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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7 Powder Horn Drive, Warren, NJ 07059
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
--- ---
At July 31, 2003, 81,017,812 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
as of June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations
- Three-Month Period Ended June 30, 2003 and 2002 4
Consolidated Statements of Operations
- Six-Month Period Ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows
- Six-Month Period Ended June 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4 Controls and Procedures 29
PART II OTHER INFORMATION 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 6 (a) Exhibits 31
(b) Reports on Form 8-K 31
Signatures 32
2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 512,877,470 $ 85,475,088
MARKETABLE SECURITIES AVAILABLE FOR SALE 137,233,993 175,706,555
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE OF $1,119,055 AND $1,019,760
AT JUNE 30, 2003 AND DECEMBER 31, 2002, RESPECTIVELY 29,731,352 17,659,065
INVENTORY 8,920,993 4,805,770
OTHER CURRENT ASSETS 12,977,400 12,449,429
------------- -------------
TOTAL CURRENT ASSETS 701,741,208 296,095,907
PLANT AND EQUIPMENT, NET 21,316,388 19,600,063
GOODWILL 2,934,184 2,972,784
INTANGIBLE ASSETS 2,852,333 3,010,000
OTHER ASSETS 29,841,824 5,607,974
------------- -------------
TOTAL ASSETS $ 758,685,937 $ 327,286,728
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 23,465,276 $ 16,515,634
ACCRUED EXPENSES 32,744,595 26,975,632
CURRENT PORTION OF CAPITAL LEASES AND NOTE OBLIGATION 27,049 86,318
CURRENT PORTION OF DEFERRED REVENUE 570,065 109,327
OTHER CURRENT LIABILITIES 1,389,574 599,341
------------- -------------
TOTAL CURRENT LIABILITIES 58,196,559 44,286,252
LONG TERM CONVERTIBLE NOTE 400,000,000 --
DEFERRED REVENUE, NET OF CURRENT PORTION 929,390 1,389,888
CAPITALIZED LEASES AND NOTE OBLIGATION, NET OF CURRENT PORTION 25,618 39,852
OTHER NON-CURRENT LIABILITIES 6,618,823 4,872,784
------------- -------------
TOTAL LIABILITIES 465,770,390 50,588,776
------------- -------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE PER SHARE,
5,000,000 AUTHORIZED; NONE OUTSTANDING AT
JUNE 30, 2003 AND DECEMBER 31, 2002 -- --
COMMON STOCK, $.01 PAR VALUE PER SHARE
120,000,000 SHARES AUTHORIZED;
ISSUED AND OUTSTANDING 80,958,825 AND 80,176,713 SHARES
AT JUNE 30, 2003 AND DECEMBER 31, 2002, RESPECTIVELY 809,588 801,768
ADDITIONAL PAID-IN CAPITAL 601,091,629 591,277,196
ACCUMULATED DEFICIT (318,520,722) (322,367,256)
NOTES RECEIVABLE FROM STOCKHOLDERS -- (42,000)
ACCUMULATED OTHER COMPREHENSIVE INCOME 9,535,052 7,028,244
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 292,915,547 276,697,952
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 758,685,937 $ 327,286,728
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIOD ENDED JUNE 30,
---------------------------------
2003 2002
---- ----
REVENUE:
PRODUCT SALES $ 62,497,290 $ 30,358,683
COLLABORATIVE AGREEMENTS AND OTHER REVENUE 2,308,349 2,556,251
ROYALTY REVENUE 2,480,535 705,697
------------ ------------
TOTAL REVENUE 67,286,174 33,620,631
------------ ------------
EXPENSES:
COST OF GOODS SOLD 11,629,439 4,110,074
RESEARCH AND DEVELOPMENT 30,517,145 19,222,205
SELLING, GENERAL AND ADMINISTRATIVE 25,905,256 18,396,573
------------ ------------
TOTAL EXPENSES 68,051,840 41,728,852
------------ ------------
OPERATING LOSS (765,666) (8,108,221)
OTHER INCOME AND EXPENSE:
INTEREST AND OTHER INCOME 4,463,391 6,399,011
INTEREST EXPENSE 593,960 5,292
------------ ------------
INCOME (LOSS) BEFORE TAXES 3,103,765 (1,714,502)
INCOME TAXES 209,693 --
------------ ------------
NET INCOME (LOSS) $ 2,894,072 $ (1,714,502)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.04 $ (0.02)
============ ============
DILUTED $ 0.03 $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK UTILIZED TO CALCULATE NET
INCOME (LOSS) PER COMMON SHARE:
BASIC 80,839,000 76,377,000
============ ============
DILUTED 85,134,000 76,377,000
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTH PERIOD ENDED JUNE 30,
-------------------------------
2003 2002
---- ----
REVENUE:
PRODUCT SALES $ 108,301,248 $ 57,997,192
COLLABORATIVE AGREEMENTS AND OTHER REVENUE 3,387,283 4,886,082
ROYALTY REVENUE 4,686,307 1,431,503
------------- -------------
TOTAL REVENUE 116,374,838 64,314,777
------------- -------------
EXPENSES:
COST OF GOODS SOLD 16,291,051 7,774,214
RESEARCH AND DEVELOPMENT 55,237,657 36,746,314
SELLING, GENERAL AND ADMINISTRATIVE 49,278,436 34,694,427
------------- -------------
TOTAL EXPENSES 120,807,144 79,214,955
------------- -------------
OPERATING LOSS (4,432,306) (14,900,178)
OTHER INCOME AND EXPENSE:
INTEREST AND OTHER INCOME 9,217,982 12,377,604
INTEREST EXPENSE 594,448 15,168
------------- -------------
INCOME (LOSS) BEFORE TAXES 4,191,228 (2,537,742)
INCOME TAXES 344,693 --
------------- -------------
NET INCOME (LOSS) $ 3,846,535 $ (2,537,742)
============= =============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.05 $ (0.03)
============= =============
DILUTED $ 0.05 $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK UTILIZED TO CALCULATE NET
INCOME (LOSS) PER COMMON SHARE:
BASIC 80,613,000 76,003,000
============= =============
DILUTED 84,435,000 76,003,000
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIOD ENDED JUNE 30,
2003 2002
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 3,846,535 $ (2,537,742)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION OF LONG-TERM ASSETS 4,183,923 3,421,207
RECOVERY FOR ACCOUNTS RECEIVABLE ALLOWANCES (151,158) (56,371)
REALIZED GAIN ON MARKETABLE SECURITIES AVAILABLE
FOR SALE (4,244,572) (2,778,460)
NON-CASH STOCK-BASED COMPENSATION 342,406 926,524
AMORTIZATION OF PREMIUM/DISCOUNT ON MARKETABLE
SECURITIES AVAILABLE FOR SALE, NET 427,532 236,427
AMORTIZATION OF DEBT ISSUANCE COSTS 200,000 --
SHARES ISSUED FOR EMPLOYEE BENEFIT PLANS 2,775,383 965,760
CHANGE IN CURRENT ASSETS & LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (11,921,129) (3,502,611)
INCREASE IN INVENTORY (4,115,223) (3,305,460)
INCREASE IN OTHER OPERATING ASSETS (1,321,716) (3,328,666)
INCREASE IN ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 15,254,877 3,242,309
INCREASE (DECREASE) IN DEFERRED REVENUE 240 (2,199,443)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,277,098 (8,916,526)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (5,244,586) (4,856,343)
INVESTMENT IN CONVERTIBLE NOTES (12,000,000) --
INCREASE IN NOTES RECEIVABLE -- (500,000)
PROCEEDS FROM SALES AND MATURITIES OF MARKETABLE
SECURITIES AVAILABLE FOR SALE 54,596,408 43,223,272
PURCHASES OF MARKETABLE SECURITIES
AVAILABLE FOR SALE (9,800,000) (39,965,724)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 27,551,822 (2,098,795)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF COMMON STOCK
OPTIONS AND WARRANTS 6,704,466 3,032,874
PROCEEDS FROM CONVERTIBLE NOTE 400,000,000 --
DEBT ISSUE COST (12,099,501) --
PROCEEDS FROM NOTES RECEIVABLE FROM STOCKHOLDERS 42,000 --
REPURCHASE OF EMPLOYEE STOCK OPTIONS -- (1,547)
REPAYMENT OF CAPITAL LEASE AND NOTE OBLIGATION (73,503) (450,349)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 394,573,462 2,580,978
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 427,402,382 (8,434,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,475,088 47,141,291
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 512,877,470 $ 38,706,948
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTH PERIOD ENDED JUNE 30,
2003 2002
------------ -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITY:
CHANGE IN NET UNREALIZED GAIN(LOSS) ON
MARKETABLE SECURITIES AVAILABLE FOR SALE $ 2,506,808 $(7,100,555)
=========== ===========
DEFERRED COMPENSATION RELATING TO STOCK OPTIONS $ -- $ 51,958
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID $ 11,448 $ 15,168
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. Organization and Basis of Presentation
--------------------------------------
The unaudited consolidated financial statements have been prepared
from the books and records of Celgene Corporation and subsidiaries ("Celgene" or
the "Company") in accordance with accounting principles generally accepted in
the United States of America for interim financial information pursuant to Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required for complete annual financial statements.
The Company is an integrated biopharmaceutical company engaged in the
discovery, development and commercialization of novel therapies designed to
treat cancer and immunological diseases through regulation of cellular, genomic
and proteomic targets. On December 31, 2002, Celgene completed the acquisition
of Anthrogenesis Corp., for an aggregate purchase price of $60.0 million.
Anthrogenesis is an early-stage biotherapeutics company delivering stem cell
therapies produced from renewable human placental sources/materials. The Company
acquired Anthrogenesis to realize the substantial therapeutic and commercial
potential of placental stem cells through its commercial and developmental
infrastructure. The acquisition was accounted for using the purchase method of
accounting for business combinations.
In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Interim results may not be indicative of the results that may be
expected for the year. Certain adjustments and reclassifications were made to
conform to the current year presentation.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10K.
2. Earnings per Share
------------------
Basic earnings per share is computed by dividing the net income
available to common stockholders by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the three months and six months ended
June 30, 2003, the denominator includes both the weighted average number of
shares of Common Stock outstanding and the number of dilutive Common Stock
equivalents. The number of dilutive Common Stock equivalents includes the effect
of stock options and warrants calculated using the treasury stock method and the
number of shares issuable upon the vesting of certain restricted stock awards.
Due to the net loss recorded for the three months and six months ended June 30,
2002, the exercise or conversion of all dilutive potential common shares is not
included for purposes of the diluted loss per share calculation. As of June 30,
2003 and 2002, the Company had 16,080,000 and 9,557,000 dilutive potential
common shares outstanding, respectively, that could potentially dilute future
earnings
8
per share calculations. The dilutive potential common shares related to the
convertible note offering on June 3, 2003 are anti-dilutive, and thus were not
included in the calculation of diluted earnings per share for the three and six
month periods ended June 30, 2003.
The following represents the weighted average number of common shares
outstanding for the three and six month periods ended June 30, 2003 and 2002
used in the basic and diluted earnings (loss) per common share calculations:
Three month period ended
June 30, 2003 June 30, 2002
------------- -------------
Weighted average number of common
stock outstanding - basic 80,839,000 76,377,000
Effect of dilutive securities:
Assumed exercise of stock options,
warrants and restricted stock 4,295,000 --
---------- ----------
Weighted average number of common
stock and dilutive potential
common stock outstanding 85,134,000 76,377,000
========== ==========
Six month period ended
June 30, 2003 June 30, 2002
------------- -------------
Weighted average number of common
stock outstanding - basic 80,613,000 76,003,000
Effect of dilutive securities:
Assumed exercise of stock options,
warrants and restricted stock 3,822,000 --
---------- ----------
Weighted average number of common
stock and dilutive potential
common stock outstanding 84,435,000 76,003,000
========== ==========
3. Anthrogenesis Acquisition
-------------------------
The following unaudited pro forma results of operations of the Company
for the three and six month periods ended June 30, 2002 assumes the acquisition
of Anthrogenesis has been accounted for using the purchase method of accounting
as of January 1, 2002 and assumes the purchase price has been allocated to the
assets purchased and the liabilities assumed based on fair values at the date of
acquisition. The unaudited pro forma net loss and net loss per share amounts for
the six month period ended June 30, 2002 include the charge for purchased
research and development of approximately $55.7 million, which was recognized at
the acquisition date, and the pro forma amounts for the three and six months
ended June 30, 2002 also include an adjustment to reflect amortization of
intangibles recorded in conjunction with the acquisition. The unaudited pro
forma results of operations is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have occurred if
the transaction had been consummated at the date indicated, nor is it
necessarily indicative of future operating results of the combined
9
companies and should not be construed as representative of these amounts for any
future dates or periods. Anthrogenesis' results of operations included in the
following pro forma financial information are derived from their unaudited
financial statements for the three and six month periods ended June 30, 2002 and
has been adjusted, where appropriate, to present their financial position and
results of operations in accordance with accounting principles generally
accepted in the United States.
Pro Forma Pro Forma
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
---------------- ----------------
Total revenues $33,620,361 $ 64,314,777
Net (loss) $(1,793,335) $(58,395,409)
Net (loss) per share $ (0.02) $ (0.77)
Intangible assets acquired pursuant to this acquisition represent
supplier agreements and customer lists and have a weighted average useful life
of 11.6 years. Amortization expense for the next five fiscal years is expected
to be approximately $315,000 per year.
The goodwill from the Anthrogenesis acquisition has been allocated to
the Company's Stem Cell Therapy segment. In accordance with SFAS 142, Goodwill
and Other Intangible Assets, the Company will not amortize goodwill resulting
from this acquisition, but will review it at least annually for potential
impairment issues.
4. Convertible Notes
-----------------
On June 3, 2003, the Company issued to institutional investors
unsecured convertible notes in the amount of $400,000,000. The notes have a five
year term and a coupon rate of 1.75% with interest payable on a semi-annual
basis. The notes have a conversion rate of $48.45 per share, which represents a
50% premium to the closing price of Celgene's common stock on May 28, 2003. The
debt issue costs related to these notes were approximately $12.2 million and are
being amortized over five years. The debt issue costs are classified under
"Other Assets" on the Company's balance sheet. Under the terms of the Purchase
Agreement, the note holders can convert the notes into common shares at any time
at the conversion price, and also have the right to require the Company to
redeem the notes prior to maturity in the event of a "fundamental change", as
defined within the Agreement. At June 30, 2003, the notes could be converted
into 8,255,920 common shares. The Company is required to register the notes and
common stock issuable upon conversion with the Securities and Exchange
Commission, and to use reasonable best efforts to keep it effective for the
defined period. The Company may not merge or transfer substantially all assets,
as defined, unless certain conditions are met.
10
5. Marketable Securities Available for Sale
----------------------------------------
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available for sale securities by major security
type at June 30, 2003 and December 31, 2002 were as follows:
Gross Gross Estimated
June 30, 2003 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Government agencies $ 149,906 $ 824 $ -- $ 150,730
Government bonds and notes 301,757 -- (164) 301,593
Corporate debt
securities 127,247,278 9,856,689 (322,297) 136,781,670
------------ ------------ ------------ ------------
Total $127,698,941 $ 9,857,513 $ (322,461) $137,233,993
============ ============ ============ ============
Gross Gross Estimated
December 31, 2002 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Government agencies $ 149,906 $ 1,795 $ -- $ 151,701
Government bonds and notes 553,593 5,235 -- 558,828
Corporate debt
securities 167,974,812 9,428,832 (2,407,618) 174,996,026
------------ ------------ ------------ ------------
Total $168,678,311 $ 9,435,862 $ (2,407,618) $175,706,555
============ ============ ============ ============
6. Inventory
---------
Inventory consists of the following:
June 30, December 31,
2003 2002
---------- ------------
Raw materials $2,596,219 $2,680,398
Work in process 1,096,315 555,232
Finished goods 5,228,459 1,570,140
---------- ----------
Total $8,920,993 $4,805,770
========== ==========
11
7. Stock Based Compensation
------------------------
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, as
amended, established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123, as amended.
When the exercise price of employee or director stock options is less
than the fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense over the vesting period of the options. Options or stock awards issued
to non-employees and consultants are recorded at their fair value as determined
in accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.
The following table illustrates the effect on net income (loss) and
net income (loss) per share as if the fair-value-based method under SFAS No. 123
had been applied.
Three Month Period Ended June 30,
2003 2002
----------- -----------
Net income (loss) applicable to common stockholders:
As reported $ 2,894,072 $(1,714,502)
Add stock-based employee compensation
expense included in reported net income (loss) 62,445 410,445
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (4,904,851) (5,321,476)
----------- -----------
Pro forma $(1,948,334) $(6,625,533)
=========== ===========
Net income(loss) per common share basic and diluted:
Basic, as reported $ 0.04 $ (0.02)
Basic, pro forma $ (0.02) $ (0.09)
Diluted, as reported $ 0.03 $ (0.02)
Diluted, pro forma $ (0.02) $ (0.09)
12
Six Month Period Ended June 30,
2003 2002
----------- ------------
Net income (loss) applicable to common stockholders:
As reported $ 3,846,535 $ (2,537,742)
Add stock-based employee compensation
expense included in reported net income (loss) 124,204 914,204
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (8,939,513) (10,542,162)
----------- ------------
Pro forma $(4,968,774) $(12,165,700)
=========== ============
Net income(loss) per common share basic and diluted:
Basic, as reported $ 0.05 $ (0.03)
Basic, pro forma $ (0.06) $ (0.16)
Diluted, as reported $ 0.05 $ (0.03)
Diluted, pro forma $ (0.06) $ (0.16)
The pro forma effects on net income (loss) per common share for the
periods ended June 30, 2003 and 2002 may not be representative of the pro forma
effects in future years since compensation cost is allocated on a straight-line
basis over the vesting periods of the grants, which extends beyond the reported
years.
The weighted-average fair value per share was $9.35 and $8.26 for
stock options granted in the six month periods ended June 30, 2003 and 2002,
respectively. The company estimated the fair values of each option grant on
their respective grant dates using the Black-Scholes option pricing model based
on the following assumptions:
Three Month Period Ended June 30,
2003 2002
---- ----
Risk-free interest rate 1.92% 1.98%
Expected stock price volatility 44% 59%
Expected term until exercise (years) 2.53 2.78
Expected dividend yield 0% 0%
Six Month Period Ended June 30,
2003 2002
---- ----
Risk-free interest rate 1.97% 2.00%
Expected stock price volatility 47% 59%
Expected term until exercise (years) 2.68 2.84
Expected dividend yield 0% 0%
13
8. Comprehensive Income(Loss)
--------------------------
Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss) which refers to those revenues, expenses, gains and
losses which are excluded from net income (loss). Other comprehensive income
(loss) includes net unrealized gains and losses on marketable securities
classified as available-for-sale.
Three Month Period Ended
June 30,
--------------------------------
2003 2002
------------ -----------
Net income (loss) $ 2,894,072 $(1,714,502)
Other comprehensive income (loss):
Unrealized holding gains arising
during the period 4,658,605 185,413
Less: reclassification adjustment
for gains included in net
income(loss) (1,701,488) (1,623,784)
----------- -----------
Net unrealized income(loss) on
securities 2,957,117 (1,438,371)
----------- -----------
Total comprehensive income(loss) $ 5,851,189 $(3,152,873)
=========== ===========
Six Month Period Ended
June 30,
--------------------------------
2003 2002
----------- -----------
Net income (loss) $ 3,846,535 $(2,537,742)
Other comprehensive income (loss):
Unrealized holding gains(losses)
arising during the period 6,751,380 (4,322,095)
Less: reclassification adjustment
for gains included in net
income(loss) (4,244,572) (2,778,460)
----------- -----------
Net unrealized income(loss) on
securities 2,506,808 (7,100,555)
----------- -----------
Total comprehensive income(loss) $ 6,353,343 $(9,638,297)
=========== ===========
14
9. Stockholders' Equity
--------------------
Deferred Compensation Expense
Prior to the Company's merger with Signal Pharmaceuticals, Inc.,
Signal recorded an aggregate of approximately $9.4 million of deferred
compensation for stock options granted from 1997 through 2000, representing the
difference between the option exercise price and the estimated fair value of the
underlying stock for financial statement presentation purposes. The deferred
compensation was being amortized over the vesting period of the options, and as
of December 31, 2002, the Company had recorded as expense or reversed the full
amount of the $9.4 million of deferred compensation. Approximately
$348,000 and $790,000 of expense was recorded during the three and six month
periods ended June 30, 2002, respectively. Upon the termination of certain
employees and consultants, the Company reversed approximately $1.1 million of
unamortized deferred compensation relating to their unvested options through
December 2002.
The Company recorded compensation expense(credits) relating to stock
options and warrants issued to consultants, advisors or financial institutions
and other stock-based compensation of approximately $167,000 and $(58,000) for
the three month periods ended June 30, 2003 and 2002, respectively and
approximately $342,000 and $137,000 for the six month periods ended June 30,
2003 and 2002, respectively.
Stock Incentive Plan
At the Company's Annual Meeting of Stockholders on June 10, 2003, the
stockholders of the Company approved an amendment to the 1998 Stock Incentive
Plan (known prior to April 23, 2003 as the 1998 Long-Term Incentive Plan) to
increase the number of shares that may be subject to awards granted thereunder
from 8,500,000 to 12,500,000 and to authorize the award of certain
performance-based awards.
15
10. Segments
--------
Effective with the acquisition of Anthrogenesis on December 31, 2002,
the Company operates in two business segments -human pharmaceuticals and stem
cell therapies. Revenues and income (loss) before taxes by segment, for the
three and six months ended June 30, 2003 were as follows:
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Revenues:
-------------
Human pharmaceuticals $ 66,161,034 $ 114,329,611
Stem cell therapies 1,125,140 2,045,227
------------- -------------
Total $ 67,286,174 $ 116,374,838
============= =============
Income(loss)before taxes:
-------------------------
Human pharmaceuticals $ 6,419,593 $ 10,223,646
Stem cell therapies (3,315,828) (6,032,418)
------------- -------------
Total $ 3,103,765 $ 4,191,228
============= =============
11. Distribution Agreement
----------------------
On March 31, 2003, the Company entered into a distribution and supply
agreement with GlaxoSmithKline ("GSK") in which GSK granted to Celgene the
exclusive right to market, promote, sell and distribute Alkeran (melphalan) in
all dosage forms. Under the terms of the agreement, Celgene will purchase
Alkeran tablets and Alkeran for injection from GSK and sell and distribute the
products in the United States under Celgene's label. The agreement requires
Celgene to purchase certain minimum quantities each year of the initial three
year term of the agreement under a take-or-pay arrangement which aggregates
$56.6 million over such period.
12. Pharmion Agreements
-------------------
In April 2003, the Company entered into an Amendment to the License
Agreement, dated November 16, 2001, with Pharmion Corporation whereby Pharmion
has agreed to provide the Company an aggregate of $8 million in research funding
for the further clinical development of THALOMID(R) during the period commencing
on the date of the agreement and ending December 31, 2005. The research funding
will consist of three installments of $1 million each, payable upon execution of
the agreement, September 30, 2003 and December 31, 2003, four quarterly
installments of $750,000 each in 2004 and four quarterly installments of
$500,000 each in 2005. The Company received the initial payment of $1 million in
April 2003, which was recognized as collaborative agreement revenue.
In April, 2003, the Company entered into a Securities Purchase
Agreement with Pharmion Corporation whereby Celgene purchased for $12 million a
Senior Convertible Promissory Note (the "Note") with a principal amount of $12
million, and a warrant with a five year term to purchase up to 1,454,545 shares
of Pharmion's common stock at a purchase price of $2.75 per share. The Note has
a term of five years with an annual interest rate of 6% compounded
semi-annually. The Note has a conversion price of $2.75 per share of Common
Stock and is automatically convertible into common stock under certain
conditions. The Note is classified under "Other Assets" on the Company's balance
sheet.
16
13. Termination Agreement
---------------------
On June 12, 2003, the Company entered into an agreement with Cell
Pathways, Inc. and OSI Pharmaceuticals to terminate the Co-Promotion agreement
between Cell Pathways and Celgene for the promotion of Gelclair. The effective
date of the agreement is July 1, 2003. Celgene will receive $3.0 million in July
2003 upon the transfer of promotional materials as specified in the agreement,
and an additional $3.0 million on the first anniversary of the effective date
assuming the Company successfully provides the aforementioned transitional
services. The Company will provide additional promotion on the product on a
transitional basis as reasonably requested by OSI through December 31, 2003.
17
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
- ---------------------
Three month period ended June 30, 2003 vs.
Three month period ended June 30, 2002
- --------------------------------------
Total revenue: Our total revenue for the three months ended June 30,
2003 increased approximately 100.0% to $67.3 million compared to $33.6 million
in the same period of 2002. Revenue in 2003 consisted of product sales of
approximately $62.5 million, made up primarily of THALOMID(R) sales of $54.9
million, Alkeran(R) sales of $6.0 million and Focalin(TM) sales of $1.3 million,
Ritalin(R) product royalties of $2.5 million and collaborative agreements and
other revenue of $2.3 million compared with THALOMID(R) sales of $28.4 million,
Focalin(TM) sales of $2.0 million, Ritalin(R) product royalties of $0.7 million
and collaborative agreements and other revenue of $2.6 million in the same
period of 2002. The combination of price increases, increasing use by
oncologists in the treatment of various types of cancer, especially in multiple
myeloma, and the market introduction of two new higher strength formulations
during the first half of 2003 contributed to the 93% growth in THALOMID(R)
sales. The second quarter 2003 marked the first period that we recorded sales of
Alkeran(R) with the commencement of our distribution and supply agreement with
GlaxoSmithKline on March 31, 2003. Focalin(TM) sales were lower due to the
timing of shipments to Novartis for their commercial distribution. The decrease
in collaborative agreement revenue is primarily attributable to the completion
of the amortization of the up-front payment from Novartis Pharma AG related to
the SERM license agreement, partially offset by revenue from our Cellular
Therapeutics division and the Pharmion collaboration agreements. The increase in
royalty income was the result of the marketing approval and subsequent launch in
August 2002 of Ritalin(R) LA, Novartis' long-acting version of Ritalin(R).
Cost of goods sold: Cost of goods sold during the three months ended
June 30, 2003 increased approximately 183% to $11.6 million compared to
approximately $4.1 million in the comparable period in 2002. The cost of goods
sold relates to sales of THALOMID(R), Alkeran(R) and Focalin(TM) in 2003 and to
sales of THALOMID(R) and Focalin(TM) in 2002, and accordingly, the increase in
cost of goods sold is related primarily to the increased volume
18
of THALOMID(R) sales during 2003, in addition to the introduction of Alkeran(R)
sales in 2003 partially offset by lower Focalin(TM) sales compared to the same
period in 2002. Cost of goods sold for the 2003 and 2002 comparable periods
relating to Focalin(TM) sales was lower than the normal cost at standard as some
manufacturing costs incurred prior to Focalin's(TM) approval in November 2001
were expensed as research and development expenses. This favorability will
continue until the quantity previously expensed is completely sold. Cost of
goods sold as a percentage of total product sales was approximately 18.6% during
the three months ended June 30, 2003 compared to approximately 13.5% in the
comparable period in 2002. The increase was primarily related to the
introduction of Alkeran(R) sales, which has a higher cost structure than
THALOMID(R), partially offset by a higher margin on THALOMID(R) sales in 2003
due to price increases, and by the higher 2002 sales of Focalin(TM) which has a
higher cost as a percentage of sales than THALOMID(R).
Research and development expenses: Research and development expenses
consist primarily of salaries and benefits, contractor fees, principally with
contract research organizations to assist in our clinical development programs,
clinical drug supplies for our clinical and preclinical programs as well as
other consumable research supplies, and allocated facilities charges such as
building rent and utilities. Research and development expenses for the second
quarter of 2003 increased 58.8% to $30.5 million from $19.2 million in 2002.
During the second quarter of 2003, approximately $20.6 million was spent on
THALOMID(R) and the IMiDs(R) and SeLCIDs(TM), primarily for preclinical
toxicology, phase I/II and phase III clinical trials and regulatory expenses. We
spent approximately $9.1 million in our gene regulation, target discovery and
agro-chemical programs, and $0.8 million in our stem cell development programs,
primarily for internal headcount related expenses, laboratory supplies and
product development costs. As a percent of total revenue, research and
development expenses were approximately 45% and 57% for the three months ended
June 30, 2003 and 2002, respectively. As a result of increasing revenue,
research and development expense may continue to decrease as a percent of total
revenue although the actual dollar amount will continue to increase as we move
our earlier stage compounds through preclinical and clinical programs. In
general, time to completion would be as follows:
19
Phase I ----- 1-2 years
Phase II ---- 2-3 years
Phase III --- 2-3 years
Due to the significant risks and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
Selling, general and administrative expenses: Selling expenses consist
of salaries and benefits for sales and marketing and customer service personnel,
warehousing and distribution costs, and other commercial expenses to support the
sales force and the education and registration efforts underlying the
S.T.E.P.S.(R) program. General and administrative expenses consist primarily of
salaries and benefits, outside services for legal, insurance, audit, tax and
investor activities and allocations of facilities costs, principally for rent,
utilities and property taxes. Selling, general and administrative expenses
increased by approximately 40.8% for the three months ended June 30, 2003 to
$25.9 million from $18.4 million in the same period in 2002. The increase was
due primarily to the expansion of the sales and marketing organization and
related expenses and an increase in customer service staff. As a percent of
total revenue, selling, general and administrative expenses were approximately
38.5% and 54.7% for the three month periods ended June 30, 2003 and 2002,
respectively.
Interest and other income and expense: Interest and other income for
the second quarter 2003 decreased 29.7% to approximately $4.5 million from $6.4
in the same period in 2002. The decrease was primarily due to lower interest
income as a result of lower interest rates in 2003 on decreased average daily
balances of total cash, cash equivalents and marketable securities.
Interest expense for the second quarter 2003 increased to
approximately $594,000 from approximately $5,000 during the same period in 2002.
The increase was a direct result of the recognition of interest expense due on
the $400 million convertible notes issued on June 3, 2003.
20
Net income (loss): We recorded net income for the three month period
ended June 30, 2003 of $2.9 million compared to a net (loss) of $1.7 million
during the same period of 2002. The net positive change of $4.6 million was the
result of an increase in total revenues of $33.7 million, primarily due to an
increase in THALOMID(R) sales of $26.5 million and first-time Alkeran(R) sales
of $6.0 million, offset by an increase in costs and expenses of $27.2 million,
which includes interest and tax expense, and a decrease in interest and other
income of $1.9 million.
Six month period ended June 30, 2003 vs.
Six month period ended June 30, 2002
- ------------------------------------
Total revenue: Our total revenue for the six months ended June 30,
2003 increased 81% to $116.4 million compared with $64.3 million in the same
period of 2002. Revenue in 2003 consisted of product sales of approximately
$108.3 million, made up primarily of THALOMID(R) sales of $100.5 million,
Alkeran(R) sales of $6.0 million and Focalin(TM) sales of $1.3 million,
Ritalin(R) product royalties of $4.7 million and collaborative agreements and
other revenue of $3.4 million compared with THALOMID(R) sales of $54.5 million,
Focalin(TM) sales of $3.4 million, Ritalin(R) product royalties of $1.4 million
and collaborative agreements and other revenue of $4.9 million in the same
period of 2002. The combination of price increases, increasing use by
oncologists in the treatment of various types of cancer, especially in multiple
myeloma, and the market introduction of two new higher strength formulations
during the first half of 2003 contributed to the 84% growth in THALOMID(R)
sales. The second quarter 2003 marked the first period that we recorded sales of
Alkeran(R) with the commencement of our distribution and supply agreement with
GlaxoSmithKline on March 31, 2003. Focalin(TM) sales were lower due to the
timing of shipments to Novartis for their commercial distribution. The decrease
in collaborative agreement revenue is primarily attributable to the completion
of the amortization of the up-front payment from Novartis Pharma AG related to
the SERM license agreement, partially offset by revenue from our Cellular
Therapeutics division and the Pharmion collaboration agreements. The increase in
royalty income was the result of the marketing approval and subsequent launch in
August 2002 of Ritalin(R) LA, Novartis' long-acting version of Ritalin(R).
21
Cost of goods sold: Cost of goods sold during the first six months of
2003 increased approximately 109% to $16.3 million compared to approximately
$7.8 million in the comparable period in 2002. The cost of goods sold relates to
sales of THALOMID(R), Alkeran(R) and Focalin(TM) in 2003 and to sales of
THALOMID(R) and Focalin(TM) in 2002, and accordingly, the increase in cost of
goods sold is related primarily to the increased volume of THALOMID(R) sales
during 2003, in addition to the introduction of Alkeran(R) sales in 2003
partially offset by lower Focalin(TM) sales compared to the same period in 2002.
Cost of goods sold for the 2003 and 2002 comparable periods relating to
Focalin(TM) sales was lower than the normal cost at standard as some
manufacturing costs incurred prior to Focalin's(TM) approval in November 2001
were expensed as research and development expenses. This favorability will
continue until the quantity previously expensed is completely sold. Cost of
goods sold as a percentage of total product sales was approximately 15.0% during
the first six months of 2003 compared to approximately 13.4% in the comparable
period in 2002. The increase was primarily related to the introduction of
Alkeran(R) sales, which has a higher cost structure than THALOMID(R), partially
offset by a higher margin on THALOMID(R) sales in 2003 due to price increases,
and by the higher 2002 sales of Focalin(TM) which has a higher cost as a
percentage of sales than THALOMID(R).
Research and development expenses: Research and development expenses
for the first six months of 2003 increased 50.4% to $55.2 million from $36.7
million in 2002. The increase was due to the initiation of several large studies
related to our clinical programs in the second half of 2002. During the first
half of 2003, we spent approximately $34.7 million on THALOMID(R) and its follow
on compounds, the IMiDs(R) and SelCIDs(TM), and Focalin(TM), primarily for
preclinical toxicology, phase I/II and phase III clinical trials and regulatory
expenses. We spent approximately $18.8 million in our gene regulation, target
discovery and agro-chemical programs, and $1.7 million in our stem cell
development programs, primarily for internal headcount related expenses,
laboratory supplies and product development costs.
As a percent of total revenue, research and development expenses were
approximately 47% and 57% for the six months ended June 30, 2003 and 2002,
respectively. As a result of increasing revenue, research and development
expense may continue to decrease as a percent of total revenue although the
actual
22
dollar amount will continue to increase as we move our earlier stage compounds
through preclinical and clinical programs.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased by approximately 42% for the six months ended
June 30, 2003 to $49.3 million from $34.7 million in the same period in 2002.
The increase was due primarily to the expansion of the sales and marketing
organization and related expenses and an increase in customer service staff. As
a percent of total revenue, selling, general and administrative expenses were
approximately 42% and 54% for the six month periods ended June 30, 2003 and
2002, respectively.
Interest and other income and expense: Interest and other income for
the first six months of 2003 decreased 25.8% to approximately $9.2 million from
$12.4 in the same period in 2002. The decrease was primarily due to lower
interest income as a result of lower interest rates in 2003 on decreased average
daily balances of total cash, cash equivalents and marketable securities,
partially offset by an increase of $1.4 million in realized gains on marketable
securities available for sale year over year, with $4.2 million realized during
the first half of 2003 compared to $2.8 million for the comparable period in
2002.
Interest expense for the first six months of 2003 increased to
approximately $594,000 from approximately $15,000 during the same period in
2002. The increase was a direct result of the recognition of interest expense
due on the $400 million convertible notes issued on June 3, 2003.
Net income (loss): We recorded net income for the six month period
ended June 30, 2003 of $3.8 million compared to a net (loss) of $2.5 million
during the same period of 2002. The net positive change of $6.3 million was the
result of an increase in total revenues of $52.1 million, primarily due to an
increase in THALOMID(R) sales of $46.0 million, offset by an increase in costs
and expenses of $42.6 million, which includes interest and tax expense, and a
decrease in interest and other income of $3.2 million.
Liquidity and capital resources: Since inception, we have financed our
working capital requirements primarily through product sales, private and public
sales of our debt and equity securities, income earned on the investment of
proceeds from the sale of such securities and revenue from research contracts
and license and milestone payments. Since our initial product launch in the
third quarter of 1998, we have recorded net
23
product sales totaling approximately $404.9 million through June 30, 2003. On
June 3, 2003, we issued convertible notes to institutional investors in the
amount of $400.0 million. Proceeds to the Company from the transaction, net of
debt issue costs, were approximately $388.0 million. We also received $37.5
million from two separate research and license agreements during 2000 and 2001.
Our net working capital at June 30, 2003 increased approximately 156%
to $643.5 million from $251.8 million at December 31, 2002. The significant
increase in working capital was primarily due to higher total cash, cash
equivalents and marketable securities balances as a result of our $400 million
convertible note offering, as well as significant increases in both inventory,
with the addition of Alkeran(R), and trade receivables, due to the increase in
THALOMID(R) sales, partially offset by increases in accounts payable and accrued
expenses.
Cash and cash equivalents increased to $512.9 million in the first six
months of 2003 from $85.5 million at December 31, 2002 while investments in
marketable debt securities decreased to $137.2 million from $175.7 million in
the same period. Total cash, cash equivalents and marketable securities
increased by approximately $388.9 primarily as a result of the $400 million
convertible note offering on June 3, 2003.
We expect that our rate of spending will increase as the result of
research and product development spending, increased clinical trial costs,
increased expenses associated with the regulatory approval process and
commercialization of products currently in development, increased costs related
to the commercialization of THALOMID(R) and increased capital investments. On
February 16, 2000, we completed a public offering of 10,350,000 shares of our
common stock. Proceeds to the Company from the transaction, net of expenses,
were approximately $278.0 million. These funds, combined with the increasing
revenue from sales of Thalomid(R) and various research agreements and
collaborations are expected to provide sufficient capital for our operations for
the foreseeable future.
Contractual Obligations
Our major outstanding contractual obligations relate primarily to our
operating (facilities) leases, our Alkeran(R) purchase commitments and our
convertible note issuance.
24
We lease a 44,500-square foot laboratory and office facility in
Warren, New Jersey, under a lease with an unaffiliated party, which has a term
ending in May 2007 with two five-year renewal options, a 29,000-square foot
facility which has a term ending in July 2010 with two five-year renewal
options, an 11,400-square foot facility with a term ending in June 2005 with a
five-year renewal option and a 7,200-square foot facility with a term ending in
June 2005 with a five-year renewal option. Monthly rental expenses for these
facilities are approximately $87,000. We also lease an 18,000-square foot
laboratory and office facility in North Brunswick, New Jersey, under a lease
with an unaffiliated party that has a term ending in March 2009 with two
five-year renewal options. Monthly rental expenses for this facility are
approximately $40,500.
In December 2001, we entered into another lease to consolidate our San
Diego operations into one building. The 78,200-square foot laboratory and office
facility in San Diego, California was leased from an unaffiliated party and has
a term ending in August 2012. Monthly rental expenses for this facility are
approximately $172,000.
The three leases for the 44,000-square feet of San Diego laboratory
and office space recently vacated by us are coterminous and end in December
2003. On July 3, 2003, one of the three leases was terminated and we received a
lease termination payment from the landlord. Under the remaining two leases, we
reimburse the landlord for taxes, insurance and operating costs associated with
the properties and have an outstanding letter of credit for $150,000 in favor of
the landlord that is fully collateralized by cash. Upon transferring our
operations to the new facility, the 2003 lease obligations and remaining
unamortized leasehold improvements for the vacated properties were taken as a
charge to earnings in the fourth quarter of 2002.
Upon completion of the acquisition of Anthrogenesis on December 31,
2002, we assumed 2 separate leases in the existing facility for office and
laboratory space in Cedar Knolls, New Jersey. The leases are for a combined
space of approximately 15,000 square feet with a monthly rental expense of
approximately $10,000. Both leases have original five year terms with one
expiring in 2004 and one expiring in 2007 with a five year renewal option. In
November 2002, Anthrogenesis entered into a lease for an additional 11,000
square feet of laboratory space in Baton Rouge, Louisiana. The lease has a five
year term with a three year renewal option. Monthly rental
25
expense for this facility is approximately $7,500. In May 2003, we entered into
a third lease in Cedar Knolls for an additional 5,300-square foot facility for
office and laboratory space which has a term ending in May 2008 with a five-year
renewal option. Monthly rental expense for this facility is approximately
$7,000.
On March 31, 2003 we entered into a Distribution and Supply Agreement
with SmithKline Beecham Corporation, d/b/a GlaxoSmithKline ("GSK") in which we
have obtained the exclusive rights to market, promote, sell and distribute GSK's
Alkeran(R) brand products approved by the FDA. Under the terms of the agreement,
we will purchase Alkeran(R) tablets and Alkeran(R) for injection from GSK and
sell and distribute the products in the United States under our marketing label.
The agreement requires us to purchase certain minimum quantities each year of
the initial three year term of the agreement under a take-or-pay arrangement
which aggregates $56.6 million over such period.
On June 3, 2003, we issued to institutional investors unsecured
convertible notes in the amount of $400,000,000. The notes have a five year term
and a coupon rate of 1.75% with interest payable on a semi-annual basis. The
notes have a conversion rate of $48.45 per share, which represents a 50% premium
to the closing price of our common stock on May 28, 2003. The debt issue costs
related to these notes were approximately $12.2 million and are being amortized
over five years. The debt issue costs are classified under "Other Assets" on our
balance sheet. Under the terms of the Purchase Agreement, the note holders can
convert the notes into common shares at any time at the conversion price, and
also have the right to require the Company to redeem the notes prior to maturity
in the event of a "fundamental change", as defined within the Agreement. At June
30, 2003, the notes could be converted into 8,255,920 common shares. We are
required to register the notes and common stock issuable upon conversion with
the Securities and Exchange Commission, and to use reasonable best efforts to
keep it effective for the defined period. We may not merge or transfer
substantially all assets, as defined, unless certain conditions are met.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and
26
results of operations. The SEC indicated that a "critical accounting policy" is
one which is both important to the portrayal of the company's financial
condition and results and requires management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Our significant accounting
policies are fully described in Note 2 to our consolidated financial statements
included in our annual report on Form 10K. Our critical accounting policies are
disclosed in the MD&A section on Form 10-K. There have been no significant
changes with respect to such accounting policies.
Cautionary Statements for Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and
Results of Operations provided above contains certain forward-looking statements
which involve known and unknown risks, delays, uncertainties and other factors
not under our control which may cause actual results, performance and
achievements of Celgene to be materially different from the results, performance
or other expectations implied by these forward-looking statements. These factors
include the results of current or pending clinical trials, actions by the FDA
and other factors detailed herein and in our other filings with the Securities
and Exchange Commission.
27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Our holdings of financial instruments are comprised of commercial paper, U.S.
government and corporate securities. These financial instruments may be
classified as securities available for sale and carried at fair value or held to
maturity and carried at amortized cost depending upon our intent. Securities
classified as available for sale are held for an indefinite period of time and
are intended to be used to meet the ongoing liquidity needs of the Company.
Unrealized gains and losses (which are deemed to be temporary) on available for
sale securities, if any, are reported as a separate component of stockholders'
equity. The cost of all debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. The amortization, along with realized
gains and losses, is included in interest income and other income. We do not use
financial derivatives for investment or trading purposes. As of June 30, 2003,
all securities have been classified as available for sale.
We have established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
may be modified depending on market conditions. Although our investments are
subject to credit risk, our Investment Policy specifies credit quality standards
for our investments and limits the amount of credit exposure from any single
issue, issuer or type of investment. Our investments are also subject to
interest rate risk and will decrease in value if market interest rates increase.
Due to the limited number of foreign currency transactions, our foreign exchange
currency risk is minimal.
28
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
2003:
2008 and
2003 2004 2005 2006 2007 beyond Total Fair Value
-------- -------- -------- -------- -------- -------- -------- ----------
(in Thousands $)
Fixed Rate $ 450 $ -- $ 20,510 $ 59,345 $ 14,500 $ 20,275 $115,080 $125,484
Average Interest
Rate 4.63% -- 8.08% 6.74% 4.71% 7.94% 7.15%
Variable Rate -- -- -- -- -- $ 12,000 $ 12,000 $ 11,750
Average Interest
Rate -- -- -- -- -- 5.72% 8.00%
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 450 $ -- $ 20,510 $ 59,345 $ 14,500 $ 32,275 $127,080 $137,234
-------- -------- -------- -------- -------- -------- -------- --------
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended), based on their evaluation
of these controls and procedures as of June 30, 2003, are effective.
(b) Changes in Internal Controls. There have not been any changes in our
internal control over financial reporting during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
29
PART II - OTHER INFORMATION
Item 1. - None
Item 2. - None
Item 3. - None
Item 4. - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 10, 2003. At this
meeting stockholders of the Company were asked to vote for the election of
directors, to amend and restate the 1998 Stock Incentive Plan (known prior to
April 23, 2003 as the 1998 Long-Term Incentive Plan) to increase the number of
shares that may be subject to awards granted thereunder from 8,500,000 to
12,500,000 and to authorize the award of certain performance-based awards, and
to consider and act upon a proposal to confirm the appointment of KPMG LLP as
the independent certified public accountants of the Company for the current
fiscal year. All nominated directors were elected, the amendment to the 1998
Stock Incentive Plan was approved, and the proposal regarding the appointment of
auditors was approved. The election of directors and the proposals were approved
by the following votes:
A. Election of Directors:
Name Number of Shares
---- -----------------------------------------------
For Withheld Abstained
John W. Jackson 71,394,285 473,018 --
Sol J. Barer, Ph.D. 71,763,995 103,308 --
Robert J. Hugin 71,764,145 103,158 --
Jack L. Bowman 71,274,972 592,331 --
Frank T. Cary 71,274,372 592,931 --
Michael D. Casey 71,488,040 379,263
Arthur Hull Hayes, Jr.,M.D. 71,484,145 383,158 --
Gilla Kaplan, Ph.D. 71,487,890 379,413 --
Richard C.E. Morgan 71,275,272 592,031 --
Walter L. Robb, Ph.D. 71,530,882 336,421 --
B. Amendment of 1998 Stock Incentive Plan:
Number of Shares
-----------------------------------------------
For Against Abstained
--- ------- ---------
60,544,425 11,172,807 150,071
30
C. Appointment of Auditors:
Number of Shares
-----------------------------------------------
For Against Abstained
--- ------- ---------
71,380,327 430,483 56,493
Item 5.-- Other Information:
None
Item 6. (a) Exhibits
10.1 Securities Purchase Agreement dated as of April 8, 2003 between the
Company and Pharmion Corporation in connection with the purchase by the
Company of Pharmion's Senior Convertible Promissory Note in the principal
amount of $12,000,000.
10.2 Pharmion Corporation Senior Convertible Promissory Note.
10.3 Warrant to Purchase an aggregate of 1,454,545 shares of common stock of
Pharmion Corporation.
10.4 Purchase Agreement dated May 28, 2003 between the Company and Morgan
Stanley & Co. Incorporated, as Initial Purchaser, in connection with the
purchase of $400,000,000 principal amount of the Company's 1 3/4%
Convertible Note Due 2008.
10.5 Indenture dated as of June 3, 2003 between the Company and The Bank of
New York, Trustee (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-3 dated August 14, 2003).
10.6 Registration Rights Agreement dated as of June 3, 2003 between the
Company, as Issuer, and Morgan Stanley & Co. Incorporated, as Initial
Purchaser (incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-3 dated August 14, 2003).
10.7 Form of 1 3/4% Convertible Note Due 2008 (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement of Form S-3 dated
August 14, 2003).
31.1 Certification by the Company's Chief Executive Officer dated August 14,
2003.
31.2 Certification by the Company's Chief Financial Officer dated August 14,
2003.
32.1 Certification by the Company's Chief Executive Officer pursuant to 18
U.S.C. Section 1350 dated August 14, 2003.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350 dated August 14, 2003.
(b) Reports on Form 8-K
- Current Report on Form 8-K, Items 5 and 7(c), filed June 5, 2003.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELGENE CORPORATION
DATE August 14, 2003 BY /S/Robert J. Hugin
--------------- --------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE August 14, 2003 BY /s/James R. Swenson
--------------- --------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
32