-----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, E2WXkFOiIUsYx53+SvP28de4C0RXmsL3vWjNIDSijqFRGovGsctltyPblNhBxjbg lwRptcj39wWB1S83lZFONQ== 0000950123-03-007345.txt : 20030723 0000950123-03-007345.hdr.sgml : 20030723 20030623145100 ACCESSION NUMBER: 0000950123-03-007345 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20030623 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-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19612 FILM NUMBER: 03753171 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-Q/A 1 y87546me10vqza.txt AMENDMENT TO FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-19612 IMCLONE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 04-2834797 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 180 VARICK STREET, NEW YORK, NY 10014 (Address of principal executive offices) (Zip code) (212) 645-1405 Registrant's telephone number, including area code NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report 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 [ ] No [X] Applicable only to corporate issuers: 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 MAY 13, 2002 Common Stock, par value $.001 73,361,837 Shares ================================================================================ EXPLANATORY NOTE We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 for the purpose of amending and restating Item 1 of Part I, containing our unaudited consolidated financial statements and related notes as of March 31, 2002 and for the three month periods ended March 31, 2002 and 2001. See Notes 2, 3 and 13 to the unaudited consolidated financial statements for further discussion of the restatement and related disclosures. We have also updated Item 2 of Part I, Management Discussion and Analysis of Financial Condition and Results of Operations, to give effect to the restatement. In addition, we have amended Item 6 of Part II to reflect the filing of certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and we have filed certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Other than the changes regarding the restatement and related disclosures, no other information in this Amendment No. 1 has been updated to reflect any subsequent information or events since the original filing of this Form 10-Q on May 15, 2002. This Amendment should be read together with our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the U.S. Securities and Exchange Commission on June 23, 2003. IMCLONE SYSTEMS INCORPORATED INDEX
PAGE NO ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Consolidated Balance Sheets - March 31, 2002 and December 31, 2001.................................................................. 1 Unaudited Consolidated Statements of Operations - Three months ended March 31, 2002 and 2001................................................................ 2 Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001................................................................ 3 Notes to Unaudited Consolidated Financial Statements................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................................................... 27 Signatures............................................................................. 28 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............... 29
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMCLONE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 2002 2001 ------------- ------------- RESTATED RESTATED (NOTE 2) (NOTE 2) ASSETS Current assets: Cash and cash equivalents................................................. $ 114,684 $ 38,093 Securities available for sale ............................................ 300,055 295,893 Prepaid expenses.......................................................... 3,476 3,891 Amounts due from corporate partners (Note 9).............................. 12,632 8,230 Other current assets...................................................... 4,550 3,547 ------------- ------------- Total current assets................................................. 435,397 349,654 ------------- ------------- Property and equipment, net.................................................. 123,023 107,248 Patent costs, net............................................................ 1,525 1,513 Deferred financing costs, net................................................ 4,982 5,404 Notes receivable............................................................. 10,000 10,000 Withholding tax assets....................................................... 13,510 13,510 Other assets ................................................................ 3,637 383 ------------- ------------- $ 592,074 $ 487,712 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................................... $ 13,574 $ 16,919 Accrued expenses.......................................................... 16,811 11,810 Withholding tax liability................................................. 38,779 38,779 Industrial Development Revenue Bonds tax liability........................ 877 851 Interest payable.......................................................... 1,203 4,446 Current portion of deferred revenue (Note 9).............................. 35,760 20,683 Current portion of long-term liabilities.................................. 330 426 ------------- ------------- Total current liabilities............................................ 107,334 93,914 ------------- ------------- Deferred revenue, less current portion (Note 9).............................. 301,074 182,813 Long-term debt............................................................... 242,200 242,200 Other long-term liabilities, less current portion............................ 25 79 ------------- ------------- Total liabilities.................................................... 650,633 519,006 ------------- ------------- Commitments and contingencies (Notes 3 and 10) Stockholders' equity (deficit): Preferred stock, $1.00 par value; authorized 4,000,000 shares; reserved 1,200,000 series B participating cummulative preferred stock........... -- -- Common stock, $.001 par value; authorized 120,000,000 shares; issued 73,531,112 and 73,348,271 at March 31, 2002 and December 31, 2001, respectively; outstanding 73,341,862 and 73,159,021 at March 31, 2002 and December 31, 2001, respectively.................................... 74 73 Additional paid-in capital................................................ 345,042 341,735 Accumulated deficit....................................................... (402,210) (372,157) Treasury stock, at cost; 189,250 shares at March 31, 2002 and December 31, 2001...................................................... (4,100) (4,100) Accumulated other comprehensive income: Unrealized gain on securities available for sale....................... 2,635 3,155 ------------- ------------- Total stockholders' deficit.......................................... (58,559) (31,294) ------------- ------------- $ 592,074 $ 487,712 ============= =============
See accompanying notes to consolidated financial statements Page 1 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- RESTATED RESTATED (NOTE 2) (NOTE 2) Revenues: License fees and milestone revenue (Note 9)............................... $ 6,663 $ 24,096 Research and development funding and royalties............................ 650 648 Collaborative agreement revenue (Note 9).................................. 11,238 3,251 ------------- ------------- Total revenues......................................................... 18,551 27,995 ------------- ------------- Operating expenses: Research and development.................................................. 37,778 25,096 Marketing, general and administrative..................................... 8,123 3,728 Industrial Development Revenue Bonds tax expense.......................... 25 25 Expenses associated with the amended Bristol-Myers Squibb Company ("BMS") Commercial Agreement........................................... 2,250 -- ------------- ------------- Total operating expenses............................................... 48,176 28,849 ------------- ------------- Operating loss............................................................... (29,625) (854) ------------- ------------- Other: Interest income........................................................... (2,264) (4,565) Interest expense.......................................................... 3,493 3,316 Loss (gain) on securities and investments................................. (801) 1,618 ------------- ------------- Net interest and other expense......................................... 428 369 ------------- ------------- Net loss............................................................. $ (30,053) $ (1,223) ============= ============= Net loss per common share: Basic and diluted: Net loss per common share.............................................. $ (0.41) $ (0.02) ============= ============= Weighted average shares outstanding.......................................... 73,307 66,258 ============= =============
See accompanying notes to consolidated financial statements Page 2 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- RESTATED RESTATED (NOTE 2) (NOTE 2) Cash flows from operating activities: Net loss..................................................................... $ (30,053) $ (1,223) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................................. 2,190 606 Amortization of deferred financing costs.................................. 422 422 Expense associated with issuance of options and warrants.................. 4 421 (Gain) loss on securities available for sale.............................. (801) 18 Write-down of investment in Valigen N.V................................... - 1,600 Changes in: Prepaid expenses....................................................... 415 (835) Amounts due from corporate partners (including amounts received from BMS of $6,533 for the three months ended March 31, 2002)............. (4,402) - Note receivable - officer.............................................. - (8) Other current assets................................................... (1,003) (611) Withholding tax assets................................................. - (7,119) Other assets........................................................... (3,254) 12 Interest payable....................................................... (3,243) (3,238) Accounts payable....................................................... (3,345) (6,034) Accrued expenses....................................................... 5,001 2,060 Withholding tax liability.............................................. - 7,119 Industrial Development Revenue Bonds tax liability..................... 26 28 Deferred revenue (including amounts received from BMS of $140,000 for the three months ended March 31, 2002)........................... 133,338 (97) Fees potentially refundable to Merck KGaA.............................. - (24,000) ------------- ------------- Net cash provided by (used in) operating activities.................. 95,295 (30,879) ------------- ------------- Cash flows from investing activities: Acquisitions of property and equipment.................................... (17,922) (15,074) Purchases of securities available for sale................................ (138,819) (11,456) Sales and maturities of securities available for sale..................... 134,938 25,554 Additions to patents...................................................... (55) (69) ------------- ------------- Net cash used in investing activities................................ (21,858) (1,045) ------------- ------------- Cash flows from financing activities: Proceeds from exercise of stock options and warrants...................... 2,651 1,204 Proceeds from issuance of common stock under the employee stock purchase plan.......................................................... 167 178 Proceeds from short-swing profit rule..................................... 486 - Purchase of treasury stock................................................ - (1,830) Payment of preferred stock dividends...................................... - (5,764) Redemption of series A preferred stock.................................... - (20,000) Payments of other liabilities............................................. (150) (203) ------------- ------------- Net cash provided by (used in) financing activities.................. 3,154 (26,415) ------------- ------------- Net increase (decrease) in cash and cash equivalents................. 76,591 (58,339) Cash and cash equivalents at beginning of period............................. 38,093 60,325 ------------- ------------- Cash and cash equivalents at end of period................................... $ 114,684 $ 1,986 ============= ============= Supplemental cash flow information: Cash paid for interest, including amounts capitalized of $300 and $494 for the three months ended March 31, 2002 and 2001, respectively....... $ 6,613 $ 6,623 ============= =============
See accompanying notes to consolidated financial statements Page 3 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PREPARATION The consolidated financial statements of ImClone Systems Incorporated ("ImClone Systems" or the "Company") as of March 31, 2002 and for the three months ended March 31, 2002 and 2001 are unaudited. In the opinion of management, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission ("SEC"). Results for the interim periods are not necessarily indicative of results for the full years. Pursuant to the guidance in Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred ("EITF No. 01-14"), the Company changed its classification for corporate partner reimbursements effective January 1, 2002 to characterize such reimbursements received for research and development and marketing expenses incurred as collaborative agreement revenue in the consolidated statements of operations. Prior to January 1, 2002, the Company characterized such reimbursements as a reduction of expenses in the consolidated statements of operations. As prescribed in EITF No. 01-14, all comparative financial statements for prior periods have been reclassified to comply with this guidance. (2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS The Company has restated its Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001, primarily to reflect a withholding tax liability and withholding tax assets primarily relating to the exercises of certain non-qualified stock options and compensatory warrants described below. The restatement includes recording withholding tax assets of $13,510,000 as of March 31, 2002 and December 31, 2001; a withholding tax liability of $38,779,000 as of March 31, 2002 and December 31, 2001; an Industrial Development Revenue Bonds tax liability of $877,000 and $851,000 as of March 31, 2002 and December 31, 2001, respectively; a cumulative increase to accumulated deficit of $26,146,000 as of March 31, 2002; and a cumulative increase to accumulated deficit of $26,120,000 as of December 31, 2001. The $26,120,000 increase to accumulated deficit reflects the fourth quarter 2001 write-down of the $25,269,000 asset noted below regarding Dr. Samuel D. Waksal and $851,000 in additional tax expense and interest expense for the years 1995 through 2001 in connection with the Company's outstanding Industrial Development Revenue Bonds issued in 1990 (the "1990 IDA Bonds"). The Company has restated its Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 to reflect additional tax expense and interest expense for the 1990 IDA Bonds. Due to the restatement, the net loss for the three months ended March 31, 2002 and 2001 increased to $30,053,000 and $1,223,000 from $30,027,000 and $1,195,000, respectively, with no impact on net loss per common share. Federal and applicable state tax laws require an employer to withhold income taxes at the time of an employee's exercise of non-qualified stock options or warrants issued in connection with the performance of services by the employee. An employer that does not do so is liable for the taxes not withheld if the employee fails to pay his or her taxes for the year in which the non-qualified stock options or warrants are exercised. In 2000 and prior years, the Company generally did not require the withholding of federal, state or local income taxes and in certain years, employment payroll taxes at the time of the exercise of non-qualified stock options or warrants. Prior to 1996, the Company did not comply with tax reporting requirements with respect to the exercise of non-qualified stock options or warrants. In January 2003, the New York State Department of Taxation and Finance ("New York State") notified the Company that it was liable for the New York State and City income taxes that were not withheld because one or more of the Company's employees who exercised certain non-qualified stock options in 1999 and 2000 failed to pay New York State and City income taxes for those years. At December 31, 2002, the Company recorded a gross New York State and City withholding tax liability of approximately $6,800,000. On March 13, 2003, the Company entered into a closing agreement with New York State, paying $4,500,000 to settle the matter. The Company believes that substantially all of the underpayment of New York State and City income tax identified by New York State is attributable to the exercise of non-qualified stock options by its former Page 4 President and Chief Executive Officer, Dr. Samuel D. Waksal. On March 13, 2003, the Company initiated discussions with the Internal Revenue Service ("IRS") relating to federal income taxes on the exercise of non-qualified stock options on which income tax was not properly withheld. Although the IRS has not yet asserted that the Company is required to make a payment with respect to such failure to withhold, the IRS may assert that such a liability exists, and may further assert that the Company is liable for interest and penalties. The Company has requested and received confirmation from all of its current and substantially all of its former employees who exercised non-qualified stock options in 1999 and 2000, on which no income tax was withheld, that they have reported the appropriate amount of income on their tax returns and paid the taxes shown as due on those returns. Based on this information, the Company determined that all but an insignificant amount of the potential liability for withholding taxes with respect to exercises of non-qualified stock options in 1999 and 2000 is attributed to those amounts related to Dr. Samuel D. Waksal. In addition, in the course of the Company's investigation into its potential liability in respect of the non-qualified stock options described above, the Company identified certain warrants that were granted in 1991 and prior years to current and former officers, directors and advisors (including the four individuals discussed herein) that the Company previously treated as non-compensatory warrants and thus not subject to tax withholding and information reporting requirements upon exercise. Accordingly, when exercised in 2001 and prior years, the Company did not deduct income and payroll taxes upon exercise or report applicable information to the taxing authorities. Based on the information discovered in the course of the Company's recent investigation, the Company now believes that such treatment was incorrect, and that the exercise of such warrants by current and former officers of the Company should have been treated in the same manner for withholding and reporting purposes as the exercise of non-qualified stock options. The Company has informed the relevant authorities, including the IRS and New York State, of this matter and intends to resolve its liability in respect of these warrants with these taxing authorities in conjunction with its resolution of the matter described above. On June 17, 2003, New York State notified the Company that, based on the issue identified above, they are continuing a previously conducted audit of the Company and are evaluating the terms of the closing agreement to determine whether or not it should be re-opened. On April 2, 2003, the Company received a request from the SEC for the voluntary production of documents and information relating to the above matters. The Company is cooperating fully with the SEC, and intends to continue to do so, while also updating the United States Attorney's Office on an ongoing basis. One of the officers and directors to whom warrants were issued and previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the Company's Chief Scientific Officer. In June 2003, Dr. Harlan W. Waksal represented that he has paid the taxes associated with the exercise of these warrants and further agreed to indemnify the Company for any withholding taxes that may be assessed and are attributable to the Company's failure to deduct income and payroll taxes on all warrants and options that he or his transferee have previously exercised, subject to the consent of Dr. Harlan W. Waksal, which can not be unreasonably withheld. Two of the other officers and directors to whom warrants were issued and previously treated as non-compensatory warrants are Dr. Samuel D. Waksal and its former General Counsel, John B. Landes. The Company has made demands on both of these individuals to pay the taxes associated with the exercise of these warrants and certain non-qualified stock options and to indemnify the Company against any liability that it may incur to taxing authorities in respect of the warrants or non-qualified stock options that they have previously exercised. The Company has recognized assets at the time of exercise relating to the above individuals. These assets are based on the fact that individuals are required by law to pay their personal income taxes, as well as the Company's determination that these individuals had the means and intention to satisfy their tax liabilities and legal claims the Company has against the individuals both during and after their employment with the Company. The Company decided to write-down these assets during the periods noted in the paragraph below. Regarding Dr. Samuel D. Waksal, the Company determined that subsequent to its receipt of a "refusal to file" letter from the United States Food and Drug Administration on December 28, 2001, with respect to its rolling Biologics License Application for ERBITUX, his financial condition deteriorated and therefore the recoverability of the asset became doubtful. Regarding Mr. Landes, based on the limited information available to it, due to the decrease in the Company's stock price during 2002 and corresponding decrease in the value of Mr. Landes' ownership of the Company's securities, the Company determined that recoverability of the asset became doubtful. Based upon these determinations, the asset write-downs of $25,269,000 and $3,384,000 were recorded during the fourth quarter of 2001 for Dr. Samuel D. Waksal and the second quarter of 2002 for Mr. Landes, respectively. The withholding tax liabilities relating to Dr. Samuel D. Waksal and Mr. Landes will remain on the Company's Consolidated Balance Sheets, until such time as these liabilities are satisfied. Should the Company negotiate settlements with the IRS and New York State tax authorities for amounts less than those noted above, the Company would reduce operating expenses for the difference between the withholding tax liabilities and settlement amounts in the period of settlement. Page 5 In April 2003, the Company discovered that it is in breach of certain covenants in its outstanding 1990 IDA Bonds. These bonds are tax-exempt and the Company is required to continue to use the proceeds for a qualified tax-exempt purpose (in this case, manufacturing), until maturity. These bonds, in principal amount of $2,200,000, bearing 11.25% annual interest, mature on May 1, 2004. While the bond proceeds were originally used for manufacturing purposes, a recent internal investigation concluded that in August 1995, this qualified purpose was abandoned and the proceeds have been used for a non-qualified purpose in later periods. As a result, the bond proceeds likely became taxable to the bondholders in August 1995. The Company is required to indemnify the bondholders from any taxes imposed upon them. The Company intends to attempt to settle any tax liability directly with the relevant taxing authorities using procedures established for that purpose. Based on the Company's understanding of these procedures, the Company has recognized a tax liability of $877,000 and $851,000 on the Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001, respectively. The Company recorded Industrial Development Revenue Bonds tax expense of $25,000 for the three months ended March 31, 2002 and 2001, and interest expense of $1,000 and $3,000 for the same periods, respectively. On May 22, 2003, the Company notified the bond trustee of its intent to redeem in full the bonds by repaying the principal amount plus accrued and unpaid interest. This redemption is scheduled to occur on June 30, 2003. The following tables present the impact of the restatement on a condensed basis:
MARCH 31, 2002 DECEMBER 31, 2001 -------------------------------- ------------------------------ AS PREVIOUSLY AS PREVIOUSLY CONSOLIDATED BALANCE SHEETS REPORTED AS RESTATED REPORTED AS RESTATED ---------------- ------------- ------------- ------------- Withholding tax assets ....................... $ -- $ 13,510,000 $ -- $ 13,510,000 Total assets ................................. 578,564,000 592,074,000 474,202,000 487,712,000 Withholding tax liability .................... -- 38,779,000 -- 38,779,000 Industrial Development Revenue Bonds tax liability.................................. -- 877,000 -- 851,000 Total current liabilities .................... 67,678,000 107,334,000 54,284,000 93,914,000 Total liabilities ............................ 610,977,000 650,633,000 479,376,000 519,006,000 Accumulated deficit .......................... (376,064,000) (402,210,000) (346,037,000) (372,157,000) Total stockholders' deficit .................. (32,413,000) (58,559,000) (5,174,000) (31,294,000) Total liabilities and stockholders' deficit .. $ 578,564,000 $ 592,074,000 $ 474,202,000 $ 487,712,000
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2002 MARCH 31, 2001 -------------------------------- ------------------------------ AS PREVIOUSLY AS PREVIOUSLY CONSOLIDATED STATEMENTS OF OPERATIONS REPORTED AS RESTATED REPORTED AS RESTATED ---------------- ------------- ------------- ------------- Industrial Development Revenue Bonds tax expense.................................... $ -- $ 25,000 $ -- $ 25,000 Total operating expenses...................... 48,151,000 48,176,000 28,824,000 28,849,000 Operating loss................................ (29,600,000) (29,625,000) (829,000) (854,000) Interest expense.............................. 3,492,000 3,493,000 3,313,000 3,316,000 Net interest and other expense................ 427,000 428,000 366,000 369,000 Net loss...................................... $ (30,027,000) $ (30,053,000) $ (1,195,000) $ (1,223,000)
The restatement did not impact the amounts presented in the Consolidated Statements of Cash Flows for net cash provided by (used in) operating activities, net cash used in investing activities or net cash provided by (used in) financing activities, although it did impact certain components of cash flows from operating activities. Amounts related to the following items are included in withholding tax assets:
MARCH 31, DECEMBER 31, 2002 2001 -------------- --------------- Dr. Harlan W. Waksal*.................................... $ 9,958,000 $ 9,958,000 John B. Landes........................................... 3,384,000 3,384,000 Other.................................................... 168,000 168,000 -------------- --------------- $ 13,510,000 $ 13,510,000 ============== ===============
* - In June 2003, Dr. Harlan W. Waksal represented that he has paid the taxes associated with the exercise of these warrants and further Page 6 agreed to indemnify the Company for any withholding taxes that may be assessed and are attributable to the Company's failure to deduct income and payroll taxes on all warrants, and options that he or his transferee has previously exercised, subject to the consent of Dr. Harlan W. Wakscal, which can not be unreasonably withheld. Amounts related to the following items are included in withholding tax liability:
MARCH 31, DECEMBER 31, 2002 2001 -------------- --------------- Withholding tax related to the exercise of stock options and warrants............................................ $ 38,349,000 $ 38,349,000 Other..................................................... 430,000 430,000 -------------- --------------- $ 38,779,000 $ 38,779,000 ============== ===============
Amounts related to the following items are included in Industrial Development Revenue Bonds tax liability:
MARCH 31, DECEMBER 31, 2002 2001 -------------- -------------- Tax related to the 1990 IDA Bonds........................ $ 637,000 $ 612,000 Accrued interest on tax related to the 1990 IDA Bonds.... 240,000 239,000 -------------- -------------- $ 877,000 $ 851,000 ============== ==============
(3) WITHHOLDING TAX CONTINGENCIES The Company has not recognized withholding tax liabilities in respect of exercises of certain warrants by the Company's then-current and now-former Chairman of the Board, Robert F. Goldhammer, the final of the four officers or directors to whom warrants were issued and previously treated as non-compensatory warrants. Based on the Company's investigation, the Company believes that, although such warrants were compensatory, such warrants were received by Mr. Goldhammer in connection with the performance of services by him in his capacity as a director, rather than as an employee, and, as such, are not subject to tax withholding requirements. In addition, in 1999, Mr. Goldhammer erroneously received a portion of a stock option grant to him in the form of incentive stock options, which under federal law may only be granted to employees. There can be no assurance, however, that the taxing authorities will agree with the Company's position and will not assert that it is liable for the failure to withhold income and employment taxes with respect to the exercise of such warrants and any stock options by Mr. Goldhammer. If the Company became liable for the failure to withhold these taxes on the exercise of such warrants and any stock options by Mr. Goldhammer, the potential liability, exclusive of any interest or penalties, would be approximately $12,600,000. The Company has not recognized accruals for penalties and interest that may be imposed with respect to the withholding tax issues described above and other related contingencies, including the period covered by the statute of limitations and the Company's determination of certain exercise dates because it does not believe that losses from such contingencies are probable. With respect to the statute of limitations and the Company's determination of certain exercise dates, while the Company does not believe a loss is probable, there is a potential additional liability with respect to these issues that may be asserted by a taxing authority. If taxing authorities assert such issues and prevail related to these withholding tax issues and other related contingencies, including penalties, the liability which could be imposed by taxing authorities would be substantial. The potential interest on the withholding tax liability recorded on the Company's Consolidated Balance Sheet could be up to a maximum amount of $5,200,000 at March 31, 2002. Potential additional withholding tax liability on other related contingencies amounts to approximately $11,000,000, exclusive of any interest or penalties, and excluding the amount potentially attributable to Mr. Goldhammer noted above. Page 7 (4) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and consist of the following:
MARCH 31, DECEMBER 31, 2002 2001 --------------- --------------- Land......................................................................... $ 3,858,000 $ 2,733,000 Building and building improvements........................................... 57,062,000 50,720,000 Leasehold improvements....................................................... 8,330,000 8,302,000 Machinery and equipment...................................................... 35,108,000 33,057,000 Furniture and fixtures....................................................... 2,073,000 2,031,000 Construction in progress..................................................... 41,414,000 33,080,000 --------------- --------------- Total cost........................................................... 147,845,000 129,923,000 Less accumulated depreciation and amortization............................... (24,822,000) (22,675,000) --------------- --------------- Property and equipment, net.................................................. $ 123,023,000 $ 107,248,000 =============== ===============
The Company is building a second commercial manufacturing facility adjacent to its new product launch manufacturing facility in New Jersey. This new facility will be a multi-use facility with capacity of up to 110,000 liters (working volume). The 250,000 square foot facility will cost approximately $225,000,000, and is being built on land purchased in December 2000. The actual cost of the new facility may change depending upon various factors. The Company incurred approximately $36,790,000, (included in construction in progress above) excluding capitalized interest of approximately $1,040,000, in conceptual design, engineering and pre-construction costs through March 31, 2002. Through April 26, 2002, committed purchase orders totaling approximately $43,676,000 have been placed for subcontracts and equipment related to this project. In addition, $49,471,000 in engineering, procurement, construction management and validation costs were committed. In January 2002, the Company purchased real estate consisting of a 7.5 acre parcel of land located adjacent to the Company's product launch manufacturing facility and pilot facility in Somerville, New Jersey. The real estate includes an existing 50,000 square foot building, 40,000 square feet of which is warehouse space and 10,000 square feet of which is office space. The purchase price for the property and improvements was approximately $7,020,000 of which, approximately $1,125,000 related to the purchase of the land and approximately $5,895,000 related to the purchase of the building and building improvements. The Company intends to use this property for warehousing and logistics for its Somerville campus. The process of preparing consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company to evaluate the carrying values of its long-lived assets. The recoverability of the carrying values of the Company's product launch manufacturing facility and its second commercial manufacturing facility currently in process will depend on (1) receiving FDA approval of our interventional therapeutic product candidate for cancer, ERBITUX(TM), (2) receiving FDA approval of the manufacturing facilities and (3) the Company's ability to earn sufficient returns on ERBITUX. Based on management's current estimates, the Company expects to recover the carrying value of such assets. (5) MANUFACTURING CONTRACT SERVICES In December 1999, the Company entered into a development and manufacturing services agreement with Lonza Biologics PLC ("Lonza"). This agreement was amended in April 2001 to include additional services. Under the agreement, Lonza is responsible for process development and scale-up to manufacture ERBITUX in bulk form under cGMP conditions. These steps were taken to assure that the manufacturing process would produce bulk material that conforms with the Company's reference material. The Company has incurred approximately $38,000 in the three months ended March 31, 2002, and $7,068,000 from inception through March 31, 2002 for services provided under the development and manufacturing services agreement. In September 2000, the Company entered into a three-year commercial manufacturing services agreement with Lonza relating to ERBITUX. This agreement was amended in June 2001 and again in September 2001 to include additional services. The total cost for services to be provided under the three-year commercial manufacturing services agreement is approximately $86,955,000. The Company has incurred approximately $7,070,000 in the three months ended March 31, 2002, and $17,383,000 from inception through March 31, 2002 for services provided under the commercial manufacturing services agreement. Under these two agreements, Lonza is manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is delivering it to the Company over a term ending no later than December 2003. The costs associated with both of these agreements are included in research and development expenses when incurred and will continue Page 8 to be so classified until such time as ERBITUX may be approved for sale or until the Company obtains obligations from its corporate partners to purchase such product. In the event of such approval or obligations from its corporate partners, the subsequent costs associated with manufacturing ERBITUX for commercial sale will be included in inventory and expensed when sold. In the event the Company terminates the commercial manufacturing services agreement without cause, the Company will be required to pay 85% of the stated costs for each of the first ten batches cancelled, 65% of the stated costs for each of the next ten batches cancelled and 40% of the stated costs for each of the next six batches cancelled. The batch cancellation provisions for certain additional batches that we are committed to purchase require the company to pay 100% of the stated costs of cancelled batches scheduled within six months of the cancellation, 85% of the stated costs of cancelled batches scheduled between six and twelve months following the cancellation and 65% of the stated costs of cancelled batches scheduled between twelve and eighteen months following the cancellation. These amounts are subject to mitigation should Lonza use its manufacturing capacity caused by such termination for another customer. At March 31, 2002, the estimated remaining future commitments under the amended commercial manufacturing services agreement are $45,522,000 in 2002 and $24,050,000 in 2003. In December 2001, the Company entered into an agreement with Lonza to manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck KGaA (the "2,000L Lonza Agreement"). The costs associated with the agreement are reimbursable by Merck KGaA and accordingly are accounted for as collaborative agreement revenue and such costs are also included in research and development expenses in the consolidated statement of operations. The Company has incurred approximately $1,762,000 in the three months ended March 31, 2002, and $4,245,000 from inception through March 31, 2002 for services provided under this agreement. Approximately $1,895,000 and $133,000 was reimbursable by Merck KGaA at March 31, 2002 and December 31, 2001, respectively, and included in amounts due from corporate partners in the consolidated balance sheets. At March 31, 2002, the estimated remaining future commitments under this agreement are $2,938,000 in 2002. In January 2002, the Company executed a letter of intent with Lonza to enter into a long-term supply agreement. The long-term supply agreement would apply to a large scale manufacturing facility that Lonza is constructing. The Company expects such facility would be able to produce ERBITUX in 20,000 liter batches. The Company paid Lonza $3,250,000 for the exclusive negotiating right of a long-term supply agreement, which amount is included in Other assets at March 31, 2002 in the consolidated balance sheet. Such negotiations commenced shortly thereafter and are continuing. Under certain conditions such payment shall be refunded to the Company. Provided the Company enters into a long-term supply agreement, such payment shall be creditable against the 20,000 liter batch price. (6) INVESTMENT IN VALIGEN N.V. In May 2000, the Company made an equity investment in ValiGen N.V. ("ValiGen"), a private biotechnology company specializing in therapeutic target identification and validation using the tools of genomics and gene expression analysis. The Company purchased 705,882 shares of ValiGen's series A preferred stock and received a five-year warrant to purchase 388,235 shares of ValiGen's common stock at an exercise price of $12.50 per share. The aggregate purchase price was $7,500,000. The Company assigned a value of $594,000 to the warrant based on the Black-Scholes Pricing Model. The ValiGen series A preferred stock contains voting rights identical to holders of ValiGen's common stock. Each share of ValiGen series A preferred stock is convertible into one share of ValiGen common stock. The Company may elect to convert the ValiGen series A preferred stock at any time; provided, that the ValiGen preferred stock will automatically convert into ValiGen common stock upon the closing of an initial public offering of ValiGen's common stock with gross proceeds of not less than $20,000,000. The Company also received certain protective rights and customary registration rights under this arrangement. The Company recorded this original investment in ValiGen using the cost method of accounting. During the second quarter of 2001, the Company purchased 160,000 shares of ValiGen's series B preferred stock for $2,000,000. The terms of the series B preferred stock are substantially the same as the series A preferred stock. The investment in ValiGen represented approximately 7% of ValiGen's outstanding equity at the time of purchase. As of June 30, 2001, the Company had completely written-off its investment in ValiGen determined based on the modified equity method of accounting. Included in loss on securities and investments for the three months ended March 31, 2001 is a $1,600,000 write-down of the Company's investment in Valigen. In the spring of 2001, the Company also entered into a no-cost Discovery Agreement with ValiGen to evaluate certain of its technology. The Company's Chief Executive Officer is a member of ValiGen's Board of Directors. (7) NET LOSS PER COMMON SHARE Basic and diluted net loss per common share are computed based on the net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period. Potentially dilutive securities, including convertible preferred stock, convertible debt, options and warrants, have not been included in the diluted loss per common share computation because they are anti-dilutive. Page 9 (8) COMPREHENSIVE INCOME (LOSS) The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 --------------- ------------- RESTATED RESTATED (NOTE 2) (NOTE 2) Net loss..................................................................... $ (30,053,000) $ (1,223,000) Other comprehensive income (loss): Unrealized holding gain arising during the period......................... 281,000 1,938,000 Reclassification adjustment for realized (gain) loss included in net loss. (801,000) 18,000 --------------- ------------- Total other comprehensive income (loss).............................. (520,000) 1,956,000 --------------- ------------- Total comprehensive income (loss)............................................ $ (30,573,000) $ 733,000 =============== =============
(9) COLLABORATIVE AGREEMENTS (a) MERCK KGaA Effective April 1990, the Company entered into a development and commercialization agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen. The agreement has been amended a number of times, most recently in December 1997. The agreement grants Merck KGaA a license, with the right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75 outside North America. The agreement also grants Merck KGaA a license, without the right to sublicense, to use, sell, or have sold, but not to make BEC2 within North America in conjunction with the Company. Pursuant to the terms of the agreement the Company has retained the rights, (1) without the right to sublicense, to make, have made, use, sell, or have sold BEC2 in North America in conjunction with Merck KGaA and (2) with the right to sublicense, to make, have made, use, sell, or have sold gp75 in North America. In return, the Company has recognized research support payments totaling $4,700,000 and is entitled to no further research support payments under the agreement. Merck KGaA is also required to make payments of up to $22,500,000, of which $4,000,000 has been recognized, through March 31, 2002, based on milestones achieved in the licensed products' development. Merck KGaA is also responsible for worldwide costs of up to DM17,000,000 associated with a multi-site, multinational phase III clinical trial for BEC2 in limited disease small-cell lung carcinoma. This expense level was reached during the fourth quarter of 2000 and all expenses incurred from that point forward are being shared 60% by Merck KGaA and 40% by the Company. Such cost sharing applies to all expenses beyond the DM17,000,000 threshold. The Company has incurred approximately $121,000 and $122,000 in reimbursable research and development expenses associated with this agreement in the three months ended March 31, 2002 and 2001, respectively. These amounts have been recorded as research and development expenses and also as collaborative agreement revenue in the consolidated statements of operations. Merck KGaA is also required to pay royalties on the eventual sales of BEC2 outside of North America, if any. Revenues from sales, if any, of BEC2 in North America will be distributed in accordance with the terms of a co-promotion agreement to be negotiated by the parties. In December 1998, the Company entered into a development and license agreement with Merck KGaA with respect to ERBITUX. In exchange for granting Merck KGaA exclusive rights to market ERBITUX outside of the United States and Canada and co-development rights in Japan, the Company received through March 31, 2002, $30,000,000 in up-front fees and early cash-based milestone payments based on the achievement of defined milestones. In March 2001, the Company satisfied a condition relating to obtaining certain collateral license agreements associated with the ERBITUX development and license agreement with Merck KGaA. The satisfaction of this condition allowed for the recognition of $24,000,000 in previously received milestone payments and initiated revenue recognition of the $4,000,000 up-front payment received in connection with this agreement. An additional $30,000,000 can be received, of which $5,000,000 has been received as of March 31, 2002, assuming the achievement of further milestones for which Merck KGaA will receive equity in the Company. The equity underlying these milestone payments will be priced at varying premiums to the then-market price of the common stock depending upon the timing of the achievement of the respective milestones. If issuing shares of common stock to Merck KGaA would result in Merck KGaA owning greater than 19.9% of our common stock, the milestone shares will be a non-voting preferred stock, or other non-voting stock convertible into the Company's common stock. These convertible securities will not have voting rights. They will be convertible at a price determined in the same manner as the purchase price for shares of the Company's common stock if shares of common stock were to be issued. They will not be convertible into common stock if, as a result of the conversion, Merck KGaA would own greater than 19.9% of the Company's common stock. Page 10 This 19.9% limitation is in place through December 2002. Merck KGaA will pay the Company a royalty on future sales of ERBITUX outside of the United States and Canada, if any. This agreement may be terminated by Merck KGaA in various instances, including (1) at its discretion on any date on which a milestone is achieved (in which case no milestone payment will be made), or (2) for a one-year period after first commercial sale of ERBITUX in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to a return of 50% of the cash-based up front fees and milestone payments then paid to date, but only out of revenues received by ImClone, if any, based upon a royalty rate applied to the gross profit from ERBITUX sales or a percentage of ERBITUX fees and royalties received from a sublicensee on account of the sale of ERBITUX in the United States and Canada). In August 2001, the Company and Merck KGaA amended this agreement to provide, among other things, that Merck KGaA may manufacture ERBITUX for supply in its territory and may utilize a third party to do so upon the Company's reasonable acceptance. The amendment further released Merck KGaA from its obligations under the agreement relating to providing a guaranty under a $30,000,000 credit facility relating to the build-out of the Company's product launch manufacturing facility. In addition, the amendment provides that the companies have co-exclusive rights to ERBITUX in Japan, including the right to sublicense, and that Merck KGaA has waived its right of first offer in the case of a proposed sublicense by the Company of ERBITUX in the Company's territory. In consideration for the amendment, the Company agreed to a reduction in royalties payable by Merck KGaA on sales of ERBITUX in Merck KGaA's territory. In conjunction with Merck KGaA, the Company has expanded the trial of ERBITUX plus radiotherapy in squamous cell carcinoma of the head and neck into Europe, South Africa, Israel, Australia and New Zealand. In order to support these clinical trials, Merck KGaA has agreed to purchase ERBITUX manufactured by Lonza for use in these trials and further agreed to reimburse the Company for one-half of the outside contract service costs incurred with respect to this Phase III clinical trial of ERBITUX for the treatment of head and neck cancer in combination with radiation. Amounts due from Merck KGaA related to these agreements totaled approximately $6,381,000 and $1,503,000 at March 31, 2002 and December 31, 2001, respectively, and are included in amounts due from corporate partners in the consolidated balance sheets. The Company has incurred reimbursable research and development expenses totaling approximately $5,022,000 and $3,129,000 in the three months ended March 31, 2002, and 2001, respectively. These amounts have been recorded as research and development expenses and also as collaborative agreement revenue in the consolidated statements of operations. Reimbursable costs associated with supplying ERBITUX to Merck KGaA for use in clinical trials totaled approximately $4,309,000 during the three months ended March 31, 2002 and are included in collaborative agreement revenue in the consolidated statements of operations. The related manufacturing costs, except for cost incurred under the 2,000L Lonza Agreement, have been expensed in prior periods when the related raw materials were purchased and the associated direct labor and overhead was consumed or, in the case of contract manufacturing, when such services were performed. (b) BRISTOL-MYERS SQUIBB COMPANY On September 19, 2001, the Company entered into an acquisition agreement (the "Acquisition Agreement") with BMS and Bristol-Myers Squibb Biologics Company, a Delaware corporation ("BMS Biologics") which is a wholly-owned subsidiary of BMS, providing for the tender offer by BMS Biologics to purchase up to 14,392,003 shares of the Company's common stock for $70.00 per share, net to the seller in cash. In connection with the Acquisition Agreement, the Company entered into a stockholder agreement with BMS and BMS Biologics, dated as of September 19, 2001 (the "Stockholder Agreement"), pursuant to which all parties agreed to various arrangements regarding the respective rights and obligations of each party with respect to, among other things, the ownership of shares of the Company's common stock by BMS and BMS Biologics. Concurrent with the execution of the Acquisition Agreement and the Stockholder Agreement, the Company entered into a development, distribution and supply agreement (the "Commercial Agreement") with BMS and its wholly-owned subsidiary E.R. Squibb & Sons, L.L.C. ("E.R. Squibb"), relating to ERBITUX, pursuant to which, among other things, the Company is co-developing and co-promoting ERBITUX in the United States and Canada, and co-developing ERBITUX (together with Merck KGaA) in Japan. On October 29, 2001, pursuant to the Acquisition Agreement, BMS Biologics accepted for payment pursuant to the tender offer 14,392,003 shares of the Company's common stock on a pro rata basis from all tendering shareholders and those conditionally exercising stock options. On March 5, 2002, the Company amended the Commercial Agreement with E.R. Squibb and BMS. The amendment changed certain economics of the Commercial Agreement and has expanded the clinical and strategic role of BMS in the ERBITUX development program. One of the principal economic changes to the Commercial Agreement is that the Company received $140,000,000 on March 7, 2002 and an additional payment of $60,000,000 is payable on March 5, 2003. Such payments are in lieu of the $300,000,000 milestone payment the Company would have received under the original terms of the Page 11 agreement upon acceptance by the FDA of the ERBITUX rolling Biologic License Application submitted for marketing approval to treat irinotecan-refractory colorectal cancer. In addition, the Company agreed to resume construction of its second commercial manufacturing facility as soon as reasonably practicable after the execution of the amendment. In exchange for the rights granted to BMS under the amended Commercial Agreement, the Company can receive up-front and milestone payments totaling $900,000,000 in the aggregate, of which $200,000,000 was received on September 19, 2001, $140,000,000 was received on March 7, 2002, $60,000,000 is payable on March 5, 2003, $250,000,000 is payable upon receipt of marketing approval from the FDA with respect to an initial indication for ERBITUX and $250,000,000 is payable upon receipt of marketing approval from the FDA with respect to a second indication for ERBITUX. All such payments are non-refundable and non-creditable. Payments received under the amended Commercial Agreement with BMS and E.R. Squibb are being deferred and recognized as revenue based on the percentage of actual product research and development costs incurred to date by both BMS and the Company to the estimated total of such costs to be incurred over the term of the agreement. Except for the Company's expenses incurred pursuant to a co-promotion option, E.R. Squibb is also responsible for 100% of the distribution, sales and marketing costs in the United States and Canada, and as between the Company and E.R. Squibb, each party will be responsible for 50% of the distribution, sales, and marketing costs and other related costs and expenses in Japan. The Commercial Agreement provides that E.R. Squibb shall pay the Company a 39% distribution fee on net sales of ERBITUX by E.R. Squibb in the United States and Canada. The Commercial Agreement also provides that the distribution fees for the sale of ERBITUX in Japan by E.R. Squibb or the Company shall be equal to 50% of operating profit or loss with respect to such sales for any calendar month. In the event of an operating profit, E.R. Squibb will pay the Company the amount of such distribution fee, and in the event of an operating loss, the Company will credit E.R. Squibb the amount of such distribution fee. The Commercial Agreement provides that the Company will be responsible for the manufacture and supply of all requirements of ERBITUX in bulk form for clinical and commercial use in the United States, Canada and Japan and that E.R. Squibb will purchase all of its requirements of ERBITUX in bulk form for commercial use from the Company. The Company will supply ERBITUX for clinical use at the Company's fully burdened manufacturing cost, and will supply ERBITUX for commercial use at the Company's fully burdened manufacturing cost plus a mark-up of 10%. In addition to the up-front and milestone payments, the distribution fees for the United States, Canada and Japan and the 10% mark-up on the commercial supply of ERBITUX, E.R. Squibb is also responsible for 100% of the cost of all clinical studies other than those studies undertaken post-launch which are not pursuant to an Investigational New Drug Application ("INDA") (e.g. phase IV studies), the cost of which will be shared equally between E.R. Squibb and the Company. As between E.R. Squibb and the Company, each will be responsible for 50% of the cost of all clinical studies in Japan. Unless earlier terminated pursuant to the termination rights discussed below, the Commercial Agreement expires with regard to the Product in each country in the Territory on the later of September 19, 2018 and the date on which the sale of the Product ceases to be covered by a validly issued or pending patent in such country. The Commercial Agreement may also be terminated prior to such expiration as follows: - by either party, in the event that the other party materially breaches any of its material obligations under the Commercial Agreement and has not cured such breach within 60 days after notice; - by E.R. Squibb, if the joint executive committee (the "JEC") formed by BMS and the Company determines that there exists a significant concern regarding a regulatory or patient safety issue that would seriously impact the long-term viability of all products; or - by either party, in the event that the JEC does not approve additional clinical studies that are required by the FDA in connection with the submission of the initial regulatory filing with the FDA within 90 days of receiving the formal recommendation of the product development committee concerning such additional clinical studies. The Company incurred approximately $2,250,000 during the three months ended March 31, 2002 in advisor fees associated with the amendment to the Commercial Agreement with BMS and affiliates which have been expensed and included as a separate line item in operating expenses in the consolidated statement of operations. In connection with the amended Commercial Agreement the Company incurred and recorded reimbursable research and development and marketing expenses totaling approximately $4,248,000 in the three months ended March 31, 2002. These amounts have also been recorded as collaborative agreement revenue for the three months ended March 31, 2002 in the consolidated statements of operations. Page 12 Reimbursable costs associated with ERBITUX used in clinical trials totaled approximately $1,847,000 during the three months ended March 31, 2002 and are included in collaborative agreement revenue in the consolidated statement of operations. The related manufacturing costs have been expensed in prior periods when the related raw materials were purchased and the associated direct labor and overhead was consumed or, in the case of contract manufacturing, when such services were provided. License fees and milestone revenues consists of the following:
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 --------------- ------------- BMS ERBITUX license fee revenue.............................................. $ 6,567,000 $ -- Merck KGaA ERBITUX milestone revenue......................................... -- 24,000,000 Merck KGaA ERBITUX and BEC2 license fee revenue.............................. 96,000 96,000 --------------- ------------- Total license fees and milestone revenues............................ $ 6,663,000 $ 24,096,000 =============== =============
Collaborative agreement revenue (see note 1) from corporate partners consists of the following:
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 --------------- ------------- BMS reimbursement of ERBITUX research and development ($5,952,000) and marketing ($143,000) expenses......................................... $ 6,095,000 $ -- Merck KGaA reimbursement of ERBITUX research and development expenses........ 713,000 2,099,000 Merck KGaA reimbursement of ERBITUX product costs for use in clinical trials.................................................................... 4,309,000 1,030,000 Merck KGaA reimbursement of BEC2 research and development expenses........... 121,000 122,000 --------------- ------------- Total collaborative agreement revenue................................ $ 11,238,000 $ 3,251,000 =============== =============
Amounts due from corporate partners consist of the following:
MARCH 31, DECEMBER 31, 2002 2001 --------------- ------------- Due from BMS, ERBITUX research and development and marketing expenses........ $ 6,130,000 $ 6,714,000 Due from Merck KGaA, ERBITUX research and development expenses............... 2,083,000 666,000 Due from Merck KGaA, reimbursement of ERBITUX product costs for use in clinical trials........................................................ 4,298,000 837,000 Due from Merck KGaA, BEC2 research and development expenses.................. 121,000 13,000 --------------- ------------- Total amounts due from corporate partners............................ $ 12,632,000 $ 8,230,000 =============== =============
Deferred revenue consists of the following:
MARCH 31, DECEMBER 31, 2002 2001 --------------- --------------- BMS, ERBITUX Commercial Agreement............................................ $ 330,881,000 $ 197,447,000 Merck KGaA, ERBITUX development and license agreement........................ 3,722,000 3,778,000 Merck KGaA, BEC2 development and commercialization agreement................. 2,231,000 2,271,000 --------------- --------------- 336,834,000 203,496,000 Less: current portion........................................................ (35,760,000) (20,683,000) --------------- --------------- $ 301,074,000 $ 182,813,000 =============== ===============
Page 13 (10) OTHER CONTINGENCIES The Company and certain of its officers and directors are named as defendants in a number of complaints filed on behalf of purported classes of its stockholders asserting claims under Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. A motion is pending that will result in the consolidation of these and any subsequently-filed actions that assert similar claims. The complaints in these actions allege generally that various public statements made by the Company or its senior officers during 2001 and early 2002 regarding the prospects for FDA approval of ERBITUX were false or misleading when made, that various Company insiders were aware of material, non-public information regarding the actual prospects for ERBITUX at the time that those insiders engaged in transactions in the Company's common stock and that members of the purported shareholder class suffered damages when the market price of the Company's common stock declined following disclosure of the information that allegedly had not been previously disclosed. On December 28, 2001, the Company disclosed that it had received a "refusal to file" letter from the FDA relating to its biologics license application for ERBITUX. Thereafter, various news articles purported to describe the contents of the FDA's "refusal to file" letter. During this period, the market price of the Company's common stock declined. The complaints in the various actions seek to proceed on behalf of a class of the Company's present and former stockholders, other than defendants or persons affiliated with the defendants, seek monetary damages in an unspecified amount and seek recovery of plaintiffs' costs and attorneys' fees. Beginning on January 13, 2002 and continuing thereafter, eight separate purported stockholders derivative actions have been filed against the members of its board of directors and the Company, as nominal defendant, making allegations similar to the allegations in the federal securities class action complaints. All of these actions assert claims, purportedly on the Company's behalf, for breach of fiduciary duty by certain members of the board of directors based on the allegation that certain directors engaged in transactions in the Company's common stock while in possession of material, non-public information concerning the regulatory and marketing prospects for ERBITUX. Another complaint, purportedly asserting direct claims on behalf of a class of the Company's shareholders but in fact asserting derivative claims that are similar to those asserted in these six cases, was filed in the U.S. District Court for the Southern District of New York on February 13, 2002, styled Dunlap v. Waksal, et al., No. 02 Civ. 1154 (RO). The Dunlap complaint asserts claims against the board of directors for breach of fiduciary duty purportedly on behalf of all persons who purchased shares of the Company's common stock prior to June 28, 2001 and then held those shares through December 6, 2001. It alleges that the members of the purported class suffered damages as a result of holding their shares based on allegedly false information about the financial prospects of the Company that was disseminated during this period. All of these actions are in their earliest stages and a reserve has not been established in the accompanying consolidated financial statements because the Company does not believe at this time that a loss is probable. The Company intends to contest vigorously the claims asserted in these actions. The Company has incurred legal fees associated with these matters totaling approximately $3,279,000 during the three months ended March 31, 2002. In addition, the Company has estimated and recorded a receivable totaling $1,639,000 for a portion of the above mentioned legal fees that the Company believes are recoverable from its insurance carriers. This receivable is included in other assets in the consolidated balance sheet at March 31, 2002. The Company has received subpoenas and requests for information in connection with investigations by the Securities and Exchange Commission, the Subcommittee on Oversight and Investigations of the U.S. House of Representatives Committee on Energy and Commerce and the U.S. Department of Justice relating to the circumstances surrounding the disclosure of the FDA letter dated December 28, 2001 and trading in the Company's securities by certain Company insiders in 2001. The Company is cooperating with all of these inquiries and intends to continue to do so. (11) CERTAIN RELATED PARTY TRANSACTIONS In September 2001 and February 2002, the Company entered into employment agreements with six senior executive officers, including the Chief Executive Officer and Chief Operating Officer. The September agreements each have three-year terms and the February agreement has a one-year term. The term of employment for each of the CEO and COO will be automatically extended for one additional day each day during the term of employment unless either the Company or the Executive otherwise gives notice. The employment agreements provide for a stated base salaries, and minimum bonuses and benefits aggregating $3,765,000 annually. Certain transactions engaged in by the Company's Chief Executive Officer, Dr. Samuel Waksal, in securities of the Company were deemed to have resulted in "short-swing profits" under Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"). In accordance with Section 16(b) of the Exchange Act, Dr. Waksal has paid the Company an aggregate amount of approximately $486,000, in March 2002, as disgorgement of "short-swing profits" he realized. This amount was recorded as an increase to additional paid-in capital. Page 14 (12) STOCKHOLDER RIGHTS PLAN On February 15, 2002, the Company's Board of Directors approved a Stockholder Rights Plan and declared a dividend of one right for each share of our common stock outstanding at the close of business on February 19, 2002. In connection with the Board of Directors approval of the stockholders rights plan Series B Participating Cumulative Preferred Stock was created. Under certain conditions, each right entitles the holder to purchase from the Company one-hundredth of a share of series B Participating Cumulative Preferred Stock at an initial purchase price of $175 per share. The Stockholder Rights Plan is designed to enhance the Board's ability to protect stockholders against, among other things, unsolicited attempts to acquire control of the Company which do not offer an adequate price to all of the Company's stockholders or are otherwise not in best interests of the Company and the Company's stockholders. Subject to certain exceptions, rights become exercisable (i) on the tenth day after public announcement that any person, entity, or group of persons or entities has acquired ownership of 15% or more of the Company's outstanding common stock, or (ii) 10 business days following the commencement of a tender offer or exchange offer by any person which would, if consummated, result in such person acquiring ownership of 15% or more of the Company's outstanding common stock, (collectively an "Acquiring Person"). In such event, each right holder will have the right to receive the number of shares of common stock having a then current market value equal to two times the aggregate exercise price of such rights. If the Company were to enter into certain business combination or disposition transactions with an Acquiring Person, each right holder will have the right to receive shares of common stock of the acquiring company having a value equal to two times the aggregate exercise price of the rights. The Company may redeem these rights in whole at a price of $.001 per right. The rights expire on February 15, 2012. (13) Convertible Subordinated Notes In February 2000, the Company completed a private placement of $240,000,000 in 5 1/2% Convertible Subordinated Notes due March 1, 2005, which notes are outstanding at March 31, 2002. On May 2, 2003, the Company informed the trustee for the Convertible Subordinated Notes of its withholding tax issues and the delay in filing its Annual Report on Form 10-K for the year ended December 31, 2002 and of the Company's intention to satisfy its tax liabilities upon completion of its discussions with the relevant taxing authorities and to file its Form 10-K as soon as possible. The indenture for the Convertible Subordinated Notes includes covenants requiring the Company to timely pay taxes and timely make Exchange Act filings. Under the indenture, there can be no acceleration of payment of the notes until the Company receives a notice of default from the trustee or a specified percentage of the note holders and a 60-day grace period lapses. The Company has not received any such notice. If, at some point in the future, the Company were to receive such a notice and if it was determined at that time that the Company was not in compliance with applicable covenants, the Company intends to and believes it would be able to cure such non-compliance within the 60-day grace period. Page 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As discussed in Note 2 to our Consolidated Financial Statements included herein and below under the "Liquidity and Capital Resources" section, we have restated our Consolidated Financial Statements for the three months ended March 31, 2002 and 2001. All amounts included in this discussion and analysis reflect the effects of the restatement. The following discussion and analysis by our management is provided to identify certain significant factors that affected our financial position and operating results during the periods included in the accompanying financial statements. CRITICAL ACCOUNTING POLICIES During January 2002, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 61 which requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC has defined critical accounting policies as those that are both important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are summarized in Note 2 to our consolidated financial statements included in Form 10-K for the fiscal year ended December 31, 2001, we believe the following accounting policies to be critical: Revenue Recognition - We adopted Staff Accounting Bulletin No. 101 ("SAB 101") in the fourth quarter of 2000 with an effective date of January 1, 2000, implementing a change in accounting policy with respect to revenue recognition. Beginning January 1, 2000, non-refundable fees received upon entering into collaborative agreements where the Company has continuing involvement are recorded as deferred revenue and recognized over the estimated service period. Payments received under the development, promotion, distribution and supply agreement (the "Commercial Agreement") dated September 19, 2001 and as amended on March 5, 2002 with Bristol-Myers Squibb Company ("BMS") and E.R. Squibb & Sons, L.L.C., a Delaware limited liability company and a wholly-owned subsidiary of BMS ("E.R. Squibb"), relating to ERBITUX, are being deferred and recognized as revenue based upon the actual product research and development costs incurred to date by BMS, E.R. Squibb and ImClone Systems as a percentage of the estimated total of such costs to be incurred over the term of the agreement. Of the $340,000,000 upfront payments we received from BMS through March 31, 2002, approximately $6,567,000 was recognized as revenue during the three months ended March 31, 2002 and $9,120,000 from the commencement of the agreement through March 31, 2002. The methodology used to recognize revenue deferred involves a number of estimates and judgments, such as the estimate of total product research and development costs to be incurred under the Commercial Agreement. Changes in these estimates and judgments can have a significant effect on the size and timing of revenue recognition. Non-refundable milestone payments, which represent the achievement of a significant step in the research and development process, pursuant to collaborative agreements, other than the Commercial Agreement with BMS, are recognized as revenue upon the achievement of the specified milestone. Withholding Taxes - The estimated amounts recorded in the accompanying Consolidated Financial Statements do not include penalties and interest that may be imposed with respect to the withholding tax issues described herein and other related contingencies, including the period covered by the statute of limitations and our determination of certain exercise dates because we do not believe that losses from such contingencies are probable. With respect to the statute of limitations and our determination of certain exercise dates, while we do not believe a loss is probable, there is a potential additional liability with respect to these issues that may be asserted by a taxing authority. However, if our assessment of these withholding tax issues and other related contingencies is incorrect, the liability that could be imposed by taxing authorities may be substantial. The potential interest on the withholding tax liabilities recorded on our Consolidated Balance Sheet could be up to a maximum amount of $5,200,000 at March 31, 2002. Potential additional withholding tax liability on other related contingencies amount to approximately $11,000,000, exclusive of any interest or penalties, and excluding the amount potentially attributable to Mr. Goldhammer noted herein. Litigation - We are currently involved in certain legal proceedings as discussed in "Contingencies" Note 10 to the financial statements. In accordance with Statement of Financial Accounting Standards No. 5, no legal reserve has been established in our financial statements for these matters because we do not believe at this time that a loss is probable. However, if we deem it probable that an unfavorable ruling in any such legal proceeding will occur, there exists the possibility of a material adverse impact on the operating results of that period. Long-Lived Assets - We review 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 undiscounted cash flows are less than carrying amounts. Fair value is generally the present value of the expected associated cash flows. We recently built a product launch manufacturing facility and are building a second commercial manufacturing facility which are summarized in Note 4 to the financial statements. The product launch manufacturing facility is dedicated to the clinical and commercial production of ERBITUX and the second commercial manufacturing facility will be a multi-use production facility. ERBITUX is currently being produced for clinical trials and potential commercialization. We believe that ERBITUX will ultimately be approved for commercialization. As such, we believe that the full carrying value of both the product launch manufacturing facility and the second commercial Page 16 manufacturing facility will be recovered. Changes in business conditions in the future could change our judgments about the carrying value of these facilities, which could result in the recognition of material impairment losses. Manufacturing Contracts - As summarized under "Manufacturing Contract Services," Note 5 to the financial statements, we have entered into certain development and manufacturing services agreements with Lonza Biologics plc ("Lonza") for the clinical and commercial production of ERBITUX. We have commitments from Lonza to manufacture ERBITUX at the 5,000 liter scale through December 2003. On March 31, 2002, the estimated remaining future commitments under the amended commercial manufacturing services agreement with Lonza were $45,522,000 in 2002 and $24,050,000 in 2003. If ERBITUX were not to receive regulatory approval when anticipated it is possible that a liability would need to be recognized for any remaining commitments to Lonza. Valuation of Stock Options - We apply APB Opinion No. 25 and related interpretations in accounting for our stock options and warrants. Accordingly, compensation expense is recorded on the date of grant of an option to an employee or member of the Board of Directors only if the fair market value of the underlying stock at the time of grant exceeds the exercise price. In addition, we have granted options to certain Scientific Advisory Board members and outside consultants, which are required to be measured at fair value. Estimating the fair value of stock options and warrants involves a number of judgments and variables that are subject to significant change. A change in the fair value estimate could have a significant effect on the amount of compensation expense recognized. Production Costs - The costs associated with the manufacture of ERBITUX are included in research and development expenses when incurred and will continue to be so classified until such time as ERBITUX may be approved for sale or until we obtain obligations from our corporate partners for supply of such product. In the event of such approval or obligations from our corporate partners, the subsequent costs associated with manufacturing ERBITUX for commercial sale will be included in inventory and expensed as cost of goods sold when sold. If ERBITUX is approved by the United States Food and Drug Administration ("FDA"), any subsequent sale of this inventory, previously expensed, will result in revenue from product sales with no corresponding cost of goods sold. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 AND 2001 REVENUES Revenues for the three months ended March 31, 2002 and 2001 were $18,551,000 and $27,995,000, respectively, a decrease of $9,444,000, or 34% in 2002. Revenues for the three months ended March 31, 2002 primarily included $6,567,000 in license fee revenue and $6,095,000 in collaborative agreement revenue from our amended ERBITUX Commercial Agreement with BMS and its wholly-owned subsidiary, E.R. Squibb. The collaborative agreement revenue is a reimbursement of certain research and development and marketing expenses as provided for in the amended Commercial Agreement. License fee revenue from payments under this agreement (of which $140,000,000 was received in 2002 and $200,000,000 was received in 2001) are being recognized over the product research and development life of ERBITUX. An additional $60,000,000 is payable on March 5, 2003, $250,000,000 is payable upon receipt of marketing approval from the FDA with respect to an initial indication for ERBITUX and $250,000,000 is payable upon receipt of marketing approval from the FDA with respect to a second indication for ERBITUX. All such payments are non-refundable and non-creditable. We also recognized $5,022,000 in collaborative agreement revenue from our ERBITUX development and license agreement with Merck KGaA. In addition, we recognized $55,000 of the $4,000,000 up-front payment received upon entering into the ERBITUX development and license agreement with Merck KGaA. This revenue is being recognized ratably over the anticipated life of the agreement. Revenues for the three months ended March 31, 2002 also included $650,000 in royalty revenue from our strategic corporate alliance with Abbott Laboratories ("Abbott") in diagnostics and $41,000 in license fee revenue and $121,000 in collaborative agreement revenue from our strategic corporate alliance with Merck KGaA for our principal cancer vaccine product candidate, BEC2. Revenues for the three months ended March 31, 2001 primarily included $24,000,000 in milestone revenue and $3,129,000 in collaborative agreement revenue from our ERBITUX development and license agreement with Merck KGaA. These milestone payments were received in prior periods and were originally recorded as fees potentially refundable to corporate partner because they were refundable in the event a condition relating to obtaining certain collateral license agreements was not satisfied. This condition was satisfied in March 2001. In addition, we recognized $55,000 of the $4,000,000 up-front payment received upon entering into this agreement. This revenue is being recognized ratably over the anticipated life of the agreement. Revenues for the three months ended March 31, 2001 also included Page 17 $648,000 in royalty revenue from our strategic corporate alliance with Abbott in diagnostics and $41,000 in license fee revenues and $122,000 of collaborative agreement revenue from our strategic corporate alliance with Merck KGaA for BEC2. OPERATING EXPENSES Total operating expenses for the three months ended March 31, 2002 and 2001 were $48,176,000 and $28,849,000, respectively, an increase of $19,327,000, or 67% in 2002. Operating expenses for the three months ended March 31, 2002 included a $2,250,000 advisor fee associated with completing the amended Commercial Agreement. OPERATING EXPENSES: RESEARCH AND DEVELOPMENT Research and development expenses for the three months ended March 31, 2002 and 2001 were $37,778,000 and $25,096,000, respectively, an increase of $12,682,000 or 51% in 2002. Research and development expenses for the three months ended March 31, 2002 and 2001, as a percentage of total operating expenses, excluding the advisor fee associated with the amended Commercial Agreement and the Industrial Development Revenue Bonds tax expense, in the three months ended March 31, 2002, were 82% and 87%, respectively. Research and development expenses include costs associated with our in-house and collaborative research programs, product and process development expenses, costs to manufacture our product candidates, particularly ERBITUX, prior to any approval that we may obtain of a product candidate for commercial sale or obligations of our corporate partners to acquire product from us, quality assurance and quality control costs, and costs to conduct our clinical trials and associated regulatory activities. Research and development expenses include costs that are reimbursable by our corporate partners. The increase in research and development expenses for the three months ended March 31, 2002 was primarily attributable to (1) the costs associated with full scale production at our product launch manufacturing facility, (2) costs related to the manufacturing services agreements with Lonza, (3) expenditures in the functional areas of product development, and pilot plant manufacturing associated with ERBITUX and (4) increased expenditures associated with discovery research. We expect research and development costs to increase in future periods as we continue to manufacture ERBITUX prior to any approval of the product that we may obtain for commercial use or until we receive committed purchase obligations of our corporate partners. In the event of such approval or committed purchase obligations from our corporate partners, the subsequent costs associated with manufacturing ERBITUX for supply to E.R. Squibb for commercial use will be included in inventory and expensed as cost of goods sold when sold. We expect research and development costs associated with discovery research and product development also to continue to increase in future periods. OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE Marketing, general and administrative expenses include marketing and administrative personnel costs, including related occupancy costs, additional costs to develop internal marketing and sales capabilities, costs to pursue arrangements with strategic corporate partners and technology licensors, and expenses associated with applying for patent protection for our technology and products. Marketing, general and administrative expenses include amounts reimbursable from our corporate partner. Marketing, general and administrative expenses for the three months ended March 31, 2002 and 2001 were $8,123,000 and $3,728,000, respectively, an increase of $4,395,000, or 118% in 2002. The increase in marketing, general and administrative expenses primarily reflected (1) legal expenses associated with the pending class action lawsuits, shareholder derivative lawsuits and investigations by the SEC, the Subcommittee on Oversight and Investigation of the U.S. House of Representatives Committee on Energy and Commerce and the U.S. Department of Justice, (2) costs associated with our marketing efforts, (3) additional administrative staffing required to support our commercialization efforts for ERBITUX and (4) expenses associated with general corporate activities. Other than the legal expenses component discussed in (1) above, whose level in the future is uncertain because it depends upon the matter in which these investigations and proceedings progress, we expect marketing, general and administrative expenses to increase in future periods to support our continued commercialization efforts for ERBITUX. OPERATING EXPENSES: INDUSTRIAL DEVELOPMENT REVENUE BONDS TAX EXPENSE Industrial Development Revenue Bonds tax expense for each of the three months ended March 31, 2002 and 2001 was $25,000. In April 2003, we discovered that we are in breach of tax covenants in our 1990 IDA Bonds. The Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 reflect additional withholding tax expense of $25,000 relating to the 1990 IDA Bonds. Page 18 INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE Interest income was $2,264,000 for the three months ended March 31, 2002 compared with $4,565,000 for the three months ended March 31, 2001, a decrease of $2,301,000, or 50% in 2002. The decrease was primarily attributable to a decrease in interest rates associated with our portfolio of debt securities. Interest expense was $3,493,000 and $3,316,000 for the three months ended March 31, 2002 and 2001, respectively, an increase of $177,000 or 5% in 2002. We have increased interest expense by $1,000 and $3,000 for the three months ended March 31, 2002 and 2001, respectively, versus the amounts previously reported. These increases represent additional accrued interest on the 1990 IDA Bonds discussed above. Interest expense for the three months ended March 31, 2002 and 2001 was offset by the capitalization of interest costs of $300,000 and $494,000, respectively, during the construction period of our product launch manufacturing facility and a second commercial manufacturing facility for which design, engineering, and pre-construction costs have been incurred. Interest expense for both periods included (1) interest on the 5 1/2% convertible subordinated notes due March 1, 2005 (the "Convertible Subordinated Notes") issued in February 2000, (2) interest on the outstanding 1990 IDA Bonds and (3) interest recorded on various capital lease obligations under a 1996 financing agreement and a 1998 financing agreement with Finova Technology Finance, Inc. ("Finova"). We recorded gains on securities and investments of $801,000 and losses of $1,618,000 for the three months ended March 31, 2002 and 2001, respectively. The losses on securities and investments for the three months ended March 31, 2001 included a $1,600,000 write-down of our investment in ValiGen N.V. NET LOSSES We had a net loss of $30,053,000 or $0.41 per share for the three months ended March 31, 2002, compared with a net loss of $1,223,000 or $0.02 per share for the three months ended March 31, 2001. The increase in the net loss was due to the factors noted above. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, our principal sources of liquidity consisted of cash and cash equivalents and securities available for sale of approximately $415,000,000. From our inception on April 26, 1984 through March 31, 2002, we have financed our operations primarily through the following means: - Public and private sales of equity securities and convertible notes in financing transactions have raised approximately $492,652,000 in net proceeds - We have earned approximately $97,966,000 from license fees, contract research and development fees, reimbursements from our corporate partners and royalties from collaborative partners. Additionally, we have approximately $336,834,000 in deferred revenue related to up-front payments received from our amended Commercial Agreement for ERBITUX, our ERBITUX development and license agreement with Merck KGaA and our BEC2 development and commercialization agreement with Merck KGaA. These amounts are being recognized as revenue over the expected lives of the respective agreements - We have earned approximately $49,378,000 in interest income - The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an aggregate of $6,300,000, the proceeds of which have been used for the acquisition, construction and installation of our research and development facility in New York City, and of which $2,200,000 is outstanding We may, from time to time, consider a number of strategic alternatives designed to increase shareholder value, which could include joint ventures, acquisitions and other forms of alliances, as well as the sale of all or part of the Company. Until September 19, 2006, or earlier upon the occurrence of certain specified events, we may not take any action that constitutes a prohibited action under our stockholder agreement with BMS and Bristol-Meyers Squibb Biologics Company, a Delaware corporation ("BMS Biologics"), which is a wholly-owned subsidiary of BMS, without the consent of the BMS directors. Such prohibited actions include (i) issuing additional shares or securities convertible into shares in excess of 21,473,002 shares of our common stock in the aggregate, subject to certain exceptions; (ii) incurring additional indebtedness if the total of the principal amount of such indebtedness incurred since September 19, 2001 and then-outstanding, and the net proceeds from the issuance of any redeemable preferred stock then-outstanding, would exceed the amount of indebtedness Page 19 outstanding as of September 19, 2001 by more than $500 million; (iii) acquiring any business if the aggregate consideration for such acquisition, when taken together with the aggregate consideration for all other acquisitions consummated during the previous twelve months, is in excess of 25% of the aggregate value of the Company at the time we enter into the binding agreement relating to such acquisition; (iv) disposing of all or any substantial portion of our non-cash assets; (v) issuing capital stock with more than one vote per share. In September 2001, we entered into a commercial agreement with BMS and its wholly-owned subsidiary, E.R. Squibb, relating to ERBITUX, pursuant to which, among other things, together with E.R Squibb we are (a) co-developing and co-promoting ERBITUX in the United States and Canada, and (b) co-developing ERBITUX (together with Merck KGaA) in Japan. The commercial agreement was amended on March 5, 2002 to change certain economics of the agreement and has expanded the clinical and strategic roles of BMS in the ERBITUX development program. Pursuant to the amended commercial agreement, we can receive up-front and milestone payments totaling $900,000,000 in the aggregate, of which $200,000,000 was received upon the signing of the agreement. The remaining $700,000,000 in payments comprises $140,000,000 paid on March 7, 2002, $60,000,000 payable on March 5, 2003, $250,000,000 payable upon receipt of marketing approval from the FDA with respect to an initial indication for ERBITUX and $250,000,000 payable upon receipt of marketing approval from the FDA with respect to a second indication for ERBITUX. All such payments are non-refundable and non-creditable. Except for our expenses incurred pursuant to the co-promotion option, E.R. Squibb is responsible for 100% of the distribution, sales and marketing costs in the United States and Canada, and E.R. Squibb and the Company, each will be responsible for 50% of the distribution, sales, marketing costs and other related costs and expenses in Japan. The commercial agreement provides that E.R. Squibb shall pay us distribution fees based on a percentage of annual sales of ERBITUX by E.R. Squibb in the United States and Canada. The distribution fee is 39% of net sales in the United States and Canada. The commercial agreement also provides that the distribution fees for the sale of ERBITUX in Japan by E.R. Squibb or us shall be equal to 50% of operating profit or loss with respect to such sales for any calendar month. In the event of an operating profit, E.R. Squibb will pay us the amount of such distribution fee, and in the event of an operating loss, we will credit E.R. Squibb the amount of such distribution fee. The commercial agreement provides that we will be responsible for the manufacture and supply of all requirements of ERBITUX in bulk form for clinical and commercial use in the United States, Canada and Japan and that E.R. Squibb will purchase all of its requirements of ERBITUX in bulk form for commercial use from us. We will supply ERBITUX for clinical use at our fully burdened manufacturing cost, and will supply ERBITUX for commercial use at our fully burdened manufacturing cost plus a mark-up of 10%. In addition to the up-front and milestone payments, the distribution fees for the United States, Canada and Japan and the 10% mark-up on the commercial supply of ERBITUX, E.R. Squibb is also responsible for 100% of the cost of all clinical studies other than those studies undertaken post-launch, which are not pursuant to an Investigational New Drug Application ("INDA") (e.g., phase IV studies), the cost of which will be shared equally between E.R. Squibb and ImClone Systems. As between E.R. Squibb and the Company, each will each be responsible for 50% of the cost of all clinical studies in Japan. In February 2000, we completed a private placement of $240,000,000 in 5-1/2% convertible subordinated notes due March 1, 2005. We received net proceeds of approximately $231,500,000, after deducting expenses associated with the offering. Accrued interest on the notes was approximately $1,100,000 at March 31, 2002. A holder may convert all or a portion of a note into common stock at any time on or before March 1, 2005 at a conversion price of $55.09 per share, subject to adjustment under certain circumstances. We may redeem some or all of the notes prior to March 6, 2003 if specified common stock price thresholds are met. On or after March 6, 2003, we may redeem some or all of the notes at specified redemption prices. In December 1999, we entered into a development and manufacturing services agreement with Lonza. This agreement was amended in April 2001 to include additional services. Under the agreement, Lonza is responsible for process development and scale-up to manufacture ERBITUX in bulk form under current Good Manufacturing Practices ("cGMP") conditions. These steps were taken to assure that the manufacturing process would produce bulk material that conforms with our reference material and to support in part, our regulatory filing with the FDA. As of March 31, 2002, we had incurred approximately $7,068,000 for services provided under the development and manufacturing services agreement. In September 2000, we entered into a three-year commercial manufacturing services agreement with Lonza relating to ERBITUX. This agreement was amended in June 2001 and again in September 2001 to include additional services. As of March 31, 2002, we had incurred approximately $17,383,000 for services provided under the commercial manufacturing services agreement. Under these two agreements, Lonza is manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is delivering it to us over a term ending no later than December 2003. The costs associated with both of these agreements are included in research and development expenses when incurred and will continue to be so classified until such time as ERBITUX may be approved for sale or until we obtain obligations from our corporate partners for supply of such product. In the event of such approval or obligations from our corporate partners, the subsequent costs associated with manufacturing ERBITUX for commercial sale will be included in inventory and expensed as cost of goods sold when sold. In the event we Page 20 terminate (i.e., the cancellation of batches of bulk product) the commercial manufacturing services agreement without cause, we will be required to pay 85% of the stated costs for each of the first ten batches cancelled, 65% of the stated costs for each of the next ten batches cancelled and 40% of the stated costs for each of the next six batches cancelled. The batch cancellation provisions for certain additional batches that we are committed to purchase require us to pay 100% of the stated costs of cancelled batches scheduled within six months of the cancellation, 85% of the stated costs of cancelled batches scheduled between six and twelve months following the cancellation and 65% of the stated costs of cancelled batches scheduled between twelve and eighteen months following the cancellation. These amounts are subject to mitigation should Lonza use its manufacturing capacity caused by such termination for another customer. At March 31, 2002, the estimated remaining future commitments under the amended commercial manufacturing services agreement are $45,522,000 in 2002 and $24,050,000 in 2003. In December 2001, we entered into an agreement with Lonza to manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck KGaA. We had incurred approximately $4,245,000 for services provided under this agreement, of which $2,350,000 was reimbursed by Merck KGaA. The remaining $1,895,000 that is due from Merck KGaA is included in amounts due from corporate partners in the consolidated balance sheet at March 31, 2002. At March 31, 2002, the estimated remaining future commitments under this agreement is $2,938,000 in 2002. On January 2, 2002 we executed a letter of intent with Lonza to enter into a long-term supply agreement. The long-term supply agreement would apply to a large scale manufacturing facility that Lonza is constructing. We expect such facility would be able to produce ERBITUX in 20,000 liter batches. We paid Lonza $3,250,000 for the exclusive rights to reserve and negotiate a long-term supply agreement for a portion of the new facility's overall capacity. Under certain conditions, such payment shall be refunded to us. If we enter into a long-term supply agreement, such payment will be creditable to us against the 20,000 liter batch price, such credit to be spread evenly over the batches manufactured each year of the initial term of the long-term supply agreement. We cannot be certain that we will be able to enter into agreements for commercial supply with third party manufacturers on terms acceptable to us. Even if we are able to enter into such agreements, we cannot be certain that we will be able to produce or obtain sufficient quantities for commercial sale of our products. Any delays in producing or obtaining commercial quantities of our products could have a material adverse effect on our business, financial condition and results of operations. Effective April 1990, we entered into a development and commercialization agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen. The agreement has been amended a number of times, most recently in December 1997. The agreement grants Merck KGaA a license, with the right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75 outside North America. The agreement also grants Merck KGaA a license, without the right to sublicense, to use, sell, or have sold, but not to make BEC2 within North America in conjunction with ImClone Systems. Pursuant to the terms of the agreement we have retained the rights, (1) without the right to sublicense, to make, have made, use, sell, or have sold BEC2 in North America in conjunction with Merck KGaA and (2) with the right to sublicense, to make, have made, use, sell, or have sold gp75 in North America. In return, we have recognized research support payments totaling $4,700,000 and are entitled to no further research support payments under the agreement. Merck KGaA is also required to make payments of up to $22,500,000, of which $4,000,000 has been recognized, based on milestones achieved in the licensed products' development. Merck KGaA is also responsible for worldwide costs of up to DM17,000,000 associated with a multi-site, multinational phase III clinical trial for BEC2 in limited disease small-cell lung carcinoma. This expense level was reached during the fourth quarter of 2000 and all expenses incurred from that point forward are being shared 60% by Merck KGaA and 40% by ImClone Systems. Such cost sharing applies to all expenses beyond the DM17,000,000 threshold. Merck KGaA is also required to pay royalties on the eventual sales of BEC2 outside of North America, if any. Revenues from sales, if any, of BEC2 in North America will be distributed in accordance with the terms of a co-promotion agreement to be negotiated by the parties. In December 1998, we entered into a development and license agreement with Merck KGaA with respect to ERBITUX. In exchange for granting Merck KGaA exclusive rights to market ERBITUX outside of the United States and Canada and co-development rights in Japan, we received through March 31, 2002, $30,000,000 in up-front fees and early cash-based milestone payments based on the achievement of defined milestones. An additional $30,000,000 can be received, of which $5,000,000 has been received as of March 31, 2002, assuming the achievement of further milestones for which Merck KGaA will receive equity in ImClone Systems. The equity underlying these milestone payments will be priced at varying premiums to the then-market price of the common stock depending upon the timing of the achievement of the respective milestones. If issuing shares of common stock to Merck KGaA would result in Merck KGaA owning greater than 19.9% of our common stock, the milestone shares will be a non-voting preferred stock, or other non-voting stock convertible Page 21 into our common stock. These convertible securities will not have voting rights. They will be convertible at a price determined in the same manner as the purchase price for shares of our common stock if shares of common stock were to be issued. They will not be convertible into common stock if, as a result of the conversion, Merck KGaA would own greater than 19.9% of our common stock. This 19.9% limitation is in place through December 2002. Merck KGaA will pay us a royalty on future sales of ERBITUX outside of the United States and Canada, if any. This agreement may be terminated by Merck KGaA in various instances, including (1) at its discretion on any date on which a milestone is achieved (in which case no milestone payment will be made), or (2) for a one-year period after first commercial sale of ERBITUX in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to a return of 50% of the cash-based up front fees and milestone payments then paid to date, but only out of revenues received, if any, based upon a royalty rate applied to the gross profit from ERBITUX sales or a percentage of ERBITUX fees and royalties from a sublicensee on account of the sale of ERBITUX in the United States and Canada). In August 2001, ImClone Systems and Merck KGaA amended this agreement to provide, among other things, that Merck KGaA may manufacture ERBITUX for supply in its territory and may utilize a third party to do so upon ImClone Systems' reasonable acceptance. The amendment further released Merck KGaA from its obligations under the agreement relating to providing a guaranty under a $30,000,000 credit facility relating to the build-out of the product launch manufacturing facility. In addition, the amendment provides that the companies have co-exclusive rights to ERBITUX in Japan, including the right to sublicense and Merck KGaA waived its right of first offer in the case of a proposed sublicense by ImClone Systems of ERBITUX in ImClone Systems' territory. In consideration for the amendment, we agreed to a reduction in royalties payable by Merck KGaA on sales of ERBITUX in Merck KGaA's territory. We have obligations under various capital leases for certain laboratory, office and computer equipment and also certain building improvements, primarily under a 1998 financing agreement with Finova. This agreement allowed us to finance the lease of equipment and make certain building and leasehold improvements to existing facilities. Each lease has a fair market value purchase option at the expiration of its 48-month term. We have entered into six individual leases under the financing agreement with an aggregate cost of $1,942,000. This financing arrangement is now expired. We rent our current New York corporate headquarters and research facility under an operating lease that expires in December 2004. In 2000 we completed renovations of the facility to better suit our needs, at a cost of approximately $2,800,000. In October 2001, we entered into a sublease for a four-story building in downtown New York to serve as our future corporate headquarters and research facility. The space, to be designed and improved in the future, includes between 75,000 and 100,000 square feet of usable space, depending on design, and includes possible additional expansion space. The sublease has a term of 22 years, followed by two five-year renewal option periods. The future minimum lease payments are approximately $50,775,000 over the term of the sublease. In order to induce the sublandlord to enter into the sublease, we made a loan to and accepted from the sublandlord a $10,000,000 note receivable. The note is secured by a leasehold mortgage on the prime lease as well as a collateral assignment of rents by the sublandlord. The note receivable is payable by the sublandlord over 20 years and bears interest at 5 1/2% in years one through five, 6 1/2% in years six through ten, 7 1/2% in years eleven through fifteen and 8 1/2% in years sixteen through twenty. In addition, we paid the owner a consent fee in the amount of $500,000. On May 1, 2001, we entered into a lease for an approximately 4,000 square foot portion of a 15,000 square foot building known as 710 Parkside Avenue, Brooklyn, New York and we have leased an adjacent 6,250 square foot building known as 313-315 Clarkson Avenue, Brooklyn, New York, (collectively "the premises") to serve as our new chemistry and high throughput screening facility. The term of the lease is for five years with five successive one-year extensions. As of March 31, 2002, we have incurred approximately $2,204,000 for the retrofit of this facility to better fit our needs. The total cost for the retrofit will be approximately $4,000,000. We built a new 80,000 square foot product launch manufacturing facility adjacent to the pilot facility in Somerville, New Jersey. The product launch manufacturing facility was built on a 5.7 acre parcel of land we purchased in December 1999 for approximately $700,000. The product launch manufacturing facility contains three 10,000 liter (working volume) fermenters and is dedicated to the clinical and commercial production of ERBITUX. The cost of the facility was approximately $53,000,000, excluding capitalized interest of approximately $1,966,000. The cost for the facility has come from our cash reserves, which were primarily obtained through the issuance of debt and equity securities. The product launch manufacturing facility was ready for its intended use and put in operation in July 2001 and we commenced depreciation at that time. Page 22 We have completed conceptual design and preliminary engineering plans and are currently reviewing detailed design plans for, and proceeding with construction of, the second commercial manufacturing facility. The second commercial manufacturing facility will be a multi-use facility of approximately 250,000 square feet and will contain up to 10 fermenters with a total capacity of up to 110,000 liters (working volume). The facility will be built on a 7.12 acre parcel of land that we purchased in July 2000 for approximately $950,000. The cost of this facility, consisting of two completely fitted out suites and a third suite with utilities only, is expected to be approximately $225,000,000, excluding capitalized interest. The actual cost of the new facility may change depending upon various factors. We have incurred approximately $36,790,000, excluding capitalized interest of approximately $1,040,000, in conceptual design, engineering, equipment and construction costs through March 31, 2002. On January 31, 2002 we purchased a 7.5 acre parcel of land located at adjacent to the Company's product launch manufacturing facility and pilot facility in Somerville, New Jersey. The real estate includes an existing 50,000 square foot building, 40,000 square feet of which is warehouse space and 10,000 square feet of which is office space. The purchase price for the property and improvements was approximately $7,020,000. We intend to use this property for warehousing and logistics for our Somerville campus. Total capital expenditures made during the three months ended March 31, 2002 were $17,922,000 and primarily included $763,000 related to the purchase of equipment for and leasehold improvement costs associated with our corporate office and research laboratories in our New York facility, $7,416,000 related to the conceptual design, preliminary engineering plans and construction costs for a second commercial manufacturing facility, $1,125,000 and $5,895,000 for the land and building, respectively, for the warehousing and logistics building, $1,541,000 for the retrofit of the Brooklyn chemistry lab, $544,000 related to improving and equipping our product launch manufacturing facility, and $314,000 related to improving and equipping our pilot manufacturing facility. Federal and applicable state tax laws require an employer to withhold income taxes at the time of an employee's exercise of non-qualified stock options or warrants issued in connection with the performance of services by the employee. An employer that does not do so is liable for the taxes not withheld if the employee fails to pay his or her taxes for the year in which the non-qualified stock options or warrants are exercised. In 2000 and prior years, we generally did not require the withholding of federal, state or local income taxes and in certain years, employment payroll taxes at the time of the exercise of non-qualified stock options or warrants. Prior to 1996, we did not comply with tax reporting requirements with respect to the exercise of non-qualified stock options or warrants. In January 2003, the New York State Department of Taxation and Finance ("New York State") notified us that we were liable for the New York State and City income taxes that were not withheld because one or more of our employees who exercised certain non-qualified stock options in 1999 and 2000 failed to pay New York State and City income taxes for those years. At December 31, 2002, we recorded a gross New York State and City withholding tax liability of approximately $6,800,000. On March 13, 2003, we entered into a closing agreement with New York State, paying $4,500,000 to settle the matter. We believe that substantially all of the underpayment of New York State and City income tax identified by New York State is attributable to the exercise of non-qualified stock options by our former President and Chief Executive Officer, Dr. Samuel D. Waksal. On March 13, 2003, we initiated discussions with the Internal Revenue Service ("IRS") relating to federal income taxes on the exercise of non-qualified stock options on which income tax was not properly withheld. Although the IRS has not yet asserted that we are required to make a payment with respect to such failure to withhold, the IRS may assert that such a liability exists, and may further assert that we are liable for interest and penalties. We have requested and received confirmation from all of our current and substantially all of our former employees who exercised non-qualified stock options in 1999 and 2000, on which no income tax was withheld, that they have reported the appropriate amount of income on their tax returns and paid the taxes shown as due on those returns. Based on this information, we determined that all but an insignificant amount of the potential liability for withholding taxes with respect to exercises of non-qualified stock options in 1999 and 2000 is attributed to those amounts related to Dr. Samuel D. Waksal. In addition, in the course of our investigation into our potential liability in respect of the non-qualified stock options described above, we identified certain warrants that were granted in 1991 and prior years to current and former officers, directors and advisors (including the four individuals discussed herein) that we previously treated as non-compensatory warrants and thus not subject to tax withholding and information reporting requirements upon exercise. Accordingly, when exercised in 2001 and prior years, we did not deduct income and payroll taxes upon exercise or report applicable information to the taxing authorities. Based on the information Page 23 discovered in the course of our recent investigation, we now believe that such treatment was incorrect, and that the exercise of such warrants by current and former officers of the Company should have been treated in the same manner for withholding and reporting purposes as the exercise of non-qualified stock options. We have informed the relevant authorities, including the IRS and New York State, of this matter and intend to resolve our liability in respect of these warrants with these taxing authorities in conjunction with our resolution of the matter described above. On June 17, 2003, New York State notified us that, based on the issue identified above, they are continuing a previously conducted audit of the Company and are evaluating the terms of the closing agreement to determine whether or not it should be re-opened. On April 2, 2003, we received a request from the SEC for the voluntary production of documents and information relating to the above matters. We are cooperating fully with the SEC, and intend to continue to do so, while also updating the United States Attorney's Office on an ongoing basis. One of the officers and directors to whom warrants were issued and previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the Company's Chief Scientific Officer. In June 2003, Dr. Harlan W. Waksal represented that he has paid the taxes associated with the exercise of these warrants and further agreed to indemnify us for any withholding taxes that may be assessed and are attributable to our failure to deduct income and payroll taxes on all warrants and options that he or his transferee has previously exercised, subject to the consent of Dr. Harlan W. Waksal, which can not be unreasonably withheld. Two of the other officers and directors to whom warrants were issued and previously treated as non-compensatory warrants are Dr. Samuel D. Waksal and our former General Counsel, John B. Landes, who entered into a separation agreement with us during October 2002. We have made demands on both of these individuals to pay the taxes associated with the exercise of these warrants and certain non-qualified stock options and to indemnify us against any liability that we may incur to taxing authorities in respect of the warrants or non-qualified stock options that they have previously exercised. The Company has not recognized withholding tax liabilities in respect of exercises of certain warrants by our then-current and now-former Chairman of the Board, Robert F. Goldhammer, the final of the four officers or directors to whom warrants were issued and previously treated as non-compensatory warrants. Based on our investigation, we believe that, although such warrants were compensatory, such warrants were received by Mr. Goldhammer in connection with the performance of services by him in his capacity as a director, rather than as an employee, and, as such, are not subject to tax withholding requirements. In addition, in 1999, Mr. Goldhammer erroneously received a portion of a stock option grant to him in the form of incentive stock options, which under federal law may only be granted to employees. There can be no assurance, however, that the taxing authorities will agree with our position and will not assert that we are liable for the failure to withhold income and employment taxes with respect to the exercise of such warrants and any stock options by Mr. Goldhammer. If we were liable for the failure to withhold these taxes on the exercise of such warrants and any stock options by Mr. Goldhammer, the potential liability, exclusive of any interest or penalties, would be approximately $12,600,000. We believe that our existing cash on hand, marketable securities and amounts to which we are entitled should enable us to maintain our current and planned operations through at least 2003. We are also entitled to reimbursement for certain marketing and research and development expenditures and certain other payments, some of which are payable upon the achievement of research and development milestones. Such amounts include $560,000,000 in cash-based payments of which $60,000,000 is payable on March 5, 2003, as well as up to $25,000,000 in equity-based milestone payments under our ERBITUX development and license agreement with Merck KGaA and up to $18,500,000 in cash-based milestone payments under our BEC2 development agreement with Merck KGaA. There can be no assurance that we will achieve these milestones. Our future working capital and capital requirements will depend upon numerous factors, including, but not limited to: - progress and cost of our research and development programs, pre-clinical testing and clinical trials - our corporate partners fulfilling their obligations to us - timing and cost of seeking and obtaining regulatory approvals - timing and cost of manufacturing scale-up and effective commercialization activities and arrangements - level of resources that we devote to the development of marketing and sales capabilities - costs involved in filing, prosecuting and enforcing patent claims Page 24 - technological advances - legal costs and the outcome of outstanding legal proceedings and investigations - status of competition - our ability to maintain existing corporate collaborations and establish new collaborative arrangements with other companies to provide funding to support these activities - the adequacy of our estimates of liabilities for tax-related matters discussed above In order to fund our capital needs after 2003, we will require significant levels of additional capital and we intend to raise the capital through additional arrangements with corporate partners, equity or debt financings, or from other sources, including the proceeds of product sales, if any. There is no assurance that we will be successful in consummating any such arrangements. If adequate funds are not available, we may be required to significantly curtail our planned operations. Below is a table that presents our contractual obligations and commercial commitments as of March 31, 2002:
PAYMENTS DUE BY YEAR ------------------------------------------------------------------------ 2005 AND TOTAL 2002 2003 2004 THEREAFTER ------------ ------------ ----------- ------------ ------------ Long-term debt ..................... $242,200,000 $ -- $ -- $ 2,200,000 $240,000,000 Capital lease obligations including interest ............. 349,000 288,000 61,000 -- -- Operating leases ................... 55,133,000 1,556,000 3,024,000 3,512,000 47,041,000 Construction commitments ........... 102,592,000 55,000,000 47,592,000 -- -- Lonza .............................. 72,510,000 48,460,000 24,050,000 -- -- ------------ ------------ ------------ ------------ ------------ Total contractual cash obligations.. $472,784,000 $105,304,000 $ 74,727,000 $ 5,712,000 $287,041,000 ============ ============ ============ ============ ============
At December 31, 2001, we had net operating loss carryforwards for United States federal income tax purposes of approximately $437,189,000, which expire at various dates from 2002 through 2021. At December 31, 2001 we had research credit carryforwards of approximately $19,415,000, which expire at various dates from 2008 through 2021. Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation's ability to use net operating loss and research credit carryforwards may be limited if the corporation experiences a change in ownership of more than 50 percentage points within a three-year period. Since 1986, we have experienced two such ownership changes. As a result, we are only permitted to use in any one year approximately $5,159,000 of our available net operating loss carryforwards that occurred prior to February 1996. Similarly, we are limited in using our research credit carryforwards. We have determined that our November 1999 public stock offering, our February 2000 private placement of convertible subordinated notes, our August 2001 issuance of common stock to Merck KGaA associated with an equity milestone payment under the ERBITUX development and license agreement and our September 2001 acquisition agreement with BMS and BMS Biologies, which provided for the tender offer by BMS Biologies to purchase up to 14,392,003 shares of the Company's common stock for $70.00 per share, net to the seller in cash, did not cause an additional ownership change that would further limit the use of our net operating losses and research credit carryforwards. Of our $437,189,000 in net operating loss carry forwards, we have approximately $395,245,000 (of which $390,086,000 will carryforward to 2003) available to use in 2002, approximately $5,159,000 available to use in each year from 2003 through 2010 and approximately $672,000 available to use in 2011. Any of the aforementioned net operating loss carryforwards, which are not utilized, are available for utilization in future years, subject to the statutory expiration dates of such net operating loss carryforwards. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On August 17, 2001, Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" was issued and will be effective for the Company in the first quarter of the year ended December 31, 2003. The new rule requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred. When the liability is initially recorded, a cost is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation for its recorded amount is paid or a gain or loss upon settlement is incurred. Management will be analyzing this requirement to determine the effect on the Company's financial statements. Page 25 CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT 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 our business, including without limitation, the risks and uncertainties associated with completing pre-clinical and clinical trials of our compounds that demonstrate such compounds' safety and effectiveness; obtaining additional financing to support our operations; obtaining and maintaining regulatory approval for such compounds and complying with other governmental regulations applicable to our 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 and ability to manufacture, as well as market and sell our 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; obtaining and protecting proprietary rights; legal costs and the outcome of outstanding legal proceedings and investigations, including, but not limited to, our investigations pertaining to tax withholding issues; avoiding delisting of our securities on the Nasdaq Stock Market; and those other factors set forth in "Risk Factors" in the Company's most recent Registration Statement and Form 10-K. Page 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 - Updated 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 - Updated (b) Reports on Form 8-K On January 25, 2002, the Company filed three Current Reports on Form 8-K and on each of February 19, 2002 and March 6, 2002 the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting events under Item 5. Page 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMCLONE SYSTEMS INCORPORATED (Registrant) Date: June 23, 2003 By /s/ DANIEL S. LYNCH ------------------------------------ Daniel S. Lynch Senior Vice President and Chief Administrative Officer Acting Chief Executive Officer Date: June 23, 2003 By /s/ MICHAEL J. HOWERTON ------------------------------------ Michael J. Howerton Vice President, Finance and Business Development Secretary and Acting Chief Financial Officer Page 28 SECTION 302 CERTIFICATIONS - CERTIFICATION I, Michael J. Howerton, Vice President, Finance and Business Development, Secretary and Acting Chief Financial Officer of ImClone Systems Incorporated (the "Company"), certify that: 1. I have reviewed this Amendment No. 1 to our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2002 of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. Date: June 23, 2003 /s/ MICHAEL J. HOWERTON --------------------------- Michael J. Howerton Acting Chief Financial Officer Page 29 CERTIFICATION I, Daniel S. Lynch, Senior Vice President, Chief Administrative Officer and Acting Chief Executive Officer of ImClone Systems Incorporated (the "Company"), certify that: 1. I have reviewed this Amendment No. 1 to our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2002 of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. Date: June 23, 2003 /s/ DANIEL S. LYNCH -------------------------- Daniel S. Lynch Acting Chief Executive Officer Page 30 EX-99.1 3 y87546mexv99w1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Amendment No. 1 to the Quarterly Report of ImClone Systems Incorporated (the "Company") on Form 10-Q for the period ended March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel S. Lynch, Senior Vice President, Chief Administrative Officer and Acting Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ DANIEL S. LYNCH - ------------------------------ Daniel S. Lynch Acting Chief Executive Officer June 23, 2003 EX-99.2 4 y87546mexv99w2.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Amendment No. 1 to the Quarterly Report of ImClone Systems Incorporated (the "Company") on Form 10-Q for the period ended March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Howerton, Vice President, Finance and Business Development, Secretary and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MICHAEL J. HOWERTON - ------------------------------ Michael J. Howerton Acting Chief Financial Officer June 23, 2003 -----END PRIVACY-ENHANCED MESSAGE-----