-----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, O6dZ1zgjC3OATmeYSoNFweOCEz65REujBszetrJaBI3KXuQKWVUhGaCSEtJV/cAc B4OV3btAQvmx0FnzJjZzIQ== 0000950133-00-001776.txt : 20000502 0000950133-00-001776.hdr.sgml : 20000502 ACCESSION NUMBER: 0000950133-00-001776 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTREMED INC CENTRAL INDEX KEY: 0000895051 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 581959440 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20713 FILM NUMBER: 615928 BUSINESS ADDRESS: STREET 1: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012179858 MAIL ADDRESS: STREET 2: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 0-20713 ENTREMED, INC. -------------- (Exact name of registrant as specified in its charter) Delaware 58-1959440 - ------------------------------------------- ----------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 9640 Medical Center Drive, Rockville, MD 20850 - ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 217-9858 - ---------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, Par Value $.01 Per Share Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K [X] As of March 24, 2000, 15,379,772 shares of common stock were outstanding and the aggregate market value of the shares of common stock held by non-affiliates was approximately $856,410,996. ================================================================================ 2 EXPLANATORY NOTE This Amendment No. 1 to the Form 10-K for the fiscal year ended December 31, 1999 is filed to add Form 10-K, Part III, which was omitted in reliance on General Instruction G.3 thereto and to revise the Cash Flow Statement contained in the Financial Statements at Part IV, Item 14(a)1 and 2. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names, ages and positions of our executive officers and directors as of December 31, 1999:
- -------------------------------------------------------------------------------- NAME AGE POSITION - -------------------------------------------------------------------------------- John W. Holaday, Ph.D. 54 Chairman of the Board, President, Chief Executive Officer - -------------------------------------------------------------------------------- Wendell M. Starke 57 Vice Chairman of the Board - -------------------------------------------------------------------------------- Edward R. Gubish, Ph.D. 51 Senior Vice President of Research and Development - -------------------------------------------------------------------------------- Joanna Horobin, M.D. 45 Senior Vice President of Commercial Development - -------------------------------------------------------------------------------- Donald S. Brooks 63 Vice President, Legal Affairs and Director - -------------------------------------------------------------------------------- R. Nelson Campbell 35 Chief Financial Officer - -------------------------------------------------------------------------------- John C. Thomas, Jr. 46 Secretary/Treasurer - -------------------------------------------------------------------------------- Jerry Finkelstein (1)(2) 83 Director - -------------------------------------------------------------------------------- Lee F. Meier (1)(4) 53 Director - -------------------------------------------------------------------------------- Mark C. M. Randall (2)(3) 36 Director - --------------------------------------------------------------------------------
(1) Member of Compensation Committee (2) Member of Audit Committee (3) Chairman of Compensation Committee (4) Chairman of the Audit Committee 3 John W. Holaday, Ph.D. is our co-founder and has served as our President and Chief Executive Officer and one of our directors since August 1992 and our Chairman of the Board since November 1995. Dr. Holaday's current term as director expires at the annual meeting of stockholders to be held in 2000. Prior thereto, from May 1989 to August 1992, he was a co-founder of Medicis Pharmaceutical Corp. where he served as Scientific Director, Senior Vice President for Research and Development and director. Dr. Holaday also serves as a director for CytImmune Sciences, Inc., a privately held research diagnostics company. From 1968 to 1989, he served at the Walter Reed Army Institute of Research, where he founded the Neuropharmacology Branch in 1980. He serves as an officer and fellow in several biomedical societies and has authored and edited numerous scientific articles in journals and books. His current academic positions include Associate Professor of Anesthesiology and Critical Care Medicine and Senior Lecturer in Medicine at The Johns Hopkins University of Medicine, Baltimore, Maryland; and Adjunct Professor of Psychiatry at the Uniformed Services University School of Medicine, Bethesda, Maryland. Wendell M. Starke has been Vice Chairman of the Board since June 1998 and one of our directors since April 1994. Mr. Starke's current term as director expires at the annual meeting of stockholders to be held in 2000. Mr. Starke is a Chartered Financial Analyst and a Chartered Investment Counselor. Mr. Starke was President of INVESCO Capital Management, Inc. and Chief Investment Officer from 1979 to 1991. From 1992 to 1999, he served as Chairman of INVESCO, Inc., the parent company of INVESCO Capital Management and other INVESCO money management subsidiaries in the United States. Mr. Starke retired from INVESCO in June 1999. Edward R. Gubish, Ph.D. has served as our Senior Vice President of Research and Development between January 1997 and December 1999. Prior to that he served as our Vice President-Regulatory and Clinical Development since November 1995 and has been employed by us since October 1993. From 1990 to September 1993, Dr. Gubish served as senior director of Regulatory Affairs for Baker Norton Pharmaceuticals (IVAX) and Fujisawa Pharmaceuticals. From 1986 to 1990, Dr. Gubish served as Chief of Regulatory Affairs for the AIDS Division at the National Institutes of Health and as a scientific and administrative contact for sponsors of new biological products and IND submissions for the Center for Drugs and Biologics at the FDA. Joanna C. Horobin, M.D. has served as our Senior Vice President of Commercial Development between February 1999 and December 1999. Prior to joining us, Dr. Horobin served as Vice President of Corporate Marketing, Oncology at Rhone-Poulenc Rorer (RPR) from March 1994 to December 1998. Dr. Horobin has also served as General Manager of RPR's joint-venture with the Chugai Pharmaceutical Company of Japan, which led to the development and European launch of the recombinant human protein, Granocyte (rhu-GCSF); Medical Director for RPR, (UK); and Head of Clinical Investigations for Beecham Pharmaceuticals (UK), where she achieved regulatory approvals of Augmentin(R), Timentin(R), and Relafen(R). Dr. Horobin spent several years in hospital and general family practice in London before entering the pharmaceutical industry. Donald S. Brooks has been one of our directors since April 1996 and Vice President, Legal Affairs since 1998. Mr Brook's current term as director expires at the annual meeting of stockholders to be held in 2001. Between 1993 and 1998, Mr. Brooks was a practicing attorney with the law firm Carella Byrne Bain Gilfillan Cecchi Stewart & Olstein, Roseland, New 4 Jersey, which represents the Company on certain matters. Mr. Brooks continues to be of counsel to the firm. Prior thereto, Mr. Brooks was employed by Merck & Co., Inc. for 27 years, most recently, from 1986 to 1993, as Senior Counsel. From 1980 to 1985, Mr. Brooks served as a U.S. employer delegate to the Chemical Industries Committee, International Labor Organization in Geneva, Switzerland. R. Nelson Campbell has served as our Chief Financial Officer since January 1997. From November 1991 to June 1996, Mr. Campbell was employed by OsteoArthritis Sciences, Inc., a venture capital financed drug discovery company where he was a co-founder and served as Vice President of Business Development and Treasurer. From 1986 to 1991, he was with the international investment banking firms of Merrill Lynch Capital Markets, Nomura Securities International and lastly Daiwa America Securities, Inc., where he was engaged in corporate finance and merger transactions. John C. Thomas, Jr. served as our Secretary/Treasurer from January 1997 until November 1999 and served part-time as our Chief Financial Officer from our inception in September 1991 until January 1997. Mr. Thomas has also served as the Chief Financial Officer of several other companies, including MEDigital, Inc., a private medical technology company since August 1996, Credit Depot Corporation, a public company engaged in loan financing (from August 1990 to March 1993 and from January 1995 until April 1996), Tapistron International, Inc., a public company engaged in the development of technology for the textile industry (from August 1991 until July 1995), and Sealite Sciences, a private biotechnology company (from June 1991 to March 1993). Mr. Thomas is a certified public accountant. Jerry Finkelstein has been one of our directors since April 1998. Mr. Finkelstein's current term as director expires at the annual meeting of stockholders to be held in 2002. Mr. Finkelstein has been a senior advisor to Apollo Advisors, L. P., a fund manager, since March 1994, and the Chairman of the Board of News Communications, Inc., a consortium of 23 publications, since August 1993. Mr. Finkelstein has been the former publisher of the New York Law Journal, a daily newspaper. He has been a member of the Boards of Rockefeller Center, Chicago Milwaukee Corporation, Chicago Milwaukee Railroad Corporation, Bank of North America, Struthers Wells Corporation, The Hill, and PATH Railroad. Mr. Finkelstein has also held the following positions: member of Task Force Committee on the sale of the World Trade Center; Chairman of the New York City Planning Commission, and Commissioner of the Port Authority of New York and New Jersey, as well as numerous civic, social and political appointments. Lee F. Meier has been one of our directors since July 1997. Mr. Meier's current term as director expires at the annual meeting of stockholders to be held in 2001. Mr. Meier has over twenty-five years of experience in the equipment financing industry. He has been affiliated with US Leasing Corporation, The Chemical Bank of New York and Steiner Financial Corporation, a privately held, tax motivated lessor. Since 1984 Mr. Meier has served as founder and managing director of Meier Mitchell & Company, an investment banking firm specializing in providing innovative debt and lease financing products. Meier Mitchell & Company targets clients in the biotechnology and electronics industries and has arranged or provided over $1.5 billion in financing to both private and public companies in these sectors. Mark C. M. Randall has been one of our directors since April 1996. Mr. Randall's current term as director expires at the annual meeting of stockholders held in 2002. Since 1985, Mr. Randall has been associated with Sarasin International Securities Limited, London, England, a wholly owned subsidiary of Bank Sarasin & Cie, a private bank based in 5 Switzerland, where he has been Director since 1994 and Managing Director since 1999. Mr. Randall also serves as Chairman of Acorn Alternative Strategies (Overseas) Ltd., an investment fund company. Item 11. EXECUTIVE COMPENSATION Compensation of the Directors Prior to April 1999, our directors received a fee of $2,000 per in-person meeting attended and were reimbursed for expenses actually incurred in connection with attending such meetings. As of April 1999, our directors no longer receive cash compensation for serving on our Board of Directors or attending meetings thereof, except that the chairman of each committee will receive an annual cash payment of $2,000. All directors continue to be reimbursed for expenses actually incurred in connection with attending such meetings. Each director receives automatic grants of non-qualified stock options as follows: upon joining the Board of Directors, each new director will be granted an option to purchase 15,000 shares of Common Stock; for services of Vice Chairman of the Board, the Vice Chairman is granted an option to purchase 15,000 shares in addition to any options received in his capacity as a director; and upon reelection to the Board to a three-year term, each director will be granted an option to purchase 30,000 shares. In addition, following the annual meeting in June 1999, each director not running for reelection was granted a one-time option to purchase 10,000 shares for each year remaining in their then-current term of office. Compensation of Executive Officers The following summary compensation table sets forth the aggregate compensation paid or accrued by us to the Chief Executive Officer and to executive officers whose annual compensation exceeded $100,000 for fiscal 1999 (collectively, the "named executive officers") for services during the fiscal years ended December 31, 1999, 1998 and 1997. 6
SUMMARY COMPENSATION TABLE -------------------------- LONG TERM COMPENSATION AWARDS SECURITIES ANNUAL UNDERLYING NAME AND PRINCIPAL SALARY BONUS OPTIONS/SARS ALL OTHER POSITION YEAR ($) ($) (#) COMPENSATION - -------------------------------------------------------------------------------------------- John W. Holaday, Ph.D. 1999 325,000 125,000 110,000 21,506 (1) Chairman, President 1998 250,000 125,000 5,000 19,467 and Chief Executive Officer 1997 275,000 - 260,000 18,883 Edward R. Gubish, Ph.D. 1999 202,700 85,000 50,000 8,955 (2) Senior Vice President of 1998 180,000 75,000 - 6,916 Research and Development 1997 165,000 50,000 100,000 6,332 Joanna C. Horobin, M.D. 1999 195,000 75,000 50,000 6,715 (2) Senior Vice President 1998 - - - - of Commercial Development 1997 - - - - Donald S. Brooks, Vice 1999 195,000 25,000 45,000 3,099 (2) President, Legal Affairs 1998 81,975 37,500 80,000 855 1997 - - 6,000 - R. Nelson Campbell, 1999 151,450 35,000 20,000 2,529 (2) Chief Financial Officer 1998 147,000 20,000 - 1,849 1997 133,718 25,000 50,000 1,301 John C. Thomas, Jr. 1999 120,000 - 5,000 - Secretary/Treasurer 1998 126,000 10,000 - 6,916 (2) 1997 120,000 25,000 50,000 -
(1) $12,551 of such amount represents the premiums paid by us with respect to a split-dollar life insurance policy on the life of Dr. Holaday. Premiums paid by us on such policy are treated as non-interest bearing advances to the insured for the policy. The initial proceeds of any death benefit are required to be used to repay the indebtedness, and the balance of the insurance proceeds are payable as designated by the insured. See "Employment Contracts and Termination of Employment and Change-in-Control Arrangements". The remaining amount represents group health insurance premiums paid on behalf of such officer. (2) Consists of group health insurance premiums paid on behalf of such officer. 7 The following table sets forth certain information with respect to individual grants of stock options made during the fiscal year ended December 31, 1999 to each of the named executive officers.
Option/SAR Grants in Last Fiscal Year - -------------------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term (1) ---------------------------------------------- -------------------------- Number of % of Total Securities Options/SARs Exercise Underlying Granted to or Base Options/SARs Employees in Price Expiration Name Granted Fiscal Year ($/sh) Date 5% ($) 10% ($) ---- ------- ----------- ------ ---- ------ ------- John W. Holaday, Ph. D. 50,000 7.13% 18.625 2/25/2009 1,516,908 2,415,422 60,000 8.55% 21.50 6/24/2009 2,101,275 3,345,927 Edward R. Gubish, Ph.D. 25,000 3.56% 18.625 2/25/2009 758,454 1,207,711 25,000 3.56% 21.50 6/24/2009 875,531 1,394,136 Joanna C. Horobin, M.D. 50,000 7.13% 12.875 2/10/2009 1,048,601 1,669,721 Donald S. Brooks 25,000 3.56% 18.625 2/25/2009 758,454 1,207,711 20,000 2.85% 21.50 6/24/2009 700,425 1,115,309 R. Nelson Campbell 10,000 1.43% 18.625 2/25/2009 303,382 483,084 10,000 1.43% 21.50 6/24/2009 350,212 557,655 John C. Thomas, Jr. 5,000 .71% 18.625 2/25/2009 151,691 241,542
(1) Calculated by multiplying the exercise price by the annual appreciation rate shown (as prescribed by SEC rules and compounded for the term of the options), subtracting the exercise price per share and multiplying the gain per share by the number of shares covered by the options. These amounts are not intended to forecast possible future appreciation, if any, of the price of our shares. The actual value realized upon exercise of the options to purchase our shares will depend on the fair market value of our shares on the date of exercise. 8 The following table sets forth information concerning all option holdings for the fiscal year ended December 31, 1999 for each of the named executive officers.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option/Value - --------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised In-the Underlying Options at Money Options at Fiscal Fiscal Year-End (#) Year-End ($) (2) --------------------------------------------------------------- Shares Acquired on Value Exercise Realized Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable - ---- --- ------- ----------- ------------- ----------- ------------- John W. Holaday, Ph.D. (3) - - 719,169 137,500 12,176,437 1,393,563 Edward R. Gubish, Ph.D. - - 232,501 62,500 3,460,769 599,125 Joanna C. Horobin, M.D. - - 23,750 26,250 302,694 334,556 Donald S. Brooks (3) - - 157,251 18,750 863,732 131,156 R. Nelson Campbell - - 112,500 27,500 1,427,488 278,713 John C. Thomas, Jr. (3) - - 147,619 16,250 2,719,026 221,544
(1) The Value Realized represents the amount equal to the excess of the fair market value of the shares at the time of exercise over the exercise price. (2) Calculated by multiplying the number of unexercised options outstanding at December 31, 1999 by the difference between the fair market value of our shares at December 31, 1999 ($25.625) and the option exercise price. (3) Holdings include warrants issued in lieu of stock options. 9 Employment Contracts and Termination of Employment and Change-In-Control Arrangements Effective January 1999, we entered into a three-year employment agreement with John W. Holaday, Ph.D. as our Chairman and Chief Executive Officer with an annual base salary of $325,000 per year and a minimal annual increase of 10% per year. We may terminate the agreement without cause and, upon such termination, Dr. Holaday will be entitled to receive his base salary through the end of the initial term of the agreement (subject to an offset for salary received from subsequent employment). The agreement contains confidentiality and non-competition provisions. We maintain a $2,000,000 split-dollar life insurance policy on the life of Dr. Holaday at an annual cost of approximately $12,551. Premiums paid by us on such policy are treated as non-interest bearing advances to Dr. Holaday for the policy. The initial proceeds of any such death benefit are required to be used to repay the indebtedness, and the balance of the insurance proceeds are payable as designated by Dr. Holaday. Each of our employees has entered into a Proprietary Information and Invention Assignment Agreement providing, among other things, that such employee will not disclose any confidential information or trade secrets in any unauthorized manner and that all inventions of such employee relating to our current or anticipated business during the term of employment become our property. In the event of certain transactions, including those that may result in a change in control, as defined under our Incentive Stock Option Plans, unvested installments of options to purchase our shares may become immediately exercisable. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the 1934 Act requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Such executive officers, directors, and greater than 10% beneficial owners are required by the SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons. Based solely on our review of such forms furnished to us and written representation from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were complied with. 10 Compensation Committee Interlocks and Insider Participation During fiscal 1999, the members of the Compensation Committee were: Lee F. Meier, Mark C.M. Randall and Jerry Finkelstein. In connection with our private placement of securities in July 1999, Mark C. M. Randall received warrants to purchase 15,000 shares of our common stock at an exercise price of $20.362 per share as compensation for services rendered as a placement agent. The warrants are exercisable for five years from the date of issuance. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 24, 2000 (except as otherwise footnoted below), stock ownership by each director or director nominee, each executive officer named under "Executive Compensation", and all of our directors and executive officers as a group. To our knowledge, no other person beneficially owns more than 5% of our Common Stock.
Amount and Nature of Percentage of Outstanding Name of Beneficial Owner (1) Beneficial Ownership (1) Class - ---------------------------- ------------------------- ----- John W. Holaday, Ph.D. 1,473,001 (2) 9.36% Edward R. Gubish, Ph.D. 268,501 (3) 1.72% Joanna C. Horobin, M.D. 47,000 (4) * Donald S. Brooks 169,751 (5) 1.09% R. Nelson Campbell 125,000 (6) * John C. Thomas, Jr. 65,599 (7) * Jerry Finkelstein 112,500 (8) * Lee F. Meier 54,000 (9) * Mark C. M. Randall 123,001 (10) * Wendell M. Starke 835,017 (11) 5.37% All executive officers and 3,273,370 (12) 20.49% directors as a group (10 persons)
- ------------------------------------------------------------------------------- *Less than 1% (1) Beneficial ownership is defined in accordance with the rules of the Securities and Exchange Commission ("SEC") and generally means the power to vote and/or to dispose of the securities regardless of any economic interest therein. (2) Includes 764,969 shares issuable upon exercise of options and warrants which are exercisable within 60 days and 126,666 shares held by a limited partnership of which Dr. Holaday is the general partner. Does not include 172,500 shares issuable upon exercise of options not exercisable within 60 days. 11 (3) Includes 257,501 shares issuable upon exercise of options that are exercisable within 60 days. Does not include 87,500 shares issuable upon exercise of options not exercisable within 60 days. (4) Includes 46,000 shares issuable upon exercise of options and warrants that are exercisable within 60 days. Does not include 55,000 shares issuable upon exercise of options not exercisable within 60 days. (5) Includes 169,751 shares issuable upon exercise of options and warrants that are exercisable within 60 days. Does not include 31,250 shares issuable upon exercise of options not exercisable within 60 days. (6) Includes 125,000 shares issuable upon exercise of options that are exercisable within 60 days. Does not include 45,000 shares issuable upon exercise of options not exercisable within 60 days. (7) Includes 65,267 shares issuable upon exercise of options and warrants that are exercisable within 60 days. Does not include 15,000 shares issuable upon exercise of options not exercisable within 60 days. (8) Includes 88,500 shares issuable upon exercise of options that are exercisable within 60 days. Does not include 12,500 shares issuable upon exercise of options not exercisable within 60 days. Does not include shares owned by various family members of Mr. Finkelstein as to which Mr. Finkelstein disclaims beneficial ownership. (9) Includes 44,000 shares issuable upon exercise of options which are exercisable within 60 days and 10,000 shares issuable upon exercise of warrants which are exercisable within 60 days held by an entity of which Mr. Meier is a 50% shareholder. (10) Includes 123,001 shares issuable upon exercise of options and warrants that are exercisable within 60 days. (11) Includes 312,429 shares issuable upon exercise of options and warrants which are exercisable within 60 days and 21,819 shares held by a limited partnership of which Mr. Starke is the general partner. Does not include 39,474 shares owned by various family members of Mr. Starke, as to which Mr. Starke disclaims beneficial ownership. (12) Includes 1,996,418 shares issuable upon exercise of options and warrants that are exercisable within 60 days. Does not include 418,750 shares issuable upon exercise of options not exercisable within 60 days. 12 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In December 1995 we entered into a collaboration agreement with Bristol-Myers Squibb Company to develop and commercialize certain antiangiogenesis therapeutics. On February 9, 1999, the original BMS collaboration was modified such that the final payment of $611,667 under the agreement was paid on June 5, 1999. As amended, BMS has no further funding obligation to us as of August 9, 1999. See also "Item 11 - Executive Compensation, Compensation Committee Interlocks and Insider Participation", regarding Mark C. M. Randall. Donald S. Brooks, one of our directors and our Vice President, Legal Affairs is of counsel to the law firm of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, which provided certain legal services to us in 1999 and will continue to provide legal services. 13 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1999 ENTREMED, INC. ROCKVILLE, MARYLAND 14 FORM 10-K - ITEM 14(a)(1) AND (2) ENTREMED, INC. AND SUBSIDIARIES List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of EntreMed, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors.........................................................F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998...........................F-2 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.........................................................................F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997......................................................F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.........................................................................F-5 Notes to Consolidated Financial Statements.............................................F-6
The following consolidated financial statement schedules of EntreMed, Inc. and subsidiaries are included in Item 14(d): None All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 15 Report of Independent Auditors Board of Directors EntreMed, Inc. We have audited the accompanying consolidated balance sheets of EntreMed, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EntreMed, Inc. at December 31, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Atlanta, Georgia ERNST & YOUNG LLP February 11, 2000
F-1 16 EntreMed, Inc. Consolidated Balance Sheets
DECEMBER 31, 1999 1998 ---------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 26,027,235 $ 30,818,689 Short-term investments - 4,352,371 Accounts receivable 618,598 112,383 Interest receivable 105,482 186,927 Prepaid expenses and other 336,443 170,877 ---------------------------------------- Total current assets 27,087,758 35,641,247 Furniture and equipment, net 4,013,785 2,979,237 Other assets 742,082 953,519 ---------------------------------------- Total assets $ 31,843,625 $ 39,574,003 ======================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,887,693 $ 2,093,017 Accrued liabilities 1,756,538 1,332,682 Deferred revenue (Note 5) 75,000 2,945,833 Notes payable 1,125,620 - ---------------------------------------- Total current liabilities 7,844,851 6,371,532 Note payable, less current portion 1,995,327 - Minority interest 18,646 14,407 Stockholders' equity: Convertible preferred stock, $1.00 par and $1.50 liquidation value: 5,000,000 shares authorized, none issued and outstanding at December 31, 1999 and 1998, respectively - - Common stock, $.01 par value: 35,000,000 shares authorized, 14,755,998 and 13,123,031 shares issued and outstanding at December 31, 1999 and 1998, respectively 147,560 131,230 Treasury stock, at cost: 291,667 and 0 shares held at December 31, 1999 and 1998, respectively (3,833,379) - Additional paid-in capital 107,863,638 78,364,136 Accumulated deficit (82,193,018) (45,307,302) ---------------------------------------- Total stockholders' equity 21,984,801 33,188,064 ---------------------------------------- Total liabilities and stockholders' equity $ 31,843,625 $ 39,574,003 ========================================
See accompanying notes. F-2 17 EntreMed, Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, 1999 1998 1997 ------------------------------------------------- Revenues: Collaborative research and development (Note 5) $ 3,099,166 $ 4,473,131 $ 4,342,369 Licensing (Note 5) 403,333 200,000 200,000 Grants 339,087 472,677 215,119 Royalties 1,123,111 - - Other 52,853 15,675 - ------------------------------------------------- 5,017,550 5,161,483 4,757,488 Costs and expenses: Research and development 35,529,435 15,084,993 8,998,705 General and administrative 8,028,922 5,760,215 4,915,724 ------------------------------------------------- 43,558,357 20,845,208 13,914,429 Interest expense (22,270) - (1,418) Investment income 1,677,361 2,169,955 2,621,630 ------------------------------------------------- Net loss $(36,885,716) $(13,513,770) $(6,536,729) ================================================= Net loss per share (basic and diluted) $ (2.67) $ (1.07) $ (0.54) ================================================= Weighted average number of shares outstanding (basic and diluted) 13,801,220 12,681,824 12,158,372 =================================================
See accompanying notes. F-3 18 EntreMed, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 31, 1999, 1998 and 1997
ADDITIONAL COMMON STOCK TREASURY PAID-IN ACCUMULATED ------------------------ SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL ----------------------------------------------------------------------------- Balance at December 31, 1996 12,009,598 $120,096 $ - $72,830,898 $(25,256,803) $47,694,191 Issuance of common stock for options and warrants exercised 244,170 2,442 - 502,190 - 504,632 Warrants issued for consulting services - - - 291,000 - 291,000 Net loss - - - - (6,536,729) (6,536,729) ----------------------------------------------------------------------------- Balance at December 31, 1997 12,253,768 122,538 - 73,624,088 (31,793,532) 41,953,094 Issuance of common stock for options and warrants exercised 869,263 8,692 - 4,740,048 - 4,748,740 Net loss - - - - (13,513,770) (13,513,770) ----------------------------------------------------------------------------- Balance at December 31, 1998 13,123,031 131,230 - 78,364,136 (45,307,302) 33,188,064 Issuance of common stock for options and warrants exercised 154,849 1,549 - 1,091,987 - 1,093,536 Sale of common stock at $20.362 per share, net of offering costs of approximately $1,675,143 1,478,118 14,781 - 28,407,515 - 28,422,296 Purchase of treasury shares at $13.143 per share (291,667) - (3,833,379) - - (3,833,379) Net loss - - - - (36,885,716) (36,885,716) ----------------------------------------------------------------------------- Balance at December 31, 1999 14,464,331 $147,560 $(3,833,379) $107,863,638 $(82,193,018) $21,984,801 =============================================================================
See accompanying notes. F-4 19 EntreMed, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31, 1999 1998 1997 -------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(36,885,716) $(13,513,770) $ (6,536,729) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 902,131 740,847 336,668 Loss on equity investment 232,000 100,000 - Stock and warrants issued for compensation and consulting expense - - 291,000 Minority interest 4,239 (48,093) 18,358 Changes in assets and liabilities: Accounts receivable (506,215) (28,232) (84,151) Interest receivable 81,445 333,530 (118,784) Prepaid expenses and other 29,653 (234,193) 9,075 Accounts payable 2,794,676 998,059 82,898 Accrued liabilities 423,856 66,777 308,187 Deferred revenue (Note 5) (2,870,833) (928,130) (871,870) -------------------------------------------------------------- Net cash used by operating activities (35,794,764) (12,513,205) (6,565,348) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments - (12,257,054) (32,014,130) Maturities of short-term investments 4,352,371 34,917,263 24,671,173 Other investments - (500,000) (300,000) Purchases of furniture and equipment (1,936,679) (1,809,546) (1,010,890) -------------------------------------------------------------- Net cash provided (used) by investing activities 2,415,692 20,350,663 (8,653,847) CASH FLOWS FROM FINANCING ACTIVITIES Sales of common stock 29,515,832 4,748,740 504,632 Proceeds from note payable 3,000,000 - - Purchase of treasury stock (3,833,379) - - Payment on note payable (94,835) Payment of lease obligation - - (104,152) -------------------------------------------------------------- Net cash provided by financing activities 28,587,618 4,748,740 400,480 -------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,791,454) 12,586,198 (14,818,715) Cash and cash equivalents at beginning of year 30,818,689 18,232,491 33,051,206 -------------------------------------------------------------- Cash and cash equivalents at end of year $ 26,027,235 $ 30,818,689 $ 18,232,491 ============================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ - $ - $ 1,418 ==============================================================
See accompanying notes. F-5 20 EntreMed, Inc. Notes to Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION EntreMed, Inc. (the "Company") operates in a single segment and is engaged primarily in the research and development of biopharmaceutical products that address the role of blood and blood vessels in the prevention and treatment of a broad range of diseases. The Company's core technologies include (i) an antiangiogenesis program focused on the development of proprietary products intended to inhibit the abnormal growth the new blood vessels associated with cancer and certain causes of blindness and (ii) a blood cell permeation device designed to enhance the ability of red blood cells to deliver oxygen to organs and tissues and which may also be used to deliver drugs, genes or other therapeutic agents that otherwise would not readily diffuse through blood cell membranes. The Company's strategy is to accelerate development of its antiangiogenesis and cell permeation technologies as well as other promising technologies which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to deepen its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate effective product commercialization. All of the Company's product candidates are in the development stage and require further research, development, testing and regulatory clearances. The Company was organized in September 1991 as a Delaware Corporation and from inception through December 1995 was in the development stage. In December 1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers Squibb") entered into a collaboration to develop and commercialize certain antiangiogenesis therapeutics (see Note 5). The Company received 68%, 92% and 95% of its revenues from Bristol-Myers Squibb in 1999, 1998 and 1997, respectively. F-6 21 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) The accompanying consolidated financial statements include the accounts of the Company's 85% owned subsidiary, Cytokine Sciences, Inc. Cytokine was formed in June 1996 for the purpose of acquiring the assets of Innovative Therapeutics, Inc. in July 1996 in exchange for 15% of the common stock of Cytokine valued at approximately $44,000. All intercompany balances and transactions have been eliminated in consolidation. Minority interest expense (income) of $4,239, $(48,093) and $18,358 is included in general and administrative expenses for the years ended December 31, 1999, 1998 and 1997, respectively. RESEARCH AND DEVELOPMENT Research and development expenses consist of independent proprietary research and development costs, the costs associated with work performed under collaborative research agreements and the Company's sponsored funding of research programs performed by others. Research and development costs are expensed as incurred. PATENT COSTS Costs incurred in filing, defending and maintaining patents are expensed as incurred. Such costs aggregated approximately $1,068,000, $778,000 and $409,000 in 1999, 1998 and 1997, respectively. INVESTMENTS The Company invests in various debt securities. These investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains and losses, and certain debt and equity securities to be reported at market with unrealized gains and losses as a separate component of stockholders' equity. F-7 22 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) Management determines the appropriate classification of investments as held-to-maturity or available-for-sale at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company has classified all investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in stockholders' equity. The amortized cost of debt securities in this category is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included as investment income. Realized gains and losses and declines in value judged to be other-than-temporary on the available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost and are depreciated over their expected useful lives. Depreciation is provided on a straight-line basis. Amortization associated with capitalized leases is included in depreciation expense. Substantially all of the Company's furniture and equipment serves as collateral for a note (see Note 7). Furniture and equipment are summarized as follows:
DECEMBER 31 1999 1998 ------------------------------------- Furniture and equipment $ 6,335,897 $ 4,432,566 Less: accumulated depreciation (2,322,112) (1,453,329) ------------------------------------- $ 4,013,785 $ 2,979,237 =====================================
CASH EQUIVALENTS Cash equivalents include cash and short-term investments with original maturities of less than 90 days. F-8 23 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. REVENUE RECOGNITION Revenue from the collaborative research and development agreement with Bristol-Myers Squibb is recorded when earned as defined under the terms of the agreement. Nonrefundable fees received upon contract signing are recorded as deferred revenue and recognized over the term of the agreement mentioned in Note 5. Revenues related to grants received for specific project proposals are recognized in revenue as earned in accordance with specified provisions, including performance requirements, in the contracts. Other periodic research funding payments received which are related to future performance are deferred and recognized as income when earned. NET LOSS PER SHARE Net loss per share (basic and diluted) was computed by dividing net loss by the weighted average number of shares of common stock outstanding. Common stock equivalents were anti-dilutive and therefore were not included in the computation of weighted average shares used in computing diluted loss per share. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements in order to conform to the 1999 presentation. F-9 24 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes new standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. These new standards require that all items recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has not presented a statement of comprehensive income as there are no additional components of comprehensive income to be presented. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") sets forth accounting and reporting standards for stock-based employee compensation plans (see Note 9). As permitted by SFAS 123, the Company continues to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, no compensation expense is recognized for stock or stock options issued to employees at fair market value. Accordingly, adoption of SFAS 123 has not affected the Company's results of operations or financial position. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. F-10 25 2. RELATED PARTY TRANSACTIONS The Company receives legal services from two law firms in which two of the Company's directors are partners. The cost of these services were negotiated on an arm's length basis and amounted to $338,000, $363,000 and $559,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, the Company maintained approximately 84% and 51%, respectively, of its cash, cash equivalents and short-term investments under the management of a registered investment advisory firm for which a Company director served as chairman of the board. Such assets under management are maintained by a high quality, third party financial institution custodian. The Company has an agreement with one of its directors under which the director provides consulting services. During 1997, the Company paid $180,000 under this agreement. 3. INVESTMENTS As of December 31, 1999, the Company did not hold any short-term investments. All of the Company's investments as of December 31, 1998 are classified as available-for-sale and are summarized as follows:
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------------------------------------------------ GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR AMORTIZED COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------ U.S. Treasury securities $2,847,036 $ - $ - $2,847,036 U.S. corporate securities 1,505,335 - - 1,505,335 ------------------------------------------------------------------------------------ Total securities $4,352,371 $ - $ - $4,352,371 ====================================================================================
The Company had no realized gains or losses from the sale of short-term investments for the years ended December 31, 1999, 1998 and 1997. All U.S. Treasury and U.S. corporate securities have maturity dates of less than one year as of December 31, 1998. F-11 26 4. SPONSORED RESEARCH PROGRAM AGREEMENTS The Company has entered into several agreements to sponsor external research programs. The Company's primary external research program agreement was entered into in September 1993 with the Children's Hospital, in Boston, Massachusetts, an entity affiliated with Harvard Medical School ("Children's Hospital, Boston"). Under this sponsored research agreement the Company agreed to pay Children's Hospital, Boston $11,000,000 over a six year period to support research on the role of angiogenesis in pathological conditions. In accordance with the terms of this sponsored research agreement, the total $11,000,000 was fully paid in March 1999. In June 1999, the Company signed a new agreement with Children's Hospital, Boston. Under this sponsored research agreement, the Company agreed to pay Children's Hospital, Boston $1,400,000 to continue the research on the role of angiogenesis in pathological conditions. In accordance with the terms of this sponsored research agreement, $700,000 has been paid as of December 31, 1999, and the remaining $700,000 is due on March 29, 2000. This sponsored research agreement gives the Company an option to negotiate a worldwide, royalty-bearing license for technology resulting from the research at Children's Hospital, Boston in areas covered by the agreement. Amounts due under the sponsored research agreement with Children's Hospital, Boston, which is cancelable by the Company at any time or by Children's Hospital, Boston upon one year prior written notice, are paid in advance every six months and are expensed as incurred as research and development costs. See also Note 12. As of December 31, 1999, the Company's total commitments for external research programs are as follows: 2000 $2,428,772 2001 682,624 --------------------- Total commitments $3,111,396 =====================
F-12 27 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT In December 1995, the Company and Bristol-Myers Squibb entered into a collaboration to develop and commercialize certain antiangiogenic therapeutics ("Original BMS Collaboration"). The Original BMS Collaboration provided for Bristol-Myers Squibb to fund the Company's research, provided for milestone payments to the Company, and provided for the payments to the Company of royalties on net sales of any products developed under the Original BMS Collaboration. In return, the Company granted Bristol-Myers Squibb exclusive worldwide rights held by the Company, to antiangiogenic applications of thalidomide, thalidomide analogs and the Angiostatin protein and a five-year right of first refusal to negotiate for commercial rights with respect to the development of any technology licensed, or to be licensed, by the Company from Children's Hospital, Boston, in the field of antiangiogenic therapeutics. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional $10,000,000 of the Company's common stock as described below. In October 1998, Bristol-Myers Squibb relinquished the rights to thalidomide analogs. In February 1999, the Company assumed all responsibility for preclinical and clinical work on the Angiostatin protein. Bristol-Myers Squibb was obligated under the Original BMS Collaboration to fund $18.35 million over five years for costs to be incurred by the Company related to specified research and development. The Company was eligible to receive an additional $32 million if the Company attained certain late-stage clinical development and regulatory filing milestones under the Original BMS Collaboration, a portion of which could be credited against royalties. In addition to this funding, Bristol-Myers Squibb reimbursed the Company $730,000 for clinical studies and ophthalmological trials. Bristol-Myers Squibb could terminate the Original BMS Collaboration for any reason with six months notice and on February 9, 1999, the Original BMS Collaboration was modified such that the final payment under the agreement was due on June 5, 1999 (see below). As amended, Bristol-Myers Squibb has no further funding obligation to the Company after August 9, 1999. F-13 28 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED) The Company also received a nonrefundable, non-creditable licensing fee of $1 million in 1995 under the Original BMS Collaboration and an additional $2.5 million on March 31, 1996 in recognition of certain research and development efforts of the Company. These amounts were recorded as deferred revenue and were being recognized over five years, the initial term of the Original BMS Collaboration agreement. On June 9, 1999, the due date of the final payment under the Original BMS Collaboration, the remaining unamortized balance of such deferred revenue was recognized as revenue. Concurrent with the signing of the Original BMS Collaboration, the Company issued Bristol-Myers Squibb 541,666 shares of common stock for aggregate cash proceeds of $6,500,000. Bristol-Myers Squibb also purchased 333,333 shares of additional common stock of the Company at the initial public offering price of $15 per share, or a total of $5,000,000, at the time the Company completed its initial public offering in June 1996 and was granted the right to purchase an additional $10,000,000 of the Company's common stock at $22.50 per share, or 444,444 shares from the Company at any time up to June 19, 1997. This warrant was renewed and expired without exercise in November 1997. During 1999, 1998 and 1997, the Company recognized approximately $3,482,000, $4,673,000, and $4,542,000 in revenue, respectively, and incurred costs of approximately $3,482,000, $5,800,000 and $5,200,000 related to the Original BMS Collaboration. On February 9, 1999, as noted above, the Company and Bristol-Myers Squibb agreed to modify the Original BMS Collaboration as follows: - - The Company will assume all responsibility for preclinical, pharmaceutical development and clinical work on the Angiostatin protein. Bristol-Myers Squibb has agreed to provide the Company with advice on structuring its clinical program but otherwise will have no direct involvement with the development of the Angiostatin protein. F-14 29 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED) - - Upon completion of Phase II clinical trials of Angiostatin, except as described below, Bristol-Myers Squibb will have the option to review all of the Company's data and exercise an option to reacquire further development and marketing rights to the product. If Bristol-Myers Squibb elects to do so, it will pay the Company a $1 million option exercise fee and the financial terms applicable to commercialization will remain the same as those in the existing research agreement, except that the Company's worldwide royalty will be substantially increased and will not be subject to any offsetting credits. - - If a third party wishes to license Angiostatin protein and fund and conduct development of Angiostatin protein and commercialize it upon FDA approval on terms satisfactory to the Company, or the Company decides to proceed with the development and commercialization of Angiostatin protein without a corporate partner (in either case prior to the completion of Phase II clinical trials and Bristol-Myers Squibb's exercise of its option), Bristol-Myers Squibb's option will be terminated effective with the signing of the Company's collaboration with such third party or its giving of written notice to Bristol-Myers Squibb that it intends to proceed without a corporate partner. - - Bristol-Myers Squibb's current rights of first offer/refusal with respect to products or technology arising out of the Company's agreement with Children's Hospital, Boston have terminated, including those rights with respect to Endostatin protein. - - Bristol-Myers Squibb is licensed, on a royalty free basis, to conduct further internal research with regard to the Angiostatin protein and will exchange with the Company any data it obtains on Angiostatin protein per se. This license will continue for a minimum of one year and thereafter until the termination of Bristol-Myers Squibb's option as described above. - - Bristol-Myers Squibb will retain its equity interest in the Company but has agreed to certain restrictions on its ability to sell its interest. These restrictions will prevent Bristol-Myers Squibb from selling its full interest in the Company until at least December 1, 2001, without the Company's consent. See also Note 9. F-15 30 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED) - - The semi-annual research support payment made on June 5, 1999 to the Company from Bristol-Myers Squibb was prorated to cover the period from June 5 to August 9, 1999 and was the final research payment under the agreement. All patent and related costs incurred by the Company prior to August 9, 1999 were reimbursed to the Company by Bristol-Myers Squibb. 6. LICENSE AGREEMENTS On December 9, 1998, the Company entered into a license agreement with Celgene Corporation ("Celgene") whereby the Company granted Celgene an exclusive license to certain of the Company's thalidomide patents. In exchange for this license, Celgene agreed to pay royalties to the Company on sales of any product which contains thalidomide. The royalties vary based on the volume of Celgene's sales. Celgene also assumed certain milestone payment obligations to Children's Hospital, Boston related to the license of thalidomide. On July 1, 1999, the Company entered into two license agreements with Calbiochem-Novabiochem Corp ("Calbiochem") whereby the Company granted non-exclusive rights and licenses to sell Endostatin protein and Angiostatin protein for non-commercial research purposes for two years. In exchange for these licenses, Calbiochem agreed to pay a total of $20,000 in nonrefundable, non-creditable fees and royalties based on net sales of the licensed products. 7. NOTES PAYABLE In July 1999, the Company entered into a note payable with a financing company for approximately $216,000 related to insurance premiums. The note bears interest at a rate of 6.26% per annum and is due in full in January 2000. In December 1999, the Company entered into a $3,000,000 note payable with a financing company secured by substantially all of the Company's furniture and equipment. The term of the note is three years and bears interest at a rate of 5.06% per annum. Maturities under this note are as follows: $909,838 in 2000, $997,245 in 2001 and $998,082 in 2002. F-16 31 8. INCOME TAXES The Company has net operating loss carryforwards for income tax purposes of approximately $94,350,000 at December 31, 1999 ($53,149,000 as of December 31, 1998) that expire in years 2007 through 2019. The Company also has research and development tax credit carryforwards of approximately $4,002,000 as of December 31, 1999 that expire in years 2008 through 2014. These net operating loss carryforwards include approximately $14,007,000 and $12,300,000 as of December 31, 1999 and 1998, respectively, related to exercises of stock options for which the income tax benefit, if realized, would increase additional paid-in capital. The utilization of the net operating loss and research and development carryforwards may be limited in future years due to changes in ownership of the Company pursuant to Internal Revenue Code Section 382. For financial reporting purposes, a valuation allowance has been recognized to reduce the net deferred tax assets to zero due to uncertainties with respect to the Company's ability to generate taxable income in the future sufficient to realize the benefit of deferred income tax assets. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liabilities as of December 31, 1999 and 1998 are as follows:
1999 1998 ------------------------------------- Deferred income tax assets (liabilities): Net operating loss carryforwards $ 35,853,000 $ 20,196,000 Research and development credit carryforward 4,002,000 2,379,000 Deferred revenues 29,000 1,119,000 Equity investment 126,000 38,000 Other 396,000 373,000 Depreciation 73,000 96,000 Valuation allowance for deferred income tax assets (40,479,000) (24,201,000) ------------------------------------ Net deferred income tax assets $ - $ - ====================================
F-17 32 8. INCOME TAXES (CONTINUED) A reconciliation of the provision for income taxes to the federal statutory rate is as follows:
1999 1998 1997 --------------------------------------------------------- Tax benefit at statutory rate $(14,017,000) $(5,135,000) $(2,484,000) Tax credits (1,623,000) (660,000) (389,000) Other 23,000 18,000 12,000 Valuation allowance 15,617,000 5,777,000 2,861,000 --------------------------------------------------------- $ - $ - $ - =========================================================
9. STOCKHOLDERS' EQUITY On July 27, 1999, the Company completed a private offering of 1,478,118 shares of its common stock, Series 1 Warrants to purchase a total of 739,059 shares of common stock at an exercise price of $33.02 and Series 2 Warrants to purchase a total of 739,059 shares of common stock at an exercise price of $25.45, resulting in gross proceeds, prior to the deduction of fees and commissions, of approximately $30.1 million (net proceeds of $28.4 million). All such warrants remained outstanding at December 31, 1999. In December 1999, the Company exercised its option to repurchase 291,667 of its common shares from Bristol-Myers Squibb for $13.143 a share or at a total repurchase price of $3,833,379. As described in Note 5, Bristol-Myers Squibb's remaining shares held in connection with the collaborative research and development agreement are subject to certain restrictions, including future repurchase rights by the Company which terminate in December 2000 and 2001. F-18 33 10. STOCK OPTIONS AND WARRANTS In 1992, 1996 and 1999, the Company adopted incentive and nonqualified stock option plans whereby 3,733,333 shares of the Company's common stock were reserved for grants to various executive, scientific and administrative personnel of the Company as well as outside directors and consultants, of which 26,828 shares remain available for grant as of December 31, 1999. These options vest over periods varying from immediately to four years and generally expire 10 years from the date of grant. Pro forma information regarding net income and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method subsequent to December 31, 1994. Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect is not fully reflected prior to 1999. The fair values for these options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.0%, 5.38% and 5.97%; no dividend yields; volatility factors of the expected market price of the Company's common stock of 1.04, 1.04 and 0.80; and a weighted-average expected life of an option of 6 years, 6 years and 7 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-19 34 10. STOCK OPTIONS AND WARRANTS (CONTINUED) For purposes of pro forma disclosures, the estimated fair values of the options and warrants granted to employees, directors and consultants are amortized to expense over the vesting period. The weighted average fair value per option granted in 1999, 1998 and 1997 was $18.60, $14.47 and $7.90, respectively. The weighted average fair value per warrant granted to employees during 1997 was $13.00. The Company's pro forma information follows:
1999 1998 1997 ---------------------------------------------------- Pro forma net loss $ (45,705,251) $(19,986,293) $(9,493,464) Pro forma loss per share $ (3.31) $ (1.58) $ (0.78)
A summary of the Company's stock options and warrants granted to employees, directors and consultants and related information for the years ended December 31 follows:
WEIGHTED AVERAGE NUMBER OF OPTIONS EXERCISE PRICE ----------------------------------------------- Outstanding at January 1, 1997 2,579,944 $6.68 Exercised (235,836) $1.93 Granted 761,575 $10.31 Canceled (5,734) $14.00 --------------------------- Outstanding at December 31, 1997 3,099,949 $7.92 Exercised (697,828) $5.20 Granted 325,250 $17.82 Canceled (76,682) $7.79 --------------------------- Outstanding at December 31, 1998 2,650,689 $9.85 Exercised (80,849) $9.56 Granted 1,176,406 $22.10 Canceled (46,240) $18.76 --------------------------- Outstanding at December 31, 1999 3,700,006 $13.64 =========================== Exercisable at December 31, 1999 2,758,683 $11.47 ===========================
F-20 35 10. STOCK OPTIONS AND WARRANTS (CONTINUED) The following summarizes information about stock options and warrants granted to employees outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ---------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/99 LIFE IN YEARS PRICE AT 12/31/99 PRICE - ----------------------------- ------------------------------------------------ ---------------------------------- $1.50 355,040 2.6 $1.50 355,040 $1.50 $6.50 - $9.50 665,164 5.6 $6.38 663,289 $6.37 $10.00 - $14.00 1,280,425 7.6 $11.67 1,077,546 $11.88 $15.00 - $19.13 458,071 8.2 $17.48 233,703 $16.39 $20.75 - $31.94 941,306 9.6 $24.16 429,105 $23.91 ----------------- --------------- 3,700,006 7.4 $13.64 2,758,683 $11.47 ================= ===============
The Company also granted 50,000 and 83,334 options to purchase common stock at $6.38 and $6.00 per share during 1995 and 1993, respectively, to Children's Hospital, Boston in connection with a sponsored research agreement (see Note 4). These options are not covered by the incentive and nonqualified stock option plan and are included in the table below. F-21 36 10. STOCK OPTIONS AND WARRANTS (CONTINUED) In addition, the Company has granted warrants to consultants and certain third parties. Warrants granted generally expire after 10 years from the date of grant. Stock warrant activity to non-employees is as follows:
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ------------------------------------------------- Outstanding at January 1, 1997 277,336 $6.47 Granted 100,000 $13.00 Exercised (8,334) $ 6.00 --------------------------- Outstanding at December 31, 1997 369,002 $8.23 Exercised (171,435) $8.15 --------------------------- Outstanding at December 31, 1998 197,567 $8.30 Granted 1,544,425 $28.85 Exercised (74,000) $7.34 --------------------------- Outstanding at December 31, 1999 1,667,992 $27.37 =========================== Exercisable at December 31, 1999 1,667,992 $27.37 ===========================
The Company also granted warrants to Bristol-Myers Squibb in connection with the Original BMS Collaboration described in Note 5 which expired in November 1997. 11. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and notes payable. As of December 31, 1999 and 1998, the Company maintained approximately 84% and 51%, respectively, of its cash, cash equivalents and short-term investments (short-duration, high quality debt securities) under the management of a registered investment advisory firm for which a Company director served as chairman of the board. Such assets under management are maintained by a high credit quality, third party financial institution custodian. F-22 37 11. FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts reported in the balance sheet for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and notes payable approximate their fair values. 12. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a lawsuit initiated in August 1995 in the United States District Court for the Eastern District of Tennessee by Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company breached an agreement between BMT and the Company by failing to pay BMT certain fees it asserts are owed under the agreement. More specifically, BMT has asserted a claim for the payment of services rendered in the approximate amount of $50,000 and seeks a success fee in an unspecified amount in connection with the Original BMS Collaboration. The judge in the case bifurcated the proceeding into two phases: an adjudication of whether the Company breached its agreement with BMT and then a damage phase. After a trial on the merits, the jury found in favor of BMT on the breach of contract claim. A trial to determine damages had been scheduled for April 14, 1998. However, on April 6, 1998, the court issued an Order pursuant to which damages were limited to those arising during the term of the agreement, which terminated on November 1, 1995. On May 6, 1999, the court confirmed its decision by granting the Company's motion for summary judgment and limiting the Company's damages to approximately $50,000 plus interest. Thus, this litigation at the trial level has been concluded. BMT has filed an appeal and the Company has cross-appealed. The Company cannot predict the outcome of such appeal. However, the Company intends to continue to contest any further action vigorously and believes that this proceeding will not have a material adverse effect on the Company or on its financial condition, although there can be no assurance that this will be the case. F-23 38 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) In May 1994, the Company entered into two license agreements, whereby the Company acquired the exclusive, worldwide, royalty-bearing licenses to make, use, and sell Angiostatin, thalidomide and thalidomide analogs, all inhibitors of angiogenesis developed by Children's Hospital, Boston. In consideration for receiving the rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, to Children's Hospital, Boston. The Company is also required to pay certain amounts upon the attainment of certain milestones. The milestone payments aggregate $2,650,000, of which $815,000 has been paid to date, and are based upon license fees and achievement of regulatory approvals. In addition, in 1996, the Company entered into two license agreements with Children's Hospital, Boston for the exclusive, worldwide, royalty-bearing licenses to make, use and sell Endostatin and 2-Methoxyestradiol, both inhibitors of angiogenesis. In consideration for receiving the rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, to Children's Hospital, Boston. Each agreement obligates the Company to pay up to $1,000,000 "upon the attainment of certain milestones." As of December 31, 1999, the Company has paid $200,000 under these agreements. These license agreements require the Company to pay Children's Hospital, Boston a specified percentage of the royalty income received on the first $100 million in net sales of the licensed products, and an increased percentage thereafter, with a minimum payment based on a percentage of net sales of the licensed products by any sublicensees. The Company has also entered into an agreement with a bioprocessing services firm for the production of materials to be used in the Company's research activities, including its clinical trials. As of December 31, 1999, the Company is committed to materials production costs due in the year 2000 of an estimated $6,000,000. F-24 39 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company leases its primary facilities through 2010. The lease agreement provides for escalation of the lease payments over the term of the lease, however, rent expense is recognized under the straight-line method. Additionally, the Company leases office equipment under an operating lease. The future minimum payments under its facilities and equipment leases as of December 31, 1999 are as follows: 2000 $ 852,700 2001 841,200 2002 855,300 2003 881,000 2004 907,400 Thereafter 3,739,000 --------------------- Total minimum payments $8,076,600 =====================
Rental expense for the years ended December 31, 1999, 1998 and 1997 was $751,000, $253,000 and $241,000, respectively. 13. EMPLOYEE RETIREMENT PLAN The Company sponsors the EntreMed, Inc. 401(k) and Trust. The plan covers substantially all employees and enables participants to contribute a portion of salary and wages on a tax-deferred basis. Contributions to the plan by the Company are discretionary. No employer contributions were made in 1999, 1998 or 1997. F-25 40 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for the years ended December 31, 1999 and 1998 is as follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------------------------------------------------------------------- 1999 Revenues $ 1,444,039 $ 1,329,031 $ 1,786,317 $ 458,163 Research and development costs 7,107,455 7,619,140 6,959,576 13,843,264 General and administrative expenses 1,895,838 2,003,069 2,223,748 1,906,267 Net loss (7,148,840) (8,008,305) (6,895,717) (14,832,854) Net loss per share $ (0.55) $ (0.61) $ (0.48) $ (1.01) 1998 Revenues $ 1,154,971 $ 1,165,485 $ 1,343,437 $ 1,497,590 Research and development costs 3,499,431 2,345,299 4,481,485 4,758,778 General and administrative expenses 1,305,890 1,221,010 1,380,387 1,852,928 Net loss (3,112,126) (1,812,631) (3,959,309) (4,629,704) Net loss per share $ (0.25) $ (0.15) $ (0.31) $ (0.35)
F-26 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENTREMED, INC. By: /s/ John W. Holaday, Ph.D. -------------------------- John W. Holaday, Ph.D., Chairman of the Board, President and Chief Executive Officer April 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----