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
For the fiscal year ended December 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-12081
AQUILA BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (508) 628-0100 04-3307818
(State or Other Jurisdiction (Registrant's telephone (IRS Employer
of Incorporation or number, including Identification No.)
Organization) area code)
175 Crossing Boulevard, Framingham, MA 01702
(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 6,850,836 shares of voting stock held by non-
affiliates of the registrant as of March 19, 1999 was approximately
$16,270,736 based on the last sale price of such stock on such date.
Indicated 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, 1999: 6,996,734
shares.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the definitive proxy statement in connection with the annual meeting
of shareholders to be held May 13, 1999 are incorporated by reference into Part
III of Form 10-K.
FIGHTING DISEASE THROUGH IMMUNE MODULATION
PART I
Item 1. Business.
Introduction
Aquila Biopharmaceuticals, Inc. ("Aquila" or the "Company") engages in
discovery, development and commercialization of products to prevent, treat or
control infectious diseases, autoimmune disorders and cancers. Advances in
biotechnology and immunology have enabled scientists to develop a new
generation of products that specifically modulate the immune system to produce
an effective immune response. These technology advances are causing
significant changes in the market for these products. Historically, these
products were generally low priced because they were used to prevent disease in
healthy people (prophylaxis) and, due to the lack of product differentiation,
companies generally competed on price. However, development of products
based on our current understanding of the immune system involves significant
technological innovation that through patenting can result in increased profit
margins. The market potential of these products is high since current
understanding of the immune system allows expansion of the market to address
new areas and the development of safer, more effective substitutions for older
products. In addition, in today's approaches to disease management and with
current cost management strategies, immunological products have been
recognized as very effective contributors to controlling the total medical costs
of certain diseases.
Aquila sells an animal healthcare product and conducts research and
development involving two proprietary core technologies, the Stimulon(TM)family
of adjuvants and the CD1 antigen presentation system. The Company is
currently advancing three products through clinical trials and supporting the
clinical development efforts of six corporate partners involving nine other
products.
The Stimulon(TM) family of adjuvants has been shown to enhance the quality and
the quantity of the immune response to a variety of antigens, both in
pre-clinical studies and in a number of human clinical trials. Use of the
Stimulon(TM) adjuvants is allowing scientists to design products that can
activate specific T cell responses and result in a new highly effective class of
vaccines for both therapeutic and prophylactic applications. New applications
include diseases involving poorly immunogenic antigens such as polysaccharides
or populations, such as the elderly, whose immune systems have deteriorated
so that they do not respond to traditional approaches. New therapeutic
products for treating people with diseases such as malaria, chronic hepatitis
infection, acquired immune deficiency syndrome ("AIDS") or various cancers,
where a cytotoxic T lymphocyte ("CTL") response is thought to be essential,
may be possible using the Stimulon(TM) adjuvants.
The CD1 antigen presentation system involves a powerful new approach to the
development of immunological products. Until recently, it was believed that
antigen presenting cells of the immune system processed and presented antigens
as peptides through two mechanisms, the Class I and the Class II MHC
pathways. Recent discoveries have demonstrated that there is a third pathway,
called the CD1 pathway, through which antigens with lipid tails are presented.
Through its acquisition of VacTex, Inc., which operates as a wholly owned
subsidiary, Aquila has exclusive license to this technology and is using the CD1
technology to advance the development of proprietary products to prevent and
treat infectious diseases, cancers and autoimmune disorders.
Aquila's product development programs include the Quilimmune(TM) human health
products, the Quilvax(TM) products for animal health and the CD1 products.
Aquila's animal health product, Quilvax-M(TM) for controlling bovine mastitis,
has undergone extensive testing in bovine immunogenicity and challenge trials.
The Company plans to initiate formal USDA licensing trials in 1999. Phase II
clinical trials of Quilimmune-P(TM) for preventing Streptococcus pneumoniae ("S.
pneumoniae") infections in people over the age of 65 are underway. The initial
Phase II clinical trial for this product involving a single immunization showed
no consistent, statistically significant differences between the product
formulations and the control. However, the safety profile of Quilimmune-P(TM)
was good and the product will be evaluated in additional clinical trials using a
second immunization. A third potential product, to help control malaria
infections incorporating the antigen SPf66 and the Stimulon(TM) adjuvant QS-21,
has been studied in Phase I clinical trials and shown very compelling
immunological results. The Company is planning to evaluate the product's
potential to provide protection from malaria infection. The Company's first
CD1 product, designed to prevent TB infection, is in animal testing. Initial
studies have shown that CD1- TB has the potential to significantly reduce
colony bacterial counts after TB challenge.
The Company's corporate partners are SmithKline Beecham p.l.c., Wyeth-
Lederle Vaccines and Pediatrics, a business group of Wyeth-Ayerst
International, Inc., a subsidiary of American Home Products Corporation,
Pasteur Merieux Connaught, Bristol Myers Squibb (Progenics
Pharmaceuticals, Inc.), VaxGen, Inc., and NABI.
Scientific Background
The human immune system is made up of several different cell types including
antigen presenting cells ("APCs"), B cells and T cells. In general, the role of
APCs is to process antigens from pathogens such as viruses, bacteria or
parasites into smaller fragments and to present the resulting proteins
(peptides), lipids, or carbohydrates to T cells. Antigens can be processed
by APC's through three pathways, the MHC Class I, MHC Class II or the CD1
pathway. Peptide fragments from antigens processed through the Class I
pathway are displayed on the surface of the APC by an immune system protein
called the MHC Class I protein and typically result in a cellular immune
response. In the cellular response, a type of T cell called a cytotoxic T
lymphocyte (CTL) is activated. These cells recognize and kill infected cells
or cells transformed by cancer. T helper cells and the cytokines they produce
are also important in generating a CTL response. 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. A different response, called the
humoral response, results when antigens processed by the Class II pathway
are displayed by MHC Class II proteins. 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. Two
populations of T helper cells have been identified, Th-1 and
Th-2. T helper cells secrete biologically active molecules called cytokines,
which mediate the effects of immune system cells. Th-1 and Th-2 T-helper cells
secrete different types of cytokines and promote the synthesis of different
classes of antibodies. The antibodies produced by B cells will bind to and can
neutralize the pathogens, bacteria, parasites and viruses, which have invaded
the body. In the third pathway, antigens with lipid components processed
through the CD1 pathway, result in a cellular response similar to that of the
MHC Class I pathway.
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 for some pathogens, 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. Alternately the DNA coding for proteins can be used
in DNA vaccines. Other specific cellular components have been used to
stimulate disease specific responses, including proteins isolated from the
pathogen itself, synthetic peptides, carbohydrates and lipoproteins.
When these new subunit vaccines were first used, it was found that while a
pathogen specific immune response was stimulated, this response was often 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
have been coupled with pathogen specific antigen approaches. These methods
for modulating the immune system include conjugation of the antigen to a
carrier protein, the use of viral or bacterial vectors to carry specific genes,
the use of cytokines or lymphokines to stimulate the immune system and the
use of adjuvants. Carrier proteins such as keyhole limpet hemocyanin (KLH)
or the toxoids from diphtheria, tetanus and cholera have been used
effectively. Viral vectors such as vaccinia, canary pox, or the bacteria BCG
are under evaluation as carriers of disease specific genes to determine
whether they stimulate a protective immune response. Adjuvants that have
been used or that are in development include aluminum hydroxide (alum); MF59,
a product of Chiron Corporation and its affiliates ("Chiron"); monophosphoryl
lipid A (MPL), a product of Ribi ImmunoChem Research, Inc. ("RIBI"); LeIF, a
product of Corixa Corporation ("Corixa"); Adjumer, a product of AVANT
Immunotherapeutics Inc. ("Avant"); and saponins from Quillaja saponaria such
as QS-21. These adjuvant technologies are not all the same, affecting the
humoral and cell mediated pathways differently. Aquila's StimulonTM family of
adjuvants, QS-21 and QS-7, are purified, defined molecules, derived from a
natural source. They stimulate antigen specific responses and have been shown
to promote both antibody and CTL immune responses in animals.
Core Technologies
Aquila and its corporate partners are developing new products based on two core
technologies, the Stimulon(TM) family of adjuvants that specifically enhance
antibody and CTL responses, and proprietary CD1 processed antigens as well as
other antigens specific for the target disease.
The typical development pathway for a disease specific product includes antigen
identification, preparation of research quantities of the antigen, formulation
studies, demonstration of a biological effect of a product containing the
antigen and development of commercial scale, product production procedures.
These developmental efforts can include those primarily accomplished within
the Company or technology licensed by the Company from outside sources, or a
combination of both approaches.
Aquila's ability to develop and produce proprietary disease specific antigens
allows it to develop products targeted at specific applications and populations.
Company scientists have scientific expertise in: (1) recombinant DNA cloning
methods; (2) mammalian, insect and bacterial cell expression; (3) extraction and
purification of compounds from natural sources and (4) carbohydrate and
polysaccharide production. Furthermore, Company scientists have
demonstrated their expertise with a variety of antigens from both viral and
bacterial pathogens including those that require high level bio-containment.
The CD1 Antigen Presentation System
In a breakthrough discovery, Michael Brenner, M.D. and Steven Porcelli, M.D.,
of Brigham and Women's Hospital and Harvard Medical School, found that lipid
containing antigens, in addition to proteins, can be processed and presented
to the immune system by antigen presenting cells. These antigens are presented
by a newly recognized antigen presenting system called the CD1 pathway. The
CD1 system involves a family of conserved mammalian proteins that are related
to the MHC molecules. The CD1 proteins bind and present antigens to T cells
that are fundamentally different than those presented through the MHC system.
The CD1 presented antigens contain a lipid component as part of their chemical
structure. Lipid containing antigens presented through CD1 stimulate the
production of additional cytotoxic T cells that recognize and kill invading
pathogens.
Since the initial discovery of the CD1 system, a large and growing body of
research has further characterized the CD1 pathway, suggesting that modulating
the immune system with lipid antigens has therapeutic potential for a broad
range of diseases such as tuberculosis, type I diabetes, and cancer. The
research has shown that the lipid antigen pathway can be used to activate
anti-tumor responses. Recently researchers have determined the crystal
structure of mouse CD1 and the model provides a structural rationale that
supports its biological activity. The three dimensional structure shows a
binding groove on CD1 that is attractive to lipids due to its hydrophobic
nature. Researchers have found that certain lipids are recognized by the same
T cell receptors as their peptide counterparts. CD1 lipid antigen presenting
proteins resemble MHC proteins in a number of ways, and it appears that they
arose from the same ancestral lineage as the MHC proteins. These lipid and
glycolipid antigens provide the opportunity for the discovery of a whole new
set of products in infectious diseases, cancer and autoimmune disorders.
The Stimulon(TM) Family of Adjuvants
QS-21 is the lead Stimulon(TM) adjuvant. It is a natural product, purified from
the bark of a tree which grows in South America, called Quillaja saponaria. Up
to 10% of the bark from Quillaja is composed of saponins of which QS-21 is
typically one of the more predominant. The bulk bark extract is available in
the United States. 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
micro-particles that are used in many experimental product 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 drug preparation, the FDA does not require licensure of
facilities used for its manufacture. A second Stimulon(TM) 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. All
patents include the use of all of these molecules as adjuvants. See "Patents
and Proprietary Rights".
The use of Stimulon(TM) adjuvants improves the quality of the immune response.
Addition of QS-21 to antigens will generally broaden the type of antibody
produced, increase the titer, or amount, of antibodies produced, and stimulate
cell mediated responses. It is potent and active at microgram doses when used
with many types of antigens, including recombinant proteins derived from
viruses and bacteria and free polysaccharide antigens from bacterial pathogens.
An unusual property of QS-21 not shared by other adjuvants is its ability both
to increase significantly the antibody response to free polysaccharide antigens
and to boost the titer further with a subsequent vaccination.
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. Aquila and its collaborators have completed over 30 studies to
date, and more than 1500 subjects have received QS-21 in various formulations.
These studies have shown that the addition of QS-21 to product formulations
improves the immune response to certain antigens, as evidenced by increased
antibody titer.
Strategy
Aquila's objective is to create and commercialize products that modulate the
immune system to prevent, control or treat infectious diseases, autoimmune
disorders and cancers. The Company intends to exploit its expertise in adjuvant
and antigen research to create products and develop them through Food and
Drug Administration ("FDA") or United States Department of Agriculture
("USDA") licensure, and to market products to end users, resellers or partners
based on market attributes. In addition, Aquila intends to support its
corporate partners' product development programs, further develop its
manufacturing capacity, and to in-license and develop related technology.
Exploit Expertise in Immunology
Aquila has developed unique expertise in understanding the molecular
mechanisms involved in stimulating and tuning the immune response to specific
antigens to allow the development of safe and effective therapeutic and
prophylactic products. The Company intends to continue to integrate its
proprietary core technologies and to identify targeted applications of its
technology. In addition, the Company plans to broaden its expertise in research
and development involving different antigens including lipid antigens,
recombinant proteins, peptides, polysaccharides and other classes of antigenic
molecules. Aquila's strategy is to acquire related products and technologies
to supplement its scientific expertise, its capabilities and its product
portfolio.
Create and Develop Products
Aquila has established a large number of corporate partnerships and a
significant number of products are being developed through these partnerships.
However, Aquila believes that it can also develop and retain significant value
through its own product development efforts. The Company has three products
in clinical development: (i) Quilvax-M(TM) to control bovine mastitis for which
final licensing trials are planned in 1999; (ii) Quilimmune-M(TM) for
controlling malaria, for which Phase I trials have been completed; and (iii)
Quilimmune-P(TM)for preventing pneumococcal infections in the elderly for
which Phase II trials are underway. The Company has completed the development
and licensure of one product, Quilvax-FeLV(TM) for preventing leukemia in cats.
See "Product Development Programs".
Aquila has a large number of ongoing academic collaborations involving other
antigens. A number of these are cancer vaccines. In certain cases the Company
has options to license related technology should it wish to accelerate the
development of these products. The Company intends to develop human
products primarily but will exploit unique, significant product opportunities in
animal health.
Support Corporate Partners Programs
Aquila has entered into collaborative agreements with SmithKline Beecham,
p.l.c., Pasteur Merieux Connaught, Wyeth-Lederle Vaccines and Pediatrics,
VaxGen, Inc., NABI, Bristol-Myers Squibb and Progenics Pharmaceuticals, Inc.
as well as a number of other biotechnology companies. Aquila intends to use
these partnerships to speed discovery and development of certain products
which the Company does not have the resources or skills to develop. These
collaborations allow the Company to focus its own efforts on products which
have different markets than those of interest to large pharmaceutical companies.
The Company has a number of potential licensing discussions underway and
intends to continue to selectively license its technology. See "Corporate
Partner Programs".
Develop Manufacturing Capacity
Aquila has retained rights to the manufacture of QS-21 on a worldwide basis in
all of its licensing agreements, and has been producing QS-21 for clinical
trials for all of its partners and its product programs. In addition, the
Company operates a small production facility to supply FeLV antigens and
vaccine to its corporate partner Virbac S.A. Aquila intends to continue to
develop manufacturing expertise and capacity to allow it to retain value from
the products that it develops.
In-license Related Technology
Aquila has been and will continue to be opportunistic by in-licensing products
and technology related to immune modulation to supplement its product
pipeline. In addition to expanding the product portfolio, this strategy will
allow the Company to capitalize on newly developed technologies which are
synergistic with the Company's existing technology base.
Product Development Programs
Aquila's strategy is to develop products itself and in partnership with other
companies. The Company has six products in development or commercialized.
Quilimmune(TM) & Quilvax(TM) Product Development
Product Market Status Partner
Quilvax-M(TM)
Product to control bovine 31 million milk Licensing trials Aquila, N.
mastitis cows in the U.S. start in 1999. America
(S. aureus & E. coli) & Europe. Virbac S.A.
Europe.
Quilimmune-M(TM) (SPf66) 1-2 billion persons Phase II trials Collaboration
Product to control malaria at risk. in 1999. with World
(Plasmodium falciparum) Health
Organization.
Quilimmune-P(TM) Adults>=65 years Phase II trials Aquila
Product to prevent ~34 million in U.S. ongoing. worldwide
pneumococcal infections rights.
Quilvax-FeLV(TM) ~ 15 million cats On market, Virbac S.A.
Product to prevent feline vaccinated per year. Leucogen(R), worldwide
leukemia (Europe); rights.
Genetivac(R),
(U.S.).
CD1 - TB Affects 1/3 of world's Preclinical Aquila.
population. research.
CD1 - Chlamydia 14 million young adults Research Aquila.
at risk per year, U.S.
Quilimmune-P(TM) for the Prevention of Pneumococcal Infections
Infections by S. pneumoniae cause serious disease in the elderly. Healthy adults
are not typically at risk for developing significant disease following exposure
to S. pneumoniae. There are over 80 recognized serotypes of pneumococci, each
with varying geographic and age-group prevalence. Quilimmune-P(TM) is
intended to be used to prevent pneumococcal infections in the elderly.
There are approximately 34 million people over the age of 65 in the United
States ("U.S."), and an additional 36 million adults with immune compromising
conditions who are at risk for developing disease caused by S. pneumoniae.
Various strains of S. pneumoniae are responsible for most community-acquired
cases of pneumonia (500,000 cases per year) and are the second most common
cause of bacteremia (50,000 cases per year, with 25% mortality). It is estimated
that S. pneumoniae causes 40,000 deaths in the elderly and
immunocompromised adults each year.
The currently available vaccines, which were developed and approved in the
early 1980s, cover the 23 serotypes which cause about 90% of infections in the
U. S. and Europe. The two vaccines approved in the U.S. are composed of
purified capsular polysaccharides from each of the 23 serotypes. These
vaccines are under-utilized by the elderly for a number of reasons. Reports in
the medical literature and confirmed in Aquila's trials indicate that, using the
current vaccines, only 60 - 70% of healthy volunteers and 50 - 60% of the
elderly respond with a 2-fold or greater increase in the level of specific
antibody. 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. In addition, the antibody titers drop over a
number of years. Typically after 3 or more years, the effective levels of
antibodies in vaccinees are quite low. Furthermore, data has recently been
presented suggesting that the ability of the vaccine to elicit functional
antibodies decreases with age of the vaccine recipient. Alternatively,
physicians have an option of treating patients who develop pneumonia with
antibiotics. However, strains of S. pneumonia that are resistant to several
classes of antibiotics have been isolated with increasing frequency over the
past few years. With increased antibiotic resistance, the option of using
antibiotics may not be 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 Quilimmune-P(TM), which
contains 23 different capsular polysaccharides and QS-21, improves the immune
response over that seen with the approved vaccine. Many polysaccharides to
which elderly mice do not typically respond become immunogenic with
Quilimmune-P(TM). In addition, antibody titers to many serotypes increases.
This effect was most pronounced following two immunizations.
Aquila has completed a Phase I clinical trial involving a single immunization in
healthy young or middle aged adult volunteers. Quilimmune-P(TM) was
immunogenic in a fashion comparable to the control. In addition, subjects who
received Quilimmune-P(TM) formulated with lower than normal doses of antigen
responded in a similar way. These results were not unexpected since healthy
adults, not elderly people, were used as subjects for the study.
In a series of Phase II studies which began in 1998, Aquila is evaluating
Quilimmune-P(TM) formulations that were shown to be well tolerated in the Phase
I studies. The first study, completed in October 1998, was a prospective,
randomized, double blind comparison of a single immunization of Quilimmune-
P(TM) to the currently licensed vaccine product in an elderly population. The
clinical endpoints were safety, quality and quantity of the immune response.
Quilimmune-P(TM) was generally well tolerated; however, the differences between
Quilimmune-P(TM) and the control vaccine in the frequency of a two-fold or
greater increase in antibody titer following the single immunization were not
consistent, and only reached statistical significance with one serotype. The
Company plans to continue evaluation of Quilimmune-P(TM) in a Phase II clinical
study evaluating a second immunization twelve months following the first.
Quilvax-M(TM) for the Control of Bovine Mastitis
Bovine mastitis is an inflammation of a dairy cow's udder. Two pathogens
cause the majority of infections resulting in mastitis: Staphylococcus aureus
("S. aureus") and Escherichia coli ("E. coli"). Mastitis is the most costly
disease affecting the dairy industry. The economic impact in the United States
of bovine mastitis is estimated to be $1.8 billion per year. According to the
National Mastitis Council, losses per cow per year are $184 (there are about 9.5
million dairy cows in the U.S.). Mastitis in dairy cows results in lower milk
quality and this lowers the economic value of the milk. Many times when an
animal develops mastitis, it is simply culled from the herd. As a result, the
farmer incurs costs due to animal treatment and replacement. Dairies pay a
premium for high milk quality.
There are a number of bovine mastitis vaccines on the market, but these are
directed towards E. coli only. 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 control of mastitis.
The S. aureus component of Quilvax-M(TM) is based on a patented cell surface
protein from S. aureus called fibronectin binding protein. Fibronectin binding
protein is primarily responsible for attachment of S. aureus to host tissue, in
this case the epithelium of the bovine mammary gland. It is believed that this
attachment is a critical step in the disease process and results in the
inflammation and tissue destruction that characterizes mastitis. In the
Company's Quilvax-M(TM) program, fibronectin binding protein is used as the
target antigen for development of a beneficial immune response. Antibodies
directed against fibronectin binding protein may block the attachment of S.
aureus to mammary gland tissue and may help kill infected cells through
antibody-dependent mechanisms.
The Company has been making use of the ability to experimentally cause S.
aureus mastitis by direct challenge of dairy cattle with bacteria deposited in
the mammary gland. In a typical challenge experiment, the response of several
groups of animals, both treated and non-treated controls, to a S. aureus
challenge are compared. Recent studies indicate that Quilvax-M(TM)is safe and
that it reduces the inflammatory response that develops upon infection.
Measurement of parameters that determine milk quality and the price dairy
producers would receive for their milk indicates that milk from animals
vaccinated with Quilvax-M(TM) would have a higher value than that from non-
treated controls.
The E. coli portion of Quilvax-M(TM) is modeled after the E. coli mastitis
products currently on the market. The marketed products make use of a mutant
strain of E. coli that has slightly altered surface carbohydrate structure.
Quilvax-M(TM) makes use of a similar E. coli mutant. Biochemical anlysis of
Quilvax-M(TM) and the marketed products indicate that the amount of active
component directed against E. coli present in Quilvax-M(TM) is similar to or
exceeds that present in the marketed products.
In order to receive authorization from the USDA to market Quilvax-M(TM), the
Company must conduct formal efficacy trials for both the S. aureus and E. coli
components of the product. Following successful completion of these studies, a
formal safety study using the product on working dairy farms is required. The
Company believes it could add a streptococcal component in a next generation
product.
The research costs are 50% funded by Virbac. The Company has retained
exclusive marketing rights in North America while Virbac has exclusive
marketing rights in Europe. The parties share marketing rights in the rest of
the world.
Quilimmune-M(TM) for the Control of Malaria
According to estimates in published reports, about 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 programs to develop products to control
malaria. One of the programs is a collaboration with SmithKline Beecham,p.l.c.
(see "Corporate Partner Programs").
In addition to this program, Aquila has a collaboration with the World Health
Organization (WHO) on another malaria product involving the antigen SPf66.
SPf66, a polymerized synthetic peptide developed by Dr. Manuel Patarroyo of
the Institute de Inmunologia in Bogota, Colombia, contains sequences from
proteins expressed during several stages of the parasite's life cycle. The
antigen has been tested with an alum adjuvant in several large clinical trials
in humans. Protection was achieved from malaria in two of the trials in about
30% of the adults and children. In two other trials no protection was
observed. These mixed observations could 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 immunization with Quilimmune-
M(TM). In this study, a control vaccine of SPf66 with alum (the product that
was used in the human studies) gave 25% protection, which is comparable to
the results obtained previously in humans.
A human clinical trial of Quilimmune-M(TM) has been completed. In this Phase I
trial, about 90 volunteers enrolled in five groups received the different
formulations of Quilimmune-M(TM), or the SPf66/alum product, or alum, or a
control of QS-21 alone. The clinical trial was designed as a dose escalation
study to evaluate the different formulations. Both two dose and three dose
schedules were evaluated with immunogenicity measured as a function of
antibody titer. Safety data indicated that Quilimmune-M(TM) was generally well
tolerated and very significantly increased the immune response after both two
and three immunizations compared to the SPf66/alum control. Antibody titers of
volunteers receiving Quilimmune-M(TM) were over 100 times higher than those of
volunteers receiving the SPf66/alum control. Two volunteers, however, who
received Quilimmune-M(TM) developed severe allergic reactions after the third
immunization. Such reactions occasionally occur following immunization;
these were quickly resolved following anti-allergic medication and
corticosteriod therapy. The Company intends to evaluate the protective
potential of the enhanced immunogenicity resulting from immunization with
Quilimmune-M(TM) in further trials.
Quilvax-FeLV(TM) for the Prevention of Feline Leukemia
Aquila has developed a recombinant sub-unit vaccine against the feline
leukemia virus. The product was approved in 1990 in the U.S. and 1991 in
Europe. The product is marketed by Virbac S.A. in Europe, Australia and Japan
under the tradename Leucogen(R) and Virbac S.A. has indicated that it intends to
market the product directly in the U.S. in 1999. Feline lukemia is a highly
contagious and commonly fatal disease of cats. Aquila's product was the first
recombinant vaccine ever developed against a tumor-causing virus in mammals.
A patent covering Quilvax-FeLV(TM) has been issued in the U.S. and a number of
other countries. Aquila manufactures bulk formulated product 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 feline lukemia vaccine in Europe, and in an independent
study was found to be the most effective of three leading feline lukemia
products on the market.
CD1-TB
Mycobacteria tuberculosis is one of the world's most prevalent infectious
diesease pathogens. It infects one third of all people and kills more
individuals, 2-3 million per year, than any other infectious agent. Strains
of Mycobacteria tuberculosis that are multi drug resistant have been isolated
and their frequency is increasing. Aquila's tuberculosis program is based on
research initated at the Brigham & Women's Hospital by Drs. Brenner and
Porcelli. In their research work, Drs. Brenner and Porcelli discovered that
lipid antigens of Mycobacteria tuberculosis are presented to the immune system
by CD1. Identification and characterization has show that these antigens have
lipid and carbohydrate components. Initial immunization challenge studies have
been conducted in laboratory animals using a vaccine containing a mixture of
these lipid antigens in a formulation with QS-21. Following immunization and
challenge, animals receiving the experimental vaccine had a significantly
reduced bacterial burden when compared to non-immunized controls. Our ongoing
work, a collaborative effort between Brigham & Women's Hospital scientists and
Aquila scientists, is focused on identifying specific Mycobacteria tuberculosis
antigens that provide immunological benefit and demonstrating usefulness in
animal models as a prelude to human studies.
CD1-Chl
Chlamydia trachomatis is believed to be the world's most common sexually
transmitted bacterial pathogen. In the U.S., Chlamydia trachomatis remains the
most common reportable infectious disease, and studies have linked infection by
Chlamydia trachomatis to Pelvic Inflammatory Disease and infertility. Aquila's
research effort is concentrated on antigen discovery with a particular interest
in antigens presented to the immune system by CD1.
Corporate Partner Programs
In addition to Aquila's internal product development programs, the Company
has six corporate partners who have licensed the Stimulon(TM) 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, Bristol Myers/Squibb, (Progenics Pharmaceuticals, Inc.),
VaxGen, Inc. and NABI. Three of the world's four largest vaccine
manufacturers are using Aquila's adjuvants. In return for rights to use
Stimulon(TM) 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. In addition to
corporate partners, the Company has developed a number of academic
collaborations to test potential product formulations containing QS-21.
SmithKline Beecham, p.l.c. ("SB") has licensed QS-21 for a number of
different applications. The world's leading manufacturer of Hepatitis B
vaccine, SB is aggressively marketing its existing portfolio of vaccines,
while developing new and improved products. SB has completed a number
of clinical trials of potential products containing QS-21 and is also
investigating the use of combinations of different adjuvants.
In collaboration with the Walter Reed Army Institute of Research
(WRAIR), SB 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 product formulated with
different adjuvants. The three different product 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
SBAS2, a proprietary SB adjuvant formulation containing QS-21 and other
adjuvants. The study results showed that the first formulation was only
weakly immunogenic compared to the other formulations. Following a
challenge with malaria carrying mosquitoes, the third formulation
containing QS-21, was the only one to give significant protection from
infection. SB has initiated Phase II studies in Africa.
SB is developing TA-GW, a vaccine for genital warts which is licensed
from Cantab Pharmaceuticals plc and has been reformulated with SBAS2.
Phase I studies have been completed and a Phase I/II dose ranging study is
underway. SB is planning to initiate additional studies in 1999.
SB has completed Phase II studies of a therapeutic product for treating
people chronically infected with hepatitis B, and is planning additional
studies in 1999. Phase I clinical studies of a therapeutic vaccine for treating
people with herpes infections have been completed.
Pasteur Merieux Connaught ("PMC") has licensed QS-21 for use in its
HIV vaccine programs. PMC has ongoing pre-clinical work on two
potential HIV products and has started a Phase I clinical trial to evaluate a
third HIV vaccine candidate.
Wyeth-Lederle Vaccines and Pediatrics ("Wyeth-Lederle") 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 has completed a Phase I
clinical trial using a product formulated with QS-21, and has informed the
company that it intends to conduct additional clinical studies.
Bristol Myers Squibb/Progenics Pharmaceuticals, Inc.
("BMS/P")licensed QS-21 for use in certain therapeutic products for
cancer. BMS/P's most advanced program involves a vaccine called GMK
which incorporates QS-21 with a ganglioside preparation called GM2 to
treat melanoma. The pivotal Phase III study in high risk melanoma patients
has passed the mid point in patient accrual. Another Phase III trial
commenced in 1997 and is being conducted outside the U.S. A third trial in
intermediate risk melanoma patients is planned. A second cancer product,
MGV, which contains QS-21 and the ganglioside GD2, is entering Phase
II/III trials. This product is expected to be applicable to a number of
cancers. Aquila has licensed Progenics to use QS-21 in exchange for a
license fee, an equity interest in Progenics, and royalties, and has a supply
agreement with BMS.
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 a number of Phase I clinical trials in
healthy volunteers with a product formulated with QS-21, under the
auspices of the National Institutes of Health. Volunteers received very low
doses of gp120 antigen combined with QS-21 and/or alum. These product
formulations were well tolerated and immunogenicity results were
promising. A fourth trial based on these product formulations was initiated
in late 1998 and is ongoing.
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 adjuvants. The Company is uncertain if or when NABI will
commence clinical trials using QS-21.
PRODUCT CLINICAL DEVELOPMENT STATUS
Pre-clinical Phase I Phase II Phase III On Market Partner
Research Feasibility Efficacy Licensing
Quilvax-FeLV ------------------------------------------------- Aquila/
Virbac
Melanoma (GM2) ----------------------------------------- BMS/
Progenics
Quilvax-M (TM) -------------------------------- Aquila
Hepatitis B -------------------------------- SB
Melanoma (GD2) -------------------------------- BMS/
Progenics
Quilimmune-P -------------------------- Aquila
Malaria (RTS,S)-------------------------- SB
HPV -------------------------- SB/Cantab
Quilimmune-M
(tm) (SPf66) ---------------------- Aquila/WHO
HIV-1 (gp 160) ---------------------- PMC
Herpes ---------------------- SB
Respiratory
Virus ---------------------- Wyeth
HIV -1 (gp 120)---------- VaxGen
CD1-TB ------- Aquila
CD1-Chl ---- Aquila
Manufacturing and Scale-up
As part of each Stimulon(TM) adjuvant licensing agreement, the Company has
retained the right to be the exclusive supplier of Stimulon(TM) adjuvants. The
license agreements stipulate 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 has scaled the critical steps
of the process to produce a batch size suitable for large-scale commercial
production up to 2,000,000 doses.
The FDA classifies QS-21 as a constituent material used in vaccine preparation.
As a result, the FDA does not require licensure of facilities used for the
manufacture of QS-21. Aquila believes that this classification affords
flexibility in the timing of investment in commercial manufacturing facilities.
After the safety and effectiveness of QS-21 has been demonstrated, Aquila
expects to be in a position to reasonably project the capital investment
required and can adjust the scale of manufacturing as additional products
reach the market.
The Company also currently manufactures Quilvax-FeLV(TM) antigen and
vaccine, which were licensed for sale in the U.S. by USDA in 1990 and for
European sales in the European Community ("E.C.") in 1991. The Company
produces commercial quantities at the 400 liter fermentation scale. Due to the
relocation of its facilities, Aquila is currently re-validating and re-licensing
its facilities.
Patents and Proprietary Rights
Aquila has pursued a policy of obtaining patent protection for its technologies
both in the U. S. and in selected foreign countries. The Company has filed or
has rights to a number of U.S. patents and patent applications and their foreign
counterparts. Aquila also relies on trade secrets, proprietary know-how, and
continuing technical innovation to develop and maintain its competitive
position.
Aquila's future success will depend, in part, upon its ability to develop
products and technologies and to obtain patent protection for its products and
technologies both in the U. S. 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. 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 that would interfere with
development of any of its products. There can be no assurance that Aquila will
not infringe existing or future patents owned by others; that third parties will
not bring suit against Aquila for infringement of such patents. There can be no
assurance 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 has three issued and five pending U.S. patents covering QS-21, QS-7,
and the other principal fractions of Quillaja saponaria and methods of their use
in vaccines. Comparable applications have been filed in appropriate additional
jurisdictions, sixteen of which have issued. The Company 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. patent due to process differences and formulation
techniques that avoid ISCOM formation. The Company believes that its products
do not include ISCOM formation nor make use of ISCOM technology. CSL and Seed
Capital Inc., another company with an interest in ISCOM technology, filed an
opposition with the European Patent Office ("EPO") on the issuance of Aquila's
QS-21 patent in Europe. A hearing before the EPO was held in October of
1998. The Company prevailed against all points raised in the opposition. CSL
may appeal the EPO's decision and though the Company does not believe that
CSL's claims have any merit or are likely to succeed, there can be no assurance
that the Company will prevail in any future actions taken to attack the validity
of its patents.
CD1 Antigen Presentation System
Aquila holds a license to a broad patent covering a CD1 restricted immune
response, a patent covering certain molecules presented through CD1 and has
several pending patents on the CD1 technology.
Mastitis
Aquila exclusively licensed from Alfa Laval Agri AB certain base technology
used in the bovine 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.
To date 11 patents have been issued in the U.S. related to fibronectin binding
proteins, the genes that encode these proteins, related synthetic peptides and
the use of these materials for treating infections.
Other Patents
Aquila holds U.S. patents on its Quilvax-FeLV(TM) vaccine and on drug delivery
compounds. Patents on methods of expressing and purifying proteins made in a
baculovirus expression system have issued. Aquila has a fully paid-up, royalty-
free license to U.S. Patent No. 4,734,362 and foreign counterparts (protein
purification) in the vaccine, therapeutic and related research fields. Aquila
has a fully paid-up, royalty-free license to U.S. Patent No. 4,753,873 in the
veterinary diagnostic field; and a non-exclusive sublicense to U.S. Patent No.
4,725,669 and U.S. Patent No. 5,068,174 (HIV-gp120-p27) in the vaccine,
therapeutic and related research fields. Aquila also has several issued and
pending patents in the field of Lyme Disease and Human Granulocytic
Ehrlichiosis.
Competition
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of Aquila in the U. S. 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 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 U. S. 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., Corixa, Avant and Chiron
Corporation, are developing adjuvants and antigens.
Merck Laboratories, Wyeth-Lederle, SB, PMC and possibly others are in human
clinical trials with conjugate pneumococcal vaccines and have existing non-
adjuvanted products on the market. Several companies market mastitis vaccines
for infections caused by E. coli. 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.
Aquila's adjuvant licensees are also licensees of Ribi, Corixa and Avant.
Government Regulation
The FDA, the USDA, the Environmental Protection Agency, and comparable
state and other agencies, including those in foreign countries, impose
requirements governing the development, manufacture and marketing of certain
of Aquila's products and products under development. The regulatory process
can take several years, involves lengthy and detailed laboratory and clinical
testing, and requires substantial expenditures. Human biologicals and
pharmaceuticals, including vaccines, typically require three stages of clinical
trials: Phase I to determine the preliminary safety of the product; Phase II
during which the efficacy of the product is preliminarily assessed and treatment
regimens refined; and Phase III (sometimes referred to as "pivotal trials")
during which final safety and efficacy data are generated. Regulatory
approval is required prior to commencement of clinical trials. The clinical
data, together with comprehensive manufacturing and facility information, is
filed with the FDA in a Product License Application ("PLA") and an Establishment
License Application, or in certain cases as a Biologics License Application, on
which the regulatory agencies base their approval decisions. In some
instances, particularly in cases of life-threatening diseases for which there
is no effective treatment, the clinical trial phases may be combined, or
approval may be sought after completion of an expanded Phase II trial.
Because QS-21 is currently classified by the FDA as a constituent material used
in drug preparation, the FDA does not require licensure of facilities used in
its manufacture. Aquila believes that this affords investment flexibility in
commercial manufacturing facilities. Aquila has filed Biologics Master Files
for QS-21 with the FDA, which its licensees can reference as part of their own
PLAs 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.
Human Resources
As of December 31, 1998, Aquila employed 47 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 is 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 7 individuals with recognized
expertise in immunology and oncology. 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:
Dr. Michael Brenner, M.D.
K. Frank Austen Professor of Medicine
Chief, Division of Rheumatology, Immunology & Allergy
Brigham and Women's Hospital
Smith Building, Room 225
One Jimmy Fund Way
Boston, MA 02115
John R. David, M.D.
Richard Pearson Strong Professor
Department of Immunology and Infectious Diseases
Harvard School of Public Health
665 Huntington Avenue
Boston, MA 02115
Robert Edelman, M.D.
Professor of Medicine and Pediatrics
Center for Vaccine Development
University of Maryland School of Medicine
685 West Baltimore Street, Room 480
Baltimore, Maryland 21201
Dr. Philip Livingston, M.D.
Clinical Immunology Service
Memorial Sloan-Kettering Cancer Center
1275 York Avenue
New York, NY 10021
Dr. Steven A. Porcelli, M.D.
Assistant Professor of Medicine
Division of Rheumatology, Immunology and Allergy
Smith Building, Room 516B
One Jimmy Fund Way
Boston, MA 02115
Dr. John Treanor, M.D.
Associate Professor of Medicine
University of Rochester Medical Center
Infectious Diseases Unit
601 Elmwood Avenue, Box 689
Rochester, New York 14642
Richard J. Whitley, M.D.
Professor of Pediatrics, Microbiology and Medicine
The University of Alabama at Birmingham
616 Children's Hospital
1600 Seventh Avenue South
Birmingham, Alabama 35233
Item 2. Properties.
Aquila's operations are conducted in a leased manufacturing, research and
office facility in Framingham, Massachusetts.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders of Aquila during the
fourth quarter of the fiscal year ended December 31, 1998.
Item 4.A. Executive Officers of the Registrant.
The following is a list of management of the Company, their ages, positions,
offices and business experience, as of February 1, 1999:
Alison Taunton-Rigby, Ph.D., 54, has been President, Chief
Executive Officer and Director since March of 1996. Dr. Taunton-
Rigby served as President and Chief Executive Officer and a member
of the Board of Directors of the Company's predecessor, Cambridge
Biotech Corporation ("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 and a
past Chair of and current member 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 Synaptic Pharmaceutical
Corporation. She is also a member of the Bentley College Ethics
Board.
Gerald A. Beltz, Ph.D., 47, is Senior 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 Aquila's FeLV feline leukemia vaccine and CBC's
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.
Deborah B. Grabbe, 47, 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 a B.A. from Oberlin College and an M.S. from John A.
Burns School of Medicine, University of Hawaii.
James L. Warren, 53, joined Aquila in January of 1998 as Vice
President of Finance, Chief Financial Officer and Treasurer of the
Company. From 1991 to January 1998, Mr. Warren was Vice
President and Corporate Controller of Genzyme Corporation, a
multinational biotechnology and health care product company. From
1984 to 1991, Mr. Warren was Vice President of Finance and
Administration of Itek Graphics Corporation, Composition Systems
Division, a supplier of composition software systems. Mr. Warren
holds a B.S. from the University of Tennessee and an M.B.A. from
Boston University.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock trades on the Nasdaq Stock Market under the
symbol AQLA. The prices quoted below for 1998 and 1997 represent sale
prices as reported by the Nasdaq Stock Market. The prices reported through the
third quarter of 1996 represent bid prices for transactions reported by brokers
on the "OTC Bulletin Board" and in the so called "pink sheets", and reflect
interdealer prices without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions. The prices reported through the
third quarter of 1996 represent transactions in the stock of Cambridge Biotech
Corporation ("CBC"), predecessor to Aquila, restated to give effect of an
exchange of CBC stock at a ratio of one share of Aquila for each 7.569 shares
of CBC. Aquila's stock was deemed registered pursuant to Rule 12g-3(a) under
the Securities Exchange Act of 1934 in October 1996 and began trading on
Nasdaq on October 24, 1996. As of March 19, 1999 there were 4,890 holders of
record of Aquila's Common Stock.
1998 1997 1996
Quarter High Low High Low High Low
1st $ 8.63 $ 4.00 $ 7.50 $ 5.00 $12.31 $ 2.81
2nd $ 7.38 $ 4.00 $ 6.38 $ 3.75 $ 9.44 $ 3.75
3rd $ 4.50 $ 2.45 $ 5.75 $ 4.63 $ 6.13 $ 2.63
4th $ 4.31 $ 2.06 $ 5.25 $ 4.06 $ 6.75 $ 3.25
The Company has not paid any dividends.
Item 6. Selected Financial Data.
Aquila Biopharmaceuticals, Inc.
For the years ended December 31,
(Dollars in thousands except per share amounts)
1998 1997 1996 1995 1994
Total revenues $ 5,597 $ 6,928 $ 6,573 $ 5,728 $ 5,010
Total expenses (1) (22,145) (10,564) (11,745) (12,242) (16,109)
Other income 1,948 4,370 5,777 2,162 360
Total reorganization items(2) -- -- (1,715) (813) (869)
______ ______ ______ ______ ______
Income/(loss) continuing operations (14,600) 734 (1,110) (5,165) (11,608)
_______ ______ _______ ______ ______
Income/(loss) discontinued
operations (3) -- 191 9,109 223 (10,668)
_______ ______ _______ ______ ______
Income/(loss) before extraordinary
loss (4) (14,600) 925 7,999 (4,942) (22,276)
________ ______ _______ ______ ______
Extraordinary loss -- -- (2,039) -- --
________ ______ _______ ______ ______
Income/(loss) $(14,600) $ 925 $5,960 $(4,942)$(22,276)
======== ====== ======= ====== ======
Income/(loss) per weighted average
number of common shares (diluted):
Continuing operations $ (2.22) $ 0.14 $(0.30) $(1.50) $ (3.40)
At year end:
Cash and marketable securities(5) $15,156 $16,897 $17,675 $7,072 $ 8,538
Working capital $11,891 $16,029 $16,157 $7,977 $ 8,886
Total assets $24,628 $20,667 $26,312 $23,045 $28,503
Long term debt $ 3,669 $ 139 $ 4,056 $ -- $ --
Total long term obligations $ 3,894 $ 364 $ 4,281 $12,168 $12,413
Stockholder's equity $15,653 $17,887 $16,917 $ 3,946 $ 8,668
____________
(1) 1998 includes $9.9 million charge for purchased incomplete technology.
(2) The Company recorded professional fee expense of $2.1 million, $1.2 million
and $0.6 million, and interest earned on cash resulting from Chapter 11
proceedings of $0.4 million, $0.4 million and $0.1 million in 1996, 1995 and
1994, respectively. In 1994, the Company recorded $0.4 million as a provision
for rejected executory contracts.
(3) In 1996, the Company sold the enterics diagnostics business for $5.7 million
and the retroviral diagnostic business for $6.5 million, recording a combined
gain of $7.6 million. In 1997, a gain of $0.2 million was recorded on the sale
of inventory from these businesses. The Company's income from these businesses
was $1.5 million and $0.2 million in 1996 and 1995, respectively. In 1994, the
Company recorded a loss from operations of $3.2 million and a loss of $7.5
million on the sale of its Irish subsidiary.
(4) The Company recorded an extraordinary loss of $2.0 million in 1996 upon its
reorganization and emergence from Chapter 11 bankruptcy for issuance of shares
valued at $5.6 million in settlement of a shareholder class action suit offset
by forgiveness of debt of $3.8 million on pre-petition liabilities.
(5) Cash and marketable securities balances reflect proceeds from the sale in
1996 of the Company's diagnostic businesses for a combined $12.2 million
proceeds, a paid up license fee of $3.3 million, and in 1997, net cash proceeds
from the sale of the Company's Rockville, Maryland property of $2.0 million.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of Aquila's management
as of the filing date of this Form 10-K. The Company's actual results could
differ materially from those anticipated by the forward-looking statements due
to risks and uncertainties such as general economic conditions; risks in
product and technology development; delays in the regulatory process;
difficulties in obtaining raw materials for the Company's products; failure
of corporate partners to commercialize successfully products using the
Company's technology; competition; the costs of acquiring additional
technology; failure to obtain additional funding for 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.
Results of Operations.
The operating results of Aquila reflect its biopharmaceutical business. The
businesses operated by Aquila's predecessor, Cambridge Biotech Corporation
("CBC"), are presented as Discontinued Operations in the Statements of
Operations.
1998 Compared to 1997
Revenues
Total revenues for 1998 were $5.6 million, a decrease of 19% from 1997.
Product revenues were $1.0 million, a decrease of 28% from 1997. Revenues
from research and development were $4.6 million, a decrease of 17% from
1997.
Product revenues were lower in 1998 due to the acquisition of a reseller by a
competitor. The Company's marketing partner, Virbac S.A., informed the
Company that it has plans to respond to this competitive action. However,
until Virbac's plans are realized, product revenues are expected to remain at
the 1998 level.
Revenues from research and development activities for 1998 were lower than
1997 due, in part, to fluctuating shipments of the Company's StimulonTM
adjuvant, QS-21, used in clinical trials by the Company's corporate partners.
Also, the Company received $0.9 million in 1998 from its animal healthcare
partner compared to $1.1 million in 1997. This program, which is developing a
product to treat bovine mastitis, has evolved from the research stage, during
which all costs were shared, to the development and final licensing trial stage,
in which only certain costs are shared. In 1998, the Company received $3.0
million, the final scheduled license payment from a partner for use of
Stimulon(TM). In 1997, this payment was $3.5 million.
Costs and Operating Expenses
Cost of sales was 101% and 78% in 1998 and 1997, respectively. The higher
cost of sales in 1998 was due to downtime caused by the move of the
Company's corporate offices and all operations to new leased facilities,
partially offset by a price increase.
Research and development expenses for 1998 were $17.4 million, including a
charge of $9.9 million for incomplete technology as a result of the purchase of
VacTex, Inc., ("VacTex") in April 1998. The purchase price was charged to
incomplete technology due to the early stage of the technology and the need to
expend additional resources to develop the technology. In 1998, the Company
expended $0.9 million on the VacTex research and development program. This
program is expected to be a long-term endeavor of the Company that will be
evaluated periodically to determine spending levels. Excluding the VacTex
charge, research and development spending was $7.4 million compared to $5.0
million in 1997, an increase of 48%. The increase was due to clinical and
licensing trial expenses, patent issuance expense, and spending on the CD1
research programs acquired from VacTex.
General and administration spending was $3.8 million compared to $4.5 million
in 1997, a decrease of 16%. The lower spending was a result of lower staffing
levels, lower legal and professional fees, and lower facility costs.
Other Income
Other income was $2.0 million, a decrease of 55% from 1997. In 1997, the
Company had a gain of $2.3 million on the sale of real estate. In 1998,
royalty income, which is derived primarily from agreements from discontinued
operations, was $0.5 million compared to $0.9 million in 1997. Royalty income
from these sources may continue to decline as new products replace products
covered by the royalty agreements. Miscellaneous income in 1998 was $0.5
million compared to $0.1 million in 1997 and included $0.1 million from
settlement of a lawsuit and $0.3 million from abatement of real estate taxes.
Net interest income was $0.9 million in 1998 compared to $0.6 million in 1997.
The increase was due to higher interest expense in 1997 on a real estate
mortgage retired upon sale of the property in November 1997.
1997 Compared to 1996
Revenues
Total revenues for 1997 were $6.9 million, an increase of 5% over 1996.
Product revenues were $1.3 million, an increase of 48% over 1996. Revenues
from research and development were $5.6 million for 1997, a decrease of 1%
from 1996.
Product revenues in 1997 increased as a result of a price increase and higher
unit sales of the Company's animal health product to the Company's marketing
partner.
Revenues from research and development for 1997 decreased due to the
completion of NIH contracts in 1996 offset by increased shipments of the
Company's StimulonTM adjuvant for use in partner's clinical trials. One of the
partners paid $3.5 million in each of 1997 and 1996 to maintain its license for
use of QS-21. In addition, the Company received $1.1 million in contract
revenues from its bovine mastitis development partner compared to $1.2 million
in 1996.
Costs and Operating Expenses
Cost of sales was 78% and 165% in 1997 and 1996, respectively, with the
improvement resulting primarily from volume generated, operating efficiencies
and to a price increase in one product.
Research and development expenses for 1997 were $5.0 million, a decrease of
4% from 1996. The decrease was due to lower spending under contractual
agreements with third parties for outside research studies in the Company's
bovine mastitis program.
General and administrative spending in 1997 was $4.5 million, a decrease of
10% from 1996 due to a lower level of employment and to the reduction in legal
fees incurred in connection with the Company's reorganization completed in
1996.
Other Income
Other income in 1997 was $4.4 million, a decrease of 24% from 1996. In 1997,
the Company recorded a $2.3 million gain on the sale of its Rockville, Maryland
real estate. In 1996, the Company received a $3.3 million license fee payment
for technology subsequently sold and $0.5 million in exchange for the
Company's interest in a joint venture. Royalty income, which is derived from
agreements related primarily to discontinued operations, declined to $0.9
million in 1997 from $1.4 million in 1996.
Liquidity and Capital Resources
At December 31, 1998 Aquila had cash, cash equivalents and marketable
securities of $15.2 million compared with $16.9 million at the end of 1997.
In 1998, marketable securities increased $0.3 million while cash and cash
equivalents declined $2.1 million. Operating activities required $3.4 million
primarily to fund the loss. Investing activities required $6.9 million,
primarily for the fit-out of the Company's new leased facility. Financing
activities provided a total of $8.2 million, $3.6 from a private placement of
common stock and $5.0 million from a long-term loan partially offset by
repayment of a $0.2 million outstanding bank loan and payment of $0.4 million
on long-term debt.
In 1997, marketable securities increased by $1.0 million while cash and cash
equivalents declined $1.8 million. Operating activities in 1997 required $3.0
million. Investing activities generated cash from the sale of property of $6.1
million while financing activities reflected the cash payment of $4.2 million
to repay the mortgage on the property sold.
In 1996, cash increased by $2.3 million. Operating activities required cash of
$1.1 million. Investing activities provided $3.4 million due to the sale of
the diagnostic businesses for a combined $12.2 million with investment of $8.6
million of the proceeds. Financing activities in 1996 were virtually nil.
The Company has conducted a Year 2000 ("Y2K") review of its computer
systems and of key vendors. The Company believes that with the relocation to
newly constructed facilities in September 1998 and the conversion to Y2K
compliant business and financial software in the first quarter of 1998, the Y2K
issue will not pose significant operational problems for the Company. Y2K
issues could adversely affect both revenues and costs if the Company were
unable to carry-on its normal activities. Audits of key vendors are performed
for regulatory and supply assurance purposes in the normal course of business.
These audits have not revealed any Y2K compliance issues with respect to
vendor's ability to supply material critical to the Company's operations. The
Company's marketing partner is a French multi-national company and the
Company has material transfer agreements with a number of companies, both
domestic and foreign. There can be no assurance that any of these companies
will be Y2K compliant. Total amounts expended to date in connection with the
Y2K issue are less than $0.1 million and future costs are expected to be nil.
The Company may consider carrying higher levels of raw material and finished
goods inventory for the third and fourth quarter of 1999 to insure no
interruption of supply.
The Company has entered into a new operating lease agreement for its executive
offices, research laboratories and manufacturing facilities that commits the
Company to aggregate future minimum lease payments of $11.0 million over
the twelve year term of the lease. In order to fit-out the facility covered by
the operating lease, the Company incurred debt of $5.0 million that has a term
of four years with aggregate payments of $6.0 million.
The Company has received a letter from CBC in February 1999 alleging that the
Company must indemnify CBC under a Master Acquisition Agreement among
the Company, CBC and bioMerieux, Inc. for potential losses from the
termination of CBC's rights under a license agreement. The Company is
evaluating this claim and has not yet determined the effect, if any, the claim
might have on the Company.
Aquila's revenues and expenses vary and will continue to vary. Future revenues
depend primarily upon the success of the Company's efforts to license its
proprietary technology and enter into cost sharing programs, and its ability to
market its products currently undergoing development or clinical trials.
Aquila's expenses fluctuate primarily due to clinical trials, which take from
six months to two years, and require varying degrees of financial support.
Revenues or operating results in any period will not necessarily be indicative
of results in subsequent periods.
Aquila expects that its available cash, investments, cash flow from research
contracts and product sales will be sufficient to finance its planned
operations and capital requirements for the next eighteen months. Thereafter,
Aquila must raise significant additional capital in order to continue
operations at current levels and to complete the commercialization of its
proprietary programs. Capital requirements could differ materially from
those currently anticipated by management. There can be no assurance that
Aquila will be successful in raising additional capital.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
The Company has one loan outstanding at December 31, 1998 that is subject to
interest rate risk. Additionally, in connection with a facility agreement, the
Company maintains an investment of $0.8 million in a debt security as collateral
for a letter of credit. Both of these investments are carried at cost, which
approximates fair value at December 31, 1998. These instruments are not
leveraged and are not held for purposes of trading. The debt carries an
interest rate of 13% and is payable as follows:
(Dollars in thousands)
____________________
1999 $1,574
2000 $1,456
2001 $1,456
2002 $1,525
______
Total $6,011
The deposit has an implicit interest rate of 5.49% and matures in February 2001
at which time proceeds of $0.9 million will be received.
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,
"Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A, in
connection with the 1999 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,
"Proposal 1, Election of Directors - Executive Compensation", to be filed
pursuant to Regulation 14A, in connection with the 1999 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Incorporated by reference to the Company's definitive proxy statement,
"Proposal 1, Election of Directors - Security Ownership of Certain Beneficial
Owners and Management", to be filed pursuant to Regulation 14A in connection
with the 1999 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive proxy statement,
"Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A in
connection with the 1999 Annual Meeting of Shareholders.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.
(a) Financial Statements.
The following documents are filed as part of this report:
1. Report of Independent Auditors.
2. Consolidated Statements of Operations for each of
the three years in the period ended December 31, 1998.
3. Consolidated Balance Sheets as of December 31, 1998
and 1997.
4. Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31, 1998.
5. Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December
31, 1998.
6. Notes to Financial Statements.
(b) Financial Statement Schedules.
None required.
(c) Exhibits.
2.1 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).
2.2 Agreement and Plan of Merger by and among Aquila
Biopharmaceuticals, Inc., Aquila Acquisition, Inc.
and VacTex, Inc. dated April 13, 1998 (incorporated
by reference to Exhibit 2.1 to Form 8-K, dated April
13, 1998, File No. D-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).
3.2 Certificate of Amendment of Amended and Restated
Certificate of Incorporation, effective March 24,
1997 (incorporated by reference to Exhibit 3.2 to
Annual Report on Form 10-K for fiscal year ended
December 31, 1996, File No. 0-12081).
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).
4.2 Form of Debenture (incorporated by reference to
Exhibit 4.1 to Form 8-K, dated April 13, 1998,
File No. 0-12081).
o4.3 Master Loan and Security Agreement dated July 15,
1998 by Aquila Biopharmaceuticals, Inc. in favor of
Transamerica Business Credit Corporation.
*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 Framingham Massachusetts facility with
NDNE 9/90 Corporate Center LLC as landlord
effective September 9, 1998 (incorporated by reference to
Exhibit 10.1 to Form S-3/A No. 1 filed May 6, 1998, File
No. 0-12081).
*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 From 10-K for
fiscal year ended December 31, 1995, File No. 01-
12081).
tm10.5 Employment Agreement with Gerald A. Beltz, dated
August 21, 1995 (incorporated by reference to
Exhibit 10.18 to Annual Report on From 10-K for
fiscal year ended December 31, 1995, File No. 01-
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. 01-12081).
tm10.7 Employment Agreement with James L. Warren,
dated January 17, 1998 (incorporated by reference to
Exhibit 10.15 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No. 01-
12081).
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).
10.11 1996 Stock Award and Option Plan (incorporated by
reference to Exhibit 10.12 to Annual Report on Form
10-K for the fiscal year ended December 31, 1996,
File No. 01-12081).
10.12 1996 Directors Stock Award and Option Plan
(incorporated by reference to Exhibit 10.13 to
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 01-12081).
10.13 1996 Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.14 to Annual Report on
Form 10-K for the fiscal year ended December 31,
1996, File No. 01-12081).
10.14 1996 Employee Retention Agreements (incorporated
by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for fiscal quarter ended September 30,
1997).
11. Computation of Earnings Per Share.
23. Consent of PricewaterhouseCoopers,LLP
27. Financial Data Schedule.
(b) Reports on Form 8-K filed in the last quarter of 1998.
None.
___________________________
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
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Aquila
Biopharmaceuticals, Inc. and its subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers, LLP
Boston, Massachusetts
February 11, 1999
AQUILA BIOPHARMACEUTICALS, INC.
Consolidated Statements of Operations
For the Years Ended December 31,
1998 1997 1996
Revenue:
Product Sales $ 955,321 $ 1,319,260 $ 890,180
Research and development 4,642,088 5,608,977 5,682,932
_________ __________ _________
5,597,409 6,928,237 6,573,112
Cost and expenses:
Cost of Sales 969,484 1,023,268 1,467,820
Research and development 7,447,359 5,019,775 5,250,502
Purchased incomplete
technology (Note 19) 9,927,227 --- ---
General and administrative 3,800,806 4,521,035 5,027,190
__________ __________ __________
22,144,876 10,564,078 11,745,512
Other income, net
(Notes 6 ,13 and 14) 1,947,832 4,370,107 5,777,032
__________ __________ __________
Income/(loss) from continuing
operations before
reorganization items and
income tax benefit (14,599,635) 734,266 604,632
Reorganization items (Note 1):
Professional fees -- -- (2,109,050)
Interest earned on
accumulated cash resulting
from Chapter 11 proceedings -- -- 394,272
____________ ___________ __________
Total reorganization items -- -- (1,714,778)
____________ ___________ __________
Income/(loss) from continuing
operations (14,599,635) 734,266 (1,110,146)
Discontinued operations (Note 3):
Income from operations -- -- 1,452,810
Gain on sale -- 191,250 7,656,683
___________ __________ _________
Income/(loss) before
extraordinary loss (14,599,635) 925,516 7,999,347
Extraordinary loss on
Reorganization (Note 11) -- -- (2,039,816)
___________ __________ __________
Net Income/(loss) $(14,599,635) $ 925,516 $ 5,959,531
____________ __________ _________
Unrealized holding gains on
available-for-sale securities 79,434 -- --
_____________ __________ _________
Total other comprehensive
income 79,434 -- --
____________ ___________ __________
Comprehensive Income/(loss) $(14,520,201) $ 925,516 $ 5,959,531
============= ============ ==========
Income/(loss) per weighted average
number of common shares:
Basic earnings per share:
Income/(loss) from continuing
operations $ (2.22) $ 0.15 $ (0.30)
Net Income/(loss) $ (2.22) $ 0.18 $ 1.60
Diluted earnings per share:
Income/(loss) from continuing
operations $ (2.22) $ 0.14 $ (0.30)
Net Income/(loss) $ (2.22) $ 0.18 $ 1.60
Weighted average number of common
shares outstanding: Basic 6,580,602 5,003,703 3,717,441
Diluted 6,580,602 5,141,815 3,717,441
The accompanying notes are an integral part of these financial statements.
AQUILA BIOPHARMACEUTICALS, INC.
Consolidated Balance Sheets
As of December 31,
1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 5,270,460 $ 7,352,450
Marketable securities (Notes 2, 4 and 6) 9,885,090 8,551,591
Accounts and other receivables
(less allowance for doubtful accounts
of $47,000 and $77,698, respectively) 1,027,711 1,625,145
Inventories (Note 5) 434,849 678,591
Prepaid expenses and other current assets 353,448 237,973
__________ __________
Total current assets 16,971,558 18,445,750
Marketable securities (Notes 2, 4 and 6) -- 993,151
Investments (Note 6) 319,500 394,500
Property, Plant, and Equipment, Net (Note 7) 6,372,345 613,730
Patents and Purchased Technology, Net (Note 8) 116,270 199,418
Other Assets (Note 14) 848,726 20,912
__________ __________
Total Assets $24,628,399 $20,667,461
========== ==========
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts Payable $ 485,975 $ 289,952
Accrued Royalties 134,263 149,572
Accrued professional fees 298,684 177,500
Other accrued expenses (Note 9) 1,970,703 1,730,716
Current maturities of long-term
debt (Note 10) 2,191,284 69,339
__________ __________
Total current liabilities 5,080,909 2,417,079
Deferred Revenue (Note 6) 225,000 225,000
Long Term Debt (Note 10) 3,669,494 138,678
__________ __________
Total Liabilities 8,975,403 2,780,757
__________ __________
Commitments and Contingencies (Note 14)
Shareholders' Equity (Note 15):
Preferred stock, authorized:
5,000,000 shares, none issued -- --
Common stock, par value: $.01 per share,
authorized: 30,500,000 shares
issued: 6,992,483 and 5,007,527 shares
in 1998 and 1997, respectively 69,924 50,075
Additional paid in capital 139,811,635 127,558,019
Accumulated other comprehensive income 79,434 --
Treasury stock at cost: 7,631 and 10,526
shares in 1998 and 1997, respectively (34,339) (47,367)
Accumulated deficit (124,273,658) (109,674,023)
____________ _____________
Total Shareholders' Equity 15,652,996 17,886,704
____________ _____________
Total Liabilities and Shareholders' Equity $ 24,628,399 $ 20,667,461
============ =============
The accompanying notes are an integral part of these financial statements.
<TABLE>
AQUILA BIOPHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income/(loss) $(14,599,635) $ 925,516 $ 5,959,531
Adjustments to reconcile net income/(loss) to net cash
used in operating activities:
Depreciation and amortization 292,650 402,555 3,448,192
Provision (recovery) for doubtful accounts 40,000 (25,000) 50,000
Purchased incomplete technology 9,927,227 -- --
Non cash compensation expense -- 10,000 50,000
Gain on sale of property, plant and equipment (25,115) (2,340,983) --
Gain on sale of discontinued businesses -- (191,250) (7,423,020)
Loss from bankruptcy consummation -- -- 2,039,816
Issuance of common shares -- 15,871 --
Receipt of investments -- -- (169,500)
Loss on disposition and write down of investments -- -- 11,164
Changes in assets and liabilities, net of effects of
businesses purchased or sold:
Accounts and other receivables 557,434 765,774 347,936
Inventories 243,742 (448,440) 1,262,592
Deferred revenue -- (917,600) (1,780,454)
Prepaid and other current assets (115,475) 540,954 (83,472)
Accounts payable and other accrued expenses 265,186 (1,720,026) (1,033,690)
Settlement of liabilities subject to Chapter 11 -- -- (3,757,436)
Minority interest -- -- (8,989)
___________ ___________ ___________
Net cash used by operating activities (3,413,986) (2,982,629) (1,087,330)
Cash Flows From Investing Activities:
Purchases of available-for-sale securities (20,693,209) -- --
Purchases of held-to-maturity securities -- (12,163,261) (8,562,730)
Proceeds from maturities of marketable securities 20,507,296 11,181,249 204,998
Other noncurrent assets (737,814) 22,120 62,391
Purchases of property, plant and equipment (5,968,118) (371,176) (309,627)
Proceeds from the sale of property,
plant & equipment, net 25,115 6,100,583 --
Patents and purchased technology -- -- (227,968)
Proceeds from the sale of discontinued businesses -- 412,123 12,201,000
___________ ___________ ___________
Net cash (used)/provided by investing activities (6,866,730) 5,181,638 3,368,064
Cash Flows From Financing Activities:
Issuance of stock 3,845,965 18,000 --
Proceeds from debt 5,000,000 208,017 --
Payment of debt (647,239) (4,184,667) (24,394)
__________ __________ __________
Net cash provided/(used) by financing activities 8,198,726 (3,958,650) (24,394)
__________ __________ __________
Net increase/(decrease) in cash and cash equivalents (2,081,990) (1,759,641) 2,256,340
__________ __________ __________
Cash and cash equivalents at the beginning of the year 7,352,450 9,112,091 6,855,751
__________ __________ __________
Cash and cash equivalents at the end of the year $5,270,460 $7,352,450 $ 9,112,091
========== ========== ==========
Supplemental disclosures:
Income taxes paid $ -- $ -- $ 4,231
Interest paid 37,682 397,776 98,541
Issuance of treasury stock in settlement of liability 13,028 -- --
Issuance of warrants in conjunction with debt 90,000 -- --
Stock received for Unearned License Fee -- -- 225,000
Conversion of Chapter 11 liabilities into long term debt -- -- 4,021,220
Stock issued under incentive plan -- -- 503,055
Stock issued to creditors pursuant to Reorganization Plan -- -- 881,582
Stock issued in settlement of class action lawsuit -- -- 5,625,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
AQUILA BIOPHARMACEUTICALS, INC.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
Additional Accumulated Other
Common Stock Paid-In Unearned Comprehensive Treasury
Shares Amount Capital Compensation Income Stock Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 26,057,006 $260,570 $120,382,104 $( 138,088) $ 0 $ 0 $(116,559,070) $3,945,516
__________ ________ ____________ ___________ _________ ______ ______________ __________
Stock exchanged with former shareholders
pursuant to Reorganization plan (22,614,701)(226,147) 226,147 -- -- -- -- --
Stock issued in settlement of class
action shareholder lawsuit 1,250,000 12,500 5,612,500 -- -- -- -- 5,625,000
Stock issued under incentive plan 111,790 1,118 501,937 -- -- -- -- 503,055
Stock issued to creditors pursuant
to Reorganization plan 195,905 1,959 879,623 -- -- -- -- 881,582
Compensation expense recognized -- -- 50,000 -- -- -- -- 50,000
Forfeiture of discounted stock options -- -- (138,088) 138,088 -- -- -- --
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 5,000,000 50,000 127,514,223 0 0 (47,367) (110,599,539) 16,917,317
_________ ________ ____________ ___________ ____________ ______ ______________ __________
Exercises of Options 4,000 40 17,960 -- -- -- -- 18,000
Stock issued to creditors
pursuant to Reorganization plan 3,527 35 15,836 -- -- -- -- 15,871
Compensation expense -- -- 10,000 -- -- -- -- 10,000
Net income -- -- -- -- -- -- 925,516 925,516
_________ ________ ____________ ___________ ____________ ______ ______________ __________
BALANCE, DECEMBER 31, 1997 5,007,527 50,075 127,558,019 0 0 (47,367) (109,674,023) 17,886,704
Stock issued for private placement 769,000 7,690 3,543,520 -- -- -- -- 3,551,210
Stock issued for employee stock purchase 11,331 113 48,724 -- -- -- -- 48,837
Acquisition of Vactex, Inc. 1,150,000 11,500 8,326,000 -- -- -- -- 8,337,500
Exercises of Options 54,625 546 245,372 -- -- -- -- 245,918
Warrants issued for debt obligation -- -- 90,000 -- -- -- -- 90,000
Unrealized gain on available-for-sale securities-- -- -- -- 79,434 -- -- 79,434
Treasury stock issued in settlement of
Chapter 11 claim -- -- -- -- -- 13,028 -- 13,028
Net loss -- -- -- -- -- -- (14,599,635)(14,599,635)
_________ ________ ___________ _________ ________ ________ ___________ __________
BALANCE, DECEMBER 31, 1998 6,992,483 $69,924 $139,811,635 $ 0 $79,434 $(34,339)$(124,273,658)$15,652,996
</TABLE>
The accompanying notes are an integral part of these financial statements.
AQUILA BIOPHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
1. Organization and Business
Aquila Biopharmaceuticals, Inc. (the "Company" or "Aquila"), organized in 1996
as a Delaware corporation, became the successor to Cambridge Biotech Corporation
("CBC") pursuant to the terms of a Reorganization Plan (the "Plan") that was
confirmed by the Bankruptcy Court in July 1996 and consummated in October 1996.
The Company engages in discovery, product development and commercialization of
products to prevent, treat or control infectious diseases, autoimmune
disorders and cancers. 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, the ability to raise additional
capital and compliance with FDA government regulations.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The Consolidated Financial Statements include
Aquila Biopharmaceuticals, Inc. and VacTex, Inc. ("VacTex") its wholly owned
subsidiary. VacTex was acquired on April 14, 1998 (See Note 19). All of the
Company's former subsidiaries, which were Biotech Research Laboratories, Inc.,
FSC, Cambridge Affiliated Corporation, collectively "the subsidiaries", were
disposed of or dissolved by the Company during the period from 1995 through
1996. Results of operations of the former subsidiaries are included in the
accompanying consolidated financial statements as discontinued operations.
All significant intercompany transactions and accounts have been eliminated.
Segment Information - The Company has determined that its reportable segments
are development and manufacturing. All research programs are aggregated in
the development segment. Revenues from the sale of the Company's commercial
product, the feline leukemia vaccine, the QS-21 material supplied to research
partners and license fees relating to these products are reported in the
manufacturing segment. The Company allocates resources among segments
primarily on the basis of labor utilization. The Company's business is conducted
entirely within the United States.
The financial results of the Company's segments are presented on the same
accounting basis as the Company's consolidated results. There are no
intersegment activities. The table below presents revenue and net income data
for the two segments for the years 1997 and 1998. Segment information for
1996 is not reported because the Company's reporting systems did not
then compile segment information. Asset information by segment is not
reported because the Company does not produce such information internally.
Reconciling Consolidated
Development Manufacturing Items Totals
Revenue Net Loss Revenue Net Inc. Net Inc./Loss Revenue Net Inc./Loss
(Dollars in thousands)
1997 $1,134 $(4,962) (1) $5,794 $2,548 (2) $ 3,339 $ 6,928 $ 925
1998 $ 872 $(8,317) (1) $4,725 $2,285 (2) $(8,568) $ 5,597 $(14,600)
(1) Includes non-recurring license fees of $3.5 million and $3.0 million in 1997
and 1998, respectively. Total export sales of this segment were approximately
$1.4 million and $1.2 million in 1998 and 1997, respectively.
(2) Includes $2.3 million gain from the sale of real estate, net royalty
income of $0.9 million, net interest income of $0.6 million and rental income
of $0.5 million in 1997 and a charge for incomplete technology of $9.9 million,
net interest income of $0.9 million, net royalty income of $0.5 million and $0.3
million real estate tax rebate in 1998.
One corporate partner has historically been the Company's principle source of
research and development revenue. Research and development revenues from this
corporate partner, included in the manufacturing segment, represented 62%, 61%
and 53% of the Company's total revenue in 1998, 1997 and 1996, respectively.
This includes compensation to the Company for producing QS-21 clinical trial
material for use in its product development programs. In 1998, this partner
made a payment of $3.0 million, the last scheduled payment under a license
agreement.
A marketing partner represents a substantial portion of the Company's product
sales and research and development revenue. Product sales to this partner are
included in the manufacturing segment and represented 17%, 19% and 13% of total
revenues in 1998, 1997 and 1996, respectively. Revenue from development
agreements with this partner are included in the development segment and
represented 16% of revenues in 1998 and 1997 and 18% of total revenue in 1996.
The Company depends on a number of corporate collaborators for reimbursement
for the supply of its adjuvant for use in their clinical trials and for
research revenues.
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, 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.
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 classifies its marketable securities at the
time of purchase in accordance with the Statement of Financial Accounting
Standards No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities". At December 31, 1998, all marketable securities were
classified as available-for-sale except for one that was classified as
held-to-maturity.
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk are primarily 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 strong financial position of
the entities with which the Company does business. Additionally, the Company
maintains reserves for potential credit losses. Write-offs for 1998, 1997 and
1996 were $72,620, $76,000 and $34,000, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost has
been determined using standard costs which approximate the first-in, first-out
method.
Property, Plant and Equipment - Property, plant and equipment are recorded at
cost. Depreciation for financial accounting purposes is computed by the
straight-line method over their estimated useful lives. The estimated useful
lives of the assets are as follows:
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. Upon retirement or disposal of assets, the
cost and the related accumulated depreciation are removed from the balance sheet
and any gain or loss is reflected in earnings.
Patents and Purchased Technology - Purchased technology related to the
acquisition of assets is recorded at fair market value at acquisition date.
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 sales is recognized at the time of
product shipment. Revenue from research and development contracts is deferred
and recognized over the contractual periods as services are performed or as
distinct milestones are met. The initial fee in alliance agreements is
recognized as revenue when a definitive agreement is reached and no contingent
factors are present.
Research and Development Costs - Research and development costs are charged to
operations as incurred.
Income Taxes - 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 current statutory tax rates.
Net Income/(Loss) Per Share - The Company applies Statement of Financial
Accounting Standards No. 128, ("SFAS 128") Earnings Per Share to compute loss
per share. Under SFAS 128, basic EPS is calculated by dividing net earnings
(loss) by the weighted-average common shares outstanding during the period.
Diluted EPS reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to common
shares using the treasury stock method based upon the weighted-average fair
value of the Company's common shares during the period.
Common stock equivalents consisting of stock options and warrants have been
excluded from the computation of diluted earnings/(loss) per share in 1998 and
1996 since, with the Company in a loss position, inclusion would be
anti-dilutive. Warrants to purchase 60,680 shares of common stock with an
exercise price of $4.12 and a term of 5 years were outstanding at December 31,
1998. Options to purchase 1,091,560 and 712,655 shares of common stock at
weighted average exercise prices of $3.89 and $4.09, respectively, were
outstanding at December 31, 1998 and 1996, respectively. Options to purchase
180,375 shares of common stock at a weighted average exercise price of $5.16
were outstanding at December 31, 1997 and not included in the computation of
diluted income per share in 1997 because their exercise price was greater than
average market price making inclusion anti-dilutive.
Basic and diluted earnings per share from discontinued operations were $0.04
and $2.45 for 1997 and 1996, respectively. Basic and diluted loss per share
from the extraordinary items in 1996 were $0.55.
3. Discontinued Operations
During 1996, the Company disposed of two separate diagnostics businesses
encompassing the Company's diagnostic assets and operations for cash proceeds
of approximately $12.2 million. Accordingly, the accompanying financial
statements include a gain from the disposal of $0.2 million and $7.6 million
in 1997 and 1996, respectively, and income from discontinued operations of
$1.5 million in 1996. Net revenue from discontinued operations was $0.4
million and $14.5 million in 1997 and 1996, respectively.
4. Marketable Securities
Available-for-sale marketable securities are carried at fair market value based
on quoted market prices. Held-to-maturity marketable securities are carried at
amortized cost, which approximates fair value. At December 31, 1998
contractual maturities of marketable securities are within one year, except
for one government-backed obligation which has a fair market value of $1.0
million and a maturity term within two years. Marketable securities consisted
of the following at December 31:
1998 1997
Available-for-sale at fair market value (Dollars in thousands)
Common stock $ 139 $ --
Corporate debt securities 6,746 --
Government-backed obligations 2,000 --
Held-to-maturity at amortized cost
Corporate debt security 1,000 7,500
Government-backed obligations -- 1,000
Certificates of deposit -- 1,000
______ ______
Total $ 9,885 $ 9,500
Gross unrealized gains on available-for-sale securities were $79,434 at
December 31, 1998.
5. Inventories
Inventories consisted of the following at December 31:
1998 1997
(Dollars in thousands)
Finished goods $ 231 $ 478
Work in process 122 127
Raw materials and supplies 82 74
______ _____
$ 435 $ 679
====== =====
6. Investments
The Company holds 270,000 shares of Protein Sciences Corporation stock as
payment for a paid up license and for royalties due and payable under terms
of a technology sublicense agreement. In 1996, the Company recorded research
and development revenue of $0.1 million based upon an estimated fair market
value of $.35 per share.
The Company holds 45,000 shares of Progenics Pharmaceuticals, Inc. common stock
in partial payment of a license fee under an agreement executed in 1995. In
1996, the Company recorded an investment of $0.3 million and deferred revenue
of $0.3 million, and recorded revenue of $0.1 million upon the achievement of
the first milestone under this agreement. The balance of $0.2 million is
included in deferred revenue at December 31, 1998 and 1997. In 1998, the
Company reclassified 11,250 shares of newly registered common stock from
Investments to Marketable Securities. These shares were carried at a
cost of $75,000, have a market value of $139,219, and are classified as
available-for-sale securities.
In August 1996, the Company sold its share of a joint venture with BioNebraska,
which had been written off in 1995, for $0.5 million in cash and reported the
gain in Other Income.
7. Property, Plant, and Equipment
Property, plant, and equipment consists of the following at December 31:
1998 1997
____ ____
(Dollars in thousands)
Furniture, fixtures, and equipment $ 3,274 $ 6,191
Leasehold and building improvements 5,112 6,124
_____ _____
Sub-total 8,386 12,315
Less accumulated depreciation and amortization ( 2,014) (11,701)
_____ ______
$ 6,372 $ 614
===== ======
Total depreciation and amortization expense during 1998, 1997 and 1996 was $0.2
million, $0.3 million and $2.6 million, respectively. In vacating its old
facility and moving to new facilities in September 1998, the Company disposed
of $9.9 million of fully depreciated equipment and leasehold improvements. The
new facility is represented by $0.7 million of equipment and $5.1 million of
leasehold improvements. Interest cost of $0.1 million out of total interest
costs of $0.2 million was capitalized in 1998 in connection with the fit-out
of the Company's new facility in Framingham, Massachusetts.
8. Patents and Purchased Technology
Purchased technology and intangibles consist of the following at December 31:
1998 1997
____ ____
(Dollars in thousands)
Purchased technology $ 240 $ 3,451
Patents and patent support 746 746
___ _____
Sub-total 986 4,197
Less accumulated amortization (870) ( 3,998)
___ _____
$ 116 $ 199
=== =====
In 1998, the Company wrote-off $3.2 million of fully amortized technology no
longer utilized. Total amortization expense was $0.1 million, $0.1 million
and $0.8 million in 1998, 1997 and 1996, respectively.
9. Other Accrued Expenses
Accrued expenses consist of the following at December 31:
1998 1997
____ ____
(Dollars in thousands)
Fit-out of new facility $ 700 $ -
Research contract obligations 674 906
Compensation 283 419
Charge for excess space -- 163
Other 314 243
_____ _____
$1,971 $ 1,731
===== =====
10. Debt
At December 31, 1996, the Company had a mortgage note payable of $4.2 million
collateralized by land, buildings and improvements with a net book value of
$3.8 million. The outstanding balance on the mortgage note was paid in full
upon the consummation of the sale of the Aquila's Rockville, Maryland real
estate in November, 1997.
In August 1997, Aquila entered into a three year $1 million credit facility
fully collatorized by equipment purchased. In December 1998, the balance of
$138,000, including interest was paid and the credit facility terminated.
In April 1998, the Company issued $1.3 million of debt as part of the purchase
of VacTex, Inc. (See Note 19). The debt bears interest of 7% and is due April
14, 1999.
In July 1998, the Company entered into a loan agreement (the "Agreement") with
Transamerica Business Credit Corporation. The Agreement made available $5.0
million for the build-out of the new facility in Framingham, Massachusetts and
for the purchase of new equipment. The Agreement calls for interest at 13
percent with a repayment term of four years and a 10 percent balloon payment
at the end of the loan term. Collateral for the loan consists of equipment and
leasehold improvements with a book value of $5.0 million. Warrants to purchase
60,680 shares of the Company's common stock were issued in connection with the
loan agreement. The warrants have an exercise price of $4.12 and a term ending
July 1, 2003. The warrants were valued at $90,000 and will be amortized over
the life of the loan. As of December 31, 1998, the Company had borrowed $5.0
million and had $4.6 million outstanding under the loan. Repayment of the loan
and related interest will require payments of $1.6 million in 1999 and $1.5
million in each of the years 2000 through 2002.
11. Extraordinary Loss on Reorganization
In October 1996, the Company recorded an extraordinary loss of $2.0 million on
its reorganization and emergence from Chapter 11 Bankruptcy. The major
components of this loss were as follows:
(Dollars in thousands)
Recognition of expense related to issuance
of 1,250,000 shares in settlement of
shareholders class action $ 5,625
Recognition of costs incurred to restructure
mortgage on Rockville real estate 193
Forgiveness of debt on pre-petition liabilities ( 3,778)
________
$ 2,040
12. 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:
1998 1997 1996
Tax expense at federal
statutory rates 34.0% 34.0% 34.0%
Utilization of loss carryforwards (34.0)% (34.0)% (34.0)%
______ ______ ______
Reported expense for income taxes 0.0% 0.0% 0.0%
====== ====== ======
The components of the deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:
1998 1997
Current: (Dollars in thousands)
Inventory $ 44 $ 62
Other 294 500
___ ___
Total current 338 562
Noncurrent:
Capital Loss Carryover 3,318 4,077
Depreciation and Amortization 72 2,334
Other 635 1,079
Federal and State NOL's 30,251 24,919
Federal and State tax credits 1,617 1,246
______ ______
Total noncurrent 35,893 33,655
______ ______
Sub-total 36,231 34,217
Less: valuation allowance (36,231) (34,217)
______ ______
Net deferred tax asset $ 0 $ 0
====== ======
Management has assessed the evidence relating to recoverability of the deferred
tax asset and has determined that it is more likely than not that the deferred
tax benefit will not be realized due to the uncertainty of future earnings.
Accordingly, a valuation reserve has been established for the full amount of
the deferred tax asset.
As of December 31, 1998, the Company had federal net operating loss (NOL)
carryforwards of approximately $79.0 million. These loss carryforwards begin
to expire in the year 2000 and expire fully by the year 2013. Utilization of
these NOL's may be limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986. The Company has state loss carryforwards of
approximately $34.0 million. These state loss carryforwards begin to expire
in 1999 and expire fully by 2004.
13. Other Income, Net
At December 31, Other Income, Net consists of the following:
1998 1997 1996
____ ____ ____
(Dollars in thousands)
Gain on sale of Rockville real estate $ -- $2,332 $ -
Royalty income, net 527 854 1,395
Interest income/(expense), net 921 645 156
Rental income, net -- 500 308
Miscellaneous income, net 500 39 168
Paid up license fee -- -- 3,250
Sale of joint venture -- -- 500
_____ _____ _____
$ 1,948 $4,370 $5,777
===== ===== =====
In December 1998, the Company received $0.3 million (included in miscellaneous)
as a rebate of taxes paid on its former leased facility in Worcester,
Massachusetts. In November, 1997, the Company sold the Rockville, Maryland
facilities for $6.5 million and recorded a gain of $2.3 million. Proceeds
from the sale were used to retire the mortgage. Royalty income represents
royalties earned under license and sublicense agreements related primarily to
diagnostic technologies, net of expenses due to third-party licensors. Rental
income derived from rental of the Company's real estate in Rockville,
Maryland ceased upon the sale of the Rockville facilities. The income from
litigation in 1996 includes $3.3 million 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, and $0.5 million received from BioNebraska in exchange for the
Company's share in a joint venture (see Note 6).
14. Commitments and Contingencies
Leases - Costs incurred under facility leases are recorded as rent expense and
totaled $0.9 million, $1.2 million and $1.1 million in 1998, 1997 and 1996,
respectively. In 1998, the Company entered into a new operating, facility
lease agreement for its executive offices, research laboratories and
manufacturing facilities in Framingham Massachusetts. The base lease
period for the new lease is twelve years and the lease contains renewal
options for two additional five-year periods. In connection to the facility
lease, the Company maintains a fully collateralized letter of credit of $0.8
million. No amounts have been drawn on the letter of credit. As of December
31, 1998, the future minimum lease payments required under the operating lease
are as follows:
Year Ending December 31,
_________________________
(Dollars in thousands)
1999 $ 877
2000 877
2001 877
2002 896
2003 939
Thereafter 6,522
______
Total $10,988
======
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
$1.0 million. Costs incurred and charged to operations under these contracts
aggregated $1.3 million, $1.2 million and $1.3 million in 1998, 1997 and 1996,
respectively.
Other Agreements - The Company has licensed fibronectin binding technology from
a Swedish company, for use in mastitis research and development. The Company
recorded $0.6 million of expense in 1998 for milestone payments relating to
patent issuance. The agreement provides for additional payments upon the
first commercial sale of future vaccines at $1.3 million per vaccine, and up
to $1.3 million 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 CBC,
certain of its officers, and in three of the actions, the CBC's former auditors,
Deloitte & Touche, LLP ("Deloitte"). In February, 1996 the plaintiffs agreed
to settle all claims against the CBC 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. The settlement was
approved by the court in July, 1996. Under the terms of the Settlement, the
class members received 1,250,000 shares of Aquila common stock, and in the
fourth quarter of 1998, 90% of the recoveries from prosecution of claims against
the Company's former auditors, with the balance of $0.1 million in recoveries
paid to the Company
Deloitte appealed the United States Bankruptcy Court's order confirming the
CBC's reorganization plan. In September 1998, the Court of Appeals granted a
motion to dismiss Deloitte's appeal, which was assented to by the Company.
In March 1995, an Adversary Proceeding was commenced by Institut Pasteur and
Genetic Systems Corporation against CBC alleging patent infringement and
asking for damages and injunctive relief. In September 1995, summary judgement
was issued by the Bankruptcy Court upholding CBC's license to two patents and
ruling that CBC was infringing a third patent issued to Institut Pasteur. CBC
was enjoined from manufacture and sale of such products and was obligated to
pay damages in the amount equal to 1% of net sales of such products for the
period July 7, 1994 through December 31, 1995. The Bankruptcy Court ruled that
as of January 1, 1996, CBC had a royalty-bearing license conferring the right
to manufacture and sell such products. Institut Pasteur appealed the Bankruptcy
Court's ruling and the United District Court's affirmation thereof to the
Federal Circuit Court of Appeals. The parties have submitted briefs, argued
the case, submitted post-argument briefs and await the Court's decision.
While the final outcome of this issue cannot be determined with certainty,
the technology is part of a business that has been sold with the only
liability arising out of the conduct of the Company prior to the sale.
Accordingly, based on current information, management believes that any
adverse settlement will not have a material effect on the Company's financial
position or results of operations.
In 1998, using treasury stock valued at $13,028, the Company settled the last
claim previously identified as Liabilities Subject to Chapter 11 Proceedings.
The Company has been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site. The EPA will
generally impose joint and several liability upon each PRP at each site. The
extent of the Company's required financial contribution to the cleanup of this
site is expected to be limited based on the number and financial strength of the
other named PRPs and the volume and types of waste involved which might be
attributed to the Company.
CSL International ACN ("CSL") and Seed Capital Inc., filed an opposition with
the European Patent Ofice ("EPO") on the issuance of the Company's Stimulon(TM)
patent in Europe. A hearing before the EPO was held in October of 1998. The
Company prevailed against all points raised in the opposition. CSL may appeal
the EPO's decision and though the Company does not believe that CSL's claims
have any merit or are likely to succeed, there can be no assurance that the
Company will prevail in any future actions taken to attack the validity of its
Stimulon(TM) patents.
The Company has received a letter from CBC in February 1999 alleging that the
Company must indemnify CBC under a Master Acquisition Agreement among the
Company, CBC and bioMerieux, Inc. for potential losses from the termination of
CBC's rights under a license agreement. The Company is evaluating this claim
and has not yet determined the effect, if any, the claim might have on the
Company.
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.
15. Stockholders' Equity
Capital Stock - The Company has 5,000,000 shares of preferred stock and
30,500,000 shares of common stock authorized at December 31, 1998. No terms
have been established for the preferred stock and none has been issued.
Exchange of Shares - Pursuant to the Reorganization Plan, an exchange of CBC
common shares for Aquila common shares was effected in October 1996 in the form
of 1 Aquila common share issued for every 7.6 CBC common shares held of record
on that date. A total of 3,442,305 shares of Aquila common were issued in
exchange for 26,057,006 shares of CBC common.
16. Stock Based Compensation Plans
The Company's 1996 Employee Stock Purchase Plan which was approved in 1997,
allows full time employees, as defined in this plan, to purchase the Company's
stock at 85% of the lesser of beginning or ending fair market value at six
month intervals. Under this plan 200,000 shares of stock are authorized for
issuance of which 11,331 shares were issued in 1998 for gross proceeds of
$48,837. A total of 188,669 shares remain available for issuance at December
31, 1998. No compensation expense has been recorded related to this plan.
At December 31, 1998, 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 general, options granted under these plans
vest over 4 years and have maximum terms of 10 years. The Company has applied
APB 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recorded for activity under these plans for
options issued to employees at fair market value.
The Company applies the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock based
Compensation, to these plans. Accordingly, the Company has determined the
fair value of each option grant. 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/(loss) and earnings/(loss) per share for the years ended December 31,
1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
______________________ ____________________ ____________________
(Dollars in thousands except per share amounts)
Net Basic Diluted Net Basic Diluted Net Basic and
___ _____ _______ ___ _____ ________ ___ _________
Loss EPS EPS Income EPS EPS Income Diluted EPS
____ ___ ___ ______ ___ ___ ______ ___________
As Reported $(14,600)$(2.22)$(2.22) $926 $0.18 $0.18 $5,960 $1.60
Pro Forma $(15,185)$(2.31)$(2.31) $532 $0.11 $0.10 $5,529 $1.49
The effects of applying SFAS123 in this pro forma disclosure are not indicative
of future effects. 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 1998, 1997 and 1996 is $1.78, $3.08 and $2.65,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively; expected
volatility of 63.6%, 63.74% and 72.94%, risk-free interest rates of 4.67%,
6.25% and 6.19%, expected lives of 5 years, 5 years and 4 years, and no
dividend yield. The fair value of the employees' purchase rights was estimated
using the Black-Scholes model with the following assumptions in 1998 and 1997,
expected volatility of 63.74%, risk-free interest rate of 5.56%; expected life
of six months and no dividend yield. The weighted average fair value of those
purchase rights granted in 1998 and 1997 was $0.82.
A summary of the status of the Company's two stock option plans as of December
31, 1998 and 1997 respectively, and changes during those years are presented
below:
1998 1997 1996
________________________________________________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ _________ ______ _________ ______ _________
Beginning outstanding 831,655 $ 4.28 712,655 $ 4.09 -- $ --
Options granted at
fair market value 336,000 3.08 194,375 5.12 551,750 4.50
Options regranted below
fair market value -- -- -- -- 173,405 2.80
Options exercised (54,625) 4.51 (4,000) 4.50 -- --
Options forfeited (21,470) 4.56 (71,375) 4.68 (12,500) 4.50
________ ____ _______ ____ ________ ____
Balance, December 31, 1,091,560 $3.89 831,655 $ 4.28 712,655 $ 4.09
========= ==== ======= ==== ======= ====
The following table summarizes information about Aquila stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
___________________________________________________ ______________________
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices At 12/31/98 Contractual Life Price at 12/31/98 Price
______ ___________ ________________ _____ ___________ ______
$2.13-$2.80 434,905 8.61 $2.77 173,405 $2.80
$3.06-$4.50 491,125 7.59 $4.46 351,750 $4.48
$4.63-$7.38 165,530 8.71 $5.15 51,710 $5.18
___________ _________ ____ _____ _______ _____
$2.13-$7.38 1,091,560 8.16 $3.89 576,865 $4.04
At December 31, 1998, there were 1,049,815 shares available for option grants.
Compensation expense of $10,000 and $50,000 was recorded in 1997 and 1996,
respectively, related to options granted to consultants during the year. No
compensation expense was recorded in 1998.
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 compensation, as permitted by law or as limited by the plan
administrator. Commencing on January 1, 1997 the Company matches 25% of the
first 6% of the employees compensation contributed to the plan. Any
contributions made by the Company are vested at 33% for each year of employment.
The amount charged to operations for the plan was $44,300 and $48,500 in 1998
and 1997, respectively.
18. Agreements
The Company has a comprehensive agreement with a corporate partner that allows
the partner 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 exclusive worldwide
rights in some fields of use, and co-exclusive or non-exclusive rights in
others. The Company recognized $3.0 million in license fees under this
agreement in 1998, and $3.5 million in 1997 and 1996. The agreement calls
for royalties to be paid by the partner on its future sales of
licensed vaccines that include Aquila's adjuvant and for Aquila to
manufacture QS-21 for the partner.
The Company has product development agreements and supply agreements with a
corporate partner and a supply agreement with the partner's U.S. subsidiary
that cover a collaboration on the development of products for feline immune
deficiency virus ("FIV") and bovine mastitis and the supply of vaccine and
adjuvant for feline leukemia ("FeLV"). The Company recorded $0.9 million,
$1.1 million and $1.2 million in revenues under the product development
agreements during 1998, 1997 and 1996, respectively. Sales to the partner
under the terms of the supply agreements were $1.0 million, $1.3 million
and $0.9 million in 1998, 1997 and 1996, 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 entered into various agreements with the National Institute of
Health ("NIH"). Such agreements provided the Company with research and
development funding through 1996, assuming, in certain cases, achievement of
mutually defined milestones. Revenue recorded under these agreements amounted
to $0.3 million in 1996.
19. Acquisition of VacTex
In 1998, with the acquisition of VacTex, the Company issued 1,150,000 shares
of common stock and $1.3 million in notes payable for all the outstanding
shares of VacTex. The notes payable carry interest at 7% and are due April
14, 1999. The acquisition has been accounted for using the purchase method.
VacTex was a development stage company advancing the recent discovery of a
novel antigen presentation system. At the date of acquisition, research had
been conducted in animals only and the linkage to protection in a human
vaccine had not been established. This remains an active area of preclinical
research. The time to human clinical trials and product approval is expected
to be typical for a biological development project and to entail the typical
risks. Though the Company expects to expend a substantial portion of its
resources to develop this technology over the next several years, the pace
and level of development will largely be determined by the science, which is
complex. Due to the early stage of the technology and the expected efforts
to develop it, the entire purchase price of $9.9 million, which included stock,
notes payable and assumed liabilities was charged to purchased incomplete
technology.
The following summary represents unaudited pro forma results of operations as
if the VacTex acquisition had occurred at the beginning of 1997. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have actually
resulted had the combination been in effect and are not intended to be
indicative of future results.
Unaudited Pro forma
Year Ended
(Dollars in thousands except per share amounts)
1998 1997
Revenues $ 5,597 $ 6,928
Net loss $ (14,790) $ (74)
Basic loss per share $ (2.25) $ (0.01)
Signatures:
Pursuant to the requirements of Section 13 and 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.
/s/ Alison Taunton-Rigby
March 22, 1999 By: __________________________
Alison Taunton-Rigby
President, (Principal Executive Officer)
/s/ James L. Warren
March 22, 1999 By: __________________________
James L. Warren
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
March 22, 1999 /s/ Melissa Morrison
By: __________________________
Melissa Morrison
Corporate Controller
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 22, 1999
Alison Taunton-Rigby
/s/ Elliott D. Hillback, Jr.
_______________________ Director March 22, 1999
Elliott D. Hillback, Jr.
/s/ Robert J. Carpenter
__ _____________________ Director March 22, 1999
Robert J. Carpenter
/s/ Keith J. Dorrington
_______________________ Director March 16, 1999
Keith J. Dorrington
/s/ Jeffrey T. Beaver
_______________________ Director March 17, 1999
Jeffrey T. Beaver
Exhibit Index
2.1 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).
2.2 Agreement and Plan of Merger by and among Aquila
Biopharmaceuticals, Inc., Aquila Acquisition, Inc.
and VacTex, Inc. dated April 13, 1998 (incorporated
by reference to Exhibit 2.1 to Form 8-K, dated April
13, 1998, File No. D-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).
3.2 Certificate of Amendment of Amended and Restated
Certificate of Incorporation, effective March 24,
1997 (incorporated by reference to Exhibit 3.2 to
Annual Report on Form 10-K for fiscal year ended
December 31, 1996, File No. 0-12081).
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 From 8-K, dated October 21, 1996, File No. 0-
12081).
4.2 Form of Debenture (incorporated by reference to
Exhibit 4.1 to Form 8-K, dated April 13, 1998,
File No. 0-12081).
o4.3 Master Loan and Security Agreement dated July 15,
1998 by Aquila Biopharmaceuticals, Inc. in favor of
Transamerica Business Credit Corporation.
*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 Framingham Massachusetts facility with
NDNE 9/90 Corporate Center LLC as landlord
effective September 9, 1998 (incorporated by reference to
Exhibit 10.1 to Form S-3/A No. 1 filed May 6, 1998, File
No. 0-12081).
*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 From 10-K for
fiscal year ended December 31, 1995, File No. 01-
12081).
tm10.5 Employment Agreement with Gerald A. Beltz, dated
August 21, 1995 (incorporated by reference to
Exhibit 10.18 to Annual Report on From 10-K for
fiscal year ended December 31, 1995, File No. 01-
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. 01-12081).
tm10.7 Employment Agreement with James L. Warren,
dated January 17, 1998 (incorporated by reference to
Exhibit 10.15 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No. 01-
12081).
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).
10.11 1996 Stock Award and Option Plan (incorporated by
reference to Exhibit 10.12 to Annual Report on Form
10-K for the fiscal year ended December 31, 1996,
File No. 01-12081).
10.12 1996 Directors Stock Award and Option Plan
(incorporated by reference to Exhibit 10.13 to
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 01-12081).
10.13 1996 Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.14 to Annual Report on
Form 10-K for the fiscal year ended December 31,
1996, File No. 01-12081).
10.14 1996 Employee Retention Agreements (incorporated
by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for fiscal quarter ended September 30,
1997).
11. Computation of Earnings Per Share.
23. Consent of PricewaterhouseCoopers,L.L.P.
27. Financial Data Schedule.
EXHIBIT 4.3
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of July 15, 1998, is made by Aquila
Biopharmaceuticals, Inc. (the "Borrower"), a Delaware corporation having its
principal place of business and chief executive office at 175 Crossing
Boulevard, Framingham, Massachusetts 01702-5404 in favor of Transamerica
Business Credit Corporation, a Delaware corporation (the "Lender"), having
its principal office at Riverway II, West Office Tower, 9399 West Higgins
Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans
to it from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to
induce the Lender to extend credit, the Borrower hereby agrees with the
Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following
meanings, and shall be equally applicable to both the singular and plural forms
of the terms defined:
Agreement shall mean this Master Loan and Security Agreement together with
all schedules and exhibits hereto, as amended, supplemented, or otherwise
modified from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or public
holiday or the equivalent for banks in New York City.
Code shall have the meaning specified in Section 8(d).
Collateral shall have the meaning specified in Section 2.
Effective Date shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
Equipment shall have the meaning specified in Section 2.
Event of Default shall mean any event specified in Section 7.
Financial Statements shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United
States of America, as in effect from time to time.
Loans shall mean the loans and financial accommodations made by the Lender
to the Borrower in accordance with the terms of this Agreement and the Notes.
Loan Documents shall mean, collectively, this Agreement, the Notes, and all
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be
modified, extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
Material Adverse Effect shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets. liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
Note shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time.
Obligations shall mean all indebtedness, obligations, and liabilities of the
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and
all other professionals' fees), costs, expenses, taxes, or otherwise.
Permitted Liens shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges
or levies or the claims or demands of landlords, carriers, warehousemen,
mechanics, laborers, materialmen, and other like Persons arising by operation
of law in the ordinary course of business for sums which are not yet due and
payable, or liens which are being contested in good faith by appropriate
proceedings diligently conducted and with respect to which adequate reserves
are maintained to the extent required by GAAP; (b) deposits or pledges to
secure the payment of worker's compensation, unemployment insurance, or
other social security benefits or obligations, public or statutory obligations,
surety or appeal bonds, bid or performance bonds, or other obligations of a like
nature incurred in the ordinary course of business; (c) licenses, restrictions,
or covenants for or on the use of the Equipment which do not materially impair
either the use of the Equipment in the operation of the business of the
Borrower or the value of the Equipment; and (d) attachment or judgment liens
that do not constitute an Event of Default.
Person shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
Schedule shall mean each Schedule in the form of Schedule A hereto delivered
by the Borrower to the Lender from time to time.
Solvent means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of
the total amount of its liabilities (including contingent liabilities as valued
in accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
SECTION 2. CREATION OF SECURITY INTEREST;
COLLATERAL. The Borrower hereby assigns and grants to the Lender a
continuing general, first priority lien on, and security interest in, all the
Borrower's right, title, and interest in and to the collateral described in the
next sentence (the "Collateral") to secure the payment and performance of all
the Obligations. The Collateral consists of all equipment set forth on all the
Schedules delivered from time to time under the terms of this Agreement (the
"Equipment"), together with all present and future additions, parts,
accessories, attachments, substitutions, repairs, improvements, and replacements
thereof or thereto, and any and all proceeds thereof, including, without
limitation, proceeds of insurance and all manuals, blueprints, know-how,
warranties, and records in connection therewith, all rights against suppliers,
warrantors, manufacturers, sellers, or others in connection therewith, and
together with all substitutes for any of the foregoing.
SECTION 3. THE CREDIT FACILITY
SECTION 3.1. Borrowings. Each Loan shall be in an
amount not less than S50,000, and in no event shall the sum of the aggregate
Loans made exceed the amount of the Lender's written commitment to the
Borrower in effect from time to time. Notwithstanding anything herein to the
contrary, the Lender shall be obligated to make the initial Loan and each other
Loan only after the Lender, in its sole discretion, determines that the
applicable conditions for borrowing contained in Sections 3.3 and 3.4 are
satisfied. The timing and financial scope of Lender's obligation to make Loans
hereunder are limited as set forth in a commitment letter executed by Lender
and Borrower, dated as of June 17, 1998 and attached hereto as Exhibit A (the
"Commitment Letter").
SECTION 3.2. Application of Proceeds. The Borrower shall
not directly or indirectly use any proceeds of the Loans, or cause, assist,
suffer, or permit the use of any proceeds of the Loans, for any purpose other
than for the purchase, acquisition, installation, or upgrading of Equipment or
the reimbursement of the Borrower for its purchase, acquisition, installation,
or upgrading of Equipment.
SECTION 3.3. Conditions to Initial Loan.
(a) The obligation of the Lender to make the initial
Loan is subject to the Lender's receipt of the following, each dated the date of
the initial Loan or as of an earlier date acceptable to the Lender, in form and
substance satisfactory to the Lender and its counsel:
(i) completed requests for information (Form
UCC-11) listing all effective Uniform Commercial Code financing statements
naming the Borrower as debtor and all tax lien, judgment, and litigation
searches for the Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing
statements (Form UCC-1) duly executed by the Borrower (naming the Lender
as secured party and the Borrower as debtor and in form acceptable for filing
in all jurisdictions that the Lender deems necessary or desirable to perfect the
security interests granted to it hereunder) and, if applicable, termination
statements or other releases duly filed in all jurisdictions that the Lender
deems necessary or desirable to perfect and protect the priority of the security
interests granted to it hereunder in the Equipment related to such initial Loan:
(iii) a Note duly executed by the Borrower
evidencing the amount of such Loan;
(iv) certificates of insurance required under
Section 5.4 of this Agreement together with loss payee endorsements for all
such policies naming the Lender as lender loss payee and as an additional
insured;
(v) a copy of the resolutions of the Board of
Directors of the Borrower (or a unanimous consent of directors in lieu thereof)
authorizing the execution, delivery, and performance of this Agreement, the
other Loan Documents, and the transactions contemplated hereby and thereby,
attached to which is a certificate of the Secretary or an Assistant Secretary of
the Borrower certifying (A) that the copy of the resolutions is true, complete,
and accurate, that such resolutions have not been amended or modified since
the date of such certification and are in full force and effect and (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party;
(vi) an agreement executed by the landlord for
the premises where the Equipment will be located covering such matters
incident to the transactions contemplated by this Agreement as the Lender may
reasonably require:
(vii) the opinion of' counsel for the Borrower
covering such matters incident to the transactions contemplated by this
Agreement as the Lender may reasonably require; and
(viii) such other agreements and instruments as
the Lender deems necessary in its sole and absolute discretion in connection
with the transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of
the Borrower after due inquiry, threatened litigation, proceeding, inquiry, or
other action (i) seeking an injunction or other restraining order, damages, or
other relief with respect to the transactions contemplated by this Agreement or
the other Loan Documents or thereby or (ii) which affects or could affect the
business, prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the judgment of the
Lender.
(c) The Borrower shall have paid all fees and
expenses required to be paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to
the initial Loan granted in favor of the Lender under this Agreement shall
have been duly perfected and shall constitute first priority liens.
SECTION 3.4. Conditions Precedent to Each Loan.
The obligation of the Lender to make each Loan is subject to the satisfaction
of the following conditions precedent:
(a) the Lender shall have received the documents,
agreements, and instruments set forth in Section 3.3(a)(i) through (v)
applicable to such Loan, each in form and substance satisfactory to the Lender
and its counsel and each dated the date of such Loan or as of an earlier date
acceptable to the Lender;
(b) the Lender shall have received a Schedule of the
Equipment related to such Loan, in form and substance satisfactory to the
Lender and its counsel, and the security interests in such Equipment related to
such Loan granted in favor of the Lender under this Agreement shall have
been duly perfected and shall constitute first priority liens;
(c) all representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct on and as
of the date of such Loan as if then made, other than representations and
warranties that expressly relate solely to an earlier date, in which case they
shall have been true and correct as of such earlier date;
(d) no Event of Default or event which with the giving
of notice or the passage of time, or both, would constitute an Event of Default
shall have occurred and be continuing or would result from the making of the
requested Loan as of the date of such request; and
(e) the Borrower shall be deemed to have hereby
reaffirmed and ratified all security interests, liens, and other encumbrances
heretofore granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND
WARRANTIES.
SECTION 4.1. Good Standing; Qualified to do
Business. The Borrower (a) is duly organized, validly existing, and in good
standing under the laws of the State of its organization, (b) has the power and
authority to own its properties and assets and to transact the businesses in
which it is presently, or proposes to be, engaged, and (c) is duly qualified and
authorized to do business and is in good standing in every jurisdiction in which
the failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the Loan
Documents, or (iii) the rights of the Lender hereunder.
SECTION 4.2. Due Execution, etc. The execution,
delivery, and performance by the Borrower of each of the Loan Documents to
which it is a party are within the powers of the Borrower, do not contravene
the organizational documents. if any, of the Borrower, and do not (a) violate
any law or regulation, or any order or decree of any court or governmental
authority, (b) conflict with or result in a breach of, or constitute a default
under, any material indenture, mortgages, or deed of trust or any material
lease, agreement, or other instrument binding on the Borrower or any of its
properties, or (c) require the consent, authorization by, or approval of or
notice to or filing or registration with any governmental authority or other
Person. This Agreement is, and each of the other Loan Documents to which the
Borrower is or will be a party, when delivered hereunder or thereunder, will
be, the legal, valid, and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, except as enforceability may he
limited by bankruptcy, insolvency, or similar laws affecting creditors' rights
generally and by general principles of equity.
SECTION 4.3. Solvency; No Liens. The Borrower is
Solvent and will be Solvent upon the completion of all transactions
contemplated to occur hereunder (including, without limitation, the Loan to be
made on the Effective Date), the security interests granted herein constitute
and shall at all times constitute the first and only liens on the Collateral
other than Permitted Liens; and the Borrower is, or will be at the time
additional Collateral is acquired by it, the absolute owner of the Collateral
with full right to pledge, sell, consign, transfer, and create a security
interest therein, free and clear of any and all claims or liens in favor of
any other Person other than Permitted Liens.
SECTION 4.4. No Judgments, Litigation. No judgments
are outstanding against the Borrower nor is there now pending or, to the best
of the Borrower's knowledge after diligent inquiry, threatened any litigation,
contested claim, or governmental proceedings by or against the Borrower
except judgments and pending or threatened litigation, contested claims, and
governmental proceedings which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 4.5. No Defaults. The Borrower is not in
default or has not received a notice of default under any material contract,
lease, or commitment to which it is a party or by which it is bound. The
Borrower knows of no dispute regarding any contract, lease, or commitment
which could have a Material Adverse Effect on the Borrower.
SECTION 4.6. Collateral Locations. On the date hereof,
each item of the Collateral is located at the place of business specified in the
applicable Schedule.
SECTION 4.7. No Events of Default. No Event of
Default has occurred and is continuing nor has any event occurred which, with
the giving of notice or the passage of time, or both, would constitute an Event
of Default.
SECTION 4.8. No Limitation on Lender's Rights.
Except as permitted herein, none of the Collateral is subject to contractual
obligations that may restrict or inhibit the Lender's rights or abilities to
sell or dispose of the Collateral or any part thereof after the occurrence of
an Event of Default.
SECTION 4.9. Perfection and Priority of Security
Interest. This Agreement creates a valid and, upon completion of all required
filings of financing statements, perfected first priority and exclusive security
interest in the Collateral, securing the payment of all the Obligations.
SECTION 4.10. Model and Serial Numbers. The
Schedules set forth are the true and correct model number and serial number of
each item of Equipment that constitutes Collateral.
SECTION 4.11. Accuracy and Completeness of
Information. All data, reports, and information heretofore,
contemporaneously, or hereafter furnished by or on behalf of the Borrower in
writing to the Lender or for purposes of or in connection with this Agreement
or any other Loan Document, or any transaction contemplated hereby or thereby,
are or will be true and accurate in all material respects on the date as
of which such data, reports, and information are dated or certified and not
incomplete by omitting to state any material fact necessary to make such data,
reports, and information not misleading at such time. There are no facts now
known to the Borrower which individually or in the aggregate would
reasonably be expected to have a Material Adverse Effect and which have not
been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
SECTION 4.12. Price of Equipment. To Borrower's
knowledge, the cost of each item of Equipment does not exceed the fair and
usual price for such type of equipment purchased in like quantity and reflects
all discounts, rebates and allowances for the Equipment (including, without
limitation, discounts for advertising, prompt payment, testing, or other
services) given to the Borrower by the manufacturer, supplier, or any other
person.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. Existence, etc. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full
force and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the profitable conduct of
its business unless the failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) continue in, and limit its
operations to, the same general lines of business as those presently conducted
by it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse
Effect on the Borrower.
SECTION 5.2. Notice to the Lender. As soon as possible, and in
any event within five days after the Borrower learns of the following, the
Borrower will give written notice to the Lender of (a) any proceeding
instituted or threatened in writing to be instituted by or against the
Borrower in any federal, state, local, or foreign court or before any
commission or other regulatory body (federal, state, local, or foreign)
involving a sum, together with the sum involved in all other similar
proceedings, in excess of $100,000 in the aggregate, (b) any contract that is
terminated or amended and which has had or could reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) the occurrence of any
Material Adverse Change with respect to the Borrower, and (d) the occurrence
of any Event of Default or event or condition which, with notice or lapse of
time or both, would constitute an Event of Default, together with a statement
of the action which the Borrower has taken or proposes to take with respect
thereto.
SECTION 5.3. Maintenance of Books and Records. The
Borrower will maintain books and records pertaining to the Collateral in such
detail, form, and scope as the Lender shall require in its commercially
reasonable judgment. The Borrower agrees that the Lender or its agents may
enter upon the Borrower's premises at any time and from time to time during
normal business hours, and at any time upon the occurrence and continuance
of an Event of Default, for the purpose of inspecting the Collateral and any and
all records pertaining thereto.
SECTION 5.4. Insurance. The Borrower will maintain
insurance on the Collateral under such policies of insurance, with such
insurance companies, in such amounts, and covering such risks as are at all
times satisfactory to the Lender. All such policies shall be made payable to
the Lender, in case of loss, under a standard non-contributory "lender" or
"secured party" clause and are to contain such other provisions as the Lender
may reasonably require to protect the Lender's interests in the Collateral and
to any payments to be made under such policies. Certificates of insurance
policies are to be delivered to the Lender, premium prepaid, with the loss
payable endorsement in the Lender's favor, and shall provide for not less than
thirty days' prior written notice to the Lender, of any alteration or
cancellation of coverage. If the Borrower fails to maintain such insurance,
the Lender may arrange for (at the Borrower's expense and without any
responsibility on the Lender's part for) obtaining the insurance. Unless the
Lender shall otherwise agree with the Borrower in writing, the Lender shall have
the sole right during the continuance of an Event of Default, in the name of
the Lender or the Borrower, to file claims under any insurance policies, to
receive and give acquittance for any payments that may be payable thereunder,
and to execute any endorsements, receipts, releases, assignments, reassignments,
or other documents that may be necessary to effect the collection, compromise.
or settlement of any claims under any such insurance policies.
SECTION 5.5. Taxes. The Borrower will pay, when due,
all taxes, assessments, claims, and other charges ("Taxes") lawfully levied or
assessed against the Borrower or the Collateral other than taxes that are beings
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by
the Borrower in accordance with GAAP. If any Taxes remain unpaid after the
date fixed for the payment thereof, or if any lien shall be claimed therefor,
then, without notice to the Borrower, but on the Borrower's behalf, the Lender
may pay such Taxes, and the amount thereof shall be included in the
Obligations.
SECTION 5.6. Borrower to Defend Collateral Against
Claims; Fees on Collateral. The Borrower will defend the Collateral against
all claims and demands of all Persons at any time claiming the same or any
interest therein. The Borrower will not permit any notice creating or otherwise
relating to liens on the Collateral or any portion thereof to exist or be on
file in any public office other than Permitted Liens. The Borrower shall
promptly pay, when payable, all transportation, storage, and warehousing
charges and license fees, registration fees, assessments, charges, permit fees,
and taxes (municipal, state, and federal) which may now or hereafter be imposed
upon the ownership, leasing, renting, possession, sale, or use of the
Collateral, other than taxes on or measured by the Lender's income and fees,
assessments, charges, and taxes which are being contested in good faith by
appropriate proceedings diligently conducted and with respect to which adequate
reserves are maintained to the extent required by GAAP.
SECTION 5.7. No Change of Location, Structure, or Identity. The
Borrower will not (a) change the location of its chief executive office or
establish any place of business other than those specified herein or (b)
move or permit the movement of any item of Collateral from the location
specified in the applicable Schedule, except that the Borrower may change its
chief executive office and keep Collateral at other locations within the United
States provided that the Borrower has delivered to the Lender (i) prior written
notice thereof and (ii) duly executed financing statements and other
agreements and instruments (all in form and substance satisfactory to the
Lender) necessary or, in the opinion of the Lender, desirable to perfect and
maintain in favor of the Lender a first priority security interest in the
Collateral. Notwithstanding anything to the contrary in the immediately
preceding sentence, the Borrower may keep any Collateral consisting of motor
vehicles or rolling stock at any location in the United States provided that the
Lender's security interest in any such Collateral is conspicuously marked on
the certificate of title thereof and the Borrower has complied with the
provisions of Section 5.9.
SECTION 5.8. Use of Collateral; Licenses; Repair. The
Collateral shall be operated by competent, qualified personnel in connection
with the Borrower's business purposes, for the purpose for which the Collateral
was designed and in accordance with applicable operating instructions. laws,
and government regulations, and the Borrower shall use every reasonable
precaution to prevent loss or damage to the Collateral from fire and other
hazards. The Collateral shall not be used or operated for personal, family, or
household purposes. The Borrower shall procure and maintain in effect all
orders, licenses, certificates, permits, approvals, and consents required by
federal, state, or local laws or by any governmental body, agency, or authority
in connection with the delivery, installation, use, and operation of the
Collateral. The Borrower shall keep all of the Equipment in a satisfactory
state of repair and satisfactory operating condition in accordance with
industry standards, and will make all repairs and replacements when and where
necessary and practical. The Borrower will not waste or destroy the
Equipment or any part thereof, and will not be negligent in the care or use
thereof. The Equipment shall not be annexed or affixed to or become part of
any realty without the Lender's prior written consent which will not be
unreasonably withheld.
SECTION 5.9. Further Assurances. The Borrower will,
promptly upon request by the Lender, execute and deliver or use its best
efforts to obtain any document required by the Lender (including, without
limitation, warehouseman or processor disclaimers, mortgagee waivers,
landlord disclaimers, or subordination agreements with respect to the
Obligations and the Collateral, give any notices, execute and file any financing
statements, mortgages, or other documents (all in form and substance
satisfactory to the Lender), mark any chattel paper, deliver any chattel paper
or instruments to the Lender, and take any other actions that are necessary or,
in the opinion of the Lender, desirable to perfect or continue the perfection
and the first priority of the Lender's security interest in the Collateral, to
protect the Collateral against the rights, claims, or interests of any Persons,
or to effect the purposes of this Agreement. The Borrower hereby authorizes
the Lender to file one or more financing or continuation statements, and
amendments thereto, relating to all or any part of the Collateral without the
signature of the Borrower where permitted by law. A carbon, photographic, or
other reproduction of this Agreement or any financing statement coverings the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. To the extent required under this Agreement, the
Borrower will pay all costs incurred in connection with any of the foregoing.
SECTION 5.10. No Disposition of Collateral. The Borrower will not in
any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except
for the lien and security interest granted hereby and Permitted Liens which are
junior to the lien and security interest of the Lender, and the Borrower will
not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise
dispose of any of the Collateral without substituting Collateral of equal or
greater value. In the event the Collateral, or any part thereof, is sold,
transferred, assigned, exchanged, or otherwise disposed of in violation of
these provisions, the security interest of the Lender shall continue
in such Collateral or part thereof notwithstanding such sale, transfer,
assignment, exchange, or other disposition, and the Borrower will hold the
proceeds thereof in a separate account for the benefit of the Lender. Following
such a sale, the Borrower will transfer such proceeds to the Lender in kind.
SECTION 5.11. No Limitation on Lender's Rights. The
Borrower will not enter into any contractual obligations which may restrict or
inhibit the Lender's rights or ability to sell or otherwise dispose of the
Collateral or any part thereof.
SECTION 5.12. Protection of Collateral. Upon notice to
the Borrower (provided that if an Event of Default has occurred and is
continuing the Lender need not give any notice, the Lender shall have the right
at any time to make any payments and do any other acts the Lender may deem
necessary to protect its security interests in the Collateral, including,
without limitation, the rights to satisfy, purchase, contest, or compromise any
encumbrance, charge, or lien which, in the reasonable judgment of the Lender,
appears to be prior to or superior to the security interests granted hereunder,
and appear in, and defend any action or proceeding purporting to affect its
security interests in, or the value of, any of the Collateral. The Borrower
hereby agrees to reimburse the Lender for all payments made and expenses
incurred under this Agreement including fees, expenses, and disbursements of
attorneys and paralegal (including the allocated costs of in-house counsel)
acting for the Lender, including any of the foregoing payments under, or acts
taken to protect its security interests in, any of the Collateral, which amounts
shall be secured under this Agreement, and agrees it shall be bound by any
payment reasonably made or act reasonably taken by the Lender hereunder
absent the Lender's gross negligence or willful misconduct. The Lender shall
have no obligation to make any of the foregoing payments or perform any of
the foregoing acts.
SECTION 5.13. Delivery of Items. The Borrower will (a) promptly (but
in no event later than one Business Day) after its receipt thereof,
deliver to the Lender any documents or certificates of title issued with respect
to any property included in the Collateral, and any promissory notes, letters of
credit or instruments related to or otherwise in connection with any property
included in the Collateral, which in any such case come into the possession of
the Borrower, or shall cause the issuer thereof to deliver any of the same
directly to the Lender, in each case with any necessary endorsements in favor
of the Lender and (b) deliver to the Lender as soon as available copies of any
and all press releases and other similar communications issued by the
Borrower.
SECTION 5.14. Solvency. The Borrower shall be and
remain Solvent at all times.
SECTION 5.15. Fundamental Changes. The Borrower
shall not (a) amend or modify its name, unless the Borrower delivers to the
Lender thirty days prior to any such proposed amendment or modification
written notice of such amendment or modification and within ten days before
such amendment or modification delivers executed Uniform Commercial
Code financing statements (in form and substance satisfactory to the Lender)
or (b) merge or consolidate with any other entity or make any material change
in its capital structure, in each case without the Lender's prior written
consent which shall not be unreasonably withheld.
SECTION 5.16. Additional Requirements. The Borrower
shall take all such further actions and execute all such further documents and
instruments as the Lender may reasonably request in order to carry out the
provisions of this Agreement.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and
satisfaction in full of all Obligations, the Borrower shall deliver to the
Lender the following financial information:
SECTION 6.1. Annual Financial Statements. As soon as
available, but not later than 120 days after the end of each fiscal year of the
Borrower and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for the
Borrower and its consolidated subsidiaries (the "Financial Statements") for
such year, reported on by independent certified public accountants without an
adverse qualification; and
SECTION 6.2. Quarterly Financial Statements. As soon as available,
but not later than 60 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter. together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are
fairly stated in all material respects (subject to normal year-end audit
adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the
following events shall Constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within two days after
notice of failure to pay when due any amount required to be paid by the
Borrower under or in connection with any Note and this Agreement;
(b) any representation or warranty made or deemed
made by the Borrower under or in connection with any Loan Document or any
Financial Statement shall prove to have been false or incorrect in any material
respect when made;
(c) the Borrower shall fail to perform or observe (i) any
of the terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10,
5.14, or 5.15 hereof or (ii) any other term, covenant, or agreement contained in
any Loan Document (other than the other Events of Default specified in this
Section 7) and such failure remains unremedied for the earlier of fifteen days
from (A) the date on which the Lender has given the Borrower written notice
of such failure and (B) the date on which the Borrower knew or should have
known of such failure;
(d) any provision of any Loan Document to which the
Borrower is a party shall for any reason cease to be valid and binding on the
Borrower, or the Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of
any bankruptcy, insolvency, arrangement, reorganization, receivership, or
similar proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof, or any action by the
Borrower is taken authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by
the Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the Borrower shall default in (i) the payment of
principal or interest on any indebtedness in excess of $100,000 (other than the
Obligations) beyond the period of grace, if any, provided in the instrument or
agreement under which such indebtedness was created; or (ii) the observance
or performance of any other agreement or condition relating to any such
indebtedness or contained in any instrument or agreement relating thereto, or
any other event shall occur or condition exist, the effect of which default or
other event or condition is to cause, or to permit the holder or holders of such
indebtedness to cause, with the giving of notice if required, such indebtedness
to become due prior to its stated maturity; or (iii) any loan or other agreement
under which the Borrower has received financing from Transamerica
Corporation or any of its affiliates;
(i) the Borrower suffers or sustains a Material Adverse
Change;
(j) any tax lien, other than a Permitted Lien, is filed of
record against the Borrower and is not bonded or discharged within five
Business Days;
(k) any judgment which has had or could reasonably be
expected to have a Material Adverse Effect on the Borrower and such
judgment shall not be stayed, vacated, bonded, or discharged within sixty
days;
(1) any material covenant, agreement, or obligation, as
determined in the good faith business judgment of the Lender, made by the
Borrower and contained in or evidenced by any of the Loan Documents shall
cease to be enforceable, or shall be determined to be unenforceable, in
accordance with its terms, the Borrower shall deny or disaffirm the
Obligations under anv of the Loan Documents or anv liens granted in
connection therewith or any liens granted on any of the Collateral in favor of
the Lender shall be determined to be void, voidable, or invalid, or shall not be
given the priority contemplated by this Agreement; or
(m) there is a change, which change results from a single
transaction or series of related transactions but not from the sale of newly
issued securities to investors, in more than 35% of the ownership of any equity
interests of the Borrower on the date hereof without Lender's prior written
consent which will not be unreasonably withheld or more than 35% of such
interests become subject to any contractual, judicial, or statutory lien,
charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred
and be continuing:
(a) The Lender may, without prejudice to any of its
other rights under any Loan Document or Applicable Law, declare all
Obligations to be immediately due and payable (except with respect to any
Event of Default set forth in Section 7(f) hereof, in which case all Obligations
shall automatically become immediately due and payable without necessity of
any declaration) without presentment, representation, demand of payment, or
protest, which are hereby expressly waived.
(b) The Lender may take possession of the Collateral
and, for that purpose may enter, with the aid and assistance of any person or
persons, any premises where the Collateral or any part hereof is, or may be
placed, and remove the same.
(c) The obligation of the Lender, if any, to make
additional Loans or financial accommodations of any kind to the Borrower
shall immediately terminate.
(d) The Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein (or in
any Loan Document) or otherwise available to it, all the rights and remedies of
a secured party under the applicable Uniform Commercial Code (the "Code")
whether or not the Code applies to the affected Collateral and also may (i)
require the Borrower to, and the Borrower hereby agrees that it will (to the
extent it is reasonably practical to do so) at its expense and upon request of
the Lender forthwith, assemble all or part of the Collateral as directed by the
Lender and make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Lender's offices or
elsewhere, for cash, on credit, or for future delivery, and upon such other
terms as the Lender may deem commercially reasonable. The Borrower agrees that,
to the extent notice of sale shall be required by law, at least ten days' notice
to the Borrower of the time and place of any public sale or the time after which
any private sale is to be made shall constitute reasonable notification. The
Lender shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Lender may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor,
and such sale may, without further notice, be made at the time and place to
which it was so adjourned.
(e) All cash proceeds received by the Lender in respect
of any sale of, collection from, or other realization upon all or any part of
the Collateral shall be applied in whole or in part by the Lender against, all
or any part of the Obligations in such order as the Lender shall elect. Any
surplus of such cash or cash proceeds held by the Lender and remaining after
the full and final payment of all the Obligations shall be paid over to the
Borrower or to such other Person to which the Lender may be required under
applicable law, or directed by a court of competent jurisdiction, to make
payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. Notices. Except as otherwise provided
herein, all notices, approvals, consents, correspondence, or other
communications required or desired to be given hereunder shall be given in
writing and shall be delivered by overnight courier, hand delivery, or certified
or registered mail, postage prepaid, if to the Lender, then to Transamerica
Technology Finance Division, 76 Batterson Park Road, Farmington,
Connecticut 06032, Attention: Assistant Vice President, Lease Administration,
with a copy to the Lender at Riverway II, West Office Tower, 9399 West
Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, and if
to the Borrower, then to Aquila Biopharmaceuticals. Inc., 175 Crossing
Boulevard, Framingham, Massachusetts 01702-4473, Attention: Vice
President - Finance or such other address as shall be designated by the
Borrower or the Lender to the other party in accordance herewith. All such
notices and correspondence shall be effective when received.
SECTION 9.2. Headings. The headings in this Agreement
are for purposes of reference only and shall not affect the meaning or
construction of any provision of this Agreement.
SECTION 9.3. Assignments. The Borrower shall not
have the right to assign any Note or this Agreement or any interest therein
unless the Lender shall have given the Borrower prior written consent and the
Borrower and its assignee shall have delivered assignment documentation in
form and substance satisfactory to the Lender in its sole discretion. The
Lender may assign its rights and delegate its obligations under any Note or this
Agreement.
SECTION 9.4. Amendments, Waivers, and Consents.
Any amendment or waiver of any provision of this Agreement and any
consent to any departure by the Borrower from any provision of this
Agreement shall be effective only by a writing signed by the Lender and shall
bind and benefit the Borrower and the Lender and their respective successors
and assigns, subject, in the case of the Borrower, to the first sentence of
Section 9.3.
SECTION 9.5. Interpretation of Agreement. Time is of
the essence in each provision of this Agreement of which time is an element.
All terms not defined herein or in a Note shall have the meaning set forth in
the applicable Code, except where the context otherwise requires. To the
extent a term or provision of this Agreement conflicts with any Note, or any
term or provision thereof, and is not dealt with herein with more specificity,
this Agreement shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Agreement shall not be relevant in determining the meaning of this
Agreement even though the accepting or acquiescing party had knowledge of
the nature of the performance and opportunity for objection.
SECTION 9.6. Continuing Security Interest. This Agreement shall create
a continuing security interest in the Collateral and shall
(i)remain in full force and effect until the indefeasible payment in full of the
Obligations, (ii) be binding upon the Borrower and its successors and assigns
and (iii) inure, together with the rights and remedies of the Lender hereunder,
to the benefit of the Lender and its successors, transferees, and assigns.
SECTION 9.7. Reinstatement. To the extent permitted by
law, this Agreement and the rights and powers granted to the Lender
hereunder and under the Loan Documents shall continue to be effective or be
reinstated if at any time any amount received by the Lender in respect of the
Obligations is rescinded or must otherwise be restored or returned by the
Lender upon the insolvency, bankruptcy, dissolution, liquidation, or
reorganization of the Borrower or upon the appointment of anv receiver,
intervenor, conservator, trustee, or similar official for the Borrower or any
substantial part of its assets, or otherwise, all as though such payments had
not been made.
SECTION 9.8. Survival of Provisions. All
representations, warranties, and covenants of the Borrower contained herein
shall survive the execution and delivery of this Agreement, and shall terminate
only upon the full and final payment and performance by the Borrower of the
Obligations secured hereby.
SECTION 9.9. Indemnification. The Borrower agrees to
indemnify and hold harmless the Lender and its directors, officers, agents,
employees, and counsel from and against any and all costs, expenses, claims,
or liability incurred by the Lender or such Person hereunder and under any
other Loan Document or in connection herewith or therewith, unless such
claim or liability shall be due to willful misconduct or gross negligence on the
part of the Lender or such Person.
SECTION 9.10. Counterparts; Telecopied Signatures.
This Agreement may be executed in counterparts, each of which when so
executed and delivered shall be an original, but both of which shall together
constitute one and the same instrument. This Agreement and each of the other
Loan Documents and any notices given in connection herewith or therewith
may be executed and delivered by telecopier or other facsimile transmission all
with the same force and effect as if the same was a fully executed and
delivered original manual counterpart.
SECTION 9.11. Severability. In case any provision in or
obligation under this Agreement or any Note or any other Loan Document
shall be invalid, illegal, or unenforceable in any jurisdiction, the validity,
legality, and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby,
SECTION 9.12. Delays; Partial Exercise of Remedies.
No delay or omission of the Lender to exercise any right or remedy hereunder,
whether before or after the happening of any Event of Default, shall impair
any such right or shall operate as a waiver thereof or as a waiver of any such
Event of Default. No single or partial exercise by the Lender of any right or
remedy shall preclude any other or further exercise thereof, or preclude any
other right or remedy.
SECTION 9.13. Entire Agreement. The Borrower and the
Lender agree that this Agreement, the Schedule hereto, and the Commitment
Letter are the complete and exclusive statement and agreement between the
parties with respect to the subject matter hereof, superseding all proposals and
prior agreements, oral or written, and all other communications between the
parties with respect to the subject matter hereof. Should there exist any
inconsistency between the terms of the Commitment Letter and this
Agreement, the terms of this Agreement shall prevail.
SECTION 9.14. Setoff. In addition to and not in limitation
of all rights of offset that the Lender may have under Applicable Law, and
whether or not the Lender has made any demand or the Obligations of the
Borrower have matured, the Lender shall have the right to appropriate and
apply to the payment of the Obligations of the Borrower all deposits and other
obligations then or thereafter owing by the Lender to or for the credit or the
account of the Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE
BORROWER AND THE LENDER IRREVOCABLY WAIVE ALL RIGHT
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY,
INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
SECTION 9.17. Venue; Service of Process. ANY LEGAL
ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE
COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK
COUNTY, OR OF THE UNITED STATES OF AMERICA FOR THE
NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF
THE AFORESAID COURTS. THE BORROWER HEREBY
IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH
ACTION OR PROCEEDING, ANY OBJECTION, INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH
RESPECTIVE JURISDICTIONS. THE BORROWER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE
BORROWER AT THE ADDRESS FOR IT SPECIFIED IN SECTION 9.1
HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE
LENDER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS
OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE
PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND REMEDIES.
IN WITNESS WHEREOF, the undersigned Borrower has caused
this Agreement to be duly executed and delivered by its proper and duly
authorized officer as of the date first set forth above.
AQUILA
BIOPHARMACEUTICALS, INC.
By:_________________________________
Name:
Title: President
Federal Tax ID:
Accepted as of the
____ day of July, 1998
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:___________________________________________
Name:
Title:
Exhibit 11
Aquila Biopharmaceuticals, Inc.
Statement of Computation of Earnings Per Share
For the Years Ended December 31,
1998 1997 1996
____ ____ ____
Basic
____
Net income/(loss) for basic
earnings per common shares $ (14,599,635) $ 925,516 $5,959,530
Weighted average number of ============ ======= =========
common shares Outstanding
during the year 6,580,602 5,003,703 3,717,441
Weighted average number of
shares used in calculation _________ _________ _________
Of basic earnings per share 6,580,602 5,003,703 3,717,441
========= ========= =========
Basic earnings per share $ (2.22) $ 0.18 $ 1.60
========= ========= =========
Diluted
_______
Net income/(loss) for diluted
earnings per common share $ (14,599,635) $ 925,516 $5,959,530
Weighted average number of
shares used in calculating
Basic earnings per common
share 6,580,602 5,003,703 3,717,441
Add - common stock equivalents
(determined using The
"treasury stock" method)
representing shares Deemed
outstanding from the assumed
exercise of Stock options
reduced by the number of
shares Purchased with the
proceeds (determined using
average Market price each of
the four quarters during the
year) 0 138,112 0
Weighted average number of shares
used in calculation of
Diluted earnings _________ _________ _________
per share 6,580,602 5,141,815 3,717,441
========= ========= =========
Diluted earnings per share $ (2.22) $ 0.18 $ 1.60
========= ========= =========
EXHIBIT 23
PricewaterhouseCoopers, LLP
One International Place
Boston, Massachusetts 02110
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Aquila Biopharmaceuticals, Inc. on Form S-3 (File No. 333-46641) of our
report dated February 11, 1999, on our audits of the consolidated financial
statements of Aquila Biopharmaceuticals, Inc. as of December 31, 1998 and
1997, and for the three years in the period ended December 31, 1998,
which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers, LLP
Boston, Massachusetts
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated balance sheets at December 31, 1998 and 1997, and the
statements of operations, shareholders' equity and cash flows for the three year
period ending December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,270,460
<SECURITIES> 9,885,090
<RECEIVABLES> 1,074,711
<ALLOWANCES> (47,000)
<INVENTORY> 434,849
<CURRENT-ASSETS> 16,971,558
<PP&E> 8,386,330
<DEPRECIATION> (2,013,985)
<TOTAL-ASSETS> 24,628,399
<CURRENT-LIABILITIES> 5,080,909
<BONDS> 5,860,778
0
0
<COMMON> 69,924
<OTHER-SE> 15,583,072
<TOTAL-LIABILITY-AND-EQUITY> 24,628,399
<SALES> 955,321
<TOTAL-REVENUES> 5,597,409
<CGS> 969,484
<TOTAL-COSTS> 8,416,843
<OTHER-EXPENSES> 13,728,033
<LOSS-PROVISION> (40,000)
<INTEREST-EXPENSE> 100,048
<INCOME-PRETAX> (14,599,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,599,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,599,635)
<EPS-PRIMARY> (2.22)
<EPS-DILUTED> (2.22)
</TABLE>
