<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
[ X ] 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
Commission File Number 0-15006
AVANT IMMUNOTHERAPEUTICS, INC.
(F/K/A T CELL SCIENCES, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3191702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
119 FOURTH AVENUE, NEEDHAM, MASSACHUSETTS 02494
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (781) 433-0771
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates as of March 1,
1999 was $57,134,276 (excludes shares held by directors and executive officers).
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
actions of the management or policies of the Registrant, or that such person is
controlled by or under common control with the Registrant. The number of shares
of common stock outstanding at March 1, 1999 was: 42,532,100 shares.
-1-
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: STATEMENTS CONTAINED IN THIS REPORT, INCLUDING PART II, ITEM 5: MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, THAT ARE NOT
HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO A VARIETY
OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY THE REGISTRANT. THESE FACTORS INCLUDE, BUT
ARE NOT LIMITED TO: (I) THE REGISTRANT'S ABILITY TO SUCCESSFULLY COMPLETE
PRODUCT RESEARCH AND DEVELOPMENT, INCLUDING PRE-CLINICAL AND CLINICAL STUDIES,
AND COMMERCIALIZATION; (II) THE REGISTRANT'S ABILITY TO OBTAIN SUBSTANTIAL
ADDITIONAL FUNDING; (III) THE REGISTRANT'S ABILITY TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS; (IV) THE REGISTRANT'S ABILITY TO ATTRACT MANUFACTURING,
SALES, DISTRIBUTION AND MARKETING PARTNERS AND OTHER STRATEGIC ALLIANCES; AND
(V) THE REGISTRANT'S ABILITY TO DEVELOP AND COMMERCIALIZE ITS PRODUCTS BEFORE
ITS COMPETITORS.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common Stock of AVANT Immunotherapeutics, Inc. (the "Company" or "AVANT")
began trading on the Nasdaq National Market (the "Nasdaq") under the symbol
"AVAN" on August 24, 1998. Prior to that date, the Company was traded on the
Nasdaq under the symbol "TCEL". The following table sets forth for the periods
indicated the high and low closing sales prices for the Company's common stock
as reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
1Q (Jan. 1 - March 31, 1997) $ 2.38 $ 1.47
2Q (April 1 - June 30, 1997) 2.09 1.28
3Q (July 1 - Sep. 30, 1997) 2.34 1.38
4Q (Oct. 1 - Dec. 31, 1997) 3.16 1.75
YEAR ENDED DECEMBER 31, 1998
1Q (Jan. 1- March 31, 1998) $ 2.94 $ 1.81
2Q (April 1 - June 30, 1998) 4.50 2.38
3Q (July 1 - Sept. 30, 1998) 2.81 1.19
4Q (Oct. 1 - Dec. 31, 1998) 1.78 1.06
</TABLE>
As of March 1, 1999, there were approximately 716 shareholders of record of the
Company's common stock. The price of the common stock was $1.50 as of the close
of the market on March 1, 1999. The Company has not paid any dividends on its
common stock since its inception and does not intend to pay any dividends in the
foreseeable future. Declaration of dividends will depend, among other things,
upon the operating and future earnings of the Company, the capital requirements
of the Company and general business conditions.
-2-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from the audited
consolidated financial statements of the Company. The results of operations for
1998 include the operating results of Virus Research Institute, Inc. ("VRI")
from August 21, 1998, the date on which the Company acquired it, through
December 31, 1998 (see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). All amounts are in thousands
except per share data.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA YEAR ENDED DECEMBER 31,
- ----------------------------------- -------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Product Sales, Product Development
and Distribution Agreements $ 2,150 $ 1,192 $ 1,115 $ 3,963 $ 6,968
--------- --------- --------- --------- ---------
OPERATING EXPENSE:
Research and Development 5,703 5,257 6,036 8,005 8,697
Charge for Purchased In-Process
Research & Development 44,630 -- -- -- --
Legal Settlement (166) 6,109 -- (2,900) --
Other Operating Expense 4,377 3,494 6,549 7,821 9,365
--------- --------- --------- --------- ---------
Total Operating Expense 54,544 14,860 12,585 12,926 18,062
--------- --------- --------- --------- ---------
Non-Operating Income (Expense), Net 594 560 680 705 (490)
--------- --------- --------- --------- ---------
Net Loss $ (51,800) $ (13,108) $ (10,790) $ (8,258) $ (11,584)
========= ========= ========= ========= =========
Basic and Diluted Net Loss Per
Common Share $ (1.56) $ (0.52) $ (0.50) $ (0.47) $ (0.68)
========= ========= ========= ========= =========
Weighted Average Common
Shares Outstanding 33,177 25,140 21,693 17,482 17,053
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE
SHEET DATA DECEMBER 31,
- ----------------------------------- -------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working Capital $ 12,298 $ 4,629 $ 11,673 $ 11,208 $ 15,027
Total Assets 22,650 9,827 17,224 18,532 20,685
Other Long Term Obligations 563 750 -- 182 500
Accumulated Deficit (122,037) (70,237) (57,129) (46,339) (38,081)
Total Stockholders' Equity 18,770 6,316 15,619 16,000 17,586
</TABLE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for certain
derivatives and other financial instruments. The Company does not utilize
derivative financial instruments. See Notes 1 and 2 to the Consolidated
Financials Statements for a description of the Company's use of other financial
instruments.
-3-
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: STATEMENTS CONTAINED IN THE FOLLOWING, ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THAT ARE NOT
HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO A VARIETY
OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY. THESE FACTORS INCLUDE, BUT ARE
NOT LIMITED TO: (I) THE COMPANY'S ABILITY TO SUCCESSFULLY COMPLETE PRODUCT
RESEARCH AND DEVELOPMENT, INCLUDING PRE-CLINICAL AND CLINICAL STUDIES, AND
COMMERCIALIZATION; (II) THE COMPANY'S ABILITY TO OBTAIN SUBSTANTIAL ADDITIONAL
FUNDING; (III) THE COMPANY'S ABILITY TO OBTAIN REQUIRED GOVERNMENTAL APPROVALS;
(IV) THE COMPANY'S ABILITY TO ATTRACT MANUFACTURING, SALES, DISTRIBUTION AND
MARKETING PARTNERS AND OTHER STRATEGIC ALLIANCES; AND (V) THE COMPANY'S ABILITY
TO DEVELOP AND COMMERCIALIZE ITS PRODUCTS BEFORE ITS COMPETITORS.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's principle activity since its inception has been research and
product development conducted on its own behalf, as well as through joint
development programs with several pharmaceutical companies. The Company was
incorporated in the State of Delaware in December 1983.
A significant portion of the Company's revenue has consisted of payments by
others to fund sponsored research, milestone payments under joint development
agreements, payments for material produced for preclinical studies, and sales of
test kits and antibodies. Certain portions of the collaborative payments are
received in advance, recorded as deferred revenue and recognized when earned in
later periods.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any in the near future.
OVERVIEW
The Company is engaged in the discovery, development and commercialization of
products that harness the human immune response to prevent and treat disease.
The Company's products derive from a broad set of complementary technologies
with the ability to inhibit the complement system, regulate T and B cell
activity, and enable the creation and delivery of preventative and therapeutic
vaccines. The Company is using these technologies to develop vaccines and
immunotherapeutics that prevent or treat disease caused by infectious organisms,
and drugs and treatment vaccines that modify undesirable activity by the body's
own proteins or cells.
ACQUISITION
On August 21, 1998 the Company acquired VRI, a company engaged in the discovery
and development of systems for the delivery of vaccines and immunotherapeutics,
and novel vaccines for adults and children. Pursuant to an Agreement and Plan of
Merger dated as of May 12, 1998 VRI became a wholly owned subsidiary of the
Company. The Company issued 14,036,400 shares of AVANT's common stock and
warrants to purchase 1,811,200 shares of AVANT's common stock in exchange for
all of the outstanding common stock of VRI, on the basis of 1.55 shares of
AVANT's common stock and .20 of an AVANT warrant for one share of VRI common
stock. The acquisition has been accounted for as a purchase. Consequently, the
purchase price was allocated to the acquired assets and assumed liabilities
based upon their fair value at the date of acquisition. The excess of the
purchase price over the tangible assets acquired was assigned to collaborative
relationships, work force and goodwill and is being amortized on a straight line
basis over 12 to 60 months. An allocation of $44,630,000 was made to in-process
research and development ("IPR&D") which represented purchased in-process
technology which had not yet reached technological feasibility and had no
alternative future use. The amount was charged as an expense in the Company's
financial statements during the third quarter of 1998.
-4-
<PAGE>
As of the date of acquisition, VRI was engaged in the following six significant
research and development projects:
1. Adjumer-TM- -- a vaccine delivery system being developed with a
collaborator, Pasteur-Merieux ("PMC"), as an adjuvant to enhance the immune
response to injected vaccines.
2. Micromer-TM- -- a vaccine delivery system designed to facilitate the
mucosal (intranasal or oral) delivery of antigens and stimulate both the
systemic and mucosal branches of the immune system.
3. Vibrio Vec-TM- -- a vaccine and immunotherapeutic system that uses a
bacterial vector for the oral delivery of antigens.
4. Rotavirus vaccine -- a vaccine against rotavirus infection being developed
with a collaborator, SmithKline Beecham.
5. Herpes vaccine -- a vaccine for the prevention of genital herpes.
6. Therapore-TM- -- a novel technology for the development of
immunotherapeutics.
As of the acquisition date, the IPR&D value assigned to each project, the
estimated cost to reach technological feasibility and the projected product
release date follows:
<TABLE>
<CAPTION>
Project Adjumer-TM- Micromer-TM- Vibrio Vec-TM- Rotavirus Herpes Therapore-TM-
- ------- ----------- ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Value Assigned $15,450,000 $ 3,260,000 $ 2,450,000 $ 3,120,000 $ 2,240,000 $18,110,000
Estimated
Project
Release Date 2001-2004 2002-2004 2003 2002 2007 2004
Estimated
Cost to
Complete $ 9,500,000 $ 3,300,000 $ 900,000 $ 1,200,000 $ 1,600,000 $41,200,000
</TABLE>
As of December 31, 1998, technological feasibility had not yet been reached on
any of the major projects acquired, and no significant departures from the
assumptions included in the valuation analysis had occurred. Substantial
additional research and development will be required prior to reaching
technological feasibility. In addition, each project will need to successfully
complete a series of clinical trials and will need to receive Food & Drug
Administration ("FDA") approval prior to commercialization. There can be no
assurance these projects will ever reach feasibility or develop into products
that can be marketed profitably, nor can there be assurance the Company and its
collaborators will be able to develop and commercialize these products before
its competitors. If these products are not successfully developed and do not
become commercially viable, the Company's financial condition and results of
operations could be harmed.
The acquisition of VRI represents the only purchase of historical IPR&D by the
Company. As of December 31, 1998, the Company has no immediate plans to acquire
additional IPR&D, although the Company expects to raise additional capital, as
required, through licensing of technology programs with existing or new
collaborative partners, possible business combinations, or issuance of common
stock via private placement and public offering.
NEW DEVELOPMENTS
Preliminary results from a Phase I clinical trial of the humanized monoclonal
antibody, ATM027, in patients with multiple sclerosis became available in the
first quarter of 1998. ATM027 is one of the products derived from the Company's
T cell antigen receptor (TCAR) program, now under development by Astra AB. The
results from the Phase I clinical trial show an effect on the target cells with
no serious adverse effects in the study to date. Astra initiated a Phase II
clinical trial for ATM027 in patients with multiple sclerosis in 1998.
Positive Phase I/II results of the Company's lead drug candidate, TP10, in
patients undergoing lung transplantation were presented by the Company in April
1998. Results in these patients showed that TP10 therapy appears safe and well
tolerated and demonstrated significant efficacy. TP10 is the Company's product
name for sCR1, a therapeutic compound which inhibits the complement system, a
key triggering mechanism for the inflammatory response. In
-5-
<PAGE>
October 1997 the Company entered into an agreement with Novartis Pharma AG,
Basel, Switzerland ("Novartis") relating to the development of TP10 for use in
xenotransplantation (animal organs into humans) and allotransplantation (human
organs into humans). The Company granted Novartis a two-year option to license
TP10 with exclusive worldwide marketing rights (except Japan) in the fields of
xenotransplantation and allotransplantation. The Company received its second
option fee payment in November 1998 which initiates year two of the option
agreement. If Novartis exercises its option to license TP10, it will provide
licensing fees, an equity investment and the Company will be entitled to
milestone payments and royalties on product sales.
The Company announced positive results of its Phase II efficacy study of its
vaccine for the prevention of rotavirus disease in infants in August 1998.
Rotavirus is a major cause of acute diarrhea and dehydration in infants for
which there are currently no approved vaccines, although several are under
development. The rotavirus vaccine is being developed and commercialized in
collaboration with SmithKline Beecham ("SmithKline"). Following successful
completion of the Phase II trial, SmithKline will assume responsibility for and
fund all subsequent clinical and other development activities. The Company will
be entitled to receive milestone payments and royalties on vaccine sales under
the agreement which grants SmithKline exclusive worldwide marketing rights to
the rotavirus vaccine.
The Company received a milestone payment of $600,000 from the Company's
collaborator Pasteur Merieux Connaught ("PMC") in the fourth quarter of 1998.
The Company is a party to two license agreements with PMC pursuant to which PMC
has been granted the exclusive and co-exclusive right (exclusive, except for the
right of the Company or one other person licensed by the Company) to make, use
and sell certain of the Company's vaccines. The milestone payment relates to a
Phase I clinical trial using the Company's Adjumer-TM--formulated RSV vaccine
initiated by PMC in 1998.
RESULTS OF OPERATIONS
The Company reported a net loss of $51,799,700, or $1.56 per share, for the year
ended December 31, 1998, compared to a net loss of $13,108,000, or $.52 per
share, for the year ended December 31, 1997 and a net loss of $10,790,100, or
$.50 per share, for the year ended December 31, 1996. The net loss for the year
ended December 31, 1998, includes a charge of $44,630,000 for purchased
in-process research and development related to the acquisition of VRI in August
1998. The net loss for the year ended December 31, 1997 includes a charge of
$6,108,800 for the settlement of the Company's litigation with its former
landlord and the landlord's mortgagee. The net loss for the year ended December
31, 1996 includes a charge to earnings of $1,751,600 for the write-off of
certain capitalized patent costs relating to the Company's TCAR program and a
$425,300 charge resulting from a severance agreement with the Company's former
president and chief executive officer. Excluding the charge for purchased
in-process research and development in 1998, the charge for the settlement of
the Company's litigation in 1997 and the charges for the write-off of certain
capitalized patent costs and the severance agreement in 1996, the net loss for
1998 increased 2.4% to $7,169,700, or $.22 per share, compared to $6,999,200, or
$.28 per share, for 1997 and the net loss for 1997 decreased 18.7% from
$8,613,200, or $.40 per share in 1996. The weighted average common shares
outstanding used to calculate the net loss per common share was 33,177,200 in
1998, 25,139,900 in 1997 and 21,693,400 in 1996.
OPERATING REVENUE
Total operating revenue increased $958,300, or 80.4%, to $2,150,400 in 1998 from
$1,192,100 in 1997 and increased $77,600, or 6.9%, in 1997 from $1,114,500 in
1996.
Product development and licensing revenue increased $946,900 in 1998, or 82.5%,
to $2,094,500 from $1,147,600 in 1997. Product development and licensing revenue
in 1998 consisted primarily of a $1,000,000 nonrefundable option fee associated
with the Company's agreement with Novartis, a milestone payment of $600,000 from
PMC and $494,500 received in connection with the Company's Small Business
Innovation Research grants ("SBIR"). In 1997, the Company recognized $250,000 of
a nonrefundable option fee from Novartis in product development and licensing
revenue, milestone payments totaling $650,000 from Astra and $247,600 received
in connection with the Company's SBIR grants. Product development and licensing
revenue increased $556,400, or 94.1%, in 1997 from $591,200 in 1996. Product
development and licensing revenue in 1996 consisted of $453,300 of TCAR project
funding from Astra and $37,900 received in connection with the Company's SBIR
grants.
-6-
<PAGE>
Product sales for 1998 and 1997 totaled $55,900 and $44,500, respectively, and
were derived from sales of the Company's TRAx-Registered Trademark- test kits.
Product sales of $523,300 in 1996 included sales of the Company's
TRAx-Registered Trademark- test kits for the full year combined with sales of
research products prior to the sale of the research products and operations of
the Company's wholly-owned subsidiary, T Cell Diagnostics, Inc. ("TCD"), in
March 1996.
OPERATING EXPENSE
Operating expense of $54,544,300 for 1998 included a charge of $44,630,000 for
purchased in-process research and development in connection with the acquisition
of VRI in August 1998. In May 1998, the Company used cash as collateral for a
$750,000 note due November 15, 1999 issued in connection with a settlement
agreement with its former landlord and the landlord's mortgagee. In accordance
with the settlement agreement, 66,250 shares of the Company's common stock
issued to secure the note were returned to the Company. The common stock was
valued at $165,600 as of October 31, 1997 and its return is included as a
reduction of operating expense in 1998. Operating expense of $14,859,600 for
1997 included a charge of $6,108,800 for the settlement of the Company's
litigation with its former landlord and the landlord's mortgagee. Excluding the
purchased in-process research and development charge in 1998 and the legal
settlement in 1997, operating expense increased $1,163,500, or 13.3%, to
$9,914,300 for 1998 compared to $8,750,800 for 1997 and decreased $3,834,000, or
30.5%, in 1997 from $12,584,800 in 1996. The increase in operating expense for
1998 compared to 1997 is primarily due to four months of operations of VRI
combined with goodwill amortization expense of $546,400 and the write-off of
certain capitalized patent costs relating to the Company's TRAx-Registered
Trademark- technology. The decrease in operating expense for 1997 compared to
1996 is primarily due to the charges for the write-off of certain capitalized
patent costs and severance agreement recognized in 1996, totaling $2,176,900,
and lower legal costs as a result of the settlement of the Company's litigation
combined with lower costs associated with Phase I and Phase I/II clinical trials
initiated in 1996.
Research and development expense increased $446,200, or 8.5%, to $5,703,100 in
1998 from $5,256,900 in 1997. The increase in 1998 compared to 1997 is primarily
due to four months of operations of VRI, partially offset by costs associated
with Phase I and Phase I/II clinical trials of TP10 ongoing in 1997. Research
and development expense decreased $779,600, or 12.9%, in 1997 from $6,036,500 in
1996. The decrease is primarily due to lower staff costs combined with a
reduction in costs associated with Phase I and Phase I/II clinical trials of
TP10 initiated in 1996. Included in research and development expense for 1996 is
two months of TCD operations prior to the sale of the research products and
operations of TCD in March 1996.
General and administrative expense increased $335,200, or 9.7%, to $3,808,100 in
1998 compared to $3,472,900 in 1997. Included in general and administrative
expense is a charge of $294,500 for the write-off of certain capitalized patent
costs associated with the Company's TRAx-Registered Trademark- technology.
Reductions in legal costs in 1998 primarily due to the settlement of the
Company's litigation in 1997 and lower consulting costs in 1998 compared to 1997
were offset by certain general and administrative costs associated with four
months of operations of VRI. General and administrative expense decreased
$2,999,700, or 46.3%, in 1997 compared to $6,472,600 in 1996. The decrease is
primarily due to a $425,300 charge resulting from a severance agreement and a
$1,751,600 write-off of certain capitalized patent costs relating to the
Company's TCAR technology in 1996. Lower legal costs in 1997 and reduced license
fees resulting from the transfer to Astra of certain of the Company's rights and
responsibilities to the TCAR technology in 1997 compared to 1996 also
contributed to the decrease in general and administrative expense in 1997
compared to 1996. In addition, included in general and administrative expense
for 1996 is two months of TCD operations prior to the sale of the research
products and operations of TCD in March 1996.
NON-OPERATING INCOME AND EXPENSE
Non-operating income increased $34,700, or 6.2%, to $594,200 for 1998 compared
to non-operating income for 1997 of $559,500 and decreased $120,700, or 17.7%,
in 1997 from $680,200 in 1996. Interest income decreased $5,400, or 0.9%, to
$571,900 for 1998 compared to $577,300 for 1997, and decreased $102,900, or
15.1%, in 1997 compared to $680,200 in 1996. These reductions in interest income
are primarily due to lower cash balances combined with lower interest rates in
1998 and 1997.
-7-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities at December 31,
1998 was $13,840,300 compared to $6,436,300 at December 31, 1997. Cash used in
operations was $8,852,000 in 1998 compared to $7,695,400 in 1997 and $9,675,800
in 1996.
In March 1998, the Company completed a private placement of approximately
2,043,500 shares of common stock to institutional investors at a price of $1.90
per share. Net proceeds from the common stock issuance totaled approximately
$3,699,800.
In November 1997, the Company reached a settlement of the litigation with its
former landlord and the landlord's mortgagee. As part of the settlement, the
Company agreed to pay $858,800 in cash on November 17, 1997 and issue a total of
1,500,000 shares of its common stock. In addition, the Company signed a note for
$750,000, due on November 16, 1998 secured by $750,000 cash and a note for
$750,000 due November 15, 1999 secured by 132,500 shares of common stock. The
total settlement, valued at $6,108,800, is comprised of the cash and notes
totaling $2,358,800 and common stock valued at $3,750,000 as of October 31,
1997. The common stock is subject to restrictions on transfer in accordance with
the settlement agreement. The settlement agreement also provides for certain
registration rights for the shares of common stock to become effective no later
than September 30, 1998. Upon such registration, however, the settlement
agreement limits the number of shares that may be sold over a given period of
time. In May 1998, in accordance with the settlement agreement, the Company
elected to secure the note for $750,000 due November 15, 1999 by $750,000 cash
in exchange for the return of 66,250 shares or one half of the common stock
originally used to secure the note. The cash collateral is recorded as
short-term restricted cash at December 31, 1998.
In March 1996, the Company received from Endogen, Inc. a convertible
subordinated note in the principal amount of $2,003,000 in connection with the
sale of the research products and operations of TCD to Endogen. Pursuant to the
terms of the note, on February 10, 1997 the Company converted the $1,802,700
outstanding principal balance of the note into shares of common stock of Endogen
which the Company subsequently sold. The realized gain on the stock sale was not
significant.
During 1994, the Company entered into an agreement providing the Company with
the right to lease up to $2,000,000 of equipment for up to a five-year term. The
lease arrangement contains certain restrictive covenants, determined at the end
of each fiscal quarter which, for the quarter ended September 30, 1995 included
a minimum cash, cash equivalents and short-term investments balance of
$10,000,000. At September 30, 1995 the Company's cash, cash equivalents and
short-term investment balance was below $10,000,000. As a result, in accordance
with the lease agreement, the Company pledged as collateral cash equal to the
amount outstanding on the lease which is to remain in a certificate of deposit
until the end of the lease, or as otherwise agreed by the lessor and the
Company. At December 31, 1998, the Company had $365,000 pledged as collateral
recorded as long-term restricted cash. In March 1996, the Company repaid
approximately $980,000 of the outstanding obligation under the lease in
conjunction with the sale of the research products and operations of its
subsidiary.
The Company believes that cash inflows from existing SBIR grants and
collaborations, interest income on invested funds and its current cash, cash
equivalents and marketable securities, net of restricted amounts, will be
sufficient to meet estimated working capital requirements and fund operations
beyond December 31, 1999 and into the first half of 2000. The working capital
requirements of the Company are dependent on several factors including, but not
limited to, the costs associated with research and development programs,
preclinical and clinical studies and the scope of collaborative arrangements.
During 1999, the Company expects to take steps to raise additional capital
including, but not limited to, licensing of technology programs with existing or
new collaborative partners, possible business combinations, or issuance of
common stock via private placement and public offering.
-8-
<PAGE>
THE STATEMENTS IN THE FOLLOWING SECTION INCLUDE THE "YEAR 2000 READINESS
DISCLOSURE" WITHIN THE MEANING OF THE YEAR 2000 INFORMATION AND READINESS
DISCLOSURE ACT.
YEAR 2000
THIS SECTION CONTAINS CERTAIN STATEMENTS THAT ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S
YEAR 2000 COMPLIANCE, AND THE EVENTUAL EFFECTS OF THE YEAR 2000 ON THE COMPANY
MAY BE MATERIALLY DIFFERENT THAN CURRENTLY PROJECTED. THIS MAY BE DUE TO, AMONG
OTHER THINGS, DELAYS IN THE IMPLEMENTATION OF THE COMPANY'S YEAR 2000 PLAN AND
THE FAILURE OF KEY THIRD PARTIES WITH WHOM THE COMPANY HAS A SIGNIFICANT
BUSINESS RELATIONSHIP TO ACHIEVE YEAR 2000 COMPLIANCE.
The "Year 2000" issue affects computer systems that have date sensitive programs
that may not properly recognize the year 2000. Systems that do not properly
recognize such information could generate data or cause a system to fail,
resulting in business interruption. The Company is currently developing a plan
to provide assurances that its computer systems are Year 2000 compliant, and
expects full compliance by the end of 1999. Given the relatively small size of
the Company's internal systems and the relatively new hardware, software and
operating systems, management does not anticipate any significant delays in
becoming Year 2000 compliant. Further, management believes at present that the
costs associated with modifications to become Year 2000 compliant will be
immaterial to the Company's continued internal operations.
The Year 2000 issue is expected to affect the systems of various entities with
which the Company interacts, including the Company's research and development
partners, suppliers and vendors. The Company's assessment of third party
anticipated risks and responses to those risks is not complete. There can be no
assurance that the systems of other companies on which the Company's system rely
will be timely converted, or that a failure by another company's system to be
Year 2000 compliant would not have a material adverse affect on the Company's
business, operating results and financial condition.
The Company does not have a contingency plan in the event Year 2000 compliance
cannot be achieved in a timely manner. A contingency plan will be developed upon
completion of the Company's Year 2000 compliance assessment.
-9-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
<S> <C>
Index to Consolidated Financial Statements and Supplementary
Schedules 10
Report of Independent Accountants 11
Consolidated Balance Sheet at December 31, 1998 and 12
December 31, 1997
Consolidated Statement of Operations for the Years Ended
December 31, 1998, December 31, 1997 and December 31, 1996 13
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1998, December 31, 1997 and December 31, 1996 14
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, December 31, 1997, and December 31, 1996 15
Notes to Consolidated Financial Statements 16
</TABLE>
-10-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
AVANT Immunotherapeutics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of AVANT
Immunotherapeutics, Inc. and its subsidiaries 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 1, 1999
-11-
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 8,937,200 $ 6,436,300
Marketable Securities 4,903,100 --
Current Portion Restricted Cash 750,000 750,000
Current Portion Lease Receivable 395,700 --
Prepaid and Other Current Assets, Net 629,700 203,300
------------- -------------
Total Current Assets 15,615,700 7,389,600
Property and Equipment, Net 1,111,400 364,500
Restricted Cash 365,000 525,000
Long-Term Lease Receivable 827,300 --
Other Assets 4,730,700 1,547,500
------------- -------------
Total Assets $ 22,650,100 $ 9,826,600
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 363,700 $ 201,200
Accrued Expenses 1,184,700 1,059,900
Deferred Revenue 750,000 750,000
Short-Term Note Payable 750,000 750,000
Current Portion Lease Payable 269,200 --
------------- -------------
Total Current Liabilities 3,317,600 2,761,100
------------- -------------
Long-Term Note Payable -- 750,000
Long-Term Lease Payable 562,900 --
------------- -------------
Commitments and Contingent Liabilities (Notes 3 and 13)
Stockholders' Equity:
Common Stock, $.001 Par Value 75,000,000 Shares Authorized;
42,512,400 Issued and 42,508,600 Outstanding at
December 31, 1998;
26,487,400 Issued and 26,477,700 Outstanding at
December 31, 1997 42,500 26,500
Additional Paid-In Capital 140,777,200 76,561,400
Less: 3,800 and 9,700 Common Treasury Shares at Cost at
December 31, 1998 and 1997, respectively (13,800) (35,800)
Accumulated Deficit (122,036,300) (70,236,600)
------------- -------------
Total Stockholders' Equity 18,769,600 6,315,500
------------- -------------
Total Liabilities and Stockholders' Equity $ 22,650,100 $ 9,826,600
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-12-
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUE:
Product Development and
Licensing Agreements $ 2,094,500 $ 1,147,600 $ 591,200
Product Sales 55,900 44,500 523,300
------------ ------------ ------------
Total Operating Revenue 2,150,400 1,192,100 1,114,500
------------ ------------ ------------
OPERATING EXPENSE:
Cost of Product Sales 22,300 21,000 358,700
Research and Development 5,703,100 5,256,900 6,036,500
Charge for Purchased In-Process Research & Development 44,630,000 -- --
General and Administrative 3,808,100 3,472,900 6,472,600
Legal Settlement (165,600) 6,108,800 --
Gain on Sale of Portion of Diagnostic Business -- -- (283,000)
Amortization of Goodwill 546,400 -- --
------------ ------------ ------------
Total Operating Expense 54,544,300 14,859,600 12,584,800
------------ ------------ ------------
Operating Loss (52,393,900) (13,667,500) (11,470,300)
Non-Operating Income (Expense), Net 594,200 559,500 680,200
------------ ------------ ------------
Net Loss $(51,799,700) $(13,108,000) $(10,790,100)
============ ============ ============
Basic and Diluted Net Loss Per Common Share $ (1.56) $ (0.52) $ (0.50)
============ ============ ============
Weighted Average Common
Shares Outstanding 33,177,200 25,139,900 21,693,400
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-13-
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Additional Treasury Total
Stock Paid-In Stock Accumulated Stockholders'
Shares Par Value Capital Cost Deficit Equity
---------- --------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 19,904,700 $ 19,900 $ 62,399,200 $ (80,500) $ (46,338,500) $ 16,000,100
Issuance at $.60 to $3.56
per Share upon Exercise
of Stock Options 60,700 100 161,600 -- -- 161,700
Employee Stock Purchase
Plan Issuance at $2.71
per Share -- -- (3,000) 11,500 -- 8,500
Net Proceeds from Stock Issuance 5,000,000 5,000 10,063,700 -- -- 10,068,700
Compensation Expense Associated
with Stock Options -- -- 170,300 -- -- 170,300
Net Loss for the Year
Ended December 31, 1996 -- -- -- -- (10,790,100) (10,790,100)
---------- --------- ------------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 24,965,400 $ 25,000 $ 72,791,800 $ (69,000) $ (57,128,600) $ 15,619,200
Issuance at $1.81 to $2.13
per Share upon Exercise
of Stock Options 12,000 -- 22,400 -- -- 22,400
Employee Stock Purchase
Plan Issuance at $1.38 and
$1.39 per Share -- -- (20,700) 33,200 -- 12,500
Issuance at $2.50 per Share for
Settlement of Litigation 1,500,000 1,500 3,748,500 -- -- 3,750,000
Compensation Expense Associated
with Issuance at $1.94 per
Share 10,000 -- 19,400 -- -- 19,400
Net Loss for the Year
Ended December 31, 1997 -- -- -- -- (13,108,000) (13,108,000)
---------- --------- ------------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 26,487,400 $ 26,500 $ 76,561,400 $ (35,800) $ (70,236,600) $ 6,315,500
Issuance at $0.60 to $1.81
per Share upon Exercise
of Stock Options 11,400 -- 15,300 -- -- 15,300
Employee Stock Purchase
Plan Issuance at $1.65 and
$1.94 per Share -- -- (10,700) 22,000 -- 11,300
Returned Shares from Settlement
of Litigation at $2.50 per
Share (66,300) -- (165,600) -- -- (165,600)
Net Proceeds from Stock Issuance 2,043,500 2,000 3,697,800 -- -- 3,699,800
Share Issued for Acquisition of
Virus Research Institute,
Inc. 14,036,400 14,000 60,679,000 -- -- 60,693,000
Net Loss for the Year
Ended December 31, 1998 -- -- -- -- (51,799,700) (51,799,700)
---------- --------- ------------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 42,512,400 $ 42,500 $ 140,777,200 $ (13,800) $(122,036,300) $ 18,769,600
========== ========= ============= ========= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
Increase in Cash and Cash Equivalents 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(51,799,700) $(13,108,000) $(10,790,100)
Adjustments to Reconcile Net Loss to Cash
Used by Operating Activities:
Depreciation and Amortization 989,800 353,800 464,800
Write-off of Capitalized Patent Costs 337,000 51,100 1,751,600
Decrease in Collaborator Advance -- -- (181,500)
Non-Cash Portion of Litigation Settlement (165,600) 5,250,000 --
Compensation Expense Associated with
Stock Issuance -- 19,400 --
Compensation Expense Associated with
Stock Options -- -- 170,300
Gain on Sale of Research Products and Operations
of T Cell Diagnostics, Inc. -- -- (283,000)
Gain on Sale of Equipment (22,300) -- --
Charge for Purchased In-Process Research and
Development 44,630,000 -- --
Changes in Assets and Liabilities, Net of Acquisition:
Increase in Current Portion Restricted Cash -- (750,000) --
Prepaid and Other Current Assets (1,529,900) 81,700 109,400
Accounts Payable and Accrued Expenses (1,291,300) (343,400) (796,200)
Deferred Revenue -- 750,000 (121,100)
------------ ------------ ------------
Net Cash Used by Operating Activities (8,852,000) (7,695,400) (9,675,800)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (294,800) (76,900) (135,200)
Proceeds from the Sale of Equipment 25,200 -- --
Redemption of Marketable Securities 4,463,000 -- --
Increase in Patents and Licenses (426,000) (381,200) (507,400)
Decrease in Long-Term Restricted Cash, Net 160,000 160,000 165,000
Cash Received from Acquisition of Virus Research
Institute, Inc. 4,391,500 -- --
Payment of Note Payable (750,000) -- --
Payment Received on Convertible Note Receivable -- 1,802,700 200,300
Other 57,600 400 30,800
------------ ------------ ------------
Net Cash Provided (Used) by Investing Activities 7,626,500 1,505,000 (246,500)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from Stock Issuance 3,711,100 12,500 10,077,200
Proceeds from Exercise of Stock Options 15,300 22,400 161,700
------------ ------------ ------------
Net Cash Provided by Financing Activities 3,726,400 34,900 10,238,900
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 2,500,900 (6,155,500) 316,600
Cash and Cash Equivalents at Beginning of Period 6,436,300 12,591,800 12,275,200
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 8,937,200 $ 6,436,300 $ 12,591,800
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
AVANT Immunotherapeutics, Inc. (the "Company") is a biopharmaceutical company
engaged in the discovery, development and commercialization of products that
harness the human immune response to prevent and treat disease. The Company
develops and commercializes products on a proprietary basis and in collaboration
with established pharmaceutical partners, including Novartis Pharma AG, Astra
AB, Yamanouchi Pharmaceutical Co., Ltd., Pasteur Merieux Connaught, and
SmithKline Beecham.
In March 1998, the Company completed a private placement of 2,043,500 shares of
common stock to institutional investors at a price of $1.90 per share. Net
proceeds from the common stock issuance totaled approximately $3,699,800. On
August 21, 1998, the Company acquired all of the outstanding capital stock of
Virus Research Institute, Inc. ("VRI"), a company engaged in the discovery and
development of (i) systems for the delivery of vaccines and immunotherapeutics
and (ii) novel vaccines (see Note 15).
The Company's cash, cash equivalents and marketable securities at December 31,
1998 was $13,840,300. The Company's working capital at December 31, 1998 was
$12,298,100. The Company incurred a loss of $51,799,700 for the year ended
December 31, 1998, which includes a charge of $44,630,000 for purchased
in-process research and development related to the acquisition of VRI (see Note
15). The Company believes that cash inflows from existing grants and
collaborations, interest income on invested funds and its current cash, cash
equivalents, and marketable securities will be sufficient to meet estimated
working capital requirements and fund operations beyond December 31, 1999. The
working capital requirements of the Company are dependent on several factors
including, but not limited to, the costs associated with research and
development programs, preclinical and clinical studies and the scope of
collaborative arrangements. During 1999, the Company expects to take steps to
raise additional capital including, but not limited to, licensing of technology
programs with existing or new collaborative partners, possible business
combinations, or issuance of common stock via private placement and public
offering. There can be no assurances that such efforts will be successful.
In March 1996, the Company sold substantially all of the assets of its
wholly-owned subsidiary, T Cell Diagnostics, Inc. ("TCD") while retaining all
rights to the TRAx-Registered Trademark- product franchise. The Company
continued to commercialize the TRAx-Registered Trademark- line of diagnostic
products which are used in the detection and monitoring of immune-related
disorders through 1998. The Company is currently focusing its efforts on
establishing a partnership for the TRAx-Registered Trademark- technology.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AVANT
Immunotherapeutics, Inc. and its wholly owned subsidiaries, Virus Research
Institute, Inc., from the date of purchase, and T Cell Diagnostics, Inc. All
intercompany transactions have been eliminated.
(C) CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Short-term investments are those
with maturities in excess of three months but less than one year. All cash
equivalents and short-term investments have been classified as available for
sale and are reported at fair market value with unrealized gains and losses
included in stockholders' equity.
In addition to cash equivalents, the Company has investments in corporate and
municipal debt securities that are classified in the balance sheet as
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Instruments
in Debt and Equity Securities."
-16-
<PAGE>
Held-to-maturity investments are securities the Company has the positive intent
and ability to hold to maturity. These securities are accounted for at amortized
cost, which approximates fair value.
The Company invests its nonoperating cash in debt instruments of financial
institutions, government entities and corporations, and mutual funds. The
Company has established guidelines relative to credit ratings, diversification
and maturities that maintain safety and liquidity.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the normal
course of business. Fair values for cash, cash equivalents, short-term
investments, accounts and notes receivable, accounts and notes payable and
accrued expenses approximate carrying value at December 31, 1998 and 1997, due
to the nature and the relatively short maturity of these instruments.
(E) REVENUE RECOGNITION
The Company has entered into various license and development agreements with
pharmaceutical and biotechnology companies. Nonrefundable revenue derived from
such agreements is recognized over the specified development period as research
and development or discovery activities are performed. Cash received in advance
of activities being performed is recorded as deferred revenue. Signing fees,
received by the Company for entering into license and development agreements are
recognized when received if the fees are nonrefundable and the Company has no
obligations to perform under the applicable agreement. Nonrefundable milestone
fees are recognized when they are earned in accordance with the performance
requirements and contractual terms. Revenues from product sales are recorded
when the product is shipped.
(F) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(G) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(H) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Laboratory
equipment and office furniture and equipment are depreciated over a five year
period and computer equipment is depreciated over a three year period. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
noncancelable term of the related lease.
(I) LICENSES, PATENTS AND TRADEMARKS
Included in other assets are the costs of purchased licenses and certain costs
associated with patents and trademarks which are capitalized and amortized over
the shorter of the estimated useful lives or ten years using the straight-line
method. The Company periodically evaluates the recoverability of these assets in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of".
(J) LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
changed the method of calculating earnings per share. SFAS 128, which the
Company adopted in the fourth quarter of 1997, requires the presentation of
"basic" earnings per share and "diluted" earnings per share. As a result of the
Company's net loss, both basic and diluted earnings per share are computed by
dividing the net loss available to common shareholders by the weighted average
number of shares of common stock outstanding.
-17-
<PAGE>
(K) STOCK COMPENSATION
The Company's employee stock compensation plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" (see Note 7).
(L) USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
2. SHORT-TERM INVESTMENTS AND RESTRICTED CASH
The Company invests in high quality, short-term investments which are considered
highly liquid and are available to support current operations. The Company also
invests in high quality, debt securities which are classified as
held-to-maturity. At December 31, 1998 and 1997, the Company's investments that
met the definition of cash equivalents were recorded at cost, which approximated
fair value.
At December 31, 1998 and 1997, the Company had pledged as collateral $750,000
which is recorded as current portion restricted cash and $365,000 and $525,000,
respectively, which is recorded as long-term restricted cash. Pursuant to the
terms of the settlement agreement between the Company and its former landlord,
the Company pledged as collateral $750,000 at December 31, 1998 and 1997 (see
Note 13). The Company also has $365,000 and $525,000 pledged as collateral at
December 31, 1998 and 1997, respectively, in accordance with the terms of the
operating lease (see Note 3).
3. PROPERTY, EQUIPMENT AND LEASES
Property and equipment includes the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Laboratory Equipment $ 2,480,000 $ 1,834,200
Office Furniture and Equipment 1,148,200 1,013,700
Leasehold Improvements 393,600 255,000
----------- -----------
Property and Equipment, Total 4,021,800 3,102,900
Less Accumulated Depreciation and Amortization (2,910,400) (2,738,400)
----------- -----------
$ 1,111,400 $ 364,500
----------- -----------
----------- -----------
</TABLE>
Depreciation expense related to equipment and leasehold improvements was
approximately $267,600, $224,000 and $290,800 for the years ended December 31,
1998, 1997 and 1996, respectively.
In May 1996, the Company entered into a six-year lease for laboratory and office
space in Needham, Massachusetts. The lease replaced two-year lease and sublease
agreements entered into in March 1995 for the same location and increased the
amount of office and laboratory space available. In March 1996, the Company sold
certain property and equipment to Endogen as part of the sale of the research
products and operations of TCD. In addition, certain lease obligations of the
Company were assigned to Endogen in conjunction with the sale (see Note 14).
In August 1994, the Company entered into a lease agreement providing the Company
with the right to lease up to $2,000,000 of equipment for up to a five-year
term. The lease agreement contains certain restrictive covenants determined at
the end of each fiscal quarter which, for the quarter ended September 30, 1995,
included a minimum cash, cash equivalents and short-term investments balance of
$10,000,000. At September 30, 1995 the Company's cash and cash equivalents
balance was below $10,000,000. As a result, in accordance with the lease
agreement, the
-18-
<PAGE>
Company pledged cash as collateral to the lessor equal to the amount outstanding
on the lease which is to remain in a certificate of deposit until the end of the
lease or as otherwise agreed by the lessor and the Company. The Company has
recorded $365,000 and $525,000 as long-term restricted cash at December 31, 1998
and 1997, respectively.
Obligations for base rent, net of sublease income, under these and other
noncancelable operating leases as of December 31, 1998 are approximately as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, 1999 $ 760,000
2000 689,600
2001 668,200
2002 252,100
2003 --
Thereafter --
----------
Total minimum lease payments $2,369,900
----------
----------
</TABLE>
The Company's total rent expense was approximately $909,500, $851,400 and
$903,100 for the years ended December 31, 1998, 1997 and 1996, respectively.
4. OTHER ASSETS
Other assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Capitalized Patent Costs $ 1,890,300 $ 1,900,700
Accumulated Amortization (595,500) (519,100)
----------- -----------
Capitalized Patent Costs, Net 1,294,800 1,381,600
Goodwill and Other Intangible Assets, Net 3,289,300 --
Other Non Current Assets 146,600 165,900
----------- -----------
$ 4,730,700 $ 1,547,500
=========== ===========
</TABLE>
In December 1998, in accordance with SFAS 121, the Company evaluated and
subsequently wrote off approximately $294,500 of capitalized patent costs
relating to its TRAx-Registered Trademark- test kit program which is included in
operating expense as general and administrative expense for the year ended
December 31, 1998.
During the second quarter of 1996, as part of the Company's realignment of
certain of its operations, the Company suspended internal funding of the
research and development of its T cell antigen receptor program pending
completion of negotiations to transfer certain of its patent and license rights
related to such technology to Astra AB. In June 1996, in accordance with SFAS
121, the Company evaluated and subsequently wrote off approximately $1,751,600
of capitalized patent costs relating to its T cell antigen receptor program
which is included in operating expense as general and administrative expense for
the year ended December 31, 1996.
Amortization expense for the years ended December 31, 1998, 1997 and 1996
relating to the capitalized costs of purchased licenses, patents and trademarks
was approximately $175,800, $129,800 and $174,000, respectively. Goodwill
amortization expense for the year ended December 31, 1998 was approximately
$546,400.
-19-
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Accrued License Fees $ 60,000 $ 60,000
Accrued Payroll and Employee Benefits 258,700 222,600
Accrued Clinical Trials 195,500 448,100
Accrued Legal 263,800 20,600
Other Accrued Expenses 406,700 308,600
---------- ----------
$1,184,700 $1,059,900
========== ==========
</TABLE>
6. INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit:
Federal $ 2,444,900 $ 4,539,100 $ 3,696,100
State 198,900 529,000 388,000
----------- ----------- -----------
2,643,800 5,068,100 4,084,100
Deferred tax assets valuation allowance (2,643,800) (5,068,100) (4,084,100)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Net Operating Loss Carryforwards $ 42,591,900 $ 25,775,200
Tax Credit Carryforwards 4,139,300 3,143,800
Other 1,626,500 1,521,500
------------ ------------
Gross Deferred Tax Assets 48,357,700 30,440,500
Deferred Tax Assets Valuation Allowance (48,357,700) (30,440,500)
------------ ------------
$ -- $ --
============ ============
</TABLE>
-20-
<PAGE>
Reconciliation between the amount of reported income tax expenses and the amount
computed using the U.S. Statutory rate of 35% follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Loss at Statutory Rates $(2,313,200) $(4,587,800) $(3,776,500)
Research and Development Credits (298,100) (172,100) (189,400)
State tax benefit, net of federal tax
liabilities (269,700) (591,500) (337,400)
Other 237,200 283,300 219,200
Benefit of losses and credits not
recognized, increase in valuation
allowance 2,643,800 5,068,100 4,084,100
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets as
management has concluded that it is more likely than not that the Company will
not recognize any benefits from its net deferred tax asset. The timing and
amount of future earnings will depend on numerous factors, including the
Company's future profitability. The Company will assess the need for a valuation
allowance as of each balance sheet date based on all available evidence.
At December 31, 1998, the Company has U.S. net operating loss carryforwards of
$73,405,802, U.S. capital loss carryforwards of $1,852,300, and U.S. tax credits
of $2,848,400 which expire at various dates from 1999 through 2010. Under the
Tax Reform Act of 1986, certain substantial changes in the Company's ownership
could result in an annual limitation on the amount of net operating loss
carryforwards, research and development tax credits, and capital loss
carryforwards which could be utilized.
7. STOCKHOLDERS' EQUITY
(A) PUBLIC AND PRIVATE STOCK OFFERINGS
On March 24, 1998, the Company completed a private placement of 2,043,500 newly
issued shares of common stock. Net proceeds were approximately $3,699,800 after
deducting all associated expenses.
On August 26, 1996, the Company completed a public offering of 5,000,000 newly
issued shares of common stock. Net proceeds were approximately $10,068,700 after
deducting all associated expenses.
(B) PREFERRED STOCK
At December 31, 1998 and 1997, the Company had authorized preferred stock
comprised of 1,163,102 shares of convertible Class B and 3,000,000 shares of
convertible Class C of which 350,000 shares has been designated as Class C-1
Junior Participating Cumulative, the terms of which are to be determined by the
Company's Board of Directors. There was no preferred stock outstanding at
December 31, 1998 and 1997.
(C) WARRANTS
The Company has issued warrants to purchase common stock in connection with the
acquisition of VRI on August 21, 1998. The warrants are exercisable at $6.00 per
share and expire August 22, 2003. In connection with the acquisition of VRI, the
Company also assumed the obligations of VRI with respect to each outstanding
warrant to purchase VRI common stock (a "VRI Warrant"). Each VRI Warrant assumed
by the Company, which will continue to have, and be subject to, the terms and
conditions of the applicable warrant agreements and warrant certificates, has
been adjusted
-21-
<PAGE>
consistent with the ratio at which the Company's common stock was issued in
exchange for VRI common stock in the acquisition.
Warrants outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Security Shares Per Share Expiration Date
-------- ------ --------- ---------------
<S> <C> <C> <C>
Common stock 35,657 $ .62 February 9, 2004
Common stock 76,842 1.26 December 14, 2005
Common stock 17,050 7.10 April 12, 2001
Common stock 1,811,843 6.00 August 22, 2003
</TABLE>
(D) STOCK COMPENSATION AND EMPLOYEE STOCK PURCHASE PLANS
STOCK COMPENSATION
The Company's 1991 Stock Compensation Plan (the "1991 Plan"), which is an
amendment and restatement of the Company's 1985 Incentive Option Plan, permits
the granting of incentive stock options (intended to qualify as such under
Section 422A of the Internal Revenue Code of 1986, as amended), non-qualified
stock options, stock appreciation rights, performance share units, restricted
stock and other awards of restricted stock in lieu of cash bonuses to employees,
consultants and outside directors.
The Plan allows for a maximum of 3,700,000 shares of common stock to be issued
prior to December 1, 2001. The Board of Directors determines the term of each
option, option price, number of shares for which each option is granted and the
rate at which each option vests. The term of each option cannot exceed ten years
(five years for options granted to holders of more than 10% of the voting stock
of the Company). The exercise price of stock options shall not be less than the
fair market value of the common stock at the date of grant (110% of fair market
value for options granted to holders of more than 10% of the voting stock of the
Company).
In connection with the acquisition of VRI, the Company assumed the obligations
of VRI under VRI's 1992 Equity Incentive Plan (the "VRI Plan") and each
outstanding option to purchase VRI common stock (a "VRI Stock Option") granted
under the VRI Plan. Each VRI Stock Option assumed by the Company is deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under the VRI Plan, shares of the Company's common stock which has
been adjusted consistent with the ratio at which the Company's common stock was
issued in exchange for VRI's common stock in the acquisition. As of the date the
acquisition was completed the Company assumed options to acquire 1,532,055
shares of the Company's common stock at a weighted average exercise price of
$2.34.
EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan (the "1994 Plan") was adopted on June 30,
1994. All full time employees of the Company are eligible to participate in the
1994 Plan. A total of 150,000 shares of common stock are reserved for issuance
under this plan. Under the 1994 Plan, each participating employee may contribute
up to 15% of his or her compensation to purchase up to 500 shares of common
stock per year in any public offering and may withdraw from the offering at any
time before stock is purchased. Participation terminates automatically upon
termination of employment. The purchase price per share of common stock in an
offering is 85% of the lower of its fair market value at the beginning of the
offering period or the applicable exercise date.
-22-
<PAGE>
A summary of stock option activity for the years ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1,773,242 $ 3.20 2,303,196 $ 5.94 2,516,313 $ 5.82
Granted 638,250 1.99 492,750 1.77 472,600 2.82
Assumed in acquisition 1,532,055 2.34 -- -- -- --
Exercised (11,355) 1.34 (12,000) 1.86 (60,710) 2.66
Canceled (577,484) 2.82 (1,010,704) 8.78 (625,007) 3.39
--------- ------ --------- ------ --------- ------
Outstanding at December 31, 3,354,708 $ 2.65 1,773,242 $ 3.20 2,303,196 $ 5.94
========= ====== ========= ====== ========= ======
At December 31,
Options exercisable 2,542,950 1,039,437 1,740,310
Available for grant 1,095,206 1,296,716 678,762
Weighted average fair value
of options granted during
year $ 1.10 $ 0.92 $ 1.26
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------
Number Weighted Average Weighted Average
Outstanding at Remaining Exercise Price
Range of Exercise Prices December 31, 1998 Contractual Life per Share
- ------------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.10 - 0.64 698,631 5.46 $0.63
0.95 - 1.97 797,515 8.97 1.78
2.03 - 2.75 575,190 7.99 2.55
2.93 - 4.04 758,091 6.77 3.57
4.06 - 7.81 525,281 5.50 5.45
- ------------------------ --------- ---- ----
$ 0.10 - 7.81 3,354,708
- ------------------------ ---------
- ------------------------ ---------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------
Number Weighted Average
Exercisable at Exercise Price
Range of Exercise Prices December 31, 1998 per Share
- ------------------------ ----------------- ---------------
<S> <C> <C>
$ 0.10 - 0.64 698,631 $0.63
0.95 - 1.97 194,642 1.76
2.03 - 2.75 414,942 2.56
2.93 - 4.04 710,204 3.59
4.06 - 7.81 524,531 5.45
- ------------------------ --------- ----
$ 0.10 - 7.81 2,542,950
- ------------------------ ---------
- ------------------------ ---------
</TABLE>
-23-
<PAGE>
FAIR VALUE DISCLOSURES
Had compensation costs for the Company's stock compensation plans been
determined based on the fair value at the grant dates, consistent with SFAS 123,
the Company's net loss, and net loss per share for the years ending December 31,
1998, 1997 and 1996 would be as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Loss:
As reported $51,799,700 $13,108,000 $10,790,100
Pro forma 52,150,800 13,514,100 11,269,900
Basic and Diluted Net Loss
Per Share:
As reported $1.56 $0.52 $0.50
Pro forma 1.57 0.54 0.52
</TABLE>
The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 63% 57% 51%
Risk-free interest rate 4.5% - 5.6% 5.5% - 6.4% 4.9% - 6.7%
Expected option term 2.5 Years 2.7 Years 2.6 Years
</TABLE>
Because the determination of the fair value of all options granted includes an
expected volatility factor in addition to the factors detailed in the table
above, and because additional option grants are expected to be made each year,
the above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
(E) SHAREHOLDER RIGHTS PLAN
On November 10, 1994, the Company's Board of Directors declared a dividend of
one preferred share purchase right for each share of common stock outstanding.
Each right entitles the holder to purchase from the Company one-one thousandth
of a share of Series C-1 Junior Participating Cumulative Preferred Stock (a
"Unit"), par value $.01 at a price of $16.00 per one-one thousandth of a share,
subject to certain adjustments. The Units are exercisable only if a person or a
group acquires 15% or more of the outstanding common stock of the Company or
commences a tender offer which would result in the ownership of 15% or more of
the Company's outstanding common stock. Once a Unit becomes exercisable, the
plan allows the Company's shareholders to purchase common stock at a substantial
discount. Unless earlier redeemed, the Units expire on November 10, 2004. The
Company is entitled to redeem the Units at $.01 per Unit subject to adjustment
for any stock split, stock dividend or similar transaction.
As of December 31, 1998 and 1997, the Company has authorized the issuance of
350,000 shares of Series C-1 Junior Participating Cumulative Preferred Stock for
use in connection with the shareholder rights plan.
(F) SEVERANCE AGREEMENT CHARGE
On May 29, 1996, the Company announced changes in its senior management. As part
of the reorganization, the Company recorded a $425,300 charge to earnings
resulting from a severance agreement with the Company's former President and
Chief Executive Officer. The charge included a $255,000 severance payment and a
non-cash charge of approximately $170,300 relating to the acceleration of
certain stock option vesting rights.
-24-
<PAGE>
(G) ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC.
The Company issued 14,036,400 shares of the Company's common stock and warrants
to purchase approximately 1,811,200 shares of the Company's common stock on
August 21, 1998, in exchange for all of the outstanding common stock of VRI (see
Note 15).
8. RESEARCH AND LICENSING AGREEMENTS
The Company has entered into licensing agreements with several universities and
research organizations. Under the terms of these agreements, the Company has
received licenses or options to license technology, certain patents or patent
applications. The Company made required payments of nonrefundable license fees
and royalties which amounted to approximately $100,000, $65,000 and $205,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
9. PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENTS
The Company's product development revenues were received from contracts with
different organizations. Total revenue received by the Company in connection
with these contracts for the years ended December 31, 1998, 1997 and 1996 were
approximately $2,094,500, $1,147,600 and $591,200, respectively. A summary of
these contracts follows:
(A) NOVARTIS PHARMA AG
In October 1997, the Company entered into an option agreement with Novartis
Pharma AG ("Novartis"), a worldwide pharmaceutical company headquartered in
Basel, Switzerland, relating to the development of TP10 for use in
xenotransplantation (animal organs into humans) and allotransplantation (human
to human). The agreement granted Novartis a two-year option to license TP10 with
exclusive worldwide marketing rights (except Japan) in the fields of
xenotransplantation and allotransplantation. In exchange for granting the
two-year option, the Company will receive annual option fees and supplies of
clinical grade TP10 with a combined value of up to $5 million. Should Novartis
exercise its option to license TP10 and continue development within the fields
of xenotransplantation and allotransplantation, it will provide equity to the
Company in the form of investment, licensing fees and milestone payments based
upon attainment of certain development and regulatory goals. The Company may
also receive from Novartis funding for research as well as royalty payments on
eventual products sales.
Under the terms of the agreement Novartis paid the Company a non-refundable
option fee related to the first option period which commenced in October 1997.
In November 1998, the Company received an option fee payment from Novartis which
initiates year two of the option agreement. During the option period, Novartis
is granted sole access to the technology for use in xenotransplantation and
allotransplantation. The Company is recording the option fee as revenue over the
one year option period.
(B) ASTRA AB
In January 1992, the Company entered into a product development and distribution
agreement with Astra AB ("Astra"), a worldwide pharmaceutical company
headquartered in Sodertalje, Sweden, for the joint development and marketing of
therapeutic products using the Company's proprietary T cell antigen receptor
("TCAR") technology. The products developed exclusively and jointly with Astra
were monoclonal antibodies and protein-derived immunomodulators that may have
efficacy in treating autoimmune diseases such as multiple sclerosis, Crohn's
disease, and rheumatoid arthritis.
In June 1996, the Company suspended further internal funding of the research and
development of the TCAR program. In December 1996, the Company further amended
its agreement with Astra to transfer certain of its rights to the TCAR
technology to Astra in addition to sole responsibility for further development
and commercialization of the TCAR technology. Under the amended agreement, the
Company received an initial signing fee of $100,000 and could receive future
milestone and royalty payments upon Astra's successful development and
commercialization of the TCAR technology.
-25-
<PAGE>
The Company recognized revenue from milestone payments in 1997 of $650,000 and
TCAR funding revenue of $453,400 in 1996 which included $181,600 from the
reduction of the collaborator advance liability. The funds were advanced from
Astra for the expansion of additional space dedicated to joint TCAR product
research.
(C) CYTOTHERAPEUTICS
In April 1996, the Company licensed portions of its patent and technology rights
regarding Complement Receptor 1 ("CR1") to CytoTherapeutics, Inc. for use in
CytoTherapeutics' cell-based products for the delivery of therapeutic substances
to the central nervous system. Under the agreement, the Company granted
non-exclusive rights for the use of CR1 in any encapsulated-cell product. The
license does not include rights to use CR1 for therapeutic effects. In 1996, the
Company received a non-refundable $100,000 signing fee and may receive
additional milestone payments and royalty payments from commercialized products
resulting from the license.
(D) PASTEUR MERIEUX CONNAUGHT
In December 1994, AVANT entered into a license agreement with Pasteur Merieux
Connaught ("PMC") which granted PMC the exclusive right to make, use and sell
Adjumer-TM--formulated vaccines for prevention of influenza, Lyme disease and
diseases caused by meningococcus and the co-exclusive right (exclusive, except
for the right of AVANT or one other person licensed by AVANT) to make, use and
sell Adjumer-TM--formulated vaccines directed against five other pathogens,
including pneumococcus and RSV. VRI has retained rights to make, use, sell and
license Adjumer-TM--formulated vaccines against the subject infections in most
of the Far East, including China and Japan, subject to certain geographical
extension rights available to PMC. In December 1998, the Company received a
milestone payment of $600,000 from PMC upon commencement of the first Phase I
clinical trial of the Adjumer-TM--formulated vaccine for RSV.
10. NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest and Dividend Income $ 571,900 $ 577,300 $ 680,200
Gain on Sale of Equipment 22,300 -- --
Gain on Sale of Investments -- (17,800) --
--------- --------- ---------
$ 594,200 $ 559,500 $ 680,200
========= ========= =========
</TABLE>
11. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, as amended, the Board
of Directors adopted, effective May 1990, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make tax deferred
contributions up to 15%, or $10,000, of their total salary in 1998. The Company
may, at its discretion, make contributions to the plan each year matching up to
1% of the participant's total annual salary. Company contributions amounted to
$20,100, $20,600 and $33,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
-26-
<PAGE>
12. FOREIGN SALES
Foreign Sales:
Product sales were generated geographically as follows:
<TABLE>
<CAPTION>
NET PRODUCT SALES
FOR THE TWELVE
MONTHS ENDED EUROPE USA ASIA OTHER TOTAL
<S> <C> <C> <C> <C> <C>
December 31, 1998 $ 5,000 $ 31,000 $ -- $ 20,000 $ 56,000
December 31, 1997 5,000 29,000 -- 11,000 45,000
December 31, 1996 145,000 240,000 130,000 8,000 523,000
</TABLE>
13. LITIGATION
In December 1994, the Company filed a lawsuit in the Superior Court of
Massachusetts against the landlord of its former Cambridge, Massachusetts
headquarters to recover the damages incurred by the Company resulting from the
evacuation of the building due to air quality problems, which caused skin and
respiratory irritation to a significant number of employees. The landlord
defendant filed counterclaims, alleging the Company breached its lease
obligations. The court ordered a limited trial between the Company and the
landlord on certain factual issues which began on November 20, 1996. Closing
arguments for the limited trial were heard on January 13, 1997. In a separate
lawsuit, the landlord's mortgagee filed claims against the Company for payment
of the same rent alleged to be owed. A motion for summary judgment filed by the
bank was denied by the court. In August 1997, the Superior Court of
Massachusetts entered findings of fact and conclusions of law on the limited
trial of the Company's lawsuit against the landlord. In its findings, the Court
concluded that the Company had not proved, as alleged by the Company, that any
fireproofing fibers contaminated the Company's space, the Company's space was
not uninhabitable because of contamination from fireproofing fibers and the
Company was not justified in terminating its lease on the grounds that its
office and laboratories were uninhabitable. In November 1997, the Company
reached a settlement of the litigation with its former landlord and the
landlord's mortgagee. The Company agreed to pay $858,800 in cash on November 17,
1997 and issue a total of 1,500,000 shares of its common stock. In addition, the
Company signed a note for $750,000 payable on November 16, 1998 secured by
$750,000 cash collateral and a note for $750,000 due November 15, 1999, secured
by 132,500 shares of common stock. The total settlement, valued at $6,108,800,
is comprised of the cash and notes totaling $2,358,800 and common stock valued
at $3,750,000 as of October 31, 1997 and is included in operating expense for
the year ended December 31, 1997. The common stock issued is subject to
restrictions on transfer per the settlement agreement. The settlement agreement
also provides for certain registration rights for the shares of common stock to
become effective no later than September 30, 1998. Upon such registration,
however, the settlement agreement limits the number of shares that may be sold
over a given period of time.
In May 1998, the Company used cash as collateral for a $750,000 note due
November 15, 1999 issued in connection with a settlement agreement with its
former landlord and the landlord's mortgagee. In accordance with the settlement
agreement, 66,250 shares of the Company's common stock issued to secure the note
were returned to the Company. The common stock was valued at $165,600 as of
October 31, 1997 and its return is included as a reduction of operating expense
in 1998.
14. SALE OF PORTION OF DIAGNOSTIC BUSINESS
On March 5, 1996 the Company sold to Endogen, Inc. the research products and
operations of TCD for a purchase price of approximately $2,880,000, while
retaining the TRAx-Registered Trademark- diagnostic product franchise. The
consideration for this sale to Endogen was paid in the form of a convertible
subordinated note receivable (the "Convertible Note") in the principal amount of
$2,003,000 and a combination of cash and a short-term note used to repay
approximately $980,000 of obligations under the Company's operating lease. On
February 10, 1997, the Company converted the outstanding
-27-
<PAGE>
principal balance, or $1,803,000, of the Convertible Note into shares of Endogen
commons stock which it subsequently sold. Additionally, the Company may receive
a royalty on certain of Endogen's sales of research products.
The Company is currently focusing its efforts on establishing a partnership for
the TRAx-Registered Trademark- technology.
15. ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC.
On August 21, 1998, the Company acquired all of the outstanding capital stock of
VRI, a company engaged in the discovery and development of (i) systems for the
delivery of vaccines and immunotherapeutics and (ii) novel vaccines. The Company
issued approximately 14,036,400 shares of AVANT's common stock and warrants to
purchase approximately 1,811,200 shares of AVANT's common stock in exchange for
all of the outstanding common stock of VRI, on the basis of 1.55 shares of
AVANT's common stock and .20 of an AVANT warrant for one share of VRI common
stock. The purchase price of $63,004,700 consisted of (i) the issuance of
14,036,400 shares of AVANT common stock valued at $51,686,800 and 1,811,200
AVANT warrants valued at $4,980,700 for all outstanding VRI capital stock, (ii)
the issuance of AVANT warrants valued at $387,600 in exchange for all of the
outstanding VRI warrants, (iii) the issuance of options to purchase AVANT common
stock valued at $3,637,900 for all of the outstanding options to purchase VRI
common stock assumed by the Company, and (iv) severance and transaction costs
totaling $2,311,700. As of the date of the acquisition of VRI, the Company had
already begun to formulate a plan to assess which activities of VRI to continue
and to identify all significant actions to be taken to terminate a number of VRI
employees and to relocate the remaining employees from the VRI facility in
Cambridge, MA (which was to be closed) to the Company's facility in Needham, MA.
The costs associated with this plan, including severance costs of approximately
$243,000, were recognized upon consummation of the merger and are included in
the $2,311,700 referenced above. The plan was finalized and implemented during
1998 and the first quarter of 1999. Actual costs were not materially different
from those accrued at the acquisition date and were paid in 1998 and early 1999.
The acquisition has been accounted for as a purchase. Consequently, the
operating results of VRI from August 22, 1998 to December 31, 1998 have been
included in the Company's consolidated results of operations. The purchase price
was allocated to the acquired assets and assumed liabilities, based upon their
fair value at the date of acquisition, as follows:
<TABLE>
<S> <C>
Net tangible assets acquired $14,539,000
Intangible assets acquired:
Work force 470,000
Collaborative relationships 1,090,000
Goodwill 2,275,700
In-process technology 44,630,000
-----------
Total $63,004,700
===========
</TABLE>
The values assigned to the intangible assets acquired, including the IPR&D,
were determined based on fair market value using a risk adjusted discounted
cash flow approach. VRI was a development stage biotechnology enterprise and
its resources were substantially devoted to research and development at the
date of acquisition. Management is responsible for determining the fair value
of the acquired IPR&D.
Each of VRI's six research and development projects in-process was valued
through detailed analysis of product development data concerning the stage of
development, time and resources needed to complete the project, expected
income-generating ability and associated risks. The significant assumptions
underlying the valuations included potential revenues, costs of completion,
the timing of product releases and the selection of an appropriate discount
rate. None of VRI's projects have reached technological feasibility nor do
they have any alternative future use. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in the AVANT consolidated financial statements for the
year ended December 31, 1998. The remaining intangible assets arising from
the acquisition are being amortized on a straight line basis over 12 months
and 60 months.
-28-
<PAGE>
A discussion of the in-process research and development projects identified
at the time of acquisition follows. The projected costs to complete the
projects represent costs to be incurred by the Company and do not include any
costs to be expended by the Company's collaborators. (i) Adjumer-TM- vaccine
delivery system. Adjumer-TM- is being developed as an adjuvant to enhance the
immune response to injected vaccines. The Company and its collaborator,
Pasteur Merieux Connaught ("PMC"), are conducting research on the development
of Adjumer-TM--formulated vaccines utilizing a variety of PMC's antigens,
including influenza, lyme disease, pneumococcus, meningococcus, Respiratory
Syncytial Virus ("RSV") and Hepatitis B. As of the acquisition date, with
projected release dates ranging from 2001 to 2004, the estimated cost to
complete the project for all antigens exceeded $9,500,000. In addition,
substantial additional work is required by PMC prior to commercialization.
Discount rates ranging from 42.5% to 47.5% were used in determining the IPR&D
value of $15,450,000 which was assigned to the Adjumer-TM- vaccine delivery
system. (ii) Micromer-TM- vaccine delivery system. Micromer-TM- is a
proprietary vaccine delivery system designed to facilitate the mucosal
(intranasal or oral) delivery of antigens and stimulate both the systemic and
mucosal branches of the immune system. The Company is conducting research on
a number of Micromer-TM--formulated vaccines, including influenza and RSV. As
of the acquisition date, the estimated cost to complete the development of
Micromer-TM--formulated vaccines for influenza and RSV exceeded $3,300,000
with projected release dates of 2002 and 2004, respectively. A discount rate
of 45% was utilized in determining the IPR&D value of $3,260,000 which was
assigned to Micromer-TM-. (iii) Vibrio Vec-TM- vaccine delivery system.
Vibrio Vec-TM- is a proprietary vaccine and immunotherapeutic system that
uses a bacterial vector for the oral delivery of antigens. The Company is
conducting research on a number of antigens proposed to be delivered by
Vibrio Vec-TM-, including, in conjunction with its collaborators, Pasteur
Merieux-Oravax and CSL, Ltd., a vaccine targeting H. pylori. At the
acquisition date, the projected product release date was 2003 and the
approximate research and development cost required to complete the Vibrio
Vec-TM- project totaled approximately $900,000. A discount rate of 45% was
used in determining the IPR&D value of $2,450,000 which was assigned to
Vibrio Vec-TM- at the time of acquisition. (iv) Rotavirus vaccine. A
collaboration with SmithKline Beecham, ("SKB") was established by the Company
to develop and commercialize its novel, proprietary vaccine against rotavirus
infection, a major cause of diarrhea and vomiting in infants. At the
acquisition date, a project release date was projected of 2002, with
$1,200,000 in additional research and development expenditures anticipated.
In addition, substantial work is required to be completed by SKB prior to
commercialization of the rotavirus vaccine. An IPR&D value of $3,120,000 was
assigned to the rotavirus vaccine utilizing a discount rate of 45%. (v)
Herpes vaccine. The herpes vaccine is a proprietary vaccine for the
prevention of genital herpes ("HSV2"). At the time of acquisition, the
vaccine was in a preclinical development stage with a projected product
release date of 2007 and an estimated cost to complete of $1,600,000. A
discount rate of 45% was utilized in determining the IPR&D value of
$2,240,000 which was assigned to the herpes vaccine. (vi) Therapore-TM-. The
Company was granted an exclusive worldwide license from Harvard for
Therapore-TM-, a novel technology for the development of immunotherapeutics.
The Company is conducting preclinical research to evaluate this system for
the treatment of persistent viral infections, such as Hepatitis B, Hepatitis
C and HIV, and certain cancers including melanoma. The first release date for
a Therapore-TM- product is estimated to be in 2004 and the projected research
and development cost to complete all indications of Therapore-TM-
approximated $41,200,000 at the acquisition date. A discount rate of 50% was
utilized in determining the IPR&D value of $18,110,000 which was assigned to
Therapore-TM-.
As of December 31, 1998, the technological feasibility of the projects had not
yet been reached and no significant departures from the assumptions included in
the valuation analysis had occurred. Substantial additional research and
development will be required prior to reaching technological feasibility. In
addition, each product needs to successfully complete a series of clinical
trials and to receive Food & Drug Administration ("FDA") approval prior to
commercialization. The Company is also dependent upon the activities of its
collaborators in developing and marketing its products. There can be no
assurance these projects will ever reach feasibility or develop into products
that can be marketed profitably, nor can there be assurance the Company and its
collaborators will be able to develop and commercialize these products before
its competitors. If these products are not successfully developed and do not
become commercially viable, the Company's financial condition and results of
operations could be materially affected.
-29-
<PAGE>
The following unaudited pro forma financial summary is presented as if the
operations of the Company and VRI were combined as of January 1, 1998 and 1997,
respectively. The unaudited pro forma combined results are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated at that date, or of the future operations of the combined
entities. Nonrecurring charges, such as the acquired in-process research and
development charge of $44,630,000, are not reflected in the following pro forma
financial summary.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 1997 1996
------------ ---- ---- ----
<S> <C> <C> <C>
Operating Revenue $ 2,206,500 $ 3,697,600 $ 7,110,900
Net Loss (13,389,800) (21,311,500) (14,011,100)
Basic and diluted net loss per share (0.32) (0.54) (0.39)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
-30-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Form 10-K/A:
(1) FINANCIAL STATEMENTS:
See "Index to Consolidated Financial Statements" at Item 8.
(2) FINANCIAL STATEMENT SCHEDULES:
Schedules are omitted since the required information is not applicable or
is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
(3) EXHIBITS:
<TABLE>
<CAPTION>
No. Description Page No.
--- ----------- --------
<S> <C> <C>
2.1 Agreement of Merger among the Incorporated by reference to
Company, T Cell Acquisition Corp. the Company's report on form 8-
and T Cell Diagnostics, Inc. dated K filed September 22, 1993
August 20, 1993 relating to
reconsolidation of the Company's
subsidiary
2.2 Asset Purchase Agreement among Incorporated by reference to
Endogen, Inc., T Cell Diagnostics, the Company's report on form 8-
Inc., with the Company dated March K filed March 20, 1996
4, 1996
2.3 Agreement and Plan of Merger, Incorporated by reference to
dated as of May 12, 1998, by and the Registration Statement on
among the Company, TC Merger Form S-4 (Reg. No. 333-59215)
Corp., Virus Research Institute,
Inc.
3.1 Third Restated Certificate of Incorporated by reference to
Incorporation of the Company the Company's Annual Report on
Form 10-K for the year ended
April 30, 1991
3.2 Certificate of Amendment of Third Incorporated by reference to
Restated Certificate of the Company's Annual Report on
Incorporation of the Company Form 10-K for the year ended
December 31, 1992
3.3 Certificate of Designation for Incorporated by reference to
series C-1 Junior Participating the Company's Annual Report on
Cumulative Preferred Stock Form 10-K for the year ended
December 31, 1994
3.4 Second Certificate of Amendment of Incorporated by reference to
Third Restated Certificate of the Registration Statement on
Incorporation of the Company Form S-4 (Reg. No. 333-59215)
3.5 Amended and Restated By-Laws of Incorporated by reference to
the Company as of November 10, the Company's report on Form 8-
1994 K dated November 10, 1994
4.1 Form of Purchase Agreement dated Incorporated by reference to
November 23, 1993 relating to the Exhibit 10.1 of the Company's
Company's private placement of Registration Statement on Form
Common Stock S-3 (Reg. No. 33-72172)
4.2 Shareholder Rights Agreement dated Incorporated by reference to
November 10, 1994 between the the Company's report on Form 8-
Company and State Street Bank and K dated November 10, 1994
Trust Company as Rights Agent
4.3 Form of Stock Purchase Agreement Incorporated by reference to
dated October 27, 1995 relating to Exhibit 10.1 of the Company's
the Company's private placement of Registration Statement on Form
Common Stock S-3 (Reg. No. 33-64021)
4.4 Form of Stock Purchase Agreement Incorporated by reference to
dated November 3, 1995 relating to Exhibit 10.1 of the Company's
the Company's private placement of Registration Statement on Form
Common Stock S-3 (Reg. No. 33-64021)
4.5 Form of Stock Purchase Agreement Incorporated by reference to
dated March 20, 1998 relating to Exhibit 4.1 of the Company's
the Company's private placement of Registration Statement on Form
Common Stock S-3 (Reg. No. 333-56755)
10.1 Amended and Restated 1991 Stock Incorporate by reference to the
Compensation Plan dated as of Company's Annual Report on Form
April 1, 1995 10K for the fiscal year ended
December 31, 1995
10.2 1994 Employee Stock Purchase Plan Incorporated by reference to
the Company's Registration
Statement on Form S-8 filed
June 8, 1994
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
No. Description Page No.
--- ----------- --------
<S> <C> <C>
10.3 Product Development and Incorporated by reference to
Distribution Agreement between the Company's report on Form 8-
Astra AB and the Company dated K filed on February 13, 1992
January 30, 1992, portions of
which are subject to confidential
treatment
10.4 Performance Plan of the Company Incorporated by reference to
the Company's Annual Report on
Form 10-K for the transition
period ended December 31, 1992
10.5 Form of Agreement relating to Incorporated by reference to
Change of Control the Company's Annual Report on
Form 10-K for the transition
period ended December 31, 1992
10.6 Termination Agreement between the Incorporated by reference to
Company and SmithKline Beecham the Company's report on Form 8-
p.l.c. relating to sCR1 dated K filed April 27, 1995
April 7, 1995, portions of which
are subject to confidential
treatment
10.7 Pledge Agreement between the Incorporated by reference to
Company and Fleet Credit the Company's Quarterly Report
Corporation dated October 24, 1995 on Form 10-Q for September
dated September 30, 1995
10.8 Amended and Restated Employment *
Agreement between the Company and
Una S. Ryan, Ph.D. dated August
20, 1998.
10.9 Severance Agreement between the Incorporated by reference to
Company and Norman W. Gorin dated the Company's Annual Report on
June 1, 1996 Form 10-K for the fiscal year
ended December 31, 1996
10.10 Consulting Agreement between the Incorporated by reference to
Company and James D. Grant dated the Company's Annual Report on
May 28, 1996 Form 10-K for the fiscal year
ended December 31, 1996
10.11 Second Amended and Restated Incorporated by reference to
Product Development and the Company's Annual Report on
Distribution Agreement between Form 10-K for the fiscal year
Astra AB and the Company dated May ended December 31, 1996
1, 1996, portions of which are
subject to confidential treatment
10.12 Commercial Lease Agreement of May Incorporated by reference to
1, 1997 between the Company and the Company's report on
Fourth Avenue Ventures Limited Form 10-Q for the quarterly
period ended September 30, 1996
10.13 Option Agreement by and between Incorporated by reference to
the Company and Novartis Pharma the Company's report on Form 10-Q
AG dated as of October 31, 1997, for the quarterly period ended
portions of which are subject to September 30, 1997
a request for confidential
treatment
10.14 Settlement Agreement between the Incorporated by reference to
Company and Forest City 38 Sidney the Company's Annual Report on
Street, Inc.; Forest City Form 10-K for the fiscal year
Management, Inc.; and Forest City ended December 31, 1997
Enterprises, Inc.
21.0 List of Subsidiaries Incorporated by reference to
the Company's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1993
23.0 Consent of Independent Accountants Page 35
27.0 Financial Data Schedule Page 36
</TABLE>
* -- Filed previously in the Company's
Annual Report on Form 10-K filed
on March 25, 1999.
(B) Reports on Form 8-K.
During 1998, the following reports on Form 8-K were filed: Form 8-K dated August
21, 1998, Form 8-K dated August 29, 1998 and Form 8-K/A dated September 29,
1998.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVANT IMMUNOTHERAPEUTICS, INC. DATE
by: s/UNA S. RYAN November 8, 1999
-------------
Una S. Ryan
President and Chief Executive Officer
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVANT IMMUNOTHERAPEUTICS, INC. Date
by: _________________________
Una S. Ryan November 8, 1999
President and Chief Executive Officer
-34-
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, (Nos. 333-43640, 333-54372, 333-80036, 333-80048,
333-62017), in the Prospectus constituting part of the Registration Statement
on Form S-3 (Nos. 333-72172, 333-69950, 333-64021, 333-08607, 333-56755,
333-64761 and 333-89341) and in the Prospectus constituting part of the
Registration Statement on Form S-4 (No. 333-59215) of AVANT
Immunotherapeutics, Inc. (f/k/a T Cell Sciences, Inc.) of our report dated
March 1, 1999 appearing on page 11 of this Annual Report on Form 10-K/A for
the year ended December 31, 1998.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS OF AVANT IMMUNOTHERAPEUTICS, INC. FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,937,200
<SECURITIES> 4,903,100
<RECEIVABLES> 11,200
<ALLOWANCES> 0
<INVENTORY> 6,100
<CURRENT-ASSETS> 15,615,700
<PP&E> 4,021,800
<DEPRECIATION> (2,910,400)
<TOTAL-ASSETS> 22,650,100
<CURRENT-LIABILITIES> 3,317,600
<BONDS> 0
0
0
<COMMON> 42,500
<OTHER-SE> 18,727,100
<TOTAL-LIABILITY-AND-EQUITY> 22,650,100
<SALES> 55,900
<TOTAL-REVENUES> 2,150,400
<CGS> 22,300
<TOTAL-COSTS> 54,522,000
<OTHER-EXPENSES> (22,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (571,900)
<INCOME-PRETAX> (51,799,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,799,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,799,700)
<EPS-BASIC> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
