SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1996 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to __________
Commission file number 0-12081
AQUILA BIOPHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware (508) 797-5777 04-3307818
(State or other (Registrant's telephone (IRS Employer
jurisdiction of number, including area Identification
incorporation or code) No.)
organization)
365 Plantation Street, Worcester, MA 01605
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X YES NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of 4,967,642 shares of voting stock
held by non-affiliates of the registrant as of March 19, 1997 was
approximately $32,289,673 based on the last sale price of such
stock on such date.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
X YES NO
Common Stock Outstanding as of March 19, 1997: 5,001,292 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement in connection with the
annual meeting of shareholders to be held May 20, 1997 are
incorporated by reference into Part III of Form 10-K.
AQUILA BIOPHARMACEUTICALS, INC. - FORM 10-K
FIGHTING DISEASE THROUGH IMMUNE MODULATION
PART I
Item 1. BUSINESS
Aquila Biopharmaceuticals, Inc. ("Aquila" or the "Company")
creates and commercializes products which modulate the immune
system to control and prevent infectious diseases and cancer.
Background
Aquila, organized in 1996, became a successor to Cambridge Biotech
Corporation ("CBC") pursuant to the terms of a Reorganization Plan
that was confirmed by the United States Bankruptcy Court on
July 18, 1996 and consummated on October 21, 1996 (the "Plan").
Prior to the confirmation of the Plan, CBC sold its enterics
diagnostic business pursuant to an order of the Bankruptcy Court
to Meridian Diagnostics, Inc. for $5,700,000 in cash and other
considerations. On or about October 21, 1996, CBC's
biopharmaceutical business and its real estate in Rockville,
Maryland were transferred to Aquila, free and clear of liens,
encumbrances, claims and interests, except as otherwise provided
in the Plan or confirmation order. Pursuant to the Plan, CBC
shareholders exchanged all of their CBC common stock for Aquila
common stock and, as a result, CBC became a wholly owned
subsidiary of Aquila. Effective as of October 22, 1996, the
Company sold all the issued and outstanding stock of CBC to
bioMerieux Vitek, Inc. ("bioMerieux") pursuant to a Master
Acquisition Agreement dated as of April 4, 1996. At the same time
bioMerieux entered into a ten year lease with Aquila for a portion
of the Rockville, Maryland real estate which lease was
simultaneously assigned by bioMerieux to CBC.
Aquila's technology and product development programs are based
upon modulation of the immune system using the StimulonTM family of
adjuvants. Advances in biotechnology and immunology have enabled
scientists to develop a new generation of products containing
portions of an infectious agent or a target cell. These
components are intended to be immunologically important. These
new products are safer than traditional vaccines, but often result
in an immune response that is less than optimum. Adjuvants can be
used to improve the immune response.
Aquila's product development programs include the QuilimmuneTM
human health products and the QuilvaxTM products for animal health.
The Company's corporate partners are SmithKline Beecham p.l.c.
("SKB"), Wyeth-Lederle Vaccines and Pediatrics, a business group
of Wyeth-Ayerst International, Inc., a subsidiary of American Home
Products Corporation, Pasteur Merieux Connaught, (the combination
of Pasteur Merieux Serums et Vaccins S.A. and Connaught
Laboratories, Inc.), Progenics Pharmaceuticals, Inc., VaxGen, Inc.
and NABI.
The Immune System and Immune Modulation
The human immune system is made up of several different cell
types, including B cells, T cells and antigen presenting cells.
In general, the immune system responds to the presence of
antigens, environmental agents or pathogens such as viruses,
bacteria, and parasites in two different ways: the humoral
response and the cellular response. When a humoral response is
stimulated, B cells are activated by a specific type of T cell,
called a helper T cell, to produce antibodies which are specific
for the antigen encountered. The antibodies will bind to and can
neutralize the pathogens - bacteria, parasites and viruses - which
have invaded the body. In the cellular response, a second type of
T cell, called a cytotoxic T lymphocyte (CTL) is activated. These
cells recognize and kill cells containing pathogens. In addition,
T cells secrete biologically active molecules called cytokines,
which mediate the effects of immune system cells and modulate
other immune functions. The specific activation of cytotoxic T
cells, called a CTL response, is thought to be very important in
products designed to treat or prevent diseases such as herpes,
hepatitis, HIV and malaria. It is also thought to be critical for
many immunotherapeutic approaches to the treatment of cancer.
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. For example, the
injection of cowpox virus protects humans against smallpox
infection. Vaccines to protect against polio have been developed
using either attenuated or killed polio viruses. While these
approaches are effective, there is a small but significant risk of
disease developing in people receiving these types of vaccines.
With the advent of recombinant technology, scientists realized
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. Other specific components have been used
to stimulate disease specific responses, including peptides
(synthetic or recombinant), carbohydrates and lipoproteins.
When these newer technologies were first used, it was found that
while a disease specific immune response was stimulated, often
this response was not of the right quality or strong enough to
provide protection from infection or disease. As a result, immune
modulation technologies have been developed that are coupled with
specific biotechnology 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 lympet hemocyanin (KLH) or the toxoids from diphtheria,
tetanus and cholera have been used effectively. An example of
this type of vaccine is the Haemophilus influenzae type b
conjugate vaccine, such as HibTITERTM sold by Wyeth-Lederle
Vaccines and Pediatrics where the antigen is conjugated to the
diphtheria CRM 197 protein. 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 include
aluminum hydroxide (Alum), MF59 a product of Chiron Corporation
and its affiliates, monophosphoryl lipid A (MPL), a product of
Ribi ImmunoChem Research, Inc. and saponins from Quillaja
saponaria. These adjuvant technologies are not all the same,
affecting the humoral and cell mediated pathways differently.
Some approaches result in general immune stimulation. Others are
more specific. Aquila is developing the StimulonTM family of
saponin adjuvants (QS-21, QS-7) as an immune modulation
technology. The Company uses biotechnology approaches for the
creation of specific antigens, and combines these with the
Company's proprietary StimulonTM adjuvants to create potentially
safe and effective products.
With the advent of new technology, changes are occurring in the
market for immune modulating agents. Because development of these
new products involves a high rate of technological innovation, it
is possible to protect new vaccines through patenting, which can
result in increased profit margins. While product liability costs
are high for traditional vaccines (because of the safety
concerns), product liability costs for vaccines using the new
technology are comparable to those for therapeutic products.
Manufacturing costs can be lower for modern vaccines than for
other therapeutic products. In the manufacturing of recombinant
therapeutic enzymes it is often difficult to retain the enzymatic
activity, and this can limit the choice of manufacturing methods.
The limitations are not so stringent for products used to modulate
the immune system. Historically, vaccines were generally low
priced, because the products were used to prevent disease in
healthy people (prophylaxis). However, in today's approaches to
disease management, vaccines have been recognized as very
effective contributors to controlling the total medical costs of
certain diseases. Therapeutic vaccines are in development for a
number of intractable diseases, as are products for populations
beyond infancy - young adults and the elderly.
The Use of Adjuvants: Technology to Modulate the Immune System
Adjuvants are agents which are added to a product to improve or
adjust the immune response. Alum is the only adjuvant currently
allowed in human vaccines licensed by the United States Food and
Drug Administration ("FDA"). This adjuvant probably acts by a
depot effect, which means that the addition of alum to a vaccine
causes the antigen to remain at the site of injection for a longer
period of time, which seems to increase the humoral immune
response. Another adjuvant under development by Ribi ImmunoChem
Research, Inc., is a mixture of lipopolysaccharides derived from
bacterial cell walls, and is called MPL. Its use can increase the
level of antibodies that are produced in response to an antigen,
but additional components are often required to stimulate a
significant CTL response. Chiron is developing an adjuvant called
MF59 which is an emulsion of three lipids and water. It is a
general, broad immune stimulant which will activate the immune
system in the absence of an antigen. Oil/water emulsions have
been used in older vaccines and also act by a depot effect. The
StimulonTM family of adjuvants, QS-21 and QS-7, Aquila's adjuvants,
are purified, defined molecules, isolated from natural sources.
They stimulate antigen specific responses and have been shown to
promote both antibody and a CTL immune responses in animal
studies.
The StimulonTM Family of Adjuvants
QS-21 is the lead StimulonTM adjuvant. It is a natural product,
purified from the bark of a tree which grows in South America,
called Quillaja saponaria. The bulk bark extract is available in
the United States. QS-21 is purified to greater than 98%. The
Company 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 microparticles
which are used in many experimental vaccine formulations. QS-21
is well-characterized with a known molecular structure -
distinguishing it from competing adjuvant candidates, which are
typically emulsions or biologicals. Because QS-21 is currently
regulated by the FDA as a "constituent material" used in vaccine
preparation, the FDA does not require licensure of facilities used
for its manufacture. A second StimulonTM molecule, QS-7, which has
a slightly different safety and activity profile, is in
development. Patents have issued to Aquila with composition of
matter claims covering QS-7 and QS-21, as well as two other
identified saponins, QS-17 and QS-18. The Company has also been
issued a patent for chemically modified saponins and all patents
include the use of all of these molecules as adjuvants.
The use of StimulonTM adjuvants improves the quality of the immune
response. Addition of QS-21 to antigens will generally broaden
the type of antibody produced and stimulate cell mediated
responses. The quality of these responses is important for the
development of effective products. QS-21 also produces a strong
quantitative response; ie, higher antibody levels are achieved,
and it is potent and active at microgram doses. The use of QS-21
has been tested in a number of human clinical trials, involving
over 900 subjects.
QS-21 increases the titer, or amount, of antibodies produced by
the immune system in response to vaccination with many types of
antigens, including recombinant proteins derived from viruses and
bacteria and free polysaccharide antigens from bacterial
pathogens. An unusual property of QS-21 is its ability both to
increase significantly the antibody response to free
polysaccharide antigens and to boost the titer further with a
subsequent vaccination.
QS-21 broadens the antibody profile through "isotype switching."
The type of protective immunity elicited by an infection with a
virus or bacterium typically includes antibodies of several
isotypes (also called classes and subclasses). Some of these
isotypes can be more important than others in mediating protection
against viral or bacterial pathogens. Vaccination with a
recombinant antigen typically stimulates only a few isotypes.
Some adjuvants, such as alum, also only stimulate a narrow range
of antibody isotypes. Hence, alum may stimulate a high quantity,
but a lower quality antibody. In contrast, QS-21 stimulates high
quantities of a broad range of antibody isotypes, enabling the
vaccine-induced antibody response to resemble natural protective
immune responses.
QS-21 also stimulates cell-mediated immune responses and induces
the production of cytotoxic T-lymphocytes (CTL). The CTL response
is a critical means of natural defense against viral infections
and, is believed to eliminate abnormal cells that might otherwise
develop into cancer. Until recently, it was generally thought
that recombinant antigens could not be used to elicit CTL
responses. The majority of adjuvants, including alum, fail to
induce CTL responses. However, Company scientists discovered that
the simple addition of QS-21 to these antigens stimulates the
production of a CTL response to the recombinant antigens in animal
studies. Other investigators have also reported that CTL
responses induced by recombinant vaccines adjuvanted with QS-21
can mimic the protective CTL responses induced by viral infection
in animal studies.
In a human clinical study reported in Cancer Research (Helling et
al., Vol. 55, p. 2,783, 1995), the effectiveness of QS-21 in
stimulating an antibody response to the carbohydrate cancer
antigen GM2 was shown. When GM2 was coupled to the carrier
protein KLH, and tested in humans, there was almost no stimulation
of an antibody response. When the GM2-KLH antigen was used in
combination with the adjuvant DetoxTM, only one subject of seven
showed a slight increase in antibody titer. However, when QS-21
was added to the GM2-KLH antigen, all of the patients responded
with the development of significant antibody titers. This product
is being developed by Progenics Pharmaceuticals, Inc. (a QS-21
licensee of Aquila) and has recently entered Phase III human
clinical trials.
Recently, SKB in collaboration with the Walter Reed Army Institute
of Research (WRAIR) reported in the New England Journal of
Medicine (Stoute et al., NEJM, January 9, 1997, pp. 86-91) results
of a Phase I human challenge study involving the testing of a
potential malaria vaccine formulated with different adjuvants.
The three different vaccine formulations all contained a
recombinant circumsporozoite malaria antigen fused to a hepatitis
B surface antigen as a carrier protein. The first formulation
also contained MPL and alum; the second an emulsion of oil and
water; and, the third was formulated with QS-21, MPL and the oil
and water emulsion. In the first formulation, with MPL and alum
only, there was a slight immunological response, but following
challenge with the malaria parasite after vaccination, only one of
the seven subjects in this group was protected from malaria. In
the second formulation, with the oil and water emulsion, the
immune response was much stronger, but in the malaria challenge,
only two of seven subjects were protected. In the third vaccine
formulation, with the addition of QS-21, the immune response was
the highest. Most importantly, the quality of the immune response
was significantly different, as six of seven subjects exposed to
the challenge with malaria were protected. These results
demonstrate that the quality of the immune response is critical.
Aquila has been informed that SKB (a licensee of QS-21 from
Aquila) is planning further clinical testing of this potential
product.
The Company 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 the Company's
licensees and collaborators have focused on proving the safety of
QS-21 and experimenting with different formulations and dose
levels. These studies, involving over 900 subjects, have shown
that the addition of QS-21 to vaccine formulations improves the
immune response to certain antigens, as evidenced by increased
antibody titer and the induction of a CTL response. No serious
adverse events attributed to QS-21 have occurred thus far in the
clinical studies. Some local reactogenicity and pain on injection
have been seen in some vaccine formulations, but this is believed
to be due principally to particular formulations.
QuilimmuneTM and QuilvaxTM Programs
Aquila's strategy is to develop products itself and in partnership
with other companies. The Company has six products in development
or commercialized.
QuilimmuneTM & QuilvaxTM Product Development
Program Market Status
Quilimmune-P TM Adults >50 years Phase I clinical
Product to prevent >20 mil. people in trials initiated Q4
pneumococcal U.S. 1996
infections
Quilvax-M TM Product to 30 million milk Bovine immunogenicity
prevent bovine cows in the U.S. & trials completed,
mastitis (S. aureus & Europe challenge studies
E. coli) ongoing
Quilimmune-T TM Persons at risk for Pre-clinical research
Product to prevent tick bites
Lyme-HGE diseases
Quilimmune-M TM 1-2 billion persons Spf66/QS-21 Phase I
Product to prevent at risk trial scheduled to
malaria (Plasmodium start 1997
falciparum)
Quilvax-L TM 10 million dogs at Licensing efficacy &
Product to prevent risk in endemic safety trials
canine Lyme disease areas completed; safety
duration of immunity
studies ongoing
Quilvax-FeLV TM
Product to prevent ~ 15 million cats On market,
feline leukemia vaccinated per year LeucogenR, Virbac
in the U.S. and (Europe), GenetivacR,
Europe Mallinckrodt
Veterinary Inc.
(U.S.)
Quilimmune-P TM for the Prevention of Pneumococcal Infections
Quilimmune-P TM is intended to be used to prevent pneumococcal
infections in the elderly. Pneumococcal infections are a major
cause of death in the elderly. There are approximately 20 million
people over the age of sixty-five in the US. Various strains of
Streptococcus 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). S. pneumoniae also causes half of childhood
otitis media, the most frequent reason (one out of three) for
visits to pediatricians. In some developing countries,
pneumococcal pneumonia kills approximately 10% of the children
under the age of five, making it the single leading cause of
death. Public health officials now place a high priority on the
development of new pneumococcal vaccines, and are considering
expanding the population for which vaccination would be
recommended.
There are currently over 80 recognized serotypes of pneumococci,
each with varying geographic and age-group prevalence. The
currently available vaccines, which were developed and approved in
the early 1980s, cover 23 serotypes, which cause over 90% of
infections in the United States and Europe. These vaccines are
composed of purified capsular polysaccharides, which are not
potent immunogens. Although approved by the FDA for use in
adults, these vaccines are not recommended for children under two
years of age, and are less effective in immune-competent elderly
individuals. Development efforts are underway by several
companies to improve the immune response to S. pneumoniae capsular
polysaccharides by conjugating the polysaccharides to immunogenic
carrier proteins. This approach was used in developing the
successful Hib (Hemophilus influenzae type b) vaccines. However,
the manufacturing expense and cumulative mass of the conjugated
components make it very difficult to include all 23 of the strains
in the currently available vaccine as conjugates. The companies
developing conjugate vaccines have therefore chosen to focus on
the five to ten strains most prevalent in infants and young
children. The resulting vaccines, if successfully developed,
would likely not be appropriate for immunization of adults and the
elderly because they address only the limited number of strains
problematic in children rather than the broader range problematic
in the elderly. It is also likely that the conjugate vaccines
would be too expensive for widespread use in the developing world.
The current pneumococcal vaccines are not widely used for the
elderly, for a number of reasons. Reports in the medical
literature indicate that the current vaccines are effective in the
elderly in only 50-60% of the recipients. A number of side
effects are caused by the current vaccines, including pain on
injection, a sore arm, fever, and a general feeling of malaise for
a few days. Because of these side effects, these traditional
vaccines have not been licensed for repeat use, perhaps resulting
in a misconception in the market that these vaccines give lifetime
protection. In elderly subjects, however, not only is the
effectiveness only 50-60%, but of those 50-60% who do respond, the
antibody titers drop over a number of years. Typically after 3 or
more years, the effective levels of antibodies in such subjects is
quite low (Shapiro et al. NEJM, 1991). Another reason these
vaccines are poorly utilized is because physicians have an option
of treating patients who develop pneumonia with antibiotics. With
increased antibiotic resistance, this option is not as effective,
and physicians are moving towards prevention as a therapeutic
choice. As a result there is an urgent need for a more effective
and safe pneumococcal vaccine for the elderly.
In animal studies Aquila scientists have shown that the use of
Quilimmune-P TM, which contains 23 different capsular
polysaccharides and QS-21, improves the immune response in mice.
For instance, many polysaccharides to which mice do not typically
respond become immunogenic with Quilimmune-P TM. In addition,
antibody titers to many strains increase. The effect may make the
use of a lower antigen dose feasible, which could make the vaccine
less expensive and also reduce side effects. Finally, mice re-
vaccinated with Quilimmune-P TM experience a booster effect for many
strains, a response not seen with existing vaccines. This effect
may allow the administration of periodic booster shots to maintain
immunity levels.
Aquila initiated a Phase I clinical trial in 1996 in healthy
volunteers. The study is being carried out in collaboration with
and supported by the National Institutes of Health (NIH). The
primary end point of the study is to evaluate safety; a secondary
goal is to evaluate immune responses. The study is designed as a
dose response study, evaluating several different dosage levels of
the polysaccharide antigens and adjuvant. The control group is
receiving the marketed vaccine. The study is expected to be
completed in 1997, and if the trial is successful, Aquila intends
to initiate a Phase II trial in an elderly population towards the
end of 1997.
Quilvax-M TM for the Prevention of Bovine Mastitis
Mastitis is an inflammation of a dairy cow's udder. Three
pathogens typically cause these infections: Staphylococcus aureus
("S. aureus"), Escherichia coli ("E. coli"), and Streptococcus
agalactiae. Mastitis is the most costly disease affecting the
dairy industry. The economic impact in the US of bovine mastitis
is estimated to be between $1-2 billion per year. According to
the National Mastitis Council, the losses per cow per year are
$184 (there are about 9.5 million dairy cows in the U.S.). The
principle losses occur from reduced milk production, from milk
which has to be discarded, and from animal replacement costs.
Many times when an animal develops mastitis, it is simply culled
from the herd. There are also extra labor costs, treatment, and
veterinary services to cope with this disease.
There are a number of bovine mastitis vaccines on the market, but
these are directed towards E. coli only. Since E. coli accounts
for only a portion of the number of cases of mastitis, these
vaccines are not widely used. E. coli and S. aureus account for
about 70-80% of the mastitis cases. Aquila's Quilvax-M TM bovine
mastitis product is bivalent, containing antigens for both S.
aureus and E. coli, and is expected to provide broader protection.
The S. aureus component of the product is based on patented anti-
adhesion technology. A single S. aureus protein known as
fibronectin binding protein is primarily responsible for
attachment of S. aureus to host tissue and subsequent
establishment of infection. In the Company's Quilvax-M TM product
program, fibronectin binding protein is used as an antigen to
induce an antibody response to block attachment of the bacterium
to the cells in the cow's udder. Recent bovine field trials have
indicated that Quilvax-M TM is safe, immunogenic, and has a
beneficial impact on mastitis in animals challenged with
S. aureus. The Company believes it could add a streptococcal
component in a next generation vaccine.
The development program is 50% funded by Virbac. The Company has
retained exclusive marketing rights in North America. Virbac has
exclusive marketing rights in Europe. The parties share marketing
rights in the rest of the world.
Quilimmune-T TM for the Prevention of Tick Borne Diseases
Ticks can transmit pathogens that cause a variety of diseases,
including Lyme disease, Rocky Mountain Spotted Fever and
Babesiosis. Lyme disease was first described in 1969, but its
cause, Borrelia burgdorferi transmitted by tick bites, was not
identified until 1981. According to the Center for Disease
Control and Prevention, Lyme disease is the leading tick-borne
infectious disease in the United States, with over 40,000 reported
cases, including cases in all 50 states. In 1991 scientists
reported the discovery of a new disease, human granulocytic
ehrlichiosis (HGE), caused by a microorganism in the genus
Ehrlichia transmitted by the bite of the same tick that carries
Lyme disease. HGE's flu-like symptoms include fever, headache and
muscular aches, as well as joint pain, nausea, vomiting and cough.
HGE is believed to have caused several deaths in immune-
compromised patients.
Aquila scientists found the HGE-causing organism in dogs in 1994
in the course of the efficacy trials of Aquila's canine Lyme
disease product, and traced its source to the ticks. Aquila
believes that it was the first to successfully cultivate the HGE
organism in tissue culture, and the Company has filed patent
applications on infected cell lines, the methods of growing the
organism, and potential vaccine antigens and diagnostic reagents
derived from the pathogen.
Aquila has been working with the Centers for Disease Control and
Prevention ("CDC") to develop a blood test to be used in
epidemiological surveys that will determine how widespread the
disease may be. Prior to Aquila's development of the cell lines,
diagnosis of the disease was extremely difficult, and impractical
for survey purposes. Aquila has been conducting additional
internal research to better characterize the organism and to
develop additional vaccine antigens and diagnostic reagents, and
has collaborations with leading academic researchers. Aquila
believes that a combination vaccine could be developed against HGE
and human Lyme disease. Aquila's work in HGE may also have
applicability for animal health applications. The HGE organism
appears to cause illness in dogs. Once the epidemiology is better
understood, Aquila may seek development funding from an animal
health partner.
Quilimmune-M TM for the Prevention of Malaria
According to estimates in published reports, over two billion
people reside in malaria-infected areas. The yearly incidence of
malaria is estimated by the World Health Organization 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 World Health Organization has identified malaria as a
priority vaccine target in developing countries.
Aquila is involved in a number of development programs to develop
products for malaria. SKB/WRAIR are developing a vaccine
containing QS-21 based on a recombinant circumsporozite protein
fused to hepatitis B surface antigen. The results of a Phase I
challenge study were published recently in the New England Journal
of Medicine (Stoute et al., NEJM, January 9, 1997, pp. 86-91)
involving three vaccine formulations. QS-21 was a critical
component of the only formulation to protect against malaria
challenge in six of the seven subjects challenged.
In addition to this study, Aquila has a collaboration with the
World Health Organization (WHO) on another malaria product
involving the antigen Spf66. Spf66, a polymerized peptide, was
discovered by Dr. Manuel Pattaroya at Instituto de Immunologica
Hospital San Juan de Dios in Colombia, South America. The antigen
has been tested with an alum adjuvant in three large clinical
trials in humans. Protection was achieved from malaria in two of
the trials in 31% of the adults and children. In the third trial
there was no protection. These mixed results are thought to be
the result of several factors: different manufacturing processes
were used for the Spf66; the design of the trials was different;
the clinical definition of malaria varied between studies; and the
study populations were different.
Aquila has investigated the effectiveness of a Quilimmune-M TM
product containing QS-21 and Spf66. In a study in Aotus monkeys,
57% of the animals were protected from malaria on challenge after
vaccination with Spf66 plus QS-21. In this study, a control
vaccine of Spf66 alum (the product that was used in the human
studies) gave only 25% protection, comparable to the results
obtained previously. A human clinical trial of Quilimmune-M tm is
planned in 1997 and will be overseen by WHO.
Quilvax-L TM for the Prevention of Canine Lyme Disease
Aquila is developing a product pursuant to a 1991 agreement with
Mallinckrodt Veterinary Inc. ("Mallinckrodt") against Lyme disease
in dogs. There are approximately 50 million dogs in the United
States, with perhaps a fifth of them living in areas infested with
the tick which transmits Borrelia burgdorferi, the cause of Lyme
disease. The potential market for a canine Lyme disease product
may be as much as $50 million.
During 1993-94, Aquila conducted efficacy trials on its canine
Lyme disease product using a protocol approved by the United
States Department of Agriculture ("USDA"). The studies showed
that use of Quilvax-L TM resulted in protection from symptoms in 89%
of the dogs. Data from this trial was submitted to the United
States Department of Agriculture ("USDA"), which reviewed the data
in support of licensure and found the outcome satisfactory.
Quilvax-L TM incorporates two outer surface proteins of Borrelia and
QS-21, a formulation which the Company believes offers better
protection against geographically diverse strains of the pathogen.
Mallinckrodt is in the process of conducting field safety studies.
A patent application has been filed on this formulation.
Under the Mallinckrodt agreement, the Company will supply
Mallinckrodt with bulk formulated product, which Mallinckrodt will
then fill, finish, and distribute. The Company will be paid a
supply price for the product and receive a royalty on
Mallinckrodt's sales.
Quilvax-FeLV TM 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 US
and 1991 in Europe. It is marketed by Virbac SA in Europe,
Australia and Japan under the tradename LeucogenR and by
Mallinckrodt in the U.S. under the tradename GenetivacR. FeLV 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. Aquila manufactures bulk
formulated vaccine for the United States and Australian markets,
and supplies Virbac with bulk antigen and adjuvant for further
manufacture for the European and Japanese markets. The product is
the leading FeLV vaccine in Europe, and in a recent independent
study was found to be the most effective of three leading FeLV
products on the market.
Corporate Partner Programs
In addition to Aquila's own product development programs, the
Company has six corporate partners who have licensed the StimulonTM
adjuvants for a variety of human diseases. The six corporate
partners are SmithKline Beecham p.l.c., Wyeth-Lederle Vaccines and
Pediatrics, Pasteur Merieux Connaught, Progenics Pharmaceuticals,
Inc., VaxGen, Inc. and NABI. Three of the world's four largest
vaccine manufacturers are partners using Aquila's adjuvants. In
return for rights to use StimulonTM adjuvants 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.
Clinical Trials Completed
Disease Market Trial
Breast Cancer 180,000 cases per year in U.S. Phase I
Influenza* 50 million infections per year Phase I
Phase I
Phase II
Herpes I/II 125 million people infected Phase I
Phase Ib
HIV-1 >1 million people infected in Phase I
U.S. Phase II
Hepatitis B 300,000 cases per year in U.S. Phase I
Malaria 1-2 billion persons at risk Phase I challenge
Melanoma* 30,000 cases per year in U.S. Phase I/II
Phase I/II
Phase I/II
Respiratory Virus 100,000/yr. - infant Phase I
hospitalizations
* Multiple partners and/or different antigens
StimulonTM Product Development Programs
Clinical Trials Ongoing
B-Cell lymph* (two, Phase I) Therapeutic
Breast cancer (two, Phase I) Therapeutic
Colon cancer (two, Phase I) Therapeutic
Hepatitis B Therapeutic
Herpes II Therapeutic
HIV-1* (Phase I) Prophylactic
Influenza* (Phase I) Prophylactic
Melanoma* (six, Phase I/II) Therapeutic
Melanoma* (two, Phase II/III) Therapeutic
Pancreatic cancer (Phase I) Therapeutic
Prostate cancer (two, Phase I) Therapeutic
Strep-pneumo* (Phase I) Prophylactic
Pre-Clinical/Research
Chlamydia
CMV
EBV
Gonococcus
Hepatitis C
Herpes zoster
HIV-1*
Melanoma*
Para influenza
Rotavirus
Toxoplasmosis
Malaria*
* Multiple partners and/or different antigens
* SmithKline Beecham, p.l.c. has licensed QS-21 for a number of
different applications, including influenza, herpes,
hepatitis, Lyme disease and malaria. 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 Phase I clinical trials of potential
products containing QS-21 and is also investigating the use
of combinations of different adjuvants. (See Management's
Discussion and Analysis for revenues received from SKB.)
* Pasteur Merieux Connaught has licensed QS-21 for use in its
influenza and HIV vaccine programs. Pasteur Merieux has
completed two clinical trials for influenza and has ongoing
pre-clinical work on three potential HIV products.
* Wyeth-Lederle Vaccines and Pediatrics licensed QS-21 in 1992
for use in five vaccines. Wyeth-Lederle, formed as a result
of the acquisition of American Cyanamid by American Home
Products, is a leader in pediatric vaccines. Wyeth-Lederle
initiated a Phase I clinical trial using QS-21 in 1995.
* Progenics Pharmaceuticals, Inc. licensed QS-21 in 1995 for
use in certain therapeutic vaccines for cancer. Progenics'
most advanced program involves the use of QS-21 with a
ganglioside preparation to treat melanoma. Phase I/II
clinical trials of this product, which was initially
developed by physicians at Memorial Hospital for Cancer and
Related Diseases ("Memorial Sloan Kettering"), have been
completed, and a Phase III study has been started under the
aegis of the Eastern and Southwestern Collaborative Oncology
Groups. A second Phase III study is expected to be initiated
in the United Kingdom and a third in Australia. Aquila has
licensed Progenics to use QS-21 in exchange for a license
fee, an equity interest in Progenics, and royalties.
* VaxGen, Inc. (an early stage company whose major corporate
shareholder is Genentech, Inc.) has licensed QS-21 for use in
its HIV-1 vaccine program. VaxGen has conducted Phase I
clinical trials in healthy volunteers with a product
formulated with QS-21, under the auspices of the National
Institutes of Health. This trial was expanded in 1994 after
improved neutralizing antibody responses were observed in
volunteers receiving products containing QS-21. While some
volunteers in this study reported pain on injection, Aquila
has been informed that an additional study with this
potential vaccine is planned.
* NABI has licensed QS-21 for use in production of
immunoglobulin for prevention and treatment of gram-negative
and gram-positive bacterial infections. NABI is currently
evaluating its products in clinical trials without using<PAGE>
adjuvants. The Company is uncertain if or when NABI will
commence clinical trials using QS-21.
Manufacturing and Scale-Up
As part of each StimulonTM adjuvant licensing agreement, the
Company has retained the right to be the exclusive supplier of
Stimulon adjuvants. The license agreements stipulate the supply
prices, within certain ranges. Pursuant to the license
agreements, the Company will also receive royalties on its
licensees' product sales.
The Company currently manufactures QS-21 for commercial animal
health use and for use in human clinical trials. The Company
produces QS-21 with an average batch size sufficient for
approximately 200,000 doses. The Company is scaling the process
to produce a batch size suitable for commercial production up to
2,000,000 doses.
QS-21 is currently classified by the FDA as a constituent material
used in vaccine preparation. As a result, the FDA does not
require licensure of facilities used for its manufacture. Aquila
believes that classification of QS-21 as a constituent material
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 plant capacity and the capital investment
required.
Patents and Proprietary Rights
Aquila has pursued a policy of obtaining patent protection both in
the United States and in selected foreign countries for patentable
subject matter in its proprietary technologies. 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.
Aquila's future success will depend, in part, upon its ability to
develop patentable products and technologies and obtain patent
protection for its products and technologies both in the United
States and Europe. There can be no assurance that patent
applications owned or licensed by the Company will issue as
patents, that patent protection will be secured for any particular
technology, or that, if issued, such patents will be valid, or
that they will provide the Company with meaningful protection
against competitors with a competitive advantage. There can be no
assurance that the patents will not be challenged or designed
around by others. Proceedings brought against Aquila's patents
could expose it to significant expense and the risk of adverse
determinations.
Aquila is not aware of any issued third party patents which would
interfere with development of any of its products, but there can
be no assurance that it will not infringe on existing or future
patents owned by others, that third parties will not bring suit
against it for infringement of such patents, that the Company
could obtain necessary or desirable licenses on acceptable terms,
or that it could design around such patents. Any litigation
instituted by third party patent holders could expose Aquila to
significant expense and the risk of adverse determination.
QS-21 and other Adjuvants
Aquila received U.S. Patent No. 5,057,540 in 1991, covering
purified QS-21, QS-7 and the other principal fractions of
Quillaja saponaria and methods of their use in vaccines. It
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 International ACN ("CSL") controls
certain patents and patent applications covering ISCOMS (immune
stimulating complexes) prepared from crude saponin fractions,
lipids and various antigens. The Company believes that its
products do not infringe CSL's U.S. or European patents due to
process differences and formulation techniques which avoid ISCOM
formation, although the issue is less clear in Europe. In the
event patents do issue to CSL or other parties which dominate QS-
21, there can be no assurance that Aquila will be able to obtain
licenses or obtain such licenses on favorable terms.
Human Granulocytic Ehrlichiosis
Aquila believes that it was the first to successfully cultivate
the HGE organism in tissue culture. The Company has filed patent
applications on infected cell lines, the methods of growing the
organism, and potential vaccine antigens and diagnostic reagents
derived from the cell line. Other researchers in the field of HGE
have filed patent applications that might conflict with Aquila's
patent applications. There can be no assurance that any of
Aquila's patent applications will issue.
Lyme Disease
Aquila has filed a patent application on its vaccine formulation
of using both the A and the B outer surface proteins and QS-21;
animal data indicates this formulation induces group-specific
immune responses (important for protection against multiple
Borrelia strains) significantly better than vaccines containing
only one or two of these components. There are several patents
pending in the United States and in Europe which, if issued in
their current form, may dominate Aquila's Lyme vaccine. Aquila
believes that it is unlikely that any dominant claims will issue
because of the extensive prior art, but there can be no assurance
that the Company's position is correct and, if dominating patents
do issue, there can be no assurance that it will be able to obtain
the necessary licenses or obtain such licenses on favorable terms.
Mastitis
Aquila exclusively licensed from Alfa Laval Agri AB certain base
technology used in the mastitis program. This technology includes
patents and patent applications on fibronectin binding proteins
from S. Aureus, E. coli and S. dysgalactiae. The Alfa Laval
license calls for payment of an initial license fee, royalties,
and additional license fees as additional patents issue and when
Aquila commercializes the vaccines. As part of the joint
development agreement with Virbac, Aquila arranged for Alfa Laval
to grant a direct license to Virbac in certain territories.
Other Patents
Aquila also holds U.S. patents on its Quilvax-FeLV TM vaccine, drug
delivery compounds, and patents on methods of expressing and
purifying proteins made in a baculovirus expression system have
issued. Aquila was granted by CBC, effective on the closing of
the transaction with bioMerieux: (a) 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; (b) a fully paid-up royalty-free license to U.S.
Patent No. 4,753,873 in the veterinary diagnostic field; and (c) 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.
Competition
The biotechnology and pharmaceutical industries are subject to
rapid and significant technological change. Competitors of Aquila
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.
There can be no assurance that Aquila's competitors will not
succeed in developing technologies and products that are more
effective than any which have been developed by the Company or may
be developed by the Company in the future or which would render
the Company'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 the Company in preclinical
testing and human clinical trials of pharmaceutical products and
in obtaining FDA and other regulatory approvals of products for
use in healthcare. Accordingly, Aquila's competitors may succeed
in obtaining FDA approval for products more rapidly than could the
Company. There can be no assurance that Aquila's products under
development will be able to compete successfully with existing
products or products under development by other companies,
universities and other institutions or that they will attain
regulatory approval in the United States or elsewhere. If Aquila
commences significant commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it may have less
experience. A significant amount of research in the field is also
being carried out at academic and government institutions. These
institutions are becoming 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 may also 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 its programs and products.
Several companies, including Ribi ImmunoChem Research, Inc. and
Chiron Corporation, are developing adjuvants.
At least two of Aquila's adjuvant licensees are also licensees of
Ribi for certain diseases. Fort Dodge and Rhone Merieux already
have canine Lyme disease vaccines on the market, while Pasteur
Merieux Connaught and SKB are in advanced human trials with human
Lyme disease vaccines. Merck, Wyeth-Lederle and possibly others
are in human clinical trials with conjugate pneumococcal vaccines
for the pediatric market, and have existing non-adjuvanted
products on the market. Several companies market mastitis
vaccines for infections caused by E. coli, but these vaccines do
not protect against staphylococcal or streptococcal infections.
The existence of products developed by these and other
competitors, or other products of which Aquila is not aware or
which may be developed in the future, may adversely affect the
marketability of products developed by Aquila.
Government Regulation
The FDA, the USDA, the Environmental Protection Agency and the
Nuclear Regulatory Commission, comparable state agencies 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
preliminary 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 initial clinical trials. The
clinical data, together with comprehensive manufacturing and
facility information, is filed with the FDA in a New Drug
Application (NDA) or Product License Application (PLA) and an
Establishment License Application (ELA), or in certain cases as a
Biologics License Application (BLA), 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 vaccine preparation, the FDA does not require
licensure of facilities used in its manufacture. Aquila believes
that this affords flexibility on investment 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 PLAs and NDAs as they seek FDA approval.
There can be no assurance that, at the end of the regulatory
process, approval will be obtained or that product developments by
competitors in the interim will not have made Aquila's products
obsolete or economically unfeasible. The extent of regulation
which may arise from future legislative or administrative action
cannot be predicted, nor can the potential impact of such future
regulation, or changes in existing regulation, be predicted with
any certainty.
Product Liability
Aquila has potential liability risks that are inherent in the
testing, manufacturing and marketing of medical products. The use
of Aquila's products or conduct of clinical trials may expose
Aquila to product liability claims and possible adverse publicity.
These risks also exist with respect to Aquila's products, if any,
that receive regulatory approval for commercial sale. The Company
currently has limited product liability coverage for the clinical
research use of its products, which management believes is
customary for companies with products at this stage of clinical
development. There can be no assurance that Aquila will be able
to maintain its existing insurance coverage or obtain additional
insurance coverage at acceptable costs, if at all, or that a
product liability claim would not materially adversely affect the
business or financial condition of the Company.
If and when Aquila manufactures products that are recommended for
routine administration to children, it is possible that it will be
required to participate in the National Vaccine Injury
Compensation Program. This program compensates children having
adverse reactions to certain routine childhood immunizations with
funds collected through an excise tax from the manufacturers of
these products.
Human Resources
As of March 1, 1997, Aquila employed 60 full-time employees. 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 these
internal resources are augmented by consulting agreements with
research scientists located at various academic institutions and
commercial organizations.
Scientific Advisory Board
Aquila's Scientific Advisory Board consists of six individuals
with recognized expertise in immunology. The Scientific Advisory
Board meets from time to time to discuss matters relating to the
Company's current and long-term scientific planning and research
and development, and the individual members are available for
consultation on an informal basis. All members of the Scientific
Advisory Board are employed by academic institutions, and may have
commitments or consulting or advisory obligations to other
entities that may limit their availability to Aquila. These
entities may be competitors of Aquila. In certain circumstances,
the academic institutions which employ the Scientific Advisory
Board members may assert ownership rights to inventions or other
technology that may result from advice provided to Aquila by such
members. In such circumstances, Aquila could seek to negotiate
licenses to such inventions or technology, but there can be no
assurance that the Company would be able to obtain such licenses
on commercially reasonable terms. No members of the Scientific
Board are expected to devote more than a small portion of their
time to Aquila's business.
The following persons are the current members of the Scientific
Advisory Board:
Mary Lou Clements-Mann, M.D., M.P.H.
Professor
Department of International Health
Johns Hopkins University
Center for Immunization Research
John R. David, M.D.
Richard Pearson Strong Professor and
Chairman of the Department of Tropical Public Health
Professor of Medicine and Chief of the Division
of Tropical Medicine
Harvard Medical School
Michael J. Hawkins, M.D.
Associate Professor of Medicine
Division of Medical Oncology
Vincent T. Lombardi Cancer Research Center
Georgetown University College of Medicine
Arthur I. Hurwitz, D.V.M., Ph.D.
Chairman, Department of Pathology
The Animal Medical Center
New York
Takis S. Papas, Ph.D.
Director, Center for Molecular and Structural Biology
and Professor of Medicine
CMSB/Hollings Oncology Center
Medical University of South Carolina
Richard J. Whitley, M.D.
Professor of Pediatrics
University of Alabama at Birmingham
Children's Hospital
Aquila's discussions as to management's plans and objectives for
Aquila's business after the date hereof are forward looking
statements which involve a number of risks and uncertainties.
Actual results may differ materially from those projected by
Aquila. The following factors, among others, could effect the
Company's actual results: general economic conditions; risks in
product and technology development; delays and difficulties in the
regulatory approval process; difficulties in obtaining raw
materials and supplies for the Company's products; failure of
corporate partners to commercialize successfully products using
the Company's technology; competition from other companies; the
costs of acquiring additional technology; failure to obtain the
funding necessary for the Company's planned activities; and other
risks and uncertainties identified in this report on Form 10-K and
in Aquila's Security and Exchange Commission filings and the
exhibits thereto.
Item 2. PROPERTIES.
Aquila currently leases a 76,475 square foot facility at the
Biotechnology Research Park in Worcester, Massachusetts. The
facility contains research and development laboratories, quality
control laboratories, manufacturing space and administrative
offices. The building is leased pursuant to a lease with a ten
year initial term expiring December 1996. The Lease has been
extended through December 1997. Since the space exceeds its needs
for the continuing business, Aquila may relocate to new space at
the end of 1997. Aquila believes that suitable replacement space
is available at reasonable rates.
Aquila owns three buildings in Rockville, Maryland. A majority of
a 46,000 square foot building at 1500 East Gude Drive and a 3,800
square foot building at 3 1/2 Taft Court are leased to bioMerieux
under a ten year lease which commenced in October 1996. A 20,852
square foot laboratory building at 3 Taft Court is leased to
Biotech Research Labs, a subsidiary of Boston Biomedica Inc.,
under a five year lease which commenced July 1992.
Item 3. LEGAL PROCEEDINGS.
The Plan of Reorganization (the "Plan") of Cambridge Biotech
Corporation ("CBC") was confirmed by the United States Bankruptcy
Court ("Bankruptcy Court") on July 18, 1996 and consummated on
October 21, 1996.
Four parties appealed the Bankruptcy Court's July 18, 1996 order
confirming the Plan, including Alfa-Laval Agri AB, Behring
Diagnostics, Inc., Deloitte & Touche, LLP ("Deloitte") and
Institut Pasteur with Pasteur Sanofi Diagnostics. The appeals
taken by Alfa-Laval Agri AB and Behring Diagnostics, Inc. have
been dismissed. The appeal by Deloitte remains pending before the
United States District Court for the District of Massachusetts
(No. 96-40192-NMG). Deloitte contests the right of counsel to
Class 5 Claimants to bring an action against Deloitte on behalf of
CBC as provided in the Plan. Finally, an appeal taken by Institut
Pasteur and Pasteur Sanofi Diagnostics (collectively, "Pasteur")
was dismissed and the confirmation affirmed, by the First Circuit
Court of Appeals by order dated January 17, 1997. Pasteur has
until April 17, 1997 to file a writ of certiorari with the Supreme
Court of the United States appealing the First Circuit Court of
Appeals' decision. Although the Company is not a party to this
litigation, a successful appeal could have an adverse effect on
the Company's continuing operations if the appellate court were to
disrupt the transactions consummated pursuant to the Plan.
In July of 1994, the Securities and Exchange Commission ("SEC")
issued an Order Directing Private Investigation (In the matter of
Cambridge Biotech Corporation, United States of America Before the
Securities and Exchange Commission, File No. B-1238),
investigating matters pertaining to CBC's financial statements,
its public filings, and its offerings of its securities. The
investigation concluded on or about October 17, 1996 with the
issuance by the SEC of an "Order Instituting Proceedings pursuant
to 8A of the Securities Act of 1933 and 21C of the Exchange Act
of 1934 Making Findings and Imposing a Cease and Desist Order".
CBC consented to the issuance of the order, without admitting or
denying any wrongdoing, that it cease and desist from committing
or causing any violation of the anti-fraud, corporate reporting,
and books and records provisions of the federal securities laws.
The SEC takes the position that this order is binding on both CBC
and the Company.
In 1995, CBC received a subpoena issued by the United States
District Court, District of Massachusetts for documents to be
presented to the Grand Jury. The Company believes the
investigation was focusing on matters similar to the investigation
of the SEC. CBC cooperated in the investigation and was informed
informally by the U.S. Attorney's Office that it was not a target
of the investigation. The Company believes it is not a target of
any current investigation.
In May 1995, a former employee of CBC filed a complaint against
CBC with the City of Rockville, Maryland Human Rights Commission,
claiming wrongful termination (Human Rights Commission on the
Complaint of Paul R. Shackelford against Cambridge Biotech
Corporation, Complaint No. 95-15-ER). The Company was informed by
letter dated January 28, 1997 from the State of Maryland
Commission on Human Relations that the complaint had been
administratively closed because a pre-determination settlement
agreement had been executed in accordance with the Maryland
Commission on Human Relations' rules and procedures.
CBC filed an appeal in the United States District Court for the
District of Massachusetts, Civil Action No. 96-40219-NMG of the
Bankruptcy Court's order entered on October 21, 1996 relating to
the calculation of the cure amount due to Hugh V. Cottingham
("Cottingham") in connection with CBC's assumption of a certain
License Agreement. Cottingham filed a cross-appeal. CBC and
Cottingham have agreed to settle the dispute and dismiss the
appeal and cross-appeal, and have filed a Joint Motion for Order
Authorizing and Approving Stipulation of Dismissal and proposed
Stipulation of Dismissal.
On January 14, 1997, the Company commenced an adversary proceeding
(No. 97-4011) in the United States Bankruptcy Court for the
District of Massachusetts, in connection with the Chapter 11 case
of CBC, against the State of Maryland, Louis Goldstein as
Comptroller of the Treasury of the State of Maryland, Montgomery
County, Maryland and Molly Q. Ruhl, the Clerk of the Circuit Court
of Montgomery County. In the adversary proceeding, the Company
seeks, among other things, (1) a declaration that the payment of
certain mortgage recordation taxes by the Company, in connection
with the recordation of a deed of trust under the terms of the
Plan of CBC, violated the Bankruptcy Court's order confirming the
Plan and the provisions of the United States Bankruptcy Code
exempting the Company from the payment of such taxes, and (2) the
recovery of such tax payments. The Bankruptcy Court has scheduled
for April 8, 1997 a hearing on the motions to dismiss filed by the
defendants.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the quarter
ended December 31, 1996.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following is a list of Executive Officers of the Company,
their ages, positions, offices and business experience, as of
March 1, 1997:
Alison Taunton-Rigby, Ph.D., 52, has been President, Chief
Executive Officer and Director since March of 1996. Dr.
Taunton-Rigby was President and Chief Executive Officer and a
member of the Board of Directors of CBC from April 1995 until
October of 1996. From 1993 to 1994, she was President and
Chief Executive Officer of Mitotix, Inc., a biopharmaceutical
company. Prior to joining Mitotix, Dr. Taunton-Rigby was
Senior Vice President, Biotherapeutics, of Genzyme
Corporation, where she had overall responsibility for
Genzyme's biotherapeutics business. Dr. Taunton-Rigby is a
member of the Board of Directors of BIO, the national trade
organization, where she is also Chair of the Emerging
Companies section. She is also a member of the Board of
Directors and a past President of the Massachusetts Biotech
Council, the trade organization representing Massachusetts
biotechnology companies. Dr. Taunton-Rigby received her
doctorate in Chemistry from the University of Bristol in
England, and is a graduate of the Advanced Management Program
of the Harvard Business School. She is a director of the CML
Group, a specialty retailer, and of Synaptic Pharmaceutical
Corporation. She is also a member of the Bentley College
Ethics Board.
Gerald A. Beltz, Ph.D., 45, is Vice President of Research and
Development of the Company. Dr. Beltz served as Vice
President of Research and Development of CBC from 1993 to
1996. For ten years prior to assuming these positions, Dr.
Beltz held various scientific positions with CBC. Dr. Beltz
was responsible for the initial development of CBC's FeLV
feline leukemia vaccine and HIV-1 diagnostic assays, and is
the lead inventor on the patents covering these products.
Dr. Beltz received his B.S. from Beloit College, his M.A. and
Ph.D. from Princeton University, and did his post-doctoral
work at Harvard University.
Stephen J. DiPalma, 38, is Vice President, Chief Financial
Officer and Treasurer of the Company. Mr. DiPalma served as
Vice President, Chief Financial Officer and Treasurer of CBC
from March 1996 to October 1996. Before joining CBC, Mr.
DiPalma was Chief Financial Officer and Chief Operating
Officer of the Picker Institute, an affiliate of the Beth
Israel Hospital, specializing in quality assessment,
improvement and information services. From 1988 to 1995, Mr.
DiPalma was Chief Financial Officer of Athena Diagnostics
Inc. (formerly Genica Pharmaceuticals Corporation), a
biotechnology company involved in therapeutic development and
diagnostic testing targeted at neurological disorders. From
1985 to 1988, Mr. DiPalma was Director of Finance of the
Health Data Institute, a division of Baxter International
Corporation. Mr. DiPalma holds a B.S. from University of
Massachusetts at Lowell and an M.B.A. from Babson College.
Deborah B. Grabbe, 45, is Vice President of Manufacturing
Operations of the Company. Ms. Grabbe served as Vice
President of Manufacturing Operations for CBC from 1995 until
1996. She was Vice President of Regulatory Affairs and
Product Quality for CBC from 1993 to 1994. Prior to joining
CBC in 1993, Ms. Grabbe was Director of Regulatory and
Clinical Affairs and Director of Product Support for Behring
Diagnostics, Inc. From 1987 to 1988 she was Vice President
of Operations at Biotechnica Diagnostics, Inc. Ms. Grabbe
holds an A.B. from Oberlin College and an M.S. from John A.
Burns School of Medicine, University of Hawaii.
Robert B. Kammer, M.D., 56, is Vice President of Medical
Affairs for the Company. Dr. Kammer served as Vice President
of Medical Affairs for CBC from 1993 until 1996. From 1988
to 1993, Dr. Kammer was employed at Schering-Plough
Corporation as Director, Anti-Infective Clinical Research.
Before joining Schering-Plough, Dr. Kammer worked at Lilly
Research Laboratories. Dr. Kammer received his B.A. and M.D.
degrees from the University of Iowa and did his internship,
residency and fellowship at the Medical College of Virginia.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Price of common stock:
1996 1995
Quarter High Low High Low
1st $1.6250 $0.3750 $0.7500 $0.1250
2nd $1.2500 $0.5000 $1.2500 $0.1870
3rd $0.8125 $0.3437 $1.6250 $0.1870
4th $6.7500 $3.2500 $1.5000 $0.2500
The above prices reflect interdealer prices without retail mark-
up, mark-down or commissions and may not necessarily represent
actual transactions. The prices reported for 1995 and until
October 1996 represent bid prices for transactions of CBC stock
reported by brokers on the "OTC Bulletin Board" and in the so
called "pink sheets." The prices for the last quarter of 1996 are
the high and low bid information as quoted on the NASDAQ National
Market System for Aquila's stock. The prices in the fourth
quarter of 1996 reflect the exchange of CBC shares for shares of
the Company at a ratio of one share of the Company for each 7.569
shares of CBC. The high and low bid prices for CBC stock for the
last quarter of 1996 fell within the range reported for Aquila,
after adjustment for the exchange of shares. The Company's stock
was deemed registered pursuant to Rule 12g-3(a) under the
Securities Exchange Act of 1934 on or about October 21, 1996 and
began trading on the NASDAQ National Market System on October 24,
1996.
Below are high and low prices (rounded to the nearest 1/16)
reported as if the exchange of CBC shares for the Company's shares
at the rate of 7.5696 shares of CBC for one share of the Company
had occurred on January 1, 1995.
1996 1995
Quarter High Low High Low
1st $12.3125 $2.8125 $ 5.6875 $0.9375
2nd $ 9.4375 $3.75 $ 9.4375 $1.4375
3rd $ 6.125 $2.625 $12.3125 $1.4375
4th $ 6.75 $3.25 $11.375 $1.875
As of March 25, 1997, there were approximately 5,445 shareholders
of record of the Company's common stock.
Item 6. SELECTED FINANCIAL DATA
- -------------------------------
Aquila Biopharmaceuticals, Inc.
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Year ended December 31:
- -----------------------
Net Sales $6,573,112 $5,727,716 $5,009,922
=========== ============= ============
Loss from continuing operations ($1,110,146) (5,164,876) ($11,608,156)
Loss from continuing operations
per share:
Primary ($0.29) ($1.50) ($3.40)
=========== ============= ============
Cash dividends declared per $0.00 $0.00 $0.00
share =========== ============= ============
At year end:
- -----------
Total Assets
$26,312,350 $23,044,579 $28,502,670
=========== ============= ============
Long term notes payable $4,055,564 $0 $0
----------- ------------ -------------
Total long term obligations 4,055,564 $0 $0
=========== ============= ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Aquila is the successor to the biopharmaceutical business of CBC
pursuant to the terms of the Plan and is the successor to CBC
under the Securities Exchange Act of 1934 and Rule 12g-3(a)
thereunder.
Results of Operations
The Statement of Operations presents Aquila's results from
operations exclusive of diagnostic activities, which are presented
as Discontinued Operations in the statement. Revenues, costs,
expenses and other items reflect the results of Aquila's
biopharmaceutical business and administrative functions only, as
more fully described below.
Revenues
Total revenues were $6,573,000 in 1996, or 15% higher than in
1995. Total revenues of $5,728,000 in 1995 increased 14% versus
1994 total revenues of $5,010,000.
Product sales were $1,398,000 and $591,000, in 1996 and 1995
respectively, an increase of 137%. Product sales in 1995 were 13%
lower than in 1994. The increase in product sales in 1996
compared with 1995 was due primarily to increased sales of certain
animal health products to Virbac S.A. and payments received for
materials provided by the Company to corporate partners. Sales of
the animal health products in 1995 were negatively impacted by
production problems during that year. In 1996, animal health
product sales reflect increased volume to compensate for
diminished supply in 1995.
Research and development ("R&D") revenues of $5,176,000 in 1996
represented a small increase compared to $5,137,000 in 1995. R&D
revenues in 1995 were 19% higher than in 1994. The majority of
these revenues were generated from license agreements and the
remainder were generated from funded research agreements. The
Company recognized $3,500,000 in both 1996 and 1995 and $3,000,000
in 1994 in revenue representing installments of a license fee
under an agreement with SmithKline Beecham p.l.c. ("SKB") which
allows SKB to use the Company's proprietary StimulonTM adjuvant
("QS21") in numerous vaccines. Income from this agreement
represented 53%, 61% and 60% of the Company's total revenue in
1996, 1995 and 1994, respectively. A final $3,000,000 installment
of the license fee is payable by SKB in January of 1998 in order
for SKB to maintain access to all the technology under the
agreement. The Company also recognized $1,920,000 in revenue from
its collaboration with Virbac S.A. on the development of a vaccine
for bovine mastitis for the three years from 1994 to 1996.
No royalty revenue has been reported in any period presented.
Although the Company did receive royalty payments under certain
license agreements during each year presented, the underlying
technology which is the subject of those agreements is primarily
diagnostic. Therefore, royalty revenue derived from these
agreements is not considered to be central to Aquila's ongoing
business and is reported as Other Income.
Costs and Expenses
Cost of products sold as a percentage of product sales was 134%,
185% and 195% in 1996, 1995 and 1994, respectively. The decrease
in 1996 from 1995 is primarily due to the increase in product
sales in 1996 compared to 1995. Despite the volume increase, cost
of products sold continued to exceed product sales in 1996 due to
unfavorable pricing. In early 1997, management was successful in
negotiating higher prices for certain of the Company's animal
health products.
Research and development expenses were $4,839,000 in 1996 and
$5,697,000 in 1995, a decrease of 15%. R&D expenses in 1995
increased 12% over 1994 expenses of $5,068,000. The decrease in
1996 is attributable to expenses recognized in 1995 related to a
milestone obligation on certain technology licensed by the
Company, which expense did not recur in 1996, and to a reduction
in personnel-related expenses.
General and administrative expenses ("G&A") were $5,027,000 in
1996 and $5,455,000 in 1995, a decrease of 8%. 1995 G&A expenses
were 23% lower than in 1994. This decrease in 1996 is due
primarily to a reduction in personnel-related expenses.
Other Income, Net
The Company recognized other income, net of $5,777,000 in 1996,
compared to $2,162,000 in 1995 and $360,000 in 1994. This
increase in 1996 is due to income recognized related to the
receipt of a paid-up license fee of $3,250,000 from a third party
and a $500,000 payment received in exchange for the Company's
interest in a joint venture. Both of these payments were
nonrecurring transactions.
As discussed above, other income, net includes royalty income in
all periods presented. Royalty income, net of royalty expense,
was $1,395,000, $1,582,000 and $832,000 in 1996, 1995 and 1994,
respectively.
Reorganization Items
The Company incurred expenses of $2,109,000, $1,200,000 and
$611,000 in 1996, 1995 and 1994, respectively, for professional
fees related to the bankruptcy process and the consummation of the
Plan. The increase in 1996 was due to expenses related to the
consummation of the Plan.
The Company considers all cash up to the amount of liabilities
subject to Chapter 11 proceedings, which were approximately $9.9
million at December 31, 1995, to be cash accumulated as a result
of Chapter 11. Interest earned on cash accumulated as a result of
Chapter 11 was $394,000, $387,000 and $100,000 in 1996, 1995 and
1994, respectively.
Discontinued Operations
On June 24, 1996, the Company sold the assets of the enterics
diagnostic business to Meridian Diagnostics, Inc. for
approximately $5,700,000 in cash and other considerations. The
results of operations of the enterics business are reported as
discontinued operations and prior periods have been restated to
reflect that presentation and the disposal of that business.
Income from discontinued enterics operations was $552,000,
$426,000 and $259,000 in 1996, 1995 and 1994, respectively. A
gain on disposal of the enterics business of $5,218,000 was
recorded in 1996.
On October 22, 1996, the Company sold its retroviral diagnostic
business to bioMerieux for $6,500,000. The results of operations
of the retroviral business are reported as discontinued operations
and prior periods have been restated to reflect that presentation
and the disposal of that business. Income from discontinued
retroviral operations was $901,000 in 1996 compared to losses from
discontinued retroviral operations of $203,000 and $1,183,000 in
1995 and 1994, respectively. A gain on disposal of the retroviral
business of $2,439,000 was recorded in 1996.
On July 21, 1994 the Company's wholly-owned Irish subsidiary, CBL,
filed for protection of the Irish high Court and an Examiner was
appointed pursuant to the Irish Companies Act of 1990. The
appointment of the Examiner and the doubtful recovery of the
Company's investment in CBL led the Company to conclude the
measurement date to be July 21, 1994 under APB 30. Consequently
the accompanying financial statements for 1994 include a loss of
$2,129,000 from the discontinued operations. Net revenue from
discontinued CBL operations were $1,952,000 for the period prior
to disposal. On November 30, 1994 the company sold its interest
in CBL to SelfCare, Inc. Total consideration for the transaction
was $2.1 million. The Company recorded a loss on disposal of
$6,963,000.
Extraordinary Loss on Reorganization
A loss on all transactions related to the consummation of the Plan
of $2,040,000 was recorded in 1996. This loss resulted primarily
from the settlement of the class action lawsuit partially offset
by the forgiveness of liabilities in the bankruptcy case.
Net Income (Loss)
The Company had a loss from continuing operations of $1,110,000,
or $.29 per share, $5,165,000, or $1.50 per share, and
$11,608,000, or $3.40 per share, in 1996, 1995 and 1994,
respectively. The Company had income of $5,960,000, or $1.57 per
share, in 1996 and losses of $4,942,000, or $1.44 per share, and
$22,276,000, or $6.52 per share, in 1995 and 1994, respectively,
including income or loss from discontinued operations, gain or
loss on the disposal of discontinued operations and the
extraordinary loss on consummation.
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"). SFAS 123 requires that companies
either recognize compensation expense for grants of stock, stock
options and other equity instruments based on fair value, or
provide pro forma disclosure of net income and earnings per share
in the notes to the financial statements. The Company adopted the
disclosure provisions of SFAS 123 in 1996 and has applied APB 25
and related interpretations in accounting for its plans.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128").
Earnings Per Share. SFAS 128 specifies the computation,
presentation and disclosure requirements for Earnings Per Share
("EPS"). This statement will be effective for fiscal year 1997
and will require restatement of all prior period EPS data
presented. The Company has not yet determined the financial
impact of adopting this statement.
Liquidity and Capital Resources
The ability of Aquila to fund its long term operations is
dependent upon several factors, including the Company's ability to
attract funding through additional public or private financing or
by establishing corporate partnerships and collaborative
arrangements. There can be no assurance that such additional
funding can be obtained on acceptable terms.
Operating activities used $1,025,000, $880,000 and $3,095,000 of
cash in 1996, 1995 and 1994, respectively. The 1996 net income of
$5,960,000 includes approximately $7,423,000 in gain on
sale of discontinued operations, a loss on the consummation
of the Plan of $2,040,000, and non-cash depreciation and
amortization of $3,448,000. In 1995, the net loss of $4,942,000
included $4,737,000 of non-cash depreciation and amortization. In
1994 the net loss of $22,276,000 included a loss on disposal of
discontinued operations of $7,482,000, and non-cash depreciation
and amortization of $4,282,000.
In 1996, the Company reduced inventories and accounts receivable
by $1,263,000, and $348,000, respectively. By comparison,
inventories increased by $402,000 and accounts receivable
decreased by $143,000 in 1995. In 1996, accounts payable and
other accrued expenses decreased by $1,034,000, primarily due to
payments made against post-petition administrative claims pursuant
to the consummation of the Plan. Cash used to satisfy pre-
petition Chapter 11 liabilities under the Plan was $3,757,000.
Deferred revenue also decreased, due primarily to the recognition
of revenue related to the Company's collaboration with Virbac on
the development of a vaccine for bovine mastitis. The primary
reason for the reduction in deferred revenue in 1995 was the
$3,500,000 license fee received in December, 1994 and earned
during 1995.
Accounts payable and other liabilities increased by $3,349,000 and
$2,074,000 in 1995 and 1994, respectively. The 1995 increase was
due primarily to the patent related milestone obligation
previously mentioned, employee retention bonus plan and timing of
payments. The 1994 increase was primarily due to postponed
payments due to a cash shortage prior to filing for Chapter 11,
employee retention bonus plan and professional fees incurred due
to the Company's filing for Chapter 11.
Investing activities generated $3,306,000 in 1996, due primarily
to the receipt of proceeds from the sales of the enterics and
retroviral diagnostic businesses. In 1995, by comparison,
investing activities used $798,000, primarily related to the
purchase of property, plant and equipment and additions to Patent
and Purchased Technology assets. In 1994 investing activities
generated $5,262,000, due primarily to the proceeds from the sale
of the Company's Irish subsidiary, the proceeds from the
collection of a note receivable and the sale of marketable
securities.
During 1994, the Company's financing activities generated
$5,455,000 due primarily to the stock issued from the January 1994
shelf offering.
Cash and cash equivalents were $9,112,000 at December 31, 1996,
compared to $6,856,000 at December 31, 1995 and $8,538,000 at
December 31, 1994. The increase in 1996 results primarily from
the sales of the enterics and retroviral diagnostic businesses and
the receipt of a paid-up license fee from a sub-licensee of
certain diagnostic technology. Total cash, cash equivalents and
marketable securities were $17,675,000 at December 31, 1996.
The Company currently occupies an office, research and
manufacturing facility in Worcester, Massachusetts under a lease
which expires on December 31, 1997. The Company expects that
relocation to another facility will be necessary. Given the
nature of Aquila's research and manufacturing activities and the
specialized space required to support those activities, it is
expected that the Company will be required to make capital
expenditures to improve the new facility and to acquire new
systems and equipment related to the new facility. While an
accurate estimate cannot be made at this time, it is possible that
these expenditures could be substantial.
Aquila's discussions as to management's plans and objectives for
Aquila's business after the date hereof are forward looking
statements which involve a number of risks and uncertainties.
Actual results may differ materially from those projected by
Aquila. The following factors, among others, could effect the
Company's actual results: general economic conditions; risks in
product and technology development; delays and difficulties in the
regulatory approval process; difficulties in obtaining raw
materials and supplies for the Company's products; failure of
corporate partners to commercialize successfully products using
the Company's technology; competition from other companies; the
costs of acquiring additional technology; failure to obtain the
funding necessary for the Company's planned activities; and other
risks and uncertainties identified in this report on Form 10-K and
in Aquila's Security and Exchange Commission filings and the
exhibits thereto.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed as part of this Annual Report on
Form 10-K are listed under Item 14 below.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Company's definitive proxy
statement, "Proposals 1 and 2, Election of Directors", to be filed
pursuant to Regulation 14A, in connection with the 1997 Annual
Meeting of Shareholders. Information concerning executive
officers of the Registrant is included in Part I of this Report as
Item 4A - Executive Officers of the Registrant.
Item 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's definitive proxy
statement, "Proposals 1 and 2, Election of Directors - Executive
Compensation", to be filed pursuant to Regulation 14A, in
connection with the 1997 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference to the Company's definitive proxy
statement, "Proposals 1 and 2, Election of Directors - Security
Ownership of Certain Beneficial Owners and Management", to be
filed pursuant to Regulation 14A in connection with the 1997
Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's definitive proxy
statement, "Proposals 1 and 2, Election of Directors", to be filed
pursuant to Regulation 14A in connection with the 1997 Annual
Meeting of Shareholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following documents are filed as part of this
report:
i. Report of Independent Auditors.
ii. Statement of Operations for each of
the three years in the period ended December 31, 1996.
iii. Balance Sheets at December 31, 1996
and 1995.
iv. Statement of Cash Flows for each of
the three years in the period ended December 31, 1996.
v. Statement of Shareholders' Equity for
each of the three years in the period ended December 31, 1996.
vi. Notes to Financial Statements for the
years ended December 31, 1996 and 1995.
(a) 2. Financial Statement Schedules.
None.
(a) 3. Exhibits.
2. Confirmed Reorganization Plan (consisting of
Reorganization Plan, dated May 20, 1996, and modification date of
July 15, 1996) (incorporated by reference to Exhibit 2 to current
report on Form 8-K, dated July 18, 1996, File No. 0-12081).
3.1 Amended and Restated Certificate of
Incorporation, effective July 25, 1996 (incorporated by reference
to Exhibit 2 to Form 8-K, dated July 18, 1996, File No. 0-12081).
o3.2 Certificate of Amendment of Amended and Restated
Certificate of Incorporation, effective March 24, 1997 (a complete
copy of the Amended and Restated Certificate of Incorporation, as
amended, is filed herewith).
3.3 By-laws (incorporated by reference to Exhibit 2
to Form 8-K, dated July 18, 1996, File No. 0-12081).
4.1 Specimen Certificate representing common stock
of the Company (incorporated by reference to Exhibit 4.1 to Form
8-K, dated October 21, 1996, File No. 0-12081).
4.5 Long Term Debt. No instrument which defines the
rights of holders of long term debt of the Company is filed
herewith. The Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
*10.1 Contract Research and License Agreement with
Virbac Laboratories, S.A. dated July 6, 1983 (incorporated by
reference to Exhibit 10.31 to Annual Report on Form 10-K for
fiscal year ended December 31, 1983, File No. 0-12081).
*10.1.1 Amendment to Agreement with Virbac Laboratories,
S.A. (incorporated by reference to Exhibit 10.10.1 to Annual
Report on Form 10-K for fiscal year ended December 31, 1988, File
No. 0-12081).
*10.2 Lease for Worcester Massachusetts facility
(incorporated by reference to Exhibit 10.13 to Annual Report on
Form 10-K for fiscal year ended December 31, 1986, File No.
0-12081).
10.2.1 Amendment to Lease Agreement for Worcester
Massachusetts facility (incorporated by reference to Exhibit 10.18
to Annual Report on Form 10-K for fiscal year ended December 31,
1992, File No. 0-12801).
*10.3 License, Development and Supply Agreement with
SmithKline Beecham, p.l.c., dated as of September 11, 1992, as
amended by Agreement dated as of March 31, 1993 (incorporated by
reference to Exhibit 10.17 to Annual Report of Form 10-K for
fiscal year ended December 31, 1992, File No. 0-12081).
tm10.4 Employment Agreement with Alison Taunton-Rigby,
dated April 6, 1995 (incorporated by reference to Exhibit 10.17 to
Annual Report on Form 10-K for fiscal year ended December 31,
1995, File No. 0-12081).
tm10.5 Employment Agreement with Gerald A. Beltz, dated
August 21, 1995 (incorporated by reference to Exhibit 10.18 to
Annual Report on Form 10-K for fiscal year ended December 31,
1995, File No. 0-12081).
tm10.6 Employment Agreement with Deborah Blackburn
Grabbe, dated August 21, 1995 (incorporated by reference to
Exhibit 10.19 to Annual Report on Form 10-K for fiscal year ended
December 31, 1995, File No. 0-12081).
tm10.7 Employment Agreement with Robert B. Kammer,
dated August 21, 1995 (incorporated by reference to Exhibit 10.20
to Annual Report on Form 10-K for fiscal year ended December 31,
1995, File No. 0-12081).
tm o10.8 Employment Agreement with Stephen J. DiPalma,
dated March 1, 1996.
10.9 Master Acquisition Agreement by and among
bioMerieux Vitek, Inc., Aquila Biopharmaceuticals, Inc. and
Cambridge Biotech Corporation, dated as of April 4, 1996
(incorporated by reference to Exhibit 10.1 to quarterly report on
Form 10-Q for quarter ended June 30, 1996, File No.
0-12081).
10.10 Asset Purchase Agreement between Meridian
Diagnostics, Inc. and Cambridge Biotech Corporation, dated as of
June 24, 1996 (incorporated by reference to Exhibit 2.1 to current
report on Form 8-K, dated June 24, 1996, File No. 0-12081).
o10.11 Lease Agreement with bioMerieux Vitek, Inc.
dated October 22, 1996 for premises located at 1500 East Gude
Drive and 3 Taft Court, Rockville, Maryland.
o10.12 1996 Stock Award and Option Plan.
o10.13 1996 Directors Stock Award and Option Plan.
o10.14 1996 Employee Stock Purchase Plan.
o11. Computation of Earnings Per Share.
o27. Financial Data Schedule.
(b) Reports on Form 8-K filed in the last quarter of 1996.
1. Current report on Form 8-K, dated October 21,
1996.
_____________________
o Filed herewith as part of this Annual Report on Form 10-K.
* Confidential treatment previously granted.
tm Management contract or compensatory plan.
Report of Independent Accountants
We have audited the accompanying balance sheets of Aquila
Biopharmaceuticals, Inc. as of December 31, 1996 and 1995, and the
related statements of operations, cash flows and stockholders' equity
for each of the three years in the period ended December 31, 1996.
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 audit provides 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 Aquila
Biopharmaceuticals, Inc. as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 7, 1997
Aquila Biopharmaceuticals, Inc.
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
Revenue: 1996 1995
Product sales $1,397,597 590,859
Research and development 5,175,515 5,136,857
_________ _________
6,573,112 5,727,716
Cost and expenses:
Cost of sales 1,879,206 1,090,408
Research and development 4,839,116 5,696,964
General and administrative 5,027,190 5,454,835
Loss on impairment of assets 0 0
(Notes 7 and 8) __________ __________
11,745,512 12,242,207
Other income, net (Note 14) 5,777,032 2,162,396
Income/(Loss) from continuing operations before
reorganization items and income tax benefit 604,632 (4,352,095)
Reorganization items (Note 1):
Professional fees (2,109,050) (1,200,188)
Provision for rejected executory contracts 0 0
Interest earned on accumulated cash
resulting from Chapter 11 proceedings 394,272 387,407
Total reorganization items (1,714,778) (812,781)
___________ _________
Loss from continuing operations before
income tax benefit (1,110,146) (5,164,876)
Income tax (expense)/benefit (Note 13) 0 0
_________ _________
Loss from continuing operations (1,110,146) (5,164,876)
Discontinued operations (Note 3):
Income/(Loss) from operations 1,452,810 223,330
Gain/(Loss) on disposal 7,656,683 0
_________ _________
Income/(Loss) before extraordinary loss 7,999,347 (4,941,546)
Extraordinary loss on Reorganization (Note 12) (2,039,816) 0
_________ _________
Net Income/(Loss) $5,959,531 ($4,941,546)
Net income/(loss) per weighted average number
of common shares:
Continuing operations ($0.29) ($1.50)
Discontinued operations $2.40 $0.06
Extraordinary loss on Reorganization ($0.54) $0.00
Net Income/(Loss) per share $1.57 ($1.44)
Weighted average number of
common shares outstanding 3,803,247 3,442,305
Aquila Biopharmaceuticals, Inc.
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
Revenue: 1994
Product sales $675,725
Research and development 4,334,197
_________
5,009,922
Cost and expenses:
Cost of sales 1,317,850
Research and development 5,068,244
General and administrative 7,051,194
Loss on impairment of assets
(Notes 7 and 8) 2,879,707
_________
16,316,995
Other income, net (Note 14) 359,796
Income/(Loss) from continuing operations before
reorganization items and income tax benefit (10,947,277)
Reorganization items (Note 1):
Professional fees (610,832)
Provision for rejected executory contracts (357,501)
Interest earned on accumulated cash
resulting from Chapter 11 proceedings 99,579
_________
Total reorganization items (868,754)
Loss from continuing operations before ___________
income tax benefit (11,816,031)
Income tax (expense)/benefit (Note 13) 207,875
____________
Loss from continuing operations (11,608,156)
Discontinued operations (Note 3):
Income/(Loss) from operations (3,186,400)
Gain/(Loss) on disposal (7,481,710)
__________
Income/(Loss) before extraordinary loss (22,276,266)
Extraordinary loss on Reorganization (Note 12) 0
___________
Net Income/(Loss) ($22,276,266)
Net income/(loss) per weighted average number
of common shares:
Continuing operations ($3.40)
Discontinued operations ($3.12)
Extraordinary loss on Reorganization $0.00
______
Net Income/(Loss) per share ($6.52)
Weighted average number of 3,416,100
common shares outstanding
The accompanying notes are an integral part of the financial statements.
Aquila Biopharmaceuticals, Inc
Balance Sheets
As of December 31, 1996 and 1995
1996 1995
Assets
Current Assets:
Cash and cash equivalents 9,112,091 6,855,751
Marketable securities
(Notes 2 and 4) 8,562,730 216,162
Accounts receivable - trade
(less allowance for
doubtful accounts of $178,565 and
$160,000, respectively) 1,545,612 2,638,024
Other receivables 820,307 125,831
Inventories (Note 5) 451,074 4,367,831
Prepaid expenses and other current assets 778,927 695,455
__________ __________
Total current assets 21,270,741 14,899,054
Investments (Note 6) 394,500 0
Property, Plant, and Equipment, Net (Note 7) 4,308,457 6,985,523
Patents and Purchased Technology, Net (Note 8) 295,620 1,054,579
Other Assets 43,032 105,423
__________ __________
Total Assets 26,312,350 23,044,579
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable 943,924 850,480
Accrued royalties 642,959 1,192,169
Accrued professional fees 383,557 753,244
Accrued incentive compensation (Note 16) 0 1,457,622
Other accrued expenses (Note 9) 2,097,326 2,258,196
Deferred revenue (Note 18) 917,600 410,739
Current maturities of long-term debt
(Note 10) 129,103 0
__________ _________
Total Current Liabilities 5,114,469 6,922,450
Deferred Revenue (Note 6) 225,000 2,287,315
Long Term Debt (Note 10) 4,055,564 0
Liabilities Subject To Chapter 11 Proceedings
(Note 11) 0 9,880,309
_________ _________
Total Liabilities 9,395,033 19,090,074
Minority Interest 0 8,989
Commitments and Contingencies (Note 15)
Shareholders' Equity (Note 16):
Preferred stock, authorized:
5,000,000 in 1996 and 1995 none issued - -
Common stock, par value: $.01 per share,
authorized: 30,500,000 and 40,000,000
shares in 1996 and 1995, respectively
issued: 5,000,000 and 26,057,006 shares
in 1996 and 1995, respectively 50,000 260,570
Additional paid in capital 127,514,223 120,382,104
Unearned compensation 0 (138,088)
Treasury stock at cost: 10,526 shares (47,367) 0
Accumulated deficit (110,599,539) (116,559,070)
Total Shareholders' Equity 16,917,317 3,945,516
Total Liabilities and Shareholders' Equity $26,312,350 $23,044,579
The accompanying notes are an integral part of the financial statements.
Aquila Biopharmaceuticals, Inc.
Statement of Cash Flows
For the years ended December 31, 1996 and 1995
1996 1995
---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $5,959,531 ($4,941,546)
Adjustments to reconcile net income/(loss)
to net cash used in operating activities:
Depreciation and amortization 3,448,192 4,736,689
Provision for doubtful accounts 50,000 61,065
Non cash compensation expense 50,000 219,381
Loss on sale of property, plant and
equipment --- ---
Loss from impairment of assets --- ---
Gain on sale of discontinued
businesses (7,423,020) ---
Loss from bankruptcy consummation 2,039,816 ---
Receipt of investments (169,500) (216,162)
Loss on disposition and write down
of investments 11,164 110,586
Changes in assets and liabilities,
net of effects of disposed
businesses:
Accounts and other receivables 347,936 143,316
Inventories 1,262,592 (402,163)
Deferred revenue (1,780,454) (4,090,520)
Prepaid and other current assets (83,472) 140,830
Accounts payable and other accrued
expenses (1,033,690) 3,349,347
Settlement of liabilities subject to
chapter 11 proceedings (3,757,436) ---
Other noncurrent assets 62,391 368
Minority interest (8,989) 8,989
Discontinued operations-non cash &
working capital changes --- ---
------------ ------------
Net cash used by
operating activities (1,024,939) (879,820)
Cash Flows From Investing Activities:
Purchases of marketable securities (8,562,730) ---
Proceeds from disposal of marketable
securities 204,998 ---
Purchases of property, plant, and
equipment (309,627) (593,551)
Proceeds from sale of property, plant
and equipment --- ---
Proceeds from collection of notes
receivable --- ---
Patents and purchased technology (227,968) (204,927)
Proceeds from sale of discontinued
businesses 12,201,000 ---
Financing activities of discontinued
operations --- ---
------------ ------------
Net cash (used)/provided by
investing activities 3,305,673 (798,478)
Cash Flows From Financing Activities:
Issuance of common stock --- ---
Payment on long-term obligations (24,394) (3,742)
------------ ------------
Net cash (used)/provided by
financing activities (24,394) (3,742)
Effect of exchange rate changes on cash
and cash equivalents --- ---
Net increase/(decrease) in cash ------------ ------------
and cash equivalents 2,256,340 (1,682,040)
Cash and cash equivalents at the
beginning of the year 6,855,751 8,537,791
------------ ------------
Cash and cash equivalents at the
end of the period $9,112,091 $6,855,751
============ ============
Supplemental disclosures:
Income taxes paid/(refunded) $4,231 $0
============ ============
Interest paid $98,541 $0
============ ============
Stock Received for Unearned License Fee $225,000 $0
============ ============
Conversion of Chapter 11 liabilities into
long term debt $4,021,220 $0
============ ============
Stock issued under incentive plan $503,055 $0
============ ============
Stock issued to Creditors pursuant to
Reoganization Plan $881,582 $0
============ ============
Stock issued in settlement of class action
lawsuit $5,625,000 $0
============ ============
The accompanying notes are an integral part of the financial statements
- -------------------------------------------------------------------------------
Aquila Biopharmaceuticals, Inc.
Statement of Cash Flows
For the year ended December 31, 1994
1994
----
Cash Flows From Operating Activities:
Net Income/(Loss) ($22,276,266)
Adjustments to reconcile net income/(loss)
to net cash used in operating activities:
Depreciation and amortization 4,282,125
Provision for doubtful accounts 46,697
Non cash compensation expense 160,253
Loss on sale of property, plant and
equipment 60,343
Loss from impairment of assets 2,879,707
Gain on sale of discontinued
businesses 7,481,710
Gain from discontinued operations ---
Loss from bankruptcy consummation ---
Receipt of investments ---
Loss on disposition and write down
of investments 531,155
Changes in assets and liabilities,
net of effects of disposed
businesses:
Accounts and other receivables 974,979
Inventories 1,524,269
Deferred revenue (468,819)
Prepaid and other current assets (275,089)
Accounts payable and other accrued
expenses 2,073,972
Settlement of liabilities subject to
Other noncurrent assets 44,261
Minority interest ---
Discontinued operations-non cash &
working capital changes (134,235)
------------
Net cash used by
operating activities (3,094,938)
Cash Flows From Investing Activities:
Purchases of marketable securities 4,139,562
Proceeds from disposal of marketable
securities ---
Purchases of property, plant, and
equipment ( 2,118,359)
Proceeds from sale of property, plant
and equipment 84,750
Proceeds from collection of notes
receivable 1,000,366
Patents and purchased technology (266,332)
Proceeds from sale of discontinued
businesses 2,391,256
Financing activities of discontinued
operations 31,152
------------
Net cash (used)/provided by
investing activities 5,262,395
Cash Flows From Financing Activities:
Issuance of common stock 6,832,513
Payment on long-term obligations (1,377,449)
------------
Net cash (used)/provided by
financing activities 5,455,064
Effect of exchange rate changes on cash
and cash equivalents 31,107
Net increase/(decrease) in cash ------------
and cash equivalents 7,653,628
Cash and cash equivalents at the
beginning of the year 884,163
------------
Cash and cash equivalents at the
end of the period $8,537,791
============
Supplemental disclosures:
Income taxes paid/(refunded) ($141,814)
============
Interest paid $254,026
============
Stock Received for Unearned License Fee $0
============
Conversion of Chapter 11 liabilities into
long term debt $0
============
Stock issued under incentive plan $0
============
Stock issued to creditors pursuant to
Reorganization Plan $0
============
Stock issued in settlement of class action
lawsuit $0
============
The accompanying notes are an integral part of the financial statements
Aquila Biopharmaceuticals, Inc.
Statement of Shareholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Additional
Common Stock Paid-In Unearned
Shares Amount Capital Compensation
------ ------ -------- --------------
BALANCE,
DECEMBER 31, 1993 23,403,445 $234,034 $113,854,636 ($796,231)
Private placement of
common stock 2,589,100 25,891 6,609,357 ---
Stock issued for the
employee stock purchase
plan 50,761 508 154,313 ---
Exercises of warrants,
options, and other
shares issued 13,700 137 42,307 ---
Forfeiture of discounted --- --- (449,134) 449,134
stock options
Compensation expense
recognized --- --- --- 160,253
Net loss --- --- --- ---
Translation adjustment --- --- --- ---
--------- -------- -------- --------
BALANCE,
DECEMBER 31, 1994 26,057,006 260,570 120,211,479 (186,844)
Compensation expense
recognized --- --- 170,625 48,756
Net loss --- --- --- ---
-------------------------------------------------
BALANCE,
DECEMBER 31, 1995 26,057,006 260,570 120,382,104 (138,088)
=================================================
Stock exchanged with
former shareholders
pursuant to Reorgan-
ization Plan (22,614,701) (226,147) 226,147 ---
Stock issued in settle-
ment of class action
shareholder lawsuit 1,250,000 12,500 5,612,500 ---
Stock issued
under incentive plan 111,790 1,118 501,937 ---
Stock issued to
creditors pursuant
to Reorganization Plan 195,905 1,959 879,623 ---
Compensation expense
recognized --- --- 50,000 ---
Forfeiture of dis-
counted stock options --- --- (138,088) 138,088
Stock held in Treasury
related to disputed
Chapter 11 claim --- --- --- ---
Net income --- --- --- ---
-------------------------------------------------
BALANCE,
DECEMBER 31, 1996 5,000,000 $50,000 $127,514,223 $0
=================================================
The accompanying notes are an integral part of the financial statements
- -------------------------------------------------------------------------------
Aquila Biopharmaceuticals, Inc.
Statement of Shareholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Cumulative
Treasury Translation
Stock Deficit Adjustment Total
------ ------ -------- --------------
BALANCE,
DECEMBER 31, 1993 --- ($89,341,258) ($1,934,051) $22,017,130
Private placement of
common stock --- --- --- 6,635,248
Stock issued for the
employee stock purchase
plan --- --- --- 154,821
Exercises of warrants,
options, and other
shares issued --- --- --- 42,444
Forfeiture of discounted
stock options --- --- --- 0
Compensation expense
recognized --- --- --- 160,253
Net loss --- (22,276,266) --- (22,276,266)
Translation adjustment --- --- 1,934,051 1,934,051
-------- -------- -------- ---------
BALANCE,
DECEMBER 31, 1994 0 (111,617,524) 0 8,667,681
Compensation expense
recognized --- --- --- 219,381
Net loss --- (4,941,546) --- (4,941,546)
---------------------------------------------------
BALANCE,
DECEMBER 31, 1995 0 (116,559,070) 0 3,945,516
===================================================
Stock exchanged with
former shareholders
pursuant to Reorgan-
ization Plan --- --- --- 0
Stock issued in settle-
ment of class action
shareholder lawsuit --- --- --- 5,625,000
Stock issued
under incentive plan --- --- --- 503,055
Stock issued to
creditors pursuant
to Reorganization Plan --- --- --- 881,582
Compensation expense
recognized --- --- --- 50,000
Forfeiture of dis-
counted stock options --- --- --- 0
Stock held in Treasury
related to disputed
Chapter 11 claim (47,367) --- --- (47,367)
Net income --- 5,959,531 --- 5,959,531
-------------------------------------------------
BALANCE,
DECEMBER 31, 1996 ($47,367) ($110,599,539) $0 $16,917,317
==================================================
The accompanying notes are an integral part of the financial statements
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Aquila Biopharmaceuticals, Inc. (the "Company" or "Aquila") is in
the business of developing, manufacturing and marketing products
that modulate the immune system to control or prevent infectious
diseases and cancer. The Company's predecessor, Cambridge Biotech
Corporation ("CBC") filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on
July 7, 1994 with the United States Bankruptcy Court for the
District of Massachusetts Western Division (the "Bankruptcy
Court"). Aquila, organized in 1996 as a Delaware corporation,
became a successor to CBC pursuant to the terms of a
Reorganization Plan (the "Plan") that was confirmed by the
Bankruptcy Court on July 18, 1996 and consummated on October 21,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The 1996 Balance Sheet reflects
Aquila alone; no subsidiaries or other entities are consolidated
in the accompanying 1996 Balance Sheet. All of the Company's
former subsidiaries, which were Biotech Research Laboratories,
Inc., FSC ("FSC"), Cambridge Affiliated Corporation ("CAC"),
Cambridge Biotech International Corporation ("CBIC") and Cambridge
Biotech Ltd. ("CBL"), collectively "the subsidiaries", were
disposed of or dissolved by the Company during the period from
1994 through 1996. Results of operations of the subsidiaries are
included in the accompanying financial statements as discontinued
operations. The Balance Sheet at December 31, 1995 includes CBC,
Biotech Research Laboratories, Inc., FSC, and CAC.
CBL's revenue and expenses from January 1, 1994 to July 21, 1994
are reflected on the Statement of Operations as a loss from
discontinued operations. CBIC ceased operations in 1994 . FSC
is a foreign sales corporation which was dissolved by the Company
on January 27, 1995. The Company's 51% ownership interest in CAC
was disposed of in October, 1996 as part of the sale of the
Company's "Retroviral" diagnostic business. All significant
intercompany transactions and accounts have been eliminated. (See
Note 3).
Nature of Operations - The Company is in the business of
developing, manufacturing and marketing products that modulate the
immune system to control or prevent infectious diseases and
cancer. The Company is subject to risks common to companies in
the biotechnology industry including, but not limited to,
development by the Company or its competitors of new technological
innovations, dependence on key personnel, protection of
proprietary technology, and compliance with FDA government
regulations.
Basis of Presentation - Certain prior year amounts have been
reclassified to conform with current year presentation.
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 and 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 and
accounts receivable and the charge for excess space (see Note 9).
Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company 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 - The Company has classified its marketable
securities 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, 1996, all
marketable securities were commercial paper of domestic corporations
and were classified as "held to maturity". At December 31, 1995,
the Company had classified its marketable securities as "available
for sale". All marketable securities at that date represented shares
of common stock of one insurance company which were sold during
1996. (See Note 4.)
Concentrations of Credit Risk - Financial instruments that
potentially subject the Company to concentration of credit risk
consist primarily of cash investments and accounts receivable. The
Company restricts cash investments to financial institutions and
corporations with high credit standings. Credit risk on accounts
receivable is minimized by the diverse nature of the entities from
which accounts receivable are due. Additionally, the Company
maintains reserves for potential credit losses. Writeoffs for
1996, 1995 and 1994 were $34,000, $51,000 and $929,000,
respectively.
Inventories - Inventories are stated at the lower of cost (first-
in, first-out method) or market.
Long-Lived Assets - The Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" in 1994. SFAS 121 requires that long-lived assets be
reviewed for impairment by comparing the cumulative undiscounted
cash flows from the assets with their carrying amount. Any
writedowns are treated as permanent reductions in the carrying
amount of the assets. Management's policy regarding long-lived
assets is 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.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. However, the carrying value is included in
management's evaluation of the recoverability of the Company's
long-lived assets. Depreciation for financial accounting purposes
is computed by the straight-line method to amortize the cost of
various classes of assets over their estimated useful lives. The
estimated useful lives of the assets are as follows:
Useful Life
Buildings 30
Furniture, fixtures and equipment 3 - 10
Leasehold and building improvements Lesser of Useful Life
or the Term of the Lease
Maintenance and repairs are charged to operations as incurred,
whereas additions and improvements are capitalized. Gains and
losses on the disposition of properties, if reflected in earnings
and the related asset costs and accumulated depreciation, are
removed from the respective accounts.
Patents and Purchased Technology - Purchased technology related to
the acquisition of assets is recorded at fair market value at
acquisition date. However, the carrying value is included in
management's evaluation of the recoverability of the Company's
long-lived assets. Capitalized patent costs include product
registrations and costs incurred for the support and protection of
existing patents. Purchased technology and patents are amortized
on a straight-line basis over periods ranging from three to seven
years.
Revenue Recognition - Revenue from product and service sales is
recognized at the time of the product shipment or performance of
the service. Revenue from research and development contracts is
deferred and recognized over the contractual periods as services
are performed. In addition, research agreements which have
established payments for distinct achievements or phases are
recorded as income is earned. The initial fee in alliance
agreements is recognized 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.<PAGE>
Income Taxes - The Company 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 the current
statutory tax rates.
Net Income/(Loss) Per Share - The net income or loss per share is
computed based on the weighted average number of common and common
equivalent shares (using the treasury stock method) outstanding
during each period. Common equivalent shares are included in the
per share calculations where the effect of their inclusion would
be dilutive. Common equivalent shares consist of outstanding stock
options.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings Per Share. SFAS 128 specifies the computation,
presentation and disclosure requirements for Earnings Per Share
("EPS"). This statement will be effective for fiscal year 1997 and
will require restatement of all prior period EPS data presented.
Management has not yet determined the financial impact of adopting
this statement.
3. DISCONTINUED OPERATIONS
During 1996, the Company disposed of two separate diagnostics
businesses encompassing the Company's diagnostic assets and
operations. On May 16, 1996, the Bankruptcy Court approved the
sale of the "Enterics" business, which was subsequently sold to
Meridian Diagnostics Inc. on June 24, 1996 for approximately
$5,700,000 in cash. The approval by the Bankruptcy Court led the
Company to conclude the measurement date, under the Accounting
Principles Board Statement No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), to be May 16, 1996.
Consequently, the accompanying financial statements include a gain
from the disposal of the Enterics business of $5,218,000 in 1996
and income from discontinued operations of the Enterics business
of $552,000, $426,000 and $259,000 in 1996, 1995 and 1994,
respectively. Net revenue from discontinued Enterics operations
were $4,718,000, $3,880,000, and $3,571,000 in 1996, 1995 and
1994, respectively.
On October 22, 1996, the Company sold its Retroviral diagnostic
business to bioMerieux Vitek Inc. for approximately $6,500,000 in
cash pursuant to the Reorganization Plan. As the Company could not
be assured the sale of this business would proceed until the
consummation of the Reorganization Plan occurred, which took place
on October 21, 1996, the Company has concluded that October 22,
1996 is the measurement date for the disposal of the Retroviral
business under APB 30 . Consequently, the accompanying financial
statements include a gain from the disposal of the Retroviral
business of $2,439,000 in 1996, income from discontinued
operations of the Retroviral business of $901,000 in 1996, and
losses from discontinued operations of the Retroviral business of
$203,000 and $1,183,000 in 1995 and 1994, respectively. Net
revenue from discontinued Retroviral operations were $9,780,000,
$16,384,000, and $12,436,000 in 1996, 1995 and 1994, respectively.
On July 21, 1994 the Company's wholly-owned Irish subsidiary, CBL,
filed for protection of the Irish High Court and an Examiner was
appointed pursuant to the Irish Companies Act of 1990. At July
21, 1994 CBL's debt to the Company represented approximately 92%
of CBL's total liabilities. The appointment of the Examiner and
the doubtful recovery of the Company's investment in CBL led the
Company to conclude the measurement date to be July 21, 1994 under
APB 30. Consequently the accompanying financial statements for
1994 include a loss of $2,129,000 from the discontinued operations
for the period January 1, 1994 through July 21, 1994. Net revenue
from discontinued CBL operations was $1,952,000 for the period
prior to disposal. On November 30, 1994 the Company sold its
interest in CBL's debt and equity to SelfCare, Inc. (a U.S.
Corporation). Total consideration for the transaction was
approximately $2.1 million. The Company recorded a loss on
disposal of $6,963,000.
The Company, through the acquisition of certain assets of
Codiapharm, S.A. in November, 1991 obtained product registration
rights and distribution contracts for the sale of products
manufactured by CBL, the Company's Irish subsidiary. These assets
were recorded by the Company's subsidiary CBIC. Effective with
the disposal of CBL, the Company wrote off the value of CBIC's assets,
and included this loss of $519,000 in the loss on disposal in 1994.
4. MARKETABLE SECURITIES
Marketable securities are held at amortized cost, which
approximates fair value, based on quoted market prices. At
December 31, 1996, marketable securities consisted entirely of
corporate commercial paper with maturities between 91 and 360 days
and gross unrealized losses of $6,000. At December 31, 1995,
marketable securities consisted entirely of the common stock of
one insurance company that the Company received when the insurance
company demutualized. The Company sold this stock during 1996 and
recorded a loss of $11,000 on the sale.
5. INVENTORIES
Inventories consist of the following at December 31:
1996 1995
---- ----
Finished goods $ 260,000 $ 681,000
Work in process 150,000 2,887,000
Raw materials and supplies 41,000 800,000
-------- -----------
$451,000 $ 4,368,000
======== ===========
6. INVESTMENTS
During 1996, the Company received 270,000 shares of MicroGeneSys,
Inc. stock as payment for a paid up license and for royalties due
and payable under terms of a sublicense agreement in regard to
certain technology. The Company recognized revenue of $95,000
based upon an estimated fair market value of $.35 per share.
During 1996, the Company received 60,000 shares of restricted
Progenics common stock as partial payment of a licensing fee,
subject to the achievement of certain milestones under a license
agreement executed in 1995 between the Company and Progenics.
Based upon an estimated fair market value of $5 per share for
Progenics common stock, the Company recorded an investment of
$300,000 and deferred revenue of $300,000 until the milestones
defined in the agreement are achieved. During 1996 the Company
recognized $75,000 of revenue upon the achievement of the first
milestone under this agreement. The remaining $225,000 is
included in deferred revenue at December 31, 1996.
At December 31, 1995, the Company owned a 19% interest in GRF
Corporation (GRF) as part of a joint venture formed to develop
and market human growth hormone releasing factor (GHRF) thought to
be beneficial in the treatment of osteoporosis and other diseases.
The remainder of this company was beneficially owned by
BioNebraska, Inc. and R&C Enterprises, Inc. Due to the uncertainty
that the joint venture would be able to raise additional funding
to support its activities, this investment had been fully written
off at December 31, 1995. In August, 1996, the Company sold its
share in the joint venture to BioNebraska for $500,000 in cash,
which was reported as Other Income in 1996.
The Company had an investment in ImmuCell Corporation, which was
accounted for on the cost method. In December, 1994 the Company
sold its interest in ImmuCell for $309,000, recognizing a $306,000
loss.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at
December 31:
1996 1995
---- ----
Land $ 0 $647,000
Buildings 0 3,356,000
Furniture, fixtures,
and equipment 5,985,000 13,329,000
Leasehold and building
improvements 5,993,000 6,780,000
Property leased to
others 5,762,000 988,000
Leased equipment 0 21,000
--------- ----------
Sub-total 17,740,000 25,121,000
Less accumulated
depreciation and
amortization (13,431,000) (18,135,000)
------------ ------------
$4,309,000 $ 6,986,000
========== ===========
Total depreciation and amortization expense during 1996, 1995 and 1994
was $2,649,000, $3,492,000 and $3,174,000, respectively. Accumulated
amortization on leasehold improvements was $5,980,000 and
$4,605,000 at December 31, 1996 and 1995, respectfully.
Accumulated depreciation on property leased to others was
$1,946,000 and $603,000 at December 31, 1996 and 1995,
respectively.
As a result of the Company filing for reorganization under Chapter
11, the Company recognized an impairment loss of $1,145,000 on its
property and plant in Rockville during 1994.
8. PATENTS AND PURCHASED TECHNOLOGY
Purchased technology and intangibles consist of the following at
December 31:
1996 1995
---- ----
Purchased technology $3,451,000 $ 3,451,000
Patents and patent support 746,000 949,000
---------- -----------
Sub-total 4,197,000 4,400,000
Less accumulated amortization (3,901,000) (3,345,000)
----------- -----------
$ 296,000 $1,055,000
========== ==========
Total amortization expense was $799,000, $1,245,000 and $1,107,000
in 1996, 1995 and 1994, respectively.
As a result of the Company filing for reorganization under Chapter
11, the Company recognized an impairment loss in 1994 of
$1,734,000 on certain purchased technology.
9. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
1996 1995
---- ----
Contract obligations $ 747,000 $ 975,000
Compensation 760,000 321,000
Rockville restructuring charge 0 257,000
Charge for excess space 361,000 0
Other 229,000 705,000
------- -------
$2,097,000 $2,258,000
========== ==========
In 1996 a charge was recorded against the gain on the sale of the
Enterics business of $361,000, representing the Company 's best
estimate of minimum lease expense related to space in the
Company's Worcester facility determined to be permanently in
excess of the Company's needs from continuing operations. The
space was previously utilized by the Enterics diagnostic
business. During 1992 the Company recorded a restructuring charge
for the consolidation of the Rockville manufacturing facilities
and processes into the Worcester, Massachusetts and Galway,
Ireland locations. The Company made $121,000 and $351,000 in
payments against this reserve in 1995 and 1994, respectively. The
remaining balance of $257,000 at December 31, 1995 consisted of
estimated severance costs and related expenses which were paid on
or about October 22, 1996, the date of the sale of the Retroviral
business, which was largely located at the Rockville manufacturing
facility.
10. DEBT
As of December 31, 1995 the Company was in default of its debt
agreements, with the exception of the capital lease agreement, and
the balance was included in liabilities subject to Chapter 11
proceedings at that date (see Note 11). During 1996, the Company's
debt agreements which were in default were restructured or paid
off as part of the Reorganization Plan. At December 31, 1996,
debt consists of the following:
1996
Mortgage note payable; monthly payments of ----
$46,000 through October, 2001, variable interest,
collateralized by real estate $4,180,000
Equipment capital lease; interest at 9.5%;
due 12/97; 5,000
----------
4,185,000
Less: current maturities (129,000)
----------
Net long term debt $4,056,000
==========
The building loans previously in default have been restructured
into a single loan collateralized by land, buildings and
improvements with a net book value of $3,816,000. As part of the
agreement restructuring the building loans, unpaid accrued
interest under the previous loans was forgiven and the principal
amount of the restructured loan was agreed to be $4,200,000.
Interest on the restructured loan is the lender's prime rate plus
2 percentage points. The interest rate on the restructured loan
at the time of the Plan consummation was 10.25%. The interest rate
is subject to adjustment at six-month intervals. The mortgage
calls for a balloon payment for the entire unpaid balance at the
end of the mortgage's five year term.
Annual principal payments on long-term debt during the next five years
are as follows:
Year ending December 31,
-----------------------
1997 $ 129,000
1998 140,000
1999 156,000
2000 172,000
2001 3,588,000
Thereafter -
----------
Total $4,185,000
==========
11. LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS
As described in Note 1, the Company's predecessor filed for
Chapter 11 protection on July 7, 1994 and had been operating as
debtor-in-possession at December 31, 1994 and 1995. At those
dates, substantially all liabilities of the Company were subject
to settlement under the Reorganization Plan. The principal
categories of claims included in Liabilities Subject to Chapter 11
Proceedings in the Balance Sheet as of December 31, 1995 are set
forth below:
1995
----
Priority liabilities $ 15,000
Collateralized Debt (see Note 10) 4,021,000
Prepetition unsecured liabilities 5,844,000
---------
Total $ 9,880,000
===========
These amounts represented management's best estimate of all valid
claims at the respective balance sheet dates. In April, 1996 the
Company filed the Reorganization Plan with
the Bankruptcy Court which, among other matters, described the
proposed settlement of these liabilities. The Bankruptcy Court
confirmed the Reorganization Plan on July 18, 1996 and it was
consummated on October 21, 1996.
Pursuant to the terms of the Reorganization Plan, the
collateralized debt was restructured as described in Note 10.
Priority liabilities were paid in cash at 100% of the value of the
claim. Prepetition unsecured liabilities included approximately
$1,393,000 in damages pursuant to contracts under which the
Company was in default, which damages were paid in cash at 100% in
order to cure the default and continue the contracts.
Approximately $40,000 of the prepetition unsecured liabilities
were claims of less than $500 that were aggregated into a
"Convenience Class" and were paid in cash at 100% to facilitate
the reorganization. The balance of the prepetition unsecured
liabilities were paid either in cash at 51% or in stock at 100% of
the face value of the claim. For those claims paid in stock, the
Bankruptcy Court determined the value of the reorganized company's
stock to be $9.50 per common share. For financial statement
purposes, the Company valued the common stock at $4.50 per share,
the market price on the distribution date.
At December 31, 1996, all claims previously identified as
Liabilities Subject to Chapter 11 Proceedings had been satisfied
except one, which remains in dispute. A reserve for the full
amount of the claim has been established and is accrued for in
Other Accrued Expenses.
12. EXTRAORDINARY LOSS ON REORGANIZATION
On October 21, 1996, the Company recognized an extraordinary loss
of $2,040,000 on its reorganization and emergence from Chapter 11
Bankruptcy. The major components of this loss were as follows:
Recognition of expense related to issuance
of 1,250,000 shares in settlement of
shareholders class action $5,625,000
Recognition of costs incurred
to restructure mortgage on
Rockville real estate 193,000
Forgiveness of debt on pre-petition
liabilities (3,778,000)
-----------
$2,040,000
===========
13. INCOME TAXES
A reconciliation between the amount of reported income tax
expense/(benefit) and the amount computed using the U.S. federal
statutory rate of 34% is as follows for the years ended December
31:
1996 1995 1994
---- ---- ----
Tax expense/(benefit) at federal
statutory rates 34.0% -34.0% -34.0%
Utilization of loss carryforwards -34.0% 34.0% 34.0%
Other 0 0 -1.6%
----- ----- -----
Reported expense/(benefit) for income
taxes 0.0% 0.0% -1.6%
====== ====== =====
The components of the deferred tax assets and liabilities at
December 31, 1996 and 1995
are as follows:
1996 1995
---- ----
Current:
Inventory $140,000 $500,000
Other 620,000 300,000
-------- --------
Total current 760,000 800,000
Noncurrent:
Capital Loss Carryover 4,691,000 7,200,000
Depreciation & Amortization 2,383,000 2,200,000
Restructuring & merger costs 426,000 1,100,000
Other 1,469,000 900,000
Federal & State NOL's 26,706,000 27,400,000
Federal tax credits 1,246,000 1,200,000
---------- ----------
Total noncurrent 36,921,000 40,000,000
---------- ----------
Sub-total 37,681,000 40,800,000
Less: valuation allowance (37,681,000)(40,800,000)
----------- ----------
Net deferred tax asset $0 $0
=========== ==========
Management has assessed the positive and negative 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 be unrealized due to the uncertainty of earning
sufficient taxable income. Accordingly, a valuation reserve has
been established for the full amount of the deferred tax asset.
As of December 31, 1996, the Company had federal net operating
loss (NOL) carryforwards of approximately $61,000,000. These loss
carryforwards begin to expire in the year 2000 and expire fully by
the year 2011. Utilization of these NOL's may be limited pursuant
to the provisions of Section 382 of the Internal Revenue Code of
1986. The Company's NOL's are subject to review by the Internal
Revenue Service and various state tax authorities.
14. OTHER INCOME, NET
Included in Other Income, Net is royalty income earned under
certain license and sublicense agreements related primarily to
diagnostic technologies, net of expenses due, in some cases, to
third-party licensors. This royalty income was previously reported
as revenue. Since the completion of the Company's Reorganization
Plan and the discontinuance of all other diagnostic operations,
however, this income is no longer considered to be central the
Company's business and has therefore been reclassified as Other
Income in all years presented. The net royalty income reported
under Other Income was $1,395,000, $1,582,000 and $832,000 in
1996, 1995, and 1994, respectively.
Other Income, Net in 1996 includes $3,250,000 received from Abbott
Laboratories under an amendment to a sublicense agreement which
granted Abbott a fully paid-up sublicense for the non-exclusive
diagnostic use of certain HIV-related technology. Also included in
Other Income in 1996 is $500,000 received from BioNebraska in
exchange for the Company's share in a joint venture (see Note 6).
The Company receives rental income on certain property from
various tenants and sub-tenants under noncancelable leases which
extend to 2006. The Company received $362,000, $286,000 and
$458,000 in rental income in 1996, 1995 and 1994, respectively.
The Company records the expenses associated with the rental income
by aggregating the expenses with the rental income in Other
Income, Net on its Statement of Operations. The Company incurred
approximately $54,000, $75,000 and $420,000 in expenses during
1996, 1995 and 1994, respectively, in regard to these leases.
Future minimum rental income on noncancelable operating leases for
the year ended December 31, 1996 are as follows:
1997 621,000
1998 477,000
1999 483,000
2000 517,000
2001 517,000
Thereafter 2,621,000
---------
Total future minimum rental income $5,236,000
==========
15. COMMITMENTS AND CONTINGENCIES
Leases - The Company has entered into operating lease agreements
for its executive offices, warehouse, research laboratories,
manufacturing facilities, and office equipment. The base lease
periods range from two to ten years. During 1996, the Company
extended the lease for its Worcester facility, housing its
executive offices, research laboratories, and manufacturing
facilities one year to December 31, 1997 and extended the lease
for its warehouse through April, 1997. Costs incurred under the
operating leases are recorded as rent expense and totaled
$1,105,000, $1,161,000 and $1,406,000 for real estate and $3,000,
$9,000 and $632,000 for equipment in 1996, 1995 and 1994,
respectively. As of December 31, 1996, the future minimum lease
payments required under operating leases are $1,032,000, all of
which is payable under the Worcester facility lease through
December, 1997.
Employment and Consulting Agreements - The Company 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 $525,000. Costs
incurred and charged to operations under these contracts
aggregated $1,268,000, $1,259,000 and $2,165,000 in 1996, 1995 and
1994, respectively.
Other Agreements -During 1992, the Company paid $2,300,000 to
Alfa-Laval, a Swedish company, to acquire its fibronectin binding
technology for use in mastitis vaccines and certain other
products. In 1995 the Company recorded $700,000 in expenses for
the granting of certain patents on this technology. The agreement
provides for additional payments to Alfa-Laval conditioned upon
the first commercial sale of future vaccines at $1,333,000 per
vaccine, and up to $1,300,000 conditioned upon the granting of
additional patents in the United States and Europe on the
technology acquired.
Contingencies - In November 1993, five civil actions were
commenced in the United States District Court, District of
Massachusetts, against the Company, certain of its officers, and
in three of the actions, the Company's former auditors. The
actions were instituted by persons alleging to be shareholders of
the Company and to be representative of a class of shareholders
claiming damages resulting from alleged violations of securities
laws by defendants in connection with the 1992 results of the
Company and the restatement thereof. The actions have been
consolidated under the caption In Re: Cambridge Biotech
Corporation Securities Litigation, Civil Action No. 93-12486-REK.
In February, 1996 the plaintiffs agreed to settle all claims
against the Company and the individual defendants and pleadings
were filed with the United States District Court for the District
of Massachusetts for the purpose of approving the settlement.
Under the terms of the Settlement, the class members received
1,250,000 shares of Aquila common stock and are entitled to
receive 90% of any recoveries from prosecution of claims, if any,
against the Company's former auditors. The Company is entitled
to receive 10% of any recoveries from prosecution of such claims.
Prosecution of claims against the Company's former auditors is an
ongoing matter.
In March 1995, an Adversary Proceeding No. 95-4074 was commenced
in the Bankruptcy court, by Institut Pasteur and Genetic Systems
Corporation alleging patent infringement and asking for damages
and injunctive relief. The Company filed an answer and
counterclaim denying the plaintiff's allegations and alleging a
breach by Institute Pasteur of its license agreement with the
Company. On September 1, 1995, the Bankruptcy Court issued a
summary judgment upholding the Company's license under two patents
issued to Institut Pasteur to commercialize diagnostics tests for
the HIV-2 strain of the AIDS virus. The Bankruptcy Court also
ruled that the Company's HIV-1 Western blot confirmatory test
infringes a third patent issued to Institut Pasteur, and enjoined
the Company from the manufacture and sale of the HIV-1 Western
blot test. On January 5, 1996, the Bankruptcy Court lifted its
injunction with respect to the Company's production and sale of
the HIV-1 Western blot kits. The Court ruled that the Company has
a license for the HIV-1 patent and must pay a royalty on related
sales. Institut Pasteur has appealed the Bankruptcy Court's
ruling. While the final outcome of these patent issues cannot be
determined with certainty, the Company no longer practices the
technology that is the subject of these proceedings, as it is part
of the Retroviral business that was sold to bioMerieux. Further,
the Company has not indemnified bioMerieux against any adverse
decision on this appeal, other than any liability arising out of
the conduct of the Company prior to the sale of the Retroviral
business to bioMerieux. Accordingly, based on the information
management currently possesses, management believes any settlement of
this appeal will not have a material adverse effect on the Company's
financial position or results of operations.
Institut Pasteur and Pasteur Sanofi Diagnostics (together
"Pasteur") objected to the confirmation of the Company's
Reorganization Plan, arguing that the treatment under the Plan of
certain technology cross-licenses was improper. The Bankruptcy
Court overruled the objection and Pasteur appealed. The U.S.
District Court for the District of Massachusetts dismissed the
appeal and affirmed the Confirmation Order on September 27, 1996.
Pasteur appealed this judgment to the U.S. Court of Appeals for
the First Circuit. By order dated January 17, 1997, the Court of
Appeals affirmed the judgment of the District Court (affirming the
Confirmation Order). To date, Pasteur has not sought further
review of the Confirmation Order, although the time to file a
petition with the U.S. Supreme Court does not expire until August
17, 1997.
In July of 1994, the Securities and Exchange Commission issued an
Order Directing Private Investigation in the matter of Cambridge
Biotech Corporation, investigating matters pertaining to the
Company's financial statements, its public filings and the
offerings of its securities. The Company cooperated fully with
the investigation, which concluded on or about October 17, 1996,
with issuance by the SEC of an order instituting public
administrative proceedings pursuant to Sec. 8A of the Securities
Act of 1933 and Sec. 21C of the Exchange Act of 1934. The Company
consented to the issuance of the order without admitting or
denying any wrongdoing, that it cease and desist from
violations of the anti-fraud, corporate reporting, and books and
records provision of the federal securities laws.
The Company has 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
the Company's financial position, liquidity, or results of
operations.
16. SHAREHOLDERS' EQUITY
Capital Stock - In the first quarter of 1994 the Company issued
2,589,100 shares in connection with a shelf offering. The
offering raised net proceeds of $6,635,000 after deducting legal
costs and other expenses associated with the offering.
The Company has 5,000,000 shares of preferred stock and 30,500,000
shares of common stock authorized at December 31, 1996. No terms
have been established for the preferred stock and none has been
issued. 5,000,000 shares of Aquila common stock have been issued,
and 10,526 are in treasury.
Employee Incentive Stock Plan - On October 27, 1994, the Company's
plan to institute a retention bonus plan for some of its employees
was approved by the United States Bankruptcy Court for the
District of Massachusetts. The plan called for bonuses to be paid
in stock of the reorganized Company upon emergence from Chapter 11
reorganization. The Company recorded compensation expense of
$830,000 and $627,000 in 1995 and 1994, respectively. Shares of
Aquila common stock totaling 111,790 were issued under the
retention bonus plan shortly after the consummation of the Plan.
Exchange of Shares - pursuant to the Reorganization Plan, an
exchange of CBC common shares for Aquila common shares was
effected on October 21, 1996, in the form of 1 Aquila common
share issued for every 7.6 CBC common shares held of record on
that date. In total, 3,442,305 shares of Aquila common were issued
in exchange for 26,057,006 shares of CBC common. All weighted
average shares and per share data have been restated to reflect
the exchange of shares as of the earliest period presented.
17. EMPLOYEE BENEFITS PLAN
The Company 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 plan compensation, as permitted by law or as limited by the
plan administrator. Prior to the Chapter 11 filing, the Company
matched 50% of the first 6% of an employee's compensation, if
contributed to the plan. Any contributions made by the Company
vest over a three-year period. The amount charged to operations
for the plan was $93,000 in 1994. The Company suspended its
matching contribution on the date of the Chapter 11 filing, but
reinstituted the matching contribution beginning in January, 1997.
Currently, the Company matches 25% of the first 6% of the
employees compensation, if contributed to the plan. Any
contributions made by the Company are vested at 33% for each year
of employment.
Stock Option Plans - Prior to the consummation of the Plan, the
Company had three stock option plans, each of which was canceled
under the Plan.
At December 31, 1996, the Company had two stock option plans.
Under the 1996 Stock Award and Option Plan (the "Employee plan"),
the Company 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"),
the Company 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 1996 the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), Accounting for Stock Based
Compensation. SFAS 123 requires that companies either recognize
compensation expense for grants of stock, stock options and other
equity instruments based on fair value, or provide pro forma
disclosure of net income and earnings per share in the notes to
the financial statements. The Company adopted the disclosure
provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly,
no compensation expense has been recognized for options granted at
or above fair market value under these plans. Had compensation
expense for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates, as
calculated in accordance with SFAS 123, the Company's net income
or loss and earnings per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net Income Earnings Per Share Net Loss Earnings Per Share
---------- ------------------ -------- ------------------
As Reported $5,960 $1.57 $(4,942) $(1.44)
Pro Forma 5,529 1.45 (5,199) (1.51)
The effects of applying SFAS123 in this pro forma disclosure are
not indicative of future amounts. SFAS123 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
1996 and 1995 is $2.65 and $2.47, respectively. A pro forma impact
is reflected for 1995 related to options granted in that year but
canceled and reissued in 1996. 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
1996 and 1995, respectively; expected volatility of 72.94% in both
years, risk-free interest rates of 6.19% and 5.41%, expected lives
of 4 years for all options grants, and no dividend yield.
A summary of the status of the Company's two stock option plans as
of December 31, 1996 is presented below:
Weighted Average
Shares Exercise Price
------ ----------------
Options granted below
fair market value 173,405 $2.80
Options granted at
fair market value 551,750 $4.50
Options forfeited 12,500 $4.50
------- -----
Balance, December 31, 1996 712,655 $4.09
The following table summarizes information about Aquila stock
options outstanding at December 31, 1996:
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Price at 12/31/96 Price
Life
-------- ----------- ----------- --------- ------------ ---------
$2.80 173,405 8.9 years $2.80 173,405 $2.80
4.50 539,250 9.2 years 4.50 165,625 4.50
------- --------- ----- ------- -----
$2.80 to 712,655 9.1 years 4.09 339,030 3.63
$4.50
At December 31, 1996, there were 1,487,345 options available to
be granted. Options available for exercise and weighted average
exercise price are not presented for 1995 and 1994, as all options
outstanding on those dates have been canceled pursuant to the
Plan. Therefore, the Company believes the presentation of that
information would not be meaningful. Compensation expense of
$50,000 was recorded in 1996 related to options granted to a
consultant during the year.
18. AGREEMENTS
The Company has a comprehensive agreement with SmithKline Beecham
p.l.c. ("SmithKline") which allows SmithKline to use the Company's
proprietary Stimulon adjuvant ("QS-21") in numerous vaccines
including hepatitis, lyme disease, human immunodeficiency virus
(HIV), influenza and malaria. The agreement grants certain
exclusive worldwide rights in some fields of use, and co-exclusive
or non-exclusive rights in others. The Company recognized
$3,500,000, $3,500,000 and $3,000,000 in license fees under this
agreement during 1996, 1995 and 1994, respectively. The agreement
calls for royalties to be paid by SmithKline on its future sales
of licensed vaccines which include Aquila's adjuvant. The terms
of the collaborative agreement with SmithKline include funding
through 1998.
The Company has product development agreements with Virbac S.A.
and supply agreements with Virbac S.A and Virbac Inc., the U.S.
subsidiary of Virbac S.A. (together, "Virbac") which cover the
ongoing collaboration between Virbac and the Company relating to
the development of products for feline immune deficiency virus
("FIV") and bovine mastitis and the supply of vaccine and
adjuvant for feline leukemia ("FeLV"). The Company recognized
$1,177,000, $581,000 and $472,000 in revenues under the product
development agreements during 1996, 1995 and 1994, respectively.
In addition, $895,000 and $2,072,000 were included in deferred
revenue at December 31, 1996 and 1995, respectively, related to
the product development agreements. Sales to Virbac under the
terms of the supply agreements were $883,000, $546,000 and
$662,000 in 1996, 1995 and 1994, respectively.
As part of its program to develop, manufacture and market products
for detection, prevention and treatment of human and animal
infectious diseases, the Company has entered into various
agreements with the National Institute of Health ("NIH"). Such
agreements provide the Company with research and development
funding through 1996, assuming, in certain cases, achievement of
mutually defined milestones. Revenue recognized under these
agreements amounted to $296,000, $596,000 and $787,000 in 1996,
1995 and 1994, respectively.
19. MAJOR CUSTOMERS
SmithKline is the Company's principle source of research and
development revenue. Research and development revenues from
SmithKline represented 53% , 61% and 60% of the Company's total
revenue in 1996, 1995 and 1994, respectively. SmithKline also
purchases certain clinical trial material from the Company for use
in its product development programs.
Virbac represents a substantial portion of the Company's product
sales and research and development revenue. Revenue from
development agreements with Virbac represented 18%, 10% and 9% of
total revenue in 1996, 1995 and 1994, respectively. Product sales
to Virbac represented 13%, 10% and 12% of total revenues in 1996,
1995 and 1994, respectively.
20. SEGMENT INFORMATION
The Company operates in one industry segment consisting of the
development, manufacturing and marketing of products that modulate
the immune system to control or prevent infectious diseases and
cancer. Total export sales were approximately $3.1 million, $4
million and $3.7 million in 1996, 1995 and 1994, respectively, of
which $1,344,000, $238,000, and $286,000 were from continuing
operations in 1996, 1995 and 1994, respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AQUILA BIOPHARMACEUTICALS, INC.
March 31, 1997 By:__/s/ Alison Taunton-Rigby__
Alison Taunton-Rigby
President, (Principal
Executive Officer)
March 31, 1997 By:__/s/ Stephen J. DiPalma
Stephen J. DiPalma
Vice President-Finance,
Treasurer
and Chief Financial Officer
(Principal Financial Officer)
March 31, 1997 By:__/s/ Paul Foulkrod
Paul Foulkrod
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934 this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated:
Signature Title Date
/s/ Alison Taunton-Rigby_______ Director March 31, 1997
Alison Taunton-Rigby
/s/ Elliott D. Hillback, Jr.__ Director March 31, 1997
Elliott D. Hillback, Jr.
/s/ John M. Nelson__________ Director March 31, 1997
John M. Nelson
/s/ Keith J. Dorrington______ Director March 31, 1997
Keith J. Dorrington
/s/ Jeffrey T. Beaver____ Director March 31, 1997
Jeffrey T. Beaver
