-----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, OLtE4x+8KIcXULr0+UippW14WurK2hbyVsZ7zjz2mnU89SgnGNMPyxTcsjELYkdO 0vhAGiAAmDPylB+v9c94UA== 0000950149-00-000356.txt : 20000223 0000950149-00-000356.hdr.sgml : 20000223 ACCESSION NUMBER: 0000950149-00-000356 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000221 ITEM INFORMATION: FILED AS OF DATE: 20000222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXYS PHARMECUETICALS INC CENTRAL INDEX KEY: 0000913056 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222969941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-22788 FILM NUMBER: 549889 BUSINESS ADDRESS: STREET 1: 180 KIMBALL WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 6508291000 MAIL ADDRESS: STREET 1: 180 KIMBALL WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FORMER COMPANY: FORMER CONFORMED NAME: ARRIS PHARMACEUTICAL CORP/DE/ DATE OF NAME CHANGE: 19931005 8-K 1 FORM 8-K FOR AXYS PHARMACEUTICALS 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): FEBRUARY 21, 2000 AXYS PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 0-22788 22-2969941 (Commission File Number) (IRS Employer Identification No.) 180 KIMBALL WAY SOUTH SAN FRANCISCO, CA 94080 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (650) 829-1000 2 ITEM 5: OTHER EVENTS: This Current Report on Form 8-K supplements the Current Report on Form 8-K filed by Axys Pharmaceuticals, Inc. (the "Company") on January 23, 1998 (the "Initial Form 8-K") in connection with the closing of the merger of the Company's wholly-owned subsidiary, Beagle Acquisition Sub, Inc. (the "Merger Sub"), and Sequana Therapeutics, Inc. ("Sequana") pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization by and between the Company, the Merger Sub and Sequana dated November 2, 1997. In compliance with the reporting requirements of Items 2 and 7 of Form 8-K, the Initial Form 8-K described the relevant aspects of the transaction required by Item 2 and filed financial statements of the business acquired required by Item 7 by incorporating by reference such financial statements as filed with the Securities and Exchange Commission (the "SEC") in Sequana's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1997, June 30, 1997 and September 30, 1997. The Initial Form 8-K filed pro forma financial information by incorporating by reference such pro forma financial information as filed with the SEC in the Registration Statement on Form S-4 (Registration No. 333-41205) on November 26, 1997. Included herein are the financial statements of Sequana for the fiscal year ended December 31, 1997 filed to supplement the disclosure of the required financial statements with respect to the acquired business referred to above and in Item 2 of the Initial Form 8-K. 3 CONSOLIDATED FINANCIAL STATEMENTS SEQUANA THERAPEUTICS, INC. YEARS ENDED DECEMBER 31, 1997 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS 4 Sequana Therapeutics, Inc. Consolidated Financial Statements Years ended December 31, 1997 and 1996 CONTENTS Report of Independent Auditors........................................................ 5 Audited Consolidated Financial Statements Consolidated Balance Sheets........................................................... 6 Consolidated Statements of Operations................................................. 7 Consolidated Statements of Shareholders' Equity....................................... 8 Consolidated Statements of Cash Flows................................................. 9 Notes to Consolidated Financial Statements............................................11
5 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Shareholders Sequana Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Sequana Therapeutics, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sequana Therapeutics, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California February 6, 1998 6 Sequana Therapeutics, Inc. Consolidated Balance Sheets
DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 12,683,306 $ 9,402,958 Investment securities, available-for-sale 43,280,639 43,316,733 Other current assets 2,129,413 2,820,355 ------------ ------------ Total current assets 58,093,358 55,540,046 Furniture and equipment, net 8,089,157 8,285,305 Investment in joint venture 2,301,140 -- Notes receivable from officers and employees 433,247 530,844 Other assets 1,176,376 1,737,075 ------------ ------------ $ 70,093,278 $ 66,093,270 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 5,983,297 $ 3,965,475 Deferred revenue 5,943,730 3,357,936 Current portion of loans and capital lease obligations 3,669,697 2,396,523 ------------ ------------ Total current liabilities 15,596,724 9,719,934 Loans and capital lease obligations, less current portion 6,480,926 4,524,311 Commitments Shareholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 50,000,000 shares authorized, 10,499,919 and 10,133,243 shares issued and outstanding at December 31, 1997 and 1996, respectively 10,499 10,113 Additional paid-in capital 95,050,268 90,611,609 Notes receivable from shareholders (261,892) (237,040) Deferred compensation (747,762) (1,220,650) Unrealized gain on available-for-sale securities 6,420,833 -- Accumulated deficit (52,456,318) (37,315,007) ------------ ------------ Total shareholders' equity 48,015,628 51,849,025 ------------ ------------ Total liabilities and shareholders' equity $ 70,093,278 $ 66,093,270 ============ ============
See accompanying notes. 7 Sequana Therapeutics, Inc. Consolidated Statements of Operations
YEARS ENDED DECEMBER 31, 1997 1996 ------------ ------------ Revenues under strategic alliances $ 19,585,206 $ 9,705,048 Operating expenses: Research and development 29,910,548 26,396,844 Charge for acquisition of in-process research and development -- 3,366,168 General and administrative 5,392,843 5,004,604 ------------ ------------ Total operating expenses 35,303,391 34,767,616 ------------ ------------ Loss from operations (15,718,185) (25,062,568) Other income (expense): Interest income 2,680,771 3,276,968 Interest expense (662,787) (433,809) Equity interest in loss of joint venture (1,441,110) -- ------------ ------------ Net loss $(15,141,311) $(22,219,409) ============ ============ Basic and diluted net loss per share $ (1.48) $ (2.31) ============ ============ Shares used in computing basic and diluted net loss per share 10,247,830 9,625,286 ========== =========
See accompanying notes. 8 Sequana Therapeutics, Inc. Consolidated Statements of Shareholders' Equity
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------------------------------------------------------ PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ---------------------------------------------------------------------------------- Balance at December 31, 1995 - $ - 8,125,632 $ 8,126 $55,484,707 Issuance of common stock in follow-on public offering - - 1,700,000 1,700 30,035,106 Issuance of common stock in acquisition - - 158,451 158 3,197,907 Issuance of common stock - - 74,445 74 1,268,234 Issuance of common stock upon exercise of options - - 47,901 48 147,683 Issuance of common stock on exercise of warrants - - 6,814 7 (7) Deferred compensation for issuance of stock and options - - - - 477,979 Amortization of deferred compensation - - - - - Repayment of notes receivable - - - - - Net loss - - - - - ---------------------------------------------------------------------------------- Balance at December 31, 1996 - - 10,113,243 10,113 90,611,609 Issuance of common stock - - 219,636 220 3,036,612 Issuance of common stock upon exercise of options, net of repurchases - - 90,245 90 204,022 Issuance of common stock related to Employee Stock Purchase Plan - - 76,795 76 717,025 Issuance of warrants related to funding of joint venture - - - - 481,000 Amortization of deferred compensation - - - - - Collection on notes receivable - - - - - Accrued interest on notes receivable - - - - - Unrealized gain on available-for-sale securities - - - - - Net loss - - - - - ---------------------------------------------------------------------------------- Balance at December 31, 1997 - $ - 10,499,919 $ 10,499 $ 95,050,268 ==================================================================================
UNREALIZED NOTES GAIN ON RECEIVABLE AVAILABLE-FOR- TOTAL FROM DEFERRED SALE ACCUMULATED SHAREHOLDERS' SHAREHOLDERS COMPENSATION SECURITIES DEFICIT EQUITY ------------------------------------------------------------------------------------- Balance at December 31, 1995 $ (254,144) $ (1,368,802) $ - $ (15,095,598) $ 38,774,289 Issuance of common stock in follow-on public offering - - - - 30,036,806 Issuance of common stock in acquisition - - - - 3,198,065 Issuance of common stock - - - - 1,268,308 Issuance of common stock upon exercise of options - - - - 147,731 Issuance of common stock on exercise of warrants - - - - - Deferred compensation for issuance of stock and options - (477,979) - - - Amortization of deferred compensation - 626,131 - - 626,131 Repayment of notes receivable 17,104 - - - 17,104 Net loss - - - (22,219,409) (22,219,409) ------------------------------------------------------------------------------------- Balance at December 31, 1996 (237,040) (1,220,650) - (37,315,007) 51,849,025 Issuance of common stock - - - - 3,036,832 Issuance of common stock upon exercise of options, net of repurchases - - - - 204,112 Issuance of common stock related to Employee Stock Purchase Plan - - - - 717,101 Issuance of warrants related to funding of joint venture - - - - 481,000 Amortization of deferred compensation - 472,888 - - 472,888 Collection on notes receivable 8,503 - - - 8,503 Accrued interest on notes receivable (33,355) - - - (33,355) Unrealized gain on available-for-sale securities - - 6,420,833 - 6,420,833 Net loss - - - (15,141,311) (15,141,311) ------------------------------------------------------------------------------------- Balance at December 31, 1997 $ (261,892) $ (747,762) $ 6,420,833 $ (52,456,318) $ 48,015,628 =====================================================================================
See accompanying notes. 9 Sequana Therapeutics, Inc. Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1997 1996 ------------ ------------ OPERATING ACTIVITIES Net loss $(15,141,311) $(22,219,409) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,250,808 2,380,897 Amortization of deferred compensation 472,888 626,131 Charge for acquisition of in-process research and development and other -- 3,274,266 Accrued interest on shareholder notes receivable (33,355) -- Common stock issued in connection with a collaboration agreement 38,519 -- Equity interest in loss of joint venture 1,441,110 -- Change in operating assets and liabilities, net of acquisition: Other current assets 690,942 (1,212,022) Accounts payable and accrued expenses 2,017,822 1,108,020 Deferred revenue 2,585,794 1,046,080 ------------ ------------ Net cash used in operating activities (4,676,783) (14,996,037) INVESTING ACTIVITIES Purchases of investment securities (45,523,152) (52,737,763) Sales and maturities of investment securities 51,980,079 37,246,053 Investment in joint venture (3,261,250) -- Purchases of furniture and equipment (3,054,660) (2,402,076) Other assets 560,699 (1,522,468) Notes receivable from employees 97,597 (67,844) ------------ ------------ Net cash provided by (used in) investing activities 799,313 (19,484,098) FINANCING ACTIVITIES Issuance of common stock, net 3,919,526 31,452,845 Proceeds from notes payable 6,000,000 1,000,000 Repayments of loans and capital lease obligations (2,770,211) (2,099,544) Other financing activities 8,503 17,104 ------------ ------------ Net cash provided by financing activities 7,157,818 30,370,405 ------------ ------------ Increase (decrease) in cash and cash equivalents 3,280,348 (4,109,730) Cash and cash equivalents at beginning of year 9,402,958 13,512,688 ------------ ------------ Cash and cash equivalents at end of year $ 12,683,306 $ 9,402,958 ============ ============
See accompanying notes. 10 Sequana Therapeutics, Inc. Consolidated Statements of Cash Flows (continued)
YEARS ENDED DECEMBER 31, 1997 1996 -------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $624,050 $ 421,830 ======== ========== SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES Equipment acquired under capital leases and loans $ -- $3,751,046 ====== ========== Warrants issued in connection with formation of joint venture $481,000 $ -- ======== ========
See accompanying notes. 11 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Sequana Therapeutics, Inc. (Sequana or the Company) is a genomics company that uses industrial-scale gene discovery technology and functional genomics to discover and characterize genes that cause certain common diseases. The Company's gene discovery methodology is based on positional cloning, a method that uses statistical analysis of disease inheritance patterns to isolate disease genes. The Company has ongoing discovery programs in asthma, diabetes, obesity, osteoporosis, schizophrenia, manic depression, and other disease areas. The Company believes that identification of disease genes and determination of their biological function will provide insights into the causes of common diseases and may facilitate the development of novel prognostic, diagnostic, and therapeutic products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, NemaPharm, Inc. (NemaPharm), since the date of acquisition (see Note 3). All significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. CONCENTRATION OF CREDIT RISK The Company generally invests its excess cash in U.S. government securities, high-credit quality commercial paper, certificates of deposit, and money market accounts. Such investments are made in accordance with the Company's investment policy which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. 12 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT SECURITIES The Company classifies its investment securities as available-for-sale. Such securities are carried at estimated fair value with unrealized gains and losses, if any, reported as a separate component of shareholders' equity. The cost of investment securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses are also included in interest income. The cost of securities sold is based on the specific identification method. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally four to seven years) on a straight-line basis. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Amortization of equipment under capital leases is reported with depreciation of furniture and equipment. RESEARCH AND DEVELOPMENT REVENUE AND EXPENSES Revenue under strategic alliances is recognized as research activities are performed over the term of the agreements and upon the achievement of certain milestones. Revenues for cost reimbursement are recognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified as deferred revenue. Research and development costs are expensed as incurred. STOCK-BASED COMPENSATION In 1996, the Company implemented the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under FAS 123, the Company will continue to account for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures of net income and earnings per share as if the fair value basis method prescribed in FAS 123 had been applied in measuring compensation expense. 13 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which requires the Company to simplify the calculation of earnings per share and achieve comparability with the recently issued International Accounting Standard No. 33, "Earnings Per Share." FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated, where appropriate, to conform to FAS 128. Basic earnings per share is computed based on the weighted average number of the Company's common stock outstanding. In addition, there were other dilutive securities outstanding in the form of options and warrants to purchase 1,323,672 and 888,888 shares of common stock at December 31, 1997 and 1996, respectively. These shares, which would normally be included in the computation of dilutive earnings per share, were not included in that computation because the effect would be antidilutive. 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 disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. 14 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 established standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of FAS 130 will not have a material impact on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 changes the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company has not yet reached a conclusion as to the appropriate segments, if any, it will be required to report to comply with FAS 131. 2. AGREEMENT AND PLAN OF MERGER AND REORGANIZATION On November 2, 1997, the Company and Arris Pharmaceutical Corporation (Arris) entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement) providing for the acquisition of the Company by Arris. Under the terms of the Merger Agreement, a wholly owned subsidiary of Arris will be merged with and into Sequana, with Sequana to be the surviving corporation. Upon the completion of the merger, Sequana will become a wholly owned subsidiary of Arris. On January 8, 1998, the shareholders of the respective companies approved the issuance of Arris common stock under the Merger Agreement. In accordance with the agreement, Arris issued approximately 14,620,000 shares of Arris common stock in exchange for all the outstanding common stock of the Company on the basis of 1.35 shares of Arris common stock for one share of Sequana common stock. 15 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACQUISITION On October 15, 1996, the Company acquired all of the outstanding capital stock of NemaPharm, a drug discovery company, through the issuance of approximately 158,000 shares of the Company's common stock and options to acquire 38,000 shares of the Company's common stock. The acquisition was accounted for under the purchase method, and accordingly, the consolidated financial statements include the operations of NemaPharm from the date of its acquisition. The aggregate cost of NemaPharm of approximately $3.4 million was charged to acquired in-process research and development during 1996. The operations of NemaPharm had no material effect on the pro forma combined results of operations of the Company and NemaPharm for the periods preceding the Company's acquisition. 4. CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES The Company holds an equity investment in Aurora Biosciences Corporation (Aurora), which is included in the investment securities balance at December 31, 1997 and 1996 and is classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Aurora completed its initial public offering in June 1997, and as of December 31, 1997, the Company reported an unrealized gain of $6.4 million on its investment in Aurora. The unrealized gain represents the excess of the fair value of Sequana's investment over the original cost ($1.5 million) and is reported as a separate component of shareholders' equity. 16 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES (CONTINUED) For the remaining portion of the Company's portfolio (certificates of deposit, corporate notes, and U.S. government securities), the estimated fair value recorded approximates amortized cost. The estimated fair value of the Company's available-for-sale securities by type is as follows:
DECEMBER 31, 1997 1996 ----------- ----------- Cash and cash equivalents: Cash $ 1,891,856 $ 121,704 Money market funds 5,119,111 7,203,632 Corporate notes 4,672,339 2,077,622 U.S. government securities 1,000,000 -- ----------- ----------- $12,683,306 $ 9,402,958 =========== =========== Investment securities: Certificates of deposit $ 2,797,918 $ 8,995,975 Corporate notes 14,110,663 12,441,960 U.S. government securities 18,497,058 20,424,631 Equity securities of Aurora 7,875,000 1,454,167 ----------- ----------- $43,280,639 $43,316,733 =========== ===========
The estimated fair value of cash equivalents and investment securities, excluding cash and equity securities, classified by date of maturity is as follows:
DECEMBER 31, 1997 1996 ----------- ----------- Due within one year $33,095,480 $36,568,934 Due after one year 13,101,609 16,029,053 ----------- ----------- $46,197,089 $52,597,987 =========== ===========
17 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. FURNITURE AND EQUIPMENT Furniture and equipment comprise the following:
DECEMBER 31, 1997 1996 ----------- ----------- Office furniture and equipment $ 891,507 $ 559,336 Computer and scientific equipment 13,693,980 11,318,393 Leasehold improvements 926,878 579,976 ----------- ----------- 15,512,365 12,457,705 Less accumulated depreciation and amortization 7,423,208 4,172,400 ----------- ----------- Furniture and equipment, net $ 8,089,157 $ 8,285,305 =========== ===========
Included in furniture and equipment at December 31, 1997 and 1996 is equipment under capital leases and loans aggregating $9.3 million, all of which is pledged as security pursuant to the Company's equipment financing agreements. Accumulated amortization with respect to such equipment totaled $6.0 million and $3.7 million at December 31, 1997 and 1996, respectively. 6. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES Notes receivable consist primarily of loans made to certain officers and employees to facilitate their relocation. Such notes accrue interest at the applicable federal rate, as adjusted yearly, and are due upon demand. The notes are secured by approximately 88,000 shares of common stock and options to purchase 219,000 shares of common stock at December 31, 1997. 7. LOAN AND LEASE OBLIGATIONS The Company leases its facilities under operating leases that generally provide for annual cost-of-living related increases. Certain equipment is leased under operating and capital leases. Total rent expense under operating leases was $2.8 million and $2.1 million for the years ended December 31, 1997 and 1996, respectively. 18 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LOAN AND LEASE OBLIGATIONS (CONTINUED) In October 1996, the Company entered into a credit agreement with a bank which, subject to compliance with certain financial covenants and conditions, may be used by the Company to finance up to $7 million of capital expenditures or other working capital requirements through September 1997. Included in loans and capital lease obligations at December 31, 1997 and 1996 were $6.6 million and $1 million, respectively, of loans obtained pursuant to this agreement. The agreement provides for equal principal installments over a four-year period, commencing in September 1997, along with interest based on Eurodollar rates. Minimum future obligations due under the Company's operating and capital leases and loans as of December 31, 1997 are as follows:
CAPITAL LEASES AND OPERATING YEARS ENDED DECEMBER 31, LOANS LEASES -------------------------------------- ----------- ---------- 1998 $ 3,840,286 $1,419,408 1999 3,202,652 1,381,354 2000 2,031,628 1,330,669 2001 1,312,500 1,370,589 2002 -- -- ----------- ---------- Total minimum lease payments 10,387,066 $5,502,020 ========== Less amount representing interest 236,443 ----------- Present value of capital lease and loan payments 10,150,623 Less current portion 3,669,697 ----------- Long-term obligations under capital leases and loans $ 6,480,926 ===========
COMMON STOCK In connection with a strategic alliance entered into during October 1997, Warner-Lambert Company made a $2 million private equity investment in the Company, purchasing 151,297 shares of common stock at a price of $13.22 per share. 19 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LOAN AND LEASE OBLIGATIONS (CONTINUED) COMMON STOCK (CONTINUED) In February 1997, pursuant to terms of the strategic alliance agreement with the Company, Corange International, Ltd. made a $1.25 million private equity investment in the Company, purchasing 56,849 shares of common sock at a price of $21.99 per share. In March 1996, the Company raised net proceeds of $30 million through a follow-on public offering of its common stock. 8. SHAREHOLDERS' EQUITY DEFERRED COMPENSATION The Company has recorded deferred compensation for the difference between the price per share of certain stock sold and stock options granted and deemed fair value of such shares for accounting purposes. Deferred compensation is amortized to expense over the vesting period of the related stock and options. The Company recorded deferred compensation of approximately $1.3 million in connection with the issuance of 208,333 shares of common stock to the Company's President and Chief Executive Officer (in exchange for a $187,500 promissory note) and the sale of 86,805 shares of common stock to two affiliated shareholders for $78,125 in March 1995. The promissory note bears interest at 7.2%, is secured by the 208,333 shares of common stock, and becomes due and payable upon the occurrence of certain events. Such shares vest over a four-year period, with the unvested shares subject to repurchase by the Company at the original issue price in the event of this employee's termination. STOCK WARRANTS At December 31, 1997, the Company had outstanding warrants to purchase an aggregate of 461,471 shares of the Company's common stock. The warrants are exercisable at prices ranging from $3.00 to $24.00 per share and expire at various dates through 2007. 20 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS In April 1994, the Company adopted the 1994 Incentive Stock Plan (the Plan), under which, as amended, 1,563,125 shares of the Company's common stock were reserved for issuance. The Plan provides for the grant of incentive stock options to employees and nonstatutory stock options to employees and consultants. Options under the Plan have a ten-year term and generally vest over four years. The exercise price of incentive stock options must equal at least the fair market value on the date of grant, and the exercise price of nonstatutory stock options is as determined by the Board of Directors. During 1995, the Company adopted the 1995 Director Option Plan (the Director Plan), under which, as amended, 225,000 shares of the Company's common stock were reserved for issuance to all nonemployee members of the Board of Directors. The Director Plan provides for the automatic grant of an option to purchase shares of the Company's common stock at the time the nonemployee joins the Board of Directors. The options have a ten-year term, an exercise price equal to the fair market value of the common stock on the date of grant, and vest over four years. At December 31, 1997, options to purchase 118,000 shares of the Company's common stock were granted and outstanding under the Director Plan with a weighted average exercise price of $13.87 per share. Pro forma information regarding net loss and net loss per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the alternative fair value method provided for in FAS 123. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997 and 1996: risk-free interest rates of 6.13% and 6.39%, volatility factors of the expected market price of the Company's common stock of 0.62% and 0.61%, and a weighted average expected life of the options of 4.62 and 5 years. The weighted average fair value of options granted during the years ended December 31, 1997 and 1996 was $9.01 and $10.06, respectively. 21 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in highly subjective 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 stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net loss and pro forma net loss per share totaled approximately $16.0 million and $1.56 per share and $23.4 million and $2.43 per share, respectively, for the years ended December 31, 1997 and 1996. The pro forma results are not likely to be representative of the effects of applying FAS 123 on the reported net income or loss for future years as these amounts reflect the expense associated with only one or two years of vesting. The following table summarizes stock option activity under the Plan and related information through December 31, 1997:
WEIGHTED AVERAGE NUMBER EXERCISE OF OPTIONS PRICE ---------- -------- Outstanding at December 31, 1995 322,809 $ 4.87 Granted 571,099 $ 15.95 Exercised (47,901) $ 3.08 Canceled (68,590) $ 9.02 -------- Outstanding at December 31, 1996 777,417 $ 12.75 Granted 377,364 $ 12.77 Exercised (79,763) $ 2.58 Canceled (143,727) $ 8.01 -------- Outstanding at December 31, 1997 931,291 $ 13.30 ========
At December 31, 1997, options to purchase an aggregate of 554,377 shares of common stock were exercisable under the Plan at a weighted average exercise price of $13.02 per share, and options to purchase 576,002 shares of common stock were available for future grant. 22 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) The following table summarizes information about stock options outstanding under the Company's plans at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- -------------------------- WEIGHTED RANGE AVERAGE WEIGHTED WEIGHTED OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE - ------------------------------------------------------------------------------------- $ 0.01 - $ 3.00 93,218 7.67 $ 1.68 80,209 $ 1.81 $ 9.00 - $13.00 335,749 9.20 $11.65 178,878 $11.61 $15.25 - $16.75 418,241 9.13 $15.72 224,012 $15.69 $18.50 - $24.12 84,083 9.20 $20.77 71,278 $20.79 ------- ------- $ 0.01 - $24.12 931,291 9.02 $13.30 554,377 $13.02 ======= =======
EMPLOYEE STOCK PURCHASE PLAN During 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the Purchase Plan) under which 200,000 shares of the Company's common stock were reserved for issuance. The Purchase Plan provides for all eligible employees to purchase the Company's common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value per share on the start date of each overlapping two-year offering period or on the date on which each semiannual purchase period ends. The Purchase Plan will terminate in May 2005. As of December 31, 1997, 76,795 shares of common stock have been issued pursuant to the Purchase Plan. COMMON STOCK RESERVED FOR FUTURE ISSUANCE Common stock reserved for future issuance is as follows at December 31, 1997: Outstanding warrants 461,471 1994 Incentive Stock Plan 637,201 1995 Director Option Plan 225,000 1995 Employee Stock Purchase Plan 81,592 --------- 1,405,264 =========
23 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. STRATEGIC ALLIANCES BOEHRINGER INGELHEIM In June 1997, the Company expanded its strategic alliance with Boehringer Ingelheim in the area of asthma. Under terms of the expanded alliance, Boehringer Ingelheim doubled its level of research funding to the Company to support additional research into asthma-related genes. The increased funding support was effective retroactively to January 1, 1997 and continues through the term of the original five-year agreement, subject to certain rights of early termination. The Company recognized revenue of $8.1 and $4.1 million in the years ended December 31, 1997 and 1996, respectively, under this alliance. Boehringer Ingelheim has the right to terminate the agreement (subject to certain notification requirements) beginning in June 1998 or earlier in the event the Company is acquired by another pharmaceutical company. CORANGE In June 1995, the Company and Corange International, Ltd. (Corange), the parent company of Boehringer Mannheim GmbH, entered into a five-year strategic alliance in the area of osteoporosis. Corange made a nonrefundable payment of $1 million to the Company, and an investment fund affiliated with Corange made an equity investment of $1 million in the Company. The Company receives ongoing payments for research support and may receive additional milestone payments and royalties on sales of diagnostic and therapeutic products resulting from the alliance. Corange is also obligated to purchase $1.25 million in shares of the Company's common stock for each of the next three years at a purchase price equal to 135% of an average per share market price. In accordance with the agreement, Corange purchased 56,849 and 37,538 shares of the Company's common stock during 1997 and 1996, respectively. The Company recognized revenue totaling $2.1 million and $2.5 million in the years ended December 31, 1997 and 1996, respectively, under this alliance. Corange has the right to terminate the agreement (subject to certain notification requirements) beginning in February 1998 or earlier in the event the Company is acquired by another pharmaceutical company. 24 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. STRATEGIC ALLIANCES (CONTINUED) WARNER-LAMBERT COMPANY On October 31, 1997, the Company entered into a five-year strategic alliance with the Warner-Lambert Company (Warner-Lambert) aimed at developing novel therapeutic products for the treatment of schizophrenia and bipolar disorder. The alliance will combine the Company's research capabilities in the areas of gene discovery, functional genomics, bioinformatics, and screening with Warner-Lambert's research, development, and clinical expertise. Under the terms of the alliance, Warner-Lambert paid the Company a nonrefundable up-front fee of $2 million and made a $2 million equity investment in the Company. The Company will also receive ongoing payments for research support and may receive additional payments upon achievement of certain milestones and royalties on the sale of small molecule therapeutic products that may result from the alliance. Under the agreement, Warner-Lambert was granted exclusive worldwide rights to develop and commercialize small molecule therapeutic products, while the Company retains certain rights to develop and commercialize diagnostic, pharmacogenetic, and nonsmall molecule therapeutic products. The strategic alliance may be extended by Warner-Lambert for up to three additional one-year periods. Warner-Lambert has certain rights of early termination, including a right, in the event certain conditions are not met, to terminate the research program during the thirty-day period commencing on the first anniversary of the proposed change in control transactions discussed further in Note 2 of Notes to Consolidated Financial Statements. 10. INVESTMENT IN JOINT VENTURE In January 1997, the Company and Memorial Sloan-Kettering Cancer Center (MSKCC) formed Genos Biosciences, Inc. (Genos), a joint venture focused on the research and identification of genes and related genetic information of value in the prognosis, diagnosis, and possible treatment of certain common cancers. The Company and MSKCC each own 50% of Genos and have committed to make capital contributions of approximately $5 million each to fund its initial operations. The Company invested approximately $3.5 million in Genos during 1997, and Sequana's remaining capital contribution is expected to be funded in early 1998. The investment in Genos is accounted for under the equity method. Terms of the joint venture agreement provide MSKCC a right of termination, under certain conditions, in the event of a change in control of the Company. 25 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. STRATEGIC ALLIANCES (CONTINUED) Under terms of the agreement, the Company licensed certain of its technology to Genos and has contracted with Genos to conduct research and provide certain other services to the joint venture. Payments to date for such research and services have not been material. In connection with the formation of Genos, the Company sold a warrant to MSKCC to purchase 350,000 shares of the Company's common stock, exercisable at a price of $17.38 per share. The Company's Chairman of the Board, Chief Executive Officer, and Chief Financial Officer are members of the Board of Directors of Genos. 11. INCOME TAXES At December 31, 1997, the Company had federal and California income tax net operating loss carryforwards of approximately $43,500,000 and $2,200,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California income tax purposes and the fifty percent limitation on California loss carryforwards. The federal and California tax loss carryforwards will begin to expire in 2008 and 1998, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $1,600,000 and $600,000, respectively, which will begin to expire in 2008 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited because of cumulative changes in ownership of more than 50% that have occurred. However, the Company does not believe such limitation will have a material impact upon the utilization of these carryforwards. 26 SEQUANA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are shown below. A valuation allowance of $21,800,000 has been recognized to offset the deferred tax assets, as realization of such assets is uncertain.
DECEMBER 31, 1997 1996 ------------ ------------ Deferred tax liability - tax over book $ 300,000 $ 298,000 depreciation Deferred tax assets: Net operating loss carryforwards 14,900,000 11,313,000 Research and development credits 2,000,000 1,199,000 Capitalized research and development 3,700,000 1,822,000 Other 1,500,000 197,000 ------------ ------------ Total deferred tax assets 22,100,000 14,531,000 Valuation allowance for deferred tax assets (21,800,000) (14,233,000) ------------ ------------ Net deferred tax assets 300,000 298,000 ------------ ------------ Net deferred tax liabilities (assets) $ -- $ -- ============ ============
12. 401(k) PROFIT SHARING PLAN The Company maintains a 401(k) profit sharing plan that allows substantially all employees to contribute up to 15% of their salary, subject to annual limitations. The Board of Directors may, at its sole discretion, approve company contributions. To date, there have been no company contributions under the plan. 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 hereunto duly authorized. AXYS PHARMACEUTICALS, INC. -------------------------- (Registrant) Date: February 21, 2000 By: /s/ Kathleen Stafford -------------------------- Kathleen Stafford Sr. VP and CFO (Chief Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----