SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Mark one)

x                              QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                          ..

Commission File No. 0-19312

MEDAREX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

New Jersey	22-2822175
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

707 State Road, Princeton, New Jersey	08540
(Address of Principal Executive Offices)	(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (609) 430-2880

Indicate by check x whether 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  o

Indicate by check x whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer x                   Accelerated filer o              Non-accelerated filer o

Indicate by check x whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No x

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Explanatory Note

In this Form 10-Q/A, Medarex, Inc. (“Medarex” or “the Company”) is restating its consolidated financial statements as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005.  Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q for all periods from 2000 up to and including September 30, 2005 affected by the restatements have not been amended and should not be relied upon.

In May 2006, the Company received a letter from the United States Securities and Exchange Commission, or SEC, informing the Company that the SEC was conducting an informal inquiry into the Company’s stock option grant practices and requesting certain information and documentation related thereto.  The Company also received a grand jury subpoena from the U.S. Attorney’s Office, District of New Jersey, requesting substantially similar information and documentation as the SEC had requested.

In June 2006, the Company announced that the Company’s Board of Directors initiated an investigation (the “Investigation”) of the Company’s stock option grant practices from 1996 through June 30, 2006 (the “relevant period”) and designated one of its independent directors to oversee the Investigation.  In September 2006, the Company announced that the Company’s Board of Directors elected two new members, who were appointed, together with the previously designated director, to a Special Investigation Committee, to complete the Investigation.  The Special Investigation Committee retained outside legal counsel that had not previously been involved with the Company’s stock option plans and the outside legal counsel retained forensic accounting consultants to assist in the Investigation and the analysis of the measurement dates for equity awards during the relevant period.  At the direction of the Special Investigation Committee, the outside legal counsel, with the assistance of forensic accounting consultants, reviewed more than 3.5 million pages of documents and conducted more than fifty witness interviews.  On November 6, 2006, the Company announced the key results of the Investigation, which are set forth in the Company’s Form 8-K filed on that date.

As a result of the findings of the Special Investigation Committee, management has concluded that incorrect measurement dates were used for financial accounting purposes for certain equity awards made in prior periods.  The Company recorded non-cash, stock-based compensation expense and related payroll tax liabilities with regard to past equity awards of approximately $0.6 million and $0.4 million for the three month periods ended March 31, 2006 and 2005, respectively.  The effect of these adjustments was to increase previously reported basic and diluted net loss per share by $0.01 for the three month period ended March 31, 2006.  The adjustments did not impact basic and diluted net loss per share for the three month period ended March 31, 2005.  There was no impact on revenue or net cash used in operating activities for any period as a result of this compensation expense, nor was there any impact on income tax expense for any period given the Company’s sustained history of losses.

As a result of the grants described below, the Company is required to record non-cash compensation expense in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25.  Stock based compensation expense was calculated as the excess of the fair market value of the Company’s stock on the measurement dates less the exercise price of the option multiplied by the number of equity awards granted.   Stock-based compensation is recognized ratably over the vesting period of the equity awards.  Prior to September 2001, the Company’s stock options had a vesting period of 1 year or less.  Beginning in September 2001, the Company changed the vesting period for employee stock option grants to 4 years.

Based upon the information obtained in the Investigation, through July 2002, the Company had a practice, in many instances, of selecting dates for its stock option grants and restricted stock grants as of the date when the stock price was the lowest during the month of grant, without disclosing this practice in its public filings and without properly measuring the compensation expense on a date that the terms of the equity awards were

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finalized.  The terms of these grants are discussed in further detail below.  Subsequent to July 2002, while the practice of selecting dates described above ceased by the Company in response to new legal and regulatory reporting requirements, there were two annual equity grants for rank and file employees for which the measurement dates differ from the grant dates recorded in the Company’s books and records, which the Investigation revealed were primarily a result of administrative delays, with no apparent intent to achieve favorable exercise prices.

The Company analyzed the evidence gathered in the Investigation related to the equity awards including electronic and hard copy documents and witness interviews.  Equity awards were organized into categories based upon recipient and the process by which the equity award was finalized.  Based upon the specific facts and circumstances, the Company applied the controlling accounting standards to determine the proper accounting measurement date with respect to every grant during the period from 1996 through July 2002 within each of the following categories:

Equity Awards Issued From 1996 through July 2002

Officer Annual Equity Awards

Officers received equity awards on an annual basis (although the dates of such awards varied from year to year).  The Company’s Stock Option Committee would approve the number of equity awards to be granted to officers, however, the Stock Option Committee did not select or consider an exercise price when approving the number of annual equity awards during its Stock Option Committee meetings.  The Company’s procedure for establishing the exercise prices of such awards, at the time, would be for certain former officers to select the lowest price for the Company’s common stock during the month of the grant of such annual awards.  The former officers believed they had the discretionary authority to select such exercise prices and this procedure was followed by the Company during the period from 1996 through July 2002. Once the price was selected, the Form 4 filing process was started by the Company and unanimous written consents (“UWCs”) were prepared and circulated for execution by the members of the Stock Option Committee in situations where UWCs were used. UWCs for three grants could not be located in the Company’s files.  The UWCs, which included the exercise prices selected by the former officers, were subsequently approved, in all instances, by the Stock Option Committee when the UWCs were signed, without exception. Since the Company’s practice was to select, at the conclusion of the month in which the grant was designated, the date corresponding to the lowest price for the Company’s stock for the month, the Company has concluded that the most appropriate measurement date is the last business day of the month in which the designated grant date occurred since at that point both the exercise price and the number of equity awards was determinable.

For all officer annual stock option awards, of which there were seven, and one officer stock award, during the relevant period, a total of approximately 3.9 million stock options and/or stock awards were made to officers where the selected grant dates coincided with a date when the stock price was the lowest during the month in which the grant was dated.  Accordingly, the Company determined the total stock based compensation expense, after accounting for forfeitures, associated with these seven officer annual stock option awards and one officer stock award was approximately $8.9 million.

Director Equity Awards

There was no specific pattern regarding equity awards to directors except that each non-executive director received an equity award when he/she joined the Company’s Board of Directors.  In certain circumstances, certain directors received annual equity awards on the date of the Company’s Annual Meeting of Shareholders in connection with previously agreed upon arrangements.  There were four designated grant dates in which a total of approximately 0.8 million stock options were made to directors when the stock price was the lowest

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during the month in which the designated grant occurred.  The Company determined the total stock based compensation expense associated with these four director awards was approximately $5.9 million and is detailed as follows:

·                  Two of the four grants were issued at the same time as the officer annual awards described above and therefore, the Company has concluded that the most appropriate measurement date for these two grants is the last business day of the month in which the designated grant date occurred since at that point both the exercise price and the number of equity awards was determinable consistent with the determination of measurement dates for officer annual awards described above.  The Company determined the total stock based compensation expense associated with these two awards was approximately $0.5 million.

·                  One grant was accounted for using variable accounting because the original grant price was modified when a Form 4 filing date was missed and the grant was cancelled and reissued subsequently at a lower price.  In that situation, Form 4s for two stock option recipients were not filed on time and the Company cancelled and issued new stock options with an exercise price representing the lowest price of the Company’s stock in the following month.  Total variable stock based compensation expense associated with this grant was approximately $0.3 million.

·                  The remaining grant was approved at a meeting of the Company’s Board of Directors where the Board of Directors specified a designated grant date which preceded the date the Board of Directors meeting.  The Company’s stock price on the designated grant date was lower than the Company’s stock price on the date of approval.  The Company used the date of approval by the Company’s Board of Directors as the measurement date resulting in stock based compensation expense of approximately $5.1 million.

Rank and File Employee Annual Equity Awards

Rank and file employees generally received equity awards on an annual basis (although the dates of such awards varied from year to year).  The designated grant dates for such awards were the same as officer annual equity awards with the exception of one date where the grant of annual equity awards to rank and file employees occurred approximately one month after the date of the officers annual equity award.  During the period from 1996 through July 2002, on an annual basis, management would allocate a pool of stock options previously discussed with and agreed to by the Chairman of the Stock Option Committee to individual employees.  Once the allocation of the total awards was finalized by management, a UWC was prepared (which included the selected grant date and exercise price) and forwarded to the Stock Option Committee for execution. Attached to the UWC was a list of the optionees and the number of options allocated by management to the optionees.  The Stock Option Committee rarely discussed individual rank and file employee equity awards, leaving it to management to make such allocations since it was generally understood that the allocation process was delegated to management and it was also generally understood that it was management’s responsibility to perform this function.  The Stock Option Committee did not dispute, challenge or question management’s allocations of any of the annual equity awards to rank and file employees.  The Company has concluded that the appropriate measurement date for rank and file annual equity awards is the UWC creation date, as both the exercise price and the number of equity awards for each employee were known with finality at such date.

For all rank and file annual equity awards, of which there were six, during the relevant period, a total of approximately 3.1 million stock options and/or stock awards were made where the price of the Company’s stock on the accounting measurement date was higher than the award’s exercise price.  Five grants had the same exercise price as the officers annual equity awards described above, however, the measurement date was always later than the measurement date for officer annual equity awards since the process of allocating the pool of options granted to rank and file employees was typically finalized a few weeks after the exercise price was

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determined.  The remaining designated grant had a different exercise price as this equity award occurred approximately one month after the date of the officers annual equity award.  The Company determined the total stock based compensation expense, after accounting for forfeitures, associated with all rank and file annual awards was approximately $15.2 million during the relevant period.

New Hire Employee Equity Awards

Generally, all new employees received an equity award as of the respective employee’s first day of employment.  In one instance, the designated grant date used by the Company for a new officer’s equity award of approximately 0.3 million stock options and/or stock awards was not the same as the measurement date.  In this instance, the designated grant date was the stated effective date of the officer’s employment agreement which preceded the officer’s first day of employment.  Since the controlling accounting literature at the time required compensation cost to be measured as of the officer’s first day of employment, the Company determined that approximately $5.1 million of stock based compensation should have been measured on the date employment began by the officer.  Other than this one instance, there were no equity awards to new hires where the measurement date used by the Company was inappropriate.

Equity Awards Issued Subsequent to July 2002

For the period subsequent to July 2002 through 2005 there were two rank and file annual equity awards where option lists were finalized two days after the designated grant date resulting in stock based compensation expense of approximately $0.6 million.

As part of this restatement, the Company recorded payroll tax liabilities relating to stock options that were incorrectly characterized as incentive stock options or ISOs.  The Company recorded a liability for payroll taxes in the event such grants would not be treated as ISOs under principles of the Internal Revenue Code, or IRC, and the regulations thereunder.  These payroll tax liabilities, which have been classified within research and development expense and general and administrative expense are not material to the consolidated financial statements for any period.

The following tables set forth the effects of the restatement on certain line items within the Company’s consolidated statements of operations for the three month periods ended March 31, 2006 and 2005 and the consolidated balance sheet as of March 31, 2006.  See Note 9 to the consolidated financial statements for impact of this restatement on the Company’s consolidated balance sheet as of March 31, 2006 and the Company’s consolidated statements of operations and cash flows for the three month periods ended March 31, 2006 and 2005. (dollars in thousands, except per share data):

 

 

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For the convenience of the reader, this Form 10-Q/A restates our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 in its entirety.  However, we have only amended disclosures presented in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 as required to reflect the matters described above and accordingly, have amended only the following items:

·                  Part I — Item 1 — Unaudited Consolidated Financial Statements

·                  Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

·                  Part I — Item 4 — Controls and Procedures

·                  Part II — Item 1 — Legal Proceedings

·                  Part II — Item 1A — Risk Factors (to amend and restate our accumulated deficit as of December 31, 2005 and our net loss for the year ended December 31, 2005 and the three month period ended March 31, 2006 which appears in the risk factor entitled “We have incurred large operating losses and we anticipate that these losses will continue”) and to add two Risk Factors entitled, “We are subject to an informal inquiry by the SEC and a grand jury investigation by the United States Attorney’s Office for the District of New Jersey, relating to our stock option granting practices, and those regulatory inquiries may result in charges filed against us and in fines and penalties and “We have civil litigation pending that relates to our stock option granting practices, and we cannot predict the ultimate outcome of this litigation”.

·                  Part II — Item 6 — Exhibits

In addition, this Form 10-Q/A includes updated certifications from our Chief Executive Officer and our Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

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MEDAREX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		March 31,			December 31,
		2006			2005
		(restated)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	105,895		$	90,602
Marketable securities		222,339			260,705
Prepaid expenses and other current assets		30,734			31,608
Total current assets		358,968			382,915
Property, buildings and equipment:
Land		6,795			6,795
Buildings and leasehold improvements		82,933			82,338
Machinery and equipment		54,959			54,130
Furniture and fixtures		4,830			4,553
		149,517			147,816
Less accumulated depreciation and amortization		(65,642		)	(61,832		)
		83,875			85,984
Marketable securities - Genmab		232,511			—
Investment in Genmab		—			3,255
Investments in, and advances to, other partners		7,757			6,400
Segregated cash		2,036			2,033
Other assets		5,864			6,289
Total assets		$	691,011		$	486,876
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	3,408		$	4,939
Accrued liabilities		32,983			29,371
Deferred contract revenue - current		21,078			20,872
Total current liabilities		57,469			55,182
Deferred contract revenue - long-term		103,766			106,827
Other long-term liabilities		2,979			4,032
2.25% Convertible senior notes due May 15, 2011		150,000			150,000
Minority interest		9,983			11,590
Commitments and contingencies		—			—
Shareholders’ equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value; 200,000,000 shares authorized; 112,201,107 shares issued and 112,126,099 outstanding at March 31, 2006 and 111,773,230 shares issued and 111,687,930 outstanding shares outstanding at December 31, 2005		1,122			1,118
Capital in excess of par value		950,693			943,245
Treasury stock, at cost 75,008 shares in 2006 and 85,300 shares in 2005		(189		)	(215		)
Deferred compensation		—			(599		)
Accumulated other comprehensive income (loss)		233,775			(2,351		)
Accumulated deficit		(818,587		)	(781,953		)
Total shareholders’ equity		366,814			159,245
Total liabilities and shareholders’ equity		$	691,011		$	486,876

 

See notes to these consolidated financial statements.

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MEDAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

 

		Three Months Ended
		March 31,
		2006			2005
		(restated)			(restated)
Contract and license revenues		$	8,230		$	5,932
Contract and license revenues from Genmab		392			600
Reimbursement of development costs		4,455			1,979
Total revenues		13,077			8,511
Costs and expenses:
Research and development		45,939			29,395
General and administrative		9,518			5,914
Total costs and expenses		55,457			35,309
Operating loss		(42,380		)	(26,798		)
Equity in net loss of affiliate		(1,037		)	(1,657		)
Interest and dividend income		3,251			2,508
Impairment loss on investments in partners		—			(20,264		)
Interest expense		(1,055		)	(1,075		)
Minority interest - Celldex		1,607			—
Non-cash gain on loss of significant influence in Genmab		3,202			—
Loss before provision for income taxes		(36,412		)	(47,286		)
Provision for income taxes		222			58
Net loss		$	(36,634	)	$	(47,344	)
Basic and diluted net loss per share:		$	(0.33	)	$	(0.44	)
Weighted average number of common shares outstanding
- basic and diluted		112,213			106,999

 

See notes to these consolidated financial statements.

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MEDAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2006			2005
		(restated)			(restated)
Operating activities:
Net loss		$	(36,634	)	$	(47,344	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		3,352			3,161
Amortization		545			1,874
Stock options and awards to employees		4,247			497
Non cash revenue - Diatos		(1,339		)	—
Non-cash gain on loss of significant influence in Genmab		(3,202		)	—
Equity in net loss of Genmab		1,037			1,657
Impairment losses on investments in partners and other assets		—			20,264
Minority interest in net loss		(1,607		)	—
Changes in operating assets and liabilities
Other current assets		874			(4,697		)
Trade accounts payable		(1,531		)	(2,889		)
Accrued liabilities		3,760			(13,677		)
Deferred contract revenue		(2,855		)	29,590
Net cash used in operating activities		(33,353		)	(11,564		)
Investing activities:
Purchase of property and equipment		(1,742		)	(1,721		)
Increase in segregated cash		(3		)	—
Purchase of marketable securities		—			(56,108		)
Sales and maturities of marketable securities		47,295			34,835
Net cash provided by (used in) investing activities		45,550			(22,994		)
Financing activities:
Cash received from sales of securities and exercise of stock options, net		2,635			25,497
Deferred offering costs - Celldex		—			(234		)
Principal payments under capital lease obligations		(5		)	—
Net cash provided by financing activities		2,630			25,263
Effect of exchange rate differences on cash and cash equivalents		466			—
Net increase (decrease) in cash and cash equivalents		15,293			(9,295		)
Cash and cash equivalents at beginning of period		90,602			64,843
Cash and cash equivalents at end of period		$	105,895		$	55,548
Non-cash investing and financing activities:
Unrealized gain on investment in Genmab		$	232,511		$	—
Supplemental disclosures of cash flow information
Cash paid during period for:
Income taxes		$	163		$	—
Interest		$	—		$	2,343

 

See notes to these consolidated financial statements.

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, unless otherwise indicated, except per share data)

 

1.                             Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared from the books and records of Medarex, Inc. and its subsidiaries (collectively, the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the year. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2005.

The Company’s financial statements consolidate all of its subsidiaries, including those that it controls and those in which it holds a majority voting interest.  Medarex currently owns approximately 60% of the outstanding common stock of Celldex Therapeutics, Inc. (“Celldex”) (see Note 4).

Effective February 1, 2006, the Company ceased accounting for its investment in Genmab A/S (“Genmab”) under the equity method of accounting due to a reduction in ownership and a corresponding loss of significant influence (see Note 2).  The Company currently accounts for its investment in Genmab in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

The Company has restated its consolidated financial statements as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005 to correct errors related to stock-based compensation not previously recorded for certain equity awards (see Note 9).

Net Loss per Share

Basic and diluted net loss per share are calculated in accordance with the Financial Accounting Standards Board (“FASB”) SFAS No. 128, Earnings per Share. Basic net loss per share is based upon the number of weighted average shares of common stock outstanding. Diluted net loss per share is based upon the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding. Potential shares of common stock result from the assumed exercise of outstanding stock options as well as the assumed conversion of convertible senior notes. Potentially dilutive securities have been excluded from the computation of diluted net loss per share for all periods presented, as their effect is antidilutive.  A summary of such potentially dilutive securities is as follows:

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Marketable Securities and Long-Term Non-Marketable Investments

Marketable securities consist of fixed income investments with a maturity of greater than three months and other highly liquid investments that can be readily purchased or sold using established markets. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, these investments are classified as available-for-sale and are reported at fair value on the Company’s consolidated balance sheet. Unrealized holding gains and losses are reported within accumulated other comprehensive income as a separate component of shareholders’ equity. Under the Company’s accounting policy, a decline in the fair value of marketable securities is deemed to be “other than temporary” and such marketable securities are generally considered to be impaired if their fair value is less than the Company’s cost basis for more than six months, or some other period in light of the particular facts and circumstances surrounding the investment. If a decline in the fair value of a marketable security below the Company’s cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge.

In addition, the Company has investments in several of its partners whose securities are not publicly traded. These investments are accounted for under the cost basis.  Because these securities are not publicly traded, the Company values these investments by using information acquired from industry trends, management of these companies, such companies’ financial statements, and other external sources.  Specifically, the Company’s determination of any potential impairment of the value of the privately held securities includes an analysis of the following for each company on a periodic basis:  review of interim and year-end financial statements, cash position and overall rate of cash used to support operations, the progress and development of technology and product platform, the per share value of subsequent financings and potential strategic alternatives.  Based on the information acquired through these sources, the Company records an impairment charge when it believes an investment has experienced a decline in value that is considered to be other than temporary.

The Company recorded no impairment charges related to investments in partners whose securities are publicly traded for the three month periods ended March 31, 2006 and 2005.  The Company recorded impairment charges of $0 and $20.3 million in partners whose securities are privately held for the three month periods ended March 31, 2006 and 2005, respectively.  The impairment charge for the three month period ended March 31, 2005 related entirely to the Company’s investment in Immuno-Design Molecules, S.A. (“IDM”).  The amount of the impairment charge was calculated as the difference between (i) the estimated per share value expected to be received by IDM shareholders upon completion of its merger with Epimmune, Inc., and (ii) the Company’s carrying value.  In August 2005, Epimmune and IDM announced the completion of their business combination in which the surviving company, IDM Pharma, Inc. (“IDM Pharma”) became a publicly traded company.  If the Company deems any of its investments to be further impaired at the end of any future period, it

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may incur additional impairment charges on these investments.

Revenue Recognition

The Company receives payments from customers and partners from the sale of antibodies, for licenses to its proprietary technology for product development, for services and from the achievement of product development milestones. These payments are generally non-refundable and are reported as deferred revenue until they are recognizable as revenue. The Company follows the following principles in recognizing revenue:

·                          Fees received from the licensing of the Company’s proprietary technologies for research and development performed by its partners are recognized generally over the term of the respective license period beginning after both the license period has begun and the technology has been delivered.

·                          Fees received for product development services are recognized ratably over the period during which the services are performed.

·                          Milestone payments are recognized as revenue upon the achievement of mutually agreed milestones, provided that (i) the milestone event is substantive and its achievement is not reasonably assured at the inception of the agreement, and (ii) there are no continuing performance obligations associated with the milestone payment.

·                          Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria, including whether the fair value of the delivered items can be determined and whether there is evidence of fair value of the undelivered items. In addition, the consideration is allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units of accounting.

·                          Revenues derived from reimbursements of costs associated with the development of product candidates are recorded in compliance with EITF Issue 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”).  According to the criteria established by EITF 99-19, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company believes it has met the criteria to record revenue for the gross amount of the reimbursements.

·                          The Company sells antibodies primarily to partners in the United States and overseas. Revenue from these sales is recognized when the antibodies are shipped and the Company has no further obligations related to the development of the antibodies.

·                  Grant revenues are recognized as the Company provides the services stipulated in the underlying grant based on the time and materials incurred. Amounts received in advance of services provided are recorded as deferred revenue and amortized as revenue when the services are provided.

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Recently Adopted Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock Issued to Employees.  Statement 123(R) requires a public company measure the cost of equity-based service awards based on the fair value of the award on its grant date.  All share-based payments to employees, including grants of employee stock options, are required to be recognized in the statement of operations based on their fair value.  The Company adopted Statement 123(R) on January 1, 2006 using the modified prospective transition method. (see Note 3).

2.                             Investments in Genmab

As a result of a series of transactions, including an initial public offering by Genmab of its ordinary shares in October 2000, the Company owned an approximately 24.7% interest in Genmab as of December 31, 2004.

During the first quarter of 2005, the remaining basis of the Company’s investment in Genmab (approximately $1.7 million) was reduced to zero and accordingly, recognition of the Company’s share of Genmab’s net losses for the remainder of the first quarter of 2005, the second quarter of 2005 and a portion of the third quarter of 2005 was suspended.

In August 2005, Genmab sold approximately 2.5 million shares of its stock to a corporate partner in connection with a global development and commercialization agreement. As a result of this sale of stock, the Company’s ownership percentage in Genmab was reduced to approximately 22.2%. The difference between the Company’s proportionate share of Genmab’s equity and its carrying value after completion of Genmab’s sale of stock to the corporate partner was approximately $8.0 million and was accounted for in accordance with APB Opinion No.18, The Equity Method of Accounting for Investment in Common Stock, and Staff Accounting Bulletin No. 51, Accounting for Sales of Stock by a Subsidiary. This transaction was accounted for as an increase to capital in excess of par value at the time the transaction was completed.

As a result of the increase in carrying value of the Company’s investment in Genmab of approximately $8.0 million in August 2005 and in accordance with EITF 02-18, Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition, the Company was required to resume the recognition of its share of Genmab’s net losses in the third quarter of 2005.

During the three month period ended March 31, 2006, the Company’s investment in Genmab was adjusted to reflect its share (22.2%) of Genmab’s net loss ($1.0 million) prior to Genmab’s February 1, 2006 private placement.

On February 1, 2006, Genmab completed the private placement of 5.75 million shares of its stock.  As a result of this private placement, the Company’s ownership percentage of Genmab was reduced to approximately 18.9%. As a result of a decrease in the Company’s ownership below 20%, on February 1, 2006 the Company began accounting for its investment in Genmab as a marketable security in accordance with SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities.  The Company’s investment in Genmab is classified as non-current marketable securities in the Company’s March 31, 2006 consolidated balance sheet as the Company does not currently have plans to liquidate its Genmab stock.  Accounting for the Company’s investment in Genmab as a marketable security in accordance with SFAS No. 115 resulted in an unrealized gain of approximately $232.5 million as of March 31, 2006.  Such unrealized gain is also included within

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accumulated other comprehensive income classified within shareholders’ equity in the March 31, 2006 consolidated balance sheet.

In addition, the Company recorded a non-cash gain on loss of significant influence in Genmab for the three month period ended March 31, 2006 of $3.2 million in accordance with FASB Staff Position APB 18-1, Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence (FSP APB 18-1).  As a result of Genmab’s private placement of 5.75 million shares of its stock in February 2006 and the corresponding reduction of our ownership percentage below 20%, our net foreign translation gains of approximately $5.4 million associated with our investment in Genmab and reflected in accumulated other comprehensive income was first offset against the remaining carrying value of our investment in Genmab ($2.2 million) reducing our investment in Genmab to zero with the remaining balance ($3.2 million) recorded as a non-cash gain in the consolidated statement of operations for the three month period ended March 31, 2006.

3.                              Equity-Based Compensation

The Company’s stock awards are governed by its 2005 Equity Incentive Plan, as amended (the “Plan”).  The exercise price of stock options under the Plan is determined by the Compensation and Organization Committee of the Board of Directors of the Company (the “Committee”) and may not be less than the fair market value of a share of the Company’s common stock on the date of grant.  No incentive stock option is exercisable after 10 years from the date of grant. As of March 31, 2006, a total of 3,943,227 shares were available for future grants under the Plan.

Prior to January 1, 2006, the Company accounted for the Plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Other than the amounts discussed in Note 9, no compensation expense was recognized in the Statement of Operations for the years ended December 31, 2005 or 2004 related to stock option grants, as all options granted under the Plan had an exercise price equal to the fair market value of the underlying common stock on the grant date.  Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method.  Under this transition method, compensation cost recognized in the first quarter of 2006 includes:  (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).  Results for prior periods have not been restated as a result of the adoption of Statement 123(R).

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s net loss for the three month period ended March 31, 2006 is approximately $4.2 million higher, or $0.04 per share, than it would have been had the Company continued to account for share-based compensation under APB Opinion No. 25.  Basic and diluted loss per share for the three month period ended March 31, 2006 would have been $(0.29)  if the Company had not adopted Statement 123(R), as compared to reported basic and diluted loss per share of $(0.33).  The total stock-based compensation cost relating to Statement 123(R) for the three month period ended March 31, 2006 has been included in the consolidated statement of operations with research and development expenses ($2.3

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million) and general and administrative expenses ($1.9 million) in accordance with Staff Accounting Bulletin (“SAB”) No. 107.

The following summarizes all stock option transactions for the Company under the Plan for the period from January 1, 2006 through March 31, 2006.

 

		Common Stock Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at beginning of period		16,803,728		$	8.47
Granted		179,368		$	14.38
Exercised		(427,877	)	$	6.16
Canceled		(41,510	)	$	8.82
Outstanding at end of period		16,513,709		$	8.60		7.1 years		$	92,799
Exercisable at end of period		9,843,858		$	8.84		6.0 years		$	59,405
Vested and unvested expected to vest at March 31, 2006		16,046,819		$	8.75		7.1 years		$	91,778

 

The weighted-average grant-date fair value of options granted during the three month periods ended March 31, 2006 and 2005 were $10.64 and $8.08, respectively.  The aggregate intrinsic value of options exercised during these same periods was $3.4 million and $0.9 million, respectively.  The grant-date fair value of shares which vested during the three month periods ended March 31, 2006 and 2005 was $5.8 million and $5.7 million, respectively.  Cash proceeds from stock options exercised during the three month periods ended March 31, 2006 and 2005 totaled $2.6 million and $0.5 million, respectively.

The fair value of each option grant is estimated using the Black-Scholes option pricing method.  The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period (4 years).  Use of a valuation model requires management to make certain assumptions with respect to selected model inputs.  Expected volatility was calculated based on the historical volatility of the Company’s common stock.  The average expected life was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior.  The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed on the date of grant.  Forfeitures are estimated based on voluntary termination behavior, as well as an analysis of actual option forfeitures.  The weighted average assumptions used in the Black-Scholes option pricing model are as follows:

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As of March 31, 2006, the total unrecognized compensation cost related to non-vested stock options was approximately $30.4 million.  This cost is expected to be recognized over a weighted average period of 1.4 years.

Fair Value Disclosures — Prior to Adopting SFAS 123(R)

Prior to January 1, 2006, the Company accounted for stock-based compensation plans in accordance with the provisions of APB Option No. 25, as permitted by SFAS No. 123, and except for the options discussed in Note 9, accordingly did not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price at the date of grant.  Had the fair value based method as prescribed by SFAS No. 123 been applied by the Company, the effect on net loss and loss per share for the first quarter of 2005 would have been as follows:

 

		Three Months Ended March 31, 2005
		(restated)
Net loss, as reported		$	(47,344	)
Add: Non-cash employee compensation expense		497
Less: Total stock-based employee compensation expense determined under fair value method		(3,683		)
Net loss, pro forma		$	(50,530	)
Loss per share:
Basic and diluted, as reported		$	(0.44	)
Basic and diluted, pro forma		$	(0.47	)

 

Deferred Compensation

The Company maintains deferred compensation programs, under which each of the Company’s executive officers elected to have a portion of his 2005, 2004 and 2003 bonuses, which were otherwise payable in cash, converted to restricted stock units representing shares of the Company’s common stock. Participants in the deferred compensation programs could elect to defer up to 50% of their respective bonuses. The number of restricted stock units awarded upon such conversion was determined by dividing (i) the amount of the bonus to be converted by (ii) the fair market value of the Company’s common stock on the grant date. Participants in the deferred compensation programs elected to defer receipt of the common stock portion of their bonuses until the

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earlier of three years from the grant date or the participant’s termination from the Company. The bonus portion deferred by each of the participants is matched on a 1:1 basis by the Company and 25% of the match vested as of the respective grant dates. So long as a participant remains employed by the Company, an additional 25% of the Company’s matching contribution vests on each anniversary of the respective grant dates for the next three years. All benefits under each of the deferred compensation programs are distributed in separate payments and will be paid exclusively in the form of shares of the Company’s common stock. The Company’s matching contribution was approximately $0.1 million and $0.1 million for the three month period ended March 31, 2006 and 2005, respectively.

4.                              Celldex Therapeutics, Inc.

In March 2004, the Company assigned or licensed to Celldex certain intellectual property related to the Company’s vaccine technology, including the rights to MDX-1307, one of the Company’s product candidates for the treatment of cancer, as well as the Investigational New Drug Application (“IND”) associated with this product candidate which became effective in February 2004.

In order to complement its technology and its internal clinical pipeline, in October 2005, Celldex completed the acquisition of all of the issued and outstanding shares of capital stock of Lorantis Limited (“Lorantis”), a privately held biotechnology company based in Cambridge, U.K. and substantially all of the assets of Alteris Therapeutics, Inc. (“Alteris”), a privately held biotechnology company based in Philadelphia, Pennsylvania.

The purchase price of Lorantis consisted of 6.8 million shares of Celldex Class A common stock (valued at $34.0 million).

The purchase price for substantially all of the Alteris assets consisted of 1.2 million shares of Celldex common stock (valued at $6.0 million) and approximately $1.6 million in cash.  Celldex may be required to pay Alteris up to $5.0 million upon obtaining the first approval for commercial sale of an EGFRvIII product.  In addition, Celldex may be required to pay an amount equal to 20% of any upfront fees or milestone payments received from a certain unrelated third-party licensee, in the event that within 12 months of the closing, Celldex enters into a license agreement with such third party for any EGFRvIII-derived product developed using the technology acquired from Alteris.  As a result of the Lorantis stock acquisition and the Alteris asset acquisition, the Company’s ownership percentage of Celldex was reduced from 100% to approximately 60%.

5.               Bristol-Myers Squibb Collaboration

In January 2005, the Company announced the closing of a collaboration and co-promotion agreement and a related securities purchase agreement with Bristol-Myers Squibb Company (“BMS”), pursuant to which the Company and BMS each granted the other certain intellectual property licenses and product rights on a worldwide basis in order to enable the parties to collaborate in research and development of certain antibody-based product candidates for the treatment of cancer and other diseases, and, in the event that further development work is successful, to commercialize any resulting products. In particular, the collaboration includes a grant by the Company to BMS of a license to commercialize ipilimumab, a fully human antibody product developed using the Company’s UltiMAb Human Antibody Development System®, that is antagonistic to cytotoxic T-lymphocyte antigen 4 (CTLA-4). Ipilimumab is currently under investigation for the treatment of a broad range of cancers. The collaboration also includes the grant by the Company to BMS of a sub-license to

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MDX-1379, a gp100 peptide vaccine, for use with ipilimumab for the treatment of metastatic melanoma.

As part of the collaboration, the two companies committed to an initial multi-year budget of approximately $192.0 million to fund the development of ipilimumab as a potential treatment for a broad range of cancers. BMS is responsible for 65% of all development costs related to clinical trials intended to support regulatory approval in both the United States and Europe, with the remaining 35% to be paid by the Company. The parties will share equally the costs of any clinical trials of product candidates intended solely for regulatory approval in the United States, and BMS will be fully responsible for all development efforts that relate solely to regulatory approval in Europe and other parts of the world. Approximately $3.3 million and $2.0 million of the Company’s revenue for the three month periods ended March 31, 2006 and 2005 represented the reimbursement of the Company’s costs associated with the development of ipilimumab recorded in compliance with EITF 99-19.  The Company’s share of the BMS development costs for the three month periods ended March 31, 2006 and 2005 was approximately $3.5 million and $0.2 million, respectively.

Under the terms of the collaboration, the Company could receive up to $205.0 million from BMS if all regulatory milestones are met, plus up to an additional $275.0 million in sales-related milestones. The Company will also have the option to co-promote any products in the United States, and, if the Company elects to exercise this option and has participated in the funding of the applicable Phase III clinical trial(s), the Company will receive 45% of any profits from commercial sales in the U.S. In the event the Company chooses not to exercise its co-promotion rights, BMS will have exclusive commercial rights in the United States and will pay the Company royalties on any commercial sales. Outside the United States, BMS will have exclusive commercial rights and will pay the Company royalties on any commercial sales.

Pursuant to these agreements, BMS made an initial cash payment to the Company of $25.0 million, which has been recorded as deferred revenue. In addition, BMS purchased a total of 2,879,223 unregistered shares of the Company’s common stock at a purchase price equal to $8.6829 per share for an aggregate purchase price of $25.0 million. The purchase price represented a small premium to the market price on the date the Company signed the collaboration agreement.

The Company determined that all elements under the collaboration and co-promotion agreement should be accounted for as a single unit of accounting under EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.  In accordance with SAB No. 104 (Topic 13, Revenue Recognition), deferral of revenue is appropriate regarding nonrefundable, upfront fees received in single unit of accounting arrangements.  As the Company has continuing obligations under the collaboration and co-promotion agreement, and as significant development risk remains, the Company recorded the $25.0 million upfront fee as deferred revenue and the Company is recognizing this amount over the enforceable term of the technology sublicensed to BMS under the collaboration and co-promotion agreement of approximately 11 years, as well as the technology and know-how to be delivered in connection therewith.

The BMS collaboration became effective in January 2005, and unless terminated earlier, will continue for as long as development and/or commercialization of any collaboration product continues.  BMS, however, may terminate the collaboration on a country-by-country basis at any time and, under certain conditions, on a product-by-product basis, resulting in the return of all rights to the Company with respect to such country and/or product.  In addition, BMS may terminate the Company’s co-promotion rights in the U.S. in the event that the Company fails to satisfy certain performance criteria.  The Company may terminate the BMS collaboration in the event of certain specified material breaches by BMS (in which case product rights would revert to the

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Company), and the Company may terminate BMS’s co-promotion rights in the event that BMS fails to satisfy certain performance criteria.

6.                             Contingencies

In August 2004, the Company completed the acquisition of all of the outstanding capital stock not already owned by the Company of Ability Biomedical Corporation (“Ability Biomedical”). Pursuant to this transaction, the Company acquired Ability Biomedical’s intellectual property related to IP-10, a protein believed to be associated with a variety of immune disorders, including multiple sclerosis, rheumatoid arthritis, inflammatory bowel disease, chronic obstructive pulmonary disease and type I diabetes.

Upon achievement of certain development milestones with respect to the Company’s anti-IP-10 antibody program, but no later than September 4, 2007, the Company may be required to pay the former shareholders of Ability Biomedical approximately $3.68 million in cash and/or common stock, subject to fluctuations in currency exchange rates. In lieu of such additional payment, the Company also has the option to revert to the original joint collaboration agreement with the former shareholders of Ability Biomedical whereby each party would be responsible for 50% of the costs associated with the anti-IP-10 antibody program.

Effective September 4, 2002, the Company entered into a Collaboration and License Agreement with Kirin which provides for the exchange by Kirin Brewery Co., Ltd. (“Kirin”) and the Company of certain cross-licenses for each other’s technology for the development and commercialization of human antibody products. The Collaboration and License Agreement supersedes a previous binding letter of intent. Pursuant to the letter of intent, the Company and Kirin developed the KM-Mouse®, a unique crossbred mouse which combines the traits of the Company’s HuMAb-Mouse® with Kirin’s TC Mouse™. Under the Collaboration and License Agreement, the Company and Kirin are exchanging cross-licenses with respect to the KM-Mouse and other antibody-generating mice. In addition, each of the cross-licenses granted under the Collaboration and License Agreement are subject to certain license, milestone and royalty payments by each party to the other.

Through March 31, 2006, the Company has not made any milestone payments to Kirin. However, approximately $2.8 million has been paid to Kirin as of March 31, 2006 representing a payment due Kirin as a result of the Company’s collaboration with Pfizer. Based on a total of three products the Company is developing, which use or the Company believes may use Kirin technology and that (i) are currently in clinical trials, or (ii) the Company anticipates may enter clinical trials through the end of 2007, the Company may be required to make milestone payments to Kirin aggregating up to approximately $12.75 million with respect to such products, or a maximum of approximately $4.25 million per product. The Company’s future milestone payment obligations to Kirin may or may not be triggered, and may vary in size, depending on a number of variables, almost all of which are currently unknown, including the following:

·       whether or not a decision is made to request a license from Kirin;

·       the type of license requested (research or commercial);

·       the success and timing of development efforts and clinical trials of product candidates covered by any such licenses;

·       the type of product developed, (payment obligations differ depending on whether a product is an ex vivo therapeutic, in vivo therapeutic, research reagent or diagnostic); and

 

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·       other financial provisions of the Kirin agreement that provide for variations in fee levels and netting of certain payments over specified periods of time that may impact the total amount potentially payable to Kirin for any particular license fee or milestone payment.

Whether the Company may be obligated to make milestone payments to Kirin in the future is subject to the success of its efforts with respect to products the Company is developing that utilize the Kirin technology and, accordingly, is inherently uncertain.

Unless terminated earlier, the Collaboration and License Agreement expires on December 31, 2014. The Collaboration and License Agreement can be terminated by either party in the event of a material breach by the other party if the breach is not cured during a specified cure period. In addition, either party may terminate any commercial license with respect to a specific biologic target granted to it by the other party under the agreement at any time.

The Company has entered into a number of other agreements that contain in-licenses of third-party technology (in addition to Kirin) which may be used together with the Company’s own platform technologies for the generation, development and/or manufacture of its antibody products. In addition, the Company has entered into other third-party agreements that contain in-licenses associated with antibody products that target specific antigens. Many of these agreements contain milestones payments that are due with respect to products using/targeting the licensed technology/antigen only if and when certain specified pre-commercialization events occur. Not all of the Company’s products currently under development trigger such milestone payments. Through March 31, 2006, the Company had made milestone payments under these agreements of approximately $0.3 million. In addition, under the agreements the Company currently has in place (other than with Kirin), based on a total of nine products the Company is developing for which milestones are potentially due and that (i) are now in clinical trials, or (ii) which the Company anticipates may enter clinical trials before the end of 2007, the Company may be obligated to make future milestone payments aggregating up to approximately $59.9 million with respect to such products. In general, potential milestone payments for antibody products may or may not be triggered under these licenses, and may vary in size, depending on a number of variables, almost all of which are currently uncertain. Typically, the events that trigger these milestone payments per product include:

·       submission of IND(s) or foreign equivalents;

·       commencement of Phase I, Phase II and/or Phase III clinical trials or foreign equivalents;

·       submission of BLA(s) or foreign equivalents; and

·       receipt of marketing approval(s) to sell products in a particular country or region.

 

In addition, the licenses above may trigger royalty payments in connection with the commercialization of certain of the Company’s products. Whether the Company will be obligated to make milestone or royalty payments in the future is subject to the success of its product development efforts and, accordingly, is inherently uncertain.

In the ordinary course of business, the Company is at times subject to various legal proceedings. The Company does not believe that any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on its operations or financial condition.

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7.                             Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes changes in the fair value of the Company’s marketable securities and the foreign exchange translation primarily relates to the Company’s loss of significant influence in Genmab and the related impact on changes in unrealized gain in the statement of changes in shareholders’ equity. The following table sets forth the components of comprehensive income (loss):

 

 

Accounting for the Company’s investment in Genmab as a marketable security in accordance with SFAS No. 115 has resulted in an unrealized gain of approximately $232.5 million as of March 31, 2006.  Such unrealized gain is also included within accumulated other comprehensive income classified within shareholders’ equity in the March 31, 2006 consolidated balance sheet.

8.             Segment Information

The Company is a biopharmaceutical company focused on the discovery, development and potential commercialization of fully human antibody-based therapeutic products. The operations of the Company and its subsidiaries constitute one business segment.

Revenue from customers representing 10% or more of total revenues is as follows:

 

 

9. Restatement of Consolidated Financial Statements

Subsequent to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, the Company concluded that certain of its previously issued financial statements should be restated to correct errors related to stock-based compensation not previously recorded for certain equity grants. Accordingly, for the years 1996 through 2002, the Company has corrected these errors by restating its beginning accumulated deficit as of January 1, 2003 and has restated its consolidated financial statements as of December 31, 2005 and 2004, and for the years ended December 31, 2005, 2004 and 2003 (see the Company’s

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amended Annual Report on Form 10-K/A for details of the restatement and impact on annual periods).  In addition, the Company has also restated its consolidated balance sheet as of March 31, 2006 and its consolidated statements of operations and cash flows for the three month periods ended March 31, 2006 and 2005 in order to correct errors related to stock-based compensation in this Form 10-Q/A.  There was no impact on revenue or net cash used in operating activities for any period as a result of this compensation expense, nor was there any impact on income tax expense for any period given the Company’s sustained history of losses.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q for all periods from 2000 up to and including September 30, 2005 affected by the restatements have not been amended and should not be relied upon.

In May 2006, the Company received a letter from the SEC, informing the Company that the SEC was conducting an informal inquiry into the Company’s stock option grant practices and requesting certain information and documentation related thereto.  The Company also received a grand jury subpoena from the U.S. Attorney’s Office, District of New Jersey, requesting substantially similar information and documentation as the SEC had requested.

In June 2006, the Company’s Board of Directors initiated an investigation (the “Investigation”) of the Company’s stock option grant practices from 1996 through June 30, 2006 (the “relevant period”) and designated one of its independent directors to oversee the Investigation.  In September 2006, the Company’s Board of Directors elected two new members, who were appointed, together with the previously designated director, to a Special Investigation Committee, to complete the Investigation.  The Special Investigation Committee retained outside legal counsel that had not previously been involved with the Company’s stock option plans and the outside legal counsel retained forensic accounting consultants to assist in the Investigation and the analysis of the measurement dates for equity awards during the relevant period.

As a result of the findings of the Special Investigation Committee, management has concluded that incorrect measurement dates were used for financial accounting purposes for certain equity awards made in prior periods.  The Company recorded non-cash, stock based compensation expense and related payroll tax liabilities with regard to past equity awards of approximately $0.6 million and $0.4 million for the three month periods ended March 31, 2006 and 2005, respectively.  The effect of these adjustments was to increase previously reported basic and diluted net loss per share by $0.01 for the three month period ended March 31, 2006.  The adjustments did not impact basic and diluted net loss per share for the three month period ended March 31, 2005.

As a result of the grants described below, the Company is required to record non-cash compensation expense in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25.  Stock based compensation expense was calculated as the excess of the fair market value of the Company’s stock on the measurement dates less the exercise price of the option multiplied by the number of equity awards granted.   Stock-based compensation is recognized ratably over the vesting period of the equity awards.  Prior to September 2001, the Company’s stock options had a vesting period of 1 year or less.  Beginning in September 2001, the Company changed the vesting period for employee stock option grants to 4 years.

Based upon the information obtained in the Investigation, through July 2002, the Company had a practice, in many instances, of selecting dates for its stock option grants and restricted stock grants as of the date when the stock price was the lowest during the month of grant, without disclosing this practice in its public filings and

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without properly measuring the compensation expense on a date that the terms of the equity awards were finalized.  The terms of these grants are discussed in further detail below.  Subsequent to July 2002, while the practice of selecting dates as described above ceased by the Company in response to new legal and regulatory reporting requirements, there were two annual equity grants for rank and file employees for which the measurement dates differ from the grant dates recorded in the Company’s books and records, which the Investigation revealed were primarily a result of administrative delays, with no apparent intent to achieve favorable exercise prices.

The Company analyzed the evidence gathered in the Investigation related to the equity awards including electronic and hard copy documents and interviews.  Equity awards were organized into categories based upon recipient and the process by which the equity award was finalized.  Based upon the specific facts and circumstances, the Company applied the controlling accounting standards to determine the proper accounting measurement date with respect to every grant during the period from 1996 through July 2002 within each of the following categories:

Equity Awards Issued From 1996 through July 2002

Officer Annual Equity Awards

Officers received equity awards on an annual basis (although the dates of such awards varied from year to year).  The Company’s Stock Option Committee would approve the number of equity awards to be granted to officers, however, the Stock Option Committee did not select or consider an exercise price when approving the number of annual equity awards during its Stock Option Committee meetings.  The Company’s procedure for establishing the exercise prices of such awards, at the time, would be for certain former officers to select the lowest price for the Company’s common stock during the month of the grant of such annual awards.  The former officers believed they had the discretionary authority to select such exercise prices and this procedure was followed by the Company during the period from 1996 through July 2002. Once the price was selected, the Form 4 filing process was started by the Company and unanimous written consents (“UWCs”) were prepared and circulated for execution by the members of the Stock Option Committee in situations where UWCs were used. UWCs for three grants could not be located in the Company’s files.  The UWCs, which included the exercise prices selected by the former officers, were subsequently approved, in all instances, by the Stock Option Committee when the UWCs were signed, without exception. Since the Company’s practice was to select, at the conclusion of the month in which the grant was designated, the date corresponding to the lowest price for the Company’s stock for the month, the Company has concluded that the most appropriate measurement date is the last business day of the month in which the designated grant date occurred since at that point both the exercise price and the number of equity awards was determinable.

For all officer annual stock option awards, of which there were seven, and one officer stock award, during the relevant period, a total of approximately 3.9 million stock options and/or stock awards were made to officers where the selected grant dates coincided with a date when the stock price was the lowest during the month in which the grant was dated.  Accordingly, the Company determined the total stock based compensation expense, after accounting for forfeitures, associated with these seven officer annual stock option awards and one officer stock award was approximately $8.9 million.

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Director Equity Awards

There was no specific pattern regarding equity awards to directors except that each non-executive director received an equity award when he/she joined the Company’s Board of Directors.  In certain circumstances, certain directors received annual equity awards on the date of the Company’s Annual Meeting of Shareholders in connection with previously agreed upon arrangements.  There were four designated grant dates in which a total of approximately 0.8 million stock options were made to directors when the stock price was the lowest during the month in which the designated grant occurred.  The Company determined the total stock based compensation expense associated with these four director awards was approximately $5.9 million and is broken down as follows:

·                  Two of the four grants were issued at the same time as the officer annual awards described above and therefore, the Company has concluded that the most appropriate measurement date for these two grants is the last business day of the month in which the designated grant date occurred since at that point both the exercise price and the number of equity awards was determinable consistent with the determination of measurement dates for officer annual awards described above.  The Company determined the total stock based compensation expense associated with these two awards was approximately $0.5 million.

·                  One grant was accounted for using variable accounting because the original grant price was modified when a Form 4 filing date was missed and the grant was cancelled and reissued subsequently at a lower price.  In that situation, Form 4s for the two stock option recipients were not filed on time and the Company cancelled and issued new stock options with an exercise price representing the lowest price of the Company’s common stock in the following month.  Total variable stock based compensation expense associated with this grant was approximately $0.3 million.

·                  The remaining grant was approved at a meeting of the Company’s Board of Directors where the Board of Directors specified a designated grant date that preceded the date of the Board of Directors meeting.  The Company’s stock price on the designated grant date was lower than the Company’s stock price on the date of approval.  The Company used the date of approval by the Company’s Board of Directors as the measurement date resulting in stock based compensation expense of approximately $5.1 million.

Rank and File Employee Annual Equity Awards

Rank and file employees generally received equity awards on an annual basis (although the dates of such awards varied from year to year).  The designated grant dates for such awards were the same as officer annual equity awards with the exception of one date where the grant of annual equity awards to rank and file employees occurred approximately one month after the date of the officers annual equity award.  During the period from 1996 through July 2002, on an annual basis, management would allocate a pool of stock options previously discussed with and agreed to by the Chairman of the Stock Option Committee to individual employees.  Once the allocation of the total awards was finalized by management, a UWC was prepared (which included the selected grant date and exercise price) and forwarded to the Stock Option Committee for execution. Attached to the UWC was a list of the optionees and the number of options allocated by management to the optionees.  The Stock Option Committee rarely discussed individual rank and file employee equity awards, leaving it to management to make such allocations since it was generally understood that the allocation process was delegated to management and it was also generally understood that it was management’s

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responsibility to perform this function.  The Stock Option Committee did not dispute, challenge or question management’s allocations of any of the annual equity awards to rank and file employees.  The Company has concluded that the appropriate measurement date for rank and file annual equity awards is the UWC creation date as both the exercise price and the number of equity awards for each employee were known with finality at such date.

For all rank and file annual equity awards, of which there were six, during the relevant period, a total of approximately 3.1 million stock options and/or stock awards were made where the price of the Company’s stock on the accounting measurement date was higher than the award’s exercise price.  Five grants had the same exercise price as the officers annual equity awards described above, however, the measurement date was always later than the measurement date for officer annual equity awards since the process of allocating the pool of options granted to rank and file employees was typically finalized a few weeks after the exercise price was determined.  The remaining designated grant had a different exercise price as this equity award occurred approximately one month after the date of the officers annual equity award.  The Company determined the total stock based compensation expense, after accounting for forfeitures, associated with all rank and file annual awards was approximately $15.2 million during the relevant period.

New Hire Employee Equity Awards

Generally, all new employees received an equity award as of the respective employee’s first day of employment.  In one instance, the designated grant date used by the Company for a new officer’s equity award of approximately 0.3 million stock options and/or stock awards was not the same as the measurement date.  In this instance, the grant date was the stated effective date of the officer’s employment agreement which preceded the officer’s first day of employment.  Since the controlling accounting literature at the time required compensation cost to be measured as of the officer’s first day of employment, the Company determined that approximately $5.1 million of stock-based compensation should have been measured on the date employment began by the officer.  Other than this one instance, there were no equity awards to new hires where the measurement date used by the Company was inappropriate.

Equity Awards Issued Subsequent to July 2002

For the period subsequent to July 2002 through 2005 there were two rank and file annual equity awards where option lists were finalized two days after the designated grant date resulting in stock based compensation expense of approximately $0.6 million.

As part of this restatement, the Company recorded payroll tax liabilities relating to stock options that were incorrectly characterized as incentive stock options, or ISOs.  The Company recorded a liability for payroll taxes in the event such grants would not be treated as ISOs under principles of the Internal Revenue Code, or IRC, and the regulations thereunder.  These payroll tax liabilities, which have been classified within research and development expense and general and administrative expense are not material to the consolidated financial statements for any period.

The following set forth the effects of the restatement on the Company’s consolidated balance sheet as of March 31, 2006 and the Company’s consolidated statements of operations and consolidated statements of cash flows for the three month periods ended March 31, 2006 and 2005:

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		March 31, 2006
		(Unaudited)
		As Reported			Adjustments			As Restated
ASSETS
Current assets
Cash and cash equivalents		$	105,895					$	105,895
Marketable securities		222,339						222,339
Prepaid expenses and other current assets		30,734						30,734
Total current assets		358,968						358,968
Property, buildings and equipment:
Land		6,795						6,795
Buildings and leasehold improvements		82,933						82,933
Machinery and equipment		54,959						54,959
Furniture and fixtures		4,830						4,830
		149,517						149,517
Less: accumulated depreciation and amortization		(65,642		)				(65,642		)
		83,875						83,875
Marketable securities - Genmab		232,511						232,511
Investments in, and advances to, other partners		7,757						7,757
Segregated cash		2,036						2,036
Other assets		5,864						5,864
Total assets		$	691,011		—			$	691,011
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	3,408					$	3,408
Accrued liabilities		32,834		(1)	$	149		32,983
Deferred contract revenue - current		21,078						21,078
Total current liabilities		57,320			149			57,469
Deferred contract revenue — long-term		103,766						103,766
Other long-term liabilities		2,979						2,979
2.25% Convertible senior notes due May 15, 2011		150,000						150,000
Minority interest		9,983						9,983
Commitments and contingencies		—						—
Shareholders’ equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized; none issued and outstanding		—						—
Common stock. $.01 par value; 200,000,000 shares authorized; 111,773,230 shares issued and 111,687,930 shares outstanding at December 31, 2005 and 85,865,333 shares issued and 85,673,693 shares outstanding at December 31, 2004		1,122						1,122
Capital in excess of par value		950,225		(1)	468			950,693
Treasury stock, at cost, 85,300 shares in 2005 and 191,640 shares in 2004		(189		)				(189		)
Accumulated other comprehensive income		233,775						233,775
Accumulated deficit		(817,970		)(1)	(617		)	(818,587		)
Total shareholders’ equity		366,963		(1)	(149		)	366,814
Total liabilities and shareholders’ equity		$	691,011		—			$	691,011

(1)          March 31, 2006 as reported amounts for accrued liabilities, capital in excess of par value, accumulated deficit and total shareholders’ equity include adjustments for the years 1996 through 2005.

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		Three Months Ended March 31, 2006
		As Reported			Adjustments			As Restated
Contract and license revenues		$	8,230					$	8,230
Contract and license revenues from Genmab		392						392
Reimbursement of development costs		4,455						4,455
Total revenues		13,077						13,077
Costs and expenses:
Research and development		45,607			332			45,939
General and administrative		9,233			285			9,518
Total costs and expenses		54,840			617			55,457
Operating loss		(41,763		)	(617		)	(42,380		)
Equity in net loss of affiliate		(1,037		)				(1,037		)
Interest and dividend income		3,251						3,251
Impairment loss on investments in partners		—						—
Interest expense		(1,055		)				(1,055		)
Minority interest—Celldex		1,607						1,607
Non-cash gain on loss of significant influence in Genmab		3,202						3,202
Loss before provision for income taxes		(35,795		)	(617		)	(36,412		)
Provision for income taxes		222						222
Net loss		$	(36,017	)	$	(617	)	$	(36,634	)
Basic and diluted net loss per share:		$	(0.32	)	$	(0.01	)	$	(0.33	)
Weighted average common shares outstanding
—basic and diluted		112,213						112,213

 

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		Three Months Ended March 31, 2006
		As Reported			Adjustments			As Restated
Operating activities:
Net loss		$	(36,017	)	$	(617	)	$	(36,634	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		3,352						3,352
Amortization		545						545
Stock options and awards to employees		3,779			468			4,247
Non-cash revenue		(1,339		)				(1,339		)
Non-cash gain on loss of significant influence in Genmab		(3,202		)				(3,202		)
Equity in net loss of Genmab		1,037						1,037
Minority interest in net loss		(1,607		)				(1,607		)
Changes in operating assets and liabilities
Other current assets		874						874
Trade accounts payable		(1,531		)				(1,531		)
Accrued liabilities		3,611			149			3,760
Deferred contract revenue		(2,855		)				(2,855		)
Net cash used in operating activities		(33,353		)	—			(33,353		)
Investing activities:
Purchase of property and equipment		(1,742		)				(1,742		)
Increase in segregated cash		(3		)				(3		)
Purchase of marketable securities		—						—
Sales and maturities of marketable securities		47,295						47,295
Net cash provided by investing activities		45,550			—			45,550
Financing activities:
Cash received from sales of securities and exercise of stock options, net		2,635						2,635
Principal payments under capital lease obligations		(5		)				(5		)
Net cash provided by financing activities		2,630			—			2,630
Effect of exchange rate differences on cash and cash equivalents		466						466
Net increase in cash and cash equivalents		15,293						15,293
Cash and cash equivalents at beginning of period		90,602						90,602
Cash and cash equivalents at end of period		$	105,895		—			$	105,895
Non-cash investing and financing activities:
Unrealized gain on investment in Genmab		$	232,511					$	232,511
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes		$	163					$	163
Interest		$	—					$	—

 

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		Three Months Ended March 31, 2005
		As Reported			Adjustments			As Restated
Contract and license revenues		$	5,932					$	5,932
Contract and license revenues from Genmab		600						600
Reimbursement of development costs		1,979						1,979
Total revenues		8,511						8,511
Costs and expenses:
Research and development		29,126			269			29,395
General and administrative		5,735			179			5,914
Total costs and expenses		34,861			448			35,309
Operating loss		(26,350		)	(448		)	(26,798		)
Equity in net loss of affiliate		(1,657		)				(1,657		)
Interest and dividend income		2,508						2,508
Impairment loss on investments in partners		(20,264		)				(20,264		)
Interest expense		(1,075		)				(1,075		)
Loss before provision for income taxes		(46,838		)	(448		)	(47,286		)
Provision for income taxes		58						58
Net loss		$	(46,896	)	$	(448	)	$	(47,344	)
Basic and diluted net loss per share:		$	(0.44	)	$	(0.00	)	$	(0.44	)
Weighted average common shares outstanding
—basic and diluted		106,999						106,999

 

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		Three Months Ended March 31, 2005
		As Reported			Adjustments			As Restated
Operating activities:
Net loss		$	(46,896	)	$	(448	)	$	(47,344	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		3,161						3,161
Amortization		1,874						1,874
Stock options and awards to employees		85			412			497
Equity in net loss of Genmab		1,657						1,657
Impairment losses on investments in partners		20,264						20,264
Changes in operating assets and liabilities
Other current assets		(4,697		)				(4,697		)
Trade accounts payable		(2,889		)				(2,889		)
Accrued liabilities		(13,713		)	36			(13,677		)
Deferred contract revenue		29,590						29,590
Net cash used in operating activities		(11,564		)	—			(11,564		)
Investing activities:
Purchase of property and equipment		(1,721		)				(1,721		)
Purchase of marketable securities		(56,108		)				(56,108		)
Sales and maturities of marketable securities		34,835						34,835
Net cash provided by investing activities		(22,994		)	—			(22,994		)
Financing activities:
Cash received from sales of securities and exercise of stock options, net		25,497						25,497
Deferred offering costs–Celldex		(234		)				(234		)
Net cash provided by financing activities		25,263			—			25,263
Net decrease in cash and cash equivalents		(9,295		)				(9,295		)
Cash and cash equivalents at beginning of period		64,843						64,843
Cash and cash equivalents at end of period		$	55,548		—			$	55,548
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes		$	—					$	—
Interest		$	2,343					$	2,343

 

10.                   Subsequent Events

In April 2006, the Company completed a public offering of 10 million shares of common stock at a public offering price of $11.75 per share resulting in net proceeds of approximately $111.3 million.  In May 2006, the Company announced that the underwriters had exercised in full their option to purchase a total of 1.5 million additional shares of common stock at the public offering price of $11.75 per share.  The Company expects to receive an additional $16.7 million of net proceeds upon closing of this additional purchase.  The exercise of the option to purchase the additional 1.5 million shares of common stock, resulting in estimated total net proceeds of approximately $128.0 million.

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