NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
ImmuLogic Pharmaceutical Corporation ("ImmuLogic" or the "Company") is a
company which was in the biopharmaceutical industry to develop novel
products with a primary emphasis on the diagnosis and treatment of
allergies and on the immunological treatment of addiction. Since inception,
the Company did not derive any revenues from product sales and has incurred
significant operating losses.
On March 23 1999, the Board of Directors of ImmuLogic Pharmaceutical
Corporation (the "Company") approved a plan to liquidate and dissolve the
Company (the "Plan"). The Plan was approved by a majority of the
stockholders of the Company on August 25, 1999. The Plan was the end result
of the restructuring which began in 1997 and included the sale of the
Company's programs to Cantab Pharmaceuticals plc ("Cantab"), the sub-lease
of its Waltham, Massachusetts facility and a reduction in workforce. The
key features of the Plan are (1) the conclusion of all business activities,
other than those in execution of the Plan; (2) the sale or disposition of
all of the Company's assets; (3) the satisfaction of all outstanding
liabilities; (4) the payment of liquidating distributions to stockholders
in complete redemption of the Common Stock; and (5) the authorization of
the filing of Certificate of Dissolution with the State of Delaware.
B. LIQUIDATION BASIS OF ACCOUNTING
The consolidated financial statements for fiscal 1998 and for the six
months ended June 30, 1999 were prepared on the going concern basis of
accounting which contemplates realization of assets and satisfaction of
liabilities in the normal course of business. As a result of the adoption
of the Plan and the imminent nature of the liquidation, the Company adopted
the liquidation basis of accounting effective July 1, 1999. This basis of
accounting is considered appropriate when, among other things, liquidation
of a company appears imminent and the net realizable value of assets are
reasonably determinable. Under this basis of accounting, assets are valued
at their estimated net realizable values and liabilities are valued at
their estimated settlement amounts. The conversion from the going concern
to liquidation basis of accounting has required management to make
significant estimates and judgements. In order to record assets at
estimated net realizable value and liabilities at estimated settlement
amounts under liquidation basis accounting, on July 1, 1999 the Company
recorded the following adjustments: recorded a $3.1 million decrease in the
value of the Cantab stock, recorded a $3.2 million receivable for
milestones and royalties, and recorded an accrual of $1.3 million for costs
to be incurred during the liquidation period. Due to the significant
increase in the trading value of the Cantab stock in the fourth quarter of
1999, the Company recorded an adjustment to increase the net estimated
realizable value of the Cantab stock from $5 million to $12 million. In
2000 the Company sold its entire position in Cantab for approximately
$10,364,000. Additionally in 2000, the Company reduced the estimated
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receivable for milestones and royalties by $1.5 million and decreased its
estimate for estimated costs to be incurred by $204,000 to $650,000 for the
remainder of the liquidation period through August 26, 2002. The decrease
in estimated costs to be incurred during liquidation of approximately
$200,000 is primarily due to the Company's revised estimates of the various
potential future costs expected to be incurred through the liquidation
period.
The amount and timing of future liquidating distributions will depend upon
a variety of factors including, but not limited to, the actual proceeds
from the sale of any of the Company's net assets, the ultimate settlement
amounts of the Company's liabilities and obligations, actual costs incurred
in connection with carrying out the Plan, including management fees and
administrative costs during the liquidation period, and the timing of the
liquidation and dissolution. A summary of significant estimates and
judgements utilized in preparation of the December 31, 2000 consolidated
financial statements on a liquidation basis follows:
Milestones & Royalties
The Company could receive up to a maximum of $11 million in milestone
payments contingent upon Cantab's successful development to the end of
Phase II clinical trials of the Nicotine and Cocaine Programs sold to
Cantab. These payments may be made in cash or in additional ADSs or a
combination thereof at Cantab's discretion. The Company would receive the
following for successful completion of the Phases as defined in the
agreement as follows:
Cocaine............................Phase II $2 million
Nicotine...........................Phase I $3 million
Nicotine...........................Phase II $6 million
Upon receipt of the Phase II Cocaine or Phase I Nicotine milestones in the
form of Cantab stock or ADSs, the Company may sell up to 25% of such shares
in each of the four quarters following the expiration of an initial
six-month period. There would be no lock-up on shares paid in respect of
any additional milestones.
The Company could potentially also receive a share of net royalties Cantab
may receive from vaccine sales proportionate to the level of worldwide
product sales achieved. While the Company will attempt to monetize these
potential royalty streams, the Company does not anticipate receiving
significant value for them and thus has not recorded any net realizable
value for the royalty stream.
The Company estimates that the range of value to be received from these
milestones and royalties to be $0 to $11 million based on the contract
terms. During 2000 the Company has reduced the net realizable value of
these milestones from the $3 million recorded as of December 31, 1999 to
$1.5 million. This reduction is due to the uncertainty surrounding Cantab's
future resulting from the discontinuance of certain Cantab programs
announced in the fourth quarter of 2000 and the delay by Cantab in the
development of the nicotine and
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cocaine programs. While based on the aforementioned business issues, the
reduction in the milestone and royalty receivable and the balance at
December 31, 2000 was based on subjective judgements by management of the
Company.
Cash Distribution
On September 1, 1999, the Company returned to its stockholders the sum of
$39.9 million (or $1.94 per share, based on 20,550,773 shares of Common
Stock currently outstanding) to stockholders of record as of August 25,
1999. On September 1, 2000 the Company returned to its stockholders the sum
of $9.7 million (or $.47 per share, based on 20,550,773 shares of Common
Stock currently outstanding) to stockholders of record as of August 25,
2000. On December 2, 2000 the Company returned to its stockholders the sum
of $1.85 million (or $.09 per share, based on 20,550,773 shares of Common
Stock currently outstanding) to stockholders of record as of November 30,
2000. Future distributions to stockholders would be made by the Board of
Directors of the Company as the Company's net assets are converted to cash.
The actual amount and timing of future distributions cannot be predicted at
this time. The Company intends to distribute pro rata to its stockholders,
in cash or in-kind, or sell or otherwise dispose of, all of its property
and net assets. The liquidation should be concluded prior to August 27,
2002 by a final liquidating distribution either directly to the
stockholders or to one or more liquidating trusts. Details regarding the
plan to liquidate and dissolve the Company can be found in the Company's
1999 Proxy Statement filed with the Securities and Exchange Commission and
mailed to stockholders on July 15, 1999.
Landlord Receivable
In February 1998, the Company entered into a phased sublease agreement with
Anadys Pharmaceuticals, Inc. (formerly Scriptgen Pharmaceuticals, Inc.) for
the Company's 85,000 square foot headquarters and research and development
facility located in Waltham, Massachusetts. The entire facility was
subleased to Anadys effective August 1, 1999. Under the terms of the
sublease, Anadys has assumed the Company's obligation under the lease in
addition to reimbursing the Company for a portion of the Company's
leasehold improvements. The Company negotiated with the landlord and Anadys
an arrangement, which eliminated the Company's liability for the lease in
the event that Anadys were to default on its sublease obligations. In
consideration for such arrangement, the Company expects to receive $55,000
per month through August of 2002 or approximately $1.25 million in the
aggregate. If Anadys were to default on its lease agreement or if the
Company sold its interest in the lease, the Company would receive less than
or none of the $1.25 million. As of December 31, 2000, the Company has
recorded $856,000 as the estimated net realizable value for the purpose of
liquidation basis accounting.
Liabilities
At December 31, 2000, the Company estimates that there are $650,000 of
costs remaining to be incurred during the remaining liquidation period
through August 26, 2002.
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C. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, ImmuLogic Securities
Corporation. All intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles for liquidation requires management to make
certain estimates and assumptions that affect the net realizability of
assets and estimated costs to be incurred during the liquidation period and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
CASH
As of December 31, 2000, the Company had cash and cash equivalents of
$1,009,000 invested primarily in money market funds.
REVENUE RECOGNITION
Payments associated with rights to license or sublicense the Company's
technology were recognized as revenue when payments were received. Payments
in connection with sponsored research and the sale of programs were
recognized as revenue when earned under the terms of the agreements.
RESEARCH AND DEVELOPMENT
All research and development costs were expensed as incurred.
INCOME TAXES
The Company follows the liability method of accounting for income taxes
whereby a deferred tax liability is measured by the enacted tax rates which
will be in effect when any differences between the financial statements and
tax basis of assets reverse. The deferred tax liability can be reduced by
net operating losses being carried forward for tax purposes.
The measurement of deferred tax assets is reduced by a valuation allowance
if, based upon weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
NET LOSS PER COMMON SHARE
As explained in Note B, effective July 1, 1999 the Company adopted the
liquidation basis of accounting. Accordingly, the presentation of per
common share information on a liquidation basis is not considered
meaningful and has been omitted.
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The basic loss per common share, for periods prior to July 1, 1999 was
computed based upon the weighted average number of common shares
outstanding. The Company had 0, 0, and 1,532,018 options outstanding at
December 31, 2000, 1999 and 1998, respectively. These options were not
included in the calculation of dilutive common equivalent shares however,
since the effect of their inclusion would have been anti-dilutive.
D. PROPERTY AND EQUIPMENT
During 1999, all of the Company's equipment and furniture was sold. In
addition, the Company recorded a loss on leasehold improvements in the
amount of $1,446,000 to record the leaseholds at their net realizable value
for liquidation basis accounting.
Depreciation and amortization expense associated with property and
equipment was approximately $72,000, and $680,000, 1999 and 1998,
respectively.
E. STOCKHOLDERS' EQUITY
COMMON STOCK
At December 31, there were 20,550,773 common shares issued and outstanding
for the years 2000 and 1999, respectively.
PREFERRED STOCK
The Company has authorized a single class of preferred stock, par value
$.01, consisting of 1,000,000 shares. This preferred stock may be issued in
series with such rights, preferences and privileges as the Board of
Directors may determine.
SHAREHOLDER RIGHTS PLAN
On July 11, 1995, the Board of the Company declared a dividend of one
preferred stock purchase right (a Right) for each outstanding share of the
Company's Common Stock to stockholders of record at the close of business
on August 1, 1995. The Company adopted the plan to protect shareholders
against unsolicited attempts to acquire control of the Company that do not
offer what the Company believes to be an adequate price to all
shareholders. Each Right entitles the registered holder to purchase from
the Company a unit consisting of one one-thousandth of a share of Series A
Junior Participating Preferred Stock, $.01 par value (the Preferred Stock),
at a purchase price of $75 in cash per unit subject to adjustment.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates
will be distributed. The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated
persons (an Acquiring Person) has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock, or (ii) 10 business days following the commencement of a
tender offer or exchange offer that would result in a person or group
beneficially owning 30% or more of such outstanding shares of Common Stock.
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The Rights are not exercisable until the Distribution Date and will expire
at the close of business on August 1, 2005, unless earlier redeemed or
exchanged by the Company as described below.
In the event that any stockholder becomes an Acquiring Person, except
pursuant to a Permitted Offer, each Right will thereafter entitle the
holder thereof to receive, upon exercise, that number of shares of Common
Stock which equals the exercise price of the Right divided by one-half of
the current market price (as defined in the Rights Agreement) of the Common
Stock at the date of the occurrence of the event.
Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. Each share of Preferred Stock will be entitled to a minimum
preferential quarterly dividend payment of $10 per share and will be
entitled to an aggregate dividend of 1,000 times the dividend declared per
share on Common Stock. In the event of liquidation, the holders of the
Preferred Stock will be entitled to a minimum preferential liquidation
payment of $1,000 per share and will be entitled to an aggregate payment of
1,000 times the payment made per share of Common Stock. Each share of
Preferred Stock will have 1,000 votes, voting together with the Common
Stock. Finally, in the event of any merger, consolidation, or other
transaction in which Common Stock is exchanged, each share of Preferred
Stock will be entitled to receive 1,000 times the amount received per share
of Common Stock. These rights are subject to adjustment for any stock
split, stock dividend, recapitalization, or similar event. At December 31,
2000, 20,550,773 preferred stock purchase rights were outstanding.
STOCK OPTIONS
As of December 31, 2000, there were no stock options outstanding. The
Company's stock option plan activity is summarized as follows:
Number Weighted Average
of Options Exercise Price
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Outstanding at December 31, 1997 1,993,218 $ 8.25
Granted during 1998 313,000 1.44
Exercised during 1998 -- --
Canceled during 1998 (774,200) 9.17
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Outstanding at December 31, 1998 1,532,018 7.98
Granted during 1999 -- --
Exercised during 1999 (174,477) 1.44
Canceled during 1999 (1,357,541) 7.03
---------- --------
Outstanding at December 31, 1999 -- $ --
Granted during 2000 -- --
Exercised during 2000 -- --
Canceled during 2000 -- --
---------- --------
Outstanding at December 31, 2000 -- $ --
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F. EMPLOYEE BENEFITS
The Company had a 401(k) savings plan (the Plan) which was available to all
of its qualified permanent employees. Participants could contribute up to
15 percent of their annual compensation to the Plan, subject to certain
limitations. The employer match to the Plan was in the form of Company
Common Stock and was calculated as the lesser of up to one-half of six
percent of a participant's total compensation or $2,000 annually in value
of Common Stock. The fair market value on the date of issuance of the
Common Stock pursuant to the matching contributions totaled approximately
$11,000 and $25,000 in 1999 and 1998, respectively. Due to the Company's
liquidation, the Plan was terminated during 1999. The Company has
distributed the assets of the Plan.
G. INCOME TAXES
At December 31, 2000 the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $137,000,000
expiring in the years 2002 through 2019, which are available to reduce
future federal taxable income. The Company also has available research and
experimentation tax credits of approximately $3,700,000 at December 31,
2000, expiring in the years 2002 through 2018. The net operating loss
carryforwards are subject to limitation in any given year in the event of
significant changes in ownership. The Company has established a valuation
reserve against the entire deferred tax asset arising from these
carryforwards due to the uncertainty of earning sufficient taxable income
and accordingly, has not given recognition to these tax benefits in the
accompanying financial statements. The Company does not believe these
operating loss carryforwards have material value and any benefit relating
to these operating losses could be lost due to failure to meet the
continuity of business requirements.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
2000 1999
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Deferred tax assets and liabilities:
Net operating loss and tax credit carryforwards $ 54,723,900 $ 60,369,608
Accrued expenses 302,800 612,000
Accrued revenue (942,404) (1,760,000)
Other 9,054 12,482
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Total deferred tax assets and liabilities 54,093,350 59,234,090
------------ ------------
Valuation allowance (54,093,350) (59,234,090)
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Net deferred tax assets and liabilities $ -- $ --
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