<PAGE> 1
Filed pursuant to Rule 424(b)(3)
File No. 333-46168
[AQUILA LOGO]
175 CROSSING BOULEVARD
FRAMINGHAM, MASSACHUSETTS 01702
September 28, 2000
Dear Common Stockholder:
We cordially invite you to attend a special meeting of the common
stockholders of Aquila Biopharmaceuticals, Inc. at our headquarters at 175
Crossing Boulevard, Framingham, Massachusetts 01702 on November 15, 2000, at
4:00 p.m., local time.
At the meeting, we will ask you to vote on a proposal to adopt a merger
agreement with Antigenics Inc. that will cause Aquila to become a wholly owned
subsidiary of Antigenics. In the merger, each one of your shares of Aquila
common stock will be converted into 0.2898 of a share of Antigenics common
stock. You will receive cash for any fractional share of Antigenics common stock
that you would otherwise be entitled to receive.
Antigenics common stock is quoted on the Nasdaq National Market under the
trading symbol "AGEN," and on September 28, 2000, its closing price was $15.313
per share.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST
INTERESTS OF AQUILA AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
ACCOMPANYING THIS LETTER IS A NOTICE OF SPECIAL MEETING OF STOCKHOLDERS AND
A PROXY STATEMENT/ PROSPECTUS. WE ENCOURAGE YOU TO READ THE ENTIRE PROXY
STATEMENT/PROSPECTUS AND TO CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER "RISK
FACTORS" ON PAGE 8 BEFORE VOTING.
Whether or not you plan to attend the meeting, please complete, sign, date
and return your proxy in the enclosed envelope. YOUR VOTE IS VERY IMPORTANT.
Sincerely,
/s/ ALISON TAUNTON-RIGBY, PH.D.
--------------------------------------
Alison Taunton-Rigby, Ph.D.
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION APPROVED OR DISAPPROVED THE MERGER DESCRIBED IN THE PROXY
STATEMENT/PROSPECTUS OR THE ANTIGENICS COMMON STOCK TO BE ISSUED IN CONNECTION
WITH THE MERGER, OR DETERMINED IF THE PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED SEPTEMBER 28, 2000
AND IS FIRST BEING MAILED TO STOCKHOLDERS ON OR ABOUT OCTOBER 4, 2000.
<PAGE> 2
[AQUILA LOGO]
175 CROSSING BOULEVARD
FRAMINGHAM, MASSACHUSETTS 01702
------------------------
NOTICE OF SPECIAL MEETING OF COMMON STOCKHOLDERS
TO BE HELD ON NOVEMBER 15, 2000 AT 4:00 P.M.
------------------------
To the Stockholders of Aquila Biopharmaceuticals, Inc.:
We will hold a special meeting of the stockholders of Aquila
Biopharmaceuticals, Inc. at our headquarters at 175 Crossing Boulevard,
Framingham, Massachusetts, on November 15, 2000, at 4:00 p.m., local time, for
the following purposes:
1. To consider and vote upon a proposal to adopt the merger agreement
among Antigenics Inc., St. Marks Acquisition Corp. and Aquila. In the
merger, Aquila will become a wholly owned subsidiary of Antigenics, and all
outstanding shares of Aquila common stock will be converted into the right
to receive 0.2898 of a share of Antigenics common stock.
2. To transact such other business as may properly be brought before
the special meeting or any adjournment of it by the Aquila board of
directors.
We cannot complete the merger unless a majority of the shares outstanding
on September 27, 2000, the record date for the special meeting, affirmatively
adopt the merger agreement. Only stockholders who owned shares of Aquila common
stock at the close of business on September 27, 2000 are entitled to notice of,
and to vote at, the special meeting and any adjournments or postponements of it.
For more information about the merger, please review the accompanying proxy
statement/prospectus and the merger agreement attached as Annex A.
By Order of the Board of Directors,
/s/ JANE V. HAWKES
--------------------------------------
Secretary
Framingham, Massachusetts
September 28, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
<PAGE> 3
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Antigenics and Aquila from other documents that are
not included in or delivered with this proxy statement/prospectus. This
information is available to you without charge upon your written or oral
request. You can obtain those documents, which are incorporated by reference in
this proxy statement/prospectus, by requesting them in writing or by telephone
from the appropriate company at the following addresses and telephone numbers:
<TABLE>
<S> <C>
ANTIGENICS INC. AQUILA BIOPHARMACEUTICALS, INC.
630 FIFTH AVENUE, SUITE 2100 175 CROSSING BOULEVARD
NEW YORK, NEW YORK 10111 FRAMINGHAM, MASSACHUSETTS 01702
(212) 332-4774 (508) 766-2700
</TABLE>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY OCTOBER 30, 2000 IN
ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See "Where You Can Find More Information" beginning on page 106.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions & Answers About The Merger........................ iii
Summary..................................................... 1
Selected Unaudited Pro Forma Consolidated Financial Data.... 5
Comparative Per Share Data.................................. 6
Comparative Stock Prices and Dividends...................... 7
Risk Factors................................................ 8
Special Note Regarding Forward-Looking Statements........... 20
The Aquila Special Meeting.................................. 21
Business Of Antigenics...................................... 23
Antigenics Selected Historical Financial Data............... 37
Antigenics Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 39
Business of Aquila.......................................... 43
Aquila Selected Historical Financial Data................... 58
Aquila Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 59
Background and Reasons For the Merger....................... 64
Background................................................ 64
Aquila's Reasons For The Merger........................... 65
Fairness Opinion of Aquila's Financial Advisor............ 66
Antigenics' Reasons for the Merger........................ 70
Potential Conflicts and Interests of Aquila Management in
the Merger............................................. 70
The Merger and the Merger Agreement......................... 72
General Description of the Merger......................... 72
Effective Time............................................ 72
Merger Consideration for Aquila Stock and Exchange
Ratio.................................................. 72
No Fractional Shares...................................... 72
Exchange of Aquila Stock Certificates..................... 72
Treatment of Aquila Stock Options and Warrants............ 73
Treatment of Aquila Benefits and Stock Purchase Plans and
Other Employee Matters................................. 73
Accounting Treatment...................................... 74
Material United States Federal Income Tax Consequences of
the Merger............................................. 74
Covenants Under the Merger Agreement...................... 75
Representations and Warranties............................ 77
Conditions to the Merger.................................. 78
Termination of the Merger Agreement....................... 79
Termination Fees and Expenses............................. 79
Payment of Expenses....................................... 80
Amendments and Waivers.................................... 80
No Relief from Liability for Willful Breach............... 80
Appraisal or Dissenters' Rights........................... 80
Nasdaq Listing of Antigenics Stock........................ 81
Delisting of Aquila Stock................................. 81
Resales of Antigenics Stock by Aquila Affiliates.......... 81
Regulatory Matters........................................ 81
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... 82
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management After the Merger................................. 87
Certain Relationships and Related Transactions.............. 92
Stock Ownership of Directors, Executive Officers and
Principal Stockholders.................................... 93
Description of Antigenics Capital Stock..................... 96
Comparison of Rights of Antigenics and Aquila
Stockholders.............................................. 98
Legal Matters............................................... 106
Experts..................................................... 106
Future Aquila Stockholder Proposals......................... 106
Other Matters............................................... 106
Where You Can Find More Information......................... 106
Index To Financial Statements............................... F-1
ANNEXES
Agreement and Plan of Merger................................ Annex A
Opinion of Adams, Harkness & Hill........................... Annex B
</TABLE>
NOTE REGARDING TRADEMARKS
Oncophage(R) is a registered trademark of Antigenics Inc.
Stimulon(R), Quilimmune(TM), Quilimmune-P(TM), Quilimmune-M(TM),
Quilvax(TM)and Quilvax-FeLV(TM) are trademarks of Aquila Biopharmaceuticals,
Inc.
Leucogen(R) is a registered trademark of Virbac, S.A.
AIDSVAX(R) is a registered trademark of Vaxgen, Inc.
ii
<PAGE> 6
QUESTIONS & ANSWERS ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A: Carefully read and consider the information contained in this proxy
statement/prospectus. Then, please complete, sign and date your proxy and
return it as soon as possible so that your shares may be represented at the
special meeting. If you sign and send in your proxy, your shares will be
voted as you indicate in your proxy. If you sign and send in your proxy, but
do not indicate how you want to vote, we will count your proxy as a vote FOR
adoption of the merger agreement. If you abstain from voting or do not vote,
it will have the effect of a vote against the merger agreement.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY?
A: Yes. You can change your vote at any time before your proxy is voted. You can
do this in one of three ways. First, you can send a written notice stating
that you would like to revoke your proxy. Second, you can complete and submit
a new proxy dated after the date of your original proxy. If you choose either
of these two methods, you must submit your notice of revocation or your new
proxy to the Secretary of Aquila at 175 Crossing Boulevard, Framingham,
Massachusetts. Third, you can attend the special meeting and vote in person.
Simply attending the meeting, however, will not revoke your proxy; you must
also vote at the special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. Follow the information provided to you by your broker. Without
instructions, your broker will not vote your shares, which will have the
effect of a vote against the merger.
Q: SHOULD I SEND IN MY AQUILA STOCK CERTIFICATES NOW?
A: No. After the merger is completed, you will receive written instructions for
exchanging your stock certificates. Please do not send in your stock
certificates with your proxy.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. If
approved by the Aquila stockholders, we expect to complete the merger during
the fourth quarter of 2000.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: You should call Annette Nealon at (508) 766-2714 with any questions about the
merger.
You can also obtain additional information about Antigenics and Aquila from
documents each of us files with the SEC by following the instructions in the
section entitled "Where You Can Find More Information" on pages 106-107 of
this proxy statement/prospectus.
iii
<PAGE> 7
SUMMARY
This summary highlights what we believe is the most important information
about the merger. Nonetheless, to more fully understand the transaction, you
should read this entire proxy statement/prospectus, including the materials
attached as annexes, as well as the other documents to which we have referred
you. See "Where You Can Find More Information" on pages 106-107. The page
references in parentheses will direct you to a more detailed description of each
topic presented in this summary.
THE COMPANIES
ANTIGENICS (SEE PAGES 23-36)
The principal executive offices of Antigenics, a Delaware corporation, are
located at 630 Fifth Avenue, New York, New York 10111 and its telephone number
at these offices is (212) 332-4774.
Antigenics is a biotechnology company engaged in the discovery and
development of novel immunotherapeutic drugs for the treatment of life
threatening and chronic medical conditions.
AQUILA (SEE PAGES 43-57)
The principal offices of Aquila, a Delaware corporation, are located at 175
Crossing Boulevard, Framingham, Massachusetts 01702 and its telephone number at
these offices is (508) 766-2700.
Aquila is a biotechnology company engaged in the discovery, development and
commercialization of products to prevent, treat or control infectious diseases,
autoimmune disorders and cancers.
THE MERGER
SUMMARY OF THE TRANSACTION (SEE PAGES 72-81)
In the proposed merger, St. Marks Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Antigenics, will be merged into Aquila. Aquila
will be the surviving corporation and the name of the surviving corporation will
be Aquila Biopharmaceuticals, Inc.
The proposed merger will occur following adoption of the merger agreement
by the Aquila stockholders and satisfaction or waiver of all other conditions to
the merger. The merger agreement is attached as Annex A. We encourage you to
read it because it is the legal document that governs the merger.
WHAT THE HOLDERS OF AQUILA COMMON STOCK WILL RECEIVE IN THE MERGER (SEE PAGES
72-74)
In the proposed merger, Aquila common stockholders will receive Antigenics
common stock, which is referred to in this proxy statement/prospectus as
"Antigenics stock." When we complete the merger, each outstanding share of
Aquila common stock, which is referred to in this proxy statement/prospectus as
"Aquila stock," will convert into a right to receive 0.2898 of a share of
Antigenics stock. Antigenics will not issue any fractional shares of Antigenics
stock in the merger. Instead, Aquila stockholders will receive cash for
fractional shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 74-75)
We intend that the merger qualify as a reorganization within the meaning of
Section 368 of the Internal Revenue Code. If the merger does qualify as a
reorganization, no gain or loss will be recognized by Aquila, Antigenics or the
merger subsidiary by reason of the merger. In addition, you will not recognize
gain or loss on the exchange of your shares of Aquila stock for shares of
Antigenics stock, except for any cash you receive instead of fractional shares.
1
<PAGE> 8
BECAUSE THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON EACH
AQUILA STOCKHOLDER'S PARTICULAR CIRCUMSTANCES, WE URGE YOU TO CONSULT YOUR
OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES TO YOU OF THE MERGER.
APPRAISAL OR DISSENTERS' RIGHTS (SEE PAGE 80)
Aquila stockholders do not have appraisal or dissenters' rights in
connection with the merger.
AQUILA'S REASONS FOR THE MERGER (SEE PAGE 65)
The Aquila board concluded that the merger was in the best interests of
Aquila and its stockholders. In reaching its decision, the board considered,
among other things, its belief that:
- the merger should provide the opportunity for Aquila stockholders to
participate in a better capitalized company in a transaction which is not
expected to result in recognition of taxable gain;
- the programs and technologies of Aquila and Antigenics are highly
complementary;
- the merger should enhance the opportunity for Aquila's programs and
technologies to lead to commercially successful products;
- the merger should provide access to significant additional resources and
capabilities; and
- the expanded infrastructure and expertise that Antigenics offers will
bring greater value to Aquila stockholders as a result of the merger.
FAIRNESS OPINION OF ADAMS, HARKNESS & HILL (SEE PAGES 66-70)
In deciding to approve the merger, the Aquila board considered an opinion
from its financial advisor, Adams, Harkness & Hill. On August 18, 2000, Adams,
Harkness & Hill delivered its written opinion to the Aquila board, that as of
that date and based on and subject to the matters set forth in the opinion, the
exchange ratio pursuant to the merger agreement was fair, from a financial point
of view, to Aquila stockholders. The full text of this written opinion is
attached as Annex B to this proxy statement/prospectus. We encourage you to read
this opinion carefully in its entirety. The opinion of Adams, Harkness & Hill is
directed to the Aquila board and is not a recommendation to any stockholder on
how to vote on the merger or the merger agreement.
ANTIGENICS REASONS FOR THE MERGER (SEE PAGE 70)
In reaching its decision to approve the merger, the Antigenics board
considered, among other things, the benefits of:
- the positive effect on Antigenics' ability to produce effective therapies
from acquiring Aquila's technology, including its patent estate;
- the expansion of Antigenics' product pipeline; and
- access to Aquila's scientists.
THE SPECIAL MEETING
DATE AND PURPOSE (SEE PAGES 21-22)
A special meeting of Aquila stockholders will be held at Aquila's
headquarters at 175 Crossing Boulevard, Framingham, Massachusetts on November
15, 2000 at 4:00 p.m., local time.
2
<PAGE> 9
RECORD DATE; VOTING RIGHTS (SEE PAGE 21)
If you owned shares of Aquila stock as of the close of business on
September 27, 2000, the record date for the special meeting, you may vote on the
adoption of the merger agreement.
On that date, there were 8,630,200 shares of Aquila stock outstanding.
Aquila stockholders will have one vote at the meeting for each share of common
stock they owned on the record date.
QUORUM; REQUIRED VOTES (SEE PAGE 21)
The holders of a majority of the outstanding shares of Aquila stock must be
present, in person or by proxy, at the Aquila special meeting for there to be a
quorum. To approve the merger, holders of a majority of the outstanding shares
of Aquila stock must vote to adopt the merger agreement. If you fail to vote or
abstain from voting, it will have the effect of a vote against the merger. A
broker who holds Aquila stock as your nominee will not have authority to vote
your shares unless you provide the broker with voting instructions.
On the record date, directors and officers of Antigenics as a group owned
no shares of Aquila stock, and directors and officers of Aquila as a group owned
approximately 8.3% of the outstanding shares of Aquila stock.
RECOMMENDATION OF THE AQUILA BOARD (SEE PAGE 21)
AQUILA'S BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTEREST OF AQUILA STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
ADOPTION OF THE MERGER.
OTHER SELECTED INFORMATION
POTENTIAL CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS (SEE PAGES 70-71)
The officers and directors of Aquila may have interests in the merger that
are different from, or in addition to, those of Aquila stockholders. The Aquila
and Antigenics boards were aware of these interests and considered them in
approving the merger agreement.
On the record date, directors and officers of Aquila as a group owned
approximately 8.3% of the outstanding shares of Aquila stock.
TREATMENT OF STOCK OPTIONS AND WARRANTS (SEE PAGE 73)
Each option and warrant to purchase shares of Aquila stock outstanding
after the merger will be assumed by Antigenics and will become an option or
warrant, as the case may be, to acquire Antigenics stock. Antigenics will adjust
the number of shares issuable upon exercise and the exercise prices to reflect
the merger's exchange ratio.
EMPLOYEE MATTERS (SEE PAGES 73-74)
Antigenics has agreed to give credit under its employee benefit plans to
Aquila employees who remain with the company after the merger. Antigenics has
also agreed to assume Aquila's employment, severance and other compensation
agreements.
ACCOUNTING TREATMENT (SEE PAGE 74)
Antigenics expects to account for the merger under the purchase method of
accounting, which means the assets and liabilities of Aquila, including its
intangible assets, will be recorded on Antigenics' books at their fair market
values. The results of operations and cash flows of Aquila will be included in
Antigenics' financial statements prospectively as of the closing of the merger.
3
<PAGE> 10
REGULATORY APPROVALS (SEE PAGE 81)
United States antitrust laws prohibit Antigenics and Aquila from completing
the merger until we have furnished information and materials about the companies
and the merger to the Antitrust Division of the Department of Justice and the
Federal Trade Commission and the required waiting period has expired. We have
filed the required forms with these government agencies. We are not aware of any
other governmental or regulatory approvals required for closing the merger other
than compliance with federal securities laws.
CONDITIONS TO THE MERGER (SEE PAGES 78-79)
We must satisfy the following conditions before completing the merger:
- Aquila stockholders must adopt the merger agreement;
- the registration statement of which this proxy statement/prospectus is a
part must have been declared effective and must not be the subject of any
stop order or related proceeding;
- we must obtain regulatory approvals; and
- we must receive legal opinions that the merger will be a reorganization
for U.S. federal tax purposes.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 79)
We can mutually terminate the merger agreement without completing the
merger. Either Antigenics or Aquila may terminate the agreement if the merger is
not completed by February 15, 2001, and under other circumstances, including
failure to obtain required stockholder approval.
TERMINATION FEES AND EXPENSES (SEE PAGES 79-80)
If Aquila or Antigenics terminates the merger agreement under circumstances
involving an alternative acquisition proposal made to or by Aquila or through a
tender or exchange offer, Aquila may be required to pay a termination fee of up
to $1,200,000 to Antigenics or to reimburse up to $600,000 of out-of-pockets
expenses.
If we do not complete the merger, each party otherwise generally will pay
its own expenses. If we complete the merger, the combined company will be
responsible for unpaid expenses.
COMPARATIVE STOCKHOLDER RIGHTS (SEE PAGES 98-105)
When we complete the merger, Aquila stockholders will hold shares of
Antigenics stock. Their rights will be governed by Antigenics' charter and
by-laws.
COMPARATIVE STOCK PRICE INFORMATION (SEE PAGE 6)
Antigenics stock and Aquila stock are quoted on the Nasdaq National Market.
The following table presents the market value of Antigenics stock (on a
historical basis) and the market value of Aquila stock (on a historical and
equivalent per share basis) as of August 18, 2000, the last business day before
we publicly announced the merger agreement.
<TABLE>
<CAPTION>
ANTIGENICS STOCK AQUILA STOCK EQUIVALENT PER
------------------------------ ------------------------- SHARE VALUE OF
HIGH LOW CLOSING HIGH LOW CLOSING AQUILA STOCK
-------- ------- ------- ----- ----- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
August 18, 2000...... $15.9375 $15.375 $15.875 $4.50 $4.25 $4.375 $4.60
</TABLE>
You are encouraged to obtain current market quotations for Antigenics stock
and Aquila stock.
4
<PAGE> 11
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma consolidated financial data
present the consolidated financial data of Antigenics and Aquila after giving
effect to the merger, assuming the merger had been effective for the periods
indicated. The selected unaudited pro forma consolidated financial data for the
year ended December 31, 1999 and as of June 30, 2000 and for the six months then
ended were derived from, and should be read in conjunction with, the unaudited
pro forma condensed consolidated balance sheet and unaudited pro forma condensed
consolidated statements of operations, including the notes, which are contained
in this proxy statement/prospectus. You should read the selected unaudited pro
forma condensed consolidated financial data in conjunction with the historical
financial statements of both Antigenics and Aquila, which are contained in this
proxy statement/prospectus. We have presented the selected unaudited pro forma
condensed consolidated financial data for illustration purposes only. This data
does not necessarily show what the operating results or financial position would
have been if the merger had been completed, nor does it indicate the future
operating results or financial position of the combined enterprise.
SELECTED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
--------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 2,068 $ 2,677
Cost of sales............................................... (858) (377)
Research and development.................................... (19,352) (11,756)
General and administration.................................. (10,038) (5,400)
-------- --------
Operating loss.............................................. (28,180) (14,856)
-------- --------
Interest income............................................. 1,558 3,000
Other, net.................................................. (561) 213
-------- --------
Loss before nonrecurring charges directly attributable to
the acquisition........................................... $(27,183) $(11,643)
======== ========
Loss before nonrecurring charges directly attributable to
the acquisition per common share, basic and diluted....... $ (1.32) $ (0.44)
======== ========
Weighted average number of common shares, outstanding, basic
and diluted............................................... 20,626 26,366
======== ========
</TABLE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------
(IN THOUSANDS)
<S> <C>
Cash, cash equivalents and marketable securities............ $112,471
Total current assets........................................ 115,918
Total assets................................................ 139,795
Total current liabilities................................... 9,384
Long-term debt, less current portion........................ 3,732
Stockholders' equity........................................ 126,679
</TABLE>
5
<PAGE> 12
COMPARATIVE PER SHARE DATA
We are providing the following comparative per share information to aid you
in your analysis of the financial aspects of the merger. You should read this
information in conjunction with each of our historical financial statements and
unaudited pro forma condensed consolidated financial statements and the related
notes that are included elsewhere in this proxy statement/prospectus. The
unaudited pro forma consolidated per share data presented below reflects the
purchase method of accounting for business combinations. The results may have
been different if our companies had always been consolidated.
Both Antigenics and Aquila have fiscal years ending on December 31. The
Aquila pro forma equivalent per share data equals the exchange ratio of 0.2898
multiplied by the Antigenics pro forma consolidated per share data. The pro
forma per share data are not necessarily indicative of the results that would
have occurred if the merger had been completed on the dates indicated or the
results that will occur after the merger. See "Selected Unaudited Pro Forma
Consolidated Financial Data."
<TABLE>
<CAPTION>
AQUILA
ANTIGENICS ------------------------
----------------------- PRO FORMA
PRO FORMA EQUIVALENT
HISTORICAL PER SHARE HISTORICAL PER SHARE
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Loss per share:
Year ended December 31, 1999................... $(1.00) $(1.32) $(1.11) $(0.38)
Six Months ended June 30, 2000................. (0.39) (0.44) (0.24) (0.13)
Dividends per share:
Year ended December 31, 1999................... -- -- -- --
Six months ended June 30, 2000................. -- -- -- --
Book value per share at June 30, 2000............ 4.47 4.64 1.29 1.34
</TABLE>
6
<PAGE> 13
COMPARATIVE STOCK PRICES AND DIVIDENDS
Antigenics stock has been quoted on the Nasdaq National Market under the
trading symbol "AGEN" since February 4, 2000; prior to that date there was no
public trading market for the stock. Aquila stock is quoted on the Nasdaq
National Market under the trading symbol "AQLA." The following table sets forth,
for the periods indicated, the high and low closing prices per share of
Antigenics stock and Aquila stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
ANTIGENICS STOCK AQUILA STOCK
------------------ -----------------
HIGH LOW HIGH LOW
------- ------- ------- ------
<S> <C> <C> <C> <C>
CALENDAR QUARTER 1998
First Quarter...................................... $ * $ * $ 9.000 $3.875
Second Quarter..................................... $ * $ * $ 7.375 $4.000
Third Quarter...................................... $ * $ * $ 4.500 $2.453
Fourth Quarter..................................... $ * $ * $ 4.313 $2.063
CALENDAR QUARTER 1999
First Quarter...................................... $ * $ * $ 4.500 $2.063
Second Quarter..................................... $ * $ * $ 2.875 $1.563
Third Quarter...................................... $ * $ * $ 2.563 $1.625
Fourth Quarter..................................... $ * $ * $ 3.750 $1.063
CALENDAR QUARTER 2000
First Quarter...................................... $71.500 $18.250 $11.375 $2.250
Second Quarter..................................... $22.500 $10.000 $ 6.000 $1.875
Third Quarter (through September 27, 2000)......... $21.750 $13.500 $ 7.625 $2.563
</TABLE>
RECENT CLOSING PRICES
The following table sets forth the high, low and closing sales prices per
share of Antigenics stock and Aquila stock as reported on the Nasdaq National
Market on August 18, 2000, the last trading day before our public announcement
of the merger agreement, and on September 28, 2000, the last practicable trading
day before the date of this document.
<TABLE>
<CAPTION>
ANTIGENICS STOCK AQUILA STOCK
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HIGH LOW CLOSING HIGH LOW CLOSING
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<S> <C> <C> <C> <C> <C> <C>
August 18, 2000................... $15.938 $15.375 $15.875 $4.500 $4.250 $4.375
September 28, 2000................ $15.688 $12.750 $15.313 $4.313 $3.500 $4.188
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The market price of Antigenics stock is likely to fluctuate prior to the
merger. You should obtain current market quotations. We cannot predict the
future prices for Antigenics stock, or on which markets it will be traded in the
future.
DIVIDEND INFORMATION
No cash dividends have ever been paid or declared on the shares of
Antigenics stock or on the Aquila stock. Antigenics does not intend to pay cash
dividends on its common stock in the foreseeable future. Antigenics' present
intention is to retain its earnings to finance the growth and development of its
business. Any future payment of dividends on Antigenics stock will be at the
board's discretion and will depend upon, among other things, Antigenics'
earnings, financial condition, capital requirements, level of indebtedness and
other factors that Antigenics' board deems relevant.
NUMBER OF STOCKHOLDERS AND NUMBER OF SHARES OUTSTANDING
As of September 27, 2000 there were 229 stockholders of Antigenics of
record who held an aggregate of 24,808,035 shares of Antigenics stock.
As of September 27, 2000, there were 4,548 holders of record who held an
aggregate of 8,630,200 shares of Aquila stock.
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RISK FACTORS
In addition to the other information included in this proxy
statement/prospectus, you should consider carefully the risk factors described
below in deciding how to vote on the merger proposal. You should keep these risk
factors in mind when you read forward-looking statements.
RISKS RELATING TO THE MERGER
THE EXCHANGE RATIO FOR AQUILA STOCK IN THE MERGER IS FIXED AND WILL NOT BE
ADJUSTED IF THERE IS ANY CHANGE IN THE PRICE OF ANTIGENICS STOCK.
In the merger, each share of Aquila stock will be exchanged for 0.2898 of a
share of Antigenics stock. This exchange ratio is fixed and will not be adjusted
as a result of any change in the price of Antigenics stock. The market value of
Antigenics stock on and after the closing date of the merger may vary
significantly from the prices on the date of execution of the merger agreement,
the date of this proxy statement/prospectus or the date on which you vote on the
merger. Any change in the price of Antigenics stock will affect the value of the
consideration that Aquila stockholders receive in the merger. The price of
Antigenics stock can be volatile and the price at the time that the merger is
completed may be lower than its price on the date of this document or the date
of the Aquila special meeting. On August 18, 2000, the date of the execution of
the merger, the closing price of Antigenics stock was $15.875 per share. On
September 28, 2000, the last practicable trading day before the date of this
document, the closing price of Antigenics stock was $15.313 per share. You are
encouraged to obtain current market quotations for Antigenics stock.
ANTIGENICS FACES DIFFERENT MARKET RISKS FROM THOSE FACED BY AQUILA, AND THESE
RISKS MAY CAUSE THE VALUE OF THE SHARES OF ANTIGENICS STOCK ISSUED TO YOU TO
DECLINE.
In the merger you will receive shares of Antigenics stock. Antigenics stock
has recently experienced extreme fluctuations in price and volume. The business,
strategy and financial condition of Antigenics are somewhat different from that
of Aquila. Antigenics' results of operations, as well as the price of Antigenics
stock, will be affected by various factors different from those affecting
Aquila's results of operations and its common stock price. Future events that
may not have affected the price of Aquila stock may cause the price of
Antigenics stock to fall.
For a description of and other information about Antigenics stock and the
differences between Antigenics stock and Aquila stock, see "Comparative Per
Share Data" on page 6, "Comparative Stock Prices and Dividends" on page 7, and
"Comparison of Rights of Antigenics and Aquila Stockholders" on pages 98-105.
ANTIGENICS AND AQUILA MAY NOT SUCCESSFULLY INTEGRATE OPERATIONS, AND THE
INTEGRATION OF THE BUSINESSES MAY BE COSTLY.
After the merger, Antigenics and Aquila, each of which previously operated
independently, will have to integrate operations. The integration will require
significant efforts from each company, including coordinating research and
development efforts. Aquila personnel may leave because of the merger. Aquila
collaborators, customers, distributors or suppliers may terminate their
arrangements with Aquila or demand new arrangements. Integrating our operations
may distract management's attention from the day-to-day business of the combined
company. If Antigenics is unable to successfully integrate the operations of the
two companies or if this integration process costs more than expected,
Antigenics' future results will be negatively impacted.
THE TERMINATION FEE AND THE RESTRICTIONS ON SOLICITATION CONTAINED IN THE MERGER
AGREEMENT MAY DISCOURAGE OTHER COMPANIES FROM TRYING TO ACQUIRE AQUILA.
Until the completion of the merger, and with some exceptions, Aquila is
prohibited from entering into or soliciting, initiating or encouraging any
inquiries or proposals that may lead to a proposal or offer for a merger or
other business combination transaction with any person other than Antigenics. In
addition, Aquila agreed to pay a termination fee to Antigenics in specified
circumstances, including where a third party acquires or seeks
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to acquire Aquila. These provisions could discourage other companies from trying
to acquire Aquila even though those other companies might be willing to offer
greater value to Aquila stockholders than Antigenics has offered in the merger.
The payment of the termination fee could also have a material adverse effect on
Aquila's financial condition.
OFFICERS AND DIRECTORS OF AQUILA HAVE CONFLICTS OF INTEREST THAT MAY HAVE
INFLUENCED THEIR DECISIONS REGARDING THE MERGER.
You should be aware of potential conflicts of interest, and the benefits
available to officers and directors of Aquila when considering the Aquila
board's recommendation of the merger. The officers and directors of Aquila have
interests in the merger that are in addition to, or different from, their
interests as Aquila stockholders. The Aquila board was aware of these conflicts
of interest when it approved the merger. These interests include the right of
Aquila's officers and directors to:
- accelerated vesting of their stock options upon consummation of the
merger;
- receipt of severance benefits under employee retention agreements in the
event they are terminated by Antigenics after the merger; and
- indemnification and insurance coverage with respect to acts and omissions
in their capacities as officers and directors of Aquila.
For a more detailed discussion of potential conflicts of interests of
Aquila management, see "Background and Reasons for the Merger -- Potential
Conflicts of Interests of Aquila Management in the Merger" on pages 70-71 of
this proxy statement/prospectus.
RISKS RELATING TO ANTIGENICS
In the merger, Antigenics will issue shares of Antigenics stock in exchange
for Aquila stock. Accordingly, before voting on the merger, you should carefully
consider the following factors affecting the business of Antigenics. These risks
could result in material adverse consequences to Antigenics' business, financial
condition, operating results or cash flows. This could cause the trading price
of Antigenics stock to decline.
ANTIGENICS DOES NOT CURRENTLY GENERATE ANY REVENUE, AND CANNOT GUARANTEE THAT IT
WILL EVER COMMERCIALIZE ANY OF ITS THERAPEUTIC VACCINES AND GENERATE REVENUE IN
THE FUTURE.
Antigenics must receive separate regulatory approval for each of its
immunotherapeutics in each indication before it can sell them commercially
in the United States or internationally.
To obtain regulatory approvals, Antigenics must, among other requirements,
complete clinical trials demonstrating that a particular therapeutic vaccine is
safe and effective. Because Oncophage is its only therapeutic vaccine in
clinical trials, any delays or difficulties Antigenics encounters in these
clinical trials may have a significant adverse impact on its operations and
cause its stock price to decline significantly. Antigenics has limited clinical
data. Future clinical trials may not show that Oncophage is safe and effective.
In addition, Antigenics or the United States Food and Drug Administration,
commonly known as the FDA, might delay or halt the clinical trials of Oncophage
for various reasons, including:
- Oncophage may not appear to be more effective than current therapies;
- Oncophage may have unforeseen adverse side effects;
- the time required to determine whether Oncophage is effective may be
longer than expected;
- patients may die during a clinical trial because their disease is too
advanced or because they experience medical problems that may not be
related to Oncophage;
- sufficient number of patients may not enroll in the trials; or
- Antigenics may not be able to produce sufficient quantities of Oncophage
to complete the trials.
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Antigenics relies on third party clinical investigators to conduct its
clinical trials. As a result, Antigenics may encounter delays outside of its
control.
The process of obtaining and maintaining regulatory approvals for new
therapeutic products is lengthy, expensive and uncertain. It also can vary
substantially, based on the type, complexity and novelty of the product
involved. To date, the FDA and foreign regulatory agencies have approved only a
limited number of cancer therapeutic vaccines for commercial sale. Furthermore,
the FDA and foreign regulatory agencies have relatively little experience with
autologous therapies. This lack of experience may lengthen the regulatory review
process for Oncophage, increase Antigenics' development costs and delay or
prevent commercialization. In addition, problems encountered with other
companies' therapeutic vaccine products may slow the regulatory review of
Antigenics' therapeutic vaccines. The FDA may not consider Oncophage to be an
appropriate candidate for fast track designation should Antigenics choose to
seek it. Accordingly, Oncophage or any of Antigenics' other future drug
candidates could take a significantly longer time to gain regulatory approval
than Antigenics expects or may never gain approval.
Because development of Antigenics' therapeutic vaccines for infectious
diseases and autoimmune disorders will involve a lengthy and complex
process, Antigenics is not certain it will be able to develop any marketable
therapeutic vaccines for these indications.
Antigenics has not completed the preclinical development of its therapeutic
vaccines for any infectious disease or autoimmune disorder. Antigenics will need
to conduct extensive additional research and preclinical and clinical testing of
these immunotherapeutics prior to commercialization. This development process
takes several years and often fails to yield commercial products. Regulatory
authorities may not permit human testing of these immunotherapeutics and, even
if they permit human testing, Antigenics may not demonstrate that an
immunotherapeutic is safe and effective.
Even if some of Antigenics' therapeutic vaccines receive regulatory
approval, those therapeutic vaccines may still face subsequent regulatory
difficulties.
If Antigenics receives regulatory approval to sell any of its therapeutic
vaccines, the FDA or a comparable foreign regulatory agency may, nevertheless,
limit the categories of patients who can use that therapeutic vaccine. In
addition, regulatory agencies subject a marketed product, its manufacturer and
the manufacturer's facilities to continual review and periodic inspections.
Furthermore, the FDA or foreign regulatory agencies may require expensive
post-approval trials. If Antigenics discovers previously unknown problems with a
product or its manufacturing and laboratory facility, a regulatory agency may
impose restrictions on that product or on Antigenics, including requiring
Antigenics to withdraw the product from the market. If Antigenics fails to
comply with applicable regulatory approval requirements, a regulatory agency
may:
- send Antigenics warning letters;
- impose fines and other civil penalties on Antigenics;
- suspend Antigenics' regulatory approvals;
- refuse to approve pending applications or supplements to approved
applications filed by Antigenics;
- refuse to permit exports of Antigenics' products from the United States;
- require Antigenics to recall products;
- seize Antigenics' products;
- impose restrictions on Antigenics' operations; or
- criminally prosecute Antigenics.
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ANTIGENICS MAY ENCOUNTER MANUFACTURING PROBLEMS THAT LIMIT ITS ABILITY TO
SUCCESSFULLY COMMERCIALIZE ITS THERAPEUTIC VACCINES.
If Antigenics is unable to purify heat shock proteins from some cancer
types, the size of its potential market would decrease.
Antigenics' ability to successfully commercialize a therapeutic vaccine for
a particular cancer type depends on its ability to purify heat shock proteins
from that type of cancer. Based on Antigenics' clinical trials conducted to
date, in renal cell carcinoma, it has been able to manufacture Oncophage from
98% of the tumors delivered to its manufacturing facility; for melanoma, 86%;
for colorectal carcinoma, 100%; for gastric cancer, 70%; and for pancreatic
cancer, 30%. The relatively low rate for pancreatic cancer is due to the
abundance of proteases in pancreatic tissue. Proteases are enzymes that break
down proteins. These proteases degrade the heat shock proteins during the
purification process. Antigenics may encounter this problem or similar problems
with other types of cancers as the company expands its research. If Antigenics
cannot overcome these problems, the number of cancer types that its therapeutic
vaccines could treat would be limited.
Delays in obtaining regulatory approval of Antigenics' manufacturing
facility and disruptions in its manufacturing process may delay or disrupt
the company's commercialization efforts.
Before Antigenics can begin commercially manufacturing its therapeutic
vaccines, it must obtain regulatory approval of its manufacturing facility and
process. Manufacturing of the company's therapeutic vaccines must comply with
the FDA's current Good Manufacturing Practices requirements, commonly known as
cGMP, and foreign regulatory requirements. The cGMP requirements govern quality
control and documentation policies and procedures. In complying with cGMP and
foreign regulatory requirements, Antigenics will be obligated to expend time,
money and effort in production, recordkeeping and quality control to assure that
the product meets applicable specifications and other requirements. If
Antigenics fails to comply with these requirements, it would be subject to
possible regulatory action and may be limited in the jurisdictions in which it
is permitted to sell its therapeutic vaccines.
Antigenics recently transferred the manufacturing of Oncophage from the
company's facility in Framingham, Massachusetts to its new facility in Woburn,
Massachusetts. Antigenics has limited manufacturing experience in this facility
and unforeseen circumstances may cause delays or disruptions in the
manufacturing process. The FDA, the Commonwealth of Massachusetts and foreign
regulatory authorities have the authority to continuously inspect this facility.
Preparing this facility for commercial manufacturing may take longer than
planned and the costs of complying with FDA regulations may be higher than those
for which Antigenics has budgeted. In addition, any material changes Antigenics
makes to the manufacturing process may require approval by the FDA, the
Commonwealth of Massachusetts or foreign regulatory authorities. It could take
longer than Antigenics expects for it to obtain these approvals. Any delays in
obtaining these approvals could disrupt Antigenics' manufacturing process.
Antigenics is the only manufacturer of its therapeutic vaccines. For the
next several years, Antigenics' expects that it will conduct all of its
manufacturing of its therapeutic vaccines in the facility in Woburn,
Massachusetts. If this facility or the equipment in the facility is
significantly damaged or destroyed, Antigenics will not be able to quickly or
inexpensively replace its manufacturing capacity. Due to the nature of
Antigenics' therapeutic vaccines, a third party may not be able to manufacture
its therapeutic vaccines.
Antigenics has no experience manufacturing Oncophage in the volumes that
will be necessary to support large clinical trials or commercial sales. The
company's present manufacturing process may not meet its initial expectations as
to:
- scheduling;
- reproducibility;
- yield;
- purity;
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- cost;
- potency;
- quality; and
- other measurements of performance.
In addition, Antigenics has not demonstrated the ability to manufacture its
therapeutic vaccines other than Oncophage in quantities sufficient for any
clinical trials.
IF ANTIGENICS IS UNABLE TO PROTECT ITS PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, IT MAY NOT BE ABLE TO OPERATE ITS BUSINESS PROFITABLY.
If Antigenics fails to sustain and further build its intellectual property
rights, competitors will be able to take advantage of its research and
development efforts to develop competing therapies.
Antigenics' success depends, in part, on its ability to maintain protection
for its products and technologies under the patent laws of the United States and
other countries, so that it can stop others from using its inventions.
Antigenics' success also will depend on its ability to prevent others from using
its trade secrets. In addition, Antigenics must operate in a way that does not
infringe, or violate, the intellectual property rights of others.
After the merger, Antigenics will have exclusive rights to 23 issued United
States patents, and foreign counterpart patents and patent applications,
relating to its heat shock protein technology or the Saponin & CD1 technology.
Antigenics' rights to 13 of these patents are as a result of exclusive worldwide
licenses with Fordham University and Mount Sinai School of Medicine of New York
University. In addition, after the merger Antigenics will have licensed or
optioned rights to 65 pending United States patent applications and foreign
counterpart patents and patent applications. The standards which the United
States Patent and Trademark Office uses to grant patents are not always applied
predictably or uniformly and can change. Consequently, Antigenics cannot be
certain as to the type and extent of patent claims that will be issued to it in
the future. Any patents which are issued may not contain claims which will
permit Antigenics to stop competitors from using similar technology. The
standards which courts use to interpret patents are not always applied
predictably or uniformly and can change, particularly as new technologies
develop. Consequently, Antigenics cannot be certain as to how much protection,
if any, will be given to its patents, if Antigenics attempts to enforce them and
they are challenged in court. If Antigenics chooses to go to court to stop
someone else from using the inventions claimed in its patents, that individual
or company has the right to ask the court to rule that Antigenics' patents are
invalid and should not be enforced against them. These lawsuits are expensive
and would consume time and other resources, even if Antigenics were successful
in stopping the violation of its patents. In addition, there is a risk that the
court will decide that Antigenics' patents are not valid and that Antigenics
does not have the right to stop the other party from using the inventions. There
is also the risk that, even if the validity of Antigenics' patents were upheld,
the court will refuse to stop the other party on the ground that such other
party's activities are not covered by, that is, do not infringe, Antigenics'
patents.
Furthermore, a third party may claim that Antigenics is using inventions
covered by such third party's patent and may go to court to stop Antigenics from
engaging in its normal operations and activities. Such lawsuits are expensive
and would consume time and other resources. There is a risk that a court would
decide that Antigenics is violating the third party's patent and would order
Antigenics to stop the activities covered by the patent. In addition, there is a
risk that a court will order Antigenics to pay the other party damages for
having violated the other party's patent.
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Antigenics relies on certain proprietary trade secrets and know-how.
Antigenics has taken measures to protect its trade secrets and know-how,
including the use of confidentiality agreements with its employees, consultants
and certain contractors. It is possible, however, that:
- these persons will breach the agreements;
- Antigenics would have inadequate remedies for any breach; or
- Antigenics' competitors will independently develop or otherwise discover
its trade secrets.
Antigenics may incur substantial costs as a result of litigation or other
proceedings relating to patent and other intellectual property rights.
The cost to Antigenics of any litigation or other proceeding relating to
intellectual property rights, even if resolved in Antigenics' favor, could be
substantial. Some of its competitors may be able to sustain the costs of complex
patent litigation more effectively than Antigenics can because they have
substantially greater resources. Uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on
Antigenics' ability to continue its operations.
Should third parties file patent applications, or be issued patents
claiming technology also claimed by Antigenics in pending applications,
Antigenics may be required to participate in interference proceedings in the
United States Patent and Trademark Office to determine priority of invention.
Antigenics, or its licensors, may also need to participate in interference
proceedings involving Antigenics' issued patents and pending applications of
another entity. An unfavorable outcome in an interference proceeding could
require Antigenics to cease using the technology or to license rights from
prevailing third parties. There is no guarantee that any prevailing party would
offer Antigenics a license or that Antigenics could acquire any license made
available to it on commercially acceptable terms.
Antigenics cannot guarantee that the practice of its technologies will not
conflict with the rights of others. Antigenics is aware of a United States
patent, issued to a third party, with claims directed to certain heat shock
protein based therapeutic vaccines and their use in the field of tissue
grafting. Antigenics does not believe that its products or activities are
infringing any valid claims of this patent. Antigenics also is aware of two
United States patents, issued to a different third party, with claims directed
to certain methods of making heat shock protein products and related
apparatuses. These patents do not claim any therapeutic applications. These
patents also do not claim any of the methods Antigenics presently uses to make
Oncophage. Moreover, Antigenics does not believe that its methods of producing
any of its heat shock protein-based therapeutic vaccines would infringe any
valid claim of either of these patents. However, Antigenics cannot guarantee
that this third party, or any other third party, will not sue it for infringing
these, or any other, patents. One of the patent applications licensed to
Antigenics contains claims which are substantially the same as claims in one of
this third party's patents. Therefore, there is a possibility that the United
States Patent and Trademark Office will declare an interference proceeding
between one or both of this third party's patents and Antigenics' patent
application. In an interference proceeding, the party with the earliest
effective filing date has certain advantages. Antigenics believes that its
claims have an earlier effective filing date than the claims of the other
patents. However, the company cannot guarantee that it would prevail in any
interference proceeding. In the past and again recently, this third party has
contacted Antigenics about licensing patents rights and the company has not yet
made a decision regarding this matter.
In some foreign jurisdictions, Antigenics could become involved in
opposition proceedings, either by opposing the validity of another's foreign
patent or by third parties opposing the validity of Antigenics' foreign patents.
In 1995, the European Patent Office issued a European patent, with claims
directed to the use of heat shock proteins to produce or enhance immune
responses to cancer and infectious diseases, to the Whitehead Institute for
Biomedical Research and to the Medical Research Council. This patent is
exclusively licensed to StressGen Biotechnologies Corporation. The patent
holders have made no attempt to enforce this patent against Antigenics.
Nonetheless, Antigenics is seeking to have this patent revoked in its entirety
in an opposition proceeding in the European Patent Office. The European Patent
Office has issued a provisional, non-binding opinion that this patent should be
revoked in its entirety. The patent owners, in response,
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amended the patent claims to exclude autologous treatment of tumors. Antigenics
then argued that this third party patent still should be revoked in its
entirety. Even if the European Patent Office changes its position and the patent
is maintained with the amended claims, Antigenics still should be free to
practice its autologous cancer business in Europe. However, the patent owners or
their licensee might try to enforce the amended patent against Antigenics'
infectious disease business in Europe. Antigenics or the holders of this patent
may appeal any decision to revoke the patent in its entirety, or to maintain the
patent in any form. Antigenics may not obtain a final, non-appealable decision
for several years, during which time the patent remains enforceable. Antigenics
may incur significant costs by participating in the opposition proceedings and
any appeals. Furthermore, if Antigenics is sued on this patent in Europe prior
to any final decision of revocation, it may incur significant costs defending
itself, even if Antigenics ultimately succeeds in proving that it does not
infringe any valid claims of this patent.
This European patent claims priority to a United States patent application
filed in 1988. Antigenics does not know whether this application, or any related
application, is still pending. Antigenics does not believe that any United
States patent has issued from this application, and it does not know whether a
United States patent will ever issue from this patent application. If a United
States patent does issue, Antigenics does not know whether the patent will be
enforceable, whether any valid claims will cover its activities or products, or
whether the patent owner will attempt to assert the patent against Antigenics.
In 1999, Antigenics received correspondence from both Copernicus
Therapeutics, Inc. and its counsel alleging similarity between the companies'
respective logos and demanding that Antigenics cease using its logo. In July
1999, Antigenics sent a response to Copernicus stating that Antigenics has prior
rights in the logo. In the response to Copernicus, Antigenics also stated that
since the respective corporate names are vastly different, both companies should
be able to continue the use of their respective logos without causing public
confusion. At this time, Antigenics has not received any further communications
from Copernicus or its counsel. Although Antigenics does not believe it is
infringing any rights owned by Copernicus, Copernicus may proceed with a
trademark lawsuit against Antigenics.
ANTIGENICS IS AN EARLY STAGE BIOTECHNOLOGY COMPANY THAT MAY NEVER BE PROFITABLE.
If Antigenics incurs operating losses for longer than it expects, it may be
unable to continue its operations.
Antigenics has not generated any revenues from sales, and although it may
receive revenues generated by the business of Aquila after the merger,
Antigenics does not expect to generate significant revenues for several years.
Antigenics has incurred losses since it was formed. From inception through June
30, 2000, Antigenics has generated losses totaling $46.8 million. On a pro forma
basis, giving effect to the merger, the combined company would have generated
losses before nonrecurring charges totaling $27.2 million for the year ended
December 31, 1999 and losses before nonrecurring charges of $11.6 million for
the six months ended June 30, 2000. In addition, on a pro forma basis, the
combined company would incur a $26.9 million nonrecurring charge pertaining to
the immediate write-off of acquired in-process research and development costs.
Antigenics anticipates incurring losses within the upcoming year. Antigenics
expects to incur increasing and significant losses over the next several years
as it completes its Oncophage clinical trials, applies for regulatory approvals,
continues development of its technology and expands its operations.
Antigenics' profitability will depend on the market acceptance of any of
its therapeutic vaccines that receive FDA or foreign regulatory approval. The
commercial success of any of Antigenics' therapeutic vaccines will depend on
whether:
- the therapeutic vaccine is more effective than alternative treatments;
- side effects of the therapeutic vaccine are acceptable to doctors and
patients;
- the company produces the therapeutic vaccine at a competitive price;
- the company obtains sufficient reimbursement for the therapeutic vaccine;
and
- the company has sufficient capital to market the therapeutic vaccine
effectively.
Because Oncophage is autologous, or patient specific, it may be more
expensive to manufacture than conventional therapeutic products. This increased
expense may decrease Antigenics' profit margins. Further-
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more, because Antigenics' autologous products are novel, some doctors and
patients may be reluctant to use them.
If Antigenics fails to obtain the capital necessary to fund its operations,
it will be unable to advance its development programs and complete its
clinical trials.
Developing therapeutic vaccines and conducting clinical trials for multiple
diseases is expensive. Antigenics plans to conduct clinical trials for many
different cancer types simultaneously, which will increase its costs. Antigenics
will need to raise additional capital:
- to fund operations;
- to continue the research and development of its therapeutic vaccines; and
- to commercialize its therapeutic vaccines.
Additional financing may not be available on favorable terms or at all. If
Antigenics is unable to raise additional funds when it needs them, it may be
required to delay, reduce or eliminate some or all of its development programs
and some or all of its clinical trials. Antigenics also may be forced to license
technologies to others that it would prefer to develop internally.
On June 30, 2000, Antigenics had $105 million in cash and cash equivalents.
On a pro forma basis, giving effect to the merger, Antigenics would have had
$112 million in cash, cash equivalents and marketable securities on June 30,
2000. Antigenics believes that it will have sufficient capital to fund its
operations for the next two years. Antigenics may need to raise capital sooner,
however, due to a number of factors, including:
- an acceleration of the number, size or complexity of its clinical trials;
- slower than expected progress in developing its therapeutic vaccines;
- higher than expected costs to obtain regulatory approvals;
- higher than expected costs to pursue its intellectual property strategy;
- higher than expected costs to further develop its manufacturing
capability; and
- higher than expected costs to develop its sales and marketing capability.
BECAUSE OF THE SPECIALIZED NATURE OF ANTIGENICS' BUSINESS, THE TERMINATION OF
RELATIONSHIPS WITH ITS SCIENTIFIC ADVISORS OR THE DEPARTURE OF KEY MEMBERS OF
MANAGEMENT MAY PREVENT IT FROM ACHIEVING ITS OBJECTIVES.
If Pramod K. Srivastava, Ph.D. severs his relationship with Antigenics, the
company may experience significant difficulties in its future development
efforts.
Since Antigenics' formation, Dr. Srivastava has played a significant role
in the company's research efforts. Dr. Srivastava is a director of Antigenics
and acts as chairman of its scientific advisory board. In addition, Antigenics
has licensed nearly all of its intellectual property from institutions at which
Dr. Srivastava has worked. Antigenics sponsors research in Dr. Srivastava's
laboratory at the University of Connecticut Health Center in exchange for the
right to license discoveries made in that laboratory with its funding. Dr.
Srivastava is a member of the faculty of the University of Connecticut School of
Medicine. The regulations and policies of the University of Connecticut Health
Center govern the relationship between a faculty member and a commercial
enterprise. These regulations and policies prohibit Dr. Srivastava from becoming
an employee of Antigenics. Furthermore, the University of Connecticut may modify
these regulations and policies in the future to further limit Dr. Srivastava's
relationship with Antigenics. While Dr. Srivastava has a consulting agreement
with Antigenics, which includes financial incentives for him to remain
associated with the company, Antigenics cannot guarantee that he will remain
associated with it even during the time covered by the consulting agreement. In
addition, this agreement does not restrict his ability to compete with
Antigenics after his association is terminated.
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If Antigenics fails to keep key management and scientific personnel, it may
be unable to successfully develop its therapeutic vaccines, conduct
clinical trials and obtain financing.
Antigenics is highly dependent on its senior management and scientific
staff, particularly Garo H. Armen, Ph.D., its chairman and chief executive
officer, and Gamil G. de Chadarevian, its vice chairman and executive vice
president, international. The competition for qualified personnel in the
biotechnology field is intense, and Antigenics relies heavily on its ability to
attract and retain qualified scientific, technical and managerial personnel.
Since Antigenics' manufacturing process is unique, its manufacturing and quality
control personnel are also very important.
THE COMMERCIAL SUCCESS OF ANY OF ANTIGENICS' THERAPEUTIC VACCINES WILL DEPEND
UPON THE STRENGTH OF ITS SALES AND MARKETING EFFORT AND THE AVAILABILITY OF
THIRD PARTY REIMBURSEMENT.
If Antigenics is unable to establish sales and marketing capabilities or
enter into agreements with pharmaceutical companies to sell and market its
therapeutic vaccines, it may experience difficulty generating revenues.
Antigenics does not have a sales organization and has no experience in the
sales, marketing and distribution of pharmaceutical products. If Oncophage is
approved for commercial sale, Antigenics plans to market it in the United States
with its own sales force. Developing a sales force is expensive and time
consuming and could delay any product launch. Antigenics cannot be certain that
it would be able to develop this capacity. If Antigenics is unable to establish
its sales and marketing capability, it will need to enter into sales and
marketing agreements to market Oncophage in the United States. Antigenics plans
to enter into these types of arrangements for sales outside the United States.
If Antigenics is unable to establish successful distribution relationships with
pharmaceutical companies, it may fail to realize the full sales potential of its
therapeutic vaccines.
If Antigenics fails to obtain adequate levels of reimbursement for its
therapeutic vaccines from third party payors, the commercial potential of
its therapeutic vaccines will be significantly limited.
Antigenics' profitability will depend on the extent to which government
administration authorities, private health insurance providers and other
organizations provide reimbursement for the cost of its therapeutic vaccines.
Many patients will not be capable of paying for Antigenics' therapeutic vaccines
themselves. A primary trend in the United States health care industry is toward
cost containment. Large private payors, managed care organizations, group
purchasing organizations and similar organizations are exerting increasing
influence on decisions regarding the use of particular treatments. These
organizations are becoming increasingly economically focused. Furthermore, many
third party payors limit reimbursement for newly approved health care products.
Cost containment measures may prevent Antigenics from becoming profitable.
In addition, healthcare reform is an area of significant government focus.
Any reform measures, if adopted, could adversely affect:
- the pricing of therapeutic vaccines in the United States or
internationally; and
- the amount of reimbursement available from governmental agencies or other
third party payors.
For example, recent proposals regarding Medicare coverage, if they take
effect, may put novel cancer therapies like Oncophage at a competitive
disadvantage compared to existing therapies.
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST ANTIGENICS MAY REDUCE DEMAND FOR ITS
PRODUCTS OR RESULT IN SUBSTANTIAL DAMAGES.
Antigenics faces an inherent risk of product liability exposure related to
testing therapeutic vaccines in human clinical trials and will face an even
greater risk if it sells any of its therapeutic products commercially. An
individual may bring a product liability claim against Antigenics if one of its
therapeutic vaccines causes,
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or merely appears to have caused, an injury. Regardless of merit or eventual
outcome, product liability claims may result in:
- decreased demand for Antigenics' therapeutic vaccines;
- injury to Antigenics' reputation;
- withdrawal of clinical trial volunteers;
- costs of related litigation; and
- substantial monetary awards to plaintiffs.
Antigenics manufactures Oncophage from a patient's tumor, and a medical
professional must inject the Oncophage into that same patient. A patient may sue
Antigenics if it, a hospital or a delivery company fails to deliver the removed
tumor or that patient's Oncophage. Antigenics anticipates that the logistics of
shipping will become more complex as the number of patients it treats increases,
and it cannot assure that all shipments will be made without incident. In
addition, administration of Oncophage at a hospital poses another chance for
delivery to the wrong patient. Currently, Antigenics does not have insurance
that covers loss of or damage to Oncophage and does not know whether insurance
will be available to it at a reasonable price or at all.
ANTIGENICS MAY INCUR SIGNIFICANT COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND
REGULATIONS.
Antigenics uses hazardous, infectious and radioactive materials that could
be dangerous to human health, safety or the environment. As appropriate,
Antigenics stores these materials and various wastes resulting from their use at
its facility pending ultimate use and disposal. Antigenics is subject to a
variety of federal, state and local laws and regulations governing the use,
generation, manufacture, storage, handling and disposal of these materials and
wastes resulting from their use. Antigenics may incur significant costs
complying with both existing and future environmental laws and regulations. In
particular, Antigenics is subject to regulation by the Occupational Safety and
Health Administration and the Environmental Protection Agency and to regulation
under the Toxic Substances Control Act and the Resource Conservation and
Recovery Act. OSHA or the EPA may adopt regulations that may affect its research
and development programs. Antigenics is unable to predict whether any agency
will adopt any regulations which could have a material adverse effect on its
operations.
Although Antigenics believes its safety procedures for handling and
disposing of these materials comply with federal, state and local laws and
regulations, it cannot entirely eliminate the risk of accidental injury or
contamination from these materials. In the event of an accident, Antigenics
could be held liable for any resulting damages which could be substantial.
ANTIGENICS' COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY
HAVE SUPERIOR PRODUCTS, MANUFACTURING CAPABILITY OR MARKETING EXPERTISE.
Antigenics' business may fail because its faces intense competition from
major pharmaceutical companies and specialized biotechnology companies engaged
in the development of therapeutic vaccines and other therapeutic products
directed at cancer, infectious diseases and autoimmune disorders. Many of
Antigenics' competitors have greater financial and human resources and more
experience. Antigenics' competitors may:
- develop safer or more effective therapeutic vaccines and other
therapeutic products;
- implement more effective approaches to sales and marketing; or
- establish superior proprietary positions.
More specifically, if Antigenics receives regulatory approvals, some of its
therapeutic vaccines will compete with well-established, FDA approved therapies
that have generated substantial sales over a number of years.
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<PAGE> 24
Antigenics anticipates that it will face increased competition in the
future as new companies enter its markets and scientific developments
surrounding immunotherapy and other cancer therapies continue to accelerate.
ANTIGENICS MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGES IN
THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES WHICH COULD MAKE ITS THERAPEUTIC
VACCINES OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Research and discoveries by others may result in medical
insights or breakthroughs which may render Antigenics' immunotherapeutics
obsolete even before they generate any revenue.
ANTIGENICS' OFFICERS AND DIRECTORS MAY BE ABLE TO BLOCK PROPOSALS FOR A CHANGE
IN CONTROL.
Antigenics Holdings L.L.C. will control approximately 40.8% of Antigenics'
outstanding common stock after the merger. Due to this concentration of
ownership, Antigenics Holdings may be able to prevail on all matters requiring a
stockholder vote, including:
- the election of directors;
- the amendment of Antigenics' organizational documents; or
- the approval of a merger, sale of assets or other major corporate
transaction.
Antigenics' directors and officers, if they elect to act together, can
control Antigenics Holdings. In addition, several of Antigenics' directors and
officers directly own shares of Antigenics stock. See "Stock Ownership of
Directors, Executive Offices and Principal Stockholders -- Ownership of
Antigenics Stock" on pages 93-94.
ANTI-TAKEOVER PROVISIONS IN ANTIGENICS' CHARTER DOCUMENTS AND UNDER DELAWARE LAW
MAY MAKE AN ACQUISITION OF ANTIGENICS MORE DIFFICULT.
Antigenics is incorporated in Delaware. Anti-takeover provisions of
Delaware law and Antigenics' charter documents may make a change in control more
difficult, even if the stockholders desire a change in control. Antigenics'
anti-takeover provisions include provisions in its certificate of incorporation
providing that stockholders' meetings may only be called by the president or the
majority of the board of directors and a provision in its by-laws providing that
its stockholders may not take action by written consent. Additionally,
Antigenics' board of directors has the authority to issue 1,000,000 shares of
preferred stock and to determine the terms of those shares of stock without any
further action by its stockholders. The rights of holders of Antigenics stock
are subject to the rights of the holders of any preferred stock that may be
issued. The issuance of preferred stock could make it more difficult for a third
party to acquire a majority of Antigenics' outstanding voting stock. Antigenics'
charter also provides for the classification of its board of directors into
three classes. This "staggered board" generally may prevent stockholders from
replacing the entire board in a single proxy contest. In addition, Antigenics'
directors may only be removed from office for cause. Delaware law also prohibits
a corporation from engaging in a business combination with any holder of 15% or
more of its capital stock until the holder has held the stock for three years
unless, among other possibilities, the board of directors approves the
transaction. The board may use this provision to prevent changes in Antigenics'
management. Also, under applicable Delaware law, Antigenics' board of directors
may adopt additional anti-takeover measures in the future. See "Comparison of
Rights of Antigenics and Aquila Stockholders" on pages 98-105.
ANTIGENICS STOCK HAS LOW TRADING VOLUME AND THEREFORE ITS PUBLIC TRADING PRICE
MAY BE VOLATILE.
Since Antigenics' initial public offering on February 4, 2000, the per
share price of its common stock has fluctuated between $10.00 and $71.50 with an
average daily trading volume over the last three months of approximately 92,991
shares. The market has experienced significant price and volume fluctuations
that are
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often unrelated to the operating performance of individual companies. In
addition to general market volatility, many factors may have a significant
adverse effect on the market price of Antigenics stock, including:
- announcements of decisions made by public officials;
- results of the company's preclinical and clinical trials;
- announcement of technological innovations or new commercial products by
Antigenics or its competitors;
- developments concerning proprietary rights, including patent and
litigation matters;
- publicity regarding actual or potential results with respect to products
under development by Antigenics or by its competitors;
- regulatory developments; and
- quarterly fluctuations in Antigenics' revenues and other financial
results.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES COULD CAUSE THE MARKET PRICE OF
ANTIGENICS STOCK TO DECLINE.
As of September 13, 2000, Antigenics had 24,808,035 shares of common stock
outstanding. After giving effect to the merger, Antigenics will have
approximately 27,290,000 shares of common stock outstanding.
The sale by Antigenics or the resale by stockholders of shares of
Antigenics stock could cause the market price of Antigenics stock to decline. Of
the shares of Antigenics stock outstanding, 17,951,083 shares are subject to
underwriter lock-up agreements or other restrictions on their resale. These
shares will be available for resale on the Nasdaq National Market on February 9,
2001, some of which are subject to volume and other limitations.
Antigenics has filed a registration statement to permit the sale of
approximately 4,800,000 shares of common stock under its equity incentive plan
and 300,000 shares of common stock under its employee stock purchase plan. As of
September 13, 2000, options to purchase 2,127,422 shares of Antigenics stock
upon exercise of options with a weighted average exercise price per share of
$7.65 were outstanding. Many of these options are subject to vesting that
generally occurs over a period of up to five years following the date of grant.
Substantially all outstanding options are subject to agreements with the
underwriters not to sell the shares issuable upon their exercise prior to
February 4, 2001. As of September 13, 2000, warrants to purchase 274,722 shares
of Antigenics stock with an exercise price per share of $13.96 were outstanding.
Approximately 248,000 shares of Antigenics stock issuable upon exercise of these
warrants may be sold on the Nasdaq National Market immediately after its
issuance.
In addition, if the merger is completed, Antigenics will assume outstanding
options and warrants to purchase shares of Aquila stock. As a result, additional
options to purchase 263,868 shares of Antigenics stock with a weighted average
exercise price per share of $11.90 would be outstanding as of September 13,
2000; and additional warrants to purchase 17,585 shares of Antigenics stock with
an exercise price per share of $14.22 would be outstanding as of September 13,
2000.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements about
Antigenics' financial condition, results of operations, business strategies,
operating efficiencies, competitive positions, growth opportunities for existing
products, future success of development-stage products, plans and objectives of
management and other matters. These forward-looking statements involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. Forward-looking
statements, therefore, should be considered in light of all of the information
included or referred to in this proxy statement/prospectus, including that set
forth under the heading "Risk Factors."
Words such as "estimate," "project," "plan," "intend," "expect," "believe,"
"should," "may" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places
throughout this proxy statement/prospectus. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this proxy statement/prospectus.
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THE AQUILA SPECIAL MEETING
The Aquila board of directors is soliciting the proxies of the common
stockholders in connection with the special meeting of common stockholders to
vote on the proposed merger. This proxy statement/prospectus contains
information about the proposed merger to help you in determining how to vote.
DATE, TIME, PLACE AND PURPOSE OF THE AQUILA SPECIAL MEETING
The special meeting of stockholders of Aquila will be held at Aquila's
headquarters located at 175 Crossing Boulevard, Framingham, Massachusetts 01702
on November 15, 2000 at 4:00 p.m., local time. At the meeting, Aquila will ask
stockholders to adopt the merger agreement.
The merger agreement is attached as Annex A to this proxy
statement/prospectus. Please read it and the other information contained in this
proxy statement/prospectus carefully before deciding how to vote.
RECORD DATE AND OUTSTANDING SHARES
The board of directors has fixed the close of business on September 27,
2000 as the record date for Aquila stockholders entitled to notice of and to
vote at the special meeting.
The only outstanding securities of Aquila entitled to vote on the merger
are the shares of Aquila stock. Only record holders of Aquila stock at the close
of business on the record date may vote at the meeting. Each stockholder is
entitled to one vote for each share of common stock held on the record date.
At the close of business on the record date, September 27 shares of Aquila
stock were outstanding. They were held of record by approximately 4,548
stockholders. Aquila has been informed that there are in excess of 10,300
beneficial owners.
VOTE REQUIRED
To approve the merger, a majority of the outstanding shares of Aquila stock
must affirmatively vote for adoption of the merger agreement.
RECOMMENDATION OF THE AQUILA BOARD
THE AQUILA BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
ADOPTION OF THE MERGER AGREEMENT.
SHARE OWNERSHIP OF MANAGEMENT AND AFFILIATED STOCKHOLDERS
On the record date, directors, executive officers and affiliates of Aquila
as a group beneficially owned 720,509 shares of Aquila stock, or approximately
8.3% of the outstanding shares.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
A majority of the Aquila stock shares outstanding on the record date must
be present at the meeting to establish a quorum. Stockholders may be present in
person or by proxy. Abstentions will count toward the quorum and be treated as
votes at the meeting, but they will have the effect of votes against the merger.
Broker non-votes will also have the effect as votes against the merger.
VOTING OF PROXIES
Accompanying this proxy statement/prospectus is a proxy card by which the
Aquila board of directors is soliciting your proxy. Aquila asks that you
complete, date and sign the proxy card and promptly mail it to Aquila. All
properly executed proxies received prior to taking the vote at the meeting, and
not revoked, will be
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voted as instructed on the proxy card. If no instructions are given, Aquila will
vote the proxy in favor of adopting the merger agreement. You may revoke your
proxy at any time before it is voted at the meeting by:
- delivering to the secretary of Aquila, by any means, including facsimile,
a written notice, bearing a date later than the date on your proxy,
stating that the proxy is revoked;
- signing and delivering to Aquila before Aquila takes the vote at the
meeting a proxy for the same shares and bearing a later date; or
- attending the meeting and voting in person -- you must vote, because your
attendance, by itself, does not revoke your proxy.
Please note, however, that if the holder of record of your shares is your
broker, bank or other nominee and you wish to vote at the meeting, you must
bring a letter from the broker, bank or other nominee confirming that you are
the beneficial owner of the shares.
You should not send any certificates representing Aquila stock with your
proxy. After the merger, you will receive instructions for the surrender and
exchange of your stock certificates.
SOLICITATION OF PROXIES
Aquila and Antigenics will share equally the costs incurred for the filing,
printing and mailing of the proxy statement/prospectus. Aquila is paying
Innisfree M&A Incorporated, a proxy solicitation firm, $9,000 plus expenses to
help with the proxy solicitation. Aquila's employees may solicit proxies by
mail, telephone, telegraph or in person. Following the mailing of the proxies
and other soliciting materials, Aquila will request brokers, custodians,
nominees and other record holders of common stock to forward the proxy and other
soliciting materials to the persons on behalf of whom they hold shares of Aquila
stock, along with a request for authority to exercise the proxies. If the record
holder requests, Aquila will reimburse the holder's reasonable expenses.
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BUSINESS OF ANTIGENICS
OVERVIEW
Antigenics is engaged in the discovery and development of novel therapeutic
vaccines for the treatment of life threatening and chronic medical conditions.
Antigenics' therapeutic vaccines are based on a specific class of proteins known
as heat shock proteins and their ability to modulate the immune system. The
company is currently evaluating its lead therapeutic vaccine, Oncophage, in ten
clinical trials for the treatment of seven different cancers, and started its
first pivotal clinical trial in June of 2000. Antigenics is also developing
therapeutic vaccines to treat infectious diseases, such as genital herpes, and
autoimmune disorders, such as diabetes and multiple sclerosis. Based upon its
scientific and drug development skills, its technology platform and its
strategic expertise, Antigenics intends to become a leader in drug discovery,
development and commercialization.
ANTIGENICS' TECHNOLOGY PLATFORM
Introduction
Antigenics is the pioneer in activating T cells using heat shock
protein-based therapies. T cells are specialized white blood cells that are
normally produced by the body to kill cancer cells and infected cells. In
individuals who develop cancer, infections and autoimmune disorders, the immune
system fails in its normal function. Antigenics' therapeutic vaccines are
designed to restore this function and treat these life threatening or chronic
disease conditions.
Antigenics believes its therapeutic vaccines will be applicable to the
treatment of all cancer types and several types of infectious diseases and
autoimmune disorders. The company's lead product candidates consist of two
components: a variable component, consisting of small protein fragments called
peptides, which is necessary for the targeting of specific diseases; and a
constant component, consisting of a heat shock protein, which is necessary for
the activation of a T cell-based immune response to the targeted disease. In the
case of cancer, which is a highly variable disease from one patient to another,
Antigenics purifies, from each patient's own tumor tissue, heat shock proteins
that are bound, or complexed, to peptides. Antigenics' cancer therapeutic
vaccines are therefore specific to each patient. In contrast, for each
infectious disease which is generally caused by a common pathogen, Antigenics
uses a human heat shock protein bound to peptides derived from the target
pathogen. Antigenics' therapeutic vaccines for infectious diseases therefore
will be disease-specific rather than patient-specific. The company's therapeutic
vaccine for autoimmune disorders will be generic, meaning it will be intended
for the treatment of most disorders that result in T cells attacking healthy
tissue.
The principle upon which Antigenics' technology platform is based extends
back over 50 years when scientists began using genetically identical laboratory
animals to study the immune response to cancer. Researchers demonstrated that
animals vaccinated with attenuated, or weakened, tumor cells are immune to
subsequent injections of live tumor cells. Further, researchers have shown that
this immunity to cancer is tumor-specific, meaning that animals are immune only
to the cancer used for immunization and not to any other kind of cancer. Twenty
years ago, the chairman of Antigenics' scientific advisory board, Pramod
Srivastava, discovered that cancers harbor molecular factors known as heat shock
proteins, which are responsible for conferring the anti-cancer immune responses.
Consistent with the observation that immunity generated with attenuated tumor
cells is tumor-specific, Dr. Srivastava discovered that heat shock proteins
generate immunity only to the tumor from which they are purified.
Heat Shock Proteins
Heat shock proteins are a class of proteins that play a major role in
transporting peptides, including antigens, within a cell and are thus often
called chaperones. In this capacity, heat shock proteins bind to the broad
antigenic repertoire or fingerprint of the cell in which they reside. Heat shock
proteins are present in all cells of all organisms from bacteria to mammals and
their structure and function are similar across these diverse life forms.
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Published research suggests that heat shock proteins play a central role in
the generation of immune responses. This role includes coordinating the
breakdown and transport of peptides from the point of their generation inside
cells to their ultimate display on the cell's surface for recognition by T
cells. Although heat shock proteins inside tumor cells and pathogen-infected
cells help display antigens to the immune system, tumors and pathogens
simultaneously employ strategies to evade immune responses. In some cases, this
evasion of immune responses results in disease progression.
The ability of heat shock proteins to chaperone peptides is key to
Antigenics' technology platform. When the company purifies heat shock proteins
from tumor cells or pathogen-infected cells according to its manufacturing
protocols, the heat shock proteins remain bound to the broad repertoire of
peptides produced by the tumor or pathogen. These purified heat shock
protein-peptide complexes isolated from diseased cells are Antigenics'
therapeutic vaccines.
Antigenics believes that when purified heat shock protein-peptide complexes
are injected into the skin, they stimulate a powerful T cell-based immune
response capable of targeting and killing cancers and pathogen-infected cells
from which these complexes originated. Doctors or nurses inject Antigenics'
therapeutic vaccines into the skin to take advantage of the high concentration
of dendritic cells in this region. These dendritic cells express receptors that
specifically recognize heat shock proteins; therefore, dendritic cells
efficiently capture and process the company's therapeutic vaccines. Once inside
dendritic cells, heat shock protein-peptide complexes separate and the dendritic
cell displays the peptides on its surface where T cells can recognize the
peptides.
Dendritic cells expressing cancer-specific or pathogen-specific peptides
activate T cells that are capable of specifically targeting and killing diseased
cells throughout the body that express those same peptides. The interaction of
heat shock proteins with their receptors on dendritic cells also leads to
secretion of cytokines by the dendritic cells that further stimulate the immune
system.
Antigenics believes its therapeutic vaccines stimulate the immune system to
recognize the broad antigenic fingerprint of a tumor or pathogen. Due to this
characteristic, Antigenics believes its therapeutic vaccines will:
- trigger the immune system to recognize and destroy all tumor or
pathogen-infected cells in the body; and
- make it difficult for tumors or pathogens to escape recognition by the
immune system.
Antigenics believes that the dendritic cells displaying these peptides
trigger a more potent immune response than that achieved by the presentation of
these same peptides by the tumor or pathogen-infected cell.
Antigenics' preclinical studies with heat shock protein based therapeutic
vaccines have demonstrated a beneficial effect in preventing or treating 13
types of cancer in three different species. The cancer types tested include
cancers of the skin, colon, lung and other tissues. Further, Antigenics'
therapeutic vaccines show therapeutic benefit in animals with metastatic
disease, which is when cancer has spread beyond the primary tumor to distant
regions of the body. Metastatic disease is often responsible for the relapse and
ultimate death of patients with cancer.
Heat Shock Protein Receptor
Antigenics' scientists recently identified a receptor expressed on
dendritic cells that recognizes the company's lead heat shock protein product,
Oncophage. The discovery of this heat shock protein receptor sequence opens up
significant new opportunities in the development of small molecule drugs to
treat cancers, serious infections and autoimmune diseases. Antigenics has filed
patents on various applications of the receptor technology and has established a
screening program to identify drugs which modulate its activity. The receptor is
99.9% identical in mice and humans.
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ANTIGENICS' PRODUCTS UNDER DEVELOPMENT
Introduction
The chart below summarizes the indications and status for each of
Antigenics' products and development programs. Antigenics uses "HSPPC" as an
abbreviation for "heat shock protein-peptide complex." The number following
HSPPC is the molecular weight of the heat shock protein used in the product. For
cancer applications, Antigenics calls HSPPC-96 "Oncophage."
<TABLE>
<CAPTION>
PRODUCTS INDICATION STATUS
---------------------------------- --------------------------------------- ---------------------------------------------
<S> <C> <C>
CANCER
Oncophage Renal cell carcinoma Phase III trial ongoing
Phase II trial enrollment completed
Phase I/II trial enrollment completed
Melanoma Phase II trial enrollment completed
Phase I/II trial enrollment completed
Phase II confirmatory trial planned
Colorectal carcinoma Phase II trial enrollment completed
Gastric cancer Phase I/II trial ongoing
Pancreatic cancer Phase I trial ongoing
Low-grade non-Hodgkin's lymphoma Phase II trial ongoing
Sarcoma Phase II trial ongoing
Prostate cancer Phase II trial planned
HSPPC-70-C Various cancers Research
HSPPC-90-C Various cancers Research
HSPPC-56-C Various cancers Research
INFECTIOUS DISEASES
HSPPC-96-GH Genital herpes Preclinical
HSPPC-70-GH Genital herpes Preclinical
HSPPC-56-I Various infectious diseases Research
HSPPC-70-I Various infectious diseases Research
AUTOIMMUNE DISORDERS
gp96 Type 1 diabetes Research
Multiple sclerosis Research
</TABLE>
ANTIGENICS' CANCER THERAPEUTIC VACCINES
Background. The American Cancer Society estimated that doctors would
diagnose approximately 1.2 million new cases of cancer in the United States in
2000. Cancer is the second leading cause of death in the United States,
resulting in an estimated 552,200 deaths in 1999. The American Cancer Society
reports that since 1990 medical professionals have diagnosed nearly 13 million
cases of cancer, and cancer has killed nearly 5 million people in the United
States.
Cancer results from the uncontrolled proliferation of abnormal cells.
Eventually, these cells form a mass referred to as a tumor. As the tumor grows,
it pushes outward, often invading adjacent tissues and organs and interfering
with their normal function. In addition, small groups of cells may break away
from the primary tumor and spread or metastasize. Tumors produced at distant
sites are referred to as metastatic tumors.
The uncontrolled proliferation of cancer cells is due to alterations, or
mutations, in a cell's DNA. Mutations can take place when a gene is exposed to
radiation or particular drugs or chemicals, or when some as yet unexplained
internal change occurs. The mutations in DNA also lead to production of
antigens. Because mutations occur randomly, the antigenic fingerprint of each
person's cancer is unique.
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Studies in animals have confirmed that a unique repertoire of antigens is
associated with each primary tumor. As cancers metastasize, they continue to
mutate, potentially producing new antigens not found in the primary tumor of the
same patient. However, Antigenics believes that a significant overlap exists
between the antigenic fingerprint of the metastatic cells and the primary tumor
of the same patient.
Current Treatments. Surgery, chemotherapy and radiotherapy are the three
most commonly used methods for treating cancer. Medical professionals often
administer a combination of these treatments to a cancer patient, depending upon
the type of cancer and the extent of the disease. Surgery is curative only when
a doctor detects a tumor at a relatively early stage of growth and is able to
completely remove the tumor. Unfortunately, most tumors metastasize when they
are very small, ultimately causing relapse and death in many cancer patients.
The use of chemotherapy or radiotherapy sometimes improves survival rates;
however, these treatments have significant limitations.
High rates of treatment failure and limitations posed by severe side
effects and tumor resistance have compelled researchers to focus on alternative
strategies of cancer treatment. Therapeutic vaccines have the ability to target
and destroy widely disseminated disease without damaging normal tissue. In
addition, therapeutic vaccines do not have many of the shortcomings of
traditional cancer treatments.
Antigenics' Approach. Antigenics purifies its cancer therapeutic vaccines
from portions of a patient's tumor that a doctor has surgically removed. The
company's cancer therapeutic vaccines are patient-specific and therefore
incorporate the entire antigenic fingerprint of each patient's own tumor.
Because its cancer immunotherapeutics contain overlapping antigens present in
both the primary and metastatic tumors, Antigenics believes it will be effective
in treating all the tumor cells that remain in the body that are derived from
the primary tumor.
ONCOPHAGE
Oncophage is Antigenics' lead cancer therapeutic vaccine. The company is
evaluating Oncophage in seven different cancers in ten separate phase III, phase
II or phase I/II clinical trials. Oncophage consists of purified,
patient-specific heat shock protein-peptide complexes designed to elicit a T
cell-based immune response to a patient's cancer. After a surgeon removes a
patient's tumor, the hospital or clinic ships a portion of the tumor tissue
frozen by overnight courier to Antigenics' facility. The company purifies
Oncophage from the tumor tissue using its proprietary manufacturing process in
less than ten hours. Depending on the dose, Antigenics requires a minimum of one
to three grams of tumor tissue to yield a sufficient amount of Oncophage for a
typical course of treatment.
Antigenics formulates Oncophage in sterile saline solution and packages it
in standard single injection vials in its manufacturing facility. Antigenics
subjects the final therapeutic vaccine to extensive quality control testing,
including sterility testing of each lot. The company ships the product frozen
via overnight courier back to the hospital. Antigenics has developed
sophisticated tracking systems and procedures designed to ensure correct
delivery of Oncophage to the appropriate patient.
There are several benefits associated with the production and
administration of Antigenics' autologous product:
- the company can sterilize Oncophage through simple filtration; sterility
is required for FDA approval of a product that will be injected into
humans;
- the scheduling of production at its central facility is flexible because
Antigenics purifies Oncophage from frozen tumor samples;
- doctors can administer Oncophage when the patient is ready to begin
treatment because Oncophage is stored frozen and has a current shelf-life
of at least six months; and
- Oncophage consists of a purified protein which can be consistently
produced from most tumor types.
A medical professional initially administers Oncophage to a patient four to
six weeks after a doctor surgically removes the patient's primary or metastatic
tumor. The typical course of treatment consists of an
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injection into the skin administered once per week for four to six weeks. An
oncologist may recommend treating a patient with more than one course of
Oncophage.
Although Antigenics believes Oncophage will be applicable to the treatment
of all cancer types, its initial focus is on cancers that are resistant to
available treatment options. Further, Antigenics has chosen types of cancer and
stages of disease that typically yield tumors that doctors can surgically
remove. Additionally, in order to complete clinical trials rapidly and file for
regulatory approvals, Antigenics has selected cancers and stages of disease
which allow the company to evaluate its immunotherapeutics in clinical trials
with near term endpoints.
Antigenics filed an IND for Oncophage in November 1996 that the FDA allowed
on December 20, 1996. To date, the company has treated approximately 240
advanced stage, metastatic cancer patients with Oncophage in its clinical
programs. The company started enrolling patients in its first clinical trial at
the Memorial Sloan-Kettering Cancer Center in New York, New York in November
1997.
Antigenics believes the collective results from these clinical trials show
that Oncophage is generally safe and well tolerated. These results also
demonstrate preliminary indications of clinical benefit in a number of these
patients. Moreover, Antigenics has shown that Oncophage can generate an
anti-tumor immunological response. In addition, the company believes it can
manufacture Oncophage consistently and in sufficient quantities from most human
cancer tissue.
The investigators participating in the company's clinical programs have
documented tumor regression using standard response criteria. A complete
response means that all tumor tissue has disappeared and the patient appears to
be disease free. A partial response means that evaluable tumor tissue has shrunk
by at least 50%. A minor response means that the tumor has shrunk by 25-50%.
Stable disease means that the tumor has either shrunk or grown by less than 25%.
Progressive disease means that the tumor has grown by more than 25%.
The investigators also document survival. Median survival refers to the
time at which 50% of patients diagnosed with a particular cancer are alive.
RENAL CELL CARCINOMA
Background. Renal cell carcinoma is the most common type of kidney cancer.
The American Cancer Society estimated that doctors would diagnose about 31,200
new cases of kidney cancer in the United States in 2000 and that the disease
would kill approximately 11,900 people during 2000. Of the 31,200 patients
diagnosed with kidney cancer, approximately 85% have the specific type of kidney
cancer known as renal cell carcinoma. By the time renal cell carcinoma is
diagnosed in these patients, about one-third of them have developed metastatic
disease.
The median survival of patients with metastatic renal cell carcinoma is
approximately 12 months. For patients with metastatic disease, the only FDA
approved treatment is intravenous high-dose interleukin-2, a human cytokine. The
response rate, which includes partial responses and complete responses, of
patients who are treated with high-dose interleukin-2 is approximately 15%.
Treatment with high-dose interleukin-2 is generally associated with severe
adverse events. These side effects often can lead to discontinuation of
treatment. Although not FDA-approved for the treatment of renal cell carcinoma,
a lower-dose of interleukin-2 injected underneath the skin, or subcutaneously,
either alone or in combination with other cytokines, has become a treatment
option. This treatment regimen has been the subject of a number of small studies
with widely varying outcomes. Generally, side effects using the subcutaneous
route of administration have been milder than those associated with high-dose,
intravenous treatment.
Antigenics' Clinical Program. In its phase I/II trial, Antigenics enrolled
patients with measurable metastatic renal cell carcinoma. The company conducted
this trial with clinical investigators at the M.D. Anderson Cancer Center in
Houston, Texas. These patients did not receive prior or concurrent cancer
therapy. After surgical removal of their primary tumors, patients were treated
at one of three dose levels of Oncophage: 2.5 micrograms, 25 micrograms or 100
micrograms. The clinical investigators treated 38 patients, of whom 34 could be
evaluated with standard radiology measurements.
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Of the 34 evaluable patients, 13 patients responded or had stable disease.
Four patients had a partial response and one patient had a minor response. The
other eight patients showed stabilization of their disease. Three of these
patients had been stable in excess of 10 months. The response rate in this
trial, which does not include patients with a minor response or stable disease,
was 12% and no adverse events were associated with treatment with Oncophage. The
median survival in this trial is 13 months.
While the analysis of immunological results is still ongoing, testing to
date shows that in four out of five patients who responded clinically, the
number of T cells increased after treatment with Oncophage. Further, in all
patients who responded clinically, the number of natural killer cells increased
after treatment with Oncophage.
In the phase I/II trial, clinical investigators found that Oncophage is
generally safe and well tolerated. Sixty-three percent of Antigenics' patients
received more than one course of treatment with Oncophage.
Antigenics was able to prepare Oncophage successfully from approximately
98% of renal cancer carcinoma samples it received at its manufacturing facility
for this phase I/II trial. Based on this result, the company believes it will be
able to manufacture Oncophage for nearly all renal cell carcinoma patients whose
tumors a surgeon can remove.
Based on the results from its phase I/II clinical trial, Antigenics
initiated a 60 patient phase II trial for patients with metastatic renal cell
carcinoma at the M.D. Anderson Cancer Center in March 1999. The company
completed enrollment for this phase II trial in the first quarter of 2000. For
this trial, the dose of Oncophage was set at 25 micrograms and patients received
one dose once a week for four weeks, followed by one dose every two weeks. Some
patients also received an injection of subcutaneous interleukin-2 if they have
not had an adequate response after three months of treatment with Oncophage. In
an interim analysis, an improvement in the course of the disease was seen in 35%
of the patients treated with Oncophage alone. This includes complete and partial
responses in 10% of the patients and stabilization of disease in an additional
25% of the patients. The addition of IL-2 did not benefit patients. Based on the
analysis of the results from the phase I/II and phase II trials, Antigenics
started a phase III trial for renal cell carcinoma in June of 2000.
MELANOMA
Background. Melanoma is the most serious form of skin cancer. The American
Cancer Society estimated that doctors would diagnose about 47,700 new cases of
melanoma in the United States in 2000 and that the disease would kill
approximately 7,700 people during 2000. The incidence of melanoma is growing at
5-7% per year, which is substantially faster than the growth in incidence rates
of most other cancers. Oncologists treat advanced or metastatic melanoma, also
known as stage III or IV, with surgery, radiation therapy, immunotherapy, or
chemotherapy depending on the case. Approximately 20% of all melanoma patients
at the time of their first diagnosis have stage III or stage IV disease.
Existing treatments have not significantly improved overall survival of patients
with melanoma. The median survival of patients with stage III melanoma varies
widely according to published literature. At the M.D. Anderson Cancer Center,
the median survival of patients with late stage III melanoma is 24 months.
According to published literature, patients with stage IV melanoma have a median
survival of about seven months. Although oncologists use various treatment
options, the only FDA approved drug therapies for patients with metastatic
melanoma are high dose intravenous interleukin-2 and alpha interferon, another
human cytokine.
Antigenics' Clinical Program. Antigenics has treated 36 patients in a
phase I/II clinical trial, evaluating Oncophage as a treatment for late stage
III and early stage IV metastatic melanoma. Eighty-three percent of the patients
in its trial were previously treated with chemotherapy, radiotherapy, and alpha
interferon. The company is conducting the trial with clinical investigators at
the M.D. Anderson Cancer Center. After surgery to remove a portion of the tumor,
the clinical investigators treated patients with 2.5 micrograms, 25 micrograms
or 100 micrograms of Oncophage.
In this trial, the clinical investigators treated 20 stage III and stage IV
patients in the adjuvant setting. This means that these patients had all of
their detectable melanoma tissue surgically removed before the
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clinical investigators treated them with Oncophage. Nineteen out of 20 patients
(95%) are alive with a median follow-up of 14 months, and of those, 15 patients
(75%) are disease free.
In the company's melanoma trial, the clinical investigators also treated 16
stage III and stage IV patients with "residual disease." These are patients who
have had only part of their disease surgically removed, leaving them with
visible disease at the time of Oncophage treatment. Eight of these 16 patients
are alive with a median follow-up of 14 months.
To date, the trial has shown Oncophage to be generally safe and well
tolerated by patients. In addition, Antigenics has been able to successfully
prepare Oncophage from approximately 92% of melanoma samples it received at its
manufacturing facility for this phase I/II trial. Based on this result,
Antigenics believes that it will be able to manufacture its product for nearly
all melanoma patients from whom a surgeon can remove an adequate amount of tumor
tissue.
In addition to its phase I/II trial at the M.D. Anderson Cancer Center,
Antigenics has completed enrollment in a planned 40 patient phase II trial for
melanoma at the Istituto dei Tumori in Milan, Italy. Clinical investigators have
treated patients in this trial at 5 or 50 micrograms of Oncophage. The purpose
of this trial is to confirm the route of administration of Oncophage.
COLORECTAL CANCER
Background. Colorectal cancer is cancer of the colon or rectum. The
American Cancer Society estimated that doctors would diagnose about 130,000 new
cases of colorectal cancer in the United States in 2000 and that this disease
would kill approximately 56,300 people during 2000.
For patients whose disease has not spread to other parts of the body,
surgery remains the most common treatment and can be curative in about two
thirds of these cases. For patients whose disease has metastasized to other
parts of the body, treatment options are limited and the patients' prognosis is
poor. Patients with recurrence of advanced disease may have their metastatic
lesions removed by surgery. The median survival for these patients is
approximately 12 months. Conventional cancer treatments such as chemotherapy and
radiation have shown limited benefit in treating colorectal cancer.
Antigenics' Clinical Program. Antigenics has completed enrollment of a 30
patient phase II clinical trial evaluating Oncophage as a treatment for
metastatic colorectal cancer. Antigenics is conducting the trial at the Istituto
dei Tumori. The clinical investigators will treat patients with 2.5 micrograms,
25 micrograms or 100 micrograms of Oncophage after a surgeon removes the
patients' metastatic tumors.
Antigenics is continuing to analyze the results from this trial. To date,
the trial has shown Oncophage to be generally safe and well tolerated by
patients. In addition, Antigenics has successfully prepared Oncophage from 100%
of colorectal cancer samples it received at its manufacturing facility for this
trial. Based on this result, Antigenics believes it will be able to manufacture
its product for nearly all colorectal cancer patients whose tumors a surgeon can
remove.
GASTRIC CANCER
Background. Gastric cancer is cancer of the stomach. The American Cancer
Society estimated that doctors would diagnose about 21,500 new cases of gastric
cancer in the United States in 2000 and that the disease would kill
approximately 13,000 people during 2000. The treatment options for gastric
cancer are surgery, chemotherapy and radiation. Biological therapies are
currently in clinical trials. For patients with surgically removable tumors,
improvements in surgical techniques have led to increased survival. Despite
these advances, as well as the development of multi-drug chemotherapy regimens,
the median survival for patients with advanced gastric cancer, according to
published research, is approximately seven months.
Antigenics' Clinical Program. Antigenics is currently enrolling patients
in a 30 patient phase I/II clinical trial evaluating Oncophage as a treatment
for metastatic gastric cancer. The company is conducting this trial with
clinical investigators at the Johannes Gutenberg-University Hospital in Mainz,
Germany, Technical University of Munich in Germany, and the Russian Oncology
Research Center in Moscow, Russia.
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After clinical investigators surgically remove a patient's tumor, the clinical
investigators treat the patient with 2.5 micrograms or 15 micrograms of
Oncophage. Although enrollment is still ongoing, to date, the trial has shown
Oncophage to be generally safe and well tolerated by patients. In addition,
Antigenics has been able to successfully prepare Oncophage from approximately
71% of gastric cancer samples it received at its manufacturing facility for this
trial. Based on this result, the company believes it will be able to manufacture
its product for the majority of gastric cancer patients whose tumors a surgeon
can remove.
PANCREATIC CANCER
Background. Pancreatic cancer is the fourth leading cause of cancer death
in the United States. The American Cancer Society estimated that doctors would
diagnose about 28,300 new cases of pancreatic cancer in the United States in
2000 and that the disease would kill approximately 28,200 people during 2000.
The treatment options for pancreatic cancer are surgery and chemotherapy.
Doctors at the Memorial Sloan-Kettering Cancer Center report that patients who
have had tumors surgically removed have a median survival of 14 months. Doctors
treat patients with tumors that cannot be surgically removed, or resected, with
chemotherapy. The median survival time for patients with unresectable disease is
less than six months.
Antigenics' Clinical Program. In early 1999, Antigenics completed a pilot
phase I clinical trial evaluating Oncophage as a treatment for resectable
pancreatic cancer. The company conducted the trial with clinical investigators
at the Memorial Sloan-Kettering Cancer Center and enrolled 15 patients. The
clinical investigators treated five of the 15 patients with five micrograms of
Oncophage after doctors had removed the patient's primary tumor.
Two out of five patients generated a T cell response to their tumor after
treatment with Oncophage.
Three patients are alive and disease free for 12, 28 and 28 months since
surgery, respectively. The two remaining patients died 8 months and 17 months
after surgery.
The trial showed Oncophage to be generally safe and well tolerated by
patients. Antigenics successfully prepared Oncophage from 5 of 15 pancreatic
cancer samples it received in its manufacturing facility. The company was not
able to prepare Oncophage from the remaining tumor samples due to the presence
of enzymes in the pancreatic tissue that break down proteins, including heat
shock proteins. Based upon its process development advances, Antigenics
anticipates that a modified process will improve its rate of success for
purifying Oncophage from pancreatic tumors.
NON-HODGKIN'S LYMPHOMA
Background. Non-Hodgkin's lymphoma is cancer that originates in lymph
tissue. The American Cancer Society estimated that doctors would diagnose about
54,900 new cases of non-Hodgkin's lymphoma in the United States in 2000 and that
the disease would kill approximately 26,100 people during 2000. Approximately
40% of patients with non-Hodgkin's lymphoma have low grade indolent disease,
which is a slow growing, often fatal, lymphoma.
Doctors have traditionally treated patients with non-Hodgkin's lymphoma
with chemotherapy. Recently, the FDA approved one new antibody therapy for low
grade non-Hodgkin's lymphoma.
Antigenics' Clinical Program. Antigenics is enrolling patients in a 35
patient phase II clinical trial evaluating Oncophage as a treatment for low
grade indolent non-Hodgkin's lymphoma. This trial is being conducted with
clinical investigators at the M.D. Anderson Cancer Center. Antigenics
anticipates that the clinical investigators will treat patients with 25
micrograms of Oncophage after a surgeon removes the patients' tumor tissue.
SARCOMA
Background. Soft tissue sarcomas are cancerous tumors that can develop
from fat, muscle, nerve, joint, blood vessel or deep skin tissues. The American
Cancer Society estimated that doctors would diagnose about
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8,100 new cases of soft tissue sarcomas in the United States in 2000 and that
the disease would kill approximately 4,600 people during 2000.
Doctors treat sarcoma with surgery, chemotherapy or targeted radiotherapy.
For resectable disease, doctors perform surgery and administer chemotherapy or
targeted radiotherapy as follow up treatments. For unresectable disease, doctors
treat patients with a combination of chemotherapy and radiotherapy.
Antigenics' Clinical Program. Antigenics is conducting a 35 patient phase
II clinical trial evaluating Oncophage as a treatment for soft tissue sarcomas.
The company will conduct the trial with clinical investigators at Memorial
Sloan-Kettering Cancer Center and may expand it to include other sites. The
company anticipates that the clinical investigators will treat patients with 25
micrograms of Oncophage after a surgeon removes the patients' tumor tissue.
OTHER CANCER THERAPEUTIC VACCINES
In addition to Oncophage, Antigenics is currently researching several other
autologous cancer immunotherapeutics using different heat shock proteins,
including HSPPC-70, HSPPC-90, and HSPPC-56. These immunotherapeutics have
demonstrated efficacy in animal cancer models.
ANTIGENICS' INFECTIOUS DISEASE THERAPEUTIC VACCINES
Background. Infectious diseases are illnesses caused by microorganisms, or
pathogens, like viruses, bacteria and parasites, and include tuberculosis,
hepatitis, genital herpes and HIV. While doctors use antiviral agents and
antibiotics to treat a number of viral and bacterial diseases effectively,
medical professionals are concerned about the emergence of new strains of
pathogens that have developed resistance to all available drugs.
Antigenics' Approach. Antigenics' therapeutic vaccines for treating
infectious diseases will consist of heat shock proteins bound to peptides that
are produced by the pathogen causing the infection. Typically, each infectious
disease is caused by a specific pathogen. Consequently, Antigenics' infectious
disease therapeutic vaccines will be common to all patients with a particular
infection and will not be patient-specific. The company currently produces these
therapeutic vaccines by binding specific peptides with heat shock proteins in
vitro. The company can generate the peptides in microorganisms or produce them
synthetically. This manufacturing procedure has enabled the company to test its
therapeutic vaccines in preclinical studies and should enable the company to
produce sufficient quantities to begin human clinical trials. Another technique
to manufacture the company's therapeutic vaccines involves purifying heat shock
protein-peptide complexes from cells infected with the target pathogen.
Genital Herpes. Genital herpes is a contagious viral infection that
affects an estimated 45 million Americans. Doctors estimate that as many as
500,000 new cases may occur each year in the United States. Genital herpes is
currently treated with palliative antiviral agents that reduce further
replication of the virus. The challenge of antiviral therapy lies not only in
treatment of the symptoms during the first and recurrent episodes but also in
the long-term suppression of the herpes virus in patients with frequent
recurrences. Antigenics expects to file an IND for this indication by year end.
ANTIGENICS' AUTOIMMUNE DISORDER THERAPEUTIC VACCINE
Background. Autoimmune disorders result from an inappropriate immune
response that targets and destroys normal tissue. While researchers have not
definitively determined what triggers autoimmune responses, many believe that
both genetic and environmental factors are probably involved in this process.
Several autoimmune disorders, including diabetes and multiple sclerosis, result
in the proliferation of misdirected T cells that attack normal tissues.
Antigenics believes that a therapeutic product that can turn off misdirected T
cell responses could treat these disorders.
Antigenics' Approach. Antigenics has demonstrated in animal models that
heat shock proteins administered at higher doses than those required for
treating cancer and infectious diseases can turn off misguided T cells that
destroy healthy tissue in animals with some autoimmune disorders. Antigenics is
currently
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researching the application of heat shock proteins to treat autoimmune diseases
like diabetes and multiple sclerosis. The source of heat shock proteins used in
the company's autoimmune disorders immunotherapeutic will be human cells. The
company's therapeutic vaccine could also be made using recombinant DNA
techniques.
MANUFACTURING
Antigenics manufactures its own therapeutic vaccine products in a 30,225
square foot manufacturing and research and development facility located in
Woburn, Massachusetts. The company is in the process of preparing this facility
for the commercialization of Oncophage.
Antigenics' process development group is currently working on improving the
process by which it manufactures heat shock protein-based therapeutic vaccines.
Efforts in this area to date have resulted in a 50% reduction in the time
required to purify Oncophage from individual patients' tumors and a 40% increase
in the quantity of Oncophage Antigenics can produce from tumor tissue. These
efforts in the company's cancer program should also benefit preparation of its
heat shock protein-based therapeutic vaccines for treatment of infectious
diseases.
SALES AND MARKETING
To commercially market its therapeutic vaccine products once its obtains
the necessary regulatory approvals, Antigenics must either develop its own sales
and marketing force or enter into arrangements with third parties. Currently,
the company's sales and marketing plans consist of the following:
- Commercialize cancer therapeutic vaccines in the United States through
its own sales force. Antigenics believes that it can build a United
States sales force to market its cancer therapeutic vaccines due to the
concentration of the United States oncology market.
- Form collaborations with pharmaceutical companies for commercializing
cancer therapeutic vaccines outside the United States. For example,
Antigenics has entered into an agreement with Sigma-Tau Industrie
Farmaceutiche Riunite S.p.A., under which it has agreed to pay for two
clinical trials in return for rights which include an option to enter
into an agreement to market Oncophage in Italy, Spain, Portugal and
Switzerland. Antigenics has also signed an agreement with Medison Pharma
Ltd. for marketing Oncophage in Israel.
- Form collaborations with pharmaceutical companies for infectious diseases
and autoimmune disorders. Unlike cancer, the number of doctors and health
care institutions prescribing treatments for infectious diseases and
autoimmune disorders is large and fragmented, and Antigenics will need a
large sales force to effectively market its products.
ANTIGENICS' INTELLECTUAL PROPERTY PORTFOLIO
Antigenics devotes significant resources to protecting and expanding its
intellectual property portfolio. The company seeks to protect its core
technologies through a combination of patents, trade secrets and know-how. As a
result of an exclusive worldwide license with Fordham University and one with
Mount Sinai School of Medicine of New York University, Antigenics has exclusive
rights to 13 issued United States patents, and foreign counterpart patents and
patent applications, relating to its heat shock protein technology. Prior to
directing the Center for Immunotherapy of Cancer at the University of
Connecticut, Dr. Srivastava, the Chairman of Antigenics' Scientific Advisory
Board, was an assistant professor of immunology at Mount Sinai School of
Medicine, and, then, a professor of immunology at Fordham University.
Antigenics also has licensed rights to 44 pending United States patent
applications, and corresponding foreign counterpart patents and applications,
from Mount Sinai School of Medicine of New York University, Fordham University,
Duke University and the University of Miami. Under the license agreements with
these institutions, Antigenics has exclusive, worldwide rights to inventions
using heat shock proteins in the treatment and prevention of cancer, infectious
diseases, autoimmune disorders and other indications. If Antigenics
commercializes any of the inventions, it will pay the licensors a royalty on
sales of the commercialized
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product. In addition, pursuant to a research agreement with the University of
Connecticut Health Center, Antigenics will fund the laboratory directed by Dr.
Srivastava at the University through December 31, 2002. The agreement calls for
payments to the University totaling a minimum of $5,000,000, payable in
quarterly installments of $250,000. In return, Antigenics has an option to
obtain an exclusive license to new inventions as that term is defined in the
research agreement, with the royalty rates and other terms to be determined by
negotiation between the parties. Antigenics also has an option to obtain an
exclusive license to certain types of "improvement" inventions as that term is
defined in the research agreement, at already-determined royalty rates, but with
the other terms to be determined by negotiation between the parties. These
options must be exercised within 180 days from the date of filing a United
States patent application on each such invention. To date, Antigenics has
exercised options to license five patent applications.
It is worth noting that:
- currently patent applications in the United States are maintained in
secrecy until patents are issued;
- patent applications in other countries generally are not published until
18 months after they are first filed in any country;
- publication of technological developments in the scientific or patent
literature often lags behind the date of these developments; and
- searches of prior art may not reveal all relevant prior inventions.
Although Antigenics has licensed 13 issued United States patents and 44
pending United States patent applications, the company cannot be certain that
its licensors' inventors were the first to invent the subject matter covered by
these patent and patent applications or that they were the first to file patent
applications for those inventions or that a court or patent authority will not
determine that these patent rights are invalid or unpatentable.
REGULATORY CONSIDERATIONS
Governmental authorities in the United States and other countries
extensively regulate the preclinical and clinical testing, manufacturing,
labeling, storage, record keeping, advertising, promotion, export, marketing and
distribution, among other things, of Antigenics' therapeutic vaccines. In the
United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act and other federal statutes and regulations subjects
pharmaceutical products to rigorous review. If Antigenics does not comply with
applicable requirements it may be fined, its products may be recalled or seized,
its production may be totally or partially suspended, the government may refuse
to approve its marketing applications or allow the company to distribute its
products, and it may be criminally prosecuted. The FDA also has the authority to
revoke previously granted marketing authorizations.
In order to obtain approval of a new product from the FDA, Antigenics must,
among other requirements, submit proof of safety and efficacy as well as
detailed information on the manufacture and composition of the product. In most
cases, this proof entails extensive preclinical, clinical and laboratory tests.
This testing, the preparation of necessary applications and processing of those
applications by the FDA are expensive and typically take several years to
complete. Antigenics cannot assure that the FDA will act quickly or favorably in
reviewing these applications, and Antigenics may encounter significant
difficulties or costs in its efforts to obtain FDA approvals that could delay or
preclude the company from marketing any products it may develop. The FDA may
also require post-marketing testing and surveillance to monitor the effects of
approved products or place conditions on any approvals that could restrict the
commercial applications of these products. Regulatory authorities may withdraw
product approvals if Antigenics fails to comply with regulatory standards or if
Antigenics encounters problems following initial marketing. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which Antigenics will have the
exclusive right to exploit them.
The first stage of the FDA approval process for a new biologic or drug
involves completion of preclinical studies and the submission of the results of
these studies to the FDA, together with proposed clinical
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protocols, manufacturing information, analytical data and other information, in
an investigational new drug application, which must become effective before
human clinical trials may commence. The investigational new drug application is
automatically effective 30 days after receipt by the FDA, unless the FDA before
that time requests an extension to review the application, or raises concerns or
questions about the conduct of the trials as outlined in the application. In the
latter case, the sponsor of the application and the FDA must resolve any
outstanding concerns before clinical trials can proceed. Antigenics cannot
guarantee that submission of an investigational new drug application will result
in the FDA authorizing it to commence clinical trials in any given case.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. The FDA regulates preclinical studies under a series of regulations
called the current "Good Laboratory Practices" regulations. If the sponsor
violates these regulations, in some cases, the FDA may invalidate the studies
and require that the sponsor replicate those studies.
After the investigational new drug application becomes effective, a sponsor
may commence human clinical trials. The sponsor typically conducts human
clinical trials in three sequential phases, but the phases may overlap. In phase
I trials, the sponsor tests the product in a small number of patients or healthy
volunteers, primarily for safety at one or more doses. In phase II, in addition
to safety, the sponsor evaluates the efficacy of the product in a patient
population somewhat larger than phase I trials. Phase III trials typically
involve additional testing for safety and clinical efficacy in an expanded
population at geographically dispersed test sites. The sponsor must submit to
the FDA a clinical plan, or "protocol," accompanied by the approval of the
institution participating in the trials, prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
The sponsor must submit to the FDA the results of the preclinical and
clinical testing, together with, among other things, detailed information on the
manufacture and composition of the product, in the form of a new drug
application or, in the case of a biologic, a biologics license application. In a
process which generally takes several years, the FDA reviews this application
and, when and if it decides that adequate data is available to show that the new
compound is both safe and effective and that other applicable requirements have
been met, approves the drug or biologic for marketing. The amount of time taken
for this approval process is a function of a number of variables, including the
quality of the submission and studies presented, the potential contribution that
the compound will make in improving the treatment of the disease in question,
and the workload at the FDA. Antigenics cannot guarantee that any of its
therapeutic vaccines will successfully proceed through this approval process or
that the FDA will approve them in any specific period of time, or at all.
Congress enacted the Food and Drug Administration Modernization Act of
1997, in part, to ensure the availability of safe and effective drugs, biologics
and medical devices by expediting the FDA review process for new products. The
Modernization Act establishes a statutory program for the approval of fast track
products, including biologics. A fast track product is defined as a new drug or
biologic intended for the treatment of a serious or life-threatening condition
that demonstrates the potential to address unmet medical needs for this
condition. Under the fast track program, the sponsor of a new drug or biologic
may request the FDA to designate the drug or biologic as a fast track product at
any time during the clinical development of the product.
The Modernization Act specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request. The FDA can base approval of a marketing application for a fast track
product on an effect on a clinical endpoint or on another endpoint that is
reasonably likely to predict clinical benefit. The FDA may subject approval of
an application for a fast track product to:
- post-approval studies to validate the surrogate endpoint or confirm the
effect on the clinical endpoint; and
- prior review of all promotional materials.
In addition, the FDA may withdraw its approval of a fast track product on a
number of grounds, including the sponsor's failure to conduct any required
post-approval study with due diligence.
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If a preliminary review of the clinical data suggests that a fast track
product may be effective, the FDA may initiate review of sections of a marketing
application for a fast track product before the sponsor completes the
application. This rolling review is available if the applicant provides a
schedule for submission of remaining information and pays applicable user fees.
However, the time periods specified under the Prescription Drug User Fee Act
concerning timing goals to which the FDA has committed in reviewing an
application, do not begin until the sponsor submits the application.
Antigenics may request fast track designation for its therapeutic vaccines.
The company cannot predict whether the FDA will grant that designation, nor can
it predict the ultimate impact, if any, of the fast track process on the timing
or likelihood of FDA approval of its therapeutic vaccines.
The FDA may, during its review of a new drug application or biologics
license application, ask for additional test data. If the FDA does ultimately
approve the product, it may require post-marketing testing, including
potentially expensive phase IV studies, and surveillance to monitor the safety
and effectiveness of the drug. In addition, the FDA may in some circumstances
impose restrictions on the use of the drug that may be difficult and expensive
to administer, and may require prior approval of promotional materials.
Before approving a new drug application or biologics license application,
the FDA will inspect the facilities at which the product is manufactured and
will not approve the product unless the manufacturing facilities are in
compliance with current Good Manufacturing Practices. In addition, the
manufacture, holding, and distribution of a product must be in compliance with
current Good Manufacturing Practices. Manufacturers must continue to expend
time, money and effort in the area of production and quality control and record
keeping and reporting to ensure full compliance with those requirements. The
labeling, advertising, promotion, marketing and distribution of a drug or
biologic product must be in compliance with FDA regulatory requirements. Failure
to comply with applicable requirements can lead to the FDA demanding that
production and shipment cease, and, in some cases, that the manufacturer recall
products, or to enforcement actions that can include seizures, injunctions and
criminal prosecution. These failures can also lead to FDA withdrawal of approval
to market the product.
Antigenics is also subject to regulation by the Occupational Safety and
Health Administration and the Environmental Protection Agency and to regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and other regulatory statutes, and may in the future be subject to other
federal, state or local regulations. Either or both of OSHA or the EPA may
promulgate regulations that may affect Antigenics' research and development
programs. The company is unable to predict whether any agency will adopt any
regulation which could have a material adverse effect on its operations.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not Antigenics has obtained FDA approval, it must obtain approval of
a product by comparable regulatory authorities of foreign countries prior to the
commencement of marketing the product in those countries. The time required to
obtain this approval may be longer or shorter than that required for FDA
approval. The foreign regulatory approval process includes all the risks
associated with FDA regulation set forth above as well as country-specific
regulations.
COMPETITION
Competition in the pharmaceutical and biotechnology industries is intense.
Many pharmaceutical or biotechnology companies have products on the market and
are actively engaged in the research and development of products for the
treatment of cancer, infectious diseases and autoimmune disorders. In addition,
many competitors focus on immunotherapy as a treatment for cancer, infectious
diseases and autoimmune disorders. In particular, some of these companies are
developing autologous cancer vaccines. Others are focusing on developing heat
shock protein products. Antigenics competes for funding, access to licenses,
personnel and third-party collaborations. In addition, many competitors have
substantially greater financial, manufacturing, marketing, sales, distribution
and technical resources, and more experience in research and development,
clinical trials and regulatory matters, than Antigenics does. A competing
company developing, or acquiring rights to, a more efficacious therapeutic
product for the same diseases targeted by
35
<PAGE> 42
Antigenics, or one which offers significantly lower costs of treatment, could
render Antigenics' products noncompetitive or obsolete.
Academic institutions, governmental agencies and other public and private
research institutions conduct significant amounts of research in biotechnology,
medicinal chemistry and pharmacology. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. They also compete with Antigenics in recruiting and retaining skilled
scientific talent.
FACILITIES
Antigenics leases approximately 30,225 square feet of laboratory space in
Woburn, Massachusetts under a lease agreement that terminates in August 2003.
The company has an option to renew for an additional five-year period with the
landlord's consent. Antigenics maintains its executive offices in New York, New
York, in an office building in which we lease approximately 10,000 square feet.
The agreement for 2,000 square feet terminates in July 2004, and the remaining
8,000 square feet terminates in December 2006. You should read the discussion
under "Certain Relationships and Related Transactions" on page 92 regarding
Antigenics' executive offices.
EMPLOYEES
As of September 6, 2000, Antigenics had 93 employees, of whom 14 have
Ph.D.s and 2 have M.D.s, 5 are clinical staff, 29 are manufacturing and quality
control staff, 24 are research and development staff, and 35 are management or
administrative staff. None of Antigenics' employees are subject to a collective
bargaining agreement. The company believes that it has good relations with its
employees.
LEGAL PROCEEDINGS
Other than the company's opposition of a European patent discussed under
"Risk Factors" on pages 13-14, Antigenics is not currently a party to any
material legal proceedings or claims. You should read the discussion of
Antigenics' opposition of this European patent under "Risk Factors" on pages
13-14.
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<PAGE> 43
ANTIGENICS SELECTED HISTORICAL FINANCIAL DATA
Antigenics is providing the following information to aid you in your
analysis of the financial aspects of the merger. Antigenics derived the selected
balance sheet data set forth below as of December 31, 1998 and 1999, and the
statement of operations data for each of the years in the three-year period
ended December 31, 1999, from its audited financial statements included
elsewhere in this proxy statement/prospectus. Antigenics derived the selected
balance sheet data as of December 31, 1995, 1996 and 1997, and selected
statement of operations data for the two years ended December 31, 1995 and 1996,
from its audited financial statements which are not included in this proxy
statement/prospectus.
Antigenics derived the selected financial data for the six months ended
June 30, 1999 and 2000, and for the period from March 31, 1994 (date of
inception) to June 30, 2000 from its unaudited financial statements which are
included elsewhere in this proxy statement/prospectus. The unaudited financial
statement data includes, in Antigenics' opinion, all adjustments (consisting
only of normal recurring adjustments) that are necessary for a fair presentation
of its financial position and the results of its operations for these periods.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ended
December 31, 2000. This information is only a summary and you should read it in
conjunction with Antigenics' historical financial statements and related notes
and "Antigenics Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in this proxy statement/prospectus.
Prior to Antigenics' converting to a corporation in February 2000, as a
limited liability company, no federal, state or local income taxes were levied
on Antigenics. Each member of the limited liability company was individually
responsible for reporting his share of Antigenics' net income or loss on their
personal tax returns. As a result, Antigenics will not be able to offset future
taxable income, if any, against losses incurred prior to the closing of the
conversion to a corporation.
Given Antigenics' history of incurring operating losses, management
believes that it is more likely than not that any deferred tax assets, net of
deferred tax liabilities, will not be realized. Therefore, there is no income
tax benefit in the financial statements for periods ended after February 2000
because of a loss before income taxes and the need to recognize a valuation
allowance on net deferred tax assets.
Increases in cash and cash equivalents, total current assets, total assets
and stockholders' equity in the periods presented below include the effects of
the receipt of net proceeds from Antigenics' equity offerings that totaled
approximately $7.6 million, $18.0 million, $41.1 million and $66.8 million in
1997, 1998, 1999 and the six-month period ended June 30, 2000.
37
<PAGE> 44
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31,
1994
SIX MONTHS ENDED (DATE OF
YEAR ENDED DECEMBER 31, JUNE 30, INCEPTION) TO
------------------------------------------------ ------------------ JUNE 30,
1995 1996 1997 1998 1999 1999 2000 2000
------- ------- ------- ------- -------- ------- -------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and development...... (742) (2,017) (2,563) (6,102) (10,977) (4,813) (7,189) (29,703)
General and administrative.... (2,453) (1,781) (1,549) (3,178) (6,875) (2,440) (3,911) (19,801)
Depreciation and
amortization................ (40) (79) (202) (360) (1,005) (340) (720) (2,422)
------- ------- ------- ------- -------- ------- -------- --------
Loss from operations............ (3,235) (3,877) (4,314) (9,640) (18,857) (7,592) (11,820) (51,926)
Interest income, net............ 8 281 481 736 723 375 2,611 4,840
Non-operating income............ -- 250 -- -- 10 -- -- 260
------- ------- ------- ------- -------- ------- -------- --------
Net loss(1)..................... $(3,227) $(3,346) $(3,833) $(8,904) $(18,124) $(7,217) $ (9,209) $(46,826)
======= ======= ======= ======= ======== ======= ======== ========
Net loss per share, basic and
diluted....................... $ (0.25) $ (0.23) $ (0.25) $ (0.54) $ (1.00) $ (0.40) $ (0.39)
======= ======= ======= ======= ======== ======= ========
Weighted average number of
shares outstanding, basic and
diluted....................... 13,049 14,602 15,401 16,459 18,144 17,904 23,884
======= ======= ======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------- AS OF JUNE 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 791 $ 9,588 $13,086 $22,168 $46,418 $105,141
Total current assets........................ 876 9,639 13,246 22,447 47,672 106,221
Total assets................................ 1,124 10,041 14,090 26,636 56,004 115,191
Total current liabilities................... 584 883 878 2,285 2,171 2,778
Long-term liabilities, less current
portion................................... -- -- -- 709 2,155 1,702
Stockholders' equity........................ 540 9,158 13,212 23,641 51,678 110,711
</TABLE>
---------------
(1) Prior to Antigenics' conversion from a limited liability company to a
corporation in February 2000, in accordance with federal, state and local
income tax regulations which provide that no income taxes are levied on
United States limited liability companies, each member of the limited
liability company was individually responsible for reporting his share of
the company's net income or loss. Accordingly, Antigenics has not provided
for income taxes in its financial statements for periods before February
2000. Given Antigenics' history of incurring operating losses, no income tax
benefit is recognized in its financial statements for periods after February
2000 because of a loss before income taxes and the need to recognize a
valuation allowance on net deferred tax assets.
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<PAGE> 45
ANTIGENICS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since Antigenics' inception in March 1994, its activities have primarily
been associated with the development of its heat shock protein technology and
its lead therapeutic vaccine, Oncophage. The company's business activities have
included:
- product research and development;
- intellectual property prosecution.
- establishing manufacturing capabilities;
- manufacturing therapeutic vaccines for clinical trials; and
- regulatory and clinical affairs.
Antigenics has incurred significant losses since its inception because it
has not generated any revenues. As of June 30, 2000, Antigenics had an
accumulated deficit of approximately $46,826,000. The company expects to
continue to incur net losses over the next several years as it completes its
Oncophage clinical trials, apply for regulatory approvals, continue development
of its technology and expand its operations. The company has been dependent on
equity and debt financings to fund its business activities. Antigenics'
financial results may vary depending on many factors, including:
- the progress of Oncophage in the regulatory process;
- the acceleration of the company's other therapeutic vaccine candidates
into preclinical and clinical trials;
- its investment in manufacturing process development and in manufacturing
capacity for Oncophage and other product candidates;
- development of a sales and marketing staff and initial sales activities
if Oncophage is approved for commercialization; and
- the progress of the company's other research and development efforts.
HISTORICAL RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenue. Antigenics generated no revenue during the six months ended June
30, 2000 or during the six months ended June 30, 1999.
Research and Development. Research and development expense increased 49.4%
to $7,189,000 for the six months ended June 30, 2000 from $4,813,000 for the six
months ended June 30, 1999. The increase was primarily due to the increase in
staff to support the company's expanded research and development activities,
which increased costs by $1,513,000, an increase in the non-cash charge for
options granted and earned by outside advisors, directors and employees from
$771,000 for the six months ended June 30, 1999 to $843,000 for the six months
ended June 30, 2000, an increase in costs associated with operating the
company's manufacturing and research facility of $459,000 and other ongoing
development activities that increased costs by $332,000. Research and
development expenses consist primarily of compensation for the company's
employees and outside advisors conducting research and development work, costs
associated with the company's sponsored research at the University of
Connecticut, costs associated with the operation of the company's manufacturing
and laboratory facility and the costs to support Oncophage clinical trials.
General and Administrative. General and administrative expenses increased
60.3% to $3,911,000 for the six months ended June 30, 2000 from $2,440,000 for
the six months ended June 30, 1999. The increase was primarily due to the growth
in the number of employees to support the company's expanded business operations
that increased costs by $547,000, increased costs related to operating as a
public company of $372,000, and the increase in the non-cash charge for options
granted and earned by outside advisors, directors and employees to $843,000 for
the six months ended June 30, 2000 from $814,000 for the six months ended
39
<PAGE> 46
June 30, 1999. General and administrative expenses consisted primarily of
personnel compensation, office expenses and professional fees.
Depreciation and Amortization. Depreciation and amortization expense
increased 111.76% to $720,000 for the six months ended June 30, 2000 from
$340,000 for the six months ended June 30, 1999. This increase was due to the
depreciation expense of the company's new 30,225 square foot manufacturing and
laboratory facility and related equipment placed in service during the second
quarter of 1999.
Interest Income. Interest income increased 512% to $2,815,000 for the six
months ended June 30, 2000 from $460,000 for the six months ended June 30, 1999.
This increase was principally attributable to a higher average cash and cash
equivalents balance during the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999 as a result of net proceeds of $38,922,000 from a
private equity financing completed in November 1999 and $66,229,000 from the
company's initial public offering completed in February 2000.
Interest expense. Interest expense increased 141.2% to $205,000 for the
six months ended June 30, 2000 from $85,000 for the six months ended June 30,
1999 due to the increased borrowings under a credit facility to partially fund
the construction of the company's manufacturing and laboratory facility.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenue. Antigenics generated no revenue during the year ended December
31, 1999 or during the year ended December 31, 1998.
Research and Development. Research and development expense increased 79.9%
to $10,977,000 for the year ended December 31, 1999 from $6,102,000 for the year
ended December 31, 1998. This increase was partially attributable to the
increase in the non-cash charge for options granted and earned by outside
advisors, directors and employees to $1,814,000 for the year ended December 31,
1999 from $314,000 for the year ended December 31, 1998. The remainder of the
increase was primarily due to the number of later stage Oncophage clinical
trials in process that increased costs by $1,055,000, an increase in staff to
support the company's expanded business activities that increased costs by
$1,342,000 and other ongoing development activities that increased costs by
$978,000. Research and development expenses consisted primarily of compensation
for employees and outside advisors conducting research and development work,
funding paid to the University of Connecticut, where Antigenics sponsors
research, costs associated with the operation of its manufacturing and
laboratory facility and funding paid to support Oncophage clinical trials.
General and Administrative. General and administrative expenses increased
116.3% to $6,875,000 for the year ended December 31, 1999 from $3,178,000 for
the year ended December 31, 1998. This increase was partially due to the
increase in the non-cash charge for options granted and earned by outside
advisors, directors and employees to $3,213,000 for the year ended December 31,
1999 from $795,000 for the year ended December 31, 1998. The remainder of the
increase was primarily due to the growth in the number of employees to support
Antigenics' expanded business operations that increased costs by $595,000.
General and administrative expenses consisted primarily of personnel
compensation, office expenses and professional fees.
Depreciation and Amortization. Depreciation and amortization expense
increased 179.4% to $1,005,000 for the year ended December 31, 1999 from
$360,000 for the year ended December 31, 1998. This increase was due to the
depreciation expense of the company's new 30,225 square foot manufacturing and
laboratory facility and related equipment.
Interest Income, net. Interest income increased 37.8% to $1,014,000 for
the year ended December 31, 1999 from $736,000 for the year ended December 31,
1998. This increase was principally attributable to a higher average cash and
cash equivalents balance during the year ended December 31, 1999 as compared to
the year ended December 31, 1998 due to a $28,000,000 private equity financing
completed in January 1999 and a $39,200,000 private equity financing completed
in November 1999. Interest expense was $291,000 during the year ended December
31, 1999 due to borrowings under a credit facility to fund the construction of
the company's manufacturing and laboratory facility. Antigenics incurred no
interest expense during the year ended December 31, 1998.
40
<PAGE> 47
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Antigenics generated no revenue during the year ended December
31, 1998 or during the year ended December 31, 1997.
Research and Development. Research and development expenses increased
138.1% to $6,102,000 for the year ended December 31, 1998 from $2,563,000 for
the year ended December 31, 1997. This increase was due primarily to an increase
of $1,777,000 in salary cost due to an increase in the number of employees as
Antigenics expanded its business and clinical activities, an increase of
$190,000 in expense to support Oncophage clinical trials, an increase in
professional fees of $126,000 related to expansion of the company's intellectual
property and patent activities, and the non-cash charge for options granted to
and earned by outside advisors, employees and directors of $236,000.
General and Administrative. General and administrative expenses increased
105.2% to $3,178,000 for the year ended December 31, 1998 from $1,549,000 for
the year ended December 31, 1997. This increase was due primarily to an increase
of $196,000 in costs related to increased personnel necessary to support
Antigenics' expanding business and clinical operations and the non-cash charge
for options granted and earned by outside advisors, employees and directors of
$621,000.
Depreciation and Amortization. Depreciation and amortization expense
increased 78.2% to $360,000 for the year ended December 31, 1998 from $202,000
for the year ended December 31, 1997. This increase was due to the depreciation
expense of the company's manufacturing and laboratory equipment.
Interest Income, net. Interest income increased 53.0% to $736,000 for the
year ended December 31, 1998 from $481,000 for the year ended December 31, 1997.
This increase was primarily attributable to a higher average cash and cash
equivalents balance during the year ended December 31, 1998 as compared to the
year ended December 31, 1997. There was no interest expense during the years
ended December 31, 1998 and 1997.
Antigenics Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements reflecting
management's current expectations regarding the company's future performance.
These expectations are based on certain assumptions regarding the timing of
Antigenics' clinical trials, the efficacy of products, the availability of
capital and other factors relating to the company's growth. These expectations
may not materialize if product development efforts are delayed or suspended or
if other assumptions prove incorrect. These factors are more fully discussed in
under "Risk Factors" beginning on page 8 of this proxy statement/prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Antigenics has incurred annual operating losses since inception, and at
June 30, 2000, the company had incurred an accumulated deficit of $46,826,000.
Since its inception, Antigenics has financed its operations primarily through
the sale of equity, interest income earned on cash and cash equivalent balances
and debt provided through a credit line secured by some of the company's
manufacturing and laboratory assets. Most recently, Antigenics completed an
initial public offering that raised net proceeds of $66,229,000. From its
inception through June 30, 2000, Antigenics raised aggregate net proceeds of
$145,800,000 through the sale of equity and the exercise of stock options and
warrants, and borrowed $3,481,000 under its $5,000,000 credit facility.
Antigenics expects that it will fund its capital expenditures and growing
operations over the next two years with current working capital. The company
may, however, raise money in the capital markets. Antigenics' future capital
requirements include, but are not limited to, supporting its Oncophage clinical
trial efforts and continuing its other research and development programs.
Satisfying Antigenics' long-term liquidity needs will require the successful
commercialization of Oncophage or other products and may require additional
capital.
Antigenics' cash and cash equivalents at June 30, 2000 were $105,141,000,
an increase of $58,723,000 from December 31, 1999. During the six months ended
June 30, 2000, the company used cash primarily to finance operations, including
its Oncophage clinical trials.
41
<PAGE> 48
Net cash used in operating activities for the six months ended June 30,
1999 and 2000 was $5,740,000 and $6,786,000. The increase resulted from the
increase in the activity of Oncophage clinical trials and general expansion of
operations.
Net cash used in investing activities for the six months ended June 30,
1999 and 2000 was $3,788,000 and $1,214,000. The investments were primarily for
the purchase of equipment, furniture and fixtures, and in 1999 the construction
of the company's manufacturing and laboratory facility, which was primarily
completed during the second quarter of 1999. During 1999, the company partially
financed its new manufacturing and laboratory facility in Woburn, Massachusetts
through the $5,000,000 credit facility discussed below and available cash
balances. During the second quarter of 2000, for investment and strategic
purposes, Antigenics invested $300,000 to become a limited partner in a limited
partnership which will invest principally in companies that apply genomic
technologies and information in their offerings of products and services or that
are engaged in research and development and efforts involving genomic
technologies with a view to developing such products and services. Antigenics'
total commitment to this limited partnership is $3,000,000 with contributions
made as authorized by the general partner.
Net cash provided by financing activities was $3,091,000 and $66,723,000
for the six months ended June 30, 1999 and 2000. Since inception, Antigenics'
primary source of financing has been from equity investments. During the six
months ended June 30, 1999 and 2000, sales of equity and, in 2000, exercises of
stock options and warrants, totaled approximately $2,212,000 and $67,115,000. At
June 30, 2000, Antigenics had outstanding $2,576,000 under its credit facility,
which was used to finance the construction of the company's manufacturing and
laboratory facility and to purchase related equipment. Loans that were drawn
down on the credit facility are secured by specific assets, including leasehold
improvements, which they finance.
OTHER
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting or Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended, will be
effective for the company's fiscal year beginning January 1, 2001. The adoption
of SFAS No. 133 is not expected to have a material effect on Antigenics'
financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (FIN 44). FIN 44 provides
guidance on the accounting for stock-based compensation grants to employees and
directors. The Interpretation will be applied prospectively beginning July 1,
2000. The adoption of FIN 44 is not expected to have a material effect on
Antigenics' financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, Antigenics is exposed to fluctuations in
interest rates as the company seeks debt financing to make capital expenditures.
The company does not employ specific strategies, such as the use of derivative
instruments or hedging, to manage its interest rate exposures. There has been no
change since the fiscal year ended December 31, 1999 with respect to its
interest rate exposures or its approach toward those exposures. Further,
Antigenics does not expect its market risk exposures to change in the near term.
The information below summarizes our market risks associated with debt
obligations as of June 30, 2000. Fair values included herein have been estimated
taking into consideration the nature and terms of each instrument and the
prevailing economic and market conditions at June 30, 2000. The table presents
cash flows by year of maturity and related interest rates based on the terms of
the debt.
<TABLE>
<CAPTION>
CARRYING
AMOUNT YEAR OF MATURITY
ESTIMATED JUNE 30, -------------------------------------------
FAIR VALUE 2000 2000 2001 2002 2003
----------- ----------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt(1)....................... $2,788,000 $2,576,000 $421,000 $939,000 $1,022,000 $194,000
</TABLE>
---------------
(1) Fixed interest rates from 13.954% to 15.084%
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<PAGE> 49
BUSINESS OF AQUILA
OVERVIEW
Aquila engages in discovery, development, and commercialization of products
to prevent, treat or control infectious disease, degenerative disorders and
cancers. Advances in biotechnology and immunology have enabled scientists to
develop a new generation of products that specifically modulate the immune
system to produce an effective immune response. These advances have allowed
development of new or improved prophylactic and therapeutic products to address
diseases that have remained largely refractive to historical methods of
intervention.
Aquila conducts research and development involving two proprietary core
technologies, the Stimulon family of adjuvants and the CD1 antigen presentation
system. The company has six product programs, including one product already
approved for sale, two clinical programs, one preclinical program and two
discovery programs. In addition, Aquila has eight corporate partners, six of
whom have ongoing clinical programs involving ten different products which use
Aquila's technology.
The Stimulon family of adjuvants has been shown to enhance the quality and
the quantity of the immune response to a variety of antigens, both in
preclinical studies and in a number of human clinical trials. Use of the
Stimulon adjuvants allows scientists to design products that can activate
specific antibody and T cell responses, and results in new, highly effective
vaccines for both therapeutic and prophylactic applications. New applications
include improved vaccines for diseases involving poorly immunogenic antigens
such as polysaccharides or for diseases affecting the elderly, whose immune
systems have deteriorated so that they do not respond to traditional approaches.
New therapeutic products involving treating people with diseases such as
malaria, chronic hepatitis infection, acquired immune deficiency syndrome or
various cancers, where a cell mediated immune response is thought to be
essential, may be possible using the Stimulon adjuvants. Finally, the use of
Stimulon adjuvants may allow new approaches to degenerative disorders, including
Alzheimer's disease.
The CD1 antigen presentation system is a new approach to the development of
immunological products. Until recently, scientists believed that antigen
presenting cells of the immune system processed and presented antigens as
peptides through two mechanisms, the Class I and the Class II MHC pathways.
Recent discoveries have demonstrated that there is a third pathway, called the
CD1 pathway, through which antigens with lipid tails are presented. Aquila's
scientists and other scientists are working to establish proof that the CD1
system is involved in an effective immune response to cancers, infectious
diseases and autoimmune disorders. Through its acquisition of VacTex, Inc.,
which operates as a wholly owned subsidiary, Aquila has an exclusive license to
a patent covering CD1 technology and is advancing the development of proprietary
products to prevent and treat infectious diseases, cancers and autoimmune
disorders. Aquila also has an exclusive license to technology involving NK T
cells.
Of Aquila's six product programs, three involve the Stimulon adjuvant QS-21
and three are based on the CD1 technology. Aquila manufactures bulk vaccine and
bulk components for the product Leucogen, which is marketed by Virbac, S.A. for
the prevention of feline leukemia virus infection. A second product,
Quilimmune-P, which is designed to prevent Streptococcus pneumoniae infections
in the elderly, is in clinical development. In initial clinical testing, the
safety profile of Quilimmune-P was good, but the immunogenicity of this
formulation was not significantly better than the control formulation. Aquila
has altered the formulation further and has received permission from the FDA for
additional clinical testing which is expected to start before the end of
October, 2000. A third program involves products designed to help control
malaria infections. One malaria antigen, SPf66, combined with QS-21 has been
studied in phase I clinical trials and has shown compelling immunological
results. Aquila is evaluating additional malaria antigens in combination with
QS-21 for their ability to provide protection from malaria infections. The three
programs based on CD1 technology include two approaches to cancer using NK T
cell immunotherapy -- one involving activation of NK T cells with a licensed
monoclonal antibody and the second, activation of NK T cells with CD1 presented
small molecules -- and a general approach to infectious diseases involving CD1
antigen discovery programs for tuberculosis, Chlamydia trachomatis,
Staphylococcus aureus, and Non-typeable Haemophilus influenzae.
43
<PAGE> 50
Aquila's corporate partners are SmithKline Beecham, P.L.C., Wyeth-Lederle
Vaccines and Pediatrics, a business group of Wyeth-Ayerst International, Inc., a
subsidiary of American Home Products Corporation, Aventis Pasteur, Bristol-Myers
Squibb (Progenics Pharmaceuticals, Inc.), Vaxgen, Inc., Elan Corporation,
P.L.C., Korea Green Cross Corporation and Virbac, S.A.
SCIENTIFIC BACKGROUND
The human immune system is made up of several different cell types,
including antigen presenting cells, or APCs, B cells and T cells. In general,
the role of APCs is to process antigens from pathogens, such as viruses,
bacteria or parasites, into smaller fragments and to present the resulting
proteins (peptides), lipids, or carbohydrates to T cells. Antigens can be
processed by APCs through three pathways -- the MHC Class I, MHC Class II or the
CD1 pathway. Peptide fragments from antigens processed through the Class I
pathway are displayed on the surface of the APC by the MHC Class I protein and
typically result in a cellular immune response. This specific activation of
cytotoxic T cells is called a CTL response and is thought to be critical for
many immunotherapeutic approaches to the treatment of cancer and the treatment
or prevention of diseases such as herpes, hepatitis, HIV and malaria. A
different response, called the humoral response, results when antigens processed
by the Class II pathway are displayed by MHC Class II proteins. In a humoral
response, B cells are activated to produce antibodies that are specific for the
antigen encountered. The antibodies produced by B cells will bind to and can
neutralize the pathogens that have invaded the body. In the third pathway,
antigens with lipid components are processed through the CD1 pathway and
generate a cellular immune response that also results in the specific activation
of cytotoxic T cells.
Traditional approaches for developing immune protection from infection in
humans involved the use of animal viruses or the use of attenuated or killed
pathogens as vaccines. While these approaches are effective for some pathogens,
there is a small but statistically significant risk of the development of
disease in people receiving these types of vaccines. With the advent of
recombinant technology, scientists learned that safer products could be created
using specific components of an organism rather than the whole organism. For
example, the genes for the surface antigens from a pathogen can be cloned using
genetic engineering and used to make recombinant proteins. The recombinant
proteins are then used in a vaccine, to make a so-called sub-unit vaccine.
Alternately, the DNA coding for proteins can be used directly in DNA vaccines.
Other specific cellular components have been used to stimulate disease specific
responses, including proteins isolated from the pathogen itself, synthetic
peptides, carbohydrates and lipoproteins.
When these new subunit vaccines were first used, scientists learned that
although a pathogen specific immune response was stimulated, the response was
often not of the right quality or strength to provide protection from infection
or disease. As a result, immune modulation technologies have been developed that
have been coupled with pathogen specific antigen approaches. These methods for
modulating the immune system include conjugation of the antigen to a carrier
protein, the use of viral or bacterial vectors to carry specific genes, the use
of cytokines or lymphokines to stimulate the immune system and the use of
adjuvants. Carrier proteins such as keyhole limpet hemocyanin (KLH) or the
toxoids from diphtheria, tetanus and cholera have been used effectively. Viral
vectors such as vaccinia, canary pox, or the bacteria BCG are under evaluation
as carriers of disease specific genes to determine whether they stimulate a
protective immune response. Adjuvants that have been used or that are in
development include aluminum hydroxide (alum); MF59, a product of Chiron
Corporation and its affiliates; monophosphoryl lipid A (MPL) and LeIF, products
of Corixa Corporation; Adjumer, a product of AVANT Immunotherapeutics Inc.; CpG,
a product of Coley Pharmaceutical Corp.; GPI-0100, a product of Galencia
Pharmaceuticals, Inc. and saponins from Quillaja saponaria such as QS-21.
These adjuvant technologies are not all the same and affect the humoral and
cell mediated pathways differently. Aquila's Stimulon family of adjuvants, QS-21
and QS-7, are purified, defined molecules, derived from a natural source. They
stimulate antigen specific responses and have been shown to promote both
antibody and CTL immune responses in animals and humans.
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CORE TECHNOLOGIES
Aquila is developing new products based on its two core technologies, the
Stimulon family of adjuvants that specifically enhance antibody and CTL
responses, and proprietary CD1 presented antigens and CD1 molecules, including
monoclonal antibodies and small molecules that are specific for the target
disease.
The typical development pathway for a disease specific product includes
antigen or molecule identification, preparation of research quantities of the
potential product, formulation studies, demonstration of a biological effect and
development of commercial scale, product production procedures. These
developmental efforts can be accomplished internally or result from technology
licensed from outside sources, or a combination of both approaches.
Aquila's ability to discover and produce proprietary, disease-specific
molecules allows it to develop products targeted at specific applications and
populations. Aquila's scientists have expertise in:
- recombinant DNA cloning methods;
- mammalian, insect and bacterial cell expression;
- monoclonal antibody development and production;
- extraction and purification of protein, glycoside and lipid compounds
from natural sources; and
- carbohydrate and polysaccharide production.
Furthermore, the company's scientists have demonstrated their expertise with a
variety of antigens from both viral and bacterial pathogens including those that
require high level bio-containment.
The CD1 Antigen Presentation System
In a breakthrough discovery, Michael Brenner, M.D., of Brigham and Women's
Hospital and Harvard Medical School, and Steven Porcelli M.D., of Albert
Einstein College of Medicine, found that lipid-containing antigens from
infectious pathogens, can be processed and presented to the immune system by
antigen presenting cells. These antigens are presented by a newly recognized
antigen presenting system called the CD1 pathway, which involves a family of
conserved mammalian proteins that are related to the MHC molecules. The CD1
proteins bind and present antigens that are fundamentally different from those
presented through the MHC system. The CD1 presented antigens contain a lipid
component as part of their chemical structure. Lipid containing antigens
presented through CD1 stimulate the production of additional cytotoxic T cells
that can recognize and kill invading pathogens.
Since the initial discovery of the CD1 system, a large and growing body of
research has further characterized the CD1 pathway, suggesting that modulating
the immune system with lipid antigens has therapeutic potential for a broad
range of diseases such as tuberculosis, type I diabetes and cancer. The research
has shown that the lipid antigen recognition pathway can be used to activate or
enhance antitumor responses. Researchers have determined the crystal structure
of mouse CD1 that provides a structural rationale that supports its biological
activity. The three-dimensional structure of CD1 shows a binding groove on CD1
that is attractive to lipids due to its hydrophobic nature. CD1 proteins
resemble MHC proteins in a number of ways, and it appears that they arose from
the same ancestral lineage as the MHC proteins. Aquila scientists are working to
establish proof that the CD1 system is involved in providing protection from
infection and, although Aquila believes it has made sufficient progress to
justify continuing the research, its scientists have yet to establish proof. The
premise is that CD1 antigens will provide an opportunity for the discovery of a
wholly new set of antigens in infectious diseases, cancer and autoimmune
disorders that can be developed into products.
NK T cells are a specialized population of T cells that are believed to
play an important immunoregulatory role. This activity is thought, at least in
part, to be mediated by the production of the immunoregulatory cytokines IL-4
and interferon-gamma. A subset of NK T cells has been shown to respond to
antigens presented by one of the CD1 molecules, CD1d. These NK T cells express a
conserved T cell receptor and are known as "invariant NK T cells." In animal
models, invariant NK T cells have also been shown to play a
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critical role in antiviral and antitumor immune responses. Defects in invariant
NK T cells have been linked to autoimmune disease in both animal models and
humans. Furthermore, the number of invariant NK T cells is dramatically reduced
in individuals with Type I diabetes, multiple sclerosis, and some forms of
cancer. Several methods have been developed for stimulating the growth of NK T
cells and altering the cytokines that these T cells produce. One method makes
use of small lipidic molecules that are presented to NK T cells through CD1d and
the other makes use of monoclonal antibodies that directly bind to the T cell
receptor on NK T cells and induces their expansion and stimulation. Scientists
at Aquila believe that expansion and stimulation of invariant NK T cells could
have therapeutic benefit to patients with disease associated with NK T cell
deficits.
The Stimulon Family of Adjuvants
QS-21 is the lead Stimulon adjuvant. It is a natural product, purified from
the bark of a tree called Quillaja saponaria that grows in South America. Up to
10% of the bark from Quillaja is composed of saponins, of which QS-21 is
typically one of the more predominant. The bulk bark extract is available in the
United States. Aquila believes QS-21 is well suited to pharmaceutical
development and formulation because it has good stability as a dried powder (at
least 3 years), is water soluble, and when rehydrated, is a clear liquid that
mixes easily with other vaccine components. QS-21 is compatible with alum and
micro-particles that are used in many experimental product formulations. QS-21
is well characterized with a known molecular structure, thus distinguishing it
from competing adjuvant candidates, which are typically emulsions, polymers or
biologicals. Because QS-21 is currently regulated by the FDA as a "constituent
material" used in drug preparation, the FDA does not require specific licensure
of facilities used for its manufacture.
Patents have issued to Aquila with composition of matter claims covering
any substantially purified saponin derived from a Quillaja saponaria extract
where the saponin has immune adjuvant activity and is less toxic than the
extract. In addition, there are issued composition of matter claims to specific
identified saponins QS-7, QS-17, QS-18, and QS-21. One of these Stimulon
molecules, QS-7, which has a slightly different safety and activity profile than
QS-21, is in development. Aquila has also been issued a patent for saponins
conjugated to antigens. All patents include the use of all these molecules as
adjuvants. For a further discussion, see "Business of Aquila--Patents and
Proprietary Rights" on pages 55-56.
The use of Stimulon adjuvants improves the quality of the immune response.
Adding QS-21 to antigens generally broadens the type of antibody produced,
increases the titer or amount of antibodies produced, and stimulates cell
mediated responses. It is potent and active at microgram doses when used with
many types of antigens, including recombinant proteins derived from viruses and
bacteria as well as polysaccharide antigens from bacterial pathogens.
Aquila believes that the performance of QS-21 will vary depending upon the
nature of the antigen and the target population. Initial human studies conducted
by Aquila's licensees and collaborators have focused on proving the safety of
QS-21 and experimenting with different formulations and dose levels. Aquila and
its collaborators have completed 60 studies with over 30 antigens to date. More
than 2,500 subjects have received QS-21 in various formulations. These studies
have shown that the addition of QS-21 to product formulations improves the
immune response to certain antigens, as evidenced by increased antibody titer.
Recently, another adjuvant derived from saponins from Quillaja saponaria
has been developed by Galenica Pharmaceuticals, Inc. This adjuvant, termed
GPI-0100, consists of a derivatized product, prepared from a partially purified
saponin preparation. The GPI-0100 adjuvant is prepared by the removal of a fatty
acid and the substitution of a different fatty acid at a different site on the
saponin. In contrast to QS-21, which is a purified molecule, the GPI-0100
adjuvant consists of many different derivatized saponins (depending upon the
purity of the initial starting material). Results from studies in mice that have
been reported by Galenica indicate that a GPI-0100 is active as an adjuvant, but
requires the use of a dose that is five to twenty times higher than a natural
saponin such as QS-21. Results in humans are not yet available, although one
clinical trial of GPI-0100 has been initiated in the field of cancer.
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STRATEGY
Aquila's objective has been to create and to commercialize products that
modulate the immune system to prevent, control or treat infectious diseases,
degenerative and autoimmune disorders and cancers. Aquila pursues this objective
by exploiting its expertise in adjuvant and antigen research to create products
and then developing them through FDA licensure, with a view to marketing
products to end users, resellers or partners based on market attributes. Aquila
also pursues this objective by supporting its corporate partners' product
development programs, further developing its manufacturing capacity, and
in-licensing and developing related technology.
Exploit Expertise in Immunology
Aquila has developed expertise in understanding the molecular mechanisms
involved in stimulating and tuning the immune response to specific antigens to
allow the development of safe and effective therapeutic and prophylactic
products. Aquila expects to continue to integrate its proprietary core
technologies and to identify targeted applications of its technology. In
addition, Aquila plans to broaden its expertise in research and development to
include different antigens such as lipid antigens, recombinant proteins,
peptides, polysaccharides and other classes of antigenic molecules involved in
the immune response. Aquila's strategy has been to acquire related products and
technologies to supplement its scientific expertise, capabilities and product
portfolio.
Create and Develop Products
Aquila has established a large number of corporate partnerships and a
significant number of products are being developed through these partnerships.
However, the company believes that it can also develop and retain significant
value through its own product development efforts. Aquila has two products in
clinical development and one product in preclinical development:
- Quilimmune-P for preventing pneumococcal infections in the elderly;
- Quilimmune-M for controlling malaria; and
- NK T cell monoclonal antibody therapy for cancer.
In addition, Aquila has completed the development and licensure of one
product, Quilvax-FeLV for preventing leukemia in cats. For a further discussion,
see "Business of Aquila -- Product Development Programs" on page .
Aquila has a large number of ongoing academic collaborations involving
other antigens, a number of which are cancer vaccines. In certain cases Aquila
has options to license related technology should it wish to accelerate the
development of these products.
Support Corporate Partners' Programs
Aquila has entered into collaborative agreements with SmithKline Beecham,
P.L.C., Wyeth-Lederle Vaccines and Pediatrics, Aventis Pasteur, Bristol-Myers
Squibb (Progenics Pharmaceuticals, Inc.), VaxGen, Inc., Elan Corporation P.L.C.
and Korea Green Cross Corporation, as well as a number of other biotechnology
companies. Aquila's current strategy is to use these partnerships to speed
discovery and development of certain products that the company does not have the
resources or skills to develop. These collaborations allow Aquila to focus its
own efforts on products that have different markets than those of interest to
large pharmaceutical companies. Aquila currently is in discussions involving a
number of potential licenses and intends to continue to selectively license its
technology. For a further discussion, see "Business of Aquila -- Corporate
Partner Programs" on page .
Develop Manufacturing Capacity
Aquila has retained rights to the manufacture of QS-21 on a worldwide basis
in all of its licensing agreements, and has been producing QS-21 for clinical
trials for all of its partners and its own product
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programs. In addition, Aquila operates an antigen production facility to supply
FeLV antigens and vaccine to its corporate partner, Virbac. Aquila's strategy is
to continue to develop manufacturing expertise and capacity to allow it to
retain value from the products that it develops.
In-license Related Technology
Aquila has been in-licensing products and technology related to immune
modulation to supplement its product pipeline. In addition to expanding the
product portfolio, this strategy has allowed the company to capitalize on newly
developed technologies that are synergistic with its existing technology base.
PRODUCT DEVELOPMENT PROGRAMS
As shown in the chart below, Aquila's strategy is to develop products
internally and in partnership with other companies.
[Aquila's Product Development Programs Chart Omitted]
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INTERNAL PRODUCT PROGRAMS
Quilvax-FeLV for the Prevention of Feline Leukemia
Aquila has developed a recombinant subunit vaccine against the feline
leukemia virus. The product was approved in 1990 in the United States and in
1991 in Europe. This product represents 100% of Aquila's product sales. Aquila
manufactures the product and sells it to Virbac, who markets it in Europe,
Australia and Japan under the trademark Leucogen. Virbac has indicated that it
intends to market the product directly in the United States. Feline leukemia is
a highly contagious and commonly fatal disease of cats. Aquila's product was the
first recombinant vaccine ever developed against a tumor-causing virus in
mammals. A patent covering Quilvax-FeLV has been issued in the United States and
in a number of other countries. Aquila manufactures bulk formulated product for
the Australian markets and supplies Virbac with bulk antigen and adjuvant for
further manufacture for the European and Japanese markets. The product is the
leading feline leukemia vaccine in Europe and in an independent study conducted
by the University of Glasgow, Bearsden, it was found to be the most effective of
three leading feline leukemia vaccine products on the market.
Quilimmune-P for the Prevention of Pneumococcal Infections
Healthy adults are not typically at risk for developing significant disease
following exposure to Streptococcus pneumoniae. However, S. pneumoniae
infections in the elderly can cause serious disease. There are over 80
recognized serotypes of pneumococci, each with varying geographic and age group
prevalence. Quilimmune-P is intended to be used to prevent pneumococcal
infections in the elderly.
There are approximately 34 million people over the age of 65 in the United
States, and an additional 36 million adults with immune compromising conditions
who are at risk for developing disease caused by S. pneumoniae. Various strains
of S. pneumoniae are responsible for most community-acquired cases of pneumonia
(500,000 cases per year) and are the second most common cause of bacteremia
(50,000 cases per year, with 25% mortality). It is estimated that S. pneumoniae
causes 40,000 deaths in the elderly and immunocompromised adults each year.
The currently available vaccines, which were developed and approved in the
early 1980s, are composed of purified capsular polysaccharides from the 23
serotypes that cause about 90% of infections. These vaccines are under-utilized
by the elderly. Reports in the medical literature and confirmed in Aquila's
trials indicate that, using the current vaccines, only 60-70% of healthy
volunteers and 50-60% of the elderly respond with a two-fold or greater increase
in the level of specific antibody.
In a series of clinical studies that began in 1998, Aquila has been
evaluating Quilimmune-P formulations that contain QS-21 and the capsular
polysaccharides. The first study completed in the target population was a
prospective, randomized, double blind comparison of a single immunization of
Quilimmune-P to the currently licensed vaccine product in an elderly population.
Quilimmune-P was generally well tolerated; however, the differences between
Quilimmune-P and the control vaccine in the frequency of a two-fold or greater
increase in antibody titer following the single immunization were not
consistent, and only reached statistical significance with one serotype. Aquila
also evaluated a second immunization of this formulation of Quilimmune-P twelve
months after the first, but this did not improve the effectiveness.
In a new strategy, Aquila is initiating clinical studies of Quilimmune-P
formulations that contain QS-21 and a more immunogenic form of the capsular
polysaccharide antigens. The immunogenicity of the capsular polysaccharides can
be substantially improved by linking these antigens to a protein carrier to
create a "conjugate" vaccine. Aquila believes that QS-21 will improve immune
responses to a conjugate vaccine in elderly humans due to previous clinical
experience with a melanoma conjugate vaccine. A Streptococcus pneumoniae
conjugate vaccine, containing 7-capsular polysaccharides, is now commercially
available as an otitis media vaccine for children. The utility of such
formulations in the elderly is unknown. Aquila is currently initiating a phase I
clinical trial of this vaccine with QS-21 in the elderly to determine whether
antibody responses to the serotypes in this vaccine will be improved in
comparison to those raised by the standard vaccine licensed for use in the
elderly.
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Quilimmune-M for the Control of Malaria
According to estimates in reports published by the World Health
Organization, commonly known as the WHO, approximately 2 billion people reside
in malaria-infected areas. The yearly incidence of malaria is estimated by the
WHO at 300 to 500 million cases, with a death toll of 1.5 to 3 million persons.
While anti-malarial drugs have been in use for decades, they are expensive and
resistant malarial strains are becoming increasingly common. The WHO has
identified malaria as a priority vaccine target in developing countries.
Aquila is involved in a number of programs to develop products to control
malaria. One of the programs is a collaboration with SmithKline Beecham, p.l.c.
For a further discussion, see "Business of Aquila -- Corporate Partner Products"
on page 53.
In addition to this program, Aquila has collaborations with a number of
other investigators on potential malaria products. With investigators at the
Center for Disease Control and Prevention, commonly known as the CDC, Aquila is
working on the development of multistage, multiepitope vaccines for both P.
falciparum and P. vivax. These vaccine candidates contain B and T cell epitopes
from several proteins expressed at all stages of the parasite life cycle.
FALVAC-1, a 44kD protein expressed in insect cells, is the farthest along in
development and has been tested in mice and Aotus monkeys in combination with
QS-21. The NIAID/ MVDU, a recently reorganized group whose mission is to provide
process development and clinical trial expertise to the testing of promising
malaria vaccine candidates, is developing vaccines using recombinant antigens
produced in yeast and baculovirus expression systems. Investigators at the
University of Hawaii have completed an Aotus challenge study with a blood stage
vaccine candidate made in insect cells in combination with QS-21. Aquila does
not have any licensed rights to these malarial antigens but does have certain
options related to malaria vaccine formulations.
NK T Cell Immunotherapy Programs
NK T cells are a specialized population of T cells that are believed to
play an important immunoregulatory role. A subset of NK T cells recognize and
respond to molecules presented by CD1d. These NK T cells have a conserved T cell
receptor that interacts with CD1d and are known as "invariant NK T cells." In
the mouse model, invariant NK T cells have been shown to play a critical role in
antiviral and antitumor immune responses. In addition, the antitumor activity of
IL-12 is not effective in mice with invariant NK T cell deficits. There have
been several studies in humans linking a decrease in the number and altered
activity of invariant NK T cells with several diseases. This linkage has been
observed in patients with type I diabetes, multiple sclerosis, and advanced
prostate cancer. It is Aquila's hypothesis that increasing the number of
invariant NK T cells and restoring their activity will provide a therapeutic
benefit for these patients. Aquila is taking two approaches for expanding
invariant NK T cells -- a small molecule approach and a monoclonal antibody
approach.
i. NK T Cell Small Molecule Screening
The objective of this program is to identify small molecules that can be
presented by antigen presenting cells through CD1d and recognized by the
conserved T cell receptor on invariant NK T cells, resulting in activation and
expansion of the NK T cells. One such molecule has been identified by scientists
from Kirin Brewery. This molecule, A-galactosyl-ceramide (A-GalCer) was
originally isolated from a sea sponge and identified based on its antitumor
effects. Only subsequent to these observations was it discovered that A-GalCer
could bind to CD1d and activate invariant NK T cells. Aquila's approach is to
recreate the molecular binding events between a CD1d/small molecule complex and
the invariant T cell receptor that result in activation of NK T cells in an in
vitro assay. Such an in vitro assay has been described using mouse reagents by
scientists at the Brigham and Woman's Hospital. This in vitro screening assay
can then be used to screen for additional small molecules that are active in
this assay from any of a number of molecular libraries. Active small molecules
could potentially be used as therapeutic compounds themselves or as lead
compounds for further drug discovery.
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ii. NK T Cell Monoclonal Therapy
Investigators at Beth Israel Deaconess Medical Center and the Dana Farber
Cancer Institute have isolated two monoclonal antibodies that recognize the
conserved T cell receptor present on human NK T cells. Most of the subsequent
work has focused on the use of one of these monoclonals, 6B11. By flow cytometry
analysis, the investigators have shown that 6B11 specifically recognizes
invariant NK T cells. The monoclonal antibody can also be used to specifically
isolate these invariant NK T cells. Furthermore, when invariant NK T cells are
stimulated with monoclonal antibody 6B11, the NK T cells grow, divide and
secrete specific immunoregulatory cytokines. With these observations, it is
clear that this and similar monoclonal antibody reagents could be used to
isolate specific invariant NK T cells from a blood sample taken from an
individual patient. The isolated NK T cells could be expanded in ex vivo culture
by treatment with the monoclonal(s) before being reinfused back into the same
patient. Aquila has established a collaborative relationship with the scientists
from Beth Israel and the Dana Farber and together are working towards initiating
clinical studies investigating the clinical benefit of ex vivo expanded NK T
cells in cancer applications.
CD1 Antigen Discovery Programs
i. CD1-TB
Mycobacterium tuberculosis is one of the most prevalent infectious disease
pathogens. According to the WHO, it infects one third of all people and kills
approximately 2-3 million individuals per year, which is more than any other
infectious agent. Strains of Mycobacterium tuberculosis that are multi-drug
resistant have been isolated and their frequency is increasing. Aquila's
tuberculosis program is based on research initiated at the Brigham & Women's
Hospital by Drs. Brenner and Porcelli involving the discovery that lipid
antigens of Mycobacterium tuberculosis are presented to the immune system by
CD1. Biochemical identification and characterization of these immunogenic lipids
has shown that these antigens have lipid and carbohydrate components. Initial
immunization challenge studies have been conducted in laboratory animals using a
vaccine containing a mixture of these lipid antigens in a formulation with
QS-21. Following immunization and challenge with aerosolized virulent
Mycobacterium tuberculosis, animals receiving the experimental vaccine had a
significantly reduced bacterial burden when compared to nonimmunized controls.
This outcome is encouraging but does not provide proof that immunization with
CD1 antigens can provide protection from infection. Aquila's ongoing work, a
collaborative effort between Brigham & Women's Hospital, Albert Einstein College
of Medicine and Aquila's scientists, is focused on identifying specific
Mycobacterium tuberculosis antigens that provide immunological benefit and
demonstrate usefulness in animal models as a prelude to human studies. Aquila
received a phase II SBIR grant in August 1999 to provide two years of support
for these studies.
ii. CD1-Chl
Genital tract infections due to Chlamydia trachomatis have been identified
by the CDC as the cause of half a million infections in the United States, with
as many as half of these found in women 15 to 19 years old. The CDC reports that
Chlamydia is the most common reportable sexually transmitted disease in the
United States. The number of cases is almost certainly underestimated since
according to the CDC 75% of women and 50% of men with Chlamydia have either no
symptoms or such mild ones that they do not seek care. Left untreated, C.
trachomatis is a major cause of pelvic inflammatory disease, ectopic pregnancy,
and infertility among women.
Perinatal transmission of C. trachomatis to infants can cause neonatal
conjunctivitis and pneumonia. In 1994, the CDC estimated the cost of untreated
chlamydial infections and their complications at $2 billion in the United
States.
From a public health and commercial perspective, this is one of the largest
potential areas for vaccine development. There are 20 million women in the
United States between the ages of 15 and 19 years. In principal, all men and
women in this age group might be vaccinated should a safe and effective vaccine
become available.
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Although the role of CD1 antigen presentation in the control of Chlamydia
infection has not been established, C. trachomatis has a large surface density
of lipopolysaccharide and produces many other lipids. In addition, Chlamydia
infection has a profound influence on host cell lipids by interrupting normal
intracellular tracking of host produced lipids. These lipids all represent
potential targets for CD1-related therapies. Aquila's research effort is
concentrated on antigen discovery with a particular interest in antigens
presented to the immune system by CD1. These studies are supported by a phase I
SBIR grant awarded to Aquila in July 2000.
iii. CD1-S. aureus
Staphylococcus aureus, a common inhabitant of the skin and mucus membranes
of humans, may cause infection to internal tissues during surgery or
trauma-induced damage to the skin or mucus membrane. These infections may lead
to complications associated with staphylococcal bacteremia, including infectious
arthritis, pneumonia, septic shock, endocarditis and abscesses. According to a
report from the National Nosocomial Infection Surveillance System (1997), these
infections result in half a million hospitalizations per year in the United
States. These conditions have historically been treated effectively with
antibiotics. However, recent increases in staphylococcal resistance to
penicillins, and especially vancomycin, the antibiotic of last resort, have
resulted in increased attention to seeking alternative approaches to therapy for
these infections.
An immunological approach to preventing or treating S. aureus infections is
a viable alternative to traditional means of therapy. A vaccine-based approach
has commercial application for individuals undergoing elective surgery and for
those in the health care field, as well as potentially for general childhood
immunization. Current vaccine development has focused on raising antibodies to
different antigens such as type-specific polysaccharide conjugates, proteins
such as adhesins or virulence factors, and a surface polysaccharide antigen.
Researchers have yet to demonstrate the efficacy of any of these vaccines in
humans.
Immunity to S. aureus, a gram-positive pathogen, occurs via circulating
antibacterial antibodies and complement factors. The role of cell mediated
immunity to gram-positive infection is unclear but may occur through T cell help
for antibody production and production of cytokines involved in killing
bacteria. Much of the protective antibody against gram-positive bacteria is
directed against polysaccharides and lipoglycans, suggesting that T cells may
recognize these nonpeptide molecules and provide appropriate B cell help. Most
staphylococci are rapidly killed and degraded following phagocytosis, but a
minority of organisms can persist intracellularly to cause recurrent infection.
A vaccine approach that involves cell mediated immunity and lipid antigen
presentation through CD1 may be helpful in reducing the adverse effects of such
infections. Aquila's research is focused on isolating and characterizing lipid
antigens that have the ability to stimulate immune cells through CD1
presentation. Aquila recently received a phase I SBIR grant to support these
studies.
iv. CD1-NTHi
Nontypeable Haemophilus influenzae is a common cause of otitis media,
pneumonia, exacerbated chronic bronchitis, sinusitis, meningitis, postpartum and
neonatal infections, osteomyelitis, septicemia, bacteremia, and other invasive
bacterial diseases. The Jordan Report (1998) estimates that the annual cost of
the medical and surgical treatment of otitis media in the United States is
between $3 billion and $4 billion dollars. Currently there is no vaccine
available that can prevent the occurrence of NTHi infections. H. influenzae
conjugate vaccines currently in widespread use are effective only against type b
capsulated strains and do not confer protective immunity against infection with
nontypeable strains.
Most children have had at least one episode of otitis media by their third
birthday, and one-third have experienced three or more ear infections.
Inappropriate antibiotic treatment of otitis media encourages the emergence of
multidrug resistant strains of bacteria making the need for a vaccine more
urgent.
Recently, scientists have reported the isolation of CD1-restricted human T
cells specific for nonprotein antigens from H. influenzae type b, thus
suggesting a role for CD1 presented lipid antigens in immunity to the related
nontypeable strains of H. influenzae. Aquila's research program involves the
identification of
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immunogenic lipid fractions and analysis of the antibody and cellular
proliferation responses to these lipids in animal models.
CORPORATE PARTNER PROGRAMS
In addition to Aquila's internal product development programs, Aquila has
seven corporate partners that have licensed the Stimulon adjuvants for a variety
of human diseases: SmithKline Beecham, P.L.C., Wyeth-Lederle Vaccines and
Pediatrics, Aventis Pasteur, Bristol-Myers-Squibb (Progenics Pharmaceuticals,
Inc.), Vaxgen, Inc., Elan Corporation, P.L.C. and Korea Green Cross Corporation.
In return for rights to use Stimulon adjuvant for specific diseases, the
corporate partners have agreed to pay Aquila license fees, milestone payments,
and royalties on product sales. Aquila has retained worldwide manufacturing
rights for QS-21. In addition to corporate partners, Aquila has developed a
number of academic collaborations to test potential product formulations
containing QS-21.
SmithKline Beecham
SmithKline Beecham, P.L.C. has licensed QS-21 for a number of different
applications. The world's leading manufacturer of Hepatitis B vaccine,
SmithKline is aggressively marketing its existing portfolio of vaccines, while
developing new and improved products. SmithKline has completed a number of
clinical trials of potential products containing QS-21 and is also investigating
the use of combinations of different adjuvants.
SmithKline has completed phase II studies of a malaria vaccine in The
Gambia, Africa in semi-immune adult Gambian men. The trial involved 306
volunteers. The vaccine was highly effective during the first two months after
completion of the immunization schedule with a protection rate of 65%. Average
protection during the entire observation period was 16%. SmithKline has
announced plans to initiate a pediatric study of this potential vaccine in The
Gambia starting as early as this fall.
SmithKline is developing TH-GW, a therapeutic vaccine for genital warts,
which is licensed from Cantab Pharmaceuticals, p.l.c. and has been reformulated
with SBAS2, one of SmithKline's adjuvant formulations that contains QS-21. A
phase I study and a phase I/II dose ranging study have been completed.
SmithKline initiated two parallel randomized, double-blind, placebo controlled
phase IIb trials in 1999 at centers in western Europe, Canada, Scandinavia,
Australia and New Zealand. The trials were designed to assess wart recurrence
rates and rates of disease regression following vaccination both in patients
with newly diagnosed warts and those with recurrent warts. Data is expected in
2000 or early 2001.
SmithKline has completed phase II studies of a therapeutic product for
treating people chronically infected with hepatitis B, and has two initiated
phase IIb studies in 2000. Phase I clinical studies of a therapeutic vaccine for
treating people with herpes infections have been completed.
Wyeth-Lederle Vaccines and Pediatrics
Wyeth-Lederle Vaccines and Pediatrics licensed QS-21 in 1992 for use in
five vaccines. Wyeth-Lederle has completed a phase I clinical trial using a
product formulated with QS-21. Wyeth has since reformulated this product and is
planning to initiate studies of the new formulation in 2000.
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Aventis Pasteur
Aventis Pasteur has licensed QS-21 for use in its HIV vaccine programs and
has completed a number of clinical trials with different antigens.
Bristol-Myers Squibb
Bristol-Myers Squibb (Progenics Pharmaceuticals, Inc.) has licensed QS-21
for use in certain therapeutic products for cancer. Bristol-Myers' most advanced
program involves a vaccine called GMK that incorporates QS-21 with a ganglioside
preparation called GM2 to treat melanoma. The pivotal phase III study in
high-risk melanoma patients completed enrollment in 1999. An unplanned early
analysis of this trial at a point when only half the patients had received two
full years of GMK therapy, was performed by the Eastern Cooperative Oncology
Group, commonly know as ECOG. ECOG informed Progenics that the vaccine was
performing less well than high-dose alpha-interferon, an approved agent with a
known early onset of clinical benefit. As a result, ECOG has concluded
participation in this trial. However, Progenics is continuing the trial,
believing that the follow-up period in the interim analysis was too brief for
the benefit of GMK therapy to be assessed. In addition, GMK was better tolerated
than alpha-interferon. A second cancer product, MGV, which contains QS-21 and
the gangliosides GD2 and GM1 along with GM2, is entering phase II/III trials.
This product is expected to be applicable to a number of cancers and Progenics
plans to initiate several trials to focus on different cancers. Aquila has
licensed Progenics to use QS-21 in exchange for a license fee, an equity
interest in Progenics, and royalties, and it has a supply agreement with
Bristol-Myers Squibb.
Vaxgen, Inc.
Vaxgen, Inc. (an early stage company whose major corporate shareholder is
Genentech, Inc.) has licensed QS-21 and the HIV protein gp120 for use in its
HIV-1 vaccine program. HIV gp120 is the antigen in Vaxgen's preventative AIDSVAX
vaccine for HIV, currently in two phase III trials in North America (5,400
volunteers) and Thailand (2,500 volunteers). VaxGen has conducted a number of
phase I clinical trials in healthy volunteers with a product formulated with
QS-21, under the auspices of the National Institutes of Health. Volunteers
received very low doses of gp120 antigen combined with QS-21 and/or alum. These
product formulations were well tolerated and resulted in immunogenicity equal to
or better than the high dose gp120. A fourth trial based on these product
formulations was completed in 1999 that confirmed the early data. Additional
studies are being planned.
Elan Corporation
Elan Corporation, p.l.c., through its wholly owned subsidiary, Neuralab
Limited, has licensed QS-21 for use with an antigen in the field of Alzheimer's
Disease. Aquila has received two milestone payments and will receive additional
fees and milestone payments plus royalties on future product sales. A phase I
clinical trial was initiated in the United States in late 1999 and was completed
this year. A second phase I trial was initiated in Europe in early 2000 to
evaluate multiple immunizations of the product formulation.
Korea Green Cross Corporation
Korea Green Cross Corporation sublicensed Wyeth's rotavirus vaccine program
which includes rights to use QS-21 for this product. This program is in
preclinical development.
MANUFACTURING
As part of each Stimulon adjuvant licensing agreement, Aquila has retained
the right to be the exclusive supplier of Stimulon adjuvants. The license
agreements stipulate supply prices, within certain ranges. Pursuant to the
license agreements, Aquila also will receive royalties on each licensees'
product sales.
Aquila currently manufactures QS-21 for commercial animal health use and
for use in human clinical trials. Aquila has scaled the critical steps of the
process to produce a batch size suitable for large-scale commercial production
up to 2,000,000 doses.
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The FDA classifies QS-21 as a constituent material used in vaccine
preparation. As a result, the FDA does not require licensure of facilities used
for the manufacture of QS-21. Aquila believes that this classification affords
flexibility in the timing of investment in commercial manufacturing facilities.
After the safety and effectiveness of QS-21 has been demonstrated, Aquila
expects to be in a position to reasonably project the capital investment
required and can adjust the scale of manufacturing as additional products reach
the market.
Aquila also currently manufactures FeLV antigen and vaccine, which were
licensed for sale in the United States by USDA in 1990 and for European sales in
the European Community in 1991. Aquila produces commercial quantities at the 400
liter fermentation scale.
PATENTS AND PROPRIETARY RIGHTS
Aquila has pursued a policy of obtaining patent protection for its
technologies both in the United States and in selected foreign countries. The
company has filed or has rights to a number of U.S. patents and patent
applications and their foreign counterparts. Aquila also relies on trade
secrets, proprietary know-how, and continuing technical innovation to develop
and maintain its competitive position.
QS-21 and Other Adjuvants
Aquila has three issued and five pending U.S. patents covering QS-21, QS-7,
and the other principal fractions of Quillaja saponaria, as well as the methods
of their use in vaccines. Comparable applications have been filed in selected
additional jurisdictions, sixteen of which have issued. Aquila believes that the
standard of purity specified in the patent for the saponin fractions is
necessary to achieve a safety profile acceptable for human use. CSL and Seed
Capital Inc. filed an opposition with the European Patent Office, or EPO, on the
issuance of the company's QS-21 patent in Europe. A hearing before the EPO was
held in October, 1998. Aquila prevailed against all points raised in the
opposition. CSL did not appeal the EPO's decision.
CD1 Antigen Presentation System
Aquila holds a license to a broad patent covering a CD1 restricted immune
response, a patent covering certain molecules presented through CD1 and has
several pending patents on the CD1 technology. Aquila also has an exclusive
license to a pending patent covering antibodies specific to T cell
subpopulations.
Other Patents
Aquila holds U.S. and foreign patents on FeLV vaccine and on drug delivery
compounds and methods. A U.S. patent on methods of expressing and purifying
proteins made in a baculovirus expression system has issued. Aquila has a fully
paid-up, royalty-free license to U.S. Patent No. 4,753,873 in the veterinary
diagnostic field; and a non-exclusive sublicense to U.S. Patent No. 4,725,669
and U.S. Patent No. 5,068,174 (HIV-gp120-p27) in the vaccine, therapeutic and
related research fields. Aquila has a fully paid-up, royalty-free license to
U.S. Patent No. 4,734,362 and foreign counterparts (protein purification) in the
vaccine, therapeutic and related research fields. Aquila also has several issued
and pending patents in the field of Lyme Disease and Human Granulocytic
Ehrlichiosis.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Aquila's competitors in the United States and
abroad are numerous. They include, among others, major pharmaceutical and
chemical companies, specialized biotechnology firms, universities and other
research institutions. Aquila's competitors may develop technologies and
products that are more effective than any that Aquila has developed or may
develop in the future, rendering Aquila's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than Aquila.
In addition, some of Aquila's competitors have substantially greater experience
than Aquila in preclinical testing and human clinical trials of pharmaceutical
products and in obtaining FDA and other regulatory approvals of products for use
in
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healthcare. Accordingly, Aquila's competitors have an advantage over Aquila in
the likelihood and speed of obtaining FDA approval for products. If Aquila
commences significant commercial sales of its products, it also will be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it may have less experience.
Academic and government institutions conduct a significant amount of
research in the field. These institutions are increasingly aware of the
commercial value of their findings and are becoming more aggressive in pursuing
patent protection and negotiating licensing arrangements to collect royalties
for use of technology that they have developed. These institutions also may
market competitive commercial products on their own or in collaboration with
competitors and will compete with Aquila in recruiting highly qualified
scientific personnel.
Aquila is aware of certain programs and products under development by
others which may compete with the company's programs and products. Several
companies, including Coley Pharmaceutical Group, Corixa Corporation, Avant
Corporation, Chiron Corporation and Galenica Pharmaceuticals, Inc., are
developing adjuvants and antigens.
Merck Laboratories, Wyeth-Lederle, SmithKline, Aventis Pasteur and others
are in human clinical trials with conjugate pneumococcal vaccines and have
existing nonadjuvanted products on the market. The existence of products
developed by these and other competitors, or other products of which Aquila is
not aware or which other companies may develop in the future, may adversely
affect the marketability of products Aquila develops.
Certain of Aquila's corporate partners are also licensees of Coley, Corixa
and Avant.
GOVERNMENT REGULATION
The FDA, the USDA, the Environmental Protection Agency, and comparable
state and other agencies, including those in foreign countries, impose
requirements governing the development, manufacture and marketing of certain of
Aquila's products and products under development. The regulatory process can
take several years, involves lengthy and detailed laboratory and clinical
testing, and requires substantial expenditures. Human biologicals and
pharmaceuticals, including vaccines, typically require three stages of clinical
trials:
- phase I to determine the preliminary safety of the product;
- phase II during which the efficacy of the product is preliminarily
assessed and treatment regimens refined; and
- phase III (sometimes referred to as pivotal trials) during which final
safety and efficacy data are generated.
Regulatory approval is required prior to commencement of clinical trials.
The clinical data, together with comprehensive manufacturing and facility
information, is filed with the FDA in a Biologics License Application or a
Product License Application and an Establishment License Application on which
the regulatory agencies base their approval decisions. In some instances,
particularly in cases of life-threatening diseases for which there is no
effective treatment, the clinical trial phases may be combined, or approval may
be sought after completion of an expanded phase II trial.
Because QS-21 is currently classified by the FDA as a constituent material
used in drug preparation, the FDA does not require licensure of facilities used
in its manufacture. Aquila believes that this affords investment flexibility in
commercial manufacturing facilities. Aquila has filed a Biologics Master File
for QS-21 with the FDA, which its licensees can reference as part of their own
Product License Applications as they seek FDA approval.
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HUMAN RESOURCES
As of June 30, 2000, Aquila employed approximately 45 employees, 9 of whom
have Ph.D's. Of the employees, 18 are in research and development, 20 are in
manufacturing operations and 7 are management or administrative staff. The
employees are not represented by any labor unions, and the company considers its
relations with those employees to be good. Aquila's scientific staff has
expertise in many relevant areas and is augmented by consulting agreements with
research scientists located at various academic institutions and commercial
organizations.
PROPERTIES
Aquila's operations are conducted in a 41,000 square foot leased
manufacturing, research and office facility in Framingham, Massachusetts.
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AQUILA SELECTED HISTORICAL FINANCIAL DATA
Aquila is providing the following information to aid you in your analysis
of the financial aspects of the merger. The table below represents selected
historical consolidated statement of operations and balance sheet data of Aquila
and its subsidiaries. Aquila derived this information from audited financial
statements for the years ended December 31, 1995 through December 31, 1999 and
unaudited financial statements for the six months ended June 30, 1999 and 2000.
In Aquila's opinion, the information for the six months ended June 30, 1999
and 2000 reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of operations and
financial condition. Results for interim periods should not be considered
indicative of results for any other periods or for the year. This information is
only a summary and you should read it in conjunction with Aquila's historical
financial statements and related notes and "Aquila Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in this
proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................. $ 5,728 $ 6,573 $ 6,928 $ 5,597 $ 2,068 $ 561 $ 2,677
Total expenses(1)............................. (12,242) (11,745) (10,564) (22,145) (10,527) (5,365) (5,268)
Other income.................................. 2,162 5,777 4,370 1,948 264 85 602
Total reorganization items(2)................. (813) (1,715) -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing operations...... (5,165) (1,110) 734 (14,600) (8,195) (4,719) (1,989)
Income (loss) from discontinued
operations(3)............................... 223 9,109 191 -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Income (loss) before extraordinary loss(4).... (4,942) 7,999 925 (14,600) (8,195) (4,719) (1,989)
Extraordinary loss............................ -- (2,039) -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)............................. $ (4,942) $ 5,960 $ 925 $(14,600) $ (8,195) $(4,719) $(1,989)
======== ======== ======== ======== ======== ======= =======
Income (loss) per weighted average number of
common shares (diluted):
Continuing operations......................... $ (1.50) $ (0.30) $ 0.14 $ (2.22) $ (1.11) $ (0.67) $ (0.24)
======== ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------- AS OF JUNE 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities(5)...................... $ 7,072 $17,675 $16,897 $15,156 $ 7,017 $ 7,330
Working capital........................................ 7,977 16,157 16,029 11,891 5,252 6,178
Total assets........................................... 23,045 26,312 20,667 24,628 15,742 16,638
Long term debt......................................... -- 4,056 139 3,669 2,607 2,030
Total long term obligations............................ 12,168 4,281 364 3,894 2,757 2,180
Stockholders' equity................................... 3,946 16,917 17,887 15,653 9,805 10,939
</TABLE>
---------------
(1) 1998 includes $9.9 million charge for purchased incomplete technology.
(2) Aquila recorded professional fee expense of $2.1 million and $1.2 million,
and interest income earned on cash resulting from Chapter 11 proceedings of
$0.4 million and $0.4 million in 1996 and 1995, respectively.
(3) In 1996, Aquila sold the enterics diagnostic business for $5.7 million and
the retroviral diagnostic business for $6.5 million, recording a combined
gain of $7.6 million. In 1997, a gain of $0.2 million was recorded on the
sale of inventory from these businesses. Aquila's income from these
businesses was $1.5 million and $0.2 million in 1996 and 1995, respectively.
(4) Aquila recorded an extraordinary loss of $2.0 million in 1996 upon its
reorganization and emergence from Chapter 11 bankruptcy for issuance of
shares valued at $5.6 million in settlement of a shareholder class action
suit offset by forgiveness of debt of $3.8 million on pre-petition
liabilities.
(5) In 1996, cash and marketable securities balances reflects proceeds from the
sale of Aquila's diagnostic business for a combined $12.2 million, and a
paid up license fee of $3.3 million. In 1997, net cash and marketable
securities reflect proceeds of $2.0 million from the sale of Aquila's
Rockville, Maryland property. In 1998, cash and marketable securities
reflect proceeds of $3.6 million from a private placement of common stock
and $5.0 million from the issuance of debt. In 1999, cash and marketable
securities reflect $1.5 million of proceeds from a private placement of
common stock.
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AQUILA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HISTORICAL RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue. Total revenues were $2,677,000 for the six months ended June 30,
2000 compared to $561,000 in the same period in 1999.
Product sales for the first six months of 2000 were $582,000 compared to
$273,000 for the same period one year ago. The reason for the higher revenues
was the resumption of regular product shipments in the first quarter of 2000
compared with the low shipments in the first quarter of 1999 during which the
company's new facility was prepared for operation.
First half research and development revenues were $2,095,000 compared to
$288,000 for the same period in 1999. The primary reason for the increase was
non-refundable license fees of $1,300,000 recognized from a corporate partner in
2000. The remaining balance of the change resulted from increased shipments of
QS-21 to research partners.
Costs and Expenses. For the first half of 2000, cost of sales was 65% of
product sales compared to the first half of 1999 when cost of sales exceeded
product sales. The primary reasons for the decrease were the reduction in
validation costs associated with preparing the company's new manufacturing
facilities in 1999 and increased production levels leading to lower unabsorbed
expenses. First half research and development spending increased by 9% from one
year ago to $3,477,000. The increase was due to higher clinical trial spending
in the first quarter of 2000. First half spending on the tuberculosis program
acquired from VacTex was $517,000 compared to $427,000 in the first half of
1999. Aquila's future spending on this program may fluctuate based on the
progress of the research and the availability of funding and resources. General
and administrative expenses were reduced by 10% from one year ago due to lower
staffing levels and lower legal fees.
Other Income, Net. Other income for the first half of 2000 was $602,000
compared to $85,000 for the same period in 1999. The reasons for the increase
were a gain of $475,000 on the sale of an investment and $57,000 of rental
income received pursuant to a sublease agreement entered into in the third
quarter of 1999.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues. Total revenues for 1999 were $2,068,000, a decrease of 63% from
1998. Product revenues were $564,000, a decrease of 43% from 1998. Revenues from
research and development were $1,503,000, a decrease of 68% from 1998.
Product revenues consist of sales of the feline leukemia vaccine to
Aquila's marketing partner Virbac, S.A., a private French company, which has
exclusive worldwide rights to market the product. Aquila's product revenues were
lower in 1999 because of low shipments in the first quarter while Aquila's new
facility was being prepared for operation, a reduction in inventories by Virbac
and the acquisition of a Virbac reseller by a competitor. Though Virbac has
indicated its intention to replace the sales of the lost reseller with sales by
Virbac's United States subsidiary, Aquila has not been able to determine when
this will happen.
Revenues from research and development activities for 1999 were lower than
1998 due to lower contract research activity, license fees, and shipments of
QS-21, Aquila's adjuvant being used in clinical trials by its six partners.
Shipments of QS-21 were delayed while the new manufacturing facility was being
prepared. License fees were lower because Aquila had a $3,000,000 payment in
1998 from its largest partner, the final in a series, partially offset by a
$500,000 payment in 1999 from a new partner, Elan Corporation. Revenues from
contract research activities were lower in 1999 primarily because the mastitis
program reached the final licensing trial stage in the second half of 1999 where
costs are not shared with Aquila's research partner, Virbac. These revenues were
$870,000 in 1998 and $232,000 in 1999. In 1999, Aquila was awarded a two year
SBIR phase II
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grant for $874,000 from the National Institute of Health to support its CD1
program in tuberculosis. Aquila has applied to the National Institute of Health
for three additional grants in other CD1 programs.
Costs and Operating Expenses. Cost of sales as a percentage of product
revenue was 152% and 97% in 1999 and 1998, respectively. The higher cost of
sales in 1999 was due to downtime caused by the required validation of the new
manufacturing facilities Aquila occupied in September 1998. The overall high
level of costs of sales is due to downtime and validation costs incurred in both
1999 and 1998. The new manufacturing facility was in full operation for the
second half of 1999.
Research and development expenses for 1999 were $6,642,000, a decrease of
11% from 1998. The decrease resulted from lower payments to a licensor for
patent issuance and lower clinical trial expense. Aquila's research spending was
allocated primarily to clinical trial spending and to the CD1 technology
acquired when Aquila bought VacTex, Inc. in 1998. Spending on the tuberculosis
program, which was the early stage research program acquired with VacTex, was
$989,000 in 1999 compared to $889,000 in 1998. Aquila is not committed to
funding this program in the future. Aquila has not yet established proof-of-
principle; however, based on progress to date, it expects the TB program to be a
long-term program and to advance the tuberculosis program to the stage where a
partner can be enlisted to share the expense. Aquila has initiated other
programs utilizing the CD1 technology in pursuit of antigens for diseases with
shorter and less costly development requirements than the tuberculosis program.
General and administration spending was $3,026,000 compared to $3,801,000
in 1998, a decrease of 20%. The lower spending was a result of lower staffing
levels, lower legal and professional fees, and lower facility costs.
Other Income. Other income in 1999 was $264,000 compared to $1,948,000 in
1998. In 1999, net royalty income, which is derived primarily from agreements
from discontinued operations, was $65,000 compared to $527,000 in 1998. Royalty
income from these sources may continue to decline as new products replace
products covered by the royalty agreements. Net miscellaneous income in 1999 was
$278,000 compared to $500,000 in 1998. Interest expense was $623,000 in 1999
compared to interest expense of $100,000 in 1998. The change was due to a full
year of interest expense on the loan for the fit-out of the new facilities.
Interest income was $544,000 in 1999 compared to $1,021,000 in 1998 due to
declining investment balances.
Year Ended December 1998 Compared to the Year-Ended December 31, 1997
Revenues. Total revenues for 1998 were $5,597,000, a decrease of 19% from
1997. Product revenues were $955,000, a decrease of 28% from 1997. Revenues from
research and development were $4,642,000, a decrease of 17% from 1997.
Product revenues were lower in 1998 due to the acquisition of a reseller by
a competitor. Revenues from research and development activities for 1998 were
lower than 1997 due to fluctuating shipments of the Stimulon adjuvant, QS-21,
used in clinical trials by corporate partners. Also, Aquila received $870,000 in
1998 from Virbac compared to $1,108,000 in 1997. This program, which is
developing a product to treat bovine mastitis, had evolved from the research
stage, during which all costs were shared, to the development stage, during
which only certain costs were shared. In 1998, Aquila received $3,000,000, the
final scheduled license payment from a partner for use of Stimulon. In 1997,
this payment was $3,500,000.
Costs and Operating Expenses. Cost of sales as a percentage of product
sales was 97% and 78% in 1998 and 1997, respectively. The higher cost of sales
in 1998 was due to downtime caused by the move of Aquila's corporate offices and
all operations to new leased facilities, partially offset by a price increase.
Research and development expenses for 1998 were $17,375,000, including a
charge of $9,927,000 for incomplete technology as a result of the purchase of
VacTex, Inc. in April 1998. Through the purchase of VacTex, Aquila acquired
rights to a patent involving the CD1 antigen presentation system; an option for
access to research in tuberculosis being conducted at a research institution in
exchange for partial funding of that research; and an ongoing, early stage
research project to develop a CD1 vaccine and test it in an animal model. The
purchase price was charged to incomplete technology due to the early stage of
the technology and
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the need to expend additional resources to develop the technology. The purchase
was accounted for in this way primarily because this very early stage technology
had not been shown to provide protection from infection in any animal models or
in humans, thus rendering the patent rights unqualified for capitalization, and
because the time and cost to prove this principle was significant and not
determinable.
In 1998, Aquila expended $889,000 on the VacTex research and development
program in tuberculosis. This program is expected to be a long-term endeavor for
the company that will be evaluated periodically to determine future spending
levels. It is expected that development of a tuberculosis vaccine will cost
several hundreds of millions of dollars over 10 to 15 years. Aquila does not
have the resources to fully develop such a product. It is Aquila's intent to
establish proof of principle that the CD1 system provides protection in
tuberculosis and then to partner the program. Also, once Aquila has established
proof of principle, it will pursue other commercial opportunities presented by
this technology. Excluding the VacTex charge, research and development spending
was $7,447,000 compared to $5,020,000 in 1997, an increase of 48%. The increase
was due to clinical and licensing trial expenses, patent issuance expense, and
spending on the CD1 research programs acquired from VacTex.
General and administration spending was $3,801,000 compared to $4,521,000
in 1997, a decrease of 16%. The lower spending was a result of lower staffing
levels, lower legal and professional fees, and lower facility costs.
Other Income. Other income was $1,948,000, a decrease of 55% from 1997. In
1997, Aquila had a gain of $2,332,000 on the sale of real estate. In 1998, net
royalty income, which is derived primarily from agreements from discontinued
operations, was $527,000 compared to $854,000 in 1997. Net miscellaneous income
in 1998 was $500,000 compared to $39,000 in 1997 and included $102,000 from
settlement of a lawsuit and $255,000 from abatement of real estate taxes. Net
interest income was $921,000 in 1998 compared to $645,000 1997. The increase was
due to higher interest expense in 1997 on a real estate mortgage retired upon
sale of the property in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Total cash, cash equivalents and marketable securities were $7,330,000 at
June 30, 2000 compared to $7,017,000 at December 31, 1999.
During the first six months of 2000, operating activities used cash of
$1,935,000 primarily due to the net loss of $1,989,000. Investing activities
provided cash of $73,000 primarily due to the net sales of marketable
securities. Financing activities provided cash of $2,702,000 due to $3,532,000
of proceeds received from the sale of 500,000 shares of common stock offset by
$830,000 payment of obligations. As of June 30, 2000, the Company had a balance
of $3,149,000 under its loan agreement with Transamerica Business Credit
Corporation and owed $205,000 for the 7% debentures issued in connection with
the acquisition of VacTex, Inc.
In 1999, cash and cash equivalents declined $4,746,000 and marketable
securities declined $3,392,000 Net working capital at the end of 1999 was
$5,252,000 compared to $11,891,000 at the end of 1998. Operations used
$8,313,000 primarily to fund the loss in 1999. Investing activities provided
$3,283,000 primarily from the sale of marketable securities. Financing
activities provided $283,000 with a $1,480,000 private placement of common stock
more than offsetting debt repayment.
In 1998, marketable securities increased $265,000 while cash and cash
equivalents declined $2,082,000. Operating activities required $3,414,000
primarily to fund the 1998 loss. Investing activities required $6,867,000,
primarily for the fit-out of the new leased facility. Financing activities
provided a total of $8,199,000, $3,551,000 from a private placement of common
stock and $5,000,000 from a long-term loan partially offset by repayment of a
$208,000 outstanding bank loan and payment of $439,000 on long-term debt.
In 1997, marketable securities increased by $982,000 while cash and cash
equivalents declined $1,760,000. Operating activities in 1997 required
$2,983,000. Investing activities generated cash from the sale of property of
$6,101,000 while financing activities reflected the cash payment of $4,185,000
to repay the mortgage on the property sold.
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Aquila received a letter from Cambridge Biotech Corporation, or CBC, the
predecessor of Aquila, in February 1999 alleging that the Aquila must indemnify
CBC under a Master Acquisition Agreement among Aquila, CBC and bioMerieux, Inc.
for potential losses from the termination of CBC's rights under a license
agreement. Aquila has not had any further communication from CBC and upon review
does not feel that adverse settlement of this matter will have a material effect
on its financial position or results of operations.
Aquila expects that available cash, proceeds from sale of investments, cash
flow from research contracts, product sales and materials transfers to its
partners will be sufficient to finance operations and capital requirements
through 2001. If the merger with Antigenics does not occur, Aquila will need to
raise significant additional capital in 2001 in order to continue operations at
current levels and to complete the commercialization of its proprietary
programs. Capital requirements could differ materially from those currently
anticipated by management. There can be no assurance that Aquila will be
successful in raising additional capital.
Aquila's expenses and revenues vary and will continue to vary. Future
revenues depend primarily upon the success of Aquila's efforts to license its
proprietary technology and enter into cost sharing programs and upon its ability
to market its products currently undergoing development in clinical trials.
Aquila's expenses fluctuate primarily due to clinical trials, which take from
six months to two years, and require varying degrees of financial support.
Revenues or operating results in any period will not necessarily be indicative
of results in subsequent periods.
ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues, as well as examples of how the staff applies revenue
recognition guidance to specific circumstances.
In June 2000, the SEC issued Staff Accounting Bulletin 101B delaying the
implementation of SAB 101 for six months. Accordingly, in the fourth quarter of
2000 Aquila will change its accounting for initial license fees. Through the
first half of 2000 revenue was recognized when the agreement was reached and no
contingent factors were present. Under the new guidance of SAB 101, revenue will
be deferred and recognized ratably over the appropriate life. In the fourth
quarter of 2000, a cumulative adjustment will be recorded retroactive to January
1, 2000 to create deferred revenue that will be recognized over future years.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 clarifies the application of certain aspects of APB
Opinion No. 25 (APB 25), including the following: the definition of an employee
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequences of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. Aquila does not expect the application of FIN 44 to have a material
impact on its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aquila invests cash balances in excess of operating requirements in
short-term marketable securities. At June 30, 2000, the fair market value of
these securities amounted to $5,966,000 with unrealized losses of $31,000
included as a component of stockholders equity. At December 31, 1999, the fair
market value of these securities amounted to $6,493,000 with unrealized gains of
$419,000 included as a component of stockholders' equity. In connection with a
facility agreement, Aquila maintains an investment of $750,000 in a debt
security as collateral for a letter of credit. This debt security has an
implicit interest rate of 6.02% and matures in February 2001 at which time
proceeds of $750,000 plus interest will be received. This investment is carried
at fair market value at June 30, 2000 with unrealized gains of $31,000 included
as a component of stockholders' equity. This instrument is not leveraged and is
not held for purposes of trading. Aquila has one loan
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<PAGE> 69
outstanding at June 30, 2000 that is subject to interest rate risk. This loan
carries an interest rate of 13% and is payable as follows:
<TABLE>
<S> <C>
2000..................................................... $ 728,000
2001..................................................... $1,456,000
2002..................................................... $1,525,000
----------
Total.................................................... $3,709,000
==========
</TABLE>
In addition, on June 30, 2000, the company had $205,000 of 7% debentures
outstanding issued in the purchase of VacTex.
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<PAGE> 70
BACKGROUND AND REASONS FOR THE MERGER
BACKGROUND
On May 15, 2000, Aquila issued a press release announcing that its board of
directors had engaged Adams, Harkness & Hill, Inc. to provide financial advisory
and investment banking services in evaluating merger and acquisition inquiries
which the company had recently received from several other companies interested
in acquiring Aquila.
On May 19, 2000, Jeffrey Rona, former Director of Corporate Development at
Antigenics, telephoned Adams, Harkness & Hill, financial advisors to Aquila, to
arrange for a meeting to discuss Antigenics' interest in a potential merger and
acquisition.
On May 31, 2000, Antigenics signed a confidentiality agreement.
On June 7, 2000, Dr. Alison Taunton-Rigby, Aquila's President and Chief
Executive Officer, James Warren, former Chief Financial Officer of Aquila, Dr.
Gerald A. Beltz, Senior Vice President of Research and Development at Aquila,
Dr. Garo H. Armen, Chairman and Chief Executive Officer of Antigenics, Dr.
Daniel Levey, Manager of Scientific Affairs at Antigenics, Mr. Rona, and Dr.
Michael Kouchakdjian, Director of Business Development for Antigenics, held an
initial meeting to discuss Aquila's potential interest in entering into a
business combination or similar transaction with Antigenics.
On June 14, 2000, Dr. Taunton-Rigby and Dr. Armen and others from both
Aquila and Antigenics met in Woburn, Massachusetts to hear Antigenics'
presentation and discuss business issues in connection with the proposed
business combination. On the same day Aquila and Antigenics held follow-up
meetings, toured Aquila's facilities in Framingham, Massachusetts and discussed
Aquila's business activities.
On June 16, 2000, Dr. Taunton-Rigby and Dr. Beltz met with Dr. Pramod
Srivastava, a member of Antigenics' board of directors and chairman of
Antigenics' scientific advisory board, and Dr. Levey of Antigenics to review the
scientific activities of Aquila. Dr. Armen and Dr. Taunton-Rigby held
discussions by phone.
Between June 16, 2000 and June 23, 2000, Dr. Taunton-Rigby had several
conversations with the State of Wisconsin Investment Board (SWIB) (the largest
stockholder of Aquila who had agreed to refrain from trading Aquila stock and to
keep all nonpublic information confidential) and discussed the proposed
transaction. SWIB indicated that they supported the proposed transaction with
Antigenics. Dr. Taunton-Rigby also discussed the proposed transaction with each
of the members of Aquila's board of directors. In addition, during the week of
June 19, 2000, Antigenics sent a letter of interest to Aquila and its
representatives and advisors, and Aquila signed a confidentiality agreement with
Antigenics. Numerous telephone conversations occurred between Dr. Taunton-Rigby
and Dr. Armen throughout the week.
During the week of June 26, 2000, Antigenics' financial, manufacturing and
regulatory teams visited Aquila's facilities in Framingham, and Aquila's due
diligence teams visited Antigenics' Woburn facilities.
On June 30, 2000, Antigenics and Aquila entered into a letter agreement
dated June 23, 2000 giving Antigenics exclusive rights to negotiate with Aquila
until July 15, 2000.
During the weeks of July 3, 2000 and July 10, 2000, counsel for Antigenics
distributed initial drafts of the definitive merger agreement and the parties
held due diligence meetings. In addition, Dr. Armen and Dr. Taunton-Rigby held
multiple phone conversations and meetings.
On July 12, 2000, Aquila's share price increased as a result of public
information concerning one of Aquila's HIV programs. Dr. Taunton-Rigby and Dr.
Armen agreed to continue working on the merger agreement while waiting for
market conditions to stabilize.
Between July 17, 2000, and August 11, 2000, Dr. Armen and Dr. Taunton-Rigby
held numerous telephonic discussions to discuss the status of negotiations
regarding the proposed merger and, towards the end of this time period, final
terms of the transaction were agreed upon.
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On August 15, 2000, there were several telephone conversations between Dr.
Taunton-Rigby, Dr. Armen and counsel for each of Antigenics and Aquila regarding
final details related to pricing and the merger agreement. The parties agreed
that each outstanding share of Aquila stock would be converted in the merger
into that fractional number of shares of Antigenics stock in an amount equal to
the quotient, rounded to four decimal places, resulting from dividing (A) the
quotient of 40,000,000 divided by 8,572,075, by (B) the average of the last
sales prices of Antigenics stock for the ten-day trading period ending and
including August 17, 2000.
On August 16, 2000, Aquila's board of directors held a special meeting to
review the terms of the transaction with Antigenics and to hear the opinion of
Adams, Harkness & Hill with respect to the fairness to the shareholders of the
proposed merger with Antigenics. Aquila's board unanimously approved the merger,
the merger agreement and all related transactions and resolved to submit the
merger and the merger agreement to the Aquila shareholders with a recommendation
for their adoption and approval of same.
On August 17, 2000, Antigenics' board of directors held a special meeting
to review the terms of the transaction with Aquila. The Antigenics board voted
unanimously to approve the merger agreement.
On August 18, 2000, Antigenics and Aquila executed a definitive merger
agreement which calls for the conversion of Aquila's shares into Antigenics
shares based upon an exchange ratio of 0.2898.
On August 21, 2000, Aquila and Antigenics issued a joint press release
announcing the merger.
AQUILA'S REASONS FOR THE MERGER
The Aquila board carefully considered the terms and conditions of the
proposed merger and the presentation of Adams, Harkness & Hill with respect to
the fairness of the transaction to the Aquila shareholders. The board
unanimously determined that the merger is in the best interests of and is on
terms that are fair to Aquila stockholders and unanimously approved the merger
and the merger agreement. In reaching its unanimous determination to approve the
merger and the merger agreement, the Aquila board considered a number of
factors.
Following is a list of reasons that were considered by the Aquila Board for
engaging in the merger transaction:
-- the merger should provide the opportunity for Aquila stockholders to
participate in a better capitalized company in a transaction which is
not expected to result in a recognition of taxable gain;
-- the programs and technologies of Aquila and Antigenics are highly
complementary and the merger of technologies, products and scientists
will create a significant force in the field of breakthrough vaccine
development;
-- the merger should enhance the opportunity for Aquila's programs and
technologies to lead to commercially successful products;
-- the merger should provide access to significant additional resources and
capabilities; and
-- the expanded infrastructure and expertise that Antigenics offers will
bring greater value to Aquila stockholders as a result of the merger.
In reaching its determination that the merger was advisable and in the best
interest of Aquila and its stockholders, the Aquila board considered and
balanced against the potential benefits of the merger a number of factors,
including risks that the merger may not be consummated. After detailed
consideration of these factors the Aquila Board concluded that the expected long
term benefits of the merger outweigh the potential risks associated with the
execution of the merger agreement. In reaching its determination, the Aquila
board took the various factors into account collectively and the Board's
determination was made in consideration of all of the factors as a whole.
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FAIRNESS OPINION OF AQUILA'S FINANCIAL ADVISOR
In connection with the merger, Adams, Harkness & Hill, Inc. provided to
Aquila financial advisory services and a financial fairness opinion. Adams,
Harkness & Hill was selected by the Aquila board of directors to act as Aquila's
financial advisor based on Adams, Harkness & Hill's qualifications, expertise
and reputation and its knowledge of the business and affairs of Aquila. At the
meeting of the Aquila board on August 16, 2000, Adams, Harkness & Hill rendered
an oral fairness opinion, that, as of market close on August 15, 2000, based
upon and subject to the various considerations set forth in the opinion, the
consideration to be received by Aquila stockholders as described in the merger
agreement was fair from a financial point of view to Aquila stockholders. This
fairness opinion was subsequently confirmed in writing on August 18, 2000,
reflecting data as of market close August 17, 2000.
The full text of the written opinion of Adams, Harkness & Hill, dated
August 18, 2000, which sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken by Adams, Harkness & Hill in rendering its opinion, is
attached as Annex B to this proxy statement/prospectus. Aquila stockholders are
urged to, and should, read the opinion carefully and in its entirety. Adams,
Harkness & Hill's opinion is directed to the Aquila board and addresses only the
fairness of the consideration to be received by Aquila stockholders as described
in the merger agreement from a financial point of view to Aquila stockholders as
of the date of the opinion, and does not address any other aspect of the merger
nor constitute a recommendation to any Aquila stockholder as to how to vote at
the Aquila special meeting. The summary of the opinion of Adams, Harkness & Hill
set forth in this proxy statement/prospectus is qualified in its entirety by
reference to the full text of that opinion.
In developing its opinion, Adams, Harkness & Hill, among other activities:
- reviewed Aquila's Annual Reports, Reports on Form 10-K and related
financial information for the three fiscal years ended December 31, 1999,
and Aquila's Report on Form 10-Q and the related unaudited financial
information for the six month period ending June 30, 2000;
- reviewed Antigenics' prospectus dated June 5, 2000 and related financial
information for the three fiscal years ended December 31, 1999, and
Antigenics' Report on Form 10-Q and the related unaudited financial
information for the six month period ended June 30, 2000;
- analyzed certain internal financial statements and other financial and
operating data concerning Aquila prepared by the management of Aquila;
- conducted due diligence discussions with members of senior management of
Aquila and Antigenics, and discussed with members of senior management of
Aquila and Antigenics their views regarding future business, financial
and operating benefits arising from the merger;
- reviewed the historical market prices and trading activity for Aquila
stock and Antigenics stock and compared them with that of certain
publicly traded companies Adams, Harkness & Hill deemed to be relevant
and comparable to Aquila and Antigenics;
- compared the results of operations of Aquila and Antigenics with that of
certain companies Adams, Harkness & Hill deemed to be relevant and
comparable to Aquila and Antigenics;
- compared the financial terms of the merger with the financial terms of
certain other mergers and acquisitions Adams, Harkness & Hill deemed to
be relevant and comparable to this merger;
- participated in certain discussions among representatives of Aquila and
Antigenics and their respective advisors;
- reviewed the merger agreement; and
- reviewed those other financial studies and analyses and performed those
other investigations and took into account those other matters as Adams,
Harkness & Hill deemed necessary, including its assessment of general
economic, market and monetary conditions.
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The following is a summary of the various valuation methodologies used by
Adams, Harkness & Hill in arriving at its opinion regarding the merger. To
determine the fairness of the transaction, Adams, Harkness & Hill employed
analyses based on the following:
- public company peers analysis;
- transaction premiums paid analysis;
- stock performance analysis; and
- thorough "marketplace testing."
Public Company Peers Analysis -- Aquila
Adams, Harkness & Hill evaluated a group of publicly traded companies that
are comparable to Aquila based on market focus, product offerings, business
model and/or financial performance. The group consisted of eight
biopharmaceutical companies with comparable characteristics. Adams, Harkness &
Hill compared certain financial information of Aquila with that of the companies
included in the peer group. This information included:
- market value of equity;
- enterprise value of firm;
- ratio of enterprise value to revenue for the last twelve months;
- long-term growth rate;
- revenue for the last twelve months;
- gross margin for the last twelve months;
- operating margin for the last twelve months; and
- year-over-year quarterly revenue growth.
Due to the fact that the peer group consisted largely of biopharmaceutical
companies at an early stage of development, financial performance metrics based
on earnings were not deemed relevant to the analysis.
The ratio of enterprise value to revenue for the last twelve months is an
indication of the value public markets place on companies in a particular market
segment. Adams, Harkness & Hill employed an enterprise value-type valuation in
this analysis because enterprise value provides a market value based on a
company's operations, in contrast to considering the valuation of a company's
operations plus or minus existing cash and debt balances. Enterprise value has
been calculated as:
(market value of equity) + (debt) - (cash, cash equivalents and short-term
investments).
To determine value using the enterprise value approach, the first step is
to calculate a company's market value, which represents the company's value
based on its common stock price per share (Adams, Harkness & Hill used the
closing share prices as of August 17, 2000, for all public company comparable
analyses), multiplied by the number of a company's fully diluted shares
outstanding. The market value is then adjusted for a company's debt and cash
positions by adding the debt balance and subtracting the cash balance to arrive
at an enterprise value.
In addition, Adams, Harkness & Hill utilized an analysis of the ratio of
technology value to book value. This type of analysis is a common metric in
valuation of biotechnology and biopharmaceutical companies.
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This analysis provides a de facto valuation of the "technology" in a company by
removing cash-like assets from its market value. Technology value has been
calculated as:
(market value of equity) - (cash, cash equivalents and short-term
investments).
The low, high and average financial ratios for the peer group as of August
17, 2000 are listed in the table below:
<TABLE>
<CAPTION>
VALUATION MULTIPLE LOW HIGH MEAN*
------------------ ---- ----- -----
<S> <C> <C> <C>
Enterprise value to revenue for the last twelve months...... 5.5x 80.6x 26.2x
Technology value to book value.............................. 0.6x 22.0x 3.8x
</TABLE>
---------------
* Mean excludes the maximum & minimum ratios for the peer group.
Adams, Harkness & Hill compared these ranges of multiples to the implied
multiple in the merger consideration as described in the merger agreement of
approximately:
<TABLE>
<CAPTION>
TRANSACTION MULTIPLES LOW
--------------------- ----
<S> <C>
Enterprise value to revenue for the last twelve months...... 8.6x
Technology value to book value.............................. 3.0x
</TABLE>
---------------
* Assumes transaction equity value of $39.8 million, Aquila debt of $3.4
million, Aquila cash equivalents of $7.3 million, and Aquila book value of
$10.9 million as of August 17, 2000.
Transaction Premiums Paid Analysis
Premiums paid in comparable public seller transactions typically indicate
the amount of consideration acquirors are willing to pay above the seller's
stock price. In this analysis, the value of consideration paid in transactions
involving stock is computed using the buyer's stock price immediately prior to
announcement, while the seller's stock price is one trading day, five trading
days, twenty trading days and fifty trading days prior to the announcement of
the transaction. Adams, Harkness & Hill reviewed 12 comparable merger and
acquisition transactions involving selected peer companies from May 11, 1998 to
May 23, 2000.
Based upon Adams, Harkness & Hill's analysis of premiums paid in selected
comparable transactions, the low, high and average premiums (discounts) paid to
sellers' share prices (using the buyer's share price on the day prior to the
announcement date of the transaction to calculate consideration in stock
transactions) for the one, five, twenty and fifty trading days prior are listed
below:
<TABLE>
<CAPTION>
LOW HIGH MEAN*
----- ----- -----
<S> <C> <C> <C>
Premium paid -- one trading day prior....................... 20.4% 107.9% 53.5%
Premium paid -- five trading days prior..................... 14.5% 237.8% 70.5%
Premium paid -- twenty trading days prior................... 1.8% 286.0% 60.5%
Premium paid -- fifty trading days prior.................... (58.6)% 200.3% 47.7%
</TABLE>
---------------
* Mean excludes minimum and maximum percentages for the peer group.
Adams, Harkness & Hill compared these ranges of implied premium as of
market close on August 17, 2000 to the implied premium (discount) of the merger
consideration as described in the merger agreement of approximately:
<TABLE>
<S> <C>
Premium paid -- one trading day prior....................... 3.1%
Premium paid -- five trading days prior..................... (13.1)%
Premium paid -- twenty trading days prior................... (9.2)%
Premium paid -- fifty trading days prior.................... 50.4%
</TABLE>
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Stock Performance Analysis
Adams, Harkness & Hill examined the following as of close of August 17,
2000:
- One-year stock price performance of Aquila:
-- Aquila stock value had increased 105.8%.
- Stock price performance of Antigenics since its initial public offering
on February 4, 2000.
-- Antigenics stock value had decreased 13.5% from Antigenics' offering
price and 74.6% from the closing price on that date.
- One-year stock price performance of Aquila compared to the NASDAQ
Composite, S&P 500, Russell 2000, and AMEX Biotech stock indices:
-- Aquila stock value had increased 105.8%;
-- NASDAQ Composite had increased 47.5%;
-- S&P 500 had increased 11.3%;
-- Russell 2000 had increased 18.5%; and
-- AMEX Biotech had increased 157.3%.
- Stock price performance of Antigenics since its initial public offering
on February 4, 2000, compared to the NASDAQ Composite, S&P 500, Russell
2000, and AMEX Biotech stock indices:
-- Antigenics stock value had decreased 13.5% from Antigenics' offering
price and 74.6% from the closing price on that date;
-- NASDAQ Composite had decreased 7.1%;
-- S&P 500 had increased 5.0%;
-- Russell 2000 had decreased 1.7%; and
-- AMEX Biotech had increased 41.3%.
- One-year stock price performance of Aquila compared to an index of public
company comparables:
-- Aquila stock value had increased 105.8%; and
-- public company comparables, as an index, had increased 75.7%.
- Stock price performance of Antigenics since its initial public offering
on February 4, 2000, compared to an index of public company comparables:
-- Antigenics stock value had decreased 13.5% from Antigenics' offering
price and 74.6% from the closing price on that date; and
-- public company comparables, as an index, had increased 1.3%.
- The existence of any "artificial" influences on the stock price
performance of Aquila during the one trading day, five trading day,
twenty trading day, and/or fifty trading day periods examined for
transaction premium analysis purposes:
-- Aquila stock price and trading volume spiked as a result of Aquila's
July 12, 2000 press release.
Marketplace Testing
Adams, Harkness & Hill and Aquila worked together in a marketing effort to
seek strategic acquirers for a period of nine months, from November 1999 to
August 2000. This effort included detailed discussions with eight qualified,
potential acquirers. Through these efforts, Aquila received several bids of
various financial
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consideration. Aquila and Adams, Harkness & Hill evaluated and analyzed each
bid, and together determined that the Antigenics offer represented the best
possible transaction for Aquila stockholders.
Summary Of Valuation Analyses
Taken together, the information and analyses employed by Adams, Harkness &
Hill led to Adams, Harkness & Hill's overall opinion that, as of August 18,
2000, the consideration to be received in the merger was fair, from a financial
point of view, to Aquila stockholders.
ANTIGENICS' REASONS FOR THE MERGER
In evaluating the proposed merger, the Antigenics board of directors
reviewed presentations from management and advisors, including the advice of its
financial advisor, US Bancorp Piper Jaffray. In reaching its determination to
approve the merger agreement and the merger, the Antigenics board of directors
considered the following factors in favor of the merger:
- the acquisition of Aquila's antibody adjuvant technology and its antigen
discovery program, which may enhance Antigenics' ability to produce
effective therapies for cancer, infectious diseases and degenerative
disorders;
- the expansion of Antigenics' product pipeline by adding Aquila's product
pipeline, which includes two product candidates in phase III clinical
trials;
- the acquisition of Aquila's patent estate; and
- the ability to access Aquila's talented team of scientists.
The Antigenics board of directors weighed these advantages against
potential risks of the merger. The following summarizes factors against the
merger:
- As with most mergers, there is a risk anticipated benefits will not be
realized; for example, Antigenics may encounter difficulties integrating
Aquila's operations. Because the merger represents Antigenics' first
acquisition, Antigenics does not have experience integrating acquired
businesses. The board, however, believed that the relative sizes of the
companies, along with the strategic fit, more than offset this risk.
- There is inherent uncertainty in developing and commercializing
biotechnology products. The board, however, believed that the promise of
Aquila's programs and technology outweighs the risk that Antigenics will
not successfully develop them.
After considering the potential positive and negative factors of the
merger, the Antigenics directors did not attempt to quantify or prioritize
particular considerations. Each board member may have viewed the various
considerations differently than other board members. Ultimately, the Antigenics
board unanimously concluded that the Aquila merger should provide significant
long-term benefits to Antigenics stockholders; consequently, the board approved
the merger agreement.
POTENTIAL CONFLICTS AND INTERESTS OF AQUILA MANAGEMENT IN THE MERGER
When considering the recommendation of Aquila's board of directors with
respect to approving the merger, you should be aware that the directors and
officers of Aquila have interests in the merger and participate in arrangements
that are different from, or are in addition to, those of Aquila stockholders
generally. The Aquila board was aware of these interests and considered them,
among other matters, in approving the merger agreement. These include:
- Employment. At the closing of the merger, most executive officers of
Aquila will become employees of Antigenics.
- Accelerated Vesting of Options. All outstanding options to purchase
Aquila stock held by a director, officer or employee of Aquila that are
unvested as of the date of the merger will accelerate in full and
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be immediately vested and exercisable immediately preceding the
consummation of the merger. Consequently, all options outstanding
immediately prior to the effective time of the merger will be subject to
accelerated vesting. On September 13, 2000, options to purchase 910,520
shares of Aquila stock were outstanding with an weighted average exercise
price per share of $3.45.
- Change of Control/Severance Agreements. Alison Taunton-Rigby, Gerald A.
Beltz, Deborah B. Grabbe and Charlotte A. Kensil, executive officers of
Aquila, have employee retention agreements that provide for the following
benefits in the event they are terminated by Antigenics without cause or
they terminate their employment for good reason following a change of
control. Each of Ms. Grabbe and Dr. Kensil are entitled to a cash payment
equal to the sum of her respective annual base salary as in effect prior
to the change of control and her average annual bonus received during the
three preceding years; continued health, dental, vision, long-term
disability and life insurance benefits for three years or until she
becomes subject to another employer's benefit plans with comparable
coverage; and accelerated vesting of outstanding options with an extended
period of time to exercise those options. Dr. Taunton-Rigby is entitled
to the benefits described above except that she will receive a payment
equal to three times the sum of her annual base salary and the average
annual bonus received by her during the past three years. Dr. Beltz is
entitled to the benefits described above except that he will receive a
payment equal to two times the sum of his annual base salary and the
average annual bonus received by him during the past three years.
- Indemnification. Aquila officers and directors have continuing
indemnification against some liabilities. Under the merger agreement,
Antigenics has committed to continue to honor the existing
indemnification obligations of Aquila to its officers and directors after
the completion of the merger.
Upon completion of the merger, Dr. Taunton-Rigby will terminate her
employment and will receive the severance payment and other benefits described
above.
As a result, the Aquila directors could be more likely to vote to approve
the merger agreement and the merger than if they did not have these interests.
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THE MERGER AND THE MERGER AGREEMENT
The following is a summary of significant provisions of the merger
agreement. For a more complete understanding of the merger agreement, you should
read the agreement. The agreement is attached as Annex A and is incorporated
into this proxy statement/prospectus by reference.
GENERAL DESCRIPTION OF THE MERGER
In the merger, St. Marks Acquisition Corp., a specially formed,
wholly-owned subsidiary of Antigenics, will merge with and into Aquila. Aquila
will be the surviving corporation and will continue to exist under Delaware law
as a wholly-owned subsidiary of Antigenics. The charter and by-laws of the
specially formed, wholly-owned subsidiary, as in effect immediately before the
merger, will be the charter and by-laws of the surviving company.
EFFECTIVE TIME
We expect to close the merger during the fourth quarter of 2000. The merger
will be effective upon the filing of a certificate of merger with the Delaware
Secretary of State, or a later time that we specify in the certificate of
merger. We plan to file the certificate of merger soon after the Aquila special
meeting.
MERGER CONSIDERATION FOR AQUILA STOCK AND EXCHANGE RATIO
At the effective time of the merger, each outstanding share of Aquila stock
will be automatically be converted into Antigenics stock based on a ratio of
0.2898 of a share of Antigenics stock for each Aquila share, with cash paid for
any fractional share. The exchange ratio was agreed to in arm's-length
negotiations between representatives of Antigenics and Aquila, with the benefit
of advice from their respective financial advisors.
Based on the number of shares of Aquila stock outstanding as of the record
date, approximately 2,501,032 shares of Antigenics stock will be issuable in the
merger, representing approximately 9.2% of the total Antigenics stock to be
outstanding after the issuance. This assumes that no Aquila stock options are
exercised between the record date and the effective time.
NO FRACTIONAL SHARES
Antigenics will not issue fractional shares in the merger. Instead,
Antigenics will pay cash to each Aquila stockholder who otherwise would be
entitled to receive a fractional share of Antigenics stock. The cash amount will
equal the fractional share number multiplied by the per share closing price of
Antigenics stock as reported by the Nasdaq National Market on the trading day
before the effective time.
EXCHANGE OF AQUILA STOCK CERTIFICATES
Promptly after the effective time, Antigenics or the exchange agent will
mail transmittal forms to each person who held shares of Aquila stock as of the
effective time for use in exchanging Aquila stock certificates for Antigenics
stock certificates and any cash for fractional shares. The transmittal forms
will include instructions specifying details of the exchange.
DO NOT SEND IN YOUR AQUILA CERTIFICATES UNTIL YOU RECEIVE A TRANSMITTAL FORM.
If certificates for any shares of Aquila stock have been lost, stolen or
destroyed, the holder must submit appropriate evidence regarding the ownership,
loss, theft or destruction of the certificate, an affidavit to that effect and a
customary indemnification agreement to the exchange agent.
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Antigenics will honor a request from a person surrendering an Aquila stock
certificate that the Antigenics stock being given in exchange be issued to a
person other than the registered holder of the certificate on the exchange
agent's books, so long as the requesting person:
- submits all documents necessary to evidence and effect the transfer to
the new holder; and
- pays any transfer or other taxes for issuing shares of Antigenics stock
to a person other than the registered holder of the certificate, unless
the requesting person satisfactorily establishes to Antigenics that any
tax has been paid or is inapplicable.
Holders of Aquila stock exchanged for Antigenics stock in the merger will
be entitled to receive dividends and other distributions on Antigenics stock
(without interest) that are declared or made with a record date after the
effective time. Dividends or other distributions will not be paid to any former
holder of Aquila stock, however, until that holder surrenders its shares of
Aquila stock to the exchange agent.
TREATMENT OF AQUILA STOCK OPTIONS AND WARRANTS
Options
At the effective time of the merger, Antigenics will assume each
outstanding and unexercised option to purchase shares of Aquila stock granted
under Aquila's 1996 Stock Award and Option Plan and 1996 Directors Stock Award
and Option Plan, whether or not exercisable. Each assumed option will continue
to be governed by the same terms and conditions of the applicable Aquila stock
option plan that were in effect immediately before the effective time of the
merger, except that:
- each option will be exercisable for a number of shares of Antigenics
stock equal to the number of shares of Aquila stock that were issuable
upon exercise of the option immediately before the effective time
multiplied by 0.2898, rounded down to the nearest whole number of shares
of Antigenics stock;
- the per share exercise price for the shares of Antigenics stock issuable
upon exercise of the assumed option will be equal to the exercise price
per share of Aquila stock at which the option was exercisable immediately
before the effective time divided by 0.2898, rounded up to the nearest
whole cent; and
- all options to purchase shares of Aquila stock will become fully vested
and exercisable.
On September 13, 2000, options to purchase 910,520 shares of Aquila stock
were outstanding; the weighted average exercise price per share of these options
was $3.45. These options will be converted into options to purchase
approximately 263,868 shares of Antigenics stock; the weighted average exercise
price per share of these options as converted into options to purchase
Antigenics stock will be $11.90.
Antigenics has agreed to file a registration statement on Form S-8 for the
shares of Antigenics stock subject to Aquila stock options. Antigenics expects
that the registration statement will be effective shortly after the effective
time of the merger, and Antigenics has agreed to use commercially reasonably
efforts to maintain the effectiveness of that registration statement for so long
as former Aquila stock options remain outstanding.
Warrants
At the effective time of the merger, Antigenics will assume a warrant to
purchase 60,680 shares of Aquila stock with an exercise price per share of
$4.12. The assumed warrant will continue to be governed by the same terms and
conditions as were applicable to the Aquila warrant. The assumed warrant will be
exercisable for 17,585 shares of Antigenics stock with an exercise price per
share of $14.22.
TREATMENT OF AQUILA BENEFITS AND STOCK PURCHASE PLANS AND OTHER EMPLOYEE MATTERS
Antigenics has agreed to give Aquila employees who remain with the company
after the merger full credit in terms of eligibility, vesting, benefit accrual,
except as would result in duplication of benefits, and determination of the
level of benefits under any employee benefit plans. Antigenics has also agreed
to waive limitations for preexisting condition exclusions and waiting periods
under any Antigenics welfare benefit plans
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that a continuing Aquila employee is eligible to participate in after the
merger. This waiver would not include, however, limitations and waiting periods
that have not been satisfied under any Aquila welfare plan maintained for the
employee prior to the merger.
Antigenics has further agreed to assume and honor all Aquila employment,
severance and other compensation agreements existing prior to execution of the
merger agreement.
Aquila has also agreed to terminate its 1996 Employee Stock Purchase Plan
prior to the effective date of the merger.
ACCOUNTING TREATMENT
Antigenics will account for the merger using the purchase method of
accounting for a business combination. Under this method of accounting, the
assets and liabilities of Aquila, including intangible assets, will be recorded
at their fair values. The results of operations and cash flows of Aquila will be
included in Antigenics' financial statements following the completion of the
merger. Consistent with generally accepted accounting principles, amounts
assigned to acquired in-process research and development -- i.e., Aquila
research and development projects that are still in process at the closing of
the merger, but which, if unsuccessful, have no alternative future use -- must
be charged to expense on the date that the merger closes.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income tax
consequences of the merger. The discussion is based on the Internal Revenue
Code, related regulations, existing administrative interpretations and court
decisions, all of which may change, possibly with retroactive effect. This
discussion assumes that Aquila stockholders hold their shares of Aquila stock as
capital assets within the meaning of Section 1221 of the Internal Revenue Code.
This discussion does not address all aspects of U.S. federal income taxation
that may be important to you either in light of your particular circumstances or
if you are subject to special rules. These special rules include those relating
to:
- stockholders who are not U.S. citizens or residents or that are foreign
corporations, partnerships, estates or trusts;
- financial institutions;
- tax-exempt organizations;
- insurance companies;
- dealers in securities;
- stockholders who acquired their Aquila stock by exercising options or
similar derivative securities or otherwise as compensation; and
- stockholders who hold their Aquila stock as part of a hedge, straddle,
appreciated financial position or conversion transaction.
This section, as it relates to matters of United States federal income tax
law, constitutes the opinions of Bowditch & Dewey, LLP, counsel to Aquila, and
Palmer & Dodge LLP, counsel to Antigenics. These opinions are based on a number
of assumptions, representations and covenants, including the assumption that the
merger will be completed as described in this document and that the
representations contained in letters delivered to counsel by Aquila, Antigenics
and the merger subsidiary in connection with the delivery of the opinions will
be accurate through the closing. The opinions neither bind the IRS nor preclude
the IRS from adopting a position contrary to that expressed in the opinions.
Aquila and Antigenics cannot assure you that contrary positions will not be
successfully asserted by the IRS or adopted by a court if the issues are
litigated. Neither of us intends to obtain a ruling from the IRS with respect to
the tax consequences of the merger.
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Tax Consequences to Aquila Stockholders
Except as discussed below, Aquila stockholders will not recognize gain or
loss for U.S. federal income tax purposes on the exchange of Aquila stock for
Antigenics stock in the merger. The aggregate tax basis of Antigenics stock
received in the merger will be the same as the aggregate tax basis of the Aquila
stock surrendered in exchange therefor, reduced by the portion of the tax basis
of the Aquila stock allocable to fractional shares of Antigenics stock for which
cash is received instead. The holding period of Antigenics stock received as a
result of the exchange will include the holding period of the Aquila stock
surrendered in exchange. Aquila stockholders will recognize gain or loss for
U.S. federal income tax purposes on the cash they receive in place of fractional
shares of Antigenics stock. The gain or loss will be measured by the difference
between the amount of cash received and the portion of the tax basis of the
Aquila stock surrendered in the merger that is allocable to those fractional
shares of Antigenics stock.
Tax Consequences to Antigenics and Aquila
Antigenics, including its merger subsidiary, and Aquila will not recognize
gain or loss for U.S. federal income tax purposes by reason of the merger.
Backup Withholding
Unless a stockholder complies with reporting and/or certification
procedures or is an exempt recipient under the backup withholding and
information reporting provisions of the Internal Revenue Code and Treasury
regulations, the holder may be subject to a 31% backup withholding tax on any
cash payments received in the merger. Any amounts withheld under the backup
withholding rules may be allowed as a refund or a credit against the holder's
federal income tax liability, provided the required information is furnished to
the IRS.
THE FOREGOING DISCUSSION IS ONLY INTENDED TO PROVIDE YOU WITH A GENERAL
SUMMARY. IT IS NOT A COMPLETE ANALYSIS OR DESCRIPTION OF EVERY POTENTIAL U.S.
FEDERAL INCOME TAX CONSEQUENCE OR ANY OTHER CONSEQUENCE OF THE MERGER. IN
ADDITION, THE DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH,
OR ARE CONTINGENT ON, YOUR INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX
CONSEQUENCES OF THE MERGER. ACCORDINGLY, WE STRONGLY URGE YOU TO CONSULT WITH
YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR U.S. FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER.
COVENANTS UNDER THE MERGER AGREEMENT
Aquila's Interim Operations
Until the closing of the merger, Aquila has agreed to operate its business
solely in the ordinary course consistent with its past practices. Aquila also
agreed to:
- use reasonable commercial efforts to keep available the services of its
employees;
- use reasonable commercial efforts to maintain its insurance policies;
- use reasonable commercial efforts to preserve intact its business and
physical properties;
- use best efforts to preserve and protect its proprietary rights;
- use reasonable commercial efforts to comply with the terms of its
material contracts;
- take all actions with respect to Aquila's outstanding options and
warrants necessary to effectuate the merger; and
- consult with Antigenics upon receipt of any material communication from
the FDA or before making any material submission to the FDA, before
materially changing any study, protocol or timeline for product
candidates or programs or before adding new clinical trials.
Antigenics may agree to exceptions to these obligations in writing.
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Aquila has also agreed until the merger closes, with some exceptions, that
it will not do or agree to do any of the following without Antigenics' prior
written consent:
- sell or encumber any of its assets other than sales or transfers in the
ordinary course of business not exceeding $50,000;
- incur any indebtedness for borrowed money, obligation or liability or
enter into any contracts or commitments involving potential payments of
$50,000 or more;
- increase the compensation of any officer, director, employee, agent or
consultant; adopt or increase benefits under any employee plan; or enter
into any employment, severance or other agreement with an officer or
director;
- change the amount of its authorized, issued or outstanding capital stock;
grant, accelerate or modify any option, warrant or other right to
purchase; declare or pay any dividend or other distribution on shares of
its capital stock; or sell, transfer, repurchase or redeem any shares of
its capital stock, except to honor the exercise of convertible securities
outstanding on the date of execution of the merger agreement;
- amend its charter or bylaws;
- acquire a material amount of property or assets other than in the
ordinary course of business;
- authorize capital expenditures exceeding $50,000 singly or $100,000 in
the aggregate;
- change any of its accounting practices or principles or restate its
consolidated financial statements;
- take any action that would prevent the merger from qualifying as a
reorganization within Section 368(a) of the Internal Revenue Code;
- settle or compromise any material tax liability, change its tax
accounting methods or periods, enter into any tax-related closing
agreement, surrender its right to any tax refund, or consent to any
extension or waiver of the limitations period applicable to any tax claim
or assessment;
- settle or compromise any pending or threatened material legal proceeding;
- adopt any plan of liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization, other than this
merger;
- satisfy any liabilities other than in the ordinary course of business
consistent with past practice;
- effectuate any plant closings or mass layoffs;
- redeem the purchase rights issued under its stockholder rights plan or
render the plan inapplicable to a transaction other than this merger;
- enter into or modify any license, development, research or collaboration
agreement; or
- modify, amend, terminate or assign any material rights or claims under
any confidentiality agreement to which Aquila is a party.
No Solicitation by Aquila
Aquila has agreed not to (1) solicit any person regarding either a business
combination with Aquila or any other transaction as an alternative to this
merger or (2) participate in any negotiations with or provide information to,
any person to seek any alternative transaction to this merger, unless Aquila's
board or officers are otherwise required by their fiduciary duties, negotiate
with, or furnish information to, a third party regarding an alternative
transaction. Aquila has agreed to inform Antigenics of any written inquiry it
receives relating to an alternative transaction.
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Recommendation of the Aquila Board
The Aquila board of directors has agreed to take all lawful action that
does not interfere with its fiduciary duties to secure the vote of its
stockholders adopting the merger agreement.
Indemnification and Insurance for Aquila Officers and Directors
Antigenics has agreed to cause the surviving corporation of the merger to
honor Aquila's indemnification obligations under agreements with its directors
and officers and its charter and bylaws in effect before the effective time of
the merger. Aquila has agreed to purchase and maintain for six years, a
directors' and officers' liability insurance policy that provides coverage
substantially similar to the coverage provided to Aquila's directors and
officers on the date of the merger agreement for events occurring before the
effective time of the merger. Aquila, however, may not pay more than $250,000
for directors' and officers' liability insurance coverage without Antigenics
prior written consent.
Other Covenants
The merger agreement contains covenants of both parties relating to, among
other things, public announcements, notifications, regulatory filings, employee
matters, reporting of the transaction for federal income tax purposes, and
further assurances, and cooperation in obtaining consents and approvals.
Aquila has also agreed, among other things, to grant Antigenics access to
company information as is reasonably necessary to investigate Aquila.
Antigenics has also agreed, among other things, to notify the Nasdaq
National Market of the shares of Antigenics stock to be issued in the merger.
REPRESENTATIONS AND WARRANTIES
Each of Antigenics and Aquila has made customary representations and
warranties to the other in the merger agreement regarding, among other things:
- its and its subsidiaries' organization and similar corporate matters;
- the authorization, execution, delivery and performance of the merger
agreement;
- its capital structure;
- reports and financial statements filed with the SEC and the accuracy of
the information contained in those documents;
- the absence of any undisclosed liabilities and material adverse events
since June 30, 2000;
- the absence of litigation;
- necessary governmental consents and filings;
- ownership, use and non-infringement of intellectual property rights;
- commercial relationships with suppliers, collaborators, licensors and
licensees;
- the absence of conflicts, violations or defaults under its organizational
documents and other agreements and documents as a result of executing the
merger agreement;
- the absence of conflicts with or violations of any laws as a result of
executing the merger agreement; and
- the accuracy of the information in this proxy statement/prospectus.
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Aquila has made additional representations and warranties to Antigenics
regarding, among other things:
- its subsidiaries and joint ventures;
- its material contracts;
- insurance coverage;
- year 2000 compliance;
- the filing of tax returns and payment of taxes;
- its employee benefit plans;
- compliance with governmental regulations concerning employees and
relations with employees;
- compliance with environmental laws and other environmental matters;
- board approval of the merger and the board's amending the Aquila
stockholder rights plan to permit the merger;
- receipt of fairness opinion; and
- merger-related brokers' and finders' fees;
Antigenics has made additional representations and warranties to Aquila
regarding, among other things:
- the capitalization of St. Marks Acquisition Corp., the subsidiary
Antigenics formed to effect the merger; and
- the business activities of St. Marks Acquisition Corp.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligation to Effect the Merger
Antigenics and Aquila do not have to consummate the merger unless the
following conditions are met or waived:
- Aquila stockholders must adopt the merger agreement;
- the registration statement of which this proxy statement/prospectus is a
part must not be subject to any stop order or related proceeding;
- Antigenics and Aquila must obtain all required approvals from
governmental entities and satisfy any required waiting periods; and
- each party must have executed the merger documents to be filed with the
secretary of state of Delaware.
Conditions to the Obligation of Antigenics
Antigenics does not have to consummate the merger unless the following
additional conditions are met or waived:
- Aquila must have performed and complied with all its agreements and
covenants in the merger agreement, and the representations and warranties
of Aquila contained in the merger agreement must be true and correct when
made and on and as of the closing date as if made at and as of that date,
except for any inaccuracies or failures to perform that would not
reasonably be expected to have a material adverse effect on Aquila;
- Antigenics must receive the customary closing documents described in the
merger agreement; and
- each affiliate of Aquila must deliver to Antigenics an agreement
regarding restrictions on the resale of the shares of Antigenics stock
issued in the merger.
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Conditions to the Obligation of Aquila
Aquila does not have to consummate the merger unless Antigenics has
performed and complied with all its agreements and covenants in the merger
agreement, and the representations and warranties of Antigenics contained in the
merger agreement are true and correct when made and on and as of the closing
date as if made at and as of that date, except for any inaccuracies or failures
to perform that would not reasonably be expected to have a material adverse
effect on Antigenics.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time before the effective
time, whether before or after its adoption by Aquila stockholders:
- by mutual written consent of Antigenics and Aquila;
- by Aquila:
-- for material misrepresentations or uncured breaches by Antigenics; or
-- if the Aquila board of directors, in the exercise of its fiduciary
duties, is obligated to approve or recommend an alternative to the
merger;
- by Antigenics:
-- for material misrepresentations or uncured breaches by Aquila;
-- if the Aquila board of directors withdraws its recommendation of the
merger agreement, recommends an alternative to the merger or fails to
recommend against, or takes a neutral position with respect to, any
tender or exchange offer; or
-- if any person or group, other than Antigenics or the State of
Wisconsin Investment Board, becomes the owner of at least 15% of the
outstanding shares of Aquila stock;
- by either Antigenics or Aquila:
-- if the merger has not closed by February 15, 2001, unless that party's
own breach of the agreement is the reason that the merger has not been
consummated;
-- if there is a non-appealable government action prohibiting the
consummation of the merger; or
-- if Aquila stockholders do not vote to adopt the merger agreement.
TERMINATION FEES AND EXPENSES
Payment of Termination Fee
Aquila has agreed to pay Antigenics $1,200,000 if the merger agreement is
terminated in any of the following circumstances:
- Aquila's board of directors, in the exercise of its fiduciary duties,
approves or recommends an alternative to the merger; or
- Antigenics or Aquila terminates the merger agreement because either
Aquila has willfully breached the merger agreement or Aquila's board of
directors withdraws it recommendation of the merger agreement, recommends
an alternative to the merger or fails to recommend against, or takes a
neutral position with respect to, a tender or exchange offer; or
- Antigenics or Aquila terminates the merger agreement because Aquila
stockholders have failed to vote to adopt the merger agreement if, at the
time of termination, either an alternative transaction between Aquila and
a third party has been announced or Aquila or its stockholders have
received a proposal for an alternative to the merger and, on or before
August 18, 2001, Aquila consummates an alternative to the merger that had
been announced or proposed prior to termination of the merger agreement.
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Expense Reimbursement
If the merger agreement is terminated by Antigenics for a material
misrepresentation or uncured breach, other than a willful breach, by Aquila,
and, at the time of termination either an alternative transaction between Aquila
and a third party has been announced or Aquila or its stockholders have received
a proposal for an alternative to the merger, and, on or before August 18, 2001,
Aquila consummates an alternative to the merger that had been announced or
proposed prior to termination of the merger agreement, then Aquila will pay
Antigenics' reasonable out-of-pocket expenses incurred in connection with the
merger agreement and the merger in an amount not to exceed $600,000.
Alternative Fee
Aquila has agreed to pay Antigenics $900,000 if either Antigenics or Aquila
terminates the merger agreement because Aquila stockholders have failed to vote
to adopt the merger agreement and, on or before August 18, 2001, Aquila
consummates an alternative to the merger that:
- had neither been announced nor proposed to Aquila or its stockholders at
the time of termination;
- was announced or proposed to Aquila or its stockholders before the
withdrawal of each alternative to the merger that had been announced or
proposed to Aquila or its stockholders before the time of termination;
and
- involves consideration payable to Aquila stockholders in excess of
$40,000,000.
PAYMENT OF EXPENSES
Antigenics and Aquila will share equally the fees and expenses of printing
and filing this proxy statement/prospectus and the registration statement.
Otherwise, and except for the expense reimbursement described above, Antigenics
and Aquila will each pay its own merger-related fees and expenses.
AMENDMENTS AND WAIVERS
Generally, Antigenics and Aquila may amend or waive any provision of the
merger agreement before the effective time of the merger. However, if a material
condition is waived, Antigenics will amend the registration statement of which
this proxy statement/prospectus forms a part, and Aquila will resolicit proxies
for the adoption of the merger agreement. In addition, after Aquila stockholders
have approved the merger, their further approval would be required to modify the
amount or type of consideration that they will receive in the merger, to alter
the charter of the surviving corporation or to otherwise alter the merger
agreement in a manner materially adverse to them.
NO RELIEF FROM LIABILITY FOR WILLFUL BREACH
No termination of the merger agreement will relieve either party of its
liability for willful breach of the agreement.
APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, Aquila stockholders are not entitled to appraisal or
dissenters' rights in connection with the merger because:
- Aquila stock was, as of the record date for the special meeting,
designated and reported for trading on the Nasdaq National Market; and
- Aquila stock will be converted into shares of Antigenics stock, which
also will be designated and reported for trading on the Nasdaq National
Market.
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NASDAQ LISTING OF ANTIGENICS STOCK
Antigenics has agreed to file a listing notification with Nasdaq concerning
the Antigenics stock to be issued to Aquila stockholders in the merger.
DELISTING OF AQUILA STOCK
If the merger is completed, Aquila stock will cease to be quoted on the
Nasdaq National Market.
RESALES OF ANTIGENICS STOCK BY AQUILA AFFILIATES
Aquila stockholders may freely transfer the shares of Antigenics stock
received in the merger, unless they are individuals and entities who are deemed
to be "affiliates" of Aquila before the merger or affiliates of Antigenics after
the merger. Persons who may be deemed to be affiliates of Aquila or Antigenics
include individuals or entities that control, are controlled by, or are under
common control with, Antigenics and may include executive officers and directors
as well as principal stockholders. These affiliates or their brokers risk being
characterized as "underwriters" when they sell shares of Antigenics stock
received in the merger. The United States securities laws require registration
of shares sold by underwriters. An affiliate and its broker can avoid being
characterized as an underwriter and, therefore, avoid the Securities Act
registration requirements by selling shares in compliance with Rule 145 or Rule
144 under the Securities Act. Rule 145 covers sales by Aquila affiliates, and
Rule 144 covers sales by Antigenics affiliates. Each rule limits the number of
shares an affiliate can sell in a particular period of time. The merger
agreement requires Aquila to use its best efforts to cause each of its
affiliates to execute and deliver to Antigenics a written agreement to the
effect that the affiliate will not offer or sell or otherwise dispose of
Antigenics stock issued to the affiliate in the merger in violation of the
Securities Act or the related rules and regulations adopted by the SEC.
This proxy statement/prospectus does not cover resales of Antigenics stock
received by any person who may be deemed to be an affiliate of Aquila and/or
Antigenics.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act and related rules,
this merger may not be completed unless information and materials about the
companies and the merger are furnished to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and the appropriate
waiting period requirements have been satisfied. Antigenics and Aquila have made
the required filings with both agencies. At any time before or after the
completion of the merger, the Department of Justice, the Federal Trade
Commission or others could take action under the antitrust laws, including
seeking to prevent the merger, to rescind the merger or to conditionally approve
the merger upon the divestiture of substantial assets of Antigenics or Aquila.
Antigenics and Aquila cannot guarantee that a challenge to the merger on
antitrust grounds will not be made or, if a challenge is made, that it would not
be successful.
Antigenics and Aquila are not aware of any other material governmental or
regulatory requirements that must be complied with regarding the merger, other
than federal securities laws and the filing of documents describing principal
terms of the merger agreement with the secretary of state of Delaware.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements reflect the proposed merger of Antigenics and Aquila in a transaction
to be accounted for as a purchase business combination.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
2000 has been prepared as if the merger had occurred on June 30, 2000. The
unaudited pro forma condensed consolidated balance sheet combines the historical
balance sheets of Antigenics and Aquila at June 30, 2000 appearing elsewhere in
this proxy statement/prospectus, and gives effect to the unaudited pro forma
adjustments necessary to account for the merger as a purchase.
The unaudited pro forma condensed consolidated statements of operations
have been prepared as if the merger had occurred on January 1, 1999. These
unaudited pro forma condensed consolidated statements of operations combine the
historical statements of operations of Antigenics for the year ended December
31, 1999 and six months ended June 30, 2000 with the historical statements of
operations of Aquila for the year ended December 31, 1999 and the six months
ended June 30, 2000, respectively, appearing elsewhere in this proxy
statement/prospectus, and gives effect to the unaudited pro forma adjustments
necessary to account for the merger as a purchase.
The unaudited pro forma adjustments reflect estimates and are based on
preliminary purchase price allocations made by Antigenics based on available
information and certain assumptions that Antigenics believes to be reasonable.
Therefore, the amounts in the unaudited pro forma condensed consolidated
financial statements are subject to change. The unaudited pro forma condensed
consolidated financial statements are provided for illustrative purposes only
and do not purport to represent what Antigenics' results of operations or
financial position would actually have been, had the merger in fact occurred on
such dates, nor do they purport to project the results of operations or
financial position of Antigenics for any future period or date.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the audited and unaudited financial statements and
accompanying notes of Antigenics and Aquila which are included elsewhere in this
proxy statement/prospectus.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------------------
HISTORICAL HISTORICAL ADJUSTMENTS
ANTIGENICS AQUILA FOR MERGER PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and marketable
securities............................. $105,141 $ 7,330 $112,471
Receivables, net.......................... 581 1,192 1,773
Inventories............................... -- 944 944
Other current assets...................... 499 231 730
-------- --------- --------
Total current assets................... 106,221 9,697 115,918
Plant and equipment, net.................... 8,229 5,832 14,061
Intangible assets........................... -- 25 $ (25)A 7,110
7,110A
Goodwill.................................... -- -- 1,031A 1,031
Other assets................................ 741 1,084 (150)C 1,675
-------- --------- --------
Total assets........................... $115,191 $ 16,638 $139,795
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 1,037 $ 334 $ 1,371
Accrued liabilities....................... 868 1,861 $ 3,086A 5,815
Current portion, long-term debt........... 874 1,324 2,198
-------- --------- --------
Total current liabilities.............. 2,779 3,519 9,384
Long-term debt.............................. 1,702 2,030 3,732
Other liabilities........................... -- 150 (150)C --
Stockholders' equity:
Common stock.............................. 248 85 25B 273
(85)B
Additional paid-in capital................ 158,666 145,346 42,844B 201,510
(145,346)B
Deferred compensation..................... (1,378) -- (1,378)
Treasury stock............................ -- (34) 34B
Accumulated deficit....................... (46,826) (134,458) (26,900)A (73,726)
134,458B
-------- --------- --------
Total stockholders' equity............. 110,710 10,939 126,679
-------- --------- --------
Total liabilities and stockholders'
equity............................... $115,191 $ 16,638 $139,795
======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
83
<PAGE> 90
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
HISTORICAL HISTORICAL ADJUSTMENTS
ANTIGENICS AQUILA FOR MERGER PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue........................................ $ -- $ 2,068 $ 2,068
Cost and expenses:
Cost of sales................................ -- 858 858
Research and development..................... 11,845 6,643 $ 864 D 19,352
General and administration................... 7,012 3,026 10,038
-------- ------- --------
Operating loss............................ (18,857) (8,459) (28,180)
Other income (expense):
Interest income.............................. 1,014 544 1,558
Other, net................................... (281) (280) (561)
-------- ------- --------
Loss before nonrecurring charges directly
attributable to the acquisition.............. $(18,124) $(8,195) E $(27,183)
======== ======= ========
Weighted average number of common shares
outstanding, basic and diluted............... 18,144 2,482 F 20,626
======== ========
Loss before nonrecurring charges directly
attributable to the acquisition per common
share, basic and diluted..................... $ (1.00) $ (1.32)
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------------------
HISTORICAL HISTORICAL ADJUSTMENTS
ANTIGENICS AQUILA FOR MERGER PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue........................................ $ -- $ 2,677 $ 2,677
Cost and expenses:
Cost of sales................................ -- 377 377
Research and development..................... 7,834 3,477 $ 445 D 11,756
General and administration................... 3,986 1,414 5,400
-------- ------- --------
Operating loss............................ (11,820) (2,591) (14,856)
Other income (expense):
Interest income.............................. 2,815 185 3,000
Other, net................................... (204) 417 213
-------- ------- --------
Loss before nonrecurring charges directly
attributable to the acquisition.............. $ (9,209) $(1,989) E $(11,643)
======== ======= ========
Weighted average number of common shares
outstanding, basic and diluted............... 23,884 2,482 F 26,366
======== ========
Loss before nonrecurring charges directly
attributable to the acquisition per common
share, basic and diluted..................... $ (0.39) $ (0.44)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
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<PAGE> 91
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Note A.
Reflects the allocation of the purchase price to the net assets of Aquila.
Under purchase accounting, the assets and liabilities of Aquila are required to
be adjusted to their fair values. The purchase price of $44,955,000 is the sum
of (i) $39,674,000 representing 2,482,000 shares of Antigenics stock valued at
approximately $15.98 per share, which represents the average closing price per
share of Antigenics stock for the five days before and after the announcement of
the merger on August 18, 2000, to be issued at an exchange ratio of 0.2898
shares of Antigenics common stock for each of the 8,563,000 outstanding shares
of Aquila stock as of August 18, 2000, (ii) $3,195,000 representing the fair
value of Aquila options and warrants to acquire Aquila stock which will be
vested upon the consummation of the merger and exchanged for options to purchase
281,000 shares and warrants to purchase 18,000 shares of Antigenics common stock
and (iii) an estimated $2,086,000 of Antigenics' costs of the merger and the
cost to sever the employment of Aquila's president. The fair value of the Aquila
options and warrants has been calculated using an option pricing model with the
following weighted average assumptions: life of the option -- 6 years; life of
the warrant -- 5 years; dividend yield -- nil; risk-free interest rate -- 5.50%;
price volatility -- 74.0%.
The following are the pro forma adjustments made to reflect the preliminary
allocation of the purchase price to the estimated fair value of the net assets
acquired based upon available information. These adjustments are subject to
completion of valuations as of the date of consummation of the merger.
Valuations of specifically identifiable intangible assets and in-process
research and development are in progress. Consequently, the actual allocation of
the purchase price could differ from that presented below. The preliminary
valuation of in-process research and development below represents the estimated
fair value of products under development at Aquila calculated using an income
approach. This involves estimating the fair value of the in-process research and
development using the present value of the estimated after-tax cash flows
expected to be generated by the acquired in-process research and development
projects. A risk adjusted discount rate of 60% has been utilized for each
specific product. Cash inflows from projects begin primarily in 2003 and 2004,
the expected dates of product approvals. Gross margins on products are estimated
at levels consistent with industry expectations.
<TABLE>
<S> <C>
Purchase price.............................................. $ 44,955,000
Net assets of Aquila(1)..................................... (10,914,000)
------------
Subtotal............................................... 34,041,000
------------
Fair value adjustments:
Core and developed technology............................. 6,600,000
Assembled work force...................................... 510,000
Acquired in-process research and development(2)........... 26,900,000
Liabilities assumed(3).................................... (1,000,000)
------------
Subtotal............................................... 33,010,000
------------
Excess of cost over fair value of net assets acquired
(goodwill)................................................ $ 1,031,000
============
</TABLE>
---------------
(1) Reflects the historical Aquila net assets adjusted to eliminate historical
patents and purchased technology, net of $25,000.
(2) Antigenics will record an immediate write-off of acquired in-process
research and development costs at the consummation of the merger. The
write-off is not reflected in the unaudited pro forma condensed consolidated
statements of operations because it is nonrecurring in nature. This
nonrecurring charge is reflected in the unaudited pro forma condensed
consolidated balance sheet as of June 30, 2000 as an increase to accumulated
deficit.
85
<PAGE> 92
(3) Reflects the estimated additional transaction-related expenses to be
incurred by Aquila between June 30, 2000 and the date of the merger. Such
expenses have not been reflected in the unaudited pro forma condensed
consolidated statements of operations because they are nonrecurring in
nature.
Note B.
Reflects the elimination of the historical Aquila equity balances and the
issuance of Antigenics' common stock, options and warrants as consideration for
the merger.
Note C.
Reflects the elimination of deferred revenue and related other assets.
Note D.
Reflects the amount by which the pro forma amortization of core and
developed technology resulting from the merger on a straight-line basis over 10
years and the amortization of the assembled work force on a straight-line basis
over 3 years ($830,000 per year or $415,000 for six months) exceeds the
amortization of Aquila's historical intangible amortization ($69,000 and $22,000
for the year ended December 31, 1999 and six months ended June 30, 2000,
respectively) and the amortization of goodwill resulting from the merger on a
straight-line basis over 10 years ($103,000 per year and $52,000 for the six
months).
Note E.
No pro forma income tax provision (benefit) is recognized because of a loss
before income taxes in each period and the need to recognize a valuation
allowance on deferred tax assets. Given the history of incurring losses,
Antigenics believes that it is more likely than not that any deferred tax assets
will not be realized.
Note F.
The weighted average number of common shares outstanding assumes that the
shares issued in the merger (2,482,000 shares of Antigenics common stock) are
outstanding throughout each period. Options and warrants to purchase Aquila
stock will become options to purchase Antigenics stock. The pro forma loss and
weighted average number of common shares outstanding used for computing diluted
loss per common share are the same as that used for computing basic loss per
common share for each period because inclusion of the options and warrants in
the calculation would be antidilutive (i.e., would reduce the loss per common
share).
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<PAGE> 93
MANAGEMENT AFTER THE MERGER
EXECUTIVE OFFICERS AND DIRECTORS
The composition of Antigenics' management and board of directors will not
change as a result of the merger. Key staff positions within the surviving
corporation have not yet been finally determined. From time to time before the
merger, decisions may be made with respect to the management and operations of
Aquila after the merger, including its officers and managers.
Set forth below is certain information regarding Antigenics' executive
officers and directors, including their age as of August 31, 2000:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Garo Armen, Ph.D............................. 47 Chairman of the Board, Chief Executive Officer
Pramod Srivastava, Ph.D...................... 45 Director, Chairman of Scientific Advisory Board
Gamil de Chadarevian......................... 48 Vice Chairman of the Board, Executive Vice
President International
Elma Hawkins, Ph.D........................... 44 Senior Vice President
Neal Gordon, Ph.D............................ 38 Vice President of Operations
Donald Panoz(1)(2)........................... 65 Director, Honorary Chairman
Noubar Afeyan, Ph.D.......................... 38 Director
Tom Dechaene(2).............................. 41 Director
Martin Taylor(1)(2).......................... 48 Director
</TABLE>
---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The size of the board of directors is currently set at eight members.
Antigenics is currently conducting a search for a qualified candidate to fill
one vacancy on its board of directors. Until such time as a qualified candidate
is identified and elected to the board of directors in accordance with
Antigenics' by-laws, it is the intention of the company to leave one vacancy on
the board of directors.
Antigenics' certificate of incorporation provides for a classified board of
directors consisting of three classes, with each class being as nearly equal in
number as possible. The term of one class expires and their successors are
elected for a term of three years at each annual meeting of the stockholders.
Antigenics currently has designated two class I directors, Messrs. de
Chadarevian and Taylor; three class II directors, Messrs. Panoz, Afeyan and
Srivastava; and two class III directors, Messrs. Armen and Dechaene. These class
I, class II and class III directors will serve until the annual meetings of
stockholders to be held in 2003, 2001 and 2002, respectively, and until their
respective successors are duly elected and qualified, or until their earlier
resignation or removal. The board of directors appoints officers until the next
annual meeting of the board of directors.
Garo Armen, Ph.D. co-founded Antigenics in 1994 and has been the Chairman
of the board and Chief Executive Officer since inception. Dr. Armen was
previously a Senior Vice President of Research for Dean Witter Reynolds,
focusing on the chemical and pharmaceutical industries. Dr. Armen has also
served as an Associate Professor at the Merchant Marine Academy and as a
research associate at the Brookhaven National Laboratory. He currently serves as
a director of Elan Corporation, Plc. and Color Kinetics Inc. Dr. Armen received
his Ph.D. degree in physical chemistry from the City University of New York in
1979. Since 1990, Dr. Armen has been the managing general partner of Armen
Partners, L.P., an investment partnership specializing in public and private
healthcare and biotechnology investments.
Pramod Srivastava, Ph.D. co-founded Antigenics in 1994 and has served as
the Chairman of the scientific advisory board since inception. Dr. Srivastava is
the Director of the Center for Immunotherapy of Cancer and Infectious Diseases
at the University of Connecticut. Dr. Srivastava has held positions at Fordham
University and the Mount Sinai School of Medicine. He performed his postdoctoral
training at Yale University and the
87
<PAGE> 94
Sloan-Kettering Institute for Cancer Research. Dr. Srivastava serves on the
Scientific Advisory Council of the Cancer Research Institute, New York, and has
been a member of the Experimental Immunology Study Section of the National
Institutes of Health of the United States Government since 1994. Dr. Srivastava
is a past recipient of the First Independent Research Support & Transition Award
of the National Institutes of Health (1987), the Irma T. Hirschl Scholar Award
(1988), the Investigator Award of the Cancer Research Institute, New York
(1991), the Mildred Scheel Lectureship (1994), and the Sigma Tau Foundation
Speakership (1996). In 1997, he was inducted into the Roll of Honor of the
International Union against Cancer and was listed in the Who's Who in Science
and Engineering. He is among the twenty founding members of the Academy of
Cancer Immunology. Dr. Srivastava earned his Ph.D. in Biochemistry from the
Centre for Cellular and Molecular Biology, Hyderabad, India. Dr. Srivastava is a
director of Iconisys, Inc.
Gamil de Chadarevian has served as Antigenics' Vice Chairman of the Board
since 1995 and as its Executive Vice President International since 1998. Until
April of 1998, he was Managing Director of Special Projects at Alza
International, responsible for creating new business opportunities in Europe.
From 1992 to 1993, Mr. de Chadarevian was the Vice President of Corporate
Development for Corange London Limited. Prior to 1992, Mr. de Chadarevian held
positions at Pasfin Servizi Finanziara SpA, GEA Consulenza and Credit Suisse. He
is also co-founder and serves as an advisor to several private health care
companies in the United States and Europe. Mr. de Chadarevian received a Lic.
Oec. Publ. Degree from the University of Zurich in Switzerland. Mr. de
Chadarevian is the co-founder and currently the Vice Chairman of Iconisys, Inc.
and CambriaTech Holding S.A.
Elma Hawkins, Ph.D. has served as Senior Vice President of Antigenics since
August 1998. From July 1996 through August 1998, Dr. Hawkins served as the
company's Chief Operating Officer. Prior to her employment with us, Dr. Hawkins
served in a number of senior positions at Genzyme Corporation, including
Director of Corporate Development. Dr. Hawkins has also held positions in
preclinical and clinical research at Warner-Lambert/Parke-Davis and at the
Center for the Study of Drug Development at Tufts Medical School. Dr. Hawkins
holds a Ph.D. in Medicinal Chemistry from the University of Alabama and an
M.B.A. from Boston University. Dr. Hawkins is a director of Nalari Computing
Corporation.
Neal Gordon, Ph.D. has served as Antigenics' Vice President of Operations
since May 1999. Prior to this position he served as Vice President Process
Development from July 1998. Previously, he was Senior Director of Chromatography
R&D at PerSeptive Biosystems, a division of PE Corp., formerly Perkin-Elmer
Corporation. Over his ten-year career at PerSeptive, Dr. Gordon was involved in
the development and application of innovative technologies for the purification
and analysis of biopolymers, most notably the development of the BioCAD
Chromatography Workstation. Dr. Gordon received his Ph.D. in Biochemical
Engineering from the Massachusetts Institute of Technology and a Bachelors
degree in Chemical Engineering from McGill University.
Donald Panoz has been a director since 1995 and is the Honorary Chairman of
Antigenics' board of directors. In 1969, Mr. Panoz founded Elan Corporation,
Plc., a pharmaceutical research and development company. Mr. Panoz was Chairman
and Chief Executive Officer of Elan Corporation from 1969 until his retirement
in 1996. Mr. Panoz is currently a Lecturer of Pharmacy at the University of
Georgia. In January 1995, Mr. Panoz was named Honorary Irish Consul General to
Bermuda. Mr. Panoz attended Pittsburgh University and Duquesne University in
Pennsylvania.
Noubar Afeyan, Ph.D. has been a director of Antigenics since 1998. Dr.
Afeyan is Chairman and CEO of the NewcoGen Group and is also a partner at One
Liberty Ventures. Dr. Afeyan was Senior Vice President and Chief Business
Officer of PE Corp. until August 1999. Prior to its acquisition by PE Corp., Dr.
Afeyan was the Chairman and Chief Executive Officer of PerSeptive Biosystems, a
company that he founded in 1987 to develop, manufacture and market instruments
and chemical reagents used to purify, analyze and synthesize biomolecules. Dr.
Afeyan served as Chairman of the Board of ChemGenics Pharmaceuticals, Inc.
during 1996 and 1997. He is also a member of the board of directors of two
private companies. Dr. Afeyan received his undergraduate degree in Chemical
Engineering from McGill University and his Ph.D. in Biochemical Engineering from
the Massachusetts Institute of Technology.
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<PAGE> 95
Tom Dechaene has been a director of Antigenics since 1999. Mr. Dechaene is
currently the Chief Financial Officer of SurfCast, Inc. He was with Deutsche
Bank from 1991 through 1999, most recently as a director in the Principal
Investments Group within the Equity Capital Markets division. Mr. Dechaene is a
director of Color Kinetics Inc., Veridicom, Inc., Xaim, Inc. and Iconisys, Inc.
Mr. Dechaene holds a law degree from Ghent University, Belgium, a degree in
Applied Economics from the University of Antwerp and an MBA from INSEAD, France.
Martin Taylor has been a director of Antigenics since June 1999. From 1993
until 1998, Mr. Taylor held the position of Chief Executive Officer of Barclays
Bank Plc. Mr. Taylor is presently a member of the Council for Science and
Technology and, since November 1999, has been chairman of the W.H. Smith Group
Plc. In October 1999, he became an advisor to Goldman Sachs International. He
was educated at Balliol College, Oxford University.
AUDIT COMMITTEE
The audit committee makes recommendations to Antigenics' board of directors
about the selection of independent auditors, reviews the results and scope of
the audit and other services provided by its independent auditors, and evaluates
the company's internal controls. The audit committee consists of Messrs. Taylor,
Dechaene and Panoz.
COMPENSATION COMMITTEE
The compensation committee reviews and approves the compensation and
benefits for Antigenics' executive officers, administers its stock option plans
and makes recommendations to the board of directors about compensation matters.
The compensation committee consists of Messrs. Taylor and Panoz.
COMPENSATION OF ANTIGENICS' EXECUTIVE OFFICERS
The following table summarizes the compensation paid to or earned during
the fiscal years ended December 31, 1998 and 1999 by Antigenics' chief executive
officer and all of its other executive officers whose salary and bonus exceeded
$100,000. Antigenics refers to these persons as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SHARES
--------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Garo H. Armen, Ph.D., Chief
Executive Officer................. 1999 $150,000 -- 254,682 $50,000(2)
1998 $ -- -- -- --
Elma Hawkins, Ph.D., Senior Vice
President......................... 1999 $200,000 $25,000 -- --
1998 $200,000 $20,000 -- --
Neal Gordon, Ph.D., Vice President
of Operations..................... 1999 $136,282 $20,000 9,634 --
1998 $ 57,272(1) $28,750 18,924 --
</TABLE>
---------------
(1) Dr. Gordon commenced employment with Antigenics in July 1998.
(2) Represents the premium Antigenics paid for an executive split-dollar life
insurance policy. Under this policy, under some circumstances, Antigenics
would be entitled to a refund of the premiums paid.
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<PAGE> 96
1999 OPTION GRANTS
The following table contains certain information regarding stock option
grants during the twelve months ended December 31, 1999 by Antigenics to its
named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED
SECURITIES TOTAL OPTIONS EXERCISE ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
---- ---------- ------------- --------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Garo H. Armen, Ph.D.,
Chief Executive
Officer................. 254,682 83.3% 12.07 2/09-4/09 -- $4,393,291 $8,816,420
Elma Hawkins, Ph.D.,
Senior Vice President... -- -- -- -- -- -- --
Neal Gordon, Ph.D., Vice
President of
Operations.............. 9,634 3.2% 6.50 1/09 $110,791 $ 219,849 $ 387,165
</TABLE>
---------------
(1) The dollar amounts under these columns are the result of calculations at
rates set by the SEC and, therefore, are not intended to forecast possible
future appreciation, if any, in the price of the underlying common stock.
The potential realizable values are calculated on the basis of the company's
initial public offering price of $18.00 per share and assuming that the
market price appreciates from this price at the indicated rate for the
entire term of each option and that each option is exercised and sold on the
last day of its term at the appreciated price.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides information about the number of shares issued
upon option exercises by the named executive officers during the year ended
December 31, 1999, and the value realized by the named executive officers. The
table also provides information about the number and value of options held by
the named executive officers at December 31, 1999. As Antigenics stock was not
publicly traded until February 4, 2000, a readily ascertainable market value as
of December 31, 1999 is not available.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END(#) FISCAL YEAR END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Garo H. Armen, Ph.D., Chief
Executive Officer............. -- -- 134,431 171,862 $1,344,839 $1,018,585
Elma Hawkins, Ph.D., Senior Vice
President..................... -- -- 137,627 -- $2,277,283 $ --
Neal Gordon, Ph.D., Vice
President of Operations....... -- -- 3,785 24,773 $ 43,540 $ 284,991
</TABLE>
---------------
(1) Based on the difference between the option exercise price and the company's
initial public offering price of $18.00 per share of common stock.
EMPLOYMENT AND CONSULTING AGREEMENTS
Under an employment agreement dated June 1, 1998, Antigenics agreed to
employ Elma Hawkins, Ph.D. as Senior Vice President for one year at an annual
base salary of $200,000, which is subject to performance and merit based
increases. Pursuant to the agreement, Antigenics issued Dr. Hawkins options to
purchase
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<PAGE> 97
137,627 shares of the company's common stock at an exercise price of $1.45 per
share vesting over three years. The agreement is automatically renewed for
successive one-year periods unless either party terminates the agreement. If
Antigenics terminates Dr. Hawkins without cause, as that term is defined in the
agreement, she is entitled to her base salary through the end of the one-year
term during which the termination occurs. If Antigenics terminates Dr. Hawkins
either because it eliminates her position of Senior Vice President or because
there is a change in control of Antigenics, Antigenics is obligated to pay her
cash or Antigenics stock equal to one year's base salary.
In March 1995, in exchange for Dr. Pramod Srivastava's consulting services,
Antigenics agreed to pay him $1,500 per day for up to three days per month. This
obligation expires in March 2005 but will be automatically extended for
additional one-year periods unless either Antigenics or Dr. Srivastava decides
not to extend the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to Antigenics' conversion from a limited liability company in
February 2000, a compensation committee consisting of Messrs. Afeyan and Edward
Brodsky, a former director, reviewed salaries and incentive compensation for
Antigenics' employees and consultants. The compensation committee of the board
of directors of Antigenics currently consists of Messrs. Taylor and Panoz.
Although none of the compensation committee members are officers or employees of
Antigenics, each of Garo Armen, the company's chairman and chief executive
officer, and Gamil de Chadarevian, the company's vice chairman and executive
vice president international, have previously participated in compensation
discussions with the committee.
Mr. Afeyan was a member of Antigenics' compensation committee until
September 2000. Dr. Armen is a member of the board of directors of NewcoGen
Group Inc., of which Mr. Afeyan is chairman and chief executive officer.
DIRECTOR COMPENSATION
Antigenics reimburses directors for out-of-pocket and travel expenses
incurred while attending board of directors and committee meetings. Antigenics
has generally granted to each non-employee director options to purchase 17,203
shares when that director has joined its board.
EMPLOYEE BENEFIT PLANS
1999 Equity Incentive Plan
Antigenics' equity plan authorizes the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and nonqualified stock options for the purchase of an aggregate of
4,800,000 shares, subject to adjustment for stock splits and similar capital
changes, of common stock to its employees and, in the case of non-qualified
stock options, to consultants or any affiliate, as defined in the equity plan.
The board of directors has appointed the compensation committee to administer
the equity plan. As of September 13, 2000, Antigenics had options outstanding to
purchase 2,127,422 shares of common stock under the equity plan, leaving
2,672,578 shares available for issuance under future grants under the equity
plan. Antigenics' stockholders approved this plan at the May 18, 2000
stockholders' meeting.
1999 Employee Stock Purchase Plan
Antigenics has also adopted an employee stock purchase plan under which
employees may purchase shares of common stock at a discount from fair value. The
company's stockholders approved this plan at the May 18, 2000 stockholders'
meeting. The company has reserved 300,000 shares of common stock for issuance
under the purchase plan. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. The compensation committee grants rights to purchase
common stock under the purchase plan. The compensation committee also determines
the frequency and duration of individual offerings under the plan and the dates
when employees may purchase stock. Eligible employees participate voluntarily
and may withdraw from any offering at any
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<PAGE> 98
time before they purchase stock. Participation terminates automatically upon
termination of employment. The purchase price per share of common stock in an
offering will not be less than 85% of the lesser of its fair value at the
beginning of the offering period or on the applicable exercise date and
employees may pay through payroll deductions, periodic lump sum payments or a
combination of both. The purchase plan terminates on November 15, 2009. As of
June 30, 2000, Antigenics has issued no shares of common stock under the
purchase plan.
401(k) Plan
Antigenics sponsors a 401(k) plan for all of its employees. Employees are
eligible to participate after they have completed one year of service with us.
Participants may contribute up to 15% of their current compensation, with a
maximum of $10,500 in 2000. Each participant is fully vested in his or her
salary contributions and related earnings and losses. Antigenics matches 100% of
the participant's contribution and these matching contributions vest over four
years. Antigenics has discretion to change that amount at any time.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From its inception until August 2000, Antigenics sub-leased office space at
cost from GHA Management Corporation which is wholly owned by Garo Armen, Ph.D.
Dr. Armen is the company's chairman and chief executive officer, and Antigenics
used the office space for its corporate headquarters. The company incurred an
expense of approximately $143,000, $211,000 and $281,000 for the years ended
December 31, 1997, 1998 and 1999, respectively, and $184,000 for the six months
ended June 30, 2000, in connection with that lease, which represented the cost
incurred by GHA management. Antigenics believes that the terms of the sub-lease
were at least as favorable as terms it could have obtained in an arm's length
transaction with an independent third party. GHA Management assigned its lease
with the RCPI Trust to Antigenics in August 2000 and Antigenics will continue to
use the office space for its corporate headquarters. As of June 30, 2000,
Antigenics had outstanding a letter of credit for the benefit of GHA Management
Corporation in connection with this lease in the amount of approximately
$78,000. The letter of credit expires in January 2001. In addition, during 1997
the company obtained office services from Armen Capital Management Corp., which
is wholly owned by Dr. Armen, for $415,000.
On May 18, 2000, Antigenics became a limited partner of the Applied Genomic
Technology Capital Fund, L.P., referred to as the Capital Fund, and committed to
invest $3,000,000 in the Capital Fund. As of June 30, 2000, Antigenics has
invested $300,000 in the Capital Fund and future contributions to the Capital
Fund will be made as authorized by the fund's general partner. The general
partner of the Capital Fund is AGTC Partners, L.P. and NewcoGen Group Inc. is
the general partner of AGTC Partners, L.P. Noubar Afeyan, Ph.D., who is one of
Antigenics' directors, is the chairman and chief executive officer of NewcoGen
Group Inc. and is also a principal of the Capital Fund. In addition, Garo H.
Armen, Ph.D., Antigenics' chief executive officer and one of its directors, is a
director of NewcoGen Group Inc.
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<PAGE> 99
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
OWNERSHIP OF ANTIGENICS STOCK
The following table sets forth certain information with respect to the
beneficial ownership of Antigenics stock as of September 27, 2000:
- each person, or group of affiliated persons, who is known by Antigenics
to beneficially own more than 5% of the common stock;
- each of its directors;
- each of its named executive officers; and
- all of its directors and current executive officers as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investing power with respect to all the shares of common stock
beneficially owned by them, subject to community property laws, where
applicable.
The "Number of Shares Beneficially Owned" column below is based on an
assumed 24,808,035 shares of Antigenics stock outstanding as of September 27,
2000. For purposes of the table below, Antigenics deems shares of Antigenics
stock subject to options that are currently exercisable or exercisable within 60
days of September 27, 2000, to be outstanding and to be beneficially owned by
the person holding the options for the purpose of computing the percentage
ownership of the person, but does not treat them as outstanding for the purpose
of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF TOTAL
------------------- ------------------ ----------
<S> <C> <C>
Antigenics Holdings L.L.C. ................................. 11,154,274(2) 45.0%
Garo H. Armen, Ph.D......................................... 196,717(3) *
Pramod Srivastava, Ph.D..................................... 182,477(4) *
Gamil de Chadarevian........................................ 1,649,290(5) 6.6%
Elma Hawkins, Ph.D.......................................... 144,866(6) *
Neal Gordon, Ph.D........................................... 10,495(7) *
Donald Panoz................................................ 270,612(8) 1.1%
Noubar Afeyan, Ph.D......................................... 169,291(9) *
Tom Dechaene................................................ -- *
Martin Taylor............................................... 54,636(10) *
All current executive officers and directors as a group (9
persons).................................................. 2,678,384(11) 10.9%
</TABLE>
---------------
* Indicates less than 1%
(1) The address of each stockholder is Antigenics Inc., 630 Fifth Avenue, New
York, New York 10111.
(2) Founder Holdings Inc. owns about 79% of the outstanding members equity of
Antigenics Holdings. Antigenics Holdings owns 45% of Antigenics stock. Drs.
Armen and Srivastava are managers of Antigenics Holdings. Dr. Armen is a
director of Founder Holdings. The following individuals beneficially own the
indicated percentages of Founder Holdings outstanding common stock:
<TABLE>
<CAPTION>
INDIVIDUAL PERCENTAGE
---------- ----------
<S> <C>
Garo Armen.................................................. 43.1%
Pramod Srivastava........................................... 24.2%
Noubar Afeyan............................................... 1.1%
Lawrence Feinberg........................................... 22.1%
</TABLE>
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<PAGE> 100
The following individuals own the indicated percentage interests in
Antigenics Holdings:
<TABLE>
<CAPTION>
INDIVIDUAL PERCENTAGE
---------- ----------
<S> <C>
Garo Armen.................................................. 13.6%
Pramod Srivastava........................................... 6.2%
</TABLE>
(3) Includes 191,717 shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000.
(4) Consists solely of shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000.
(5) Includes 144,802 shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000.
(6) Includes 143,866 shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000.
(7) Includes 9,495 shares of Antigenics stock issuable upon exercise of options
currently exercisable or exercisable within 60 days of September 27, 2000
and 1,000 shares of Antigenics stock owned by Mr. Gordon's wife.
(8) Consists of (a) 17,203 shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000 and (b) 253,409 shares of Antigenics stock held by Fountainhead
Holdings Ltd., all of the capital stock of which is held by trusts, the
beneficiaries of which are the children and grandchildren of Mr. Panoz.
(9) Includes 164,291 shares of Antigenics stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of September
27, 2000.
(10) Includes 17,478 shares of Antigenics stock issuable upon exercise of
options and a warrant currently exercisable or exercisable within 60 days
of September 27, 2000.
(11) Includes 871,329 shares of Antigenics stock issuable upon exercise of
options and a warrant currently exercisable or exercisable within 60 days
of September 27, 2000. See footnotes (3), (4), (5), (6), (7), (8), (9) and
(10).
AQUILA STOCK OWNERSHIP
The following table sets forth certain information with respect to the
beneficial ownership of Aquila stock as of September 13, 2000:
- each person, or group of affiliated persons, who is known by Aquila to
beneficially own more than 5% of the common stock;
- each of its directors;
- each of its named executive officers; and
- all of its directors and current executive officers as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investing power with respect to all the shares of common stock
beneficially owned by them, subject to community property laws, where
applicable.
The "Number of Shares Beneficially Owned" column below is based on an
assumed 8,630,200 shares of Aquila stock outstanding as of September 27, 2000.
For purposes of the table below, Aquila deems shares of Aquila stock subject to
options that are currently exercisable or exercisable within 60 days of
September 13, 2000, to be outstanding and to be beneficially owned by the person
holding the options for the purpose of computing the percentage ownership of the
person, but does not treat them as outstanding for the purpose of computing the
percentage ownership of any other person.
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<PAGE> 101
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED TOTAL
---------------- ------------------ -------------
<S> <C> <C>
Alison Taunton-Rigby Ph.D.+................................. 295,499(1) 3.4%
Jeffrey T. Beaver+.......................................... 65,422(2) *
Robert J. Carpenter+........................................ 119,658(3) 1.4%
Keith J. Dorrington Ph.D.+.................................. 17,500(4) *
Elliott D. Hillback, Jr.+................................... 20,000(5) *
Gerald A. Beltz, Ph.D.+..................................... 91,721(6) 1%
Deborah B. Grabbe+.......................................... 90,345(7) 1%
Charlotte A. Kensil, Ph.D.+................................. 19,270(8) *
Melissa Packard+............................................ 1,094(9) *
Directors and Executive Officers as a Group................. 720,509(10) 8.3%
State of Wisconsin Investment Board
State of Wisconsin
121 E. Wilson Street
Madison, Wisconsin 53707................................ 1,580,741(11) 18.3%
</TABLE>
---------------
* Less than 1%
+ The address of each of these stockholders is Aquila Biopharmaceuticals,
Inc., 175 Crossing Boulevard, Framingham, Massachusetts 01702
(1) Includes 277,792 Aquila shares which Dr. Taunton-Rigby may acquire upon the
exercise of options.
(2) Includes 132 Aquila shares held as custodian for one daughter and 132
Aquila shares held as custodian for another daughter. Mr. Beaver disclaims
beneficial ownership of the Aquila shares held as custodian for his
daughters. Includes 54,681 Aquila shares which Mr. Beaver may acquire upon
the exercise of options.
(3) Includes 7,500 Aquila shares which Mr. Carpenter may acquire upon the
exercise of options.
(4) Includes 17,500 Aquila shares which Dr. Dorrington may acquire upon the
exercise of options.
(5) Includes 20,000 Aquila shares which Mr. Hillback may acquire upon the
exercise of options.
(6) Includes 91,666 Aquila shares which Dr. Beltz may acquire upon the exercise
of options.
(7) Includes 86,250 Aquila shares which Ms. Grabbe may acquire upon the
exercise of options.
(8) Includes 19,270 Aquila shares which Dr. Kensil may acquire upon the
exercise of options.
(9) Includes 1,094 Aquila shares which Ms. Packard may acquire upon the
exercise of options.
(10) See Footnotes Numbers 1-9.
(11) Based solely upon information contained in Schedule 13G filed with the
Securities and Exchange Commission on April 6, 2000.
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<PAGE> 102
DESCRIPTION OF ANTIGENICS CAPITAL STOCK
Antigenics' authorized capital stock consists of 100,000,000 shares of
common stock, $0.01 par value per share, and 1,000,000 shares of preferred
stock, $0.01 par value per share. On September 13, 2000, there were:
- 24,808,035 shares of common stock outstanding;
- options to purchase 2,127,422 shares of common stock outstanding, of
which options to purchase 1,417,037 shares are exercisable;
- warrants to purchase 274,722 shares of common stock outstanding, all of
which are currently exercisable; and
- no shares of preferred stock outstanding.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available for payment of
dividends, as the board may from time to time determine. Each stockholder is
entitled to one vote for each share of common stock held on all matters
submitted to a vote of stockholders. Antigenics' certificate of incorporation
does not provide for cumulative voting for the election of directors, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Each
outstanding share of common stock is fully paid and nonassessable.
PREFERRED STOCK
Pursuant to Antigenics' certificate of incorporation, the company's board
of directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences, privileges and relative participating,
optional or special rights as well as the qualifications, limitations or
restrictions of those shares, including dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences, any or all of
which may be greater than the rights of the common stock. Antigenics' board of
directors, without stockholder approval, is able to issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Antigenics could therefore
issue preferred stock quickly with terms calculated to delay or prevent a change
in control or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock, and may adversely affect the voting and other rights of the
holders of common stock. At present, Antigenics has no shares of preferred stock
outstanding.
WARRANTS
As of September 13, 2000, Antigenics has warrants to acquire an aggregate
of 274,722 shares of Antigenics stock. The per share exercise price for the
warrants is $13.96. If not previously exercised, each warrant will expire on
November 29, 2002. Holders may not transfer the warrants without Antigenics'
consent.
ANTI-TAKEOVER PROVISIONS
Delaware Law
Section 203 of the Delaware General Corporation Law is applicable to
corporate takeovers of Delaware corporations. Subject to exceptions enumerated
in Section 203, Section 203 provides that a corporation shall not engage in any
business combination with any "interested stockholder" for a three-year period
following the date that the stockholder becomes an interested stockholder
unless:
- prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
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<PAGE> 103
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, though some shares may be excluded from the
calculation; and
- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and by the affirmative votes of
holders of at least two-thirds of the outstanding voting stock that is
not owned by the interested stockholder.
Except as specified in Section 203, an interested stockholder is generally
defined to include any person who, together with any affiliates or associates of
that person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation, any time within three years immediately prior to the
relevant date. Under some circumstances, Section 203 makes it more difficult for
an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may elect not to
be governed by this section, by adopting an amendment to Antigenics' certificate
of incorporation or by-laws, effective 12 months after adoption. Antigenics'
certificate of incorporation and by-laws do not exclude the company from the
restrictions imposed under Section 203. Antigenics expects that the provisions
of Section 203 may encourage companies interested in acquiring it to negotiate
in advance with Antigenics' board of directors. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control of
Antigenics, which could depress the market price of Antigenics stock and which
could deprive stockholders of opportunities to realize a premium on shares of
Antigenics stock held by them.
Charter and By-Law Provisions
Antigenics' certificate of incorporation and by-laws contain provisions
that could discourage potential takeover attempts and make more difficult
attempts by stockholders to change management. The certificate of incorporation
provides that stockholders may not take action by written consent but may only
act at a stockholders' meeting, and that only Antigenics' president or a
majority of its board may call special meetings of the stockholders. Antigenics'
by-laws also require that stockholders provide advance notice of business to be
brought by a stockholder before the annual meeting. Antigenics' certificate of
incorporation includes provisions classifying the board of directors into three
classes with staggered three-year terms. In addition, the company's directors
may only be removed from office for cause. Under Antigenics' certificate of
incorporation and by-laws, the board of directors may enlarge the size of the
board and fill any vacancies on the board. The by-laws provide that stockholders
may not make nominations for directors at any annual or special meeting unless
the stockholder intending to make a nomination notifies Antigenics of the
stockholder's intention a specified period in advance and furnishes certain
information.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Antigenics stock is American Stock
Transfer & Trust Company. Its telephone number is (800) 937-5449.
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<PAGE> 104
COMPARISON OF RIGHTS OF ANTIGENICS AND AQUILA STOCKHOLDERS
Antigenics and Aquila are Delaware corporations subject to the provisions
of the Delaware General Corporation Law or DGCL. Upon completion of the merger,
Aquila stockholders, whose rights are currently governed by Aquila's charter,
by-laws and the DGCL, will become stockholders of Antigenics and their rights
will be governed by Antigenics' charter, by-laws and the DGCL.
The following description summarizes the material differences which may
affect the rights of holders of Antigenics stock and Aquila stock. This is not a
complete statement of all those differences, or a complete description of the
specific provisions referred to in this summary. The identification of specific
differences is not intended to indicate that other equally or more significant
differences do not exist. For additional information regarding the specific
rights of holders of Antigenics capital stock, see "Description of Antigenics
Capital Stock" on pages 96-97. You should read carefully the relevant provisions
of the DGCL, the charter and by-laws of Antigenics and the charter and by-laws
of Aquila.
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
CORPORATE The rights of Antigenics The rights of Aquila
GOVERNANCE stockholders are governed by stockholders are currently
Delaware law and Antigenics' governed by Delaware law and
charter and by-laws. Upon Aquila's charter and by- laws.
completion of the merger, the Upon completion of the merger,
rights of Antigenics the rights of Aquila stock-
stockholders will continue to holders who become Antigenics
be governed by Delaware law and stockholders in the merger will
Antigenics' charter and be governed by Delaware law and
by-laws. Antigenics' charter and
by-laws.
AUTHORIZED The authorized capital of The authorized capital stock of
CAPITAL STOCK Antigenics is set forth under Aquila consists of 30,500,000
the "Description of Antigenics shares of common stock, $.01
Capital Stock" above. par value per share, and
5,000,000 shares of preferred
With respect to Antigenics' stock, $.01 par value per
preferred stock, the Antigenics share.
board is authorized, without
stockholder approval, to issue With respect to Aquila's
shares of preferred stock in preferred stock, the Aquila
one or more series and to board is authorized, without
determine the preferences, stockholder approval, to issue
voting powers, qualifications, shares of preferred stock in
and special or relative rights one or more series. The Aquila
or privileges of that series. board may determine or alter
the rights, preferences,
privileges and restrictions
granted to or imposed upon
unissued series of preferred
stock.
DIVIDENDS Dividends are payable on Dividends are payable on Aquila
Antigenics stock only when, as stock only when, as and if
and if declared by Antigenics' declared by Aquila's board of
board of directors, out of directors, out of funds legally
funds legally available for available for distribution.
distribution. Under the DGCL, a Under the DGCL, a corporation
corporation may pay dividends may pay dividends out of
out of surplus or net profits surplus or net profits for the
for the current or preceding current or preceding fiscal
fiscal year, provided that the year, provided that the capital
capital of the corporation is of the corporation is not less
not less than the aggregate than the aggregate liqui-
liquidation preference of dation preference of the
corpora-
</TABLE>
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<PAGE> 105
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
the corporation's outstanding tion's outstanding stock having
stock having a preference upon a preference upon distribution
distribution of assets. of assets.
LIQUIDATION Upon liquidation or Subject to the rights of any
RIGHTS dissolution, after payment has preferred stock, upon
been made to any holder of liquidation, dissolution or
preferred stock of the full winding up of Aquila, the
amount to which they are holders of Aquila common stock
entitled, the holders of are entitled to receive the net
Antigenics stock are entitled assets of the corporation
to share ratably according to available for distribution on a
the number of shares of common pro rata basis.
stock held by them in all
remaining assets of the company
available for distribution to
its stockholders.
VOTING RIGHTS Stockholders of Antigenics Aquila stockholders vote
stock vote together as one together as one class on all
class on all matters on which matters that common
common stockholders generally stockholders are entitled to
are entitled to vote. Holders vote. Holders of Aquila stock
of Antigenics stock are are entitled to one vote for
entitled to one vote for each each share of stock held at any
share of stock held at any meeting of stockholders.
meeting of stockholders.
CUMULATIVE Neither Antigenics' charter nor Neither Aquila's charter nor
VOTING FOR its by-laws provide for its by- laws provide for
ELECTION OF cumulative voting in the cumulative voting in the
DIRECTORS election of directors, which election of directors, which
means that the holders of a means that the holders of a
majority of the shares voted majority of the shares voted
can elect all of the directors can elect all of the directors
then outstanding for election. then nominated for election.
MEETINGS OF A special meeting of A special meeting of
STOCKHOLDERS; stockholders may be called only stockholders may be called at
NOTICE by the president or by a any time by the board of
majority of the board of directors pursuant to a
directors. resolution approved by the
affirmative vote of a majority
A written notice stating the of the directors then in
time, place and purpose of the office, the chairman of the
meeting shall be given not less board, the president or by the
than ten nor more than 60 days holders of 66 2/3% of the
before the meeting to each outstanding stock entitled to
stockholder entitled to notice. vote in the election of
directors.
A written notice stating the
time, place and purpose of the
meeting shall be given at least
10 but not more than 60 days
before the date of the meeting
to each stockholder entitled to
vote at the meeting.
</TABLE>
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<PAGE> 106
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
STOCKHOLDER The DGCL permits stockholders The DGCL permits stockholders
ACTION BY to take action without a to take action without a
WRITTEN meeting, prior notice or vote, meeting, prior notice or vote,
CONSENT if they do so by written if they do so by written
consent. Antigenics' charter, consent. Aquila's charter,
however, provides that however, provides that
stockholder actions must be stockholder actions must be
taken only at a duly called taken only at a duly called
annual or special meeting and annual or special meeting and
not by written consent. not by written consent.
STOCKHOLDER Antigenics' by-laws provide Aquila's by-laws provide that
PROPOSALS that for a stockholder proposal for a stockholder proposal to
to be brought properly before be properly brought before an
an annual meeting, the annual meeting, the stockholder
stockholder must notify must notify Aquila of the
Antigenics of the proposal 75 proposal in writing not less
days before the anniversary than 60 days nor more than 150
date of the prior years' annual days before the meeting. If,
meeting. This, however, does however, Aquila gives less than
not apply if there was no 70 days' prior public notice of
annual meeting in the prior the meeting, the stockholder
year or if the date of the must deliver notice of the
current annual meeting is more proposal within 10 days of the
than 30 days from the earlier of the date on which
anniversary date of the prior notice of the meeting is mailed
year's annual meeting. or the date Aquila makes public
disclosure of the meeting.
QUORUM FOR The holders of a majority in The holders of a majority of
MEETING OF interest of all outstanding the issued and outstanding
STOCKHOLDERS stock entitled to vote at a shares of Aquila stock entitled
Antigenics stockholder meeting, to vote at a meeting, present
present in person or repre- in person or represented by
sented by proxy, constitutes a proxy, constitutes a quorum for
quorum for transacting business transacting business at a
at a meeting. meeting.
STOCKHOLDER Under the DGCL and Antigenics' Under the DGCL and Aquila's by-
INSPECTION by-laws, any stockholder has laws, any stockholder has the
RIGHTS the right to inspect the right to inspect the company's
company's stock ledger, stock ledger, stockholder list,
stockholder list, and other and other books and records at
books and records for a purpose least ten days before every
reasonably related to the meeting of stockholders for a
person's interest as a purpose reasonably related to
stockholder. the person's interest as a
stockholder.
NUMBER OF Antigenics currently has seven Aquila currently has five
DIRECTORS directors. Antigenics' by-laws directors. Aquila's by-laws
provide that the board of provide that the board of
directors shall be at least directors shall be at least
one. The number of directors is one. The number of directors is
fixed by the board and may be fixed by the board and may be
enlarged at any time by a vote enlarged at any time by a vote
of the majority of directors. of the majority of directors.
CLASSIFICATION Antigenics' charter provides Aquila's charter provides that
OF BOARD OF that the board of directors the board of directors will
DIRECTORS will consist of three classes, consist of three classes, with
with each class being each class being
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
as equal in size as possible. as equal in size as possible.
Each class of directors is Each class of directors is
elected for a three-year term elected for a three-year term
at alternating annual meetings at alternating annual meetings
of the stockholders. of the stockholders.
REMOVAL OF Directors may be removed only Directors may be removed with
DIRECTORS for cause and by a majority or without cause, by the
vote of stockholders. Under affirmative vote of at least
Antigenics' by-laws, vacancies 66 2/3% of the outstanding
on the board may be filled by stock of Aquila or at least two
the board. Vacancies resulting thirds of the directors then in
from the enlargement of the office. Under Aquila's char-
board may be filled by the ter, vacancies on the Board,
directors then in office, whether resulting from increase
though less than a quorum. in the board, death,
resignation or removal, may be
filled only by the affirmative
vote of a majority of the
remaining directors then in
office, though less than a
quorum.
LIMITATION ON Antigenics' charter provides Aquila's charter provides that
PERSONAL that directors shall not be directors shall not be
LIABILITY OF personally liable to Antigenics personally liable to Aquila or
DIRECTORS AND or its stockholders for its stockholders for monetary
OFFICERS monetary damages for breaching damages for breaching their
their fiduciary duties ex- fiduciary duties except for:
cept:
- breaches of their duty of
- breaches of their duty of loyalty to Aquila or its
loyalty to Antigenics or its stockholders;
stockholders;
- acts or omissions not in good
- acts or omissions not in good faith or involving
faith or involving intentional misconduct or a
intentional misconduct or a knowing violation of law;
knowing violation of law;
- unlawful payment of dividends
- unlawful payment of dividends or unlawful repurchases of
or unlawful repurchases of stock;
stock; or
- transactions from which the
- transactions from which the directors derived improper
directors derived improper personal benefit; or
personal benefit.
- acts or transactions set
forth in order confirming the
Plan of Reorganization of
CBC.
INDEMNIFICATION Delaware law permits and Delaware law permits and
OF DIRECTORS Antigenics' by-laws provide Aquila's by-laws provide for,
AND OFFICERS for, indemnification of indemnification of directors,
directors and officers for officers, employees and agents
expenses, judgments or for expenses, judgments or
settlements actually and settlements actually and
reasonably incurred by them in reasonably incurred by them in
legal proceedings if they acted legal proceedings if they acted
in good faith and in a manner in good faith and in a manner
they reasonably believed to be they reasonably believed to be
in Antigenics' best interests. in or not opposed to Aquila's
best interests. Whether in-
</TABLE>
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<PAGE> 108
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
Antigenics' by-laws provide demnification is proper shall
that indemnification is a be determined:
contract right for the benefit
of the directors, officers and - by a majority vote of a
other persons entitled to be quorum of disinterested
indemnified. directors;
The DGCL does not permit a - if a quorum of disinterested
corporation to indemnify directors so directs, by
persons against judgments in independent legal counsel in
actions brought by or in the a written opinion; or
right of the corporation.
- by the stockholders.
The DGCL does not permit a
corporation to indemnify
persons against judgments in
actions brought by or in the
right of the corporation.
AMENDMENTS TO Under the DGCL, a charter may Under the DGCL, a charter may
CHARTER be amended by the affirmative be amended by the affirmative
vote of a majority of the vote of a majority of the
outstanding stock and a outstanding stock and a
majority of the outstanding majority of the outstanding
shares of each class entitled shares of each class entitled
to vote as a class. Antigenics' to vote as a class. Aquila's
charter provides for amendments charter provides for amendments
to be made in the manner to be made only upon approval
prescribed by Delaware law. of a majority of directors then
in office and then by the
affirmative vote of the holders
of at least 66 2/3% of the
outstanding stock entitled to
vote for the election of
directors.
AMENDMENTS TO Antigenics' by-laws may be Aquila's by-laws may be altered
BY-LAWS altered or repealed, and new or repealed and new by-laws may
by-laws may be made by the be made by the board of
board of directors. Antigenics' directors.
by-laws may also be altered,
amended or repealed, and new
by-laws may be adopted, by the
affirmative vote of the holders
of a majority of votes properly
cast at any annual or special
meeting of stockholders. In the
case of a special meeting, a
description of the alteration,
amendment, repeal or adoption
must be included in the notice
of the special meeting.
ANTI-TAKEOVER Section 203 of the DGCL Section 203 of the DGCL
PROVISIONS prohibits a Delaware prohibits a Delaware
corporation from engaging in a corporation from engaging in a
"business combination" with a "business combination" with a
person owning 15% or more of person owning 15% or more of
the corporation's voting stock the corporation's voting stock
(an "interested stockholder") (an "interested stockholder")
for for
</TABLE>
102
<PAGE> 109
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
three years following the time three years following the time
that person became an that person became an
interested stockholder, unless: interested stockholder, unless
the:
- the board, before the time
the person became an interested - the board, before the time
stockholder, approved either the person became an interested
the business combination or stockholder, approved either
the transaction that resulted the business combination or
in the person becoming an the transaction that resulted
interested stockholder; in the person becoming an
interested stockholder;
- the person became an
interested stockholder and 85% - the person became an
owner of the voting stock in interested stockholder and 85%
the transaction, excluding owner of the voting stock in
shares owned by directors and the transaction, excluding
officers and shares owned by shares owned by directors and
some employee stock plans; or officers and shares owned by
some employee stock plans; or
- the combination transaction
is approved by the board and - the combination transaction
authorized by the affirmative is approved by the board and
vote of at least two-thirds authorized by the affirmative
of the outstanding voting vote of at least two-thirds
stock not owned by the of the outstanding voting
interested stockholder. stock not owned by the
interested stockholder.
A Delaware corporation can
elect in its charter or by-laws A Delaware corporation can
not to be governed by Section elect in its charter or by-laws
203. Antigenics has not made not to be governed by Section
that election. 203. Aquila has not made that
election.
STOCKHOLDER Antigenics does not have a Aquila has a shareholder rights
RIGHTS PLAN stockholders rights plan. agreement under which each out-
standing share of Aquila stock
entitles the holder to purchase
one share of Aquila common
stock at a purchase price of
$50.00 per share, as adjusted.
The rights are not currently
exercisable but will become
exercisable upon the earlier
of:
- 10 days following the public
announcement that a person or
group has acquired 15% or
more of the outstanding
shares of Aquila stock, or
- 10 days after announcement of
a tender or exchange offer
which would result in the
offeror owning 15% or more of
Aquila stock.
</TABLE>
103
<PAGE> 110
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
When exercisable, each right
permits its holder to buy that
number of shares of Aquila
stock equal in value to twice
the right's purchase price. The
acquirer who triggers the
rights cannot exercise or
transfer its rights. If Aquila
is acquired in a merger or
other business transaction, or
Aquila sells 50% or more of its
assets, each outstanding right
will become a right to buy that
number of shares of the
acquiring company's common
stock equal in value to twice
the right's purchase price.
The rights will expire on June
2, 2008 unless redeemed. The
Aquila board may redeem the
rights at $0.01 per right any
time before the tenth day after
the 15% or more acquisition.
The Aquila board has amended
the rights plan to make it
inapplicable to this merger.
PROVISIONS The DGCL generally requires The DGCL generally requires
RELATING TO that a merger and that a merger and
SOME BUSINESS consolidation, or sale, lease consolidation, or sale, lease
COMBINATIONS or exchange of all or substan- or exchange of all or substan-
tially all of a corporation's tially all of a corporation's
property and assets be approved property and assets be approved
by the directors and by a by the directors and by a
majority of the outstanding majority of the outstanding
stock. A corporation's charter stock. A corporation's charter
may require a greater vote. may require a greater vote.
Antigenics' charter does not Aquila's charter does not
provide for a greater vote. provide for a greater vote.
Under the DGCL, a surviving Under the DGCL, a surviving
corporation need not obtain corporation need not obtain
stockholder approval for a stockholder approval for a
merger if: merger if:
- each share of the surviving - each share of the surviving
corporation's stock outstanding corporation's stock outstanding
prior to the merger remains prior to the merger remains
outstanding in identical form outstanding in identical form
after the merger; after the merger;
- the merger agreement does not - the merger agreement does not
amend the charter of the amend the charter of the
surviving corporation; and surviving corporation; and
- either no shares of common - either no shares of common
stock of the surviving stock of the surviving
corporation are to be issued corporation are to be issued
or delivered in or delivered in
</TABLE>
104
<PAGE> 111
<TABLE>
<CAPTION>
ANTIGENICS STOCKHOLDER RIGHTS AQUILA STOCKHOLDER RIGHTS
----------------------------- -------------------------
<S> <C> <C>
the merger or, if common the merger or, if common
stock will be issued or stock will be issued or
delivered, it will not delivered, it will not
increase the number of shares increase the number of shares
of common stock outstanding of common stock outstanding
prior to the merger by more prior to the merger by more
than 20%. than 20%.
APPRAISAL OR Under Delaware law, the right Under Delaware law, the right
DISSENTERS' of dissenting stockholders to of dissenting stockholders to
RIGHTS obtain the fair value for their obtain the fair value for their
shares is available in shares is available in
connection with some mergers or connection with some mergers or
consolidations. Unless consolidations. Unless
otherwise provided in the otherwise provided in the
corporate charter, appraisal corporate charter, appraisal
rights are not available to rights are not available to
stockholders when the stockholders when the
corporation will be the corporation will be the
surviving corporation in a surviving corporation in a
merger and no vote of its merger and no vote of its
stockholders is required to stockholders is required to
approve the merger. In approve the merger. In
addition, no appraisal rights addition, no appraisal rights
are available to holders of are available to holders of
shares of any class of stock shares of any class of stock
which is either: which is either:
- listed on a national - listed on a national
securities exchange or securities exchange or
designated as a national designated as a national
market system security on an market system security on an
interdealer quotation system interdealer quotation system
by the NASD, or by the NASD, or
- held of record by more than - held of record by more than
2,000 stockholders, 2,000 stockholders,
unless those stockholders are unless those stockholders are
required by the terms of the required by the terms of the
merger to accept anything other merger to accept anything other
than (1) shares of stock of the than (1) shares of stock of the
surviving corporation, (2) surviving corporation, (2)
shares of stock of another shares of stock of another
corporation which, on the corporation which, on the
effective date of the merger or effective date of the merger or
consolidation, are of the kind consolidation, are of the kind
described above, (3) cash described above, (3) cash
instead of fractional shares of instead of fractional shares of
stock, or (4) any combination stock, or (4) any combination
of the consideration set forth of the consideration set forth
in (1) through (3). in (1) through (3). Since
Aquila stock is listed on the
Nasdaq National Market and
stockholders will receive
shares of Antigenics common
stock in the merger, Aquila
stockholders are not entitled
to appraisal rights.
</TABLE>
105
<PAGE> 112
LEGAL MATTERS
Palmer & Dodge LLP, Boston, Massachusetts will pass upon the validity of
the Antigenics stock offered by this proxy statement/prospectus and has passed
upon the tax treatment of the merger for Antigenics. Michael Lytton, a partner
at Palmer & Dodge LLP, is secretary of Antigenics.
Bowditch & Dewey, LLP, Worcester, Massachusetts has passed upon the tax
treatment of the merger for Aquila.
EXPERTS
Antigenics has included in this proxy statement/prospectus, and in the
registration statement of which this proxy statement/prospectus forms a part,
the financial statements of Antigenics Inc. as of December 31, 1998 and 1999,
and for each of the years in the three-year period ended December 31, 1999, and
for the period from March 31, 1994 (date of inception) to December 31, 1999, in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this proxy statement/prospectus, and upon the authority
of that firm as experts in accounting and auditing.
The financial statements of Aquila Biopharmaceuticals, Inc. as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this proxy statement/prospectus, and registration statement
on Form S-4 of which this proxy statement/prospectus forms a part, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
FUTURE AQUILA STOCKHOLDER PROPOSALS
Assuming the timing for completing the merger contemplated in the merger
agreement requires Aquila to hold an annual meeting in 2001, proposals of
stockholders intended to be presented at the meeting must be received by Aquila
at its offices at 175 Crossing Boulevard, Framingham, Massachusetts 01702,
Attention: President, not later than 60 days prior to the meeting. As noted in
Aquila's proxy statement for Aquila's 2000 annual meeting, the deadline to have
stockholder proposals included in the proxy statement for the 2001 Aquila annual
meeting is December 9, 2000. Proposals must comply with the SEC's proxy
regulations relating to stockholder proposals in order to be considered for
inclusion in Aquila's proxy materials.
OTHER MATTERS
Neither Antigenics nor Aquila presently intends to bring before the Aquila
special meeting any matters other than those specified in the notice
accompanying this proxy statement/prospectus, and neither Antigenics nor Aquila
has any knowledge of any other matters which may be brought up by other persons.
However, if any other matters come before the Aquila special meeting or any
adjournments of the meeting, the persons named in the enclosed form of proxy,
including any substitutes, will use their best judgment to vote the proxies.
WHERE YOU CAN FIND MORE INFORMATION
Antigenics and Aquila file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other
106
<PAGE> 113
information that Antigenics and Aquila file with the SEC at the SEC's public
reference rooms at the following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, 7 World Trade Center Citicorp Center
N.W Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and
other information concerning Antigenics and Aquila may also be inspected at the
offices of The Nasdaq Stock Market, which is located at 1735 K Street, N.W.,
Washington, D.C. 20006.
Antigenics filed a registration statement on Form S-4 to register with the
SEC the Antigenics stock to be issued to Aquila stockholders in the merger. This
proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of Antigenics in addition to being a proxy statement of
Aquila. As allowed by SEC rules, this proxy statement/prospectus does not
contain all the information you can find in Antigenics' registration statement
or the exhibits to the registration statement.
Antigenics has supplied the information contained or incorporated by
reference in this proxy statement/ prospectus relating to Antigenics, and Aquila
has supplied the information relating to Aquila.
You should rely only on the information contained or incorporated by
reference in this proxy statement/ prospectus. We have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement/prospectus. This proxy statement/prospectus is dated September
28, 2000. You should not assume that the information contained in this proxy
statement/ prospectus is accurate as of any date other than that date. Neither
the mailing of this proxy statement/prospectus to stockholders nor the issuance
of Antigenics stock in the merger creates any implication to the contrary.
107
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANTIGENICS INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and for the period from March 31, 1994
(date of inception) to December 31, 1999.................. F-4
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 and for the period from
March 31, 1994 (date of inception) to December 31, 1999... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and for the period from March 31, 1994
(date of inception) to December 31, 1999.................. F-6
Notes to Financial Statements............................... F-7
ANTIGENICS INC. UNAUDITED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1999 and June 30, 2000.... F-20
Statements of Operations for the six months ended June 30,
1999 and 2000, and for the period from March 31, 1994
(date of inception) to June 30, 2000...................... F-21
Statements of Stockholders' Equity for the six months ended
June 30, 2000 and for the period from March 31, 1994 (date
of inception) to June 30, 2000............................ F-22
Statements of Cash Flows for the six months ended June 30,
1999 and 2000, and for the period from March 31, 1994
(date of inception) to June 30, 2000...................... F-23
Notes to Unaudited Financial Statements..................... F-24
AQUILA BIOPHARMACEUTICALS, INC. FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-27
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999............... F-28
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-29
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999............... F-30
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1999..... F-31
Notes to Financial Statements............................... F-32
AQUILA BIOPHARMACEUTICALS, INC. UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999.................................................. F-44
Consolidated Statements of Operations and Comprehensive
Income for the six month period ended June 30, 2000 and
1999...................................................... F-45
Consolidated Statements of Cash Flows for the six month
period. ended June 30, 2000 and 1999...................... F-46
Notes to Interim Financial Statements....................... F-47
</TABLE>
F-1
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Antigenics Inc.:
We have audited the accompanying balance sheets of Antigenics Inc. (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999 and for the period from
March 31, 1994 (date of inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Antigenics Inc. as of
December 31, 1998 and 1999 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999 and for
the period from March 31, 1994 (date of inception) to December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 9, 2000
F-2
<PAGE> 116
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 22,168,049 $ 46,417,942
Prepaid expenses............................................ 230,632 103,204
Deferred public offering costs.............................. -- 559,417
Other assets................................................ 21,189 591,134
Due from related party...................................... 27,605 240
------------ ------------
Total current assets................................... 22,447,475 47,671,937
Plant and equipment, net.................................... 4,106,183 8,034,598
Other assets................................................ 74,071 297,646
Organization costs, less accumulated amortization of $28,174
in 1998................................................... 7,885 --
------------ ------------
Total assets........................................... $ 26,635,614 $ 56,004,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 2,036,814 $ 424,673
Accrued liabilities......................................... 48,134 933,440
Current portion, long-term debt............................. 200,497 812,702
------------ ------------
Total current liabilities.............................. 2,285,445 2,170,815
Long-term debt.............................................. 709,006 2,155,005
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 1,000,000
shares authorized; no shares issued and outstanding.... -- --
Common stock, par value $0.01 per share, 100,000,000
shares authorized; 17,895,623 and 20,715,942 shares
issued and outstanding at December 31, 1998 and 1999,
respectively........................................... 178,956 207,159
Additional paid-in capital................................ 45,670,228 89,747,036
Subscription notes receivable............................. (2,102,000) --
Deferred compensation..................................... (613,545) (659,081)
Deficit accumulated during development stage.............. (19,492,476) (37,616,753)
------------ ------------
Total stockholders' equity............................. 23,641,163 51,678,361
------------ ------------
Total liabilities and stockholders' equity................ $ 26,635,614 $ 56,004,181
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 117
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE
PERIOD FROM MARCH 31, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
1994
(DATE OF
INCEPTION) TO
DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue................................ $ -- $ -- $ -- $ --
Expenses:
Research and development:
Related party..................... (39,630) -- (33,000) (72,630)
Other............................. (2,523,041) (6,102,362) (10,943,934) (22,441,824)
----------- ----------- ------------ ------------
(2,562,671) (6,102,362) (10,976,934) (22,514,454)
----------- ----------- ------------ ------------
General and administrative:
Related party..................... (518,011) (211,152) (248,000) (1,269,555)
Other............................. (1,030,934) (2,966,011) (6,626,543) (14,620,306)
----------- ----------- ------------ ------------
(1,548,945) (3,177,163) (6,874,543) (15,889,861)
----------- ----------- ------------ ------------
Depreciation and amortization........ (202,090) (360,285) (1,005,411) (1,701,758)
----------- ----------- ------------ ------------
Total operating loss.............. (4,313,706) (9,639,810) (18,856,888) (40,106,073)
Other income:
Non-operating income................. -- -- 10,000 259,988
Interest income...................... 481,179 735,778 1,014,008 2,520,729
Interest expense..................... -- -- (291,397) (291,397)
----------- ----------- ------------ ------------
Net loss.......................... $(3,832,527) $(8,904,032) $(18,124,277) $(37,616,753)
=========== =========== ============ ============
Net loss per common share, basic and
diluted........................... $ (0.25) $ (0.54) $ (1.00)
=========== =========== ============
Weighted average number of common
shares outstanding, basic and
diluted........................... 15,401,289 16,458,985 18,143,966
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 118
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE
PERIOD FROM MARCH 31, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED
NUMBER ADDITIONAL SUBSCRIPTION DURING
OF PAID IN NOTES DEFERRED DEVELOPMENT
SHARES PAR VALUE CAPITAL RECEIVABLE COMPENSATION STAGE TOTAL
---------- --------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994...... -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss....................... -- -- -- -- -- (183,440) (183,440)
Issuance of common stock to
founders during 1994, for
cash, $0.03 per share......... 11,216,591 112,166 287,844 -- -- -- 400,010
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1994... 11,216,591 112,166 287,844 -- -- (183,440) 216,570
Net loss....................... -- -- -- -- -- (3,226,579) (3,226,579)
Issuance of common stock in
connection with the
recapitalization in December
1995, $1.45 per share......... 1,032,202 10,322 1,489,678 (150,000) -- -- 1,350,000
Grant of common stock.......... 1,513,896 15,139 2,184,861 -- -- -- 2,200,000
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1995... 13,762,688 137,627 3,962,383 (150,000) -- (3,410,019) 539,991
Net loss....................... -- -- -- -- -- (3,345,898) (3,345,898)
Payment of subscription notes
receivable.................... -- -- -- 150,000 -- -- 150,000
Deferred compensation on stock
options....................... -- -- 781,200 -- (781,200) -- --
Grant and recognition of stock
options....................... -- -- 1,116,815 -- 347,200 -- 1,464,015
Issuance of common stock in
private placement from March
13, 1996 to December 31, 1996,
$6.50 per share............... 1,636,384 16,364 10,583,636 (250,000) -- -- 10,350,000
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1996... 15,399,072 153,991 16,444,034 (250,000) (434,000) (6,755,917) 9,158,108
Net loss....................... -- -- -- -- -- (3,832,527) (3,832,527)
Payment of subscription notes
receivable.................... -- -- -- 250,000 -- -- 250,000
Deferred compensation on stock
options....................... -- -- 144,004 -- (144,004) -- --
Grant and recognition of stock
options....................... -- -- 62,815 -- 188,373 -- 251,188
Issuance of common stock in
private placement from
September 8, 1997 to December
31, 1997, $11.17 per share.... 660,953 6,610 7,378,390 -- -- -- 7,385,000
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1997... 16,060,025 160,600 24,029,244 -- (389,631) (10,588,444) 13,211,769
Net loss....................... -- -- -- -- -- (8,904,032) (8,904,032)
Deferred compensation on stock
options....................... -- -- 493,701 -- (493,701) -- --
Grant and recognition of stock
options....................... -- -- 838,654 -- 269,787 -- 1,108,441
Exercise of stock options...... 38,536 385 249,615 -- -- -- 250,000
Issuance of common stock in
private placement from January
1, 1998 to December 31, 1998,
$11.17 per share.............. 1,797,063 17,971 20,059,014 (2,102,000) -- -- 17,974,985
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1998... 17,895,623 178,956 45,670,228 (2,102,000) (613,545) (19,492,476) 23,641,163
Net loss....................... -- -- -- -- -- (18,124,277) (18,124,277)
Payment of subscription notes
receivable.................... -- -- -- 2,102,000 -- 2,102,000
Deferred compensation on stock
options....................... -- -- 354,009 -- (354,009) -- --
Grant and recognition of stock
options....................... -- -- 4,718,582 -- 308,473 5,027,055
Exercise of stock options...... 1,720 17 83 -- -- -- 100
Issuance of common stock in
private placement in January,
1999, $11.17 per share........ 9,806 98 109,902 -- -- -- 110,000
Issuance of common stock and
warrants in private placement
on November 30, 1999, $13.96
per share (net of issuance
costs of $293,000)............ 2,808,793 28,088 38,894,232 -- -- -- 38,922,320
---------- -------- ----------- ----------- --------- ------------ ------------
Balance at December 31, 1999... 20,715,942 $207,159 $89,747,036 $ -- $(659,081) $(37,616,753) $ 51,678,361
========== ======== =========== =========== ========= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 119
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE
PERIOD FROM MARCH 31, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
1994 (DATE OF
INCEPTION) TO
DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(3,832,527) $(8,904,032) $(18,124,277) $(37,616,753)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........ 202,090 360,285 1,005,411 1,701,758
Stock options and predecessor company
options............................ 251,188 1,108,441 5,027,055 7,850,699
Common stock grants.................. -- -- -- 2,200,000
Changes in operating assets and
liabilities:
Other assets............................ (64,583) (28,885) (793,520) (888,780)
Prepaid assets.......................... (87,927) (91,638) 127,428 (103,204)
Organization costs...................... -- -- -- (32,934)
Accounts payable........................ (553,263) 1,791,212 (1,612,141) 424,673
Accrued liabilities..................... 504,004 (522,735) 885,306 933,440
Due to/from related party, net.......... 63,361 (89,263) 27,365 (240)
----------- ----------- ------------ ------------
Net cash used in operating activities... (3,517,657) (6,376,615) (13,457,373) (25,531,341)
----------- ----------- ------------ ------------
Cash flows from investing activities:
Purchase of plant and equipment......... (622,504) (3,704,168) (4,925,941) (9,735,364)
Proceeds from the sale of plant and
equipment............................ 4,000 27,942 -- 31,942
----------- ----------- ------------ ------------
Net cash used in investing activities... (618,504) (3,676,226) (4,925,941) (9,703,422)
----------- ----------- ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of equity........ 7,635,000 17,974,985 41,134,320 78,994,315
Exercise of stock options............... -- 250,000 100 250,100
Deferred public offering costs.......... -- -- (559,417) (559,417)
Payments of long-term debt.............. -- -- (512,835) (512,835)
Proceeds from long-term debt............ -- 909,503 2,571,039 3,480,542
----------- ----------- ------------ ------------
Net cash provided by financing
activities:.......................... 7,635,000 19,134,488 42,633,207 81,652,705
----------- ----------- ------------ ------------
Net increase in cash and cash
equivalents............................. 3,498,839 9,081,647 24,249,893 46,417,942
Cash and cash equivalents at beginning of
period.................................. 9,587,563 13,086,402 22,168,049 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of
period.................................. $13,086,402 $22,168,049 $ 46,417,942 $ 46,417,942
=========== =========== ============ ============
Non-cash investing and financing
activities:
Sale of equity financed by notes
receivable.............................. $ -- $ 2,102,000 $ -- $ --
=========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 120
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The business was formed on March 31, 1994 through the creation of a
Delaware corporation (the Predecessor Company). In July 1995, the founders of
the Predecessor Company formed Antigenics Inc., formerly, Antigenics L.L.C.
(Antigenics or the Company), a Delaware limited liability company, and
subsequently transferred to the Company all of the assets, liabilities,
properties and rights of the Delaware corporation in exchange for an initial
81.5% equity interest in the Company. The accounting for this recapitalization
was recorded at the Predecessor Company's historical cost. In connection with
the recapitalization, the Company also raised $1,500,000 (including $150,000 of
subscription notes receivable) in a private equity transaction in exchange for a
7.5% initial ownership interest and a further 11% initial ownership interest was
exchanged for services rendered to the Company by certain outside advisors, the
value of which was recognized as a non-cash expense of $2,200,000 during 1995.
Since the reorganization in 1995, the Predecessor Company has directly or
indirectly owned a majority of the Company's common stock. As of December 31,
1999, the Predecessor Company owns approximately 79% of a limited liability
company that in turn owns approximately 54% of the Company's outstanding common
stock. Certain board members and executive officers of the Company own
significant interests in these related parties.
The Company is developing immunotherapeutics for the treatment of cancer,
infectious diseases and autoimmune disorders based on the Company's proprietary
heat shock protein technology. The Company's research has demonstrated that when
purified heat shock protein-peptide complexes are injected into the skin, they
trigger an immune response against cancers and infectious diseases. Antigenics
seeks to create immunotherapeutics to stimulate patients' immune systems into
destroying diseased cells in the body.
Antigenics is primarily engaged in the development of its heat shock
protein technology and its lead immunotherapeutic product, Oncophage(R). The
related business activities include product research and development activities,
regulatory and clinical affairs, establishing manufacturing capabilities,
production for clinical trials, and administrative and corporate development
activities. As of December 31, 1999, the Company has not commenced commercial
operations and, accordingly, is in the development stage. Consequently, the
Company is subject to all the risks inherent in the establishment of a new
business. The Company has incurred annual operating losses since inception and,
as a result, at December 31, 1999 has a deficit accumulated during the
development stage of approximately $37.6 million. The Company's operations
during development have been funded principally by stockholders' equity. While
the Company believes that its working capital resources are sufficient to
satisfy its liquidity requirements over the next 12 months, satisfying the
Company's long-term liquidity needs will require the successful
commercialization of Oncophage or other products and may require additional
capital.
The Company's immunotherapeutics require clinical trials and approvals from
regulatory agencies as well as acceptance in the marketplace. The Company is
conducting clinical trials in various cancer indications. Although the Company
believes its patents, patent rights and patent applications are valid, the
invalidation of its patents or failure of certain of its pending patent
applications to issue as patents could have a material adverse effect upon its
business. The Company competes with specialized biotechnology companies, major
pharmaceutical and chemical companies and universities and research
institutions. Many of these competitors have substantially greater resources
than the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The Company's financial statements include the accounts of Antigenics Inc.
F-7
<PAGE> 121
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Cash and Cash Equipment
The Company considers all highly liquid investments purchased with
maturities at acquisition of three months or less to be cash equivalents. Cash
equivalents at December 31, 1998 and 1999 consist of investments in money market
accounts which are unrestricted as to withdrawal or use.
(d) Plant and Equipment
Plant and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Amortization
of leasehold improvements is computed over the shorter of the lease term or
estimated useful life of the asset. Additions and improvements are capitalized,
while repairs and maintenance are charged to expense as incurred.
(e) Organization Costs
Prior to 1999, organization costs, consisting primarily of legal fees, were
amortized using the straight-line method over a five-year period. Effective
January 1, 1999, the Company adopted the provisions of the American Institute of
Certified Public Accountants' Statement of Position No. 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that the
costs of start-up activities and organizational costs be expensed as incurred
and that previously capitalized organizational costs be charged to operations.
The adoption of SOP 98-5 had an immaterial effect on the Company's financial
statements.
(f) Long-Lived Assets
The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful lives of the related assets. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of," these assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. The assets are evaluated for continuing value and proper useful
lives by comparison to expected undiscounted future net cash flows. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets, calculated as expected discounted future cash flows.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(g) Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amounts of financial instruments that are
recognized at historical cost amounts. The estimated fair values of all of the
Company's financial instruments, excluding debt, approximate their carrying
amounts in the balance sheets. The fair value of the Company's long-term debt
was derived by evaluating the nature and terms of each term note and considering
the prevailing economic and market conditions at the balance sheet date. The
carrying amount of debt, including
F-8
<PAGE> 122
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
current portions, is approximately $910,000 and $2,968,000 at December 31, 1998
and 1999, respectively; and the fair value is estimated to be approximately
$910,000 and $3,026,000 at December 31, 1998 and 1999, respectively.
(h) Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Clinical trials............................................. $23,946 $399,897
Professional fees........................................... -- 170,000
Vacation.................................................... 2,400 59,551
Sponsored research.......................................... -- 81,000
Other....................................................... 21,788 222,992
------- --------
$48,134 $933,440
======= ========
</TABLE>
(i) Stock Option Plan
The Company accounts for options granted to employees and directors in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense is recorded on fixed stock option grants only if the
current fair value of the underlying stock exceeds the exercise price of the
option at the date of grant.
The Company accounts for stock options granted to non-employees on a fair
value basis in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services". As a result, the non-cash charge
to operations for non-employee options with vesting or other performance
criteria is affected each reporting period by changes in the fair value of the
Company's common stock.
As required, the Company also provides pro forma net loss and pro forma net
loss per common share disclosures for employee and director stock option grants
as if the fair-value-based method defined in SFAS No. 123 had been applied (see
Note 5).
(j) Research and Development
Research and development expenses include the costs associated with
internal research and development by the Company and research and development
conducted for the Company by outside advisors, sponsored university-based
research partners, and clinical study partners. All research and development
costs discussed above are expensed as incurred. Amounts received under research
and development contracts, which are not refundable, are recorded as a reduction
to research and development expense in the statement of operations.
(k) Income Taxes
Prior to converting to a corporation, as a Delaware limited liability
company, no federal, state and local income taxes were levied on the Company.
Each member of the Company was individually responsible for reporting his or her
share of the Company's net income or loss on their personal tax returns.
Therefore, no provision for income taxes and no deferred tax assets or
liabilities are recognized in the accompanying financial statements.
F-9
<PAGE> 123
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes are accounted for under the asset and liability method.
Beginning February 9, 2000, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be reversed or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
tax assets are recorded when they more likely than not are able to be realized.
(l) Net Loss Per Share
Basic earnings or loss per share (EPS) is computed using the weighted
average number of shares of common stock outstanding during the period being
reported on. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
stock at the beginning of the period being reported on and the effect was
dilutive. Net loss and weighted average common stock used for computing diluted
EPS were the same as those used for computing basic EPS for each of the years
ended December 31, 1997, 1998 and 1999 because the Company's stock options and
warrants were not included in the calculation since the inclusion of such
potential shares would be antidilutive.
(m) Segment Information
The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive officer.
The Company does not operate separate lines of business or separate business
entities with respect to any of its product candidates. Accordingly, the Company
does not prepare discrete financial information with respect to separate product
areas or by location and does not have separately reportable segments as defined
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including derivatives instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all the Company's fiscal quarters
beginning January 1, 2001. This statement is not expected to affect the Company
as it currently does not have derivative instruments or engage in hedging
activities.
F-10
<PAGE> 124
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PLANT AND EQUIPMENT, NET
Plant and equipment, net at December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
1998 1999 LIVES
---------- ---------- -------------
<S> <C> <C> <C>
Furniture, fixtures and other................ $ 486,933 $ 575,989 3 to 10 years
Laboratory and manufacturing equipment....... 1,426,427 2,915,053 3 to 10 years
Leasehold improvements....................... 224,580 5,901,213 2 to 5 years
Construction in progress..................... 2,639,181 --
---------- ----------
4,777,121 9,392,255
Less accumulated depreciation and
amortization............................... 670,938 1,357,657
---------- ----------
$4,106,183 $8,034,598
========== ==========
</TABLE>
Plant and equipment retired and removed from the accounts aggregated
$310,807 for the year ended December 31, 1999.
(4) EQUITY
Prior to its conversion to a corporation, Antigenics had one class of
members' equity. All members voted their equity interests in proportion to their
respective unit interest in the Company. Net profits and losses of the Company
for each fiscal year were allocated to the capital accounts of the members as
described in the limited liability company agreement, generally in proportion to
their respective unit ownership interests. No members were liable for any
obligations of the Company or were required to contribute any additional capital
related to the deficits incurred.
On February 9, 2000, the Company converted from a limited liability company
to a corporation as described in note 11. In conjunction with such conversion,
the Company's authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01
par value per share. The Company's board of directors is authorized to issue the
preferred stock and to set the voting, conversion and other rights.
Since the formation of the Company in 1995 (see Note 1), the Company has
raised capital through private placement equity transactions. During 1996, the
Company completed a private placement offering of approximately 1,636,000 common
shares in exchange for $10,600,000. Subscription notes receivable of $250,000 at
December 31, 1996, which represented promissory notes from members in
consideration of their equity contributions, were satisfied in full during 1997.
During 1997, the Company commenced a private placement offering, which
resulted in approximately 661,000 common shares being sold for approximately
$7,385,000 during 1997 and approximately 1,797,000 common shares being sold for
approximately $20,077,000 during 1998. This offering was completed during early
1999 and resulted in an aggregate of approximately $27,572,000 being received by
the Company over the three-year period.
Subscription notes receivable of $2,102,000 at December 31, 1998, which
represented promissory notes from members in consideration of their equity
contributions, were satisfied in full during 1999.
In November 1999, the Company raised gross proceeds of approximately $39.2
million from the sale of approximately 2,809,000 common shares, inclusive of
warrants, through a private equity placement. In connection with the private
placement, the Company netted approximately $293,000 of expenses against the
F-11
<PAGE> 125
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
gross proceeds and agreed to issue approximately 5,500 common shares to
placement agents which are not considered outstanding as of December 31, 1999.
Each member participating in this private placement received a warrant to
purchase an additional 10% of the shares acquired in that offering, rounded to
the nearest whole number, at a price of approximately $13.96 per share. The
warrants expire on September 30, 2002. Each stockholder participating in this
private placement also received registration rights.
(5) EQUITY OPTIONS
In March 1996, the board of directors approved an equity-based incentive
compensation plan (the Plan). Pursuant to the provisions of the Plan, the board
of directors may grant options to directors, employees and outside advisors to
purchase common stock of the Company. At the date of grant, the board of
directors sets the terms of the options including the exercise price and vesting
period. The options granted through December 31, 1999 have vesting periods
ranging up to five years. Options generally have a contractual life of ten
years. A maximum of 9% (increased from 7% during 1999) of total equity,
inclusive of the options granted, may be granted as options (approximately
2,047,000 options as of December 31, 1999).
The following summarizes activity for options granted to directors and
employees, including those with an exercise price equal to the fair value of the
underlying shares of common stock at the date of grant ("at-the-money exercise
price"), those with an exercise price greater than the fair value of the
underlying share of common stock at the date of grant ("out-of-the-money
exercise price"), and those with an exercise price less than the fair value of
the underlying share of common stock at the date of grant ("in-the-money
exercise price"):
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED
EXERCISABLE AVERAGE AVERAGE
AT END OF GRANT-DATE EXERCISE
OPTIONS YEAR FAIR VALUE PRICE
------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding December 31, 1995............ --
Granted:
At-the-money exercise price......... 223,643 $0.70 $ 1.45
In-the-money exercise price......... 154,830 5.51 1.45
Exercised.............................. -- -- --
-------
Outstanding December 31, 1996............ 378,473 258,050
=======
Granted:
At-the-money exercise price......... 18,923 3.99 6.50
In-the-money exercise price......... 28,558 6.47 3.03
Exercised.............................. -- -- --
-------
Outstanding December 31, 1997............ 425,954 298,134
=======
Granted:
Out-of-the-money exercise price..... 26,493 6.73 11.17
In-the-money exercise price......... 92,210 8.38 5.82
Exercised.............................. -- -- --
-------
Outstanding December 31, 1998............ 544,657 347,851
=======
</TABLE>
F-12
<PAGE> 126
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED
EXERCISABLE AVERAGE AVERAGE
AT END OF GRANT-DATE EXERCISE
OPTIONS YEAR FAIR VALUE PRICE
------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Granted:
Out-of-the-money exercise price..... 254,609 $6.25 $12.07
In-the-money exercise price......... 50,921 9.67 6.50
Expired................................ (21,848) -- 7.10
Exercised.............................. -- -- --
------- ----- ------
Outstanding December 31, 1999............ 828,339 500,101
======= =======
</TABLE>
During 1996, 1997, 1998 and 1999, 154,830, 28,558, 92,210 and 50,921
options, respectively, were granted to employees and directors at exercise
prices which were less than the fair value of the shares of common stock on the
grant date. Compensation expense recognized with respect to such options totaled
approximately $347,000, $188,000, $270,000 and $308,000 for the years ended
December 31, 1996, 1997, 1998 and 1999, respectively. Deferred compensation at
December 31, 1999 of approximately $659,000 will be recognized over the vesting
period of the options.
The following summarizes activity for options granted to outside advisors:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED
EXERCISABLE AVERAGE AVERAGE
AT END OF GRANT-DATE EXERCISE
OPTIONS YEAR FAIR VALUE PRICE
------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding December 31, 1995............ --
Granted................................ 353,873 $3.35 $ 2.00
Exercised.............................. -- -- --
-------
Outstanding December 31, 1996............ 353,873 249,276
=======
Granted................................ -- -- --
Exercised.............................. -- -- --
-------
Outstanding December 31, 1997............ 353,873 319,466
=======
Granted................................ 191,817 9.59 3.19
Exercised.............................. (38,535) -- 1.45
-------
Outstanding December 31, 1998............ 507,155 306,735
=======
Granted................................ 273,705 9.38 12.01
Exercised.............................. (1,720) -- 0.06
-------
Outstanding December 31, 1999............ 779,140 611,579
======= ======= ===== ======
</TABLE>
In December 1999, the board of directors accelerated the remaining vesting
requirements on 268,716 stock options granted to outside advisors. As a result,
the Company recognized a charge to operations in the fourth quarter of 1999 of
approximately $2,093,000.
The 1996 options grants above exclude 88,941 options granted to outside
advisors with an exercise price which is determined based on fair value of the
underlying shares of common stock beginning on the second anniversary of the
grant date as the options vest. Compensation expense for these options is
recognized when the exercise price becomes known and performance has been
completed. For the years ended December 31, 1998 and 1999, approximately
$199,000 and $189,000, respectively, was charged to operations for 23,740 and
F-13
<PAGE> 127
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23,912 of such options, respectively, that vested at an exercise price of
approximately $11.17 per share of common stock in each year.
The charge to operations related to options granted to outside advisors by
the Company, including the amounts described in the previous two paragraphs,
totaled approximately $696,000, $63,000, $839,000 and $4,719,000 for the years
ended December 31, 1996, 1997, 1998 and 1999, respectively. At December 31,
1999, unrecognized expense for options granted to outside advisors for which
performance (vesting) has not yet been completed but the exercise price of the
options is known is approximately $40,000; such amount is subject to change each
reporting period based upon changes in the fair value of the Company's common
stock, estimated volatility and the risk free interest rate until the outside
advisor completes his or her performance under the option agreement.
A summary of the Company's options outstanding and exercisable, excluding
the 1996 options described above for which the exercise price is not yet known,
as of December 31, 1999, follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVE. -----------------------------
NUMBER REMAINING WEIGHTED AVE. NUMBER WEIGHTED AVE.
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.45 - $ 5.00............. 904,552 6.73 $ 1.75 739,744 $ 1.52
$ 5.01 - $ 8.00............. 199,731 8.13 6.50 29,073 6.50
$ 8.01 - $11.00............. -- -- -- -- --
$11.01 - $14.00............. 550,851 9.27 12.08 342,862 12.07
--------- ---------
1,655,134 1,111,679
========= =========
</TABLE>
Since the 1995 reorganization described in Note 1, the Predecessor Company
has directly or indirectly owned a majority of the Company's common stock.
During 1996, the Predecessor Company approved a stock option plan (the
Predecessor Plan). In accordance with generally accepted accounting principles,
the Predecessor Plan is accounted for as if it had been adopted by Antigenics
and treated as a contribution to stockholders' equity. Pursuant to the
provisions of the Predecessor Plan, the Predecessor Company may grant options to
officers, directors, employees and consultants to purchase common stock of the
Predecessor Company. The terms of the options, including exercise price and
vesting period, are set at the date of grant. The options have a contractual
life of ten years and may not have an exercise price less than the fair value of
a share of common stock of the Predecessor Company at date of grant. A maximum
of 300 options may be granted under the Predecessor Plan.
During 1996, the Predecessor Company granted approximately 160 options to
directors and employees at a weighted average exercise price of $9,006 per share
of Predecessor Company common stock and a weighted average grant-date fair value
of approximately $4,301 per share. During 1997, the Predecessor Company granted
approximately 14 options to a director at a weighted average exercise price of
$26,666 per share of Predecessor Company common stock and a weighted average
grant-date fair value of $16,407 per share. All the options are immediately
vested and exercisable. All of the options remain outstanding and none have been
exercised. No compensation expense was recognized by Antigenics during 1996 and
1997 as the exercise price of the options is equal to the fair value of the
common stock of the Predecessor Company at the date of the option grant.
During 1996, the Predecessor Company granted approximately 76 options to
consultants at a weighted average exercise price of $9,006 per share and a
weighted average grant-date fair value of approximately $5,535 per share. All of
the consultants' options are immediately vested and exercisable. All of the
consultants' options remain outstanding and none have been exercised. During
1996, Antigenics recognized a charge to operations related to options granted to
consultants by the Predecessor Company of approximately $421,000.
F-14
<PAGE> 128
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for options granted to employees and directors under
APB Opinion No. 25. Had compensation cost for options granted to employees and
directors by Antigenics and the Predecessor Company been determined consistent
with SFAS No. 123, the Company's pro forma net loss and pro forma net loss per
common share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(3,832,527) $(8,904,032) $(18,124,277)
Pro forma................................ (4,090,742) (8,978,654) (19,097,345)
=========== =========== ============
Net loss per common share:
As reported.............................. $ (0.25) $ (0.54) $ (1.00)
Pro forma................................ (0.27) (0.55) (1.05)
=========== =========== ============
</TABLE>
The effects of applying SFAS No. 123, for either recognizing or disclosing
compensation cost under such pronouncement, may not be representative of the
effects on reported net income or loss for future years. The fair value of each
option granted is estimated on the date of grant using an option-pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Estimated volatility........................................ 57% 61% 54%
Expected life in years -- employee and director options..... 6 6 6
Risk-free interest rate..................................... 6.3% 5.4% 5.0%
Dividend yield.............................................. 0% 0% 0%
</TABLE>
The Company estimates volatility for purposes of computing compensation
expense on outside advisor options and for disclosure purposes using the
volatility of public companies that the Company considers comparable. The
expected life used to estimate the fair value of outside advisor options is
equal to the contractual life of the option granted.
(6) COMMITMENTS
In November 1994, the Predecessor Company entered into a Patent License
Agreement (Mount Sinai Agreement) with the Mount Sinai School of Medicine (Mount
Sinai). Through the Mount Sinai Agreement, the Company has obtained the
exclusive licenses to the patent rights which resulted from the research and
development performed by Dr. Pramod Srivastava, a director of the Company. Under
the Mount Sinai Agreement, the Company agreed to pay Mount Sinai a nominal
royalty on related product sales (as defined in the Mount Sinai Agreement)
through the last expiration date of the patents under the Mount Sinai Agreement
(2015). In addition to these royalty payments, Mount Sinai was issued a nominal
equity interest.
During 1995, Dr. Srivastava moved his research to Fordham University
(Fordham). The Predecessor Company entered into a Patent License Agreement
(Fordham Agreement) with Fordham, agreeing to reimburse Fordham for all approved
costs incurred in the performance of the research. The Predecessor Company has
also agreed to pay Fordham a nominal royalty on related product sales, as
defined, through the last expiration date of the patents under the Fordham
Agreement. This agreement ended in mid-1997. During 1995, 1996 and 1997, the
direct and indirect costs incurred by the Company related to this agreement were
approximately $546,000, $926,000 and $902,000, respectively, and are included in
research and development expenses in the statements of operations for such
years.
F-15
<PAGE> 129
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company entered into a research agreement with the
University of Connecticut Health Center (UConn) and Dr. Srivastava. The
agreement has a term of approximately five years and calls for payments to UConn
totaling a minimum of $5,000,000, payable quarterly at the rate of $250,000
(contingent on the continuing employment of Dr. Srivastava by UConn). In
addition, as research was begun by Dr. Srivastava in 1997, the Company agreed to
pay approximately $475,000 for these previous services and expensed such amount
as research and development during 1997. Research and development expense in the
accompanying 1998 and 1999 statements of operations includes approximately
$1,000,000 in each of the respective years of costs incurred under the UConn
agreement. Royalties at varying rates are due to UConn upon commercialization of
a product utilizing technology discovered during the research agreement.
In 1996, Antigenics entered into an agreement with Sloan-Kettering
Institute for Cancer Research (Sloan Kettering) to conduct clinical studies. The
Company is required to pay Sloan Kettering $10,000 for administration and start
up costs and $4,000 per patient in the study.
On December 2, 1997, Antigenics entered into two agreements with The
University of Texas M.D. Anderson Cancer Center (M.D. Anderson) to conduct
clinical studies. The Company is required to pay M.D. Anderson a total of
approximately $538,000 for expenses for the clinical study of approximately 90
patients and other related costs payable in four installments. In addition, on
March 20, 1998 the Company entered into another clinical study with M.D.
Anderson. Under such 1998 agreement, the Company is required to pay M.D.
Anderson a total of approximately $118,000 for the study of 30 patients and
other related costs payable in four installments.
In 1998, Antigenics entered into an agreement with the Johannes Gutenberg
Universitat Mainz Klinikum (Universitat) to conduct additional clinical studies.
The Company is required to pay the Universitat approximately $279,000 for
expenses for the clinical study of approximately 30 patients. The first
installment was paid upon signing the agreement.
In 1998, Antigenics entered into an agreement, as amended, with Sigma-Tau
Industrie Farmaceutiche Riunite S.P.A (Sigma-Tau), a minority interest-holder of
the Company's common stock, to conduct clinical studies in Italy, Spain,
Portugal and Switzerland. Under the agreement, Sigma-Tau is required to pay
Antigenics for services provided by the Company in relation to these clinical
studies. In return, Antigenics has granted Sigma-Tau the exclusive right to
negotiate a marketing and development agreement (the Development Agreement) for
the exclusive use of Antigenics' patent rights and their product, and the right
of first offer to negotiate licenses for other medical uses of their product, in
Italy, Spain, Portugal and Switzerland. The Development Agreement has not been
finalized. During 1999, Antigenics provided approximately $581,000 of services
associated with this agreement. This receivable amount is included in other
current assets in the accompanying balance sheet. Amounts received under this
agreement are non-refundable even if the research effort is unsuccessful. In
addition, Antigenics does not incur any future performance commitments in
relation to amounts recorded for Sigma-Tau.
On June 21, 1999, Antigenics entered into another agreement with M.D.
Anderson to conduct clinical studies. The Company is required to pay M.D.
Anderson a total of approximately $277,000 for the clinical study of
approximately 40 patients and other related costs payable in installments over
two years.
For the years ended December 31, 1996, 1997, 1998 and 1999, approximately
$10,000, $4,000, $255,000 and $975,000, respectively, has been expensed in the
accompanying statements of operations related to the above mentioned clinical
studies.
(7) RELATED PARTY TRANSACTIONS
The Company rents office space for its New York City headquarters (see Note
8) and, prior to 1999, utilized certain office services of entities which are
wholly-owned by the Company's chief executive officer and
F-16
<PAGE> 130
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
chairman of the board. Rent and office services, which are recorded at the
affiliates' cost, are allocated to the Company based on square footage and
clerical staff usage, respectively, which management believes is reasonable.
Such transactions amounted to approximately $293,000, $558,000, $211,000 and
$281,000 for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively. The Company also periodically pays the entire monthly rent amount
for all of the office space on behalf of the above noted entities for which the
Company is reimbursed on a current basis. As of December 31, 1998 and 1999, the
affiliated entities were indebted to the Company for $27,605 and $240,
respectively, for costs paid on the affiliated entities' behalf.
During 1997 and renewed each year thereafter, the Company obtained standby
letters of credit for the benefit of the related party in the amount of
approximately $297,000 and $78,000 in connection with the related party's lease
of the New York City office space expiring in January 2000 and 2001,
respectively.
(8) LEASES
The Company leases administrative, laboratory and office facilities under
various month-to-month and long-term lease arrangements. Rent expense, exclusive
of the amounts paid to the affiliate (see Note 7), was approximately $134,000,
$685,000 and $560,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
In November 1999, the Company signed a long-term lease agreement for its
New York City headquarters with an entity wholly-owned by the Company's chief
executive officer and chairman of the board. The lease expires in December 2006
and requires annual rental payments of approximately $312,000 which is equal to
the affiliates cost. Prior to November 1999, the headquarters office space was
rented on a month-to-month basis from the same affiliate.
The future minimum rental payments under the Company's lease of its Woburn,
Massachusetts manufacturing and laboratory facility, which expires in 2003, and
its New York City headquarters, are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $ 759,516
2001...................................................... 759,516
2002...................................................... 759,516
2003...................................................... 591,696
2004...................................................... 312,000
Thereafter................................................ 624,000
----------
$3,806,244
==========
</TABLE>
(9) DEBT
The Company has a $5 million credit facility from a financial institution
pursuant to which the Company can draw down amounts to make or refinance certain
capital expenditures. As the Company utilizes the credit facility, separate term
notes will be executed. Each term loan will have a term of forty-two months and
the interest rate is fixed at the closing of each term loan. Each loan is
collateralized by the equipment, fixtures, and improvements acquired with the
proceeds of the loan.
The aggregate maturities of the term loan for each of the five years
subsequent to December 31, 1999 are as follows: 2000 -- $812,702;
2001 -- $939,303; 2002 -- $1,021,634; 2003 -- $194,068.
F-17
<PAGE> 131
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) 401(k) PLAN
The Company sponsors a defined contribution 401(k) savings plan for all
eligible employees, as defined. Participants may contribute up to 15% of their
compensation, as defined, with a maximum of $10,000 in 1999. Each participant is
fully vested in his or her contributions and related earnings and losses. The
Company matches 100% of the participant's contribution and such matching
contribution vests over four years. For the years ended December 31, 1997, 1998
and 1999, the Company charged approximately $29,000, $55,000 and $145,000 to
operations for the 401(k) plan.
(11) INITIAL PUBLIC OFFERING
The Initial Public Offering
In November 1999, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC) to sell
shares of its common stock in connection with the proposed initial public
offering (IPO). On February 9, 2000, the Company completed the IPO of 4,025,000
shares of common stock at $18 per share. Gross proceeds to the Company before
deduction of offering expenses of approximately $6,221,000 were $72,450,000.
Concurrent with the completion of the IPO, the Company was converted from a
limited liability company to a corporation. All members of the limited liability
company exchanged their respective member interests for shares of common stock
in the corporation based on an exchange ratio of 172.0336 shares of common stock
for each members' equity unit. The financial statements have been retroactively
restated to reflect the change from a limited liability company to a corporation
and the exchange of members' equity units for common stock.
Through December 31, 1999, the Company deferred approximately $559,000 of
offering costs on its balance sheet. These and other costs of the offering will
be netted against the gross proceeds from the offering at closing.
Adoption of Employee Stock Purchase Plan
In connection with the IPO, the board of directors approved an employee
stock purchase plan; the plan is also subject to stockholder approval. Under the
plan, employees may purchase shares of common stock at a discount from fair
value. There are 300,000 shares of common stock reserved for issuance under the
purchase plan. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended. Rights to purchase common stock under the purchase plan are
granted at the discretion of the compensation committee, which determines the
frequency and duration of individual offerings under the plan and the dates when
stock may be purchased. Eligible employees participate voluntarily and may
withdraw from any offering at any time before the stock is purchased.
Participation terminates automatically upon termination of employment. The
purchase price per share of common stock in an offering will not be less than
85% of the lesser of its fair value at the beginning of the offering period or
on the applicable exercise date and may be paid through payroll deductions,
periodic lump sum payments or a combination of both. The plan terminates on
November 15, 2009.
Adoption of Equity Incentive Plan
In connection with the IPO, the board of directors approved an employee
equity incentive plan. Antigenics Inc.'s equity incentive plan authorizes the
grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and nonqualified stock options for
the purchase of an aggregate of 4,800,000 shares (subject to adjustment for
stock splits and similar capital changes) of common stock to employees and, in
the case of non-qualified stock options, to consultants and directors as defined
in the equity plan. The board of directors has appointed the compensation
committee to
F-18
<PAGE> 132
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
administer the equity plan. The grant of incentive stock options to employees
and directors is subject to approval by the stockholders. Members' equity
options outstanding under the Company's current equity-based incentive
compensation plan (see Note 5) will be exchanged for stock options under the new
equity incentive plan at the closing of the IPO.
(12) PRO FORMA INCOME TAX PROVISION (UNAUDITED)
As discussed in Note 2(k), the Company is not subject to income taxes and
therefore does not provide for income taxes in its financial statements. Had the
Company been organized as a tax paying entity for the year ended December 31,
1999, there would be no pro forma income tax provision because of a loss before
income taxes and the need to recognize a valuation allowance on all gross
deferred tax assets. Given the Company's history of incurring operating losses,
management believes that it is more likely than not that any deferred tax assets
will not be realized.
F-19
<PAGE> 133
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1999 AND
JUNE 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $46,417,942 $105,140,814
Prepaid expenses............................................ 103,204 454,755
Deferred public offering costs.............................. 559,417 --
Due from related party...................................... 240 --
Other assets................................................ 591,134 625,394
----------- ------------
Total current assets.............................. 47,671,937 106,220,963
Plant and equipment, net.................................... 8,034,598 8,228,701
Other assets................................................ 297,646 741,086
----------- ------------
Total assets...................................... $56,004,181 $115,190,750
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 424,673 $ 1,024,310
Accrued liabilities......................................... 933,440 867,712
Due to related party........................................ -- 12,349
Current portion, long-term debt............................. 812,702 873,711
----------- ------------
Total current liabilities......................... 2,170,815 2,778,082
Long-term debt.............................................. 2,155,005 1,702,084
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share; 1,000,000
shares authorized; no shares issued and outstanding.... -- --
Common stock, par value $0.01 per share; 100,000,000
shares authorized; 20,715,942 and 24,795,146 shares
issued and outstanding at December 31, 1999 and June
30, 2000, respectively................................. 207,159 247,951
Additional paid-in capital.................................. 89,747,036 158,666,170
Deferred compensation....................................... (659,081) (1,377,678)
Deficit accumulated during development stage................ (37,616,753) (46,825,859)
----------- ------------
Total stockholders' equity........................ 51,678,361 110,710,584
----------- ------------
Total liabilities and stockholders' equity........ $56,004,181 $115,190,750
=========== ============
</TABLE>
See accompanying notes to unaudited financial statements.
F-20
<PAGE> 134
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000, AND FOR
THE PERIOD FROM MARCH 31, 1994 (DATE OF INCEPTION) TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
SIX MONTHS ENDED JUNE 30, 1994 (DATE OF
-------------------------- INCEPTION) TO
1999 2000 JUNE 30, 2000
----------- ----------- -------------
<S> <C> <C> <C>
Revenue............................................. $ -- -- --
Expenses:
Research and development:
Related party.................................. (16,500) (26,633) (99,263)
Other.......................................... (4,796,163) (7,161,988) (29,603,812)
----------- ----------- -----------
(4,812,663) (7,188,621) (29,703,075)
----------- ----------- -----------
General and administrative:
Related party.................................. (107,779) (157,250) (1,426,805)
Other.......................................... (2,332,365) (3,753,936) (18,374,242)
----------- ----------- -----------
(2,440,144) (3,911,186) (19,801,047)
----------- ----------- -----------
Depreciation and amortization..................... (339,574) (720,048) (2,421,806)
----------- ----------- -----------
Operating loss................................. (7,592,381) (11,819,855) (51,925,928)
Other income/(expense):
Non-operating income.............................. -- -- 259,988
Interest expense.................................. (85,211) (204,737) (496,134)
Interest income................................... 460,441 2,815,486 5,336,215
----------- ----------- -----------
Net loss....................................... $(7,217,151) (9,209,106) (46,825,859)
=========== =========== ===========
Net loss per share, basic and diluted............... $ (0.40) (0.39)
=========== ===========
Weighted average number of shares outstanding, basic
and diluted....................................... 17,904,433 23,884,054
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-21
<PAGE> 135
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND FOR THE PERIOD
FROM MARCH 31, 1994 (DATE OF INCEPTION) TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL DURING
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED DEVELOPMENT
SHARES PAR VALUE CAPITAL NOTES COMPENSATION STAGE TOTAL
---------- --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994....... -- $ -- -- -- -- -- --
Net loss...................... -- -- -- -- -- (183,440) (183,440)
Issuance of common stock to
founders during 1994, for
cash, $.03 per share........ 11,216,590 112,166 287,844 -- -- -- 400,010
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1994.... 11,216,590 112,166 287,844 -- (183,440) 216,570
Net loss...................... -- -- -- -- -- (3,226,579) (3,226,579)
Issuance of common stock in
connection with the
recapitalization in December
1995, $1.45 per share....... 1,032,202 10,322 1,489,678 (150,000) -- -- 1,350,000
Grant of common stock......... 1,513,896 15,139 2,184,861 -- -- -- 2,200,000
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1995.... 13,762,688 137,627 3,962,383 (150,000) -- (3,410,019) 539,991
Net loss...................... -- -- -- -- -- (3,345,898) (3,345,898)
Deferred compensation on stock
options..................... -- -- 781,200 -- (781,200) -- --
Grant and recognition of stock
options..................... -- -- 1,116,815 -- 347,200 -- 1,464,015
Payment of subscription notes
receivable.................. -- -- -- 150,000 -- -- 150,000
Issuance of common stock in
private placement from March
13, 1996 to December 31,
1996, $6.50 per share....... 1,636,383 16,364 10,583,636 (250,000) -- -- 10,350,000
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1996.... 15,399,071 153,991 16,444,034 (250,000) (434,000) (6,755,917) 9,158,108
Net loss...................... -- -- -- -- -- (3,832,527) (3,832,527)
Payment of subscription notes
receivable.................. -- -- -- 250,000 -- -- 250,000
Deferred compensation on stock
options..................... -- -- 144,004 -- (144,004) -- --
Grant and recognition of stock
options..................... -- -- 62,815 -- 188,373 -- 251,188
Issuance of common stock in
private placement from
September 8, 1997 to
December 31, 1997, $11.17
per share................... 660,953 6,609 7,378,391 -- -- -- 7,385,000
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1997.... 16,060,024 160,600 24,029,244 -- (389,631) (10,588,444) 13,211,769
(continued)
Net loss...................... -- -- -- -- -- (8,904,032) (8,904,032)
Deferred compensation on stock
options..................... -- -- 493,701 -- (493,701) -- --
Grant and recognition of stock
options..................... -- -- 838,654 -- 269,787 -- 1,108,441
Exercise of stock options..... 38,536 385 249,615 -- -- -- 250,000
Issuance of common stock in
private placement from
January 1, 1998 to December
31, 1998, $11.17 per
share....................... 1,797,063 17,971 20,059,014 (2,102,000) -- -- 17,974,985
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1998.... 17,895,623 178,956 45,670,228 (2,102,000) (613,545) (19,492,476) 23,641,163
Net loss...................... -- -- -- -- -- (18,124,277) (18,124,277)
Payment of subscription notes
receivable.................. -- -- -- 2,102,000 -- -- 2,102,000
Deferred compensation on stock
options..................... -- -- 354,009 -- (354,009) -- --
Grant and recognition of stock
options..................... -- -- 4,718,582 -- 308,473 -- 5,027,055
Exercise of stock options..... 1,720 17 83 -- -- -- 100
Issuance of common stock in
private placement in January
1999, $11.17 per share...... 9,806 98 109,902 -- -- -- 110,000
Issuance of common stock and
warrants in private
placement on November 31,
1999, $13.96 per share...... 2,808,793 28,088 38,894,232 -- -- -- 38,922,320
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at December 31, 1999.... 20,715,942 207,159 89,747,036 -- (659,081) (37,616,753) 51,678,361
Net loss...................... -- -- -- -- -- (9,209,106) (9,209,106)
Deferred compensation on stock
options..................... -- -- 976,714 -- (976,714) -- --
Grant and recognition of stock
options and warrants........ -- -- 1,427,578 -- 258,117 -- 1,685,695
Exercise of stock options and
warrants.................... 54,204 542 325,931 -- -- -- 326,473
Issuance of common stock in
IPO on February 9, 2000, $18
per share (net of issuance
costs of $6,220,839)........ 4,025,000 40,250 66,188,911 -- -- -- 66,229,161
---------- -------- ----------- ---------- ----------- ------------ -----------
Balance at June 30, 2000........ 24,795,146 $247,951 158,666,170 -- (1,377,678) (46,825,859) 110,710,584
========== ======== =========== ========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-22
<PAGE> 136
ANTIGENICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 AND FOR THE PERIOD
FROM MARCH 31, 1994 (DATE OF INCEPTION) TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1994
(DATE OF
JUNE 30, INCEPTION) TO
------------------------- JUNE 30,
1999 2000 2000
----------- ----------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $$(7,217,151) (9,209,106) (46,825,859)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... 339,574 720,048 2,421,806
Stock options, warrants and Predecessor Company
stock options................................... 1,585,160 1,685,695 9,536,394
Common stock grant................................ -- -- 2,200,000
Changes in operating assets and liabilities:
Other assets...................................... (87,202) (177,700) (1,066,480)
Prepaid assets.................................... 63,758 (351,551) (454,755)
Organization costs................................ -- -- (32,934)
Accounts payable.................................. (455,362) 599,637 1,024,310
Accrued liabilities............................... (4,668) (65,728) 867,712
Due to/from related party, net.................... 35,783 12,589 12,349
----------- ----------- -----------
Net cash used in operating activities............. (5,740,108) (6,786,116) (32,317,457)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of plant and equipment...................... (3,787,561) (914,151) (10,649,515)
Investments.......................................... -- (300,000) (300,000)
Proceeds from the sale of plant and equipment........ -- -- 31,942
----------- ----------- -----------
Net cash used in investing activities............. (3,787,561) (1,214,151) (10,917,573)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from sale of equity..................... 110,000 66,788,578 145,223,476
Subscriptions receivable............................. 2,102,000 -- --
Exercise of stock options and warrants............... -- 326,473 576,573
Proceeds from long-term debt......................... 1,019,636 -- 3,480,542
Payments of long-term debt........................... (140,885) (391,912) (904,747)
----------- ----------- -----------
Net cash provided by financing activities......... 3,090,751 66,723,139 148,375,844
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents... (6,436,918) 58,722,872 105,140,814
Cash and cash equivalents at beginning of period....... 22,168,049 46,417,942 --
----------- ----------- -----------
Cash and cash equivalents at end of period............. $15,731,131 105,140,814 105,140,814
=========== =========== ===========
Supplemental cash flow information:
Interest paid........................................ $ 85,211 204,737 496,134
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-23
<PAGE> 137
ANTIGENICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements of Antigenics Inc. have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
annual financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1999 included in our
registration statement on Form S-1 filed with the Securities and Exchange
Commission on May 25, 2000.
NOTE B -- INITIAL PUBLIC OFFERING
On February 9, 2000, we completed an initial public offering (the "IPO") of
4,025,000 shares of common stock at $18 per share. We received $72,450,000
before deduction of offering expenses of approximately $6,221,000. Concurrent
with the completion of the IPO, we were converted from a limited liability
company to a corporation. All members of the limited liability company exchanged
their respective member interests for shares of common stock in the corporation.
The financial statements have been retroactively adjusted to reflect the
conversion from a limited liability company to a corporation and the exchange of
each unit of members' equity into 172.0336 shares of common stock.
NOTE C -- INCOME TAXES
Prior to converting to a corporation, as a limited liability company, no
federal, state or local income taxes were levied on the company. Each member of
the limited liability company was individually responsible for reporting their
share of the company's net income or loss on their personal tax returns. As a
result we will not be able to offset future taxable income, if any, against
losses incurred prior to the conversion to a corporation.
Income taxes are accounted for under the asset and liability method.
Beginning February 9, 2000, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be reversed or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
tax assets are recorded when they more likely than not are able to be realized.
Given our history of incurring operating losses, management believes that
it is more likely than not that any deferred tax assets, net of deferred tax
liabilities, will not be realized. Therefore, there is no income tax benefit in
the accompanying financial statements because of a loss before income taxes and
the need to recognize a valuation allowance on net deferred tax assets.
NOTE D -- EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires the calculation and presentation of "Basic" and "Diluted"
earnings per share. Basic earnings per share is calculated by dividing net loss
by the weighted average number of common shares outstanding. Diluted earnings
per share is calculated by dividing net loss by the weighted average common
shares outstanding plus the dilutive effect of outstanding stock options and
stock warrants. Because we report a net loss, diluted earnings per share is the
same as basic earnings per share because the effect of outstanding stock options
and
F-24
<PAGE> 138
ANTIGENICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
stock warrants being added to weighted average shares outstanding would reduce
the net loss per share. Therefore, outstanding stock options and stock warrants
are not included in the calculation.
NOTE E -- STOCK-BASED COMPENSATION PLANS
Employee Stock Purchase Plan
In connection with the IPO, the board of directors approved an employee
stock purchase plan. The stockholders, at the May 2000 stockholders' meeting,
approved the plan. Under the plan, employees may purchase shares of common stock
at a discount from fair market value. There are 300,000 shares of common stock
(subject to adjustment for stock splits and similar capital changes) reserved
for issuance under the purchase plan. The purchase plan is intended to qualify
as an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code of 1986, as amended. Rights to purchase common stock under
the purchase plan are granted at the discretion of the compensation committee,
which determines the frequency and duration of individual offerings under the
plan and the dates when stock may be purchased. Eligible employees participate
voluntarily 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 lesser of its fair value at the beginning of the offering period or on
the applicable exercise date and may be paid through payroll deductions,
periodic lump sum payments or a combination of both. The plan terminates on
November 15, 2009. As of June 30, 2000, no shares of common stock have been
issued under the purchase plan.
Equity Incentive Plan
In connection with the IPO, the board of directors approved an employee
equity incentive plan. Our equity incentive plan authorizes the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options for the
purchase of an aggregate of 4,800,000 shares of common stock (subject to
adjustment for stock splits and similar capital changes) to employees and, in
the case of non-qualified stock options, to outside advisors and directors of
Antigenics. The board of directors has appointed the compensation committee to
administer the equity plan. The ability to grant incentive stock options to
employees and directors was approved by the stockholders at the May 2000
stockholders' meeting.
During the six months ended June 30, 2000, we granted approximately 233,000
non-qualified stock options to employees and directors with exercise prices at
or below the fair value of the underlying shares at the date of grant and
approximately 212,000 incentive stock options. These options were granted at a
weighted average exercise price of $12.06 per share. In addition, we granted
approximately 91,000 non-qualified stock options to outside advisors of which
approximately 62,000 options vested immediately and the remainder vest over
periods up to five years. These options were granted at a weighted average
exercise price of $12.84 per share. Approximately 46,000 options were forfeited
during the six months ended June 30, 2000 with a weighted average exercise price
of $6.85 per share.
We recorded a charge to operations related to the grants of options to
employees and directors for the six months ended June 30, 1999 and 2000, of
approximately $156,000 and $258,000, respectively. The charge to operations
related to options granted and earned by outside advisors totaled approximately
$1,429,000 and $1,427,000 for the six months ended June 30, 1999 and 2000,
respectively.
F-25
<PAGE> 139
ANTIGENICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
NOTE F -- COMMITMENTS AND RELATED PARTY TRANSACTIONS
On February 11, 2000, we entered into a research agreement with The
University of Texas M.D. Anderson Cancer Center ("MDA") to conduct clinical
studies. We are required to pay MDA a total of approximately $358,000 for the
clinical study of approximately 35 patients. The first installment was paid upon
signing the agreement.
On May 16, 2000, we entered into another research agreement with MDA to
conduct clinical studies. We are required to pay MDA $273,611 over the next year
in 3 installments.
On May 18, 2000, we committed $3,000,000 to become a limited partner in a
limited partnership which will invest principally in companies that apply
genomic technologies and information in their offerings of products and services
or that are engaged in research and development and efforts involving genomic
technologies with a view to developing such products and services. Contributions
to the limited partnership are made as authorized by the general partner. As of
June 30, 2000, we have invested $300,000 and have included this amount in
non-current other assets. We account for this investment under the cost method.
The general partner of the limited partnership is AGTC Partners, L.P. and
NewcoGen Group Inc. is the general partner of AGTC Partners, L.P. Noubar Afeyan,
Ph.D., who is one of our directors, is the president of NewcoGen Group Inc. and
is also a principal of the limited partnership. In addition, Garo H. Armen,
Ph.D., our chief executive officer and one of our directors, is a director of
NewcoGen Group Inc.
F-26
<PAGE> 140
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Aquila
Biopharmaceuticals, Inc. and its subsidiary ("the Company") at December 31, 1999
and December 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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.
/s/ PRICEWATERHOUSECOOPERS, LLP
Boston, Massachusetts
February 8, 2000
(except for Note 19, as to
which the date is March 24th, 2000)
F-27
<PAGE> 141
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Revenue:
Product Sales.................................... $ 564,170 $ 955,321 $ 1,319,260
Research and development......................... 1,503,494 4,642,088 5,608,977
----------- ------------ -----------
2,067,664 5,597,409 6,928,237
Cost and expenses:
Cost of Sales.................................... 858,200 969,484 1,023,268
Research and development......................... 6,642,407 7,447,359 5,019,775
Purchased incomplete technology (Note 18)........ -- 9,927,227 --
General and administrative....................... 3,026,129 3,800,806 4,521,035
----------- ------------ -----------
10,526,736 22,144,876 10,564,078
Other income, net (Notes 6, 12 and 13)............. 264,296 1,947,832 4,370,107
----------- ------------ -----------
Income/(loss) from continuing operations........... (8,194,776) (14,599,635) 734,266
Discontinued operations (Note 3):
Gain on sale..................................... -- -- 191,250
----------- ------------ -----------
Net Income/(loss).................................. $(8,194,776) $(14,599,635) $ 925,516
----------- ------------ -----------
Unrealized holding gains on available-for-sale
securities.................................... 483,190 79,434 --
Less: reclassification adjustment for gain
included in net income........................ (136,434) -- --
----------- ------------ -----------
Total other comprehensive income................. 346,756 79,434 --
----------- ------------ -----------
Comprehensive Income/(loss)........................ $(7,848,020) $(14,520,201) $ 925,516
=========== ============ ===========
Income/(loss) per weighted average number of common
shares:
Basic earnings per share:
Income/(loss) from continuing operations......... $ (1.11) $ (2.22) $ 0.15
Net Income/(loss)................................ $ (1.11) $ (2.22) $ 0.18
Diluted earnings per share:
Income/(loss) from continuing operations......... $ (1.11) $ (2.22) $ 0.14
Net Income/(loss)................................ $ (1.11) $ (2.22) $ 0.18
Weighted average number of common shares
outstanding:
Basic............................................ 7,394,147 6,580,602 5,003,703
Diluted.......................................... 7,394,147 6,580,602 5,141,815
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 142
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 524,070 $ 5,270,460
Marketable securities (Notes 2, 4 and 6).................. 6,493,044 9,885,090
Accounts and other receivables (less allowance for
doubtful accounts of $47,000 in 1998).................. 636,555 1,027,711
Inventories (Note 5)...................................... 497,853 434,849
Prepaid expenses and other current assets................. 280,041 353,448
------------- -------------
Total current assets.............................. 8,431,563 16,971,558
Investments (Note 6)........................................ 244,500 319,500
Property, Plant, and Equipment, Net (Note 7)................ 6,191,244 6,372,345
Patents and Purchased Technology, Net (Note 8).............. 46,891 116,270
Other Assets (Note 13)...................................... 827,738 848,726
------------- -------------
Total Assets...................................... $ 15,741,936 $ 24,628,399
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 554,159 $ 485,974
Accrued Royalties......................................... -- 134,263
Accrued professional fees................................. 164,967 298,684
Accrued expenses and other (Note 9)....................... 883,588 1,970,703
Current maturities of long-term debt (Note 10)............ 1,577,036 2,191,284
------------- -------------
Total current liabilities......................... 3,179,750 5,080,909
Deferred Revenue (Note 6)................................... 150,000 225,000
Long Term Debt (Note 10).................................... 2,607,397 3,669,494
------------- -------------
Total Liabilities................................. 5,937,147 8,975,403
------------- -------------
Commitments and Contingencies (Note 13)
Shareholders' Equity (Note 14):
Preferred stock, authorized: 5,000,000 shares, none
issued................................................. -- --
Common stock, par value: $.01 per share, authorized:
30,500,000 shares, issued: 7,888,446 and 6,992,483
shares in 1999 and 1998, respectively.................. 78,884 69,924
Additional paid in capital................................ 141,802,488 139,811,635
Accumulated other comprehensive income.................... 426,190 79,434
Treasury stock at cost: 7,631 shares in 1999 and 1998..... (34,339) (34,339)
Accumulated deficit....................................... (132,468,434) (124,273,658)
------------- -------------
Total Shareholders' Equity........................ 9,804,789 15,652,996
------------- -------------
Total Liabilities and Shareholders' Equity........ $ 15,741,936 $ 24,628,399
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 143
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income/(loss).................................... $(8,194,776) $(14,599,635) $ 925,516
Adjustments to reconcile net income/(loss) to net
cash used in operating activities:
Depreciation and amortization...................... 816,427 292,650 402,555
Provision (recovery) for doubtful accounts......... (39,500) 40,000 (25,000)
Purchased incomplete technology.................... -- 9,927,227 --
Non cash compensation expense...................... -- -- 10,000
Gain on sale of property, plant and equipment...... (14,300) (25,115) (2,340,983)
Gain on sale of discontinued businesses............ -- -- (191,250)
Issuance of common shares.......................... -- -- 15,871
Changes in assets and liabilities:
Accounts and other receivables..................... 430,656 557,434 765,774
Inventories........................................ (63,004) 243,742 (448,440)
Deferred revenue................................... (75,000) -- (917,600)
Prepaid and other current assets................... 73,407 (115,475) 540,954
Accounts payable, accrued expenses and other....... (1,246,795) 265,186 (1,720,026)
----------- ------------ ------------
Net cash used by operating activities....... (8,312,885) (3,413,986) (2,982,629)
Cash Flows From Investing Activities:
Purchases of available-for-sale securities......... (8,789,784) (20,693,209) --
Purchases of held-to-maturity securities........... -- -- (12,163,261)
Proceeds from maturities of marketable
securities....................................... 12,595,957 20,507,296 11,181,249
Other noncurrent assets............................ 28,616 (737,814) 22,120
Purchases of property, plant and equipment......... (565,947) (5,968,118) (371,176)
Proceeds from the sale of property, plant and
equipment, net................................... 14,300 25,115 6,100,583
Proceeds from the sale of discontinued
businesses....................................... -- -- 412,123
----------- ------------ ------------
Net cash (used)/provided by investing
activities............................... 3,283,142 (6,866,730) 5,181,638
Cash Flows From Financing Activities:
Issuance of stock.................................. 1,511,015 3,845,965 18,000
Proceeds from debt................................. -- 5,000,000 208,017
Payment of debt.................................... (1,227,662) (647,239) (4,184,667)
----------- ------------ ------------
Net cash provided/(used) by financing
activities............................... 283,353 8,198,726 (3,958,650)
----------- ------------ ------------
Net increase/(decrease) in cash and cash
equivalents........................................ (4,746,390) (2,081,990) (1,759,641)
----------- ------------ ------------
Cash and cash equivalents at the beginning of the
year............................................... 5,270,460 7,352,450 9,112,091
----------- ------------ ------------
Cash and cash equivalents at the end of the year..... $ 524,070 $ 5,270,460 $ 7,352,450
=========== ============ ============
Supplemental disclosures:
Interest paid........................................ $ 683,775 $ 37,682 $ 397,776
Issuance of treasury stock in settlement of
liability.......................................... -- 13,028 --
Issuance of warrants in conjunction with debt........ -- 90,000 --
Issuance of stock in settlement of debt and accrued
interest........................................... $ 488,798 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE> 144
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL INCOME STOCK DEFICIT TOTAL
--------- ------- ------------ ------------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.......... 5,000,000 $50,000 $127,514,223 $ 0 $(47,367) $(110,599,539) $16,917,317
Exercises of options................ 4,000 40 17,960 -- -- -- 18,000
Stock issued to creditors pursuant
to Reorganization plan............ 3,527 35 15,836 -- -- -- 15,871
Compensation expense................ -- -- 10,000 -- -- -- 10,000
Net income.......................... -- -- -- -- -- 925,516 925,516
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1997.......... 5,007,527 50,075 127,558,019 0 (47,367) (109,674,023) 17,886,704
Stock issued for private
placement......................... 769,000 7,690 3,543,520 -- -- -- 3,551,210
Stock issued for employee stock
purchase.......................... 11,331 113 48,724 -- -- -- 48,837
Acquisition of Vactex, Inc.......... 1,150,000 11,500 8,326,000 -- -- -- 8,337,500
Exercises of options................ 54,625 546 245,372 -- -- -- 245,918
Warrants issued for debt
obligation........................ -- -- 90,000 -- -- -- 90,000
Unrealized gain on
available-for-sale securities..... -- -- -- 79,434 -- -- 79,434
Treasury stock issued in settlement
of Chapter 11 claim............... -- -- -- -- 13,028 -- 13,028
Net loss............................ -- -- -- -- -- (14,599,635) (14,599,635)
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1998.......... 6,992,483 69,924 139,811,635 79,434 (34,339) (124,273,658) 15,652,996
Stock issued for private
placement......................... 666,667 6,667 1,473,254 -- -- -- 1,479,921
Stock issued for employee stock
purchase.......................... 12,322 123 30,971 -- -- -- 31,094
Stock issued for debt............... 216,974 2,170 486,628 -- -- -- 488,798
Unrealized gain on
available-for-sale securities..... -- -- -- 346,756 -- -- 346,756
Net loss............................ -- -- -- -- -- (8,194,776) (8,194,776)
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1999.......... 7,888,446 $78,884 $141,802,488 $426,190 $(34,339) $(132,468,434) $ 9,804,789
========= ======= ============ ======== ======== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 145
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Aquila Biopharmaceuticals, Inc. (the "Company" or "Aquila"), engages in
discovery, product development and commercialization of products to prevent,
treat or control infectious diseases, autoimmune disorders and cancers. Aquila
is subject to risks common to companies in the biotechnology industry including,
but not limited to, development by Aquila or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, the ability to raise additional capital and compliance
with FDA government regulations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The Consolidated Financial Statements
include Aquila Biopharmaceuticals, Inc. and VacTex, Inc. ("VacTex") its wholly
owned subsidiary. VacTex was acquired on April 14, 1998 (See Note 18). All
significant intercompany transactions and accounts have been eliminated.
Segment Information -- Aquila's reportable segments are development and
manufacturing. All research programs are aggregated in the development segment.
Revenues from the sale of the Company's one commercial product, the feline
leukemia vaccine, the QS-21 material supplied to research partners, and license
fees relating to these products are reported in the manufacturing segment.
Aquila allocates resources among segments primarily on the basis of labor
utilization. Aquila's business is conducted entirely within the United States.
The financial results of the Company's segments are presented on the same
accounting basis as the Company's consolidated results. There are no
inter-segment activities. The table below presents revenue and net income data
for the two segments for the years 1997, 1998 and 1999. Asset information by
segment is not reported because we do not produce such information internally.
<TABLE>
<CAPTION>
CONSOLIDATED
DEVELOPMENT MANUFACTURING RECONCILING TOTALS
------------------ ----------------------- ITEMS -----------------------
REVENUE NET LOSS REVENUE NET INC./LOSS NET INC./LOSS REVENUE NET INC./LOSS
------- -------- ------- ------------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1997................. $1,134 $(4,962)(1) $5,794 $2,548(2) $ 3,339 $6,928 $ 926
1998................. $ 872 $(8,317)(1) $4,725 $2,285(2) $(8,568) $5,597 $(14,600)
1999................. $ 460 $(7,952)(1) $1,608 $ (436)(2) $ 193 $2,068 $ (8,195)
</TABLE>
---------------
(1) Includes non-recurring license fees of $3.5 million, $3.0 million and $0.8
million in 1997, 1998 and 1999 respectively. Total export sales of this
segment were approximately $0.8 million, $1.4 million and $1.2 million in
1999, 1998 and 1997, respectively.
(2) Includes $2.3 million gain from the sale of real estate, net royalty income
of $0.9 million, net interest income of $0.6 million and rental income of
$0.5 million in 1997; a charge for incomplete technology of $9.9 million,
net interest income of $0.9 million, net royalty income of $0.5 million and
$0.3 million real estate tax rebate in 1998, and net interest expense of
$0.1 million and income from the sale of available-for-sale securities of
$0.2 in 1999.
One corporate partner, SmithKline Beecham, has historically been our
principle source of research and development revenue. Research and development
revenues from this corporate partner, included in the manufacturing segment,
represented 5%, 62% and 61% of Aquila's total revenue in 1999, 1998 and 1997,
respectively. This includes compensation to Aquila for producing QS-21 clinical
trial material for use in its product development programs. In 1998, this
partner made a payment of $3.0 million, the last scheduled payment under a
license agreement.
F-32
<PAGE> 146
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, Aquila received license fee revenue from Elan Corporation and
Progenics Pharmaceuticals. The research and development revenue from these two
partners, included in the manufacturing segment, represents 24% and 16%,
respectively, of Aquila's total revenue in 1999.
A marketing partner, Virbac S.A., represents all of the Company's product
sales and a substantial portion of the Company's research and development
revenue. Product sales to this partner are included in the manufacturing segment
and represented 27%, 17% and 19% of total revenues in 1999, 1998 and 1997,
respectively. Revenue from development agreements with this partner are included
in the development segment and represented 11% of total revenues in 1999, and
16% of total revenues in 1998 and 1997.
Aquila depends on a number of corporate collaborators for reimbursement for
the supply of its adjuvant for use in their clinical trials and for research
revenues.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Such estimates include, but are not limited to, valuation
allowance against deferred tax assets. Actual results could differ from those
estimates.
Cash and Cash Equivalents -- Aquila considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents include money market accounts, certificates of
deposit, commercial paper and short-term investments.
Marketable Securities -- Aquila classifies its marketable securities at the
time of purchase in accordance with the Statement of Financial Accounting
Standards No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities". At December 31, 1999, all marketable securities were
classified as available-for-sale.
Concentrations of Credit Risk -- Financial instruments that potentially
subject Aquila to concentration of credit risk are primarily cash investments
and accounts receivable. Cash investments are restricted to financial
institutions and corporations with high credit standings. Credit risk on
accounts receivable is minimized by the strong financial position of the
entities with which the Company does business. Write-offs for 1999, 1998 and
1997 were $7,500, $72,620 and $76,000, respectively.
Inventories -- Inventories are stated at the lower of cost or market. Cost
has been determined using standard costs which approximate the first-in,
first-out method.
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost. Depreciation for financial accounting purposes is computed by the
straight-line method over their estimated useful lives. The estimated useful
lives of the assets are as follows:
<TABLE>
<CAPTION>
USEFUL LIFE
------------------------
<S> <C>
Furniture, fixtures and equipment........................... 3 -- 10
Leasehold and building improvements......................... Lesser of Useful Life
or the Term of the Lease
</TABLE>
Maintenance and repairs are charged to operations as incurred, whereas additions
and improvements are capitalized. Upon retirement or disposal of assets, the
cost and the related accumulated depreciation are removed from the balance sheet
and any gain or loss is reflected in earnings.
Long-Lived Assets -- The Company reviews long-lived assets for impairment
by comparing the cumulative undiscounted cash flows from the assets with their
carrying amount. Any write-downs are to be treated as permanent reductions in
the carrying amount of the assets. Management's policy regarding long-lived
assets is
F-33
<PAGE> 147
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to evaluate the recoverability of its assets when the facts and circumstances
suggest that these assets may be impaired. This analysis relies on a number of
factors, including operating results, business plans, budgets, economic
projections and changes in management's strategic direction or market emphasis.
The test of such recoverability is a comparison of the asset value to its
expected cumulative net operating cash flow over the remaining life of the
asset.
Patents and Purchased Technology -- Purchased technology related to the
acquisition of completed technology is recorded at fair market value at
acquisition date. Capitalized patent costs relate to patented technologies from
which the Company is deriving economic benefit. Purchased technology and patents
are amortized on a straight-line basis over their estimated useful lives ranging
from three to seven years.
Revenue Recognition -- Revenue from product sales is recognized at the time
of product shipment. Revenue from research and development contracts is deferred
and recognized over the contractual periods as services are performed or as
distinct milestones are met. The initial fee in alliance agreements is
recognized as revenue when a definitive agreement is reached and no contingent
factors are present.
Research and Development Costs -- Research and development costs are
charged to operations as incurred.
Income Taxes -- Aquila uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities using
current statutory tax rates.
Net Income/(Loss) Per Share -- Aquila applies Statement of Financial
Accounting Standards No. 128, ("SFAS 128") Earnings Per Share to compute loss
per share. Under SFAS 128, basic EPS is calculated by dividing net earnings
(loss) by the weighted-average common shares outstanding during the period.
Diluted EPS reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to common
shares using the treasury stock method based upon the weighted-average fair
value of our common shares during the period.
Common stock equivalents consisting of stock options and warrants have been
excluded from the computation of diluted earnings/(loss) per share in 1999 and
1998 since inclusion would be anti-dilutive because Aquila was in a loss
position. Warrants to purchase 60,680 shares of common stock with an exercise
price of $4.12 and a term of 5 years were outstanding at December 31, 1999 and
1998. Options to purchase 1,136,288 and 1,091,560 shares of common stock at
weighted average exercise prices of $3.37 and $3.89, respectively, were
outstanding at December 31, 1999 and 1998, respectively. Options to purchase
180,375 shares of common stock at a weighted average exercise price of $5.16
were outstanding at December 31, 1997 and not included in the computation of
diluted income per share in 1997 because their exercise price was greater than
average market price making inclusion anti-dilutive (see also Note 19).
Basic and diluted earnings per share from discontinued operations were
$0.04 for 1997.
Accounting Pronouncements
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. Accordingly, no later than the second quarter of 2000
Aquila will change its accounting for initial license fees. Through 1999 revenue
was recognized when the agreement was reached and no contingent factors were
present. Under the new guidance of SAB 101, revenue will be deferred and
recognized ratably over the appropriate life. No later
F-34
<PAGE> 148
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than the second quarter of 2000, a cumulative adjustment will be recorded to
create deferred revenue that will be recognized over future years.
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedging accounting. SFAS 133 will be effective for the Company's
year ending December 31, 2001. The Company believes the adoption of SFAS No. 133
will not have a material effect on the financial statements.
3. DISCONTINUED OPERATIONS
During 1996, Aquila disposed of two separate diagnostics businesses
encompassing its diagnostic assets and operations for cash proceeds of
approximately $12.2 million. The accompanying financial statements include a
gain from the disposal of $0.2 million in 1997. Net revenue from discontinued
operations was $0.4 million in 1997.
4. MARKETABLE SECURITIES
Available-for-sale marketable securities are carried at fair market value
based on quoted market prices. Held-to-maturity marketable securities are
carried at amortized cost, which approximates fair value. At December 31, 1999,
all marketable securities were classified as available-for-sale. Marketable
securities consisted of the following at December 31:
<TABLE>
<CAPTION>
UNREALIZED
FAIR --------------- AMORTIZED
VALUE GAINS LOSSES COST
------ ----- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1999
Available-for-sale at fair market value
Common stock........................................... $ 550 $475 $ -- $ 75
Corporate debt securities.............................. 492 -- (7) 499
Government-backed obligations.......................... 5,451 -- (49) 5,500
------ ---- ---- ------
Total.......................................... $6,493 $475 $(56) $6,074
1998
Available-for-sale at fair market value
Common stock........................................... $ 139 $ 64 $ -- $ 75
Corporate debt securities.............................. 6,746 15 -- 6,731
Government-backed obligations.......................... 2,000 -- -- 2,000
Held-to-maturity at amortized cost
Corporate debt security................................ 1,000 -- -- 1,000
------ ---- ---- ------
Total.......................................... $9,885 $ 79 $ -- $9,806
</TABLE>
F-35
<PAGE> 149
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $157 $231
Work in process............................................. 236 122
Raw materials and supplies.................................. 105 82
---- ----
$498 $435
==== ====
</TABLE>
6. INVESTMENTS
Aquila holds 270,000 shares of Protein Sciences Corporation stock as
payment for a paid up license and for royalties due and payable under terms of a
technology sublicense agreement. The shares are carried at a cost of $.35 per
share.
Aquila received 45,000 shares of Progenics Pharmaceutical's Inc.
("Progenics") common stock in partial payment of a license fee under an
agreement executed in 1995. As Progenics attains certain milestones as defined
in the agreement, these shares are released from restriction and Aquila earns
permanent ownership of the shares. The value of the stock was determined to be
$0.3 million and was recorded in Investments and Deferred Revenue. The Company
earned the first milestone in 1996 and subsequently sold the unrestricted shares
for $0.2 million in 1999. In 1999, the Company earned the second milestone,
reclassified another 11,250 shares of Progenics common stock from Investments to
Marketable Securities, and recorded revenue of $75,000, which represented the
cost of these shares. At December 31, 1999, these shares had a market value of
$0.5 million and were classified as available-for-sale. The remaining 22,500
restricted shares are carried at cost of $150,000 and Deferred Revenue of the
same amount. In the first quarter of 2000, the Company sold the 11,250 shares of
unrestricted Progenics common stock for proceeds of $0.6 million.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures, and equipment.......................... $ 3,594 $ 3,274
Leasehold and building improvements......................... 5,358 5,112
------- -------
Sub-total................................................... 8,952 8,386
Less accumulated depreciation and amortization.............. (2,761) (2,014)
------- -------
$ 6,191 $ 6,372
======= =======
</TABLE>
Total depreciation expense during 1999, 1998 and 1997 was $0.7 million,
$0.2 million and $0.3 million, respectively. Interest cost of $0.1 million out
of total interest costs of $0.2 million was capitalized in 1998 in connection
with the fit-out of our new facility.
F-36
<PAGE> 150
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PATENTS AND PURCHASED TECHNOLOGY
Purchased technology and intangibles consist of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Purchased technology........................................ $ 240 $ 240
Patents and patent support.................................. 746 746
----- -----
Sub-total................................................... 986 986
Less accumulated amortization............................... (939) (870)
----- -----
$ 47 $ 116
===== =====
</TABLE>
Total amortization expense was $0.1 million, in each of in 1999, 1998 and
1997.
9. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fit-out of new facility..................................... $ 40 $ 700
Research contract obligations............................... 152 674
Compensation................................................ 433 283
Other....................................................... 259 314
---- ------
$884 $1,971
==== ======
</TABLE>
10. DEBT
In August 1997, Aquila entered into a three year $1 million credit facility
fully collateralized by equipment purchased. In December 1998, the balance of
$138,000, including interest was paid and the credit facility terminated.
In April 1998, Aquila issued $1.3 million of debt as part of the purchase
of VacTex, Inc. (See Note 18). The debt bears interest of 7% and was callable as
of April 14, 1999. In 1999, Aquila redeemed $0.8 million of outstanding
debentures including accrued interest for 216,974 shares of common stock and
$0.3 million in cash. As of December 31, 1999, Aquila had $0.5 million in
outstanding debentures. In the first quarter of 2000 Aquila redeemed $0.3
million including accrued interest for cash.
In July 1998, Aquila entered into a loan agreement (the "Agreement") with
Transamerica Business Credit Corporation. The Agreement made available $5.0
million for the build-out of the new facility in Framingham, Massachusetts and
for the purchase of new equipment. The Agreement calls for interest at 13
percent with a repayment term of four years and a 10 percent balloon payment at
the end of the loan term. Collateral for the loan consists of equipment and
leasehold improvements with a net book value of $4.5 million. Warrants to
purchase 60,680 shares of Aquila's common stock were issued in connection with
the loan agreement. The warrants have an exercise price of $4.12 and a term
ending July 1, 2003. The warrants were valued at $90,000 and will be amortized
over the life of the loan. As of December 31, 1999, the full amount had been
borrowed and $3.7 million was outstanding under the loan. At current interest
rates available to the Company, the fair value of the debt approximates the
carrying value. Repayment of the loan and related interest will require payments
of $1.5 million in each of the years 2000 through 2002.
F-37
<PAGE> 151
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The components of the deferred tax assets and liabilities at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current:
Inventory................................................. $ 110 $ 44
Other..................................................... 157 294
-------- --------
Total current............................................... 267 338
Noncurrent:
Capital Loss Carryover.................................... 3,318 3,318
Depreciation and Amortization............................. (156) 72
Impairment of Long Lived Assets........................... 719 --
Other..................................................... (15) 635
Federal and State NOL's................................... 34,199 30,251
Federal and State tax credits............................. 1,421 1,617
-------- --------
Total noncurrent............................................ 39,486 35,893
-------- --------
Sub-total................................................... 39,752 36,231
Less: valuation allowance................................... (39,752) (36,231)
-------- --------
Net deferred tax asset...................................... $ 0 $ 0
======== ========
</TABLE>
Management has assessed the evidence relating to recoverability of the
deferred tax asset and has determined that it is more likely than not that the
deferred tax benefit will not be realized due to the uncertainty of future
earnings. Accordingly, a valuation reserve has been established for the full
amount of the deferred tax asset.
As of December 31, 1999, the Company had federal net operating loss (NOL)
carryforwards of approximately $89.0 million. These loss carryforwards begin to
expire in the year 2000 and expire fully by the year 2018. The Company has state
loss carryforwards of approximately $41.4 million. These state loss
carryforwards begin to expire in 1999 and expire fully by 2005. Utilization of
these NOL's may be limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986.
12. OTHER INCOME, NET
At December 31, Other Income, Net consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of Rockville real estate..................... $ -- $ -- $2,332
Royalty income, net....................................... 65 527 854
Interest income........................................... 544 1,021 1,044
Interest (expense)........................................ (623) (100) (399)
Rental income, net........................................ -- -- 500
Miscellaneous income, net................................. 278 500 39
----- ------ ------
$ 264 $1,948 $4,370
===== ====== ======
</TABLE>
In 1999, Aquila recorded $0.2 million of income (included in miscellaneous)
from the gain on the sale of available-for-sale securities. In December 1998,
Aquila received $0.3 million (included in miscellaneous) as a
F-38
<PAGE> 152
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rebate of taxes paid on its former leased facility in Worcester, Massachusetts.
In November, 1997, Aquila sold the Rockville, Maryland facilities for $6.5
million and recorded a gain of $2.3 million. Proceeds from the sale were used to
retire the mortgage. Royalty income represents royalties earned under license
and sublicense agreements related primarily to diagnostic technologies, net of
expenses due to third-party licensors. In 1997, rental income derived from the
rental of our real estate in Rockville, Maryland ceased upon the sale of the
Rockville facilities.
13. COMMITMENTS AND CONTINGENCIES
Leases -- Costs incurred under facility leases are recorded as rent expense
and totaled $0.8 million, $0.9 million and $1.2 million in 1999, 1998 and 1997,
respectively, (net of sublease income of $28,500 in 1999). In 1998, Aquila
entered into a new operating, facility lease agreement for its executive
offices, research laboratories and manufacturing facilities in Framingham,
Massachusetts. The base lease period for this lease is twelve years and the
lease contains renewal options for two additional five-year periods. In
connection with the facility lease, the Company maintains a fully collateralized
letter of credit of $0.8 million. No amounts have been drawn on the letter of
credit. As of December 31, 1999, the future minimum lease payments (net of
sublease income of $85,000 in 2000) required under the operating lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (DOLLARS IN THOUSANDS)
------------------------ ----------------------
<S> <C>
2000............................................ $ 792
2001............................................ 877
2002............................................ 896
2003............................................ 939
2004............................................ 939
Thereafter...................................... 5,583
-------
Total........................................... $10,111
=======
</TABLE>
Employment and Consulting Agreements -- Aquila has agreements with various
consultants and key employees, with terms ranging from one to three years. These
agreements provide for future aggregate annual payments of approximately $1.0
million. Costs incurred and charged to operations under these contracts
aggregated $1.1 million, $1.3 million and $1.2 million in 1999, 1998 and 1997,
respectively.
Other Agreements -- Aquila has licensed fibronectin binding technology from
a Swedish company, for use in mastitis research and development. Aquila recorded
$0.3 million and $0.6 million of expense in 1999 and 1998, respectively, for
milestone payments relating to patent issuance. The agreement provides for
additional payments upon the first commercial sale of future vaccines at $1.3
million per vaccine, and up to $0.6 million upon the granting of additional
patents in the United States and Europe on the technology acquired.
Contingencies -- Five civil actions commenced in 1993 in the United States
District Court, District of Massachusetts against Cambridge Biotech Corporation
("CBC") a predecessor of Aquila, certain of its officers, and in three of the
actions, CBC's former auditors -- Deloitte & Touche, LLP ("Deloitte"), have all
been settled. The settlement of claims against CBC and the individual defendants
was approved by the court in July, 1996. Under the terms of the Settlement, the
class members received 1,250,000 shares of Aquila common stock. In the fourth
quarter of 1998, the class members received 90% of the recoveries from
prosecution of claims against Aquila's former auditors, with the balance of $0.1
million in recoveries paid to Aquila.
In March 1995, an Adversary Proceeding was commenced by Institut Pasteur
and Genetic Systems Corporation against CBC alleging patent infringement and
asking for damages and injunctive relief. Institut Pasteur appealed the
Bankruptcy Court's ruling in favor of CBC, and the United District Court's
affirmation
F-39
<PAGE> 153
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereof, to the Federal Circuit Court of Appeals, which on July 7, 1999, ruled
in favor of CBC. The time in which to file an appeal from this decision has
expired.
In 1998, using treasury stock valued at $13,028, Aquila settled the last
claim previously identified as Liabilities Subject to Chapter 11 Proceedings.
Aquila had been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site. On July 16,
1999 the EPA sent Aquila a letter stating its intent to take no further action
against Aquila or its business regarding this matter.
CSL International ACN ("CSL") and Seed Capital Inc., filed an opposition
with the European Patent Office ("EPO") on the issuance of Aquila's Stimulon(TM)
patent in Europe. A hearing before the EPO was held in October of 1998. The
Company prevailed against all points raised in the opposition. The period of
time in which to file an appeal from this decision has expired. There can be no
assurance that Aquila will prevail in any future actions taken to attack the
validity of its Stimulon(TM) patents.
Aquila has received a letter from CBC in February 1999 alleging that we
must indemnify CBC under a Master Acquisition Agreement among Aquila, CBC and
bioMerieux, Inc. for potential losses from the termination of CBC's rights under
a license agreement. The Company has evaluated this claim and in the opinion of
management, any potential liability will not have a material adverse effect on
the Company's financial position, liquidity, or results of operations.
Aquila has been and is engaged in negotiations of various contracts with
other parties regarding issues generally incidental to the normal course of
business. While the outcome of these negotiations and the ultimate liability
from these discussions is difficult to determine, in the opinion of management
any additional liability will not have a material adverse effect on our
financial position, liquidity, or results of operations.
14. STOCKHOLDERS' EQUITY
Capital Stock -- Aquila has 5,000,000 shares of preferred stock and
30,500,000 shares of common stock authorized at December 31, 1999. No terms have
been established for the preferred stock and none has been issued.
15. STOCK BASED COMPENSATION PLANS
Aquila's 1996 Employee Stock Purchase Plan which was approved in 1997,
allows full time employees, as defined in this plan, to purchase our stock at
85% of the lesser of beginning or ending fair market value at six month
intervals. Under this plan 200,000 shares of stock are authorized for issuance
of which 12,322 and 11,331 shares were issued in 1999 and 1998, respectively,
for gross proceeds of $31,094 and $48,837, respectively. A total of 176,347
shares remain available for issuance at December 31, 1999. No compensation
expense has been recorded related to this plan.
At December 31, 1998, Aquila had two stock option plans. Under the 1996
Stock Award and Option Plan (the "Employee plan"), Aquila may grant incentive
stock options, nonqualified stock options, discounted stock options, deferred
stock awards, restricted stock awards, or Stock Appreciation Rights to its
employees for up to 2 million shares of common stock. Under the 1996 Directors
Stock Award and Option Plan (the "Directors plan"), Aquila may grant the same
types of options and awards as under the Employee plan, except that certain
additional restrictions apply to the grant of Stock Appreciation Rights under
the Directors plan. Up to 200,000 shares of common stock may be issued under the
Directors plan. In general, options granted under these plans vest over 4 years
and have maximum terms of 10 years. The Company has applied APB 25 and related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recorded for activity under these plans for options issued to employees
at fair market value.
F-40
<PAGE> 154
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense for our stock-based compensation plans been
determined based on the fair value at the grant dates, the Company's net
income/(loss) and earnings/(loss) per share for the years ended December 31,
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- ------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET BASIC DILUTED NET BASIC DILUTED NET BASIC DILUTED
LOSS EPS EPS LOSS EPS EPS INCOME EPS EPS
------- ------ ------- -------- ------ ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As Reported.............. $(8,195) $(1.11) $(1.11) $(14,600) $(2.22) $(2.22) $926 $0.18 $0.18
Pro Forma................ $(8,718) $(1.18) $(1.18) $(15,185) $(2.31) $(2.31) $532 $0.11 $0.10
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future effects. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated. The weighted average fair
value of options granted in 1999, 1998 and 1997 is $1.28, $1.78 and $3.08,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1999, 1998 and 1997, respectively; expected
volatility of 85.19%, 63.60% and 63.74%, risk-free interest rates of 5.50%,
4.67% and 6.25%, expected lives of 5 years and no dividend yield. The fair value
of the employees' purchase rights was estimated using the Black-Scholes model
with the following assumptions in 1999, 1998 and 1997, respectively, expected
volatility of 85.19%, 63.74% and 63.74%, risk-free interest rate of 4.81%, 5.56%
and 5.56%; expected life of six months and no dividend yield. The weighted
average fair value of those purchase rights granted in 1999, 1998 and 1997,
respectively, is $0.79, $0.82 and $0.82.
A summary of the status of Aquila's two stock option plans as of December
31, 1999, 1998 and 1997 respectively, and changes during those years are
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Beginning outstanding..... 1,091,560 $3.89 831,655 $4.28 712,655 $4.09
Options granted at fair
market value............ 267,250 1.82 336,000 3.08 194,375 5.12
Options exercised......... -- -- (54,625) 4.51 (4,000) 4.50
Options forfeited......... (222,522) 4.08 (21,470) 4.56 (71,375) 4.68
--------- ----- --------- ----- ------- -----
Balance, December 31,..... 1,136,288 $3.37 1,091,560 $3.89 831,655 $4.28
========= ===== ========= ===== ======= =====
</TABLE>
The following table summarizes information about Aquila stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES 12/31/99 CONTRACTUAL LIFE PRICE 12/31/99 PRICE
------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.63-$2.75 468,884 9.25 $2.25 147,710 $2.18
$2.80-$4.50 545,155 6.70 $3.93 519,655 $3.91
$4.94-$7.38 122,249 7.72 $5.16 68,927 $5.17
--------- -------
$1.63-$7.38 1,136,288 7.86 $3.37 736,292 $3.68
</TABLE>
At December 31, 1999, there were 1,005,087 shares available for option grants.
Compensation expense of $10,000 was recorded in 1997 related to options granted
to consultants during the year. No compensation expense was recorded in 1999 and
1998.
F-41
<PAGE> 155
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EMPLOYEE BENEFITS PLAN
Aquila has a savings plan for its employees pursuant to Section 401(k) of
the Internal Revenue Code. Substantially all employees can participate, and the
plan allows for a minimum deferral of 1% to a maximum deferral of 15% percent of
compensation, as permitted by law or as limited by the plan administrator.
Commencing on January 1, 1997 the Company matches 25% of the first 6% of the
employees compensation contributed to the plan. Any contributions made by Aquila
are vested at 33% for each year of employment. The amount charged to operations
for employer contributions to the plan was $37,750, $44,300 and $48,500 in 1999,
1998 and 1997, respectively.
17. AGREEMENTS
Aquila has a comprehensive agreement with a corporate partner that allows
the partner to use our proprietary Stimulon adjuvant ("QS-21") in numerous
vaccines including hepatitis, lyme disease, human immunodeficiency virus (HIV),
influenza and malaria. The agreement grants exclusive worldwide rights in some
fields of use, and co-exclusive or non-exclusive rights in others. Aquila
recognized $3.0 million in license fees under this agreement in 1998, and $3.5
million in 1997. The agreement calls for royalties to be paid by the partner on
its future sales of licensed vaccines that include Aquila's adjuvant and for
Aquila to manufacture QS-21 for the partner.
Aquila has product development agreements and supply agreements with Virbac
S.A. and a supply agreement with the Virbac S.A.'s U.S. subsidiary that cover a
collaboration on the development of products for feline immune deficiency virus
("FIV") and bovine mastitis and the supply of vaccine and adjuvant for feline
leukemia ("FeLV"). Aquila recorded $0.2 million, $0.9 million and $1.1 million
in research revenues under the product development agreements during 1999, 1998
and 1997, respectively. Sales to the partner under the terms of the supply
agreements were $0.6 million, $1.0 million and $1.3 million in 1999, 1998 and
1997, respectively.
In 1999, the Company was awarded a grant from the National Institutes of
Health to support the development of novel vaccines for tuberculosis based on
the CD1 immune enhancement technology. The grant will provide funding of
$870,000 over a two year period. Aquila recorded $0.2 million in research and
development revenues to reimburse costs incurred under this grant during 1999.
Aquila entered into a license agreement with Neuralab Limited, a wholly
owned subsidiary of Elan Corporation, p.l.c., that grants exclusive, worldwide
rights to use its lead Stimulon adjuvant ("QS-21") with an undisclosed antigen
in the field of Alzheimer's Disease. Aquila also signed a supply agreement for
the adjuvant. Aquila recorded $0.5 million in license fees under the agreement
during 1999 and could receive additional license fees and royalties on future
product sales.
18. ACQUISITION OF VACTEX
In 1998, with the acquisition of VacTex, Aquila issued 1,150,000 shares of
common stock and $1.3 million in notes payable for all the outstanding shares of
VacTex. The notes payable carry interest at 7% and were callable April 14, 1999.
The acquisition has been accounted for using the purchase method.
VacTex was a development stage company advancing the recent discovery of a
novel antigen presentation system. At the date of acquisition, research had been
conducted in animals only and the linkage to protection in a human vaccine had
not been established. This remains an active area of pre-clinical research. The
time to human clinical trials and product approval is expected to be typical for
a biological development project and to entail the typical risks. The
tuberculosis project will require several hundreds of millions of dollars over
ten to fifteen years. It is Aquila's intent to establish the proof of principle
that this system provides protection from tuberculosis and then to partner the
program. Though we expect to expend a substantial portion of its resources to
develop this technology over the next several years, the pace and level of
development will largely
F-42
<PAGE> 156
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be determined by the science, which is complex, and by Aquila's ability to
obtain research partners to share the development expense. Due to the early
stage of the technology and the expected efforts to develop it, the entire
purchase price of $9.9 million, which included stock, notes payable and assumed
liabilities was charged to purchased incomplete technology.
The following summary represents unaudited pro forma results of operations
as if the VacTex acquisition had occurred at the beginning of 1997. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have actually
resulted had the combination been in effect and are not intended to be
indicative of future results.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
YEAR ENDED
----------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 5,597 $6,928
Net loss.................................................... $(14,790) $ (74)
Basic loss per share........................................ $ (2.25) $(0.01)
</TABLE>
19. SUBSEQUENT EVENTS
In February 2000, Aquila received $0.6 million in license fees from two of
its corporate partners pursuant to license agreements that allow the partners to
use Aquila's lead Stimulon(TM) adjuvant QS-21 in their product development
programs. Aquila also sold 11,250 shares of Progenics common stock for $0.6
million. These shares were carried at a cost of $0.1 million and were classified
as available-for-sale. The Company received $0.5 million from the exercise of
employee stock options and redeemed $0.3 million of VacTex debentures including
accrued interest. In March 2000, the Company sold 500,000 shares of Common Stock
to the State of Wisconsin Investment Board in a self-directed private placement
for proceeds of $3.0 million.
F-43
<PAGE> 157
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents................................... $ 1,364 $ 524
Marketable securities....................................... 5,966 6,493
Receivables................................................. 1,192 637
Inventories................................................. 944 498
Prepaid expenses & other current assets..................... 231 280
--------- ---------
Total current assets.............................. 9,697 8,432
Investments................................................. 244 244
Property, Plant, and Equipment, Net......................... 5,832 6,191
Patents and Purchased Technology, Net....................... 25 47
Other Assets................................................ 840 828
--------- ---------
Total Assets...................................... $ 16,638 $ 15,742
========= =========
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable.......................................... $ 334 $ 554
Accrued professional fees................................. 115 165
Other accrued expenses.................................... 1,746 884
Current maturities of long-term debt...................... 1,324 1,577
--------- ---------
Total Current Liabilities......................... 3,519 3,180
Deferred Revenue............................................ 150 150
Long Term Debt.............................................. 2,030 2,607
--------- ---------
Total Liabilities................................. 5,699 5,937
Shareholders' Equity:
Preferred stock, authorized: 5,000,000 shares, none
issued................................................. 0 0
Common stock, par value: $.01 per share, authorized:
30,500,000 shares, issued: 8,509,623 at June 30, 2000
and 7,888,446 at December 31, 1999..................... 85 79
Treasury Stock............................................ (34) (34)
Additional paid in capital................................ 145,346 141,802
Accumulated other comprehensive income.................... 0 426
Accumulated Deficit....................................... (134,458) (132,468)
--------- ---------
Total Shareholders' Equity........................ 10,939 9,805
--------- ---------
Total Liabilities and Shareholders' Equity........ $ 16,638 $ 15,742
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-44
<PAGE> 158
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Product sales............................................... $ 582 $ 273
Research and development.................................... 2,095 288
------- -------
2,677 561
Cost and expenses:
Cost of sales............................................... 377 592
Research and development.................................... 3,477 3,185
General & administrative.................................... 1,414 1,588
------- -------
Total costs and expenses.......................... 5,268 5,365
Other income, net........................................... 602 85
------- -------
Net Loss.................................................... $(1,989) $(4,719)
------- -------
Unrealized holding gains/(losses) on available-for-sale
securities................................................ 49 8
Less: reclassification for gain included in net income...... (475) --
------- -------
Total other comprehensive income/(loss)........... (426) 8
------- -------
Comprehensive loss.......................................... $(2,415) $(4,711)
======= =======
Basic and diluted loss per weighted average share:
Net loss.................................................... $ (0.24) $ (0.67)
Weighted average number of common shares outstanding:
Basic and diluted................................. 8,245 6,999
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-45
<PAGE> 159
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss.................................................... $(1,989) $(4,719)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation and amortization............................. 397 401
Issuance of non-employee options.......................... 17 --
Changes in assets and liabilities:
Receivables............................................... (555) 470
Inventories............................................... (446) 34
Prepaid expenses and other current assets................. 49 109
Accounts payable and other accrued expenses............... 592 (1,290)
------- -------
Net cash used by operating activities.................. (1,935) (4,995)
Cash Flows From Investing Activities:
Purchases of marketable securities........................ (3,496) (8,000)
Proceeds from maturities of marketable securities......... 3,573 9,723
Other noncurrent assets and liabilities................... 12 17
Purchases of property, plant, and equipment............... (16) (245)
------- -------
Net cash provided/(used) by investing activities....... 73 (1,495)
Cash Flows From Financing Activities:
Payment of long-term obligations.......................... (830) (515)
Issuance of common stock.................................. 3,532 21
------- -------
Net cash provided/(used) by financing activities....... 2,702 (494)
------- -------
Net increase/(decrease) in cash and cash equivalents........ 840 (3,994)
Cash and cash equivalents at the beginning of the year...... 524 5,270
------- -------
Cash and cash equivalents at the end of the period.......... $ 1,364 $ 1,276
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-46
<PAGE> 160
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying interim financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and regulations. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement
of the results for the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1999, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, filed with the Securities and Exchange Commission.
The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. SEGMENT INFORMATION:
The Company has determined that its reportable segments are development and
manufacturing. All research programs are aggregated in the development segment.
Revenues from the sale of the feline leukemia vaccine, the QS-21 material
supplied to research partners, and QS-21 license fees are reported in the
manufacturing segment. Financial results of segments are presented on the same
accounting basis as the Company's consolidated results. There are no
inter-segment activities. The Company's business is conducted entirely within
the United States.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Development
Revenue................................................ $ 131 $ 231
Net income/(loss)...................................... (4,148) (3,801)
Manufacturing
Revenue................................................ 2,546 330
Net income/(loss)...................................... 1,597 (941)
Reconciling items
Net income/(loss)(1)................................... 562 23
Consolidated totals
Revenue................................................ 2,677 561
Net loss............................................... $(1,989) $(4,719)
======= =======
</TABLE>
---------------
(1) 2000 includes a gain of $475,000 on the sale of an investment, $114,000 of
royalty income, $57,000 of rental income and $14,000 refund of insurance
premium offset by net interest expense of $58,000 and an unabsorbed overhead
charge of $40,000. 1999 includes $50,000 of royalty income, a gain of
$10,000 on disposal of an asset, $35,000 refund of insurance premium,
$16,000 of net interest expense, income tax expense of $10,000 and a charge
for excess facilities of $44,000
F-47
<PAGE> 161
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
<S> <C> <C>
Finished goods............................................ $718 $157
Work-in-process........................................... 125 236
Raw materials & supplies.................................. 101 105
---- ----
$944 $498
==== ====
</TABLE>
4. EARNINGS PER SHARE:
The common stock equivalents of the Company consist of stock options and
warrants. The Company was in a net loss position at June 30, 2000 and June 30,
1999; therefore, common stock equivalents were not used to compute diluted loss
per share since the effect would have been anti-dilutive. Options to purchase
1,011,833 and 1,069,123 shares of common stock at weighted-average prices of
$3.43 and $3.88, respectively, were outstanding at June 30, 2000 and 1999,
respectively. Warrants to purchase 68,680 shares of common stock at an exercise
price of $4.12 were outstanding at June 30, 2000.
5. CONTINGENCIES:
The Company received a letter from CBC in February 1999 alleging that the
Company must indemnify CBC under a Master Acquisition Agreement among the
Company, CBC, and bioMerieux, Inc. for potential losses from the termination of
CBC's rights under a license agreement. The Company has not received any further
communication from CBC and upon review does not feel that adverse settlement of
this matter would have a material effect on its financial position or results of
operations.
6. ACCOUNTING PRONOUNCEMENT:
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. In June 2000, the SEC issued Staff Accounting Bulletin
101B delaying the implementation of SAB 101 for six months. Accordingly, in the
fourth quarter of 2000 Aquila will change its accounting for initial license
fees. Through the first half of 2000 revenue was recognized when the agreement
was reached and no contingent factors were present. Under the new guidance of
SAB 101, revenue will be deferred and recognized ratably over the appropriate
life. In the fourth quarter of 2000, a cumulative adjustment will be recorded
retroactive to January 1, 2000 to create deferred revenue that will be
recognized over future years.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation: an interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of certain aspects of APB Opinion No. 25 ("APB 25"), including
the following: the definition of an employee for purposes of applying APB 25,
the criteria for determining whether a plan qualifies as a non-compensatory
plan; the accounting consequences of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
F-48
<PAGE> 162
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
ANTIGENICS INC., ST. MARKS ACQUISITION CORP.
AND AQUILA BIOPHARMACEUTICALS, INC.
------------------------------
DATED AS OF AUGUST 18, 2000
------------------------------
<PAGE> 163
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1 -- THE MERGER................................................ A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time.............................................. A-1
1.3 Effects of the Merger....................................... A-1
1.4 Certificate of Incorporation and By-Laws.................... A-1
1.5 Directors and Officers...................................... A-1
1.6 Conversion of Common Stock.................................. A-2
1.7 Company Options, Warrants and Purchase Rights............... A-2
1.8 Closing of Company Transfer Books........................... A-3
1.9 Exchange of Certificates.................................... A-3
1.10 No Liability................................................ A-4
1.11 Lost Certificates........................................... A-4
1.12 Withholding Rights.......................................... A-4
1.13 Distributions with Respect to Unexchanged Shares............ A-4
1.14 Further Assurances.......................................... A-4
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF COMPANY................. A-4
2.1 Organization and Qualification.............................. A-4
2.2 Authority to Execute and Perform Agreements................. A-5
2.3 Capitalization and Title to Shares.......................... A-5
2.4 Company Subsidiaries and Company Joint Ventures............. A-6
2.5 SEC Reports................................................. A-7
2.6 Financial Statements........................................ A-7
2.7 Absence of Undisclosed Liabilities.......................... A-7
2.8 Absence of Adverse Changes.................................. A-7
2.9 Compliance with Laws........................................ A-7
2.10 Actions and Proceedings..................................... A-8
2.11 Contracts and Other Agreements.............................. A-8
2.12 Intellectual Property....................................... A-9
2.13 Insurance................................................... A-10
2.14 Year 2000 Matters........................................... A-10
2.15 Commercial Relationships.................................... A-10
2.16 Tax Matters................................................. A-10
2.17 Employee Benefit Plans...................................... A-12
2.18 Employee Relations.......................................... A-13
2.19 Environmental Matters....................................... A-14
2.20 No Breach................................................... A-15
2.21 Board Approvals............................................. A-16
2.22 Financial Advisor........................................... A-16
2.23 Proxy Statement and Registration Statement.................. A-16
</TABLE>
-A-i-
<PAGE> 164
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF PARENT.................. A-17
3.1 Organization and Qualification.............................. A-17
3.2 Authority to Execute and Perform Agreement.................. A-17
3.3 Capitalization.............................................. A-17
3.4 SEC Reports................................................. A-17
3.5 Financial Statements........................................ A-17
3.6 Absence of Undisclosed Liabilities.......................... A-18
3.7 Absence of Adverse Changes.................................. A-18
3.8 Actions and Proceedings..................................... A-18
3.9 Compliance with Laws........................................ A-18
3.10 Intellectual Property....................................... A-18
3.11 Commercial Relationships.................................... A-18
3.12 No Breach................................................... A-19
3.13 Proxy Statement and Registration Statement.................. A-19
3.14 Interim Operations of Merger Sub............................ A-19
SECTION 4 -- COVENANTS AND AGREEMENTS.................................. A-19
4.1 Conduct of Business......................................... A-19
4.2 Corporate Examinations and Investigations................... A-21
4.3 Expenses.................................................... A-21
4.4 Authorization from Others................................... A-22
4.5 Further Assurances.......................................... A-22
4.6 Preparation of Disclosure Documents......................... A-22
4.7 Public Announcements........................................ A-23
4.8 Affiliate Letters........................................... A-23
4.9 Nasdaq Listings............................................. A-23
4.10 No Solicitation............................................. A-23
4.11 Regulatory Filings.......................................... A-24
4.12 Termination of 401(k) Plan.................................. A-24
4.13 Notification of Certain Matters............................. A-24
4.14 Registration of Certain Shares.............................. A-24
4.15 Employee Matters............................................ A-24
4.16 Indemnification............................................. A-25
4.17 Section 16 Approval......................................... A-25
4.18 Participation in Certain Actions and Proceedings............ A-25
SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY TO
CONSUMMATE THE MERGER................................................ A-25
5.1 Stockholder Approval........................................ A-25
5.2 Registration Statement...................................... A-25
5.3 Absence of Order............................................ A-25
5.4 Regulatory Approvals........................................ A-25
5.5 HSR Act..................................................... A-26
</TABLE>
-A-ii-
<PAGE> 165
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND
MERGER SUB TO CONSUMMATE THE MERGER.................................. A-26
6.1 Representations, Warranties and Covenants................... A-26
6.2 Corporate Certificates...................................... A-26
6.3 Secretary's Certificate..................................... A-26
6.4 Affiliate Letters........................................... A-26
6.5 Certificate of Merger....................................... A-26
6.6 Tax Opinion................................................. A-26
6.7 Consents.................................................... A-26
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF COMPANY TO
CONSUMMATE THE MERGER................................................ A-27
7.1 Representations, Warranties and Covenants................... A-27
7.2 Merger Documents............................................ A-27
7.3 Tax Opinion................................................. A-27
SECTION 8 -- TERMINATION, AMENDMENT AND WAIVER......................... A-27
8.1 Termination................................................. A-27
8.2 Effect of Termination....................................... A-28
8.3 Termination Fees and Reimbursement of Expenses.............. A-28
8.4 Amendment................................................... A-29
8.5 Waiver...................................................... A-29
SECTION 9 -- MISCELLANEOUS............................................. A-30
9.1 No Survival................................................. A-30
9.2 Notices..................................................... A-30
9.3 Entire Agreement............................................ A-30
9.4 Governing Law............................................... A-30
9.5 Binding Effect; No Assignment; No Third-Party A-31
Beneficiaries...............................................
9.6 Section Headings, Construction.............................. A-31
9.7 Counterparts................................................ A-31
9.8 Severability................................................ A-31
9.9 Submission to Jurisdiction; Waiver.......................... A-31
9.10 Enforcement................................................. A-31
9.11 Rules of Construction....................................... A-31
9.12 Waiver of Jury Trial........................................ A-32
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Affiliate Letter
</TABLE>
-A-iii-
<PAGE> 166
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 18,
2000 is among Antigenics Inc., ("Parent"), a Delaware corporation, St. Marks
Acquisition Corp. ("Merger Sub"), a Delaware corporation and Aquila
Biopharmaceuticals, Inc. ("Company"), a Delaware corporation. The parties wish
to effect the acquisition of Company by Parent through a merger (the "Merger")
of Merger Sub with and into Company on the terms and conditions set forth
herein.
R E C I T A L S
A. For United States Federal income tax purposes, it is intended that the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), and that this
Agreement constitutes a plan of reorganization within the meaning of Section
1.368-2(g) of the income tax regulations promulgated under the Code.
B. For financial accounting purposes, it is intended that the Merger will
be accounted for using the purchase method of accounting.
In consideration of the mutual representations, warranties and covenants
contained herein, the parties hereto agree as follows:
SECTION 1 -- THE MERGER
1.1 The Merger.
(a) Upon the terms and subject to the conditions hereof, and in
accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), Merger Sub shall be merged with and into Company. The Merger shall
occur at the Effective Time (as defined herein). Following the Merger,
Company shall continue as the surviving corporation (sometimes referred
herein as the "Surviving Corporation") and the separate corporate existence
of Merger Sub shall cease.
(b) The name of the Surviving Corporation shall be "Aquila
Biopharmaceuticals, Inc."
1.2 Effective Time. As soon as practicable after satisfaction or waiver of
all conditions to the Merger, the parties shall cause a certificate of merger
(the "Certificate of Merger") with respect to the Merger to be filed and
recorded in accordance with the DGCL and shall take all such further actions as
may be required by law to make the Merger effective. The Merger shall be
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State of Delaware in accordance with the DGCL or at such later time
as is specified in the Certificate of Merger (the "Effective Time"). Immediately
prior to the filing of the Certificate of Merger, a closing (the "Closing") will
be held at the offices of Palmer & Dodge LLP, One Beacon Street, Boston,
Massachusetts (or such other place as the parties may agree) for the purpose of
confirming the foregoing. The date on which the Closing occurs is referred to
herein as the "Closing Date."
1.3 Effects of the Merger. The Merger shall have the effects set forth in
Sections 259, 260 and 261 of the DGCL.
1.4 Certificate of Incorporation and By-Laws. The Certificate of
Incorporation and By-Laws of Merger Sub, in each case as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation and
By-Laws of the Surviving Corporation until thereafter changed as provided
therein or by applicable law.
1.5 Directors and Officers. The directors and officers of Merger Sub
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, in each case, until the earlier of his or her
resignation or removal or otherwise ceasing to be a director or officer, as the
case may be, or until his or her respective successor is duly elected and
qualified. Each current director of Company shall submit his or her resignation
at the Closing to be effective at the Effective Time.
A-1
<PAGE> 167
1.6 Conversion of Common Stock
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of Parent or Company:
(i) Subject to payment of cash in lieu of fractional shares as
provided in Section 1.6(a)(ii), each share of Company common stock,
$0.01 par value per share (together with the associated Rights (as
defined in Section 2.21(c)), "Company Common Stock") outstanding
immediately prior to the Effective Time, other than shares held by
Company as treasury stock or shares held by any Company Subsidiary (as
defined in Section 2.4(a)), shall be cancelled and extinguished and
automatically converted into and become the right to receive a fraction
of a share of Parent common stock, $0.01 par value per share ("Parent
Common Stock") equal to the Exchange Ratio. The Exchange Ratio shall
equal 0.2898. Notwithstanding the foregoing, if prior to the Closing
Date there is a change in the number of issued and outstanding shares of
Parent Common Stock as the result of reclassification, subdivision,
recapitalization, stock split (including reverse stock split) or stock
dividend, the number of shares of Parent Common Stock issued in the
Merger shall be equitably adjusted to give effect to such event. The
shares of Parent Common Stock payable pursuant to this Section
1.6(a)(i), together with cash payments in lieu of fractional shares
pursuant to Section 1.6(a)(ii), are referred to collectively as the
"Merger Consideration."
(ii) No fractional shares of Parent Common Stock shall be issued
pursuant to this Agreement. In lieu of fractional shares, each
stockholder who would otherwise have been entitled to a fraction of a
share of Parent Common Stock hereunder (after aggregating all fractional
shares to be received by such stockholder), shall receive, without
interest, an amount in cash (rounded to the nearest whole cent)
determined by multiplying such fraction by the per share closing price
of Parent Common Stock as reported by the Nasdaq on the trading day
immediately preceding the Effective Time.
(b) All shares of Company Common Stock (and the associated Rights)
held at the Effective Time by Company as treasury stock or by a Company
Subsidiary shall be cancelled and extinguished and no payment shall be made
with respect thereto.
(c) Each issued and outstanding share of the capital stock of Merger
Sub shall be converted into and become one fully paid and nonassessable
share of common stock, par value $0.01 per share, of the Surviving
Corporation.
1.7 Company Options, Warrants and Purchase Rights
(a) At the Effective Time, each outstanding option to purchase shares
of Company Common Stock (the "Company Options") under the Company's 1996
Stock Award and Option Plan and the Company's 1996 Directors Stock Award
and Option Plan (the "Company Stock Option Plans"), whether or not then
exercisable, shall be assumed by Parent. Each Company Option so assumed by
Parent under this Agreement shall continue to have, and be subject to, the
same terms and conditions set forth in the applicable Company Stock Option
Plan immediately prior to the Effective Time (including, without
limitation, any repurchase rights), except that (i) each Company Option
shall be exercisable (or shall become exercisable in accordance with its
terms) for that number of shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable
upon exercise of such Company Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole
number of shares of Parent Common Stock, and (ii) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Option shall be equal to the quotient determined by
dividing the exercise price per share of Company Common Stock at which such
Company Option was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole cent. After the
Effective Time, Parent shall issue to each holder of an outstanding Company
Option a notice describing the foregoing assumption of such Company Options
by Parent. The adjustments provided herein with respect to any Company
Options that are "incentive stock options" as defined in Section 422 of the
Code shall be and
A-2
<PAGE> 168
are intended to be effected in a manner which is consistent with Section
424(a) of the Code so as to preserve the benefits of such "incentive stock
options."
(b) At the Effective Time, each outstanding warrant to purchase shares
of Company Common Stock (the "Company Warrants"), whether or not then
exercisable, shall be assumed by Parent. Each Company Warrant so assumed by
Parent under this Agreement shall continue to have, and be subject to, the
same terms and conditions set forth in the applicable warrant immediately
prior to the Effective Time (including, without limitation, any repurchase
rights), except that (i) each Company Warrant shall be exercisable (or
shall become exercisable in accordance with its terms) for that number of
shares of Parent Common Stock equal to the product of the number of shares
of Company Common Stock that were issuable upon exercise of such Company
Warrant immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounded to the nearest whole number of shares of Parent Common
Stock, and (ii) the per share exercise price for the shares of Parent
Common Stock issuable upon exercise of such assumed Company Warrant shall
be equal to the quotient determined by dividing the exercise price per
share of Company Common Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded to
the nearest whole cent. After the Effective Time, Parent shall issue to
each holder of an outstanding Company Warrant a notice describing the
foregoing assumption of such Company Warrants by Parent.
(c) Company shall amend its 1996 Employee Stock Purchase Plan (the
"Company Purchase Plan") so that as of the Effective Time (i) the Company
Purchase Plan is terminated and (ii) there are no outstanding rights of
participants under the Company Purchase Plan. Prior to the Effective Time,
Company shall take all actions (including, if appropriate, amending the
terms of the Company Purchase Plan) that are necessary to give effect to
this Section 1.7(c).
1.8 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of Company shall be closed and no further registration of
transfers of shares of Company Common Stock shall thereafter be made. On or
after the Effective Time, any Certificates presented to the Exchange Agent (as
defined in Section 1.9) or Parent for any reason shall be converted into the
right to receive the Merger Consideration with respect to the shares of Company
Common Stock formerly represented thereby and any dividends or other
distributions to which the holders thereof are entitled pursuant to Section
1.13. For purposes of this Agreement, a "Certificate" is a stock certificate
that immediately prior to the Effective Time represented outstanding shares of
Company Common Stock that were converted into the right to receive the Merger
Consideration.
1.9 Exchange of Certificates. Parent shall authorize one or more persons
to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as
practicable after the Effective Time, Parent shall cause the Exchange Agent to
mail, to all former holders of record of shares of Company Common Stock that
were converted into the right to receive Merger Consideration, instructions for
surrendering their Certificates in exchange for a certificate representing
shares of Parent Common Stock and cash in lieu of fractional shares. Upon
surrender of Certificates for cancellation to the Exchange Agent, together with
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss of, and title to, the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent) and other requested
documents and in accordance with the instructions thereon, the holder of such
Certificates shall be entitled to receive in exchange therefor (a) a certificate
representing that number of whole shares of Parent Common Stock into which the
shares of Company Common Stock theretofore represented by the Certificates so
surrendered shall have been converted pursuant to the provisions of this
Agreement and (b) a check in the amount of any cash due pursuant to Section
1.6(a)(ii) or Section 1.13. No interest shall be paid or shall accrue on any
such amounts. Until surrendered in accordance with the provisions of this
Section 1.9, each Certificate shall represent for all purposes only the right to
receive Merger Consideration and, if applicable, amounts under Section 1.13.
Shares of Parent Common Stock into which shares of Company Common Stock shall be
converted in the Merger at the Effective Time shall be deemed to have been
issued at the Effective Time. If any certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the Certificate
surrendered is registered, it shall be a condition of such exchange that the
person requesting such exchange shall deliver to the Exchange Agent all
documents necessary to evidence and effect
A-3
<PAGE> 169
such transfer and shall pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of a certificate representing shares of
Parent Common Stock in a name other than that of the registered holder of the
Certificate surrendered, or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not applicable. Beginning the date which is
six months following the Closing Date, Parent shall act as the Exchange Agent
and thereafter any holder of an unsurrendered Certificate shall look solely to
Parent for any amounts to which such holder may be due, subject to applicable
law. Notwithstanding any other provisions of this Agreement, any portion of the
Merger Consideration remaining unclaimed five years after the Effective Time (or
such earlier date immediately prior to such time as such amounts would otherwise
escheat to, or become property of, any governmental entity) shall, to the extent
permitted by law, become the property of Parent free and clear of any claims or
interest of any person previously entitled thereto.
1.10 No Liability. None of Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any shares (or
dividends or distributions with respect thereto) or cash payments delivered to a
public official pursuant to any applicable escheat, abandoned property or
similar law.
1.11 Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent shall deliver in exchange for such lost, stolen
or destroyed Certificate, applicable certificates representing shares of Parent
Common Stock, cash in lieu of fractional shares and any amounts due pursuant to
Section 1.13.
1.12 Withholding Rights. Parent shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
holder of shares of Company Common Stock such amounts as it is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Parent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Company Common Stock in respect of which such deduction and withholding was
made.
1.13 Distributions with Respect to Unexchanged Shares. No dividend or
other distribution declared with respect to Parent Common Stock with a record
date after the Effective Time shall be paid to holders of unsurrendered
Certificates until such holders surrender such Certificates. Upon the surrender
of such Certificates in accordance with Section 1.9, there shall be paid to such
holders, promptly after such surrender, the amount of dividends or other
distributions, without interest, declared with a record date after the Effective
Time and not paid because of the failure to surrender such Certificates for
exchange.
1.14 Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of Company, any deeds, bills of sale,
assignments or assurances and to take and do, in the name and on behalf of
Company, any other actions and things to vest, perfect or confirm of record or
otherwise in the Surviving Corporation any and all right, title and interest in,
to and under any of the rights, properties or assets acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the Merger.
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth on the disclosure schedule delivered by Company to
Parent on the date hereof (the "Company Disclosure Schedule"), the section
numbers of which are numbered to correspond to the section numbers of this
Agreement to which they refer, Company hereby makes the following
representations and warranties to Parent and Merger Sub:
2.1 Organization and Qualification.
(a) Each of Company, each Company Subsidiary (as defined in Section
2.4(a)) and each Company Joint Venture (as defined in Section 2.4(c)) is a
corporation or other legal entity duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization and has
corporate or similar power and authority to own, lease and operate its
assets and to carry on its business as
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now being and as heretofore conducted. Each of Company, each Company
Subsidiary and each Company Joint Venture is qualified or otherwise
authorized to transact business as a foreign corporation or other
organization in all jurisdictions in which such qualification or
authorization is required by law, except for jurisdictions in which the
failure to be so qualified or authorized could not reasonably be expected
to have a material adverse effect on the assets, properties, business,
results of operations or financial condition of Company and the Company
Subsidiaries, taken as a whole (a "Company Material Adverse Effect").
(b) Company has previously provided to Parent true and complete copies
of the charter and bylaws or other organizational documents of Company,
each Company Subsidiary and each Company Joint Venture as presently in
effect, and none of Company, any Company Subsidiary, or any Company Joint
Venture is in default in the performance, observation or fulfillment of
such documents, except, in the case of Company Subsidiaries and Company
Joint Ventures, such defaults that, in the aggregate, could not reasonably
be expected to have a Company Material Adverse Effect.
2.2 Authority to Execute and Perform Agreements. Company has the corporate
power and authority to enter into, execute and deliver this Agreement and,
subject, in the case of consummation of the Merger, to the adoption of this
Agreement by the holders of Company Common Stock, to perform fully its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of Company. No other action on the part of Company is
necessary to consummate the transactions contemplated hereby (other than
adoption of this Agreement by the holders of Company Common Stock). This
Agreement has been duly executed and delivered by Company and constitutes a
valid and binding obligation of Company, enforceable in accordance with its
terms.
2.3 Capitalization and Title to Shares.
(a) Company is authorized to issue 30,500,000 shares of Company Common
Stock, of which 8,570,754 shares were issued and outstanding as of August
9, 2000. All of the issued and outstanding shares of Company's Common Stock
are duly authorized, validly issued, fully paid, nonassessable and free of
pre-emptive rights.
(b) Company Options to purchase 969,374 shares of Company Common Stock
were outstanding as of August 9, 2000. Section 2.3(b) of the Company
Disclosure Schedule includes a true and complete list of all Company
Options with shares vested and exercise prices. True and complete copies of
all instruments (or the forms of such instruments) referred to in this
section have been furnished previously to Parent. Except as indicated in
Section 2.3(b) of the Company Disclosure Schedule, the Company is not
obligated to accelerate the vesting of any Company Options as a result of
the Merger.
(c) Company Warrants to purchase 60,680 shares of Company Common Stock
were outstanding as of June 30, 2000. Section 2.3(c) of the Company
Disclosure Schedule includes a true and complete list of all outstanding
warrants with vesting schedules and exercise prices. True and complete
copies of all instruments (or the forms of such instruments) referred to in
this section have been furnished previously to Parent.
(d) Company has reserved 200,000 shares of Company Common Stock for
future issuance under the Company Purchase Plan through December 31, 2000.
(e) Company is authorized to issue 5,000,000 shares of Preferred Stock
("Company Preferred Stock"), none of which are issued and outstanding.
(f) Except for (i) shares indicated as issued and outstanding on
August 9, 2000 in Section 2.3(a), and (ii) shares issued after August 9,
2000, upon (A) the exercise of outstanding Company Options listed in
Section 2.3(b) of the Company Disclosure Schedule or Company Options issued
in accordance with Section 4.1(b)(iv), (B) the exercise of outstanding
Company Warrants listed in Section 2.3(c) of the Company Disclosure
Schedule, or (C) the exercise of purchase rights in accordance with the
Company Purchase Plan and in an amount not in excess of the number
indicated as reserved for such
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purpose in Section 2.3(d), there are not as of the date hereof, and at the
Effective Time there will not be, any shares of Company Common Stock issued
and outstanding.
(g) Company's authorized capital stock consists solely of the Company
Common Stock described in Section 2.3(a) and the Company Preferred Stock
described in Section 2.3(e). There are not as of the date hereof, and at
the Effective Time there will not be, authorized or outstanding any
subscriptions, options, conversion or exchange rights, warrants, repurchase
or redemption agreements, or other agreements, claims or commitments of any
nature whatsoever obligating Company to issue, transfer, deliver or sell,
or cause to be issued, transferred, delivered, sold, repurchased or
redeemed, additional shares of the capital stock or other securities of
Company or obligating Company to grant, extend or enter into any such
agreement, other than Company Options listed in Section 2.3(b) of the
Company Disclosure Schedule, Company Warrants listed in Section 2.3(c) of
the Company Disclosure Schedule, rights to purchase shares of Company
Common Stock pursuant to the Company Purchase Plan and the Rights. To the
knowledge of Company, there are no stockholder agreements, voting trusts,
proxies or other agreements, instruments or understandings with respect to
the voting of the capital stock of Company.
(h) Neither Company nor any Company Subsidiary beneficially owns any
shares of capital stock of Parent.
(i) Company has no outstanding bonds, debentures, notes or other
indebtedness which have the right to vote on any matters on which
stockholders may vote.
2.4 Company Subsidiaries and Company Joint Ventures.
(a) Section 2.4(a) of the Company Disclosure Schedule sets forth all
of the Company Subsidiaries and the jurisdiction in which each is
incorporated or organized. All issued and outstanding shares or other
equity interests of each Company Subsidiary are owned directly by Company
free and clear of any charges, liens, encumbrances, security interests or
adverse claims. As used in this Agreement, "Company Subsidiary" means any
corporation, partnership or other organization, whether incorporated or
unincorporated, (i) of which Company or any Company Subsidiary is a general
partner or (ii) at least 50% of the securities or other interests having
voting power to elect a majority of the board of directors or others
performing similar functions with respect to such corporation, partnership
or other organization are directly or indirectly owned or controlled by
Company or by any Company Subsidiary, or by Company and one or more Company
Subsidiaries.
(b) There are not as of the date hereof, and at the Effective Time
there will not be, any subscriptions, options, conversion or exchange
rights, warrants, repurchase or redemption agreements, or other agreements,
claims or commitments of any nature whatsoever obligating any Company
Subsidiary to issue, transfer, deliver or sell, or cause to be issued,
transferred, delivered, sold, repurchased or redeemed, shares of the
capital stock or other securities of Company or any Company Subsidiary or
obligating Company or any Company Subsidiary to grant, extend or enter into
any such agreement. To the knowledge of Company, there are no stockholder
agreements, voting trusts, proxies or other agreements, instruments or
understandings with respect to the voting of the capital stock of any
Company Subsidiary.
(c) Section 2.4(c) of the Company Disclosure Schedule sets forth, for
each Company Joint Venture, the interest held by the Company and the
jurisdiction in which such Company Joint Venture is organized. Interests in
Company Joint Ventures held by Company are held directly by Company, free
and clear of any charges, liens, encumbrances, security interest or adverse
claims. The term "Company Joint Venture" means any corporation or other
entity (including partnerships, limited liability companies and other
business associations) that is not a Company Subsidiary and in which the
Company or one or more Company Subsidiaries owns an equity interest (other
than equity interests held for passive investment purposes which are less
than 10% of any class of the outstanding voting securities or other equity
of any such entity).
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2.5 SEC Reports. Company previously has delivered to Parent its (i) Annual
Report on Form 10-K for the year ended December 31, 1999 (the "Company 10-K"),
as filed with the Securities and Exchange Commission (the "SEC"), (ii) all proxy
statements relating to Company's meetings of stockholders held or to be held
after December 31, 1999 and (iii) all other documents filed by Company with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
since July 1, 1997. As of their respective dates, such documents complied, and
all documents filed by Company with the SEC under the Exchange Act between the
date of this Agreement and the Closing Date will comply, in all material
respects, with applicable SEC requirements and did not, or in the case of
documents filed on or after the date hereof will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Since July 1, 1997,
Company has timely filed, and between the date of this Agreement and the Closing
Date will timely file, with the SEC all reports required to be filed by it under
the Exchange Act. No Company Subsidiary is required to file any form, report or
other document with the SEC.
2.6 Financial Statements. The consolidated financial statements contained
in the Company 10-K and in Company's quarterly report on Form 10-Q for the
quarter ended June 30, 2000 (the "Company 10-Q") have been prepared from, and
are in accordance with, the books and records of Company and present fairly, in
all material respects, the consolidated financial condition and results of
operations of Company and the Company Subsidiaries as of and for the periods
presented therein, all in conformity with generally accepted accounting
principles applied on a consistent basis, except as otherwise indicated therein
and subject in the case of the unaudited financial statements included in the
Company 10-Q to normal year-end adjustments, which in the aggregate are not
material, and the absence of footnote disclosures.
2.7 Absence of Undisclosed Liabilities. As at December 31, 1999, Company
and the Company Subsidiaries had no material liabilities of any nature, whether
accrued, absolute, contingent or otherwise (including without limitation,
liabilities as guarantor or otherwise with respect to obligations of others or
liabilities for taxes due or then accrued or to become due), required to be
reflected or disclosed in the balance sheet dated December 31, 1999 (or the
notes thereto) included in the Company 10-K (the "Company Balance Sheet") that
were not adequately reflected or reserved against on the Company Balance Sheet.
Company has no material liabilities of any nature, whether accrued, absolute,
contingent or otherwise, other than liabilities (i) adequately reflected or
reserved against on the Company Balance Sheet, (ii) reflected in Company's
unaudited balance sheet dated June 30, 2000, included in the Company 10-Q, (iii)
included in Section 2.7 of the Company Disclosure Schedule or (iv) incurred
since June 30, 2000 in the ordinary course of business consistent with past
practice.
2.8 Absence of Adverse Changes.
(a) Since June 30, 2000, there has not been any change, event or
circumstance that has had, or is reasonably likely to have, a Company
Material Adverse Effect.
(b) Since June 30, 2000, there has not been any action taken by
Company or any Company Subsidiary during the period after June 30, 2000
through the date of this Agreement that, if taken during the period from
the date of this Agreement through the Effective Time, would constitute a
breach of Section 4.1.
2.9 Compliance with Laws.
(a) To Company's knowledge, Company and the Company Subsidiaries have
all licenses, permits, franchises, orders or approvals of any federal,
state, local or foreign governmental or regulatory body material to the
conduct of their businesses (collectively, "Permits"); to Company's
knowledge, such Permits are in full force and effect; and no proceeding is
pending or, to the knowledge of Company, threatened to revoke or limit any
Permit.
(b) Company and the Company Subsidiaries are not in violation of and
have no liabilities, whether accrued, absolute, contingent or otherwise,
under any federal, state, local or foreign law, ordinance or regulation or
any order, judgment, injunction, decree or other requirement of any court,
arbitrator or governmental or regulatory body, relating to the operation of
clinical testing laboratories, labor and
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employment practices, health and safety, zoning, pollution or protection of
the environment, except for violations of or liabilities under any of the
foregoing which could not, in the aggregate, reasonably be expected to have
a Company Material Adverse Effect.
(c) To Company's knowledge, each product or product candidate subject
to the United States Food and Drug Administration (the "FDA") jurisdiction
under the Federal Food, Drug and Cosmetic Act ("FDCA") that is
manufactured, tested, distributed, held, and/or marketed by Company or any
Company Subsidiary is being manufactured, tested, distributed, held and
marketed in compliance with all applicable requirements under the FDCA
including, but not limited to, those relating to investigational use,
premarket clearance, good manufacturing practices, labeling, advertising,
record keeping, filing of reports and security.
(d) To Company's knowledge, Company has, prior to the execution of
this Agreement, provided to Parent access to all documents in its or any
Company Subsidiary's possession material to assessing compliance with the
FDCA and its implementing regulations, including, but not limited to,
copies of (i) all warning letters, notices of adverse findings and similar
correspondence received in the last three years, (ii) all audit reports
performed during the last three years, and (iii) any document concerning
any significant oral or written communication received from the FDA in the
last three years.
(e) Neither Company nor any Company Subsidiary nor, to the best of
Company's knowledge, any director, officer, agent, employee or other person
acting on behalf of Company, or any Company Subsidiary, has used any
corporate or other funds for unlawful contributions, payments, gifts, or
entertainment, or made any unlawful expenditures relating to political
activity to government officials or others, or established or maintained
any unlawful or unrecorded funds in violation of the Foreign Corrupt
Practices Act of 1977, as amended, or any other domestic or foreign law.
Neither Company nor any Company Subsidiary nor, to the best of Company's
knowledge, any director, officer, agent, employee or other person acting on
behalf of Company or any Company Subsidiary, has accepted or received any
unlawful contributions, payments, gifts or expenditures.
2.10 Actions and Proceedings. There are no outstanding orders, judgments,
injunctions, decrees or other requirements of any court, arbitrator or
governmental or regulatory body against Company, any Company Subsidiary, any
Company Joint Venture or any of their assets or properties. There are no
actions, suits or claims or legal, administrative or arbitration proceedings
pending or, to the knowledge of Company, threatened against Company, any Company
Subsidiary, any Company Joint Venture or any of their securities, assets or
properties. To the knowledge of Company, there is no fact, event or circumstance
now in existence that reasonably could be expected to give rise to any action,
suit, claim, proceeding or investigation that, individually or in the aggregate,
could be reasonably expected to have a Company Material Adverse Effect or
interfere with Company's ability to consummate the transactions contemplated
hereby.
2.11 Contracts and Other Agreements.
(a) Neither Company nor any Company Subsidiary is a party to or bound
by, and neither they nor their properties are subject to, any contract or
other agreement required to be disclosed in a Form 10-K, Form 10-Q or Form
8-K of the SEC which is not disclosed in the Company 10-K or the Company
10-Q. All of such contracts and other agreements and all of the contracts
required to be set forth in Section 2.11 of the Company Disclosure Schedule
are valid, subsisting, in full force and effect, binding upon Company or
the applicable Company Subsidiary, and, to the knowledge of Company,
binding upon the other parties thereto in accordance with their terms, and
Company and the Company Subsidiaries have paid in full or accrued all
amounts now due from them thereunder, and have satisfied in full or
provided for all of their liabilities and obligations thereunder which are
presently required to be satisfied or provided for and are not in default
under any of them, nor, to the knowledge of Company, is any other party to
any such contract or other agreement in default thereunder, nor does any
condition exist that with notice or lapse of time or both would constitute
a default thereunder. True and complete copies of all of the contracts and
other agreements referred to in this Section 2.11 have been provided
previously to Parent.
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(b) Section 2.11 of the Company Disclosure Schedule sets forth a list
of the following contracts and other agreements to which Company or any
Company Subsidiary is a party or by or to which they or their assets or
properties are bound or subject:
(i) any agreement (A) involving research, development or the
license of Proprietary Rights (as defined in Section 2.12), (B) granting
a right of first refusal, or right of first offer or comparable right
with respect to Proprietary Rights, (C) relating to a joint venture,
partnership or other arrangement involving a sharing of profits, losses,
costs or liabilities with another person or entity, (D) providing for
the payment or receipt by the Company or a Company Subsidiary of
milestone payments or royalties, or (E) that individually requires
aggregate expenditures by Company and/or any Company Subsidiary in any
one year of more than $50,000;
(ii) any indenture, trust agreement, loan agreement or note that
involves or evidences outstanding indebtedness, obligations or
liabilities for borrowed money in excess of $50,000;
(iii) any agreement of surety, guarantee or indemnification that
involves potential obligations in excess of $50,000;
(iv) any agreement that limits or restricts Company, any Company
Subsidiary or any of their affiliates or successors in competing or
engaging in any line of business, in any therapeutic area, in any
geographic area or with any person;
(v) any interest rate, equity or other swap or derivative
instrument; or
(vi) any agreement obligating Company to register securities under
the Securities Act of 1933, as amended (the "Securities Act");
(c) No executive officer or director of Company has (whether directly
or indirectly through another entity in which such person has a material
interest, other than as the holder of less than 2% of a class of securities
of a publicly traded company) any material interest in any property or
assets of Company (except as a stockholder) or a Company Subsidiary, any
competitor, customer, supplier or agent of Company or a Company Subsidiary
or any person that is currently a party to any material contract or
agreement with Company or a Company Subsidiary.
(d) Company and the Company Subsidiaries own no real property.
2.12 Intellectual Property. Company, the Company Subsidiaries and the
Company Joint Ventures own, or are licensed to use, or otherwise have the full
right to use all patents, trademarks, service marks, trade names, trade secrets,
franchises, inventions, copyrights, and all other technology and intellectual
property (including, without limitation, biological materials), all
registrations of any of the foregoing, or applications therefor, and all grants
and licenses or other rights running to or from Company, a Company Subsidiary or
a Company Joint Venture relating to any of the foregoing that are material to
their businesses as presently conducted or as contemplated to be conducted
(collectively, the "Proprietary Rights"). A list of all copyrights, trademarks,
servicemarks, tradenames, patents and patent applications, computer programs
(except off-the-shelf office software for word processing, spreadsheet or
similar applications), databases and biological materials held by Company or a
Company Subsidiary has been delivered previously to Parent and is included in
Section 2.12 of the Company Disclosure Schedule. All patents, registered
trademarks and copyrights set forth on the list referred to above are valid and
subsisting and are not subject to any taxes, maintenance fees or actions falling
due within 90 days. Company is not aware of any basis for any claim by any third
party that the businesses of Company, the Company Subsidiaries or the Company
Joint Ventures infringe upon the proprietary rights of others, nor has Company,
any Company Subsidiary or, to the knowledge of Company, any Company Joint
Venture received any notice or claim of infringement from any third party.
Company is not aware of any existing or threatened infringement by any third
party on, or any competing claim of right to use or own any of, the Proprietary
Rights. Except as disclosed in Section 2.12 of the Company Disclosure Schedule,
Company and the Company Subsidiaries have the unencumbered right to sell their
products and services (whether now offered for sale or under development) free
from any royalty or other obligations to third parties. To the knowledge of
Company, none of the activities of the employees of Company
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or any Company Subsidiary on behalf of such entity violates any agreement or
arrangement which any such employees have with former employers. The policies
and procedures of Company and the Company Subsidiaries designed to establish and
protect the Proprietary Rights are described in Section 2.12 of the Company
Disclosure Schedule. All employees and consultants who contributed to the
discovery or development of any of the Proprietary Rights (other than
Proprietary Rights licensed to Company or a Company Subsidiary by any party
other than a consultant to the Company or Company Subsidiary) did so either (a)
within the scope of his or her employment such that, in accordance with
applicable law, all Proprietary Rights arising therefrom became the exclusive
property of the Company or the Company Subsidiary or (b) pursuant to written
agreements assigning all Proprietary Rights arising therefrom to the Company or
the Company Subsidiary.
2.13 Insurance. Section 2.13 of the Company Disclosure Schedule sets forth
a true and complete list of all policies or binders of fire, liability, product
liability, workmen's compensation, vehicular, directors' and officers' and other
insurance held by or on behalf of Company and the Company Subsidiaries. Such
policies and binders are in full force and effect, are reasonably believed to be
adequate for the businesses engaged in by Company and the Company Subsidiaries
and are in conformity with the requirements of all leases or other agreements to
which Company or the relevant Company Subsidiary is a party and, to the
knowledge of Company, are valid and enforceable in accordance with their terms.
Neither Company nor any Company Subsidiary is in default with respect to any
provision contained in such policy or binder nor has any of the Company or a
Company Subsidiary failed to give any notice or present any claim under any such
policy or binder in due and timely fashion. There are no outstanding unpaid
claims under any such policy or binder. Neither Company nor any Company
Subsidiary has received notice of cancellation or non-renewal of any such policy
or binder.
2.14 Year 2000 Matters. Company and the Company Subsidiaries have not
experienced, and do not reasonably expect to experience, any material problems
related to computer hardware, firmware, software, systems, databases, devices,
machinery, equipment and related items (including embedded microcontrollers in
non-computer equipment) ("Systems") failing to be Year 2000 Compliant. For
purposes of this Agreement, "Year 2000 Compliant" means, when used with respect
to Systems, that such Systems whether used alone or in combination, will
correctly differentiate between years, in different centuries, and will
accurately process date/time data (including, where applicable, calculating,
comparing and sequencing) from, into and between the twentieth and twenty-first
centuries, including leap year calculations and unusual date situations, without
interruption.
2.15 Commercial Relationships. The relationships of Company, the Company
Subsidiaries and the Company Joint Ventures with their suppliers, collaborators,
licensors and licensees are generally good commercial working relationships. No
such entity has canceled or otherwise terminated its relationship with Company,
a Company Subsidiary or a Company Joint Venture or has, during the last twelve
months, materially altered its relationship with Company, a Company Subsidiary
or a Company Joint Venture. Company does not know of any plan or intention of
any such entity, and has not received any written threat or notice from any such
entity, to terminate, cancel or otherwise materially and adversely modify its
relationship with Company, a Company Subsidiary or a Company Joint Venture.
2.16 Tax Matters.
(a) For purposes of this Agreement, the term "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means all United States
federal, state, and local, and all foreign, income, profits, franchise,
gross receipts, payroll, transfer, sales, employment, use, property,
excise, value added, ad valorem, estimated, stamp, alternative or add-on
minimum, recapture, environmental, withholding and any other taxes,
charges, duties, impositions or assessments, together with all interest,
penalties, and additions imposed on or with respect to such amounts,
including any liability for taxes of a predecessor entity. "Tax Return"
means any return, declaration, report, claim for refund, or information
return or statement filed or required to be filed with any taxing authority
in connection with the determination, assessment, collection or imposition
of any Taxes.
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(b) All Tax Returns required to be filed on or before the date hereof
by or with respect to Company and the Company Subsidiaries have been filed
within the time and in the manner prescribed by law. All such Tax Returns
are true, correct and complete in all material respects, and all Taxes owed
by Company or the Company Subsidiaries, whether or not shown on any Tax
Return, have been paid. Company and the Company Subsidiaries file Tax
Returns in all jurisdictions where they are required to so file, and no
claim has ever been made by any taxing authority in any other jurisdiction
that Company or the Company Subsidiaries are or may be subject to taxation
by that jurisdiction.
(c) There are no liens or other encumbrances with respect to Taxes
upon any of the assets or properties of Company or the Company
Subsidiaries, other than with respect to Taxes not yet due and payable.
(d) No audit is currently pending with respect to any Tax Return of
Company or the Company Subsidiaries, nor is Company or its officers or
directors aware of any information which has caused or should cause them to
believe that an audit by any tax authority may be forthcoming. No
deficiency for any Taxes has been proposed in writing against Company or
the Company Subsidiaries, which deficiency has not been paid in full. No
issue relating to Company or the Company Subsidiaries or involving any Tax
for which Company or the Company Subsidiaries might be liable has been
resolved in favor of any taxing authority in any audit or examination
which, by application of the same principles, could reasonably be expected
to result in a deficiency for Taxes of Company or the Company Subsidiaries
for any subsequent period, and neither Company nor its officers or
directors knows of any other basis for the assertion of such a deficiency.
(e) There are no outstanding agreements, waivers or arrangements
extending the statutory period of limitation applicable to any claim for,
or the period for the collection or assessment of, Taxes due from or with
respect to Company or the Company Subsidiaries for any taxable period, no
power of attorney granted by or with respect to Company or the Company
Subsidiaries relating to Taxes is currently in force, and no extension of
time for filing any Tax Return required to be filed by or on behalf of
Company or any Company Subsidiary is in force. Company has delivered to
Parent complete and correct copies of all income Tax Returns, audit reports
and statements of deficiencies for each of the last three taxable years
filed by or issued to or with respect to Company or the Company
Subsidiaries.
(f) With respect to any period for which Tax Returns have not yet been
filed, or for which Taxes are not yet due or owing, Company has, in
accordance with generally accepted accounting principles, made due and
sufficient accruals for such Taxes in the Company's books and records.
(g) No consent to the application of Section 341(f)(2) of the Code (or
any predecessor provision) has been made or filed by or with respect to
Company or any Company Subsidiary or any of their assets or properties.
(h) Company and the Company Subsidiaries have not been and are not
currently in violation (or, with or without notice or lapse of time or
both, would be in violation) of any applicable law or regulation relating
to the payment or withholding of Taxes, and all withholding and payroll Tax
requirements required to be complied with by Company and the Company
Subsidiaries up to and including the date hereof have been satisfied.
(i) Company and the Company Subsidiaries are not and have never been a
party to or bound by, nor do they have or have they ever had any obligation
under, any Tax sharing agreement or similar contract or arrangement.
Neither Company nor any Company Subsidiary has any liability for the Taxes
of any other person under Treasury Regulation 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract, or otherwise.
(j) There is no contract or agreement, plan or arrangement obligating
Company or the Company Subsidiaries to make any payment that would not be
deductible by reason of Section 162(m) or 280G of the Code. Neither Company
nor any Company Subsidiary has agreed to, or is required to, make any
adjustments under Section 481(a) of the Code by reason of a change in
accounting method or otherwise.
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(k) Neither Company nor the Company Subsidiaries are, or were during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, a
United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code.
2.17 Employee Benefit Plans.
(a) Section 2.17 of the Company Disclosure Schedule sets forth a
complete list of all pension, savings, profit sharing, retirement, deferred
compensation, employment, welfare, fringe benefit, insurance, short and
long term disability, incentive, bonus, stock, vacation pay, severance pay
and similar plans, programs or arrangements (the "Plans"), including
without limitation all employee benefit plans as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
maintained by Company or the Company Subsidiaries or to which Company or
any of the Company Subsidiaries are parties or required to contribute.
(b) Company has delivered or made available to Parent current,
accurate and complete copies of (i) each Plan that has been reduced to
writing and all amendments thereto, (ii) a summary of the material terms of
each Plan that has not been reduced to writing, including all amendments
thereto, (iii) the summary plan description for each Plan subject to Title
I of ERISA, and in the case of each other Plan, any similar employee
summary (including but not limited to any employee handbook description),
(iv) for each Plan intended to be qualified under Section 401(a) or Section
501(c)(9) of the Code, the most recent determination letter or exemption
determination issued by the Internal Revenue Service ("IRS"), (v) for each
Plan with respect to which a Form 5500 series annual report/return is
required to be filed, the most recently filed such annual report/return and
annual report/return for the two preceding years, together with all
schedules and exhibits, (vi) all insurance contracts, administrative
services contracts, trust agreements, investment management agreements or
similar agreements maintained in connections with any Plan, (vii) copies of
any correspondence from the IRS, Department of Labor ("DOL") or other U.S.
government agency or department relating to an audit or an asserted or
assessed penalty with respect to a Plan or relating to requested relief
from any liability or penalty (including, but not limited to, any
correspondence relating to the IRS's EPCRS, APRSC, VCR, CAP or Walk-in Cap
programs or the DOL's amnesty programs for late filers and non-filers),
(viii) for each Plan that is a defined benefit pension plan, copies of the
most recent actuarial valuation report and actuarial valuation report for
the two preceding years, (ix) for each Plan that is intended to be
qualified under Code Section 401(a), copies of compliance testing results
(nondiscrimination testing (401(a)(4), ADP, ACP, multiple use), 402(g), 415
and top-heavy tests) for the most recent plan year and three preceding plan
years, and (x) copies of COBRA and HIPPA forms and notices used for each
Plan that is a group health plan. No employee benefit handbook or similar
employee communication relating to any Plan nor any written communication
of benefits under such Plan describes the Plan in a manner materially
inconsistent with the documents and summary plan descriptions relating to
such Plan that have been delivered pursuant to the preceding sentence.
(c) There is no entity (other than Company or any Company Subsidiary)
that together with Company or any Company Subsidiary would be treated as a
single-employer within the meaning of Section 414(b), (c), (m) or (o) of
the Code or Section 4001(b) of ERISA. Neither Company nor any Company
Subsidiary has ever maintained, contributed to or incurred any liability
under any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA or
a "multiple employer plan" as defined in Section 413(c) of the Code.
Neither Company nor any Company Subsidiary has incurred any liability under
Sections 4062, 4063 or 4201 of ERISA.
(d) Each Plan maintained by Company or a Company Subsidiary which is
intended to be qualified under either Section 401(a) or 501(c)(9) of the
Code ("Qualified Plans") is so qualified. Each Plan has been administered
in all material respects in accordance with the terms of such Plan and the
provisions of any and all statutes, orders or governmental rules or
regulations, including without limitation ERISA and the Code, and to the
knowledge of Company, nothing has been done or not done with respect to any
Plan that could result in any liability on the part of Company or any
Company Subsidiary under Title I of ERISA or Chapter 43 of the Code. All
reports, forms and notices required to be filed with respect to each
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Plan, including without limitation Form 5500 series annual reports/returns
and PBGC Form 1s, have been timely filed. All contributions, premiums and
other amounts due to or in connection with each Plan under the terms of the
Plan or applicable law have been timely made, and provision has been made
on the balance sheet included in the Company 10-Q for such contributions,
premiums and other amounts that were due as of the date of the balance
sheet but were attributable to service before such date.
(e) No "reportable event" as defined in Section 4043 of ERISA has
occurred with respect to any Plan subject to Title IV of ERISA. With
respect to each Plan subject to Title IV of ERISA, such Plan has no
unfunded benefit liabilities and such Plan could be terminated in a
"standard termination" under Section 4041(b) of ERISA on or before the
Effective Time without any additional contribution from any contributing
employer (but disregarding any other prerequisites for terminating such
Plan). With respect to each Plan subject to Section 412 of the Code, there
is no accumulated funding deficiency (whether or not waived) under such
Plan.
(f) All claims for benefits incurred by employees on or before the
Closing Date are or will be fully covered by third-party insurance policies
or programs. Except for continuation of health coverage to the extent
required under Section 4980B of the Code or Section 601 et seq. of ERISA,
other applicable law or as otherwise set forth in this Agreement, there are
no obligations under any Plan providing benefits after termination of
employment.
(g) Neither Company nor any Company Subsidiary has contracted with any
"leased employee" within the meaning of Section 414 of the Code or any
"independent contractor".
(h) Except for individual employment agreements, each Plan can be
amended, modified or terminated without advanced notice to or consent by
any employee, former employee or beneficiary, except as required by law.
2.18 Employee Relations.
(a) Company and the Company Subsidiaries, collectively, have
approximately 45 full-time and part-time employees and two independent
contractors and generally enjoy good employer-employee relations. Neither
Company nor any Company Subsidiary is delinquent in payments to any of its
employees or consultants for any wages, salaries, commissions, bonuses or
other direct compensation for any services performed by them or amounts
required to be reimbursed to such employees. Upon termination of the
employment of any employees, none of Company, the Company Subsidiaries nor
Parent shall be liable, by reason of the Merger or anything done prior to
the Effective Time, to any of such employees for severance pay or any other
payments (other than accrued salary, vacation or sick pay in accordance
with normal policies). True and complete information as to all current
directors, officers, employees or consultants of Company and the Company
Subsidiaries including, in each case, name, current job title and annual
rate of compensation has been made available previously to Parent.
(b) Company and each Company Subsidiary (i) is in compliance in all
material respects with all applicable foreign, federal, state and local
laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours, in each case, with
respect to employees, (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
employees, (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing, and (iv) is not
liable for any payment to any trust or other fund or to any governmental
entity, with respect to unemployment compensation benefits, social security
or other benefits or obligations for employees (other than routine payments
to be made in the ordinary course of business and consistent with past
practice).
(c) No work stoppage or labor strike against Company or any Company
Subsidiary is pending or threatened. Neither Company nor any Company
Subsidiary is involved in or, to the knowledge of Company, threatened with,
any labor dispute, grievance, or litigation relating to labor, safety or
discrimination matters involving any employee, including without limitation
charges of unfair labor practices or discrimination complaints, that, if
adversely determined, would result in material liability to Company.
Neither Company nor any Company Subsidiary has engaged in any unfair labor
practices
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within the meaning of the National Labor Relations Act that would, directly
or indirectly result in material liability to Company. Neither Company nor
any Company Subsidiary is presently, nor has it been in the past, a party
to or bound by any collective bargaining agreement or union contract with
respect to employees other than as set forth in Section 2.18 of the Company
Disclosure Schedule and no collective bargaining agreement is being
negotiated by Company or any Company Subsidiary. No union organizing
campaign or activity with respect to non-union employees of Company or any
Company Subsidiary is ongoing, pending or, to the knowledge of Company,
threatened.
2.19 Environmental Matters.
(a) Neither Company nor any of the Company Subsidiaries has violated,
is in violation of, or has been notified that it is in violation of,
Environmental Law, and except in full compliance with Environmental Laws,
neither Company nor any of the Company Subsidiaries has generated, used,
handled, transported or stored any Hazardous Materials or shipped any
Hazardous Materials for treatment, storage or disposal at any other site or
facility. There has been no generation, use, handling, storage or disposal
of any Hazardous Materials in violation of any Environmental Law at any
site owned or operated by, or premises leased by, Company or any of the
Company Subsidiaries during the period of Company's or such Company
Subsidiary's ownership, operation or lease or, to the best of Company's
knowledge, prior thereto, nor has there been or is there threatened any
Release of any Environmental Contaminants into, on, at or from any such
site or premises, including without limitation into the ambient air,
groundwater, surface water, soils or subsurface strata, during such period
or, to the best of Company's knowledge, prior thereto in violation of any
Environmental Law or which created or will create an obligation to report
or respond in any way to such Release. There is no underground storage tank
or other container at any site owned or operated by, or premises leased by
Company or any Company Subsidiary or, to the best of Company's knowledge,
on any site formerly owned or operated by, or premises formerly leased by,
Company or any Company Subsidiary.
(b) Neither Company nor any Company Subsidiary has received
notification in any form that, and Company has no knowledge that, any site
currently or formerly owned or operated by, or premises currently or
formerly leased by, Company or any Company Subsidiary is the subject of any
federal, state or local civil, criminal or administrative investigation
evaluating whether, or alleging that, any action is necessary to respond to
a Release or a threatened Release of any Environmental Contaminant. No such
site or premises is listed, or to Company's knowledge, proposed for
listing, on the National Priorities List or the Comprehensive Environmental
Response, Compensation, and Liability Information System, both as provided
under the federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), or any comparable state or local governmental
lists. Neither Company nor any Company Subsidiary has received written
notification of, and Company has no knowledge of, any potential
responsibility of Company or any Company Subsidiary pursuant to the
provisions of (i) CERCLA, (ii) any similar federal, state, local or other
Environmental Law, or (iii) any order issued pursuant to the provisions of
any such Environmental Law with respect to Environmental Contaminants used,
manufactured, generated, stored, or treated at, transported from, or
disposed of on, any site currently or formerly owned or operated by, or
premises currently or formerly leased by, Company or any Company
Subsidiary.
(c) Company and the Company Subsidiaries have obtained all permits
required by Environmental Law necessary to enable them to conduct their
respective businesses and are in compliance with all material aspects of
said permits.
(d) There is no environmental or health and safety matter that
reasonably could be expected to have a Company Material Adverse Effect.
Company previously has furnished to Parent copies of any and all
environmental audits or risk assessments, site assessments, documentation
regarding off-site disposal of Hazardous Materials or Release of
Environmental Contaminant, spill control plans and all other material
correspondence, documents or communications with any governmental agency or
other entity regarding the foregoing.
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(e) For purposes of this Agreement:
(i) "Environmental Laws" means any Federal, state, local or foreign
laws (including common law), regulations, codes, rules, orders,
ordinances, permits, requirements and final governmental determinations
pertaining to the environment, pollution or protection of human health,
safety or the environment, as adopted or in effect in the jurisdictions
in which the applicable site or premises are located, including without
limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, 42 U.S.C. sec. 9601 et seq.; the Emergency
Planning and Community Right-to-Know Act, 42 U.S.C. sec. 11001 et seq.;
the Resource Conservation and Recovery Act, 42 U.S.C. sec. 6901 et seq.;
the Federal Water Pollution Control Act, 33 U.S.C. sec. 1251 et seq.;
the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. sec.
136 et seq.; the Toxic Substance Control Act, 15 U.S.C. sec. 2601 et
seq.; the Oil Pollution Act of 1990, 33 U.S.C. sec. 1001 et seq.; the
Hazardous Materials Transportation Act, as amended, 49 U.S.C. sec. 1801
et seq.; the Atomic Energy Act, as amended 42 U.S.C. sec. 2011 et seq.;
the Occupational Safety and Health Act, as amended, 29 U.S.C. sec. 651
et seq.; the Federal Food, Drug and Cosmetic Act, as amended 21 U.S.C.
sec. 301 et seq. (insofar as it regulates employee exposure to Hazardous
Substances), and any state or local statute of similar effect; and
including without limitation any laws relating to protection of safety,
health or the environment which regulate the use of biological agents or
substances including medical or infectious wastes as any such laws have
been amended;
(ii) "Environmental Contaminant" means Hazardous Materials, or any
other pollutants, contaminants, toxic or constituent substances or waste
radioactive substances, materials or special wastes, petroleum or
petroleum products, polychlorinated bi-phenals, asbestos containing
materials, or any other substance or material, in each case regulated by
applicable Environmental Laws;
(iii) "Hazardous Materials" means (A) any chemicals, materials or
substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "hazardous air pollutants," "contaminants," "toxic
chemicals," "toxins," "hazardous chemicals," "extremely hazardous
substances," "pesticides," "oil" or related materials as defined in any
applicable Environmental Law, or (B) any petroleum or petroleum
products, oil, natural or synthetic gas, radioactive materials,
asbestos-containing materials, urea formaldehyde foam insulation, radon,
and any other substance defined or designated as hazardous, toxic or
harmful to human health, safety or the environment under any
Environmental Law; and
(iv) "Release" has the meaning specified in CERCLA.
2.20 No Breach. Except for (a) filings with the SEC under the Exchange
Act, (b) filings with the Secretary of State of Delaware, (c) the filing of a
Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements
Act, as amended (the "HSR Act") and (d) matters listed in Section 2.20 of the
Company Disclosure Schedule, the execution, delivery and performance of this
Agreement by Company and the consummation by Company of the transactions
contemplated hereby will not (i) violate any provision of the Certificate of
Incorporation or By-Laws of Company, (ii) violate, conflict with or result in
the breach of any of the terms or conditions of, result in modification of, or
otherwise give any other contracting party the right to terminate, accelerate
obligations under or receive payment under or constitute (or with notice or
lapse of time or both constitute) a default under, any instrument, contract or
other agreement to which Company, any Company Subsidiary or any Company Joint
Venture is a party or to which any of them or any of their assets or properties
is bound or subject, (iii) violate any law, ordinance or regulation or any
order, judgment, injunction, decree or other requirement of any court,
arbitrator or governmental or regulatory body applicable to Company or the
Company Subsidiaries or by which any of Company's or the Company Subsidiaries'
assets or properties is bound, (iv) violate any Permit, (v) require any filing
with, notice to, or permit, consent or approval of, any governmental or
regulatory body, (vi) result in the creation of any lien or other encumbrance on
the assets or properties of Company or a Company Subsidiary, or (vii) cause any
of the assets owned by the Company or any Company Subsidiary to be reassessed or
revalued by any taxing authority or other
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governmental entity, excluding from the foregoing clauses (ii), (iii), (iv),
(v), (vi) and (vii) violations, breaches and defaults which, and filings,
notices, permits, consents and approvals the absence of which, in the aggregate,
could not reasonably be expected to have a Company Material Adverse Effect or
materially interfere with the ability of Company to consummate the transactions
contemplated hereby.
2.21 Board Approvals.
(a) The Board of Directors of Company, as of the date of this
Agreement, has determined (i) that the Merger is fair to, and in the best
interests of, Company and its stockholders, (ii) to propose this Agreement
for adoption by the Company's stockholders and to declare the advisability
of this Agreement, and (iii) to recommend that the stockholders of Company
adopt this Agreement.
(b) Company has taken all action necessary such that no "fair price,"
"control share acquisition," "business combination" or similar statute
(including Section 203 of the DGCL) will apply to the execution, delivery
or performance of this Agreement.
(c) The Board of Directors has approved an amendment (the "Rights
Amendment") to the Shareholder Rights Agreement dated as of May 26, 1998
between Company and American Stock Transfer & Trust Company (the "Company
Rights Plan") so as to provide that (i) Parent will not become an
"Acquiring Person," (ii) no "Stock Acquisition Date" or "Distribution Date"
(as such terms are defined in the Company Rights Plan) will occur as a
result of the approval, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and thereby, and (iii)
the Rights (as defined in the Company Rights Plan) will terminate
immediately prior to the Effective Time. Promptly following the execution
and delivery of this Agreement, Company shall take all action necessary to
make the Rights Amendment effective.
2.22 Financial Advisor.
(a) Company has received the opinion of Adams, Harkness & Hill, dated
the date of this Agreement, to the effect that, as of such date, the
Exchange Ratio is fair, from a financial point of view, to the holders of
Company Common Stock, a copy of which opinion has been made available to
Parent.
(b) Other than Adams, Harkness & Hill, no broker, finder, agent or
similar intermediary has acted on behalf of Company in connection with this
Agreement or the transactions contemplated hereby, and there are no
brokerage commissions, finders' fees or similar fees or commissions payable
in connection herewith based on any agreement, arrangement or understanding
with Company, or any action taken by Company. Company previously has
provided Parent with a copy of Adams, Harkness & Hill's engagement letter.
2.23 Proxy Statement and Registration Statement. None of the information
supplied or to be supplied by Company for inclusion or incorporation by
reference in the registration statement on Form S-4 to be filed with the SEC in
connection with the issuance of shares of Parent Common Stock in the Merger (the
"Registration Statement") will, at the time the Registration Statement is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. None of the
information supplied or to be supplied by Company for inclusion or incorporation
by reference in the proxy statement/prospectus included in the Registration
Statement (the "Proxy Statement/Prospectus"), on the date it is first mailed to
holders of Company Common Stock or at the time of the Company Stockholders
Meeting (as defined in Section 4.6(b)), will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus will comply as to form in all material respects with the
requirements of the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder.
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SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF PARENT
Except as set forth on the disclosure schedule delivered by Parent to
Company on the date hereof (the "Parent Disclosure Schedule"), the section
numbers of which are numbered to correspond to the section numbers of this
Agreement to which they refer, Parent and Merger Sub hereby make the following
representations and warranties to Company:
3.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has corporate or similar power and authority to own, lease and
operate its assets and to carry on its business as now being and as heretofore
conducted. Parent is qualified or otherwise authorized to transact business as a
foreign corporation or other organization in all jurisdictions in which such
qualification or authorization is required by law, except for jurisdictions in
which the failure to be so qualified or authorized could not reasonably be
expected to have a material adverse effect on the assets, properties, business,
results of operations or financial condition of Parent taken as a whole (a
"Parent Material Adverse Effect"). Parent has no Parent Subsidiaries. As used in
this Agreement, a "Parent Subsidiary" means any "significant subsidiary" of
Parent, as such term is defined in Rule 1-02(w) of Regulation S-X under the
Exchange Act.
3.2 Authority to Execute and Perform Agreement. Each of Parent and Merger
Sub has the corporate power and authority to enter into, execute and deliver
this Agreement and to perform fully its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Parent and Merger Sub. This Agreement has been duly executed and delivered by
each of Parent and Merger Sub and constitutes their valid and binding
obligations, enforceable against each of them in accordance with its terms.
3.3 Capitalization. The authorized capital stock of Parent consists of
100,000,000 shares of common stock, $0.01 par value per share, and 1,000,000
shares of preferred stock, $0.01 par value per share ("Parent Preferred Stock").
As of August 7, 2000, 24,795,751 shares of Parent Common stock were issued and
outstanding. As of the date of this Agreement, no shares of Parent Preferred
Stock are outstanding. The authorized capital stock of Merger Sub consists of
1,000 shares of Common Stock, $0.01 par value per share, all of which, as of the
date hereof, are issued and outstanding and are held by Parent. All issued and
outstanding shares of Parent Common Stock are validly issued, fully paid,
non-assessable and free of any preemptive rights.
3.4 SEC Reports. Parent previously has delivered to Company (i) the
prospectus, dated February 3, 2000, used in its initial public offering, (ii)
all proxy statements relating to Parent's meetings of stockholders held since
February 3, 2000 (the effective date of its registration under the Exchange Act)
and (iii) all other documents filed by Parent with the SEC under the Exchange
Act since February 3, 2000 (together with the documents filed by Parent with the
SEC under the Exchange Act prior to the Effective Time, the "Parent SEC
Reports"). As of their respective dates, such documents complied, and all
documents filed by Parent with the SEC under the Exchange Act between the date
of this Agreement and the Closing Date will comply, in all material respects
with applicable SEC requirements and did not, and in the case of documents filed
on or after the date hereof will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Since February 3, 2000, Parent has timely filed, and
between the date of this Agreement and the Closing Date will timely file, with
the SEC all documents required to be filed under Sections 13, 14 or 15(d) of the
Exchange Act.
3.5 Financial Statements. The (i) audited consolidated financial
statements contained in Parent's registration statement on Form S-1 filed with
the SEC on May 25, 2000, and (ii) the unaudited consolidated financial
statements contained in Parent's quarterly report on Form 10-Q for the quarter
ended June 30, 2000 (the "Parent 10-Q"), have been prepared from, and are in
accordance with, the books and records of Parent and fairly present the
consolidated financial condition, results of operations and cash flows of Parent
and its consolidated subsidiaries as of and for the periods presented therein,
all in accordance with generally accepted accounting principles applied on a
consistent basis, except as otherwise indicated therein and subject, in the
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case of the unaudited financial statements, to normal year-end and audit
adjustments, which in the aggregate are not material, and the absence of
footnote disclosures.
3.6 Absence of Undisclosed Liabilities. As at December 31, 1999, Parent
had no material liabilities of any nature, whether accrued, absolute, contingent
or otherwise (including, without limitation, liabilities as guarantor or
otherwise with respect to obligations of others or liabilities for taxes due or
then accrued or to become due), required to be reflected or disclosed in the
balance sheet dated December 31, 1999 (or the notes thereto) that were not
adequately reflected or reserved against on such balance sheet. Except as
disclosed in the Parent SEC Reports, Parent has no such liabilities, other than
liabilities (i) adequately reflected or reserved against on such balance sheet,
(ii) reflected in Parent's unaudited consolidated balance sheet (or the notes
thereto) dated June 30, 2000 included in the Parent 10-Q, (iii) incurred since
June 30, 2000 in the ordinary course of business or (iv) that would not, in the
aggregate, have a Parent Material Adverse Effect.
3.7 Absence of Adverse Changes. Since June 30, 2000, except as disclosed
in the Parent SEC Reports, there has not been any event, change or circumstance
which has had a Parent Material Adverse Effect.
3.8 Actions and Proceedings. Except as set forth in the Parent SEC
Reports, there are no actions, suits or claims or legal, administrative or
arbitration proceedings pending or, to the knowledge of Parent, threatened
against Parent that individually or in the aggregate could reasonably be
expected to have a Parent Material Adverse Effect or materially interfere with
Parent's ability to consummate the transactions contemplated hereby. To the
knowledge of Parent, except as disclosed in the Parent SEC Reports there is no
fact, event or circumstance now in existence that reasonably could be expected
to give rise to any suit, action, claim, investigation or proceeding that,
individually or in the aggregate, could reasonably be expected to have a Parent
Material Adverse Effect or interfere with Parent's ability to consummate the
transactions contemplated hereby.
3.9 Compliance with Laws. Except as disclosed in the Parent SEC Reports,
to Parent's Knowledge:
(a) Parent has all Permits material to the conduct of its business;
such Permits are in full force and effect; and no proceeding is pending or
threatened to revoke or limit any Permit.
(b) Parent is not in violation of and has no liabilities, whether
accrued, absolute, contingent or otherwise, under any federal, state, local
or foreign law, ordinance or regulation or any order, judgment, injunction,
decree or other requirement of any court, arbitrator or governmental or
regulatory body, relating to the operation of clinical testing
laboratories, labor and employment practices, health and safety, zoning,
pollution or protection of the environment, except for violations of or
liabilities under any of the foregoing which could not, in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
(c) Each product or product candidate subject to the FDA jurisdiction
under the FDCA that is manufactured, tested, distributed, held, and/or
marketed by Parent is being manufactured, tested, distributed, held and
marketed in compliance with all applicable requirements under the FDCA
including, but not limited to, those relating to investigational use,
premarket clearance, good manufacturing practices, labeling, advertising,
record keeping, filing of reports and security.
3.10 Intellectual Property. Except as disclosed in the Parent SEC Reports:
Parent owns, or is licensed to use, or otherwise has the full right to use all
Proprietary Rights that are material to its business; all patents listed on
Section 3.10 of the Parent Disclosure Schedule are valid and subsisting; Parent
is not aware of any basis for any claim by any third party that the business of
Parent infringes upon the proprietary rights of others, nor has Parent received
any notice or claim of infringement from any third party; and Parent is not
aware of any existing or threatened infringement by any third party on, or any
competing claim of right to use or own any of, its Proprietary Rights.
3.11 Commercial Relationships. The relationships of Parent with its
suppliers, collaborators, licensors and licensees are generally good commercial
working relationships. No such entity has canceled or otherwise terminated its
relationship with Parent, or has, during the last twelve months, materially
altered its relationship with Parent.
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3.12 No Breach. Except for (a) the filing of the Registration Statement
with the SEC, (b) filings required under the Exchange Act, (c) filings with the
Secretary of State of Delaware, (d) the filing of a Notification and Report form
under the HSR Act and (e) the matters listed in Section 3.9 of the Parent
Disclosure Schedule, the delivery and performance of this Agreement by Parent
and Merger Sub and consummation by each of them of the transactions contemplated
hereby will not (i) violate any provision of the charter or by-laws of Parent or
Merger Sub, (ii) violate, conflict with or result in the breach of any of the
terms or conditions of, result in modification of the effect of, or otherwise
give any other contracting party the right to terminate or accelerate
obligations under, or constitute (or with notice or lapse of time or both
constitute) a default under, any material instrument, contract or other
agreement to which Parent or a Parent or Merger Sub is party or to which either
of them or any of their assets or properties is bound or subject, (iii) violate
any law, ordinance or regulation or any order, judgment, injunction, decree or
requirement of any court, arbitrator or governmental or regulatory body
applicable to Parent or Merger Sub or by which any of their assets or properties
is bound, (iv) require any filing with, notice to, or permit, consent or
approval of, any governmental or regulatory body or (v) result in the creation
of any lien or other encumbrance on the assets or properties of Parent or Merger
Sub, excluding from the foregoing clauses (ii), (iii), (iv) and (v) violations,
breaches and defaults which, and filings, notices, permits, consents and
approvals the absence of which, in the aggregate, would not have a Parent
Material Adverse Effect or interfere with Parent's ability to consummate the
transactions contemplated hereby.
3.13 Proxy Statement and Registration Statement. None of the information
supplied or to be supplied by Parent for inclusion in the Registration Statement
will, at the time the Registration Statement is filed with the SEC, at any time
it is amended or supplemented or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by Parent for inclusion or incorporation by reference in the Proxy
Statement/Prospectus will, at the date it is first mailed to holders of Company
Common Stock or at the time of the Company Stockholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
3.14 Interim Operations of Merger Sub. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
SECTION 4 -- COVENANTS AND AGREEMENTS
4.1 Conduct of Business. Except with the prior written consent of Parent
and except as otherwise contemplated herein or referred to in Section 4.1 of the
Company Disclosure Schedule, during the period from the date hereof to the
Closing Date, Company shall observe the following covenants:
(a) Affirmative Covenants Pending Closing. Company shall:
(i) Preservation of Personnel. Use reasonable commercial efforts
to preserve intact and keep available the services of present employees
of Company and the Company Subsidiaries;
(ii) Insurance. Use reasonable commercial efforts to keep in
effect casualty, public liability, worker's compensation and other
insurance policies in coverage amounts not less than those in effect at
the date of this Agreement;
(iii) Preservation of the Business; Maintenance of Properties,
Contracts. Use reasonable commercial efforts to preserve the business
of Company, advertise, promote and market Company's business activities
in accordance with past practices over the last twelve months, keep
Company's properties intact, preserve its goodwill and business,
maintain all physical properties in such operating condition as will
permit the conduct of Company's business on a basis consistent with past
practice, and perform and comply in all material respects with the terms
of the contracts referred to in Section 2.11.
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(iv) Intellectual Property Rights. Use best efforts to preserve
and protect the Proprietary Rights;
(v) Ordinary Course of Business. Operate Company's business solely
in the ordinary course consistent with past practices;
(vi) Company Options and Warrants. Take all actions necessary with
respect to Company Options and Company Warrants to effectuate the terms
of this Agreement, provided, however, that Parent shall have the right
to approve any agreements to modify terms of the underlying instruments;
and
(vii) FDA Matters. Notify and consult with Parent immediately (A)
after receipt of any material communication from the FDA and before
giving any material submission to the FDA, and (B) prior to making any
material change to a study protocol, the addition of new trials, or a
material change to the development timeline for any its product
candidates or programs.
(b) Negative Covenants Pending Closing. Except as set forth on
Schedule 4.1(b) hereto, Company shall not without the prior written consent
of Parent:
(i) Disposition of Assets. Sell or transfer, or mortgage, pledge,
lease or otherwise encumber any of its assets, including its Proprietary
Rights, other than sales or transfers in the ordinary course of business
and in amounts not exceeding $50,000;
(ii) Liabilities. Incur any indebtedness for borrowed money,
obligation or liability or enter into any contracts or commitments
involving potential payments to or by Company or any Company Subsidiary
of $50,000 or more;
(iii) Compensation. Change the compensation payable to any
officer, director, employee, agent or consultant; or enter into any
employment, severance or other agreement with any officer, director,
employee, agent or consultant of Company or a Company Subsidiary; or
adopt, or increase the benefits under, any employee benefit plan, except
as required by law;
(iv) Capital Stock. Make any change in the number of shares of its
capital stock authorized, issued or outstanding or grant or accelerate
the exercisability of, any option, warrant or other right to purchase,
or convert any obligation into, shares of its capital stock, or declare
or pay any dividend or other distribution with respect to any shares of
its capital stock, or sell or transfer any shares of its capital stock,
or redeem or otherwise repurchase any shares of its capital stock,
except upon the exercise of convertible securities outstanding on the
date of this Agreement and disclosed herein;
(v) Charter and By-Laws. Cause, permit or propose any amendments
to the Certificate of Incorporation or By-laws of Company;
(vi) Acquisitions. Make, or permit to be made, any material
acquisition of property or assets outside the ordinary course of
business;
(vii) Capital Expenditures. Authorize any single capital
expenditure in excess of $50,000 or capital expenditures which in the
aggregate exceed $100,000;
(viii) Accounting Policies. Except as may be required as a result
of a change in law or in generally accepted accounting principles,
change any of the accounting practices or principles used by it or
restate, or become obligated to restate, the financial statements
included in the Company 10-K or Company 10-Q;
(ix) Tax Treatment. Take, or permit any of the Company
Subsidiaries to take, any action that would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of
the Code.
(x) Taxes. Make any Tax election or settle or compromise any
material federal, state, local or foreign Tax liability, change annual
tax accounting period, change any method of Tax accounting, enter into
any closing agreement relating to any Tax, surrender any right to claim
a Tax refund, or
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consent to any extension or waiver of the limitations period applicable
to any Tax claim or assessment;
(xi) Legal. Settle or compromise any pending or threatened suit,
action or claim which is material or which relates to the transactions
contemplated hereby;
(xii) Extraordinary Transactions. Adopt a plan of complete or
partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of Company or any of the
Company Subsidiaries (other than the Merger);
(xiii) Payment of Indebtedness. Pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge
or satisfaction, in the ordinary course of business and consistent with
past practice, of liabilities reflected or reserved against in the
balance sheet included in the Company 10-Q or incurred in the ordinary
course of business;
(xiv) WARN Act. Effectuate a "plant closing" or "mass layoff," as
those terms are defined in the Worker Adjustment and Retraining
Notification Act of 1988;
(xv) Rights Plan. Amend, modify or waive any provisions of the
Company Rights Plan, or take any action to redeem the Rights or render
the Rights inapplicable to any transaction other than the Merger;
(xvi) New Agreements/Amendments. Enter into or modify, or permit a
Company Subsidiary to enter into or modify, any license, development,
research or collaboration agreement with any other person or entity;
(xvii) Confidentiality Agreements. Modify, amend or terminate, or
waive, release or assign any material rights or claims with respect to
any confidentiality agreement to which Company is a party;
(xviii) Obligations. Obligate itself to do any of the foregoing;
(c) Control of Company's Business. Nothing contained in this
Agreement shall give Parent, directly or indirectly, the right to control
or direct Company's operations prior to the Effective Time. Prior to the
Effective Time, Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision over its
operations.
4.2 Corporate Examinations and Investigations. Prior to the Effective
Time, Parent shall be entitled, through its employees and representatives, to
have such access to the assets, properties, business and operations of Company,
as is reasonably necessary or appropriate in connection with Parent's
investigation of Company with respect to the transactions contemplated hereby.
Any such investigation and examination shall be conducted at reasonable times
and under reasonable circumstances so as to minimize any disruption to or
impairment of Company's business and Company shall cooperate fully therein. No
investigation by Parent shall diminish or obviate any of the representations,
warranties, covenants or agreements of Company contained in this Agreement. In
order that Parent may have full opportunity to make such investigation, Company
shall furnish the representatives of Parent during such period with all such
information and copies of such documents concerning the affairs of Company as
such representatives may reasonably request and cause its officers, employees,
consultants, agents, accountants and attorneys to cooperate fully with such
representatives in connection with such investigation.
4.3 Expenses. Except as otherwise provided in Section 8.3, Company and
Parent shall bear their respective expenses incurred in connection with the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby, including without limitation, all fees and expenses of
agents, representatives, counsel and accountants, except that (a) each of Parent
and Company shall bear and pay one-half of the costs and expenses incurred in
connection with the filing, printing and mailing of the Registration Statement
and the Prospectus/Proxy Statement and (b) Parent shall bear and pay the fee due
in connection with the filing of the Notification and Report Forms under the HSR
Act.
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4.4 Authorization from Others. Prior to the Closing Date, the parties
shall use reasonable commercial efforts to obtain all authorizations, consents
and Permits of others, necessary or desirable to permit the consummation of the
Merger on the terms contemplated by this Agreement.
4.5 Further Assurances. Each of the parties shall execute such documents,
further instruments of transfer and assignment and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby. Each party shall use
its respective reasonable commercial efforts to take other such actions to
ensure that, to the extent within its control or capable of influence by it, the
transactions contemplated by this Agreement shall be fully carried out in a
timely fashion. Nothing in this Agreement shall require Parent or Merger Sub to
sell, hold separate, license or otherwise dispose of or conduct their business
in a specified manner, or agree to sell, hold separate, license or otherwise
dispose of or conduct their business in a specified manner, or permit the sale,
holding separate, licensing or other disposition of, any assets of Parent or
Merger Sub, whether as a condition to obtaining any approval from a governmental
entity or any other person or for any other reason.
4.6 Preparation of Disclosure Documents
(a) As soon as practicable following the date of this Agreement,
Company and Parent shall prepare the Proxy Statement/Prospectus. Company
shall, in cooperation with Parent, file the Proxy Statement/ Prospectus
with the SEC as its preliminary proxy statement and Parent shall, in
cooperation with Company, prepare and file with the SEC the Registration
Statement, in which the Proxy Statement/ Prospectus will be included. Each
of Company and Parent shall use reasonable commercial efforts to have the
Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing and to keep the Registration
Statement effective as long as is necessary to consummate the Merger.
Company shall mail the Proxy Statement/Prospectus to its stockholders as
promptly as practicable after the Registration Statement is declared
effective under the Securities Act and, if necessary, after the Proxy
Statement/Prospectus shall have been so mailed, promptly circulate
supplemental or amended proxy material, and, if required in connection
therewith, resolicit proxies.
(b) (i) Company shall, as soon as practicable following the date of
this Agreement and the effectiveness of the Registration Statement, duly
call, give notice of, convene and hold a meeting of its stockholders (the
"Company Stockholders Meeting") for the purpose of obtaining the required
stockholder votes with respect to this Agreement, (ii) the Board of
Directors of Company, unless otherwise required pursuant to the applicable
fiduciary duties of the Board of Directors of Company to the stockholders
of Company (as determined in good faith by the Board of Directors of
Company after consulting with outside counsel), shall give its unqualified
recommendation that its stockholders adopt this Agreement and (iii) Company
shall take all lawful action to solicit such adoption. No withdrawal,
modification, change or qualification in the recommendation of the Board of
Directors of Company shall change the approval of the Board of Directors of
Company for purposes of causing any state takeover statute or other state
law to be inapplicable to the transactions contemplated hereby, or change
the obligation of Company to present the Merger Agreement for adoption at a
the Company Stockholders Meeting. Company agrees to give Parent written
notice at least 3 business days prior to publicly indicating any
withdrawal, modification, change or qualification in the recommendation of
the Board of Directors of the Company.
(c) Except as required by law, no amendment or supplement to the Proxy
Statement/Prospectus or the Registration Statement shall be made by Parent
or Company without the approval of the other party (which shall not be
unreasonably withheld). Each party shall advise the other party, promptly
after it receives notice thereof, of the time when the Registration
Statement has become effective or any supplement or amendment has been
filed, of the issuance of any stop order by the SEC, or of any request by
the SEC for amendment of the Proxy Statement/Prospectus or the Registration
Statement or comments thereon and responses thereto or requests by the SEC
for additional information.
(d) Company shall use reasonable efforts to cause to be delivered to
Parent a letter from Company's independent public accountants, dated the
date on which the Registration Statement shall become effective, addressed
to Company and Parent, in form and substance reasonably satisfactory to
Parent and
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customary in scope and substance for comfort letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
4.7 Public Announcements. Company shall consult with Parent to get
Parent's approval (which will not be unreasonably withheld), before issuing any
press release or otherwise making any public statement with respect to the
Merger or this Agreement and shall not issue any such press release or make any
such public statement prior to such consultation and approval, except as may be
required by law.
4.8 Affiliate Letters. Prior to the Closing Date, Company shall identify
to Parent all persons who, at the time of the Company Stockholders Meeting,
Company believes may be "affiliates" of Company within the meaning of Rule 145
under the Securities Act. Company shall use its best efforts to provide Parent
with such information as Parent shall reasonably request for purposes of making
its own determination of persons who may be deemed to be affiliates of Company.
Company shall use its best efforts to deliver to Parent prior to the Closing
Date a letter from each of such affiliates identified by Company and Parent in
substantially the form attached hereto as Exhibit A (the "Affiliate Letters").
4.9 Nasdaq Listings. Prior to the Closing Date, Parent shall file with
Nasdaq a Notification for Listing of Additional Shares covering the shares of
Parent Common Stock to be issued in the Merger. Prior to the Closing Date,
Company shall take such actions as are necessary so that trading of Company
Common Stock on the Nasdaq National Market ceases prior to the Effective Time.
4.10 No Solicitation. Company shall not, and shall cause each Company
Subsidiary and each director, officer, employee, agent or other representative
(including each financial advisor and attorney) of Company and each Company
Subsidiary not to, (a) solicit, initiate, facilitate, assist or encourage action
by, or discussions with, any person, other than Parent, relating to the possible
acquisition of Company or any Company Subsidiary or of all or a material portion
of the assets or capital stock of Company or any Company Subsidiary or any
merger, reorganization, consolidation, business combination, share exchange,
tender offer, recapitalization, dissolution, liquidation or similar transaction
involving Company or any Company Subsidiary (an "Alternative Transaction"), (b)
participate in any negotiations regarding, or furnish information with respect
to, any effort or attempt by any person to do or to seek any Alternative
Transaction or (c) grant any waiver or release under any standstill or similar
agreement. Notwithstanding the foregoing, Company and the Board of Directors of
Company shall be permitted (i) to comply with Rule 14e-2(a) under the Exchange
Act with regard to an Alternative Transaction (to the extent applicable) and
(ii) prior to the date on which the stockholders of Company adopt the Merger
Agreement, to engage in discussions or negotiations with, or provide information
to, a person who makes an unsolicited bona fide written proposal for an
Alternative Transaction if (and only if) (A) Company is not in breach of its
obligations under this Section 4.10, (B) the Board of Directors of Company
concludes in good faith (after consultation with its financial advisor) that the
proposal is reasonably likely to lead to an Alternative Transaction more
favorable for Company's stockholders than the Merger (including any adjustment
to the terms and conditions proposed by Parent in response to the proposal for
the Alternative Transaction), (C) the Board of Directors of Company concludes in
good faith (after consultation with its outside legal counsel) (who may be
Company's regularly engaged legal counsel) that the engaging in such
negotiations or discussions or the provision of such information is required by
the directors' fiduciary duties under Delaware law and (D) prior to providing
any information or data, the recipient delivers to Company an executed
confidentiality agreement with terms substantially similar to those contained in
the confidentiality agreement (the "Confidentiality Agreement") dated June 26,
2000 between Parent and Company. Company shall notify Parent promptly (and, in
any case, within 24 hours) of any inquiries, proposals or offers received by,
any information requested from, or any discussions or negotiations sought to be
initiated or continued with, it, any Company Subsidiary or any of their
directors, officers, employees, agents or other representatives concerning an
Alternative Transaction, indicating, in connection with such notice, the names
of the parties and the material terms and conditions of any proposals or offers
and, in the case of written materials, providing copies of such materials.
Company agrees that it will keep Parent informed, on a prompt basis (and, in any
case, within 24 hours of any significant development), of the status and terms
of any such proposals or offers and the status of any such discussions or
negotiations. Company agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with respect to
any potential Alternative Transaction or similar transaction or arrangement and
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request the return or destruction of all confidential information regarding the
Company previously provided in connection with such activities, discussions or
negotiations. Company agrees that it will take the necessary steps to promptly
inform the individuals or entities referred to in the first sentence of this
Section 4.10 of the obligations undertaken in this Section 4.10.
4.11 Regulatory Filings. As soon as is reasonably practicable, Company and
Parent each shall file with the United States Federal Trade Commission (the
"FTC") and the Antitrust Division of the United States Department of Justice
("DOJ") any Notification and Report Forms relating to the Merger required by the
HSR Act, as well as comparable pre-merger notification forms required by the
merger notification and control laws and regulations of any other applicable
jurisdiction, as agreed to by the parties. Company and Parent each shall
promptly (a) supply the other with any information which may be required in
order to make such filings and (b) supply any additional information which may
be requested by the FTC, the DOJ or the competition or merger control
authorities of any other jurisdiction and which the parties reasonably deem
appropriate.
4.12 Termination of 401(k) Plan. Company agrees to terminate its 401(k)
Plan immediately prior to the Closing, unless the Parent, in its sole and
absolute discretion, agrees to sponsor and maintain such policy by providing the
Company with written notice of its election at least three (3) days prior to the
Closing Date.
4.13 Notification of Certain Matters. Between the date hereof and the
Closing Date, Company shall give prompt notice to Parent, and Parent and Merger
Sub shall give prompt notice to Company, of (a) the occurrence or non-occurrence
of any event or circumstance the occurrence or non-occurrence of which would be
likely to cause any representation or warranty contained in this Agreement to be
untrue or inaccurate if made at such time and (b) any failure of Company, Parent
and Merger Sub, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
4.14 Registration of Certain Shares. Promptly after the Effective Time,
Parent shall file registration statements on Form S-8 (or any successor or other
appropriate forms), with respect to the shares of Parent Common Stock subject to
Company Stock Options or purchase rights under the Company Purchase Plan, and
shall use commercially reasonable efforts to maintain the effectiveness of such
registration statement for so long as such options or purchase rights remain
outstanding.
4.15 Employee Matters.
(a) Parent shall give individuals who are employed by Company
immediately prior to the Effective Time and remain as employees of the
Surviving Corporation or Parent ("Affected Employees") full credit for
purposes of eligibility, vesting, benefit accrual (except for purposes of
benefit accrual under any defined benefit pension plans and except as would
result in duplication of benefits) and determination of the level of
benefits under any employee benefit plans or arrangements maintained by
Parent for such Affected Employees' service with Company to the same extent
recognized by Company immediately prior to the Effective Time.
(b) Parent shall waive all limitations as to preexisting conditions
exclusions and waiting periods with respect to participation and coverage
requirements applicable to the Affected Employees under any medical or
dental benefit plans that such employees may be eligible to participate in
after the Effective Time, other than limitations or waiting periods that
are already in effect with respect to such employees and that have not been
satisfied as of the Effective Time under any plan maintained for the
Affected Employees immediately prior to the Effective Time.
(c) As of the Effective Time, Parent shall assume and honor in
accordance with their terms all employment, severance and other
compensation agreements and arrangements existing prior to the execution of
this Agreement which are between Company and any director, officer or
employee thereof, including without limitation the Company's Employee
Retention Plan and the Company's Employee Severance Plan, each as described
in Section 2.17 of the Company Disclosure Schedule, except as otherwise
expressly agreed between Parent and such person.
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4.16 Indemnification.
(a) From and after the Effective Time, Parent shall cause the
Surviving Corporation to fulfill and honor in all respects the obligations,
to the extent legally permissible, of Company pursuant to the
indemnification agreements between Company and certain of its directors and
officers (the "Indemnified Parties") that are listed in Section 4.16 of the
Company Disclosure Schedule and any indemnification provisions under
Company's Certificate of Incorporation or By-laws as in effect on the date
hereof.
(b) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges with any other person and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers substantially all of its assets to any person
in a single transaction or a series of transactions, then, and in each such
case, Parent shall either guarantee the indemnification obligations
referred to in this Section 4.16 or will make or cause to be made proper
provision so that the successors and assigns of the Surviving Corporation
assume the indemnification obligations described herein for the benefit of
the Indemnified Parties.
(c) Parent understands and agrees that, prior to the Effective Time,
Company intends to obtain a six-year "tail" insurance policy that provides
coverages substantially similar to the coverage provided under Company's
directors and officers insurance policy in effect on the date of this
Agreement for the individuals who are directors and officers of Company on
the date of this Agreement for events occurring prior to the Effective
Time; provided, however, without Parent's prior written consent, Company
shall not pay more than $250,000 to purchase such policy.
4.17 Section 16 Approval. Prior to the Effective Time, the Board of
Directors of Parent or an appropriate committee of non-employee directors
thereof, shall adopt a resolution consistent with the interpretive guidance of
the SEC so that the acquisition by any officer or director of Company who may
become an officer or director of Parent for purposes of Section 16 of the
Exchange Act and the rules and regulations thereunder ("Section 16") of Parent
Common Stock or options to acquire Parent Common Shares pursuant to this
Agreement and the Merger shall be an exempt transaction for purposes of Section
16.
4.18 Participation in Certain Actions and Proceedings. Until this
Agreement is terminated in accordance with Section 8.1, Parent shall have the
right to participate in the defense of any action, suit or proceeding instituted
against Company (or any of its directors or officers) before any court or
governmental or regulatory body or threatened by any governmental or regulatory
body, to restrain, modify or prevent the consummation of the transactions
contemplated by this Agreement, or to seek damages or a discovery order in
connection with such transactions.
SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF EACH PARTY TO CONSUMMATE THE MERGER
The respective obligations of each party to consummate the Merger shall be
subject to the satisfaction or waiver by mutual consent of the other party, at
or before the Effective Time, of each of the following conditions:
5.1 Stockholder Approval. Company shall have obtained any required vote of
holders of Company Common Stock necessary to adopt this Agreement.
5.2 Registration Statement. The Registration Statement shall have been
declared effective and shall remain effective and shall not be subject to a stop
order at the Effective Time.
5.3 Absence of Order. No temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other governmental
entity of competent jurisdiction shall be in effect and have the effect of
making the Merger illegal or otherwise prohibiting consummation of the Merger.
5.4 Regulatory Approvals. All approvals from governmental entities shall
have been obtained; provided, however, that the conditions of this Section 5.4
shall not apply to any party whose failure to fulfill its
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obligations under this Agreement shall have been the cause of, or shall have
resulted in, such failure to obtain such approval.
5.5 HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have expired.
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
PARENT AND MERGER SUB TO CONSUMMATE THE MERGER
The obligations of Parent and Merger Sub to consummate the Merger are
subject, to the fulfillment of the following conditions, any one or more of
which may be waived by Parent:
6.1 Representations, Warranties and Covenants. The representations and
warranties made by Company in this Agreement shall have been accurate in all
material respects as of the date of this Agreement and shall be accurate as of
the Closing Date as if made on and as of the Closing Date except (other than
representations and warranties set forth in Section 2.3) to the extent failure
to be accurate, in the aggregate, could not reasonably be expected to have a
Company Material Adverse Effect. The representation and warranties set forth in
Section 2.3 shall be true and correct in all respects (other than de minimis
variations) as of the Closing Date as if made on and as of the Closing Date.
Company shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by it on or prior to the Effective Time. Company shall have delivered to
Parent a certificate from its chief executive officer, dated the Closing Date,
to the foregoing effect.
6.2 Corporate Certificates. Company shall have delivered a copy of the
Certificate of Incorporation of Company, as in effect immediately prior to the
Closing Date, certified by the Delaware Secretary of State and a certificate, as
of the most recent practicable date, of the Delaware Secretary of State as to
Company's corporate good standing.
6.3 Secretary's Certificate. Company shall have delivered a certificate of
the Secretary of Company, dated as of the Closing Date, certifying as to (a) the
incumbency of officers of Company executing documents executed and delivered in
connection herewith, (b) a copy of the By-Laws of the Company, as in effect from
the date this Agreement was approved by the Board of Directors of Company until
the Closing Date, (c) a copy of the resolutions of the Board of Directors of the
Company authorizing and approving the applicable matters contemplated hereunder
and (iv) a copy of the resolutions of the stockholders of Company adopting this
Agreement.
6.4 Affiliate Letters. Parent shall have received the Affiliate Letters
referred to in Section 4.8.
6.5 Certificate of Merger. Company shall have executed and delivered the
Certificate of Merger referred to in Section 1.1.
6.6 Tax Opinion. Parent shall have received the opinion of Palmer & Dodge
LLP, dated on or prior to the effective date of the Registration Statement, to
the effect that (i) the Merger will constitute a reorganization under Section
368(a) of the Code, and (ii) Parent, Company and Merger Sub will each be a party
to that reorganization. In rendering such opinion, counsel shall be entitled to
rely on customary representation letters of Parent, Company and Merger Sub and
others, in form and substance reasonably satisfactory to such counsel; provided,
however, if Palmer & Dodge LLP was unwilling to deliver such opinion, this
condition shall be deemed satisfied if Bowditch & Dewey, LLP delivered such
opinion.
6.7 Consents. Company shall have obtained waivers or consents, which shall
remain in full force and effect, with respect to each agreement required to be
disclosed in Section 2.20 of the Company Disclosure Schedule (other than
employment agreements) such that the terms of each such agreement are unchanged
by the Merger.
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SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF
COMPANY TO CONSUMMATE THE MERGER
The obligation of Company to consummate the Merger is subject to the
fulfillment of the following conditions, any one or more of which may be waived
by it:
7.1 Representations, Warranties and Covenants. Except for changes
contemplated by this Agreement, the representations and warranties made by
Parent and Merger Sub in this Agreement shall have been accurate in all material
respects as of the date of this Agreement, and shall be accurate as of the
Closing Date as if made on and as of the Closing Date except to the extent
failure to be accurate, in the aggregate, could not reasonably be expected to
have a Parent Material Adverse Effect. Parent and Merger Sub shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by it on
or prior to the Effective Time. Parent shall have delivered to Company a
certificate from an authorized officer dated the Closing Date, to the foregoing
effect.
7.2 Merger Documents. Merger Sub shall have executed and delivered the
Certificate of Merger referred to in Section 1.1.
7.3 Tax Opinion. Company shall have received the opinion of Bowditch &
Dewey, LLP, dated on or prior to the effective date of the Registration
Statement, to the effect that (i) the Merger will constitute a reorganization
under Section 368(a) of the Code, and (ii) Parent, Company and Merger Sub will
each be a party to that reorganization. In rendering such opinion, counsel shall
be entitled to rely on customary representation letters of Parent, Company and
Merger Sub and others, in form and substance reasonably satisfactory to such
counsel; provided, however, if Bowditch & Dewey, LLP was unwilling to deliver
such opinion, this condition shall be deemed satisfied if Palmer & Dodge LLP
delivered such opinion.
SECTION 8 -- TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether prior to or after the stockholders of Company adopt this
Agreement:
(a) by either Company or Parent, by written notice to the other, if
the Effective Time shall not have occurred on or before February 15, 2001;
provided, however, that the right to terminate this Agreement under this
Section 8.1(a) shall not be available to any party whose breach of a
representation or warranty or failure to fulfill any covenant or other
agreement under this Agreement has been the cause of, or resulted in the
failure of, the Merger to occur on or before such date;
(b) by Company (provided that Company is not then in material breach
of any representation, warranty, covenant or other agreement contained
herein), by written notice to Parent, if a circumstance exists or
circumstances exist such that it is reasonably certain that the conditions
to Company's obligation to close that are set forth in Section 7.1 will not
be satisfied; provided, however, Company shall not have a right to
terminate this Agreement pursuant to this Section 8.1(b), (i) if the
circumstance is or the circumstances are susceptible to change through
action or inaction by Parent and (ii) within 20 days after written notice
from Company, Parent effects a change in the circumstance or circumstances
such that it ceases to be reasonably certain that the conditions to
Company's obligation to close that are set forth in Section 7.1 will not be
satisfied;
(c) by Parent (provided that Parent is not then in material breach of
any representation, warranty, covenant or other agreement contained
herein), by written notice to Company, if a circumstance exists or
circumstances exist such that it is reasonably certain that the conditions
to Parent's obligation to close that are set forth in Section 6.1 will not
be satisfied; provided, however, Parent shall not have a right to terminate
this Agreement pursuant to this Section 8.1(c), (i) if the circumstance is
or the circumstances are susceptible to change through action or inaction
by Company and (ii) within 20 days after written notice from Parent,
Company effects a change in the circumstance or circumstances such that it
ceases to be reasonably certain that the conditions to Company's obligation
to close that are set forth in Section 6.1 will not be satisfied;
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(d) by either Parent or Company, by written notice to the other, if
any governmental entity shall have issued any injunction or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger and such injunction or other action shall have
become final and non-appealable;
(e) by either Parent or Company, by written notice to the other, if
the stockholders of Company shall not have adopted this Agreement within
sixty (60) days after the later of (i) the date Company mails the Proxy
Statement/Prospectus to the Company stockholders or (ii) the date of the
most recent supplemental proxy materials that Company is legally required
to distribute to its stockholders; provided, however, the right to
terminate this Agreement under this Section 8.1(e) shall not be available
to any party whose breach of a representations or warranty or failure to
fulfill any covenant or agreement under this Agreement has been the cause
of or resulted in the failure to receive such stockholder votes on or
before such date;
(f) by Parent, by written notice to Company, if the Board of Directors
of Company (i) fails to include in the Proxy Statement/Prospectus its
recommendation that Company's stockholders vote to adopt this Agreement,
(ii) withdraws, modifies or qualifies its approval of, or its
recommendation that its stockholders vote in favor of, such actions or
takes any action or makes any statement inconsistent with such approval or
recommendation, (iii) adopts resolutions approving or otherwise authorizes
or recommends an Alternative Transaction or (iv) fails to recommend
against, or takes a neutral position with respect to, a tender or exchange
offer in any position taken pursuant to Rules 14d-9 and 14e-2(a) under the
Exchange Act;
(g) by Company, if as a result of a proposal for an Alternative
Transaction, the Board of Directors of Company, shall have determined in
good faith, based upon the advice of outside legal counsel, that the
failure to approve and recommend an Alternative Transaction would be
reasonably likely to constitute a breach of their fiduciary duties under
Delaware law; provided, however that it shall be a condition precedent to
the termination of this Agreement by Company pursuant to this Section
8.1(g) that Company shall have made the payment required by Section 8.3;
provided, further, however that it shall be a condition precedent to the
termination of this Agreement pursuant to Section 8.1(g) that Company shall
have given Parent notice of its intention to terminate at least three
business days prior to such termination;
(h) by Parent, if any person or group (as defined in Section 13(d)(3)
of the Exchange Act), other than Parent, the State of Wisconsin Investment
Board, or any of their affiliates, shall have become the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act) of at least 15% of the
outstanding shares of Company Common Stock; and
(i) at any time with the written consent of Parent and Company.
8.2 Effect of Termination. If this Agreement is terminated as provided in
Section 8.1, this Agreement shall forthwith become void and have no effect,
without liability on the part of Parent, Merger Sub and Company and their
respective directors, officers or stockholders, except that (a) the provisions
of this Section 8, Section 9, Section 4.3 relating to expenses, and Section 4.7
relating to publicity shall survive, and (b) no such termination shall relieve
any party from liability by reason of any willful breach by such party of any of
its representations, warranties, covenants or other agreements contained in this
Agreement.
8.3 Termination Fees and Reimbursement of Expenses
(a) Fee. If this Agreement is terminated by Company pursuant to
Section 8.1(e) or (g), or by Parent (i) pursuant to Section 8.1(e) or (f)
or (ii) pursuant to Section 8.1(c) due to a willful breach by Company, then
Company shall pay to Parent in cash $1.2 million (the "Fee"); provided,
however, that the Fee shall not be owed if this Agreement is terminated
pursuant to 8.1(c) due to a willful breach by Company unless at the time of
termination an Alternative Transaction shall have been announced or Company
has or Company's stockholders have received a proposal for an Alternative
Transaction; and, provided, further, however, that the Fee shall not be
owed if this Agreement is terminated pursuant to 8.1(e) unless (i) at the
time of termination an Alternative Transaction shall have been announced or
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Company has or Company's stockholders have received a proposal for an
Alternative Transaction and (ii) within 12 months of the date of this
Agreement Company consummates such an Alternative Transaction. Company
shall pay the Fee to Parent concurrently with Company terminating this
Agreement pursuant to Section 8.1(g), within one business day of Parent
terminating this Agreement pursuant to Section 8.1(f) and on the date of
consummation of an Alternative Transaction if Parent terminates this
Agreement pursuant to Section 8.1(c) due to a willful breach by Company.
(b) Expense Reimbursement. Notwithstanding Section 4.3(a), if this
Agreement is terminated by Parent pursuant to Section 8.1(c) other than due
to a willful breach by Company, then Company shall pay to Parent an amount
equal to the reasonable out-of-pocket fees and expenses incurred by Parent,
including fees and expenses paid or payable to legal, accounting and
financial advisers, in connection with this Agreement and the transactions
contemplated hereby; provided, however, that in no event shall Company be
obligated pursuant to this Section 8.3(b) to pay to Parent an amount in
excess of $600,000; and, provided, further, however, that such amount shall
not be owed unless (i) at the time of termination an Alternative
Transaction shall have been announced or Company has or Company's
stockholders have received a proposal for an Alternative Transaction and
(ii) within 12 months of the date of this Agreement Company consummates
such an Alternative Transaction. Such payment shall be due on the later of
(i) the date of consummation of the Alternative Transaction or (ii) three
business days after receipt of an invoice indicating the amount of the fees
and expenses.
(c) Alternative Fee. If this Agreement is terminated by Company or
Parent pursuant to Section 8.1(e), then Company shall pay to Parent in cash
$900,000 if within 12 months of the date of this Agreement Company
consummates an Alternative Transaction that (i) at the time of such
termination, had not been announced nor proposed to Company or Company's
stockholders, (ii) was announced or proposed prior to withdrawal of each
proposal for an Alternative Transaction that had been announced or proposed
prior to termination of this Agreement, and (iii) involves consideration
payable to Company stockholders with an aggregate fair market value in
excess of $40 million.
(d) Payments. Any payments required under this Section 8.3 shall be
payable by Company by wire transfer of immediately available funds to an
account designated by Parent. If Company fails to promptly make any payment
required under this Section 8.3 and Parent commences a suit to collect such
payment, Company shall, in the event that Parent prevails in such suit or
Company settles such suit, indemnify Parent for its fees and expenses
(including attorneys fees and expenses) incurred in connection with such
suit and shall pay Company interest on the amount of the payment at the
prime rate of Fleet National Bank (or its successors or assigns) in effect
on the date the payment was payable pursuant to this Section 8.3.
8.4 Amendment. This Agreement may not be amended except by an instrument
signed by each of the parties hereto; provided, however, that after adoption of
this Agreement by the stockholders of Company, without the further approval of
the stockholders of Company, no amendment may be made that (a) alters or changes
the amount or kind of consideration to be received as provided in Section 1.6,
(b) alters or changes any term of the Certificate of Incorporation of the
Surviving Corporation or (c) alters or changes any of the terms and conditions
of this Agreement if such alteration or change would adversely affect the
stockholders of Company.
8.5 Waiver. At any time prior to the Effective Time, either party hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other party hereto or (b) waive compliance with any of the
agreements of the other party or any conditions to its own obligations, in each
case only to the extent such obligations, agreements and conditions are intended
for its benefit; provided that any such extension or waiver shall be binding
upon a party only if such extension or waiver is set forth in a writing executed
by such party.
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SECTION 9 -- MISCELLANEOUS
9.1 No Survival. None of the representations and warranties of Company,
Parent or Merger Sub contained herein shall survive the Effective Time, and only
those covenants and agreements contained herein that by their terms are to be
performed after the Effective Time shall survive the Effective Time.
9.2 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
(a) if to Parent or Merger Sub, to:
Antigenics Inc.
630 Fifth Avenue, Suite 2100
New York, New York 10111
Garo H. Armen, Ph.D.
Telephone: (212) 332-4774
Facsimile: (212) 332-4778
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attn: Paul M. Kinsella
Telephone: (617) 573-0100
Facsimile: (617) 227-4420
(b) if to Company, to:
Aquila Biopharmaceuticals, Inc.
175 Crossing Boulevard
Framingham, Massachusetts 01702
Attn: Alison Taunton Rigby
Telephone: (508) 627-0100
Facsimile: (508) 766-2710
with a copy to:
Bowditch & Dewey, LLP
311 Main Street
Worcester, Massachusetts 01608
Attn: Jane V. Hawkes
Telephone: (508) 926-3412
Facsimile: (508) 929-3017
Any party may by notice given in accordance with this Section 9.2 to the
other parties designate another address or person for receipt of notices
hereunder.
9.3 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the Merger and related transactions, and supersede
all prior agreements, written or oral, between the parties with respect thereto,
other than the Confidentiality Agreement and the confidentiality agreement,
dated on or about June 26, 2000 between parent and Company, which both shall
survive execution of this Agreement and any termination of this Agreement.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to conflict of
laws provisions.
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9.5 Binding Effect; No Assignment; No Third-Party Beneficiaries.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns. This
Agreement is not assignable without the prior written consent of the other
parties hereto.
(b) Nothing in this Agreement, express or implied, is intended to or
shall confer upon any person other than Parent, Merger Sub and Company and
their respective successors and permitted assigns and right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
9.6 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
9.7 Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original, and both of which together shall
constitute one and the same instrument.
9.8 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable. The
parties further agree to replace such invalid or unenforceable provision of this
Agreement with a valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes of such invalid or
unenforceable provision.
9.9 Submission to Jurisdiction; Waiver. Each of Company, Parent and Merger
Sub irrevocably agrees that any legal action or proceeding with respect to this
Agreement or for recognition and enforcement of any judgment in respect hereof
brought by the other party hereto or its successors or assigns may be brought
and determined in the courts of the Commonwealth of Massachusetts and each of
Company, Parent and Merger Sub hereby irrevocably submits with regard to any
action or proceeding for itself and in respect to its property, generally and
unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each
of Company, Parent and Merger Sub hereby irrevocably waives, and agrees not to
assert, by way of motion, as a defense, counterclaim or otherwise, in any action
or proceeding with respect to this Agreement, (a) any claim that it is not
personally subject to the jurisdiction of the above-named courts for any reason
other than the failure to lawfully serve process, (b) that it or its property is
exempt or immune from jurisdiction of any such court or from any legal process
commenced in such courts (whether through service of notice, attachment prior to
judgment, attachment in aid of execution of judgment, execution of judgment or
otherwise), and (c) to the fullest extent permitted by applicable law, that (i)
the suit, action or proceeding in any such court is brought in an inconvenient
forum, (ii) the venue of such suit, action or proceeding is improper and (iii)
this Agreement, or the subject matter hereof, may not be enforced in or by such
courts.
9.10 Enforcement. The parties recognize and agree that if for any reason
any of the provisions of this Agreement are not performed in accordance with
their specific terms or are otherwise breached, immediate and irreparable harm
or injury would be caused for which money damages would not be an adequate
remedy. Accordingly, each party agrees that in addition to other remedies the
other party shall be entitled to an injunction restraining any violation or
threatened violation of the provisions of this Agreement. In the event that any
action shall be brought in equity to enforce the provisions of the Agreement,
neither party will allege, and each party hereby waives the defense, that there
is an adequate remedy at law.
9.11 Rules of Construction.
(a) The parties hereto agree that they have been represented by
counsel during the negotiation and execution of this Agreement and,
therefore, waive the application of any law, regulation, holding or ruling
of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
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(b) The phrase "to Company's knowledge" and similar qualifiers shall
mean and be limited to the actual knowledge of the persons identified in
Section 9.11 of the Company Disclosure Schedule after due inquiry of
officers and other employees who may reasonably be expected to have
knowledge of such matters.
9.12 Waiver of Jury Trial. EACH OF PARENT, MERGER SUB AND COMPANY HEREBY
IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER RELATED DOCUMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENT OR ACTION RELATED HERETO OR
THERETO.
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IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of
Merger as of the date first stated above.
ANTIGENICS INC.
By /s/ GARO H. ARMEN
------------------------------------
Name: Garo H. Armen
Title: President and Chief Executive
Officer
ST. MARKS ACQUISITION CORP.
By /s/ GARO H. ARMEN
------------------------------------
Name: Garo H. Armen
Title: President
AQUILA BIOPHARMACEUTICALS, INC.
By /s/ ALISON TAUNTON RIGBY
------------------------------------
Name: Alison Taunton Rigby
Title: President and Chief Executive
Officer
[Signature Page to Agreement and Plan of Merger]
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EXHIBIT A
[FORM OF AFFILIATE LETTER]
, 2000
Antigenics Inc.
630 Fifth Avenue, Suite 2100
New York, New York 10111
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of Aquila Biopharmaceuticals, Inc. (the "Company"), a Delaware
corporation, as the term "affiliate" is used in Rule 145 of the rules and
regulations of the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"). Pursuant to the terms
of the Agreement and Plan of Merger (the "Merger Agreement") dated as of August
18, 2000 between Antigenics Inc. ("Parent"), a Delaware corporation, and the
Company, the Company will be merged with and into a wholly owned subsidiary of
Parent (the "Merger").
In connection with the Merger, I am entitled to receive shares of common
stock, $0.01 par value per share, of Parent (the "Parent Shares"), in exchange
for the shares owned by me of common stock, $0.01 par value per share, of the
Company (the "Company Shares").
I represent, warrant and covenant to Parent that in the event I receive any
Parent Shares as a result of the Merger:
(a) I shall not make any sale, transfer or other disposition of the Parent
Shares in violation of the Securities Act or the rules and regulations
thereunder.
(b) I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable limitations
upon my ability to sell, transfer or otherwise dispose of the Parent Shares, to
the extent I felt necessary, with my counsel or counsel for the Company.
(c) I have been advised that the issuance of the Parent Shares to me
pursuant to the Merger has been or will be registered with the SEC under the
Securities Act on a Registration Statement on Form S-4; however, because I may
be deemed to be an affiliate of the Company and the distribution of the Parent
Shares by me or on my behalf has not been registered under the Securities Act,
dispositions of the Parent Shares by me or on my behalf may be restricted under
the Securities Act and the rules and regulations thereunder. I will not sell,
transfer, hedge, encumber or otherwise dispose of the Parent Shares issued to me
in the Merger unless the disposition (x) is made in conformity with the volume
and other limitations of Rule 145 under the Securities Act, (y) is made pursuant
to an effective Registration Statement under the Securities Act or (z) is, in
the opinion of counsel reasonably acceptable to Parent or as described in a
"no-action" or interpretive letter from the staff of the SEC, exempt from
registration under the Securities Act.
(d) I understand that Parent is under no obligation to register under the
Securities Act the disposition of the Parent Shares by me or on my behalf or to
take any other action necessary in order to make compliance with an exemption
from such registration available.
(e) I also understand that there will be placed on the certificates for the
Parent Shares issued to me, or any substitutions therefor, a legend stating in
substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, APPLIES. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS
OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND
ANTIGENICS INC.
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(f) I also understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145 under the Securities Act (and satisfactory
evidence of such conformity is provided to Parent), or pursuant to an effective
registration statement, Parent reserves the right to put the following legend on
the certificates issued to my transferee:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933, AS AMENDED.
It is understood and agreed that the legends set forth in paragraphs (e)
and (f) above shall be removed by delivery of substitute certificates without
such legend if the undersigned shall have delivered to Parent a copy of a "no
action" or interpretive letter from the staff of the SEC, or an opinion of
counsel reasonably satisfactory to Parent in form and substance satisfactory to
Parent, to the effect that disposition of the shares by the holder thereof is
not restricted under the Securities Act; provided, however, that the legend set
forth in paragraph (e) will, under all circumstances, remain on the certificate
until the public announcement described in Section 2 hereof.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Company as described in the first paragraph of
this letter, or as a waiver of any rights I may have to object to any claim that
I am such an affiliate on or after the date of this letter.
Very truly yours,
------------------------------------
Name (print):
Address:
Accepted:
ANTIGENICS INC.
By:
------------------------------------
Name (print):
Title:
Dated:
------------------------------------
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<PAGE> 201
ANNEX B
Adams, Harkness & Hill, Inc.
August 18, 2000
Board of Directors
Aquila Biopharmaceuticals, Inc.
175 Crossing Boulevard
Framingham, MA 01702
Members of the Board:
You have requested our opinion (the "Fairness Opinion") as to the fairness,
from a financial point of view, to the holders of common stock (the "Common
Stock"), of Aquila Biopharmaceuticals, Inc. (the "Company") of the exchange
ratio, pursuant to an Agreement and Plan of Merger dated August 18, 2000 (the
"Agreement") among the Company, Antigenics Inc. (the "Purchaser"), and St. Marks
Acquisition Corp. (the "Merger Sub"). The Agreement provides for the merger (the
"Merger") of the Merger Sub with and into the Company, whereby the outstanding
shares of the Company's Common Stock will be converted and exchanged at a fixed
ratio of 0.2898 shares of the Purchaser's Common Stock at the Effective Time.
The Merger, herein and after, is referred to as the "Transaction." The terms and
conditions of the Transaction are more fully set forth in the Agreement. This
Fairness Opinion is based solely on the stock consideration to be received
pursuant to the Agreement.
Adams, Harkness & Hill, Inc. as part of its investment banking business is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for corporate and other purposes. In the ordinary
course of our business, we may actively trade the securities of both the Company
and Purchaser for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have served as financial advisor to the Company in connection with the
Agreement, and will receive a fee from the Company for those services.
We are expressing no opinion as to the value of the Common Stock either
now, upon consummation of the Transaction, or at any other time. Our Fairness
Opinion as expressed herein is limited to the fairness, from a financial point
of view, of the exchange ratio as of the day hereof and does not address the
Company's underlying business decision to engage in the Agreement.
In developing our Fairness Opinion, we have, among other things: (i)
reviewed the information contained in the Company's Annual Report, Form 10-K,
and related financial information for the fiscal year ended December 31, 1999
and the Company's Form 10-Q and the related unaudited financial information for
the three month period ended June 30, 2000; (ii) analyzed and discussed certain
financial statements and other financial and operating data concerning the
Company, including forecasts, prepared by members of the senior management of
the Company; (iii) conducted due diligence discussions with members of senior
management of the Company; (iv) reviewed the historical market prices and
trading activity for the Common Stock and compared them with those of certain
publicly traded companies we deem to be relevant and comparable to the Company;
(v) reviewed the historical market prices for the Common Stock and compared them
with those of certain market indices we deem to be relevant; (vi) compared the
results of operations of the Company with those of certain companies we deem to
be relevant and comparable to the Company; (vii) compared the financial terms of
the Agreement with the financial terms of certain other mergers and acquisitions
to the extent we deemed them to be relevant and comparable to the Agreement;
(viii) participated in certain discussions among representatives of the Company
and their financial and legal advisors; and (ix) reviewed such other financial
studies and analyses and performed such other investigations and took into
account such other matters as we deemed necessary, including our assessment of
general economic, market and monetary conditions as of the date hereof. In
connection with our review and arriving at our Fairness Opinion, we have not
independently verified any information received from the Company, have relied on
such information, and have assumed that all such information is complete and
accurate in all material respects. With respect to any forecasts reviewed
relating to the prospects of the Company, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of Company management as
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<PAGE> 202
Board of Directors
Aquila Biopharmaceuticals, Inc.
August 18, 2000
Page 2
to the future financial performance of the Company. Our Fairness Opinion is
rendered on the basis of securities market conditions prevailing as of the date
hereof and on the conditions and prospects, financial and otherwise, of the
Company as known to us on the date hereof. We have not conducted, nor have we
received copies of, any independent valuation or appraisal of any of the assets
of the Company. In addition, we have assumed, with your consent, that any
material liabilities (contingent or otherwise, known or unknown) of the Company
are as set forth in the consolidated financial statements of the Company.
This Fairness Opinion is necessarily based upon the information available
to us and facts and circumstances as they exist and are subject to evaluation on
the date hereof; events occurring after the date hereof could materially affect
the assumptions used in preparing this Fairness Opinion. We are not expressing
any opinion herein as to the price at which shares of Common Stock have traded
or may trade at any future time. We have not undertaken any commitment to
reaffirm or revise this Fairness Opinion or otherwise comment upon any events
occurring after the date hereof and do not have any obligation to update, revise
or reaffirm this Fairness Opinion.
This Fairness Opinion is directed to the Board of Directors of the Company
and is not intended to be and does not constitute a recommendation to any
stockholder of the Company. We were not requested to opine as to, and this
Fairness Opinion does not address, the basic business decision to proceed with
or effect the Transaction. It is understood that this letter is for the
information of the Board of Directors of the Company and may not be used for any
other purpose without our prior written consent, except that this opinion may be
included in its entirety in filing with the Securities and Exchange Commission,
or in the prospectus/proxy statement relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration is fair, from a financial point of view, to the
Company and the Company's stockholders.
/s/ ADAMS, HARKNESS & HILL, INC.
B-2
