add a sentence at the end of the section as follows: "The funds required herein for the support of research of the BEC-II and gp75 had been paid by Merck, and Merck shall have no further obligations as a result of this Section 3.2" 11. Section 3.4 shall be modified so that it shall read in its entirety as follows: "3.4. The Research and Development Protocol includes the plans for the conduct and management of clinical trials, development and manufacturing, further research, and for the filing for appropriate regulatory approvals for the sale of the Licensed Products. All of such clinical trials and regulatory submissions shall be the responsibility of Merck in the territories wherein it has a license and/or assignment hereunder. However, it is the intention of the parties, as further set forth in the Research and Development Protocol, to conduct a multi-site multi-national pivotal clinical trial for the BEC-II. 3 Costs, including those of ImClone, as contemplated in the Research and Development Protocol, for manufacturing of materials for clinical trials, conduct of clinical trials, and regulatory submissions (other than drug approval fees which are the responsibility of Merck or ImClone in their respective territories) in connection with the development of the Licensed Products for the U.S., Europe, Australia and New Zealand shall be shared by the parties in the proportion of 60% by Merck and 40% by ImClone. It is the intent of the parties that ImClone be the commercial manufacturer of the Licensed Products worldwide. Achievement of such shall be as set forth in the Research and Development Protocol." 12. Section 4.2 was amended by the amendment dated November 2, 1993 (the "Amendment"). It is hereby acknowledged by the parties that Payments one, two, three and four under Section 4.2(a) through 4.2(c) of the Agreement and Payment one of the Amendment have been made. Other consideration in the Agreement originally contemplated in the remainder of Section 4.2, as amended by the Amendment, and Section 4.3, shall be increased, and the payment structure shall be as follows, which shall replace Sections 4.2(d), 4.2(e) and Section 4.3 in their entirety: "4.2(d) Upon the achievement of milestone (a) in Section 4.3, a schedule of quarterly payments totaling $4,700,000 shall commence. The first payment, in the amount of $625,000, shall be made within 30 days after the achievement of the milestone. Seven quarterly payments shall be made thereafter, at quarterly intervals, all in the amount of $625,000, but for the last payment, which shall be in the amount of $325,000. The last payment has been reduced in part to reflect the acknowledgment of the parties that the payment for the demonstration originally called for in Section 4.2(c) was made under dispute, which has been resolved." Section 4.2(e) shall be deleted in its entirety. Section 4.3 shall be modified to read in its entirety as follows: 4 "4.3 In addition, Merck shall pay ImClone the following non-refundable milestone payments: a. $500,000 upon the achievement of a pilot-scale (based on the Research and Development Protocol) fermentation in the manufacture of BEC-II yielding at least 7.5 grams of material meeting the specifications of the Research and Development Protocol; b. $1,000,000 upon successful manufacture of bulk cGMP BEC-II material meeting the specifications of the Research and Development Protocol; c. *** ***; d. *** ***; e. *** ***; f. *** ***; g. *** ***; h. *** ***; i. *** ***; j. *** ***; k. In the case that Merck enters into a distribution or sublicensing arrangement for the marketing of BEC-II in Japan and receives 5 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. consideration in such transaction other than royalties or payments related to sales (e.g. license fees, payments in lieu of royalties), *** such payments shall be paid over to ImClone at the time or times that Merck receives such consideration, not to exceed *** ." 13. Section 4.4 shall be modified to read in its entirety as follows: "4.4(a) On Net Sales of Licensed Products in Europe, Australia or New Zealand by Merck, its Affiliates, distributors or sublicensees, Merck shall pay ImClone *** ." "4.4(b) On Net Sales of Licensed Products outside Europe, Australia and New Zealand, excluding North America, by Merck, its Affiliates, distributors or sublicensees, Merck shall pay ImClone *** ;" 14. Section 9.1 shall be modified to read in its entirety as follows: "9.1 ImClone represents that to the best of its knowledge Merck's use, making, having made, selling and/or having sold Licensed Products does not violate the patent rights of any third party. The parties hereby acknowledge families of patent applications filed under the name of the inventors Koprowski et. al. and entitled "Induction of Antibody Response to Solid Tumors with Anti-Idiotype Antibodies," and the parties acknowledge that Merck has obtained a non-exclusive worldwide license by Wistar under the patent applications mentioned above, and that ImClone shall not be required to contribute payments to such license in Merck's territory." 15. Section 10.2 shall be modified to read in its entirety as follows: "10.2 The parties may agree at any time to terminate the Agreement at a fixed date. Prior to or at termination, as the case may be, if any portion of 6 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. any payment under Section 4.2(d) is due ImClone through the agreed upon termination date, based on a proration according to calendar time, such portion shall be paid by Merck to ImClone. Alternatively, if at termination any portion of any payment pursuant to Section 4.2(d) already received by ImClone is attributable to the period after the termination date (based on a proration according to calendar time) ImClone shall promptly refund such portion to Merck." 16. Section 10.3 shall be modified to read in its entirety as follows: "10.3 Prior to the completion of all payments under Section 4.2(d), Merck shall have the right to terminate the Agreement, based on a sound scientific determination. Merck shall give ImClone written notice of its intent to terminate, and a meeting of the Research Committee shall be convened within two (2) weeks to discuss the grounds for termination. ImClone shall have ninety (90) days from the date of the meeting to provide data to substantiate continuation of the work. Merck may then terminate the Agreement with immediate effect. Prior to or at termination, as the case may be, if any portion of any payment under Section 4.2(d) is due ImClone through the intended date of termination, based on a proration according to calendar time, such portion shall be paid by Merck to ImClone. Alternatively, if at termination any portion of any payment under Section 4.2(d) already received by ImClone is attributable to the period after the termination date (based on a proration according to calendar time), ImClone shall promptly refund such portion to Merck." 17. Section 10.6 shall be modified to read in its entirety as follows: "10.6 If Merck fails in a country in which Merck has a right to sell Licensed Products or Alternative Products to pursue in a timely fashion and with all due diligence regulatory approval or sale of an Alternative Product or Licensed Product, and such failure is not remedied within sixty days (60) after written notice from ImClone specifying such failure, ImClone may 7 immediately, without further notice or opportunity to cure, terminate the license with respect to such Licensed Product or Alternative Product in such country." 18. Section 10.7 shall be modified to remove the word "other" from the first line of the section. IN WITNESS WHEREOF, this Amendment to the Agreement has been executed this _______ day of May, 1996. ImClone Systems Incorporated Merck KGaA By: /s/ Samuel D. Waksal By: /s/ Dr. Orth /s/ Dr. Uhl --------------------------- ----------------------------- Name: Samuel D. Waksal Name: Dr. Orth Dr. Uhl Title: President & CEO Title: Principal Officer/ Authorized Representative Date: May 14, 1996 Date: October 23, 1996 8 Attachment E: Research and Development Protocol 1. BEC-2 The initial development plan for the development of the product established by the parties is attached hereto as encl. 1 (MS-Project EMD 60 205) and will be amended from time to time. 1.1 Manufacturing of trial medication for the multinational pivotal phase II/III study or studies in the indication SCLC The trial medication must meet at least the specifications laid down in BB-IND 5076 resp. must fulfill new requirements of the US and EU authorities (c.f. encl. 1) and show equal potency with adequate methods (c.f. section 1.2). ImClone is responsible for the production and the quality control as well as for the release of bulk, of the final formulation and of the clinical trial medication including the appropriate storage and shipment according to the requirements of EU and US guidelines. ImClone will coordinate all activities necessary to supply BEC-2 for phase II/III clinical trial(s). ImClone will provide support Merck for any legal and regulatory release requirements or negotiations specific for EU clinical investigations. These activities will be carried out in close contact with the responsible persons at Merck. ImClone will consult with Merck and come to an agreement with Merck on all questions related to the establishment of and/or all changes concerning upstream processing, downstream processing, formulation, filling, the stability program (bulk and final formulation), the specifications (including all assays and test procedures) as well as the committed BCG medication. ImClone will consult with Merck about their contracts with any third party contractors and will obtain an approval from Merck for all agreements with third party contractors related to the manufacturing of BEC-2 clinical trial medication. Merck use its best efforts to review and approve such contract agreements within a short period of time. Merck will receive the complete documentation (original data and reports) on all aspects of manufacturing, including but not limited to cell banks, such documentation having to be identical to the documentation available to ImClone. Merck will receive, on request, samples of the MCB and the WCB. Merck will have the right to make audits at ImClone or at the sites of third partners of ImClone. Furthermore, ImClone will ensure that Merck has access to all available data in original and final report form. ImClone will use best efforts to ensure access to original data in the event a contractor ceases its operation. Costs to be paid to third parties for manufacturing, quality control, storage, etc., of the clinical trial material shall be shared by the parties according to section 3.4 of the LICENSE AGREEMENT. Any occurring costs must be approved in advance by the RESEARCH COMMITTEE. Manufacturing costs as well as costs to manufacturing (e.g., costs for quality control and batch release) arising at ImClone will be shared by Merck only if the BEC-2 production at Celltech Therapeutics fails to meet the specification laid down in BB-IND 5076 and if both parities agree to manufacturing at ImClone. 1.2 Preclinical studies to verify the identity of BEC-2 In order to more fully characterize BEC-2 the following will be done 1. *** . 2. *** . 3. *** . 4. *** . Further preclinical studies performed to verify the identity of BEC-2 may be included. ImClone will consult with Merck about any contracts with third party contractors and will obtain an approval from Merck for all agreements with third party contractors related to the preclinical studies with BEC-2. Merck use its best efforts to review and approve such contract agreements within a short period of time. Merck will receive the complete documentation (original data and reports)on all aspects of preclinical studies performed to verify the identity of BEC-2, such documentation having to be identical to the documentation available to ImClone. 1.3 Clinical studies The parties will jointly prepare, perform, evaluate and report the pivotal study or studies necessary for obtaining the approval for marketing of BEC-2 both in the US and in the EU. Both parties have the right to perform audits at the other party's site and the sites of all clinical investigators. If both parties do not come to an agreement on the study protocol(s), the evaluation of the data or on the final report(s), third party's expertise (3 experts, to be named) shall be obtained for arbitration. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Furthermore, both parties shall consult each other about additional clinical trials which may be performed by one party alone. ImClone will provide Merck with the trial material for any such studies to be performed by Merck. The parties agree to inform each other on all planned or ongoing activities within the RESEARCH COMMITTEE. 1.4 Regulatory Affairs a) ImClone is responsible for providing all sections of regulatory dossiers including but not limited to expert reports of -IND, CTX and other applications clinical trial licenses -PLA's and other applications for marketing authorization Any such documentation will be prepared according to current or then applicable FDA, EU, Japan or other national or international regulatory requirements. b) Merck will share with ImClone all national or international information on the European regulatory status of the BEC-2 project. On the other hand, ImClone will use its best efforts to keep Merck informed about the US regulatory status of the BEC-2 project. c) An electronic mail system between the regulatory departments of both companies will be established as soon as possible. 2. gp75 and other entities covered under this Agreement gp75 as referred to in Attachment E of the Agreement dated April 1, 1990 will be amended by the RESEARCH COMMITTEE. EX-10.66 5 AMENDMENT OF DECEMBER 1997 Exhibit 10.66 Amendment of December 1997 to the Research and License Agreement between ImClone Systems Incorporated and Merck KGaA WHEREAS ImClone Systems (hereinafter "ImClone") and Merck KGaA (hereinafter "Merck" ) are parties to a Research and License Agreement (hereinafter the "Agreement") effective April 1, 1990 which has been previously amended on September 1, 1993, November 2, 1993, and on May 14, 1996; and WHEREAS the parties intend to further modify the Agreement to represent the current intent of the parties with respect to the marketing of BEC2 in North America, it being the intent of the parties that ImClone and Merck shall co-market BEC2 in North America in accordance with the "Terms of Co-Marketing of BEC2 by Merck and ImClone in North America" to be negotiated in good faith by the parties hereafter and appended as Exhibit B to this Amendment; and WHEREAS the parties have also on this day entered into a Preferred Stock Purchase Agreement for the purchase by Merck of ImClone convertible preferred stock; and THE PARTIES HEREBY MODIFY and amend the Agreement in the following respects (hereinafter the "Amendment"): 1. Section 2.1 shall be modified to read in its entirety as follows: "2.1 ImClone hereby grants to Merck an exclusive license, with the right to sublicense, in the Field under Licensed Patents and/or Licensed Technology to make, have made, use, sell, or have sold Licensed Products which incorporate BEC2 and gp75 worldwide outside North America; and ImClone grants to Merck a Sole License restricted in accordance with Exhibit B and the other terms of this Amendment, without the right to sublicense, to use, sell or have sold, but not to make, Licensed Products which incorporate BEC2 in North America in conjunction with ImClone." 1 2. Section 2.2 shall be modified to read in its entirety as follows: "2.2 Merck hereby grants to ImClone a Sole License, without the right to sublicense, to all rights which it may have to Licensed Technology to make, have made, use, sell or have sold Licensed Products which incorporate BEC2 in North America in conjunction with Merck in accordance with Exhibit B and the other terms of this Amendment; and Merck grants to ImClone an exclusive license, with the right to sublicense, to all rights which it may have to Licensed Technology to make, have made, use, sell or have sold Licensed Products which incorporate gp75 in North America." 3. Section 2.3 shall be modified to read in its entirety as follows: "2.3 If, during the term of the Agreement, ImClone intends to grant a license, exclusive or otherwise (or right to distribute) in the Field, under Licensed Patent(s) and/or Licensed Technology, to make, use or sell Licensed Product(s) which incorporate gp75 in North America, it shall so notify Merck in writing and afford Merck the opportunity to negotiate terms for such a license. Should the parties not enter into such a license in writing within ninety (90) days of such written notification to Merck, the offer shall be deemed formally withdrawn." 4. Section 2.5 (b) shall be modified to read in its entirety as follows: "2.5(b) ImClone hereby grants to Merck an exclusive license, with the right to sublicense, in the Field to such rights as ImClone may hold to Improvements to make, have made, use, sell, or have sold Licensed Products which incorporate Improvements to BEC2 and gp75 worldwide outside North America; and ImClone grants to Merck a Sole License restricted in accordance with Exhibit B and the other terms of this Amendment, without the right to sublicense, to such rights as ImClone may hold to Improvements to use, sell or have sold, but not to make, Licensed 2 Products which incorporate Improvements to BEC2 in North America in conjunction with ImClone." 5. Section 2.5 (c) shall be modified to read in its entirety as follows: "2.5(c) If ImClone grants Merck a license to Licensed Products which incorporate gp75 (or right to distribute) under Section 2.3 above, then ImClone shall grant Merck the same kind of license, (or right to distribute) in the Field to such rights as ImClone may hold to Improvements to make, use or sell Licensed Products which incorporate Improvements to gp75 in North America." 6. Section 2.5 (d) shall be modified so that the first sentence shall read in its entirety as follows (the remainder of the section shall remain unchanged): "2.5(d) Merck hereby grants to ImClone a Sole License, without the right to sublicense, to such rights as Merck may hold to Improvements, to make, use, sell or have sold Licensed Products which incorporate Improvements to BEC2 in North America in conjunction with Merck in accordance with Exhibit B and the other terms of this Amendment; and Merck grants to ImClone an exclusive license, with the right to sublicense, to such rights as Merck may hold to Improvements, to make, have made, use, sell or have sold Licensed Products which incorporate Improvements to gp75 in North America." 7. Section 3.4 shall be modified to read in its entirety as follows: "3.4 The Research and Development Protocol includes the plans for the conduct and management of clinical trials, development and manufacturing, further research, and for the filing for appropriate regulatory approvals for the sale of the Licensed Products. All of such clinical trials and regulatory submissions shall be the responsibility of Merck worldwide outside North America. It is the intention of the parties, as further set forth in the Research and Development Protocol, to conduct a multi-site multi-national pivotal clinical trial to obtain approval for the indication of the treatment of limited disease small cell lung carcinoma for the 3 BEC2. Costs, including out-of-pocket costs of ImClone (but not including cost of establishment of a manufacturing facility), as contemplated in the Research and Development Protocol, for manufacturing of materials for clinical trials, conduct of clinical trials, and regulatory submissions (other than drug approval fees which are the responsibility of Merck or ImClone in their respective territories) in connection with the development of the Licensed Products which incorporate BEC2 worldwide shall be paid by Merck. Notwithstanding the previous sentence, Merck's sole responsibility to bear the expense of the conduct of such clinical trials shall be capped at 17 million DM. To the extent that the expenses of the conduct of such clinical trials exceed 17 million DM, such expenses shall be shared, 60% for Merck and 40% for ImClone. The expense of the conduct of additional clinical trials for other indications shall be subject to separate budgets to be negotiated by the parties. It is the intent of the parties that ImClone be the party responsible for establishment of the manufacturing site for the active agent, at ImClone's expense. It is also intended that ImClone be responsible for providing supply of the active agent worldwide, at the expense of Merck. However, costs of goods in North America, which shall include ImClone's costs plus a negotiated provision for overhead, shall be paid out of gross sales of the Licensed Product in North America, in accordance with the terms of the Co-Marketing Agreement, Exhibit B." 8. Section 4.3 shall be modified to read in its entirety as follows: "4.3 In addition, Merck shall pay ImClone the following non-refundable milestone payments: a. $500,000 upon the achievement of a pilot-scale (based on the Research and Development Protocol) fermentation in the manufacture of BEC 2 yielding at least 7.5 grams of material meeting the specifications of the Research and Development Protocol (paid); b. $1,000,000 upon successful manufacture of bulk cGMP BEC 2 material meeting the specifications of the Research and Development Protocol (paid); 4 c. *** ***; d. $500,000 upon signing of this Amendment; e. *** ***; f. *** ***; g. *** ***; h. *** ***'; i. *** ***; j. *** ***; k. *** ***; l. *** ***; m. *** ***; n. *** ***; o. *** ***; p. In the case that Merck enters into a distribution or sublicensing arrangement for the marketing of BEC2 in Japan and receives consideration in such transaction 5 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. other than royalties or payments related to sales (e.g. license fees, payments in lieu of royalties), *** of such payments shall be paid over to ImClone at the time or times that Merck receives such consideration, not to exceed *** ." 9. Section 4.4 shall be modified to read in its entirety as follows: "4.4(a) On Net Sales of Licensed Products in Europe, Australia or New Zealand by Merck, its Affiliates, distributors or sublicensees, Merck shall pay ImClone *** ." "4.4(b) On Net Sales of Licensed Products outside Europe, Australia and New Zealand, excluding North America, by Merck, its Affiliates, distributors or sublicensees, Merck shall pay ImClone *** ." "4.4(c) Gross Sales of Licensed Products which incorporate BEC2 in North America shall be distributed in accordance with the terms of Exhibit B appended hereto entitled "Terms of Co-Marketing of BEC2 by Merck and ImClone in North America" to be negotiated in good faith by the parties hereafter and to be appended hereto as Exhibit B. Exhibit B shall establish the terms of a co-marketing of BEC2 in North America by Merck and is intended to include among other things the following: o Establishment of a committee of the parties to plan and monitor the marketing of BEC2 in North America, which is anticipated to involve sales by separate but coordinated sales forces of ImClone and Merck and coordinated distribution of final product, with ImClone responsible for manufacture of the active agent, and costs for manufacture to be paid from gross sales in North America. 6 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. o Defining the components of Gross Margin against which costs reimbursable to the parties and shares payable to the parties shall be determined (Gross Margin generally to be Net Sales less cost of goods, cost of distribution and other third party payments, including royalties); and o A division of Gross Margin such that each party will receive a guaranteed share of *** of Gross Margin, and the remaining *** of Gross Margin shall be divided between the parties in accordance with the respective level of sales and marketing expense contributed by the parties." IN WITNESS WHEREOF, Amendment to the Agreement has been executed this _______ day of December, 1997. ImClone Systems Incorporated Merck KGaA By: /s/ Samuel D. Waksal By: /s/ E. R. Roberts --------------------------- -------------------------- Name: Samuel D. Waksal Name: E. R. Roberts Title: President & CEO Title: Managing Partner Date: December 3, 1997 Date: December 3, 1998 7 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-21.1 6 SUBSIDIARIES Exhibit 21.1 EndoClone Incorporated, a Delaware corporation, is a wholly-owned subsidiary of ImClone Systems Incorporated. EndoClone Incorporated does business under its own name. EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.1 The Board of Directors ImClone Systems Incorporated We consent to the incorporation by reference in the registration statements (Nos. 33-95860, 333-07339, 333-21417, 333-22341 and 333-39067 on Form S-3 and Nos. 333-10275 and 33-95894 on Form S-8) of ImClone Systems Incorporated of our report dated February 20, 1998, relating to the balance sheets of ImClone Systems Incorporated as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997, Annual Report on Form 10-K of ImClone Systems Incorporated. /s/ KPMG PEAT MARWICK LLP --------------------------- KPMG PEAT MARWICK LLP New York, New York March 27, 1998 EX-27 8 FDS --
5 This schedule contains summary information extracted from the financial statements of Part II, Item 8, of the December 31, 1997 Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,558 57,052 0 0 0 60,795 23,165 (11,294) 75,780 4,124 2,200 0 400 24 67,802 75,780 0 5,348 0 21,811 (1,523) 0 551 (15,491) 0 (15,491) 0 0 0 (15,491) (0.67) (0.67)
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