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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 0-15006
T CELL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3191702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
119 Fourth Avenue, Needham, Massachusetts 02194
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (617) 433-0771
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates as of March
13, 1997 was $44,402,815 (excludes shares held by directors and executive
officers). Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the actions of the management or policies of the Registrant, or that such
person is controlled by or under common control with the Registrant. The number
of shares of common stock outstanding at March 13, 1997 was: 24,946,601 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 13, 1997, are incorporated by reference into Part
III of this Form 10-K.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements contained in this report, including Part I, Item 1: Business,
that are not historical facts may be forward-looking statements that are subject
to a variety of risks and uncertainties. There are a number of important factors
that could cause the actual results to differ materially from those expressed in
any forward-looking statements made by the Company. These factors include, but
are not limited to: (i) the Company's ability to successfully complete product
research and development, including pre-clinical and clinical studies, and
commercialization; (ii) the Company's ability to obtain substantial additional
funding; (iii) the Company's ability to obtain required governmental approvals;
(iv) the Company's ability to attract manufacturing, sales, distribution and
marketing partners and other strategic alliances; and (v) the Company's ability
to develop and commercialize its products before its competitors.
PART I
Item 1. BUSINESS
A. General
T Cell Sciences, Inc. ("T Cell " or "TCS") is a biopharmaceutical company
engaged in the discovery and development of innovative drugs targeting diseases
of the immune, inflammatory and vascular systems. The Company's technology
platforms are based on its understanding of the ways in which the body triggers
its natural defense mechanisms. The Company's lead therapeutic program is
focused on developing compounds that inhibit the inappropriate activation of the
complement cascade, a vital part of the body's immune defense system. The
Company has also established programs for the discovery and development of
small-molecule immunoregulatory therapeutic compounds, for the prevention of
immune rejection of transplanted organs and the treatment of autoimmune
disorders, and for the development of a therapeutic vaccine for the treatment of
atherosclerosis. As described below, in 1996 the Company realigned certain of
its operations to focus on these three ongoing therapeutic drug discovery
programs.
In March 1996, the Company sold the operations and research product line of its
wholly owned subsidiary, T Cell Diagnostics, Inc. ("TCD") to Endogen, Inc.
("Endogen"), while retaining the TRAx(R) diagnostic product franchise (see
Section C: "Diagnostic Business"). T Cell has outsourced distribution and
manufacture of TRAx products, which are used primarily in the monitoring of T
cell levels in HIV-infected individuals.
Also in March 1996, T Cell announced a series of collaboration agreements
designed to utilize the Company's proprietary T cell screening and functional
assay technology platform to identify small-molecule immunoregulatory
therapeutic compounds (see Section B: "Therapeutic Drug Discovery Programs",
Item 2. "Small-Molecule Immunoregulators"). The Company entered into a strategic
alliance with ArQule, Inc., which provides access to ArQule's proprietary,
non-peptidic small-molecule arrays. The Company signed a collaborative agreement
with MYCOsearch, Inc. (which was subsequently acquired by Oncogene Sciences,
Inc.), which enables T Cell to screen that company's natural products libraries.
In May 1996, the Company completed a reorganization of senior management to
reflect its focus on therapeutic drug discovery. T Cell appointed Una S. Ryan,
Ph.D., as President and Chief Operating Officer and announced that Norman W.
Gorin had joined the Company as Vice President, Finance and Chief Financial
Officer. Subsequently, in August, the Company also named Dr. Ryan Chief
Executive Officer.
In August 1996, the Company completed a financing, raising approximately $10.9
million through the sale of 5.0 million shares of common stock in a public
follow-on offering.
In September 1996, the National Institutes of Health ("NIH") awarded the Company
a $100,000, phase I Small Business Innovation Research ("SBIR") grant for the
development of its cholesterol-lowering cholesteryl ester transfer protein
("CETP") vaccine for the prevention of atherosclerosis. (See Section B:
"Therapeutic Drug Discovery Programs" Item 3. "CETP Vaccine"). The funds will be
used to develop a rat atherosclerosis model. In February 1997, the NIH awarded T
Cell a second phase I SBIR grant to develop a novel DNA vaccine. In preclinical
studies, rabbits treated with the vaccine showed an increase in HDL (high-
density lipoprotein, or
"good" cholesterol) and exhibited significantly fewer atherosclerotic lesions in
their blood vessels compared with untreated rabbits.
In December, the Company amended its collaboration with Astra AB, initiated in
1992 to develop products based on the Company's T cell antigen receptor ("TCAR")
program (see Section B: "Therapeutic Drug Discovery Programs" Item 4. "T Cell
Antigen Receptor"). The program has identified several compounds for evaluation
as potential treatments for multiple sclerosis. Under the amended agreement, the
Company has discontinued internal funding of the program and could receive
royalties from product sales, as well as upfront and milestone payments which
may total up to $4 million as certain clinical and commercial milestones are
achieved.
B. Therapeutic Drug Discovery Programs
1. Complement Inhibition
T Cell's lead therapeutic program is focused on developing compounds that
inhibit a part of the immune system called the complement system. The complement
system is a series of proteins that are important initiators of the body's acute
inflammatory response against disease, infection and injury. Excessive
complement activation also plays a role in chronic inflammatory conditions. When
complement is activated, it helps to identify and eliminate damaged tissue. In
certain situations, however, excessive complement activation may destroy viable
and healthy tissue and tissue which, though damaged, might recover. This
excessive response compounds the effects of the initial injury or introduces
unwanted tissue destruction in clinical situations such as organ transplants,
other surgeries and treatment for heart attacks. Many independent published
studies have reported that the Company's lead compound, TP10, a soluble form of
naturally occurring Complement Receptor 1 (sCR1), effectively inhibits the
activation of the complement cascade in animal models. The Company believes that
regulation of the complement system could have therapeutic and prophylactic
applications in several acute and chronic conditions, including adult
respiratory distress syndrome ("ARDS"), reperfusion injury, organ transplant,
multiple sclerosis, Alzheimer's disease, rheumatoid arthritis and lupus. In the
United States, several million people are afflicted with these
complement-mediated conditions.
T Cell started the complement program in 1988. From 1989 through 1994, TP10 was
under development in a joint program with SmithKline Beecham, p.l.c., ("SB") and
Yamanouchi Pharmaceutical Co. ("YPC"). During 1994, TCS and SB negotiated
various amendments to the agreement and, in February 1995, the two companies
agreed to a mutual termination by which T Cell regained all rights to the
program except for co-marketing rights in Japan and Taiwan that are retained by
SB and YPC.
Under T Cell's direction, in 1995, the first phase I clinical trial of TP10 in
24 patients at risk for ARDS was completed. Results of this trial were presented
in October 1995 at The American College of Chest Physicians meeting. A second
phase I safety trial for reperfusion injury was completed in December 1995 in 25
patients with first-time myocardial infarctions. This study was presented at the
American Heart Association's Joint Conference on Thrombosis, Arteriosclerosis
and Vascular Biology in February 1996. In each trial, TP10 demonstrated
excellent safety and pharmacokinetic profiles with no drug- related adverse
events, had a terminal phase half-life of at least 72 hours and was able to
inhibit complement activity in a dose-dependent, escalating activity profile.
Based on these favorable results, in January 1996 TCS initiated a phase IIa
trial in patients with established ARDS. This trial is an open-label,
single-dose feasibility trial to determine the potential for efficacy of TP10 in
reducing neutrophil accumulation in the lung and improved clinical outcome of
patients with ARDS. During the second half of 1996, the Company initiated a
series of steps, including broadening enrollment criteria, to modify this trial
to improve the rate of patient accrual. The Company also began enrolling
patients in a Phase I/II clinical trial in patients with reperfusion injury
following lung transplantation in August 1996. This study is a randomized,
placebo-controlled, double-blind trial consisting of single dosages of 10 mg/kg
of TP10 as an intravenous infusion over 30 minutes. The trial is being conducted
at multiple centers in North America and is intended to include a total of 60
patients with end-stage pulmonary disease who are undergoing lung transplant
surgery. The Company anticipates completing both of these trials in the second
half of 1997.
In addition to TP10, TCS has identified other product candidates to inhibit
activation of the complement system. The lead candidate under research
evaluation is a modified form of sCR1 (TP10) which has been changed to add the
sLex carbohydrate structures. sLe(x) is a sugar structure which mediates binding
to selectin proteins, which appear on the surface of activated endothelial cells
as a pre-inflammatory event. Selectin-mediated binding of neutrophils to
activated endothelial cells is a critical event in inflammation. The combined
sCR1sLe(x) molecule has demonstrated increased functional benefits in in vitro
and early in vivo experiments. During 1996, the Company confirmed the presence
of the desired carbohydrate structures and their function in in vivo experiments
and confirmed the presence of both anti-complement and selectin-binding
functions in in vitro experiments.
sCR1sLe(x) may create new and expanded opportunities for the Company in
complement and selectin-dependent indications such as stroke and myocardial
infarction. The Company believes that this sCR1sLe(x) has the ability to target
the complement-inhibiting CR1 to the site of inflammation and, at the same time,
inhibit the leukocyte/endothelial cell adhesion process.
2. Small Molecule Immunoregulators (SMIR)
As a direct result of over thirteen years of experience working with T cells and
building on the Company's evaluation capabilities in molecular and cellular
immunology and small-animal immunology models, the Company has developed a
proprietary screening platform that it uses to identify small-molecule compounds
which can regulate T cell activation. These whole cell screens are based on
signal transduction and gene regulation directed to cytokine gene targets. T
cell activation plays an important role in solid organ transplant rejection as
well as in certain autoimmune diseases. The Company is seeking to develop an
alternative treatment to existing immunosuppressants such as Cyclosporin and
FK506 which, due to their toxicity, have limited application in chronic
conditions. Despite this limitation, worldwide sales of Cyclosporin in 1995
exceeded $1 billion. TCS' basic approach is to combine the biological skills and
proprietary screens it has developed with the small-molecule libraries created
by other biotechnology companies.
In March 1996, T Cell announced a series of collaboration agreements designed to
utilize the Company's proprietary T cell screening and functional assay
technology platform to identify small-molecule immunoregulatory therapeutic
compounds. The Company entered into a strategic alliance with ArQule, Inc.,
which provides access to ArQule's proprietary non-peptidic small-molecule
arrays. The Company also signed a collaborative agreement with MYCOsearch, Inc.,
(which was subsequently acquired by Oncogene Sciences, Inc.) which enables T
Cell to screen that company's natural products libraries. Under each agreement,
T Cell and its partners will share rights to compounds identified using T Cell's
screens. As of March 14, 1997, the Company has identified one immunostimulator
hit and 20 immunosuppressor hits from screening activities with four distinct
compound libraries from these two companies. Further research directed to
pinpointing the mechanisms of activity and optimizing potency is underway.
3. CETP Vaccine
The Company is developing a therapeutic vaccine against endogenous cholesteryl
ester transfer protein ("CETP") which may be useful in reducing risk factors for
atherosclerosis. CETP is a key intermediary in the balance of high-density
lipoprotein ("HDL" or "good" cholesterol) and low-density lipoprotein ("LDL" or
"bad" cholesterol). T Cell is developing a vaccine to stimulate an immune
response against CETP which it believes may improve the ratio of HDL to LDL and
reduce the potential of atherosclerosis. The Company has conducted studies of
rabbits which had been administered the CETP vaccine and fed a high-cholesterol,
high-fat diet. In these studies, vaccine-treated rabbits exhibited an increase
in the level of HDL over 70-day and 108-day periods and exhibited relatively
lesion-free blood vessels, while a control group of untreated rabbits showed no
increase in HDL levels and developed significant blood vessel lesions. These
studies have demonstrated, in animal models, the Company's ability to break
immune tolerance, produce autoreactive antibodies to CETP, elevate HDL levels
and reduce lesions.
Atherosclerosis is one of the leading causes of morbidity and mortality in the
United States and most of the Western world. Current pharmacologic treatments
require daily administration and can result in high costs and poor patient
compliance. In 1995, the market for cholesterol-lowering drugs exceeded $4
billion worldwide. A vaccine directed at lowering CETP activity, such as the one
being developed by the Company, may offer several advantages over conventional
approaches, including not requiring daily dosing, lessened expense, reduced side
effects, and improved patient compliance.
In September 1996, the National Institutes of Health (NIH) awarded the Company a
$100,000, phase I Small Business Innovation Research (SBIR) grant for the
development of a rat atherosclerosis model, affording better comparison to human
atherosclerosis. In February 1997, the NIH awarded T Cell a second phase I SBIR
grant to develop a novel DNA vaccine to reduce CETP.
4. T Cell Antigen Receptor (TCAR)
In early 1992, TCS entered into a joint development program with Astra AB to
develop products resulting from TCS' proprietary TCAR technology, which utilizes
the T cell antigen receptor for selectively targeting the T cells involved in
autoimmune diseases such as multiple sclerosis and rheumatoid arthritis. The
original agreement was modified in December 1993 with Astra assuming all
responsibility for the development of the lead antibody products and TCS
retaining leadership of the first peptide product candidate. Under the original
and modified agreements, TCS received funding support of approximately $15
million in the early years with the potential of up to $17 million of additional
funding based on clinical progress. By the end of 1995, T Cell had received
substantially all of the original funding payments.
In June 1996, the Company suspended further internal funding of the research and
development of the TCAR program. In December 1996, the Company amended its
agreement with Astra to transfer certain of its rights to the TCAR technology,
including two therapeutic products, TM27-monoclonal and TP12-peptide, to Astra,
who will be solely responsible for further clinical development and
commercialization. Under the amended agreement, TCS could receive royalties from
product sales, as well as upfront and milestone payments which may total up to
$4 million as certain clinical milestones are achieved.
C. Diagnostic Business
In March 1996, the Company realigned certain of its operations and sold the
operations and research product line of its wholly owned subsidiary, T Cell
Diagnostics, Inc. ("TCD") to Endogen, Inc. ("Endogen") for $3.0 million, while
retaining the Company's TRAx(R) diagnostic product franchise. T Cell received a
five year convertible subordinated note for $2.0 million combined with a buy-out
of approximately $1 million of facility and equipment lease obligations. The
note was convertible to Endogen stock at T Cell's option at a price of $4.63 per
share. T Cell recognized a gain on this transaction of $0.3 million. On February
10, 1997, T Cell received approximately $1.8 million following the conversion of
the remaining balance of the Endogen note into shares of Endogen common stock,
which were subsequently sold.
T Cell retained all rights to the TRAx product franchise and has agreed to
source the manufacture of TRAx kits from Endogen in a separate supply contract.
TCD signed a sales and distribution contract for the United States market with
Diamedix Corporation in December 1995. Diamedix is a wholly owned subsidiary of
Ivax Corporation with a history of selling enzyme immunoassays in the in vitro
diagnostics market. The contract covers the TRAx CD4 and CD8 microtiter plate
format products. The Company has deferred filing a 510(K) application with the
Food and Drug Administration (FDA) for clearance to market TRAx CD8 in the
United States while it focuses on establishing a partnership for the TRAx
technology.
D. Patents and Proprietary Rights
The successful development and marketing of products by the Company will depend
in part on its ability to create and maintain intellectual property, including
patent rights. The Company has established a proprietary patent position in the
areas of complement inhibitor molecules and diagnostic technologies, and is the
owner or exclusive
licensee of numerous patents and pending applications around the world,
including 11 U.S. patents. Although the Company continues to pursue patent
protection for its products, no assurance can be given that any pending
application will issue as a patent, that any issued patent will have a scope
which will be of commercial benefit or that the Company will be able to
successfully enforce its patent position against competitors.
In the area of complement molecules, T Cell has an exclusive license to patent
rights, which it co-owns with The Johns Hopkins University and Brigham & Women's
Hospital, covering CR1 inventions. These rights are based in part on the work of
Dr. Douglas Fearon and include U.S. patents which claim the nucleic acid
sequences of recombinant CR1, soluble CR1 (sCR1) and active fragments, and
pharmaceutical uses of CR1. TCS also owns or has rights to a number of other
patent applications relating to CR1, sCR1sLe(x) and other complement inhibitor
molecules.
In April 1996, the Company announced that it had licensed portions of its patent
and technology rights regarding CR1 (Complement Receptor 1) to CytoTherapeutics,
Inc. for use in CytoTherapeutics' cell-based products for the delivery of
therapeutic substances to the central nervous system.
In December 1996, the Company amended its agreement with Astra AB to transfer
certain of its patent rights and licenses to the TCAR technology to Astra AB.
This transfer includes patent applications which have resulted to date in U.S.
patents covering the DNA, protein, protein fragments and antibodies relating to
the Alpha TCAR and the DNA, full-length proteins and antibodies relating to Beta
TCAR, and two European patents covering Beta TCAR inventions. In addition, the
Company has transferred recent filings on new T cell antigen receptor inventions
resulting from the partnership with Astra.
In the area of diagnostics, T Cell is the owner of several patent rights
relating to the TRAx CD4 and CD8 and other applications of the TRAx product
technologies. The first U.S. patent covering TRAx CD4 and CD8 products was
issued on June 11, 1996.
The Company is aware that others, including universities and companies, have
filed patent applications and have been granted patents in the United States and
other countries which claim subject matter potentially useful or necessary to
the commercialization of the Company's products. The ultimate scope and validity
of existing or future patents which have or may be granted to third parties, and
the availability and cost of acquiring rights to those patents which are
necessary to the manufacture, use or sale of the Company's products presently
cannot be determined by the Company.
Trade secrets and confidential know-how are important to the Company's
scientific and commercial successes. Although the Company takes measures to
protect its proprietary information, there can be no assurance that others will
not either develop independently or obtain access to this information.
E. Competition
The Company is engaged in a rapidly expanding area of biotechnology in which
research is being conducted worldwide by universities, public and private
institutions and biotechnology and pharmaceutical companies. A number of these
entities are developing product candidates which may become competitors of the
Company's products in development. Several such companies are involved in
product development efforts aimed at treatments for autoimmune diseases and
inflammatory conditions and some are specifically developing products based on T
cell receptors and the human complement system. There can be no assurance that
the Company's products will be commercialized or that other companies,
universities and public and private foundations, among others, many of which
have greater financial resources than the Company, will not be able to develop
competing proprietary positions or products.
The Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary technology and products, and secure sufficient capital resources to
fund product ideas to commercialization. There can be no assurance that the
Company will be successful in its efforts in these areas.
F. Government Regulation
The product testing, manufacture, safety and efficacy requirements, labeling,
storage, record keeping, approval, advertising, promotion and sale of the
Company's present and future products are closely regulated by federal and other
governmental authorities. The FDA and comparable government agencies in foreign
countries have established mandatory procedures and safety and efficacy
standards which must be met before the appropriate authority approves the
clinical testing, manufacturing and marketing of a human health care product.
The steps required before a pharmaceutical product may be marketed in the United
States include (i) in vitro and in vivo preclinical testing, (ii) submission to
the FDA of an Investigational New Drug application (IND) and clearance to begin
human clinical trials, (iii) adequate human clinical trials to establish the
safety and efficacy of the drug, (iv) the submission of a New Drug Application
("NDA") or Product License Application ("PLA") to the FDA, and (v) FDA approval
of the NDA or PLA prior to commercial sale or shipment of the product. In
addition to obtaining FDA approval for each product, each drug manufacturing
establishment must be registered with, and approved by, the FDA.
The steps required before an in vitro diagnostic product may be marketed in the
United States include (i) clinical trials which demonstrate that the product's
results are substantially equivalent to results obtained from a product
currently on the market, or if no product is currently marketed for the intended
use, then clinical trials which correlate assay results with the intended
clinical use, (ii) the submission of a 510(k) or Premarket Approval ("PMA")
application to the FDA, and (iii) FDA clearance to market the product. Under a
510(k) or PMA, the facility in which products are produced must comply with Good
Manufacturing Practices.
The Company's present and future business activities are and will be subject to
regulation under additional federal, state and local laws and regulations,
including regulations by the U.S. Environmental Protection Agency and the U.S.
Occupational Safety and Health Administration. The Company also will be subject
to widely varying foreign regulations governing clinical trials and
pharmaceutical sales. Whether or not FDA approval has been obtained, approval of
a product by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing of the product in those
countries. The approval process varies from country to country and the time may
be longer or shorter than that required for FDA approval. The Company intends to
rely on foreign licensees to obtain regulatory approvals to market products in
foreign countries.
Regulatory approval often takes a number of years and involves the expenditure
of substantial resources. Approval times also depend on a number of factors,
including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials.
G. Employees; Scientific Consultants
As of March 15, 1997, the Company employed 43 full time persons, 16 of whom have
doctoral degrees. Of these employees, 33 were engaged in or directly supported
research and development.
T Cell has also retained a number of scientific consultants and advisors in
various fields and has entered into consulting agreements with each of them.
These consultants include the members of the Scientific Advisory Board: Dr. Mark
Davis, Stanford University; Dr. Tak Mak, Ontario Cancer Institute; Dr. Peter
Ward, University of Michigan School of Medicine; Dr. Hans Wigzell, Karolinska
Institute; Dr. Peter Henson, National Jewish Center for Immunology and
Respiratory Medicine; and Dr. Peter Libby, Brigham and Women's Hospital.
Item 2. PROPERTIES
In September 1994, TCS relocated its headquarters and therapeutic research
operations to existing laboratory and office space in Needham, Massachusetts,
under a short-term lease and sublease for approximately 33,000 square feet. In
October 1994, TCD relocated to Woburn, Massachusetts under a five-year lease for
approximately 27,000 square feet. This lease was assigned to Endogen, Inc. in
March 1996 in connection with the sale of the research products business and
operations of TCD.
In May 1996, TCS entered into a long term lease for its headquarters and
therapeutic research operations space in Needham, Massachusetts. Under this
agreement, the Company leased approximately 54,000 square feet of which it
subleased 13,000 square feet to a tenant. The Company is obligated to pay base
annual rent and occupancy costs of approximately $676,000 until June 1997 and of
approximately $756,000 until the end of the initial term of April 2002.
Aggregate rental payments for the year ended December 31, 1996 for this facility
were approximately $672,000 and for December 31, 1995 were approximately
590,000. Concurrent with the May 1996 lease agreement, the Company entered into
an agreement to sublease excess space for a four-year term. Under the sublease
agreement, the Company will receive base annual subrental income of
approximately $110,000 until June 1998 and approximately $134,000 until the end
of the initial term of April 2000.
Item 3. LEGAL PROCEEDINGS
In December 1994, the Company filed a lawsuit against the landlord of its former
Cambridge, Massachusetts headquarters for damages it has incurred as a result of
the forced evacuation and relocation of its operations in 1994 due to air
quality problems. The defendants in this lawsuit have counterclaimed alleging
that the Company has breached its lease obligations. In August 1996, the court
ordered a bifurcated non-jury trial on the limited issues of whether the
fireproofing in the building degraded and whether it contaminated the space. The
bifurcated trial commenced on November 20, 1996, and closing arguments were
heard on January 13, 1997. The judge has not yet entered his findings on the
bifurcated issues. Until the Court enters its findings, the Company is unable to
assess what impact the findings will have on the trial of the issue of T Cell's
liability under the lease.
The Company's insurance carrier had agreed to reimburse the Company for certain
legal expenses associated with defense of certain of the counterclaims, under a
reservation of rights. On March 14, 1996, the insurance carrier moved to
intervene in this action for a declaration that the allegations contained in the
pleadings are not covered under the Company's policy of insurance. The Court
allowed the motion to intervene on May 20, 1996. The judge allowed the carrier's
motion for summary judgment over T Cell's opposition on November 21, 1996. The
Court has not yet entered the order on the docket. Once such order is entered, T
Cell expects to appeal the ruling.
In July 1995, the bank holding a mortgage on the building containing the
Company's former facilities filed a lawsuit in a different state court against
the Company to collect rents it alleges are due to the bank, instead of the
landlord, as a result of an agreement pertaining to the financing of the initial
build-out of the Cambridge facility in 1987. The Company has added its former
landlord as a third party defendant on a claim for indemnification in the event
the Company is not successful in its defense. A motion for summary judgment
filed by the bank was denied by the court.
The Company brought suit in July 1995 against its insurance carrier and the
policy underwriter for a judgment that the Company is entitled to insurance
coverage for its property and business interruption losses incurred as a result
of the forced evacuation and relocation. This lawsuit has been dismissed as a
result of a November 1995 settlement agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted in the Nasdaq National Market under the symbol TCEL. The following table
sets forth the high and low closing sales prices for the Company's common stock
as reported by Nasdaq.
High Low
Fiscal Period
Year Ended December 31, 1995
1Q (Jan. 1 - March 31, 1995) $3.50 $2.38
2Q (April 1 - June 30, 1995) 4.38 2.63
3Q (July 1 - Sep. 30, 1995) 5.38 2.88
4Q (Oct. 1 - Dec. 31, 1995) 4.38 2.50
Year Ended December 31, 1996
1Q (Jan. 1 - March 31, 1996) $3.38 $2.50
2Q (April 1 - June 30, 1996) 4.38 2.63
3Q (July 1 - Sep. 30, 1996) 3.75 1.94
4Q (Oct. 1 - Dec. 31, 1996) 2.38 1.59
As of March 13, 1997, there were approximately 692 shareholders of record of the
Company's common stock. The price of the Common Stock was $1.8125 as of the
close of March 13, 1997. The Company has not paid any dividends on its common
stock since its inception and does not intend to pay any dividends in the
foreseeable future. Declaration of dividends will depend, among other things,
upon the operating and future earnings of the Company, the capital requirements
of the Company and general business conditions.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
December 31, 1996, 1995, 1994 and 1993, and for the year ended April 30, 1992,
have been derived from the audited consolidated financial statements of the
Company. All amounts in thousands except per share data.
CONSOLIDATED STATEMENTS Year Ended Year Ended
OF OPERATIONS DATA December 31, April 30,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
OPERATING REVENUE:
Product Sales, Product Development
and Distribution Agreements $ 1,115 $ 3,963 $ 6,968 $ 9,018 $ 8,916
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Research and Development 6,036 8,005 8,697 9,438 7,956
Other Operating Expense 6,832 7,821 9,365 8,841 7,417
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expense 12,868 15,826 18,062 18,279 15,373
- -------------------------------------------------------------------------------------------------------------------
Non-Operating Income (Expense), Net 963 3,605 (490) 1,193 1,562
- -------------------------------------------------------------------------------------------------------------------
Net Loss Before Minority Interest (10,790) (8,258) (11,584) (8,068) (4,895)
Minority Interest Share of Loss -- -- -- 310 246
- -------------------------------------------------------------------------------------------------------------------
Net Loss $(10,790) $ (8,258) $ (11,584) $ (7,758) $ (4,649)
===================================================================================================================
Net Loss Per Common Share $ (0.50) $ ( 0.47) $ (0.68) $ (0.56) $ (0.35)
===================================================================================================================
Weighted Average Common
Shares Outstanding 21,693 17,482 17,053 13,931 13,109
===================================================================================================================
CONSOLIDATED BALANCE
SHEET DATA December 31, April 30,
- --------------------------------------------------------------------------------------------------- ---------------
1996 1995 1994 1993 1992
Working Capital $ 11,673 $ 11,208 $ 15,027 $ 26,088 $ 20,880
Total Assets 17,224 18,532 20,685 33,067 27,023
Other Long Term Obligation -- 182 500 500 --
Accumulated Deficit (57,129) (46,339) (38,081) (26,497) (15,107)
Total Stockholders' Equity 15,619 16,000 17,586 29,134 23,090
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements contained in the following, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, that are not
historical facts may be forward-looking statements that are subject to a variety
of risks and uncertainties. There are a number of important factors that could
cause the actual results to differ materially from those expressed in any
forward-looking statements made by the Company. These factors include, but are
not limited to: (i) the Company's ability to successfully complete product
research and development, including pre-clinical and clinical studies, and
commercialization; (ii) the Company's ability to obtain substantial additional
funding; (iii) the Company's ability to obtain required governmental approvals;
(iv) the Company's ability to attract manufacturing, sales, distribution and
marketing partners and other strategic alliances; and (v) the Company's ability
to develop and commercialize its products before its competitors.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
T Cell Sciences' principal activity since its inception has been research and
product development conducted on its own behalf, as well as through joint
development programs with several pharmaceutical companies. The Company was
incorporated in the State of Delaware in December 1983.
A significant portion of the Company's revenue has consisted of payments by
others to fund sponsored research, milestone payments under joint development
agreements, payments for material produced for preclinical studies, sales of
test kits and antibodies and interest earned on investments. Certain portions of
the collaborative payments are received in advance, recorded as deferred revenue
and recognized when earned in later periods.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any in the near future.
OVERVIEW
The Company initiated efforts during the first half of 1996 to focus its
business operations on the development of proprietary therapeutic products. On
March 5, 1996, the Company sold the operations and research product line of its
wholly owned subsidiary, T Cell Diagnostics, Inc. ("TCD"), excluding the TRAx(R)
product franchise and related assets, to Endogen, Inc. ("Endogen") for a
purchase price of approximately $2,900,000. In June 1996, the Company
reorganized its senior management with the appointment of Una S. Ryan, Ph.D.,
its Chief Scientific Officer, to the position of President and Chief Operating
Officer. Dr. Ryan was subsequently appointed to the position of Chief Executive
Officer in August 1996. The Company also appointed Norman W. Gorin as Vice
President, Finance and Chief Financial Officer.
In an effort to strengthen the Company's financial position and to provide
additional resources to focus on the discovery and development of innovative
drugs targeting the immune and inflammatory systems, the Company successfully
completed a public offering of 5,000,000 shares of its common stock in August
1996. The public stock offering yielded net proceeds of $10,069,000 which the
Company anticipates using to fund ongoing clinical trials for its lead
therapeutic program, research and development programs for its preclinical
product candidates and for general working capital requirements.
The Company's lead therapeutic program is focused on developing compounds that
inhibit complement activation which is part of the body's immune defense system.
In January 1996, the Company initiated a Phase IIa clinical trial for the
evaluation of the Company's lead therapeutic compound, TP10, in patients with
adult respiratory distress syndrome. In July 1996, the Company initiated a Phase
I/II clinical trial, using TP10, to prevent reperfusion injury in patients
receiving lung transplants. The Company is also engaged in the discovery and
development of T cell activation inhibitors for the prevention of transplant
rejection and autoimmune diseases, and a vaccine for the management of
atherosclerosis. In September 1996, the Company was awarded a $100,000 Phase I
Small Business Innovation Research (SBIR) grant from the National Institute of
Health (NIH).
The funds from the grant will contribute to the development of a rat
atherosclerosis model. A second Phase I SBIR grant from the NIH was awarded to
the Company in February 1997. Funding from the grant will contribute to the
development of a novel DNA vaccine. Both grants are contributing to the
Company's program for the development of a vaccine for the management of
atherosclerosis.
The Company has in the past developed and produced both therapeutic and
diagnostic products. While the Company will continue the development of its
proprietary TRAx technology, it has deferred filing a 510(K) application with
the Food and Drug Administration (FDA) for clearance to market TRAx CD8 in the
United States, and is focusing its efforts on establishing a partnership for the
TRAx technology. In June 1996, the Company suspended further internal funding of
the research and development of its T cell antigen receptor ("TCAR")
therapeutics program, developed jointly with its partner Astra AB ("Astra"). The
Company amended its agreement with Astra, in December 1996, to transfer certain
of its rights to the TCAR technology to Astra who will be solely responsible for
further clinical development and commercialization. Under the amended agreement,
the Company could receive future milestone and royalty payments upon Astra's
successful development and commercialization of the TCAR technology. In
conjunction with these developments, the Company wrote off certain capitalized
patent costs related to the TCAR technology, incurring a $1,752,000 charge to
earnings in the second quarter of 1996.
RESULTS OF OPERATIONS
The Company reported a net loss of $10,790,000 or $0.50 per share for the year
ended December 31, 1996, compared with a net loss in 1995 of $8,258,000 or $0.47
per share and a net loss of $11,584,000 or $0.68 per share in 1994. The
operating results for 1996 reflect total revenue, including interest income, of
$1,795,000 (a 60.7% decrease compared to the same period in 1995) offset by
total operating costs of $12,868,000 (an 18.7% decrease compared to 1995). The
operating results for 1995 reflect total revenue, including interest income, of
$4,568,000 (a 45.2% decrease compared to the same period in 1994) offset by
total costs of $15,826,000 (a 12.4% decrease compared to the same period in
1994). The net operating results for 1996 include a charge to earnings of
$1,752,000 for the write-off of certain capitalized patent costs relating to the
Company's TCAR program and a $425,000 charge to earnings resulting from a
severance agreement with the Company's former President and Chief Executive
Officer. Excluding these charges, the net operating loss for 1996, including
interest income, decreased 21.0% or $2,362,000 compared to 1995.
In 1996, revenue from collaborative product development and distribution
agreements of $591,000 decreased 63.3% from $1,609,000 in 1995 and 84.2% from
$3,737,000 in 1994. The declines are primarily due to reductions in funding from
Astra in accordance with the 1992 agreement for the joint development and
marketing of therapeutic products resulting from T Cell Sciences' proprietary
TCAR technology. As part of the agreement, as amended in December 1993, the
responsibility for future development and manufacturing of the two initial
monoclonal antibody candidates shifted to Astra while the Company continued to
be responsible for the initial peptide candidate. In December 1996, the
agreement was further amended, transferring certain of the Company's rights to
the TCAR technology to Astra who will be solely responsible for further clinical
development and commercialization. The Company received a $100,000
non-refundable execution fee in connection with the amended agreement which is
included in product development revenue in 1996. Also, included in product
development revenue in 1996 is a $100,000 non-refundable execution fee
associated with an agreement granting CytoTherapeutics, Inc. a worldwide,
nonexclusive license to the Company's technology and patent rights relating to
Compliment Receptor 1 in return for a series of milestone payments and
royalties. In 1996 the Company did not have any distribution agreement revenue
compared to $175,000 in 1995 and $715,000 in 1994. These revenues represent
signing fees or milestone payments related to distribution and marketing
agreements for TRAx products with Diamedix Corporation ("Diamedix") in 1995 and
Yamanouchi Pharmaceutical Co., Ltd. and INCSTAR Corporation in 1994.
Product sales revenue for 1996, 1995 and 1994 was $523,000, $2,354,000 and
$3,231,000, reflecting a decline of 77.8% and 27.1%, respectively, when compared
to the prior year. The decrease in product sales for 1996 compared to the prior
year is attributable to the sale of the research products and operations of TCD
to Endogen in
March 1996 which resulted in research product sales for the first two months of
the year only, compared to twelve months in 1995. Sales of research products
decreased in 1995 compared to 1994 due to a shift in the Company's sales focus
toward the launch of TRAx CD4, combined with increasing competition with certain
preclinical products and continued weakness in the international diagnostic
product market. TRAx CD4 received marketing clearance from the U.S. Food and
Drug Administration in May 1995. Sales growth has continued to be slow with
minimal TRAx product sales for 1996 and 1995.
Cost of product sales amounted to $359,000, 68.5% of product sales, $1,879,000,
79.8% of product sales and $2,008,000, 62.2% of product sales for 1996, 1995 and
1994, respectively. The fluctuation in gross margin is the result of several
factors including: costs associated with the inefficiencies of producing
products at lower volumes, the disruption and change in facilities during 1994
and costs associated with replacing the manufacturing facility in 1995, costs
related to staff reductions in the third quarter of 1995 and expenses to
increase manufacturing proficiency in anticipation of increased sales volume
associated with the TRAx CD4 test kit.
Research and development expense was $6,036,000 for 1996 compared to $8,005,000
for 1995, reflecting a 24.6% decrease. The decrease is primarily due to the sale
of the research products and operations of TCD in March 1996, combined with the
full-year impact of a restructuring program implemented in the third quarter of
1995, and was partially offset by costs associated with a Phase IIa clinical
trial initiated in January 1996 and a Phase I/II clinical trial which began
patient accrual in August 1996. Both clinical trials are evaluating the
Company's lead product candidate, TP10. Research and development expense
decreased 8.0% from $8,697,000 in 1994 to $8,005,000 in 1995 primarily due to
cost containment programs implemented in 1994 combined with a restructuring
program implemented in the third quarter of 1995. Costs associated with two
Phase I clinical trials evaluating the use of TP10 partially offset the effects
of the Company's cost containment programs and restructuring in 1995.
General and administrative expense of $5,957,000 increased 37.1% for the year
ended December 31, 1996 compared to 1995. Excluding the $425,000 charge
resulting from the severance agreement with the Company's former President and
Chief Executive Officer in June 1996 and the $1,752,000 write-off of certain
capitalized patent costs, general and administrative costs decreased 13.0% or
$563,000 compared to last year. General and administrative expense for the year
ended December 31, 1995 was $4,344,000 compared to $4,346,000 in 1994.
Marketing and sales costs decreased 67.7% in 1996 to $516,000 compared to
$1,598,000 in 1995. The decrease is primarily due to the sale of the research
products and operations of TCD to Endogen in March 1996 which resulted in two
months of marketing and sales costs relating to research product sales, compared
to twelve months in 1995. Marketing and sales costs in 1996 included marketing
costs relating to the TRAx product franchise. Marketing and sales costs
increased 13.2% for 1995 compared to 1994. The increase is primarily due to
marketing costs associated with the launch of the TRAx CD4 test kit during the
latter half of 1995.
Facility relocation expense represents costs incurred directly associated with
the forced evacuation of the Company's former Cambridge facility due to air
quality problems. The Company incurred incremental costs when it vacated its
Cambridge facility and moved to alternative temporary sites, including costs to
physically move property, establish computer and telephone networks at alternate
sights and legal and other costs directly resulting from vacating the facility
and terminating the lease. The amount recorded in 1994 was $688,000. Also
included in 1994 is $911,000 to write off the net book value of leasehold
improvements at the Cambridge facility.
Other non-operating income of $963,000 in 1996 includes a $283,000 gain
recognized from the sale of the research products and operations to Endogen and
interest income of $680,000. Other non-operating income of $3,605,000 in 1995,
includes $2,900,000 received from the settlement of a lawsuit the Company
brought against its insurance carrier and interest income of $605,000. Other
non-operating expense, of $490,000 in 1994, includes losses recognized on
redemption of the Company's short-term bond fund, the change in net asset value
of its short-term bond fund during the year and interest and dividend income of
$1,362,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1996 is $12,592,000
compared to $12,275,000 (including short-term restricted cash of $958,000) at
December 31, 1995. Cash used in operations was $9,676,000 in 1996 , compared
with $7,948,000, which was partially offset by $2,900,000 received from the
settlement of the lawsuit, and $8,633,000, adjusted to exclude facility
relocation expense, during the twelve months ended December 31, 1995 and 1994,
respectively.
The Company received a convertible subordinated note receivable in the principal
amount of $2,003,000 in connection with the sale of the research products and
operations of TCD to Endogen. Payments were due in ten semi-annual installments
commencing September 1, 1996 with interest receivable thereon at the rate of 7%
per annum. A principal payment of $200,000 was received, in accordance with the
terms of the note, on September 1, 1996, reducing the outstanding principal
amount to $1,803,000 at December 31, 1996. The outstanding principal amount of
the note was convertible at any time at the option of the Company into shares of
common stock of Endogen. On February 10, 1997 the Company converted the
outstanding principal balance of $1,803,000 into shares of common stock of
Endogen and subsequently sold the shares.
During 1994, the Company entered into an agreement providing the Company with
the right to lease up to $2,000,000 of equipment for up to a five-year term. The
lease arrangement requires that the Company maintain certain restrictive
covenants, determined at the end of each fiscal quarter. At September 30, 1995
the Company's cash, cash equivalents and short-term investment balance was below
the $10,000,000 minimum covenant requirement. As a result, and in accordance
with the lease agreement, the Company pledged cash as collateral equal to the
amount outstanding on the lease, which is to remain in a certificate of deposit
until the end of the lease, or as otherwise agreed by the lessor and the
Company. Total cash on deposit, and considered restricted at December 31, 1996
was $685,000 compared to $1,808,000 at December 31, 1995. In March 1996, the
Company repaid approximately $980,000 of the outstanding cash payments due under
the lease in conjunction with the sale of the research products and operations
of its subsidiary.
In December 1994, the Company filed a lawsuit in the Superior Court of
Massachusetts against the landlord of its former Cambridge, Massachusetts
headquarters, to recover the damages incurred by the Company resulting from the
evacuation of the building, due to air quality problems which caused skin and
respiratory irritation to a significant number of employees. The landlord
defendant has filed counterclaims, alleging the Company has breached its lease
obligations. In a separate lawsuit, the landlord's mortgagee has filed claims
against the Company for payment of the same rent alleged to be owed. A motion
for summary judgment filed by the bank was denied by the court. Due to the
current stage of the lawsuits, a range of potential losses, cannot be estimated
at this time. Accordingly, no accrual has been made in the financial statements
relative to any potential effects on the Company's future operating results. A
significant adverse settlement could have a negative impact on the future
operating results of the Company.
The Company believes its current cash and cash equivalents, combined with
anticipated net cash provided by operations will be sufficient to meet working
capital requirements into 1998. These requirements will depend on several
factors including, but not limited to, the progress and costs associated with
research and development programs; preclinical and clinical studies; time and
costs associated with obtaining regulatory approval; timing and scope of
collaborative arrangements; long term facility costs; and expenses and outcome
of pending litigation on the air quality problem. The Company will consider
alternative sources of funding and capital when available and appropriate.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Index to Consolidated Financial Statements
and Supplementary Schedules 15
Report of Independent Accountants 16
Consolidated Balance Sheet at December 31, 1996 and 17
December 31, 1995
Consolidated Statement of Operations for the Years Ended 18
December 31, 1996, December 31, 1995 and December 31, 1994 18
Consolidated Statement of Stockholders' Equity for the Years 19
Ended December 31, 1996, December 31, 1995 and
December 31, 1994
Consolidated Statement of Cash Flows for the Years Ended 20
December 31, 1996, December 31, 1995, and
December 31, 1994
Notes to Consolidated Financial Statements 21
Report of Independent Accountants
To The Board of Directors and Shareholders of
T Cell Sciences, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of T Cell
Sciences, Inc., and its subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
ended December 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
February 18, 1997
CONSOLIDATED BALANCE SHEET
December 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents, Including Restricted
Cash of $0 and $958,025 $ 12,591,770 $ 12,275,217
Accounts Receivable, Net of the Allowance for Doubtful
Accounts of $0 and $17,187 19,541 339,167
Current Portion Convertible Note Receivable 400,596 --
Inventories 23,947 403,293
Prepaid and Other Current Assets 241,527 541,411
- -----------------------------------------------------------------------------------------------------
Total Current Assets 13,277,381 13,559,088
Property and Equipment, Net 511,640 1,172,137
Restricted Cash 685,000 850,000
Convertible Note Receivable 1,402,085 --
Other Assets 1,347,579 2,951,062
- -----------------------------------------------------------------------------------------------------
Total Assets $ 17,223,685 $ 18,532,287
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 325,970 $ 724,944
Accrued Expenses 1,278,488 1,504,586
Deferred Revenue -- 121,083
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 1,604,458 2,350,613
- -----------------------------------------------------------------------------------------------------
Collaborator Advance -- 181,573
- -----------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Notes 3 and 14)
Stockholders' Equity:
Common Stock, $.001 Par Value; 50,000,000 Shares
Authorized; 24,965,416 and 24,946,601 Issued
and Outstanding in 1996, respectively; 19,904,706
and 19,882,730 Issued and Outstanding in 1995, respectively 24,966 19,905
Additional Paid-In Capital 72,791,819 62,399,255
Less: 18,815 and 21,976 Common Treasury Shares at Cost (68,938) (80,523)
Accumulated Deficit 57,128,620) (46,338,536)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 15,619,227 16,000,101
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,223,685 $ 18,532,287
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------
OPERATING REVENUE:
Product Development and
Distribution Agreements $ 591,246 $ 1,608,677 $ 3,737,143
Product Sales 523,254 2,354,377 3,230,815
-------------------------------------------------------------------------------------------
Total Operating Revenue 1,114,500 3,963,054 6,967,958
-------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Cost of Product Sales 358,644 1,879,387 2,008,279
Research and Development 6,036,498 8,004,598 8,697,174
General and Administrative 5,956,619 4,343,764 4,345,972
Marketing and Sales 516,001 1,597,888 1,411,420
Facility Relocation -- -- 1,598,609
-------------------------------------------------------------------------------------------
Total Operating Expense 12,867,762 15,825,637 18,061,454
-------------------------------------------------------------------------------------------
Operating Loss (11,753,262) (11,862,583) (11,093,496)
Non-Operating Income (Expense), Net 963,178 3,604,634 (490,055)
-------------------------------------------------------------------------------------------
Net Loss $ (10,790,084) $(8,257,949) $(11,583,551)
===========================================================================================
Net Loss Per Common Share $ (0.50) $ (0.47) $ (0.68)
===========================================================================================
Weighted Average Common
Shares Outstanding 21,693,351 17,482,143 17,053,443
===========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Additional Treasury Total
Common Stock Paid-In Stock Accumulated Stockholders'
Shares Par Value Capital Cost Deficit Equity
-----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 17,049,697 $17,050 $55,739,278 $(125,075) $(26,497,036) $29,134,217
Issuance at $2.13 to $5.25
per Share upon Exercise
of Stock Options 4,525 4 13,302 -- -- 13,306
Employee Stock Purchase
Plan Issuance at $2.13
per Share -- -- (26,437) 48,144 -- 21,707
Net Loss for the Year
Ended December 31, 1994 -- -- -- -- (11,583,551) (11,583,551)
-----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 17,054,222 $17,054 $55,726,143 $ (76,931) $(38,080,587) $17,585,679
Issuance at $.60 to $4.25
per Share upon Exercise
of Stock Options 88,668 89 244,664 -- -- 244,753
Employee Stock Purchase
Plan Issuance at $2.13
and $2.71 per Share -- -- (23,169) 47,864 -- 24,695
Private Placement Proceeds 2,550,000 2,550 6,102,332 -- -- 6,104,882
Issuance at $1.65 upon
Exercise of Stock Warrants 211,816 212 349,285 -- -- 349,497
Purchase of 16,466 Shares of
Treasury Stock at Cost -- -- -- (51,456) -- (51,456)
Net Loss for the Year
Ended December 31, 1995 -- -- -- -- (8,257,949) (8,257,949)
-----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 19,904,706 $19,905 $62,399,255 $ (80,523) $(46,338,536) $16,000,101
Issuance at $.60 to $3.56
per Share upon Exercise
of Stock Options 60,710 61 161,643 -- -- 161,704
Employee Stock Purchase
Plan Issuance at $2.71
per Share -- -- (3,019) 11,585 -- 8,566
Net Proceeds from Stock Issuance 5,000,000 5,000 10,063,652 -- -- 10,068,652
Compensation Expense Associated
with Stock Options -- -- 170,288 -- -- 170,288
Net Loss for the Year
Ended December 31, 1996 -- -- -- -- (10,790,084) (10,790,084)
-----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 24,965,416 $24,966 $72,791,819 $(68,938) $(57,128,620) $15,619,227
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
Increase in Cash and Cash Equivalents 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net Loss $ (10,790,084) $ (8,257,949) $(11,583,551)
Adjustments to Reconcile Net Loss to Cash
used by Operating Activities:
Depreciation and Amortization 464,756 719,573 844,741
Write-off of Leasehold Improvements -- -- 910,812
Losses on Short-term Investments -- -- 1,851,782
Decrease in Collaborator Advance (181,573) (318,427) --
Write-off of Capitalized Patent Costs 1,751,626 -- --
Compensation Expense Associated with Stock Options 170,288 -- --
Gain on Sale of Research Products and Operations of
T Cell Diagnostics, Inc. (282,980) -- --
Changes in Assets and Liabilities:
Accounts Receivable (24,364) 132,657 22,429
Inventories 14,135 5,973 (7,288)
Prepaid and Other Current Assets 119,686 18,734 (270,753)
Accounts Payable and Accrued Expenses (796,203) (369,322) (401,237)
Deferred Revenue (121,083) 121,083 (433,000)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (9,675,796) (7,947,678) (9,066,065)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of Short-term Investments -- -- (1,190,608)
Redemption of Short-term Investments -- 8,539,666 13,983,558
Acquisition of Property and Equipment (135,246) (577,263) (770,344)
Increase in Patents and Licenses (507,463) (1,216,884) (493,885)
(Increase) Decrease in Long-Term Restricted Cash 165,000 (850,000) --
Payment Received on Convertible Note Receivable 200,297 -- --
Other 30,839 10,352 (4,435)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (246,573) 5,905,871 11,524,286
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net Proceeds from Stock Issuance 10,077,218 6,129,577 21,707
Proceeds from Exercise of Stock Options 161,704 244,753 13,306
Proceeds from Exercise of Stock Warrants -- 349,497 --
Purchases of Treasury Stock -- (51,456) --
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 10,238,922 6,672,371 35,013
- ------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 316,553 4,630,564 2,493,234
Cash and Cash Equivalents at Beginning of Period 12,275,217 7,644,653 5,151,419
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 12,591,770 $ 12,275,217 $ 7,644,653
========================================================================================================================
Cash, Cash Equivalents, Short-term Investments and Marketable
Securities at End of Period $ 12,591,770 $ 12,275,217 $ 16,184,319
========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Business
T Cell Sciences, Inc. (the "Company") is a biopharmaceutical company engaged in
the discovery and development of innovative drugs targeting diseases of the
immune, inflammatory and vascular systems. The Company develops and
commercializes products on a proprietary basis and in collaboration with
established pharmaceutical partners, including Astra AB and Yamanouchi
Pharmaceutical Co., Ltd.
In March 1996, the Company sold substantially all of the assets of its
wholly-owned subsidiary, T Cell Diagnostics, Inc. ("TCD") while retaining all
rights to the TRAx(R) product franchise. The Company will continue to
commercialize the TRAx line of diagnostic products which are used in the
detection and monitoring of immune-related disorders.
(B) Basis of Presentation
The financial statements include the accounts of T Cell Sciences, Inc. and its
wholly owned subsidiary, T Cell Diagnostics, Inc. All intercompany transactions
have been eliminated. Certain prior year information was reclassified to conform
with the current year presentation.
(C) Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Short-term investments are those
with maturities in excess of three months but less than one year. All cash
equivalents and short-term investments have been classified as available for
sale and are reported at fair market value with unrealized gains and losses
included in stockholders' equity.
The Company invests its nonoperating cash in debt instruments of financial
institutions, government entities and corporations, and mutual funds. The
Company has established guidelines relative to credit ratings, diversification
and maturities that maintain safety and liquidity.
Included in cash and cash equivalents at December 31, 1995 is $958,000 of
short-term restricted cash (see Note 3).
(D) Fair Value of Financial Instruments
The Company enters into various types of financial instruments in the normal
course of business. Fair values for cash, cash equivalents, short-term
investments, accounts and notes receivable, accounts payable and accrued
expenses approximate carrying value at December 31, 1996 and 1995, due to the
nature of these instruments and the relatively short maturity of these
instruments.
(E) Revenue Recognition
The Company has entered into separate agreements with corporate collaborators
for the performance of certain specified product developments. The product
development agreements provide for periodic nonrefundable payments which are
recognized as revenue as the work is performed. Cash payments received by the
Company in advance of performing the work are recorded as deferred revenue. The
Company has received nonrefundable fees at the time of signing agreements as
payment for entering into the agreement. These signing fees are recognized as
revenue when received. Revenues from product sales are recorded when the product
is shipped.
(F) Research and Development Costs
Research and development costs are expensed as incurred.
(G) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(H) Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Laboratory
equipment and office furniture and equipment are depreciated over a five year
period and computer equipment is depreciated over a three year period. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
noncancelable term of the related lease.
(I) Licenses, Patents and Trademarks
Included in other assets are the costs of purchased licenses and certain costs
associated with patents and trademarks which are capitalized and amortized over
the shorter of the estimated useful lives or ten years using the straight-line
method. The Company periodically evaluates the recoverability of these assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121")."
(J) Loss Per Share
Net loss per share of common stock is based on the weighted average number of
common shares outstanding during each period. Common stock equivalents are not
included for any period presented, as their effect is antidilutive.
(K) Stock Compensation
The Company's employee stock option plans are accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (see Note 9).
(L) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at December 31, 1996 and 1995 and the reported
amounts of revenue and expense for the years ended December 31, 1996, 1995 and
1994. Actual results could differ from those estimates.
2. SHORT-TERM INVESTMENTS AND RESTRICTED CASH
The Company currently invests in only high quality, short-term investments which
are considered highly liquid and are available to support current operations. At
December 31, 1996 and 1995, the Company's investments met the definition of cash
equivalents and were recorded at cost, which approximated fair value in all
material respects. At December 31, 1994, the Company's investments were
comprised of certain debt and equity securities and were classified as
available-for-sale.
Proceeds from maturities and other sales of securities for the year ended
December 31, 1994 were $13,984,000, the related gross realized losses on such
sales were $879,000 and gross realized gains were immaterial. Additionally, in
December 1994, the Company decided, as a result of the duration and extent of
the unrealized losses on its bond fund, that the unrealized loss was other than
temporary and realized a loss of $973,000. In February 1995, the Company
liquidated its investment in the bond fund; actual losses incurred approximated
the amount recognized in 1994.
In accordance with the terms of the Company's operating lease agreement, the
Company has pledged as collateral $685,000 and $1,808,000 at December 31, 1996
and 1995, respectively. At December 31, 1996, the amount
pledged as collateral is recorded as long-term restricted cash and at December
31, 1995 $958,000 is recorded as short-term restricted cash and is included in
cash equivalents and $850,000 is recorded as long-term restricted cash. In March
1996, the Company repaid a portion of the outstanding obligation under the
operating lease in conjunction with the of the research products and operation
of TCD (see Note 16). As a result, the amount required as collateral was reduced
to $850,000.
3. PROPERTY, EQUIPMENT AND LEASES
Property and equipment includes the following:
December 31, December 31,
1996 1995
-------------------------------
Laboratory Equipment $ 2,054,966 $ 2,800,649
Office Furniture and Equipment 751,547 953,189
Leasehold Improvements 219,496 614,616
------------------------------
Property and Equipment, Total 3,026,009 4,368,454
Less Accumulated Depreciation and Amortization (2,514,369) (3,196,317)
------------------------------
Property and Equipment, Net $ 511,640 $ 1,172,137
------------------------------
Depreciation expense related to equipment and leasehold improvements was
approximately $291,000, $465,000 and $649,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
In May 1996, the Company entered into a six-year lease for laboratory and office
space in Needham, Massachusetts. The lease replaced two-year lease and sublease
agreements entered into in March 1995 for the same location and increased the
amount of office and laboratory space available. Concurrent with the May 1996
lease, the Company entered into an agreement to sublease excess space for a
four-year term and provided the subtenant with the right to extend the sublease
for up to an additional two years. In March 1996, the Company sold certain
property and equipment to Endogen as part of the sale of the research products
and operations of TCD. In addition, certain lease obligations of the Company
were assigned to Endogen in conjunction with the sale (see Note 16).
Obligations for base rent, net of sublease income, under these and other
noncancelable operating leases as of December 31, 1996 are approximately as
follows:
Year ending December 31,1997 $ 829,000
1998 849,000
1999 846,000
2000 819,000
2001 763,000
Thereafter 252,000
-------------
Total minimum lease payments $ 4,358,000
-------------
The Company's total rent expense was approximately $903,000, $1,100,000 and
$1,100,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
In August 1994, the Company entered into a lease agreement providing the Company
with the right to lease up to $2,000,000 of equipment for up to a five-year
term. The lease agreement requires that the Company maintain certain restrictive
covenants determined at the end of each fiscal quarter. At September 30, 1995
the Company's cash and cash equivalents balance was below the $10,000,000
minimum covenant requirement. As a result, in accordance with the lease
agreement, the Company pledged cash as collateral to the lessor equal to the
amount outstanding on the lease which is to remain in a certificate of deposit
until the end of the lease or as otherwise agreed by the lessor and the Company.
At December 31, 1996, $685,000 is recorded as long-term restricted cash and at
December 31, 1995, $958,000 and $850,000 is recorded as short-term and long-term
restricted cash,
respectively. In March 1996, the Company repaid approximately $980,000 of the
outstanding payments due under the lease in conjunction with the sale of the
research products and operations of TCD.
4. OTHER ASSETS
Other assets include the following:
December 31, December 31,
1996 1995
-------------------------------------
Capitalized Patent Costs $1,570,530 $3,272,109
Accumulated Amortization (397,907) (577,624)
-------------------------------------
Capitalized Patent Costs, Net 1,172,623 2,694,485
Other Non Current Assets 174,956 256,577
-------------------------------------
$1,347,579 $2,951,062
=====================================
During the second quarter of 1996, as part of the Company's realignment of
certain of its operations, the Company suspended internal funding of the
research and development of its T cell antigen receptor program pending
completion of negotiations to transfer certain of its patent and license rights
related to such technology to Astra AB. In June 1996, in accordance with SFAS
121, the Company evaluated and subsequently wrote off approximately $1,752,000
of capitalized patent costs relating to its T cell antigen receptor program
which is included in the Company's operating expense in general and
administrative.
Amortization expense for the years ended December 31, 1996, 1995 and 1994
relating to the capitalized costs of purchased licenses and patents and
trademarks was approximately $174,000, $254,000 and $196,000, respectively.
5. ACCRUED EXPENSES
Accrued expenses include the following:
December 31, December 31,
1996 1995
----------------------------------
Accrued License Fees $ 55,000 $ 47,584
Accrued Funded Research -- 19,350
Accrued Royalties -- 13,809
Accrued Payroll and Employee Benefits 208,444 210,961
Accrued Relocation Expenses -- 79,725
Accrued Clinical Trials 364,765 195,944
Accrued Patent Costs 58,614 228,981
Accrued Consulting 95,958 --
Other Accrued Expenses 495,707 708,232
----------------------------------
$1,278,488 $1,504,586
==================================
6. INCOME TAXES
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
Income tax benefit:
Federal $ 3,696,048 $ 2,984,812 $3,705,826
State 388,031 354,821 1,013,701
--------------------------------------------------
4,084,079 3,339,633 4,719,527
Deferred tax assets
valuation allowance (4,084,079) (3,339,633) (4,719,527)
--------------------------------------------------
$ -- $ -- $ --
==================================================
Deferred tax assets are comprised of the following at December 31:
December 31, December 31,
1996 1995
----------------------------------
Net Operating Loss Carryforwards $ 21,346,733 $ 17,207,019
Tax Credit Carryforwards 3,043,880 2,921,484
Other 981,784 1,159,815
----------------------------------
Gross Deferred Tax Assets 25,372,397 21,288,318
Deferred Tax Assets
Valuation Allowance (25,372,397) (21,288,318)
----------------------------------
$ -- $ --
==================================
In reconciliation between the amount of reported income tax expenses and the
amount computed using the U.S. Statutory rate of 35% follows:
1996 1995 1994
---------------------------------------------
Loss at Statutory Rates $ (3,776,529) $(2,890,282) $(4,054,243)
Research and Development Credits (189,381) (255,752) (165,657)
State tax benefit, net of federal
tax liabilities (337,425) (231,249) (573,354)
Other 219,256 37,650 73,727
Benefit of losses and credits
not recognized, increase in
valuation allowance 4,084,079 3,339,633 4,719,527
---------------------------------------------
$ -- $ -- $ --
=============================================
The Company has provided a full valuation allowance for deferred tax assets as
management has concluded that it is more likely than not that the Company will
not recognize any benefits from its net deferred tax asset. The timing and
amount of future earnings will depend on numerous factors, including the
Company's future profitability. The Company will assess the need for a valuation
allowance as of each balance sheet date based on all available evidence.
At December 31, 1996, the Company has U.S. net operating loss carryforwards of
$55,460,217, U.S. capital loss carryforwards of $1,852,324, and U.S. tax credits
of $2,508,351 which expire at various dates from 1999 through 2010.
Under the Tax Reform Act of 1986, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss carryforwards, research and development tax credits, and capital loss
carryforwards which could be utilized.
7. STOCKHOLDERS' EQUITY
(A) Public and Private Stock Offerings
On August 26, 1996, the Company completed a public offering of 5,000,000 newly
issued shares of common stock. Net proceeds were approximately $10,069,000 after
deducting all associated expenses.
On November 7, 1995, the Company completed a private placement of 2,550,000
newly issued shares of common stock. Net proceeds were approximately $6,100,000
after deducting all associated expenses.
(B) Preferred Stock
At December 31, 1996 and 1995, the Company had authorized preferred stock
comprised of 1,163,102 shares of convertible Class B and 3,000,000 shares of
convertible Class C of which 350,000 shares has been designated as Class C-1
Junior Participating Cumulative, the terms of which are to be determined by the
Company's Board of Directors. There was no preferred stock outstanding at
December 31, 1996 and 1995.
(C) Stock Options and Employee Stock Purchase Plans
Stock Options
The Company's 1991 Stock Compensation Plan (the "1991 Plan"), which is an
amendment and restatement of the Company's 1985 Incentive Option Plan, permits
the granting of incentive stock options (intended to qualify as such under
Section 422A of the Internal Revenue Code of 1986, as amended), non-qualified
stock options, stock appreciation rights, performance share units, restricted
stock and for other awards of restricted stock in lieu of cash bonuses to
employees, consultants and outside directors.
The Plan allows for a maximum of 3,700,000 shares of common stock to be issued
prior to December 1, 2001. The Board of Directors determines the term of each
option, option price, number of shares for which each option is granted and the
rate at which each option is exercisable. The term of each option cannot exceed
ten years (five years for options granted to holders of more than 10% of the
voting stock of the Company). The exercise price of stock options shall not be
less than the fair market value of the common stock at the date of grant (110%
of fair market value for options granted to holders of more than 10% of the
voting stock of the Company).
In December 1995, the Company canceled 211,405 stock options and regranted
169,123 stock options resulting in a 42,282 decrease in options outstanding in
connection with a repricing offer to non-officer employees, most of whom were
long-term employees.
Employee Stock Purchase Plan
The 1994 Employee Stock Purchase Plan (the "1994 Plan") was adopted on June 30,
1994. All full time employees of the Company are eligible to participate in the
1994 Plan. A total of 150,000 shares are reserved for issuance under this plan.
An employee may participate voluntarily in any offering for up to 15% of their
compensation to purchase up to 500 shares per year and may withdraw from any
offering at any time before stock is purchased. Participation terminates
automatically upon termination of employment. The purchase price per share of
common stock in an offering is 85% of the lower of its fair market value at the
beginning of the offering period or the applicable exercise date.
A summary of the Stock Compensation Plan option activity for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995
Weighted Weighted
Average Exercise Average Exercise
----------------------------------------------
Shares Price Shares Price
- -------------------------------------------------------------------------------
Outstanding at January 1, 2,516,313 $5.82 2,559,820 $6.42
Granted 472,600 2.82 620,523 3.06
Exercised (60,710) 2.66 (88,668) 2.45
Canceled (625,007) 3.39 (575,362) 6.05
- -------------------------------------------------------------------------------
Outstanding at December 31, 2,303,196 $5.94 2,516,313 $5.82
================================================================================
At December 31,
Options exercisable 1,740,310 1,498,401
Available for grant 678,762 571,516
Weighted average fair value
of options granted during
year $1.26 $1.36
================================================================================
The following table summarizes information about the stock options outstanding
at December 31, 1996:
Options Outstanding
-----------------------------------------------------
Number Weighted Average
Outstanding at Remaining Weighted Average
Range of Exercise Prices December 31, 1996 Contractual Life Exercise Price
- ------------------------- ----------------- ----------------- -----------------
$ 2.03 - 2.75 555,650 7.28 $ 2.46
2.94 - 3.19 621,308 6.36 3.03
3.25 - 6.13 492,238 4.97 4.53
6.25 - 12.38 434,000 2.77 9.70
20.00 - 20.00 200,000 0.41 20.00
- -------------------------------------------------------------------------------
$ 2.03 - 20.00 2,303,196
===============================================================================
Options Exercisable
---------------------------------------------------
Number
Exercisable at Weighted Average
Range of Exercise Prices December 31, 1996 Exercise Price
- ------------------------- ------------------------- -------------------------
$ 2.03 - 2.75 338,834 $ 2.46
2.94 - 3.19 345,873 3.03
3.25 - 6.13 428,228 4.54
6.25 - 12.38 427,375 9.74
20.00 - 20.00 200,000 20.00
- -------------------------------------------------------------------------------
$ 2.03 - 20.00 1,740,310
===============================================================================
Fair Value Disclosures
Had compensation cost for the Company's option plans been determined based on
the fair value at the grant dates, consistent with SFAS 123, the Company's net
loss, and net loss per share for the years ending December 31, 1996 and 1995
would be as follows:
1996 1995
--------------------------------------------------------
Net Loss:
As reported $10,790,084 $8,257,949
Pro forma $11,269,924 $8,471,362
Net Loss Per Share:
As reported $0.50 $0.47
Pro forma 0.52 0.48
The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1996 1995
---------------------------------------------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 51% 51%
Risk-free interest rate 4.9% - 6.7% 5.4% - 7.5%
Expected option term 2.6 Years 2.6 Years
Because the determination of the fair value of all options granted includes an
expected volatility factor in addition to the factors detailed in the table
above and, because additional option grants are expected to be made each year,
the above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
(D) Shareholder Rights Plan
On November 10, 1994, the Company's Board of Directors declared a dividend of
one preferred share purchase right for each share of common stock outstanding.
Each right entitles the holder to purchase from the Company one-one thousandth
of a share of Series C-1 Junior Participating Cumulative Preferred Stock (a
"Unit"), par value $.01 at a price of $16.00 per one-one thousandth of a share,
subject to certain adjustments. The Units are exercisable only if a person or a
group acquires 15% or more of the outstanding common stock of the Company or
commences a tender offer which would result in the ownership of 15% or more of
the Company's outstanding common stock. Once a Unit becomes exercisable, the
plan allows the Company's shareholders to purchase common stock at a substantial
discount. Unless earlier redeemed, the Units expire on November 10, 2004. The
Company is entitled to redeem the Units at $.01 per Unit subject to adjustment
for any stock split, stock dividend or similar transaction.
As of December 31, 1996 the Company has authorized the issuance of 350,000
shares of Series C-1 Junior Participating Cumulative Preferred Stock for use in
connection with the shareholder rights plan.
(E) Severance Agreement Charge
On May 29, 1996 the Company announced changes in it senior management. As part
of the reorganization, the Company recorded a $425,000 charge to earnings
resulting from a severance agreement with the Company's former President and
Chief Executive Officer. The charge included a $255,000 severance payment and a
non-cash charge of approximately $170,000 relating to the acceleration of
certain stock option vesting rights.
8. RESEARCH AND LICENSING AGREEMENTS
The Company has entered into licensing agreements with several universities and
research organizations. Under the terms of these agreements, the Company has
received licenses or options to license technology, certain patents or patent
applications. The Company is required to make payments of nonrefundable license
fees and royalties which amounted to approximately $205,000, $200,000 and
$336,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
9. PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENTS
The Company's product development revenues were received from contracts with
different organizations. Total revenue received by the Company in connection
with these contracts for the years ended December 31, 1996, 1995 and 1994 were
approximately $600,000, $1,600,000 and $3,700,000, respectively. A summary of
these contracts is as follows:
(A) Astra AB
In January 1992, the Company entered into a product development and distribution
agreement with Astra AB ("Astra"), a worldwide pharmaceutical company
headquartered in Sodertalje, Sweden, for the joint development and marketing of
therapeutic products resulting from T Cell Sciences' proprietary T cell antigen
receptor ("TCAR") technology. The products developed exclusively and jointly
with Astra were monoclonal antibodies and protein-derived immunomodulators that
may have efficacy in treating autoimmune diseases such as multiple sclerosis,
Crohn's disease, and rheumatoid arthritis. Revenue recognized for the years
ended December 31, 1996, 1995 and 1994 was $272,000, $1,400,000 and $3,000,000,
respectively.
In June 1996, the Company suspended further internal funding of the research and
development of the TCAR program. In December 1996, the Company further amended
its agreement with Astra to transfer certain of its rights to the TCAR
technology to Astra, who will be solely responsible for further development and
commercialization. Under the amended agreement, the Company has received an
initial signing fee of $100,000 and could receive future milestone and royalty
payments upon Astra's successful development and commercialization of the TCAR
technology.
Included in revenue for the years ended December 31, 1996 and 1995, is $182,000
and $318,000, respectively, from the reduction of the collaborator advance
liability. The funds were advanced from Astra for the expansion of additional
research space dedicated to joint TCAR product research. The collaborator
advance liability was reduced based on the amended agreement.
(B) CytoTherapeutics
In April 1996, the Company licensed portions of its patent and technology rights
regarding CR1 (Complement Receptor 1) to CytoTherapeutics, Inc. for use in
CytoTherapeutics' cell-based products for the delivery of therapeutic substances
to the central nervous system. Under the agreement, the Company granted
non-exclusive rights for the use of CR1 in any encapsulated-cell product. The
license does not include rights to use CR1 for therapeutic effects. The Company
received a $100,000 signing fee and will receive additional milestone payments
and royalty payments from commercialized products resulting from the license.
(C) Yamanouchi Pharmaceutical Co., Ltd.
In December 1986 the Company entered into an agreement with Yamanouchi
Pharmaceutical Co., Ltd. ("YPC") for the development and marketing of certain
diagnostic products in Japan and in April 1989, the Company executed a new joint
development agreement for several new diagnostic products for Japan. In May
1992, the Company expanded its relationship with YPC to include a product
marketing arrangement for Japan and Taiwan related to several TRAx products in
development. Revenues of approximately $500,000 were recognized under these
agreements for the year ended December 31, 1994.
(D) Diamedix Corporation
In December 1995, the Company received a $175,000 signing fee associated with a
distribution agreement with Diamedix Corporation to market TRAx CD4 and TRAx CD8
microtiter plate diagnostic kits to clinical diagnostic laboratories in the
United States. The Company retains the rights to sell kits to certain research
laboratories and pharmaceutical companies.
(E) SmithKline Beecham, p.l.c
In 1989, the Company signed an exclusive development and distribution contract
for TP10 (sCR1) with SmithKline Beecham. The Company entered into a new
agreement in October 1994, with SmithKline Beecham, superseding the original
agreement. Under the new agreement, the Company regained exclusive rights to
sCR1 in North America, including clinical development and marketing rights and
SmithKline Beecham was granted an option for clinical development and marketing
of injectable sCR1 outside of North America. The Company and SmithKline Beecham
mutually agreed to terminate the October agreement in February 1995, with no
future financial obligations to either party.
(F) INCSTAR
In March 1994, the Company received a $250,000 signing fee associated with a
distribution agreement with INCSTAR Corporation to market TRAx CD4 and TRAx CD8
kits in North America, Europe and most other countries of the world. During
1995, the Company and INCSTAR Corporation mutually agreed to terminate the
agreement without any future financial obligations.
10. NON-OPERATING INCOME(EXPENSE)
Non-Operating income(expense) includes the following:
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
Interest and Dividend Income $680,198 $604,634 $1,361,727
Gain on Sale of Portion of Diagnostic
Business 282,980 -- --
Settlement of Lawsuit -- 2,900,000 --
Gain on Sale of Investments -- 100,000 --
Realized Loss on Sale of Investments -- -- (878,924)
Other than Temporary Loss on
Writedown of Investment -- -- (972,858)
---------------------------------------
$963,178 $3,604,634 $(490,055)
========================================
11. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective May 1990, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make tax deferred
contributions up to 15%, or $9,500, of their total salary in 1996. The Company
may, at its discretion, make contributions to the plan each year matching up to
1% of the participant's total annual salary. Company contributions amounted to
$33,000, $39,000 and $42,000 for the years ended December 31, 1996, 1995 and
1994.
12. FOREIGN SALES
Foreign Sales:
- --------------
Product sales were generated geographically as follows:
Net Product Sales for the
Twelve Months Ended Europe USA Asia Other Total
- ------------------- ------ --- ---- ----- -----
December 31, 1996 $ 145,000 $ 240,000 $130,000 $ 8,000 $ 523,000
December 31, 1995 732,000 992,000 491,000 139,000 2,354,000
December 31, 1994 1,187,000 1,455,000 526,000 63,000 3,231,000
13. FACILITY RELOCATION EXPENSE
In June 1994, the Company temporarily vacated its headquarters building at 38
Sidney Street in Cambridge, Massachusetts due to air quality problems within the
building causing a significant number of employees to experience skin and
respiratory irritation. During the third quarter of 1994, the Company determined
that it could not return to the building and ensure the protection of its
employees health. As a result, the Company moved its headquarters to Needham,
Massachusetts and its diagnostic subsidiary to Woburn, Massachusetts. The costs
to physically move property and establish computer and telephone networks at
alternate sights, write-off the net book value of leasehold improvements and
legal and other costs directly associated with vacating the Sidney Street
location are included in operating expense as Relocation Expense.
The total amount charged to relocation expense was included in the Company's
property and business interruption claims with its insurer. In July 1995, the
Company brought suit against its insurance carrier and the policy underwriter
for a judgment that the Company is entitled to insurance coverage for its
property and business interruption losses incurred as a result of the forced
evacuation and relocation. In November 1995, the Company received $2,900,000 as
a result of a settlement agreement and the lawsuit was dismissed.
14. LITIGATION
In December 1994, the Company filed a lawsuit in the Superior Court of
Massachusetts against the landlord of its former Cambridge, Massachusetts
headquarters, to recover the damages incurred by the Company resulting from the
evacuation of the building, due to air quality problems which caused skin and
respiratory irritation to a significant number of employees. The landlord
defendant has filed counterclaims, alleging the Company has breached its lease
obligations. The court ordered a limited trial between the Company and the
landlord on certain factual issues which began on November 20, 1996. Closing
arguments for the limited trial were heard on January 13, 1997. The court has
not yet entered its findings on the limited trial. Until the court enters its
findings, the Company is unable to assess what impact the findings will have on
the trial of the issue of the Company's liability under the lease. In a separate
lawsuit, the landlord's mortgagee has filed claims against the Company for
payment of the same rent alleged to be owed. A motion for summary judgment filed
by the bank was denied by the court. Due to the current stage of the lawsuits, a
range of potential losses, cannot be estimated at this time. Accordingly, no
accrual has been made in the financial statements relative to any potential
effects on the Company's future operating results. A significant adverse
settlement could have a negative impact on the future operating results of the
Company.
The Company's insurance carrier was reimbursing the Company for certain legal
expenses associated with the counterclaims, under a reservation of rights. The
Company's insurance carrier filed a motion for summary judgment seeking a
determination of noncoverage. The Company filed an opposition to the insurer's
motion for summary judgment. On November 21, 1996, the court allowed the
carrier's motion for summary judgment over the Company's opposition. The Company
expects to appeal the ruling once it has been entered into the court records.
15. RELATED PARTY TRANSACTION
During 1995, the Company entered into a Placement Agency Agreement with a firm
whereby the Company paid $165,000 in fees for the private placement of stock of
the Company with certain investors. A Managing Director of the firm is also a
Director of the Company.
16. SALE OF PORTION OF DIAGNOSTIC BUSINESS
On March 5, 1996 the Company sold to Endogen, Inc. the research products and
operations of TCD for a purchase price of approximately $2,880,000, while
retaining the TRAx diagnostic product franchise. The consideration for this sale
was paid in the form of a convertible subordinated note receivable (the
"Convertible Note") in the principal amount of $2,003,000 and a combination of
cash and a short-term note used to repay approximately $980,000 of obligations
under the Company's operating lease. The Convertible Note was due in semi-annual
installments over a five year period commencing September 1, 1996 with interest
receivable thereon at a rate of 7% per annum. A principal payment of $200,000
was received, in accordance with the terms of the note, on September 1, 1996,
reducing the outstanding principal amount to $1,803,000 at December 31, 1996.
The outstanding principal balance of the Convertible Note was convertible at any
time at the option of the Company into shares of common stock of Endogen. On
February 10, 1997, the Company converted the outstanding principal balance, or
$1,803,000, of the Convertible Note into shares of Endogen commons stock which
it subsequently sold. Additionally, the Company may receive a royalty on certain
of Endogen's sales of research products.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company's Form 8-K dated February 10, 1994, reporting a change of the
Company's independent accountant effective February 10, 1994, is hereby
incorporated by reference.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Proposal 1 - Election of Directors" and
"Management" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 13, 1997, is hereby incorporated by reference.
Item 11. EXECUTIVE COMPENSATION
The information under the Section "Management" of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 13, 1997 is
hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Beneficial Ownership of Common Stock" of the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 13, 1997, is hereby incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Proposal 1 - Election of Directors" and
"Management" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 13, 1997, is hereby incorporated by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Form 10-K:
(1) Financial Statements:
See "Index to Consolidated Financial Statements" at Item 8.
(2) Financial Statement Schedules:
Schedules are omitted since the required information is not applicable or
is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits:
No. Description Page No.
- -------------------------------------------------------------------------------------------------------
2.1 Agreement of Merger among the Company, T Cell Incorporated by reference to the Company's
Acquisition Corp. and T Cell Diagnostics, report on form 8-K filed September 22, 1993
Inc. dated August 20, 1993 relating to
reconsolidation of the Company's subsidiary
2.2 Asset Purchase Agreement among Endogen, Inc., Incorporated by reference to the Company's
T Cell Diagnostics, Inc., with the Company report on form 8-K filed March 20, 1996
dated March 4, 1996
3.1 Third Restated Certificate of Incorporation Incorporated by reference to the Company's
of the Company Annual Report on Form 10-K for the year ended
April 30, 1991
3.2 Certificate of Amendment of Third Restated Incorporated by reference to the Company's
Certificate of Incorporation of the Company Annual Report on Form 10-K for the year ended
December 31, 1992
3.3 Certificate of Designation for series C-1 Incorporated by reference to the Company's
Junior Participating Cumulative Preferred Annual Report on Form 10-K for the year ended
Stock December 31, 1994
3.4 Amended and Restated By-Laws of the Company Incorporated by reference to the Company's
as of November 10, 1994 report on Form 8-K dated November 10, 1994
4.1 Form of Purchase Agreement dated November 23, Incorporated by reference to Exhibit 10.1 of
1993 relating to the Company's private the Company's Registration Statement on Form
placement of Common Stock S-3 (Reg. No. 33-72172)
4.2 Shareholder Rights Agreement dated November Incorporated by reference to the Company's
10, 1994 between the Company and State Street report on Form 8-K dated November 10, 1994
Bank and Trust Company as Rights Agent
4.3 Form of Stock Purchase Agreement dated Incorporated by reference to Exhibit 10.1 of
October 27, 1995 relating to the Company's the Company's Registration Statement on Form
private placement of Common Stock S-3 (Reg. No. 33-64021)
4.4 Form of Stock Purchase Agreement dated Incorporated by reference to Exhibit 10.1 of
November 3, 1995 relating to the Company's the Company's Registration Statement on Form
private placement of Common Stock S-3 (Reg. No. 33-64021)
10.1 Amended and Restated 1991 Stock Compensation Incorporate by reference to the Company's
as of April 1, 1995 Annual Report on Form 10K for the fiscal year
ended December 31, 1995
10.2 1994 Employee Stock Purchase Plan Incorporated by reference to the Company's
Registration Statement on Form S-8 filed
June 8, 1994
10.3 Product Development and Distribution Incorporated by reference to the Company's
Agreement between Astra AB and the Company report on Form 8-K filed on February 13, 1992
dated January 30, 1992, portions of
which are subject to confidential treatment
10.4 Commercial Lease Agreement of October 15, Incorporated by reference to the Company's
1994 between T Cell Diagnostics, Inc. and Annual Report on Form 10-K for the year ended
Cummings Properties Management December 31, 1994
10.5 Performance Plan of the Company Incorporated by reference to the Company's
Annual Report on Form 10-K for the transition
period ended December 31, 1992
10.6 Employment Agreement between the Company and Incorporated by reference to the Company's
Alan W. Tuck dated February 6, 1992 Annual Report on Form 10-K for the transition
period ended December 31, 1992
10.7 Consulting Agreement between the Company and Page ____
Patrick C. Kung dated January 1, 1997
10.8 Form of Agreement relating to Change of Incorporated by reference to the Company's
Control Annual Report on Form 10-K for the transition
period ended December 31, 1992
10.9 Termination Agreement between the Company and Incorporated by reference to the Company's
SmithKline Beecham p.l.c. relating to sCR1 report on Form 8-K filed April 27, 1995
dated April 7, 1995, portions of which are
subject to confidential treatment
10.10 Pledge Agreement between the Company and Incorporated by reference to the Company's
Fleet Credit Corporation dated October 24, Quarterly Report on Form 10-Q for September 1995
dated September 30, 1995
10.11 Employment Agreement between the Company and Page ____
Una S. Ryan, Ph.D. dated May 28, 1996
10.12 Severance Agreement between the Company and Page ____
Norman W. Gorin dated June 1, 1996
10.13 Consulting Agreement between the Company and Page ____
James D. Grant dated May 28, 1996
10.14 Second Amended and Restated Product Page ____
Development and Distribution Agreement
between Astra AB and the Company dated May 1,
1996 portions of which are subject to a
request for confidential treatment
10.15 Commercial Lease Agreement of May 1, 1997 Incorporated by reference to the Company's
between the Company and Fourth Avenue report on Form 10-Q for the quarterly period
Ventures Limited ended September 30, 1996
16.0 Letter regarding Change in Certifying Incorporated by reference to the Company's
Accountant report on Form 8-K dated February 10, 1994
21.0 List of Subsidiaries Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1993
23.0 Consent of Independent Accountants Page ___
27.0 Financial Data Schedule Page ____
(B) Reports on Form 8-K.
During 1996, the following reports on Form 8-K were filed: Form 8-K dated March
5, 1996 and Form 8-K dated May 29, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
T CELL SCIENCES, INC. Date
by: /s/ Una S. Ryan March 21, 1997
-----------------------------------
Una S. Ryan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Una S. Ryan President, Chief Executive Officer March 21, 1997
-------------------------
(Una S. Ryan)
/s/ Norman W. Gorin Vice President, Finance and Chief March 21, 1997
------------------------- Financial Officer
(Norman W. Gorin)
/s/ James D. Grant Chairman of the Board and Director March 21, 1997
-------------------------
(James D. Grant)
/s/ Patrick C. Kung Vice Chairman of the Board and Director March 21, 1997
-------------------------
(Patrick C. Kung)
/s/ John P. Munson Director March 21, 1997
-------------------------
(John P. Munson)
/s/ Thomas R. Ostermueller Director March 21, 1997
-------------------------
(Thomas R. Ostermueller)
/s/ John Simon Director March 21, 1997
-------------------------
(John Simon)
/s/ Harry H. Penner, Jr. Director March 21, 1997
-------------------------
(Harry H. Penner, Jr.)